Kbuzz Issue 16 April 12

KBuzz
Sector Insights
Issue 16 April 2012

kpmg.com/in
1 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
The mid of this month saw the much awaited and long delayed move by the RBI, when it
slashed its key lending rate. The repo rate was lowered by 50 bps for the first time in three
years of the RBIs focus on containing inflation. The move, largely based on slowing growth
and reducing inflation, was welcomed by all and is expected to be a key driver of economic
revival in the country
1
.
Illustratively, the headline inflation for March 2012 reduced to 6.9 percent from 7.0 percent
seen in February 2012. Inflation has moderated in India since November 2011, however,
upside risks from fuel price movements still exist.
On the growth side, various indicators of economic activity continue to show weak
performance. Illustratively, growth in the Index of Industrial Production (IIP), an important
indicator of industrial activity in the economy, stands at 3.5 percent from April-February, 2011-
12 compared with 8.1 percent during the same period of the previous year. While, in
February the indicator was up - 4.1 percent vis--vis 1.1 percent noticed in January 2012,
which is much below market expectations
2
.
Additionally, the Purchasing Managers Index (PMI) for manufacturing slowed for a third
consecutive month. It reduced to 54.7 in March,2012 from 56.6 in February, 2012 as growth
in new orders eased and raw material costs displayed upward pressure. PMI for services also
slipped to a five-month low of 52.3 in March from 56.5 in the previous month as growth in
new orders eased and future expectations dimmed to its weakest level since 2009
3
.
Indias external sector also continued to show weak performance. The exports for
February,2012 were up by 4.3 percent while imports rose by a staggering 20.7 percent. The
gap led to a widening of the trade deficit to USD 15.2 billion during February from USD 14.8
billion in January. As per the recent data released by commerce secretary, Rahul Khullar,
Indias exports grew by 21 percent while imports grew by 32.1 percent during 2011-12 and
trade deficit widened to a record USD 184.9 billion in 2011-12. The widening trade deficit
might drive Indias deteriorating current account position and can have adverse implications
for the rupee
4
.
Amidst slowing economic activity, RBIs loosening grip on the monetary policy can play an
important role in reviving business confidence and fueling investment activity, which in turn
can support growth in the Indian economy. However, much would depend upon the
complementary steps taken by the Indian government to tame inflation.
I hope you find this issue of KBuzz engaging and insightful.
Regards,
Rajesh Jain
Head Markets
KPMG in India
Sources:
1- RBI, Monetary Policy Statement for 2012 -2013, April 17, 2012
2- Ministry of Finance, Monthly Economic Report, March 2012
3- Business Standard, Services PMI inches up, May 04, 2012
4- Economic Times. Exports grow 21% at USD 303.7 billion, trade deficit zooms to record high USD185 billion, May 1, 2012

2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated
Pending
Indian Economy 03
Loosening liquidity A right move?
Education 06
A skilled India @ 75 NSDCs role, challenges and opportunities
Energy and Natural Resources 09
PNGRB regulation on IGLs tariff Implications for CGD Industry
Financial Services 12
NBFC gold loan Short term pain, long term gain?
Government 15
Direct cash subsidy and its impact in the Indian context
Healthcare 18
Medical devices sector: Key challenges and methodologies
IT-BPO 21
Future of IT hardware industry in India
Media and entertainment 25
Is the cable industry digital ready?
Private equity 28
2012 could be a good vintage year for private equity investments
Real estate and construction 33
Joint development arrangement Gaining importance and posing
significant challenges
Transportation and logistics 37
Warehousing opportunities in India
Indian
Economy
3 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Rohit Bammi
Head
Financial Risk Management
rohitbammi@kpmg.com
RBI has fired its big guns
and positively surprised
even the most optimistic
market watchers.
Suppressed inflation,
particularly in petroleum
products, and the current
account deficit would keep
a check on further
aggressive rate cuts
Rohit Bammi
Head
Financial Risk Management
KPMG in India
RBI in its annual Monetary Policy meet for FY13 started the monetary easing
cycle and aggressively cut the repo rate by 50 basis points first cut in three
years. The move surprised the people from all rungs even the most
optimistic experts who were expecting a 25 bps decline in repo rate amid
concerns over inflation risks from suppressed coal, electricity, fertilizer and oil
prices. With this cut, repo rate stands at 8 percent while CRR remains
unchanged at 4.75 percent and reverse repo at 7 percent.
Guided considerations
The RBI move has been guided by the twin considerations of growth
slowdown and declining inflation. Illustratively, growth declined to almost a
three year low of 6.1 percent in the third quarter of FY12 and headline
inflation accommodating receding demand pressures moderated to below 7
percent in March 2012 as compared to 9.5 percent witnessed in November
2011.
More importantly, core (non-food manufactured products) inflation dropped
from a high of 8.4 per cent in November 2011 to 4.7 per cent in March 2012,
actually coming below 5 per cent for the first time in two years
1
.
The need
The monetary loosening was required as the economic activity plummeted in
the economy last fiscal due to a combination of domestic and external factors.
Domestically, the liquidity tightening measures by the RBI pulled down
consumption and investment drastically during the last fiscal. Illustratively,
investment growth dipped to -2.7 percent in Q2, FY12, which was the lowest
in two years
2
.
Similarly, private consumption, an important demand side driver of growth
(which accounts for around three fifths of the GDP), feeling the heat of
inflation and rate hikes by the RBI, dipped in line with other economic
indicators. The IIP, another indicator of industrial activity, also declined,
posting a negative growth rate of -4.9 percent in October 2011 the lowest
since March 2009
2
.
These domestic pressures coupled with global uncertainty triggered a flight to
safety amongst global investors and led to an outflow of FII that touched a
three year high in August 2011 (USD -1.77 billion). The rush towards the US
Dollar translated into the Rupee weakening, which touched an all time low of
INR 54.30/USD in mid December 2011
3
.
So, the aggressive move of the RBI is justified in order to revive growth in the
economy which remains below pre-crisis level with weak business and
investors sentiments further threatening to pull the growth down in long run.
RBI on the expectations of normal monsoon, revival in industrial activity, and a
relatively better global outlook expects GDP growth in FY 13 to be 7.3
percent
4
. The growth is expected to remain below trend till first quarter of
FY13, however, it is expected to improve gradually thereafter as the impact of
monetary policy easing unfolds and the government also support.
1. RBI Monetary Policy Statement for 2012 -2013, April 17, 2012
2. Ministry of Statistics and Programme Implementation, Reports and Publication
3. SEBI website statistics section
4. RBI Monetary Policy Statement for 2012 -2013, April 17, 2012
KPMG in India point of view - The future course
RBI has also stated a limited room for further monetary policy easing. This is
because the deviation of growth from its trend is modest plus several
upside risks to inflation persist, particularly petroleum products. If the
subsidies targets as set in the Union Budget, 2012-2013 are not met,
demand pressures will remain and could lead to inflationary pressures in the
economy limiting the scope for further monetary easing. The RBI expects
inflation to remain range bound during the year with March 2013 WPI to be
approximately 6.5 percent. Nevertheless, expectations exist for another 25
bps cut in repo rate depending upon the complementary fiscal policy move
from the government on supply side to improve investment climate and
addressing inflationary pressures.
To conclude, the RBI has acted timely however a little more aggressively
than expected. The move is expected to support the real economy, as it will
signal banks to ease lending rates much however would depend upon the
attempts by the government to stick to deal with the supply side
constraints.
Key projections for FY13
Growth in key variables (%)
GDP growth 7.3
March 13WPI inflation 6.5
Deposit growth 16.0
Non-food credit growth 17.0
Money supply growth 15.0
Source: RBI, YES BANK Limited
Education
Narayanan Ramaswamy
Head
Education
narayananr@kpmg.com
Overview
Though fate stands in the way, strenuous effort yields fruit. Labour
recompenses what fate denies --- Thirukkural 619
Quoting this famous couplet from a hugely popular Tamil literary work, in his
India @ 75 presentation in 2007, Professor CK Prahalad defined Indias role
as a global power in the year 2022. While this vision document outlines
many a goal for India to achieve and among them a very ambitious goal for
human development to have a 500 million strong skilled labour by 2022.
Today, fulfilment of this audacious goal is driven by no less than the Indian
Prime Ministers office. The Prime Ministers National Council on Skills
Development is pushing for a skilled India through various government
mechanisms as shown in the pie chart below.
1

NSDC A mixed bag of results to date
Among other initiatives, the National Skill Development Corporations
(NSDC) mission is interesting since the model assumes little intervention
from the government beyond its role as an investment partner to private
enterprise and to setup facilitating bodies in the form of sector skills
councils. It funds private sector skills training providers to setup centres that
can train people for employability in various high labour demand sectors. A
quick analysis of its portfolio of investments
2
reveals interesting insights.

