West Bengal University Of Technology

Summer Project Work

“Emerging SME Sectors in India and their

future prospects At

By

WBUT Registration No: 091360710078 OF 2009-2010WBUT Roll No: 09136009106

ARMY INSTITUTE OF MANAGEMENTKOLKATA

1

AUTHORISATION

This project was undertaken at Bank of Baroda, SME Loan Factory, Kolkata from July 01,

2010 to August 31, 2010 as an Assignment for Summer Internship Project in management

for partial fulfillment of the PGDM Program at Army Institute of Management, Kolkata

Date: Aug,31st 2010

2

ACKNOWLEDGEMENT

I would like to express my gratitude to Mr. Victor Vincent, General Manager, HRD, Bank of Baroda, Kolkata, for giving me the permission to carry out my Summer Internship at Bank of Baroda, SME Loan Factory, Kolkata.

My sincerest gratitude also goes to Mr. Swapan Chandra, Chief Manager, SME Loan Factory, Kolkata, who took proactive steps granting requisite organizational facilities, He was extremely kind and patient and his guidance and encouragement was of immense help throughout my project.

I would like to thank Mr. Subir Sanyal, Senior Manager Credit, SME Loan Factory, Kolkata who as my Project Guide has always encouraged me to do new things, to critically analyze the cases and gave his inputs as and when it was necessary.

My gratitude goes to Prof. Moushmi Bhattacharya, Army Institute of Management, Kolkata, who as my Faculty Guide has always motivated us to put our best foot forward by setting high standards. I thank him for guiding us at every step of the project and motivating us to do in-depth analysis.

My special thanks also go to the following individuals at SME Loan Factory, Kolkata. Their cooperation has helped me immensely and made the experience of the internship program at Bank of Baroda, SME Loan Factory an enriching one. Mr. Arun Khandelwal, Manager CreditMr. Pankaj Biswas, Manager Credit Mr. Jayanto Samadar, Manager CreditMr. Sunil Kumar Saha, Manager CreditMr. Ujjwal Roy, Manager CreditMs. Snehi More, Officer Credit

Last but not the least; I would like to thank all my family members for their care, encouragement and support.

TABLE OF CONTENTS

CHAPTERS TOPICS PAGE NO. SECTION- 0 Title 1

Authorisation 2Acknowledgement 3

SECTION- 1.0 Industry Overview 71.1 Banking Industry 71.2 Indian Banking: A Paradigm Shift 10

3

1.3 Types of Reform Measures for the Banking Sector

13

1.4 Limitations of the Study 161.5 Impacts of Reforms upon the Banking Industry 201.6 Small And Medium Enterprises (SMEs) In

India21

1.7 Role of Small and Medium Enterprises (SMEs) 221.8 Financing the SMEs 22

SECTION- 2.0 Company Background 232.1 Bank’s Mission Statement 232.2 Brief History 242.3 Products And Services 242.4 Bank’s Logo 242.5 Business & Financial Performance. 24

SECTION -3.0 SME Policy 25

3.1 Objectives 253.2 Scope of Policy 263.3 Small & Medium Enterprise Sector. 263.4 Bank’s approach towards SME 273.5 Establishment of SME Loan Factory 273.6 Targets for Priority Sector / SME Sector

Lending28

3.7 Guidelines for Takeover of Advance Accounts 283.8 SME Products 30SECTION- 4.0 Food & Agro Based Industries 314.1 Executive Summary 324.2 Methodology 324.3 Data Collection & Analysis 334.4 Findings 424.5 Conclusion & Recommendations 48SECTION- 5.0 Chemicals 515.1 Executive Summary 525.2 Methodology 535.3 Data Collection & Analysis 545.4 Findings 645.5 Conclusion & Recommendations 68SECTION- 6.0 Textiles 706.1 Executive Summary 716.2 Methodology 716.3 Data Collection & Analysis 726.4 Findings 776.5 Conclusion & Recommendations 83SECTION- 7.0 Automotive Components 867.1 Executive Summary 877.2 Methodology 87

4

7.3 Data Collection & Analysis 887.4 Findings 917.5 Conclusion & Recommendations 99

SECTION- 8.0 Pharmaceuticals 1028.1 SME Model 1038.2 Procedure of Processing 1038.3 Data Collection & Analysis 1048.4 Findings 1108.5 Conclusion & Recommendations 114

5

1.0) INDUSTRY OVERVIEW

1.1 Banking Industry

A Banking sector performs three essential functions in an economy: the operation of the

payment system, the mobilization of savings and the allocation of savings to the investment

projects. By allocating capital to the highest value use while limiting the risks and the costs

involved the banking sector can exert a positive influence on the overall economy and thus

is of broad macroeconomic consequence (Roland, 2006; Jaffe and Levonian, 2001, Rajan and

Zingales, 1998).

Commercial banking has been one of the oldest businesses in India and the earliest

reference of commercial banking in India can be traced in the writings of Manu. Modern

banking in India can be dated as far back as in 1786 with the establishment of General Bank

of India (Kalita, 2008). In the early nineteenth century three Presidency Banks were

established in Bengal, Bombay and Madras and in 1921 they were merged in to newly form

6

Imperial Bank of India. In 1935, the Reserve Bank of India was established under the

Reserve Bank of India Act as the central bank of India (Chakrabarti, 2005). The Imperial

Bank of India was converted in to State Bank of India under the State Bank of India Act,

1955.

In spite of all these developments, independent India inherited a rather weak banking and

financial system marked by a multitude of small and unstable private banks whose failures

frequently robbed their middle-class depositors of their life’s savings. After independence,

the Reserve Bank of India was nationalized in 1949 and given wide powers in the area of

bank supervision through the Banking Companies Act (later renamed Banking Regulations

Act). The nationalization of the Imperial bank through the formation of the State Bank of

India and the subsequent acquisition of the state owned banks in eight princely states by

the State Bank of India in 1959 made the government the dominant player in the banking

industry. In keeping with the increasingly socialistic leanings of the Indian government, 14

major private banks, each with deposits exceeding Rs. 50 crores, were nationalized in 1969.

This raised the proportion of scheduled bank branches in government control from 31% to

about 84%(Kalita, 2008 ) .In 1980, six more private banks each with deposits exceeding Rs

200 crores, were privatized further raising the proportion of government controlled bank

branches to about 90%(Chakrabarti, 2005).

While there are those who have emphasized the political importance of public control over

banking, most arguments for nationalizing banks are based on the premise that profit

maximizing lenders do not necessarily deliver credit where the social returns are the

highest. The Indian Government when nationalizing all the larger Indian banks in 1969

argued that banking was “inspired by a larger social purpose” and must “sub serve national

priorities and objectives such as rapid growth in agriculture, small industry and exports”

(Banerjee et.al, 2004, Das et. al., 2005).

There are essentially two views that justify Government’s ownership of financial markets.

The optimistic or „developmental‟ view is that of Alexander Gerschenkron who emphasized

on the necessity of financial development for economic growth (La Porta et.al. 2002;

Dobson 2006).Gerschenkron argued that privately owned commercial banks had been

crucial for channelising savings into industry in the second half of the 19th century in

industrialized nations such as Germany. However, in some countries, most conspicuously

Russia, economic institutions were not sufficiently developed for private banks to play this

7

crucial development role. According to Gerschenkron “...no bank could have successfully

engaged in long term credit policies in an economy where fraudulent banking practices had

almost elevated to the rank of a general business practice…” (La Porta et. al., 2002).

Banking in India has grown at a rapid pace with the number of commercial banks increasing

from 89 in 1969 to 284 in 1995 (RBI Banking Statistics, 2009).

Prakash Tandon, former chairman of the Punjab National Bank (nationalized in 1969)

describes the rationale for nationalization as follows:

The two significant aspects of nationalization were rapid branch expansion and channeling

of credit according to Plan priorities (Mohan, 2002).

As in other areas of economic policy-making, the emphasis on government control began to

weaken and even reverse in the mid-80s and liberalization set in firmly in the early 90‟s.

The poor performance of the public sector banks, which accounted for about 90% of all

commercial banking, was rapidly becoming an area of concern. The continuous escalation in

Non-Performing Assets (NPAs) in the portfolio of banks posed a significant threat to the very

stability of the financial system. They were the „smoking gun threatening the very stability

of the Indian Banks‟ (Bidani, 2002). The lack of recognition of the importance of

transparency, accountability and prudential norms in the operations of the banking system

led also to a rising burden of non-performing assets (Ghosh and Prasad, 2007).

Banking reforms, therefore, became an integral part of the liberalization agenda which

provided the necessary platform for the banking sector to operate on the basis of

operational flexibility and functional autonomy enhancing productivity, efficiency and

profitability (Kalita, 2008).For good reason, India chose a „gradualistic‟ approach to the

reform over a „big-bang‟ approach (Bhinde, Prasad and Ghosh, 2002). As pointed out by

Bhide et.al., 2002, such gradualism was due to the fact that reforms were not introduced in

face of a prolonged economic crisis, and most importantly; gradualism was a result of India’s

democracy and highly pluralistic polity in which reforms could be undertaken only if based

on popular consensus. While expansion of credit was desirable to help the economy grow,

equally important was the need for proper credit appraisal.

8

1.2 Indian Banking: A Paradigm Shift

The decade gone by witnessed a series of financial reforms, with many of them still in the

process of implementation. The 1990s saw India implementing Macroeconomic Adjustment

Program of which the financial sector reform is a major component (Narayana, 2000).The

basic principle guiding financial sector reform was that the financial system has a crucial

role to play in the mobilization of savings and their allocation to the most productive uses.

Research studies have time and again proved that financial liberalization had a positive

effect on bank performance (Koeva, 2003). The ground for reform was the several

distortions which had crept into the financial system rendering it unable to meet the

challenges of a competitive environment. Joshi and Little (1996) had characterized the

Indian banking sector as „...unprofitable, inefficient and financially unsound…‟ The first

Narasimham Committee set the stage for financial and bank reforms in India. Interest

rates, previously fixed by the Reserve Bank of India, were liberalized in the 90‟s and

directed lending through the use of instruments of the Statutory Liquidity Ratio which was

reduced (Chakrabarti, 2008). While several committees have looked into the ailments of

commercial banking in India, three of them – the Narasimham committee I (1992) and II

(1998) and the Verma committee – have aimed at major changes in the banking system.

The financial reform process is often thought of as comprising two stages – the first phase

guided broadly by the Narasimham Committee I report while the second is based on the

Narasimham Committee II recommendations. The aim of the former was to bring about

“operational flexibility” and “functional autonomy” so as to enhance “efficiency, productivity

and profitability”. The latter focused on bringing about structural changes so as to

strengthen the foundations of the banking system to make it more stable (Chakrabarti,

2008).

The Narasimham Committee had acknowledged the success of public sector banks in

respect of branch expansion, deposit mobilization in household sector, priority sector

lending and removal of regional disparities in banking. But during the post nationalization

period, the banking sector suffered serious erosion in its efficiency and productivity (Dhar,

2003). Moreover, the sound banking system had been disturbed by the system of directed

credit operation in the form of subsidized credit flow in the under banked and priority areas,

IRDP lending, loan festival, etc. According to the committee the operational expenditure of

the public sector banks had tremendously increased due to rise in number of branches, poor

supervision, rising staff level and high unit cost of administering loan to the priority sector.

9

The major recommendations made by the Narasimham I committee report are listed below

(Kalita, 2008).

1. The ban on setting new banks in private sector should be lifted and the licensing policy in

the branch expansion must be abolished.

2. The govt. has to be more liberal in the expansion of foreign bank branches and also

foreign operations of Indian banks should be rationalized.

3. The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be progressively

brought down from 1991-92.

4. The directed credit program should be re-examined and the priority sector should be

redefined to comprise small and marginal farmers, the tiny industrial sector, small business

operators and weaker sections.

5. Banking industry should follow BIS/Basel norms for capital adequacy within three years.

6. Interest rates should be deregulated to suit the market conditions.

7. The govt. should tighten the prudential norms for the commercial banks.

8. The govt. share of public sector banks should be disinvested to a certain percentage like

in case of any other PSU.

In order to initiate the second generation of financial sector reforms a committee on Banking

Sector Reforms (BIS) was formed in 1998 under the chairmanship of M. Narasimham. The

committee submitted its report on 23rd April 1998 to the Finance Minister of Govt. of India

(Kalita, 2008). Narasimham committee report II observed that Central Bank’s role should be

separated from being monetary authority to that of regulator of the banking sector.

The major recommendations of the second Narasimham II report were mentioned below

(Kalita, 2008).

1. The committee favoured the merger of strong public sector banks and closure of some

weaker banks if their rehabilitation was not possible.

10

2. Expressing concern over rising non-performing assets, the committee provided the idea of

setting up an asset reconstruction fund to tackle the problem of huge non-performing assets

(NPAs) of banks under public sector.

3. The report emphasized the need of enhancement of capital adequacy norms from the

present level of 8 percent but did not specify the amount to which it should be raised.

4. The Banking Sector Reform Committee further suggested that existence of a healthy

competition between public sector banks and private sector banks was essential.

5. The report envisaged flow of capital to meet higher and unspecified levels of capital

adequacy and reduction of targeted credit.

11

1.3 Types of Reform Measures for the Banking Sector

Since the general importance of a banking sector for an economy is widely accepted, the

questions arise under which coordination mechanism – state or market – it best performs its

functions, and, if necessary, how to manage the transition to this coordination mechanism

(Kaminsky and Schmukler, 2002).Currently, there are opposing views concerning the most

preferable coordination mechanism. According to the development and political view of

state involvement in banking, a government is through either direct ownership of banks or

restrictions on the operations of banks better suited than market forces alone to ensure that

the banking sector performs its functions. The argument is essentially that the government

can ensure a better economic outcome by for example channeling savings to strategic

projects that would otherwise not receive funding or by creating a branch infrastructure in

rural areas that would not be build by profit-maximizing private banks.

In the words of Lenin „...Without big banks, socialism would be impossible. The „big banks‟

are the state apparatus which we need to bring about socialism and which we take ready

made from capitalism…” (La Porta et. al., 2002). , Governments acquire control of

enterprises and banks in order to provide employment, subsidies and other benefits to

supporters, who return the favour in the form of votes and political contributions. The

attraction of such political control of banks is greatest in economies with underdeveloped

financial systems and poorly protected property rights, because the government does not

have to compete with the private sector. The view of state ownership is buttressed by

considerable evidence documenting the inefficiency of government enterprises, the political

motives behind the provision of services and the benefits of privatization The active

involvement of government thus ensures a better functioning of the banking sector, which in

turn has a growth enhancing effect (Denizer, Desai and Gueorguiev, 1998; La Porta, Lopez

de Silanes and Schleifer, 2002).

The proponents of financial liberalization take an opposite stance. In their view, repressive

policies such as artificially low real interest rates, directed credit programs and excessive

statutory pre-emption that are imposed on banks have negative effects on both the volume

and the productivity of investments. Removing these repressionist policies and giving more

importance to market forces will, in the view of the proponents of financial liberalization,

increase financial development and eventually lead to higher economic growth

(Demetriades and Luintel, 1997, p. 311; Denizer, Desai and Gueorguiev, 1998).However, a

majority of the empirical studies support the financial liberalization hypothesis supporting

the fact that financial liberalization is essential for economic growth (King and Levine, 1993;

Watchel, 2001).

12

The banking sector reforms started in the early 1990s essentially followed a two pronged

approach; first, the level of competition was gradually increased within the banking system

while simultaneously introducing international best practices in prudential regulation

supervision tailored to Indian requirements (Kalita, 2008). In particular, special emphasis

was placed on building up the risk management capabilities of Indian banks while measures

were initiated to ensure flexibility, operational autonomy and competition in the banking

sector.

Secondly, active steps were initiated to improve the institutional arrangements like legal and

technological frameworks (Mohan, 2006). Some of the measures undertaken in this regard

are as follows (Kalita, 2008; Mohan, 2006; Roland, 2006; Singh, 2005).

Competition Enhancing Measures

Allowing operational autonomy and reduction of public ownership in public sector

banks by raising capital from equity market up to 49 percent of paid up capital.

Transparent norms for entry of Indian private sector banks, foreign banks and joint

venture banks.

Permission for foreign investment in the financial sector through foreign direct

investment (FDI) as well as portfolio investment.

The banks are allowed to diversify product portfolio and business activities.

Roadmap for foreign banks and guidelines for mergers and amalgamation of private

sector banks with other banks and NBFCs.

Instructions and guidelines on ownership and governance in private sector banks.

Measures enhancing role of market forces

Reduction in pre-emption through reserve requirement, market determined pricing

for govt. securities, disbanding of administered interest rates and enhanced

transparency and disclosure norms to facilitate market discipline.

Introduction of auction-based repos and reverse repos for short term liquidity

management, facilitation of improved payments and settlement mechanism.

Significant advancement in dematerialization and markets for securitized assets are

being developed.

13

Prudential measures

Introduction of international best practices norms on capital to risk weighted asset

ratio (CRAR) requirement, accounting, income recognition, provisioning and

exposure. Following the Basel Accord of 1988, the capital to risk-weighted assets

ratio (CRAR), which took into account the element of risk involved in both balance

sheet as well as off-balance sheet business, emerged as a well recognized and

universally accepted measure of soundness of the banking system. Accordingly, as a

part of banking sector reforms, India adopted the Basel norms in a phased manner. In

fact, India went a step further and stipulated CRAR at nine per cent as against the

international norm of eight per cent from March 31, 2000. Furthermore, India also

prescribed the capital charge for market risk in June 2004, broadly in line with the

1996 amendment to Basel norms.

Measures to strengthen risk management though recognition of different component

of risk, assignment of risk weights to various asset classes, norms of connected

lending, risk concentration,

Introduction of capital charge for market risk, higher graded provisioning for NPAs,

guidelines for ownership and governance, securitization and debt restructuring

mechanism norms, etc.

Introduction and roadmap for implementation of Basel II.

14

1.4 Impacts of Reforms upon the Banking Industry

The Indian banking industry had made sufficient progress during the reforms period. Before

the start of the 1991 reforms, there was little effective competition in the Indian banking

system for two reasons. First, the detailed prescriptions of the RBI concerning for example

the setting of interest rates left the banks with limited degrees of freedom to differentiate

themselves in the marketplace. Second, India had strict entry restrictions for new banks,

which effectively shielded the incumbents from competition (Roland, 2006; Joshi and Little,

1997) .Through the lowering of entry barriers; competition has significantly increased since

the beginning of the 1990s. Seven new private banks entered the market between 1994 and

2000. In addition, over 20 foreign banks started operations in India since 1994. By March

2004, the new private sector banks and the foreign banks had a combined share of almost

20% of total assets Deregulating entry requirements and setting up new bank operations

has benefited the Indian banking system from improved technology, specialized skills, better

risk management practices and greater portfolio diversification (RBI Report on Trend and

Progress of banking in India).

Kumar and Gulati (2008) have examined the issue of convergence of efficiency levels among

Indian public sector banks (PSBs) during the post-reforms period spanning from 1992/1993

to 2005/2006. Their empirical results indicate that the majority of PSBs have observed an

ascent in technical efficiency during the post-reforms years. Further, the inefficient PSBs

have been noted to be catching up with the efficient ones. That is, the banks with low level

of efficiency at the beginning of the period are growing more rapidly than the highly efficient

banks. In sum, the study confirms a presence of convergence phenomenon in the Indian

public sector banking industry.

Table 1.1: Progress of Scheduled Commercial Banks in India Pre and Post-Reforms

Progress of Scheduled Commercial Banks in India Indicators

June 1980

March1991

March 2000

March 2005

1. No. of SCBs 154 272 298 288 2.No. of bank offices 34594 60570 67868 68355 Of which Rural and Semi-urban 23227 46550 47693 47485 3. Population per Office („000) 16 14 15 16 4. Per capita Deposit (Rs.) 738 2368 8542 16091 5. Per capita Credit (Rs.) 457 1434 4555 10440 6. Deposit (% to national income) 36 48.1 53.5 68.3

15

Interest rate deregulation

Prior to the reforms, interest rates were a tool of cross-subsidization between different

sectors of the economy. To achieve this objective, the interest rate structure had grown

increasingly complex with both lending and deposit rates set by the RBI. One of the major

factors that affected the banks‟ profitability was the high pre-emptions in the form of Cash

Reserve Ratio (CRR) and Statutory Liquidity Ratio which had reached at the historically high

levels of 63.5% in early 1990s. The administered structure of interest rates did not allow

banks to charge the interest rates depending upon the credit worthiness of the borrower and

thus, impinged on the allocated efficiency of resources (Report on Currency and Finance,

RBI, 2006-2008). The deregulation of interest rates was a major component of the banking

sector reforms that aimed at promoting financial savings and growth of the organized

financial system (Singh, 2005, Roland, 2006). Deregulation of interest rates implied that

banks were able to fix the interest rates on deposits and loans depending upon the overall

liquidity position and their risk perceptions (for lending rates).

