October 19, 2011

October 25, 2011

Also Inside This Issue:

Textile Exports To Miss Target

High Costs, Demand Slowdown Hit Ceramic Products Output

Rupee Fall May Lead To Higher Domestic Polymer Prices

Hopes Pinned On Festive Demand

October 19, 2011

Hopes Pinned On Festive Demand

Amid gloomy domestic and global economic prospects, Corporate India has pinned its hopes on the current festive season to boost its

financial performance that has been weakening this year. Demand for consumer products is typically high during October-December

when a number of festivals like Dussehra, Diwali, Eid, Christmas and New Year are celebrated. Consumer centric industries — includ-

ing food and beverages, consumer durables, automobiles, travel and tourism and precious metals — are hoping the festive demand will

provide a fillip to their bottomlines.

Following is an overview of industries that are expected to witness a rise in sales this season.

Food Products

Higher prices of food products including sugar, edible oils,

dairy, bakery and packaged food stuff indicate demand has

increased so far this season.

Sugar: Prices rose `50 a quintal in September from the previ-

ous month, following heavy buying by stockists to meet festi-

val demand.

Bulk consumers, such as soft drink and ice-cream makers and

retailers, were the main buyers ahead of the festival season.

Edible Oils: Depreciation of rupee versus dollar and festive

demand is believed to have pushed up domestic prices of palm

oil.

Nearly 50% of India’s edible oil needs are met through imports. Palm oil constitutes 80% of India’s edible oil imports, and domestic

prices follow global markets. However, local prices have firmed up despite a fall in Malaysia, a key palm oil producing country. Prices

of other variants of edible oils including vanaspati have also registered an increase.

Consumer Durables

Sales of consumer durables goods — including washing machines, refrigerators and televisions — typically rises during this season.

Source: CMIE, Dhanbank PRU

Source: CMIE, Dhanbank PRU

October 19, 2011

Companies are expecting ―smart‖ devices to boost sales in urban centres this year. These premium segment devices are expected to

offer WiFi connectivity and a touchscreen interface that will enable users to communicate with them.

On the other hand, demand for mass products is likely to be driven by rural markets. A good monsoon is expected to result in to higher

farm incomes. This together with increase in non-farm incomes are likely to boost rural consumption.

Automobiles

Growth in sales of automobiles has recorded a sharp deceleration

this year. While it is believed there may be an uptick in volumes in

October and November, as has been the case traditionally during

the festive season, sales across various segments may differ.

Two-wheelers and commercial vehicles are likely to perform bet-

ter compared with passenger cars. Demand for cars in the compact

segment, which is sensitive to interest rates and fuel prices, has

been weak in the past few months. It is estimated only 30% of two

-wheeler sales are on credit. Hence, sales of two-wheelers will

continue to be healthy in the next few months.

Gold, Silver

Buoyed by ongoing festive demand and firm international prices,

both gold and silver recorded an increase in domestic prices. India's

gold demand is expected to be strong during this festive season of

October-December, despite high prices.

Traditional demand for jewellery has not been the only factor driv-

ing gold sales in India in recent times. In April-June, demand for

gold bars and coins that forms a key component of investment de-

mand, surged 78% from a year ago. This trend is likely to continue

this quarter.

Travel And Tourism

Travel and tourism industry across the globe witnesses a

sharp growth during October-March as it is the peak travel

season. Chart 5 shows that growth in foreign tourist arrivals

increase during this period each year. This results in higher

hotel occupancy and higher demand for air travel.

Sale of houses also rise during the festival season that fall in

this quarter. Owing to high prices and interest rates, realty

companies offer freebies and discounts to home buyers to

push sales. Demand for cement also starts rising by Septem-

ber, which also marks the end of southwest monsoon in In-

dia.

Source: CMIE, Dhanbank PRU

Source: Bloomberg, Dhanbank PRU

Source: CMIE, Dhanbank PRU

200000

300000

400000

500000

600000

700000

800000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Chart 6 : Foreign Tourist Arrivals in India

2009-10 2010-11 2011-12

October 19, 2011

Sectors that indirectly get a boost from higher festive consumption include steel (used in production of automobiles and consumer electronics), automobile ancillary and textiles.

Dampening The Festive Mood

While festivities have begun, weak global and domestic economic factors are likely to weigh on demand. High inflation is one such

factor that may affect demand for products as a large number of Indian consumers are price-sensitive.

Rising cost of credit is another factor that may affect consumption of products. These include financing driven sectors such as automo-

biles and consumer durables.

