13th April’ 2017

WHAT WE ARE READING – Vol.127

The Skilling Juggernaut

Comprehensive view on Skill India reform

Entering new financial year

Taking cognizance of the macros and nifty valuations

Understanding e-NAM

A critical reform in attaining vision of Doubling Farmer Income

Government spending in FY18

Taking cautious view backed by various data points

Future Hospitals

How technology can change the healthcare industry

Electric Cars on the horizon

Industry transitioning and where does India stand

The changing source of energy consumption

A report reasons this transition which can impact some conventional ways

Office Space sharing

An emerging area in India

Skilling Juggernaut Anilesh S Mahajan March 20, 2017

When Shruti Malik drives past farmland being ploughed on the outskirts of Yamunanagar, Haryana, she

has reason to feel proud. She knows one of the men on the tractors at work was once her student at IRIS

Learning, the skilling institute she runs in the town, which has so far trained 2,400 young people in

sugarcane cultivation, polyhouse farming and the use of different kinds of agricultural implements. After a

month-long training stint at IRIS, Rakesh Sandhu bought a tractor with a loan from the Pradhan Mantri

Mudra Yojna - a scheme to facilitate micro business ventures begun in 2016 - which he hires out (with

himself as driver) for a fee to farmers around Yamunanagar who need their fields ploughed.

"After the training, my students command a premium," says Malik. "Many of them are in great demand in

neighbouring districts as well." Malik herself quit her job with Sapient Nitro in Gurgaon within six months of

joining to pursue her dream of becoming an entrepreneur. IRIS Learning, which she set up in 2015, is one

of the 4,526 skilling centres in the country which partner with the National Skill Development Corporation

(NSDC) - under the National Skills Qualification Framework - to combat India's gigantic skills shortage.

Apart from agriculture-related skills, IRIS also provides training for prospective electricians, fitters, mobile

phone repairers and more. "I don't regret my decision to give up my well-paying job at all," she says.

India's youthful demographic ensures it produces 10-12 million job seekers a year, but only 10 per cent of

them are trained in some employable skill. The education most receive does not equip them to land jobs.

In comparison, 96 per cent of similar job aspirants in South Korea, 80 per cent in Japan and 75 per cent in

Germany, are trained. Yet India needs skilled labour much more than these other countries - the late

management guru C.K. Prahalad had estimated in 2007 that the country would require a skilled workforce

of 400 million by 2022, including 130 million for newly-created jobs. It is lack of skills rather than absence

of employment opportunities that is responsible for the unemployment rate in the country being around five

per cent. Also, according to the Economic Survey 2014/15, 92 per cent of all employment is in the

unorganised sector. Economists have estimated that India's skills shortage constrains its gross domestic

product (GDP) by as much as two percentage points.

To reconcile the situation, the government has embarked on a massive exercise, setting up a separate

Ministry of Skill Development and Entrepreneurship (MSDE), with Rajiv Pratap Rudy in charge, and

allocating it a budget of `6,000 crore over three years. The ministry has its task cut out - to convince more

young people with limited means to attain specific skills rather than pursue graduation; to get companies to

pay skilled entrants better than their unskilled counterparts; to convince companies to employ skilled

aspirants rather than train their own; to combat lack of infrastructure, bureaucratic sloth and growing

automation. But most of all, it has to anticipate demand and provide the right courses which lead to prompt

employment.

PHOTOGRAPHS BY VIVAN MEHRA & SHEKHAR GHOSH

Industrial Training Institutes (ITIs), run by the National Council for Vocational Training, now under the

MSDE's purview, have been around for decades. There are 13,106 of them, both government and

privately run, with a capacity to train 1.87 million aspirants a year in 127 different trades. But in practice,

the ITIs run only two courses - that of fitter and electrician - which have any demand: they attract 1.1

million students a year. The remaining courses struggle to attract candidates. Indeed, many employers

confided that most ITIs were in bad shape, with obsolete training equipment, outdated courses and

uninterested teachers.

SKILL DEFICIT

When Rajat Goel was setting up EyeQ in 2007 - a chain of eye-care centres in Tier-III/IV towns - he did

not have much of a problem enlisting ophthalmologists. The problem arose while trying to recruit his

support staff of operation managers, operation theatre technologists and hospital managers: employable

ones were few and far between. "The courses required to train such people are either not available or

obsolete," he says. Finally, in 2013, Goel decided to set up his own training institute for these particular

skills at his eye hospital in Rohtak, Haryana, even though, for a company like his with a modest turnover of

`45 crore, investing `2 crore in skilling alone was a risk. The step has proved unexpectedly successful, with

459 people having been trained by EyeQ so far, while the demand for such training has seen the

company's turnover rise close to Rs 100 crore.

"The availability of skilled labour determines the capacity of any business to take advantage of new

opportunities," says Anil Chaudhry, Country President and Managing Director, Schneider Electric India.

But it is precisely that which is lacking. To make up for it, like Goel, innumerable companies - from the

smallest to the widely known - run their own in-house training programmes. "We are investing around `55

crore to train certified carpenters, retail store staffers, managers and more," says Juvenico Maetzu, CEO,

IKEA India, which is set to open its first store in the country, in Hyderabad, later this year, and is investing

`1,000 crore in the project. Small enterprises, however, find it difficult to afford such investment, more so

because, as one industrialist, who prefers anonymity, says: "Within a year, people we train move out,

getting more lucrative opportunities."

OBSESSION WITH DEGREES

A recent EY report notes that though India produces six million graduates every year, most of them are not

"industry ready" - cannot be employed immediately. EY's figures are frightening - the 'unprepared' include

93 per cent of MBAs, 80 per cent of engineering graduates, 83 per cent of hotel management graduates

and 97 per cent of accounts graduates. "My cook recently asked me if I could employ his son in any of my

factories," says R.V. Kanoria, Chairman and Managing Director, Kanoria Chemicals and Industries. "But

the boy could not write a simple job application." To add to the problem, educated youth fail to realise how

ill-equipped they are for the jobs they think are their due. The Employment and Unemployment Survey

(EUS) 2016 notes that 58 per cent of unemployed graduates and 62 per cent of such post graduates said

they were jobless because they were not being offered jobs worthy of their education. "It is a painful task

to tell such people that graduation does not help to find jobs and they should acquire skills instead," says

Rohit Nandan, former MSDE Secretary.

Maetzu, IKEA India's head, notes many of those he interviews for blue collar jobs, lack aspiration. "They

ought to take pride in their work, which they don't," he says. "I began my career on the shop floor and

gradually rose in the organisation." Yet Indian youth remain obsessed with graduation and white collar

jobs. "My family wanted me to do a BA and get a good job," says Rajiv Kumar, a student at a Delhi ITI. "I

came to ITI only because my close friend joined it and I wanted to be with him." Ikram Hussain, learning

hairdressing at an upmarket Delhi salon, was already ambivalent about the profession. "I think I would

have earned more and led a more respectable life had I done my graduation and got an office job," he

says.

Those who know better, from Kanoria to Malik of IRIS, despair of this attitude. "The mindset needs to

change," says Kanoria. "The world is changing, job profiles are changing." Malik notes that IRIS holds

kaushal shivirs (skilling camps) every month to convince more young people to seek skills, but the

conversion rate - between those attend the camps and those taking up courses - is barely 30 per cent.

"Young people think only school dropouts should learn skills of the sort we teach," she adds. "We try hard

to convince them it is not so."

Why not include some of the skills employers seek in the school curriculum itself? "We are working with

governments in the states of Haryana, Himachal Pradesh and Kerala to make some vocational courses

compulsory, on a pilot basis, from Classes VIII to X," says a Human Resource Development Ministry

official. "The learning from this effort will be applied in other states." In Germany, for instance, basic

courses in carpentry, knitting and electrical work, were introduced in schools in the 1990s. Other countries,

including the US, the UK, China and South Korea, have followed suit. "It is the educational system we

have that is responsible for the obsession with graduation," says Anirban Roy, founder of SEED, which

works with corporate houses to impart skills.

GREAT INDIAN GAME PLAN

But in the last few years, a concerted effort has been made. Nor is the MSDE working alone. Already, 21

other ministries have taken up the gauntlet of providing skill training, for which a staggering `17,273 crore

has been budgeted this year. The textile ministry, for example, has programmes for training in traditional

handloom, handicrafts, wool knitting and silk weaving, apart from courses in spinning, weaving and other

aspects of garment manufacture. The rural development ministry, as also the ministry for minority affairs,

are also supporting courses in handloom weaving and handicrafts. The civil aviation ministry is working

with Boeing and Airbus to create a one-year course to make diploma holders employable in the aviation

ministry. Others like the Tatas, BHEL, Alstom, GE, Siemens and Toshiba are also working with

engineering colleges to make their course content more industry oriented.

Indeed, a Committee of Secretaries (CoS) is working on a plan to converge all these training efforts by

ministries other than the MSDE. It has already shifted the training institutes run by the ministry of small

and medium enterprises, the ministry of tourism and the ministry of north east region to the MSDE. "The

convergence of all skill development schemes is critical to ensure a holistic, outcome oriented approach,"

Minister Rudy told Business Today. "It will not only enable consolidated and well-thought programmes, but

also avoid overlap and minimise the chances of leakages." He wants a synergised skill implementation

effort, with the ITI network strengthened further and modernised, the NSDC's own training centres - called

Pradhan Mantri Kaushal Kendras - extended to every district headquarters. He is also keen that the sector

skill councils (SSCs) be made more flexible and industry oriented. He even wants the All India Council for

Technical Education (AICTE), which grants recognition to technical institutes - and is currently with the

HRD ministry - under his ministry's ambit.

There are three aspects to the MSDE's skilling programme: creating a pool of labour with the skills modern

industry needs, setting up finishing schools where white collar workers acquire the additional skills needed

to be competent at their jobs and involving states more actively in the effort. Finance Minister Arun Jaitley

has promised to provide funds to increase the number of Kaushal Kendras from 60 to 600, as well as to

set up another 100 Indian International Skill Centres, which will train Indians to take up overseas jobs.

Financial provision for these projects has been raised from `2,173 crore in the last financial year to `3,016

crore in 2017/18. Rudy is also working with the Central Board of Secondary Education (CBSE) to give ITI

students the equivalent of a Class X or XII school leaving certificate and offer a parallel academic pathway

after completing the ITI course.

There are also numerous skilling programmes being conducted by

state governments. But the Centre now wants common norms,

common qualifications and curriculum. The respective industry

bodies have set up 46 SSCs and norms are being developed in

partnership with them - from plumbing to finance to IT & ITES and

including, beauty & wellness, construction, hospitality, retail,

tailoring, accountancy, travel and tourism, soft skills and spoken

English. These norms provide common definitions of training,

placement, expected duration of courses and procedure to seek

finance. "It makes sense to push skill development with a single

concentrated force. The task is huge, and scope for failure is none,"

says Pramod Bhasin, founder of Genpact, who now, along with

DLF's Pia Singh, run Skill Academy, headquartered in Gurgaon.

A consolidated skilling programme also helps skilling

entrepreneurs. "We can then focus on skilling rather than diverting

our energies towards compliance and chasing payments," says

Mansi Agarwal of Mumbai-based UpSkill, which runs vocational

training courses in Rajasthan and Gujarat. "At present, every

ministry has its own targets and compliances. But thanks to the

MSDE, common norms, qualifications and curriculums are being

developed." But convergence doesn't come easy. "There is always

turf conflict in government," says a department secretary. But

others differ, insisting the glitches can be overcome. "The job is

huge, so we need to avoid duplication, bring in some rationality,"

says a secretary from another ministry. "The turf war is passé;

now the discussion is on who can provide the training better," says

Nandan.

The functioning of the Pradhan Mantri Kaushal Vikas Yojana

(PMVKY), under which the government provides short-term

courses of all kinds, has already benefitted from being under a

single ministry, the MSDE. Synergy will only help programmes

currently under other ministers. "The institutes carrying out R&D, or

providing higher professional qualifications in addition to skilling,

will remain with the same ministry as before," adds Nandan.

HURDLES TO EMPLOYMENT

"Most job aspirants don't lack the hard skills required to do a

particular job, but the softer ones," says Agarwal of Upskill. "This includes self confidence, high standards

of personal hygiene, a sense of discipline, an ability to adapt to the new world." She has found that as

important as imparting knowledge related to a course is the job of teaching her students, for instance, how

to use a western-style toilet, prevent body odour, wear ironed clothes and speak confidently.

Relevant skill training could also put the brakes on migration to big urban centres which are already

overcrowded. "If you give people good working conditions in the place where they are based, opportunities

to grow and inspirational jobs, they will not feel the need to migrate," says former CEO of NSDC, Dilip

Chenoy. It is also important for industry to appreciate the skills aspirants bring with them, "There are still

companies that prefer to hire unskilled labour and train it themselves," says R.C. Bhargava, Chairman,

Maruti Suzuki India Ltd. "This allows them to get away with paying lower wages." There is also overall

industry reluctance to hire, mainly due to the complex web of labour laws. Skill does not get the

appreciation it deserves. "Leave aside industry, do we pay extra to an electrician for doing a job

efficiently," says R.C.M. Reddy, CEO and Managing Director, IL&FS Education.

But at the same time, the shift of certain industries such as retail or beauty and wellness from the informal

to the formal sector is helping skilled aspirants. "Mere skill development doesn't solve all problems. One

needs to put one's heart and soul into the job," says Ajay Shriram, Chairman, DCM Shriram Group. He

advocates more liberal labour laws and pins hope on the return of the investment cycle post the

implementation of the Goods and Services Tax and other key reforms for employment to pick up.

Again, increasing automation is another looming threat for job seekers. "Smart factories are the in thing,"

says an industrialist, preferring anonymity. "Automation makes operations management efficient and also

reduces the chances of defects in products." Many are looking at increasing their use of machines and

robots in areas such as packing, fitting, welding, painting, and more. "Technology is changing every day,"

says Manish Sabharwal, Chairman and co-founder of recruiting company TeamLease. "SSCs need to be

flexible in creating these job roles. New job seekers need to be ready to grab new opportunities."

In mid-2015, the National Democratic Alliance (NDA) government amended the Apprentices Act, 1961, to

allow employers to fix hours of work and leave as per their discretion and provide apprenticeship training

to non-engineering graduates and diploma holders as well. This has opened up employment for trainees in

new trades, including IT-enabled services.

It was followed by the National Apprenticeship Promotion Scheme in September, by which the government

promised to reimburse 25 per cent of the stipend paid to trainees to employers directly. "The idea was to

encourage more on-job training," says Nandan.

BRINGING STATES ON BOARD

The states have their own problems, which Rudy has to grapple with. A sub-committee of chief ministers

decided that there should be state chapters of SSCs as well. These are being set up, but challenges

remain. Five states - Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh and West Bengal - make for more

than half the 239 million people projected to be added to India's population between 2009 and 2026. "Not

only do these states score low on many development indicators, they lag on economic parameters as well

compared to the southern and western states," says Ashok Varma, Partner at PricewaterhouseCoopers.

Most of the jobs will be created in the better-off states, while most of the job aspirants will be in the less

developed ones. Now that the BJP has won a massive mandate in Uttar Pradesh, the challenge for the

new government would be to make the state a skills hub.

The NSDC has been asked to carry out a district-wise mapping of skills requirements and gaps. "We are

also trying to understand the requirement of skills elsewhere in the world. Our candidates should be

competent enough to seek a job anywhere," says Nandan.