As it redoubles its efforts
to transform the skills
training landscape in the
country, it will no doubt
rope in expertise from
international consulting
organizations that can
bring their global
experience in vocational
education and skills
training to bear fruit in the
Indian context. Indeed, it
is in overcoming such
challenges that
opportunities will flourish.
Narayanan Ramaswamy
Head
Education
KPMG in India
1. NSDC Reports,
2. NSDC Annual Report, year ending March 2011, KPMG in India Analysis
National Skill
Development
Corporation, 150
Ministry of Labor
and
Employment,
100
Ministry of
Human
Resources and
Development, 50
17 ministries
and
departments,
200
65%
13%
18%
4%
43%
24%
20%
13%
79%
75%
77%
42%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0%
10%
20%
30%
40%
50%
60%
70%
Top 4 Next 4 Next 10 Next 15
Targets Funding NSDC/ PC
Split of 500million target across various government initiatives
Portfolio analysis - NSDC
On an average NSDC share in total project cost is approximately 70 percent. The total number
of training centres of investee companies envisaged is approximately 14000 and the average
number of students foreseen per centre per year is approximately 415
3

While the top 4 investments have about 2/3rd of the total committed numbers for skills
development (~58 mn), they account for only 43% of the project costs. This is indicative of
the benefits of scale accruable to investments in this space
4
NSDC has been investing on creation of capacity on a large scale. The typical ratio of NSDC
funding within total project costs is 80 : 20 for the top 4 entities
5

The target for NSDC is to train 0.5 million students per year but its has been able to train only
approximately 75,000 students which is 16 percent of the target
Despite this support for highly scaled models, there is reason to believe, that while NSDCs
smaller investments have been relatively more compliant with their committed targets, large
multi sector/ geography players may have significantly underperformed
In light of the current trends in investment performance, NSDC is likely to significantly tighten
its appraisal & monitoring, tread more cautiously on further disbursements and revise
estimates to indicate a delay of 2 -3 years to achieve current commitments.
Indeed, much of NSDCs initiatives that are currently underway indicate a move toward a more
robust evaluation of investments and Sector Skills Councils (SSC) are bodies which will identify
current and projected skill gaps in the sectors and develop sector-specific competency.

NSDC has already approved 8 SSCs for the following sectors (i) Automobile Manufacturing (ii)
Private Security (iii) Energy (iv) Media, Animation, Gaming, and Films (v) IT and ITeS (vi) Health
care (vii) Retail and (viii) Banking and Financial Services. While approval is only the first
milestone, actual implementation requires expertise and knowledge that multilateral funding
agencies like
6
ADB and World Bank are trying to inculcate, through select SSCs that they
have picked up for funding.
KPMG in India point of view
There can be no doubt that the NSDC, the lean organization that it is has a mammoth task cut
out for itself. As it redoubles its efforts to transform the skills training landscape in the country, it
will no doubt rope in expertise from international consulting organizations that can bring their
global experience in vocational education and skills training to bear fruit in the Indian context.
Indeed, it is in overcoming such challenges that opportunities can flourish.
Mandate of Sector Skill Councils
Research
Identify current and projected skill gaps
Develop sector specific competency standards and benchmark these with international occupation standards
Establish sector specific Labor market information systems.
Quality Assurance
Standardize and streamline the affiliation and accreditation process
Participate in accreditations and certifications in their sectors.
Delivery
Develop and update course modules, and train trainers
Partner with educational institutions to train the trainers
Promote academies of excellence.
3. NSDC Annual Report, year ending March 2011,
Energy and
Natural
Resources
Arvind Mahajan
Head
Energy and Natural
Resources
arvindmahajan@kpmg.com
Overview
The downstream regulator Petroleum and Natural Gas Regulatory Board
(PNGRB) has issued an order determining the transmission tariff and
compression charges for IGL's city gas distribution (CGD) network in Delhi.
As per the order, PNGRB has approved a significantly lower compression
charge of INR 2.75/kg (vs INR6.66/kg as proposed by IGL) and network tariff
of INR 38.58/mmbtu (vs INR 104.05/mmbtu as proposed by IGL)
retrospectively from April, 2008
1
. Thus, the combined new tariff is around 60
percent lower than proposed by the IGL. Moreover, PNGRB has directed
IGL to reduce its selling price for CNG and PNG in accordance with the
lower transmission tariff and compression charges. In response to this
order, IGL has moved to Delhi High court challenging the constitutionality
and legality of the powers of the PNGRB to fix the tariff.
Compression and Network Tariff

Source: PNGRB, IGL

Early stage to judge the impact on IGL profitability
The margins of CGD companies are broken into three segments network
charges, compression charges and marketing margins. As per the current
policy, network and compression charges are determined by the regulator,
whereas marketing margins are unregulated with a view to induce
competition in the CGD industry. The PNGRB decision of fixing the tariffs at
much lower rate than what IGL is currently charging is estimated by many
analysts to have an adverse affect on the companys profitability.
In FY2011, IGL made a net profit of around INR 2.6/scm, with a net profit
margin of approximately 15 percent. If PNGRB order is followed, then end
consumer prices would be reduced by around INR 5.5/scm, implying net
loss for IGL
2
. Further, PNGRBs decision to follow these rates
retrospectively would put an additional burden of around INR 1000 - 1600
crores on the company
3
.
However, it is likely that IGL could offset tariff reduction by increasing
unregulated marketing margins or challenge the basis of tariff computation
and get a revised tariff order.

1 Petroleum and Natural Gas Regulatory Board; http://pngrb.gov.in/newsite/pdf/orders/order9april.pdf
2 IGL website, Financial Results
3 IGL takes a battering on PNGRB ruling; Business Standard, 10 April 2012
PNGRB order on
regulating the tariffs
might have an
unfavorable impact on
future CGD bidding
rounds.
Arvind Mahajan
Head
Energy and Natural
Resources
KPMG in India

PNGRB regulation on IGLs Tariff Implications for CGD
Industry
Category Unit IGL Tariff PNGRB Tariff Percentage Reduction
Compression
Charges
INR/KG 6.66 2.75 58.7%
INR/scm 5.35 2.21 58.7%
Network Tariff
INR/mmbtu 104.05 38.58 62.9%
INR/scm 3.75 1.39 62.9%
PNGRB regulation on IGLs Tariff Implications for CGD
Industry
The current order is only applicable for IGL, but in future, PNGRB might
issue similar regulations for other downstream natural gas players such
Gujarat Gas, Adani Gas, GAIL etc., impacting their profitability.
PNGRB was created to promote investment in the downstream sector,
foster competition among entities and protect consumers interest. The
recent decision of the Board seems to be a favourable step for natural gas
consumers. However it does open up Pandora's box in terms of issues to
deal with.
Until now, CGD segment has been perceived to be operating in free market
environment with minimum government intervention. Due to possibility of
high operating margins, the previous rounds of CGD bidding had attracted
interests from several private players across industries such as power, real
estate and infrastructure. However, the tariff/margins control by the
government might be seen as a step to quasi-govern the sector, impacting
the attractiveness.
The addition of new cities into the CGD network has already slowed down
due to regulatory impediments. The final awards of the third CGD round are
yet to be made and the fourth round has been cancelled by PNGRB due to
irrational bidding.
Thus the Board has to consider its action vis--vis the market need. It needs
to be debated whether the need is to have an intrusive set of regulations
that determines tariff /margins or a regulation that encourages participation
by players such that competing fuels determine the distribution margins.
Given the target set by PNGRB to cover around 300 cities under CGD
network by 2015, it seems the latter approach could be a prudent approach.

