September 7, 2011

September 7, 2011

Highlights

Overall Growth Slows Down Scooter Segment Growth Higher than Overall Growth

Q1FY12 Financial Performance Stable

Two Wheeler Sector Update

September 7, 2011

Two Wheelers Sector Update

The two wheeler (2w) industry in India has shown strong volume

growth, even as several other automobile segments showed signs

of a cyclical dip in growth in the past few months. Factors like

high rural demand, increase in urbanisation, penetration potential

and strong rural demand has led to the growth of the 2w seg-

ment.

The annual 2w market is around 13 million units currently grow-

ing at around 20% with 79% of the volumes coming from motor-

cycles (M. Cycle), 16% from scooters and 5% from mopeds

(Chart 1). Hero Motor Corp has the highest market share of

around 41% followed by Bajaj Auto with a 25% share. TVS en-

joys a 15% share while Honda has a 12% share in the total vol-

umes. The rest of the players together have a 7% market share.

Volume Growth

The 2w industry has witnessed strong volume growth over the

past few years with the industry clocking a 2-year CAGR of

23.5% (CY09 & CY10). This calendar year however, the growth

rate has slowed down to 19% Y-o-Y for the first 7 months of the

year. Signs of high inflation and increased cost of financing has

hurt the overall growth of the auto sector and the same effect

can be seen in the 2w segment too.

Bajaj and Honda, with a market share of 25% and 12% respec-

tively, have been the laggards in the overall 2w space and

dragged the growth rate down for YTD CY11 (Chart 2).

Bajaj has recorded a 16% Y-o-Y growth in the current calendar

year while Honda’s volume growth is a subdued 6%.

Motorcycle Segment

The overall growth rate for 2w has slowed down to 19% Y-o-Y

in the current calendar year due to the slowdown in the motor-

cycle segment. After posting a 2 year CAGR of 22% (CY09-

10), the Y-o-Y growth rate in YTD CY11 has come down to

18%. Bajaj, TVS and Honda witnessed a slower growth than

the overall motorcycle segment (Chart 3).

The entry segment (<125 cc category), which comprises 70%

of total sales in the motorcycle segment, has witnessed a con-

siderable slowdown in volume growth for YTD CY11 by post-

ing a growth of 16% after clocking a 2-year CAGR of 23%

(higher than overall growth rate of 22%). All players witnessed

a slowdown in the segment but Bajaj was the most impacted

with the growth rate slowing down to 10% in YTD CY11 from

a 2-year CAGR of 41%.

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Chart 1: Player Profile - YTD CY11

M. Cycle Scooters Mopeds

September 7, 2011

Scooter Segment

The scooters segment contributes 16% to the overall 2w vol-

umes. Honda is the market leader with around 50% of the share

followed by TVS (20%) and Hero Motor Corp (15%). Around

99% of total volumes are contributed by the 75-124 cc category.

Honda has witnessed a very dismal growth of 5% which has

largely contributed to the slowdown in the growth rate (Chart 4).

For YTD CY11, the Y-o-Y growth rate dipped to 21.5% against

a 2-year CAGR of 31%.

Mopeds Segment

The mopeds segment contributes a small 5% to the overall 2w volumes. TVS is the only player manufacturing mopeds since CY09 as

Majestic Auto and Kinetic exited the segment in CY08. The mopeds segment recorded a 2-year CAGR volume growth of 25% (CY09-

10) which has slowed down in the current year to 18% (Jan-July 2011).

Q1FY12 Financial Performance

The 2w industry has withstood the current scenario of high

interest rates and soaring raw material (RM) prices. The vol-

ume growth has been robust for Q1FY12 but the pace of

growth has declined as the broader economic environment

kicks in. A volume growth of 18% has led to a 27% jump in

net sales indicating higher realizations due to better product

mix and also passing on some of the raw material price in-

creases to the consumer (Table 1).

The RM cost increased by 32% Y-o-Y for the quarter and

RM cost as a percentage of sales increased from 71.3% in

Q1FY11 to 73.8% in Q1FY12. The impact of raw material

prices was reduced by employee cost and other expenses

which increased by 16% and 3% respectively. As percentage

of sales, employee cost reduced from 3.8% in Q1FY11 to

3.5% in Q1FY12 and other expenses reduced from 9.8% to

7.9% of sales during the same period.

