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HDFC BANK

A Project Report

Submitted by

Abhishek Agrawal


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Welingkar Institute Of Management

SUMMER PROJECT REPORT

INDUSTRY & PORTFOLIO RESEARCH

PROJECT FOR

HDFC BANK

BY

Abhishek Agrawal

WELINGKAR INSTITUTE OF MANAGEMENT

DEVELOPMENT AND RESEARCH

UNDER THE GUIDANCE OF

Mr. Benjamin Frank

Sr. Vice president Wholesale Credit & Market Risk

PROJECT DURATION


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MAY-JUNE 2008

CERTIFICATE

This is to certify that Abhishek Agrawal, a student ofWelingkar Institute of Management,

Mumbai has successfully completed his Summer Internship at HDFC Bank, under my

guidance and supervision and submitted this report as a part of it.

This report meets the requisite standards and expectations from the companys side and

has not been reproduced from any other report, book or monograph.

Mr. Benjamin Frank

Sr. Vice President Wholesale Credit & Market Risk

Mr. Sumit Kakkar

Vice President & Head Emerging Corporate Credit Risk


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Acknowledgement

Any accomplishment requires the effort of many people and this is not an exception.

The collaboration and assistance of many people are involved in producing such a report. At

the end of this report, I would like to take this opportunity to thank all those people who

have helped in the successful completion of this training program.

First and foremost I would like to thank Mr. Benjamin Frank, Sr. Vice President

Wholesale Credit & Market Risk, to provide me with an opportunity to undergo training inthe company. I have learnt a lot from him and definitely the project would not have been a

success without his support and guidance. He has been of help in more ways than one by

being a constant motivating force.

I would like to express my deepest & sincere thanks to Mr. Sumit Kakkar, Vice

President & Head Emerging Corporate Credit Risk. He not only provided me with the

industry knowledge, but also gave me proper directions to effectively and efficiently

complete the project.

A special word of gratitude and appreciation is also due to Mrs. Farida Daruwala,

Assistant Vice President Wholesale Credit & Market Risk, for helping me gain an in-depth

knowledge about the Industry and for her constant attention and overwhelming support.

A vote of thanks to all the staff members at HDFC Bank for providing their timely

support and insights for enhancing my learning and making my summer internship

experience a memorable one.

Abhishek Agrawal


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Table of Contents

Topic

Page

No.

Acknowledgement 4

HDFC Bank at a glance 8

Executive Summary 12

Introduction 14

Objective 14

Scope 14

Research Methodology 15Limitations of the project report 15

Tea industry - a Snapshot 16

Classification of Tea 16

Industry Segmentation 17

Marketing of Tea 17

Factors influencing Tea Prices 17

Cost elements 18

Manufacturing Process 18

Value Chain 19

Some Facts about the Tea Industry 19Import trends 20

Area under cultivation 20

Industry Characteristics 20

Competiotion 20

Key success factors 21

Demand determinants 21

Export demands 21

Supply determinants 21

Growth drivers of the pachaged tea segment 21

Government Regulations 21Government schemes for Tea Industry 22

Key Financial Indicators 22

Player market shares (Domestic branded Tea market) 22

Performance Highlights 23

Outlook 23

Coal Industry - Snapshot 24

Types of coal 24

Industry Structure 25


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Evolution of Coal 25

Coal Mining 26

Open-cast Mining 26

Undergroung Mining 26

Some facts about the Coal Industry 27

Industry Characteristics 27

Legal provisions on royalty 28

E-auctions 28

Logistics 28

Growth Opportunities 29

Coal Washing 29

Coal consumption in Power sector 29

Coal Exploration 29

Policies and Regulations 30

Environmental Issues 30

Pricing 31

Key Financial Indicators 31

Performance Highlights 32

Outlook 32

ITeS Industry - Snapshot 33

ITeS sector in a nutshell 33

Positive factors affecting ITeS sector 33

Negative factors affecting ITeS sector 33

AT Kearney Scores for top 10 off-shoring destinations 34

Different segments where domestic ITeS industry has forayed into 34

Important factors required to sustain competitiveness 35

Competitve advantage under threat 35

The future plan of action - Domestic market 35

Latest trends in IteS space 35

New opportunities to explore 36

Factors that differentiate TOP ranked companies with lower rung companies 36

Ranking of the TOP 15 ITeS companies in India as on (2006 - 07) 37

Film Financing by Banks - A Report 38

Industry Overview 38

Recent State of Industry 38Commercial movies 38

Animated movies 38

Industry Segments 39

Production 39

Distribution 39

Exhibition 39

Value Chain 40

Business Model 41


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How does the Industry make money 42

Producer 42

Distributor 42

Exhibitor 42

Risk associated with Film Financing 42

Risk Mitigation factors 43

FDI :- International funds 43

Factors affecting the film Industry adversely 43

Where does a bank fit into the picture? 43

Process of film financing - by a bank 44

Important factors considered by a bank 44

Mode of finance 44

Cost heads 44

Steps followed by a bank for financing a film 45

Major risk associated with the film (from a bank's perspective) 45

How is risk mitigated 45

Other leading bank's Process 46

What does Production house expect from Banks? 46

Models of Film financing 47

Upfront guarantee model 47

Box-office model 47

Production house's procedure 47

Financial strength of the production house 47

Revenue generation from a movie 47

Conclusion 48

References 49

Annexure 1 : RBI Guidelines for Film Financing by Banks 50

Annexure 2 : Manufacturing Process (Tea Industry) 52


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HDFC Bank at a glance

The Housing Development Finance Corporation Limited (HDFC) was amongst the first

to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in

the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994.

The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its

registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled

Commercial Bank in January 1995.

Promoter

HDFC is India's premier housing finance company and enjoys an impeccable track

record in India as well as in international markets. Since its inception in 1977, the

Corporation has maintained a consistent and healthy growth in its operations to remain the

market leader in mortgages. Its outstanding loan portfolio covers well over a million

dwelling units. HDFC has developed significant expertise in retail mortgage loans to different

market segments and also has a large corporate client base for its housing related credit

facilities. With its experience in the financial markets, a strong market reputation, large

shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a

bank in the Indian environment.

Business focus

HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build

sound customer franchises across distinct businesses so as to be the preferred provider of

banking services for target retail and wholesale customer segments, and to achieve healthy

growth in profitability, consistent with the bank's risk appetite. The bank is committed to

maintain the highest level of ethical standards, professional integrity, corporate governance

and regulatory compliance. HDFC Bank's business philosophy is based on four core values -

Operational Excellence, Customer Focus, Product Leadership and People.

Capital structure

The authorised capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The paid-up

capital is Rs. 354.43 crore (as on 31. March 08). The HDFC Group holds 23.26% of the bank's


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equity and about 21.61% of the equity is held by the ADS Depository (in respect of the

bank's American Depository Shares (ADS) Issue). Roughly 31.3% of the equity is held by

Foreign Institutional Investors (FIIs) and the bank has about 190,000 shareholders. The

shares are listed on the The Stock Exchange, Mumbai and the National Stock Exchange. The

bank's American Depository Shares are listed on the New York Stock Exchange (NYSE) underthe symbol "HDB".

Distribution network

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable

network of over 761 branches spread over 327 cities across India. All branches are linked on

an online real-time basis. Customers in over 120 locations are also serviced through

Telephone Banking. The Bank's expansion plans take into account the need to have a

presence in all major industrial and commercial centres where its corporate customers are

located as well as the need to build a strong retail customer base for both deposits and loan

products. Being a clearing/settlement bank to various leading stock exchanges, the Bank has

branches in the centres where the NSE/BSE have a strong and active member base.

The Bank also has a network of about over 1977 networked ATMs across these cities.

Moreover, HDFC Bank's ATM network can be accessed by all domestic and international

Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express Credit/Charge

cardholders.

Management

Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this, Mr.

Capoor was a Deputy Governor of the Reserve Bank of India. The Managing Director, Mr.

Aditya Puri, has been a professional banker for over 25 years, and before joining HDFC Bank

in 1994 was heading Citibank's operations in Malaysia. The Bank's Board of Directors is

composed of eminent individuals with a wealth of experience in public policy,

administration, industry and commercial banking. Senior executives representing HDFC are

also on the Board.

