December 14, 2011

December 14, 2011

Also Inside This Issue:

Indian Marine Products Industry Poised For Growth Adverse Affect Of Slowing IIP Seen In Financials

Steel Companies Shift Focus To Rural Market

...And Much More.

Direct Cash Transfers: What’s In It For Fertilisers?

December 14, 2011

Direct Cash Transfer - What’s In It For Fertilisers?

Government of India in the budget for FY12 has proposed the substitution of subsidies by direct cash transfers for specific budget items --

kerosene, liquefied petroleum gas (LPG) and fertilisers. Annual subsidy disbursement has increased dramatically over the years. Total

subsidy for FY12 accounted for about 15% of the total government expenditure. One of the major reasons for ballooning subsidy has been

the wide-spread diversions, leakages and black marketing. Direct cash transfer aims at reducing the subsidy burden by effective targeting

of the beneficiary and addressing leakages and diversions through transparency by use of technology. A task force headed by Nandan

Nilekeni was set up in February this year to recommend and implement solutions for direct cash transfer of various subsidies.

The task force aims at setting up an IT-enabled public distribution system to facilitate transfer of cash from the ministry of finance to the

nodal bank and then to the bank account of the beneficiaries.

We at PRU try to analyse the proposed framework of the task force towards direct transfer of subsidy for kerosene, LPG and fertilisers.

The pilot for Phase I of the recommendation for fertiliser subsidy transfer has already started last month in select locations of Orissa, Ra-

jasthan, Tamil Nadu, Assam, Maharashtra and Haryana. We analyse the three phases of transition and its implementation and the chal-

lenges faced.

Proposed Framework:

Aadhaar and banks have a major role to play towards implementation of the scheme.

The solution architecture for implementation of the subsidy scheme consists of a Core Subsidy Management System, a concept similar to

the core banking system implemented by all large banks. CSMS manages all business information, procedures and flow of information

relating to subsidy including

Identification of the beneficiary (Aadhaar integration)

Product movement and stock tracking (ERP integration)

Direct subsidy transfer (integration with nodal bank and payment gateway)

In addition to these above functions, CSMS will be integrated with a large number of external service providers for effective monitoring

of the scheme.

Aadhaar number, or the Unique Identification number, makes it possible for online identification of the individual’s identity anywhere in

the country, at any point of time, as it captures the biometric details/demographic information. It enables the elimination of errors involv-

ing inclusions and exclusions in identification of the beneficiaries. This helps the Government to identify leakages as subsidy moves from

the intermediary agency to the intended beneficiary.

The goods and stock movement at various levels of the supply chain — manufacturer, wholesaler and dealer — will be recorded in the

CSMS. This requires integration with the ERP (enterprise resource planning) systems of the manufacturer, wholesaler and dealer. ERP

systems integrate the external and internal information across the organization.

The activities undertaken by the retailer — such as, receipt and sale of good, billing, customer identification etc — can be tracked through

a terminal, or a mobile phone for that matter, depending on the size of the retailer.

Financial inclusion and electronic transfer is an integral part in scheme involving direct transfer of subsidy. The model envisages funds

are available in advance to the implementing ministry and then to the nodal bank on timely basis. CSMS can then instruct the nodal banks

to transfer the funds to the bank accounts of the beneficiaries when the particular product is purchased or on periodic basis (refer flow-

chart 1).

December 14, 2011

Flow Of Funds

Source: Ministry of Finance

Fertiliser

In order to increase agriculture production and yield, Government of India has been constantly making incremental reforms in the sub-

sidy and pricing policies of fertiliser, a crucial input. Government has to ensure availability of fertilisers to the farmers at a reasonable

price, help increase the domestic production of fertilisers by attracting investment in the industry and reduce the subsidy burden.

One of the major steps towards achieving these three goals is direct cash transfer of subsidy to the farmer as proposed by the finance

minister in this budget. Under the current system, there is no clear identification of the target beneficiary; hence it leads to large scale

diversions and leakages. For instance, subsidised urea is diverted for production of urea formaldehyde, which is used for garment

manufacturing, melamine production and soap manufacturing. Manufacturers also wait for subsidy compensation which increases the

working capital requirement substantially as there is a time lag between the dispatch and subsidy transfer by the Government.

Direct cash transfer aims to address these issues by setting up a robust information management system that will help in correct identifi-

cation of the target, track the flow of fertiliser from the manufacturer down to the farmer level and develop efficient delivery mecha-

nism system for cash transfer to the beneficiary’s bank account.