As a result of the above, the decline in EBITDA margin was

contained. EBITDA margin reduced by only 30 basis point

from 15.1% in Q1FY11 to 14.8 in Q1FY12 (Chart 5).

Other income jumped 24% Y-o-Y for the quarter. However,

a higher depreciation charged due to capacity addition by

the industry resulted in a comparatively lower growth of

14% in PBIT.

Interest cost, which declined by 11% Y-o-Y and a lower tax

outgo (22% tax rate in Q1FY12 versus 25% in Q1FY11) led

to a growth of 19% in adjusted PAT.

Table 1: Y-o-Y Growth Q2FY11 Q3FY11 Q4FY11 Q1FY12

Volume 26% 30% 21% 18%

Sales 30% 34% 28% 27%

RM Cost 38% 42% 36% 32%

Employee Cost 1% 4% 6% 16%

Other Expenses 16% 40% 10% 3%

Total Expenses 33% 40% 31% 28%

EBITDA 15% 3% 16% 25%

Other Income 63% 53% 425% 24%

Depreciation 8% 6% 155% 164%

PBIT 20% 7% 57% 14%

Interest 19% -26% 49% -11%

PBT 20% 8% 57% 15%

Tax 16% 1% 30% 2%

PAT 21% 10% 66% 19%

Adjusted PAT 19% 15% 8% 19%

September 7, 2011

Growth Outlook

The overall growth for the 2w industry is expected to slow down if the current macro environment persists or deteriorates. However,

the 2w segment will continue to post better growth rates than other segments (such as passenger vehicles, commercial vehicles, etc) in

the automobile space.

For the motorcycle segment, the entry level slab (<125 cc category) is expected to considerably lag the 2w industry growth as the

OEMs find limited scope for margin expansion. They find the high interest-rate sensitivity in the segment also a major hurdle. Instead,

the OEMs may increase their focus on the premium segment (>125 cc category) to help sustain their existing margins in a scenario

where raw material prices are rising. This segment, therefore, is expected to witness the fastest growth in the medium term.

The scooters segment is finding new players entering the market, Mahindra being the latest. The segment is also witnessing the maxi-

mum growth in the overall 2w space and gradually the scooters segment may command a higher market share which will also ensure

enough room for the existing and new players to survive and grow.

________________________________

September 7, 2011

Edible Oils On A High

Rise in edible oil prices: On Friday, the prices of domestic edible oils improved, with groundnut oil extending the bull run to a new

high in Mumbai market. (www.indiainfoline.com, September 3, 2011)

PRU Analysis

India relies heavily on imports to meet over 50% of the domestic edible oil requirements. Through the years, India’s domestic produc-

tion of oilseeds has not grown in line with edible oil demand. The government has raised minimum support prices for oilseeds consis-

tently in order to encourage better acreage for the oilseeds. The need to ensure better domestic availability arises due to policy frame-

work and other factors favouring production of competing crops.

Edible oil prices have witnessed a rising trend over the last

few months on the back of increased demand, reduced avail-

ability of raw material for crushing and a decline in acreage

during the current kharif season (Chart 6).

Groundnut oil has peaked to an all-time high level as the

kharif season acreage for the groundnut seeds has declined

by 14.5% from 49 lakh hectares to 41.9 lakh hectares which

has resulted in lower expectation of output for the next year.

Also, reduced availability of raw material in the current sea-

son for crushing has caused the prices of groundnut oil to

jump by 32% since April 2011 to `102 per kg. This is despite

production more than doubling as the increase in demand

from the retail segment and the expansion of branded players

in the category is inflating the prices to a large extent.

A change in price can be attributed to inflation, current and expected production of raw material and finished product, and the perplex-

ing trend of reduced imports. Moreover, the 14.5% drop in acreage for groundnut seeds, which would lead to reduced output in future,

has already resulted in a 17.5% jump in raw material costs (WPI change) shown in Table 2 below. The current price of groundnut seed

is `290 per kg which is 7.5% above the MSP of `270 per kg declared for the 2011/12 kharif season.

If we look some of the other edible oils — like rapeseed & mustard oil — the prices have increased by 19% since April 2011. This is

primarily due to high seed prices (indicated by the change in WPI) and zero imports during the first quarter of current fiscal year.

