Sector analysis for portfolio management

FMCG sector

Fast-moving consumer goods (FMCG) sector is the 4th largest sector in the Indian economy with
Household and Personal Care accounting for 50 per cent of FMCG sales in India. Growing
awareness, easier access and changing lifestyles have been the key growth drivers for the sector.
The urban segment (accounts for a revenue share of around 55 per cent) is the largest contributor
to the overall revenue generated by the FMCG sector in India However, in the last few years, the
FMCG market has grown at a faster pace in rural India compared with urban India. Semi-urban
and rural segments are growing at a rapid pace and FMCG products account for 50 per cent of
total rural spending.

Market size

The Retail market in India is estimated to reach US$ 1.1 trillion by 2020 from US$ 840 billion in
2017, with modern trade expected to grow at 20 per cent - 25 per cent per annum, which is likely
to boost revenues of FMCG companies. Revenues of FMCG sector reached Rs. 3.4 lakh crore
(US$ 52.75 billion) in FY18 and are estimated to reach US$ 103.7 billion in 2020. The sector
witnessed growth of 16.5 per cent in value terms between July-September 2018; supported by
moderate inflation, increase in private consumption and rural income.

Investment/ Development

The government has allowed 100 per cent Foreign Direct Investment (FDI) in food processing
and single-brand retail and 51 per cent in multi-brand retail. This would bolster employment and
supply chains, and also provide high visibility for FMCG brands in organized retail markets,
bolstering consumer spending and encouraging more product launches. The sector witnessed
healthy FDI inflows of US$ 14.42 billion, during April 2000 to December 2018. Some of the
recent developments in the FMCG sector are as follows:

In FY2019, ITC made more than 60 launches in the Fast Moving Consumer Goods (FMCG)
segment in India.
In February 2019 India’s leading FMCG Contract Manufacturer Hindustan Foods Limited
received investment of US$ 22 million from Convergent Finance LLP.

 Patanjali will spend US$743.72 million in various food parks in Maharashtra, Madhya
Pradesh, Assam, Andhra Pradesh and Uttar Pradesh.
 Dabur is planning to invest Rs 250-300 crore (US$ 38.79-46.55 million) in FY19 for
capacity expansion and is also planning to make acquisitions in the domestic market.
 In May 2018, RP-Sanjiv Goenka Group created an Rs 1 billion (US$ 14.92 million)
venture capital fund to invest in FMCG start-ups.
 In August 2018, Fonterra announced a joint venture with Future Consumer Ltd which
will produce a range of consumer and foodservice dairy products.

Government Initiatives

Some of the major initiatives taken by the government to promote the FMCG sector in India are
as follows:

 The minimum capitalisation for foreign FMCG companies to invest in India is US$100
million.
 The Government of India has approved 100 per cent Foreign Direct Investment (FDI) in
the cash and carry segment and in single-brand retail along with 51 per cent FDI in multi-
brand retail.
 The Government of India has drafted a new Consumer Protection Bill with special
emphasis on setting up an extensive mechanism to ensure simple, speedy, accessible,
affordable and timely delivery of justice to consumers.

The Goods and Services Tax (GST) is beneficial for the FMCG industry as many of the FMCG
products such as Soap, Toothpaste and Hair oil now come under 18 per cent tax bracket against
the previous 23-24 per cent rate.
The GST is expected to transform logistics in the FMCG sector into a modern and efficient
model as all major corporations are remodeling their operations into larger logistics and
warehousing.

Road heads

Rural consumption has increased, led by a combination of increasing incomes and higher
aspiration levels; there is an increased demand for branded products in rural India. The rural
FMCG market in India is expected to grow to US$ 220 billion by 2025 from US$ 23.6 billion in
FY18. In FY18, FMCG’s rural segment contributed an estimated 10 per cent of the total income
and it is forecasted to contribute 15-16 per cent in FY 19. ^ FMCG sector is forecasted to grow at
12-13 per cent between September–December 2018. @

On the other hand, with the share of unorganised market in the FMCG sector falling, the
organised sector growth is expected to rise with increased level of brand consciousness, also
augmented by the growth in modern retail.