Senior banking professionals with substantial experience in India and abroad headvarious businesses and functions and report to the Managing Director. Given the

professional expertise of the management team and the overall focus on recruiting and

retaining the best talent in the industry, the bank believes that its people are a significant

competitive strength.

Technology


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HDFC Bank operates in a highly automated environment in terms of information

technology and communication systems. All the bank's branches have online connectivity,

which enables the bank to offer speedy funds transfer facilities to its customers. Multi-

branch access is also provided to retail customers through the branch network and

Automated Teller Machines (ATMs). The Bank has prioritised its engagement in technologyand the internet as one of its key goals and has already made significant progress in web-

enabling its core businesses. In each of its businesses, the Bank has succeeded in leveraging

its market position, expertise and technology to create a competitive advantage and build

market share.

Businesses

HDFC Bank offers a wide range of commercial and transactional banking services and

treasury products to wholesale and retail customers. The bank has three key business

segments:

Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in

the Indian corporate to small & mid-sized corporates and agri-based businesses. For these

customers, the Bank provides a wide range of commercial and transactional banking

services, including working capital finance, trade services, transactional services, cash

management, etc. The bank is also a leading provider of structured solutions, which

combine cash management services with vendor and distributor finance for facilitating

superior supply chain management for its corporate customers. Based on its superior

product delivery / service levels and strong customer orientation, the Bank has made

significant inroads into the banking consortia of a number of leading Indian corporates

including multinationals, companies from the domestic business houses and prime public

sector companies. It is recognised as a leading provider of cash management and

transactional banking solutions to corporate customers, mutual funds, stock exchange

members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range

of financial products and banking services, giving the customer a one-stop window for all

his/her banking requirements. The products are backed by world-class service and delivered

to the customers through the growing branch network, as well as through alternative

delivery channels like ATMs, Phone Banking, NetBanking and Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank

Plus and the Investment Advisory Services programs have been designed keeping in mind


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needs of customers who seek distinct financial solutions, information and advice on various

investment avenues. The Bank also has a wide array of retail loan products including Auto

Loans, Loans against marketable securities, Personal Loans and Loans for Two-wheelers. It is

also a leading provider of Depository Participant (DP) services for retail customers, providing

customers the facility to hold their investments in electronic form.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and

Derivatives, Local Currency Money Market & Debt Securities, and Equities. With the

liberalisation of the financial markets in India, corporates need more sophisticated risk

management information, advice and product structures. These and fine pricing on various

treasury products are provided through the bank's Treasury team. To comply with statutory

reserve requirements, the bank is required to hold 25% of its deposits in government

securities. The Treasury business is responsible for managing the returns and market risk on

this investment portfolio.

Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit Analysis &

Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed Deposit

programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which represents

instruments considered to be "of the best quality, carrying negligible investment risk". CARE

has also rated the bank's Certificate of Deposit (CD) programme "PR 1+" which represents

"superior capacity for repayment of short term promissory obligations". Fitch Ratings India

Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned the "tAAA ( ind )" rating to the Bank's

deposit programme, with the outlook on the rating as "stable". This rating indicates "highest

credit quality" where "protection factors are very high".

Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a Corporate

Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating

Information Services of India Limited (CRISIL). The rating provides an independentassessment of an entity's current performance and an expectation on its "balanced value

creation and corporate governance practices" in future. The bank has been assigned a

'CRISIL GVC Level 1' rating which indicates that the bank's capability with respect to wealth

creation for all its stakeholders while adopting sound corporate governance practices is the

highest.


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Executive Summary

This report is divided into 4 parts. Each part in itself is a separate report for each of the 4

industries studied. The individual reports give a very brief but important outlook of the

sector covered. The report covers those aspects of each industry that are of utmost

importance for a credit analyst while analyzing a company in that particular sector. Each

sector study was done keeping in mind the information required to make a decision

regarding the credit approval/rejection by HDFC Bank. Such snapshot industry reports come

handy when instead of reading a voluminous externally published report with lot of

unrequited data, a comprehensive report with necessary and sufficient information is

available, for quick reference. It not only saves time but gives a snapshot of the industry in a

more readable format like graphs, charts and tables. Basically the report gives an

understanding of the key factors and dynamics of the industry. The 4 industries covered are:

Tea industry

The report on Tea Industry gives a snapshot of the industry covering various aspects

such as the existing and estimated production & consumption capacities, major companies

in this sector, demand drivers, manufacturing process, value-chain, growth opportunities,

industry characteristics, key success factors, performance highlights, government

regulations and future outlook. The report also gives a brief analysis of other major

countries involved in import and export of Tea all over the world. Lastly, a tabular

representation of the important financial data of major companies in Tea Industry (listed on

stock exchange or widely known) is shown.

Coal industry

Coal is one of the most important elements used to produce power, which in turn is

of utmost importance to any developed or developing country. The report on Coal Industrycan be of great use to a credit analyst trying to understand this business and get an

overview of the various important aspects such as industry characteristics, demand and

supply drivers, performance highlights, manufacturing process, environmental factors and

major companies and countries dealing in this industry. At the end a financial analysis of

various companies in Coal Sector in done and presented in a tabular format.

ITeS industry


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The report on ITeS sector involved the study of this sector with a view to find the

positive and negative factors that have a direct or indirect impact on the companies in this

industry. Both macro-economic as well as micro-economic factors were studied. The report

analyzed various important aspects such as competitiveness, future plans, latest trends and

growth opportunities for the ITeS industry. The report also gives Indias standing amongother countries and what factors are affecting the standing year-on-year basis. Finally a list

of top 15 companies in the sector was analyzed with a view to find out what differentiates

them from their peers/competitors and thus helps them to remain at the top spot. Such

analysis would help the companies at the bottom, to grow, and give a new perspective to

anyone analyzing this sector.

Film Financing

This is an untapped and unorganized sector as far as banks are concerned. In 2001,

RBI allowed private and public sector banks to provide finance for films. Till recently only a

couple of banks ventured into this sector owing to the high risk involved in this sector. HDFC

Bank had received quiet many proposals from production houses to do Film financing.

Therefore, before getting ahead with such proposals, HDFC Bank required to do an initial

level study about the Film Industry so as to understand the business model and the risk. Film

financing report emphasizes on understanding the business model from the perspective of

both, the Bank and the Production house.


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Introduction

Objective:

The objective of this report is to study and understand the 4 industries, in order to

help the credit analyst get an overview about them. The report gives a very brief but

important outlook of the each industry covered. Each sector study was done keeping in

mind the factors that are of utmost importance for a credit analyst while analyzing a

company in that particular sector, so as to make an assessment and a decision regarding the

credit approval/rejection. Another objective was to cover a wide range of sectors. In order

to accomplish this, one industry from manufacturing sector (Coal Industry), one from service

sector (ITeS industry), one from agricultural sector (Tea Industry) and one from

entertainment sector (Film Financing) were covered. Also, while others are organized

sectors, Film financing is an untapped and unorganized sector, so there is no ready data or

report available to understand it. A lot of primary research was done in order to accomplish

and successfully complete this report. The 4 industries covered are:

1. Tea industry2. Coal industry3. ITeS industry4. Film Financing

Scope:

Industry research is broader in scope and examines all aspects of a business

environment. It asks questions about industry characteristics, growth drivers, demand-

supply scenario, competitors, market structure, government regulations, economic trends,

cost elements, performance highlights, outlook over near future, manufacturing process,

technological advances, historical trend analysis and numerous other factors that make up

the business environment. Sometimes the term refers more particularly to the financial

analysis of companies, industries, or sectors. In this case, industry research and financial


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analysis is done to help the credit analyst in understanding the industry with necessary and

sufficient information.

The scope of this project was to study the 4 sectors and make a report to help the

credit analyst understand the important aspects of the industry so as to make a decision

regarding credit approval/rejection. The scope was limited to Banks perspective and does

not in any way reflect on the overall characteristics of the sectors covered.

Research methodology:

1. industry reviews/ company reports2. Numerous articles from newspapers, trade journals, industry portals and magazines

have been used to collect latest data and compile in a form most suited to get a

quick understanding of each industry covered.

3. Databases like Capitaline have been used to get the financial statistics about specificcompanies within each industry.

Limitations of the project report:

1. The HDFC specific data (Portfolio research part) has been removed from the reportsubmitted to college in order to maintain confidentiality.