The Narasimham Committee having commended the Indian Banking system for its

impressive quantitative achievements during the two decades since nationalisation in 1969

noted the decline in productivity and efficiency of the system and the related erosion of

profitability (Narayana, 2000). In the Committee's view the major elements leading to low

productivity and profitability were-

Constraints on operational flexibility owing to directed investment in terms of SLR

together with cash reserve ratios and directed credit programs.

Decline in portfolio quality owing to political and administrative interference in credit

decision making.

Concessional interest rate on directed investment and credit.

Expansion of branch network into rural and semi-urban areas turning many offices

into primarily deposit centres without adequate credit business and income.

The above diagnosis of the maladies of banking led the Committee to recommend-

SLR requirements be related to prudential requirements and be brought down to 25%

of net demand and time liabilities.

16

The borrowing rates to be brought closer to market rates. CRR be turned into an

instrument of monetary policy.

Directed credit program be phased out in the long run; redefine priority sector in the

short run, and review the concessional interest rate. Use fiscal instruments rather

than the credit system to help the weaker sections.

Dismantle the administered interest rate structure and allow interest rates "to

perform their main function of allocating scarce loan-able funds to alternative use”.

The motive behind the liberalization of interest rates in the banking system was to allow the

banks more flexibility and encourage competition. Banks can charge rates according to their

cost of funds and to reflect the creditworthiness of different borrowers. Banks can vary

nominal rates offered on deposits in line with changes in inflation to maintain real returns

(Ahluwalia, 2002).

The most important and far reaching impact of banking liberalization in India has been the

deregulation of the interest rate (Kalita, 2008). The Indian banks are now adopting a

completely market driven interest rate structure which was in earlier a govt. driven interest

rate structure. The interest rate deregulation has resulted in the integration of the lending

rates across spectrum. The prime lending rate of each bank is now synchronized with the

bank rate. The bank rate was revived by the RBI to serve as the reference rate for the

banking sector.

Directed credit Policies: Directed credit policies have been an important part of India’s

financial sector reforms. Under the directed credit policy commercial banks are required to

provide 40% of their commercial loans to the priority sectors which include agriculture,

small-scale industry, small transport operators, artisans, etc. (Kalita,2008). Within the

aggregate ceiling there are various sub-ceilings for agriculture and also for loans to poverty

related target groups. The Narasimham committee had recommended reduction of the

directed credit to 10% from 40%. The committee had also suggested narrowing down the

definition of priority sector to focus on small farmers and low income target groups.

The policy of 40% of loans to the priority sectors has not been abolished by the govt.

However, the definition of the priority sector activities has been broadened with the new

inclusion and reclassifications. The Committee on Banking Reforms has suggested inclusion

of activities related to food processing, dairying and poultry in the priority sector list (Kalita,

17

2008).This will increase the list of activities under the priority sector credit and also improve

the quality of the portfolio.

The issue of priority sector lending, an important concern against privatization, is no longer

that crucial, since in 2003 the share of credit of private sector banks going to the priority

sector had surpassed that of public sector banks [In 2002-03, 42.5% of the total credit of

PSUs was given to the priority sector whereas 44.4% of the total bank credit was given by

Private Sector Banks to priority sector] (Source: Trend and Progress of Banking in India, RBI).

At present if a bank fails to fulfill the target for priority sector lending, it can invest the

shortfall amount in RBI securities dealing with flow of funds towards agriculture and small-

scale industries but it still desirable that banks adhere to the priority sector lending target

(RBI, 2008).The current arrangement shows how the banking sector reforms have provided

operational flexibility to the banks even while meeting social objectives. The priority sector

lending norms have been fulfilled by a good margin by both public and private sector banks

at present. While public sector banks, as a group, achieved the overall priority sector targets

40%, they failed to achieve the various sub-targets for agriculture, tiny sector within the SSI

sector, advances to weaker sections, etc. Significant variation was also observed in the

performance of different banks within the public sector banks with regard to the

achievement of sub-targets (RBI, Annual Report, 2004-05).

One of the major objectives of the reform was to bring in greater efficiency in the Indian

Banking sector by permitting entry of private sector banks and increased operational

flexibility of the banks. Keeping this view several measures were initiated to instil

competitiveness in the banking sector where the lack of threat to the entry of new players

had led to inefficiency in the banking sector. In January 199, norms for the entry of Private

players were announced. In the context towards deregulation, it was decided in 1992 to give

greater freedom to banks in opening up branches. Following liberalization of entry of new

private sector banks, 10 new banks were set up by 1998. Besides, 22 foreign banks were

also set up. The number of foreign bank branches increased from 140 at end-March 1993 to

186 at end-March 1998. However, that the impact on competition remained muted was

evident from the limited number of mergers (four). Normally when competition intensifies, it

inevitably leads to increased mergers and acquisitions activity. The lack of enough

competition was also reflected in the net interest margins (NIM) of banks, which increased

during this phase from 2.51% in 1992-93 to 2.95 per cent in 1997-98 (RBI Report on

Currency and Finance 2006-08, Vol. 1).

18

3.5 Small And Medium Enterprises (SMEs) In India

The small and medium enterprises segment has been a topic of intense deliberation among banks, financial

institutions, industry and academicians. In India, ‘small and medium enterprises’ (SME) is a generic term used to

describe small scale industrial (SSI) units and medium-scale industrial units. As per the Micro, Small and Medium

Enterprises Development Act of 2006, any industrial unit with a total investment in its fixed assets or leased assets

or hire-purchase asset upto Rs10 million is considered as a SSI unit and investment up to Rs. 100 million is

considered as a medium unit. In addition, an SSI unit should neither be a subsidiary of any other industrial unit nor

can it be owned or controlled by any other industrial unit.

The SME sector produces a wide range of industrial products such as food products, beverage, tobacco and tobacco

products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products,

furniture and fixtures, paper & paper products, printing publishing and allied industries, machinery, machines,

apparatus, appliances and electrical machinery. SME sector also has a large number of service industries.

In India, SME is the biggest provider of employment next only to Agriculture. The SMEs constitute 95% of

total industrial units and constitute 40% of total industrial output.

Formerly, both Government and RBI credit policy placed emphasis on manufacturing units from the Small

Scale Sector. However, in order to make the size of the unit and the technology employed by firms to be

globally competitive, the definition of “Small Scale Sector” was revisited. Keeping in view the same and

the global practices, it was decided to broaden the concept of SSI Sector by inclusion of services within its

ambit as also including the “Medium Enterprises” in a composite sector of “Small & Medium Enterprises”.

Subsequently, MSMED Act was operationalised with effect from 2nd October 2006, which defines an

“enterprise” instead of an “industry” to give recognition to service sector and also defines a “medium

enterprise” to facilitate technology upgradation and graduation.

Banks were interalia advised to formulate comprehensive and more liberal policies than the existing

policies in respect of loans to SME Sector.

3.6 Role of Small and Medium Enterprises (SMEs)

SMEs have been playing a pivotal role in country’s overall economic growth, and have

achieved steady progress over the last couple of years. From the perspective of industrial

development in India, and hence the growth of the overall economy, SMEs have to play a

prominent role, given that their labour intensiveness generates employment. The SME

segment also plays a major role in developing countries such as India in an effort to alleviate

19

poverty and propel sustainable growth. They also lead to an equitable distribution of income

due to the nature of business. Moreover, SMEs in countries such as India help in efficient

allocation of resources by implementing labour intensive production processes, given the

abundant supply of labour in these countries, wherein capital is scarce.

The enactment of the Micro, Small and Medium Enterprises Development (MSMED) Act,

2006 was a landmark initiative taken by the Government of India to enable the SMEs’

competitive strength, address the issues and challenges and reap the benefits of the global

market. SME policy initiatives at the national and state level are aimed at strengthening the

role of SMEs at the base as well as at the higher level.

With globalisation, all forms of production of goods and services are getting increasingly

fragmented across countries and enterprises. With large players adopting different models

of business that include involvement of the traditional partners, suppliers or distributors at a

different level, SMEs now are experiencing a new model of functioning in the value chain.

The past few years has seen the role of the SME segment evolve from a traditional

manufacturer in the domestic market to that of an international partner. The restructuring of

production at the international level through increased outsourcing is having significant

effects on small and medium entrepreneurs in a positive as well as negative manner.

Demand in terms of new niche products and services are providing more opportunities for

SMEs that are in a better position to take advantage of their flexible nature of operations.

However, at the same time they have realized their drawback in terms of inadequate

availability of managerial and financial resources, lack of working capital, personnel training

and inability to innovate on a faster pace.

The combined effect of market liberalisation and deregulation has forced the SME segment

to change their business strategies for survival and growth. Some of the changes that SMEs

are focusing on include acquiring quality certifications, increasing use of ICT, creating e-

business models and diversification to meet the increasing competition. Globalisation,

economic liberalisation and the WTO regime would undoubtedly open up a unique

opportunity for the largest business community, i.e. SMEs through effective involvement in

international trade by streamlining certain factors, such as, access to markets, access to

technology, access to skills, finance, development of necessary infrastructure, SME-tax

friendly environment, exchanges of best practices to name a few.

The SME sector has also registered a consistently higher growth rate than the overall

manufacturing sector. In fact, it plays a dual role since the output produced by SMEs is not

20

only about final consumption but also a source of capital goods in the form of inputs to

heavy industries.

3.7 Financing the SMEs

In Feb 2008, the Ministry of Micro, Small and Medium Enterprises (MSME), continued with its

dereservation policy by removing 79 items from the list of 114 items reserved specifically for

SSI (small scale industries) manufacturing. Only 35 items remain in the reserved category

from the total 836 selected in 1994 denoting the declining monopoly of the SSI segment on

the reserved products. However, the government has set up various schemes in place such

as the Credit Linked Capital Subsidy Scheme, MSME Cluster Development Scheme and ISO

9000 Reimbursement Scheme to help SMEs for procuring timely funds. Also the government

has put in place the Credit Guarantee Scheme to encourage banks to lend up to Rs 0.50

million without collateral. There has also been a recent budget announcement of setting up

of a Risk Capital Fund.

Though SMEs are being touted as the priority sector within the economy, they continue to

face problems pertaining to finance. When it comes to banks, they have a very traditional

way of lending to this segment against collateral and SMEs end up being under financed.

Evidently, the biggest challenge before the SMEs today is to have access to non debt based

and non-traditional financial products such as external commercial borrowings, private

equity, factoring etc.

Lately this segment has been witnessing winds of change in the new sources of capital- in

the form of private equity (PE) and foreign direct investments (FDI). In Jan 2008, The Soros

Economic Development Fund (SEDF), Omidyar Network and Google.org announced a Small

to Medium Enterprise Investment Company with an initial corpus of $17 million for providing

capital to SMEs in underserved markets. Mauritius-based Frontline Strategy launched a $200

million India Industrial Growth Fund (IIGF) for investment in SMEs targeting companies,

primarily in the industrial space with revenues between Rs 200 – 1,000 million. In 2007,

Mauritius-based Horizon advisors launched Ambit Pragma Fund I, an India dedicated PE fund,

with a corpus of $100 million for providing equity capital and professional management

advice to SMEs.

Investments in the SME sector are not only by PE funds but this sector is also attracting FDI.

In this respect the government has removed the 24 per cent cap on FDI in the SME sector.

Foreign entities are also keen on promoting trade and cooperation between SMEs of

different countries. Genesis Initiative, an UK-based organization consisting of entrepreneurs,

21

policy makers and SMEs, is trying to forge mutual cooperation between SMEs in India and UK

for in terms of JVs and partnerships in sectors such as textiles, IT, infrastructure etc.

CHAPTER 2 : COMPANY BACKGROUND

Bank of Baroda (BoB) is the 3rd largest bank in India, after State Bank of India and Punjab National Bank and

ahead of ICICI Bank. BoB has total assets in excess of Rs. 2.27 lakh crores, or Rs. 2,274 billion, a network of over

3000 branches and offices, and about 1100+ ATMs. It offers a wide range of banking products and financial services

to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and

affiliates in the areas of investment banking, credit cards and asset management. [1]

2.1 Bank’s Mission Statement

2.2 Brief History

Bank of Baroda was incorporated in 1908 by Maharaj Sayajirao Gaekwad III. It launched its first branch in 1910 in

Ahmedabad. In 1953, its first branches in Kampala and Mombasa became operational. Its overseas branch in

Nairobi was opened in 1954.

2.3 Products And Services

Bank of Baroda provides it banking products and services in several categories like personal, international, business,

treasury, corporate and rural. In personal banking section Bank of Baroda offers products like deposits, debit cards,

Gen-Next, personal banking services, loans, lockers and credit cards.

In business banking sector, Bank of Baroda offers products and services such as deposits, business banking services,

loans and advances and lockers. In corporate banking section, Bank of Baroda offers products and services like

wholesale banking, loans and advances, deposits and corporate banking services.

22

2.4 Bank’s Logo

Bank’s new logo is a unique representation of a universal symbol. It comprises dual ‘B’ letterforms that hold the

rays of the rising sun. They call this the Baroda Sun.

The sun is an excellent representation of what our bank stands for. It is the single most powerful source of light and

energy – its far reaching rays dispel darkness to illuminate everything they touch. At Bank of Baroda, it seek to be

the source that will help all our stakeholders realise their goals. To our customers, we seek to be a one-stop, reliable

partner who will help them address different financial needs. To our employees, we offer rewarding careers and to

our investors and business partners, maximum return on their investment.

2.5 Business & Financial Performance

The Bank has reported a healthy growth in its business and profits with improvement in all key parameters during

FY10. [2]

As stated earlier, its Global Business touched a new milestone of Rs 4,16,080 crore in FY10 reflecting a

growth of 24.0% (y-o-y).

Both its domestic deposits and advances increased at the above-industry pace of 22.4% and 21.3%,

respectively.

The Bank recorded a growth of 44.0% in SME credit, 27.0% in farm credit and 24.0% in retail credit

reflecting a well-diversified growth achievement.

Total assets of the Bank’s overseas operations increased from Rs 51,165 crore to Rs 68,375 crore

registering a growth of 33.6% during the year under review.

The Bank’s Net Profit at Rs 3,058.33 crore for FY10 reflected a robust year-on-year growth of 37.3%.

As the Bank’s primary objective has been to grow with quality, the Bank focused on containing the

impaired assets to the minimum possible level. While the Gross NPA in domestic operations stood at

1.64% at end-March 2010, the same for Overseas Operations was at 0.47%. In spite of growing slippages

for Indian banking industry during FY10, our Bank succeeded in restricting its global Gross NPA level to

1.36% and Net NPA level to 0.34% by end-March, FY10.

23

CHAPTER 3 : SME POLICY

3.1 Objectives

The SME Loan Policy is framed with the following objectives:

To improve flow of credit to SME Sector.

To formulate norms of lending to SME sector, to ensure availability of adequate and timely credit to the

sector.

To provide guidelines to the branches to dispense credit to SME Sector.

To devise an organizational structure at all levels for handling SME credit portfolio in a more focused

manner.

To comply with terms of Policy package announced by Hon’ble Union Finance Minister on 10.08.2005 and

further guidelines received from Reserve Bank of India from time to time for improving flow of credit to

SME Sector.

3.2 Scope of Policy

This Policy will form a part of Bank’s Domestic Loan Policy and will cover

following:

Composition of SME Sector

Broad guidelines on lending to SME Sector

SME Loan Factory Model

Credit Rating and Pricing Policy

Identifying Thrust Industries

Discretionary lending powers

Training needs

24

Reporting and Monitoring System

3.3 Small & Medium Enterprises Sector

The SME segment is broadly classified as under in MSMED ACT, 2006 :

Particulars Investment in Plant &Machineries in case ofManufacturingEnterprises *

Investment in Equipmentin case of Service SectorEnterprises *

Micro Enterprises Upto Rs. 25/- lacs Upto Rs.10/- lacs

Small Enterprises Above Rs. 25/- lacs andupto Rs.500/- lacs

Above Rs.10/- lacs andupto Rs.200/- lacs

MediumEnterprises

Above Rs.500/- lacs andupto Rs.1000/- lacs

Above Rs.200/- lacs and upto Rs.500/- lacs

* original cost excluding land and building and the items specified by the Ministry of Small Scale Industries

** original cost excluding land & Building and Furniture, Fittings and other items not directly related to the service

rendered or as may be notified under MSMED Act, 2006

3.4 Bank’s Approach Towards SME Sector

SMEs are growth engines for development of Economy. Bank has therefore for internal purposes given focused

attention to finance all Commercial enterprises i.e. enterprises which may be outside the purview of regulatory

definition of SME but having turnover upto Rs 150.00 crores and new infrastructure and real estate projects where

the project cost is upto Rs. 50/- crores by treating them as part of SME segment. SME Banking business will thus

include the following across the bank:

Micro, Small and Medium Enterprises – as per regulatory definition irrespective geographical location, i.e.

rural, semiurban, urban, metro areas.

All other entities with their annual sales turnover of Rs. 1/- crore to Rs. 150/- crores and new infrastructure

and real estate projects, where the project cost is upto Rs. 50/- crores.

SMEs which are Associate/sister concerns of Wholesale Banking customers.

Clubs, Trusts, etc.

Financing under various Government schemes launched for MSME Sector.

However, such units, which are outside the purview of regulatory definition will not form part of Priority Sector

lending.

25

3.5 Establishment Of SME Loan Factories

Business Model which operates on assembly line principle is adopted by the bank for hassle free and faster

dispensing of credit to SME segment. This model titled SME Loan factory has separate Hub for Centralized

Processing of SME proposals.

SME LOAN FACTORY :

To grab vast business opportunities available and with an aim to extend focused attention to Industries & Service

Sector, Bank of Baroda has come out with an unique model in the form of SME LOAN FACTORY exclusively

for SMEs.

It is a revolutionary step taken by Bank of Baroda amongst the Nationalised Banks. It envisages setting up

of Centralized Processing Hub to ensure speedy appraisal and sanctioning of proposal of SME Sector

within a time bound schedule.

The model works on assembly line principles with simplified processes using latest technology and in-

house skilled men power to deliver focused services to SME customers.

A team of Relationship Officers/Relationship Managers have been stationed at different key places spread

over the micro segment of the city who will reach out to SME customers.

As of March, 2009, 34 SME Loan Factories have been operationalized across the country.

Attractive features of the model are as under :

Team of officers having expertise in the area of credit with positive approach is selected.

Instead of appointing DSAs(Direct Selling Agents), bank has appointed officers from existing dedicated

team only.

The hub’s main role is ensuring speedy appraisal & sanctioning of proposals pertaining to SME sector in a

time bound program.

The team members reach out to different market segments.

Its important feature is working of the SME Loan Factory on assembly line principles with simplified

processes.

We have two nodes to take care of the marketing /sales(SALES HUB) and credit processing

sanction(CREDIT HUB), under a single umbrella of the SME Loan Factory.

3.6 Targets for Priority Sector / SME Sector Lending

As regards lending to SME Sector, Banks are advised to fix their own target in order to achieve a minimum 20%

YOY growth in credit to SME as per statutory guidelines so as to double flow of credit to SME sector by the year

2009-10. There is no sub-target fixed for lending to small enterprises sector. However in order to ensure that credit

is available to all segments of the Small Enterprises sector, banks are advised to ensure that 60% of the total

advances to small enterprises sector should go to Micro Enterprises as under:

26

40% to Micro (manufacturing) enterprises with investment in plant and machinery upto Rs.5 lacs and

Micro(service) enterprises having investment in equipment upto Rs.2 lacs

20% to Micro (manufacturing) enterprises with investment in plant and machinery above Rs.5 lacs and

upto Rs.25 lacs and Micro(service) enterprises having investment in equipment above Rs.2 lacs and upto

Rs.10 lacs.

3.7 Guidelines for Takeover of Advance Accounts:

There are two types of compliances:

Non-Financial norms to be complied in case of takeover of SME accounts as per regulatory guidelines or

SME as per expanded coverage:

Sr.No.

Norms Deviation allowed

a.Profit-making (i.e. net profit before tax) concerns only as per last audited Balance Sheet.

Various authorities have been authorized to permit deviations in respect of accounts.

b.Accounts be rated as per the new credit rating model (BOBRAM) subject to ‘minimum’ BOB 6.Accounts, which are not covered under BOBRAM Credit Rating System, may be considered underpermitted deviation as per extant guidelines issued from time to time.

c. There should not have been any reschedulement /restructuring in the account during last two years.

d. Satisfactory report from the existing bank/FI and/or satisfactory conduct of account as per latest statement of accounts.

Various authorities have been authorized to permit deviations in respect of accounts.

e. Accounts with existing lenders should be under the category of “Standard Assets”.

f. All other existing norms, guidelines as applicable to borrowal accounts are to be scrupulously followed.

27

Financial norms in case of takeover of SME accounts as per regulatory guidelines or SME accounts as per expanded coverage:

Ratio Norms Authority who can allowDeviation

1 2 3 ProposedMicro & SmallIndustriesundermanufactu-ring sectorand serviceSector as per regulatoryguidelines

MediumEnterprises undermanufact-uring sectorand serviceSector as per regulatoryguidelines

Unitsoutside thepurview ofregulatorydefinitionbut coveredunder SMESector asPer expandeddefinition.