The transition is planned in three phases and is each leg involves numerous process and system-related hurdles. Setting up of the re-

quired infrastructure is a huge challenge in itself.

Three phases:

National Informatics Centre (NIC) is developing the software, called the mobile-based Fertiliser Management Software. NIC is also

developing a mobile phone application that distributors, retailers and wholesalers can use to transmit (via SMS) their stock positions

and transactions to the government. This will help to re-route the fertiliser subsidy from companies to retailers, from the next kharif

season (June 2012) onwards. Later, once farmers are allotted unique identification numbers, cash transfers can begin flowing directly to

them.

Payment Instruction

Subsidy Funds

Feed data

Identification

Subsidy

Ministry of Finance Implementing Ministry

Nodal Bank

Payment Network

Beneficiary UIDAI

CSMS

December 14, 2011

Phase I

• Identification of wholesaler, retailer chain into the system.

• Tracking of fertiliser movement up to retailer level using mobile technology.

• Receipt of fertiliser at retailer level

• Daily sales reporting by retailer

Phase II

• Reconciliation of sales

• Subsidy payment to retailers

• Subsidy payment through banking channels

Phase III

• Extension of activities of Phases I & II

• Use of UID by the farmer

• Registering individual sales into the system

• Purchase at market price

• The subsidy will be disbursed directly to the farmer on actual fertiliser purchases

• Subsidy released to farmer’s account by the designated bank.

• Online and real time banking network to be in place for subsidy management

• The funds will be provided by government to the designated bank.

Benefits:

The current subsidy framework has limitations in terms of visibility of the entire supply chain, timely disbursements of subsidy claim

and efficiencies in production. The proposed scheme aims at capturing the fertiliser movement from the manufacturer down to the

farmer which will bring in more transparency and visibility of the supply chain and will enable the ministry to tackle the issues of leak-

ages and diversions.

Urea and MoP are illegally diverted for industrial use. MOP is used for manufacturing potassium chloride which is used in explosives

and fire crackers. Fertilisers are also smuggled out of the country to the neighboring countries where the price is at a higher level.

Availability of extensive data will enable more efficient supply chain management on back of realistic demand projections. Current

system monitors day-to-day dispatches/imports, movement, receipt and sale only at district level.

Under the current system, the subsidy claims of the manufacturers have to be substantiated with documentation maintained by the

dealers and wholesalers, which is time consuming. This increases the working capital requirement of the manufacturer substantially

which affects production and the industry becomes subsidy dependant. The proposed frame work aims to address this issue by shifting

the increase in working capital requirement to the retailer.

Challenges faced:

Phase I:

Under the proposed system, Government will have to deal with approximately 2,30,000 retailers against interacting with a limited num-

ber of manufacturers currently. This could be a challenging task. Tracking data from supply network of retailers could be a complex

task as they might be procuring from multiple sources. The task force proposes to address these issues by registration of wholesalers,

retailers and co-operatives which will enable better tracking of the stock. Transactions through sms and portals with current stocks de-

tails at the retail level can be very useful monitoring tool.

December 14, 2011

Subsidy Flow Chart

Current Subsidy

Proposed Direct cash transfer

Phase II

In the second phase, retailers will turn into a principal stock managers. This phase aims at integrating the information system with the

disbursal mechanisms. Subsidies will be directly disbursed to the bank account of the retailer, thereby shifting the realisation of the

working capital to them.

The issues that need to be tackled in the second phase include

Whether to transfer the cash to retailer only after the sale of the fertiliser instead of after receipt of the stock from the wholesaler/

dealer. But transfer of cash after sale is prone to less risk as it captures the seasonal purchasing pattern of the farmer. But this will

lead to increase in capital requirement for the retailer.

Automated payments to the bank account of the retailer

Inadequate storage facility can constrain retailer’s ability to maintain adequate stock.

Amendments can be done in the payment rules and procedures by the Government for smooth integration and transition from Phase I to

Phase II.

This phase is planned to be completed by the end of June next year.

Farmer

Retailer

Manufacturer/

Importer

Department of Fertil-

iser

Finance/PMO

Fertiliser supplied at

subsidised prices

Fertiliser supplied at

subsidised prices

December 14, 2011

Phase III

The main concern in Phase III of the implementation is clear identification of the beneficiary. It will be a complex task given that there

are no fixed criteria for identifying the beneficiary. A database of farmers with relevant information — on annual income, land hold-

ings, types of crop, fertiliser consumption pattern etc — needs to be built for effective disbursal of the subsidy. The issuance and subse-

quent linkages of Adhaar numbers to the farmer database will go a long way in identifying the intended beneficiary.