On the other hand, the decline in acreage for sunflower seed has not led to a massive change in the price of sunflower oil as the imports

have jumped by 16.3% in Q1FY12 to meet demand and contain the price rise. Prices of soyabean oil has increased by 8% primarily due

to the decline in imports by around 50%.

Table 2

Oil Seed (Raw Material) Season Acerage WPI change Edible Oil Production Imports Price Change

Groundnut Seed Kharif -14.5% 17.5% Groundnut Oil 139% 32%

Rape & Mustard Seed Rabi 10.5% 10.7% Rape & Mustard Oil 122% -100% 19%

Sunflower Seed Kharif -17.1% 0.0% Sunflower Oil 34% 16.3% 6%

Soyabean Seed Kharif 11.0% 1.1% Soyabean Oil 84% -49.6% 8%

Notes

Kharif season 2011 data: Till 25 August Price change: Since April 2011

Rabi season: FY11 data Production data: For Q1FY12

Imports data: April - July 2011 WPI change: Since April 2011

September 7, 2011

PRU View

Edible oil and oil seeds together constitute around 5% of the total inflation index. The scarcity of raw material and increase in demand

along with decline in imports has led to an increase in prices for edible oils. The rise in key edible oil prices in the domestic market is

likely to cause margin pressures for the food FMCG companies, apart from stoking inflation which is already at very high levels.

Auto Components Growth To Slow Down

Auto component industry growth to slow to 12-15% in FY12 says ACMA: The Automotive Component Manufacturers Association

of India (ACMA) today said it expects the growth rate of the industry to slow down to 12-15% in the current financial year. (The Eco-

nomic Times, August 31, 2011)

PRU Analysis

The total turnover of the auto component industry during

FY11 was `1821 billion. The industry has witnessed a robust

CAGR of 17% over the past five years.

For FY11, the turnover increased by an impressive 34% while

the exports also witnessed a turnaround after a slump in FY10

and posted a growth of 54% Y-o-Y to reach $5.2 billion

(Chart 7). The growth in exports was primarily due to the

revival in key markets — North America (+65%), Western

Europe (+46%) and Asia (+48%).

Imports also increased by 30% Y-o-Y in FY11 as OEMs in-

creased their imports of auto components.

The growth in auto components industry is dependent on the

fortunes of the automobile sector. In the past two years, the

automobile industry has grown at a CAGR of 26% in volume

terms and around 38% in value terms. During the same pe-

riod, the auto components industry has grown at a CAGR of

31%.

The growth in auto component industry generally lags the

growth witnessed in the automobile sector as evident from

Chart 8. Even the 2-year CAGR (for FY10 & FY11) in the

auto components industry has lagged the growth rate of auto-

mobile industry.

Volumes in the automobile industry have been robust in the past two years with good growth in the passenger vehicle and two wheeler

segment. However, in the recent months the volume growth has tapered off and the current scenario suggests even further slowdown in

growth rate. For Q1FY12, the total automobile sales grew at a much lower pace of 18% Y-o-Y compared with the 32% growth seen in

Q1FY11.

With the automobile sales volume getting affected by high interest rates, soaring fuel prices and persistent rise in inflation, the growth

rate in automobile sector is expected to come down in future and as a consequence, the growth in auto components will also get af-

fected.

September 7, 2011

Financial Performance Of Sensex Scrips

The momentum in sales growth continued during the quarter ended June 2011. However, higher costs dented net profits across indus-

tries and downward pressure on margins is constant.

The set of BSE 30 companies that form the Sensitive Index registered a healthy sales growth of 25.5% during June 2011 quarter (refer

Table 3). Among the BSE 30 sensex companies, Bajaj Auto, Wipro, Larsen & Toubro and ITC registered an over 20% year-on-year

growth during the quarter. Jaiprakash Associates and Sun Pharmaceuticals recorded a decline. Excluding oil and gas companies, the

Sensex set managed to post a 19% growth in sales.

Higher volumes, rather than pricing gains, played an important role in boosting sales growth for a majority of Indian firms in the quar-

ter ended June 30.

