July 13 , 2011

July 13 , 2011

Indian Pesticide Industry: An Analysis

Highlights Industry is Becoming Export Oriented Theres A Preponderance of Generic Producers Nature of Domestic Demand Is Seasonal

July 13 , 2011

Agrochemicals Industry in India

Overview Agrochemicals are generally used for crop protection. They are referred to as Pesticides. Pesticides are among the crucial inputs required to sustain and improve the agricultural production in the country. Substantial amount of crop is lost due to attack from insects. What is surprising is that, despite the countrys huge agricultural base, pesticide consumption in India is still among the lowest in the world. The pesticide industry in India has in recent times been marked by the manufacture of generic pesticides as well as healthy exports. However, the industry still faces lot of challenges such as, seasonal demand, lack of R&D investments, lack of brand awareness and farmers requiring long credit periods. We at PRU try to analyse the production and consumption trends, challenges faced and outlook. Segments They are classified into three categories Insecticide, Herbicide and Fungicide on basis of the types of pests they control. Insecticide: They are agents of chemical or biological origin that controls pests. Insecticides act against insects which feed on crops, leaves, roots, and other parts of plants. Among the insecticides, one of the largest molecules globally available is Chlorpyriphos. Herbicide: A herbicide, commonly known as weed killer, is a type of pesticide used to kill unwanted plants that act as parasites on the agricultural crop. Herbicides are usually safe and dont affect the environment. However, consumption is low due to availability of cheap labour which is employed to pull out the weeds manually. Fungicide: These are used to control disease attack on the crops. High use of new hybrid seeds has led to increase in diseases, resulting in higher sales in the past five years. Its use has increased from 8% to 16%. Mancozeb is the largest selling product in this category. Production Trends India is the fourth largest producer of agrochemicals in the world after USA, Japan and China. According to the Centre for Monitoring Indian Economy (CMIE), pesticide production in India for FY10 stood at 6.2 lakh tonnes. Note: The production data provided by central Statistical Organization (CSO) is grossly underestimated. The pesticides production data given under the new IIP series is much lower than the data given under old series. Hence, CMIE has taken production details from the annual reports of the pesticide companies. Still actual production can be much higher as there are lot of small unauthorised individuals and companies manufacturing pesticides without product registration. There is no data available on that. The presence of these small players has resulted in driving down the prices due to fierce competition. The domestic market is driven by monsoons, crop yields, pest attack, farmer awareness and price realisation of crops. This is somewhat detached from the global conditions. In spite of the increasing population and high emphasis on achieving self sufficiency in foodgrains, we can see here that production (technical grade) has remained almost stagnant over the past five years. The reasons for the same could be:

The costs associated with discovery, development and registration of a new molecule have increased substantially over the years. On an average, it takes more than nine years between the first research to final authorization of the products. Indian companies have not focused on developing newer molecules due to the absence of patent protection.

July 13 , 2011

India is dominated by generic producers. Even if they produce off-patent products, these companies still have to go through the complex and time-consuming registration process when they launch their products.

* Its only till December 2010. Currently, there are 226 pesticide products registered in India. Pesticides produced in India can be broadly divided into two categories technical grade and formulated. Technical grade pesticides are highly toxic and contain hazardous material whereas formulations are obtained by processing the technical grade with emulsifiers or other agents. More than 60 technical grade pesticides are manufactured mainly by multinationals. A formulations market is highly fragmented and includes small formulators. Consumption Pesticide consumption in India is one of the lowest in the world with per hectare consumption of less than one kg compared to US (4.5 kg/ha) and Japan (11 kg/ ha). Consumption could be low for the following reasons:

Source: Ministry of Chemicals and Petrochemicals

Lack of awareness among the farmers about different types of pesticides available and their impact on environment Pesticide is the last input in agricultural cropping operation; hence, farmers generally have no surplus money left and start using them only after the pest attack.
7,600

Pesticide Market Size(INR Crore)

7,690

Consumption is mainly driven by cotton and paddy crops. In India pesticide use is extended to approximately 16.7 mn hectares, which is just 9% of the total cultivable land.

7,460 7,220

7,100

7,000

Insecticide accounts for largest share in consumption in India followed by herbicide and fungicide, unlike high herbicide and fungicide usage globally. This is probably because Indias tropical climate is conducive for the propagation of insects.