2. In film financing, the secondary data is taken from reliable sources on Internet. Forprimary data, the study required to find the perspective of the bank. There are two

banks which are highly involved in film financing, however only EXIM bank could be

contacted; IDBI bank was not ready to reveal/share any information.

3. For the companies studied in each sector, companies where randomly chosen fromthose listed on the stock exchanges or widely known in each sector.


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Tea Industry - Snapshot

No. of domestic manufacturers: Over 200

Major domestic players: Hindustan Lever Ltd,

Tata Tea Ltd, Mcleod Russel India Ltd.,

Goodricke group Ltd, Jayshree Tea & Ind Ltd,

Apeejay tea, Gujarat Tea Processors and Packers

(GTPP), Dhunseri Tea Industries Ltd.

Prominent Global Players (countries): China,

Kenya, SriLanka, Bangladesh, Indonesia

Production capacity (aggregate 2007)

1. Existing:Worldwide: 3300 million kg

Domestic: 945 million kg

2. Estimated: 989 million kg 2009

Demand Analysis:

3. Existing: (2007)Domestic: 801 million kg

Exports: 156 million kg

4. Estimated: (2009)Domestic: 849 million kg

Exports: 180 million kg

Main Buyers:

5. Domestic: Individuals, Hotels, Corporateoffices.

6. Overseas Buyers: China, Russia, UK,

Related Sectors: Coffee industry


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Japan, Pakistan, US

Classification of Tea:

Source: Crisil Research

Industry Segmentation:

1. PlantersTea growers, who primarily sell their produce at auctions and to exporters.

2. Planters-cum-traders (Integrated)Originally tea growers, who diversified into the packaged segment to insulate

themselves from fluctuations in auction prices. They are present throughout

the value chain, from estate operations, manufacture and processing of tea,

blending to marketing and sale.

3. Non-integrated playersPlayers who do not own tea plantations. They purchase tea and then blend,pack and market it.

4. Non-corporate Entities1. Green leaf growers (GLGs)2. Bought leaf factories (BLFs)

Marketing of tea:

5. Indian auctions6. Private sales outside auctions7. Direct exports


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Auctions continue to be the biggest distribution channel. Auction offers the benefit of

acting as a single-point mechanism for sourcing varieties of tea, thus helping both the

producer and the buyer. It also allows the small growers, who cannot afford a distribution

network, to sell their produce at a reasonable price. Auction services do not require a broker

for determining the quality of tea, as auction centres have their own apparatus for tastingand blending.

There are 7 auction centres, located at Guwahati, Siliguri, Kochi, Kolkata, Coonor,

Coimbatore and Amritsar, with Guwahati being the world's largest CTC (crush, tear and curl)

tea auction centre.Factors influencing tea prices:

Cost Elements:

Cost Factor % of

sales

Description

Man Power

Cost

40% It has increased from 31% in 1998 to 40% in 2007. The rise can be

attributed to declining productivity levels and the impact of high

social and fixed overhead element in the wage structure. Labour

costs for the tea industry are subject to provisions of the Plantation

Labour Act 1951.

Short Term Medium Term Long Term

Climatic conditions Acreage in major producing nations Demographic changes in

major consuming nations

Economic downturn in

any major consuming

nation

Emergence of new producing

nations, especially in the East

African region.

Changes in tea-drinker's

preferences over time.

Yield and age of bushes Emergence of other

substitute beverages

Re plantation efforts undertaken by

major producers.

Changes in orthodox to CTC mix


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Raw Material 13% Non-integrated players have a higher incidence of material cost.

Material cost comprises tea bought at auctions (in addition to

production) and green leaf purchases. For integrated players, the

decision on quantum of auction purchases is a trade-off between

prevailing auction prices and the cost of production on ownplantations.

Capital

Investment

2-3% Capital costs are limited to the initial investment in plantation land

and setting up of a processing factory, besides the periodic

expenditure on re plantation and pruning intended to maintain the

yield and quality of produce.

Financing

Cost

6-8% Despite the low interest rate scenario, financing costs in the tea

industry have been rising steadily. Over the years, the interest

coverage ratio has improved.

Power & Fuel 10% It has increased over the years on account of the increasing prices of

coal and fuel oil. In per kg terms, energy costs are high and work out

to Rs 5-7 per kg, mainly because the industry is classified as a HT

consumer, despite the relative simplicity of its processing

operations.

Taxes &

Duties

30% The effective rate of direct taxes (for integrated players) is high,

because of the simultaneous levy under the Central Income Tax Act

at 30 per cent (on 40 per cent of profits) and under the State

Agricultural Tax Act at rates of 30 per cent and above (on the

balance 60 per cent of profits).

Selling Cost 7-8% The ratio of selling costs is higher for major branded players such as

Tata Tea Limited at almost 13-14 per cent of sales. Selling costs of

players in the branded market are higher on account of expenses

incurred by them on promotional activities.

Manufacturing process:

The diagrammatic representation of the manufacturing process is shown in

Annexure 2

Value-Chain:


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Some Facts about the Tea Industry:

1. India is the world's largest consumer and second largest producer (China being first)of tea, and accounts for 28% of the global supply.

2. Tea is a significant foreign exchange earner; hence it has a large share in India'sexports.3. Tea production is mostly concentrated in North India.

4. Major tea producing states are Assam, West Bengal, Tamil Nadu, Kerala, andKarnataka.

5. Consumption is growing at 3% per annum.6. Exports for 2007(Jan-Dec) were 28.3 per cent lower at 156.7 million kg. The decline

in exports were on account of the following:

1. Strong rupee appreciation that rose more than 12 percent in 2007.2. Sharp drop in exports to Iraq, given the bad experience of several exporters

who had found a problem of remittance against past exports.

3. Lower off take from Pakistan and Kenya.7. According to industry sources, on an average, the most productive age of the tea

bush is 11-20 years. Productivity remains stable between 20 and 40 years of age,

after which it starts declining. The current age profile of tea plantations suggests that

about 36 per cent are below their peak yield.

8. The emergence of Sri Lanka, Kenya and China as major competitors, the dismantlingof the erstwhile USSR and uncompetitive pricing of Indian tea as a result of high

costs and taxes viz--viz Kenya and China have been some of the key factors for the

decline of India's Tea exports in the last few years.


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9. The Monopolies Restrictive Trade Practices (MRTP) Act, which restricted the growthof large tea companies, was abolished in 1991. Moreover, the gradual decline in

auction sales, following the growth in the consumption of packaged tea also resulted

in greater consolidation in the industry.

10. Import Trends:1. India's tea imports are minimal, meant chiefly for re-export.2. Tea was on the restricted items category of the negative list of imports till

1998.

3. Many government policies, combined with the oversupply situation has keptimports at low levels.

11. Area under cultivation:1. India has the second largest area under cultivation after China.2. Government policies in the form of Land ceiling Act, 1956 and the national

forest policy have affected growth in the area under cultivation.

3. Further the land policy of 1979 does not permit surplus land with thegovernment to be transferred to the corporate sector for tea cultivation.

4. In 1994, around 7000 hectares were added, and again during 1998-2000about 70,000 hectares were further added.

Industry Characteristics:

1. The tea industry is seasonal, with production and quality varying from month tomonth. Conditions conductive to the growth of tea are a combination of warm days,

long hours of sunshine, high humidity and adequate rainfall.

2. The industry is characterized by the presence of a large number of unorganizedplayers. The leading 20 players account for only about 47 per cent of total domesticvolumes. The balance is accounted for by integrated SMEs, BLFs, merchant exporters

and regional retailers.

3. This labour-intensive industry employs over 2 million workers directly and another10 million indirectly.

4. The Indian tea Industry is characterised by levy of multiple taxes. Tea companies arerequired to pay corporate tax on a certain percentage of their profits and the

remaining profits are subject to state agricultural income tax.

5. The domestic tea industry is highly regulated. Government policies influence theindustry's key aspects right from the raw material to the end-product stage.

6. Competition:1. The tea industry faces competition from alternative beverages such as juices

and cool drinks.

2. It also competes against coffee in traditional coffee drinking belts.3. Tea board has been promoting tea as a health drink, and not just a refreshing

beverage. The tea board has sanctioned a Rs.200-million advertising package

for the purpose.