Financial
Services
13 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
India is known to possess large stocks of gold, estimated at about 11
percent of global gold stock. Over the past ten years, the value of gold in
India has increased at a compounded average growth rate (CAGR) of 13
percent, outpacing the country's real gross domestic product, inflation and
population growth by 6 percent, 8 percent and 12 percent respectively. India
has one of the highest savings rates in the world (34 percent of GDP in
FY10), of which one third is invested in gold.
1
In India, gold prices increased by a staggering 180 percent during FY06-
FY11 and have outperformed practically all known asset classes in the last
decade.
2
It is estimated that 10 per cent of the countrys gold stock is
pledged as collateral for loans, of which approximately 75 percent is in the
unorganized market (money lenders, pawn brokers, etc.), and the remaining
25 percent in the organized market (specialized Non-Banking Finance
Companies (NBFCs), other NBFCs, commercial/cooperative banks, etc).
3

The value of the organized gold loan market in India is estimated at INR 400-
450 billion, with a CAGR of approximately 40 percent during FY02-FY10.
4

Gold loan NBFCs have recorded significant growth in recent years in terms
of both their balance sheet and physical presence. These NBFCs have
increased their books by a little more than 50 percent year-on-year over the
past two years, while banks registered growth of only 32-37 percent.
5
To
meet their growth objectives, the NBFCs have increased their dependence
on public funds, including bank finance and non-convertible debentures
issued to retail investors.
6

With these NBFCs are growing beyond the normal rate, the impact on them
of any future crash in price by the same margin or more could be severe.
The financial sector may also be affected, since NBFCs are often big
borrowers. To rein in the uncontrolled growth of gold loans and reduce the
risks involved (concentration risk and market risk because of adverse
movements in gold prices), the Reserve Bank of India (RBI) has brought in a
slew of measures to tighten regulatory supervision in the sector during the
last year.

Naresh Makhijani
Partner
Tax Financial Services
nareshmakhijani@kpmg.com
In spite of tighter
regulation, the benefits
like flexibility, less
formalities, faster
turnaround time, ability to
service non bankable
customers etc. should
help NBFCs to garner
significant portion of the
gold loan market share in
future.
Naresh Makhijani
Partner
Tax - Financial Services
KPMG in India
Organized gold loan market size (INR bn) Share of organized gold loan market
players (%)
CAGR 40%
25
120
250
375
FY02 FY07 FY09 FY10
14.5 12.1
9.7
18.4 23.6
32.2
14.8
13.7
11.6
52.3 50.6
46.5
FY07 FY09 FY10
Cooperatives NBFCs
Private sector banks Public sector banks

Source: IMACS Gold loan industry report, 2010
1. World Gold Council, Reserve Bank of India, 2010
2. Reserve Bank of India, Handbook of Statistics on Indian Economy, 2010-11
3. IIFL Gold Loans Lending with Comfort, June 2011
4. ICRA Press Release, 22 March 2012
5. ICRA Press Release, 22 March 2012; Business Standard, 18 April 2012
6. Reserve Bank of India, Lending Against Security of Single Product Gold Jewellery, 21 March 2012
14 2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
Earlier, in February 2011, the RBI removed priority sector status from gold loan
companies, which led to a higher cost of borrowings for these companies.
7
In another
step to protect the financial system against any possible adverse movement in gold
prices, RBI introduced the following guidelines for gold loan NBFCs in March 2012:
1. Loan to value (LTV) ratio not to exceed 60 percent for loans granted against the
collateral of gold jewellery
2. Percentage of gold loans to total assets to be disclosed in balance sheets
3. Loans not to be granted against bullion, primary gold, gold coins
4. Tier I capital requirement (currently 10 percent) raised to 12 percent by April 1,
2014 for gold loan NBFCs (where such loans comprise 50 percent or more of their
financial assets).
As there were previously no LTV restrictions, many companies had extended up to
90-95 percent of the value of gold jewellery as loans, and a relatively small proportion
of the lending happened at LTVs of 60 percent or lower.
8
The new LTV cap of 60
percent could result in significantly lower growth rates, as borrowers will have to bring
in additional gold jewellery to obtain a loan of the same amount. The RBIs new
measures could also adversely impact the asset quality of gold loan companies in the
short term as the loan eligibility of borrowers seeking refinance is expected to decline.
In addition, this development could result in business shifting to the unorganized
sector or to banks, which would continue to extend loans at higher LTV ratios. The
current high profitability of gold loan companies may also moderate as they are likely
to reduce pricing in order to protect their market shares and prevent a shift to the
unorganized sector.
The RBI guidelines are expected to impact gold loan NBFCs business in the short-
term. Business growth could fall from more than 50 percent to 20-25 percent per
annum while return on assets could fall from 4.5 percent to 2.5-3 percent.
9
However,
in the long term these guidelines should have an overall positive impact on the sector,
by bringing regulatory clarity. The moderation of growth would increase the
confidence of stakeholders, including banks and other investors, in the sector. In
addition, the LTV cap would lead to better asset quality. Furthermore, slower growth
rates will likely reduce capital requirements over the medium term.
In April 2012, the RBI required banks to reduce exposure to any single NBFC engaged
in the gold loan business from the current 10 percent of their capital funds to 7.5
percent.
10
This means that banks will have fewer funds to lend to these gold loan
NBFCs, which will increase their borrowing cost. Even if the new regulations attempt
to make gold loan NBFCs less attractive, these specialized NBFCs have nevertheless
created a niche for their gold loans capabilities by flexibility, easy access, low levels of
documentation and formalities, quick approval and disbursal of loans, faster
turnaround time, customer trust, ability to service non bankable customers and quality
of service. These unspoken associated benefits will help NBFCs to capture and
sustain a significant portion of the gold loan market share in future, in spite of the
tighter regulations.
To summarize, these guidelines might moderate the growth and impact the
profitability of gold loan NBFCs in short term. In the long term, however, they are
expected to enhance the gold loan NBFCs ability to assimilate the impact of any
sharp decline in gold prices, thereby improving the sector's asset quality. These
guidelines should not only strengthen the well-capitalized established business
players but also help regulate new players which lack the experience or the necessary
understanding of the business, making the gold loan market more mature.
7 Business Standard, 18 April 2012
8 Finance Express, 22 March 2012
9 Crisil Press Release, 22 March 2012
10 Reserve Bank of India, Monetary Policy Statement 2012-13
Government
Direct cash subsidy
would not only eliminate
the opportunity for
benefiting from pilferage
and diversion in the
current system due to sale
of goods at more than one
prices, but also give the
liberty to the beneficiaries
to buy the goods of
their own choice and
choose the place where
they buy their goods from.
Navin Agrawal
Head
Government
KPMG in India
Navin Agrawal
Head
Government
navinagrawal@kpmg.com
Existing system and its challenges
Under direct transfer, the difference between the market price and subsidized
price is directly transferred to the beneficiary in the form of cash in proportion
to the quantity uplifted from the market.
1

In the Union Budget 2011, the government announced a direct transfer of
subsidies to BPL households which is a drastic departure from the existing
indirect or price subsidy system wherein subsidies are routed through
manufacturers who are required to sell goods below the market rate.
The change in subsidy policy follows in response to the following shortcomings
in the current system.
Dual-pricing
Market distortions
Unresponsiveness to customer needs
Poor targeting of BPL population
Diversion and leakages
Under recoveries for Oil Manufacturing Companies (OMCs).
The new policy would help poor access basic goods by reducing demand
constraints. Since now the manufacturers and retailers would be selling the
commodities at market determined price universally; this policy would not only
put a check on dual pricing, market distortions and leakages but would also
remove the burden of under recoveries on OMCs. However, the real success
of the policy lies in the accuracy and efficiency in identification of worthy
beneficiaries, i.e. BPL Households.
International best practices
Several countries including Jamaica, Philippines, Turkey, Chile, Mexico,
Indonesia, South Africa, Morocco and United States have adopted this system
in the form of Conditional Cash Transfer (CCT) programs
2
. Under such
programs, direct cash is provided to the poor families on condition that its used
for verifiable investments in human capital, such as regular school attendance
or used in attaining basic nutrition and health care.
The largest and the most successful conditional cash transfer program is the
Bolsa Famlia Program (BFP) in Brazil that covered close to 100 percent of
Brazil's poor in 2007
2
. Under the programme, the government transfers cash
straight to a family subject to conditions such as school attendance, nutritional
monitoring, pre-natal and post-natal tests. The entire system is managed
through efficient targeting, disbursement and regular monitoring of the
disbursed funds.
Evolution in India
The government in order to leverage technology solutions and in particular the
Aadhaar i.e. the Unique Identification (UID) programme for this purpose,
constituted a task force on Direct Transfer of Subsidies on Kerosene, LPG &
Fertilizer headed by Nandan Nilekani (Chairperson of UID Authority). The task
force proposed the Solution Architecture (Core Subsidy Management System
(CSMS)) to achieve a fully electronic back-office process for direct transfer of
subsidy. The system would automate all business processes related to direct
subsidy transfer and can be customized according to the business rules. At the
very core of the system would be: Aadhaar Integration, ERP Integration and
Integration with nodal bank and payments gateway.
1. Financial times Lexicon
2. Direct cash subsidy: Challenges for implementation; Business Standard, 25 April 2011
As the task force proposed in its report, the new subsidy system for kerosene would
be implemented in 2 phases:
Phase I
Direct transfer of subsidy through state
governments/UT Administration
States purchase commodity from manufacturers
at market price
Central government transfers the differential
subsidy directly to the state govts./UT
Subsidy amount is proportional to commodity
uplifted from the retail points in a state/UT
States reform their distribution system based on
the CSMS system proposed by the Task Force.
Phase II
Subsidy transfer to beneficiaries
The cash equivalent of subsidy is transferred
directly to beneficiaries through their bank
accounts by linking transactions to Aadhaar
The commodity purchase and then transfer of
cash subsidy to their account will be based on
successful authentication of the beneficiary
through Aadhaar at the point of sale.