CurrentRatio

Minimum1.17 &above

Minimum1.20 &above

Minimum1.33 &above

Various authorities have been authorized to permit deviations in respect of accounts.

DebtEquityRatio(TTL /TNW)

Maximum4:1

Maximum3:1

Maximum3:1

Various authorities have been authorized to permit deviations in respect of accounts...

Totaloutsideliability/TNW

Maximum4.5:1

Maximum4.5:1

Maximum4.5:1

Various authorities have been authorized to permit deviations in respect of accounts..

AverageDSCRforTermLoan

Minimum1.75 with aconditionthat in anyone year itshould notbe below1.25

Minimum1.75 withaconditionthat inany oneyear itshouldnot bebelow1.25

Minimum1.75 with aconditionthat in anyone year itshould notbe below1.25

Various authorities have been authorized to permit deviations in respect of accounts.

28

3.8 SME Products

The following products are launched for SME sector across the country:

Baroda SME Gold Card providing additional 10% facility over the assessed MPBF for meeting emergent

business requirements.

Baroda SME Loan Pack providing single line of credit for meeting SME borrowers’ working capital as

well as long term requirements within the overall limit approved by the bank as per the eligibility, i.e. 4

times of borrower’s tangible net worth as per last audited Balance Sheet, or Rs. 2/- crores, whichever is

lower.

Baroda Overdraft against Land & Building is a unique product for financing working capital

requirements, long term margin requirements of SME borrowers against the security of unencumbered land

and building belonging to the unit, or, promoters of the unit, upto a maximum limit of Rs. 2/- crores

depending on the location, viz. rural and semi-urban, urban and metro.

Baroda Vidyasthali Loan providing finance to Educational Institutional upto a limit of Rs. 5/- crores on

liberalized terms. This scheme is implemented at select branches of the Bank depending on the business

potential.

Baroda Arogyadham Loan for providing finance for setting up new Nursing Homes, Hospitals including

Pathological Laboratories, renovation of existing Nursing Homes/Hospitals, purchase of medical diagnostic

equipments as also office equipments etc. and to meet working capital requirement upto a maximum limit

of Rs.5/- crores, depending on the location, on liberalized terms. This scheme is also implemented at select

branches of the bank.

Scheme for financing existing SME customers/Current Account holders for purchase of new

vehicles upto a limit of Rs. 50/- lacs with 10% margin.

29

4.) FOOD & AGRO BASED INDUSTRIES

30

4.1) EXECUTIVE SUMMARY

Emerging Food Processing SMEs of India attempts to provide a platform to the Food Processing SMEs, so as to facilitate their interface with potential global partners and buyers. The report has profiled 262 companies with a turnover of less than Rs 1,000 mn. Of these, 83% are small-scale firms and 17% are medium scale. There are 53 companies having presence in more than one industry sub-segment. Of the balance 209 companies profiled, around 33% are into grain processing & spices, 10% each in non-alcoholic beverages and packaged/convenience food, 8% in fruits & vegetables, 7% each in bakery and milk & milk products, 5% in sugar & confectionary, 4% each in meat & poultry and marine products, 3% in alcoholic beverages and 9% in the others sub-segment.

The regional representation of companies in the report suitably reflects the geographical concentration of the Indian food processing industry. The profiled companies are from 17 states and 2 union territories. The list consists of 89 companies from West India (49% registered in Mumbai-Navi Mumbai region, followed by 8% each from Ahmedabad and Pune), 82 from the South (20% each from Chennai and Hyderabad) and 68 companies from the North (50% registered in Delhi, followed by 21% from Rajasthan). These regions are the major industrial clusters of food processing SMEs in the country.

Of the 262 companies profiled, as many as 245 companies provided us sufficient data points to enable a statistical analysis. Some of the insights revealed include the following:

In terms of ownership patterns, 13% are proprietary firms, 17% partnership firms, 43% private limited companies and the rest 27% are public limited companies. As many as 65% of profiled companies are engaged solely in manufacturing, while 35% are engaged in manufacturing as well as trading. Around 79% of the companies began operations during the 1980s and 1990s, while 18% of the companies are relatively new and have begun operations post-2000. 71% companies have a single manufacturing facility while 27% operate with 2 or more plants. In terms of IT penetration, 42% companies have a website.

The food processing industry is expected to continue its high-growth trajectory in the near future, and SMEs are expected to play a critical role. Emerging Food Processing SMEs of India will provide the right platform for SMEs, enabling them to become globally competitive.

4.2) METHODOLOGY

The Micro, Small and Medium Enterprises Development Act of 2006, which came into effect from October 2, 2006 defines SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery for firms engaged in production of goods. Considering the challenges entailed in tapping financial information from a highly fragmented sector, the analysis has formulated a correlation between investment and turnover to arrive at a benchmark of Rs 1,000 mn turnover for the SMEs.

Emerging Food Processing SMEs of India focuses on processors of food and food products across the value chain, from fruits & vegetables to meat & poultry, bakery, non-alcoholic beverages, packaged/convenience food, milk & milk products, marine products, alcoholic beverages and grain processing. Trading companies have been excluded. The

31

report also includes diversified companies operating in the food processing and allied segments and having business interests in other industries. The report has excluded subsidiaries of large Indian business houses, multinational companies and subsidiaries of multinational companies, thus honouring the true Indian entrepreneurial spirit that the SMEs represent.

The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Other considerations included financial growth performance over the past two years, growth prospects and production efficiencies.

Every effort was made to ensure that the report covers food processors located across the length and breadth of the country. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. we identified a large universe of auto component manufacturers.

The sections titled Industry Report and SME Insights are special analyses on the food processing industry which looks at current trends, competitive dynamics and the future outlook for the segment. The SME Insights section presents analytical findings drawn from the primary information collated by leading consulting firms across the world.

4.3) DATA COLLECTION AND ANALYSIS

Overview

The food processing industry in India is a sunrise sector that has gained prominence in recent years. Availability of raw materials, changing lifestyles and relaxation in policies has given a considerable push to the industry’s growth. This sector is among the few that serves as a vital link between the agriculture and industrial segments of the economy. Strengthening this link is of critical importance to improve the value of agricultural produce; ensure remunerative prices to farmers and at the same time create favourable demand for Indian agricultural products in the world market. A thrust to the food processing sector implies significant development of the agriculture sector and ensures value addition to it.

The Indian food processing industry holds tremendous potential to grow, considering the still nascent levels of processing at present. Though India’s agricultural production base is reasonably strong, wastage of agricultural produce is sizeable. Processing of fruits and vegetables is a low 2%, around 35% in milk, 21% in meat and 6% in poultry products. By international comparison, these levels are significantly low - processing of agriculture produce is around 40% in China, 30% in Thailand, 70% in Brazil, 78% in the Philippines and 80% in Malaysia. Value addition to agriculture produce in India is just 20%, wastage is estimated to be valued at around US$ 13 bn (Rs 580 bn).

India, with an arable land of 184 mn hectares is, the highest producer of milk in the world at 90 mn tonnes p.a., second largest producer of fruits & vegetables (150 mn tonnes), third largest producer of foodgrains and fish and has the largest livestock population. Considering the wide-ranging and large raw material base that the country offers, along with a

32

consumer base of over one billion people, the industry holds tremendous opportunities for large investments.

Ministry of Food Processing Industries

The Ministry was set up in 1998 and the industry segments that come under its purview are:

Fruit & Vegetable processing (including freezing and dehydration) Grain Processing Processing of Fish (including canning and freezing) Processing and refrigeration of certain agricultural products, dairy products, poultry

and eggs, meat and meat products Industries related to bread, oilseeds, meals (edible), breakfast foods, biscuits,

confectionery, malt extract, protein isolate, high protein food, weaning food and extruded food products (including other ready-to-eat foods)

Beer, including non-alcoholic beer Alcoholic drinks from non-molasses base Aerated water and soft drinks Specialised packaging for food processing industries.

The Ministry of Food Processing Industries, GoI, has estimated the size of the Indian food market at US$ 191 bn (Rs 8,600 bn). The processed food market is projected to be over US$ 100 bn, of which the primarily processed food market accounts for 60%, while the value-added processed food market is around 40%.

The average annual growth of the food processing industry has been around 8% between FY01-FY08. The segments that have driven the growth are the beverages and meat & meat products and processed fish sectors. The food processing industry in India has a share of 1.5% in the total GDP of the country, and as part of total manufacturing accounts for 9%. India’s share in world trade in respect of processed food is about 1.6%.

An extensive and highly fragmented industry, the food processing sector largely comprises of the following sub-segments: fruits & vegetables, milk and milk products, beer & alcoholic beverages, meat and poultry, marine products, grain processing, packaged/convenience food and packaged drinks. A large number of players in this industry are small sized companies, and are largely concentrated in the unorganised segment. This segment accounts for more than 70% of the output in volume terms and 50% in value terms. However, though the organized sector is comparatively small, it is growing at a much faster pace.

33

Food Processing Units in Organised Sector (numbers)

Source: Ministry of Food Processing Industries, Annual Report 2007-08.

Industry Sub-Segments

Fruits & Vegetables

The installed capacity of fruits and vegetables processing industry has increased from 1.1 mn tonnes in January 1993 to 2 mn tonnes in 2000 and further to 2.2 mn tonnes in 2008. The processing of fruits and vegetables is estimated to be around 2.2% of the total production in the country. The prominent processed items in this segment are fruit pulps and juices, fruit based ready-to-serve beverages, canned fruits and vegetables, jams, squashes, pickles, chutneys and dehydrated vegetables. Some recent products introduced in this segment include vegetable curries in retortable pouches, canned mushroom and mushroom products, dried fruits and vegetables and fruit juice concentrates.

34

The fruits and vegetable processing industry is highly decentralized, and a large number of units are in the cottage / household and small scale sector, having small capacities of up to 250 tonnes/annum. Since 2000, the industry has seen significant growth in ready-to-serve beverages, fruit juices and pulps, dehydrated and frozen fruits and vegetable products, pickles, processed mushrooms and curried vegetables, and units engaged in these segments are export oriented.

The domestic industry is yet to change its preference in favour of processed foods. Consumption of value added fruits and vegetables is low compared to the primary processed foods, and fresh fruits and vegetables. The inclination towards processed foods is mostly visible in urban centers.

A significant thrust can be given to this sector by strengthening linkages between farmers and processors. The weak linkage between farmers and markets, as well as, farmers and processing companies has brought about inefficiencies in the supply chain and encouraged the involvement of middlemen. The Government of India’s National Agriculture Policy envisages the participation of the private sector through contract farming and land leasing arrangements which not only assures supply of raw material for processing units, but also a market for agriculture produce, accelerate technology transfer and capital inflow into the agriculture sector.

Contract farming in wheat practiced in Madhya Pradesh by Hindustan Lever Ltd and by Pepsi Foods Ltd in Punjab for tomatoes, foodgrains, spices and oilseeds are some successful examples of contract farming in India, which changed the farming landscape and promoted the cultivation of processable variety of farm produce. Such innovative practices will power the fruits, vegetables and grain processing industry. Apart from such initiatives, fiscal incentives and tax concessions will also give impetus to the sector. The five-year 100% tax exemption announced by the Government in FY05 was one such incentive for upcoming fruits and vegetable processing units.

Milk and Milk Products

India has one of the highest livestock population in the world, accounting for 50% of the buffaloes and 20% of the world’s cattle population, most of which are milch cows and milch buffaloes. India’s dairy industry is considered as one of the most successful development programmes in the post-Independence era.

As of 2008-09 total milk production in the country was over 100 mn tonnes with a per capita availability of 229 gms/day. The industry has been recording an annual growth of 4% during the period 1993-2007, which is almost 3 times the average growth rate of the dairy industry in the world. Milk processing in India is around 35%, (with the organized dairy industry accounting for 13% of the milk produced) while the rest of the milk is either consumed at farm level, or sold as fresh, non-pasteurized milk through unorganised channels.

Dairy Cooperatives account for the major share of processed liquid milk marketed in the India. Milk is processed and marketed by 170 Milk Producers’ Cooperative Unions, which federate into 15 State Cooperative Milk Marketing Federations. Over the years, several brands have been created by cooperatives like Amul (GCMMF), Vijaya (AP), Verka (Punjab), Saras (Rajasthan). Nandini (Karnataka), Milma (Kerala) and Gokul (Kolhapur).

The milk surplus states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Gujarat, Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. The manufacturing of milk products is concentrated in these milk surplus States.

35

As per data released by the Ministry of Food Processing Industries, exports of dairy products have been growing at the rate of 25% p.a. in quantity terms and 28% in value terms since 2001. Significant investment opportunities exist for the manufacturing of value-added milk products like milk powder, packaged milk, butter, ghee, cheese and ready-to-drink milk products.

Meat & Poultry

Since 1995, production of meat & meat products has been steadily growing at a rate of 4% p.a.. Currently, the processing level of buffalo meat is estimated at 21%, poultry 6% and marine products 8%. Only about 1% of the total meat is converted into value added products like sausages, ham, bacon, kababs, meat balls, etc. Production of meat is governed under local by-laws as slaughtering is a state subject. Processing of meat is licensed under the Meat Food Products Order, 1973.

In 2003 India had a livestock population of 470 mn that included 205 mn cattle and 90 mn buffaloes. The country produces about 450 mn broilers and 30 billion eggs annually. Cattle, buffaloes, sheep and goat, pigs and poultry are the types of animals which are generally used for production of meat. Slaughter rate for cattle as a whole is 20%, for buffaloes it is 41%, pigs 99%, sheep 30% and 40% for goats. The country has 3,600 slaughter houses, 9 modern abattoirs and 171 meat processing units licensed under the meat products order.

The poultry industry is among the faster growing sectors rising at a rate of 8% per year. Vertical integration of poultry production and marketing has lowered costs of production, marketing margins and consumer prices of poultry meat. There are eight integrated poultry processing units in the country, which hold a significant share in the industry.

Marine Products

India is the third largest fish producer in the world and ranks second in inland fish production. India’s vast potential for fishes, from both inland and marine resources, is supplemented by the 8,000 km coastline, 3 mn hectares of reservoirs, 1.4 mn hectares of brackish water, 50,600 sq km of continental shelf area and 2.2 mn sq km of exclusive economic zone.

Processing of marine produce into canned and frozen forms is carried out almost entirely for the export market. Infrastructure facilities for processing of marine products include 372 freezing units with a daily processing capacity of 10,320 tonnes and 504 frozen storage facilities with a capacity of 138,229.10 tonnes. Apart from these, there are 11 surimi units, 473 pre-processing centres and 236 other storages.

Processed fish products for export include conventional block frozen products, individual quick frozen products (IQF), minced fish products like fish sausage, cakes, cutlets, pastes, surimi, texturised products and dry fish etc.

Exports of marine products have been erratic and on a declining trend which can be owed to the adverse market conditions prevailing in the EU and US markets. The anti-dumping procedure initiated by the US Government has affected India’s shrimp exports to the US.

Grain Processing

36

Grain processing includes milling of rice, wheat and pulses. As of 1999-00, there were over 91,000 rice hullers and 2,60,000 small flour mills engaged in primary milling. Also, there are about 43,000 modernised rice mills/huller-cum-shellers. Around 820 large flour mills in the country convert about 10.5 mn tonnes of wheat into wheat products. Also there are 10,000 pulse mills milling about 75% of pulse production of 14 mn tonnes in the country.

Primary milling of grains is the most important activity in the grain processing segment of the industry. However, primary milling adds little to shelf life, wastage control and value addition. Around 65% of rice production is milled, mostly in modern rice mills. However, the sheller-cum-huller mills operating give low recovery. Wheat is processed for flour, refined wheat flour, semolina and grits. Apart from the 820 large flour mills, there are over 3 lakh small units operating in this segment in the unorganised sector. Dal milling is the third largest in the grain processing industry, and has approximately 11,000 mechanised mills in the organised segment. Oilseed processing is another major segment, an activity largely concentrated in the cottage industry. According to estimates, there are approximately 2.5 lakh ghanis and kolus (animal operated oil expellers), 50,000 mechanical oil expellers, 15,500 oil mills, 725 solvent extraction plants, 300 oil refineries and over 175 hydrogenated vegetable oil plants.

Indian rice, especially Basmati rice, has gained international recognition, and is a premium export product. Branded grains as well as grain processing is now gaining popularity.

Beer & Alcoholic Beverages

India is the third largest market for alcoholic beverages in the world, and the domestic market is largely dominated by United Breweries, Mohan Meakins and Radico Khaitan. The demand for beer and spirits is estimated to be around 373 mn cases per year. There are 12 joint venture companies having a licensed capacity of 33,919 kilo-litres p.a. for production of grain based alcoholic beverages. Around 56 units are manufacturing beer under license from the Government of India.

The two segments in the liquor segment, country liquor and Indian Made Foreign Liquor, both cater to different sections of society. The former is consumed in r ural areas and by low-income groups, while the latter is consumed by the middle and high income groups.

There are approximately 23,000 licensed liquor outlets in India, with another 10,000 outlets in the form of bars and restaurants. Regulations in this sector differ state-wise. In Tamil Nadu, Kerala and Andhra Pradesh, the distribution is controlled by the state government, and any change XVIII in the ruling party has a direct impact on the availability of alcohol. In Uttar Pradesh, liquor distribution licenses were earlier based on bidding, and the highest bidder was given the license. This has not changed to the lottery allotment system. Gujarat Government has banned the sale and distribution of liquor in the state.

The wine industry in India has come into prominence lately and has been receiving support from the Government as well. The market for this industry has been estimated to be growing at around 25% annually. Maharashtra has emerged as an important state for the manufacture of wines. There are more than 35 wineries in Maharashtra, and around 1,500 acres of grapes are under cultivation for wine production in the state. The Maharashtra Government has declared wine-making business as small-scale industry and has also offered excise concessions.

Consumer Foods

37

This segment includes packaged foods, aerated soft drinks, packaged drinking water and alcoholic beverages.

Packaged / Convenience Foods

Consumer food industry mainly consists of ready-to-eat and ready-to-cook products, chips, salted snacks, pasta products, cocoa based products, bakery products, biscuits, soft drinks, etc.

There are around 60,000 bakeries, 20,000 traditional food units and several pasta food units. The bakery industry is among the few processed food segments whose production has been increasing steadily in the country in the last couple of years. Bakery products include bread, biscuits, pastries, cakes, buns, rusk etc. This activity is mostly concentrated in the unorganized sector. Bread and biscuits constitute the largest segment of consumer foods with an annual production is around 4.00 mn tonnes. Bread manufacturing is reserved for the small scale sector. Out of the total production of bread, 40% is produced in the organized sector and the remaining 60% in the unorganised sector. Similarly, in the production of biscuits, share of unorganized sector is about 80%.

Cocoa Products

There are 20 units engaged in the manufacture of cocoa products like chocolates, drinking chocolate, cocoa butter substitutes, cocoa based malted milk foods with an annual production of approximately 34,000 tonnes.

Soft drinks

This segment is the 3rd largest in the packaged foods industry, after packed tea and packed biscuits. The aerated soft drinks industry in India comprises over 100 plants and provides direct and indirect employment to over 125,000 employees. It has attracted one of the highest foreign direct investments in the country. Its position is strengthened by strong forward and backward linkages with glass, plastic, refrigeration, sugar and the transportation industry.

Penetration levels of aerated soft drinks in India are quite low compared to other developing and developed markets, which is indicative of the potential the segment holds for further growth.

Constraints & Drivers of Growth

Growing urbanization, increasing disposable income, emergence of organised food retail, changing lifestyles and food consumption patterns are the key factors driving growth for processed foods in India. These are post-liberalisation trends that have given an impetus to the sector.

Consumption patterns in India have been undergoing a visible shift. Earlier, the share of cereal products was the highest, followed by milk & milk products, vegetables, edible oil and meat products. However, in recent years, the growth rates for fruits, vegetables, meat and dairy products have been higher than cereals and pulses. This shift in turn implies that there is also a need to diversify the food production base to match the changing consumption preferences.

38

This shift in consumption follows the pattern observed in developed countries in the evolution of the global food demand. There is a shift from carbohydrate staples to animal sources and sugar. Going by this pattern, in future, there will be increasing demand for prepared meals, snack foods and convenience foods and further on the demand would shift towards functional, organic and diet foods.

Some of the key constraints identified by the industry include:

Lack of suitable infrastructure in terms of cold storage, warehousing, etc Lack of adequate quality control and testing infrastructure Inefficient supply chain and involvement of middlemen High inventory carrying cost High taxation High packaging cost Affordability and cultural preference of fresh food

Highest priority has been accorded by the Government for the development of infrastructure. The Government has already taken several initiatives on this front which include developing of food parks, packaging centres, modernised abattoirs, integrated cold chain facilities, irradiation facilities and value added centres.