4. Competition from regional players.


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Key Success Factors:

1. Demand Determinants: Population growth, Trends in per capita consumption,Export prospects.

2. Export demands:1. Being the largest producer, India is a major player in the export market,

accounting for 14% of the world exports.

2. Exports have fallen on account of a shift in consumption pattern from CTC toorthodox as well as substitution of Indian tea with tea from lower cost

producers such as Sri Lanka, Kenya and Indonesia.

3. Supply Determinants: Age profile of bushes, Yield, Climatic and soil conditions, Areaunder cultivation.

4. Growth drivers of the packaged tea segment: Rise in affordability, Qualityconsciousness, Player initiative to step up packaged tea sales, Relaxation of TeaMarketing Control Order (TMCO) provisions.

5. Branding6. Value Addition7. Strong distribution network and retail outlets.8. Mechanization and automation of operations.1. Vertical expansion: Land rejuvenation and replanting activities.Government Regulations:

1. Special Purpose Tea Fund (SPTF)This regulation was implemented for Re plantation and rejuvenation of ageold bushes to improve their productivity and quality of tea.

2. Tea Marketing Control OrderIn 1984, the Ministry of Commerce promulgated the Tea Marketing Control

Order (TMCO), which mandated all tea producers to sell 75 per cent of their

output through auction centres in India. The order was primarily issued to

protect small tea growers from payment delays or defaults arising from

private sales. The TMCO was revoked in December 2001 to allow unrestricted

sales of tea outside the auction system, with an intention to improve

prevailing prices of tea. The government re-formulated a new order, TMCO,

in January 2003.3. Regulations pertaining to increasing area under cultivation

The Central government has made it mandatory for manufacturers, growers

and brokers of tea to obtain a Licence from the Tea Board prior to the

commencement of business operations.

4. Management or control of tea units by the Central governmentIn this, the Central government has the right and power to take over the

board (management) or control of a tea unit, or authorize any person(s) to

take over control of a tea unit under a few circumstances.


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5. Control over prices and distributionIn this, Central government has the power to control maximum or minimum

prices, which may be charged by a grower, manufacturer or trader in tea in

the domestic or export market.

6. Tea (Distribution and Export) Control Order, 2005In 2005, the Government of India introduced Tea (Distribution and Export)

Control Order, 2005. which replaced the earlier Tea (Distribution and

Export) Control Order, 1957.

7. Quality controlAs a food product, tea is governed by the Prevention of Food Adulteration

Act (PFA).Government Schemes for Tea Industry:

8. Scheme to boost production of orthodox tea.9. Market expansion scheme10. Price sharing formula11. Quality up gradation and product diversification subsidy scheme.12. 100 per cent FDI in the plantation sector.13. Crash tea up gradation scheme.14. Plan allocationsKey Financial Indicators:

All figures in Rs. Crores

Name Net Sales PBDIT Operating

Margin

PAT TNW TOL/TNW

Ratio

Current

Ratio

Tata Tea* 1054.47 386.92 29% 306.57 1521.86 0.39 0.52

Mcleod Russel* 604.42 117.33 8% 47.47 544.47 0.9 0.45

Goodricke Russel* 236.5 20.19 3% 7.73 69.06 0.48 1.16

Jayshree Tea* 239.41 19.98 2% 5.63 134.34 1.02 1.17

Apeejay Tea* 92.56 8.89 1% .69 64.31 1.07 2.03

Gujarat Tea** 205.78 16.74 5% 9.72 45.3 0 2.43

Dhunseri Tea* 65.98 14.34 11% 7.07 71.84 0.68 0.66

*The data is for year ended March 2007 **For Gujarat Tea, the data is for year ended March 2005

Player Market Shares (Domestic branded tea market):


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Company Name % Share

Hindustan Unilever 32%

Tata Tea 23%

Wagh Bakri 5%

Duncans 5%

Goodricke 2%

Eveready 2%

Jayshree 1%

Dhunseri 1%

Others (i.e.; local and regional players) 30%

Performance Highlights:

1. Production in April 2008 increased by 22.4 per cent compared to April 2007 levels.2. North Indian tea production up to April (January-April) increased by 6.9 per cent to

96 million kg, while South Indian tea production, up to April 2008, increased by 18.9

per cent to 74 million kg.

3. Exports up to April 2008 (January-April) increased by 3.3 percent to 55.1 million kg.For the month of April 2008, exports increased by 33.7 per cent to 11.9 million kgagainst the same period previous year, this was mainly due to higher demand from

Pakistan.

4. Average auction prices in May 2008 were Rs 78.25 per kg, 15.2 per cent higher (y-o-y).

5. To boost the domestic tea vending industry, the commerce ministry has increasedthe cap on export oriented units' (EoU) sale of instant tea in the domestic tariff area

(DTA) from the existing 20 per cent of f.o.b value of exports to 30 per cent.

6. In 2007-08, the average price per kg of tea was Rs 98.36, which was higher by Rs 4.59as compared to 2006-07. However, the volume shipped dropped to 155.59 millionkgs, which is 62.56 million kgs lower than the 2006-07 level. Consequently, overall

earnings declined from Rs 2,045 crore to Rs 1,530 crore.

7. Tea production declines in Kenya; increases in Sri Lanka.Outlook:

1. Production will increase marginally at a CAGR of 0.4 per cent over next 2 years.While average yield from tea plantations may improve, the area under tea would


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decline marginally with the implementation of the Special Purpose Tea Fund (SPTF)

scheme. This would result in stagnant production.

2. Considering the growth in tea drinking population and per capita consumption, thedemand for tea is expected to grow at a CAGR of 2.89 per cent over 2007-2011,

which would tighten the demand-supply gap leading to price rise by a further 5-6 per

cent in 2008.

Coal Industry - Snapshot

No. of domestic manufacturers: 45

Major domestic players: South Eastern

Coalfields Ltd (SECL), Northern Coalfields Ltd

(NCL), Eastern Coalfields Ltd (ECL), Bharat

Coking Coal Ltd (BCCL), Mahanadi Coalfields

Ltd (MCL), Tata Steel, SAIL.

Prominent Global Players (country): Peabody

Energy(US), Rio Tinto(US & Australia), China

Shenhua Energy (China), Arch Coal (US).

Production in India

Coking Coal

1. Proved: 165412. Indicated : 134533. Inferred : 2102

Non-Coaking Coal

1. Proved : 793252. Indicated : 1063163. Inferred : 35564


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Main Buyers : Power Generation companies Related Sectors: Power, Steel products, Steel

intermediaries, Cement Industry

Types of Coal:

1. For commercial purposes, there are different grades of coking, semi-coking and non-coking coal.

1. Coking coal is broadly categorized on the basis of ash content while non-coking coalis graded on the basis of useful heat value (UHV).


Industry Structure:


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Evolution of Coal

2. There are different types of coal, based on their heating value, ash-meltingtemperature, sulphur and other impurities, mechanical strength, and many other

chemical and physical properties.3. There are four stages in coal formation peat, lignite, bituminous and anthracite.

The conditions to which the plant remains were subjected to when they were buried

determines the type of coal. Thus, the greater the pressure and heat the plant

remains were exposed to the higher the rank of coal. Higher-ranking coal is denser,

contains less moisture and gases, and has a higher heat value than lower-ranking

coal.


Coal Mining:


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Broadly there are two ways to mine coal:

1. Open-cast/surface miningOpen-cast mining is open from the top. In such mines, the whole portion of

land is dug from the top until the coal seam is sighted. In such mining, the

top-soil is cleared by removing overburden from the seam, and then blasting

and removing the coal. The ratio of overburden excavated to the amount ofcoal removed is called the overburden ratio and the lower the ratio, the more

productive the mine.

There are several types of surface coal mines:

1. Area surface mines2. Contour mining3. Mountain-top removal mines4. Underground mining

In this type of mining, coal is found deep inside the earth. This depth can vary

from a few metres to more than 1,000 metres. Here, a small portion of land is

excavated until the coal seam is found. Such mines have to be developeddeep inside the earth, which is very difficult. This also affects the productivity

vis--vis open-cast production. When the coal seam is found, different

techniques are applied to extract coal.