6,600

2009

2010e

2011e

2012e

The total market size in India, including exports, for 2009 was approximately `70 bn. According to a latest report released by Research On India, a leading provider of market Source: Research On India intelligence reports on leading industries, the market is expected to grow at CAGR of 2.38% for next 3 years. Exports India is a major exporter of pesticides. Exports in value terms have almost doubled from `27.9 bn in 2006 to `52.2 bn in 2010. Exports have grown at CAGR of 13.48% over the past five years. Manufacturers have shifted their focus more towards exports due to domestic seasonal demand, better price realisation in the global market, domestic overcapacity and low credit periods.

July 13 , 2011

It can be mentioned here that the seasonal nature of demand (timing and coverage of monsoon) forces companies to maintain high levels of inventory. Hence, working capital requirement goes up substantially. Since pesticide is the last input in the agricultural production cycle, farmers generally have no surplus money left. This forces them to go in for longer credit periods. India also has an advantage of low manufacturing cost due to availability of cheap and high quality scientific pool. India exports mainly to US, some EU and African countries. Challenges

Export of Pesticides(INR Crore)

6,000 4,980 4,000
2,790

5,250

2,880

3,140

2,000

2006

2007

2008

2009

2010*

Source: Rsearch On India Product registration: According to the Insecticides Act 1968, the government regulates manufacture, sale, usage, export and import of pesticides. No pesticide is allowed to be manufactured, exported or imported without registration. Companies face a restricted market for exports due to the different registration procedures fixed by different countries. Registration of pesticides in countries like US/EU is time consuming since lot of tests are required to ebe carried out.

According to Care Rating, a leading rating agency in India, one product registration takes about 3-5 years and costs about $10-15 million. Registration process in the domestic market takes about 1-3 years. Hence, such an investment both in terms of time and money acts as a virtual entry barrier. Companies with high number of product registrations, therefore, have an edge. Distribution network: Demand for agrochemicals is seasonal in India and is dependent on the monsoon; hence companies that have wide distribution network are in an advantageous position to deal with the uncertainties. This also provides them a channel for educating the farmers about their new products and their usage. Hence, companies with wide distribution network are better placed to take on the intense competition. R&D requirement: Patent protection generally enables producers to command higher prices in the market. This acts as an incentive to invest more on R&D. Due to the lack of a viable patent regime, MNCs introduce successful molecules only after they go off-patent. Sometimes, due to frequent use of the same pesticide, insects mutate and develop resistance to a particular molecule. Hence, there is a dire need for manufacturers to invest in developing new products. Emerging threat from genetically modified seeds: Genetically modified seeds are immune to natural adversaries. The cotton crop accounts for major portion of the pesticide (insecticide) use in India. With wide acceptance of Bt cotton (GM seed) the demand will be affected negatively in future. It can be mentioned here that GM seed usage has spread to other crops as well including soya bean, maize etc. Health issues leading to ban of pesticides: The Supreme Court recently banned endosulfan a generic technical pesticide for two months after health hazards were reported from Kerala. India supplies about 70% of the worlds endosulfan requirement, a market valued at `1,340 crore. Therefore, companies which have a concentration in one or two products, expose their earnings to risk of ban or phasing out of a particular product. Also, concentration on a particular crop (like cotton) also can make the top line vulnerable to any kind of technological advancement. Outlook This industry has good growth prospects given the low consumption levels, pressure for better crop yields and growing demand from export markets. Companies have been focused more on the exports market in order to deal with the uncertainty in domestic demand due to dependency on monsoon. In future, to increase their global reach, companies operating in India will be focusing more on forming partnership or acquiring strong local players in overseas markets, who can provide support to register, launch and distribute the products in their respective countries.