The initiative to develop food parks was taken primarily in order to assist the small and medium enterprises which are unable to invest in capital intensive activities. So far, 22 food parks have come into operation which provide common facilities like cold storage, food testing and analysis laboratories, packaging centres, etc

In terms of policy support, the ministry of food processing has taken the following initiatives:

Formulation of the National Food Processing Policy Complete de-licensing, except for alcoholic beverages Declared as priority sector for lending in 1999 100% FDI on automatic route Excise duty waived on fruits & vegetables processing from 2000 – 01 Income tax holiday for fruits & vegetables processing from 2004 – 05 Customs duty reduced on freezer van from 20% to 10% from 2005 – 06 Implementation of Fruit Products Order Implementation of Meat Food Products Order Enactment of FSS Bill 2005 Food Safety & Standards Bill, 2005

Apart from these initiatives, the Centre has requested state Governments to undertake the following reforms:

Amendment to the APMC Act Lowering of VAT rates Declaring the industry as seasonal Integrate the promotional structure

Investments

The total inflow of foreign direct investment in the food processing sector has been around Rs 55 bn between 1991 to November 2008. During the last five years, FDI witnessed an

39

inflow of over Rs 24 bn of foreign investment. The highest investment in a single year was in 2001-02 amounting to Rs 10 bn.

Maharashtra was among the front-runners to receive the highest share of FDI in food processing during the last five years. The dairy and consumer industrise received FDI worth Rs 2.7 bn each as foreign investment. Nearly 30 per cent of FDI in the food processing sector comes from EU countries such as Netherlands, Germany, Italy and France. Perfetti, Cadbury, Godrej-Pilsbury, Nutricia International, Manjini Comaco are some of the successful ventures from EU countries.

Major Food Processing Companies in India

The entry of multinational companies has increased competition in the food processing industry. At the same time, these companies are facing tough competition from strong Indian brands. This level of competition has increased innovations, facilitating a sustained growth of the sector and also improve global competitiveness. The emerging new growth phase of the sector is just in its initial stages with the potential for India to emerge as a leading food supplier to the world.

SWOT Analysis of Food–Processing Industry

Strengths

Abundant availability of raw material Priority sector status for agro-processing given by the central Government Vast network of manufacturing facilities all over the country Vast domestic market

Weaknesses

Low availability of adequate infrastructural facilities Lack of adequate quality control & testing methods as per international standards Inefficient supply chain due to a large number of intermediaries High requirement of working capital. Inadequately developed linkages between R&D labs and industry. Seasonality of raw material

Opportunities

Large crop and material base offering a vast potential for agro processing activities Setting of SEZ/AEZ and food parks for providing added incentive to develop

greenfield projects

40

Rising income levels and changing consumption patterns Favourable demographic profile and changing lifestyles Integration of development in contemporary technologies such as electronics,

material science, bio-technology etc. offer vast scope for rapid improvement and progress

Opening of global markets

Threats

Affordability and cultural preferences of fresh food High inventory carrying cost High taxation High packaging cost

4.4) FINDINGS

SME Insight

The attention that small and medium enterprises are lately commanding from banks, institutions, industry and academicians, has encouraged this study on the SME segment. The SMEs were relatively over-shadowed for long by other economic concerns. As a result, there has been a deficit of authentic information on this segment and has limited the estimation of value contributed by it to India’s economy. Through this primary research undertaken by the leading consulting firms, we attempt to add value through insights that have emerged from our study.

This study aims to draw a profile of how small and medium companies in the food processing space function. We have attempted to chart their operational structure, business practices, preferences, marketing, efficiency parameters, etc. For this quantitative exercise, a sample of 245 companies was considered; the requirement being that at least 80% of the information sought has been provided.

Some key characteristics of the sample of 245 companies are:

Ownership pattern of companies include: proprietary firms 13.5%, partnership firms 16.5%, private limited companies 43% and public limited companies 27%

The sample covers over 98% of the food processing clusters, except a few in Himachal Pradesh and Jammu & Kashmir

The geographical spread of the sample companies mirrors the concentration of food processing companies in the country. The West and South have maximum representation. Around 33.5% companies are located in the West, 31% in the South, 27.5% in the North and 8% in the East

Reflecting the low capital intensive nature of the industry, around 77% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. The rest are medium enterprises. (Refer Fig 01)

The representation from the various sub-segments of the industry is as follows: 34% in grain processing & spices segment, 14% into packaged / convenience food, 8% in non-alcoholic beverages which includes soft drinks, tea, coffee, fruit juices, water, etc, 7% each in milk & milk products and fruits & vegetable processing, 6% into bakery, 5% into sugar & confectionary, 4% in meat & poultry, 3% each into alcoholic beverages and marine products and 9% in the others segment (Refer Fig. 2). The

41

‘others’ category include manufacturers of food colours, flavours, additives, seeds, guar gum etc. (Refer Fig 02)

Around 65% of the companies are solely into manufacturing, while 35% are engaged in manufacturing as well as trading

Around 78.5% of the companies in the sample began operations between 1980 and 2000; only 4% were present prior to 1980s. The rest are relatively new having begun operations post-2000

71% of companies have a single manufacturing facility while 27% operate with 2 or more plants.

In terms of IT penetration, 42% of the companies have a website.

42

Turnover

Over 50% of the companies in the sample have a turnover of less than Rs 100 mn, and most of them were private limited companies, followed by proprietary firms. Another 33% were earning over Rs 100 mn but less than Rs 500 mn. Of the remaining 17% of the companies which were in the turnover bracket of Rs 500 mn and Rs 1,000 mn, the public limited and private limited companies dominated with a share of 60% and 33% respectively.

In terms of the regional spread of these companies, a large number of small firms were concentrated in the West. The northern and southern region showed a higher proportion of companies falling in the Rs 500 mn and above turnover bracket.

43

Figure 03

Top

Ownership Structure

The North-based companies once again showed a preference for proprietary form of ownership, similar to that observed among textile SMEs. The companies in the South were prominently private limited companies. The companies in the Western region were again predominantly private limited companies. (Refer Fig. 04)

44

Branding

Around 65% of the companies in the sample had branded products. The grain processing and packaged/convenience foods segments were the most prominent among the brand owning companies. Brand consciousness among companies was widespread irrespective of their size. It was found that among the small scale companies with turnover less that Rs 100 mn, 62% of the companies had branded products. Correspondingly, 69% of the companies in the turnover bracket of Rs 500-1,000 mn had developed brands for their products.

Exports

Around 114 companies, or 47% of the sample, were exporting their products and 36% were exporting more than 90% of their produce. Of the total exporting firms, 23 companies were 100% exporters mainly in the grain processing, fruits & vegetables and meat & poultry segments, with many of them exporting directly to foreign clients.

Of the exporting companies, 61% have branded products and almost 55% have quality certifications. The average capacity utilization among exporting companies was relatively higher (80%) compared with those selling only in the domestic market. Segment-wise, the pre-dominant exporters were companies in the grain processing and the fruits & vegetables segments having a share of 29% and 15% respectively.

In terms of the various sub-segments in the food processing industry and their exports, it was found that companies exclusively into meat & poultry exported over 96% of their output, followed by marine product manufacturers, which on an average exported 93% of their produce.

Capacity Utilisation

The companies in the study were operating at an average capacity utilisation of 78%. Approximately 44% of the companies were operating at 90% and above of installed capacity. Of these companies operating at 90% and above capacity, 38% were operating in the Grain Processing & Spices segment followed by companies in Fruits & Vegetable Processing segment.

Regionally, the North-based companies reflected higher capacity utilisation and were on an average operating at 82% of installed capacity. In terms of ownership, public limited companies constituted a significant 36% of those operating at more then 90% capacity. On the basis of size, the enterprises having turnover between Rs 250-500 mn showed higher average capacity utilisation of an average 88%.

Average capacity utilisation across segments

45

Table 2

Top

Future Plans

Of the total 245 companies in the sample, 61% have envisaged strategies for future growth. The plans range from capacity expansion, modernisation, diversification to new marketing initiatives and venturing into newer markets.

Out of the total companies with future plans for growth, 45% of the companies have plans for expanding their capacity in order to meet the growing demand. A substantial 29% of the companies have diversification plans into related or un-related fields.

Segment-wise, the grain processing companies showed highest dynamism with 65% of the companies in this segment having divulged future growth plans. In terms of future plans, of the companies having capacity expansion plans, 33% were from the grain processing segment followed by packaged/convenience foods (15%). Bakeries accounted for 13% of the companies having plans for diversifying their product segment, while 16% companies looking for newer markets belonged to non-alcoholic beverages segment

46

 Figure 05

Hindrances to growth

Infrastructure and lack of institutional support were cited as the key hindrances to growth by the SMEs. Nearly 52% of the companies in the sample responded to the query on hindrances to growth. Of these, over 80% of the responses alluded to lack of institutional support as an impediment. A large number of these companies were from the northern and southern belt. Infrastructure as a barrier was cited by 37% of the companies. The West-based companies were largely concerned with marketing issues.

Top

4.5) CONCLUSION AND RECOMMENDATIONS

FUTURE PROSPECTS

The decade-and-a-half of Indian economic reforms have now reached a stage where it is bringing about changes in the the agriculture and food processing sectors. Reforms had more or less bypassed the agriculture sector till recently. However, demographic factors, changing lifestyles and consumer demand for greater variety has increased pressures on the food processing sector to provide products at competitive prices. Experience of large developed agricultural economies has proven that the integration of production and processing stages are a universal feature of efficient food marketing systems in the advanced stages of economic development.

Driving growth in the food processing sector holds the key to imparting changes in the labour intensive agriculture sector in India. Inefficient marketing systems are already being targeted. Policies are now promoting the participation of private investors that would promote efficiency in food processing and agriculture marketing systems. These are just the initial stages of development and further efficiencies in the agriculture sector, in terms of improving productivity and investments, will be a source of power for the food processing

47

sector in turn. In other words, the two sectors share a symbiotic relationship and changes to either will impact the other.

In this backdrop, the Government of India is already in the midst of a vision, strategy and action plan for the food processing sector. This strategy addresses issues of taxation, organised retail, infrastructure development, marketing interventions and regulations, strengthening of institutions and issues of food safety and regulations. The Vision 2017 strategy released in 2007-08 envisages:

Trebling the size of the processed food sector to close to US$ 400 bn by 2015 Increasing level of processing of perishables from 6% to 20% Value addition to increase from 20% to 35% Increase share in global food trade from 1.5% to 3% Increase the share of value added products in food consumption from the current

16% to 50%.

Realising this vision entails an investment of US$ 24 bn over the decade of 2004-2015. Acquiring global competitiveness implies building-in efficiencies into the agricultural production and processing systems. For the agriculture sector, the state Governments will have to play a critical role in raising yields and improving quality of agricultural produce. This would require improving infrastructure for warehouses, cold storage, access roads, creating facilities for primary grading/sorting, improving access to price and market information to farmers, contract farming and supply chain management.

Policy reforms in the food processing sector are already in their advanced phase, and have prompted several corporates to invest in the sector. Among the food processing segments, progress has been pre-eminent in the grain processing sector with the extensive branding of processed end-products like wheat flour and processed rice. A few prominent companies XXIX investing in this segment include ITC, HLL and Cargill. The other growing segment is poultry and meat, where too significant progress has taken place in terms of branding and marketing of products. This is among the faster growing segments in the industry, and will continue to witness significant changes in the next few years. Key players in this segment include Venky’s India and Godrej.

The fruits and vegetables segment is still localised in its operations, and largely unbranded. However, several companies have already made foray into this segment, and are backward integrating their operations. The products that would see remarkable growth include pickles, fruit pulps, canned and frozen fruits and vegetables.

Organised food retailing is likely to play an important role in increasing the consumption of processed food items. The retail format reduces the number of intermediaries and transaction costs. It also aids better understanding of consumer preferences as it is a vital link between the processors and consumers. The Ministry of Food Processing, GoI, has projected the organised food retail industry to grow by 30% for the next five years. Among the key categories that constitute the organised retail market, the food and beverages segment make up a high 29%. Though current sales of processed foods through retail outlets are hardly 1% of total food sales, it is estimated to grow at an annual rate of 40% in the near future. Indian corporates who have already ventured into this segment include ITC, Bharti, Reliance, Aditya Birla Group, Subhiksha and Future Group.

Studies on the impact of organised food retailing on the supply chain have shown that it helps in consolidation among farmers towards meeting consumer requirements,

48

investments in infrastructure and a shift towards centralised distribution centres from the traditional wholesale markets.

The food processing industry in India has taken off substantially and will continue to grow rapidly considering the untapped potential in the sector. The growth in this segment not only indicates the changing development patterns of the country, similar to the developed nations, but also the promise it holds in driving growth of a certain section of society that has remained marginalised for a long time. More than just demand and supply dynamics, stakeholders in the food processing sector of India have a social responsibility to fulfil.

 

49

5.) CHEMICALS

5.1) EXECUTIVE SUMMARY

50

The Emerging Chemical SMEs of India attempts to provide a platform to the chemical SMEs, so as to facilitate their interface with potential global partners and buyers to tap ever increasing export opportunities by leveraging high quality Indian technical expertise. The report has profiled 384 companies with a turnover of less than Rs 1,000 mn.

The report covers SMEs based in 10 chemical clusters across the country. The geographical spread of the industry mirrors the concentration of chemical companies in the country with the West region dominating with a 76% share. The region is entirely represented by two states – Gujarat (58% of total West) and Maharashtra (42% of total West). Around 11% companies are located in the North, 9% in the South and 4% in the East. Location-wise, companies are featured from 75 cities, with Ahmedabad at 30% and Mumbai at 25% share topping the chart.

Of the 384 companies profiled, as many as 271 companies were used for a statistical analysis. Some of the insights revealed include:

Three segments — organic, inorganic and dyestuff — were most optimistic on future growth, and on an average, around 60% of companies in these segments were exporting their products.

It was observed that public sector companies had a dominant presence in the Rs 500 – 1000 mn bracket, while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket.

On the query of availability of funds, a large 55% of the companies responded that fund availability was moderate. Another 35% felt that it was easy to acquire funds, and a large number of such companies were located in the West and South of the country.

The average capacity utilisation of the sample companies was around 85%, with 45% of the companies operating at over 90% of their capacity.

On the strengths of low cost manpower, a large and growing domestic market, strong forward and backward linkages and a conducive policy environment, prospects for the Indian chemicals sector are bright. Emerging Chemical SMEs of India will provide the right platform for SMEs, enabling them to become globally competitive.

5.2)METHODOLOGY.

51

The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. As per the Micro, Small and Medium Enterprises Development Act of 2006, the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. Considering the challenges entailed in tapping financial information from a highly fragmented sector, the analysis has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1,000 mn turnover for auto component SMEs.

Emerging Chemical SMEs of India focuses on manufacturers of chemicals and allied products; trading companies have been excluded. The report includes diversified companies operating in the chemical space and having business interests in other industries. The report has excluded subsidiaries of large Indian business houses, multinational companies and subsidiaries of multinational companies, thus honouring the true Indian entrepreneurial spirit that the SMEs represent.

The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Other considerations included financial growth performance over the past two years, growth prospects and production efficiencies.

Every effort was made to ensure that the report touches upon auto component manufacturers located across the length and breadth of the country. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. we identified a large universe of auto component manufacturers.

The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends, competitive dynamics and the future outlook for the segment. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms.

5.3) DATA COLLECTION AND ANALYSIS.

Introduction

52

The Indian chemical industry is among the established traditional sectors of the country, playing an integral role in the country’s economic development. This sector, forming part of the basic goods industry, is a critical input for industrial and agricultural development. The industry has a weight of 14% in the Index of Industrial Production (Base year 1993-94 = 100), giving an indication of the importance the sector holds in the country’s industrial growth. A robust chemical industry is a harbinger of significant economic and strategic benefits to the nation.

The chemical industry is among the most diversified industrial sectors, including basic chemicals and its products, petrochemicals, fertilisers, paints, gases, pharmaceuticals, dyes, etc. The sector covers over 70,000 commercial products, and provides the building block for many downstream industries, such as finished drugs, dyestuffs, paper, synthetic rubber, plastics, polyester, paints, pesticides, fertilisers and detergents.

The industry includes a wide variety of products, from basic chemicals to research-driven specialised products, at different levels across the industry supply chain. The fundamental nature and diversity of the industry is best understood from the fact that the industry itself is the largest consumer of its products, accounting for around 33% of total consumption.

Sources: Department of Chemicals & Petrochemicals,Gol

As stated in the Annual Report of 2005-06 of the Department of Chemicals & Petrochemicals, GoI, the domestic chemical industry contributes about 17.6% to the total output in the manufacturing sector, 13-14% to total exports and 8-9% of total imports into the country. The sector has a share of 3% to the country’s total GDP. Its contribution to the revenue kitty of the Government is around 18-20%.

The domestic industry’s turnover is estimated to have crossed US$ 30 bn (Rs 1,300 bn), which is slightly over 1% of the global production. In world ranking, India stands 12th in terms of production.

Industry structure

The chemical industry can be broadly classified into two segments – organic and inorganic chemicals. Organic chemicals cover over half of all known chemical compounds, and

53

includes petrochemicals, drugs, cosmetics, agrochemicals, etc. Inorganic chemicals comprise of alkalis, dyes & dyestuffs.

Based on a more functional classification, chemicals may be divided into basic, specialty and fine chemicals.

The basic chemicals industry forms the largest part of the chemical industry and is characterised by capital intensive, high volume, low margin products. Specialty and fine chemicals are low volume, high margin in nature. It is estimated that nearly 70% of fine chemicals produced in India are used by the pharmaceutical and agrochemical industries. Specialty chemicals include adhesives, additives, antioxidants, biocides, corrosion inhibitors, cutting fluids, dyes, lubricants, pigments, etc..

Sources: Department of Chemicals & Petrochemicals, Gol

This report largely focuses on basic chemicals, which can be further divided into alkalis, organic and inorganic chemicals, pesticides and fungicides, dyes and dyestuffs. This classification is based on the product categorisation as provided by the Department of Chemicals & Petrochemicals, GoI, for the chemical industry, and excludes drugs & pharmaceuticals and petrochemicals.

Regional concentration of the basic chemicals industry

54

Sources: Department of Chemicals & Petrochemicals,Gol

Though the chemical industry is spread across the country, there is relatively a high concentration along the west-coast, largely due to the proximity to raw materials and ports. Gujarat alone is estimated to contribute around 53% to the total production in the country, followed by Maharashtra, which contributes 9%.

The other major producing states include UP, TN, MP and Punjab. On the other hand, in the case of heavy chemicals segment, especially inorganic chemicals, fuel availability is a determining factor, and hence there is a concentration of these companies around power plants. Due to the regional concentration of chemical companies in certain pockets, logistics costs for the industry have tended to become a significant position of total costs.

Industry Sub-segments

The annual production of basic chemicals between FY02-FY06 has been growing at 7% per year, while consumption has been rising at 5% per annum. Imports and exports have also been rising at 7.25% and 37.6% respectively, implying that India has been a net exporter of chemicals. As per the Department of Chemicals, on the largest imports, in value terms have been for organic chemicals followed by dyes & dyestuffs, while the largest export item in value terms is also organic chemicals and chlor-alkali chemicals.

State-wise Capacity & Production of Major Chemicals(‘000 MT)

55

Sources: Department of Chemicals & Petrochemicals,Gol

Chlor Alkali

Chlor alkalis, the largest segment of basic chemicals produced in India, is a volume driven, low margins industry and accounted for around 72% of the total production in FY06. Caustic soda, soda ash and chlorine are products of this industry, forming the basic building block for the chemical processing industry. End-users of this segment include aluminium, dyes, pharmaceuticals, glass, newsprint, paper & boards, soaps & detergents, viscose, textiles, water treatment, pesticides industries, to name a few. The scale of margins for alkalis, to a large extent, depends upon the levels of industrial activity in sectors such as metals, textiles and pharmaceuticals.

Being a capital intensive sector, the sector is largely dominated by big players. Hence, energy costs form a key determinant of the profitability of the industry. Chlor alkali companies are largely concentrated along the west coast due to the availability of salts, a key raw material.

56

Sources: Department of Chemicals & Petrochemicals,Gol

The Chlor alkali segment has been witnessing a robust 6% growth in production since FY02, with production in FY06 touching an estimated 5.5 mn tonnes. This is one of the few industries where supply exceeds demand, thus having tremendous potential for exports. Since FY03, the sector has been a net exporter. Exports of chlor alkali have been growing at 52% annually since 2001, while imports are rising at close to 6% per year.

Technology has played a key role in this segment in adopting better production techniques. Around 60% of mercury-based caustic-chlorine plants in the country have shifted from mercury cell technology to membrane cell technology that has been recommended as a viable production alternative.

Performance of Chlor Alkali Chemicals(‘000 MT)

Note: @ = Production + Imports - ExportsSource: Annual Report 2005 – 2006, Department of Chemicals & Petrochemicals, GoI

Organic Chemicals

57

Organic chemicals form the second largest segment of the chemical industry. This segment has the largest number of products classified under it, most of which are knowledge driven. As a result, R&D forms a considerable part of the manufacturer’s costs. Acetic acid, phenol, methanol, formaldehyde, nitrobenzene, citric acid, etc are part of this segment, most of which are used in drugs, pesticides, etc. This segment accounts for 20% of total chemical production in the country.