On October 17 last year, the MSDE revamped the flagship PMKVY scheme, linking payments to training

partners with completion of training and achievement of a certain minimum placement (roughly 70 per

cent). The new plan made it mandatory for training partners to track placements of students. "Once you

start tracking your student for a year, you can understand where your course content may be going

wrong," says R.C.M. Reddy of IL&FS Education. "This pushes skill centres to offer those courses which

ensure job placement," says the head of another skill centre, preferring anonymity. According to official

data till April 25, 2016, only 81,978 of the 1.76 million trained candidates were placed, while only 577,000

candidates have been certified since the launch of the scheme in July 2015. "Placements will improve if

job creation improves," says Malik of IRIS. "The payment cycle from the MSDE has improved. We get 80

per cent of the payment by the time the student completes the course and the remaining only if we

manage 70 per cent placement."

Indeed, the ministry bears the entire training cost under PMKVY, which varies from a minimum of `7,600 to

a maximum of `20,000. Training of unarmed security guard, for instance, requiring 150-200 training hours,

costs around `7,600; while that of a technician for the auto sector, which takes about 500 training hours,

costs `20,000. Admission is open to youth from poor families with the minimum qualification of having

passed Class X. Aspirants have to take a basic aptitude test to determine the interests and abilities.

Course material and even practical training are all provided by the centre.

TRAINING THE TRAINERS

Another challenge is creating a pool of competent trainers. Rudy has tied up with the ministry of defence to

rope in retired officers for the job, but agrees that more needs to be done. "Many of the sector skill councils

have not achieved the standards required for trainers either," says Anita Rajan,

Chief Operating Office, Tata Strive, the Tata Group's skilling initiative. "To even

teach in school, people undergo formal training, but there is no such training for

trainers here." Reddy of IL&FS Education sees a solution in technology. "We have

standardised the course content, and through the internet we can stream it even to

remote areas," he says.

In the meantime, ex-servicemen are being roped in to impart training, especially in

electronics, signals and logistics. "We hired a few of the trainees and trained them

further to be training partners," says Malik. Many corporate houses are also urging

employees to undergo the trainers' programme. The centres at and near bigger

cities still attract reasonably good trainers, but the challenge lies in providing them

in the hinterland.

CHANGED STRATEGY

The ruling NDA is pursuing a skilling strategy which differs in some ways from that

of the erstwhile United Progressive Alliance (UPA) government's. Between 2008

and 2012, the UPA government formed three bodies to further skill development:

the Prime Minister's Office-led Council on Skill Development, the National Skill

Development Coordination Board and the NSDC. Former TCS CEO S. Ramadorai

was roped in with the rank of cabinet minister to assist the effort.

The NDA government has brought in the states too, with the MSDE given the

responsibility to coordinate all efforts. In December 2015, NITI Aayog's Sub-Group of Chief Ministers, led

by the then Punjab Chief Minister, Parkash Singh Badal, submitted its report asking for more knowledge

sharing with states on programmes and experiences of skill administration. Seven sub-missions were set

up which would work alongside the NSDC, the NSDA and Directorate of Training. "Every state has its own

priority and preferences," one of the chief ministers pointed out.

Madhya Pradesh Chief Minister Shivraj Singh Chouhan told BT that he is taking skill development as a

mission and has roped in Symbiosis Group of Institutes, Pune, to set up a skills university in the state.

Similarly, Chief Minister of Jharkhand, Raghubar Das, roped in Singapore-based Institute of Technical

Education to set up a skilling centre in the state. The two have very different plans. Chouhan is looking to

cater to the demands of local industry, while Das is looking at opportunities across the world. "India has

the potential to become a hub of skilled labour, and must leverage this demographic dividend," he told BT.

Meanwhile, Rudy has also got clearance to recruit a new cadre of officers for skill development alone.

These officers will man most of the skill development-related activities at state and district levels. Similarly,

states also have been asked to recruit dedicated provincial officers - a distinct step away from the UPA's

strategy of working through private players. "During the UPA's tenure, skilling was like a start-up, but now

it has transformed into a full-fledged scaled up project," Ramadorai told BT, a fortnight before he resigned

his position.

However, in the UPA's tenure, many states, including Gujarat, then led by Narendra Modi, refused to

follow the UPA model of skill development but devised their own. The Gujarat model included settings up

of Kaushal Kendras at block level, after mapping local aspirations and business needs. Madhya Pradesh

announced its own technical education and skill development policy in 2012, and other states like Tamil

Nadu, Uttar Pradesh, Karnataka and Punjab followed suit. But coordination with the Centre - despite the

National Skill Development Coordination Board, headed by the then Planning Commission Deputy

Chairman Montek Singh Ahluwalia - remained a challenge.

Earlier autonomous, the NSDC and NSDA now have to work under Rudy's MSDE.

There have been murmurs over the past year that government role in skill

development has been increasing to the detriment of private players. The murmurs

were especially loud when former NSDC CEO Dilip Chenoy and his COO Atul

Bhatnagar abruptly resigned in October 2015. A Comptroller and Auditor General

report was subsequently critical of NSDC's functioning under Chenoy and

Bhatnagar, maintaining that while almost all the capital in NSDC came from the

government's coffers, private parties held 49 per cent equity. "Rules were laid

down before I took over and private parties adhered to them," says Chenoy,

defending himself. Minister Rudy feels differently. "We can't let private players

make bounty on the government exchequer," he says. "I feel there was some

bungling somewhere."

Clearly, the Modi government is firing on all cylinders to skill India. If it succeeds in

its mission, it will not only provide employment opportunities to the youth but also

boost economic growth significantly.

@anileshmahajan

India - Strategy

Ashutosh Datar ashutosh.datar@iiflcap.com 91 22 4646 4642

Amit Tiwari | amit.tiwari@iiflcap.com 91 22 4646 4649

|

DD MMM YYYYTowards an upturn

11 April 2017

Portfolio change

Institutional Equities

The Indian economy seems to be recovering faster than expected from the demonetisation shock. This coupled with strong external growth ou tlook im plies a better than e xpected gr owth ou tlook. The resilience of labour market will allow for faster normalisation of co nsumption. Co rporate e arnings near-term however w ill remain under-pressure p artly due t o re cent cu rrency appreciation. The big picture however is that corporate profits are depressed a nd w ill mean-revert i n t he next c ouple o f ye ars if growth continues to remain strong. Market valuations are on the higher side implying lim ited s cope fo r f urther r e-rating of t he market. In vestors sh ould t hus focus on stocks an d sect ors with strong earnings outlook. Overweight domestic consumption.

Economic re covery fa ster than e xpectation: The I ndian e conomy is seeing fa ster-than-expected recovery f rom demonetisation-led sl owdown, due to a resilient la bour market. U nemployment h as actually f allen in recent months. This should allow for faster normalisation in consumption demand. In addi tion, strong global growth has meant that export growth has also been strong in volume terms. Consequently, we are increasing our FY18 GDP growth estimate to 7.4% (GVA basis) from 6.8% before.

Near-term earnings outlook cloudy; mean reversion the key: Near-term corporate earnings outlook will remain challenging, due to high starting estimates an d the rece nt appreciation in the c urrency. We exp ect rup ee appreciation to result in 3-4% downgrade to earnings (ex-financials). From a medium-term p erspective, h owever, m ean revers ion in corp orate p rofits from t he current h ighly de pressed le vel ho lds the key to continued outperformance from equities. Corporate profits at 2% of GDP are currently 2ppt below the long-term average.

Portfolio strategy – f ocus on earnings visibility: Given demanding valuations in most sectors, we focus on stocks and sectors with strong earnings vi sibility and low r isk o f mul tiple contraction. Accordingly, we are overweight s taples, f inancials and e nergy. We a re underweight on IT, phar ma and indus trials. Our to p l arge c ap buys ar e: H CLT, HPCL, Motherson, P owergrid and Ye s Bank. O ur to p mi d c ap buys are : Ci ty Union, Deepak Nitrite, Indraprastha gas, MCX , Supreme Industries

Real GDP growth is likely to recover in FY18  

Source: CMIE, IIFL Research  Corporate profit as a share of GDP is lowest in more than a decade 

Source: CMIE, IIFL Research. Based on a standalone financials of more than 15,000 companies 

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ashutosh.datar@iiflcap.com

India - Strategy

2

Institutional Equities

At the be ginning o f the y ear, our expectation was that it wo uld be a difficult year for stocks, given uncertainty presented by de monetisation and tr ansition to GST later i n the year. The s harp r ally in the market has thus surprised us. In par t, this reflects a c ombination of less-than-expected adverse i mpact o n the economy due to d emonetisation an d expectation of a quicker and stronger recovery in the next few months. Figure 1: PMI has almost recovered to pre‐demonetization levels 

Source: Markit Economics, IIFL Research  GDP growth – st ronger recovery likely: While the precise impact of demonetisation o n the r eal e conomy i s s till unclear, gi ven pauc ity of data on the unorganised part of the economy, i t does appear that th e overall impact has not been as severe as expected. The biggest surprise for u s h as b een t he re silience of t he l abour market. D ata f rom C MIE suggests a s harp f all in une mployment, c ompletely c ontrary to our expectation. Unless, this sharp fall is due to a f all in participation rate (for which we do not have data), this suggests that the labour market has b een fa r m ore r esilient th an exp ected. Th is b odes w ell for normalisation in consumption demand in the current quarter.

Figure 2: Unemployment has fallen despite the demonetisation led slowdown 

Source: CMIE, IIFL Research  The other area where things have been better than expected is exports, reflecting t he b uoyancy i n gl obal econ omy. Although in va lue t erms export g rowth i s st ill an aemic, i n vol ume t erms exports ar e seeing a strong uptick. Export t raffic at major ports, for example, i s growing at the fastest pace in seven years. While the recent appreciation in r upee will affect exports for a few quarters down the line, at least the near-term outlook remains robust, especially if the global economy continues to see strong growth.

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ashutosh.datar@iiflcap.com

India - Strategy

3

Institutional Equities

Figure 3: Exports port traffic growth is near multi‐year high 

Source: CMIE, IIFL Research  Consequently, we are increasing our FY18 GDP growth forecast to 7.4% (GVA b asis) from 6 .8% b efore. Th is is b roadly i n line w ith con sensus and the RBI’s p rojection. However, estimate for growth in FY18 i s still lower than the projections just before demonetisation, suggesting there could be upside to growth estimates if global growth remains strong and monsoons are normal. GST – potent ial for short-term disruption: The transition to GST is now just a couple of months away. Although we do not have any doubts on the long-term positive impact of GST on the economy, there remains potential f or di sruption in t he s hort r un, gi ven the s cale o f c hange. However, gi ven the recent experience wi th demonetisation, which was an even bigger di sruption for the economy, and i ts limited impact, we believe di sruption to th e e conomy f rom G ST i s li kely to be s mall a nd short-lived a t b est. H owever, it is likely t hat t he m arkets a re o ver-estimating some of the benefits from GST in the short term. Most of the beneficial impact o f G ST i n terms of i mproved tax c ompliance, mor e formalisation of the economy, and hi gher productivity are likely to play out o ver 2-3 y ears r ather than i n the immediate 1-2 quar ters, i n our view.

Figure 4: Real GDP growth is likely to recover in FY18  

Source: CMIE, IIFL Research  Figure 5: RBI is unlikely to cut policy rates through the course of the current year 

Source: CMIE, IIFL Research  Interest rates t o remain st able, as i nflation re mains w ithin comfort zone: A consequence of faster-than-expected growth and shift in the stance from MPC to neutral means that interest rates are likely to remain st able for t he next f ew q uarters. While t here could b e s ome

(30)

(20)

(10)

0 

10 

20 

30 

40 

Jan‐10 Apr‐11 Jun‐12 Aug‐13 Oct‐14 Dec‐15 Feb‐17

Port Traffic  (Exports)(3mma, YoY%)

5.4 6.2 

6.9 7.8 

6.6 7.4 

0 

2 

4 

6 

8 

10 

FY13 FY14 FY15 FY16 FY17ii FY18ii

Real GDP Growth (YoY%)

0 

2 

4 

6 

8 

10 

12 

Jan‐10 Mar‐11 May‐12 Jun‐13 Aug‐14 Sep‐15 Nov‐16 Dec‐17

3m T‐Bill Repo Rate(%)

ashutosh.datar@iiflcap.com

India - Strategy

4

Institutional Equities

monetary tr ansmission f rom bank s i n te rms o f l owering the MCL R, money market rates are already low due to ple ntiful liquidity. Thus, by and large, we are at the bottom of the interest rate cycle, in our view. Figure 6: CPI inflation is likely to remain below 5% for third consecutive year in FY18 

Source: CMIE, IIFL Research  Our v iew on i nflation has no t c hanged muc h. W e continue to e xpect another year of sub-5% inflation (the third consecutive year), although inflation will tick higher in FY18 relative to FY17. The uptick will largely be driven by normalisation in food inflation, which has fallen sharply in the l ast f ew mo nths due to a bump er crop and th e i mpact of demonetisation o n p rices of p erishable agr i pr oducts. Al though commodity pr ices have i ncreased, the r ecent s harp appr eciation in rupee and low domestic capacity utilisation will keep higher commodity prices from feeding into generalised in flation. Further, wage pressures are also muted. Monsoon is a wildcard at this point of time. However, as FY15 a nd F Y16 showed, a lo wer monsoon d oes no t n ecessarily imply higher food and overall inflation.

Figure 7: Commodity prices have increased sharply in recent weeks but rupee appreciation has provided comfort 

Source: Bloomberg, IIFL Research.  Earnings - d owngrade c ycle likely t o co ntinue in n ear-term: Despite economic growth l ikely to surprise our expectation at the start of the year, corporate earnings have continued to see downgrades, as we expected. And thi s is despite the general perception that results for the De cember qua rter were by and l arge be tter than e xpected. T hus, consensus e xpectation of ag gregate BS E200 PA T h as seen a 3 % downgrade si nce t he st art of t he y ear. Th e d owngrades f or t he m ore widely tracked but narrow Nifty Index are 4.5%.

9.9  9.4 

5.9 4.9  4.5  4.9 

0 

2 

4 

6 

8 

10 

12 

FY13 FY14 FY15 FY16 FY17ii FY18ii

CPI Inflation(YoY%)

(30)

(20)

(10)

0 

10 

20 

30 

40 

Jan‐12 Aug‐12 Apr‐13 Dec‐13 Aug‐14 Apr‐15 Dec‐15 Aug‐16 Apr‐17

LME Metals  Index CRB Commodity  IndexINR Terms (YoY%)

ashutosh.datar@iiflcap.com

India - Strategy

5

Institutional Equities

Figure 8: Earnings estimates continue to see downgrades 

Source: Bloomberg, IIFL Research. Based on aggregate earnings of 174 BSE 200 and 50 Nifty companies that have data for the period of FY15‐FY18E   Although a t a h eadline le vel, c onsensus expectation is f or earnings growth to moderate slightly in FY18 th is is in large part due to hi gher earnings gr owth f or the vo latile me tals c ompanies and PSU ban ks. Excluding t hese, c onsensus e xpectation i s for a sh arp ac celeration i n profit gr owth to 14 % i n FY18, al most 6ppt h igher than in FY17e . In particular, the domestic consumer and cyclical sectors a re expected to see a sharp acceleration in earnings in FY18

Figure 9:  Consensus estimates seem optimistic, even excluding PSU banks and metals companies BSE200 Earnings Growth (YoY%)  FY16 FY17E  FY18E Consumer Discretionary  9.9  (2.1)  31.0 Consumer Staples  12.9  6.9  16.0 Energy  13.6  19.6  6.1 Financials  (25.4) 41.0  27.7 Health Care  19.6  15.1  16.9 Industrials  41.1  9.2  19.9 Information Technology  8.6  5.2  8.0 Materials  (39.1) 88.4  41.6 Real Estate  1.7  25.6  12.6 Telecommunication Services  (10.1) (32.1)  (20.4) Utilities  17.4  7.8  19.1 BSE200 Index  (1.0) 19.2  18.7 BSE200 Ex‐PSU Banks, Metals  12.5  8.5  14.5 Source: Bloomberg, Company, IIFL Research. Note: Based on 174 BSE200 companies that have data for the period of FY15‐FY18E  With no minal G DP g rowth li kely to be i n l ow do uble di gits and gi ven elevated corporate margins for many companies in the domestic sector (excluding com modities), we b elieve t he d ownside ri sk t o con sensus earnings estimates continues. The recent sharp appreciation in rupee is another add ed headwi nd f or c orporate earnings. In the pas t thr ee months, the Indian r upee has app reciated by 5-5. 5% agai nst mo st major cu rrencies su ch a s t he U SD, C hinese R enminbi, Eu ro, a nd t he British Pound. While this reflects a general trend of US Dollar weakness, the r upee has c ontinued to outperform mos t o ther EM currencies and thus, the rupee has appreciated even in trade-weighted terms. At least in the short-term, thi s reduces competitiveness of domestic producers relative to overseas producers.