July 13 , 2011

IIP Growth in May Falls To A 9-Month Low

IIP growth momentum slows: IIP growth in May 2011 fell to 5.6% YoY compared with 5.8% YoY (revised downwards from 6.3% YoY) a month ago according to the new series (2004-05), which is the slowest growth in the last 9 months, despite a low base. Slower intermediate and capital goods growth led to the decline in IIP growth, despite a pick-up in basic and consumer goods growth during the month. IIP performance is far poorer as per the old series (1993-94) where growth plummeted to 3.6% YoY from 4.4% YoY before. Manufacturing pulls down IIP growth: In May, as per Industry groups, IIP growth (new series) was lower due to slower 5.6% YoY growth in Manufacturing compared with 6.3% YoY growth a month ago. Manufacturing has the highest weight of 75.5% in the IIP index. Electricity growth improved to 10.3% YoY compared with 6.5% YoY in May 2011. Electricity has weight of 10.3% in the new index. Mining growth was marginal at 1.4% YoY compared with 1.3% YoY a month ago. According to Used Based Classification: Basic & consumer goods growth improved in May according to the news series. Basic goods growth stood at 7.3% YoY compared with 6.9% YoY a month ago while consumer goods growth improved to 5.4% YoY compared with 2.9% YoY before. Capital & intermediate goods growth declined during the month. Intermediate goods growth fell sharply to 1% YoY from 4.5% YoY before while capital goods growth was lower at 5.9% YoY compared with 7.3% YoY before. Impact of economic environment: Both consumer durables and non durables goods growth improved in May due to a low base in the same period last year. The impact of high inflation and high interest rates is beginning to show its impact on consumer goods (durables plus non-durables) as growth contacted 3.5% on a MoM basis. While on a YoY basis, consumer durables goods growth improved (due a low base) to 5.2% YoY compared with 3.7% YoY in April, consumer non-durables goods growth improved to 5.6% YoY from 4.9% YoY before. IIP growth worst according to the old series: According to the old series, IIP growth fell to 3.6% YoY from 4.4% YoY a month ago. According to the old series, manufacturing growth stood at 3.2% YoY compared with 4.4% YoY in April. Electricity and mining also displayed trends similar to the new series. While both the series have shown similar declining trend, slower momentum is more prominent in the old series. According to the old series, capital goods growth stood negative at 0.6% YoY compared with 2.5% YoY before. In line with the new series, intermediate goods growth as per old series slowed to 1.2% YoY and basic goods growth improved to 6.8% YoY compared with 5.6% YoY a month ago. Consumer goods growth posted a decline according to the old series which is in contrast to higher growth posted by the category in the new series. April IIP growth revised downwards: April IIP growth was revised downwards to 5.8% YoY compared with 6.3% YoY reported before. The downwards revision increases probability of May growth being lower than reported by provisional numbers.

IIP growth, New series

14.0 12.0 10.0
8.0
16.0 14.0 12.0
10.0

IIP growth , Old series

8.0 6.0

6.0 4.0 2.0

5.6

4.0 2.0
0.0

3.6

May-10

May-10

May-11

Sep-10

Jan-11

Feb-11

Mar-11

Jun-10

Aug-10

Nov-10

Dec-10

Apr-11

Oct-10

Jul-10

May-11

Sep-10

Jan-11

Feb-11

Mar-11

Jun-10

Aug-10

Nov-10

Dec-10

Apr-11

Oct-10

Jul-10

July 13 , 2011

Volatility remains in the new Series: There have been sharp changes due to revision of the April data. Revised capital goods growth is now 7.3% YoY for April compared to 14.5% declared before. Consumer goods growth is now 3.7% YoY for April compared to 2.8% earlier. Mining goods growth was revised down to 1.3% from 2.2% before.

New and Old Series Comparison:

New IIP Series based on 2004-05:
% YoY, 2004-05 Weight May-10 8.5 14.2 75.5 10.3 7.8 8.9 6.2 Mar-11 8.8 0.3 10.4 7.2 Apr-11 5.8 1.3 6.3 6.5 May-11 5.6 1.4 5.6 10.3 .

Industrial Production
Sector Based Mining Manufacturing Electricity

Use Based Classification Basic Goods Capital Goods Intermediate Consumer Goods Durables Non Durables 45.7 8.8 15.7 29.8 8.5 21.3 6.1 15.8 11.7 7.4 14.7 1.9 6.3 15.4 1.9 11.7 13.9 9.9 6.9 7.3 4.5 4.3 3.7 4.9 7.3 5.9 1.0 5.4 5.2 5.6

Old IIP Series based on 1993-94:

% YoY, 1993-94 Industrial Production Sector Based Mining Manufacturing Electricity 10.5 79.4 10.2 9.9 12.9 6.4 0.4 8.4 7.2 2.1 4.4 6.4 1.2 3.2 10.3 Weight May-10 12.2 Mar-11 7.8 Apr-11 4.4 May-11 3.6

