EQUITY RESEARCH

INDUSTRY UPDATE
www.chiefsforum.tk
December 7, 2010

India Rising—Dawn of a
INDIA
New Era for the Asian
Juggernaut
2011—A Great Time to Visit India
SUMMARY

We see India as an attractive investment destination due to 1) relatively strong GDP

and earnings growth vs.other economies–emerging as well as developed, 2) a
politically stable environment at least over the next 4 years with a near-majority
government in place, 3) a stable financial system, 4) acceleration in pace of reforms
with an untethered government at the helm, 5) solid long-term growth potential
given a higher mix of domestic demand vs. other emerging economies, and
6)favorable demographics with India's burgeoning young populace one of the most
compelling growth drivers.

KEY POINTS

■ Domestic demand accentuates India's attractiveness vs. other emerging

markets: Around 85% of India's aggregate economic demand is domestically
driven. India's large investment program and the demographic dividend of a
growing, young and educated middle class are likely to continue to drive strong
domestic demand for the long term.

■ Favorable demographics make the India growth story resilient and

insulated: India's young populace represents one of this market's most
compelling total growth drivers over the coming years. A well-managed
young-population economy leads to high visibility of nominal and real earnings
growth. Also, for such an economy, the acceleration stage in the purchase of
financial assets lies ahead.

■ Market tailwind from underowned equities and wealth creation: India's

transition to an increasingly market-based economy, associated with lower
taxation, increased transparency and growing economic integration with the rest
of the world, has sown the seeds for an key transition in the way Indian
households channel their savings. We foresee a continuation of the shift in
savings behavior from cash/gold to higher equity ownership through
participation in the secondary markets.

■ May 2009 elections—a seminal event: While the elections seem like eons
ago, we believe them to be a seminal event in India's history and most
encouraging for sustainable long-term economic growth. While the jury is still
out on whether or not the current Congress-led UPA government with a majority
Manish Hemrajani seat count has really been able to break the shackles, some of the key areas of
212 667-5407 improvement have been divesting government assets, stabilizing capital inflows,
Manish.Hemrajani@opco.com and resolving infrastructure bottlenecks.

Oppenheimer & Co. Inc. does and seeks to do business with companies covered in its research reports. As
a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. See "Important Disclosures and Certifications" section at the end of this report for
important disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks
to Price Target" sections at the end of this report, where applicable.

Oppenheimer & Co Inc. 300 Madison Avenue New York, NY 10017 Tel: 800-221-5588 Fax: 212-667-8229
INDIA

India Rising—Dawn of a New

Era for the Asian Juggernaut

2
 INDIA

Contents
2011—A GREAT TIME TO VISIT INDIA ................................................................ 3
INVESTMENT RISKS........................................................................................... 4
STRONGER ABILITY TO WITHSTAND SHOCKS AND DOWN-CYCLES ____________ 5
ECONOMY—INDIA AT A GLANCE ___________________________________ 6
EARNINGS GROWTH ACCELERATING THROUGH FY12 _____________________ 7
DOMESTIC DEMAND A POSITIVE FOR INDIA VS. OTHER EMERGING MARKETS ____ 8
FAVORABLE DEMOGRAPHICS MAKE THE INDIA GROWTH STORY RESILIENT _____ 9
MARKET TAILWIND FROM UNDEROWNED EQUITIES AND WEALTH CREATION___ 10
LIMITED INVESTMENT OPTIONS FOR OVERSEAS INVESTORS ________________ 11
2009 GENERAL ELECTIONS—A SEMINAL EVENT ________________________ 12
OVERVIEW __________________________________________________ 14
GROSS DOMESTIC PRODUCT ______________________________________ 16
FOREIGN EXCHANGE RESERVES ___________________________________ 22
FOREIGN INVESTMENT __________________________________________ 23
FII INFLOWS _________________________________________________ 25
IIP HAS REBOUNDED NICELY; RECENT WEAKNESS, HOWEVER, A CONCERN ____ 29
INDIA’S RISING MIDDLE CLASS ____________________________________ 30
WALLET-SHARE SHIFT FROM BASIC NECESSITIES TO DISCRETIONARY ITEMS _____ 31
STOCK EXCHANGES ____________________________________________ 32
BFSI SECTOR (BANKING, FINANCIAL SERVICES, INSURANCE) _______________ 34
INSURANCE SECTOR ____________________________________________ 39
IT/BPO SERVICES _____________________________________________ 47
PHARMACEUTICAL SECTOR _______________________________________ 53
EDUCATION SECTOR____________________________________________ 57
RETAIL SECTOR _______________________________________________ 61
MEDIA SECTOR _______________________________________________ 64
AUTO SECTOR ________________________________________________ 66
INFRASTRUCTURE SECTOR ________________________________________ 69
TRAVEL SECTOR _______________________________________________ 72

www.chiefs-world.tk

3
INDIA

Executive Summary—India Strategy

2011—A Great Time to Visit India

We see India as an attractive investment destination due to 1) relatively strong GDP and earnings growth vs. other
economies—emerging as well as developed, 2) a politically stable environment at least over the next 4 years with a
near-majority government in place, 3) a stable financial system, 4) acceleration in the pace of reforms with an
untethered government at the helm, 5) solid long-term growth potential given a higher mix of domestic demand vs.
other emerging economies, and 6) favorable age demographics with India's burgeoning young populace one of the
most compelling growth drivers.

Near Term Acceleration in Earnings Growth

India’s growth remains highly geared to capital flows. A stable government at the helm with a strong mandate has
resulted in an improved outlook for capital flows. Even without the impetus of significant reforms, we have seen a
recovery in growth over the last 12 months, and that recovery has gained further momentum over the last 6 months.

Domestic Demand Accentuates India’s Attractiveness Vs. Other

Emerging Markets
Around 85% of India’s aggregate economic demand is domestically driven. India’s large investment program and the
demographic dividend of a growing, young and educated middle class are likely to continue to drive strong domestic
demand for the longer term.

Favorable Demographics Make the India Growth Story Resilient and

Insulated
India’s young populace represents one of the Indian market’s most compelling total return drivers over the coming
years. In our view, a well-run, young economy is one where the visibility of nominal and real earnings growth remains
high. Also, for such an economy, the fruits lie ahead in the acceleration stage in the acquisition of financial assets,
similar to what the United States experienced in the early 1990s and Korea in the 1980s.

Market Tailwind from Underowned Equities and Wealth Creation

Traditionally, Indian households have been hoarders of cash and gold. Over the past several years, however, India’s
transition to an increasingly market-based economic system associated with lower taxation, increased transparency
and growing economic and informational integration with the rest of the world, has sown the seeds for an important
transition in the manner in which Indian households channel their hard-earned savings. Going forward, we foresee a
continuation of such a shift in savings behavior on the part of Indian retail and institutional investors with higher equity
ownership through participation in the secondary markets.

2009 Election Results—A Seminal Event

While the 2009 elections seem like eons ago, we believe that they were a seminal event in India’s history and most
encouraging for the sustainable long-term development and growth of the Indian economy. In 2009 the Indian
electorate delivered its most unanimous verdict since 1991 and brought the Congress-led UPA back to power with

4
 INDIA

close to a majority seat count—the highest for any party since 1991. This meant that for the first time since 1995,
India had the opportunity to break the shackles of coalition politics and channel its efforts toward cohesive and all-
around growth. While the jury is still out as to whether or not the current government has really been able to break the
shackles, some of the key areas of focus for the government have been 1) improving public finances, 2) taking action
on government owned asset-divestment—to raise funds/resources, 3) attracting stable capital flows from overseas
into the country, 4) resolving infrastructure bottlenecks, and 5) addressing pending reforms in insurance, aviation,
pension funds, banking, retail and telecom. With these efforts, the chances of upward revisions in India’s economic
growth prospects are better than ever.

Investment Risks
Country Risk: Investments are subject to the geographical, political, economic and social issues specific to India.

Currency Risk: Investors in India may be subject to the exchange rate fluctuations between their investment
currency and the Indian rupee.

Volatility risk: The Indian stock markets are more volatile than the stock markets of the developed economies of
Western Europe and North America.

Tax risk: Tax treatment of foreign investments in India may be changed by the Indian government without notice.

Regulatory risk: Foreign investors in India may be restricted from investing in certain sectors or companies, or be
subject to investment limits.

Liquidity risk: Liquidity in small and mid-cap companies tends to be thin in India, which adds some amount of
liquidity risk.

Corruption Risk: India ranks high on Transparency International’s 2010 Corruption Perceptions Index. The
Corruption Perceptions Index measures the perceived levels of public sector corruption in 178 countries worldwide.
Investors in India may be unaware of corrupt practices in some invested companies.

Political Violence Risk: Several terrorist attacks in recent years in many major cities highlight the threat posed by
Islamist militant groups within India. The latest—the November 2008 Mumbai attack—resulted in over 180 deaths.
Though there have been no major attacks since 2008, warnings of pending attacks are becoming increasingly
common and future attacks in major cities are a possibility.

Tensions with Pakistan have threatened regional stability since 1947. Several years of peace talks on the disputed
Jammu-Kashmir territories have resulted in little progress. The Mumbai attacks led to deterioration in Indo-Pakistani
relations due to Indian government’s allegations of Pakistani government agencies’ involvement in the attacks.

The ongoing Maoist (Naxalite) insurgency—named the single biggest threat to internal security by Prime Minister
Singh—is growing increasingly violent. New Delhi may be forced to take on more responsibility in tackling the
Naxalites, an issue that has hitherto been considered an internal matter for individual states to deal with.

It should be noted that investments in India are subject to the normal risks associated with emerging markets,
including but not limited to risk of losing some or all of the capital invested, high volatility, variable liquidity,
geopolitical risks (including political instability), exchange rate fluctuations and restrictions on foreign investors.

5
INDIA

India: The Structural Transformation

Stronger Ability To Withstand Shocks And Down-Cycles
Exhibit 1: India Economic Indicators 1970s to Present

India's Growth Story In Numbers - 1970s to current

Variable 1970s 1980s 1990s 2000-04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E
The Real Economy
Real GDP Growth 3.6 6.3 5.8 5.7 7.5 9.4 9.6 9.0 6.7 7.4 8.5-8.75
Agriculture 0.6 4.4 3.5 2.2 0 6 3.8 4.5 1.6 -2 1
Industry 4.7 7.4 6.7 5.7 8.4 8 11 8.5 3.9 6.5 8.5
Services 4.1 6.4 7.7 7.3 10 10.3 11.2 10.8 9.7 8 11
Savings and Investment
Private Consumption Expenditure (% of GDP) 74.3 65.6 64.6 65.7 64.3 58.6 55.3 53 52 50
Savings (% of GDP) 17.5 19.4 23.1 25.2 31.1 32.4 35.7 37.7 37 37 37
Investment (% of GDP) 17.6 21.3 23.1 24.6 30.2 32.2 36.9 39.1 36.6 37.5 37.5
Government Finances
10.0-
Fiscal Deficit- Centre+States (% of GDP) 6.0 8 7.7 9.4 7.5 6.7 6.4 5.6 9 10 11.0
Fiscal Deficit- Centre (% of GDP) 3.8 6.8 5.7 5.6 4 4.1 3.7 3.1 6 6.5 6.5
Inflation
WPI (%) 9.0% 8.0% 8.1% 4.4% 5.1% 4.0% 6.5% 4.8% 8.0% 3.6% 3.5%
Balance of Payments
Foreign Exchange Reserves (US$ Bn) 7.4 4 38.7 113 141.5 145.1 191.9 299.1 241.6 252.8 260
Import Cover in Months 6 3.8 6.6 12.9 14.3 11.6 12.4 14.1 10.5 11 11
Currency –Re/$ 7.9 17.5 44.9 45.9 43.8 44.6 43.6 40.2 48.5 46 44

Source: CSO & Oppenheimer & Co.

Exhibit 2: India Economic Indicators FY05 to Present

India Economic Indicators FY05 FY06 FY07 FY08 FY09 FY10

National Accounts
GDP Current Prices (Rs. B) 31494 35867 41292 47234 49832 53071
GDP Current Prices ($B) 700 810 913 1173 1249 1330
India's share of world GDP % 1.6% 1.7% 1.8% 2.0% 2.2% 2.4%
Gross National Savings % of GDP 31.7% 34.2% 35.7% 37.7% 36.4% 36.5%
GDP per Capita 642 732 813 1031 1088 1158
Debt Level
Total External Debt (US$B) 123 138 170 225 236 247.3
Debt to GDP Ratio 17.1 17.1 18.1 18.8 18.9% 18.6%
International Transactions
Current Account ($B) -2.5 -9.9 -9.6 -15.7 -28.8 -38.4
Capital Account ($B) 28 25.5 45.2 106.6 7.2 53.6
Net FDI ($B) 3.7 3 7.7 15.9 17.5 19.9
External Trade
Exports 81.9 105.2 128.9 166.2 189 182.2
Imports 111.2 157.1 190.7 257.6 307.7 299.5
Trade Balance -29.4 -51.9 -61.8 -91.4 -118.7 -117.3
Production and Domestic Demand
IIP 8.4 8.2 11.5 8.6 2.8 10.4
Prices
CPI 3.8 4.2 6.8 6.2 9.6 10.8
WPI 6.5 4.4 5.4 4.8 8 3.6

Source: CSO, Reserve Bank of India

6
 INDIA

Economy—India at a Glance
Exhibit 3

Annual GDP Growth Trends Industrial Production Growth

20%
Nominal GDP growth Real GDP growth

18%
16% 15%
14%
12%
10%
10%
8%
6% 5%
4%
2%
0% 0%

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Feb-07

Feb-08

Feb-09

Feb-10
Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10
Aug-06
Oct-06

Aug-07
Oct-07

Aug-08
Oct-08

Aug-09
Oct-09

Aug-10
FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

-5%

Wholesale Price Index (1970s to present) Forex Reserves ($B) (1970s to present)

350
10.0%
9.0% 300
8.0%
250
7.0%
6.0% 200
5.0% 150
4.0%
3.0% 100
2.0% 50
1.0%
0.0% 0

Re-US$ Exchange Rate (1970’s—present) Trade Balance ($B)

60 Exports Imports

50 600

40 500

400
30
300
20
200
10
100
0
0
2010E
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008

FY05 FY06 FY07 FY08 FY09 FY10

Source: SEBI, RBI, CSO, Oppenheimer & Co estimates.

