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Objective
To formulate a realistic estimate for PET demand over the next 3-5 years To identify trends and determinants that will influence demand and help build alternate scenarios for PET demand
Structure
Part I: The macroeconomic context for analysis Part II: Selecting an estimation method Part III: Approach and methodology Part IV: PET demand estimates and findings Addendum: Other information
Part I:
The macroeconomic context
A new boom phase marked by high growth, rise in consumer spending and changing lifestyles
7%
-2 -4 -6
1992Post-reforms period
2010
12
50 40 30 20 10 0
India US
2000
2010
2020
2030
9 8 7 6 5 4 3 2 1
2040
2050
Brazil
2005
2015
2025
2035
2045
Agriculture 32 22 46 37 24 40 1981
Industry 41 27 32 1991
Services
51
56
27 22 2003
28 16 2010*
1951
1971
An average 8.5% growth in Services will create more white collar jobs and propel the trend towards urbanisation and aspirational lifestyles An average 6.5% Industrial growth will create blue collar employment and boost incomes and spending in the middle and lower-middle classes However, agriculture will remain monsoon-impacted; hence, average growth will be relatively modest (3%)
* IMA India forecast, assuming 8.5% average growth in Services, and 6.5% average growth in Industry from 2004-05 to 2009-10
2 3 9 Rural
6 6 18
9 10 21 Urban
25 22 27
32
54
46
24
35
24
24
3
Lower
Consumption will be fuelled by greater number of households rising to the high and middle-income categories the inverted pyramid Source: NCAER (% of HH)
Income classes (annual household income, Rs) High (> 215,000); UM (45,000-215,000); M (22,000-45,000); LM (16,000-22,000); L (<16,000)
*estimated
1991
2001
2030
TamilNadu
All India
Madhya Pradesh
Bihar
Steady urbanisation nationally but faster in the key consuming states of Tamil Nadu, Maharashtra, Gujarat, Karnataka, Punjab, and Haryana
Himachal Pradesh
Andhra Pradesh
Maharashtra
Karnataka
Rajasthan
Haryana
Punjab
Kerala
Uttar Pradesh
Gujarat
West Bengal
Orissa
China
India
USD
20000 15000 10000 5000 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Indias per capita income will increase five-fold by 2025 and will be the fastest growing between 2025-2050
Source: Goldman Sachs Report (2003) Dreaming with the BRICs: The path to 2050
North South
0.52
0.38
0.35
0.06
0.02
A larger working population means more income and fewer dependents hence, greater surpluses and spending power
With over a million cars annually, currently India is worlds 12th largest market expected to become the 7th largest by 200607
Two-wheeler sales (million)
5 3.7 1.3
1993-94 2000-01 2001-02 2002-03 2003-04
5.6
With over 5 million units sold annually, India is the second largest two-wheelers market in the world
4.3
26.1
0.9 1997-98
1.2 1998-99
2000-01
2001-02
2002-03
2003-04 2004-05*
In the last 5 years, cellular telephony has grown by 70-80% annually adding more subscribers than added in the previous 50 years
^ Includes GSM mobile telephones only
* as on Dec 2004
5.5
At 9 million CTVs pa, currently India is the worlds 5th largest market expected to be the third largest by 2005-06
PC sales (millions)
3.8
1996
2001
2002
2003
2004
1.9 1.7
2.3
PC sales have doubled to almost 4 million units in 3 years; projected to more than double by the end of the decade
0.6
1996-97 2000-01 2001-02 2002-03 2003-04 200405*
* MAITs estimates
1.9
2.5
1995
1996
1997
1998
1999
2000
2002
2003
*estimated
Consumer credit has more than doubled to Rs 800 billion over the last 3 years
2004
1995
1996
1997
1998
1999
2000
2001
2002
2003
-10 -20
Household asset purchases are driven by the wealth effect which is reflected in the state of the capital markets Strong capital market typically induce greater consumption of luxury goods, durables, etc and vice-versa
2004
Part II:
Selecting a demand estimation method for PET
Macroeconomic extrapolation
The macroeconomic context suggests that growth rates across key sectors of the economy will be strong
This is on account of the combined effects of factors such as strong GDP growth, higher incomes, lifestyle changes, availability of options, urbanisation, media exposure, etc With the Indian economy in the midst of a strong boom phase, this performance can be sustained over the next few years The low per capita consumption of several products in relation to international levels implies scope for further growth in these categories
Prima facie, this would suggest that growth rates in the PET industry (and its user industries) should exhibit a similar trend However, a range of sector-specific, micro level factors are also at work these have a more direct bearing on growth prospects