Use Based Classification Basic Goods Capital Goods Intermediate Consumer Goods Durables Non Durables 35.6 9.3 26.5 28.7 5.4 23.3 8.2 37.2 11.0 7.2 23.7 1.0 4.4 13.6 6.1 8.2 12.7 6.2 5.6 2.5 2.4 5.9 9.2 4.5 6.8 -0.6 1.9 4.2 6.7 3.2

July 13 , 2011

Trends According New IIP Series:

Manufacturing growth moderates, % YoY
14.0 12.0

Mining Growth, % YoY

10.0 8.0 6.0 4.0
5.6

10.0
8.0 6.0 4.0 2.0

2.0 0.0

1.4

May-10

May-10

Basic Goods Growth, % YoY

12.0
10.0

May-11

Sep-10

Jan-11

Feb-11

Mar-11

Jun-10

Aug-10

Nov-10

Dec-10

Apr-11

Oct-10

Capital Goods Growth, % YoY

44.0 40.0 36.0 32.0 28.0 24.0 20.0 16.0 12.0 8.0 4.0 0.0 -4.0

8.0 6.0 4.0 2.0

0.0

7.3

May-11
5.9

Sep-10

Jan-11

Feb-11

Mar-11

Jun-10

Aug-10

Nov-10

Jul-10

May-11

May-10

May-10

Dec-10

Apr-11
Apr-11

Oct-10

Jul-10

Consumer Durables, % YoY

Consumer Non Durables, % YoY

May-11

Sep-10

Jan-11

Feb-11

Mar-11

Jun-10

Sep-10

Jan-11

Feb-11

Nov-10

Nov-10

Mar-11

Aug-10

Apr-11

Oct-10

Dec-10

Jun-10

Aug-10

Jul-10

Oct-10

Dec-10

Jul-10

July 13 , 2011

Cement Mini Plants Economically Unviable

Mini cement plant owners shut shops: The small cement manufacturers are unable to survive amidst competition from bigger players and as a result about 80 units have closed their plants in past six months. (The Economic Times, July 9, 2011)

PRU Analysis

Plants with capacity of less than two million tonnes are classified as mini cement plants. In our articles on the Indian cement sector in the past, we had mentioned that the cement industry is facing severe cost pressures. Prices of raw materials such as coal, limestone, and freight costs have risen by nearly 30-40% over the past two years. Cement consumption by the user industries has been growing at a far slower pace than capacity addition in the sector. This has kept cement price rise under check. Cement is a seasonal industry and its demand is weak during the monsoon months. High costs, together with slower demand and weak prices, have dented profits of the cement industry. At one time, nearly 2-3 years ago, cement was one of the highly profitable (in terms of operating and net profit margin) industries in India. However, net profit margin has dipped to nearly 7.4% (net of non-recurring transactions) in financial year 2010-11 from 9.2% a year earlier. The Indian cement industry, struggling with oversupply, saw capacity utilisation fall to a 13-year low of 83.9% for 2010-11, according to Cement Manufacturers Association. In the past five years, capacity utilisation of the industry stood close to 95%. During June 2011, demand remained subdued due to the onset of monsoon, slower construction activity and lower consumption by real estate sector. Average prices across India witnessed a correction during June 2011. Region-wise price movement is as under: Manufacturers in the south, have tried to maintain a cap on output over the past several months resulting in firm prices Northern region registered a fall in prices as demand continued to be low Prices eroded in the east due to rainfall Onset of monsoon and higher supply pushed down prices in the western parts

Average Wholesale Prices of Cement (`/50 kg)

320 300 280 260 240 220 200
Aug-10 Dec-10 Apr-10 Oct-10 Sep-10 Nov-10 May-10 Feb-11 Apr-11 Jan-11 May-11 Jun-10
Mar-11

Mumbai

Delhi

Kolkata

Chennai

Source: CMIE, Dhanbank PRU

Jun11 Cement majors ACC Ambuja Cements UltraTech Shree Cement Dalmia Cement OCL Jaiprakash Associates 9.71 1 .91 1 .70 3.22 0.84 0.41 0.25 1 .37