Automobile and metal companies witnessed a surge in raw material costs. On an aggregate level, raw material expenses for the BSE 30

companies rose by 29.7%. Interest expenses soared by 32.7% and high power & fuel cost dented profits the most. However, a tight

leash on other operating expenses enabled a 10.8% growth in net profits.

India Inc records highest sales growth in 8 quarters

The 3,200 listed companies that have declared their Q1FY12 results (aggregates available in Table 4) shows a slightly different picture

than the Sensex compa- nies.

Table 3: Financial Parameters of BSE Sensex Companies (% YoY growth)

Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Total Income 22.8 19.3 17.9 20.3 24.6

Net Sales 25.5 19.1 17.8 21.4 24.6

Raw Materials & Finished Goods Purchased 45.4 19.6 17.2 27.1 29.7

Salaries and Wages 9.9 24.4 20.9 17.4 21.2

Power & Fuel 13.8 16.9 17.9 17.8 30.8

Other Expenses 24.3 18.3 19.9 23.5 17.9

Interest Expenses -11.4 -2.5 12.2 24.6 32.7

Depreciation 22.3 37.3 -0.2 9.8 12.9

Net Profit 4.3 13.6 28.2 7.1 10.8

PAT/Total Income (%) 14.8 14.2 14.7 12.6 13.1

Table 4: Financial Performance of India Inc (% YoY growth)

Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

Total income 18.5 22.2 18.3 21.5 27.8

Net sales 20.7 20.4 18.8 22.4 28.1

Raw materials & finished gds purchased 32.5 22.9 20.0 26.7 33.5

Salaries and wages 15.8 24.9 19.4 22.3 18.2

Power & fuel 23.2 13.3 18.8 24.2 25.8

Other expenses 17.1 5.4 16.2 17.6 15.0

Interest expenses -0.3 5.4 17.2 30.6 42.2

Depreciation 17.9 23.4 8.1 15.1 12.3

Net profit -9.0 45.3 18.8 9.1 3.8

September 7, 2011

The set of 3,200 companies posted a robust 28.1% rise in net sales, which

is the highest in the past 8 quarters. However, they managed to record a

mere 3.8% growth in net profits.

The surge in sales can be largely attributed to the oil and gas companies.

On excluding these companies, sales growth dipped to 22.7%.

It is interesting to note that the Top 100 companies accounted for nearly

68% of total sales of India Inc. Profits of these companies also comprised

nearly 91% of the total profits of the corporate sector.

Poor profit performance of companies at an aggregate level reflect the

weakness of the small and medium sized companies. Only the top 500

companies registered a double-digit growth in net profits. Companies

above 1,000 pulled down the overall profits.

Sectoral Performance

Barring the cement sector, which witnessed muted volume growth, sectors like IT, FMCG and automobiles witnessed moderat-

ing volume growth (as compared to the March quarter).

Moderation in some consumer companies’ volume growth was a function of lowering advertising expenditure, as well as price

rises taken to protect margins from high input-cost inflation.

In automobiles, the high interest rate scenario also impacted demand in the passenger, medium and heavy commercial vehicle

segments.

Telecom equipment and shipping companies posted a fall in sales revenues during the quarter.

PRU View

A healthy domestic consumption demand helped India Inc post higher volumes. Increase in prices of commodities and other products

pushed up sales realisations. However, if the cost pressures and global economic uncertainties continue, it may lead to lower volume

growth and affect ability of the companies to pass on the cost burden to the consumer. Given the rising interest costs, profitability of the

companies is under severe pressure.

Index of Eight Core Industries Records 5.8% Growth

The overall growth in eight core industries — with a weightage of 37.9% in the overall IIP — registered a healthy 7.8% growth during

July 2011 compared to 5.7% a year-ago.

Steel (up 15.5%), electricity (up 13%) and cement (with 10.6% growth) drove the overall rise in core industries’ output. Natural gas

and fertilisers were the laggards.

However, growth during the four months of the current financial year has been lower than year-ago level. Segment-wise details are

given below:

Crude Oil: Crude oil production (weight of 5.22% in the IIP) registered a growth of 7.3% during April-July 2011-12 compared to

8.4% during the same period of 2010-11.