Another major factor propelling the demand for food services in India is the growing youth
population, primarily in the country’s urban regions. India has a large base of young consumers
who form the majority of the workforce and, due to time constraints, barely get time for cooking.

Online portals are expected to play a key role for companies trying to enter the hinterlands. The
Internet has contributed in a big way, facilitating a cheaper and more convenient means to
increase a company’s reach. It is estimated that 40 per cent of all FMCG consumption in India
will be online by 2020. The online FMCG market is forecasted to reach US$ 45 billion in 2020
from US$ 20 billion in 2017.

It is estimated that India will gain US$ 15 billion a year by implementing the Goods and Services
Tax. GST and demonetisation are expected to drive demand, both in the rural and urban areas,
and economic growth in a structured manner in the long term and improve performance of
companies within the sector.
Automobile industry

The Indian auto industry became the 4th largest in the world with sales increasing 9.5 per cent
year-on-year to 4.02 million units (excluding two wheelers) in 2017. It was the 7th largest
manufacturer of commercial vehicles in 2017.

The Two Wheelers segment dominates the market in terms of volume owing to a growing
middle class and a young population. Moreover, the growing interest of the companies in
exploring the rural markets further aided the growth of the sector.

India is also a prominent auto exporter and has strong export growth expectations for the near
future. Automobile exports grew 15.54 per cent during April 2018-February 2019. It is expected
to grow at a CAGR of 3.05 per cent during 2016-2026. In addition, several initiatives by the
Government of India and the major automobile players in the Indian market are expected to
make India a leader in the two-wheeler and four wheeler market in the world by 2020.

Market size

Domestic automobile production increased at 7.08 per cent CAGR between FY13-18 with 29.07
million vehicles manufactured in the country in FY18. During April 2018-January 2019,
automobile production increased 9.84 per cent year-on-year to reach 26.26 million vehicle units.

Overall domestic automobiles sales increased at 7.01 per cent CAGR between FY13-18 with
24.97 million vehicles getting sold in FY18. During April 2018-January 2019, highest year-on-
year growth in domestic sales among all the categories was recorded in commercial vehicles at
22.79 per cent followed by 14.79 per cent year-on-year growth in the sales of three-wheelers.

Premium motorbike sales in India crossed one million units in FY18. During January-September
2018, BMW registered a growth of 11 per cent year-on-year in its sales in India at 7,915 units.
Mercedes Benz ranked first in sales satisfaction in the luxury vehicles segment according to J D
Power 2018 India sales satisfaction index (luxury).

Sales of electric two-wheelers are estimated to have crossed 55,000 vehicles in 2017-18.
Investment

In order to keep up with the growing demand, several auto makers have started investing heavily
in various segments of the industry during the last few months. The industry has attracted
Foreign Direct Investment (FDI) worth US$ 20.85 billion during the period April 2000 to
December 2018, according to data released by Department of Industrial Policy and Promotion
(DIPP).

Some of the recent/planned investments and developments in the automobile sector in India are
as follows:

 Ashok Leyland has planned a capital expenditure of Rs 1,000 crore (US$ 155.20 million)
to launch 20-25 new models across various commercial vehicle categories in 2018-19.
 Hyundai is planning to invest US$ 1 billion in India by 2020. SAIC Motor has also
announced to invest US$ 310 million in India.
 Mercedes Benz has increased the manufacturing capacity of its Chakan Plant to 20,000
units per year, highest for any luxury car manufacturing in India.
 As of October 2018, Honda Motors Company is planning to set up its third factory in
India for launching hybrid and electric vehicles with the cost of Rs 9,200 crore (US$ 1.31
billion), its largest investment in India so far.
 In November 2018, Mahindra Electric Mobility opened its electric technology
manufacturing hub in Bangalore with an investment of Rs 100 crore (US$ 14.25 million)
which will increase its annual manufacturing capacity to 25,000 units.

Government initiatives

The Government of India encourages foreign investment in the automobile sector and allows 100
per cent FDI under the automatic route.