(2.6)

(3.1)(2.8) (2.7)

(3.5)

(3.0)

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0 

BSE200 BSE200 Ex‐PSU Banks, Metals

Nifty Nifty Ex‐PSU Banks, Metals

FY18 Earnings  change since 31‐Dec‐2016 (%)

ashutosh.datar@iiflcap.com

India - Strategy

6

Institutional Equities

Figure 10: INR has appreciated sharply against most major currencies over last few months 

Source: Bloomberg, IIFL Research. Rebased to 100 as on 01‐Jan‐2016  Although o n o ne han d th is appr eciation w ill a lleviate s ome of the pressure from rising commodity prices, that b enefit would be relatively modest and would be more than offset by likely downgrades to earnings to commodity and e xporting sectors. Our bal lpark calculations suggest that 3-4% appr eciation in e xchange r ate (v s. USD) w ill r esult in 4 % downgrade to FY18 earnings f or c ompanies under o ur c overage (excluding financials). Sectors such as metals, energy, and IT will bear the d isproportionate i mpact o f cu rrency appreciation. Thus, consensus earnings estimates are likely to see further downgrades in the next few weeks. We believe that e ventually, corporate earnings growth for FY18 is likely to settle at around 10% from the current mid-teens estimate. Earnings dep ressed from a medium-term pers pective; catch u p the ke y: Beyond the near-term, the bi gger picture i s that c orporate profits are highly depressed relative to long-term average, reflecting the prolonged do wnturn i n the investment c ycle. Co rporate pr ofits ar e currently just above 2% of GDP as agai nst a long-term average of 4% of GDP and a peak in FY08 of almost 7% of GDP. Unless the profit cycle starts reverting to the me an, s ustained o utperformance f rom s tocks would be difficult in the medium term.

Figure 11:  Corporate profit as a share of GDP is lowest in  more than a decade 

Source: CMIE, IIFL Research. Based on a standalone financials of more than 15,000 companies for each year  Valuations above average: Equity markets have been buoyant in the first three months of 2017 wi th double-digit returns for the large-caps and m ore t han 2 0% return for smaller-cap com panies. Wh ile t he economy remains o n a we ak wi cket re lative to pr e-demonetisation levels, t he b uoyancy in m arkets r eflects a n exp ectation of st rong recovery in the economy from the demonetisation-led slowdown, aided by G ST, the bi g s tructural r eform ki cking in l ater thi s ye ar. Thus, expectations are clearly running high and reflect in the sharp expansion in valuation multiples. The Ni fty i s tr ading at mo re than 22x tr ailing PE or m ore than 1. 5 standard deviation above i ts l ong-term average. Similarly, the broader BSE200 index i s trading at 1. 8 standard deviation above i ts l ong-term average. In a bsolute terms, t hese m ultiples lo ok ve ry egregious. However, one c omforting fact or i s t hat d omestic c ost of cap ital has fallen si gnificantly in the p ast cou ple of y ears. Th e yield on the benchmark 10-y ear gover nment bo nd ha s f allen 200bps i n the pas t couple o f ye ars t o p ost g lobal f inancial c risis lo ws o f le ss t han 7 %. Adjusting fo r th is fa ll in c ost o f c apital, a lthough va luations ar e s till above t he l ong-term a verage, p rima fa cie t hey d o n ot l ook q uite a s

75

8085

90

95100

105110

115

Jan‐16 Mar‐16 Jun‐16 Aug‐16 Nov‐16 Jan‐17 Apr‐17

INR‐USD INR‐EUR INR‐GBP INR‐CNY

0 

1 

2 

3 

4 

5 

6 

7 

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

PAT (% of GDP) Average

ashutosh.datar@iiflcap.com

India - Strategy

7

Institutional Equities

egregious a s he adline v aluation m ultiples a ppear, e specially b ecause corporate earnings, in aggregate, are quite depressed. Figure 12: BSE100 trailing PE ratio is more than one std. deviation above long term average  

Source: Bloomberg, IIFL Research.   Given this backdrop, one has to accept that there is little, if any, scope for further r e-rating of st ocks, especially s ince t he e ra o f l ow co st of capital is probably behind us, not just g lobally but a lso in India, g iven the shift in the stance by MPC. Thus, one has to look to earnings growth as be ing the p rimary driver of e quity re turns and ho pe that i nvestor optimism o n India k eeps v aluations unc hanged. Thus, equity r eturns mimicking earnings growth i s the bes t-case outcome f or s tocks i n the next few quarters in our view.

Figure 13:  Earnings yield gap has worsened a bit due to rising yields and equity markets 

Source: Bloomberg, IIFL Research. Note:  Calculated as BSE100 earnings yield minus 10Yr GSec yield. 

Domestic l iquidity – t he k ey s upport for t he m arket: Do mestic inflows in the equity market remain robust. Thus, in just the first three months o f the y ear, d omestic mutua l f unds have re ceived mo re than US$6bn of inflows in their equity funds.

Figure 14:  Domestic equity MFs continue to see large inflows  

Source: AMFI, IIFL Research. Equity flows includes funds collected under ‘Growth’, ‘ELSS’ and 50% of ‘Balanced’ category. EPFO includes funds other ‘Other ETF’ category. Assuming exchange rate of Rs. 65/US$ 

0 

5 

10 

15 

20 

25 

30 

Jan‐03 Aug‐04 Mar‐06 Oct‐07 May‐09 Dec‐10 Jul‐12 Jan‐14 Sep‐15 Apr‐17

BSE100 Trailing PE Ratio +/‐1 Std. Dev Average(x)

(500)

(300)

(100)

100 

300 

500 

Jan‐03 Oct‐04 Jul‐06 May‐08 Feb‐10 Dec‐11 Sep‐13 Jun‐15 Apr‐17

BSE100 Yield Gap Average(bps)

(5)

0 

5 

10 

15 

FY13 FY14 FY15 FY16 FY17

Equity EPFO(US$ bn)

Domestic MF Equity Collection

ashutosh.datar@iiflcap.com

India - Strategy

8

Institutional Equities

A s ignificant s ource f or i nflows wi th domestic mutua l f unds i s the s o-called ‘sy stematic i nstalment p lans (SIPs)’ where monthly i nflows now total ~US$700m on a gross basis. In addition, the decision by Employee Provident Fund O rganization (EPFO) to i nvest 5% o f i ts incremental inflows i nto equity market has been a major contributor to i nflows for domestic funds. A large part of this flow is sticky, and thus, this liquidity support to the market is likely to continue in the near term. On one hand, domestic flows in the equity market are robust and on the other hand, FP Is hav e tur ned ne t buy ers o f Indian s tocks i n the last quarter (f rom ne t sellers i n the p receding quar ter). Thus, thi s wal l of liquidity c hasing d omestic s tocks is a f actor be hind t he s trong performance of Indian stocks. In a sense, there are no major sellers in the market! Portfolio strategy – focus on earnings delivery Despite our slightly optimistic macro view, we believe investors should continue to buil d c onservative p ortfolios with a c lose atte ntion to earnings risk and valuations. That said, the changed macro outlook and especially t he ch anged cu rrency outlook w arrant a ch ange i n ou r portfolio. Accordingly, we move the IT sector to neutral and Healthcare sector to unde rweight from overweight before, given added headwinds from currency and the consequent uncertain earnings outlook. Given our view of a faster recovery in domestic economy, especially in consumption, we change ou r st ance on st aples an d d iscretionary t o

overweight, g iven the mac ro re covery and thus i mproving e arnings outlook. Our overweight stance on energy with a preference for the oi l marketing companies continues. We change our stance on financials to neutral, reflecting a c ombination of structural and c yclical ta ilwinds for private financials offset by concerns over valuations. Figure 15:  Portfolio allocation table Sector  Nifty weight IIFL recommended weight Consumer Discretionary  10.9  12.0 Consumer Staples  8.7  10.0 Energy  11.6  15.0 Financials  33.2  33.0 Health Care  5.5  5.0 Industrials  5.8  6.0 Information Technology  12.6  9.0 Materials  6.2  5.0 Real Estate  0.0  0.0 Telecommunication Services  1.8  1.0 Utilities  3.6  4.0 Aggregate  100.0  100 

Source: NSE, IIFL Research

Page 2 Page 2

STRATEGY

Market data

BSE Sensex 29,737

NSE Nifty 9,220

Date April 3, 2017

Performance (%)

1m 3m 12m

BSE200 4% 13% 23%

Sensex 3% 11% 17%

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

GAUTAM SINGH gautam@sparkcapital.in +91 22 6176 6804

GAURAV NAGORI, CFA gaurav@sparkcapital.in +91 44 4344 0072

ARJUN N arjun@sparkcapital.in +91 44 4344 0081

Spark India Strategy

eNAM – A Path Breaking Reform in Agri Supply Chain

eNAM – electronic National Agriculture Market – is creating a single national agricultural market for sale and

purchase of agri-produce by connecting fragmented agricultural markets (called mandis) on an online trading

portal. After evaluating the nuts and bolts of how eNAM is beginning to change an inefficient legacy structure,

we conclude that this GoI initiative could dramatically overhaul the entire agri value chain. In fact, we think the

Agri commodity market in India is at the same juncture where the Indian equity market was in the early 1990s,

when floor trading gave way to the electronic market place.

Early winds of change are visible. Out of ~2400 mandis across India, ~400 mandis have already been integrated

with eNAM. Once integrated completely, India, with an Agri GDP size of US$ 325bn, would become the largest

digital agri commodity spot exchange market in the world. We estimate that eNAM could deliver 20%-30%

reduction in intermediation cost, leading to 10%-15% increase in farmers’ realization and 10%-15% reduction in

prices paid by consumers. More importantly, like the hugely successful crop insurance scheme (see our note

Crop Insurance Scheme), eNAM’s structural impact is in reducing the volatility in farmers’ income by replacing

local region demand-supply vagaries with more stable pan-India demand-supply dynamics.

Why we need eNAM: India consists of various agricultural belts, viz., Maharashtra alone produces 30% of India’s total

onion and Madhya Pradesh produces 27% of India’s total pulses. During harvest season, prices of agri-commodities vary

widely across markets. Current regulations and lack of infrastructure force farmers to sell their produce only in the nearby

mandi to registered traders (called as Adatias). Adatias tend to form cartels affecting price discovery for farmers and

food-processors/retailers, alike, as these mandis operate independent of price movements outside their precincts.

How eNAM changes the equation: Once implemented fully, eNAM aims to 1) Eliminate traders’ cartels and therefore

price manipulation at mandi-level; 2) Provide a better and real-time price discovery based on actual demand and supply

of agri-commodities that should result in lower prices for processors / retailers / consumers and would also discourage

hoarding as information on agri-commodities holding would be readily available; 3) A better price realisation for farmers

would lead to increased focus on optimisation of agri-inputs (seeds, fertilizers, agro-chemicals, mechanization, irrigation,

etc.), which in turn, would result in higher farm productivity and incomes; 4) Digitize agri commodities transactions,

leading to reduction in cash transactions that would benefit both Government and the banking system alike.

Current progress and acceptability: While there are ~2400 mandis across India, ~400 mandis in 13 states – Haryana,

Telangana, AP, Gujarat, Rajasthan, MP, UP, Jharkhand, Chattisgarh, Himachal Pradesh, Maharashtra, Orissa, and

Uttarakhand – have joined the eNAM platform. 3.6mn farmers, 78,716 traders and 36,937 agents have been registered

with eNAM. So far, eNAM has already handled a turnover of Rs. 140bn and a total quantum of 5.4mn MT.

Key issues need to be addressed: Our mandi-level interactions suggest that GoI needs to work on 3 important aspects

to make eNAM most effective: 1) Each mandi needs to have automated assaying facility which should be completely

reliable so that traders don’t have to be physically present in the mandi, 2) Traders physically not present at a specific

mandi where a farmer is delivering his produce need adequate logistical support on managing the physical transfer,

storage and transportation of their purchases, and 3) Online infrastructure (kiosks for farmers, included) and internet

speed need to be sound enough to handle peak season arrivals smoothly.

-10%

0%

10%

20%

30%

Mar-

16

Jun

-16

Se

p-1

6

De

c-1

6

Mar-

17

Sensex BSE 200

S

Page 3 Page 3

STRATEGY eNAM in a nutshell

#1. What is eNAM

•National Agriculture Market (NAM) is a pan-India online trading portal which connects the existing agri mandis (APMC - agricultural produce market committee) to create a unified national market for agricultural commodities.

What is eNAM

•Fragmented nature of agri markets and deterring APMC regulations restrict farmers to sell their produce directly to the consumers and to access pan-India agri markets. It results in higher agri commodity prices for the consumers without benefitting the farmers.

Why we need eNAM

•Farmer brings his produce to mandi. After assaying and fixing a price, the bid is loaded on to eNAM platform. Buyers across the country bid and make the payment through NEFT to eNAM, which transfers it to the farmer.

How it works

•13 states – Haryana, Telangana, AP, Gujarat, Rajasthan, MP, UP, Jharkhand, Chattisgarh, HP, Maharashtra, Odisha, and Uttarakhand have amended their APMC acts and joined eNAM platform. So far, 400 mandis have been connected to the eNAM platform (India has 2,477 regulated agri markets)

Current Progress

•Currently 69 agricultural and horticultural commodities including fruits and vegetables have been notified for trading on eNAM platform. Traded commodities

•As per the latest data, 3.6mn farmers, 78,716 traders and 36,937 commission agents have been registered on the eNAM at present. Total turnover done by eNAM is Rs. 140bn in the last five months. Total quantum traded is 5.4mn MT.

Acceptability

Pre-requisites for enabling a eNAM: APMCs have to make the following three changes in their existing rules to implement eNAM

The State APMC Act must have a specific provision for electronic trading

The State APMC Act must provide for issue of licences to anyone in India to trade through the NAM in the local mandis.

There must be one single licence for each State to facilitate trading in all the mandis of that State and a single point levy of transaction fee.

Page 4 Page 4

STRATEGY #2. Why eNAM

To facilitate optimal price discovery

through auctioning process.

Only registered traders can buy the

notified products directly from the

farmers thereby ring-fencing farmers

from big retail houses.

Prevents

Exploitation by

Corporates

Perfect

Competition

Scenario

Information from all mandis to help in

achieving better price discovery across

markets in a state. Unified Markets

The agents collude and fix the auction

price far below the market price leading

to exploitation of farmers. This has led to

a monopolistic market situation.

Exploitation

under the veil of

law

Cartelisation

& Monopoly

High market fee for farmers and

licensing fee from the commissioning

agents who mediate between buyers and

farmers restricts new comers.

Exorbitant Fees

morphed into

entry barriers

Intended Objectives Reality

A monopolistic market situation has led

to wide gap between the market price

and the price paid to the farmers

To understand this, let’s first understand the APMC Act, its intended objectives versus reality

As per the APMC Act, states are geographically divided into markets (mandis). Farmers can sell their produce via an auction at the mandi in their region to APMC agents, who require a license to operate within a mandi. The major objective of the act was to protect the farmers from the wholesale and retail traders who were buying at a price far lower than the market price.