This segment produces a large number of products and combinations thereof, and is dominated by medium and small players, with specialised focus in particular product segment. Being largely a technology driven segment, these manufacturers have exhibited the competence to produce chemicals of high quality standards. This segment too is concentrated in Western India.

Sources: Department of Chemicals & Petrochemicals,Gol

During FY06, production of organic chemicals is estimated to have increased by 2% to 1.5 mn tonnes. This sluggish rate of growth has been persisting since FY05, while between FY02-FY05 production grew at an impressive 7%. Exports of organic chemicals have been impressive, both in terms of value and volume. Between FY02-FY05, exports grew by 55% while imports went up by 6% annually in quantity terms. This rise in exports can be attributed to the significant value-addition to the Indian product list, especially in the drugs and pharmaceutical segments.

During FY05, exports of organic chemicals rose by 36% in volume terms to 63 thousand tonnes, with a 66% jump in value terms to Rs 5.7 bn. Imports, although dropped by 6% to 561 thousand tonnes in volume in FY05, saw a rise of 26% in value to Rs 12.3 bn during this period. The domestic market forms a large part of the consumer base for the XVI industry. However, due to price competitiveness, products like methanol are mainly imported into India.

Inorganic Chemicals

This segment comprises of products such as aluminum fluoride, calcium carbide, carbon black, potassium chlorate, sodium chlorate, titanium dioxide and red phosphorous, etc. End-users of these chemicals include manufacturers of soaps & detergents, glass, fertilisers and alkalis.

58

Sources: Department of Chemicals & Petrochemicals,Gol

Inorganic chemicals are manufactured by using naturally occurring minerals, and therefore availability of raw materials is the key determinant for the development of the industry. In 2005, this segment accounted for 7% of total chemical production in India. There are large variations among products in the segment owing to the required skills and technology used, and the value addition to the products.

The inorganic chemicals sector is the fastest growing sub-segment, having recorded an average annual growth rate of around 11% between FY02-FY05. During FY06 production is estimated to have risen by 7% to 544 thousand tonnes. Exports of inorganic chemicals too have been rising by over 50% annually since FY02. Imports have been erratic and on the decline in volume terms, though the value of imports has been high, implying the high-value imports by domestic players.

Performance of Inorganic Chemicals (’000 MT)

Source: Annual Report 2005 – 2006, Department of Chemicals & Petrochemicals, GoI

Pesticides

Pesticides are one of the most important constituent of the agro-chemicals sub-segment, which has played an almost revolutionary role in the Indian agricultural sector. According to

59

estimates, India is the second largest manufacturer of agrochemicals in the world with 165 pesticides registered in the country.

Sources: Department of Chemicals & Petrochemicals,Gol

India has one of the most dynamic generic pesticide manufacturing base, with more than 60 technical grade pesticides being manufactured indigenously by 125 producers consisting of large and medium scale enterprises, including about 10 multinational companies, and more than 500 pesticide formulators spread all over the country. India is also a dominant producer of Isoproturon, a weedicide, accounting for nearly 25% of the world’s production.

This segment is also a knowledge driven segment and R&D plays an important role. It has witnessed consolidation over a period of time and the presence of MNCs has been expanding through increased acquisitions of local players. Nonetheless, a large number of small and medium players are associated with the production, distribution and marketing of agrochemicals.

Use and production of pesticides is directly related to the crop situation, and indirectly to monsoons. Cash crop producers are the major consumers of pesticides. During FY06, production of pesticides dropped by 12% to 82,000 tonnes mainly due to lower intake of pesticides in the cotton crop, which typically consumes the highest proportion of pesticides.

However, exports have been one of the growth enablers for this sector, which also helps to hedge the risk of weather conditions. Although most of the exports have been undertaken by MNCs through their established distribution channels across the globe, Indian players have also shown competence in select product segments.

During FY05, exports of pesticides grew by 9% to 22,000 tonnes. However, unit realization remained under pressure and fell by 9% thus leading to a decline in the export value by 1.6% to Rs 5,180 mn. Some key export destinations for India include US, UK, France, Netherlands, Belgium, Spain, South Africa, Bangladesh, Malaysia and Singapore. India meets most of the domestic requirement of pesticides and imports are limited to only few innovative products.

60

Performance of Pesticides(’000 MT)

Source: Annual Report 2005 – 2006, Department of Chemicals & Petrochemicals, GoI

India has lately emerged as a global base for generic agrochemicals, sales of a significant proportion which are to traders and not to end-users. The reason for this is that apart from lack of necessary sales and distribution infrastructure, companies have yet to obtain relevant product registrations to enable direct sales.

Dyes and Dyestuff

Dyes and dyestuff finds application in a range of industries, including paints, leather, textiles, ink, plastics, etc. The textile industry is the largest consumer for this segment, accounting for nearly 80% of total demand. A large number of manufacturers in this segment are small and medium scale players. However, being intermediate suppliers, their performance is critically linked with that of their end-users’ performance.

From being an importer and distributor during the 1950s, the dyes and dyestuff industry has come a long way. India today accounts for 6% of total world production of dyes, and Indian dyes are exported to the East Asia, Africa, EU, etc. During FY06, production of dyes grew by 4% to 30,000 tonnes. As per data available from the Department of Chemicals & Petrochemicals, exports of dyes and dyestuff witnessed a fall of 7% during FY05 to 112,000 tonnes in volume and a drop of 6% in value to Rs 2.27 bn. In contrast, imports went up by 21% to 15,000 tonnes in volume and by 20% to Rs 3.56 bn in value during this period.

Performance of Dyes & Dyestuffs (’000 MT)

Source: Annual Report 2005 – 2006, Department of Chemicals and Petrochemicals, GoI

61

Key Strengths & Drivers

The chemical industry forms the backbone of the Indian manufacturing base. Some key strengths of the sector that can drive growth for the industry include low cost manpower, large domestic market, strong forward and backward linkages and conducive policy environment.

Considering the vastness of this sector, some of the common growth drivers that could be identified for the sector include:

(a) Macroeconomic factors

Being largely an intermediate product, a strong economic growth is an important factor for sustaining demand for the chemical industry. In fact, the per capita consumption of most of the finished products under this sector is far below the world average, giving a hint to the potential growth for the industry.

(b) Integration along the value chain

The industry participates in different stages of the value chain by producing intermediates and finished goods. This makes integration of processes easier. In fact, growing competition in select chemical segments has forced the industry to scale up production, which, inter-alia, requires backward or forward integration in some cases. Higher consolidation and capacity building has driven growth.

(c) Focus on R&D

Specialty and fine chemicals are essentially a knowledge-based industry, which requires sustained investment in R&D. During the past few years, the chemical industry has witnessed a rise in R&D and technology up-gradation. This has led to many new products being introduced in the market, thus boosting demand.

(d) Outsourcing and contract manufacturing

On the strength of low-cost production and world-class technology, India is being looked upon as a preferred destination for outsourcing and contract manufacturing. This has led to higher utilisation of capacity and revenue generation for the participants.

 

The Indian chemical industry today is emerging from a protected environment into highly competitive global market, and at the same time the domestic market is already reaching a mature level where demand potential for chemical end-products is on the rise. In these changing circumstances, the industry faces some key challenges.

(a) Power costs

Chemicals, especially heavy chemicals, are power intensive sectors, and sustained supply of power is imperative. Volatility in power supply and prices of crude oil has been impacting the margins of the chemical companies.

(b) Technology

62

Although India has shown remarkable improvement in technological innovation, it still lags behind international standards. Chemical sectors are one, where technological changes are rapid and needs continuous up-gradation and innovation.

(c) Infrastructure

Poor infrastructure, like roads, rail and ports are other detrimental factors. Regional concentration of the chemical industry requires better infrastructure and logistics to reach across the country.

(d) Dumping

Growing international competition and low customs duty on some of the chemicals have led the dumping of certain chemicals in domestic industry. Notably, most of the cases related to anti-dumping duty in India relates to chemical sector.

5.4) FINDINGS

SME Insights

The small and medium enterprises, which form the backbone of India’s manufacturing sector, have been the focus of banks, institutions, industry and academicians. However, there has been a deficit of authentic information on this segment that has limited the estimation of value contributed by it to India’s economy. Through this primary research undertaken by the leading consulting firms, we present here some insights that have emerged from our study.

This study aims to draw a profile of how small and medium companies operating in the chemical space function; we have attempted to chart their operational structure, business practices, preferences, marketing, efficiency parameters, etc. For this exercise, we have considered a sample of 271 companies, which have provided over 85% of the information sought.

Some key characteristics of the sample of 271 companies are:

Ownership pattern of companies include: proprietary firms 30%, partnership firms 25%, private limited companies 34% and public limited companies 11%.

The total sample is from 15 states; the highest coming from the Western region. The companies in the West are entirely from Gujarat and Maharashtra and account for 74.5% of the total sample. Around 11.4% companies are located in the North, 8.5% in the South and 5.5% in the East.

Around 89% of the companies in the sample are small scale enterprises with investments less than Rs 50 mn in plant and machinery. The rest are medium sized enterprises.

Close to 77% of the companies in the sample operate in a single segment. The Organic and Inorganic manufacturers constitute 65% of the sample, organic companies at 37% and inorganic 28%. The next largest segment is Dyes and Dyestuff accounting for 22%. Representation of Alkali and Pesticide companies is 1.2% each.

Depicting the long-established nature of the industry, around 49% of the companies in the sample were established prior to 1990. Another 42% began operations during the 1990s, while only 9% began operations post-2000.

63

In terms of IT penetration, around 39% of the companies have a website.

Turnover

A large number of companies, close to 72%, had a turnover of up to Rs 100 mn, while another 16% had a turnover of between Rs 100 – 250 mn. Unlike other SME-dominated segments, the small companies in this sample of chemical companies did not show any particular ownership pattern, and were equally represented by proprietary, partnership and private firms. It was observed that public limited companies had a dominant presence in the Rs 500 – 1000 mn bracket, while private limited companies were prominently high in the Rs 100 – 500 mn turnover bracket.

Chemical sub-segments

Though alkalis forms the largest segment of the basic chemicals industry in terms of production, their representation in the sample was very small. The organic, inorganic and dyes & dyestuff companies dominate the sample, accounting for 87%. Around 63 companies were operating in more than one segment, with over 50% of these companies manufacturing organic as well as inorganic chemicals. Among these companies operating in multiple segments, a large number of dyes & dyestuff manufacturing companies were also manufacturing organic chemicals.

64

The three segments — organic, inorganic and dyestuff — are the key growth drivers of the basic chemicals industry. On an average, around 60% of the companies in these segments were exporting their products. Among the dyes & dyestuff manufacturers that were exporting their products, a significant 66% were exporting more than 50% of their products.

Branding

Around 38% or 102 companies in the sample sold their products under a brand name. Among these brand conscious companies, partnership companies accounted for 31%, private limited were 29% while proprietary firms accounted for 24%. Nearly 68% of these companies were exporting their products, with 27% of them exporting more than 50% of their total production.

Exports

Nearly 61% or 165 companies in the sample were exporting their products. Of these exporting firms, 7% of the companies were totally export oriented. Around 39% of the companies were exporting over 50% of their produce, and nearly 43% of the exporting companies have quality certifications. Nearly 41% of the companies exporting were private firms, followed by proprietary firms at 25%, partnership firms having a share of 22 and public limited companies 12%. In terms of chemical sub-segments, the major exporters were organic chemical manufacturers, followed by dyes, inorganic chemicals, alkalis and pesticides.

65

Funding

Banking preference of companies was largely rooted with the public sector banks with 72% of the companies banking with PSUs, while 12% with private sector and another 3% each with cooperatives and MNCs. The remaining 10% were dependent on internal resources to meet their working capital requirements. On the query of availability of funds, a large 55% of the companies responded that fund availability was moderate. Another 35% felt that it was easy to acquire funds while 5% of the companies expressed difficulty in acquiring funds.

Hindrances in Business

In terms of concerns expressed by the companies for business growth, lack of institutional support was highlighted by maximum number of companies. Nearly 70% of such companies were located to the West, another 9% in the North, and 4% each from East and South. The other major concerns were related to marketing and infrastructure. Availability of facilities

66

for quality checks and hindrances in having an assured market was also brought forth by the companies, in terms of pre-empting the cyclical nature of operations.

5.5) CONCLUSIONS AND RECOMMENDATIONS.

FUTURE PROSPECTS.

Prospects for the Indian chemical industry are bright, considering the central role it plays in the growth of the manufacturing and agriculture sector of the country. The current growth pattern of the country, driven by agriculture, industry and services, ensures a sustained demand for chemicals in future. Nevertheless, the industry also faces considerable challenges in a changing environment, such as increased globalisation of markets, societal demand for improved environmental performance and the need for increased profitability and productivity.

India’s global competitiveness in the chemical industry has grown and will continue to grow in the medium term for the following reasons:

High demand growth in the domestic and global market Localisation of end-user industries. Some of the end-user industries are also growing

rapidly and are emerging as outsourcing hubs for the global market, like textiles, pharmaceuticals.

Low production costs in terms of labour, resources, etc

These factors have led to increasing investments, R&D spending as well as building up of a skill base. Going forward, technology may play a significant role in empowering the chemical industry to meet future challenges.

However, the dumping of chemicals and increased inflow of chemical products (mostly basic) under a reduced customs regime will hinder the growth in certain sub-segments.

Big-push from the Pharmaceutical sector

The pharmaceutical sector is a significant growth driver for the chemical industry, and will continue to be an adjunct to the chemical industry. Indian pharmaceutical players have shown impressive progress on filing new chemicals entities with foreign regulatory agencies, which illustrates the maturing technical and chemical synthesis skills of Indian players. This trend is likely to gain momentum in the backdrop of recently announced government policies related to R&D in the Union Budget for FY08.

The Union Budget FY08 offers incentives for R&D by way of extending the weighted deduction at the rate of 150% of the expenses on R&D for the next five years and duty exemption for imports of specified machinery used for R&D purpose. These measures will help the sector to augment R&D capabilities. Moreover, the proposed exemption of customs duty on coking coal would also provide respite to the fuel intensive sectors.

Growth in the pharmaceutical sector in turn implies impressive growth for the organic chemicals segment. Also, following the future trend and opportunities in the field of CRAMS, this segment, especially exports is set to witness high growth in the near term.

67

Pesticides segment may witness further consolidation, however, domestic players may give stiff competition to MNCs

MNCs have expanded their presence in the country by introducing innovative products, process integration and acquisition. However, few big domestic players have shown their competitive skills in the domestic and international market by pushing their superior products. Although, the growing presence of MNCs will impact the small and medium players, it will simultaneously open up opportunities in terms of contract manufacturing and research.

In fact, the strength of domestic pesticide players lies in their regional presence and understanding local needs, which will help them to stay and grow in the market.

Dyes and dyestuff have good prospects based on economic growth

Impressive performance of the-end user segments in the dyes and pigment sector is set to give a boost to a large number of players associated with the industry, whether organized or unorganized.

68

6.0) TEXTILES

69

6.1) EXECUTIVE SUMMARY

Emerging Textile SMEs of India attempts to provide a platform to the Textile SMEs, so as to facilitate their interface with potential global partners and buyers. The report has profiled 621 companies with a turnover of less than Rs 1,000 mn. Of these, 88% are small-scale firms and 12% are medium scale. Around 16% of the profiled companies are into spinning, 11% into weaving, 20% in the clothing segment and 15% are into made-ups. There are 62 companies that have integrated operations and function in more than one sub-segment.

The regional representation of companies in the report suitably reflects the geographical concentration of the Indian textile and clothing industry. The profiled companies are from 18 states and 2 union territories. The list consists of 232 companies from the North (31% registered in Delhi-Noida region, followed by 19% from Panipat) 144 from the West (80% registered in Mumbai region, followed by 10% each from Ahmedabad and Surat) and 226 from the South (23% from Tirupur, followed by 15% from Coimbatore), the major industrial pockets of textile manufacturers in the country. No response was received from companies in the North-eastern states.

Of the 621 companies profiled, as many as 350 companies provided us sufficient data points to enable a statistical analysis. Some of the insights revealed include: in terms of ownership pattern; proprietary firms are 24%, partnership firms 31%, private limited companies 27% and public limited companies 18%; around 63% of the companies are only into manufacturing, while 37% are engaged in manufacturing as well as trading; around 70% of the companies in the sample began operations during the 1980s and 1990s, 16% of the companies are relatively new and have begun operations post-2000; 73% of companies have a single manufacturing facility while 27% operate with 2 or more plants; in terms of IT penetration, 42% of the companies have a website.

The textile and clothing industry is expected to continue its high-growth period in the near future, and SMEs are expected to play a critical role. Emerging Textile SMEs of India will provide the right platform for SMEs, enabling them to become globally competitive.

6.2) METHODOLOGY

The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. As per the Micro, Small and Medium Enterprises Development Act of 2006, the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. Considering the challenges entailed in tapping financial information from a highly fragmented sector, the analysis has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1,000 mn turnover for auto component SMEs.

Emerging Textile SMEs of India focuses on manufacturers of textile products across the value chain, from yarns, fibres to processing and finished goods. Trading companies have been excluded. The report also includes diversified companies operating in the textiles and readymade garments space and having business interests in other industries. The report has excluded subsidiaries of large Indian business houses, multinational companies and

70

subsidiaries of multinational companies, thus honouring the true Indian entrepreneurial spirit that the SMEs represent.

The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Other considerations included financial growth performance over the past two years, growth prospects and production efficiencies.

Every effort was made to ensure that the report touches upon auto component manufacturers located across the length and breadth of the country. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. we identified a large universe of auto component manufacturers.

The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends, competitive dynamics and the future outlook for the segment. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms.

6.3) DATA ANALYSIS AND COLLECTION

Overview

The Indian textile industry is one the largest and oldest sectors in the country and among the most important in the economy in terms of output, investment and employment. The sector employs nearly 35 million people and after agriculture, is the second-highest employer in the country. Its importance is underlined by the fact that it accounts for around 4% of Gross Domestic Product, 14% of industrial production, 9% of excise collections, 18% of employment in the industrial sector, and 16% of the country’s total exports earnings. With direct linkages to the rural economy and the agriculture sector, it has been estimated that one of every six households in the country depends on this sector, either directly or indirectly, for its livelihood.

A strong raw material production base, a vast pool of skilled and unskilled personnel, cheap labour, good export potential and low import content are some of the salient features of the Indian textile industry. This is a traditional, robust, well-established industry, enjoying considerable demand in the domestic as well as global markets.

India vis-à-vis Global Textiles

The global textile and clothing industry is estimated to be worth about US$ 4,395 bn and currently global trade in textiles and clothing stands at around US$ 360 bn. The US market is the largest, estimated to be growing at 5% per year, and in combination with the EU nations, accounts for 64% of clothing consumption.

The Indian textile industry is valued at US$ 40 bn with exports totalling US$ 19 bn in 2007-2008. At the global level, India’s textile exports account for just 4.72% of global textile and clothing exports. The export basket includes a wide range of items including cotton yarn and fabrics, man-made yarn and fabrics, wool and silk fabrics, made-ups and a variety of garments. Quota constraints and shortcomings in producing value-added fabrics and

71

garments and the absence of contemporary design facilities are some of the challenges that have impacted textile exports from India.

India’s presence in the international market is significant in the areas of fabrics and yarn.

India is the largest exporter of yarn in the international market and has a share of 25% in world cotton yarn exports

India accounts for 12% of the world’s production of textile fibres and yarn In terms of spindleage, the Indian textile industry is ranked second, after China, and

accounts for 23% of the world’s spindle capacity Around 6% of global rotor capacity is in India The country has the highest loom capacity, including handlooms, with a share of 61%

in world loomage.

India’s Textile Industry Structure

Cotton textiles continue to form the predominant base of the Indian textile industry, though other types of fabric have gained share in recent years. In 1995-96, the share of cotton and manmade fabric was 60% and 27% respectively. More recently, cotton fabrics accounted for 46% of the total fabric produced in 2007-08, while man-made fibres held a share of 41%. This represents a clear shift in consumer preferences towards man-made fabric.

The fibre and yarn-specific configuration of the textile industry includes almost all types of textile fibres, encompassing natural fibres such as cotton, jute, silk and wool; synthetic / man-made fibres such as polyester, viscose, nylon, acrylic and polypropylene (PP) as well as multiple blends of such fibres and filament yarns such as partially oriented yarn (POY). The type of yarn used is dictated by the end product being manufactured.

The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles, while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers.

It is well-established that India possesses a natural advantage in terms of raw material availability. India is the largest producer of jute, the second-largest producer of silk, the third-largest producer of cotton and cellulosic fibre/yarn and fifth-largest producer of synthetic fibres/yarn.

The industry structure is fully vertically integrated across the value chain, extending from fibre to fabric to garments. At the same time, it is a highly fragmented sector, and comprises small-scale, non-integrated spinning, weaving, finishing, and apparel-making enterprises. The unorganised sector forms the bulk of the industry, comprising handlooms, powerlooms, hosiery and knitting, and also readymade garments, khadi and carpet manufacturing units. The organised mill sector consists of spinning mills involved only in spinning activities and composite mills where spinning, weaving and processing activities are carried out under a single roof.