Cement Despatches for Jun 2011 (million tonnes) Y-o-Y % M-o-M % Apr-Jun May11 Jun10 Change Change 2011 9.86 9.38 3.60 -1.50 29.60 1.99 1 .78 7.30 -4.00 5.95 1.76 1 .72 -1.20 -3.60 5.33 3.24 3.00 2.00 -0.70 9.66 0.79 0 .79 6.60 7.10 2.42 0.43 0 .34 21.10 -2.60 1.23 0.28 0 .26 -3.40 -10.60 0.83 1.37 1 .33 3.50 0.40 4.18

Apr-Jun 2010 28.87 5 .32 5 .52 9 .89 2 .39 1 .03 0 .81 3 .91

% Change 2.50 11.80 -3.40 -2.30 1.30 19.30 2.20 7.00

Source: Company, Edelweiss research

Jun-11

Jul-10

July 13 , 2011

PRU View

This scenario of contracting profits reduced the price advantage between mini cement plants and the large plants with deeper pockets, thereby making it unviable for the smaller plants to survive. Hence, 80 units with an average capacity to manufacture 100 tonnes of cement have shut shop. Given the rising supply and slower growth in demand for cement, we believe that these 80 mini cement plants accounting for only 7% of Gujarats 13 million tonne capacity are unlikely to affect either supply or prices in the region. Also, we estimate the cement companies to record a weak profit performance during the June 2011 quarter. While revenues are estimated to have grown, a sharp rise in costs is expected to dent profitability.

Power: Plugged In
Power Exchanges Spark an Industrial Revolution: Cheaper electricity helps companies restart sick units, introduce night shifts and retire diesel-fired backup units. (The Economic Times, July 9, 2011)

PRU Analysis

India has been a power deficit nation for the past many years. It continues to face a power deficit particularly during the peak demand hours. This necessitated the need for the development of power exchanges where there would be open access. The open access system allows for a transparent market in electricity, enabling consumers to source their power requirements from any producer and from any part of the country without any geographical or regulatory restrictions on such sale. Benefits of Open Access Ensures reliable supply of power to consumers who are willing to pay a premium Facilitates generation companies allowing them to encash their surplus capacity Thereby helping generation utilities to maintain a healthy revenue flow

Currently, power exchanges in India have ample supplies at a rate as low as `1.50 per unit at night. The average per unit cost of electricity in the open market has come down to `3 from `10 about a year ago as there is surplus power in the system because of low offtake by state utilities. Availability of low cost power has resulted in a number of sick units re-starting their operations, introduction of night shifts, and lower use of diesel-fired power back-up units where costs are as high as `10-11 per unit. Two state governments including Punjab and Tamil Nadu, where open access policies are favourable recorded a sharp rise in power trading by several steel, textiles and cement mills. The onset of monsoon resulted in lower demand for electricity and a consequent fall in prices at which merchant power is traded. Power trading volumes nosedived 71% in May compared to a month ago. Prices also collapsed over the two months. According to a report by Macquarie Capital Securities, while 96% of contracts in April were priced higher than `4/kWh, only 28% of total volume in May was contracted at the price. While power is available at a reasonable cost on the exchanges, a number of state governments are creating roadblocks in the form of high charges/taxes levied. These include transmission charges, transmission losses charges, wheeling charges, wheeling losses charges which makes electricity from power exchanges costlier by 80 paise every unit. Punjab government has also proposed a cross-subsidy surcharge of 74.48 paise per unit from July 1, to prevent financial loss to Punjab State Power Corporation Ltd. However, open access remains the core of reforms in the power sector, and states have to remove subsi-

July 13 , 2011

dies, says CERC. It must be noted that the state electricity boards have huge losses on their balance sheet and they cannot increase tariff by over 10% each. Hence, it will take a while before they can clear off these losses.

Indian Aviation Industry: Trying To Fly

Delhi & Mumbai airport developers face combined service tax liability on fee already charged: The finance ministry has decided to impose service tax on the development fee the Mumbai and Delhi airports collected before the levy was banned, dealing a further blow to the operators facing a funding gap. (The Economic Times, July 11, 2011) New route dispersal guidelines for smaller cities await aviation minister's approval: The aviation ministry is reworking capacity distribution norms for airlines to ensure better connectivity for smaller cities and towns, but the move could spell problems for carriers not geared for small airports. (The Economic Times, July 11, 2011)

