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India: Time to invest? - Views on News from Equitymaster
 
 
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  • Jun 9, 2001

    India: Time to invest?

    India, one of the fastest growing emerging markets has become the destination of foreign funds over the past few years. In the year 2000, foreign direct investment in the country was US$ 2.2 bn (Rs 102 bn). Despite perennial problems of infrastructure bottlenecks (particularly power), political and budgetary disarray the country has been recording more or less stable growth over the past few years.

    During the current year, the government has taken some important steps to attract foreign investments in India, which have been slowing down in the past few years. The government has allowed 100% foreign investment without any approval requirements in practically all sectors of the economy. It has passed the controversial Insurance Bill (IRDA) and Foreign Exchange Management Act Bill (FEMA) in the previous winter session of the Parliament. Removal of quantitative restrictions will however pressurize the domestic industry growth rates. China being the biggest threat!

    In the year 2000, the world economy grew by an estimated 4.8%. The activity in 2001 has however slowed down markedly with global growth now projected at 3.2%. Engine of world’s economy, US, accounting for 22% of total GDP, is witnessing an economic downturn. India accounts for a miniscule share of 1% in the world’s GDP estimated to be about US$ 45 trillion. Although, these figures sound rather discouraging, the positive side is that due to limited participation, India is relatively insulated from the global recession. The Indian economy has achieved some sort of self-sufficiency and it is possible for the country to generate about 6% GDP growth even in the difficult time as faced in FY01. This is one of the reasons of foreign funds flights to the Indian market, which presents breathtaking opportunities in the new economy sectors.

    India- A small child
    (Rs bn) Market size India's share
      World India  
    GDP (US$ bn) 44,549 474 1.1%
    Aluminium 1,833 38 2.1%
    Copper 1,128 23 2.0%
    Pharma 13,950 186 1.3%
    Biotech 3,720 116 3.1%
    Cellular 1,269 33 2.6%
    IT 17,995 380 2.1%
    Media 10,000 150 1.5%
    Tourism 172,050 860 0.5%
    Paints 5,000 50 1.0%

    Lets start with one of the fastest growing pharma industry, which is pharma (as software these days is out of favour). In the next five years the world pharmaceutical market (Rs 14 trillion) is expected to grow at a compounded annual growth rate (CAGR) of 8%. India’s share at 1.3% is indicative of the expected boom in the industry. The companies in the sector are riding on high margin exports, positive R&D activities and on going consolidation (M&A). The industry growth is however trimmed by stringent DPCO (Drug Price Control Order) norms and competition from generic drug industry. Although, currently only process patents are recognized in India, the country being a member of World Trade Organisation (WTO) and a signatory to the General Agreement on Tariffs and Trade (GATT) it is bound recognise product patents, latest by 2005. The average R & D spends in India is growing at a CAGR of 18% over the last five years. But it is just 1.9% of sales as against 9-10% spend by global pharma companies. Further, the recent decision of the government to allow 100% FDI in the industry is expected to open doors of contract research work in the country. Thus, the trigger for success of Indian pharma companies is to increase the R&D spend and move up the value chain by developing more patented drugs.

    After IT, the next revolution is expected to come in the Biotech industry. The industry was worth only Rs 23 bn in 1997-98 and is expected to turn in Rs 116 bn by the end of current fiscal (a CAGR of 38%). India was amongst the first countries to adopt biotechnology and accord it priority. The global biotech market, which is currently placed at Rs 3.7 trillion, is growing at the rate of over 20%. The pace will accelerate, as research increases and accordingly India’s miniscule share at 3% is likely to expand. The decoding of the human genome has thrown up a mountain of data, which needs to be refined, classified and analysed before it is made applicable in developing new drugs and therapies.

    For the first time in the last several years, the Indian IT industry was caught into a downturn thanks to the US economy slowdown. The fascination for the industry today is waning as the world’s largest economy (US) is sliding into recession. The global IT market is expected to grow at a rate of 11% in the next five years to a size of Rs 30 trillion. India’s market share, which currently stands at a mere 2%, is expected to be about 7% in 2005. A sharp increase in the share is indicative of the fact that, the industry in India is still not saturated. Its low cost advantage coupled with intellectual capital would enable it to outpace the world market growth rates and rise at the rate of 40% in the next five years. Although, the Indian software companies are betting on the outsourcing model and shifting more business to offshore, the key challenge for them remains diversifying into other geographies (other than US) and improving the software value chain. Developing more software products with a recognized brand and a foray into high-end technology could only facilitate the high growth rates.