7
INDIA

Key Points
2011—A Great Time to Visit India
India’s share of world GDP has been gradually growing from 1.8% in CY05 to 2.3% in
CY09 largely due to anemic growth in the developed markets. In 2009, world GDP growth
was -1.9% coupled with outsized growth in India. India’s GDP growth has averaged 8.3%
since FY05. We expect India’s GDP share to continue to grow on better growth prospects.
Recently, the IMF said that India's GDP growth is expected to accelerate to 9.4% in 2010
as robust corporate profits and favorable financing conditions fuel investments. The Indian
Government expects GDP growth in the 8.5-8.75% range in FY11 (ending March). While
the growth forecasts made by IMF and the Indian Government are not comparable, both
estimates put India second behind China in GDP growth. Comparatively, the IMF global
growth forecast for 2010 is 4.5%. IMF expects the Chinese economy to grow by 10.5% in
2010.

In our view, the Indian equity market is one among very few markets around the world
that looks poised to advance on a long-term bull phase over the next several years. Key
factors supporting our enthusiasm are demographics, a sound medium and long-term
earnings outlook, a vastly improved policy backdrop and India’s allure at a point in history
where its growth premium is most likely bound to reset at higher levels. In addition, we
believe, the foremost technical factor anchoring our outlook entails the vast underowned
status of Indian equities both at the domestic and international levels (retail and
institutional).

We are bullish on the Indian economy and equities in particular despite more than
doubling of the BSE Sensex (the Bombay Stock Exchange Sensitive Index) from yearly
lows in March 2009. With a stable Congress-led UPA government at the helm, we believe
investors can look forward to four more years (through 2014) of political stability. More
important, the new government, devoid of pressures from the Left Front, has already
shown more latitude with policy reforms, devoid of resistance from coalition politics as was
the case in the preceding five year term.

We believe the Indian equity market holds the potential for annualized returns in the
vicinity of 12-18% in rupee terms, and 15-21% in US dollar terms over the next 5-10 year
horizon. Our return outlook reflects 1) our expectation for an annualized medium-term
earnings growth outlook in the vicinity of 12-18% in rupee terms, 2) the potential for a
further decline in India’s equity risk premium as the inflation outlook continues to improve
and 3) the rupee’s revaluation potential versus the US dollar. (Note that our return
calculations exclude applicable costs.)

Earnings Growth Accelerating through FY12

India’s growth is highly geared to capital flows, and the government’s strong mandate has
already improved the outlook for such flows. Without assuming significant reforms, we
believe growth will continue to be robust post recent recovery in FY11 and through FY12.
The Indian Government recently forecasted GDP growth for FY11 to be in the range of
8.5-8.75%, above FY10’s 7.4% and is expecting growth of at least 9% in FY12.

8
 INDIA

Domestic Demand A Positive For India Vs. Other

Emerging Markets
Exhibit 4: India—Strong Domestic Sector

Public consumption Pvt consumption

80
70
60
50
40
30
20
10
0
2005

2006

2007

2008

2009

2010E
Source: CSO

Share of Consumption to GDP (%) Has Remained Largely Consistent

Over The Years
Around 85% of India’s aggregate economic demand is domestically driven. India’s large
investment program and the demographic dividend of a growing, young and educated
middle class are likely to continue to drive strong domestic demand.

India is considered primarily a domestic economy—its share in world trade is a measly

1.1%, with exports constituting only 21% of its GDP. India also has enough forex reserves
(an import cover of 11 months in FY10) to take care of capital flight and has a high
outgoing FDI (foreign direct investment) component compared to emerging economies.
The headline numbers in terms of trade deficit also favor India, with the country actually
running a current account deficit (-2.9% of GDP) compared with a high current account
surplus (6% of GDP) for China in 2009. The risk here, though, is that rising imports due to
strong domestic demand and concerns that export growth may be slow could add to the
widening current account gap. Recently, India’s Planning Commission deputy chairman
stated that the government expects the current account deficit for FY11 to be just above
3%.

Low Share in World Merchandise Trade Makes It Less Susceptible To

Protectionism
India is potentially at a lower risk of protectionism than other emerging economies due to
its low contribution to world merchandise trade. India contributes only 1.1% to net world
merchandise exports compared with China, which accounts for 8.7% of the world exports.

Thus, it would be much easier for a country like the US to impose restrictions on a larger
player like China (which contributed to a substantial 16% of its net imports in FY08),
compared with India—which constituted only 1% of the US’s net imports in the same year.

Low Contribution of Exports to India’s GDP

India ranks pretty low in comparison with other emerging economies in terms of
contribution of exports to GDP. This makes India less dependent on exports for its

9
INDIA

economic growth and hence reduces the possible impact of protectionism on the Indian
economy as a whole; even though it may result in lowering of its net exports.

Favorable Demographics Make the India Growth

Story Resilient and Insulated
India’s young populace represents one of the Indian market’s most compelling total-return
drivers over the coming years. A well-run, young population economy means that the
visibility of nominal and real earnings growth is high. Also, for this kind of an economy, the
acceleration stage in the purchase of financial assets lies ahead. India today resembles
the situation of the early 1990s in the United States and the 1980s in Korea.

Other positives, both from a macro and market perspective, include benign fiscal
implications stemming from a wide generational pyramid of workers-to-retirees. In other
words, the ratio of workers to retirees is high. Contrast this with the situation in the US
and more so in Japan, where a declining young population and a growing retiree base is
slowly moving toward an inverted workers-to-retirees pyramid.

Exhibit 5: Younger Population Mix—A Longer-term positive

Source: World Bank data for 2005

The working age population is defined as the population between the ages of 15-64. The
number of Indians in the working age group of 15-64 years is forecast to rise from 63% of
the population in 2006 to 68% in 2026 (source: Indiastat). Public-sector employment, with
its social-security guarantees, is declining; private-sector employment, with its higher
salaries but lower job security, is increasing rapidly. This shift, we believe, can only boost
demand for new financial products and the need for Indian investors to remain in charge
of their own savings, presenting opportunities for both the government and financial-
services providers to channel those savings productively.

10
 INDIA

Exhibit 6: Proportion of Working Age Population to Total

Source: CIA World Factbook 2009.

Exhibit 7: Ratio of the Inactive Elderly Population Aged 65 and Over To The Labor Force

2 050 20 00
100

80

60

40

20

Source: OECD 2008

Market Tailwind From Underowned Equities And

Wealth Creation
Traditionally, Indian households have hoarded cash and gold. Over the past several
years, India’s transition to an increasingly market-based economic system associated with
lower taxation, increased transparency and growing economic and informational
integration with the rest of the world, has laid the foundation for a major shift in the way

11
INDIA

Indian households manage their finances, including their savings. Going forward, we
foresee a continuation of such a shift in savings behavior on the part of Indian retail and
institutional investors.

Exhibit 8: India’s Share of Investment to GDP Second Only To China

FY05 FY09

45
40
35
30
25
20
15
10
5
0

Source: CSO

Exhibit 9: India: Rising Trends in Domestic Savings and investments

Investment to GDP Savings to GDP

45

40

35

30

25

20
2003 2004 2005 2006 2007 2008 2009 2010E

Source: CSO

Limited Investment Options for Overseas

Investors
As the Indian growth engine powers ahead, more and more overseas investors are
looking at investing in India. In fact, there is ample reason for India's viability as a
destination for foreign investment.

12
 INDIA

Improving macroeconomic fundamentals and greater integration with the world economy
have increased India’s global competitiveness, and visibility, helping place the country on
the radar screens of investors worldwide. India’s market infrastructure, regulatory
institutions and corporate governance, while not yet of the same standards as those of
developed markets, are rapidly improving.

In addition, macro-economic indicators, higher disposable incomes, an emerging and

broadening middle class, a low cost competitive workforce, investment friendly policies
and progressive reform processes are all likely to combine to make a strong case for India
to have a larger share in the overall investment pie.

Also, Indian companies are becoming increasingly competitive, global in both focus and
reach. These companies are scoring well in innovation and sophistication of operations,
and in adoption of the latest technologies from across the world. With disposable incomes
rising, consumer products companies are witnessing solid growth. Rising incomes
combined with low-interest financing have also given the automobile industry a big boost.
India is also one of the fastest-growing mobile phone markets in the world.

India is one of the few economies growing at sustainable 6%+ levels (source: CSO),
making the country a real opportunity for investors looking for sustainable returns in the
medium to long term.

2009 General Elections—A Seminal Event

Back in June 2009, the Indian electorate delivered its most polarized verdict since 1991
and brought the Congress-led UPA back to power with close to a majority seat count. The
Congress party won over 200 seats— the highest seat count for any party since the
Congress won 244 seats in 1991. We believe with four more years of stability at the top.
The current government has more latitude with policy reforms, being less encumbered by
coalition politics as was the case for the prior government during 2004-09.

A positive outlook, however, partly hinges on the government’s policy response and partly
on global outcomes. The government has the challenge to revive growth in a difficult
global environment and to deal with a large fiscal deficit.

Some of the key areas of focus for the government include 1) improving public finances,
2) taking action on disinvestment—to raise resources, 3) attracting stable capital flows in
to the country, 4) resolving infrastructure bottlenecks, and 5) addressing pending reforms
in insurance, aviation, pension funds, banking, retail and telecom. With these areas in
focus, the chances of upward revision in India’s economic growth prospects are better
than ever.

13
INDIA

India—An Overview
India gained independence from Great Britain on August 15, 1947. Its Constitution took
effect on January 26, 1950. India is a federal republic with 29 states and 6 union
territories.

The largest democracy in the world, India holds general elections every five years. Indian
politics has been dominated by three major parties since the 1980s—the Congress Party,
the Janata Dal (JD) and the Bhartiya Janata Party (BJP). The Congress Party has been
the most dominant party in Indian politics, having served 12 terms at the helm with 7 prime
ministers elected. In 2004, Dr. Manmohan Singh (India’s current prime minister) and the
Congress led a coalition called the United Progressive Alliance (UPA), which was backed
by the Left parties, among others. However, the Left parties withdrew support from the
UPA government in July 2008 in protest against the government’s decision to proceed
with the Indo-US nuclear deal. In the subsequent elections held in June last year, the
th
Congress Party-led UPA coalition won the 15 LokSabha elections with the highest
majority for any party since 1991 and once again formed the government under the
leadership of Dr. Singh.

The Congress Party has historically adopted secular and socialist principles. The
Congress government in 1991 got the liberalization ball rolling by encouraging greater
private sector participation and by initiating capital market reforms. Dr. Singh, the then
finance minister, was instrumental in pushing ahead with the reforms process that
liberalized India's economy. The opening up of the economy gave India a vibrant and
economically empowered middle class that forms the crux of its current expansion and
growth.

India, the seventh-largest country in the world, is situated in Southeast Asia. It covers an
area spanning approximately 1.3 million square miles. The country shares its borders with
the People's Republic of China, Nepal and Bhutan in the north, Pakistan in the west, and
Myanmar and Bangladesh in the east. The world's second most populous country, India
has a total population of around 1.15 billion, according to recent Census Bureau estimates
and is expected to reach 1.27 billion by 2016. Although migration from rural to urban
centers has increased steadily, India's population remains predominantly rural. The 2001
census reported that 72.2% of the total population still lived in villages. Around 35.6% of
India’s population is below 14 years of age.

According to Central Intelligence Agency estimates, India’s life expectancy for males and
females at birth is now 67.5 years and 72.6 years, respectively in 2009. The literacy rate
increased from 18.3% of the population in 1950-51 to 67.6% of the population in 2005-06.

According to the Indian Government’s data, per capita income grew by 10.5% to 44,345
rupees (Rs) in 2009-10 against Rs 40,141 in the year-ago period. Per capita income (at
2004-05 prices) stood at Rs 33,588 in FY10 against Rs 31,821 in the previous year,
according to estimates of national income.

14
 INDIA

Exhibit 10: World Population (in millions) as of July 2009

1400

1200 1330

1148
1000
975
800
804
600

400
338
200

0
China India Africa Europe North America

Source: Internet World Stats

Indian Economy
Overview
The Indian economy has been witnessing exceptional growth since the last decade and is
among the fastest-expanding economies in the world. In fact, it is the second fastest-
growing major economy with a GDP growth rate of 7.4% in FY10, up from 6.7% in a global
macro-impacted FY09. Currently, the Indian economy is the fourth-largest in the world, as
measured by Purchasing Power Parity (PPP). Measured in US dollars, it is the 12th-
largest with a GDP of $1.3 trillion in 2009. However, India’s huge population results in a
per capita income of just $2,960 at PPP and $1,070 at nominal rates in 2008. The World
Bank, in its June 2010 update, classified India as a “lower middle income” economy.