In underground mining, there are two main methods of extracting coal:

1. Room-and-pillar (bord-and-pillar)2. Long wall mining



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Some Facts about Coal Industry:

3. The Indian coal industry is the fourth largest in terms of coal reserves and thirdlargest in terms of coal production in the world.

4. The world's proven reserve base can last up to 155 years at the current pace ofproduction. Also, these reserves are distributed well across all continents unlikeoil, which is dominant in a few parts of the world.

5. The total Coal reserves in India were 287 billion tonnes in 2007. Out of this, 255billion tonnes was non-coking coal and rest was coking coal.

6. Coal has become an irresistible option, owing to its abundance, its distribution, andits affordability and most of all due to the advances in clean coal technology.

Moreover, the scarcity in oil and gas and their soaring prices favour coal, making it

an important fossil fuel for fulfilling future energy requirements.

7. Coal accounts for around 54 per cent of the country's total energy needs.8. Primary energy consumption in India has grown by 163.6 per cent in the last 2

decades, while coal production has grown by 151.9 per cent. The current estimatedper capita primary energy consumption in India is about 362.5 kilogramme oil

equivalent (kgoe) per year.

9. China is the largest producer and consumer of coal in the world.10. Of the total energy consumption in India, around 55 per cent comes from of coal.11. India has huge coal reserves 253 billion tonnes as on January 2006. Of this, proven

reserves are estimated to be 96 billion tonnes. Indian coal deposits are spread over

27 major coalfields, which are mainly confined to the eastern and central parts of the

country.

12. India accounts for around 10 per cent of the total proven reserves in the world.13.

Coking coal is mainly used in steel plants and foundries, while non-coking coal isused in power, cement, and other sectors.

14. Reserves of coking coal are low in India.Industry Characteristics:

1. India currently has 45 non-coking coal washeries with total installed capacity ofabout 103 mt. Of these, seven are run by Coal India Ltd (CIL) and the rest are

operated by the private sector.

2. A coal washery gives a project IRR of about 14 per cent, and equity IRR of about 16.6per cent.

3. India's non-coking coal production was about 390.6 mt in 2006-07, of which totalwashed noncoking coal was only about 55 mt.

4. Coal, gas and oil comprise the bulk of fossil fuels. Out of these, coal is widely useddue to its availability and affordability.

5. Coal is one of the world's most important sources of energy, and it is used to meet40 per cent of the world's electricity needs.

6. Categories of coal reserves: Under the current system of reporting, coal reserves areclassified into three categories based on the level of investigation conducted on the

resources proven, probable, and inferred.


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7. The coal demand is expected to increase at a CAGR of around 7.5 per cent during2005-06 to 2011-12.

8. Coal is a freely tradable commodity.9. As per the current import policy, coal can be freely imported (under Open General

Licence - OGL) by consumers themselves as per their needs and by exercising their

own commercial judgments.10. A 100 per cent FDI is allowed in the equity of an Indian subsidiary of a foreign

company or in the equity of an Indian company. However, these companies are not

allowed to sell coal to a third party, as it is only meant for captive uses.

11. Legal provisions on royalty:According to section 9 (1) of the Mines and Minerals (Development &

Regulation) Act, the holder of a mining lease is required to pay royalty in

respect of any mineral removed or consumed from the leased area. The

Central government is empowered to increase or reduce royalty rates, in

respect of any mineral, by notification in the Official Gazette under section 9

(3) of the MMDR Act. However, it is not permitted to increase the rate ofroyalty in respect of any mineral more than once during a period of 3 years.

The Act also does not mandate that royalty on coal should be revised after

every 3 years.

1. E-auction1. E-auction was started by CIL and its subsidiaries to sell coal in the open

market. Emarketing was introduced in order to bring about transparency in

the sale of coal.

2. This initiative also gathered steam to put an end to coal black-marketing,which was quite widespread. E-marketing ensured that the premiums that

were cornered by unscrupulous traders and bogus industries would accrue tocoal companies instead, thus improving their profitability/viability.

3. Further, it covered those genuine non-linked consumers in the official chainof supply, who had no access to coal than at the black markets.

4. Under the bidding process, the company needing coal would have to submitan application and then bid for the same. The highest price bidder would get

the coal.

5. However, e-auction has been discontinued following a Supreme Court order.A new scheme in place of e-auction is under formulation. In the meanwhile,

an interim policy for sale of coal through e-booking has been introduced.

Under the interim policy, any buyer can make an offer for purchase of coalbut cannot bid for the price. Sale of coal takes place at a fixed price that is

notified by the coal company in advance. The maximum quantity that can be

booked cannot be more than one-third of the quantity offered for booking.

6. Based upon some guidelines, the new e-auction system has been introducedfrom December 2007.

2. Logistics:Coal is produced in the eastern and central parts of India, while it is

consumed nationwide. As coal is predominantly used in the power, cement


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and steel sectors, and as its consumption is distributed, it needs to be

transported over long distances. Coal is transported using the rail, road and

sea routes.

Growth Opportunities:

1. Coal washing: An imperative in India due to lower grade of coalCoal washing, technically called coal beneficiation, is a process by which the

quality of raw coal is improved by reducing the ash content and the

extraneous matter that gets extracted along with the mined coal. Although

India has significant quantities of coal, its production at present is of lower

grade as compared with other countries such as Australia and South Africa.

This is reflected in its high ash and moisture content.

2. Driven by a rising population, expanding economy and a quest for improved qualityof life, the energy usage in India is expected to swell from the current level. Thiswould ultimately lead to increased consumption of coal.

Coal consumption in Power Sector:

Primary energy consumption in India

Coal Exploration:

3. Exploration of coal reserves in the country is carried out in two stages. In the firststage, the geological Survey of India (GSI) continuously undertakes regional

exploration to locate potential coal-bearing areas. In order to supplement the efforts

of regional exploration, GSI and the Mineral Exploration Corporation Limited (MECL)

have been engaged for carrying out promotional regional exploration.


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4. In the second stage, a detailed exploration is carried out. The CMPDIL on its own,as well as through MECL, state governments and private agencies carries out

detailed exploration taking into account mine planning and exploitation of coal

reserves to meet sector-wise demand. Detailed exploration in the command area of

SCCL is carried out departmentally.

Policies and Regulations:

1. Mines and Minerals (Development and Regulation) Act, 1957The Act sets out regulations relating to acquisition of land, prospecting fees,

royalties, and dead rent payable to the state government.

2. Coal Mines (Nationalisation) Act, 1973The Act was amended on May 27, 1976, and it terminated all the mining

leases on coal held by the private lessees. This Act allowed captive mining by

private companies engaged in the production of iron and steel. Sub-leasing to

private parties was also allowed under the Act.

3. Coal Mines (Nationalisation) Act, 2000Coal mining is allowed in the public sector and for captive mining purposes. Abill namely, the Coal Mines (Nationalisation) Amendment Bill, 2000 has

already been introduced in the Parliament to open up the coal sector to

private investment.

4. Colliery Control Order, 1945In this Act, the Central government had the power to fix the prices. However,

a few changes were made in a phased manner to deregulate the prices of

coal based on their grades and colliery.

5. Colliery Control Order, 2000Colliery Control Order 2000 was notified with effect from January 1, 2000, insuper cession of the Colliery Control Order, 1945. Under the Colliery Control

Order, 2000, the Central government's authority to fix the prices of coal was

abolished.Environmental issues:

6. Water PollutionThe major reason for water pollution from coal mines is suspended solids

carried over in the drainage system of the mine sump water and storm water

drainage. In some coal mines, acidic water is also found in underground

aquifers.

7. Air PollutionIt is mainly due to the fugitive emission of particulate matter and gases

including methane, sulphur dioxide, and oxides of nitrogen. Mining

operations like drilling; blasting; the heavy earth-moving machinery on haul

roads; collection, transportation and handling of coal; and screening, sizing

and segregation units are major sources of such emissions.

8. NoiseThe main sources of noise are blasting, heavy earth-moving machines,

drilling, and coal handling plants.


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9. Land DegradationA large number of waste-dumps appear in the coal-mining area, occupying

huge areas of land. This diminishes the fertility of the soil and makes it

unsuitable for agriculture.

10. Solid WasteA major source of solid waste in a coal mine is the overburden. Segregationof the stones in the coal handling plants and the coal breeze also contribute

to solid waste generation.