    The outstanding performance of the IT industry is highly dependent on the bandwidth capacity available in the industry. Telecom infrastructure in India is not sufficient to fulfill the target set for the software industry. As against the demand of 5 gigabytes (GB) of bandwidth the availability is just 325 megabytes (MB). Not ignoring the fact that the number of Internet connection in India has crossed the 3 m mark, the future growth depends on the availability of bandwidth. The demand for basic telephony services (which is expected to grow at a CAGR of 24% in the next five years) is likely to benefit from the surge in demand for Internet access, for which telephone connection is essential. The tele density in India is at 3.5% as compared to China's 8.6%. Both these factors, therefore, will lead to an encouraging growth of basic telephony services. In the nascent cellular market (Rs 33 bn) too, India’s share in the world market is expected to reach 7% by 2005 from the current 3%, translating to a growth rate of 30% annually.

    TMT is incomplete without mentioning the media industry. The entertainment industry worldwide is growing at the rate of 18% per annum and is currently valued at about Rs 10 trillion. India’s share of 1.5% in the world market could increase only with the increase in the development of quality content. Currently the sector is going through a significant transformation with content creators venturing into broadcasting and the broadcasters venturing into media marketing & pay channels. The Indian government has taken an important step by according an industry status to the media sector. The corporatisation of the industry is another significant move towards eliminating the circulation of unaccounted money in the sector. Indian media industry, which is growing at the rate of over 30% annually, is expected to account for 3% share in the global entertainment market in 2005.

    It is not only the dazzling TMT sector where the opportunities are unlimited. The commodity, utility and FMCG industry too presents untapped potential. This is after considering the restructuring and improved efficiencies in the old economy companies and a slowdown in the tech sector.

    The Indian cement sector, which is growing at 8% annually, is the third largest in the world after US and China. However, the per capita consumption of cement in the country is as low as 90 kgs compared to the world average of 250 kgs. International majors are eyeing domestic cement companies considering this consumption gap. While consolidation in the industry will increase the pricing power of the companies, the sustainability of the cartel will keep prices firm and will be the key driver for buoyant earnings. Nevertheless, weakness in demand and overcapacity could continue to haunt the sector.

    The argument holds true even for the metal industry. Although, growth rates are not as high as TMT, low per capita consumption would drive the demand. While aluminium & steel industries globally are growing at the rate of 5-8% per annum, the growth rates for copper consumption is dismal 3.6%. On the other hand Indian steel and copper industries are growing in double digits at 11%. At a miniscule share of 2% in the global markets, the Indian metal industry is reaping the advantage of favourable demand supply gap and low cost of operations. The state of world economy and international metal prices however plays an important role in determining these projections.

    The scenario is completely different for the fast moving consumer goods and food-processing sector. The industry runs on the brand and marketing network. Although, unorganized players have a strong hold (regionally), the tantalizing growth rates and a relatively nascent stage of the sector is attracting MNCs to this segment. With the removal of the quantitative restrictions global brands are entering the Indian markets at competitive prices. Since the developed markets for these brands are competitively saturated, they are entering India to capitalize on growth. The Rs 3 trillion Indian food industry is set to double by 2005, translating into growth rates of over 18% annually. Interestingly only 5% of output is processed and consumed in packaged forms. This throws up huge potential for expansion of the food processing industry for MNCs.

    While FMCGs are controlled by MNCs, the fortune of energy sector is in the hands of the public sector units. The sector is growing at a CAGR of 6% (volume driven) with poor domestic demand. The per capita consumption of petroleum products in India stands at 98 kgs compared to 165 kgs by China and 585 kgs by rest of the world. The anticipated deregulation in petroleum marketing by 2002 is an important event in the overall dynamics of the industry. Opening up of the sector to global competition will see the entry of international majors. Global companies will be keen contenders in the divestment procedures of oil PSUs and the companies with strong marketing network would be at the most advantageous position.

    The performance of the energy is largely linked to the power sector. Although, the sector will continue to grow at the rate of 6% annually with few players, private participation is mired by poor policy framework. This could dent the future investment in this sector.

    The opening up of the Indian economy in the last decade has injected a new competitive dynamism across the industry segments. India’s economic reforms have played a critical role in the performance of the economy since 1991. Despite a slowdown in the recent years, the average growth rates in the past six years was about 6.5% which was higher than 5.6% achieved in the 1980s. However, to continue this growth trajectory the government needs to attract more private investment particularly in the infrastructure segment. Although allowing 100% FDI is a step in the right direction, labour laws and tax laws are yet to be made more transparent for participation in any core industry segment. Unlike China, India has received comparatively less FDI in the past few years due to stringent laws and operating problems.

     

     

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