Following independence, India pursued a developmental policy based on strong

centralized planning, regulation & control of private enterprise, state ownership, trade
protectionism, and strict limits on the entry of foreign capital as well as technology. This
protectionist regime limited India's economic development until the mid-1980s, when a
movement toward liberalization and market orientation of the economy took shape. The
balance of payments crisis in 1991 threatened to destabilize the economy. At that time,
India was running a current account deficit of around $10 billion. Reserve levels were
down to two weeks of imports in spite of an IMF loan of $1.8 billion. India's financial
credibility was low, commercial borrowing almost impossible, inflation high, and FDI
(foreign direct investment), lacking. Further exacerbating the crisis were factors such as 1)
a widening fiscal deficit; 2) an increase in petroleum imports coupled with oil price spikes
due to tension in the Persian Gulf; 3) the reduction in remittances from the Persian Gulf,
which had a large Indian population; 4) the collapse of the Soviet Union and the resulting
pressures on India's exports; and 5) domestic political instability.

In response to this crisis, the government instituted a program of structural reforms aimed
at stabilizing the economy and promoting reliance on market mechanisms. The main
components of the structural reform program were: 1) exchange and trade liberalization;
2) financial sector reform; and 3) control of budget deficits, inflation as well as currency
15
INDIA

supplies. The program promoted foreign technology transfers and foreign investment in
certain sectors of the economy as well as further development of the private sector.

The Indian Government instituted significant reform initiatives, such as rationalization of

income tax rates, during this period. From 1999, further reform initiatives were instituted,
including:

• The Indian Electricity Act passed in 2003 to encourage competition in the power
sector.

• The Indian Fiscal Responsibility Act passed in 2003 to provide a legal and institutional
framework for controlling deficits and stabilizing debt.

• Pension reforms (through the 2003-04 budget) and introduction of a new restructured
defined-contribution pension system for new entrants to central government services,
except the armed forces.

• Implementation of a scheme called States Fiscal Reform Facility (2000-01 to 2004-

05) to facilitate fiscal reforms by states; as a measure of tax reform, 25 states and 6
union territories had introduced VAT (Value Added Tax) in place of the sales tax by
December 31, 2005

• Launch of the Indian National Highway Development Program for the construction of
17,161 kilometers of highways also known as the Golden Quadrilateral Project

• The planned introduction of Goods and Services Tax (GST) by April 2011 (delayed by
a year). This is in line with tax reforms focusing on an efficient and harmonized tax
system.

In addition, the government raised foreign direct investment limits in the

telecommunications, refining and banking sectors as well as opening up the insurance
and broadcasting sectors to FDI inflows. Growing investor interest in India based on
strong fundamentals as well as government initiatives led to an 11% year-over-year rise in
total FDI inflows in 2008-09.

16
 INDIA

Exhibit 11: FDI Breakdown – By Sector (US$ Billion)

7
6 FY09 FY10
5
4
3
2
1
0

Telecom
Services

Chemicals
Metallurgical
Power
Construction Activities

Automobile Industry
Housing and Real
Computer S/W and

Petroleum & Natural

Industries
Estate
H/W

Gas
Source: Reserve Bank of India and Oppenheimer & Co

Gross Domestic Product

GDP Growth
India’s average yearly real GDP growth from 2000-01 to 2009-10 was 7.34%. For the
recently concluded financial year 2009-10, the Indian economy registered growth of 7.4%,
with 8.6% year-over-year growth in F4Q10. Growth was primarily driven by robust
performance of the manufacturing sector on the back of government and consumer
spending.

GDP growth rate of 7.4% in FY10 exceeded the government forecast of 7.2%. According
to government data, the manufacturing sector witnessed growth of 16.3% in F4Q10.
During 2009-10, the services sector remained the largest contributor to GDP. Economic
activities which showed significant growth rates in 2009-10 were mining and quarrying
(10.6%), manufacturing (10.8%), electricity, gas and water supply (6.5%), construction
(6.5%), trade, hotels, transport and communications (9.3%), financing, insurance, real
estate and business services (9.7%), community, social and personal services (5.6%). Per
capita income is estimated to grow at 5.6% in 2009-10.

Despite the uncertain outlook for developed economies, further monetary tightening in the
pipeline and the beginning of pullout of fiscal stimulus, real GDP growth in India is
expected to accelerate in FY11 and FY12, with the government forecasting GDP growth of
8.5-8.75% in FY11 and 9% in FY12. Investment and industrial activity, which is more
oriented towards the domestic market, should sustain growth, while consumer sentiment
could be dampened by persistent high inflation. A majority-led governing party at the helm
—the Congress Party—bodes well for continued economic reforms, with the move
towards gradual liberalization, privatization and deregulation expected to continue under
the current government. While sustained annual double-digit growth remains a few years
away, a rebound to the 8-9% growth rates seen before the 2008 crisis is very likely in
FY11 and FY12.

17
INDIA

Composition of GDP

Exhibit 12: India GDP Share FY10

Agriculture & Other 17.0%

Agriculture 14.6%
Mining & Quarrying 2.4%
Industry 26.0%
Manufacturing 16.1%
Elec. Gas Water supply 2.0%
Construction 7.9%
Services 56.9%
Trade, hotels, transport, communication 26.5%
Financing insurance, realestate 17.2%
Community Social and personal services 13.1%

Mining
&
Quarry
ing, 14.
3%
Agricul
ture, 8
5.7%

Social Agriculture &

and Other
personal 17%
services, Trade, h
24.3% otels, tra
nsport, c Services
omm Industry Constru
Financin 57%
49.9% 26% ction, 3
g
insuranc 0.5%
e, real
estate … Elec. Manufa
Gas cturing,
Water 62.0%
supply,
7.5%

Source: CSO

Historically, the agricultural sector had been the largest contributor to GDP (52.5% during
1951-52 to 1955-56—the Indian Government’s first Five-Year Plan). However, in
subsequent Five-Year Plans, contributions from the manufacturing and services sectors
toward GDP growth have outpaced that of agriculture.

Growth rates of the various economic sectors (measured in 1999-00 prices) during 2003-
04 to 2009-10 are shown below.

18
 INDIA

Exhibit 13: Growth in GDP By Sector

(% annual real change)

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Agriculture, forestry & fishing 10 0 5.8 4 4.9 1.6 0.2

Mining & quarrying 3.1 8.2 4.9 8.8 3.3 1.6 10.6
Manufacturing 6.6 8.7 9.1 11.8 8.2 3.2 10.8
Electricity, gas & water supply 4.8 7.9 5.1 5.3 5.3 3.9 6.5
Construction 12 16.1 16.2 11.8 10.1 5.9 6.5
Trade, hotels, transport and Comm 12.1 10.3 12.3 13.4 12.3 7.6 9.3
Financing, insurance, real estate & business services 5.6 8.7 11.4 13.8 11.7 10.1 9.7
Community, social & personal services 5.4 6.8 7.1 5.7 6.8 13.9 5.6
GDP at factor cost 6.7 7.4

Source: CSO

The surge in oil and commodity prices during the first half of 2008-09 shifted the focus
from growth to containment of spiraling inflation. In line with this, the government:

• Reduced import duties on food items, including semi- and wholly-milled rice, crude
and refined edible oils.

• Imposed an export duty of INR 8000 PMT on basmati rice.

• Abolished import duties on crude petroleum and reduced import duties on petrol and
diesel to 2.5%. Lowered customs duty on other petroleum products to 5%.

• Reduced import duties on many iron and steel products.

• As a part of fiscal stimulus package, the excise duty rate on most of non-petroleum
products was reduced by 4%

• Fully exempted aviation turbine fuel (ATF) from import duties to aid the aviation
industry

With reference to government finances, the fiscal deficit appears to be conforming to the
estimates made in the Union Budget for FY11. Higher than expected realizations on 3G
and broadband wireless access (BWA) auctions combined with buoyant tax revenues
have virtually eliminated the risk of the fiscal deficit overshooting the targeted 5.5%, even
after the supplementary demand for grants is taken into account. This should help
stabilize market expectations of liquidity and interest rate movements.

Exhibit 14: Total Expenditures of the National Government

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010

Total Expenditures (INR Billion) 4,712.03 4,982.52 5,057.38 5,833.87 7,127.32 8,840.00 10,215.00
Non-Plan Expenditures, including 3,489.23 3,659.60 3,651.00 4,135.27 5,076.50 6,087.00 7,064.00
(a) Interest Payments 1,240.88 1,269.34 1,326.30 1,502.72 1,710.30 1,922.00 2,195.00
(b) Defence Expenditures* 432.03 438.62 482.11 516.82 542.19 733 884
(c) Subsidies 435.35 447.53 444.8 534.95 674.98 1,297.00 1,310.00
Plan Expenditures 1,222.80 1,322.92 1,406.38 1698.6 2,050.82 2,752.00 3,152.00
Revenue Expenditures 3,620.74 3,843.29 4,393.76 5146.09 5,944.94 7,938.00 9,063.00
Capital Expenditures 1,091.29 1139.23 663.62 687.78 1182.38 902 1152

Source: CSO

19
INDIA

Exhibit 15: Growth in Services Remains Robust

Service sector Community and social services

25%

20%

15%

10%

5%

0%

Agriculture Industry Services

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Source: CSO

Service Sector to Lift Economic Growth

In India, services constitute a higher mix of GDP versus that for other emerging market
countries. The service sector (including construction) now accounts for about 62% of the
country’s GDP. Its share was about 40% in the early 1980s. Naturally, service has been a
major driver for the economy’s current high-growth path. High growth in the sector comes
from a wide array of services. These include construction, trade, hotels, restaurants,
transport, communication, financial services and business services. Given the plans for
infrastructure investments in roads & ports, planned investment in housing and
commercial real estate and continued capex by Indian companies, the construction sector
we believe should remain on a double-digit growth path. Additionally, higher income is
changing consumption patterns, dramatically increasing the demand for travel, food and
entertainment.

20
 INDIA

Key highlights of growth in the services sector in the recent past include:

• Construction recorded growth of 12.8% annually over the past four years.

• Trade, hotels, transport and communication has recorded 11.6% growth annually
over the past four years, led by mushrooming growth in communication services.

• Financing, insurance, real estate and business services has recorded average growth
of 10.7% over the past two years compared with 6.7% in the preceding five-year
period.

• Community, social and personal services have recorded average growth of 6.0% in
previous seven years compared with an average growth of 11.4% in the previous
three years when the impact of fifth pay commission wage hikes was felt.

As of late, growth in construction and trade & hotels services has picked up with an overall
increase in economic activity and business sentiment. Growth in the financial services
sector has remained steady but has not expanded because of continued uncertainty in the
financial markets. The growth rate in community, social & personal services has declined
sharply as fiscal stimulus has eased.

Global View of GDP

The global economy is expanding again, and financial conditions have improved
markedly. It will still take some time, however, until the outlook for employment improves
significantly. Emerging and developing economies are further ahead on the road to
recovery, led by a resurgence in Asia—in general, emerging economies have withstood
the financial turmoil much better than expected, which reflects improved policy
frameworks. Strengthened domestic demand helps emerging market economies maintain
growth in the face of lower exports. Most advanced economies and a few emerging
economies still face large adjustments. Their recoveries are proceeding at a sluggish
pace, and high unemployment poses major social challenges. However, gains in activity
are now being seen more broadly, including in the major advanced economies. Financial
market sentiment and risk appetite have rebounded, banks have raised capital and
wholesale funding markets have reopened, and emerging market risks have eased.

Going forward, the pace of recovery worldwide will depend on the balance between
opposing forces. The downward drag exerted by the financial shock, the sharp fall of
global trade, and the general increase in uncertainty and collapse of confidence are
gradually diminishing. However, supportive forces are still weak. Many housing markets
have yet to bottom out. Importantly, financial markets remain impaired, and bank balance
sheets still need to be cleaned up, and institutions restructured. Cuts in interest rates,
continued provision of ample liquidity, credit easing, public guarantees, and bank
recapitalization have appreciably lowered concerns about systemic failure and have
supported intermediation. Bank lending conditions are expected to remain tight and
external financing conditions constrained for a considerable time. At the same time,
commodity prices have rebounded ahead of the recovery. The recent rally in commodity
prices has been strong and broad-based, reflecting improved market sentiment, US dollar
depreciation, and commodity-specific factors. In the oil market, prices have responded
strongly to perceptions that market dynamics are shifting from significant oversupply to
more balanced conditions. In this setting, activity and credit growth are likely to remain
subdued in many economies.

Low consumer confidence and reduced household incomes and wealth are holding
consumption down in many advanced economies. These advanced economies grew only
about 3.5% (IMF estimates) during 1H2010, a low rate considering that they are emerging

21
INDIA

from the deepest recession since World War II. Their recoveries are expected to remain
fragile for as long as improving business investment does not translate into higher
employment growth. However, household spending is doing well in many emerging
market economies, which expanded by close to 8% and where investment is propelling
job creation.

The IMF forecasts global activity to expand by 4.8% in 2010 and 4.2% in 2011. WEO
projections are that output of emerging and developing economies will expand at rates of
7.1% and 6.4%, respectively, in 2010 and 2011. In advanced economies, however, growth
is projected at only 2.7% and 2.2%, respectively, with some economies slowing noticeably
during 2H2010 and 1H2011, followed by a reacceleration of activity. Slack likely will
remain substantial, and unemployment, persistently high. Inflation is projected to stay
generally low, amid continued excess capacity and high unemployment, with a few
exceptions among the emerging economies.