Impact on government
The new system is expected to reduce this cost and subsidy bill through better targeting
In the Union Budget 2012-13, target is to keep 2012-13 subsidies under 2 percent of GDP
and under 1.75 percent of GDP in the next 3 years
3

Government endeavors to scale up and roll out Aadhaar enabled payments for various
government schemes in at least 50 districts within next 6 months
Public sector OMCs have launched LPG transparency portals to improve customer service
and reduce leakage.
Critical success factors
The governments efficiency in dealing with the fundamental issues like the basis of
targeting, definition of poverty line & identification of intended beneficiaries
Effectively subsidizing the poor for fertilizer or kerosene once the prices are market
determined and are liable to fluctuate
Devising a methodology to transfer the cash subsidy to the poor
State governments endeavor in taking up fundamental reforms required in Public
Distribution System (PDS).
Recommendations
Identification of beneficiaries
Selection criteria should be kept broad-based and inclusive. Lessons can be learnt from the
successful implementation of Brazils Bolsa Famlia Program
Vulnerability to fluctuating market prices
Prices can be averaged out yearly based on forecasts. Cash subsidy should allow flexibility
in the choice of commodity to the beneficiary. The amount of subsidy should be calculated
based on the number of individuals per household rather than assuming an average
household size
Transfer of cash subsidy
To expedite the implementation, bank accounts can initially be opened for one member per
household. The withdrawal can be done at bank branches and ATMs through debit cards
and through the business correspondent model using smart cards, PoS devices, etc.
Source: Report submitted by the task force on Direct Transfer of Subsidies on Kerosene, LPG & Fertilizer, GoI.
3. Union Budget 2012-13
Healthcare
Introduction
The Indian market for medical equipment and supplies ranks among the worlds top 20
but, despite strong growth rates, the market remains disproportionately small with per
capita spending of USD 2, as of 2011, the medical devices market in India was estimated
to be worth USD 2642 million. As the sector gains traction continually over the years,
there is a perpetual demand for high quality products (especially in the private sector).
Although the high-tech end of the medical device market is dominated by multinationals
with extensive service networks, the market for medical supplies and disposable
equipment is dominated by domestic manufacturers.
1

Key issues in the industry and possible solutions
Unstable regulatory environment
The regulation of medical devices is often complicated by legal technicalities. In India, the
Department of Health has nominal jurisdiction over medical devices, evident from the
illegal reprocessing and re-packaging of used syringes for re-sale and the availability of
equipment that fails minimum safety and quality standards
.2

About seven years ago, the use of unregulated implantable devices came to the notice of
the Mumbai High Court who passed orders insisting on regulation of medical devices. As
a result, the office of the Drug Controller General of India (DCGI) announced regulation of
ten categories implantable medical devices on October 7, 2005. A number of issues
arose following this announcement owing to lack of preparation on the side of the
industry and the lack in experience of the regulatory body.
It is imperative all stakeholders in the field; industry, regulators and customers be aware
of the regulatory environment. There is considerable gap in knowledge that needs to be
bridged.
The need for regulations arose primarily due to the safety concerns that surround the field
and hence it is essential to have on board regulatory personnel with qualifications and
knowledge appropriate for regulation of these products.
There are multiple proposals being made to effect the provisions of the Drugs and
Cosmetics Act, hence the regulation of medical devices is likely to be an issue that would
not be taken up immediately and without debate. It would therefore be in the best
interest of all stakeholders of the industry if the Ministry of Health were to separately take
up and fast track the setting up of an independent Medical Device Regulation as well as
an independent authority for its implementation.
Lack of funding in R&D
There has not been much investment in R&D in the segment. Due to various cost cutting
initiatives that have been taken by firms in the healthcare sector, innovation, particularly in
this segment has not been witnessed.
It is important to acknowledge the fact that innovation can only be achieved in a
collaborative manner with the clinicians / healthcare service providers. It is imperative that
they participate in all aspects, from need identification to scientifically documenting
outcomes and ideally subjecting it to stringent peer review. It has to be noted that the
cost and time of development of Medical Devices is high but needs to be amortized over
much smaller numbers over a shorter product lifecycle. This should be understood and
recognized.
It is also important that the industry develop the ability to understand and protect
intellectual property thus created.
Amit Mookim
Head
Healthcare
amookim@kpmg.com
1. Epsicom Research
2. AmChamreport KPMG
Insufficient skill sets
The Department of Science and Telecom, The Ministry of Health and Family
welfare and Indian Council for Medical Research have taken strong initiatives to
improve the quality manpower in the medical device sector. The Department of
science and Technology and Sree Chitra Tirunal Institute for Medical Sciences
and Technology (SCTIMST) have drafted a recent bill for biomedical devices
regulatory authority to structure the industry dynamics.
The Department of Science and The Ministry of Health and Family welfare have
introduced several courses with an industrial perspective in the biomedical
sector. Namely:
MTech in clinical engineering at IIT Madras in collaboration with Christian
Medical College and Sree Chitra Tirunal Institute for Medical Sciences and
Technology (SCTIMST), Thiruvananthapuram.The course was funded by the
department of science and The Ministry of Health and Family welfare in 2007.
Apart from B-Tech Biomedical programmes in some private and semi-private
institutes, IIT-Bombay, Khagarpur and Madras have some viable programmes in
this stream.
Amalgamation programmes are also catching the attention of students at the
premier institutes which are expected to play a major role in reducing the skill set
crisis. A good model of blend of medical and engineering streams is the Stanford
Biodesign programme, because of which AIIMS and IIT Delhi students are
working together.
Lack of domestic participation
Medical products are manufactured in India by both private companies and
companies incorporated under the Ministry of Health and Family Welfare. A
number of Indian manufacturers are either involved or interested in joint
ventures/licensing agreements with companies in the USA and Europe while
domestic manufacturers dominate the low tech, disposable equipment and
supplies end of the market. Lack of incentives from the government and high
capital requirement with deferred break-even is restricting the entry of domestic
players for manufacturing.
A number of international companies have set up manufacturing facilities in India,
including Bausch &Lomb,B. Braun, Becton Dickinson, Drger, GE Medical
Systems, Siemens, Terumo, and Zeiss etc with some of the domestic giants like
BPL healthcare, Nicholas Piramal (diagnostics kits), Opto Circuits India Ltd, and
Advanced Micronic Devices Ltd coming to the fore
.3
The government needs to attract domestic players by efficient incentive
packages which motivate domestic players to manufacture medical devices and
hence bring the cost of manufacturing to the desired profit base.
Conclusion
The medical technology segment has tremendous potential. This potential is
being recognized by the government and there have been many initiatives to
promote the sector. In the Union Budget 2012-2013, customs duty has been
reduced from 16 percent to 8 percent for medical and veterinary furniture. The
sector is expected to grow at a CAGR of 13.4 percent (USD 4,957.8 million by
2016).
4