As in January 2008, there were 1779 cotton/man-made fibre textile mills in the organised sector, with an installed capacity of 34.1 million spindles and 395,000 rotors. Of these, 218 were composite mills which accounted for just 3% of total fabric production, with 97% of fabric production happening in the unorganised segment. Cloth production in the mill sector has fallen from 1,714 million sq mtrs in 1999-2000 to a projected 1,493 million sq mtrs in

72

2007-08, declining at a rate of 2% per annum. As a result, the number of sick units in the organised segment has also been growing rapidly.

The competitiveness of composite mills has declined in comparison to the powerlooms in the decentralised segment. Policy restrictions relating to labour laws and the fiscal advantages enjoyed by the handloom and powerloom sectors have been identified as two of the major constraints responsible for the declining scenario of the mill sector.

Nonetheless, overall cloth production in the country has been growing at 3.5% per annum since 2000, with growth driven largely by the powerloom sector. Being the largest manufacturer of fabric in the country, the powerloom sector produces a wide variety of cloth, both grey as well as processed. According to the Ministry of Textiles, there are 1.923 mn powerlooms in the country distributed over 430,000 units. The sector accounts for 63% of the total cloth production in the country and provides employment to 4.815 mn people.

The handloom sector is the second-highest employer in the country after agriculture. The sector accounts for 13% of the total cloth produced in the country, not including wool, silk and handspun yarn. The production of handloom fabrics had gone up to 4700 mn sq mtrs in 2007, from 500 mn sq mtrs in the 1950s, representing an annual growth of around 4%. The sector is weighed down by several problems such as obsolete technology, unorganised production systems, low The Man-made textile industry comprises fibre and filament yarn manufacturing units of cellulosic and non-cellulosic origin. The cellulosic fibre/yarn industry is under the administrative control of the Ministry of Textiles, while the non-cellulosic industry is under the administrative control of the Ministry of Chemicals and Fertilisers. XV productivity, weak marketing links, overall stagnation in demand and competition from the powerloom and mill sectors.

Knitting and hosiery units account for around 17% of fabric production in the country. According to data available for the year 2000, India had about 6,000 knitting units registered as producers or exporters and most of these units were registered as small-scale units.

Trends in Production

Yarn and fabric production has been growing annually at 1.9% and 2.7% respectively, since 2000. Yarn production has increased from 3,940 mn kg in 1999- 00 to 4,400 mn kg in 2007-08. Man-made yarn has driven much of this, showing a robust growth of 4.3% in the last five years. Spun yarn production and the cotton yarn sector have also grown, albeit less impressively, recording growths of 2.4% and 0.6% respectively.

Source: Ministry of Textiles, GoI

Fabric production has been growing at 2.9% annually between 2000 and 2008, driven primarily by the smallscale, independent powerloom sector. Growth in the 100% non-cotton segment touched 5%, followed by cotton fabric at 1.5% and blended fabric at 0.3%. Fabric production touched a peak 47000 million sq mtrs in 2007-08, and in Nov 08, production recorded a robust 9% growth compared to the corresponding period in the previous year.

Trade Scenario

According to the provisional DGCI&S data, textile exports during fiscal 2007-08 stood at around US$17.5 billion, recording a 22% growth year-on-year. Except for man-made

73

textiles, all segments in the textile industry, including handicraft carpets, wool and silk, have recorded a growth in exports during 2007-08 - the first year since the phasing out of the quota system in the global market.

Readymade garments (RMG) is the largest export segment, accounting for a considerable 45% of total textile exports. This segment has benefited significantly with the termination of the Multi-Fibre Arrangement (MFA) in Jan 08. In 2007-08, total RMG exports grew by 29%, touching US$ 7.75 bn. In 2003-04 and 2007-08, the growth in RMG exports was 8.5% and 4.1% respectively. The jump in 2007-08 exports has been largely due to the elimination of quotas.

Exports of cotton textiles -- which include yarn, fabric and made-ups -- constitute over 2/3rd of total textiles exports (excluding readymade garments). Overall, this segment accounts for 26% of total textile exports. According to the Ministry of Textiles, in 2007-08, total cotton textile exports Source: Ministry of Textiles, GoI Source: Ministry of Textiles, GoI XVI were worth US$ 4.5 bn, implying a growth of 27% over the exports in 2007-08, which were worth US$ 3.5 bn.

Man-made textiles exports have witnessed a decline of 2.5% in 2007-08. Between 1999-2000 and 2002-03, man-made textiles exports were growing at around 30% per annum. The slowdown began since 2003-04 and have been on the decline since.

Major export destinations for India’s textile and apparel products are the US and EU, which together accounted for over 75% of demand. Exports to the US have further increased since 2005, post the termination of the MFA. Analysis of trade figures by the US Census Bureau shows that post-MFA, imports from India into the US have been nearly 27% higher than in the corresponding period in 2007-08.

Investments

Investments in the textiles sector can be assessed on the basis of three factors:

Plan schemes such as the Technology Upgradation Funds Scheme (TUFS), Technology Mission on Cotton, Apparel Parks, etc. -- Under the TUFS scheme, a total of Rs 916 bn has been disbursed for technology upgradation. There are around 26 Apparel Parks in eight states in India, with a total estimated investment of Rs 134 bn

Industrial Entrepreneurship Memorandums implemented from 1992 to Aug 08, amounting to Rs 263 bn

Foreign Direct Investments inflows worth US$ 910 mn have been received by the textile industry between Aug 91 and May 08, which account for 1.29% of total FDI inflows in the country.

Though significant investments are being made in the textiles segment, the bulk of them are in the spinning and weaving segments. A cumulative total of US$ 6.67 bn in investment is expected by 2008. Of this, more than two-thirds is expected in the spinning and weaving segments, while only 25% is expected in processing and garment units.

74

Source: Ministry of Textiles

Government Initiatives

The Government’s role in the textile industry has become more reformist in nature. Initially, policies were drawn to provide employment with a clear focus on promoting the small-scale industry. The scenario changed after 1995, with policies being designed to encourage investments in installing modern weaving machinery as well as gradually eliminating the pro-decentralised sector policy focus. The removal of the SSI reservation for woven apparel in 2000 and knitted apparel in 2008 were significant decisions in promoting setting up of large-scale firms. Government schemes such as Apparel Parks for Exports (APE) and the Textile Centres Infrastructure Development Scheme (TCIDS) now provide incentives for establishing manufacturing units in apparel export zones.

The new Textile Policy of 2000 set the ball rolling for policy reforms in the textile sector, dealing with removal of raw material price distortions, cluster approach for powerlooms, pragmatic exit of idle mills, modernisation of outdated technology etc. The year 2000 was also marked by initiatives of setting up apparel parks; 2002 and 2003 saw a gradual reduction in excise duties for most types of fabrics while 2004 offered the CENVAT system on an optional basis. The Union Budget of 2005-2006 announced competitive progressive policies, whose salient features included:

A major boost to the 1999-established Technology Upgradation Fund Scheme for its longevity through a Rs 4.35 bn allocation with 10% capital subsidies for the textile processing sector

Initiation of cluster development for handloom sector Availability of health insurance package to 0.2 mn weavers from 0.02 mn initially Reduction in customs duty from 20% to 15% for fibres, yarns, intermediates, fabrics

and garments; from 20% to 10% on textile machinery and from 24% to 16% in excise duty for polyester oriented yarn/polyester yarn

Reduction in corporate tax rate from 35% to 30% with 10% surcharge

75

Reduction in depreciation rate on plant and machinery from 25% to 15% Inclusion of polyster texturisers under the optimal CENVAT rate of 8%

To meet the challenges of the post-MFA setup, the Government of India initiated a reforms process which aimed at promoting large capital investments, pruning cumbersome procedures associated with the tax regime, etc. The Textile Vision 2015 was born as a result of interaction between the government and the industry which has around 12% annual growth in the textile industry from US$ 36 billion now to US$ 85 billion by 2010. Additionally, Vision 2015 also proposes the creation of an additional 15 million jobs through this initiative.

6.4) FINDINGS

SME Insights

This study aims to draw a profile of how small and medium companies in the textiles space function; we have attempted to chart their operational structure, business practices, preferences, marketing, efficiency parameters, etc. For this quantitative exercise, a sample of 350 companies was considered; the requirement being that at least 80-90% of the information sought has been provided.

Some key characteristics of the sample of 350 companies are:

In terms of ownership pattern; proprietary firms are 24%, partnership firms 31%, private limited companies 27% and public limited companies 18%

The geographical concentration of the sample companies reflects the concentration of textile manufacturers in the country. The North and South have maximum representation. Around 37% companies are located in the North, 33% in the South, 26% in the West and 4% in the East

The sample of 350 companies has representation from all textiles clusters across the country, except from those based in Orissa and Madhya Pradesh

On the basis of investments in plant and machinery, around 92% of the companies are small scale enterprises, mirroring the low capital intensive nature of the industry (Figure 01)

In terms of the textiles industry sub-segments, 18% of the companies are into weaving, 16% into garmenting, 12% each into spinning and dyeing, 11% each into knitting and made-ups, 8% into printing and 2% in ginning (Figure 02)

Similarly on the basis of raw materials used, 43% companies are into cotton and cotton based products, 16% each in man-made and silk, 13% in blended and 10% use wool

Around 63% of the companies are only into manufacturing, while 37% are engaged in manufacturing as well as trading

Around 70% of the companies in the sample began operations during the 1980s and 1990s. Around 16% of the companies are relatively new which have begun operations post-2000

73% of companies have a single manufacturing facility while 27% operate with 2 or more plants

In terms of IT penetration, 42% of the companies have a website.

76

Turnover

The dominance of small-scale enterprises was largely reflected in the sample. Over 55% of the companies have an annual turnover of less than Rs 100 mn, with investments of less than Rs 20 mn. Another significant 35% were earning over Rs 100 mn but less than Rs 500 mn. Of the remaining companies in the bracket of Rs 500 mn and Rs 1,000 mn, the public limited and private limited companies dominated with a share of 52% and 26% respectively.

77

In terms of the regional spread of these companies, the southern region showed a higher proportion of companies falling in the Rs 250 mn and above turnover bracket. The northern region had a high share of small companies. The western region had a reasonably proportionate share of companies in the various revenue brackets. (Figure 03)

Ownership Structure

Though no distinct ownership structure was evident, but north-based companies showed a preference for proprietary form of ownership while south-based companies were prominently for partnership. The companies from the Western region were predominantly private limited companies. (Figure 04)

Comparing ownership structure with the turnover of companies revealed that proprietary firms were concentrated in the Rs 100 mn and below turnover bracket. The private and public enterprises were mostly in the Rs 500 mn and above turnover range.

Exports

Around 234 companies, or 67% of the sample, were exporting their products. Of these, 114 companies were 100% exporters with many of them exporting directly to foreign clients. Another 53% of the 234 companies export 90% of their total output. In terms of market access, 27% of the companies directly export 100% of their output to foreign clients, indicating they are part of the global value chain. Another 20% of the companies export only through trading houses. The remaining sell partly through trading houses and direct sales.

Of the exporting companies, only 35% have shown to have any kind of quality certifications. The average capacity utilization among exporting companies was relatively higher compared with those selling only in the domestic market.

The major export destinations were the US and Europe, with over 70% of the companies necessarily exporting to these countries. On an average, these companies were exporting at least 71% of their produce. The pre-dominant exporters were garment and fabric manufacturers having a share of 39% each. The other major segment was home furnishings. (Figure 05)

In terms of the various sub-segments in the textile industry and their exports, it was found that companies exclusively into made-ups exported, on an average, over 90% of their output, followed by garment firms, which on an average exported 82% of their produce.

78

Capacity Utilisation

Approximately 59% of the companies were operating at 80% and above of their installed capacity. Among these, 2% of the companies were operating across the value chain, from yarn making to garmenting. Companies in this sample, that were exclusively into weaving and garmenting held a share of 23% and 18%, respectively.

Regionally, the South-based companies reflected higher capacity utilization and were on an average operating at 86%. In terms of ownership, partnership companies constituted a significant 32% of those operating at more then 90% capacity. (Figure 06)

On the basis of size, the medium scale enterprises having turnover between Rs 500-1000 mn showed higher average capacity utilisation of an average 91% - endorsing the industry view that the bigger companies are able to fulfill more orders.

79

Figure 06

Top

Regional Products

Of the companies engaged in the manufacture of home furnishing products, 67% were located in North India. Fabric manufacturers had a strong presence in the South and North India, with a share of 34% and 31% respectively. Yarn manufacturers were concentrated mostly in the South, representing 59% of the yarn manufacturers.

In terms of the finished goods, representation of garment and home furnishings manufacturers in the sample was largely from the North. Industrial textile manufacturers were more in number from the Western region. (Table 01)

(as % of total companies)

Region Fabrics Yarn Garment HomeFurnishing

North 31.4 14.3 42.4 66.1

South 33.9 58.7 25.8 13.6

East 7.4 1.6 9.1 1.1

West 27.3 25.4 22.7 19.2

Growth

The companies in the sample were largely optimistic on growth prospects over the next two years. On an average, the players were expecting an average growth rate of 32% for the next two years, the garment firms being the most hopeful and expecting a 40% increase in sales. The other sub-segments that are expecting to do well are manufacturers of fabric and made-ups. (Figure 07)

80

In the last two years, the average growth for all companies in the sample was an average 28%. The Western region showed higher growth compared with the other regions.

Figure 07

Technology Upgradation Fund (TUF)

The number of companies that have availed of the TUF facility given by the government comprise 24% of the sample size. Of these, 53% are into yarn and fabric manufacturing. Another interesting factor is that nearly 73% of those benefiting from this Fund were small scale enterprises with investments in the range of Rs 10-50 mn. In terms of ownership, 37% of the companies were private limited companies.

Figure 08

Top

81

Funding

Funding Of the companies in the sample, 75% met their funding requirements from nationalised banks. Private Banks were next in preference for these companies, however with only a 13.5% share. Cooperative banks and MNCs were least preferred. There were 4% companies which utilized internal resources to meet their finances. Most respondents felt that availability of funds for future plans and working capital requirements was moderately difficult. (Figure 09)

Hindrances to growth

Of the companies in the sample, 29% of them perceive lack of infrastructure as the biggest hindrance to growth; over 50% of these companies being small scale enterprises with turnover less than Rs 100 mn. This concern was mostly highlighted by the south-based companies.

Almost 28% of the companies raised concerns regarding labor issues and an equal proportion highlighted lack of institutional support as their priority concern. These companies were mostly from the North, South and East. The garmenting and weaving segments mainly showed labour as their principal concern.

6.5) CONCLUSION AND RECOMMENDATIONS

FUTURE PROSPECTS

Expectations are high, prospects are bright, but capitalising on the new emerging opportunities will be a challenge for textile companies. Some prerequisites to be included in the globally competing textile industry are:

Imbibing global best practices Adopting rapidly changing technologies and efficient processes

82

Innovation

Networking and better supply chain management

Ability to link up to global value chains.

The Indian textiles industry has established its supremacy in cotton based products, especially in the readymade garments and home furnishings segment. These two segments will be the key drivers of growth for Indian textiles. Readymade garment exports were worth US$ 9 bn in FY08 and will cross US$ 20 bn by the end of 2015, assuming a conservative growth of 15% per annum. According to estimates, investments in textiles are expected to touch US$ 31 bn by 2010.

The readymade garment segment will be the principal driver of growth even in the domestic industry. The changing preferences of Indian consumers -- from buying cloth to readymade garments -- have prompted several companies to move up the value chain into the finished products segment.

Strategic Initiatives

Business integration -- especially forward integration -- by the larger textile companies has been prominent among Indian companies. Several companies that are engaged in fabric manufacturing, are now keen to enter the readymade garments space. A recent entrant is Siyaram, which launched its readymade garments range in Nov 06, following suit with other majors like Century Textiles and Raymonds.

Most of the large textile companies have opted for an inorganic growth strategy to scale up operations. Acquisition is the most logical step towards integrating operations and building the value chain. Domestic acquisitions are on the rise, while acquiring foreign assets is yet to gain traction. Some recent domestic acquisitions that have been executed in 2006 include KSL & Industries’ acquisition of Deccan Cooperative, and Ambattur Clothing taking over Celebrity Fashions. Another growing phenomenon observed among Indian textile companies is the setting up of manufacturing facilities in strategic regions outside India, where they can avail of duty concessions and reduce export lead-time. Zodiac and Ambattur Clothing have set up facilities in the Gulf region to cut down on export delivery schedules to the European and US markets. Raymonds has set up a unit in Bangladesh to avail of the zero duty access to the EU.

This trend is seen primarily among the large domestic players, who are trying to achieve sizable scales in order to win orders from the large retailers in the US and EU. Global retailers prefer large-sized companies that can scale up capacities consistently, keep up with delivery schedules and meet their growing demand. They have clear preferences for companies with integrated design, process and manufacturing facilities.

An interesting commonality in countries with successful garment exports is that they have a much lower level of sub-contracting than India. A study during the 1990s found that apparel firms Future Outlook XXXIII in India subcontracted 74% of their output, as compared to only 11% in Hong Kong, 18% in China, 20% in Thailand, 28% in South Korea and 36% in Taiwan. Consequently, these countries have a wider base of exports and have done very well in the market for large volumes of uniform products.

                       

83

The exports market will remain favourable for India till 2008, when quota restrictions on China end. Post 2008, competition will become tougher. This will be the phase in which Indian textile companies will come under tremendous pricing pressures and tighter product delivery schedules. Nevertheless, the value-added segments of readymade garments, home furnishings and made-ups will continue to grow.

Implications for SMEs

The new business dynamics have varying undertones across the value chain. The segment that is likely to be hit is weaving. The SMEs in the powerloom and handloom sector will face significant churn in the future. Spinning mills that account for 95% of the yarn and fibre production, will move up the value chain into weaving. This will erode the viability of the hitherto protected powerloom and handloom operators numbering over 400,000, who have remained insulated from competitive forces so far. A possible remedy could be for these weavers to align with bigger players or integrate operations that would ensure off-take of their products.

The fragmented industry structure has in the past been beneficial in generating employment, but will be difficult to sustain in a globally competitive environment. For fabric manufacturers in the unorganised segment, this will mean inefficient units losing out eventually, while the more efficient and dynamic ones aligning with manufacturers or buyers.For readymade garment SMEs, rising demand and preference for ready-to-wear outfits in the domestic market will sustain a large number of units in this sector. This will be the most thriving segment in the industry and SMEs will play a key role.

India’s key assets include a large and low-cost labour force, sizable supply of fabric, sufficiency in raw material and spinning capacities. On the basis of these strengths, India will become a major outsourcing hub for foreign manufacturers and retailers,with composite mills and large integrated firms being their preferred partners. It will thus be essential for SMEs to align with these firms, that can ensure a market for their products and new orders.

Weaknesses of the Indian textile industry include fragmentation of the industry, lengthMessages in this topic   (1) y delivery times, delays in customs clearance and high transportation and input costs. To tackle these factors, the Government will have to play a key role. Infrastructure development, reforms in labour laws and significant policy support will be essential.

84

7.0.) AUTOMOBILE COMPONENT INDUSTRY

85

7.1) EXECUTIVE SUMMARY.

The Auto Component sector has tremendous potential to encourage entrepreneurship, and was therefore selected for profiling in the first report of the series. The sector has emerged among the fastest growing industries in the Indian economy, with strong potential for global impact. The sector is projected to grow at a rate of 15-20% over the next decade. Further, the production process lends itself to operations that can be divided and tiered, and promises a wide range of opportunities for SMEs, considering the diverse nature of the industry.

Emerging Auto Component SMEs of India profiles 370 companies with a turnover of less than Rs 1,000 mn. Of these, 70 companies are not members of any industry associations or trade bodies, thus tapping a range of companies that have remained unrecognised.

The number of small and medium firms profiled is in the proportion of 43:57. Of the 370 companies profiled, 160 companies are small-scale firms with investments of less than Rs 50 mn in plant and machinery, and have a turnover range of Rs 50 mn to Rs 535 mn. The rest of the companies are medium scale and have a maximum turnover of Rs 1,000 mn.

The regional representation of companies in the report suitably reflects the concentration of the Indian auto component industry. We have covered companies from 17 states and 3 union territories. The list consists of 152 companies from the north, 128 from the west and 78 from the south, the major industrial clusters of auto component manufacturers in the country.

An interesting aspect of this industry segment, as revealed by our research, is that public sector banks are their principal lenders, with few dependent on private sector banks.

The auto component industry is expected to continue its high-growth period for at least another decade, and SMEs will play a pivotal role in this critical growth phase. Emerging Auto Component SMEs of India will provide the right platform to SMEs, enabling them to become globally competitive.

7.2) METHODOLOGY.

The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. As per the Micro, Small and Medium Enterprises Development Act of 2006, the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. Considering the challenges entailed in tapping financial information from a highly fragmented sector, Dun &

86

Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1,000 mn turnover for auto component SMEs.

