FDI in Multi Brand Retail Trade – The Journey

Dinodia Capital Advisors September 2012

2

Executive Summary

For more than a year, every problem in India has been blamed on the incumbent

government by national and international lobbies and “Policy Paralysis” has been the

reason cited for every shortfall including the falling rupee, the worsening fiscal deficit, high

inflation, high interest rates and delayed capital expenditure plans

On September 14, 2012 the government broke the shackles and came out with the much

needed and highly anticipated reforms regarding Foreign Direct Investment (FDI) in the

Multi-brand Retail Sector (MBRT) of India with a surety of no roll – back this time

Dinodia Capital Advisors’ view is that these reforms will create price competition and

remove the multiple layers of inefficiency between the farmers and the final retailer and

hopefully help the farmers and producers of goods realize a bigger share of the pie in

the long-run

Given the current negative sentiment of foreign investors (post Vodafone and Draft

GAAR Guidelines) and the lack of capital inflows in India, these reforms will encourage

foreign firms to give India a serious look and encourage them to invest capital in the

country

As foreign firms who partner with local Indian firms are able to generate profits and achieve

success in India it will encourage FDI in other sectors as well and create a positive

image for India globally as a good place to do business!

3

The Story So Far….

100% FDI being permitted in cash & carry wholesale trading under the government approval route

FDI permitted in cash & carry, wholesale trading comes under the automatic route

FDI in single brand retail was permitted to the extent of 51%

DIPP had put up a discussion paper proposing FDI in multi-brand retail

Union Cabinet approved 51% FDI in multi-brand retail Increasing the FDI limit in single

brand retail to 100% However the implementation was

deferred, for evolving a broader consensus on the subject

January DIPP notified the

decision to allow 100% FDI in Single brand retail

September Union Cabinet approves

the FDI limit in Multi brand retail of 51%

*DIPP: Department of Industrial Policy and Promotion

4

The Policy - Single Brand Retail Trading

EARLIER NOW

FDI in single brand retail trading is permitted

up to 100% with Government approval

Products to be sold should be of a ‘Single

Brand’ only

30% sourcing is to be done from micro and

small industries (investment in Plant and

Machinery not exceeding US $ 1mm)

This condition will ensure that SME sector,

including artisans, craftsman, handicraft and

cottage industry gets the benefits of

liberalization

For Single Brand Retail Trading (SBRT)

sector – only 51% FDI permitted – subject

to approvals and conditions such as:

Products should be of a ‘Single

Brand’ only

Products to be under the same brand

in one or more countries if are sold

outside India

‘Single Brand’ products should be

branded during manufacturing

The foreign investor should be the

owner of the brand

5

EARLIER

FDI in Multi Brand Retail Trading was not allowed

FDI in Multi Brand Retail Trade is permitted up

to 51%, subject to following conditions:

Outlets to be set up - only in cities with a

population of more than 1m (within a 10km

range)*

Minimum investment by the foreign investor -

US $100mm and at least 30% of the

procurement of manufactured / processed

products shall be sourced from 'small

industries’ (investment in Plant and Machinery

not exceeding US $1million)

Sourcing requirements will be checked

together for first five years – after that on a

annual basis

Retail trading by means of e-commerce – not

permissible

At least 50% of total FDI brought in shall be

invested in ‘back-end infrastructure’** within

three years of the induction of FDI

NOW

The Policy - Multi Brand Retail Trading

* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana, J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and Dadra Nagar Haveli

** Back-end Infrastructure includes supply chain, logistics and warehousing but not land and rentals

6

SWOT Analysis of FDI in Retail

STRENGTHS

WEAKNESSES

OPPORTUNITIES

THREATS

• Retail is a $450bn Industry in India

• Young and dynamic manpower• Highest shop density in the world• High growth rate in retail &

wholesale trade• Presence of big industrial houses

with deep pockets

• High capital investment required in the retail sector (real estate)

• Lack of trained and educated work force

• Higher prices as compared to local shops

• Will mainly cater to high-end consumers placed in metros

• High employment generation in the future

• Will enhance financial condition of farmers

• Encourage foreign capital inflows• Result in increasing supply-chain

efficiency• Improve Logistics & Infrastructure

• Effect on the small retailers - local Kirana stores (mom-pop stores)

• Long gestation period - Foreign Retailers will take a while to adapt to India and generate profits

• States not buying in so efficiencies expected may not be achieved

7

Subsequent populist decisions are feared, such

that the foreign retailers may not be able to

achieve dominant market positions or buy / rent at

the right locations

Rough ride so far…..