3. KPMG Analysis
4. IBEF Research

IT - BPO
India has witnessed remarkable success in the field of information
technology and business process outsourcing (IT-BPO) over the two
decades. Total export revenues earned by IT-BPO sector have grown to
USD 69 billion in FY12, with the overall sector (including hardware) touching
revenues of USD 100 billion.
1
The domestic hardware market comprising
desktops, laptops, servers, printers, storage, networking peripherals is the
largest segment within the domestic IT-BPO market. This segment is
expected to reach revenues of nearly USD 13 billion.
1

This growing market, which is currently sized at USD 13 billion, has been led
by BFSI, Manufacturing and Government, which have the maximum share in
hardware spend in India.
2
Factors such as infrastructure requirement in
public sector, capital-intensive nature of manufacturing firms and increasing
need or modernization of banks has been driving the spending of these
three verticals. While these three verticals lead the market in the current
scenario, sectors such as Communications and Media, Financial Services
and Healthcare are expected to ride the next wave of growth witnessing
growth rates of 12 percent, 11.6 percent and 11.4 percent respectively.
2
The hardware industry in
India is bullish and
promises immense
potential. While significant
opportunity lies ahead of
us, there is a need to
make some policy
changes to tap the latent
potential. Inverted duty
structure duty due to
which importing finished
goods turn out to be
cheaper than assembling
them in India needs an
overhaul. All we need is to
take the right foot forward
towards making India an
electronic manufacturing
hub.
Pradeep Udhas
Head
IT-BPO
KPMG in India
Pradeep Udhas
Head
IT-BPO
pudhas@kpmg.com
1. NASSCOM Strategic Review 2012
2. Ovum, IT Hardware Global Forecast Model, March 2011
Domestic Hardware Market in India Vertical Split of Domestic Hardware
Market FY 2012(100%=USD13billion)

Source: NASSCOM Strategic Review 2012; Ovum, IT Hardware Global Forecast Model, March 2011
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
FY2011 FY2012
Other Peripherals
Printers
Servers
Storage
Network Equipments
Desktop PCs
Notebooks
3.2
3.6
2.7
2.8
2.2
2.5
0.5
0.5
0.4
0.5
0.4
0.4
2.4
2.6
11.7
12.8
23%
16%
11%
9%
9%
9%
7%
7%
7%
3%
Financial Services
Manufacturing
Government & Education
Communications & Media
Retail & Wholesale
Professional Services
Transportation & Logistics
Energy and Utilities
Healthcare
Other
Estimated Growth of Verticals (2010 15)
Source: Ovum, IT Hardware Global Forecast Model, March 2011
2.0%
11.6%
10.7%
11.2%
12.0%
10.6%
11.1%
11.1%
10.0%
11.4%
10.6%
Financial Services
Manufacturing
Government & Education
Comms & Media
Retail & Wholesale
Professional Services
Transportation & Logistics
Energy and Utilities
Healthcare
Other
4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 0.0%
Although the segment is promising and has immense potential, the
increasing demand-supply gap remains to be a cause of concern. While the
demand for hardware was estimated to be USD 13 billion in FY12, the
production of goods stood merely at USD 6 billion.
3
Growing demand for
hardware fuelled by modernization across verticals, clubbed with the slow
rate of increase in domestic production, is widening the demand-supply gap.
While this is seen as a challenge, it is also also unveils a plethora of
opportunities for hardware manufacturers, be it global or India, who can gain
significantly while bridging this chasm.
Growth drivers of the Indian IT hardware ecosystem
The key drivers of the Indian IT hardware ecosystem are:
Growth in per capita income and corporate spend on hardware: Nearly
10 million households now have income levels above USD 10,000 per
annum in 2012.
3
Transformation of IT hardware from an aspiration to a
utilitarian need has made these products more affordable for people
Government focus on digital education: Various state governments in
the country, like Tamil Nadu and Uttar Pradesh, have mandated laptops
for all school children. This is driving a massive spike in the demand for
laptops and other computer hardware
Increasing spending from IT services industry: IT and ITES industries
continue to drive the demand for the IT equipment. With Indian firms
adopting automation, the demand for IT equipment is increasing
Need for innovative products at low cost: Innovative low cost products
like the Aakash tablet are also driving demand from both consumers as
well as the government.
Challenges faced by Indian IT hardware manufacturers
Inadequate infrastructure interrupting growth: Lack of power, land
acquisitions issues and poor transport links restrict hardware
manufacturing firms
Tax issues: When compared to low cost destinations such as China and
Taiwan, Indias current tax structure makes the final product less
competitive
Limited preferential access for local firms: As of now there are no
preferential laws or incentives in place which enforce usage of domestic
products to some extent.
The IT hardware industry can play a big role in providing products and
solutions to aid the India growth story. It has the potential to leapfrog India
to next generation of technology adoption and holds immense
transformational potential for various industry verticals.
3 Report of Task Force to suggest measures to stimulate growth of IT-ITeS and Hardware manufacturing industries in India, MIT, Govt. of India, December 2009
While India has the fastest growing Hardware market, the absolute size of
the market is still small when compared to leading countries such as China
and Japan in Asia Pacific.
4
Other economies such as China, Malaysia and
Vietnam have been taking significant steps to enhance manufacturing
capabilities. China has become the worlds manufacturing hub, Vietnam has
turned into an attractive destination for Electronic Manufacturing Services
(EMS), and semiconductors and Original Device Manufacturing (ODM), and
Malaysia has also transformed into an industrialized market.
4

In order to drive high growth in the industry, it is imperative for the
government to provide impetus to the domestic IT manufacturing industry.
Some of these measures include Convert existing clusters such as
Sriperumbudur and Noida into Centers of excellence; creating a joint
Government-Industry committee to market India and attract investment in
India; incentivizing investments in India by creating a model where the
subsidy or rebate given to a manufacturer is determined on the basis of the
value addition; focusing on R&D; and creating a fund to promote
manufacturing, business and growth for the industry.
Industry Vertical Present state Future potential
Access No digital connectivity Wireless connectivity
Education Limited equipment Digital classrooms
Healthcare Accessibility and cost Telemedicine reduces cost, improves access
Digitization Analog to Digital Electronic society, Unique ID
Growth Story of Comparable Countries
Source: KPMG in India Analysis; 3 Report of Task Force to suggest measures to stimulate growth of IT-ITeS and
Hardware manufacturing industries in India, MIT, Govt. of India, December 2009
Initiated SEZ program in the early 1980s, as compared to India, which
started SEZs in 2005
Decentralized power by authorizing local provinces to frame the
guidelines to administer the different zones
Benefits to business units differ across SEZs based on parameters such
as length of operations, use of advanced technologies, etc.
C
h
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a

M
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i
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V
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a
m

100% FDI on investments for expansion/diversification of projects
Corporate tax rate was reduced from 26% in 2008 to 25% in 2009.
Government also offers other significant tax incentives under the
Promotion of Investments Act 1986 and the Income Tax Act 1967
Companies are opting for Vietnam to reduce their dependence on China
and evenly spread their business risks in Asia
Strong work ethics, improved infrastructure, reduced labor costs and the
availability of a skilled labor pool have been instrumental in making
Vietnam an attractive destination
4 KPMG in India Analysis; 3 Report of Task Force to suggest measures to stimulate growth of IT-ITeS and Hardware manufacturing industries in India, MIT, Govt. of India,
December 2009
Malaysia
Vietnam
China
Media and
Entertainment
The cable television industry in India is poised for one of its most significant
developments in the last decade a transformation to the Digital Addressable
System (DAS) for television distribution. Cable operators in a DAS regime
would be legally bound to transmit only digital signals. Subscribed channels
can be received at the customers premises only through a set-top-box
equipped with a conditional access card, and a subscriber management
system (SMS).
With the parliament clearing the bill to amend the Cable Television Networks
(Regulation) Act in December 2011, the stage has now been set for transition
to DAS, to be implemented across India in four phases. The sunset date of
30th June 2012 has been set for completion of phase-I and the government
seem to be committed towards ensuring a smooth transition within the set
timelines. However, with an installed base of only 6 million
1
set-top-boxes
(STBs), is the cable industry ready to usher the first wave of digitization?
Some of the digital cable operators expect that 70-75 percent of the analog
market has the potential to easily shift to digitization, provided that the cable
industry is prepared for it.
1
Further, they believe that if the cable industry
does not gear itself for the transition, the DTH industry may gather around 40-
45 percent of the market.
1