Pricing:

11. In India, coal prices were regulated by CIL. These prices are governed and fixed by CILin consultation with the Central government (Ministry of Coal). The domestic price

adjustment is based on the inflation indices WPI (for all commodities) and CPI (for

industrial workers). However, in the international market, the price is governed by

demand-supply factors.

12. The real change in price regulation came in when the government de-regulated thepricing of coal under Colliery Control Order, 2000. Under the Colliery Control Order,2000, the Central government's authority to fix prices was abolished.

13. Coal prices are not fixed on the basis of demand-supply. Prices are based on costingand a particular profit margin that is based on economic and social consideration. It

includes the cost of land, cost of forestation, other capital costs (appropriately

apportioned over the life of the project), and other operating costs.

14. Coal prices are fixed by the respective coal companies and are revised periodically.Basic price is the price of the coal at the place of production at the pithead (run of

the mine). There are lot of adjustments to be made to this basic price to arrive at the

actual cost of coal. The final customer price includes freight and other charges(royalty and sales tax).

15. International prices:International prices are governed by demand-supply factors. In the

international arena, prices of exporting countries like Australia, Indonesia and

South Africa reflect the international prices. However, freight rates are also

added to the total cost of coal.Key Financial Indicators:

All figures in Rs. Crores

Name FYE* Net Sales PBDIT OperatingMargin

PAT TNW TOL/TNWRatio

CurrentRatio

Eastern Coalfields 2007 4583.53 261.38 2% 110.6 (-)2925.43 0 0.33

Western Coalfields 2004 4141.09 933.64 11% 461.65 1745.98 0.28 1.04

Central Coalfields 2006 4474.45 1468.5 17% 748.27 1322.48 0.88 0.85


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Mahanadi

Coalfields

2006 3201.77 1843.62 39% 1256.3 3504.74 0.06 1.64

North Coalfields 2007 4630.84 2550.58 30% 1366.48 5560.35 0.18 2.92

Bharat CokingCoalfields

2005 2865.81 (-)737.55 -37% (-)1046.61 (-)4926.02 0 0.16

South Eastern

Coalfields

2006 7070.83 1532.61 13% 952.03 3441.24 0.14 1

*FYE= Financial Year ended (As these are government run companies, their latest financial data is

not available)

Performance Highlights:

1. The role of captive coal mining in growth of power sector has gained prominence inrecent times with an increasing number of captive coal blocks being allocated to thissector and power projects with associated coal blocks setting new benchmarks for

tariffs through competitive bidding - for instance, the Sasan ultra-mega power

project (UMPP).

2. Though the potential for incremental coal production from captive coal mines issignificant, several issues pertaining to project execution has led to dismal

performance on this front. Hence, it is expected that 20 million tonnes (mt) of

incremental coal production will take place from this route during the 11th plan

period.

3.

Coal remains the most preferred and competitive fuel option for power units within500 km radius.

4. Captive coal could provide better returns to power producers and lower tariffs forconsumers.

Outlook:

1. From 2006-07 to 2011-12, the domestic production of coking coal is likely to grow ata CAGR of 1.67 per cent, while that of non-coking coal is expected to grow at 7.84

per cent. Also, in 2011-12, around 94 per cent of coal production in India would be of

the non-coking variety.

2. Coal requirement for the power utility will grow at a CAGR of around 10% during2007-08 to 2011-12.

3. High coking coal demand by the Indian steel industry and low reserve base hasboosted the import of coking coals.

4. Coking coal requirement in steel production is expected to touch over 85.34 MillionMetric Tons in 2011-12.

5. By 2011-12, there will be a requirement of an additional 100 mt of coal washingcapacity. With each tonne of coal washing requiring about Rs 200 of capex, this

represents an investment potential of about Rs 20 billion.


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6. The 12th plan period is likely to record much higher contribution to overall supplyfrom the allocated blocks. The total coal production through captive route by the

end of 2016-17 is estimated to be almost thrice of that at the end of the 11th plan

period (2011-12).

ITeS Industry - Snapshot

ITeS sector in a nutshell

1. The Indian ITeS industry has predominantly been an export-oriented market.2. In FY 07, the Indian ITES-BPO segment grew by 33.5% per cent contributing $8.4

billion to the total software and services exports of $31.4 billion.

3. India holds a 45-50 per cent share of the global off shoring market.4. The most significant competitive factors are service quality, price, reliability, breadth

of services, data security, industry experience, scalability, technology capabilities,

and disaster recovery capabilities.

5. Customer care continues to be the largest segment in terms of revenue, followed byfinance and administration.

6. The Indian ITeS industry employed around 415,000 people in 2005-06, exhibiting aCAGR of 46 per cent over the last 6 years. According to NASSCOM, India's ITeS

industry employed around 545,000 professionals in 2007E.

Positive Factors affecting ITeS sector

1. Increased IT adoption2. Language compatibility3. Availability of huge talent pool4. Low labor cost


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5. Rising acceptability of outsourcing non-core activities6. Rapid infrastructure development7. Robust telecom infrastructure8. Favourable political environment9. Favourable tariff and tax regime10. Liberal foreign direct investment (FDI) regulations11. The Telecom Regulatory Authority of India (TRAI) has brought down the international

private leased circuit (IPLC) tariffs, which are widely used in the ITeS industry.

Negative Factors affecting ITeS sector

12.

Rupee appreciation

13. High wage inflation14. Attrition15. Competition from emerging off shoring destinations (Philippines, China, Malaysia,

Mexico, Brazil, Sri Lanka, Czech Republic and Russia)

16. Limited negotiating ability with clients17. As 80% of the clients are from US and UK, India has a no near-shore disadvantage.18. Multilingual CRM services (other than English)19. The monotonous work, coupled with graveyard shift timings have resulted in high

attrition rates, and growing recruiting and training costs.

AT Kearney Scores for top-10 off shoring locations

Country 2007 2005

Rank Score Score

India 1 6.9 6.9

China 2 6.6 6.2

Malaysia 3 6.1 6.1

Thailand 4 6.0 5.7

Brazil 5 5.9 5.5

Indonesia 6 5.9 5.5

Chile 7 5.8 5.6


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Different segments where domestic ITeS industry has forayed into:

1. TelecomIt is adding 7- 8 million mobile subscribers every month, constitutes close to 50 per cent of

the domestic ITeS industry revenues. Growth in mobile subscriber base, which is expected

to reach around 325 - 350 million in 2008-09, is likely to drive the growth in the telecom

vertical.

2. BFSIOutsourcing in the BFSI vertical refers to the customer relationship management (CRM),

document processing, policy renewal and claims processing functions. Servicing of savings

account and credit/debit card holders via CRM will generate sizeable revenues in the

banking vertical.

3. Document processing4. Transaction processing (Finance, Administration and Accounting (F&A), Insurance

etc)

5. CRM6. Human Resource administration7. Credit & Debit cardsThe credit card base is expected to reach around 350 - 375 million by 2008-09, growing at an

annual rate of 20 - 25 per cent for the next 2 years. Meanwhile, debit cards are forecasted

to reach a whopping 1.8 - 2 billion by 2008-09, registering a growth rate of 35 - 40 per cent.

Philippines 8 5.8 5.9

Bulgaria 9 5.8 5.3

Mexico 10 5.7 5.3


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Important factors required to sustain competitiveness

8. The pressure on availability of total talent pool is expected to stay. We have to factorthe suitability of the talent pool, based on educational background and English

language compatibility.

9. While acquisitions were one way of being located nearer to the outsourcer, settingup delivery centres in foreign countries is the other approach being adopted by most

Indian players.

10. The need to increase association with educational institutions/colleges is in the self-interest of the industry to sustain its long-term growth story.

11. The proliferation of the Software Technology Park of India (STPI) scheme and theNational Urban Renewal Mission (NURM) has been among the most successful

measures for the development of the country's IT sector.

Competitive advantage under threat

12. Indian players would face intense competition from other off shoring countries such as thePhilippines, Eastern Europe, Latin America and China. Consequently, the ability of Indian

players to pass on billing rate hikes might be a tough proposition.

13.