Farmers might face some difficulty in initial mobilisation of funds for buying the fertiliser at market price since the subsidy will be paid

only after the purchase. This might lead working capital constraints for the farmer and a subsequent drop in fertiliser purchases, and the

idea of reaching the target beneficiary gets defeated.

Conclusion

With the proposed urea decontrol policy being rejected recently, the cash transfer scheme can incentivise urea producers by reducing

their working capital requirement. However, the feasibility of foolproof implementation looks very difficult due to numerous process

and system related hurdles. Although the cash transfer mechanism has been successfully implemented in some developing countries,

such as Brazil, the obstacles to achieving the same in in India are very high due to a larger population mass that needs to be covered,

the low level of financial inclusion and the enormous task of integrating the entire supply chain into a cohesive IT network.

——————————————————

December 14, 2011

Automobile Industry Feels The Shocks

Car sales bounce back after 4 months; post 7 % jump in November: Domestic passenger car sales witnessed a turnaround in November

after four consecutive months of contraction, rising by 7% on the back of a marginal revival in demand, coupled with a low base. (PTI,

December 8, 2011)

PRU Analysis

Passenger vehicles sales witnessed a relatively better performance in November terms when with October. This was despite the strike

having a negative impact on Maruti Suzuki’s performance and the floods in Thailand hampering Honda car sales.

Two and three-wheeler companies continued to report strong growth in sales during the month. Sales of commercial vehicles moder-

ated.

Adverse impact of labour issues in the plants of Maruti led to a fall in sales across all categories. Overall sales declined by

18.5% in November compared to the year ago month. The company managed to settle the labour issues and attained full pro-

duction during the month which enabled an improvement in sales compared to October.

Domestic automotive segment of Mahindra and Mahindra grew by a robust 51.6% year-on-year. While four-wheeler sales

surged 73.6%, growth in passenger utility vehicles stood at 44.6%. Its farm equipment segment recorded 2.6% decline over

November 2010. Overall volumes were up 30.4%

Sales of Tata Motors soared 40.5% year-on-year. While its domestic sales surged 43.7%, exports were marginally up 2.5%.

Exports growth of Tata Motors was weak when compared to robust double-digit growth of M&M and TVS.

Amongst two-wheeler players, volumes for Hero Motocorp accelerated by 27.4% on Y-o-Y basis. For TVS Motors, volumes

increased by 11.8% Y-o-Y. Exports from TVS were as high as 69.2%. Bajaj Auto saw a 18.24 per cent rise in sales.

While growth in car sales has been slowing, companies plan to raise prices with effect from January 2012. Car manufacturers, including

Maruti Suzuki, Hyundai, Ford, General Motors and Toyota Kirloskar, have announced that they would be raising prices in the range of

2-3%. This is because a depreciating Indian currency and high raw material costs are taking a toll on their profitability.

Car companies are also witnessing an increase in demand for diesel vehicles (although they are priced higher than petrol cars) due to

the price differential between petrol and diesel in India. Currently, diesel cars make up for 80% of the total demand for the models in

which diesel variant is available. Companies also plan to increase their capacities to produce higher number of diesel cars. However,

continuing ambiguity on the diesel pricing policy is discouraging auto companies from increasing investments in diesel capacity.

PRU View

We expect the buoyancy in sales of two wheelers and three wheeler segments to continue in the coming months. However, the rate of

growth may slow down a bit.

Table 1: Automobiles sales performance in November 2011

YoY

% growth MoM

% growth Apr-Nov

% YoY growth

Hero Honda 27.4 4.8 19.6

TVS Motors 11.8 -4.5 12

Maruti -18.5 65.1 -17.8

M&M 30.4 -20.6 26.5

Tata Motors 40.5 9.7 9.4

Source: Companies

December 14, 2011

It has been observed that sales of commercial vehicles partially reflect the health of economic activity in a country. With high interest

rates and slowing economic activity, sales of medium and heavy vehicles (MHCVs) witnessed slow growth.

In the commercial vehicles segment, we expect the MHCVs to continue to record a weak growth, while light commercial vehicles (both

passenger and goods) are likely to record a better growth.