Sectoral growth rates do not exhibit a strong correlation with GDP growth
160 140 120 100
%
2004-05
Part III:
Approach and methodology
Approach Basic principles: As an industrial input, PET demand is directly and completely explained by demand from user industries Assuming constant input-output manufacturing ratios, volume growth in PET demand will be determined by three factors:
Volume growth in existing user industries Propensity to convert to PET (i.e. PET usage vis--vis alternative packaging material) in each existing user industry Emergence of new user industries for PET
Approach (3)
In summary: Examine the macroeconomic context within which to interpret growth estimates and forecasts Estimate growth in each user industry over the next 3-5 years Quantify propensity to shift to PET in each industry In each case, identify causative factors and by extension, those that can lead to higher/lower demand in an industry or its PET consumption Explore possible new uses of PET and the resulting demand Obtain further validation by looking at growth expectations of intermediate players (pre-form/bottle manufacturers)
Methodology
Core methodology: primary research tap the most authoritative sources of information and insights Interview leading players in each user industry Interview leading pre-form/bottle manufacturers
seek 3-5 year growth forecasts for each user industry/PET industry multiple responses obtained from major players to arrive at representative average values (PET manufacturers also asked to respond to industry-wise growth expectations to corroborate user industrys estimates) identify causative factors and influences and seek scenariobased growth ranges Understand factors governing increase/decrease in PET usage in each industry Identify possible new uses of PET and use of recycled PET
Focus on senior-level interviews given the long term and strategic nature of questions involved
Methodology (2) Support with desk research to: Understand additional factors/trends in each industry Stated growth expectations of industry players; views on PET usage Analysts and observers forecasts, if any
Part IV:
PET demand estimates and findings
Healthcare 8%
CSD, packaged water and personal care account for over half of the total consumption currently Last 5 years CAGR: 42%; a seemingly high rate of growth however, skewed because of the low base (e.g. 4-year CAGR is 36%, 3-year CAGR is 29%)
* Includes malted and other food products and artificial juices/drinks ** includes retail PET bottles/jars and homecare products
CSD: An Overview
Recent growth trend ~10%, reflecting the adverse impact of the pesticides controversy of 2003 and continuing tax anomalies Nevertheless, low per capita consumption** (10) vis--vis comparable nations Pakistan (18), Sri Lanka (24), China (21), Thailand (113) indicates substantial untapped potential and scope for long term growth Over the next 5 years growth will be higher: players will drive width (new consumers) in rural markets (rural penetration has almost doubled over the past 3 years) and depth (greater consumption by existing customers) in urban markets
Forecasts* Base case: 13% Optimistic: 15% Pessimistic: 12% Key scenario determinants^ Tax corrections within 2-3 years; stable input costs; no further regulatory conflicts Immediate tax correction; low input costs Volatile economic/agricultural growth; high input costs
** 8-ounce servings
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
12
20
25
25
31
Additional considerations: Focus on family/home consumption (i.e. 1-2 litre bottles) will drive PET usage, as will rapid urban retail development (which encourages consumption on the go) Over a 5 year period, PET growth will be robust, but not linear continuous sales-driven innovations in CSD will shift the balance from time to time
Pessimistic: 18%
* Forecasts based on inputs by major industry players ^ Only includes major factors behind each scenario; not an exhaustive listing of all growth-impacting determinants
Computation: 22.5% industry growth* + conversion to PET Conversion: Nil. Packaging mix to remain constant (predominantly PET)
29 5 10 16 17 20
Additional considerations: Rapid urbanisation and emphasis on hygiene will bring new consumers into the fold and sustain healthy growth in the bottled water segment Bulk packs will increasingly become an alternative to (poor) municipal water supply (which is unable to keep pace with urban population growth), in both major and second-rung urban centres will grow even faster
* 18% growth in bottled segment (55% weightage) and 28% growth in bulk segment (45% weightage)