PRU Analysis

The Supreme Court had ruled in April 2011 that levy and collection of development fees from airline passengers in Delhi and Mumbai by the private operators of these airports was illegal. Passengers flying out of Delhi had been paying `200 for domestic and `1,300 for international travel as development fees since March 1, 2009. The airport promoted by GMR, has collected `1,200 crore and GVK promoted Mumbai airport collected `1,300 crore by charging `100 and `600 respectively from domestic and international travelers. The Central Board of Excise and Customs (CBEC), has asked the two airports to pay 10% service tax on development fee collected by both these companies. According to CBEC, "the development fee is also collected from passengers in lieu of providing airport services, so there is no reason as to why it should not be taxed." Delhi and Mumbai airports collected development fee, and used it to fund development, treating it as a capital receipt. In contrast, Bangalore and Hyderabad airports collect user development fee, which goes to the investor and is taxable as it is considered a revenue receipt. In another development, India plans to develop and modernise airports in 35 cities other than the four metros. It must be noted that the modernisation programme of two metro airports, in Chennai and Kolkata, is far away from completion. Problems and delay in land acquisition is the primary reason behind these delays.

PRU View

The number of passengers at Indian airports are expected to reach up to 450 million a year by 2020 due to continued double-digit domestic traffic growth. If the airport infrastructure does not improve at a rapid pace, Indian airline companies would be adversely affected. Also, with the government planning to introduce the new route dispersal guidelines, which require airlines to increase flights to small cities and towns, costs for the industry are likely to rise. This is because small town routes witness only 40-60% occupancy and are a loss-making proposition, claim airline companies. Spice-Jet is likely to be one of the beneficiaries of this proposition as it has ordered smaller aircraft (Bombardier Q400s) for dedicated regional operations that are to commence this month.

July 13 , 2011

Car Growth Rate Crashes

June car sales static on rising rates, fuel costs: Domestic car sales have registered a tepid 1.6 per cent year-on-year growth in June, with manufacturers blaming it on negative consumer sentiment arising from rising interest rates and higher fuel costs. (The Hindu Business Line, July 12, 2011)

PRU Analysis
50% 40% 30%

Quarterly PV Sales Growth

44% 33% 25% 28% 34% 29% 24%

As expected, marred by the unprecedented rise in inflation, interest rate and petrol prices, the growth in the domestic four wheeler passenger vehicle (PV) segment has crashed to 1.6% Y-o-Y in June 2011. The growth of 1.6% is the slowest recorded in the last 2 years. The Y-o-Y growth rate has been falling continuously since the last 3 months. For the previous quarter (Q1FY12), the PV sales growth was 7% which was similar to the growth seen in Q4FY09 and Q1FY10. The high double digit growth between Q1FY10 and Q1FY12 was on a low base and was powered by low interest rates and low petrol prices. The repo rate peaked in September 2008 at 9% and then fell steady and very quickly to 4.75% in April 2009. The petrol prices in January 2009 was at `44.6 per litre which was slashed 19% since November 2008. However, since March 2010, in a bid to control high inflation, the repo rate has been increased ten times to 7.25% currently. Also petrol prices have jumped 54% from the January 2009 lows of `44.6 per litre to `68.6 per litre. This has slowed down the PV growth rate.

20%
10% 0%
6% 5% 7%

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Y-o-Y Growth

200000
175000

Domestic PV Sales

9.0%
8.5%

8.0% 7.5%
7.0%

150000
125000

6.5% 6.0%
5.5%

100000
75000

5.0% 4.5%
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11

50000

PRU View

PV Sales

Repo Rate (RHS)

Consumers have either postponed their purchases or completely dropped their plans of purchase or have shifted to two wheelers as auto loans have become expensive and affordability becomes an issue. The auto companies, in a bid to revive their sales, are now offering huge discounts on petrol versions and have increased production of diesel variants. Consumers are resorting to diesel variants in a bid to keep their operating costs low but due the higher costs associated with the diesel variants and lack of enough models in the compact (economy) segment, the absolute sales numbers are not showing a significant increase. Moreover, with the economy slowing down, the growth may further slowdown in the coming months.