 Some of the recent initiatives taken by the Government of India are -

  The government aims to develop India as a global manufacturing centre and an R&D
hub.
 Under NATRIP, the Government of India is planning to set up R&D centres at a total
cost of US$ 388.5 million to enable the industry to be on par with global standards
 The Ministry of Heavy Industries, Government of India has shortlisted 11 cities in the
country for introduction of electric vehicles (EVs) in their public transport systems under
the FAME (Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in
India) scheme. The government will also set up incubation centre for start-ups working in
electric vehicles space.
 In February 2019, the Government of India approved the FAME-II scheme with a fund
requirement of Rs 10,000 crore (US$ 1.39 billion) for FY20-22.

Road Ahead

The automobile industry is supported by various factors such as availability of skilled labour at
low cost, robust R&D centres and low cost steel production. The industry also provides great
opportunities for investment and direct and indirect employment to skilled and unskilled labour.

Indian automotive industry (including component manufacturing) is expected to reach Rs 16.16-

18.18 trillion (US$ 251.4-282.8 billion) by 2026. Two-wheelers are expected to grow 9 per cent
in 2018.

IT sector

The global sourcing market in India continues to grow at a higher pace compared to the IT-BPM
industry. India is the leading sourcing destination across the world, accounting for approximately
55 per cent market share of the US$ 185-190 billion global services sourcing business in 2017-
18. Indian IT & ITeS companies have set up over 1,000 global delivery centres in about 80
countries across the world.
India has become the digital capabilities hub of the world with around 75 per cent of global
digital talent present in the country.

Market size

India’s IT & ITeS industry grew to US$ 181 billion in 2018-19. Exports from the industry
increased to US$ 137 billion in FY19 while domestic revenues (including hardware) advanced to
US$ 44 billion.

Spending on Information Technology in India is expected to grow over 9 per cent to reach US$
87.1 billion in 2018.*

Revenue from digital segment is expected to comprise 38 per cent of the forecasted US$ 350
billion industry revenue by 2025.

Investment/ Development

Indian IT's core competencies and strengths have attracted significant investments from major
countries. The computer software and hardware sector in India attracted cumulative Foreign
Direct Investment (FDI) inflows worth US$ 35.82 billion between April 2000 to December
2018, according to data released by the Department of Industrial Policy and Promotion (DIPP).

Leading Indian IT firms like Infosys, Wipro, TCS and Tech Mahindra, are diversifying their
offerings and showcasing leading ideas in blockchain, artificial intelligence to clients using
innovation hubs, research and development centres, in order to create differentiated offerings.

Some of the major developments in the Indian IT and ITeS sector are as follows:

 Nasscom has launched an online platform which is aimed at up-skilling over 2 million
technology professionals and skilling another 2 million potential employees and students.
 Revenue growth in the BFSI vertical stood at 6.80 per cent y-o-y between July-
September 2018.
 As of March 2018, there were over 1,140 GICs operating out of India.
 PE investments in the sector stood at US$ 2,400 million in Q4 2018.
  Venture Capital (VC) investments in the IT & ITeS sector stood at US$ 53.0 million
during Q4 2018

Government Initiatives

Some of the major initiatives taken by the government to promote IT and ITeS sector in India are
as follows:

 The government has identified Information Technology as one of 12 champion service

sectors for which an action plan is being developed. Also, the government has set up a Rs
5,000 crore (US$ 745.82 million) fund for realising the potential of these champion
service sectors.
 As a part of Union Budget 2018-19, NITI Aayog is going to set up a national level
programme that will enable efforts in AI^ and will help in leveraging AI^ technology for
development works in the country.
 In the Interim Budget 2019-20, the Government of India announced plans to launch a
national programme on AI* and setting up of a National AI* portal.
 National Policy on Software Products-2019 was passed by the Union Cabinet to develop
India as a software product nation.

Road ahead

India is the topmost offshoring destination for IT companies across the world. Having proven its
capabilities in delivering both on-shore and off-shore services to global clients, emerging
technologies now offer an entire new gamut of opportunities for top IT firms in India. Export
revenue of the industry is expected to grow 7-9 per cent year-on-year to US$ 135-137 billion in
FY19. The industry is expected to grow to US$ 350 billion by 2025 and BPM is expected to
account for US$ 50-55 billion out of the total revenue.