22
 INDIA

Foreign Exchange Reserves

India’s foreign exchange reserves have been rising consistently and expanded at a CAGR
of 20% during 2002-03 to 2009-10, somewhat marred by global macro-led weakness in
FY09. Foreign exchange reserves grew from US$5.8 billion in 1991-92 to US$280.1 billion
in 2009-10, primarily due to a positive capital-account balance.

In FY09, India’s foreign exchange reserves declined by 18.7% year over year, or US$57.7
billion. A significant part (over 65%) of the decline stemmed from the movement of the US
dollar vs. other currencies. An increased current account deficit in 2008-09 coupled with
the exodus of foreign institutional investors during the year also contributed to the decline
in foreign exchange reserves. However, in FY10 to date, forex reserves have rebounded
nicely, up 11% YoY to $280.1 billion with a 2HFY10 (Oct.-Mar.) led recovery.

Exhibit 16: Foreign Exchange Reserves

INR Billion US$ Billion

End of financial year SDRs Gold Foreign Reserve Total SDRs Gold Foreign Reserve Total
currency tranche currency tranche
assets position assets position
2002-03 0.2 167.9 3,414.8 31.9 3,614.7 0.004 3.5 71.9 0.67 76.1
2003-04 0.1 182.2 4,662.2 56.9 4,901.3 0.002 4.2 107.4 1.31 113.0
2004-05 0.2 196.9 5,931.2 62.9 6,191.2 0.005 4.5 135.6 1.44 141.5
2005-06 0.1 256.7 6,473.3 33.7 6,763.9 0.003 5.8 145.1 0.76 151.6
2006-07 0.1 295.7 8,366.0 20.4 8,682.2 0.002 6.8 191.9 0.47 199.2
2007-08 0.7 401.2 11,960.2 17.4 12,379.7 0.018 10.0 299.2 0.44 309.7
2008-09 0.1 487.9 12,287.9 50.0 12,825.9 0.001 9.6 241.2 0.98 251.7
2009-2010 2.2 811.9 11,375.7 61.7 12,472.9 5.026 18.0 255.7 1.39 280.1
As of September 2010 2.3 900.4 12,046.6 89.9 13,310.0 5.083 20.0 264.5 1.98 291.6

Source: Reserve Bank of India

As the tables above show, gold and foreign currency assets are the major contributors to
India’s growing foreign exchange reserves. Foreign currency assets expressed in dollar
terms include the effect of appreciation or depreciation of non-US currencies (such as the
euro, the sterling and the yen) held in reserves. The official reserve assets as of
September 2010 were US$291.6 billion. Countries hold foreign-exchange reserves partly
to protect themselves against external crises.

Increased focus on reforms in the post-1990 era attracted more foreign investments to
India, leading to significant growth in foreign exchange reserves. During 1991-92 to 2008-
09, India recorded cumulative foreign investments of US$155.2 billion in the form of FDI
and FII. Rising foreign exchange reserves have provided the country a cushion against a
potential slide back into recession. India’s import cover increased to 11 months in March
2010 from a mere three weeks at the end of December 1990.

23
INDIA

Exhibit 17: Import Cover Comparison of Various Countries

Source: Thomson Reuters; IMF; Economist

Foreign Investment
Despite the political uncertainty over reforms, bureaucratic hassles, shortages of power,
and infrastructural deficiencies, India has generally been perceived as a good investment
destination by foreign players given its vast potential and burgeoning middle class. Due to
the liberal policies pursued post the Persian Gulf crisis, the inflow of foreign investment in
India, FDI as well as portfolio or foreign institutional investment (FII), has increased.
Foreign investment is now allowed in all major sectors, including services, but continues to
be subject to government-imposed limits in certain industries.

To encourage FDI, the Indian Government has allowed 100% foreign ownership in the
development of integrated townships and regional urban infrastructure, the tea industry,
and advertising and film production. In January 2004, the government revised FDI limits in
several sectors, including banking, petroleum and natural gas. In 2004-05, it lowered the
cap on FDI in the domestic airline industry and basic and cellular telecom services. FDI is
also permitted in FM radio broadcasting. According to the Ministry of Finance, India
received an inward FDI equity flow of US$34.17 billion in 2009-2010 compared to
US$27.3 billion during 2008-09 and US$24.6 billion in 2007-08. Mauritius continues to be
the top contributor to the FDI inflows in India (largely for tax reasons, as we explain later).
For the last two years, yearly contributions from Singapore and the US have exceeded $3
billion and $1 billion, respectively.

The government made the following policy changes to stimulate growth:

• The central government has divested some of its powers of approving foreign
investments that it exercised through the Foreign Investment Promotion Board (FIPB)

24
 INDIA

and has handed them over to the general permission route under the Reserve Bank
of India (RBI), further streamlining the process.

• Opened up many sectors in the manufacturing industry to 100% FDI under the
automatic route.

• Increased the FDI cap for telecommunications to 74% from 49%.

• Set up an Investment Commission to help raise funds in the infrastructure sector

among others, and plans to increase the limit on investment in the infrastructure
sector.

• Now allows 51% FDI in single brand products in the retail sector.

• Allows 100% FDI in new sectors such as power trading, processing and warehousing
of coffee and rubber.

• Subject to other regulations, allows 100% FDI in distillation and brewing of potable
alcohol, industrial explosives and hazardous chemicals.

For petroleum and natural gas, the government took the following policy decisions:

• Deleted the condition of compulsory divestment of 26% equity within five years for
actual trading and marketing of petroleum products

• Increased the FDI limit to 49% from 26% in petroleum refining by PSUs (Public Sector
Undertakings) with prior approval of FIPB

• Decided to allow FDI up to 100% in mining and mineral separation of titanium bearing
minerals & ores.

• The FDI policy for the civil aviation sector allows up to 100% FDI in greenfield
projects under the automatic route and up to 100% FDI in existing projects with prior
approval from the government for investment beyond 74%.

• Under the new guidelines, the government clarified that 100% FDI would be allowed
in setting up new as well as in established industrial parks and would not be subject
to conditions mentioned in Press Note 2 (2005).

• In the financial services sector, FDI is allowed up to 74% in fields such as private
banks. However, in insurance, FDI of only up to 26% is allowed. In the case of asset
reconstruction companies (ARCs), stock exchanges, depositories, clearing
corporations and commodity exchanges, minority foreign equity of up to 49% is
allowed.

• In the publication of similar editions of foreign newspapers, FDI of up to 100% is

allowed with prior consent of the government, whereas up to 26% investment by Non
Resident Indians (NRIs)/Persons of Indian Origin (PIOs)/FII is allowed (with prior
consent of the government) in publication of Indian editions of foreign magazines
which deal with news and current affairs.

Foreign institutional investors are also significant contributors to the rising levels of foreign
investment in India, attracted to the robust growth in Indian capital markets.

The Securities and Exchange Board Of India (SEBI) recently expanded the eligible
categories of FII applicants to allow NRI-owned investment managers to register as

25
INDIA

foreign institutional investors. It also decided to remove the restrictions on overseas

derivative instruments (ODIs) and derivatives as well as quantitative restrictions on ODI
issuance capabilities. In September 2010, the Government of India increased the FII limits
on government securities to US$10 billion (from an earlier level of $5 billion) and in
corporate bonds to $20 billion (from earlier levels of $15 billion). Thus in total, FIIs can
invest up to $30 billion in Indian debt securities. The increase in limits will provide the FIIs
with greater avenues to deploy their funds in the Indian debt market. The Indian
Government has stipulated that the incremental investments of $5 billion in government
securities can only be made in securities with residual maturity of over five years while
incremental investments in corporate bonds can be made only in securities with residual
maturity of over five years and issued by companies in the infrastructure sector.

On the flip side, the government is considering a review of its foreign investment
guidelines following the ever increasing risk of terror funds entering the country via various
routes. The National Security Council has suggested legislation in which it has advised the
government to suspend any foreign acquisition, merger or takeover of Indian companies
that could damage national interests.

Exhibit 18: Share of Top Investing Countries’ FDI Equity Inflows (USD billion)

FDI Inflows (USD $B) 2007 2008 2009 2010

Mauritius 6.36 11.10 11.21 10.38
Singapore 0.58 3.07 3.45 2.38
USA 0.86 1.09 1.80 1.94
Cyprus 0.06 0.83 1.29 1.62
Japan 0.09 0.82 0.41 1.18
Others 7.79 7.67 9.17 8.38
Total 15.73 24.58 27.33 25.89

Source: Department of Industrial Policy and Promotion

Surprisingly, the small island nation of Mauritius is by far the largest FDI investor in to
India, contributing US$10.4 billion in FDI inflows in fiscal 2010 or 40% of total. This
situation stems largely from a double taxation avoidance treaty that offers investors tax
benefits and stimulates capital flows into India. Also, more than 65% of Mauritius’
population is of Indian descent.

FII Inflows
Foreign institutional investors play an important role in Indian securities markets. Since
1992-93, when FIIs were allowed entry into Indian financial markets, foreign institutional
investment has increased over the years except in 1998-99 and 2008-09.

The FII inflows into the primary market in India come mainly through the conversion of
foreign currency convertible bonds (FCCBs), private placement to qualified institutions
placements (QIPs), initial public offers (IPOs), follow-on overseas offers, conversion of
warrants and preferential offers.

The number of SEBI-registered FIIs went up to 1,713 by the end of March 2010 from
1,635 a year ago. Their net purchase in equities was US $23.25 billion in 2009-10 as
against net sales of US$10.32 billion in the previous year (2008-09). The bulk of these
investments have come through the primary market, rather than buying via secondary
markets. Large FII inflows in to India also led to strengthening of the INR (Indian rupee,
also abbreviated Rs) against USD.

26
 INDIA

The relatively low risk in acquiring shares through the primary route and availability of bulk
quantities at a discount are reasons for FIIs to invest via QIPs and conversions. The FIIs
can buy quality shares through the primary route at stipulated prices with low impact cost.

Exhibit 19: India’s Balance of Payments (US$ billion)

US$ billion FY 2008 FY 2009 FY2010

CURRENT ACCOUNT -15.7 -28.8 -38.4
Trade Balance -91.4 -118.7 -117.3
Current a/c as % of GDP -1.3% -2.4% -2.9%
Exports 166.2 189 182.2
Imports 257.6 307.7 299.5
Invisibles (Net) 78.6 88.1 100.3
-Service 36.9 43.5 48.2
-Transfers 41.7 44.6 52.1
CAPITAL ACCOUNT 106.6 7.2 53.6
Foreign investment 43.3 3.5 52.3
-FDI 15.9 17.5 19.9
-FII 27.4 -14 32.4
Loans 40.7 8.7 12.2
OVERALL BALANCE OF PAYMENTS 90.9 -21.6 15.2

Source: Reserve Bank of India, Oppenheimer & Co

Balance of payments recovering: For FY09, India’s balance of payments (BOP)

registered a deficit of US$21 billion compared with a surplus of US$91 billion as of FY08.
In FY10, BOP recovered to positive territory at US$15.2B. The trade deficit, however,
continued to be high at US$117.3B. The surge in non-oil imports is the key reason behind
the sharp increase in India’s trade deficit. Available data suggest that contrary to popular
perception, neither capital goods nor gold imports are contributing significantly to the
surge. The buoyancy of domestic growth (and, therefore, strong import demand), coupled
with subdued growth outlooks in major industrialized countries, the main importers of
Indian products, indicates there is little likelihood of any softening of trade deficit.
Government sources indicated that trade deficit in FY11 may reach ~US$135B.

INR-USD Exchange rate trends: Reflecting the inflow of FII funds in September 2010,
the Indian rupee has strengthened from Rs. 47.08 to the US dollar on 31st August 2010 to
Rs. 44.46 on 19th October, an appreciation of 5.6% over a period of a little over a month.
The appreciation of the Indian rupee relative to the dollar since September has been
stronger than that experienced by several Asian currencies. Although a stronger rupee is
beneficial in reducing the fiscal burden of the oil import bill as well as prices of imported
commodities, the adverse impact of rupee appreciation on the competitiveness of Indian
exports and the current account balance is likely to emerge as a competing concern for
the RBI.

In the coming months, the emerging dynamic between the US and China regarding trade
and currency valuations is likely to shape policy actions in other economies, particularly
with regard to interventions in currency markets to support export competiveness and
growth. Intervention by the RBI in the foreign exchange market to stem the rise of the
rupee would, however, enhance the domestic money supply and counteract the efforts
made by the Central Bank in the past year to manage inflation and inflationary
expectations.

27
INDIA

Exhibit 20: INR - USD Exchange Rate Trend

60

50

40

30

20

10

Source: FactSet

Raising Funds through Divestments

Between 1991-92 and 2009-10, the government privatized assets worth over $14.68
billion. However, the pace of divestment slowed in FY05-FY09 with the government
divesting assets worth just $1.9 billion during the period. This could be primarily attributed
to the Left parties, which were a part of the ruling coalition government, and unwilling to
privatize government assets. Nevertheless, with Left parties out of the current equation,
the government plans to divest assets worth over $5 billion every year, which we think
could be far surpassed when all is said and done. FY10 saw divestments of Rs. 25000
crores, or ~ $5.56 billion, via sales of the government’s stake in Oil India, NMDC, REC
and NTPC. The government has announced a divestment target of Rs. 40,000 crores
(~$8.9 billion) for FY11. The recent Coal India public issue alone saw a divestment of
~$3.44 billion, taking total divestment to date for FY11 to $3.89 billion, leading us to
believe that the Indian Government could easily exceed its divestment targets for FY11.

Exhibit 21: Divestment (US$ Billions)

10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E

Source: Department of Divestment

28
 INDIA

The Ministry of Finance pegs India’s economic growth in the range of 8.5% to 8.75% in
2010-11. A favorable monsoon season (key to agriculture) coupled with a robust recovery
in the service sector has led to further confidence for a more favorable economic growth
scenario in FY11.