Currently, India enjoys a competitive edge over all other off shoring destinations,except China. There is a substantial difference in the wage costs between India and

other destinations such as Malaysia, Latin America and Eastern Europe (nearly 1.9-

2.0-times).

The future plan of action --- Domestic Market

ITeS players are to seriously consider foraying into the domestic market.

Reasons:

1. Exports revenue has grown at a CAGR of 32 per cent for the past 3 years, while thedomestic revenue grew by 58 per cent in the same period. This high rate of growth

experienced by the domestic industry has only added to its potential attraction.

2. Booming telecom, BFSI and hospitality industries are likely to boost domestic ITeSrevenues.

3. Externally, factors such as GDP growth, currency volatility, technology adoption andcost reduction are expected to be the key drivers of the domestic ITeS growth story.


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4. The rupee, which has appreciated by over 9 per cent with respect to the dollar in thefirst quarter of this financial year alone, has been exerting tremendous pressure on

exporters. By diversifying into the domestic market, ITeS players will be able to

mitigate this exchange risk and give some kind of stability to their revenue model.

Latest trends in the ITeS space

1. Onshore expansion by M&A activities in the US and other locations with severalobjectives, which include access to new markets beyond just toe-holds, with ready

resources, clients and revenues; access to new skill sets or domain and process

expertise in the target market; access to new technologies; and greater credibility

with target clients.

2. Service providers are now drifting to higher-end strategic processes.3. Service providers are diversifying their geographic bases by creating new

infrastructure in Tier II cities, in order to leverage lower costs and lower attritionrates, as well as to gain access to a larger talent base.

New opportunities to explore

1. The next growth story would be in the space of domain/business-relatedopportunities such as KPO (credit analysis, equity analysis etc), legal process

outsourcing, data analytics etc. According to CRISIL Research estimates, such

knowledge-related activities have the potential to increase manifold (nearly five-

times), and are expected to grow at nearly 1.5-times the industry growth rate.

2. Off-shoring3. Services like the various 'high end' knowledge-based processes such as financial

services research support and analysis for equity/debt/derivatives markets;

econometrics, data analytics and modelling; business/corporate

research/competitive intelligence; legal services, animation and game development

services; medical transcription and basic; shared back-office and administrative

functions.

The factors that differentiate TOP ranked companies with other lower rung companies.

1. Presence in locations worldwide provides the company with multilingual capabilities,access to a larger employee pool and "near-shoring" capabilities to take advantageof time zones.

2. Been in the ITeS space for a long time (most TOP ranked companies date back to adecade).

3. Almost all the TOP ranked companies are subsidiaries of well established BRANDS intheir own domain.


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4. Domain knowledge, functional expertise, experience and superior technology.5. They provide a wide range of services like travel, banking, financial services,

insurance, manufacturing, retail, logistics, utilities and professional services.

6. Business leaders are experienced outsourcing industry professionals from globalcompanies.

7. Attracting and retaining senior talent.8. Advanced job training and development.9. Most TOP ranked companies follow the principles of lean six sigma.10. Centers of excellence have been created to harvest and share the in-depth

knowledge of each function.

11.

Strong local market understanding.

12. Trust of the customer due to long-term relationship.

Ranking of the TOP ITeS companies in India as on (2006-07)

Top 15 3rd

party ITeS-BPO firms in India Parent Company

1 Genpact GE


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Film Financing By Banks A Report

2 WNS Global Services Warburg Pincus

3 Transworks Information Services Aditya Birla Group

4 IBM-Daksh IBM

5 TCS BPO TCS

6 Wipro BPO Wipro7 First source Solutions ICICI Bank

8 HCL BPO HCL

9 Infosys BPO Infosys

10 EXL Service Holdings -

11 Citigroup Global Services Citigroup

12 Aegis BPO Services -

13 HTMT Global Solutions Hinduja Group

14 24/7 Customer -

15 Mphasis BPO -


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Industry Overview

1. Releasing more than 1,000 movies a year, India is the largest producer of films in theworld.

2. Media and Entertainment industry grows faster than the gross domestic productgrowth (GDP) due to the elasticity of income. Entertainment industry is growingfaster than the IT sector.

3. Film production was given `industry` status in 2000 and RBI allowed banks to lend tofilm production.

4. On an average film budget is Rs.10-25 crore5. Entertainment Tax is around 60%, although its different for each state. Trade and

service aspects are governed under the General Agreement on Tariff and Trade

(GATT).

6. Indian film industry makes movies that people want to watch, unlike studios in theUK and the US, where people make movies because they think they have a great

idea.7. Today, Indian films are screened in over 100 countries and watched by nearly 4

billion people worldwide. Bollywood is one of India's best-known brands

internationally.

8. India has a National Film Development Corporation (NFDC) which finances somefilms. However, NFDC cannot be considered to play a central role in the film industry

because it finances too few films which, too, are not of the type that has made the

Indian film industry so vibrant.

Recent State of the Industry

Commercial Movies

Mere Baap Pehle Aap starring Akshay Khanna and Paresh Rawal, was released on

13th June 2008. It has not been able to recover its money back. It was produced by

Shemaroo at a total cost of Rs.22 Crore. Overseas distribution was sold at Rs.2 Crore. PVR

bought the distribution rights at Rs.13.5 Crore and spent another Rs.2 Crore on promotion

and marketing of the movie. With a commission of 20% on this expenditure, PVR would

share the overflow of revenues with Shemaroo after earning Rs.18 Crore. Shemaroo also

expects to earn another Rs. 10-12 Crore form selling satellite rights.

Animated Movies

Animated movies are the latest trend in Indian cinema, and are catching up real fast. Most

animated movies are based on an Indian mythological character as the protagonist.

Ghatotkach is a recently released animated movie which could not fare well at the Box-

office. It was made at an estimated budget of Rs.12 Crore. PVR had given Rs.50 lakhs. It also

expects to earn another Rs. 10-12 Crore from selling satellite rights.

Most movies released in first half of 2008 were FLOPS!


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Jodha Akbar, Halla Bol, Sarkar Raj were big budget movies with big star cast and

made by most reputed producers and directors have also not fared well at the Box-office in

the first half of 2008. This shows how risky the situation is. This is one of the most important

factors to be considered by Banks.

Industry Segments

The Film Industry basically has three main segments:Production

1. The production process involves the development of the idea and making of the film.People involved in this activity includes, scriptwriter, executive producer, co-

producer, producer, production manager, production co-ordinator, production

accountant, director, first/second assistant director, continuity supervisor,

cinematographer, camera assistant, art director, location manager, sound recordist,

lighting assistant etc.2. The producer is frequently the first person involved in a project by selecting and

developing material, engaging the best crew for the project, supervising the

production and post production processes, securing exhibition and managing the

publicity and marketing. They are responsible for creating the team, the process and

almost inevitably the environment that will allow a production to succeed to its best

potential and is ultimately responsible to the financiers/investors for any problems,

delays or overspending that occurs.Distribution

A distributor will acquire the rights to a production for a certain territory/ies and then use a

variety of strategies to get the best screening outcomes for a production. Distributors can

be very large, and attached to major media corporations. They will often manage the

distribution of a production in several territories. Smaller, independent distributors tend to

focus on one or two local territories. The job of distributor is really only found in the film

industry as other types of production tend to deal only with sales agents and broadcasters.Exhibition

An exhibitor is the final link in the screen production chain. In television an exhibitor would

be a broadcaster; in film, a cinema or series of cinemas, or perhaps a film festival.

Video/DVD stores could be seen as a mix of distributor/exhibitor. In essence they are the

venue that a production will finally show on. Like distributors, exhibitors can be very largecompanies affiliated to major broadcasting corporations, or much smaller independent local

cinema owners or local television stations.

Value Chain


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Business Model


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How the industry makes money

Producer:

1. Distributors give him a minimum guarantee fee before the movie in return for filmrights in a territory within the country.

2. Producers can recover up to 30 per cent of the cost of the film, pre-selling it todistributors.

3. If the movie does well and the distributor recovers his money, any additional inflowsget divided between the two.

4. Another 25 per cent of the revenue comes from overseas rights, 20 per cent fromsatellite rights, 10 per cent from the emerging home video market, 10 per cent from

music (which includes wireless and Internet downloads). If the producer owns the

intellectual property rights and has not sold it off in perpetuity (generally, rights are

given for five years), he could make money selling his library to a TV channel in the

long term.