With rising demand and the lead time for the delivery of STBs being 3-4
months, operators who did not place timely orders for STBs are likely to see
delays as the deadline approaches near. As cable operators begin STB
installation very close to the actual deadline, it is unlikely that all existing
analog cable TV homes will be able to make a transition to digital cable within
the specified time frame. Accordingly, we may witness a delay of
approximately 6 to 12 months for complete digitization across metros (Phase
I). Also, the implementation may vary across the metro cities. The Delhi
market is considered the most challenging, given the highly fragmented
nature of cable industry in the city, while the Mumbai market is largely
consolidated, with fewer MSOs.
We believe that timely installation of STBs is one of the many challenges that
the cable operators will need to confront. The shift will require large capital
expenditure (INR 15-20 billion in phase-I)
1
on digital head-ends, back-end
infrastructure, and STB installation. Regional and smaller Multiple System
Operators (MSOs), which account for approximately 50 percent of the cable
TV market, may find it difficult to raise the required capital for phase-I in
time.
1

Apart from the financial requirements, digitization also presents large
organizational challenges for the MSOs. A consumer focused approach will
be a critical success factor for MSOs to succeed post digitization. While
MSOs will continue to provide technical and manpower assistance to Local
Cable Operators (LCOs) for setting up head-ends and installation of STBs,
they will also need to scale up their back-end infrastructure such as IT
systems, call centres, billing operations and STB management (procurement
and repair). While the back-end infrastructure and required network is largely
in place for Phase-I, however much more work needs to be done to scale-up
billing and customer service operations, which may further lead to large scale
IT outsourcing contracts. This would call for significant manpower
preparedness and deriving learnings from consumer focused industries such
as Telecom where most critical processes are outsourced.
Jehil Thakkar
Head
Media and
Entertainment
jthakkar@kpmg.com
1. KPMG-FICCI Frames Report 2012, Digital Dawn- The metamorphosis begins
Conclusion
While the industry is excited and positive about successful adoption of
digitization, the transition is not expected to be entirely smooth and there are
bound to be implementation challenges. The Indian consumer also appears to
be ready for digital television, as demonstrated by the high penetration of
DTH platform amongst C&S subscribers. However, the cable industry will
need to accelerate its efforts and ensure that it does not lose out on the
digitization opportunity to the DTH players. In the quest to build a sizeable
subscriber base, going forward, we may witness consolidation amongst
MSOs, LCOs being acquired by MSOs and capital rising by MSOs. The
success will depend on how the players work collaboratively towards
overcoming their operational challenges, ensuring technological and
manpower preparedness and building sustainable processes which will
define the dynamics of the industry.
P
r
o
c
e
s
s
e
s

Telecomindustrys key outsourced processes
Pre-sales Order Fulfillment Billing Support Post Sales
Outbound sales
Inbound sales
Up-sell, cross-sell,
right-sell
Lead management/
maintenance
Pre-sales support
Product configuration
Credit check
Set up payment
process.
Order processing
Credit analysis
and approval
Pricing, billing
and involving
Dispute
resolution
Claims/Returns
handling.
Billing credits/
Adjustments & billing
cycles
Past due accounts,
Account
Status/changes
Service
suspend/Interrupt/
Reinstate
Amount owned on bill
Credit card/Online
payments
Roaming queries
Security deposits
Convergence billing.
Retention
Account maintenance
Collections
Loyalty program
Customer analytics
Local number porting
Installations
Technical trouble
shooting
Provisioning/Field
Support
Customer interaction
centre.
F&A
Payroll Processing
Knowledge Management
HR Services
Document Management
Source: Phocuswright, Vendor websites, Company presentations
Note: The list of processes outsourced, vendors and clients is not exhaustive. A few key processes, vendors and clients have been mentioned for illustration
Private Equity
28
Union budget 2012-13: Impact analysis
Vikram Utamsingh
Head
Private Equity
vutamsingh@kpmg.com
2012 could be a good
vintage year for private
equity investments against
the backdrop of relatively
low valuations and better
quality deal flow
Vikram Utamsingh
Head
Private Equity
KPMG in India
1. Venture Intelligence, Data does not include real estate deals
2. Repo rate
3. RBI
4. RBI Policy Meeting, 17 April 2012
2012 could be a good vintage year for private equity
investments
Background
The year 2011 was worse than 2010 given a tough fundraising environment
as well as a poorer exit activity. But in a way, 2010 was a hard act to follow,
too, given the blockbuster exits private equity and venture funds had seen
that year. Many Indian funds went to market but found it tough to raise
fresh capital owing to adverse global economic conditions and intense
competition for the LP dollar. The Indian stock markets were one of the
worst performing markets globally with the Bombay Stock Exchanges
bellwether index falling by a quarter in 2011. Exits were also under pressure
and PE exit value fell to USD 2.8 billion in 2011 against USD 4.5 billion in
2010, a decline of nearly 38 percent, as per data by the Indian research
agency, VCCEdge.
However, PE investments rose to USD 9.1 billion across 459 deals in 2011
as compared to USD 7.6 billion across 364 deals in 2010
1
, reaffirming Indias
attractiveness amongst PE investors. We believe that this trend will
continue and 2012 could be a good vintage year for PE investments. We
highlight a few important aspects below which are likely to shape up 2012.
Improving macro-economic environment
The macroeconomic environment in 2011 was characterized by slowing
GDP growth, declining industrial production, high inflationary environment
and a large fiscal deficit. Corruption scandals and government inaction on
key policy reforms also stalled investor interest. Not surprisingly, PE
investments in the second half of 2011 lost momentum with only USD 3.2
billion invested compared to USD 5.9 billion that was invested in the first
half of that year.
A key macroeconomic concern among investors in 2011 was inflation which
led the Reserve Bank of India (RBI) to tighten interest rates from 6.25
percent to 8.5 percent
2
. This rise of 225 basis points is starting to bear fruit
as inflation is now beginning to fall. Price rises have eased to their lowest in
two years, after remaining at over 9 percent for the most part of 2010 and
2011. They fell to 6.6 percent in January 2012 as against 7.5 percent at the
end of 2011
3
.
Although inflation has been sticky over the past few months hovering at
around 6.9 percent in March 2012, a hopeful plus this year is likely to be a
turn in the monetary policy cycle, with the RBI gradually shifting from
controlling inflation to catalyzing growth. Recent indications from the central
bank seem to suggest that rate hikes are over. In January this year, the RBI
cut the cash reserve ratio (CRR), which is the portion of deposits that banks
need to maintain with it, by 50 bps to 5.5 percent. This was followed by
another round of CRR cut by 75 bps in March 2012 and the more recent 50
bps cut in repo and reverse repo rates bringing them to 8 percent and 7
percent respectively
4
.
Lower interest rates are likely to increase investment spending and augment
GDP growth. This should help rebuild confidence and we are likely to see
more promoters come forward to raise money for expansion. The fall in
interest rates should increase valuations owing to lower cost of capital and
this can help PE firms to deliver better exit returns.

investments
Current valuations are lower than before but starting to see an uptrend
The steep fall in public markets in 2011 has meant that companies are now
trading at valuations that are below their historical averages. The BSE
Sensex price earnings (PE) multiple on a trailing basis is currently at 17.8x
5
,

which is at a discount to its five year trailing average of 18.9x. Similarly, on a
price to book basis, the Sensex was trading at 3.4x as of March 2012
against its five year trailing average of 4.1x. Lower valuations should allow
for deals to happen at more realistic levels and expectation of earnings
growth for the financial year 2013 is expected to increase investments.
Although comparative valuations in India may still not be compelling vis--vis
other emerging markets, they have come down sharply across certain
sectors. For instance, valuations in the power sector have declined by more
than 60 percent in December 2011 since the peak in December 2007.
Similarly valuations for engineering and construction companies have gone
down by about 25 to 30 percent over the same period (See Exhibit 1). Other
sectors too such as oil and gas and logistics have witnessed a fall in
valuations. Given that most funds in India are sector-agnostic; PE investors
are likely to find attractive opportunities across sectors.