Monthly inflation—based on the Consumer Price Index (CPI)—averaged 6.3% during April
2007 to August 2010. Recently, however, YTD inflation average has been double-digits at
10.2% driven by a surge in commodity prices. Nevertheless, with the worsening of
economic crisis in the last quarter of 2008, commodity prices plunged, and inflation in
India began to retreat.

Exhibit 22: Monthly Inflation (CPI)

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
Apr-08

Apr-09

Apr-10
Feb-08

Feb-09

Feb-10
Jun-08

Jun-09

Jun-10
Dec-07

Dec-08

Dec-09
Aug-07

Oct-07

Aug-08

Oct-08

Aug-09

Oct-09

Aug-10
-2.00%

Source: Ministry of Commerce & Industry

29
INDIA

INDIA IN THE “BRIC” ECONOMY—

A Fact File
Exhibit 23: India vs. Other BRIC Countries (2005)

Indicator Brazil Russia India China World

Population (mill) 194 142 1155 1331 6775
Surface Area 8515 17098 3287 9595 133947
GNI in $B USD (PPP terms) 1988 2609 3768 9018 72038
GDP Per Capita in US$ (PPP terms) 9454 13553 2969.5 8609 9513
GNI per Capita in US$ (PPP terms) 3550 18390 3260 6770 10632
Avg GDP Growth 2005-2009 3.6 3.98 8.2 11.4 2.3
Agriculture 4.0 4 3.1 4.7 2.9
Industry -4.7 4.48 8.9 12.1 4.1
Manufacturing 2.4 9.8 13.1 5.2
Services 4.0 8.25 10.0 12.3
GDP In $mill USD (2009) 1571978 1230725 1310170 4984731 58228178
Gross Domestic Savings (% GDP) 16.2 33.04 29.8 54.2 22
% of World GDP (2009) 2.7% 2.1% 2.3% 8.6% 100%
Inflation (2009) 4.8% 2.3% 3.8% -0.6%
FDI ($B 2009) 25.9 37.1 34.6 78.2

Source: The World Bank Group and Oppenheimer & Co.

A comparison of the BRIC countries reveals high savings rates when measured as a
percentage of GDP, ranging from 16.2% for Brazil to as high as 54.2% for China with
Russia at 33% and India close to 30%. The four countries, combined, currently account
for more than a quarter of the world's land area and more than 40% of the world's
population.

IIP Has Rebounded Nicely Across All Segments

Recent Weakness, However, A Concern
Exhibit 24: IIP April 2006—September 2010

20%

15%

10%

5%

0%
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Feb-07

Feb-08

Feb-09

Feb-10
Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10
Aug-06
Oct-06

Aug-07
Oct-07

Aug-08
Oct-08

Aug-09
Oct-09

Aug-10

-5%

Source: Bloomberg

Since April 2006, India’s Index of Industrial Production (IIP) has averaged a commendable
8.4%, going as high as 17.7% in December 2009. Recently, in June 2010, an IIP of 5.3%

30
 INDIA

was the lowest in 13 months. It bounced back to double-digit growth in July, however,
mainly driven by the capital goods sector.

During July 2010, the growth rate of the manufacturing sector, with a weighting of 79.4%,
surged by 15%. Twelve of the seventeen industry groups showed positive YoY growth in
July. The industry groups consisting of “Machinery and Equipment other than Transport
Equipment” showed the highest growth of 49.4%, followed by 31.1% in ”Other
Manufacturing Industries” and 24.9% in “Transport Equipment and Parts.”

There is a strong correlation between IIP growth, sales and profit growth. As such, better
than expected growth in real activity is likely to result in upside to sales and earnings
growth forecast for many industrial companies.

The IIP number has exceeded expectations over the past year, partly due to a depressed
base since August 2008, although stimulus measures should be given their due here. In
light of a subdued external environment and hence India’s export demand, the IIP number
is even more commendable. Going forward, we see industrial growth picking up the pace
but believe that the pace of growth can be maintained especially given a more than
adequate monsoon season.

With just over 40% of India's agricultural land irrigated, farm output depends heavily on
rain. An above-normal monsoon season has the potential to spur rural demand, which
accounts for more than half of India's domestic consumption.

August and September 2010 data, which shows IIP growth of 6.9% and 4.4%,
respectively, however is concerning. In fact, September’s growth was the slowest since
May 2009. Widespread flooding in September in northern India and delayed withdrawal of
the monsoon this year are partly to blame for sluggish growth in September. Other
indicators of growth—auto sales, FMCG volume growth, consumer durable sales, non-oil
imports—all suggest robust demand in the economy, and do not suggest any slackening
in demand growth. However, indicators leveraged to external demand—export traffic
growth and railway freight growth—indicate weakness in external demand.

India’s Rising Middle Class

Economic liberalization in India, which began in 1991, transformed Indian demographics
through rising income levels and changing consumption patterns. According to McKinsey,
income levels are estimated to almost triple by 2025. The country’s income pyramid is
also expected to change, with India’s middle class (defined as households with annual
income of between Rs. 200,000 to Rs. 1,000,000, or between ~$4,000-$20,000) expected
to grow by over ten times from 50 million people in 2005 (approximately 5% of the total
Indian population) to 583 million people by 2025 (approximately 41% of the total). With a
growing population, the expansion of middle class and rising incomes, India should
become one of the world’s largest consumer markets by 2025. Consumption is expected
to increase by 7.3% annually over the next 20 years to reach more than Rs. 69.5 trillion, or
$1.5 trillion, by 2025.

31
INDIA

Exhibit 25: India’s Rising Middle Class

120 1600

1400
100
1200
80
1000
Upper Class
60 800 Middle Class

600 Underpriviliged
40
Total Population
400
20
200

0 0
1985 1995 2005 2015E 2025E

Source: McKinsey and Oppenheimer & Co

Wallet-share Shift from Basic Necessities to

Discretionary Items
Progressive deregulation, rising income levels and supportive demographic trends make
India one of the fastest-growing markets in the world for discretionary spending. As Indian
incomes rise, the share-of-wallet of consumer spending should also change significantly.
Today, the largest Indian spending categories are food, beverages and tobacco, and
transportation and housing. According to consultant McKinsey’s estimates, by 2025, food,
beverages and tobacco is still expected to be the biggest spending category, although its
share is anticipated to drop from 42% in 2005 to 25% in 2025. Transportation, which
includes leisure travel in the mix, is expected to rise from a 17% share in 2005 to 20% in
2025—significant when viewed in the context of wallet size tripling from 2005-2025. The
key takeaway here is that discretionary spending is expected to rise to 70% of total
spending by 2025 vs. 52% in 2005.

32
 INDIA

Exhibit 26: India Discretionary vs. Non-discretionary Spending

100%
90%
80% 39%
52%
70% 61%
70%
60%
50%
40%
30% 61%
48%
20% 39%
30%
10%
0%
1995 2005 2015E 2025E

Necessities Discretionary Spending

Source: McKinsey and Oppenheimer & Co

Stock Exchanges
Indian markets figure among the world’s largest stock markets. In terms of number of
listed securities, India is second only to the US. With the Bombay Stock Exchange and
National Stock Exchange put together, India ranked 7th in terms of market capitalization
and 13th in terms of turnover ratio as of December 2009, according to Standard & Poor’s
Fact Book, 2009.

Exhibit 27: Details of Indian Stock Exchanges as of Mar 2010

Year Established Members Listed Companies

BSE 1875 1204 4996
NSE 1992 1297 1470

Source: BSE, NSE

33
INDIA

Sector Outlooks
We believe that India’s growth will likely be driven by the following structural themes–

Infrastructure
There is a need for significant infrastructure improvement in India to facilitate continued
economic growth. Population growth and migration from rural areas to larger towns and
cities has led to significant infrastructure investments in electricity, transport,
telecommunications, irrigation and water supply. We believe investments in the
Infrastructure sector are not a short-term phenomenon and that they are expected to
continue longer-term.

Move Toward Urbanization

India’s industry and service sectors continue to grow faster than India’s GDP, generating
significant employment potential, primarily for the urban populace. Migration to cities and
towns is thus being fueled by the movement of a young working population with growing
disposable income.

Financial Services
Financial services is an important sector of the Indian economy. Opportunities abound in
banking, financial and insurance services where current levels of penetration point toward
long-term sustainable growth. The central government is taking steps to expand the depth
of the domestic financial market. We point to preliminary forays for policy reforms in
insurance, banking, and pension funds as an indication of that intent.

Indian Outsourcing
Last but not least, the Indian outsourcing model, in our opinion, is now increasingly being
recognized as the template for global firms. A sluggish US economy poses potential short-
term challenges for this sector. However, India’s exports are now more diversified across
the globe—reducing its reliance on the US—and outsourcing is increasingly diversifying
into engineering, pharmaceutical, petrochemical and auto-ancillary exports.

34
 INDIA

BFSI Sector (Banking, Financial Services,

Insurance)

Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Axis Bank 532215-IN 1,410 $31.32 571,128 $126,917 1,608 919 396 3.6 62 22.7
HDFC Bank 500180-IN 2,392 $53.17 1,095,128 $243,362 2,518 1,550 472 5.1 5 443.9
ICICI Bank 532174-IN 1,182 $26.27 1,356,784 $301,507 1,277 773 460 2.6 36 32.7
IndusInd Bank 532187-IN 291 $6.47 119,524 $26,561 309 132 58 5.0 9 34.1
Kotak Mahindra Bank 500247-IN 486 $10.79 356,069 $79,126 530 350 114 4.2 5 95.9
Yes Bank 532648-IN 330 $7.34 113,966 $25,326 388 223 91 3.6 10 32.3
Andhra Bank 532418-IN 161 $3.57 77,867 $17,304 190 95 91 1.8 22 7.4
Bank of India 532149-IN 480 $10.67 252,268 $56,060 588 309 275 1.7 33 14.5
Canara Bank 532483-IN 729 $16.19 298,767 $66,393 844 345 366 2.0 51 14.4
IOB 532388-IN 150 $3.33 81,557 $18,124 176 85 138 1.1 13 11.5
IDBI Bank 500116-IN 168 $3.74 122,031 $27,118 202 106 142 1.2 14 11.8
PNB 532461-IN 1,272 $28.27 401,175 $89,150 1,395 842 593 2.1 1 1899.0
SBI 500112-IN 3,071 $68.25 1,949,918 $433,315 3,515 1,863 1,309 2.3 144 21.3
Syndicate Bank 532276-IN 137 $3.04 71,379 $15,862 164 80 108 1.3 16 8.8
Source: FactSet. Pricing as of 12/03/2010.

Exhibit 28: BSE BANKEX Chart

16000
15000
14000
13000

12000
11000
10000
9000
1/14/2010

2/17/2010

3/19/2010

4/21/2010

5/21/2010

6/23/2010

7/26/2010
8/10/2010
8/25/2010
9/10/2010
9/27/2010
11/24/2009
12/10/2009
12/29/2009

10/12/2010
10/27/2010
11/11/2010
2/1/2010

3/4/2010

4/6/2010

5/6/2010

6/8/2010

7/9/2010

Source: Factset Data Systems

Earnings visibility of the banking sector has improved with superior outlook on credit,
margins and asset quality of the banks. The BSE BANKEX (shown above) has registered
43% returns over the last year. In the short term, bank earnings could come in higher than
current estimates on improved economic conditions—better loan growth, lower NPLs and
lower credit provisions. We believe however, given the sharp recent rally over the past 5
months, the sector may not offer similar upside.

Interest Rate Tightening Remains a Key Risk for BankEx Index

Taking into account trends in non-food credit, non-oil imports, inflation and growth, we
could see further tightening from the RBI through 2010. Last month, the RBI increased the
repurchase rate by 25 basis points to 6% and the reverse repurchase rate by 50bps to

35
INDIA

5%. Assuming 25bps of further tightening would take the repo and reverse-repo rate to
6.25% and 5.25%, respectively, by the end of 2010.

Economic Revival a Positive for Banks

Continuation of higher fund flows could enable enterprises to enhance their equity capital
and reduce the risk of NPLs (nonperforming loans) and eventual write-offs for banks.

An improving economic outlook could lead to an increase in loan demand and provide an
impetus to earnings.

RBI policy on CRRs (cash reserve ratios), however, could impact negatively. An increase
in required CRRs over the next few quarters could lead to a decline in NIM (net interest
margin). CRR currently stands at 6%.

Better NPL Trends To Enhance Near-Term Earnings For Banks

Bank stocks, especially those of public banks, have seen sharp appreciation over the past
few months given their attractive valuations, increasing comfort on asset quality and
expectation of higher permissible limits in the HTM (hold-to-maturity) category. Even as
valuations get less comfortable, we expect better asset quality trends to drive the near-
term earnings of banks.

Exhibit 29: Trends in Gross and Net NPLs in India (%)

Gross NPL s(%) Net NPL s(%)

16
14
12
10
8
6
4
2
0
1998 19 99 2000 2001 2002 2003 2004 2005 20 06 2007 20 08 2009 E

Source: Reserve Bank of India, Kotak MF

GOI Recapitalization of PSUs Targeting 8% Capital Adequacy

Back in April 2010, the Government of India kicked off the recapitalization of government
owned Indian banks for FY11 by announcing an infusion of Rs165B for re-capitalization of
government owned banks, to ensure each bank has minimum Tier-1 capital
adequacy of 8%. We view this as a positive for banks that are capital constrained—mid-
tier government owned banks.