Emerging Auto Component SMEs of India focuses on manufacturers of auto components; trading companies have been excluded. The report includes diversified companies operating in the auto component space and having business interests in other industries. The report has excluded subsidiaries of large Indian business houses, multinational companies and subsidiaries of multinational companies, thus honouring the true Indian entrepreneurial spirit that the SMEs represent.

The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Other considerations included financial growth performance over the past two years, growth prospects and production efficiencies.

Every effort was made to ensure that the report touches upon auto component manufacturers located across the length and breadth of the country. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. we identified a large universe of auto component manufacturers.

The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends, competitive dynamics and the future outlook for the segment. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms.

7.3) DATA COLLECTION & ANALYSIS.

Overview of Auto Component Industry.

The Indian auto component industry has been navigating through a period of rapid changes with great élan. Driven by global competition and the recent shift in focus of global automobile manufacturers, business rules are changing and liberalisation has had sweeping ramifications for the industry. The global auto components industry is estimated at US$1.2 trillion. The Indian auto component sector has been growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015.

The Indian auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labour cost, raw material availability, technically skilled manpower and quality assurance. An average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991. India’s process-engineering skills, applied to re-designing of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers.

87

Innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. Several large Indian auto component manufacturers are already gearing to this new reality and are in the process of substantially investing in capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas and setting up greenfield ventures, R&D facilities and design capabilities.

Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi, Rico Auto and Subros. The India’s Top 500 Companies, published by Dun & Bradstreet in 2008, listed 26 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn. These companies are in the process of making a mark on the global arena, and some have already acquired assets abroad.

Industry Structure

The total turnover of the Indian auto component industry is estimated at US$10 bn in 2008. The industry has the resources to manufacture the entire range of auto products required for vehicle manufacturing, approximately 20,000 components. The entry of global manufacturers into India during the 1990s enabled induction of new technologies, new products, improved quality and better efficiencies in operations. This in turn effectively acted as a catalyst to the local development of the component industry.

The Indian auto component industry is extensive and highly fragmented. Estimates by the Department of Heavy Industries, Government of India, indicate there are over 400 large firms who are part of the organised sector and cater largely to the Original Equipment Manufacturers (OEMs). Another 10,000 firms exist in the unorganised sector that operates in a tier-format. The firms in this segment operate in low technology products and cater to Tier I and Tier II suppliers and also serve the replacement market

Around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs. Within the unorganised segment, apart from supplying in the aftermarket, a number of players are also involved in job work and contract manufacturing. 

Source: ACMA   

88

The range of products manufactured, with each broad product segment having a different market structure and technology, has negated any possible concentration of the market in a few hands. The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. However, there are a select few large companies that have integrated their operations across the value chain. The key to competing in this industry is through specialisation by product-type, and integrating operations across the related area of specialisation.

An interesting insight provided by a study conducted by the National Council of Applied Economic Research revealed that the market segments for auto components included OEMs constituting 33%, local components having 25% with the balance 42% comprising of spurious market including re-conditioned parts. A large part of the spurious or grey market companies are in the unorganised sector.

The regional base of auto component manufacturers is mostly concentrated in the West, North and South of India.This regional concentration of auto component manufacturers has been dictated by the emergence of automobile manufacturers in these regions. The set up of Tata Motors, Bajaj, Mahindra & Mahindra and TVS in the 1950s and 1960s laid the foundation for auto component manufacturers in the West and South, whilst the entry of Maruti during the 1980s created the base in the North.

Industry Growth

Production of auto ancillaries was estimated at US$13 bn in 2007-08 and has been growing at a robust 20% per annum since 2000. Exports of auto components have been strong growing at 24% per annum since 2000. This growth in exports if sustained for another five years will see India’s auto components exports will touch US$ 8 bn by 2015 from the US$ 3.5 bn at present.

Till the 1990s, the auto component industry was solely dependent on the domestic automobile industry todrive the demand for ancillary products. This composition of the market however is undergoing radical changes with global outsourcing gaining momentum. In recent times, exports has emerged as a significant driver of growth, and the demand emanating from global OEMs and Tier I manufacturers has opened new opportunities for the auto component industry in India. At the same time, a bright outlook for the domestic automobile industry also offers significant growth potential, given the fast rising income levels with a rapidly growing middle and high income consumers. Share of exports in total production has risen from 10% in 1997 to 20% in 2008. The composition of exports in terms of the proportion of OEM and aftermarket has also undergone a sweeping change since the past decade. The ratio of OEM to aftermarket has changed from 35:65 in the 1990s to 75:25 in 2008. While exports have been booming, there has been a sharp rise in imports of auto components as well, especially in the last three years. From an import of US$ 250 mn in FY03, they have gone up to US$800 mn in FY08. This is a healthy trend, indicative of rising domestic demand.

Investments

Since 2000, the auto component industry has recorded an investment level of Rs 18 bn and has attracted US$ 530 mn in terms of foreign direct investment. Investments in the sector have been growing at 14% per year. In 2007-08, investments touched US$ 5 bn, and have grown significantly since then.

89

The Investment Commission has set a target of attracting foreign investment worth US$ 5 bn for the next five years to increase India’s share in the global auto components market from the present 0.4% to 3-4%. This is a sizeable target considering the meagre amount of FDI currently coming into the industry. The changing perception of global auto makers is however fast altering this scenario.

With less than 1% share in the global market, India has tremendous potential to emerge as a supply base. Several global giants like Ford and Toyota have already set up base in India to source auto components. Outsourcing is fast catching up with domestic OEMs as well, with most Indian OEMs today sourcing nearly 70-80% of their component requirements from vendors.

7.4) FINDINGS

SME Insights.

The small and medium enterprises segment has been a topic of intense deliberation among banks, financial institutions, industry and academicians. However, the paucity of authentic information on this segment has limited the estimation of value contributed by this integral constituent of India’s economy.

The research began with the leading consulting firms reports association member directories and trade listings. This database was further short-listed based on the criteria of being only manufacturing companies, having less than Rs 1,000 mn turnover and other parameters. These companies were contacted through various means. Of the responses received, 370 companies met the criteria set by D&B India, and have been profiled in the report.

Of the profiled 370 companies, 332 were considered for the purpose of this quantitative exercise. Some key characteristics of this sample include:

Ownership pattern of these 332 companies include proprietary firms 8%, partnership firms 12%, private limited companies 58% and public limited companies 22%

The firms included are to a degree replicating the concentration of auto component manufacturers across the country, with maximum representation coming from the North and West. Around 40% companies are located in the North, 37% in the West, 18% in the South and 4% in the East

Around 43% of the companies are small scale, and 57% are medium scale on the basis of their investments in plant and machinery

Of the 332 companies, 254 or 77% of the companies are having a website and 309 companies have an email facility

Over 60% of the companies in the sample began operations during the 1980s and 1990s. Around 7% of the companies are relatively new which have begun operations post-2000

Around 61% of companies have single manufacturing facility while 22% operates 2 plants.

Key observations and findings are covered below.

90

Turnover

The proportion of companies in the sample with a turnover above Rs 500 mn is high in the Southern and Western parts of the country. Around 15% of the companies from the South and 17% of those in the West fall in this bracket as compared to 8.5% in the North and 8.3% in the East. Around 90% of the auto component manufacturers in the East are small enterprises with a turnover less than Rs 250 mn.

Overall, around 41% of the companies have an income up to Rs 100 mn. Only 13% of the companies were in the turnover bracket of Rs 500 mn to Rs 1,000 mn, of which 58% are in the private sector while 35% are public limited companies.

Top

91

Demand

Around 57% of the companies are supplying to OEMs and Tier I suppliers. In terms of ownership, private sector companies are the largest suppliers to OEMs and Tier I firms followed by public limited companies. About 77% of total proprietary firms and 55% of partnership firms in the sample are supplying to only OEMs and Tier I companies. Around 30% of the companies are supplying to both OEMs and the replacement market.

Regionally, the North, West and South based companies are supplying to all segments of the market, while the East based companies are largely supplying to the OEMs. The North and West based companies are the largest players in the replacement market.

Top

Nature of Operations

Regardless of type of ownership, around 60% of the companies in the sample are operating on standalone basis, while the remaining are either into contract manufacturing or are ancillary units. Around 56% of these standalone companies are supplying to OEMs. Assessing in terms of ownership of these companies, over 70% of partnership firms, 60% of private and public sector firms, and 55% of proprietary firms are operating on a standalone basis.

Region-wise, over 50% of companies in the North, East and South are standalone companies while over 33% of the companies in the West are ancillary units.

92

Top

Exports

Almost 67% of the companies in the sample are exporting their products; 7% of the companies are totally export oriented. Around 21% of the companies export more than 50% of their produce. The major export destinations are Americas and EU, with over 60% of the companies exporting to these countries. The regional distribution of these exporting companies show a high concentration in the North and West accounting for 46% and 35% respectively.

Nearly 90% of the exporting companies in the sample have quality certifications. The private sector companies constitute a large portion of these certified companies, accounting for 59%. Proprietary and partnership firms constituted just 2%. Ownership-wise, the private sector companies were most dominant among the exporting firms, accounting for 56%, followed by public limited companies (25%), partnership firms (10%) and proprietary firms (7%).

93

Product Brands

In this sample, around 16% of the companies manufactures engine parts, 17% manufacture body & chassis parts, 13% manufacture suspension and braking parts and 14% manufacture drive transmission & steering parts. Only 35% of the companies sell their products under a brand name. Among these brand conscious companies, the private limited companies dominate holding a share of 61% followed by public limited companies with 25%. Branding among proprietary and partnership firms is low at 5% and 9% respectively. Over 55% of the companies with brands have indicated exploring new markets both in India and abroad. Around 31% of these companies are drawing up plans for undertaking innovative marketing initiatives.

Top

94

Collaborations

Only 11% of the companies in the sample have entered into joint ventures or collaborations, either with domestic or international companies. Some of these companies have multiple collaborations, while nearly 90% of the companies indicated having tie-ups with foreign companies in some form or the other.

The purpose for the collaboration varied, ranging from financial, strategic to marketing arrangements and technical tie-ups. Of the total companies in this basket, 57% have collaborated for technical purposes, while 13% have strategic alliances. The rest have marketing, production and financial tie-ups.

Capacity Utilisation

The companies were found to be operating on an average at about 75% of their capacity. Around 19% of the companies have a capacity utilisation of over 90%. These companies were mostly concentrated in the Northern and Western parts of the country. The private limited companies constituted 55% of all companies with above 90% capacity utilisation. On an average, theSouth-based companies showed higher capacity utilisation compared to the other regions. They exhibit an average capacity utilization of 77%. This was followed by the North with utilisation rate of 74%.

A noteworthy factor noticed from the sample was that the smaller the company the higher their capacity utilisation. The small companies, with investments less than Rs 10 mn, operated at 81% capacity, with the average capacity utilisation ranging around 77-78% for higher investments. Partnership firms showed higher capacity utilisation while public limited companies were the lowest.

95

Top

Growth

The companies have exhibited growth of an average rate of 35% over the last two years. The North-based companies conveyed a higher growth followed by companies in the Western region. Private sector companies showed the most robust growth followed by the public sector. Furthermore these companies are confident of maintaining the momentum over the next two years. Around 22% of the companies are expecting the industry to grow at a rate of 10-20%, while 30% of the respondents are expecting the domestic auto component industry to continue growing at 20% and above for another two years.

The companies indicating future plans for diversification, capacity expansion, modernisation and marketing accounted for 68% of the total sample. Of these, a large number (66%) are planning capacity expansion. Modernisation plans were indicated by around 45% of the companies, while 14% were planning marketing initiatives. A little over 55% of the companies intend to extend their reach by making forays into new markets.

Top

Funding

The most preferred source of funding among companies in the sample was the public sector banks. Nearly 66% of the companies preferred banking with public sector banks (PSBs) or

96

nationalised banks for their fund requirements, followed by private banks and cooperative banks. MNC banks were funding only 1% of the companies. There were approximately 4% companies that have funded their business through internal resources.

In terms of availability of funds, some 7% of companies in the sample have claimed difficulty in acquiring funds. These are primarily North and West based, standalone companies, with a turnover of less than Rs 300 mn.

Top

Hindrances in Business

Infrastructure and lack of institutional assistance were cited as the key hindrances to growth for these SMEs. Only 35% of the companies gave a response to this query. Around 56% of the companies that have responded complained of lack of infrastructure with close to 50% of the companies with issues pertaining to infrastructure from the Northern belt. Around 35% of the companies complained of marketing issues. This issue largely emanated from Maharashtra, West Bengal and Haryana.

97

Top

We hope that the fine points that have emerged from this study are useful for further deliberation.

7.5) CONCLUSION AND RECOMMENDATIONS

FUTURE PROSPECTS

Current trends indicate a smooth run for the auto component industry. In fact, since 2000, this is one sector which has made a global mark and has been identified as a sunrise industry. The industry is transforming from being highly domestic-centric, to a force ready to face global competition.

The factors that will drive growth for the auto component industry are:

The growth expected in the domestic automobile industry will give a fillip to the auto component sector. The Indian automobile industry offers great potential considering the low penetration along with rising income levels and a rapidly growing middle class. These factors will see a boost in demand for vehicles, especially passenger cars and two wheelers. These two segments are estimated to grow at between 10-12% for at least the next five years.

The entry of global OEMs, making India as their manufacturing base, has given a big boost to the industry. For instance, Skoda plans to source parts for its European operations from its Indian base and raise indigenisation level for Indian models to 70%. This trend has also enabled Indian companies to gain a competitive edge in the

98

global market. Further, the model of cluster-based development prominent in this sector will provide economies of scale.

Export of automobiles has also emerged as a key component of growth. Rising exports of Indian-made vehicles like M&M’s Scorpio model, Bajaj Auto’s Bikes, Tata Motors’ City Rover are indirectly increasing the demand for Indian auto components. Also, the export of India-made models of global OEMs like Hyundai’s Santro Xing and Suzuki’s Alto has given a boost to the industry.

De-regulation and the Government’s policy initiatives have facilitated growth and focus has now shifted towards attracting foreign direct investments. Also, the Government’s initiative towards road development will give a boost to demand for vehicles and indirectly auto components.

The Government’s initiatives towards opening up channels of finance. Investments coming in for research and development will keep the industry abreast

of the latest technology.

Entry of global OEMs has transformed the Indian automobile and auto components landscape. India is being perceived as a major market for cars and two wheelers by global OEMs. Before the end of 2010, at least 30 new car models are expected to be launched by foreign OEMs.

These factors portend a robust auto ancillary industry in India and the overall expected good growth will provide several opportunities for the emergence of new enterprises. Extending their reach to global markets is the pre-dominant outlook among the top auto component manufacturers in the country. The vision to compete globally comes from the inherent strengths the Indian auto component industry possesses. Some features are:

Cost reduction of 25-30% in production in the domestic market compared to overseas Low labour costs Designing, engineering and technical skills Established quality systems Availability of raw materials Adaptability to new technology Investments in research and development, coming in from global OEMs. This stands

out positively in favour of India. Key players are not only willing to invest in R&D but also in mechanical and engineering operations. These investments are expected to increase in the near future

Though India rides on these inherent strengths, a few risks exist that the auto component manufacturers may have to confront.

A global slowdown can derail the prospects of the industry. Volatility in the prices of metals and other inputs could erode the industry’s cost

competitiveness. Further, global OEMs expect a commitment of 5-10% reduction in prices every year.

Tier I manufacturers taking up greenfield projects overseas. Intense competition from counterparts in other emerging economies may add

pressure on margins of manufacturers.

The Indian auto component industry is poised for robust growth till 2015. There is a perceptive exuberance in the industry and growth estimates indicate a booming industry. Going by current trends in production and exports of auto components, indicate a doubling of the domestic auto component industry by 2015. The production of auto components could grow to US$30 bn by 2015. Similarly, India’s exports of auto components could grow

99

to US$4.5 bn as compared to US$1.8 bn in 2015. Achieved growth in production and exports of auto components is shown in the graphs below.

This growth outlook implies opportunities for the small and medium enterprises. The overall trend is encouraging, but remaining competitive in this changing scenario will be the toughest challenge. The combination of low manufacturing costs along with quality systems would give an edge to companies in terms of pricing and quality. Expansion and diversification will help break into new markets. It would be imperative for these companies, which are largely based on traditional management practices, to imbibe technology in a big way. The SMEs can exploit these opportunities through joint ventures, collaboration and technical tie ups. Knowledge, specialisation, innovation and networking will determine the success of the SMEs in this globally competitive environment.

100

8.0)PHARMACEUTICAL INDUSTRY

101

8.1)EXECUTIVE SUMMARY

Emerging Pharmaceutical SMEs of India attempts to provide a platform to the pharmaceutical SMEs, so as to facilitate their interface with potential global partners and buyers to tap ever increasing export opportunities by leveraging high quality Indian technical expertise. This report has profiled 271 companies with a turnover of less than Rs 1,000 mn.

The report covers SMEs based in 10 pharmaceutical clusters. The geographical spread of the industry mirrors the concentration of pharmaceutical companies in the country with the West region dominating with 56% companies based in three states – Goa, Gujarat and Maharashtra. Around 21% companies are located in the North, 19% in the South and 4% in the East. In the western region, Mumbai with 28% and Ahmedabad with 8% of total companies top the charts, while Hyderabad with 8% and Delhi with 10% are key hubs in southern and northern regions respectively.

Of the 271 companies profiled, as many as 225 companies provided us sufficient data points to enable a statistical analysis. Some of the insights revealed include:

In terms of ownership pattern; proprietary firms are 9%, partnership firms 14%, private limited companies 52% and public limited companies 25%

Around 50% of companies featured in the report export there products to various overseas destinations including US, Europe, Middle East, Africa etc. Moreover, exports, with a reported growth of 22% in the last five years, will continue to remain the biggest opportunity for pharmaceutical companies.

Going forward, R&D would be the key growth driver and survival strategy for SMEs. Interestingly, 12% of the SMEs considered for this analysis are keenly involved in R&D activities such as clinical trials and contract research.

The generic opportunities in the overseas market, growing domestic market, orientation towards R&D, CRAMs (Contract Research and Manufacturing Services) opportunities would keep the pharmaceutical industry on a high growth trajectory, and SMEs are expected to play a critical role. Emerging Pharmaceutical SMEs of India will provide the right platform for SMEs, enabling them to become globally competitive.

8.2)METHODOLOGY

The definition of small and medium enterprises (SMEs) in the Indian context has remained contentious until recently. As per the Micro, Small and Medium Enterprises Development Act of 2006, the Government of India has defined SMEs as entities that have an investment of above Rs 10 mn and below Rs 100 mn in plant and machinery. Considering the challenges entailed in tapping financial information from a highly fragmented sector, Dun & Bradstreet India (D&B India) has formulated a correlation between investment and turnover to arrive at a cut-off Rs 1,000 mn turnover for auto component SMEs.

102

Emerging Pharmaceuticals SMEs of India focuses on manufacturers of pharmaceuticals; trading companies have been excluded. The report includes diversified companies operating in the pharmaceutical and having business interests in other industries. The report has excluded subsidiaries of large Indian business houses, multinational companies and subsidiaries of multinational companies, thus honouring the true Indian entrepreneurial spirit that the SMEs represent.

The companies that qualified on the basis of turnover were further screened through another set of parameters to arrive at a truly representative list of emerging SMEs. Companies with negative net worth and those declared financially sick by the Board for Industrial & Financial Reconstruction (BIFR) were eliminated. Other considerations included financial growth performance over the past two years, growth prospects and production efficiencies.

Every effort was made to ensure that the report touches upon auto component manufacturers located across the length and breadth of the country. Based upon the Annual Survey of Industries (ASI) and National Sample Survey Organization (NSSO) And Centre for monitoring Indian economy and Capitaline database. we identified a large universe of auto component manufacturers.

The sections titled Industry Report and SME Insights are special analyses on the auto component industry which look at current trends, competitive dynamics and the future outlook for the segment. The SME Insights section presents analytical findings drawn from the primary information collated by the various research conducted by the leading consulting firms.

8.3) DATA COLLECTION AND ANALYSIS.

OVERVIEW OF PHARMACEUTICAL INDUSTRY

The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years, driven by rising consumption levels in the country and strong demand from export markets. The pharmaceutical industry in India is estimated to be worth about US$ 10 bn, growing at an annual rate of 9%. In world rankings, the domestic industry stands fourth in terms of volume and 13th in value terms. The ranking in value terms may also be a refl ection of the low prices at which medicines are sold in the country.

The industry has seen tremendous progress in terms of infrastructure development, technology base and the wide range of products manufactured. Demand from the exports market has been growing rapidly due to the capability of Indian players to produce cost-effective drugs with world class manufacturing facilities. Bulk drugs of all major therapeutic groups, requiring complicated manufacturing processes are now being produced in India. Pharma companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms.

In addition to having GMP, WHO, several Indian companies have also been getting plant approvals from international regulatory agencies like US FDA, MCA (UK), TGA (Australia), MCC (South Africa). India possesses the highest number of US FDA approved manufacturing facilities outside the USA and currently tops in filing the drug master files (DMF) with the US FDA. This has also facilitated the domestic industry to attract contract manufacturing opportunities in the rapidly growing generics market.