September 7, 2011

Petroleum Refinery Products: Refinery throughput grew by only 4.9% to 570.1 lakh tonnes during April-July 2011. Petroleum prod-

ucts consumption during this period grew at an even slower rate of 3.9%. Demand for auto fuels registered weak growth on the back of

a hike in fuel prices and slower automobile sales.

Cement: While re-stocking by dealers prior to the beginning of the festive demand resulted in higher production for cement during

July (up by 10.6% YoY). However, on a cumulative basis, cement output recorded YoY growth of merely 1.8% during April-July

2011. High base of last year and weak domestic demand resulted in muted growth.

Coal: Production of coal in India nearly remained stagnant during the current financial year. This is the second consecutive year of

almost no growth during April-July period. This is also a cause of slower growth in coal-based thermal power generation vis-a-vis rise

in generation capacity.

Electricity: The index of electricity generation rose by a healthy 9.4% during April-July 2011. Electricity generation from hydel plants

rose by 20.4% and that from nuclear plants by a robust 53.3% during this period. Thermal power generation during the same period

was up by 6.2%.

Fertiliser: A muted growth in fertiser production can be attributed to ambiguity in fertiliser subsidy policy and raw material con-

straints.

Steel (Alloy and Non-Alloy): Capacity addition by small players boosted growth in steel production.

Natural Gas: Decline in production in domestic natural gas output has been a reason for pulling down overall growth in the core infra-

structure industries. A high base effect of last year, together with decline in output by Reliance Industries’ owned Krishna-Godavari

basin, has led to this fall. Details of the natural gas industry are analysed in the following article.

Natural Gas Imports Surge

Reliance Industries hopes to profit with BP expertise, gas price revision in 2014: Reliance Industries and global oil major BP hope

to significantly boost natural gas output from the country's largest gas field in the D-6 block in the next two to three years, and make

handsome gains, as gas prices are due for revision in 2014, industry officials said. (The Economic Times, September 5, 2011)

September 7, 2011

PRU Analysis

Domestic natural gas production continued to report a year-on-year fall for the eighth consecutive month in July 2011. Gas production

was down by 8.2% during the month. A fall in gas production from Reliance Industries’ KG-D6 basin continued to affect the overall

gas production.

Output by RIL at the KG –D6 basin was expected to be ramped up to 80 million metric standard cubic meter per day (mmscmd) but it

peaked at 60 mmscmd and fell below 50 mmscmd because of technical issues, claims the company. RIL claims that the reservoir turned

out to be different from what the company had initially envisaged on the basis of surveys.

Hence, Reliance has brought in BP as a joint venture partner to acquire 30% stake in Reliance's 21 oil and gas blocks, including D-6,

for $7.2-billion. RIL expects that BP’s expertise in the sector will help boost output. However, it claims that the ramp-up in production

will take 2-3 years.

Due to lower availability of gas in the country, imports

of LNG surged during the current financial year. Im-

ports of gas during June 2011 soared by 62.5% while

it rose by 39.5% during the quarter on a year-on-year

basis.

It must be noted that cost of imported natural gas is as

high as $14 per mmbtu compared to $4.2 a unit sup-

plied by RIL. Prices of gas supplied by RIL will be

renewed in 2014. At that time, a ramp up in capacity is

sure to help RIL boost its revenues and profitability.

PRU View

The cumulative gas production in India during April-July 2011 was down by 9.7% compared to a healthy 32.3% growth in the corre-

sponding year-ago period. Although gas production is expected to report a y-o-y fall, the rate of decline is likely to slow down in the

coming months. This is because gas production to increase in the second half of 2011-12.

ONGC is expected to commence gas production from fields like GS-1 & GS-15 in the KG Basin and Mumbai Heera oil redevelopment

fields. Gujarat State Petroleum is likely to commence production from Cambay Basin.

Domestic Steel Prices Go Up

Steelmakers increase prices by 3 per cent: Domestic steelmakers have increased prices across categories between `500 and `1,000

per tonne on an average or three per cent on rising input costs. (Business Standard, September 3, 2011)

PRU Analysis

In a recent development, major steel manufacturers in India – Tata Steel, JSW Steel and Steel Authority Of India Ltd (SAIL) — have

increased prices by `500-1,000 across different products. The price rise is attributable to the rise in raw material costs, which have been

squeezing their margins for some time now. Hence, steel makers have increased prices to pass on the raw material cost hike.