5. And where does he get his money? From banks. He can borrow on the strength ofhis balance sheet. He can fund his films from IPOs. Or go to individual high net worth

individuals or companies to put in money as equity. Or, of course raise money

upfront from distributors, or through selling some of the rights early to finance the

cost of the film.Distributor:

1. They offer a Minimum Guarantee (MG) fee to the producer to book a territory. Andspend on print and publicity on which they take a 20 per cent commission.

2. Any overflow of revenue after recovery of the MG fee and commission is dividedbetween them and the producer.

Exhibitor:

1. In the old system distributors paid a rental to the theatre, irrespective of whetherthe movie ran or not is rapidly becoming history. Under a new system revenue gets

shared between theatre owners and distributors.

2. Generally, in the first week of a release, the split is evenly 50:50, in the second weekthe producer gets 40 per cent and the exhibitors the rest, in the third week the

producer makes 30 per cent and if the movie continues into the fourth week, he gets

25 per cent of the collections.Risk associated with Film Financing

Mainly there are three risks:

1. Completion Risk2. Marketing Risk3. Cost OverrunsRisk Mitigation Factors


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1. Stringent selection criteria.2. Producers with satisfactory track record should only be considered.3. Track record of cast and crew is very important (a rating mechanism would go a long

way).

4. Banks take the money back before the release of the film, because the distributorspay upfront.

5. Bank gives only 50% of the finance.6. Need proper agreements with stars and suppliers.7. Insurance should be done for all those who are participating in the venture.8. Completion insurance.9. Contract should be defined in writing and should be legally enforceable as well as

assigned in favour of the lender.

10. Transparency in production and distribution arrangements that should be honored.11. Indian films enjoy greater acceptance and across a wider geographical market.12. Music, satellite, theatrical distribution, rights to cable, oversees distribution, gaming

rights, broadband rights and home video rights are the other ways of generatingrevenues apart from Box-office collections, which narrows the risk further.

FDI :- International funds

1. The corporatisation of the film industry has also attracted FDI into the film industry.2. Sony Pictures released its first Indian production Saawariya in 2007.3. Walt Disney has tied up with Yash Raj Films for the production of three animation

movies.

4. International co-productions with the likes of 20th Century Fox and Warner Bros areon the rise.

5.

Under automatic route up to 100 per cent FDI is permitted in film industry (i.e. filmfinancing, production, distribution, exhibition, marketing and associated activities

relating to film industry) subject to certain conditions.Factors affecting the Film Industry adversely

1. High entertainment tax is negative for the industry, as it increases the cost ofwatching movies in theatres for average audience.

2. Rising cost of talent and distribution acquisition rights out pacing the revenue-earning potential of films.

3. Lack of quality content being produced.4. PiracyWhere does a Bank fit into the picture?

5. With the huge and increasing number of movies releasing each year, its apparentthat the production houses and independent producers require more and more

money.

6. In 2001, RBI allowed Banks to provide funds for Film Financing. Although only theproduction part could be funded by banks and not the distribution part which is

equally important these days.


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7. RBI norms cap the extent of exposure to the sector to 5 per cent and also prescribestringent rules for lending. A brief outline of the instructions stated in RBI circular is

present in Annexure 1.

8. Banks, in recent years, have been extending support to the Indian film industry. IDBIis one of the largest players in this segment. EXIM Bank, too, is a big player, although

loans are available only to films that can generate an international revenue stream.9. Earlier filmmakers were dependent on independent financiers who lent at 25-30

per cent interest. As for banks, lending against films is certainly more lucrative, with

interest rates at about 10-14 per cent.

10. Finance has been extended based on the rights of the film. Repayment of finance isdone prior to the release of the film. So the exposure is only towards completion of

the film.

To understand the process of film financing by a bank and to understand the

business model from a bank's perspective, it was important to discuss it with those whohave the relevant experience. Thus, leading Banks with exposure in film financing were

contacted. However, many Banks refused to share any information. One bank with a

sizable exposure in film financing were ready to provided their extended support and

time to help us understand the Bank's role in film industry. Following is the discussion

outcome with that bankProcess of Film Financing by a bank

Important factors considered by the Bank

1. Successful track record of the producer. The producer should have made profits onthe films produced in the past 5 years.

2. Project based funding.3. Only 40-50% of the film is financed by the Bank.4. As a company policy, bank have a limit of Rs.20-25 crore per filmMode of finance

1. Cash Flow financingCost Heads

2. The maximum money is spent on the fees of the lead artists (50-60% of the total costof film).

3. Other cost include fee of director, cost of shooting, equipment, making sets etc.which would together constitute about 15-20 Crore.

4. Marketing the movie after shooting, creating hype before release, etc. are othercosts associated with films.

Steps followed by the Bank for financing a film


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1. The Producer comes to the Bank with implementation schedule, the star cast andDirector at the time of proposal.

2. If the Producer has a good track record then Completion guarantee is not required,but with a fairly new cast n crew, the Bank may insist on a completion guarantee.

3. The funding decision is majorly based on the track record and credibility of theProducer (whether the Producer will be able to complete and sell the film).

4. The Bank may look at how strong is the Balance Sheet of the Production house.5. The Bank may require a certificate from the Chartered Accountant.6. The Bank requires the insurance of all the Key persons involved with the project.7. The Bank may insist on collateral, again depending on the comfort level with the

Producer.

8. Once the funding decision is made, a TRA (Trust and Retention) Account is opened ina bank.

9. The funds are disbursed to the Producer from the TRA Account.10. The Bank holds all the rights of the film.11. During the pre-production and production phase, the Bank keeps getting progress

reports.

12. The Bank may at times visit the sets and talk to producers.13. Bank also gets report from the processing Labs, which has the negatives of the film.14. Apart from this, the Bank gets monthly TRA Account reports.15. The Bank starts getting the revenue once the Shooting is complete.16. The funds are shared on a Pro-rata basis.17. Once the movie is near completion, the Producer sells it to the Distributors and

thereby gets his money which he puts in the TRA Account. Once the Bank gets its

money back, it gives permission to the Processing Lab and the Producer to release

the Film.18. The Bank gets back its money, a month before the release of the movie.Major risk associated with the film (from a banks perspective)

1. Whether the Producer will be able to complete the film or not.2. After completion, whether the Producer will be able to sell the film to the

Distributors or not.

How is risk mitigated

1. The film cannot be released before the Bank gets its money back because theProcessing Lab requires the permission of the Bank to release the negatives.

2. Cost and schedule overruns are not funded by the Bank. In fact the producer doesnot even come to the Bank for such funding.

3. Only 40-50% funding is given by the Bank.4. The recovery of money is not dependent on the revenues generated by the movie at

the Box-office (i.e. whether the movie is Hit or Flop). The Bank would get back the

money before the release of the film.


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5. Even if the film doesn't recover all its money at the Box Office, Television rights andOversees rights can be used to recover more revenues.

Other leading bank's Process

Although, it was not possible to discuss the film financing process with other banks with

exposure in film financing, some information from reliable sources was collected.

1. Film Financing portfolio is Project-oriented2. Advisory committee with representatives from various sections (people drawn from

the industry producers, distributors, actors and film critics)

3. Film is treated as a project, financed on SPV basis.4. Money distribution

1. 45-50% max2. 30% promoter's money3. 20% other sources

5. But Bank needed to be convinced about the remaining 50% to be from identifiablesources and should be satisfied with the financial close-up. This may not be true forall banks.

6. Loans are given to individual producers on the basis of1. how their films have fared in the past2. project's strength3. producer's financial capability4. Track record of the completion of the films.

7. Bank may insist on completion guarantee.8. Bank would have tied up with film processing laboratories to ensure that the release

of the films would take place only on debt payments.9. Rates exceed the PLR by 1.5 to 2%.10. Funding only to production side and not to distribution and exhibition side of the

value chain.

11. Does not extend loan below Rs.4 crore and does not fund the entire project cost. Butit does check the veracity of funds brought in by the producer or the film company.

12. Loan above Rs.20 crore has to be backed by a completion guarantee.13. Insist on 1:1 debt equity ratio.14. Producers are required to repay the debt before the release of the movie, holding

IPR rights may not be a safety net for loan recoveries.

15

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