However, over the period, APMC agents formed local cartels, forcing farmers to sell at lower prices. Also, farmers can not move the produce to another mandi within the state because each market requires separate license and transportation costs is too high.

Multiple charges levied within the mandis such as market fees, licensing fees and commission etc. pushed up agri commodity prices. That’s why APMC act failed to deliver on its objectives.

Why the existing APMC model is not up to the mark

Page 5 Page 5

STRATEGY #3: How things would change after eNAM implementation A pre and post eNAM comparison

Limited number of traders due to strict licensing policy Large number of traders due to Liberal licensing policy

Fragmented nature of agri markets A unified national e-market platform for notified

agricultural commodities

Need for multiple licenses to trade within a state Single trading license valid across the State

Pre-condition of physical presence or possession of

shop in market yard No need to have physical presence

No transparency in pricing, local traders decide price Better and real-time price discovery based on actual

demand and supply of agri-commodities

Multiple level of fees, agent commission etc. Single point levy of market fee across the State

PRE eNAM POST eNAM

Farmers can sell their produce only through APMCs APMCs continue to exist. But farmers can sell to

traders across India on eNAM

Rampant collusion, traders usually form cartels Eliminate forming of cartelization as traders don’t

know each other

Lot of information asymmetry between buyers and

sellers

Removes information asymmetry between buyers and

sellers

Lot of scope and incentive for hoarding given that no

information about hoarding

Hoarding would be curtailed as one can pinpoint who

is hoarding

4. Participants

2. License Requirement

3. Physical Presence

5. Price Discovery

1. Market Structure

6. Fees

7. Selling Restrictions

8. Cartelization

9. Information Gap

10. Scope for Hoarding

KEY PARAMETERS

Page 6 Page 6

STRATEGY #4: Key stakeholders and responsibilities Four major stakeholders in implementing eNAM

eNAM

Small Farmers Agribusiness

Consortium (SFAC)

SFAC is the lead agency for implementation of eNAM. It carries out all administrative and management functions

with respect to implementation

Strategic Partner (SP)

Nagarjuna Fertilizers and Chemicals Limited (NFCL)

has been appointed as SP for a period of 5 years to develop

and maintain eNAM Portal

Directorate of Marketing and

Inspection (DMI) Provides assistance on scrutiny of the detailed

project reports submitted by States. Assists Project

Appraisal Committee (PAC) with respect to regulatory and

reforms aspects

National Informatics Centre (NIC)

NIC is the technical partner responsible for providing all

the infrastructure (virtual servers, base operating systems, firewall, load

balancers, SMS and email services etc)

Page 7 Page 7

STRATEGY #5. The system design of eNAM How eNAM operates

APMC/ Channel

Partners / Seller

Facilitation

SELLER

National Agriculture Market Portal

Settlement

BUYER

FARM ER

T RADER

COM M ISSION

AGENT

SELLER

TRADE MATCH

Quality Certification

by Identified Labs

Clearing Bank

(Deposit Money)

Goods Delivery

Payments

Price Quote

by Buyer

1

2

3

4

Acceptance of

Price Quote by Seller

Step 1

Farmer is registered with eNAM.

Step 2

Farmer gives his produce for quality

assessment

Step 3

The details of the product is loaded on

the portal

Step 4

Buyers across India bid for the product

and deal is finalized when trade matches

Step 5

Buyers make the payment for the

selected lot through NEFT to eNAM

Step 6

eNAM transfers it to the farmer after

deducting a transaction fee

5

6

Source: GoI, Spark Capital Research

Settlement period: T+0

eNAM platform provided

by Nagarjuna Fertilizer

Page 8 Page 8

STRATEGY

Total of 585 mandis to be connected via eNAM by Mar’18

Source: GoI, Spark Capital Research

Pan India implementation status: 400 mandis in 13 states have been

connected to eNAM platform of the 2,477 regulated agri markets

Himachal

Pradesh

19 | 7 | 37%

Uttarakhand

5 | 0 | 0%

Uttar Pradesh

66 | 66 | 100% Rajasthan

25 | 25 | 100%

Haryana

54 | 37 | 69%

Gujarat

40 | 40 | 100%

Telengana

44 | 44 | 100%

Maharashtra

30 | 12 | 40%

Madhya Pradesh

50 | 20 | 40%

Chattisgarh

14 | 12 | 86%

Jharkhand

19 | 8 | 42%

Source: GoI, Spark Capital Research

AP

22 | 12 | 55%

#6. Progress and timeline for implementation

•Trading portal creation

Apr’16

•250 Mandis

By Sep’16

•400 Mandis

By Mar’17

•Roll out in 585 Mandis

By Mar’18

Total APMC

Online APMC

Implementation on a fast track

Sr. No. State Total

APMC

Online

APMC Active APMC %

1 Rajasthan 25 25 100%

2 Telangana 44 44 100%

3 Uttar Pradesh 66 66 100%

4 Gujarat 40 40 100%

5 Andhra Pradesh 22 12 55%

6 Chhattisgarh 14 12 86%

7 Haryana 54 37 69%

8 Himachal Pradesh 19 7 37%

9 Jharkhand 19 8 42%

10 Madhya Pradesh 50 20 40%

11 Maharashtra 30 12 40%

12 Uttarakhand 5 0 0%

Page 9 Page 9

STRATEGY #7. Key benefits of eNAM for individual stakeholders Efficient and transparent price discovery across the agri supply chain

eNAM

Farmer

Single market fee, access to all agri

markets;

Expect 10-15% better price realization Trader

Single licence valid across state;

Access to all agri markets with single license

APMCs

Continue to exist.

eNAM to transfer the mandi fees to respective APMC. Food

Processor/ Retailer

To pay lower prices due to better price

discovery and direct access to

agri markets

Consumer

To pay lower prices due to efficient and

transparent price discovery

Hoarder

eNAM would discourage hoarding as

information on holding would be

available

Page 10 Page 10

STRATEGY #8. How eNAM would increase farmers’ income Farmers' realization to increase by 10-15%

Once eNAM is fully operational, we believe, eNAM would deliver ~20-30% reduction in intermediation cost depending on the agri commodity, leading to ~10-15% increase in farmers’ realization and 10-15% reduction in prices paid by consumers.

Farmers

Commissioning Agent

Wholesaler

Consumer Retailer

15%

30%

30%

Final consumer

pays Rs. 22/kg,

~94% jump

Farmers

Traders

Commissioning Agent

Wholesaler

Consumer Retailer

20%

25%

30%

30%

Final consumer

pays Rs. 25/kg,

~150% jump

Current system

Farmers sell their produce to local traders / APMC agents, who

offer lower than market price because they know that farmers

have no choice but to sell to them.

Then these traders / APMC agents charge double commission

(both from seller and buyer) and sell it to wholesalers, who sell

it to retailers and then final consumers buy it from retailers.

In this entire process, the price of the produce goes up by

100%-150%, which increases price for consumer without

any benefit to farmers.

Post eNAM implementation

eNAM would provide a pan India platform where farmers could

sell their produce to buyers across the country, eliminating the

monopoly of the local traders.

It would result in higher return to farmers as they get the market

price for their produce which is higher than the price offered by

the local traders.

We believe, eNAM would deliver ~20-30% reduction in

intermediation cost depending on the agri commodity,

leading to ~10-15% increase in farmers’ realization and 10-

15% reduction in prices paid by consumers.

Cost:

Rs.8/kg

Rs.10/kg

Rs.12/kg

Rs.15/kg

Rs.20/kg

Rs.25/kg

Cost:

Rs.8/kg

Rs.11.5/kg

Rs.13.2/kg

Rs.17.2/kg

Rs.22.4/kg

Farmer

produces onion Farmer

produces onion

Source: Spark Capital Research

Page 11 Page 11

STRATEGY #9. Key issues need to be addressed Way forward

For eNAM to be more effective, the following issues need to be resolved:

#1

•Grading laboratories: One of the most important factors for inter-state transactions to take place is the assurance of the quality of the selected product. Therefore, Govt needs to put quality control laboratories for assaying and grading purpose so that traders across the country can bid based on the grading provided by the quality officers. The concept of virtual reality should also be considered to add more credibility to the system.

#2

•Warehousing, logistics and quality assurance: Traders outside the mandi bidding in e-auctions need support on managing the physical transfer, storage and transportation of their purchases. These issues need to be resolved to make eNAM workable for the traders who are not physically present in the mandis. There is a need for a body which handles the settlements, ensuring that the high grade product is not replaced by low grade product during the delivery process.

#3

•Lot size: A big challenge for inter-state trade is the difference between the lot size demanded by the traders and the lot size supplied by the farmers. Traders outside the mandis usually demand for larger lots to take the benefit of the economy of scale in handling the logistics (transportation etc.), whereas farmers supply smaller lots.

#4

• Internet speed & other technical glitches: There are incidents of poor internet speed, system down during the peak season arrivals. The online infrastructure needs to be sound enough to handle such technical glitches like crashing of servers, failure of bidding etc.

#5

•Awareness and training: To increase awareness and acceptability, the importance of eNAM has to be explained to the farmers and traders through awareness campaigns. State govts also should promote eNAM proactively. There are 2477 regulated APMC markets in India. Even if the Govt’s target of connecting 585 markets is achieved, it is just 24% of the total of 2477 regulated agri markets (APMC) in India.

#6

•Smooth gate entry and registration: During peak harvest season, APMC markets receive a large number of farmers, creating a long queue at mandis gate which in turn, creates traffic jams . Gate entry and registration process needs to be fast to avoid such issues.

Page 12 Page 12

STRATEGY Supply chain constraints that limit farmer incomes to ease

#Appendix 1: Our conversations with the stakeholders

Farmer in Karnal (Haryana)

“Post eNAM, the benefit is that I get immediate payment from trader in

my bank account. Earlier sometimes I had to wait up to one

month for the payment.”

Farmer in Charkhi (Haryana)

“Earlier we had no choice but to sell our produce to the local traders at whatever price they gave to us.

eNAM allows us to sell to traders from all Indi. We are already seeing

its impact on prices”

Farmer in Kaithal (Haryana)

“During harvest season, many times we had to sell our produce below Minimum Support Price (MSP).

eNAM has ensured that no one can quote a price below MSP now.”

APMC agents

“The quantity each farmer brings to the mandi is very small. Farmers would still need us for sorting and

consolidating their produce. We are still very much in the in the game.”

An official on eNAM

“Software we are building for eNAM platform would be 2.5 times that of BSE and NSE put together. The

potential is huge in this business.”

An official on logistics

“Every mandi will have accredited and authorised transporters. Half a dozen

organised logistic companies are walking into this space”

StrategyMarket outlook

Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

For important disclosures please refer to page 6.

Mahesh Nandurkarmahesh.nandurkar@clsa.com+91 22 6650 5079

Abhinav Sinha+91 22 6650 5069

Alok Srivastava+91 22 6650 5037

7 April 2017

IndiaMarket Strategy

www.clsa.com

Gov’t spend not a tailwindWeak tax growth, fiscal correction impacting expenditureGov’t (central + state) expenditure growth of 16% during FY17 was a key driver of growth. This number will be less than 10% in FY18. We analysed the budget documents of 15 states accounting for 87% of GDP and the trend is not very different from the federal budget. The states plan to taper expenditure growth to 10% in FY18 from 19% in FY17 as they plan to get the fiscal deficit back in shape - down 50bps YoY to 2.6%. The focus is on rural development (roads, irrigation). Select states are focusing on housing and Maharashtra has proposed land monetisation /off-balance sheet funding for infrastructure spend. With increased political risk of farm loan waivers, the possibility of a reduction inproductive development spend exists.

State gov’t expenditure growth to shrink in FY18q The total FY18 expenditure of the 15 states for which budget documents are

available adds up to Rs25tn as against Rs21tn for the federal gov’t.q During FY17, states’ own revenue growth was moderate at 11% but strong support

from the central gov’t and a higher fiscal deficit drove expenditure growth to 19%.q In FY18, the state governments plan to reduce the fiscal deficit from 3.1% in FY17

to 2.6%. Also, total revenue growth will decelerate as the oil-led bonanza is now behind us. Expenditure growth is expected to reduce to 10% in FY18.

q The states are already building in 15% own tax revenue growth for FY18 and most states have already built in a compensation under GST. Revenue projections of Maharashtra, Karnataka, Gujarat, etc appear conservative.

q We note that only about 25% of the total state gov’t revenues are assured 14% revenue growth under GST.

Focus clearly visible on social housing/other social sectorsq Several large states have budgeted for housing construction. Karnataka is the most

aggressive with 0.7m units, followed by Tamil Nadu and Telangana with 0.2m.q Rural roads is also a priority for most states. Tamil Nadu has planned a large 20%

increase in irrigation budget.q Bihar has raised spending on rural works by 25% in FY18BE and Andhra Pradesh

(AP) has increased allocation to rural development by 27%. Madhya Pradesh and Odisha are have hiked allocation to urban development by 34%/22% YoY.

If farm loan waivers spread…q The state of Andhra Pradesh has already provided for Rs36bn in this year’s budget

towards the Agriculture redemption scheme.q With Uttar Pradesh approving a large Rs360bn (3% of state GDP, 10% of the state

gov’t total expenditure) farm loan waiver, pressure is building on the other states.q Maharashtra and Tamil Nadu are reportedly considering this too. If farm loan

waivers spread, funds available for productive investments might be affected.

Other interesting points from the state budgetsq Combined with the state’s discom, Tamil Nadu will save Rs13bn/year due to UDAY. q Haryana has saved Rs6bn through DBT/Aadhaar database. It weeded out ineligible

beneficiaries of kerosene subsidy, social pension and scholarships. q Gujarat and Haryana explicitly mention implementation of pay commission awards.

Gujarat has allocated Rs55bn towards this in FY18.q Rajasthan has completed GST registration for 80% of tax assesses in the state.q Kerala has installed smart surveillance cameras on border roads on an experimental

basis to prepare for GST. If the camera captures goods vehicles that have not uploaded the invoices, such vehicles can be intercepted and checked by mobile squads of the Commercial Taxes Department for tax evasion.

q Karnataka has said that the impact of demonetisation on stamps and registration revenues was Rs13.5bn (total collection of Rs78bn) in FY17.

Gov’t spend not a tailwind Strategy

7 April 2017 mahesh.nandurkar@clsa.com 2

Gov’t expenditure growth to decelerate in FY18Figure 1

Trend in YoY growth in total government expenditure

Source: Ministry of Finance, State budgets, RBI, CLSA; RE is revised estimates and BE is budgeted estimates.