Capital Adequacy Levels in India Remain Comfortable

The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9%, 1%
point above the Basel II requirement. All banks have their CRAR above the stipulated
requirement of Basel guidelines (8%) and RBI guidelines (9%). As per Basel II norms,
Indian banks should maintain tier I capital of at least 6%. The average Capital Adequacy

36
 INDIA

Ratio as per Basel II norms improved from 12.35% in FY08 to 13.48% in FY09. Most
banks in India have capital adequacy of more than 12%. As of June 30, the CAR of the
banking system stood at 13.4%, of which Tier-I capital accounted for 9.3%.

Exhibit 30: Total Capital to Risk Weighted Assets in India

13.60%
13.40%
13.20%
13.00%
12.80%
12.60%
12.40%
12.20%
12.00%
11.80%
11.60%
FY04 FY05 FY06 FY07 FY08 FY09 FY10

Source: Reserve Bank of India

Exhibit 31: CAR – Asia vs. Europe vs. US

Source: IMF

37
INDIA

Bank assets in India tend to be comparatively smaller than in other economies.

Exhibit 32: Bank Assets as a Percentage of GDP (FY09)

1200% 1100%

1000%

800%
650%
600% 500%
375%
400%
200% 180%
200% 100%
50%
0%

Source: Reserve Bank of India

Margins to Continue Improving As High-Cost Deposits Reprice And

As Loan Demand Improves
The margins of banks are likely to continue to be positively impacted by the repricing of
high-cost deposits (especially longer-term ones) over the next few quarters, as well as by
improved loan demand that allows banks to deploy their resources in better yielding loan
assets rather than in investments. Bank NIIs have already seen an improvement with the
RBI’s aggressive tightening policy of late. Any further tightening of rates in 2H
CY10/1HCY11 may also help banks to further improve their net interest margins as their
assets would reprice faster than their liabilities.

Early Signs of Pickup in Loan Growth

Loan growth has seen some pickup recently in conjunction with the festival season
(Diwali, which was in early November). We expect further loan growth pickup due to the
following factors: 1) working capital requirements are likely to rise on the back of
increased industrial activity and rising inflation, and 2) capital expenditure related
requirements are likely to increase on account of better confidence levels. Better loan
growth is likely to be positive for bank margins and asset quality; however, interest rates
could also harden.

Loan Growth—Averaging 3X Base GDP Growth, 1.8X Nominal GDP

Loan growth in India has averaged about three times base real GDP growth and about 1.8
times nominal GDP growth over the past 10 years.

Underlying Economic Conditions Improving

We expect the outlook for loan disbursements to improve from current levels. Economic
data trends have been positive with industrial output increasing nicely. Couple that with
positive WPI (Wholesale Price Index), and it is likely to be positive for loan demand. The
buoyant equity markets may help companies access equity capital and expedite their

38
 INDIA

capital expenditure plans. We expect the demand for banking sector loans to rise in the
near term as capital expenditures are allocated for new projects.

Seasonal Factors Contribute to Loan Demand Improvement

In India, industrial loan activity generally picks up post the monsoon season (which is
typically June through September), driven by demand for food harvesting, festival season
and higher industrial activity

Better Loan Growth Positive for Bank Margins and NPLs

Improved loan demand could also help banks to deploy their excess liquidity in higher
yielding assets and thereby enhance margins for the banking system. Better loan demand/
economic activity should also bode well for asset quality in the system.

Revival in Economic Activity and Sentiment—Positive For Bank

Earnings
The improved economic activity of the past few months could lead to better earnings for
banks in the near term through higher loan demand, lower levels of fresh NPL slippages
and consequently lower credit provisions.

39
INDIA

Insurance Sector

Key Players
Company Indian Promoter Foreign Partner Mkt Share FY09
LIC GOI None 71%
ICICI Prudential ICICI Bank Ltd Prudential, UK 6.92%
Bajaj Allianz Bajaj Auto Allianz, Germany 4.79%
SBI Life SBI BNP Paribas, France 3.25%
HDFC Standard Life HDFC Standard Life, UK 2.51%
Birla Sun Life Aditya Birla Group Sunlife, Canada 2.06%
Reliance Reliance Group None 2.22%
Max New York Max India New York Life, USA 1.74%
Tata AIG Tata Group AIG, USA 1.24%
Aviva Dabur CGU Life, UK 0.90%
OM Kotal Life Kotak Mahindra Bank Old Mutual, South Africa 1.06%
Metlife J&K Bank Metlife, USA 0.90%
ING Vyasa Gujarat Ambuja, Enam, Exide ING Insurance, Netherlands 0.65%
Shriram Life Shriram Group Sanlam, South Africa 0.20%
Sahara Sahara Group None 0.09%
Bharti AXA Bharti Group AXA Insurance, France 0.16%
IDBI Fortis Life IDBI, Federal Bank Fortis, UK 0.14%
Future Generali Future Group Generali Group, Italy 0%
Canara HSBC OBC Canara Bank, OBC HSBC, Asia Pacific 0.13%
AEGON Religare Religare AEGON, USA 0.01%
Star Union Dai-ichi Bank of India, Union Bank of India
Dai-ichi, Japan 0.02%
Source: IRDA(Insurance Regulatory and Development Authority

Size & Growth on an Upward Trajectory

The total Insurance Industry premiums have grown at a CAGR of 25% from 2002–03 to
2008–09 to reach US$52.6 billion in 2008–09. The number of insurance players has
increased from four and eight in life and non-life sectors, respectively, in 2000 to 23 and
22, respectively, as on January 2010. Total premium income has grown at a high CAGR
of 25.8% between 2002–03 and 2008–09. The number of policies issued grew at a CAGR
of 12.3% between 2002–03 and 2008–09.

Life Insurance: India is the world’s fifth-largest life insurance market with gross written
premiums of over $46 billion in 2009 and growing at a CAGR of 25% from FY03-FY09
making it the fastest growing market among the top-ten largest insurance markets,
according to the Life Insurance Council.

With an estimated 100 million people entering the insurable population over the next few
years, strong growth in per capita incomes, rising affluence, a high savings rate and
increasing life expectancy, the demographics are very supportive of strong growth
continuing in the industry. Even assuming life insurance penetration increases from
current levels of 4% of GDP to 5% over the next five years implies potential growth of 20%
for the industry over this period.

According to IRDA (the Insurance Regulatory and Development Authority), insurers sold
10.55 million new policies in 2009-10 with LIC selling 8.52 million and private companies
2.03 million policies. At the end of March 2010, LIC held 65% market share in terms of
new business income collection with the private sector contributing the remaining 35%
share in 2009-10.

40
 INDIA

General Insurance: As per IRDA data, the general insurance industry recorded 13.4%
growth in gross premium collected in FY10 with gross premium totaling US$ 7.84 billion.

Health Insurance: The Indian health insurance market has emerged as a new and
lucrative growth avenue for both existing players and new entrants. Per RNCOS
estimates, the health insurance premium is expected to grow at a compound annual
growth rate (CAGR) of over 25% for the period spanning from FY10 to FY14 accounting
for US$ 3 billion in the next three years.

Fast-progressing medical technology and increasing demand for better healthcare has
resulted in rising demand for health insurance. Regulatory initiatives to promote health
insurance include:

IRDA has set up a separate department for health insurance.• It has recommended that
the government bring down capital requirements for stand-alone health insurance
companies to US$10.42 million from US$20.83 million.

• The government has raised budgetary support to US$ 28.33 billion for the health
sector during the Eleventh Plan Policy & Regulatory Framework.
• IRDA was formed by an act of the Indian Parliament (known as the IRDA Act, 1999)
as the regulatory body to govern the Indian insurance sector.

• A company, to operate as an insurance company in India, must be incorporated

under the Companies Act, 1956 and possess the certificate of the memorandum of
association and articles of association.

• Capital requirement —paid up equity share capital

1. At least US$ 208.3 million for life insurance or non-life insurance business

2. At least US$ 416.7 million for reinsurance business

• International players can operate in India only through a joint venture with a domestic
firm and are classified under private sector insurers.

• FDI up to 26% is permitted in the insurance sector.

IRDA does not allow foreign reinsurance companies to open branches in India. This
proposal is currently under consideration in the Parliament.

Insurance Penetration Expected To Rise Further

It is estimated that only 20% of the insurable population (the age group 20-60) has been
insured despite the strong industry growth in the past few years. With an estimated 100
million people entering the insurable population over the next few years, demographics
are very supportive of strong growth continuing in the industry. Penetration levels are still
lower than other developed countries’. Measured as premiums/GDP, India’s penetration
level for life insurance is at 4% vs. 6-9% for other Asian countries. Premium per capita is
$40 vs. an average of $157 for Asia. We estimate penetration levels to surpass 4.5%
levels over the next couple of years, driven by increasing focus on semi-urban and rural
areas given that rural areas remain relatively under-penetrated with only 26% of the
population covered in rural areas compared with 50-60% in metropolitan areas. We are
seeing increased focus by the Insurance companies on building up distribution capabilities
in Tier-II and III cities.

41
INDIA

Exhibit 33: India’s Penetration/GDP levels

6.00%

Non-life Life
5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: IRDA

Rising Affluence Should Aid Growth

The strong economic growth outlook for India should be a key driver for the continued rise
in insurance penetration. We believe that over the next few years, there will be a
continued upward migration among household income levels.

The Demographic Profile Is Strongly Supportive Of Insurance Growth

India is a relatively young country. Over the next eight years, more than 100 million
individuals will enter the working age of 15 to 65 years. Further, the proportion of women
in the workforce is increasing. According to the Registrar General of India, the proportion
of women in the workforce has been gradually rising from 19.7% in 1981 to 25.7% in
2001, the most recent census. As the insurable population over the next few years is
expected to increase, penetration of insurance in the country should rise. This
demographic profile also has favorable implications for savings, investment and overall job
growth in the country.

Rising incomes and better living conditions have pushed up life expectancy steadily in
India, and this is expected to rise further. Life expectancy in India has increased by five
years over the past decade to 65 years in 2005-10 and is projected to rise to 73 years by
2025-30.

In India, government-funded retirement programs for its citizens are virtually non-existent.
Expenditures on social protection and health are therefore a lot less when compared to
those of most developed countries. Only government employees are entitled to pension
benefits post-retirement. Also, the self-employed or those working for small enterprises
are exempt from contributing to the employees’ “provident fund” (similar to the 401(k) plan
in the US, in which the employer contributes a discretionary match to employee
contributions) and need to make their own arrangements for savings and protection cover.
The growth of “nuclear” families in urban locations, resulting in the breakdown of
traditional old-age support structures, also supports this trend.

Therefore, it is not surprising that household savings constitute a large 70% portion of
gross national savings for India. Moreover, the Indian household savings rate of 28% is
among the highest globally.

42
 INDIA

Financial literacy should also ensure that Indian households transfer savings from physical
assets, such as gold and real estate, to financial assets, such as insurance and pension
products. Combined with an increasing savings rate, this trend is expected to be
extremely beneficial to the life insurance industry.

Private Insurers Continue To Gain Market Share

The Indian life insurance industry has been a monopoly of the state sector player LIC,
since nationalization of the industry in 1956. Lack of competition has hindered product
innovation and market innovation, and consequently penetration levels were just 1.4% of
GDP even in 1999. With the entry of private players in 2000-01, the insurance industry
changed almost overnight. Private life insurers had better and more marketing and
product innovation, resulting in a wide suite of products and novel product delivery
mechanisms. In recent years, LIC has also improved significantly in the face of
competition. However, private life insurers have been continually taking market share from
LIC, and in just ten years since their appearance, private insurers now have a 60% share
of the new business in the industry.

Over the past eight years, India’s life insurance industry has experienced a rapid 28%
CAGR. This growth acceleration was triggered by the entry of private players into the
industry and aided by the rising popularity of linked products in a munificent stock market
environment. In FY09, however, the downturn in the capital markets took the sheen off
some of these products, and the industry witnessed a 6% decline in new business
premiums in FY09. The slowdown was particularly severe for private insurers, which over
the past five years had witnessed a 70% CAGR rise in premiums, and which slowed to
just 1% in FY09. The predominance of linked products has also resulted in persistency
rates (renewal rates) for many insurers dropping 10-20% on the back of the capital
markets’ fall. With the Indian regulator recently capping the fees on these linked products,
we expect further volatility in insurers’ product portfolios and potentially a compression in
their new business margins.

Entry of private players has led to the introduction of innovative product offerings.
Aggressive growth by the private players has been driven by

• Heavy spending on brand promotions and awareness.

• Intensive ramp-up in tied agency business with aggressive marketing strategies.

• Development of alternative distribution channels including bancassurance.

• Innovating product offerings across different life segments and income levels.

• Greater promoter focus and product development expertise from the foreign joint
venture partner.

43
INDIA

Exhibit 34: Life Insurance Market Share – LIC vs. the rest

100% 5% 9% 14%
90% 18%
26%
80% 39% 35%

70%
60%
50% 95% Others
91% 86%
40% 82% LIC
74%
30% 61% 65%

20%
10%
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10E

Source: IRDA

Non-Life Insurance Market

In the non-life insurance segment, premium income grew at a CAGR of 14% between
FY03 and FY09. Growth would have been even higher if not for the global macro
meltdown in FY09 with FY09 recording just 10% growth. As of January 2010 in the non-
life insurance market, there are 22 players, out of which 7 are public sector players
(including 1 reinsurer) and 15 private sector firms. Segments covered in the non-life
insurance market include auto, health, fire, marine and engineering, among others. Auto
insurance had the largest share of 43% in the non-life insurance segment in FY09. The
health segment recorded growth of 21.3% in FY09. Public sector companies have a
dominant share in the marine insurance segment. The non-life insurance sector has
witnessed personal/retail line products pick up on the back of increasing income levels
and changing lifestyles. A rise in sale of passenger cars continues to fuel demand for auto
insurance. Between FY03 and FY10, the number of passenger cars increased at a CAGR
of 16%. This trend is likely to continue due to strong growth in the auto segment resulting
from an increase in consumer income levels. Between FY06 and FY10, auto insurance
premiums have increased at a CAGR of 22%.