The rise in raw material prices has been relentless. For instance, most of the steel companies have signed coking coal contracts for the

Q2 at $315 per tonne, which is 40% higher Y-o-Y basis( Chart 11). Domestic iron ore prices are also ruling high after the Karnataka

mining ban. JSW Steel, which procures iron ore in the spot market, has been the worst affected as the company has to source iron ore

from far areas which is adding up to the freight cost. The international prices of iron ore continue to show an upward bias, owing to the

huge demand for the commodity from China.( Chart 12)

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Chart 9: LNG Prices & Imports in India

LHS: Imports (trillion btu) RHS: LNG Price in Japan

September 7, 2011

Demand for steel is expected to pick up in Q3 and Q4 as con-

struction activity picks up after monsoon. The steel industry

generally witness a slack in demand during the monsoon

months, largely as construction activity comes to a near halt

during this period.

It can be mentioned here that steel makers have been maintain-

ing price levels of flat steel (mainly used by automobile sector)

category despite a slowdown in demand from the automobile

industry.

However, we at PRU expect the demand to remain subdued

due to slow down of overall industrial growth in the country.

Automobile industry another major user industry is going

through tough times, hit by high inflation, a sharp rise in inter-

est rates and spike in fuel prices.

International prices have softened in recent times on the back of stagnant demand due to slow global economic growth. In spite of the

price hike, domestic steel prices are still lower than international prices, hence we don’t expect any imports from China due to the re-

cent price hike.( Chart 10)

Supreme Court has recently allowed auctioning of the 25 million tonnes of iron ore in Karnataka. This might ease the raw material sup-

ply for steel companies there. But, we don’t expect another round of price hike in Nov-Dec 2011.

Engineering Exports Might Slow Down

High interest rates to hit engineering exports: EEPC: Hike in interest rates will have an adverse impact on growth in engineering

exports in the third and fourth quarters of the current fiscal, the trade body EEPC India said today. (The Economic Times, September

4, 2011)

PRU Analysis

Indian engineering exports have been witnessing steady growth, year on year, for the past five years. India has turned into one of the

fastest growing engineering exporters in the world, growing at CAGR of 17.77% for the period FY07-FY11 (Chart 13).

660

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Chart 10: Hot Rolled Coil Price Movement

Domectic HRC Price(Rs/tonne) International HRC ($/tonne)(RHS)

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Chart 11: Sharp Increase In Coking Coal Contract Price

Coking Coal Price($/tonne)

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Chart 12: Spot Iron Ore Prices Remain Firm

China Import Iron Ore 62 Fe($/tonne)

China Import Iron Ore 58 Fe($/tonne)

September 7, 2011

According to the latest data released by the

Engineering Export Promotion Council

(EEPC), a trade body set up by the Union com-

merce ministry to promote exports of engineer-

ing products, exports during July FY12 regis-

tered a mind-numbing growth of 187% Y-o-Y to touch

$8.2 billion. Cumulative engineering exports for the

period April-July this fiscal jumped by 114.3 % Y-o-Y

to $31.6 billion from $14.74 billion in the correspond-

ing period last year.(Table5)

Engineering exports have been a major contributor to

country’s total exports. It can be mentioned here that

during FY11, it accounted for about 24.47% of the total

exports. ( Chart 13)

This is phenomenal growth is attributable to rising de-

mand from new markets like Latin America and Africa.

There is jump in orders from emerging markets like

Brazil, Mexico, Argentina and Columbia.

Demand is expected to be sluggish in the key export destinations like US and EU, which accounts for about 40% of the total engineer-

ing exports. There are renewed concerns over the global economic uncertainty due to fears of US economy slipping into another reces-

sion and worries of sovereign debt contagion in Europe. This is expected to further weaken demand in future.

According to EEPC, high interest rates are likely to hit engineering exports during Q3 and Q4 of FY12. When combined with the with-

drawal of the interest subvention scheme for exports — discontinued since March 31, 2011 — the sector is likely to be deeply im-

pacted. SMEs, which form a considerable chunk of manufacturers and exporters in this sector, do not have the financial staying power

to stomach these changes. The high cost of credit will be detrimental for competitiveness of Indian engineering exports.