Higher share from Centre helped in FY17Figure 2

States revenue and expenditure in FY18 vs FY17Rsbn FY16A FY17RE FY18BE %YoY

FY17RE%YoY

FY18BEComments

States' total revenue 15,600 18,513 20,840 18.7 12.6 Own revenues+ contribution from central gov’t

States’ own revenues 8,862 9,933 11,391 12.1 14.7States' own tax revenues 7,611 8,446 9,717 11.0 15.1 Own tax revenue growth was lower than

budgeted; FY18BE appears aggressiveStates' own non-tax revenues

1,250 1,486 1,673 18.9 12.6

Contribution from central gov’t 6,739 8,581 9,450 27.3 10.1 Central gov’t transfer was higher than budgeted in FY17

Tax share 4,234 5,086 5,659 20.1 11.3Grants in aid 2,505 3,495 3,791 39.5 8.5

Total expenditure 19,477 23,091 25,437 18.6 10.2 Expenditure growth to decelerate to control fiscal deficit

Capex 3,496 4,062 4,556 16.2 12.2FD as a % of GDP 2.7 3.1 2.6 37 bps -55 bps Fiscal deficit higher than budgeted in FY17

Source: State budget documents

States’ own taxes account for nearly half of their revenuesFigure 3

Sources of revenues for states, FY16BE

Source: RBI

16 14

15

10

25

12

16

9

0

5

10

15

20

25

30

FY11 FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE

Total centre+state combined expenditure, ex- interest % YoY% YoY

States's own tax revenue

47%

Share in central taxes24%

States's own non-tax revenue

9%

Grants from the centre20%

VAT56%

Taxes on Property and

Capital Transactions

13%

State Excise12%

Taxes on vehicles

5%

Tax on goods and passengers

2%

Others12%

Total government expenditure growth is

budgeted to decelerate to 9% in FY18 as both

Centre and states reduce their fiscal deficit

States get nearly half of their revenues from their own taxes, of which more than half comes from the

value-added tax

Gov’t spend not a tailwind Strategy

7 April 2017 mahesh.nandurkar@clsa.com 3

States’ own tax growth weaker than Centre’s in FY17Figure 4

Trend in tax revenue growth of states and Centre

Source: RBI, State budget documents, CLSA

Several states’ own tax revenue growth in single digits…Figure 5

State’s own tax revenue growth for FY17RE

Source: State budgets

… as property markets remain weakFigure 6

FY17 increase in stamps and registration fees

Source: State Budgets, CAG, *11MFY17 over 11MFY6 data

3

27

12

17

10 9

17 17

12 13

27

21

18 15

8 9 11

15

0

5

10

15

20

25

30

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE

Central govt gross tax revenue States own tax revenue

(% YoY)

3 3 3 8 8 9 10 10 10 11

14 15

22 24 25

46

05

101520253035404550

Utt

ar

Pra

des

h

Odis

ha

Guja

rat

Mah

arash

tra

Tam

il N

adu

Kar

nat

aka

Bih

ar

Madhya

Pra

desh

Raj

asth

an

All

state

s

Ker

ala

West

Bengal

Har

yan

a

Andhra

Pra

des

h

Tel

angan

a

Jhar

khan

d

%YoY

(8) (7) (6)(1)

0 3 4

30

(15)(10)(5)05

101520253035 FY17RE growth in stamps and registration fees

% YoY

States own tax revenue growth was 11% in FY17 vs 14% budgeted for the

year

Property market weakness led to decline in

stamp and registration fees in many states

States are building in higher tax revenue

growth vs the Centre in FY18

Gov’t spend not a tailwind Strategy

7 April 2017 mahesh.nandurkar@clsa.com 4

But states are building in strong growth in FY18Figure 7

State’s own tax revenue growth for FY18BE

Source: State budgets. Note: Uttar Pradesh numbers are based on the interim budget.

Several states above the 3% fiscal deficit level in FY17...Figure 8

Fiscal deficit revised estimates of states for FY17, as a per cent of GSDP

Source: State budgets; MP numbers include UDAY impact

…which is reflected in a yield widening of states…Figure 9

Differential between state bond and G-Sec yields

Source: Bloomberg, RBI

9 12

14 14 14 15 15 15 16 16 17 18 19 20 20

25

0

5

10

15

20

25

30

Kar

nata

ka

Mahar

ashtr

a

West

Ben

gal

Mad

hya

Pra

desh

Tam

il N

adu

Har

yana

Bih

ar

All

stat

es

Odis

ha

Raj

asth

an

Andhra

Pra

des

h

Guja

rat

Jhar

khand

Utt

ar P

rades

h

Ker

ala

Tel

angan

a

%YoY

1.8 2.2 2.2

2.5 2.5 2.6 2.7 3.1 3.2 3.3 3.4 3.5

4.2 4.5 4.6 4.6

0.00.51.01.52.02.53.03.54.04.55.0

Guja

rat

Kar

nat

aka

Mah

aras

htr

a

Har

yana

Jhar

khan

d

Wes

t Ben

gal

Andhra

Pra

des

h

All

stat

es

Odis

ha

Tel

angan

a

Raj

asth

an

Ker

ala

Bih

ar

Utt

ar P

rades

h

Tam

il N

adu

Mad

hya

Pra

des

h

% of state's GDP

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Dec 15 Feb 16 Jul 16 Sep 16 Nov 16 Jan 17 Feb 17

10-year State Govt bond yield 10-year G-Sec yield%

69bps

38bps

91bps

States are building in own tax revenue growth of

15% YoY in FY18BE

States’ fiscal deficit for FY17RE was 50bps ahead

of budgeted estimates

State bond yields gap vs G-Sec has widened to

91bps

Gov’t spend not a tailwind Strategy

7 April 2017 mahesh.nandurkar@clsa.com 5

… but states are building in a decline in deficits in FY18Figure 10

FY18 budgeted fiscal deficit, % of GSDP

Source: State budgets, CLSA

Capex growth deceleratingFigure 11

Trend in states’ capex growth, YoY

Source: CLSA, State budgets

1.5 1.8 1.8

2.3 2.6 2.6 2.6 2.8 2.9 3.0 3.0 3.1

3.4 3.4 3.5 3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Mah

aras

htr

a

West

Bengal

Guja

rat

Jhar

khand

All

stat

es

Kar

nat

aka

Har

yan

a

Tam

il N

adu

Bih

ar

Raj

asth

an

Andhra

Pra

des

h

Utt

ar P

rades

h

Tel

angan

a

Ker

ala

Madhya

Pra

des

h

Odis

ha

%

0

5

10

15

20

25

30

35

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE

Capex(YoY increase)

Capex growth is decelerating as states

look to reduce fiscal deficit

Some states expect to breach FRBM limits in

FY18 as well

12/04/2017 Electric vehicles and the auto industry

https://www.pressreader.com/india/business­standard/20170411/282054801893315 1/3

The prospect of elec tric ve hi cles (EV) dis rupt ing the au to mo bile in dus try has led to ex cite ment, fearand nu mer ous re search re ports. Some ex perts feel it is all doom and gloom for the in cum bent auto orig i ­nal equip ment man u fac tur ers  (OEMs) as EVs re place  in ter nal  com bus tion en gine  (ICE) cars and  theywill suf fer the same fate as the horse car riage man u fac tur ers they them selves re placed more than a hun ­dred years ago. The au to mo bile ma jors are ob vi ously far less bear ish, and con tinue to be lieve they willthrive and lead the tran si tion. They be lieve only they have the scale, dis tri bu tion, brand and tech no log i ­cal re sources needed to thrive in a world of EVs.

This  tran si tion  is  of  huge  sig nif i cance  as  glob ally  the pas sen ger  ve hi cle  in dus try has  a  turnover  of$1.8 tril lion, prof its of $150 bil lion and vol umes of 90 mil lion. Just for con text, the smart phone in dus tryhas rev enues of $340 bil lion and the per sonal com puter in dus try rev enues are $170 bil lion. The tran si ­tion  from  ICE  ve hi cles  to  bat tery­pow ered  EVs will  cause  dis rup tion  on  a  scale  not  seen  be fore.  Thesheer size of the rev enues and prof its at risk, and the mul ti tude of play ers in the value chain af fected arenot triv ial. From power semi con duc tor de sign ers to cobalt min ers and cath ode man u fac tur ers, the ben e ­fi cia ries are nu mer ous as are the losers.

Lithium­ion bat ter ies will be one of  the main build ing blocks  for  trans porta tion,  re new able en ergystor age  and  back­up  power.  These  bat ter ies  will  be  one  of  the  crit i cal  tech nolo gies  of  the  next  fewdecades.

Why does this mat ter? Es pe cially to any one based in India? How will it impact our com pa nies? Whyshould we worry?

The re al ity is that au to mo biles is one of the few man u fac tur ing sec tors where India has had suc cess.The coun try will ex port nearly 800,000 cars  in 2017, a value of at  least $4 bil lion, with nearly 90 percent lo cal i sa tion. In small cars, we are now a global man u fac tur ing hub. To this, we must add our suc cessin auto com po nents, an other $4­5 bil lion of ex ports. This is one of the few sec tors where we have globalscale and com pet i tive ness. Make in India works for small cars. India is pro jected to be the third largestcar mar ket in the world by 2020, with do mes tic vol umes over 4.5 mil lion. Cur rently, we have com po nentlo cal i sa tion of above 85 per cent, with the ma jor ity of the value ad di tion in India. If the in dus try is mov ­ing to EVs, will  it un der cut what ever man u fac tur ing edge we have in this space? Will we re main a car

The govt will have to help but India needs a strat egy. We can not re main just an im ­porter of crit i cal en abling tech nolo gies of the fu ture

Electric vehicles and the autoindustry

Business Standard · 11 Apr 2017 · AKASH PRAKASH

12/04/2017 Electric vehicles and the auto industry

https://www.pressreader.com/india/business­standard/20170411/282054801893315 2/3

man u fac tur ing hub with high do mes tic value ad di tion or be come a cheap as sem bler of im ported lithium­ion  bat ter ies  and  com po nents?  Will  we  be come  in  cars,  what  we  are  to day  in  smart phones:  Cheapassem bly with lim ited do mes tic value ad di tion?

First some back ground. The move to wards EVs is in evitable. The only ques tion is tim ing and it is notonly driven by global warm ing con cerns. It is fun da men tally a bet ter prod uct — just look at the wow fac ­tor as so ci ated with Tesla. Dis rup tion has started at the high­end pre mium ve hi cles but will come downto the mass mar ket even tu ally. The big gest is sue is cost, as the power train of an EV (ba si cally the bat ­tery) is about $17­18,000, com pared to an ICE power train (en gine, trans mis sion and ex haust sys tems)of about $5,000. This gap will nar row as  the costs of bat ter ies  fall by about 20 per cent an nu ally andmore strin gent emis sion and fuel ef fi ciency norms raise the costs of con ven tional en gines. Most ex pertsex pect a cross over in cost some where be tween 2025 and 2030. Given that EVs are faster, more fuel­ef fi ­cient and with zero emis sion, once costs are sim i lar the switchover should hap pen rapidly. Stud ies I haveseen show EV pen e tra tion of 25 per cent by 2025 ris ing to 90 per cent by 2035. The more bear ish stud iesin di cate 10 per cent pen e tra tion in 2025 and 30 per cent by 2035. China will lead this tran si tion fol lowedby the Euro pean Union. Emerg ing Mar ket (EM) coun tries will lag, given the lack of ad e quate charg ingin fra struc ture.

This huge shift will shake up the whole in dus try. If one looks at the pat tern of tech no log i cal dis rup ­tion seen in other sec tors, then value will move away from the tra di tional auto OEMs and their sup pli ersto  core  com po nents  (bat ter ies)  and en ablers of  the new gen er a tion of  au to mo biles. As  the OEMs  losecon trol of the core tech nol ogy, which is bat ter ies, their abil ity to dif fer en ti ate and earn rea son able mar ­gins will re duce.

EVs will  be much  sim pler  to man u fac ture with  al most  half  the  com po nents  of  the  clas sic  in ter nalcom bus tion en gine ve hi cle. This will se verely impact the com po nent sup pli ers. Spe cial ists in en gine andtrans mis sion  com po nents,  or  com pa nies  fo cused  on  fuel  in jec tion  and  ex haust  sys tems will  lose  out.These are to day’s high est mar gin ar eas with maximum com plex ity and will be com pletely dis rupted andren dered ob so lete.

How ever, the in dus try has at least a decade to ad just. Even un der the most bullish as sump tions of EVadop tion, global ICE ve hi cle vol umes (in clud ing mild hy brids) will de cline by only 0.75 per cent per an ­num be tween 2016 to 2026, as ris ing ICE sales in the EM mar kets off set the rapid switch to EVs in thede vel oped world. The fall off ac cel er ates post­2026.

Our com po nent sup pli ers have a decade to pen e trate the value chains of EV sup pli ers. Whether sup ­ply ing to new com pa nies like Tesla or the ex ist ing OEMs, sup pli ers need to en sure their rel e vance in thenew de signs. Given that all our car ex ports go into EMs, we should have time to ad just as EM vol umesfor ICE cars will con tinue to grow for the com ing decade.

The re al ity is that China has taken a lead ing po si tion in bat tery tech nol ogy. In 2016, it led the worldin sales of EVs, driven by sub si dies and  forced gov ern ment  fleet pur chases.  It  is go ing  to cre ate a na ­tional cham pion in bat ter ies and is de ter mined to close the gap with Korean and Ja panese bat tery mak ­ers by 2020.

India un for tu nately has a very lim ited play in this tech nol ogy dis rup tion. We have no scale in bat teryman u fac tur ing nei ther do we have the tech nol ogy. I have heard of no at tempt by any In dian com pany or

12/04/2017 Electric vehicles and the auto industry

https://www.pressreader.com/india/business­standard/20170411/282054801893315 3/3

the gov ern ment to try and catch up. We missed the semi con duc tor, the smart phone, the polysil i con andthe  flat­panel  tech nol ogy waves. We  have  ab so lutely  no  tech nol ogy  or man u fac tur ing  ca pac ity  of  anysub stance in any of these ar eas. It looks like some thing sim i lar will hap pen again in bat tery tech nol ogyas well.

The gov ern ment will have to help, but as a coun try we need a strat egy. We can not af ford to miss an ­other tran si tion, and re main just an im porter of crit i cal en abling tech nolo gies of the fu ture.

 

 

A prescription for the future  

How hospitals could be rebuilt, better than before  

Technology could revolutionise the way they work 

Apr 8th 2017 

 

IN A nondescript part of Cleveland,  in a room known as the bunker, a doctor, nurses and medical  technicians gather to 

keep watch over 150 patients in special‐care units and intensive care beds. Their patients are scattered around the region, 

in clinics that have no specialists covering the night shift. On a wall of beeping screens the bunker team members track 

their  charges’ vital  signs. They can zoom  in on any patient via a camera at  the  foot of each bed. “These here are PVCs 

[premature ventricular contractions]; they’re bad things,” says Jim Goldstein, a cardiac technician, pointing to a graph of a 

patient’s heartbeat. The PVCs are getting worse, warns a flashing light. It’s time to alert a nurse on the ground.  

Health‐care providers such as the Cleveland Clinic,  the big American hospital group that runs this remote  intensive‐care 

unit (ICU), are rethinking the way hospitals work. Today, hospitals are where patients go for consultations with specialists, 

and where  specialists, with  the help of medical  technicians and pricey machinery, diagnose  their  ills.  They are also  the 

main setting for surgery and medical  interventions such as chemotherapy; and where sick people go for monitoring and 

care.  But  high‐speed  internet,  remote‐monitoring  technology  and  the  crunching  of  vast  amounts  of  data  are  about  to 

change all that. In the coming years a big chunk of those activities—and nearly all the monitoring and care—could move 

elsewhere.  

Plenty of other  institutions are  trying  to grab some of  the work—and profits—that will be displaced,  including primary‐

care  groups,  insurers  and  health‐management  organisations.  And  technology  firms  are  already  playing  a  bigger  part  in 

health care as phones become more powerful and patients  take control of  their own diagnosis and  treatment. But  the 

more far‐sighted hospitals are hoping to remain at the centre of the healthcare ecosystem, even as their role changes.  

“When I think of the hospital of the future, I think of a bunch of people sitting in a room full of screens and phones,” says 

Toby Cosgrove, the Cleveland Clinic’s head. In such a vision, a hospital would resemble an air‐traffic control tower, from 

which  medical  teams  would  monitor  patients  near  and  far  to  a  standard  until  recently  only  possible  in  an  ICU.  The 

institution itself would house only emergency cases and the priciest equipment. The only in‐hospital consultations would 

be those requiring the expertise of several specialists working in a team. Patients inside the building would be cared for 

better. But fewer people would be admitted, as hospitals co‐ordinated care remotely and led population‐wide efforts to 

keep people well.  