Exhibit 1: Valuations across selective sectors

Note: Figures are on a median basis for a set of companies in the respective sectors and as of December 2007 and
December 2011 respectively. Valuation is based on trailing basis for last 12 months.
Source: Bombay Stock Exchange, Capitaline, KPMG in India analysis
Better deals are flowing to PE
The weak IPO market coupled with the high interest rate environment over
the past year has meant that companies have had to look for alternate
sources of capital for their expansion plans. This has led to deals flowing to
PE investors particularly in the case of companies which were seeking to
raise funds through a public listing. For instance, AGS Transact
Technologies, an ATM outsourcing and system integration company based
in Mumbai raised USD 33 million in June last year by diluting a stake to TPG
Capital
6
. The company had earlier filed for an IPO in September 2010.
Similarly, Avantha Power and Infrastructure which had earlier filed for an IPO
in March 2010 to raise close to USD 278 million, raised USD 76 million in its
second round of PE funding in July 2011 from a host of investors led by
Kohlberg Kravis Roberts and Co (KKR)
6
.

Sectors PE EV/Sales EV/EBITDA EV/EBIT
2007 2011 %Change 2007 2011 %Change 2007 2011 %Change 2007 2011 %Change
Logistics 26.1x 17.6x -32.4% 1.6x 1.7x 4.5% 13.2x 7.6x -42.4% 16.2x 9.3x -42.4%
Pharma 12.6x 16.3x 28.6% 1.9x 2.2x 15.9% 8.6x 9.4x 9.6% 10.3x 11.3x 9.3%
Power 32.7x 12.5x -61.9% 7.2x 2.2x -69.5% 18.5x 5.6x -69.8% 22.5x 7.5x -66.5%
Oil & Gas 10.4x 8.9x -14.4% 0.6x 0.2x -61.6% 6.2x 10.1x 62.9% 7.6x 21.6x 185.9%
Engineering 19.2x 14.7x -23.3% 1.7x 1.1x -36.3% 9.4x 6.9x -26.5% 11.1x 7.8x -30.1%
Oil
Exploration
27.6x 11.2x -59.4% 4.7x 2.7x -41.5% 11.7x 4.8x -58.6% 13.6x 6.2x -54.4%
5. As of March 2012
6. VCCEdge
Exhibit 2: Companies that dropped IPO plans and raised PE funding

Note: * DRHP was filed by parent Ind-Barath Power Infra
Source: SEBI, VCCEdge, Venture Intelligence, News articles, KPMG in India analysis

Company DRHP Filed PE Investment PE Investment (USD mn) PE Investor
AGS Transact Technologies 2010 Jun-11 33.0 TPG Capital
AMR Construction 2008 Nov-10 30.4 Avigo Capital
Asian Business Exhibition 2010 Nov-10 17.0 QInvest
Avantha Power & Infrastructure 2010 Jul-11 76.0 KKR
Endurance Technologies 2010 Dec-11 71.0 Actis
Ind-Barath Energy* 2010 Mar-11 45.0 3i IIF
IOT Infrastructure & Energy Services 2010 Dec-11 19.0 UTI Capital
Max Flex & Imaging Systems 2010 Oct-11 21.0 Reliance Equity
One97 Communications 2010 Oct-11 10.0 SAP Ventures
PNC Infratech 2009 Jan-11 33.0 NYLIM India
Super Religare Laboratories 2011 Apr-11 23.0 Avigo Capital
Trimax IT Infrastructure and Services 2011 Apr-12 20.0 Aditya Birla Private Equity
7. VCCEdge
investments
Rise in secondary deals
Secondary sales increased from USD 354 million in 2010 to USD 529 million
in 2011
7
- another positive development for the PE industry. Globally,
secondary sales have become an established exit route providing much
needed liquidity for investors. Increasing number of such deals augurs well
for the PE industry and is a sign of a maturing PE industry.
Better understanding of PE by promoters and GPs
There seems to be a better appreciation of the value add by PE investors.
Promoters have also become more knowledgeable about the PE asset class.
On their part, PE investors have started to adopt an investing strategy
backed by a higher engagement model with their portfolio companies. This
is evident from the increasing number of operating partners at PE firms and
the increasing number of specialized consultants that PE firms are using to
help them support their portfolio companies. In a survey conducted by
KPMG in India in 2011 and presented in the report Returns from Indian
Private Equity the following areas were seen as areas of contribution post
investment:

PE funds contribution to portfolio companies

Note: Data represents percentage of responses
Source: KPMG in Indias report on Returns from Indian Private Equity, December 2011
19.3%
14.0%
12.3% 12.3% 12.3%
8.8%
7.0%
5.3%
3.5% 3.5%
1.8%
0%
5%
10%
15%
20%
25%
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c
o
m
p
a
n
y

i
n

g
r
o
w
t
h

p
h
a
s
e

H
e
l
p
e
d

b
u
s
i
n
e
s
s

t
o

e
x
p
a
n
d

a
n
d

a
c
c
e
s
s

n
e
w

m
a
r
k
e
t
s

I
m
p
r
o
v
e
d

c
o
r
p
o
r
a
t
e

g
o
v
e
r
n
a
n
c
e

i
n

c
o
m
p
a
n
y

H
e
l
p
e
d

i
n

b
u
i
l
d
i
n
g

w
o
r
l
d

c
l
a
s
s

c
a
p
a
b
i
l
i
t
y

H
e
l
p
e
d

a
c
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e
s
s

o
t
h
e
r

s
o
u
r
c
e
s

o
f

f
u
n
d
i
n
g

s
p
e
c
i
f
i
c
a
l
l
y

d
e
b
t

H
e
l
p
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d

i
n

e
f
f
i
c
i
e
n
c
y

i
m
p
r
o
v
e
m
e
n
t

E
n
a
b
l
e
d

i
n
f
r
a
s
t
r
u
c
t
u
r
e

c
a
p
a
c
i
t
y

d
e
v
e
l
o
p
m
e
n
t

O
t
h
e
r
s

H
e
l
p
e
d

i
m
p
r
o
v
e

t
h
e

p
e
r
c
e
p
t
i
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n

o
f

t
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q
u
a
l
i
t
y

o
f

t
h
e

c
o
m
p
a
n
y

investments
Conclusion
Currently deal flow is in abundance for the PE industry. One would hope that
a more positive environment will prove for 2012 to be a good vintage year,
particularly for those willing to ride out short term fluctuations.