44
 INDIA

Exhibit 35: Market Share of Non-Life Insurance in FY09

10.10% 6.30% Reliance General

5%
IFFCO-Tokio
12.90% 11.20% ICICI-Lombard
Bajaj Allianz
New India
8.60%
National
14%
United India
Oriental
18%
14% Others

Source: IRDA

Structural Growth Drivers Remain Intact

Annual industry premiums have grown more than seven-fold over the past decade from
US$7.2 billion in FY01 to US$53 billion in FY10, and India is currently the world’s fifth-
largest life insurance market. It is also the fastest-growing market with a growth rate of
25% over FY05-09, albeit aided by the surge in linked products. With an estimated 100
million people entering the insurable population over the next few years, strong growth in
per capita incomes, rising affluence, a high savings rate and increasing life expectancy,
the demographics are very supportive of strong growth continuing in the industry. Even
assuming life insurance penetration increases from current levels of 4% of GDP to 5%
over the next five years, implies potential growth of 20% for the industry over this period.

45
INDIA

Exhibit 36: Insurance Premium Growth Trends (In INR Billion)

Source: Insurance Regulatory and Development Authority

Rising Competitive Intensity

Increased marketing, novel product delivery mechanisms and increased product variety
have resulted in penetration levels rising from 2.7% in FY01 to 4.9% in FY09. Further, if
the government raises the foreign direct investment ceiling on investment in a life
insurance company from the current 26% to 49%, even more competition is expected,
which could result in further growth in the industry and more market share to the private
sector.

Apart from the LIC, 100%-owned by the Indian Government, there are 21 life insurance
companies operating in India. The competitive intensity in the industry has been steadily
increasing with 7 new players in just the past 3 years.

As discussed earlier, the private sector has consistently taken market share from LIC.
Within the private sector, not all players have performed equally well. The top-six players
account for a 75% share. Among these, ICICI Prudential is still the largest, despite
steadily losing share to other private sector entrants in recent years. SBI Life has
aggressively improved market share by leveraging off its strong brand name and parent’s
branch network and now has a 15% share. Bajaj Allianz’s market share has also
moderated since it peaked in FY07, after government regulators disallowed actuarially-
funded products that contributed to 70% of its premiums. Reliance Life, one of the recent
entrants, has been steadily growing market share and is targeting to emerge among the
three private players in the country. Birla Sun Life, which pioneered ULIPs (unit linked
insurance plans) in India, has been consistently losing market share since FY04 though it
significantly improved market share in FY09. Max and HDFC Standard Life have
maintained steady market shares of 5% and 8%, respectively, over the past three years.

Key Challenges
High Capital Intensity

The insurance business is very capital-intensive, and players have pumped in INR 250
billion until now with additional requirement of INR 70-100 billion in next 3 years, without

46
 INDIA

any taste of profits. The ability of many players to inject more capital is limited, making it
difficult for them to grow.

Lower Productivity

A single-minded focus on growth has created lot of excesses in the system, which have
led to poor capital efficiency and lower sales productivity for most of the players. While
companies have been quick to learn from their mistakes, we believe the unabashed
pursuit of growth has put life insurers in a challenging environment such that not all will
emerge unscathed.

Low Financial Literacy & Unfair Practices

Financial literacy in India is very low, which makes the market open to a multitude of unfair
practices especially when it comes to selling innovative products in the insurance industry.
This low literacy has led to a very high rate of surrenders/withdrawals in the premature
stages of Insurance policies. India’s Insurance Regulatory and Development Authority
(IRDA) had been cracking down on companies to safeguard investors, but actuarial
innovation seems to find enough loopholes to counter these regulations. We believe that
this situation has to correct for long term viability of the sector.

High Volatility

Increasing dependence on ULIPs has created volatility in new business written. FY09 saw
the industry contracting by 10% with a few companies shrinking by as much as 33%.
Recovery has not been seen as yet with industry retreating by 3% and private players by
more than 15%. Although the lag effect of market recovery is yet to be seen, the industry
should remain volatile.

47
INDIA

IT/BPO Services

Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
IT Services
HCL Technologies 532281-IN 423 $9.41 287,877 $63,973 455 318 93 4.6 16 27.2
Hexaware Tech 532129-IN 88 $1.96 12,761 $2,836 103 64 63 1.4 9 10.2
Infosys Tech. 500209-IN 3,123 $69.40 1,783,444 $396,321 3,249 2,333 460 6.8 102 30.7
Mindtree 532819-IN 501 $11.13 19,913 $4,425 730 490 178 2.8 53 9.5
Patni Computer 532517-IN 466 $10.36 61,085 $13,575 551 386 299 1.6 42 11.1
Polaris Soft. 532254-IN 158 $3.51 15,636 $3,475 215 132 98 1.6 11 14.0
Satyam Computer 500376-IN 64 $1.43 75,629 $16,806 121 60 17 3.8 26 2.5
TCS 532540-IN 1,095 $24.34 2,144,038 $476,453 1,112 680 111 9.9 29 38.2
Tech Mahindra 532755-IN 667 $14.83 83,883 $18,641 1,158 600 246 2.7 61 11.0
Wipro 507685-IN 428 $9.51 1,049,701 $233,267 500 321 88 4.9 0 1297.3
BPO
eClerx Services 532927-IN 727 $16.15 20,884 $4,641 798 252 86 8.4 38 19.1
Genpact G 666 $14.81 $3,268 $18.71 $8.00 6.3 106.6 0.6 24.7
WNS Holdings WNS 574 $12.76 $558 $15.95 $8.46 5.8 99.1 0.9 13.6
ExlService Holdings EXLS 972 $21.60 $633 $21.67 $7.39 8.1 120.4 0.9 24.0
Firstsour.Solu. 532809-IN 22 $0.49 9,418 $2,093 38 20 33 0.7 0 62.6
Vishal Info.Tec. 533011-IN 4 $0.10 1,079 $240 17 4 #N/A #N/A 1 4.7
Source: FactSet. Pricing as of 12/03/2010.

Exhibit 37: BSE IT Index

6500

6000

5500

5000

4500

4000
1/13/2010
1/29/2010
2/16/2010

3/18/2010

4/20/2010

5/20/2010

6/22/2010

7/23/2010

8/24/2010

9/24/2010
11/24/2009
12/10/2009
12/28/2009

10/11/2010
10/26/2010
11/10/2010
11/26/2010
3/3/2010

4/5/2010

5/5/2010

6/7/2010

7/8/2010

8/9/2010

9/9/2010

Source: FactSet Data Systems

IT stocks have rallied sharply on the Indian bourses, and consensus is now positive. The
BSE IT index is up 40% in the past year. Faster than expected macro recovery and better
vendor cost control as well as better revenue visibility and productivity improvements have
led to a rise in consensus estimates, especially for the IT services large caps. A pickup in
demand from the financial services vertical, lower project cancellations and favorable
cross-currency movements continue to provide a tailwind for IT stocks. Rupee
appreciation remains the key risk, however. Current hedging levels are not adequate to
protect against sharp rupee appreciation.

48
 INDIA

BFSI, Telecom Show Meaningful Rebound, Declines Arrested in

Manufacturing
Four verticals— BFSI, telecom, retail and manufacturing— contribute about 84% of Indian
IT vendors' revenue. Growth has started to emerge with a rebound in the BFSI market
although telecom still continues to lag.

Exhibit 38: Indian Offshore Sector Revenue (2009)

Others, 11%
Energy/Utilities,
5%
BFSI, 36%
Manufacturing,
17%

Telecom, 18% Retail, 13%

Source: Company Reports and Oppenheimer & Co.

Worldwide Market Overview:

Market researchers IDC expect the offshore IT services market to reach $41.9 billion in
2013 for a CAGR of 6.2%. In 2010, the United States contributed 65% of the overall
revenue with Europe 31%.

Corporate-Performance Decline in Key Sectors Bottoms Out

There is a bottoming out of declines in corporate performance in key sectors such as
BFSI, telecom, retail and manufacturing, which contribute more than 80% to Tier 1 IT
firms’ revenue. While BFSI is showing signs of improvement, retail and manufacturing
might take longer to recover. Telecom demand is expected to get a push from emerging
markets.

Vendor Consolidation and Efficiency Spending To Drive Growth

We have seen vendor consolidation and onsite contractor replacement exercises adopted
by several large customers, which we believe is likely to result in incremental volume
growth for Indian vendors. For example, BP has consolidated its vendors by awarding
extra work to IBM, Infosys and Wipro. A similar exercise is being taken by companies
such as Chevron, Exxon and a few others. In our view, this wave of offshoring by
companies that have offshore spending of less than 10% of total IT application spending is
likely to continue. This spending shift is likely to happen in verticals such as energy and
utilities, media, retail and manufacturing, as most of these companies have yet to reach an
optimal level of offshoring, in our view.

Apart from vendor consolidation, offshore spending is also picking up in areas where
global delivery is required for better business efficiency. This includes spending directed
towards retaining and growing customers, improving customer service or geographic
penetration.

49
INDIA

What Does Indian IT-BPO Bring To The Table?

Low Cost Of Delivery
While geographical mismatch of demand and supply of skilled labor makes offshoring a
necessity, wage differentials make it attractive. With entry level salaries in India at around
a tenth of those in the US for similar skills, and communication costs falling continuously,
use of offshore resources versus domestic onsite resources makes a compelling business
case for customers of IT services in developed markets. Cost reduction has typically been
associated with outsourcing efforts, and remains a powerful driver of outsourcing.
NASSCOM/McKinsey and Oppenheimer estimates put the net savings by outsourcing to
Indian IT firms to be in the range of US$20-25 billion in 2009 alone. India offers the lowest
cost of delivery as compared to other offshore locations, with Tier-I locations offering
savings of ~70%t over source locations, Tier-II/III cities in India offer a still larger benefit.

Talent Supply/Demand Skewed in India’s Favor

One of the key drivers in India for growth in outsourcing and offshoring is a mismatch
between demand and supply of skilled labor in developed markets. Availability of skilled
talent has been India’s foremost attraction as a global sourcing country. India’s graduate
churn-out has more than doubled in the past decade, with the addition of 3.7 million
graduates in FY2010, a scale unmatched by any other country. While some gaps in talent
suitability exist, they are being addressed through strong provider-level initiatives and
industry-led programs.

Robust Process Delivery

The industry has been extremely quality focused, with India based centers accounting for
the largest number of quality certifications achieved by any country. The industry has also
set standards in the establishment and maintenance of best practices in corporate
governance, and leads in customer satisfaction.

Stable Business Environment And Infrastructure

Timely government policies and increased public/private participation have played a key
role in developing an enabling business environment for the Indian IT-BPO sector. India’s
strong education framework ensures an ample supply of technical and nontechnical talent,
while the establishment of Software Technology Parks of India (STPI), and later Special
Economic Zones (SEZs) provided an enabling ecosystem for the industry to flourish.
Infrastructure development has been addressed by both public and private sector, leading
to the development of world class facilities in select cities.

Global Footprint
Increased focus on global delivery has required the industry to enhance its global
footprint, which has in turn helped the industry reach out to new customer segments and
offer new services. Over the last two years, there has been a 32% increase in the number
of global delivery centers with outreach expanding to 12 new countries.

Improving Offshore Brand

Offshore providers, particularly the larger players (e.g., Infosys, Wipro, HCL, Infosys, TCS,
and Cognizant), have moved up the value chain of IT services from basic technical
support to systems integration and outsourcing. This shift has clearly expanded their
brand as more than companies that compete on price alone. However, despite the
economic growth and success of these players, the term “offshore” still drives the

50
 INDIA

perception of using low-cost, labor-based resources. It is this perception which still is likely
limiting offshore providers from gaining top-level recognition as front runners in IT services
although we believe this perception is slowly ebbing away.

BPO–Opportunities in India
The business process outsourcing industry in India, like the IT services segment, has
predominantly been an export-oriented sector. It has derived the bulk of its revenues from
the US, EMEA and Asia Pacific.

Currently worth around $11 B (including captive BPOs), it is expected to experience

fourfold growth over the next four years. According to trade group NASSCOM, the BPO
industry is estimated to touch revenue figures of $40 billion by 2014 and provide jobs to
over two million people.

Market Outlook Improving

Recent BPO vendor commentary indicates that client demand for offshore BPO is
improving, decision making cycles are shortening, and deal sizes are creeping up –
although they have not reached pre-recession levels.

M&A in the BPO Space

There was significant consolidation in the global and regional BPO market in 2009, with
some large M&A deals announced in 2H09. Xerox acquired ACS, Stream merged with
eTelecare, Sykes acquired ICT group and Dell acquired Perot. In 2010, however, merger
and acquisition activity has been restricted to small, niche buyouts. BPO services vendors
are acquiring attractively valued, niche BPO players. We believe this helps them fill gaps
in their portfolio and expand to newer customer sets or geographies

Captive BPO Outlook

We are witnessing mixed signals from the captive BPO market. While some India BPO
vendors in the past have tried to consolidate their presence by taking over entire captive
customer setups, recently we have seen efforts by large financial institutions such as
Citigroup to set up their own captive BPOs in India. Historically, attrition levels at captive
BPO tend to be higher than the overall industry average, and it remains to be seen how
long the captives survive.