Hospitals have already been reinvented several times. During the Middle Ages they were run by religious institutions and 

offered little more than shelter and palliative care for the poor, and a place to die. After the advent of modern medicine 

during  the  Enlightenment,  ambitious  institutions  such  as Westminster  and  Guy’s,  in  London,  developed  into  complex 

organizations that combined care, treatment, research and education. Poor‐relief moved elsewhere; smaller  institutions 

closed  or  merged;  doctors  specialised  and  clustered  in  big  cities;  and  nursing  was  professionalised  under  Florence 

Nightingale and her successors. 

Temples to healing  

The transformation in the coming decades will be as wrenching as any hospitals have yet seen. And health‐care reform is 

always difficult, as is clear from a glance at Britain’s creaking National Health Service, France’s near‐bankrupt system—or 

the  interminable  battles  in  America  over  the  future  of Obamacare.  Fast‐ageing  populations  and  the  rising  cost  of  new 

treatments will further complicate the transition. But the need for change is pressing. In the past half‐century the burden 

of disease  in all but the poorest countries has shifted. Communicable diseases are no  longer the big problem; now  it  is 

chronic ones related to unhealthy lifestyles and longer lifespans. The gap between populations’ health needs and the care 

offered by systems organised around hospitals has grown ever wider.  

Picturing what hospitals could be, if the various obstacles are overcome, means abandoning long‐held assumptions about 

the delivery of care,  the role of  the patient and what makes a good doctor. The First  is what should happen where. “A 

hospital can also be at home,” says Lord Ara Darzi, a surgeon and professor at Imperial College London, a university that 

runs  teaching hospitals.  Just as online banking made  life more  convenient  for  consumers and  freed up branch  staff  for 

complex queries, online health care could mean fewer people need to come to hospitals to be cared for by them. Last year 

half  of  consultations  offered  by  Kaiser  Permanente,  an  integrated American  health‐care  Trm  that  runs many  hospitals, 

were virtual, with medical professionals communicating with patients by phone, e‐mail or video conference.  

The main  limitations today, says Kari Gali, a paediatric nurse‐practitioner  for the Cleveland Clinic who takes such video‐

calls, are that she cannot  look into children’s ears or  listen to their chests. As these and more sophisticated diagnostics, 

including blood  tests  and  virtual  imaging, become available  remotely, more patients  could  receive hospital‐quality  care 

without leaving home. Gupta Strategists, a Dutch research company, reckons that around 45% of care now given in Dutch 

hospitals could be done better at home. Shifting almost all dialysis and chemotherapy out of hospitals is further off, but is 

on the way. And with better remote monitoring some chronically ill patients who now need to be in hospitals will be able 

to stay at home, only coming in when their conditions deteriorate. Moving care outside institutions will both save money 

and raise standards, by making patients more comfortable and reducing infection rates.  

Each to their own  

For all  this  to happen, primary care and home support will need  to  improve. Kaiser  shows what  such “integrated care” 

might look like. It offers a host of alternatives to a hospital visit, from its website to kiosks to urgent‐care centres, which 

are cheaper, often more convenient for minor ailments and equipped to deal with disease management and prevention, 

and the social issues that increase ill‐health. “If we get a hospitalisation of a diabetic patient in a coma, that’s a failure of 

our system,” says Bernard Tyson, Kaiser’s boss. He blames skewed financial incentives to have “heads in beds” for much 

over‐hospitalisation.  

Banner Health,  a  large non‐profit American health  system,  runs 28 hospitals  and  several  specialised  facilities  across  six 

states. Its Tele‐ICU programme, for which Philips, a Dutch health technology firm, provides equipment, programming and 

software support, has its headquarters in Phoenix. It manages care for critically ill patients who may be thousands of miles 

away. Under  its  “intensive ambulatory  care programme”, patients are helped  to  leave hospital  earlier  than  is usual  for 

their conditions. They remain under constant monitoring and care in their own homes, and can “beam in” by video to talk 

to a doctor or nurse at any time of day. After a pilot study with Philips, Banner Health thinks this tele‐health programme 

could reduce admissions by nearly half, and cut costs by a third.  

For  patients  who  must  still  be  admitted  to  hospital,  the  experience  could  be  much  more  convenient  and  pleasant. 

Hospitals could operate more like a cross between a modern airport and a swish hotel, with mobile check‐in, self‐service 

kiosks  for blood and urine  tests  and  the  like,  and updates on patients’  and  relatives’ phones.  For pre‐planned visits  an 

algorithm could decide which tests are needed before a patient leaves home. Some of these could be done in advance and 

the results streamed directly to patients’ electronic records.  

Health‐care  managers  are  already  waking  up  to  the  fact  that  a  patient’s 

environment  affects  outcomes  such  as  recovery  times  and  success  rates. 

Some are aiming for pristine, white and clinical; others for pastels, seashells 

and classical music. The  latter can all be  found  in Kaiser’s Manhattan Beach 

Medical Oce, in Los Angeles, which is also planning yoga and cooking classes 

for  patients.  The  new  Karolinska  University  Hospital,  in  Stockholm,  has 

SKr118m  ($13.2m)  worth  of  art  and  lots  of  glass  to  maximise  light,  both 

intended to aid healing. It will be much quieter and calmer than a typical city 

hospital,  says Annika  Tibell,  the medical  director;  instead of  flashing  alarms 

and  loudspeakers,  staff  will  have  discreet  personal  buzzers.  Kaiser  has 

switched from neonatal wards to private rooms in its new hospitals. All these 

may seem like  luxuries, but patients who cannot sleep recover more slowly. 

Some  hospitals  have  had  acoustic  levels  at  night  of  over  70  decibels,  the 

equivalent of a nearby vacuum cleaner.  

But  the  biggest  upgrades  to  hospitals  are  needed  behind  the  scenes.  Johns 

Hopkins Hospital,  in Baltimore, has built a NASA‐inspired “command centre” 

to manage its patient flows. Surrounded by 22 beeping flat‐screens, live video streams and lots of phones, staff members 

wearing  headsets  orchestrate  the  1,100‐bed  institution  around  the  clock.  GE  Healthcare,  a  medical‐technology  firm, 

helped mix, filter and present data streams in new ways—even including information such as the weather. Bed‐planning 

has gone from an art to a science with the help of programs that predict demand with great precision and warn when a 

crunch is approaching. The centre stays in touch with nearby institutions whose patients require its specialists’ input, but 

not to be physically present. The aim is to “maximise the number of patients with access to Hopkins’ expertise”, says Jim 

Scheulen, the director.  

In future, rather than checking patients’ vital signs only at intervals, or parking ICU‐nurses next to beds, live data‐streams 

from medical machines and wearable devices could flow straight to such command centres, where supercomputers could 

screen them for anything worth bringing to the attention of medical staff. Doctors in the command centre, or even in their 

own  homes,  could  be  at  patients’  bedsides  virtually with  a  swipe  of  a  touch  screen.  All  this would  not  only make  the 

hospital safer and more efficient; it would also give medical staff a more complete record of patients’ progress.  

In Kaiser’s Oakland Medical Centre, the nurses in the neonatal unit, among the most sensitive departments in any hospital, 

do not need to watch the babies as closely as they used to, because algorithms ping an alarm to their phones whenever 

there is something to worry about. The unit automatically goes into lockdown if anyone takes an infant, tagged with a bar 

code,  to  the  exit.  Soon  Karolinska  hospital  will  equip  every  patient  with  a  vital‐signs  tracker.  In  the  Cleveland  Clinic’s 

recently  opened  Avon  Hospital,  sensors  track whether  staff  have washed  their  hands  before  entering  a  patient  room: 

lights ash on their badges if not 

Cleared for landing  

A command centre could watch over patients not only  in hospitals, but also at home. Wearable devices  that  track vital 

signs,  contact  lenses  that monitor  blood‐sugar  levels  and  smart‐stitches  that measure  the  pH  level  of  fluid  in wounds 

would all mean fewer patients in hospital for monitoring. When he speaks of how such remote monitoring could improve 

care for his leukaemia patients, the eyes of Matthew Kalaycio, an oncologist at the Cleveland Clinic, light up. If his phone 

warned him of a worrying change  in a patient’s  temperature, he could wake the patient with a call even before he felt 

anything and tell him to come to hospital or, if caught early enough, to take medication to resolve the problem at home.  

All  this  monitoring  would  bring  two  new  risks:  mass  hypochondria,  as  patients  obsessed  over  their  data  and  flooded 

hospitals  with  requests  for  consultations;  and  alarm  fatigue,  in  both  patients  and  medics.  The  antidote  would  be  an 

intelligent monitoring system combining all  the different data‐streams,  filtering out  the  least  relevant and alerting staff 

only when needed. A computer taught to recognise deviations from standard recovery would be able to alert medical staff 

to  aberrations.  For  example,  a  pneumonia  patient who  does  not  shake  off  a  fever  after  two  days  of  antibiotics  needs 

attention. Most others simply need to complete the course of drugs, and get some rest.  

Physician, heal thyself  

As well as enabling doctors to monitor patients more effectively, technology could also improve their skills, increase their 

reach—and, sometimes, take their jobs. Although hospital managers insist that technology would not replace staff, this is 

of course nonsense. Basic  tasks, such as carting  laundry around, are already being taken over by robots. Everyday care, 

such as keeping patients clean, could be next. Radiologists and pathologists, whose skills are primarily visual, are at risk of 

being elbowed aside by machines. 

Engineers at Imperial College London recently developed Deep Medic, a computer program that assesses scans of patients 

with head  injuries  for  signs of  brain  trauma.  Today,  these are  diagnosed by  a  doctor who pores over MRI  scans. Deep 

Medic can do the job in seconds. Brain tumours could be next. Such diagnoses would be cheaper and more accurate than 

possible with the human eye.  

But mostly  such  technological  advances would make  doctors  better,  not  replace  them.  The  Cleveland  Clinic  is  putting 

Watson,  IBM’s  robot  that  learns  to  reason as  it  is  fed data,  through medical  school.  It  could soon  join doctors on  their 

rounds. University Hospital Marburg, in Germany, recently began using Watson to improve the diagnosis and treatment of 

rare diseases (one early success was to help trace mysterious stomach symptoms to water snails in a patient’s aquarium, 

leading to a diagnosis of bilharzia, a tropical disease). The smart phones in doctors’ pockets could replace the stethoscopes 

around their necks. Machines do not get emotional or tired, nor do they struggle to distinguish whether a newborn baby is 

blue (and thus in need of urgent intervention) or pink.  

The surgeon’s job, too, could be transformed. Today, the use of robots in the operating room is limited because they must 

be steered manually with a  joystick.  In  future  robots might be able  to carry out  some standard procedures such as hip 

replacements  autonomously,  with  a  surgeon  getting  things  started  and  the  robot  doing  the  rest. With more  complex 

operations,  a  supercomputer  linked  to  a  real‐time  virtual‐reality  (VR) machine  could  help walk  surgeons  through  their 

operations.  It  could,  for example, highlight where a  tumour sits  in  the  liver and warn a  surgeon about  impinging on an 

artery, just as a satnav warns of traffic jams ahead.  

Sricharan  Chalikonda,  a  surgeon  at  the  Cleveland  Clinic,  says  he  can  imagine  scrubbing  up  “full  Robocop‐style”, with  a 

helmet with built‐in VR goggles giving him fighter‐pilot “super‐vision” and gloves that give him “super‐hands”. His  team 

has  already worked with  3D prints  of  patients’  organs;  the next  big  leap would be  to  project  live  images,  showing  the 

blood  owing  through  them. Microsoft  HoloLens,  clever  virtual‐reality  goggles,  is  already  being  used  to  teach  students 

about anatomy; cadavers can be cut up, which is useful, but to observe biological processes such as circulation in action 

only a live or VR body will do. In the future, every big hospital could have a Star Trek‐style holodeck where surgeons could 

plan and rehearse complex operations on a 3D projection of the patient. Advances in minuscule robotic tools could correct 

for the  imperfections of the shaky, too‐large human hand, allowing fewer and smaller cuts than keyhole surgery as  it  is 

currently practiced.  

With  quicker  and  less  invasive  treatments,  recovery  times  would  fall.  Medical  errors  would  become  less  frequent,  as 

would the need for repeat operations. Surgeons in the control tower might, eventually, operate on patients all round the 

world.  “I  can  totally  see myself  sitting here  at my desk,  guiding  three operations  in  three different  locations,”  says Mr 

Chalikonda, as he leans back in his chair.  

As technology amplified the reach of each health‐care professional, one useful consequence would be to ease a looming 

labour shortage. Without a big leap in productivity America alone will lack up to 90,000 doctors by 2025. And worldwide 

demand  for  health  care  is  growing as  lives—and  that part of  them  lived  in  poor health—grow  longer.  The World Bank 

estimates  that  by  2030  the  number  of  healthcare  workers  will  need  to  double,  compared  with  2013—an  extra  40m 

workers globally. High rates of stress and burnout are already a problem in health care; if workloads continue to increase 

they will only rise further. But if medical staff are made more productive with the help of computers, monitoring devices 

and robots, they can be freed up to do the work that only humans can do, and helped to do it better and more happily.  

If full advantage is to be taken of new medical technologies, not only medical professionals, but patients, too, will have to 

take  on  a  new  role: more  like  co‐pilot  than  passenger.  Illegible  charts  at  the  end  of  the  bed—literally  out  of  patients’ 

reach—would be replaced by a constantly updated electronic health record accessible on any device, by doctor, nurse or 

patient. Clinic already streams patient records, including test results, to “MyChart”, a site and app through which patients 

can also contact their physicians.  

In many Kaiser hospitals, a flat‐screen television on the wall gives patients information about their recovery and what they 

must do before they can go home. It may not be long before patients can be given access to the same sights and sounds as 

their doctors, for example by streaming the sound of a stethoscope to a headset or the view from an otoscope to a screen. 

Mr Tyson wants people to become as interested and engaged in their bodies as they are (or, at least, as he is) in their cars. 

He  thinks  that  with  the  right  technological  and  medical  support  they  would  be  able  to  spot,  and  respond  to,  raised 

cholesterol as quickly as they would to low tyre pressure.  

The modern hospital is a great achievement. And, in some form, it is sure to survive. “There will always be hospitals where 

patients with complex needs go for multidisciplinary diagnosis and treatment by teams of specialists,” says John Deverill of 

GE. He predicts that separate facilities will spring up to provide common surgical interventions, such as joint replacements 

or cataract removals, to benefit from scale. And hospitals will also continue to be needed to treat emergency cases.  

Beam me better, Scotty  

The  next  iteration  of  the  hospital,  however,  is  tantalisingly  within  reach—and  it  is  more  the  coordinating  node  in  a 

network  than a  self‐contained  institution.  “We have  reached  the peak of bringing patients  to  the healing  centres—our 

hospitals,” says Samuel Smits of Gupta. “We are on the brink of bringing the healing to patients.” This article appeared in 

the International section of the print edition under the headline "Prescription for the future" 

 

India│April 7, 2017

Strategy Note

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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India Strategy- Disruption Series III Falling battery cost: Sinking fossil fuel demand ■ Given across-the-board decline in energy storage costs for batteries, the virtuous

loop of solar power is complete, which is bad news for fossil fuel, especially coal.

■ While lithium ion (li-ion) is still the most versatile battery type, the rapid development in flow batteries could be a real game changer.

■ In contrast to li-ion batteries, flow batteries (particularly VRFB) have long cycle life and 40-50% lower energy storage costs (UScts/kWh).

■ In our view, the decline in energy storage costs may lead to widespread adoption of renewable energy, which would be negative for fossil fuel demand, particularly coal.

Significant decline in battery prices across the board The price of batteries is falling across technologies, from li-ion to flow batteries. Li-ion battery prices have fallen by ~70% in the past 10 years and we project that they will further decline by 20-30% in the next few years. The effective cost of flow batteries, particularly vanadium-based flow batteries, is even lower than that of li- Ion batteries, as they last almost 20 years. The technological innovation in flow batteries could lead to prices declining by another c.40% in the next 3-4 years, in our view.