103

A paradigm shift occurred in the Indian pharmaceutical industry with India becoming a signatory to the WTO order, ushering in the Product Patent Regime. Earlier, with the enactment of The Patent Act, 1970, only process patent was applicable for pharmaceuticals.

With the introduction of the product patent beginning 01-Jan-05, which has now made India TRIPS compliant, the Indian market has become an attractive option for the introduction of research-based products. As a result, the Indian companies are now exploring new business models such as contract research, for drug and discovery research & development, as well as contract manufacturing.

However, it poses a challenge to the generics industry as it would no longer be able to freely continue with the production of generics of the new patented molecules without license/payment of royalty to the innovator company.

Industry Trends

A highly fragmented industry, the Indian pharmaceutical industry is estimated to have over 10,000 manufacturing units, as given by the Organisation of Pharmaceutical Producers of India. The organized sector accounts for just 5% of the industry with around 300 players, while a huge 95% is in the unorganized sector. A large number of players in the unorganized segment are small and medium enterprises and this segment contributes 35% of the industry’s turnover.

In calendar year (CY) 2008, turnover of the organized sector companies aggregated to Rs 302 bn, of which 19% came from MNCs while the remaining 81% was contributed by Indian companies. Turnover of players in the unorganized segment, though difficult to assess, is estimated to be around Rs 160 bn.

The Indian pharmaceutical industry consists of manufacturers of bulk drugs and formulations. Bulk drugs include the active pharmaceutical ingredients (APIs) which are used for the manufacture of formulations. According to estimates, the proportion of formulations and bulk drugs is in the order of 75:25. There are believed to be over 60,000 formulations manufactured in India in more than 60 therapeutic segments. More than 85% of the formulations produced in the country are sold in the domestic market. India is largely

104

self-sufficient in case of formulations, though some life saving, new-generation-technology-barrier formulations continue to be imported.

Among the therapeutic segments, the anti-infectives top domestic production in volumes. In 2007, the chronic therapy segment accounted for around 26% of the domestic formulation business, growing at a rate of 10%; faster than the acute therapy segment. The chronic therapy segment includes anti-diabetics, cardiac and neuro-psychiatry formulations.

Bulk drug manufacturing is largely concentrated in Andhra Pradesh, which accounts for more than one-third of the country’s total bulk drug production, followed by Gujarat. The Indian bulk drug industry has lately been gaining signifi cant presence in the global market as foreign and multinational companies are looking to sourcing APIs and intermediates from Indian manufacturers. Factors favouring the industry are a vast resource of technical people, stateof- the-art manufacturing facilities, low cost and the advantage of the English language. As part of government’s support to increase exports, duty free zones have been set up and several manufacturers of bulk drugs have been shifting their facilities to these areas. As a result, the diverse spread has now started getting consolidated and concentrated in certain regions across the country.

India has a significant share in the global generics market and is ranked third. In recent years, this segment has been facing stiff competition which makes the scale of production important to improve profitability. India has pre-dominantly been a generic player and has the potential to gain a global presence for the following key developments:

Multiple branded drug patent expirations in the short term. According to IMS Health, in 2007 and 2008 a total of US$ 28 bn and US$ 20 bn, respectively, of branded sales were likely to become susceptible to the entry of generic equivalents

Increasing confidence of consumers in generics in the developed markets A pro-generic sentiment from healthcare authorities driven by the pressure of

containing rising healthcare costs An aging population across the world, leading to increasing demand for low cost

therapies Global healthcare crisis like AIDS in the developing world, necessitating affordable

medication for the masses

Generic companies in India are recognizing the importance of patent expiries and are making significant incremental investments in research and drug development.

Production and Trade

The domestic bulk drug and formulation industry has been able to largely meet the domestic demand for these products. Besides, it also exports to several regions, including the EU and US. Exports currently constitute nearly 48% of the industry’s turnover, and have been growing at an average 22% annually since 1994. In FY08, exports grew by an impressive 21% touching Rs 300 bn.

The growing demand from the domestic market and increased manufacturing activities has led to rising imports during the past few years. In FY08, imports were worth Rs 50 bn as against Rs 35 bn in FY05. The nature of imports has undergone a significant change over the years, from finished doses imported prior to the 1970s, to largely bulk drugs today.

Domestic demand has been showing significant growth; the rise in consumption being primarily attributed to the rising population, rise in income levels and increasing health

105

awareness among people. New product launches by the Indian and multinational companies have also catalyzed market demand. Moreover, the favourable regulatory environment, increased expenditure on R&D and improved technical skills in the fi eld of chemical synthesis has also played an important role.

The increasing alliances and tie-ups of Indian companies with global players has further given a boost to Indian exports.

Key Drivers for the Pharmaceutical Industry

Growing orientation towards Research and Development (R&D)

The introduction of product patent in India has brought some fundamental changes in strategies of Indian pharmaceutical companies, with focus shifting more towards R&D.

The original Indian patent law, which recognized only process patent, gave Indian companies the opportunity to produce products under patent in overseas markets, particularly regulated markets, by adopting new processes. Consequently, companies were in advantageous position to produce drugs through reverse engineering at relatively very low cost that helped the domestic industry to grow faster during the initial stages of development. On the other hand, this discouraged multinational companies from launching their new products in India, fearing duplication of their new drug discovery through reverse engineering. As a result, MNCs’ market share declined from 70% prior to 1972 to 20% at present.

The introduction of product patent has led the domestic industry towards exploring new avenues of drug development, which would require higher capital investment in R&D, and greater thrust towards innovation. Current trends indicate that R&D expenditure of top domestic companies has increased from a mere 2% of total turnover in CY00 to nearly 4% in CY05. Though this is the average for the industry, top-line players have spent in the range of 8-10% during FY08. This level of expenditure is however low compared with the spending of 12-16% of turnover on R&D by international leaders.

R&D by Indian pharmaceutical companies is backed by a favourable policy environment and availability of surplus skilled technical workers at low costs. This is to the advantage of the sector and will see a significant thrust in coming years.

Leveraging CRAMs opportunities

The global pharmaceutical industry is increasingly facing cost pressures on various counts, and R&D productivity of these players has gone down significantly in recent years, under rising manpower costs and higher regulatory risk. In fact, the process of getting approval of new products in regulated market requires strict compliance of quality norms, which is stringent and is also subject to high legal risk. This factor is forcing MNCs to outsource part of their R&D and manufacturing activities to low cost destinations like India and China.

India is emerging as the global hub for contract research and manufacturing services (CRAMs) due to its low cost advantage and world class quality standards. The Indian pharma industry possesses world standard manufacturing facilities as per the GMP norms which are approved by various regulatory agencies across the globe. The diverse disease

106

profile and abundance of patients in India provides better ground for clinical trials. India has leveraged this advantage to attract clinical trials process outsourced by the companies involved in innovation.

Majority of the contract manufacturing deals relate to production of active pharmaceutical ingredients (APIs) and intermediates, in which India possesses competence. Nicholas Piramal, Shasun Chemicals, Divi’s Lab, Dishman Pharma, Cadila Healthcare, Lupin, Matrix Lab and Aurobindo Pharma are some of the companies which have witnessed impressive growth in revenues from their CRAMs business under various tie-ups with global pharmaceutical majors.

Growing exports

Exports have been the major growth enabler of the Indian pharmaceutical industry in recent years. India exports pharmaceutical products, APIs and intermediates to more than 200 countries across the world. Traditionally, Russia, Germany, Nigeria and India’s neighbouring countries like Sri Lanka, Nepal, and the Middle East were the major markets for Indian pharmaceutical exports. Most of these markets are not highly regulated and are considered to be low-value markets.

Remarkably, the proportion of exports in domestic turnover has been increasing over the years, despite the growing domestic demand. Currently, exports constitute 48% of estimated turnover of the industry as compared to nearly 35% during CY02.

Expanding presence in regulated market

Over the years, India has shown better regulatory awareness and superior technical skills, which has enabled Indian companies to penetrate the high-value markets like the US and EU. Exports of pharmaceutical products (finished products as classified under heading 30 of ITC-HS code) to the US grew by an impressive 33% to Rs 23 bn and by a whopping 62% to Rs 35 bn to the EU during FY04-FY06. Regulated markets, though difficult to penetrate due to stringent regulations, are known to give better value and margin to exporters

The increasing presence in high-value markets like the USA and Europe has strongly boosted the overall growth of the Indian pharmaceutical industry. However, with competition getting stiffer in the regulated markets and the consequent pressure on margins, Indian players are also expanding their geographical reach to high-growth regions such as the CIS and Latin American countries. Although considered as low-value markets, these markets are witnessing impressive growth and therefore it provides great opportunity for Indian players.

Rise in new product launches

In the pharmaceutical industry, new product launches create new demand. After the introduction of product patent in India, the domestic industry has witnessed a fresh spell of new product launches. New products launched since 2007 accounted for around 12% of the overall market growth. These launches have been done by both domestic and international players and some of them are first time launch of new chemical entity (NCE).

107

The rise in new launches of products has emerged as one of the important factors, which has driven the growth in recent past. In fact, the rate of launching new molecules had come down during the process patent era.

Key issues facing the Pharmaceutical Industry

Some of the issues the domestic industry is facing are as under:

Increasing span of price control

The draft National Pharmaceuticals Policy, 2006, currently underway and awaiting approval from the Parliament, intends to bring 354 drugs under price control, which is in addition to the 74 bulk drugs already notified under price control. The price control as proposed in the Policy is likely to cover at least 50-60% of the domestic market under price control. The proposed control on prices is set to impact the industry margin significantly, especially those players having only local operations. However, to secure the profitability, firms will have to increase their scale of production.

The number of drugs under price control had come down from nearly 400 in the 1970s to 72 in 1995, and further reduced to 29 in 2002. This decision was however stalled by the Supreme Court, asking the Department of Fertilisers and Chemicals, GoI, to identify the essential and life saving drugs that need to continue remaining under price control. The Department listed 354 items that it purchases for its hospitals called the National List of Essential Medicines (NLEM). The new draft policy consists of these 354 drugs that are likely to be under the cost based price control.

Price erosion in generics

Indian generics market is witnessing a margin pressure in most of the product categories due to two main reasons: the proposed price control likely to be imposed by the Government and the stiff competition among domestic players. In fact, India has witnessed a fast rise in the number of players over a period of time. Moreover, the expansion of capacities by certain leading players has also fuelled competition in certain product categories, which restricts margins of the smaller players.

The fall in prices of generic drugs are not limited to India only. The US, which is the world’s largest pharmaceutical market, is also experiencing a sharp reduction in prices of generic drugs due to stiff competition. Some other developed countries like the UK and Germany have also witnessed the same scenario. The erosion in prices is to the extent of 90% in some cases. Indian players, which have been operating in these markets, have also witnessed erosion in margins in certain therapeutic segments.

Low R&D productivity

Despite the increasing expenditure on R&D, the introduction of new molecules by Indian players has been limited. It is, in fact, a hit-and-miss situation in the field of discovery and developments of new chemical entity (NCEs), where misses are more than hits. Very few

108

discoveries reach the final stages of approvals, and in most of the cases, the claim for patent gets stuck in legal battles.

In spite of the rising expenditure in R&D, the level of investment in R&D is still low, at average 4% as compared to the global practice of spending 12-16% of sales on R&D.

The changing global pharmaceutical industry has transformed prospects of Indian pharmaceutical companies. The leading pharma companies in India have been actively extending the frontiers of scientific knowledge and going global through mergers and acquisitions. In 2005, acquisitions by the Indian pharmaceutical companies were the highest, with 20 buyouts abroad. A similar trend was observed during 2006, which include Dr Reddy’s buyout of Germany’s Betapharm and Ranbaxy’s purchase of Romania’s Terapia. Europe has emerged as the most preferred destination for acquisitions by Indian companies.

The European generics market has emerged as a major attraction for acquisitions by Indian companies. According to reports, margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic.

Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players. The Government has estimated that by year 2015, the industry has the potential to achieve a size of US$ 40 bn

8.4) FINDINGS.

SME INSIGHTS

This study aims to draw a profile of how small and medium companies in the pharmaceuticals space function; we have attempted to chart their operational structure, business practices, preferences, marketing, efficiency parameters, etc. For this quantitative exercise, we have considered all the 225 companies; the requirement being that at least 80-90% of the information sought has been provided.

Some key characteristics of the sample of 225 companies are:

Ownership pattern of companies include: proprietary firms 9.6%, partnership firms 14%, private limited companies 51.7% and public limited companies 24.7%.

Apart from Orissa, the sample covers companies from 10 out of the 11 pharmaceutical clusters identified.

The representation of companies is highest from the West with 56.1% of the companies located in this region. Around 21.4% companies are located in the North, 18.8% in the South and 3.7% in the East.

Around 82% of the companies in the sample are small scale enterprises on the basis of investments in plant and machinery. The rest are medium enterprises.

Bulk drug manufacturers constitute 8% of the sample, which includes 2% companies also into intermediaries. Another 5% companies are solely into intermediaries. Companies manufacturing allopathic formulations account for 74%, while 13% are into other forms of medicines like herbal and ayurveda.

In the sample, around 98% of the companies were necessarily into manufacturing either on their own or on contractual basis, but 75% companies were purely manufacturing companies with own facilities. Close to 1.5% of the companies were focused on only research & development, and another 10.5% of the companies were

109

doing R&D work (clinical tests as well as contract research) along with manufacturing. 13% companies were engaged in manufacturing as well as trading.

Around 57% of the companies in the sample began operations before 1990 while only 11% are relatively new having begun operations post-2000.

59% of the companies have a single manufacturing facility while the remaining operates with 2 or more plants.

Some key highlights have been presented below.

Ownership pattern

Private and public limited companies largely dominate the sample accounting for 76%, with 60% of these companies located in the western region of the country. It has been observed that pharmaceutical companies are largely concentrated along the coastal states. The largest number of companies with quality certification was among the private and public limited companies. Companies engaged in contract-based manufacturing were observed largely among private limited companies. Proprietary and partnership firms were mostly in the turnover bracket of less than Rs 10 mn. These companies largely sold their products in the domestic market.

Research & Development

Companies in the sample that have undertaken only clinical trials were small enterprises with investments of up to Rs 10 crore. Companies with investments between Rs 10-50 mn were engaged in manufacturing as well as clinical trails. The companies engaged in the dual function of manufacturing and R&D were mostly medium sized enterprises. R&D operations among companies did not show any connection with ownership patterns.

Exports

Of the total sample, 48% companies were exporting their products. The West-based companies were found to be dominating in terms of exports with 61% of those exporting concentrated in this region. The 100% export-oriented firms were mostly large companies with turnover above Rs 500 mn.

Region-wise exports classified by share in turnover

Nearly 87% of the exporting companies were found to be having quality certifications, a prerequisite in the pharmaceutical industry. A large number of these companies were operating in the anti-infectives, gastrointestinal, cardiac, and vitamins therapeutic

110

segments. Over 90% of these companies divulged future plans of accessing new markets or undertake product diversification.

Capacity Utilisation

On an average, the capacity utilisation in the sample was at 75.5% with the North-based companies being way ahead of the rest of the regions. These companies were operating at an average 82% of their capacity. There were 43% companies which were operating at more than 90% capacity utilization, and most of these companies were located in the West.

Finance

the pharmaceutical SMEs also showed a strong preference for banking with public sector banks. A massive 84% of the respondents revealed banking with PSUs, followed by co-operative banks. A large number of West-based companies were receiving funds from co-operatives. MNCs had a small share in funding of pharmaceutical SMEs in the sample.

111

Growth Trends

The turnover growth indicated by companies in the sample averaged around 23%. Most of the respondents were expecting growth to accelerate in the next two years to around 29%. The South and West-based companies were the most optimistic.

Hindrances to Growth

Some interesting aspects came to light when companies were asked what they perceived as the major hindrances to the growth of their business. Pertaining to lack of infrastructure, 56% companies who responded to the query agreed that infrastructure inadequacy was a big hindrance, with majority emphasising as investment in R&D as a big constraint.

A whopping 94% of the respondents viewed lack of institutional support as a major hindrance, the biggest worry being industry regulation along with price controls, taxes & duties imposed. 78% of the companies cited marketing issues and the lack of marketing and distribution networks. Quite a few of companies expressed apprehensions regarding the threat from spurious and counterfeits available in the market.

To conclude, the western region was found to be the most prominent and dominant region for pharmaceutical companies, especially Maharashtra and Gujarat. Concentration of companies in the higher turnover bracket was largely from this region and also in terms of exports.

112

8.5) CONCLUSION AND RECOMMENDATIONS.

FUTURE PROSPECTS.

The Indian pharmaceutical industry is passing through a transformation and industry players are organizing themselves to avail of the immense opportunities that have opened up globally. The sector is set to report impressive growth in the years to come and outlook for the industry remains strong.

Demographic factorsPopulation growth coupled with rise in per capita income and increasing health awareness are factors which will continue to drive domestic demand for the pharmaceutical industry. Demographic factors like population growth and improving life expectancy is set to drive domestic demand. According to projections given in the Economic Survey 2005-06, India’s population is likely to touch 14.11 bn by 2026. The proportion of population in the age-group of 15-65 years is likely to constitute 68% of the total population in 2026 as against 61% in 2001.

New product launchesAfter the introduction of product patent laws in India, multinational companies have shown renewed interest in launching some blockbuster products in India. This trend is likely to continue in future as well. Launches of new molecules by MNCs will accrue contract manufacturing and in-licensing opportunities for Indian players including the small and medium enterprises. SMEs have acquired expertise in formulations & chemical synthesis. Manufacturing under contracts gives them a safe position against margin fluctuations.

Increasing investments in R&DGiven the long gestation period right from the discovery of molecules to the final approval for marketing, the current investments made towards R&D will lead to sustainable growth. Some important molecules developed by Indian players have already reached different stages of clinical trials, some of which have reached the critical phase-II.

SME players, however, have been lagging in investments towards in-house R&D. To circumvent this fallback, several small players have started setting up separate clinical research unit. Doing so categorises them as a research organisation, thus giving them the edge in acquiring research contracts from the big players in the domestic, as well as international market. Already, several such companies have attracted sizeable contracts for research.

Growing generics market - an opportunity for IndiaIncreasing number of products getting off-patent and recognition of generic drugs by some developed countries is set to expand opportunities for India in the generics market. The generic industry is estimated to grow by more than 20% annually till 2008 and the total size is estimated to be around US$ 100 bn by 2010. In the US, generic drugs make up for 55% of the prescription written.

Leveraging the cost-effective production capabilities of Indian manufacturers, better scientific skills and favourable regulatory environment, the Indian pharmaceutical industry is well-placed to tap these opportunities. For SMEs which are largely engaged in the generics business, this rise in the generic market size will be to their benefit.

Growing exports marketExports will continue to remain strong and an enabler of growth for the pharmaceutical

113

industry. Impressive performance of Indian exports, achieved during last few years, is likely to continue in the near future. During FY08, exports grew by 21% despite the sharp price erosion in key generics markets. Exports as a proportion of the industry’s turnover have gone up to 43% in 2008 from 36% in 2002. Despite the growing competition in the global generics market and increased participation among developing countries in the global generics market, Indian companies have already proven their ability to compete.

CRAMs opportunities will continue to pick up

Contract manufacturing and contract research will gain prominence among the Indian pharmaceutical companies. There has been a spate of tie-ups and acquisitions by companies in the CRAMS segment in India. The driving factors include the rising manufacturing costs in developed countries and falling prices in the generics segment world over. India aptly suits the changing global scenario, having the largest number of US FDA approved facilities outside the US and low cost manpower with technical expertise. Contract manufacturing business is estimated to touch US $40 bn by 2015 and is likely to grow at 10-12%.

In the field of R&D, Indian companies are capable of conducting various clinical trials at relatively lower costs. Although India has also started experiencing rising bills on skilled manpower, it is still in a relatively advantageous position on the cost front. Contract research business is estimated at US$ 6-10 bn, and is growing in the range of 16-18%.

Price control remains the principal concernThe expanding span of control on drug prices in India remains the main concern for the pharmaceutical industry. As the price is proposed to be fixed on the basis of manufacturing costs and fixed margins, the volume of sales will determine the profits of the players. Under this situation SMEs may be hit due to the smaller economies of scale. Nevertheless, the price scenario in markets not under price control will witness a rise in prices due to increasing demand.

Hedge risk by changing the product mixDespite the price control on certain bulk drugs and formulations, it has been seen that the prices of medicines, on an average, have been increasing over a period of time. The increase in average price is attributed to the rise in prices of drugs not under control and upward revision in prices of certain controlled drugs owing to rise in input costs.

Most of the OTC drugs are out of the ambit of price control and recent trends show an impressive growth in the Over The Counter (OTC) segment. Therefore, the product-mix between prescription and OTC drugs or the mix of business between domestic and exports holds the key to profitability for players in general, and for SMEs in particular.

To sum up, despite the concern over pricing and huge investments in R&D leading to blocking of funds and resulting in short term obstacles, the industry is set to grow in the medium to long term on the strength of better R&D capabilities and rise in exports to a high value and high growth market.

114

115