Economic slowdown in the US and Europe is likely to affect export-oriented sectors. A recent newspaper article quoted producers of

gift items stating that demand for expensive gifts usually purchased by the information technology industry is being replaced by cheaper

gifting.

Depreciation of the Indian rupee also makes imports expensive, thereby resulting in fall in demand.

Growth in consumption needs to be supported by investment growth that seems to be lagging currently. In 2003-08, gross investments

in India rose substantially, with gross capital formation-to-gross domestic product ratio rising to an all-time high of over 38% in 2007-

08. However, investment rate in India has not picked up since then. While consumption has remained high, the lack of a matching

growth in investment activity results in capacity constraints, which then exerts inflationary pressures in the economy.

———————————————————

October 19, 2011

Textile Exports To Miss Target

Textile Exports To Miss Target Despite Weak Rupee: Textile and garment exports are likely to miss the $33-billion target for this

financial year set by the government, despite a weakening rupee and shipment incentives announced in the foreign trade policy, as fi-

nancial crisis in top buyers — the US and Europe — has crimped demand, compounding worries of mills that are struggling to pass on

huge raw material costs to consumers (Financial Express, October 21).

PRU Analysis

According to the Confederation of Indian Textile Industry, textile exports in 2011-12 (April-March) are likely to miss the $33-billion

target set by the government. This is attributable to demand weakening in top export destinations — the US and European Union —

due to economic uncertainty.

Indian textile exports have witnessed ups and downs in the past few years. Global economic crisis hit textile exports in FY10, but it

recovered and remained slightly above the FY11 target of $25 billion. The country shipped out textile products and garments worth $28

billion in FY11.

Apparel/readymade garments constitute about 40% of the total textile exports from India. According to the latest data released by Ap-

parel Exports Promotion Council, apparel exports in April-June reached $3,581 million (approximately `15,824 crore), a growth of

31.74% from a year ago. As per data released by the commerce ministry, cotton yarn and fabric made-up exports have also risen by

22.5% to $3.4 billion in the first six months of this financial year compared with a year ago.

But, growth in exports of apparel (value terms) has been driven by higher realisations. Export volumes have remained flat and are likely

to decline in the future as the US and EU account for 70-80% of total apparel exports from India.

Textile exports to EU and US that accounts for 65% of the total exports are expected to decline due to the adverse impact of the debt

crisis, which in turn has weakened demand. Despite rupee depreciation, Indian textile exporters are finding it difficult to get new or-

ders. Chances of export being driven by higher realisation look bleak in the future as exporters are finding it difficult to raise prices in

overseas markets due to poor demand.

Currently, textile mills in India have a huge inventory pile-up of cotton yarn produced with cotton procured at high prices prior to Feb-

ruary this year. Mills have already incurred losses of close to `6,500 crore due to cotton and cotton price fluctuations in the market.

Recently, a 2% interest subvention on credit for garment shipments credit was announced by the government. But losses on raw mate-

rial costs far outweigh any such concessions.

Table 1: Textile Exports (`Crore)

2008-09 2009-2010 2010-11(p)

Readymade Garments 47,112 47,608 48,355

Cotton Textile 21,795 27,016 38,038

Manmade Textile 15,090 18,783 21,125

wool and woollen 2,199 2,224 1,955

silk 3,107 2,819 2,708

Handicrafts 4,949 4,548 5,445

Jute 1,375 1,033 2,076

Coir 680 759 689

Total (` crore) 96,311 106,045 122,056

USD Billion (approx) 21.75 22 28

% Growth over previous Year -2 0.11 25

October 19, 2011

High Costs, Demand Slowdown Affect Ceramic Products Output

High fuel prices are eroding profits of the lucrative ceramic industry. Constant increase in gas and fuel prices in the past one year has

resulted in lower profits for ceramic product–makers including HSIL Ltd, Kajaria Ceramics Ltd, Nitco Ltd, Somany Ceramics Ltd and

Asian Granito Ltd.

A look at the Top Three companies that declared their financial results for July-September reflects a contracting profit performance.

Power costs have risen from April-June. In the June quarter, sales of 16 companies whose financials were available grew by a robust

30%. However, aggregate power and fuel costs rose at a faster pace of 40.6%.

Rising costs have resulted in production shutdown at 40% of the 500 units located in Morbi area in Gujarat. There are nearly 700 ce-

ramic manufacturers across the country, generating a turnover of nearly `10,000 crore.

The ceramic products industry includes ceramic tiles,

sanitaryware and crockery. Among these, ceramic

tiles have the largest share followed by sanitaryware

and kitchenware. Ceramic tiles are available in three

variations – floor tiles, wall tiles and vitrified tiles.