Over the next 5 years growth will remain consistent, given the effects of westernisation and media exposure and rise in incomes; low penetration levels (skin care-25%, hair wash-23%) clearly indicate scope for driving new consumption
Forecasts* Base case: 20% Optimistic: 22% Key scenario determinants^ Growing media access and trade liberalisation (the channels of westernisation) Strong agricultural growth to encourage acceptance in rural markets Volatile economic growth, high input costs/tariffs
Pessimistic: 18%
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
11
15
20
Additional considerations: Current growth will be sustained through sachetisation (to reduce entry cost and bring new consumers into the fold) and category branding (to create need for specialised application products e.g. skin care, facial care etc amongst existing consumers to enhance their consumption) (Marginal) scope for change in packaging mix exists based on price equations vis--vis substitutes (see summary of scenarios)
Healthcare: An Overview
Recent growth trend ~16%, driven largely by increased health awareness and lifestyle changes Low per capita health expenditure (USD in PPP terms): India (80), China (224), Thailand (254) offers significant scope for continuing growth Over the next 5 years growth will rise even further as the newly ushered-in patent protection regime will encourage new product introductions and market expansion
Forecasts* Base case: 18% Key scenario determinants^ Continuing urbanisation and health awareness, strong patent protection Optimistic: 20% Regulatory clarity on status of OTC# drugs and easing of restrictions on marketing, promotion, distribution Pessimistic: 15% Weak patent protection or enforcement
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
# Over The Counter
11
Additional considerations: Convenience will drive shift towards PET; technology advancement (e.g. PET that does not react with vitamins) can spur this trend further However, relative cost of PET (vis--vis substitutes) will determine rate of shift; scope for faster conversion exists if price equation changes significantly
Pessimistic: 8%
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
20
Computation: 10.5% growth in regular segment* (low priced 12 brands) + conversion to PET 8 Conversion: Nil. Packaging mix 7 5 to remain broadly constant but 4.5 4 year-to-year variations may exist (based on relative prices) 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2009-10 Additional considerations: PET usage will be limited to some regular segment brands and defence supplies No scope for PET usage in premium brands due to consumer perceptions and technical constraints (guala caps cannot be fitted on PET bottles) However, regular segment will witness higher-than-industry growth on account of entry of consumers shifting up from the informal sector
* Based on industry estimate that growth in the regular segment will lead overall industry growth by 1-2 percentage points; regular segment defined as spirits priced below Rs 180-200 a litre
Confectionery: An Overview
Recent growth trend ~5% Rigidity of price points (minor price reductions do not spur demand) and an uncertain tax/regulatory environment has limited growth, despite the potential suggested by per capita consumption e.g. sugar confectionery (grams per capita) India: 621,
UK: 4600, Sweden: 9600; chocolates (grams per capita) India: 312, UK: 9300, Sweden: 6400
Over the next 5 years growth will be marginally higher assuming tax reform; regulatory reform (e.g. Integrated Food Law, safety standards) can spur growth further through new product introductions (sugar-free, adult chewing gums, etc)
Forecasts* Base case: 6% Optimistic: 8% Pessimistic: 5% Key scenario determinants^ Current economic growth; ongoing tax reform; rural penetration Integrated food law and well-enforced safety standards Volatile economic growth, high input/infrastructure costs
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
14
9 7 5 0.5 2
Additional considerations: PET will remain the primary packaging option but pouches in small proportions will continue to be used as refills Entry of players with deep rural distribution (e.g. HLL, ITC) will help drive penetration in these markets
14
Computation: 12% growth in industry + conversion to PET Conversion: Nil. Packaging mix to remain broadly constant
8 3 4 5 6 6
Additional considerations: PET packaging limited to specific brands and consumer segments where transparency is a desirable feature; other materials will remain important due to molding flexibility and opacity In the long term, an increase in domestic oilseed production can help maintain growth by reducing dependence on highly-taxed imports
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