Decline in battery prices is a boon for renewable grid stability Given the rising proportion of renewable energy in the electricity mix, concerns are being expressed regarding grid stability. The arrival of cheaper flow batteries would solve most of the grid issues related to increasing proportion of renewable power, including: 1) peak power requirements, 2) grid stability, 3) frequency management, 4) integration of solar power into grid, and 5) management of transmission/distribution systems. We believe these functions could be fulfilled by flow batteries at half the cost of li-ion batteries.

Off-grid solar power plants are viable option with flow batteries The rapid development in energy storage technology has the potential to render all concerns about grid instability caused by renewable energy passé. Vanadium redox flow batteries (VRFB) provide a cheap storage option at the cost of 5 UScts/kWh. VRFB, combined with solar power (costs have come down to 5-6 UScts/kWh), could replace off-grid diesel generator (DG) sets (average power cost of up to 30 UScts/kWh).

Next-generation flow batteries show marked improvement Next-generation flow batteries have arrived on the market and interestingly, innovator NanoFlowcell (www.nanoflowcell.com) claims that they can be miniaturised to fit into cars. Developments in flow battery technology, particularly VRFB, could significantly reduce the cost of energy storage. While the older VFRB flow batteries (demonstration power plant in California) operate at a cost of 9 UScts/kWh, the newer VRFB operate at a lower cost of 5 UScts/kWh.

Bad news for coal, DG set and thermal plant equipment makers The development in battery technology is negative for thermal power plant equipment maker BHEL, coal producer CIL, as well as diesel engine maker Cummins India. The back-up power market for DG sets will not be negatively affected, but we believe the market for off-grid power will be completely taken over by batteries in a few years. These headwinds, coupled with rapid battery developments, make us negative on Cummins.

Figure 1: Prices of all battery types have fallen significantly and we expect the downtrend to continue in coming years

SOURCES: CIMB, www.Irena.org

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Bharat Heavy Electricals REDUCE, TP Rs125.0, Rs179.1 close

We remain concerned about BHEL’s medium-term order inflow prospects, as its thermal capacity utilisation is at an all-time low and it faces slow-moving orders. The lower battery prices are alleviating the concerns about grid instability from rising renewable energy, which is another negative for thermal power plants and BHEL.

Coal India REDUCE, TP Rs271.0, Rs286.4 close

Coal demand is at risk from rising proportion of renewable energy in the electricity mix. Improvement in battery technology would address the issues related to grid stability from rising contribution from solar energy and hence, is negative for coal demand.

Cummins India Ltd REDUCE, TP Rs830.0, Rs959.2 close

In our view, challenges to earnings growth are likely to remain for the domestic powergen segment, considering the lower power deficit amid intense competition that could limit its pricing power. Increasing viability of batteries as an energy source is another headwind.

Analyst(s)

Satish KUMAR

T (91) 22 6602 5185 Saurabh PRASAD T (91) 22 6602 5186 E saurabh.prasad@cimb.com Sachin MANIAR T (91) 22 6602 5174 E sachin.maniar@cimb.com

India│Strategy Note│April 7, 2017

2

KEY CHARTS

The prices of storage batteries are falling There has been continuous decline in the prices of storage batteries in 2014-2016. Li-ion battery prices have fallen by 70% in the last decade and we expect them to fall further. With innovation, flow batteries could also become cheaper moving forward.

Li-ion batteries (still the most versatile) production capacity to expand by 130% in CY18-20F Li-ion battery production capacity is slated to go up by 130% over the next three years, in our view. Li-ion batteries are still the most versatile battery type, as it can be used in a wide range of applications, from mobile phones to electric cars and solar power plants.

Flow batteries, particularly VRFB, are ideal for big storage applications Big storage applications require batteries with long cycle life and the batteries used are subject to multiple cycles of complete discharge and recharge. As indicated in the chart on the left, li-ion batteries can fail in such applications. In contrast, the new-generation VRFB can last up to 20,000 cycles.

Decline in flow battery prices make them viable for most grid energy storage needs The decline in prices of batteries, particularly flow batteries, has made it possible to use them in grid energy storage systems (ESS). VRFB storage cost is now as low as 5 UScts/kWh.

SOURCE: CIMB RESEARCH, COMPANY REPORTS

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India│Strategy Note│April 7, 2017

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Rooftop solar power plants are even viable for consumers, given power purchase cost Rooftop solar power plants, even with the usage of li-ion batteries, are becoming viable for behind-the meter applications. We estimate the cost of power from a rooftop solar power plant is 11 UScts/kWh or around Rs7/kWh, which is close to the price paid by the consumer for power from the national grid.

Overall battery market size in India to expand to 27GW by 2020F Given the price decline, batteries are likely to become the energy source of choice for many off-grid applications such as data centres, in our view. Indian battery manufacturers are falling behind the innovation curve and hence, we do not recommend any significant player in India that is likely benefit from the recent developments.

Improvement in battery technology is negative for coal and hence, CIL Higher battery cost was the key impediment to wider adoption of solar and other renewable energy technologies. With that hurdle removed, we believe solar energy will be adopted more widely, which is a key risk to coal consumption and hence, CIL. CIL is trading close to its historical mean now, but given the earnings risk, we believe it faces valuation downside.

Development in batteries is negative for DG set makers like Cummins India The bulk of Cummins India’s business comes from the back-up power segment, which we do not expect to be negatively affected by the new batteries. However, its off-grid power business will face significant growth challenges. Furthermore, the stock’s current high valuation does not leave any room for negative surprises. Hence, Cummins India remains a Reduce for us.

SOURCE: CIMB RESEARCH, COMPANY REPORTS

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India│Strategy Note│March 19, 2017

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Falling battery cost: Sinking fossil fuel demand

Battery industry: Big changes in the offing

Ongoing developments in battery storage technology have the potential to negate the concerns about grid stability due to rising proportion of renewable energy in the energy mix. Developments in flow battery technology could significantly reduce the energy storage costs for renewable power plants. It would also diminish the prevalent usage of li-ion batteries in electric cars, as well as for mass storage functions. We believe the off-grid fossil fuel-based power generators will become obsolete in the next few years.

Rapid development in battery technology

We are witnessing rapid development in battery innovation and cost reduction. Batteries are becoming more durable, less costly and more user friendly. In many cases, these developments could make traditional power storage sources redundant. The falling cost of batteries is good news for the penetration of rooftop solar power plants in India, where net metering has not started yet.

Four categories of batteries

Batteries can be broadly classified into four categories, as follows: 1. Flow batteries;

2. Lead-acid batteries;

3. Lithium-ion (li-ion) batteries; and

4. Sodium-sulphur batteries.

Each type of battery has its own advantages and disadvantages. Most importantly, not all batteries are meant to be used for all purposes. Figure 3 illustrates the intended uses of different energy storage devices and their intended operation ranges (in MW).

Figure 3: Flow batteries are ideal for medium-capacity energy storage

SOURCE: www.climatecouncil.org.au

India│Strategy Note│March 19, 2017

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Flow batteries witnessing rapid advancement in technology

Flow batteries essentially work under the principal that the mixing of two different electrolytes will result in electron flow and hence, flow of electric current in the circuit. Flow batteries have an intrinsic advantage over solid-state batteries, which is their long durability. Flow batteries were initially used in stationary applications but given the recent advancements in technology (https://www.nanoflowcell.com/), they are now being tested for use in motor vehicles

Multiple types of flow batteries Various types of flow cells (batteries) have been developed, including reduction and oxidation (redox), hybrid and membrane-less. The fundamental difference between conventional batteries and flow batteries is how the energy is stored. Energy is stored in the form of electrode material in conventional batteries but as electrolytes in flow batteries.

Redox batteries most suitable for regular and industrial applications The redox cell is a reversible cell in which electrochemical components are dissolved in an electrolyte. Redox flow batteries are rechargeable as they employ heterogeneous electron transfer, rather than solid-state diffusion or intercalation. Flow batteries are known as “fuel cells”.

Various types of redox batteries Redox batteries come in the following varieties:

Zinc-bromine batteries;

Vanadium-based batteries; and

Iron-chromium flow batteries

Zinc-bromine is the established technology but its cost is still high at 20 UScts/kWh Zinc-bromine is the established flow battery technology. Redflow Energy Storage Solutions (http://redflow.com/) is the pioneer in this technology. The unique features of its batteries are listed below: 1. 10kWh battery said to deliver aggregate of 40,000kWh energy over its

lifetime.

2. The cost of this unit is around ~US$8,000-8,800, which translates into Rs13/unit.

3. The power cost is too high for solar application but is feasible for back-up power and other applications that DG sets are currently being used by end-consumers for.

VRFB appears to have the highest potential, given its low cost of 5 UScts/kWh now Vanadium redox flow batteries (VRFB) have long shelf lives and remain charged for a long period of time. Because of their long cycle life, the cost of electricity production by VRFB can be much lower than that of zinc-bromine batteries.

India│Strategy Note│March 19, 2017

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Figure 4: Flow batteries have intrinsic advantage over solid-state batteries (long durability) and the latest batteries do not degrade even after 20 years

SOURCES: CIMB, COMPANY REPORTS

The following features of VRFB make them highly suitable for back-up power/telco tower usage: 1. VRFB are fully containerised, non-flammable, compact, reusable over semi-

infinite cycles, discharge 100% of the stored energy and do not degrade for more than 20 years.

2. Most batteries use two chemicals that change valence (charge or redox state) in response to electron flow, which converts chemical energy to electrical energy, and vice versa. VRFB batteries use multiple valence states purely in vanadium to store and release charges.

3. This type of battery offers almost unlimited energy capacity, as capacity can be increased by simply using larger electrolyte storage tanks. VRFB can be left completely discharged for long periods with no ill effects, making maintenance simpler than for other batteries. Given these unique properties, the new VRFB reduces the cost of storage to about 5 UScts/kWh.

Figure 5: VRFB can last for 20 years and lower the overall cost of power production to 5 UScts/kWh

SOURCES: CIMB, COMPANY REPORTS

Li-ion batteries are the most versatile

Li-ion batteries can be used in a wider variety of applications than other batteries. Li-ion battery uses range from cars to mobile towers and solar power plants. While the cycle life of li-ion batteries is lower than that of flow batteries, li-ion batteries do not cease to function after end of life (EOL) and they can still be used, albeit at reduced capacity.

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India│Strategy Note│March 19, 2017

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Global li-ion battery production capacity to see exponential growth in coming years

Figure 6: Global li-ion battery production capacity to increase by 80GW or 130% over next 3 years, based on our estimates

SOURCES: CIMB, COMPANY REPORTS

Overall li-ion battery demand to increase by 15.2% CAGR in 2015-2020F We project that demand for li-ion batteries will continue to be lower than capacity until 2020F. Hence, we rule out the possibility of li-ion battery price rising due to demand-supply mismatch in the near future.

Figure 7: Overall li-Ion battery demand to increase by 15.2% CAGR in 2015-2020F but grid storage likely to see fastest increase of 38% CAGR

SOURCES: CIMB, COMPANY REPORTS

Li-ion battery capacity is increasing but new battery storage technologies are emerging On the one hand, we observe an increase in li-ion battery capacity but on the other, rival technologies are making serious progress, as follows: 1. The new VRFB battery technology poses serious competition to the li-ion

battery makers. The providers of VRFB technology claim that these batteries can last up to 20 years, with peak power, which translates into electricity storage cost of 5 UScts/kWh.

2. The cost of zinc-bromine batteries is also coming down. While it is not a major competitor at present, the falling prices and high cycle life of zinc-bromine batteries could make it a threat to li-ion batteries in the future.

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India│Strategy Note│March 19, 2017

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Energy storage cost is the key criterion in battery selection

The cost of batteries depends on three factors: 1. Capital cost;

2. Cycle life of batteries, i.e. how many charge and discharge cycles it can withstand; and

3. Usability after EOL. For example, lead-acid batteries are likely to be of no use after EOL but li-ion batteries can still have significant use.

Capital cost is coming down for all batteries but steepest decline is for lithium-ion batteries

Figure 8: There has been a steep drop in storage battery prices Figure 9: Li-ion battery prices have come down by almost 70% in last 6 years

SOURCES: CIMB, www.Irena.org SOURCES: CIMB, Bloomberg New Energy Finance

Critical point of differentiation between batteries is cycle life The cycle life of various battery types is entirely different. The warrantied expected operational life (EOL) is defined for all batteries, even li-ion ones, but the batteries do not cease to function after reaching EOL. Li-ion batteries typically have significant life left after reaching EOL. However, lead-acid and zinc-bromine batteries generally have miniscule life left after EOL.

Figure 10: Battery life of li-ion batteries in test conditions extend well beyond 6,000 cycles

Figure 11: Cycle life of most of flow batteries (VRFB and zinc-bromine) is much higher than that of li-ion batteries

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

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India│Strategy Note│March 19, 2017

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New developments in VRFB to make them more attractive than other technologies There have been tremendous developments in VRFB storage technology. VRFB have significant advantages over other flow batteries, such as: 1. Theoretically infinite cycle life, as VRFB only use one electrolyte and hence,

there is no risk of contamination;

2. No decline in residual capacity after multiple cycles of charge and discharge, as there is no electrolyte contamination;

3. VRFB can last more than 20 years; and

4. The average cost of storage is as low as 5 UScts/kWh.

Renewable energy storage, vehicles and off-grid applications: Flow batteries are new kings

Historically, li-ion batteries were the only storage technology available for renewable energy applications. However, li-ion batteries are set to be replaced by flow batteries, given the new developments in storage technologies.

Flow battery technology has improved significantly

There have been significant improvements in flow battery technology. Flow batteries have come a long way from zinc-bromine to VRFB and now, nanoFlowcell batteries. 1. Zinc-bromine batteries – These batteries can last more than 10 years and

store ~40,000kWh of electricity over their lifetime. At capital cost of ~US$800/kWh, we estimate the average cost of energy storage over the lifetime of the zinc-bromine batteries is 20 UScts/kWh.

2. Vanadium redox flow batteries (VRFB) – While other flow batteries use two different electrolytes to produce electricity, VRFB use only vanadium. VRFB does not face the risk of contamination, which is the main cause of failure for many flow batteries. In theory, VRFB have infinite life span but in practice, they have average life span of 20 years. The energy storage cost for CRFB is as low as 5 UScts/kWh.

3. NanoFlowcell technology – All flow batteries are safer than li-ion batteries but they are also bigger in size. NanoFlowcell batteries appear to have overcome this hurdle. NanoFlowcell IP AG (https://www.nanoflowcell.com/) claims to have miniaturised the flow cell to a size that can fit into a car. The company claims that the battery can store 300kWh and power a motor vehicle for more than 1,000km (top speed of 300km/hour).

Figure 12: Flow batteries outperform li-ion batteries in terms of cycle life and cost of storage (data on nanoFlowcell is not available yet)

SOURCES: CIMB, COMPANY REPORTS

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India│Strategy Note│March 19, 2017

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VRFB flow cells present serious challenge to viability of DG set power generation

VRFB challenges the viability of DG set power generation. Globally, many companies like UniEnergy Technologies are installing the vanadium-based power storage devices. VRFB, used in conjunction with solar power plants, present a viable alternative to DG sets for many applications like: 1) off-grid telco power usage, 2) mini power grids in remote areas.

Globally there is a significant market for off-grid telco power usage that flow batteries can cater to In our view, the off-grid telco power markets could change in two ways, with: 1) the installation of new VRFB/flow batteries in new towers, and/or 2) the conversion of older towers to hybrid or green solutions.

