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Penetration favours the... - Views on News from Equitymaster
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  • Jul 25, 2007

    Penetration favours the...

    We had written an article on the opportunity for the FMCG players due to lower penetration of the products in India. The robust economy is likely to aid rise in incomes, increase in urbanisation, rise in aspirations of the middle class and rise in demand for goods for better lifestyle. This would be beneficial to not only to FMCG companies but also other sectors. In this article let us look at other sectors with potential.

    2005 Penetration rate (per 1000 people) Market size (m units)
      India China India China
    Passenger cars 10 14 1.1 3.2
    Motorcycles 39 59 5.8 10.5
    Cellular subscribers 69 301 28 59
    Internet subscibers 6 85 1.1 17
    Televisions 104 416 12 87

    Source: Ficci presentation

    Car ownership (per 1000 people)
    India 10
    Russia 160
    UK 400
    Japan 502
    USA 745
    Brazil 122
    Automobiles and auto ancillary: India has seen a phenomenal growth in the automobile industry. The demand for cars in the last 3 years has gone up by 22%. However, India's entire automobile industry collectively manufactures about 1.4 m vehicles a year. This is still very small as compared to China, which is likely to produce 10 m vehicles in 2007.

    Growing incomes, increased buyer incentives, attractive finance packages, and low ownership costs in India will continue to drive the demand for cars. On the back of these favorable factors, the growth rate of car sales in India is expected to average about 10% to 12% over the next 3 years. Auto ancillary output is projected to go up from US$ 10 bn in FY06 to US$ 40 bn by 2015.

    India is also soon to become the world's factory for exporting small cars. Hyundai Motors has set up a plant in South India to make and exports cars to about 67 countries. Tata Motors plans to make an Rs 1 lakh car, setting new standards for the industry. Nissan and Renault are also exploring possibilities of cheap cars. The Society of Indian Automobile Manufacturers (SIAM) predicts car exports from India to rise more than five times to 1 m units by 2010. Auto ancillary exports crossed the US$ 1 bn mark in FY04 and projected to touch US$ 25 bn by FY15E. With design, engineering and components manufacture facilities India can be an important R&D hub.

    Pharma: Large potential exists in the domestic market. India's per capita spending on pharmaceutical drugs is one of the lowest in the world -as seen from the graph. Health care Industry is growing at 13% annually and is expected to grow at 15% over the next few years.

    Health insurance coverage has grown from 4.5 m to 12 m people in last 6 years. However, this is only 1.2% of population of the country. Investment of US$ 78 to US$ 89 bn is expected in health infrastructure by 2012. Rising income levels are pushing the demand for best in class Health Services and health insurance.

    Collaborative research, custom synthesis, drug development, in-licensing, clinical trials support, API supply, contract manufacturing etc are likely to be the main growth drivers. India is a low cost centre. Hence it would have a huge advantage for the generics and the contract manufacturing segments. With government across the global, trying to reduce the healthcare cost, India stands to gain. Estimated opportunity in outsourcing for India is US$ 4.5 bn by 2008, employing about 0.2 m people. Healthcare business processes outsourced to India can result in cost savings of 20% to 30%.

    Retail: The retail sector is one of the fastest growing in the country. The share of organised retail in the total retail pie is set to increase from the current 2% to about 10% by 2010. This growth is on the back of changing customer aspirations and improving retail real estate infrastructure in the country. As seen in case of mobile phones, the growth could even be higher due to changing aspirations. India has the largest young population (median age of 24). This young population is the major driver of consumption as they have the ability (disposable income) and willingness to spend. Also retail formats offer convenience, variety and availability of items under single roof. With change in family structure from joint family to nuclear family and women working too has made the case for organised retailing stronger.

    Food processing: Indians spend the most of their income on the food and beverages (F&B). By 2025, F&B would continue to still be biggest category, although its share dropped from 42% to 25%. The per capita food consumption is however very small compared to the other countries. With rising income and changing lifestyle, the demand is likely to shift to value added products. Many companies like Reliance, HUL, ITC have shown a large appetite to enter this segment.

    Food Processing - huge opportunity
      2003-04 (US$ bn) 2014-15 US$ bn
    Total food consumption 205  
    Processed foods 126 274
    Primary processed food 79 136
    Value added food 48 138
    Share of value added products in food consumption 16% 50%
    Source: Ficci

    Media: India is one of the largest media markets with over 1,000 movie releases annually, third largest C&S reach and third largest print market. Yet, Indian media industry (revenues of US$ 10 bn) is just 0.7% of the global (US$ 1.4 trillion) media industry. The industry is expected to growth at a CAGR of 18% in the next 5 years (Ficci estimates). The media sector is to benefit from the demographic impetus with rising income levels, growing urban class and increasing Indian middle class. Rising literacy will also increase the internet and newspaper readership.



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