Biosimilars: Growth Galore

Drug makers bet on local biosimilar markets: Many Indian pharmaceutical companies wishing to get part of the global biosimilar (copies of biological drugs) market are first trying their luck closer home. (Business Standard, July 11, 2011)

PRU Analysis

Biosimilars are officially approved subsequent versions of innovator biopharmaceutical products. Biopharmaceutical products, commonly known as biological drugs, are made of larger molecules with high molecular complexity unlike the more common normal small-molecule chemical drugs. They are developed through advanced technology called genetic modification or biologic process

Q1FY12

July 13 , 2011

rather than being chemically synthesized used for chemical drugs. Biologic drugs can be composed of sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues. Gene-based and cellular biologics, for example, often are at the forefront of biomedical research, and may be used to treat a variety of medical conditions for which no other treatments are available. Biological drugs are generally more effective in treating complex diseases, such as cancer, but are more expensive because of the high costs involved in making them. According to a recent study by an independent analyst group, Datamonitor, the Indian biosimilars market is expected to grow to $580 million by 2012. Recent collaborations such as, the $200-million (received upfront) deal between Biocon and Pfizer for marketing the formers four generic insulin products in emerging markets, including India and Brazil, and then later in US and other developed nations will give a boost to Indias biosimilar market. The worlds biopharmaceutical market is currently worth $137 billion with biosimilars contributing a mere $243 million. However, by 2015, the biosimilars contribution is expected to exponentially grow to $3.7 billion while the biopharmaceuticals market is expected to reach a size of $200 billion. The growth in biosimilar market will be due to the current biological drugs worth $60 billion going offpatent during the next five years. Some of the major players in the Indian biosimilar space include Biocon, Cipla, Dr Reddy's Laboratories, Intas Biopharmaceuticals, Shantha Biotechnics Ltd., Wockhardt and Panacea Biotech.

PRU View

While much of the global biologics spending is concentrated in the US, biosimilar spending is concentrated in Germany and other European markets which adopted approval guidelines earlier, and now account for over 80% of global biosimilars spending. Asian countries enjoy a dominant position in the global biosimilars product market with a share of over 30% (34.1% in 2008). The Indian drug manufacturers are well positioned to capitalise on the future growth of the biosimilars market both domestically and internationally. However, due to the lack of clarity on the regulations pertaining to biosimilars in the developed markets, Indian biosimilar companies are targeting unregulated (African, Eastern European and Latin American countries) and semi-regulated markets, such as China, India, Brazil and South Korea in the short term. In the US, for example, regulators are currently working to establish intensive testing and drug approval process to allay key concerns over the safety and efficacy of such biosimilar drugs. While in Europe, the European Medicines Agency has so far approved 13 simpler biosimilar drugs (such as insulin) but the final guidelines for complex biosimilars are still pending which may be introduced next year. Accessing only the developed pharma markets might be difficult because the complex and expensive clinical trials and registration processes are yet to be formalised. These regulatory entry barriers have compelled drug biosimilar companies to access unregulated and semi-regulated markets in the interim to recover their development costs. With the regulations in place in the developed nations, the Indian companies are expected to corner a major share of the biosimilar market as they have established expertise in the generic market, enjoy healthy relations with the leading pharma companies of the world and have safe and cost effective manufacturing units.

Tyre Companies Bat For Better Profitability

Ceat ups tyre price, see better margins as rubber drops: Ceat Ltd, Indias fourth largest tyre maker, last week raised prices of tyres 2-2.5% across categories. (Mint, July 06, 2011)

PRU Analysis

Following the footsteps of JK Tyres and Apollo Tyres, Ceat has also raised its prices by 2-2.5% across segments to battle the high input costs for manufacturing tyres. Rubber constitutes approximately 60% of the raw material, both in value and volume terms and has increased by around 40% since March 2010 shrinking the margins of the tyre manufacturers. Tyre manufactures had resorted to various

July 13 , 2011

price hikes in the last financial year to battle high cost of production. This year too, the trend continues as almost all tyre manufacturers have increased the prices anywhere between 3-8%.

PRU View

The prices of natural rubber have declined from their peaks. The domestic natural rubber prices, after having peaked in April 2011, have fallen by 12% whereas the international natural rubber prices have fallen by 28% since they peaked in February 2011. Synthetic rubber prices have more or less stayed flat in the last few months on the back of stable crude oil prices.

The margins for the tyre sector has deteriorated in the last 8 quarters; the margins has slipped from 15% in Q2FY10 to around 8% in Q4FY11. However, with the round of price increases already taken, the companies are expected to show better Q2FY12 margins and even better results for Q3FY12 (on Q-o-Q basis) as the full effect of price hike and lower raw material costs sets in.