Demand for ceramic products mainly comes from

new construction demand in both residential and com-

mercial sectors. Apart from real estate, retail, hospi-

tality, health and infrastructure sectors also drive de-

mand.

While demand growth has slowed marginally in the

current financial year, high costs are eroding profits.

We believe increasing fuel prices will continue to

affect profitability in Q2 and Q3. However, a pick-up

in demand post-monsoon and the festive season will

boost revenues of the industry.

Rupee Fall May Lead To Higher Domestic Polymer Prices

Overview

Plastics is one of the fastest growing industries in India. Robust demand for plastic has in turn led to a high demand for polymers that

are intermediaries for producing plastic. Domestic production of high density polyethylene – HDPE, a polymer -- for the first five

months of FY12 has declined 6%, from a year ago. Although we don’t have import data for the first five months of this year, i t does

seem that domestic production is coming under pressure from an increasing volume of cheap imports.

One of the major trends witnessed in the supply side of the plastic industry for the past five years (2007-2011) has been an increased

dependence on imports. Thirty to forty percent of domestic demand for polymers is met by imports.

Manufacturers in the Middle East enjoy a cost advantage. They use natural gas as feedstock that costs less compared with naphtha—a

principal feedstock for many petrochemical plants in India. Middle East markets also enjoy a freight cost advantage compared with

other export destinations.

However, recent depreciation of rupee has made imports expensive, hence domestic manufacturers can take a shot at increasing prices.

Earlier, the scope for price increase in the domestic market was limited despite increased crude oil prices, as price increase could lead to

0510152025

050

100150200250300350

Sep-10 Sep-11 Sep-10 Sep-11 Sep-10 Sep-11

H S I L Ltd. Kajaria Ceramics Ltd.

Somany Ceramics Ltd.

Chart 7: Performance of Major Ceramic Producers (`crore)

Sales Power Cost

Source: Companies, Dhanbank PRU

October 19, 2011

increased imports. With the rupee depreciation, the cost of landed imports has also gone up.

Note: Naphtha normally is a distillation product from petroleum. Hence, naptha prices follow crude oil pricing trend.

Impact

Cheap polymer imports help plastic manufacturers

improve profitability by keeping a check on domes-

tic polymer prices. But, the recent depreciation of

the rupee is likely to make imports expensive, which

in turn will probably provide domestic polymer

manufacturers with an opportunity to hike prices.

Domestic polymer production contributes to about

60-70% of the total polymer demand. The rise in

crude oil prices has led to increased polymer prices

in the domestic market. Domestic polymer prices

have increased by 6-7% in last one year, though they

still remained lower than imported prices.

Conclusion

The demand supply mismatch is expected to con-

tinue in the domestic polymer market, especially in

case of poly vinyl chloride (PVC) and polyethylene

(PE). Another 1.64 million tonnes of PE capacity is

proposed to be added by 2015-16. In case of PVC,

there are no major capacity expansions in the pipeline.

Going forward, we expect import dependence to con-

tinue.

The increased dependence on polymer imports doesn’t

look worrying given the estimated global PE capacity

additions of 23 million tonnes from 2009 up to 2015.

China and West Asia account for the largest share of

the additions. However, any import hike on polymers in future can make imports expensive thus leading to rise in domestic prices.

The availability of cheaper imports from the Middle Eastern markets is probably one of the reasons which inhibit the addition of fresh

capacity, which is required for bridging the gap between consumption and production.

To some extent, it might fair to state that recent government policies might have acted as a disincentive against polymer capacity addi-

tion in India. Naphtha imports attract an import duty of 5% since 2008. Currently, the same amount of duty is also being imposed on

polymers as well.

—————————————————

Polymers Uses

High Density Polyethyl-

ene (HDPE)

Injection moulds, electrical insulation, drums,

pallets,

Low Density Polyethyl-

ene (LDPE) Lamination films, coating and moulding etc

Polyvinyl Chloride

(PVC)

Pipes and fittings, bottles , container, footware,

blood bags etc

Polypropylene(PP) microwave container , furniture, automobile

components , Luggage etc

Source: CMIE, Dhanbank PRU

0.80

1.00

1.20

1.40

1.60

50

60

70

80

90

100

Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11

Chart 8: International And Domestic Polymer Prices

Linear Low Density Poly Ethylene Prices: Delhi (LHS)

High Density Poly Ethylene Prices: Delhi (LHS)

PVC Delhi Price (LHS)

Film: South East Asia (RHS)

Suspension grade PVC Prices: South East Asia (RHS)

` /kg $/kg

October 19, 2011

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