Flow batteries with solar plants will be much cheaper for off-grid telco applications than DG sets Capital expenditure for DG sets is low at ~US$ 100,000 for 1MW but operational expenditure is very high. Hence, we estimate the overall cost (including depreciation) of DG sets is 30 UScts/kWh. In comparison, we estimate that the cost of new technology flow batteries, used with solar power plants, is as low as 11 UScts/kWh.

This puts the significant DG markets in India and Africa at risk

Figure 13: The significant off-grid telco power market could be captured by battery-based renewable energy power plants

Figure 14: High likelihood of off-grid telco tower conversion from fossil fuel-based to renewable energy, in our view

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Flow batteries also present challenge to li-ion electric car market

In the recent past, Tesla ruled the electric car market. However, new technologies are emerging fast and present a serious challenge to Tesla. The heart of the electric car is its li-ion battery. Li-ion batteries have many disadvantages, including: 1) overheating, 2) operating at high voltage, 3) risk of fire, and 4) low cycle life. In contrast, NanoFlowcell claims that the cycle life of its batteries is 10x that of li-ion batteries, poses no risk of fire and operates at low voltage (safer for driver and passengers).

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India│Strategy Note│March 19, 2017

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Grid issues related to renewable energy: Lower battery cost is the answer

The national power grid-balancing issues related to rising renewable energy (including solar power plants) are often discussed of late. The argument against renewable energy is that the grid-balancing cost for solar power plants is too high, making them uneconomical as a source of electricity for the grid. Batteries provide an easy solution to the grid-balancing issues. Given the decline in energy storage cost, batteries are the low-priced answer to meeting grid requirements. Batteries are now a viable solution.

Many types of energy storage systems

Energy storage systems (ESS) vary in load-handling capacity. On one hand, there are old flywheels that are used to pump water into hydroelectric plants and on the other hand, there are batteries that are used for energy storage.

Advantages of the energy storage system

Optimises power generation: Powergen companies could use energy storage facilities to enhance the market value of its power generation by shifting off-peak generation to more lucrative peak periods. Distribution licensees could use the storage facility to adjust generation output according to the load curve in order to effectively meet the electricity requirements of consumers.

Controls intermittent generation from renewable energy sources: An energy storage facility could also be used to store generation output from renewable sources of energy, which are intermittent in nature, to deliver electricity to buyers over a longer period.

Reliable operation of power system: Another possible use for an energy storage facility is to store generation output in order to maintain the flow of power over tie-lines (transmission lines that connect one area of the power system to another area). The regulation of power flow through tie-lines is important as it is critical to ease congestion in the transmission system and for reliable operation of the transmission system.

Minimise deviation from schedule dispatch or drawl: Any deviation from schedule incurs huge penalties, particularly any deviation that is detrimental to national power grid operations. In order to reduce deviations from schedule, the powergen companies or distribution licensees could use storage facilities to ensure effective and well-controlled power exchange with the grid.

Batteries or other energy storage devices needed for grids with high proportion of renewable power

Today, to meet peak demand, high-cost power generation is dispatched. The ESS could be deployed to solve the problem of peak demand by shifting delivery of economical power generation during quieter periods to peak periods.

ESS could improve the reliability of the power system by ensuring that the frequency stays at 50Hz.

ESS could improve the efficiency of the power system through the storage of excess power generation (above the required generation for 50Hz frequency) and reduce greenhouse gas emissions caused by wasteful generation of excess capacity.

ESS could reduce the need for major augmentation to the new transmission grid. In addition, distributed storage could reduce line congestion and line loss by moving electricity generated at off-peak periods to peak periods and reduce the need for overall generation during peak periods. By reducing peak loading (and overloading) of transmission lines, ESS can extend the useful life of existing infrastructure;

India│Strategy Note│March 19, 2017

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ESS could play an important role in a black start (process of restoring an electric power station or a part of an electric grid to operation without relying on the external transmission network), ensuring the emergency preparedness and robust operations of the power system.

As a source of energy, batteries can perform all the functions of an electricity grid stabiliser

Figure 15: The chart below shows the range of costs at which flow batteries can perform the grid stabilisation functions.

SOURCES: CIMB, COMPANY REPORTS

Off-grid solar power plants and rooftop solar plants to become reality with energy storage devices

Thanks to energy storage devices, off-grid solar power plants are likely to become reality in the near future. The power generated by these plants now costs much less than DG set-based power. Even rooftop solar power plants are becoming viable.

Off-grid DG sets likely to become redundant

Based on our estimates, the cost of power from off-grid DG set-based plants is around 30 UScts/kWh. However, we calculate that the cost of power from solar power plants with flow battery storage systems is as low as 11 UScts/kWh. Such off-grid solar power plants could easily replace DG sets moving forward.

Power from DG sets costs ~30 UScts/kWh.

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Figure 16: Assuming electricity generated per litre of diesel is 3.5kW and plant life of 10 years, we estimate the overall cost of power from DG sets is close to 30 UScts/kWh

SOURCES: CIMB, COMPANY REPORTS

Cost of power from even best-in-class solar power plants with battery storage will be much cheaper than power from DG sets Both li-ion and flow batteries are viable to power off-grid solar cells. We believe that flow batteries are more viable than li-ion because they can be fully discharged, which makes them better suited for off-grid applications.

Figure 17: VRFB are ideal for off-grid applications, as they have long cycle life even at high discharge rates

SOURCES: CIMB, COMPANY REPORTS

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Figure 18: For off-grid applications with discharge rate of higher than 75%, the lower cycle life of li-ion batteries will translate into higher costs

Figure 19: Despite higher capex, VRFB batteries can handle deep discharge and have long cycle life. Hence, they work out to be cheaper than li-ion batteries

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Given the falling cost of batteries, rooftop solar power plants with battery storage is becoming viable

Rooftop solar cells with energy storage capacity do not go through severe charge and discharge cycles. Hence, li-ion batteries are a feasible option for a rooftop solar power plant. In a rooftop power plant application, li-Ion batteries can last for 5,000-6,000 cycles. We estimate that the overall cost for such a set up (including battery storage cost) is around 11 UScts/kWh. This is much lower than grid power cost.

Impact on markets: Battery market to expand and DG set makers to lose

We estimate that over the next four years, India battery market will be around 27GW by 2020F. However, if the technological changes progress at current pace, the India battery market in 2020F could be much larger than our estimate. In our view, DG set makers in India are bound to lose in the medium term. Unfortunately, Indian companies are behind the global technological innovation curve and hence, they are unlikely to benefit from the developments in battery technology.

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Indian battery market: 27GW opportunity over 2017-2020F

Figure 20: Indian battery market present 27 GW opportunity over 2017-2020. The market can be higher if technology adoption is faster

SOURCES: CIMB, COMPANY REPORTS

Indian DG set makers likely at losing end

DG set makers essentially cater to three markets: 1) back-up power, 2) off-grid diesel-based power plants, and 3) construction. We do not think that the back-up power and construction markets will be negatively affected by the progress in battery technology. However, we believe that the DG set makers’ off-grid power market is at serious risk. Over the past few years, telecom companies were the biggest users of DG sets (although the cost of power generated by these sets is high at Rs20/unit). However, the changing power supply scenario and developments in battery technology put this market at risk.

Cummins India share price is too high and the emerging headwinds are likely to cause further de-rating, in our view

Figure 21: Cummins India’s off-grid power business will face significant growth challenges and its current high valuation does not leave any room for negative surprises. Hence, we keep our Reduce call on the stock

SOURCES: CIMB, COMPANY REPORTS

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The world of shared office spaces offers convenience and cost benefits Sharedworkingspaceshelpfirmscutcornersonexpensesaswellasbuildsustainablenetworks

By Varsha Meghani

Published: Apr 11, 2017

Classified ads portal OLX has a four-member sales team operating out of Mumbai’s business district of

Lower Parel. The company pays a rent of Rs 48,000 to Rs 50,000 per month for the work space, averaging

about Rs 12,000 per person. For the premium piece of real estate that Lower Parel is, OLX would typically

have had to pay anywhere between Rs 12,000 to Rs 18,000 per month for one workstation (of

approximately 100 square feet) plus a security deposit equivalent to six to 12 months’ rent. The expenses

would have further shot up in conventional leasing as landlords don’t offer floor plates less than 1,000 to

1,200 square feet, no matter how small the team. So, how has OLX gotten off this easy? Because it is

merely one of the many companies that shares Awfis, a two-storied co-working space that allows offices to

enjoy a top location, and a range of amenities without having to pay through their noses.

Welcome to the world of shared office spaces in which a co-working company takes lease of a larger space,

re-designs it and then rents out smaller plates and single desks to ‘members’, as tenants are called. Says

Ramesh Nair, CEO and country head for property consultancy Jones Lang LaSalle (JLL) in India,

“Companies can save as much as 15 to 20 percent by working in a co-working space.”

But it’s not just the cost benefits that make co-working an attractive proposition. There’s the convenience

factor, where members needn’t worry about fitting out the workplace, buying furniture or getting an

internet connection, as they would under a traditional lease. Desk space can easily be reserved through an

app, giving members all the perks of a top-class office facility, including Wi-Fi connectivity, conference

rooms, storage units, informal lounges and pantry facilities, as well as not-so-traditional offerings like beer

on tap, discounts on Microsoft Office products and even yoga classes.

The concept of shared office spaces is not new. Established players, like the London-listed Regus, which

provides fully serviced office spaces and posted revenues of about $1.3 billion in the half year ended June

2016, have been in the business for almost three decades now. So what do they do that is different from co-

working?

A key point of difference is that most co-working spaces appoint ‘culture managers’ or ‘hosts’ within each

space whose job is to create opportunities for collaboration—both formal, like talks by renowned speakers

and informal, like happy-hour Thursdays. It is through such active efforts that members are able to build

sustainable networks with one another. Ole Ruch, WeWork’s managing director for the Asia Pacific region,

points out that because of their “focus on creating a community”, around 70 percent of their members

collaborate, while 50 percent actually end up doing business with each other.

That’s the real identity of a co-working space, feels Adam Neumann, the Israel-born co-founder of global

co-working giant WeWork. Despite the multiple hats it wears (of a real estate, tech and services firm), a co-

working venture, says Neumann, is actually a “community company”. For instance, WeWork’s 90,000-

strong member network, spread across 158 workplaces in 15 countries, is encouraged to share ideas and

draw on each other’s strengths.

Last valued at $16 billion, WeWork tied up with Bengaluru-based property developer Jitendra Virwani’s

Embassy group last February. Their first India centre is set to open in an Embassy-owned building in

Bengaluru’s prime Residency Road area, in the second quarter of this year. At 1.4 lakh square feet, the

space is expected to house 1,800 members. A second centre in Mumbai’s business district Bandra Kurla

Complex is to follow.

“Typically, WeWork accommodates around 2,000 members in one space, so, say, your business needs a

graphic designer. The chances of you finding one from that pool are very high,” says Karan, Virwani’s son

and the driving force behind WeWork’s foray into India.

The 25-year-old Karan Virwani spent two years understanding his father’s core real estate business, when

it struck him that the office space market dynamics were fast changing, as were the needs of tenants. “No

one was providing space to meet the increasing demands of smaller companies. Everyone was offering

large floor plates (upwards of 5,000 sq ft),” he says. Fuelling this demand is the rise of the ‘gig’ economy,

characterised by freelance or contractual work, as well as the surge in startups.

Like Virwani, Sidharth Menda, a third-generation scion of the Bengaluru-based realtors RMZ Corp, set up

CoWrks last September to plug this gap. His logic: The nature of work has changed and so must

workplaces. “While baby boomers valued privacy, Millennials value networks. Driven by a culture of

sharing on social media, they value meaningful connections with others,” says Menda. As a real estate

player first, and now a co-working operator, the 27-year-old says he is able to draw on not just a solid

understanding of the real estate market, but also years of insights into workplace designs that enable

people to function most productively. CoWrks currently has two fully operational centres in Bengaluru,

and two more in the pipeline in Mumbai and Delhi-NCR respectively.

Like Menda and Virwani, a number of startups too have sniffed opportunity, so much so that there are

over a 100 co-working space providers in India today, according to JLL. While these spaces comprise a

fraction of the country’s total commercial real estate market, they’re fast growing in popularity. According

to Amit Ramani, founder and CEO of Awfis, a prominent player on the scene, of the total 500 million sq ft

of commercial Grade A and Grade B space in India, co-working and business centres comprise 0.4 to 0.5

percent. Over the next three years, he expects this to grow to about 2 percent.

However, Harsh Lambah, the country manager for Regus in India, believes that co-working has suddenly

become a buzzword.

“We’ve been at the forefront of the co-working and flexible working industry for the last 25 years. It’s just

that over the last six to eight months co-working has become a big buzz. But we’re happy. It will grow the

category and there will be focus on who the big industry players are,” he says.

Meanwhile, proponents of the co-working craze believe that this is a “mega-trend”, as Anand Lunia,

founder of early stage venture fund India Quotient, puts it. For startups in need of flexibility, the long

leases and large floor plates offered by traditional landlords are impractical. “Startups or SMEs don’t think

in square feet. They think in terms of desks. If they have five people, they need five desks. If they grow or

shrink their business, we can easily adapt to their requirements,” says Ramani, who boasts of hosting over

220 companies in 20 Awfis centres spread across seven cities.

Larger companies looking for temporary space also see merit in co-working spaces. As do an increasing

number of multi-national companies like consulting firm Accenture, that Awfis counts as a client, or the

Boston Consulting Group, that works out of a CoWrks facility in Bengaluru. The desire to adopt a “startup-

like culture” and thereby foster innovation is a key driver, points out Nair.

The concept of co-working might have caught on, but its business model is inherently risky. While a co-

working company commits itself to a long-term lease with a landlord, of typically seven to eight years, its

members only commit to monthly contracts. “You can’t have fluctuating revenue at one end and fixed

rental at the other. It’s not a sustainable model,” says India Quotient’s Lunia.

Globally, WeWork has thus far taken this risk because when the times are good and demand is high, the

margins can be as high as a reported 45 percent.

Neumann claims business is good in bad times too as that’s when laid off employees are looking for

alternate spaces to work out of. In fact, WeWork was set up in 2010, when the global economy was still

reeling from the after-effects of the US housing market crash in 2008 and the financial downturn that

followed. That wasn’t the case with Regus though, which filed for Chapter 11 bankruptcy protection for its

US business in 2003 after the dotcom bubble burst. (The business has since recovered.)

In India, however, WeWork has struck an unusual deal. Virwani will lease out the office space—from

Embassy as well as other developers—and invest in re-designing it, while WeWork will lend its brand,

ethos and expertise for a fixed management fee and a share of the profits. The upside of such a model is

lower, but so is the risk.

“They [Embassy] come with incredible in-market experience, which is amazing to have as we enter a new

market,” says Ruch of WeWork Asia Pacific. On Virwani’s part, he says that even though capex is the

biggest spend for them, the Embassy group’s deep understanding of the Indian real estate market and

their relationship with landlords will enable them to “get the best deals”.

CoWrks, aside from leveraging its own properties to build its co-working spaces, has also entered into

revenue sharing deals with third party landlords to mitigate the risks of the business. Awfis, too, has a

“managed aggregation” model wherein some properties are plain vanilla leases while others are revenue

share deals. Diversifying the client base is yet another way to offset risk. According to Menda, CoWrks

typically limits its exposure to startups whose churn tends to be higher. Instead, SMEs and MNCs together

account for about 80 percent of their members while early-stage startups comprise 10 to 15 percent. The

rest are freelancers.

Does co-working signal the end of the conventional office? Not just yet. While JLL’s Nair is “very bullish”

about the co-working market, he points out that it is still very nascent. Landlords will take a while to warm

up to revenue sharing deals, he says, and until that happens it’s difficult for a standalone startup—without

the financial muscle and wherewithal that real estate players like Virwani and Menda have—to survive.

Consolidation will occur and the industry will see four or five players emerge, says Nair. “Eventually, only

the big boys will remain.” 

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