It is worth mentioning here that overall exports for July registered a phenomenal growth of 82% Y-o-Y to hit $29.3 billion. This im-

proved export performance is believed to be due to the fast-approaching September 30 deadline by when an export incentive known as

Duty Entitlement Pass Book (DEPB), is likely to be abolished. This impending removal of a key export incentive seems to have

prompted exporters to frontload their exports to take maximum advantage of it.

Duty Entitlement Pass Book (DEPB) scheme was started in the year 1997 to encourage exports from this country. This scheme neutral-

izes the incidence of various types of duty (basic and special customs duty) charged on the import content of the exported product. The

scheme expires by end of this month. Under DEPB, rates are notified based on an assumption that the exporter has used duty-paid im-

ported inputs, whether or not it is actually done. Hence, this assumption brings in an element of subsidy. This has considerably in-

creased the burden of the Government, which annually spends about `8,500 crore for re-reimbursing exporters on the taxes paid on

import equivalent content of export products.

However, there is still continued uncertainty regarding international crude oil prices, impact of the earthquake in Japan and global econ-

omy recovery. Therefore, the withdrawal of DEPB, a popular and exporter-friendly scheme for more than a decade, might impact ex-

port performance in the immediate future. A major share of about 60% of the funds under the DEPB goes to exporters in the chemical

and engineering sectors.

Hence, engineering exports are most likely to slow down due to the hike in interest rates, withdrawal of interest subvention and discon-

tinuation of DEPB.

Table 5: Engineering Exports($ Billion)

FY11 FY12 Growth (%)

July 2.88 8.2 187

Cumulative (April-July) 14.74 31.6 114.3

26.4933.74

40.09

33.73

60.1

-40

-20

0

20

40

60

80

100

0

20

40

60

2006-07 2007-08 2008-09 2009-10 2010-11

Chart 13: Engineering Exports Movement

Engineering Exports ($ bn) % of Total Exports Y-o-Y Growth(%)

September 7, 2011

Manmade Fibre And Yarn

Abolition of anti-dumping duty on yarn, fibre sought: With the prices of synthetic yarn and fibre increasing in the domestic market,

weavers and the importers have demanded that the anti-dumping duty on all types of yarns and fabrics imported from China and other

countries should be abolished to streamline prices in the local market.( The Times Of India, September 3, 2011)

PRU Analysis

Prices of manmade yarn and fibre in domestic market

have witnessed a divergent trend in recent times.

Prices of polyester staple fibre (PSF) and polyester fila-

ment yarn (PFY) have been declining since May

(Chart14). This is attributable to overall subdued demand

and declining cotton prices. Manmade fibre is used as a

replacement for cotton. High cotton prices in recent times

saw demand shifting to PFY and PSF. This resulted in

prices of PFY and PSF also going up. However, with

cotton prices declining now, both PSF and PFY prices

have also started declining.

Prices of synthetic yarn, like viscose staple fibre (VSF)

and viscose filament yarn (VFY), on the other hand, have

been exhibiting a rising trend.(Chart 14)

It can be mentioned here that on an average, prices of different qualities of synthetic yarn manufactured by the domestic players have

gone up from `80 per kilogram to ` 130 per kilogram. This impacted the profit margins of weavers, especially the small players who

run 15 to 20 power loom machines.

Hence, weavers and importers have demanded abolition of anti-dumping duty on all types of synthetic yarns in order to bring down the

the domestic prices . Due to the imposition of the anti-dumping duty, the domestic manufacturers of yarns and fibre have a free hand in

increasing prices when the demand goes up. The synthetic fibre and yarn manufactured in China is 15-20% cheaper compared to the

one manufactured by domestic players.

Hence, imposition of anti-dumping duties on synthetic yarn and fibre reduces availability of competing products and increases the input

cost for the weaving sector. The production capacity for man-made fibres and yarn in India is characterised by the presence of very few

large players. For instance, VSF is produced only by Grasim Industries. Reliance Industries produces about 64% of PSF and 48% of

PFY. This, then, has a direct bearing on man-made fibre yarn prices in the domestic market.

——————————————

70

170

270

370

Chart 14: Manmade Fibre And Yarn Price Movement

PSY PSF VFY VSF

September 7, 2011

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