High interest rates, economic uncertainty and firm fuel prices are expected to adversely impact sales of passenger vehicles. Utility vehi-

cles may perform better than passenger cars. In fact, SIAM has already revised the passenger car sales forecast downwards to 2-4%

from 16-18% in April and is still uncertain if the 2-4% forecast in sales for FY 2012 will be met. However, the market share of diesel

cars is expected to cross the 33% mark this fiscal from 27% last year.

Indian Marine Products Industry Poised For Growth

Marine products exports for the first six months of FY12 (April-September 2011) have been about $1.5 billion, up by 48% YoY. Ac-

cording to a release from PIB last week, Marine Products Exports Development Authority claims that exporters will be able to earn $4

billion in 2011-12.

PRU Analysis

According to a study by Assocham, revenues of the Indian marine products industry are estimated at `53,000 crore. Growing at a com-

pound annual rate of 7%, it expects revenues to touch `67,800 crore by the end of 2015.

Export Trends

The export of marine products has grown over the years to `12,902 crore in 2010-11. Chennai,

Mumbai, Kerala and Vishakapatnam are the four biggest seafood-exporting ports in India. A

look at the product-wise exports shows that merely five per cent of India’s seafood exports are

in processed form. Most exports are in the form of frozen fish. Frozen shrimp, which accounts

for 19% in quantity terms, generates export revenue of around 44%.

Earlier, USA was the single largest market for India’s marine products. Over a period of time,

EU emerged as the largest importer.

Table 3: Exports of Marine Products from India

FY

2010 FY

2011

Quantity in tonnes

13% 20%

Value in ` 17% 28%

Value in $ 12% 34% Source: MPEDA

Table 2: Product-wise Exports from India in FY 2010-11

Share in

Total Quantity

Share in Total Value

Frozen Fin Fish 38% 20%

Frozen Shrimp 19% 44%

Frozen Squid 11% 8%

Dried items 10% 7%

Frozen Cuttlefish 7% 9%

Chilled items 3% 2%

Live items 1% 1%

Others 12% 8%

Total Marine Exports 100% 100% Source: PIB

0

2

4

6

8

10

0

500000

1000000

1500000

Chart 1: Exports of Marine Products From India

Value (LHS) Volume in tonnes (RHS)

` Lakh

December 14, 2011

During 2010-11 European Union (EU) continued as the largest market with a revenue share (in $ terms) of 26.8% followed by South

East Asia 16.4%, China 15.4%, USA 15.4%, Japan 13.1%, Middle East 5.2% and other countries 7.8%. The tsunami in Japan and the

subsequent nuclear power plant disaster has resulted in reduced demand for Japanese marine exports, thereby benefiting Indian exports.

Share of India’s exports to Japan has also risen sharply.

Rising demand for Indian marine products and fish, both raw and ready-to-eat format, is growing both in the Indian as well as global

markets. Processed segment comprised only 15% of the domestic marine and fish industry. Lack of distribution and storage infrastruc-

ture is one of the reasons behind this. Thus, we believe that there exists a vast potential for growth of this industry, given that the gov-

ernment is also giving an impetus for the development of food parks and processing zones as processed food garners a higher value

than merely frozen or dried products. This will augur well for food processing companies and ready-to-eat categories of food products.

Steel Companies Focus On Tapping Rural Market

Steel Companies Shift Focus To Rural Markets As Demand Dips: Tapping the rural markets is currently on top of the agenda of all

Indian steel makers. Given the slide in automobile sales, besides the drying up of new infrastructure project pipelines and a fall in over-

all demand growth, steel makers are back at wooing the rural market. They have sensed it would help keep their sales ticking (Business

Standard, December 8, 2011)

PRU Analysis

Being hit by a demand slow-down, major steel producers in the country are currently focusing on tapping the rural market.

According to the latest data released by Joint Plant Committee, a research wing of the Union steel ministry, demand for the April-

October period grew by a mere 2.9% from a year ago to 39.58 million tones, compared with 8.5% growth in the same period last year.

The World Steel Association has forecast demand growth for 2011 and 2012 at 4.3 % and 7.9 % respectively.

This dip in demand has prompted steel producers to shift their focus to rural markets by aggressive expansion of their dealer network in

those areas.

Following are the plans of the major steel makers

Steel Authority of India (SAIL), one of the major players, has plans to expand its dealer network from 2,700 currently to 3,700

by the end of 2012, the additions coming mainly from rural areas.

JSW Steel plans to set up additional 463 retail shops by end of next year in the semi-urban and rural areas. Currently, JSW

Shoppe has 264 shops all over India.

Essar Hypermart, the retail shop of Essar Steel, has plans to expand to 775 shops by 2012 from the current 630. The company

has plans to sell 30 % of its total production through these hypermarts.