Ice-Cream Players Form Association

Association for ice-cream makers to boost consumption: In a bid to increase consumption and enhance quality standards, ice-cream manufacturers in the cooperative and private sectors of India got together to form the Indian Ice-Cream Manufacturers' Association. (Business Standard, July 10, 2011)

PRU Analysis

The Indian ice-cream industry is highly fragmented with the organised market contributing 36% to the total volumes of around 350 million litres. In value terms, the total size of the market is around `2,500 crore. The branded segment is around `1,500 crore, which is growing at a rapid pace of 15-20% per annum. The largest player in the organised market is Amul (32%), followed by Kwality Walls (HUL, 18%), Vadilal (13%) and Mother Dairy (9%). Currently, the ice-cream industry falls under luxury category and is highly taxed, attracting excise duty and value added tax (VAT) as opposed to other countries where it is considered as a food item. For the first time in India, a formal body has been formed, the Indian IceCream Manufacturers' Association (IICMA), with 80 members from the branded and unbranded segment to cater to the needs of the industry in terms of quality standards, boost consumption and share technology among other measures to promote the industry. The association plans to add over 200 members across India soon.

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PRU View

Competition seems to be brewing up in the industry as companies hope to garner a fair share in the premium ice-cream segment which offer 25-30% margins as opposed to the 10% margin in other segments. Vadilal, the third largest by sales in the organised market has recently expanded its capacity from 2.25 lakh litres to 3.35 litres per day. Kwality Dairy, which had earlier exited the ice-cream business by selling it to HUL, is looking to make a re-entry into the business while almost all major players are looking to expand their distribution network by roping in franchisees for exclusive stores. The association formed will reap long term benefits for the industry as it gets a common and stronger platform to put forward its concerns to the government along with sharing knowledge to improve the prospects of the industry.

Cotton Yarn Industry In Trouble

Cotton yarn sector loss at Rs 11,000 crore: Emphasizing the crisis in the industry, the Confederation of Indian Textile Industry (Citi) has estimated a loss of Rs 11,000 crore for the cotton yarn sector due to measures like withdrawal of export incentives, restrictions on exports, and imposition of excise duty. (Business Standard, July 7, 2011)

PRU Analysis

Indian cotton yarn industry is going through a tough time. The various factors impacting the industry include:

Quantitative restriction on yarn exports. Earlier government had capped the cotton yarn exports at 760 million kg for FY11. Hence prices dropped due to oversupply in domestic market. Withdrawal of export incentives namely, duty drawback and Duty Entitlement Pass Book (DEPB) schemes. Demand weakening in the international market.

Imposition of 10% excise duty in branded garments has slowed down domestic demand growth for cotton yarn Most of the spinning mills are holding high level of cotton inventory bought at higher price earlier. The domestic cotton prices of popular Shankar-6 had hit all time high price of `63,000 a candy (356 kg) during February-March this year. However, it crashed to `45,000 a candy in April and is currently hovering around `38,000 a candy. Since mills generally stock cotton for 2-3 months, most of the them had bought cotton at higher prices on speculation of demand going up in future. With yarn prices going down in the domestic market (due to a ban on exports), the domestic apparel manufacturers as well as foreign buyers could have renegotiated prices and forced yarn manufacturers to sell at lower rates. It can be mentioned here that the government lifted the ban on April 1, 2011. According to the Confederation Of Indian Textile Industry (CITI), spinning mills have lost an estimated `6,000 crore so far. Currently, about 6.5 million bales (one bale = 170 kg) of cotton bought at a high price earlier is still believed to be lying as inventory with the spinning mills. These losses in turn have worn out the working capital of these mills. These units are operating at only 50-60% of their capacity. This can be attributable to dismal export prospects as well. Majority of the units are not able to meet their loan and interest repayment obligations. This is subsequently leading to closures. Hence, the industry is demanding certain rescue measures including:

Withdrawal of 10% excise duty on branded garments imposed earlier in budget in order to boost domestic demand. Immediate restoration of Duty Entitlement Pass Book Scheme and duty drawback on exports of cotton yarn.

Suspension of two years on repayment of all loans and interest including under TUFS (Technology Upgradation Fund Scheme) loans for all units in the textile and clothing industry. The Indian textile industry is labour intensive. The government has the tough task of protecting the job losses in this sector.

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