Financial Service Sector

India has a diversified financial sector undergoing rapid expansion, both in terms of strong
growth of existing financial services firms and new entities entering the market. The sector
comprises commercial banks, insurance companies, non-banking financial companies, co-
operatives, pension funds, mutual funds and other smaller financial entities. The banking
regulator has allowed new entities such as payments banks to be created recently thereby adding
to the types of entities operating in the sector. However, the financial sector in India is
predominantly a banking sector with commercial banks accounting for more than 64 per cent of
the total assets held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance this
industry. The Government and Reserve Bank of India (RBI) have taken various measures to
facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These
measures include launching Credit Guarantee Fund Scheme for Micro and Small Enterprises,
issuing guideline to banks regarding collateral requirements and setting up a Micro Units
Development and Refinance Agency (MUDRA). With a combined push by both government and
private sector, India is undoubtedly one of the world's most vibrant capital markets. In 2017,a
new portal named 'Udyami Mitra' has been launched by the Small Industries Development Bank
of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium
Enterprises' (MSMEs) in the country. India has scored a perfect 10 in protecting shareholders'
rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Market Size

The Mutual Fund (MF) industry in India has seen rapid growth in Assets Under Management
(AUM). Total AUM of the industry stood at Rs 23.16 trillion (US$ 321.00 billion) as of
February 2019. At the same time the number of Mutual fund (MF) equity portfolios reached a
high of 74.6 million as of June 2018.

Another crucial component of India’s financial industry is the insurance industry. The insurance
industry has been expanding at a fast pace. The total first year premium of life insurance
companies reached Rs 159,004 crore (US$ 22.04 billion) as of Jan 2019.
Along with the secondary market, the market for Initial Public Offers (IPOs) has also witnessed
rapid expansion. The total amount of Initial Public Offerings (IPO) stood at Rs 14,032 crore
(US$ 1.94 billion) as of Feb 2019.

Furthermore, India’s leading bourse Bombay Stock Exchange (BSE) will set up a joint venture
with Ebix Inc to build a robust insurance distribution network in the country through a new
distribution exchange platform.

Investment/ Development

Investments by Foreign Portfolio Investors (FPIs) in Indian capital markets have reached Rs
5,400 crore (US$ 748.44 million) up to December 30, 2018.

As of October 2018, the Financial Inclusion Lab has selected 11 fintech innovators with an
investment of US$ 9.5 million promoted by the IIM-Ahmedabad's Bharat Inclusion Initiative
(BII) along with JP Morgan, Michael and Susan Dell Foundation, and the Bill and Melinda Gates
Foundation.

The private equity and venture capital (PE/VC) investments reached US$ 33.1 billion in 2018.

Government Initiatives

In December, 2018, Securities and Exchange Board of India (SEBI) proposed direct overseas
listing of Indian companies and other regulatory changes. It has provided companies with a
broader investor base, better valuation, increased awareness, analyst coverage and visibility.

Bombay Stock Exchange (BSE) introduced weekly futures and options contracts on Sensex 50
index from October 26, 2018.
In September 2018, SEBI asked for recommendations to strengthen rules which will enhance the
overall governance standards for issuers, intermediaries or infrastructure providers in the
financial market.

The Government of India launched India Post Payments Bank (IPPB), to provide every district
with one branch which will help increase rural penetration. As of August 2018, two branches out
of 650 branches are already operational.

Road Ahead

India is today one of the most vibrant global economies, on the back of robust banking and
insurance sectors. The relaxation of foreign investment rules has received a positive response
from the insurance sector, with many companies announcing plans to increase their stakes in
joint ventures with Indian companies. Over the coming quarters there could be a series of joint
venture deals between global insurance giants and local players.

The Association of Mutual Funds in India (AMFI) is targeting nearly five fold growth in assets
under management (AUM) to Rs 95 lakh crore (US$ 1.47 trillion) and a more than three times
growth in investor accounts to 130 million by 2025.

India's mobile wallet industry is estimated to grow at a Compound Annual Growth Rate (CAGR)
of 150 per cent to reach US$ 4.4 billion by 2022 while mobile wallet transactions to touch Rs 32
trillion (USD $ 492.6 billion) by 2022.