All the steel companies are sensing a huge potential fro growth from the rural markets. The reason is: per capita consumption in rural

areas is just 10kg compared to all India average of 140 kg.

Policy stasis, elevated inflation levels and rising interest rates have impacted all steel user industries and this is reflected in the indus-

trial growth rate numbers. The Index for Industrial Production for October contracted 5.1% from a year ago to hit a 31-month low.

The automobile sector, a key user industry, is facing tough times because of high inflation, high interest rates and a spike in fuel prices.

Sales growth of passenger vehicles for April-November remains stagnant from a year ago.

Order inflows from infrastructure companies, another major steel consumer, have also been slowing down.

Another trend emerging in the Indian steel industry is the prospect of domestic over-capacity, given the significant capacity additions

December 14, 2011

expected in the next two years. According to ICRA estimates, almost 25 million tonnes of new capacity is expected to be commissioned in

the next 18-24 months. Given the weak demand scenario, the rate of capacity addition is likely to outpace domestic demand growth leading

to over-capacity. This will result in increased domestic competition as well as exports. India might turn into a next exporter by FY13 .

Organised Gold Market Growing

Gold Loans Industry Soars To `55,000 Crore: More than `50,000 crore worth of gold is likely to be pledged this year to procure loans

in a rapidly expanding gold loan market, allowing India's favourite hoarded asset to re-enter financial markets and provide a boost to the

economy. (The Economic Times, December 9)

PRU Analysis

According to a recent report from Citibank, about 10% of the country’s gold stock has been pledged for loans in the organised gold loan

market. The size of the organised market as of November-end

was `55,000 crore, the report said (refer chart 2).

South India accounts for 85-90% of this organised market.

This phenomenal growth is mainly attributable to the sustained

rally in gold prices. Also, the stigma attached to selling gold

jewellery -- a status symbol in India -- is diminishing slowly. A

change in the general perception towards taking gold loans has

also contributed to the growth of the market. Gold loans are

now increasingly perceived as an option of convenience, against

the traditional view of considering such loans as the last option.

According to a IMaCS (ICRA Management Consulting Ser-

vices) industry report, market share of non-banking financial

services companies in the organised gold market has increased

to 32% in FY10 from 18% in FY07 (refer chart 3).

On the other hand, other players like public and private banks and co-operative banks have witnessed a marginal decline in their market

share. NBFCs have been able to attract more customers despite their higher interest rates. The reason for the same could be:

Low level of documentation and formalities

Quick approval and disbursal of loans

Higher loan to value exposure (75% as compared with

60-65% given by banks)

The organised gold market in India is dominated by two ma-

jor players, namely, Muthoot Finance Ltd and Manappuram

Finance Ltd, accounting for about 27% of the total market.

Muthoot Finance, the largest gold financing company in the

country with a loan book of `15,900 as of March 2011, ac-

counts for 20% of total market share.

A sustained rally in gold prices over the past five years has

been the main driving force behind the growth of the market in

India. However, a major chunk of the gold market is still domi-

nated by the unorganised players, mainly brokers and money

lenders, operating in rural areas. The unorganised gold loan

market is thriving despite the exorbitant interest rates charged.

This is because these players have better understanding of the

2,500

12,000

25,000

37,500

51,500

55,000

0 10,000 20,000 30,000 40,000 50,000 60,000

FY02

FY07

FY09

FY10

FY11

FY12*

Chart 2: Organised Gold Loan Market( ` Crore)

52.3% 50.5% 46.5%

14.8% 13.7%11.6%

18.4% 23.6% 32.2%

14.5% 12.1% 9.7%

0%

20%

40%

60%

80%

100%

120%

FY07 FY09 FY10

Chart 3: Movement In Market Share Of Organised Players

Public banks Private banks NBFCs Co-operatives

December 14, 2011

rural customer base and offer immediate liquidity to the borrowers without elaborate formalities.

According to a recent report on the gold loan industry by India Infoline, published in July, there are about 1 lakh moneylenders in India

and 40-50% them are in the southern states of Andhra Pradesh, Karnataka, Tamil Nadu and Kerala

Adverse Affect Of Slowing IIP Seen In Financials

India’s industrial output, as reflected by the Index for Industrial Production (IIP), dipped for the first time in 31 months. Production fell by

5.1% in October 2011 compared to the year ago month. The fall in IIP exceeded analyst estimates of 0.7% drop, as per Bloomberg News

survey. PRU has estimated a 1% contraction in IIP.