Real Estate and
Construction
Introduction
The Joint Development Arrangement (JDA), as a business model has been
in vogue for a couple of years in the real estate sector. With the evolution of
the sector, opening up FDI for the sector and increased corporatization, JDA
concept has also evolved and gained importance.
The key feature of JDA is that the land owner contributes land and
developer undertakes the responsibility of obtaining approvals, property
development, launching and marketing the project with its financial
resources.
Depending upon various factors such as land prices, products to be
developed on the land, financial risks undertaken, roles and responsibilities
undertaken by each participant, JDA model is structured. The land owner
expects much higher consideration in return for providing development
rights to the developer. Typically, consideration is discharged in the form of
upfront payment, sharing of gross revenue, sharing of constructed area or a
combination thereof. Given these commercial, regulatory and tax facets of
the JDA various innovative JDA models are being structured. Each model
offers its unique challenges and its implications also differ variedly.
JDA is effectively a cost effective, lesser financial risk and lesser litigative
model for the developer. At the same time, it also allows the land owner to
participate and share upside in the commercial exploitation of the land. JDA
allows a land owner to climb up the value chain without having to be
engaged (in a real sense) in the construction / developmental activities. It
also presents developer an avenue to commence projects without making
investment in the land, which in metro and major cities, constitutes a
significant portion of the project cost and for which bank finance is not
available. Increase in land prices has contributed significantly to the growth
of JDA as a most suitable model in the recent years.
By its very nature, JDA concept encompasses complex interplay between
the parties involved. Further, the complexities have also increased due to
the use of JDA model in newer opportunities of Redevelopment projects,
Slum Rehabilitation projects, etc. As such, JDA model poses various
challenges from tax (direct and indirect), stamp duty and accounting
perspective. The key challenges from tax and regulatory perspective are
summarised below:
Tax and Regulatory Challenges
Considering the complexities involved, different tax positions (basis the
specific facts) are adopted. Certainly, these tax positions are subject to
challenge from revenue authorities and we are observing significant litigation
on some of the issues common to any JDA. Key tax and regulatory
challenges faced by the land owner and developers are highlighted below:
Joint development arrangement Gaining importance and
posing significant challenges
Sachin Menon
Partner
Real Estate and
Construction
sachinmenon@kpmg.com
In the hands of land owner
The land parted by the land owner, whether constitutes a stock in trade
or capital asset? Since the scheme of taxability is different for business
income and capital gains, this issue is quite relevant. Further, whether
the land owner by parting with the land under the JDA is engaging
himself in the business of real estate is also relevant question and is
dependent upon the specific facts. Many a times, in practice we have
observed conversion of capital asset into stock in trade before
participation by the land owner into a JDA to achieve tax efficiency and
defer the incidence of taxation on transfer of development rights in the
land. This conversion is often attempted to be disregarded by the
revenue authorities.
There is no uniform principle or guideline for determining point of accrual
of capital gains (if land is capital asset) and taxability of income in the
hands of land owner. The point of transfer is a matter of debate i.e.
whether at the time of entering into a JDA or handing over of
possession or receipt of consideration (i.e. cash or built-up area or share
in revenue / profits,) or eventual sale of built-up area received by the land
owner. Matter gets further complicated when varied forms of Power of
Attorney (POA) i.e Specific POA and General POA are executed by land
owner in favor of the developer.
Basis of computation of consideration received in the form of built-up
area or sharing of revenue/ profits is again a disputed area. In case of
area sharing without consideration being capped, the land owner could
be exposed to significant taxation as the revenue authorities could apply
the valuation rules as deemed fit in the absence of any specific rules.
This consequently impacts the quantum of taxability in the hands of the
land owner.
Applicability of stamp duty on JDA and provisions of section 50C of the
Income-tax Act is another challenge.
In the hands of the Developer
Manner in which JDA is structured also exposes parties to Association
of Persons (AOP) Exposure. If JDA is treated as an AOP, it would be
taxed as a separate entity. Further, there are various other downsides of
being taxed as AOP, which makes the arrangement tax inefficient for the
parties to the JDA.
Union Budget 2012 has proposed a new withholding tax provision on the
sale of immoveable property. The challenge which arises is whether
withholding tax would be applicable to JDA. In other words, whether
rights in land are being transferred or land itself is being transferred
needs to be determined. Further, the value on which tax would have to
be deducted is also unclear.
In case of area sharing, the developer too faces challenges namely what
should be the cost of development right that he should claim while
computing business income over the life cycle of the project.
In the hands of land owner
JDA poses another important challenge from the service tax regime.
Whether the JDA per se is subject to service tax or not a moot question.
Further, in cases where the land owner receives built-up area, whether
service tax or VAT is applicable on the basis that land owner is
appointing developer for construction of its share is another tricky issue.
The changes proposed in the Finance Bill 2012 have further complicated
the subject of levy of service tax given the introduction of negative list.
Two more important proposals in the Finance Bill 2012 namely GAAR
and domestic Transfer Pricing provision would significantly impact the
JDA structuring especially when the arrangement is entered into
between the related entities.
Accounting of construction cost for the built-up area to be provided to
the land owner or share of revenue / profit to the land owner is also
quite complex and different parties adopt different accounting principles.
Summing Up
While there exist tax and regulatory challenges, business realities and
commercial advantages / necessities would require parties to adopt varied
JDA models depending upon commercial aspects. Further, complexities
surrounding JDA are also bound to increase with parties adopting more
innovative and varied forms of JDAs. While, it is generally said that tax
cannot be driving the business, but in todays time tax cost cannot be
ignored and all possibilities of optimizing tax cost should be evaluated.
Therefore, it is extremely important that the parties should undertake
efficient pre-planning and structuring the JDA post evaluating all possible tax
and regulatory aspects.

Transportation
and Logistics
Introduction
As the Indian transportation and logistics market witnesses new heights,
there has been increasing buzz around technology adoption, network
optimization, multimodal transportation and improving warehousing. The
latter in particular has been evolving rapidly from traditional godowns to
modern facilities. Though this sector has been widely researched and
analyzed, in this paper we take a unique view on its several dynamic
aspects: latest forecast of warehousing demand, the key end user
segments, attractive locations across India, critical success factors for
service providers and end users key buying criteria.
Warehousing demand growing at ~ 6.8 percent CAGR (2010-13)
Driven by growth in production and consumption, organized retail, logistics
outsourcing, modern assets and the likely rollout of Goods and Service Tax
(GST), the demand for warehousing space is estimated to grow from ~ 391
mn sq. ft. in 2010 to 476 mn sq. ft. in 2013, growing at ~ 6.8 percent CAGR
during this period
1
.
The warehousing
landscape in India is
witnessing multiple
interesting trends,
including increasing
opportunities across many
user segments,
emergence of attractive
tier-2 cities as
warehousing locations and
several key buying
preferences of
customers.
Manish Saigal
Head
Transportation and
Logistics
KPMG in India
Manish Saigal
Head
Transportation and
Logistics
msaigal@kpmg.com
Warehousing demand in India
Automotive & Components Chemicals FMCG
Food Engineering Goods IT, Electronics & Telecom
Pharmaceuticals Textiles
53 56 59 63
53
57 60
64
16
17
18
19
99
105
111
117
50
55
59
64 56
61
66
71
20
21
23
24
44
47
51
54
0
100
200
300
400
500
2010E 2011E 2012E 2013E
W
a
r
e
h
o
u
s
i
n
g

s
p
a
c
e

(
m
n

s
q

f
t
.
)

Note: Warehousing demand excludes CFS warehousing space, warehousing space within factories and public agriculture warehouses
Source: Industry discussions, KPMG in India Analysis
Among the key sectors, the highest growth is expected from Engineering
Goods and IT, Electronics & Telecom domains since their warehousing
demand is estimated to respectively grow at CAGR ~ 8.6 and 8.2 percent
during 2010-13. The other sectors are estimated to witness growth rates in
the range of 5.7 to 7.1 percent CAGR
1
.

However, the overall growth potential is limited by several key challenges.
While high price sensitivity of customers and infrastructure connectivity limit
a service providers capabilities to offer world-class services, the usually
underdeveloped state of industry-specific customization capabilities, asset-
heavy nature of the business, need for large capital and issues related to land
acquisition make things all the more difficult for service providers.
1. Industry discussions, KPMG in India Analysis
Location attractiveness landscape presents a wide opportunity across
India
In the light of various growth prospects and challenges, a deeper analysis
across the geographic landscape in India reveals that while Mumbai,
National Capital Region (NCR) and Nagpur are most attractive locations,
most other attractive locations lie in major western and southern cities.
Further, to appropriately tap opportunities at the
discussed locations especially with regard to
modern warehousing, industry stakeholders need
to be wary of two crucial aspects: (1) customers
Key Buying Criteria, and (2) Critical Service
Factors. While price sensitivity, manpower
availability and location rank as the leading buying
criteria, service providers need to offer high-quality
industry-specific value-added solutions, skilled
manpower both management and operational,
IT/technology solutions - ERP, Put-to-Light, GPS,
etc., and build up strong relationships with
customers, helping ensure long-term contracts
and hence regular and predictable volumes.

Conclusion
Given that the Indian warehousing landscape is
gradually getting redefined from the conventional
concept of godown - a mere four-wall-and-shed
to modern set ups with high levels of automation,
multi-rack and palletization infrastructure, etc., the
need for the wider industry to re-visit their
warehousing approach is pressing. Perhaps, the
onset of GST, with its potential to revamp the
national warehousing network, could be
considered as the single largest industry-wide
opportunity to consider smart warehousing as a
cost-saving opportunity across the supply chain
instead of a standalone necessary evil due to its
capital-intensive nature.
Critical Success Factors and Key Buying Criteria
Notes: Location refers to proximity to user groups
Source: Industry discussions, KPMG in India Analysis
Location Attractiveness for Warehousing
Connectivity is defined as follows:
Well connected to Road, Rail and Air links - High
Well connected with two out of three transport modes-
Average
Well connected with only one out of three modes - Low
Cargo traffic is defined as follows:
High domestic and EXIM cargo - High
High on either domestic or EXIM (low on the other) -
Average
Low on both domestic and EXIM Low
Note: Factors considered while evaluating cargo intensity
include proximity to ports, industrial belts and consumption
centres
Competitive Intensity
Low Medium High
Source: Secondary Research, KPMG in India Analysis
The information contained herein is of a general nature and is not intended to address the circumstances
of any particular individual or entity. Although we endeavor to provide accurate and timely information,
there can be no guarantee that such information is accurate as of the date it is received or that it will
continue to be accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (KPMG International), a
Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of
KPMG International.
kpmg.com/in
This document has been compiled by the Research, Analytics, and
Knowledge (RAK) team at KPMG in India.

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