2
1.5 0.75
0.6 0.3
Additional considerations: 2001-02 2002-03 2003-04 2004-05 2009-10 PET usage will remain limited to promotional supplies/specific SKUs* due to cost, perceived technical issues (such as moisture absorption by PET and lower shelf life of PET-packaged bottles) and availability of well-accepted familiar substitutes (glass, tins, etc) in this product category
* Stock keeping units
Pesticides: An Overview
Recent growth trend ~4% volatile and unstable growth due to erratic monsoons; major producers shifting focus to exports to drive top-line growth Despite low per capita consumption (600 grams per hectare, compared to 10 kg per hectare in developed countries), growth prospects are limited by purchasing power and unpredictable weather conditions/pest attacks Over the next 5 years growth will be marginally higher than current levels, based on gradual improvements in farming techniques/awareness levels
Forecasts* Base case: 5% Optimistic: 7% Key scenario determinants^ Agricultural growth to remain moderate (<3% average) Higher agriculture growth, faster acceptance of modern farming techniques (based on the current Governments focus on agriculture) Volatile agricultural growth, regulatory/environmental restrictions on use of certain chemicals in pesticides
Pessimistic: 4%
* Forecasts based on inputs by major industry players ^ Only includes major determinant behind each scenario; not an exhaustive listing of all growth-impacting determinants
15
6 3 1 1 1 4
Additional considerations: A gradual focus on shelf-appeal and packaging quality will drive the shift to PET
Others*
5-year PET demand growth forecast: 8%
Computation: 8%* growth in industry + conversion to PET Conversion: not applicable
PET demand (kilotonnes)
9
6 4 3 3
1.5 Key considerations: 1 Lifestyle improvements and aspirations driving demand 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2009-10 for hygienic home storage options (PET jars/ containers) Penetration being driven by new shapes, sizes and colours of PET jars and containers However, re-usage of PET-packaged products (e.g. CSD, bottled water, foods, etc) will moderate the demand for new jars and containers
340.5KT
137 KT
2004-05
2009-10
2009-10 figures arrived at by applying industry-specific CAGR forecasts to 2004-05 figures for PET consumption by industry (as provided by RIL) Forecasts do not include PET usage in beer and natural fruit juices
434 KT 10 KT 9
15 13 2 14 14 20 38 50
17 18 2 16 15 29 8 268 KT 15
55 67
137 KT
94 80
10 2 13 13 19 27 34 58
85.5 2009-10
111
68 2009-10
2004-05
Current
Base case
Optimistic
Pessimistic
2009-10 figures arrived at by applying industry-specific CAGR forecasts to 2004-05 figures for PET consumption by industry (as provided by RIL) Forecasts do not include PET usage in beer and natural fruit juices
340.5
292
207
171 137
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Forecasts do not include PET usage in beer and natural fruit juices
Summary of Scenarios
Scenarios Industry growth PET growth Assumptions regarding PET usage (assumptions regarding industry growth are covered in individual industry sections) CSD Base case Optimistic Pessimistic Base case 13% 15% 12% 22.5% 22.5% PET penetration will rise from 20% to 30%* 29% PET penetration will rise from 20% to 35%* 17% PET penetration will rise from 20% to 25%* Packaged water 22.5% PET penetration will remain constant
Optimistic
Pessimistic
26.5%
18%
* Pet usage will not grow in a linear fashion given continuous pack size and other innovations in the industry, which will shift the balance vis-vis PET from time to time
20% PET penetration will remain constant 27.5% PET penetration will rise from 20% to 25%, if PET prices fall significantly vis--vis substitutes 11.5% PET penetration will fall from 20% to 15%, if PET prices rise significantly vis--vis substitutes Healthcare 28% PET penetration will rise from 20% to 30% 38% PET penetration will rise from 20% to 40%, if PET prices fall significantly vis--vis substitutes 20% PET penetration will rise from 20% to 25%, if PET prices rise significantly vis--vis substitutes
Pessimistic
5%
* Excludes beer ^ Year-to-year variations in PET usage are possible based on price movements vis--vis glass
Pessimistic
Base case Optimistic Pessimistic
10%
5% 5% 5%
8% 10% 6%
Others^ 8% PET penetration will remain constant 10% PET penetration will remain constant 6% PET penetration will remain constant
* Includes artificial fruit juices, nectars, RTS (ready-to-serve) drinks; natural fruit juices are covered separately in the new uses section ^ Includes PET jars/containers sold in retail and PET usage in homecare products
Addendum:
Other information