Output was down 3.3% from September, the third sequential decline in four months. Hardening interest rates, elevated inflation levels,

policy drift, falling value of Indian rupee and global uncertainty (including a sovereign debt crisis in Europe) are believed to have com-

bined to contribute to this contraction.

The cumulative growth for the period April-October 2011-12 stands at 3.5% over the corresponding period of the previous year.

Manufacturing which accounts for a large portion of the IIP recorded 6% decline in output. Nine out of the 22 industry groups in the

manufacturing sector showed a decline.

Textiles output with 6.16% weightage contracted 11% during the month, over October in 2010. Apparels production fell 5.7%.

On cumulative basis also these sectors recorded a fall.

Motor vehicles, trailers & semi-trailers (with 4.07% weight) fell 7.1% during the month. Growth till September was up 10.6%

Electrical machinery & apparatus and Machinery & equipments recorded a steep fall of 14.2% and 3.3% during April-

September.

Chemicals and chemical products (10.06%) fell 6.7%. Cumulative decline of 1.6% was seen.

Basic metals and fabricated metal products (except machinery & equipment) registered a healthy year-on-year growth. Food products was

another category that showed double-digit rise.

Output of mined products declined sharply during the current financial year. Heavy rains, floods in Orissa, strikes by the employees of

Coal India and agitations in Telangana took a toll on coal production. Production of iron ore is believed to have been poor because of the

ban on iron ore exports and the restrictions imposed on mining from Karnataka.

Financial Performance (based on CMIE’s classification of industries)

Textiles and Apparels

The cloth industry, including cotton and synthetic fabrics, posted a robust growth in sales during April-September 2011. This growth was

backed by an increase in the volumes and realisations on fabric. Higher operating costs together with forex losses (due to a sharp decline

in Indian rupee) has led to a sharp drop in profits.

As per the latest data available from the Office of Textiles and Apparel (OTEXA) of the US Department of Commerce, the value of In-

dia’s apparel exports to the US grew by 9.3% during April-September 2011. The rise was on account of a 15.8% rise in realisations. Ap-

parel export volumes fell by 5.6% during the period.

Companies in the apparels industry witnessed a weak growth in sales revenues during the first half of FY 2012. With a sharp rise in ex-

penses, net profit of the industry fell by nearly 50%. Falling Indian rupee is likely to benefit the industry as a large volumes are exported.

Motor Vehicles, Trailers & Semi-trailers (Automobiles)

December 14, 2011

Net sales of automobiles have been robust during April-September 2011, driven by better volumes. While sales of companies producing

commercial vehicles was healthy, strike at Maruti’s plant resulted in a single-digit sales growth in the passenger vehicle segment.

It must be noted that among the passenger vehicle companies with a large market share, financials of only Maruti and Mahindra & Mahin-

dra are available on a quarterly basis. Large automobile companies — such as Hyundai, Toyota, Honda and Ford — are unlisted, and

hence do not disclose their financial details to the public. Thus, the poor results of Maruti alone impacted passenger vehicles segment.

Two and three wheelers were the only automobile segments to report a growth in net profits. A robust increase in two-wheeler sales en-

abled the companies to overcome high input costs and led to profits. However, profits rose at a far slower pace than revenues, due to forex

losses and high marketing expenses in rebranding exercise undertaken by Hero Motocorp.

Machinery & Equipments and Electrical Machinery

The volatility in capital goods index resulted in a 0.3% fall during April-October 2011. Large companies in the sector continued to face

headwinds in terms of lower order inflows and hardening interest rates. Most capital goods majors registered a slowdown in order inflows

during July-September.

While sales of the generators, transformers and switchgears segment grew healthily in June quarter, a sluggish growth was seen in Sep-

tember quarter. A sharp rise in prices of key input costs — like steel and copper — pushed up the raw material cost, thereby resulting in a

fall in profitability.

Financials of companies manufacturing wires and cables — a part of electrical machinery industry — shows that the industry was unable

to translate the healthy sales growth into profits growth. While production of wires and cables, as depicted by the IIP, showed a decline

during the current financial, higher sales realisations enabled a double-digit growth in sales value.

We at PRU feel that a weakening Indian rupee, high forex losses, contracting domestic demand and exports, firm input prices and high

interest rates are likely to drag down the financial performance of Corporate India in the December quarter.

————————————————————

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

Chart 4: Capital Goods Index Growth (%)

YoY

M-o-M

3MA

December 14, 2011

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