It is not easy to be successful in a place where culture, tradition and food habits change

every 124 miles

Some of the largest and most prominent Indian business houses such as Reliance, Godrej,

RPG and the Future Group have all struggled in the Retail Industry in India1. These large

players have lost a significant amount of money and in fact one of the leaders in the space,

Subhiksha, which at one time had almost 1,600 outlets has shut down

India’s image is one of a “fickle policy maker” with regulations being frequently changed,

rolled back and even retrospectively amended have made investors speculative

1In order to read a detailed report on the Indian Retail Industry please visit:http://www.dinodiacapital.com/research.asp

8

Hidden Opportunity despite the rough ride

A comparison of the Retail Industry in Emerging Markets shows that India actually has the

lowest organized retail sector amongst its peers and therefore is the biggest opportunity

India’s closest peer in terms of size of population, China, has an organized retail market that

is almost 3x the size of the market in India. A country like Brazil which is less than a 1/6th

of India in terms of population has a organized retail market of almost 6x of that of India

and mostly homogeneous tastes across the country making it easy to standardize offerings

Indonesia which is the largest economy in Southeast Asia and often cited as replacing

India as the “I” in BRIC economies has displayed strong growth in 2011 and in the first

half of 2012 with significant growth in the Retail sector. It has only 1/5th of India’s

population and yet has a organized retail sector which is 5x of that of India

There are two ways to look at the above data. One is to see that there are plenty of

emerging markets where more capital could be deployed in retail, but the other is to see

the hidden opportunity in investing in the retail sector in India (the 2nd largest country in

the world in terms of population) where there is a white canvas and wide spaces and the

story of organized retail can be painted in whichever way the potential foreign entrants

desire

9

Global Experience of FDI in Retail

Emerging Markets which allowed FDI in Retail with the share of organized retail in the overall retail industry:

Source : Goldman Sachs, Technopak

10

Steps to Establish Presence in India

11

Proposed Business Model

Outcome:

-There is a possibility of a mutually symbiotic relationship between the Foreign and Indian Partner to jointly harness their capabilities and create a world-class Retailer in India, which will have the unique advantage of a being the first mover and establishing the benchmark of excellence for the Industry

12

The ride despite the speed breakers …

There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign

Retailers to co-exist in India

The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have

a homogenous selection of products across their stores, typically need 150,000 sq feet of

space and require a car to get to. India is years away from when majority of its population

will have the ability to only shop at the Wal-Marts of the world. Competition will force the

Kirana Stores to lift their game, become more price competitive, have a better selection

of goods at lower prices and maintain proper records of customers (people will still shop

there for proximity, comfort of relationship and easy credit)

Foreigners will bring to India their expertise and efficiency in retailing, they will invest

capital in improving logistics and infrastructure in India (for example: Cold Storage

Logistics is still almost non-existent in India) and share technology and know-how with

their local Indian Partners, but will also be able to become profitable over a period of time

as their brands and presence increase across the country

Hopefully, the Domestic Giants will learn the best practices from their foreign counterparts

and just as in Brazil foreign retailers thrive but still a local player is the most dominant

(Pao de Acucar) India will see a much more inclusive and efficient Retail Industry

13

On the whole, if India has to grow it needs capital, training

and innovation. Yes the short-term effects of the

announced reforms will be painful, but in the long-term if they

will help make Retail a more organized industry in India,

provide better quality goods at cheaper prices at

convenient locations, improve infrastructure and the

supply chain mechanism throughout the country, provide

employment and retail sector specific training to a large

population it will be a huge boon to the nation

Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. But

those who are willing to be patient and make a more long-term bet on India, definitely have

the opportunity to “HIT THE BULLS EYE.” India is a virtually untapped and a huge growing

market in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized

retail). The foreign players who are willing to learn from their mistakes in other emerging

markets and early experiences in India, go through a careful partner selection process,

understand the political / legal / external hurdles and invest with a realistic time horizon

truly have an unique opportunity to create win-win situations for all stakeholders. Several other

sectors have seen foreign entrants with a successful and profitable model in India (Dominos,

Citigroup, Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the

times to come!

The ride despite the speed breakers …

14

Dinodia Capital Advisors

Dinodia Capital Advisors Corporate Profile

Dinodia Capital Advisors is a Financial Consulting firm based in New Delhi, India. It assists clients across all industries grow, both organically and inorganically. The firm helps clients Raise Capital. Execute Merger & Acquisition opportunities. Restructure, Transform and Turnaround businesses. Resolve challenging problems. Take advantage of financial and strategic opportunities. Balance investor expectations. DELIVER VALUE

15

Dinodia Capital Advisors Service Offerings

Dinodia Capital Advisors Advice Clients on :

Mergers and AcquisitionWe help in conducting a robust scan of the market and selecting the most suitable buyer or seller

Capital RaisingWe advice clients on their capital needs and find them the right partner who brings more than just capital

RestructuringWe advise on business restructurings to help achieve financial, strategic and operational efficiency

India Entry StrategyWe help set up and incubate businesses in India, acting as a trusted advisors to facilitate the India entry strategy

Organizational TransformationWe work with companies to put systems, processes and people in place to help take advantage of both organic and inorganic synergies

TurnaroundsWe work closely with companies to help devise and implement a turnaround strategy by plugging the deficiencies of management, technology, capital or partnerships

Dinodia Capital Advisors Private Limited C-37, Connaught Place , New-Delhi 110001, Website - www.dinodiacapital.comTel No: +91 11 2341 7692, 2341 5272 ,Fax No: +91 11 4151 3666Email: dinodiacapital@dinodiacapital.com

For Further Details, Contact :

Pankaj DinodiaChief Executive Officer

Email: pankaj.dinodia@dinodiacapital.com

16

This report and the information provided herein is the sole Intellectual property of Dinodia Capital Advisors Pvt. Ltd. (“DCA”) and DCA holds its complete copyrights. No part of this report shall be reproduced / copied / extracted etc. without the express permission of DCA in writing. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced. Neither DCA nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in with the use of this information.