Worldwide Market for BPOs

Worldwide BPO services for 2014 are expected to reach $201B. While growth is expected
to come from all three regions of North America, Europe and Asia Pacific, APAC is
expected to grow the fastest at 9.4% vs. NA and EMEA at 5%. APAC’s lively growth
bodes well for BPO players with significant market presence there.

51
INDIA

Exhibit 39: Worldwide BPO Market

250 APAC EMEA America 14%

12%
200 10%
8%
150 6%
4%
100 2%
0%
50 -2%
-4%
0 -6%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: IDC

Macro made an obvious impact on growth in 2009 with the market declining 5% but
according to various third-party market researchers, it is expected to rebound by around
4% in 2010 and close to 5% in 2011.

Outlook
We believe the improving economic conditions and a return of consumer confidence and
renewal of business growth should drive IT spending going forward. IT services is
expected to grow by 2.4% 2010, and 4.2% in 2011 (Gartner).

We believe key near term drivers for IT services could be SaaS, or software as a service;
security; and cloud computing solutions. Government IT spending as well continues to rise
across the world, largely focusing on infrastructure, and security. Other areas of spending
include data management, on-demand ERP, and virtualization.

BPO spending in 2010/11 is expected to be increasingly driven by the F&A segment and
procurement, followed by HR outsourcing.

Even though India has a 51% market share of the offshoring market, there is tremendous
headroom for growth as the current off shoring market is still a small part of the overall
outsourcing industry. Significant opportunities exist in core vertical and geographic
segments of BFSI and US, and emerging geographies and vertical markets such as Asia
Pacific, retail, healthcare and government respectively. Development of these new
opportunities can triple the current addressable market, and can lead to Indian IT-BPO
revenues of $225B by 2020.

52
 INDIA

Key Sectoral Risks

Protectionism
The increase in government intervention with private sector industries, such as finance
and manufacturing, coupled with rapidly increasing unemployment, particularly in the
United States, is heightening citizen reaction to the use of offshore resources as
undermining employment opportunities. The impact of these events is moving
governments to consider greater levels of protectionism in Europe and the United States.
The impact on offshore providers will be to utilize more local resources or potentially
invest in new delivery models for local use.

Corporate Credibility
The effects of the Satyam debacle (in January 2009, the Indian IT services provider
admitted to falsifying its finances) appear to have had limited impact on offshore providers.
However, we believe that offshore providers need to provide maximum transparency of
their companies' financial and business operations.

Increased Competition Including New Competition from New

Locations
Competition in the offshore world is coming from two major groups. The first group
involves increased investment by emerging offshore locations, such as Egypt and China,
which are building up their local capabilities and promoting their abilities to developed
markets. The second group involves an alternative means of procuring IT services. This
group involves providers offering such IT services as SaaS and cloud/utility computing.
These IT services can also be construed as opportunities given the need for deployment
and maintenance services.

Wage Inflation Starting to Creep Up

Last year’s benign wage inflation due to the weak economic macro environment has given
way to rising wage inflation since the beginning of 2010. Our current assumption is for
wage inflation to rise to the low teens in 2010 as variable compensation has made its way
back in to the total compensation mix. While benign wage inflation’s benefit has abated for
the IT sector, we would note that wage inflation should remain under control in the lower
teens, and IT offshore providers especially the Tier 1s should continue to benefit on their
higher mix of “fresher” employees (that is, employees with less than 3 years’ experience).

53
INDIA

Pharmaceutical Sector
Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Unichem Labs. 506690-IN 249 $5.53 22,458 $4,991 268 105 62 4.0 15 16.8
Wockhardt 532300-IN 358 $7.97 38,995 $8,666 426 115 -22 -16.1 -32 -11.2
Torrent Pharma. 500420-IN 567 $12.61 48,013 $10,669 606 379 116 4.9 24 23.2
Aurobindo Pharma 524804-IN 1,288 $28.63 75,011 $16,669 1,349 786 374 3.4 10 134.5
Glenmark Pharma. 532296-IN 374 $8.30 100,915 $22,426 385 230 97 3.9 5 78.5
Cadila Health. 532321-IN 771 $17.12 157,769 $35,060 809 413 97 7.9 37 20.9
Piramal Health 500302-IN 441 $9.80 92,164 $20,481 600 331 684 0.6 21 20.8
Dr Reddy's Labs 500124-IN 1,826 $40.59 309,035 $68,675 1,835 1,051 267 6.8 50 36.4
Ranbaxy Labs. 500359-IN 574 $12.75 241,366 $53,637 625 364 129 4.4 14 42.1
Cipla 500087-IN 370 $8.23 297,434 $66,097 375 300 74 5.0 13 27.5
Sun Pharma.Inds. 524715-IN 447 $9.94 463,112 $102,914 476 280 88 5.1 9 51.5
Jubilant 530019-IN 288 $6.41 45,776 $10,172 402 265 144 2.0 23 12.6
Lupin 500257-IN 496 $11.02 221,033 $49,118 520 262 58 8.6 15 34.0
Source: FactSet. Pricing as of 12/03/2010.
Market Size
India's pharmaceutical industry is now the third-largest in the world in terms of volume and
stands 14th in terms of value. According to data published by the Department of
Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover (i.e., revenues)
of India's pharmaceuticals industry between September 2008 and September 2009 was
US$ 21.04 billion. Of this, the domestic market was worth US$12.26 billion

Export of pharmaceutical products from India increased from US$ 6.23 billion in 2006-07
to US$ 5.92 billion in 2007-08 and to US$ 8.7 billion in 2008-09—a combined annual
growth rate (CAGR) of 21.25%. According to Jyotiraditya M Scindia, Minister of State for
Commerce, pharmaceutical exports from the country have recorded growth rates of
21.61%, 14.37% and 28.54%, respectively, in the three consecutive years of 2006-07,
2007-08 and 2008-09.

Export Driven Market

Despite having many domestic players, India accounts for only 1.3% of the global
pharmaceutical market. Around 45% of total revenue for the Indian pharmaceutical
industry comes from exports, with the US alone accounting for 20-30% of total revenue.
Even though combined sales in the US have grown at a steady pace in the past three
years (accounting for more than 20% of net sales), most Indian companies are still in the
early stages of their ramp, with a 1-2% market share.

The Indian pharmaceutical industry also provides a wide range of contract services across
the drug development value chain including drug discovery, contract manufacturing,
clinical trials and data management to foreign multinational companies. A comparison (by
the Organization of Pharmaceutical Producers of India) of set-up costs of these facilities in
the US vis-à-vis India shows that it is 37% more economical to set up a captive unit in
India than in the US.

In addition to cost benefits, the global pharmaceutical majors also enjoy certain other
benefits in shifting their R&D operations to countries like India. These include greater
access to the patient population they are trying to serve, access to indigenous plants
known to have huge medicinal potential (but not fully tested or commercialized yet), a
favorable environment for developing significant new research processes and access to
funds from local or regional governments to treat diseases that are generally neglected.

54
 INDIA

In fact, due to the huge cost and time benefits, many multi-national pharmaceutical
companies in the US and Europe have been increasingly outsourcing API (active
pharmaceutical intermediate), intermediate and generic drug production to India. A cost-
benefit analysis of typical manufacturing cost elements between the US and India (by the
Department of Pharmaceuticals) illustrates that outsourcing of manufacturing operations
to India typically results in net savings of 27%.

The government: Cheaper generic drugs are an important factor in the cost cutting plans
of the US Government, considering that it currently spends more than US$2 trillion
annually on healthcare and subsidizes medicines for the elderly and the poor. Healthcare
expenditure generally accounts for a major share in the total spending of developed
countries including 10.7% of the GDP in Germany, 9.7% in Canada and 9.5% in France in
2008.

With rising healthcare costs in Europe and the US, cheap generic drugs exported from
other countries have proven to be a silver lining. A recent study by the Generic
Pharmaceutical Association in the US revealed that the American healthcare system
saved US$734 billion between 1999 and 2008 by using generic drugs, including about
US$121 billion in savings in 2008 alone. With India being one of the major sources for
manufacturing these cheap generic drugs, the governments in the US and Europe would
seemingly want to further promote their imports from India.

The insurance companies: Around 85% of the US population has health insurance
coverage, with private insurance companies and funds accounting for more than 50% of
total healthcare expenditure. The insurance companies would thus benefit from cheaper
drugs manufactured in India. These multinationals also have a significant say in the
governments in these countries. The generic drugs imported from India are, in turn,
beneficial to consumers that typically pay a lower health insurance premium for using
these drugs. Recent estimates indicate that the average insurance premium for family
coverage in the US in 2008 grew at an average rate of 5%, 2x the average rate of inflation
(source: Kaiser Health Research).

The workforce: The pharmaceutical industry in the US and Europe and the manufacturing
sector at large in developed countries are not perceived as major job creators due to the
high degree of automation in manufacturing. In fact, the pharmaceutical sector employed
only 0.3% of the US working population in 2008 compared with healthcare and social
assistance services, which correspondingly employed 12.5%. Thus, recent cries of
protectionism in the US and Europe related to growing concerns of unemployment in
various sectors are not so relevant to the pharmaceutical manufacturing industry.

The pharmaceutical sector is one that has felt a relatively lesser impact of the global
financial crisis and the corresponding demand slump following it compared with other
manufacturing sectors. This is because primary drugs are essential commodities, and
consumers accord a high priority to healthcare.

Increasing Outsourcing In Research And Manufacturing

The environment for outsourcing remains favorable as innovators look to reduce costs and
increase the speed of the research process. Clinical trials are increasingly becoming
expensive in the developed world. Low cost, high quality Indian manufacturing has
become essential for API and intermediate production.

Indian companies have acquired firms that give them client access, create necessary
manufacturing/research facilities and widen portfolio of clients and services reducing
concentration risks. Indian companies are present in the highest value adding segments—
high potency substances in CMOs (contract manufacturing organizations) and discovery
research in CROs (contract research organizations).

55
INDIA

CMO Business
Most of the Indian companies are operating in the CMO field, focused on APIs and
intermediates. This is a natural extension of India’s core competency in chemistry-driven
manufacturing. Manufacturing of commercial scale API and intermediates is shifting to
India while early stage manufacturing is still being done in Europe and US.

Advantages of Indian Companies in the CMO Space Are:

• Cost savings—Indian manufacturing is up to 50% cheaper compared to the

US/Europe’s.

• World class skills—India scientists have the skills necessary for chemistry-based
manufacturing.

• Large number of FDA approved plants—India has the largest number of FDA
approved plants outside the US.

• Existing strong manufacturing base—India has traditionally strong manufacturing

skills, and the country is known for generic manufacturing.

CRO Business—High Barriers To Entry, Better Margins

Growth in India’s CRO business is driven by several factors –1) legacy chemistry skills
and synthesis experience over the past several years, 2) English speaking scientists at
significantly lower costs than developed markets, 3) faster patient recruitment; and 4) high
quality of data.

CRO—Outlook
Globally, R&D driven pharma companies are under pressure to reduce R&D costs.
According to PhRMA (the Pharmaceutical Research and Manufacturers of America), out
of every 5,000-10,000 screened compounds, only 250 enter pre-clinical testing. Of these,
only five make their way to clinical testing, and only one eventually is approved by the
USFDA. Due to the large number of clinical trials required by USFDA, introducing a new
drug now costs 3.5x more than it did 15 years ago. Global R&D expenditure has grown to
~US$60 billion in 2007. The CRO market size is estimated at US$21 billion in 2009 and
expected to grow at 8.5% per year to reach US$ 35 billion by 2015.

Besides lower trial costs, clients need patient access, medical and therapeutic expertise,
clinical development teams. CROs provide substantial global capacity to drug developers
and have become a critical contributor to clinical trial activity. Clinical trials conducted by
CROs are completed up to 30% more quickly than those conducted in-house by pharma
companies.

India—A Popular Destination for CROs

Key factors favoring India include:

• Large pool of labor with chemistry skills, with India having about 8.5 million qualified
scientists with majority if not all of them English speaking.

• Labor costs a fraction of those in the developed world. The Indian cost advantage has
been pegged at 1/6 to 1/3 of the cost of drug development in the West.

• Second-largest pool of qualified medical doctors globally after the US.

56
 INDIA

• Diverse patient/gene pool with diverse disease characteristics for clinical trials and a
high level of patient consent that reduces time and costs involved in clinical trials.

Key risks include:

• Continuing regulatory compliance necessary to be in the business.

• Increasing competition in India and China.

• Limited operating history and evolving business models with widespread use of M&A
for growth.

• Exchange rate risk with the volatility of the Indian rupee vs. the US dollar.

57
INDIA

Education Sector

Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Educomp 532696-IN 570 $12.66 54,409 $12,091 876 442 184 3.1 24 24.1
Everonn Systems 532876-IN 628 $13.95 9,495 $2,110 756 334 188 3.3 29 21.9
NIIT 500304-IN 59 $1.31 9,741 $2,165 78 51 31 1.9 2 32.4
Core Projects 512199-IN 241 $5.36 24,972 $5,549 325 150 101 2.4 11 21.3
Manipal Education Private
Source: FactSet. Pricing as of 12/03/2010.

India—The Largest Education Market In The World

A large number of students and schools and the required services across various levels of
education make India the largest school education market in the world. Government data
indicate that about 220 million students access the education system with another 100
million out of the system. India has a million schools, of which 95% are government
schools and the balance private schools. However, government and private bodies believe
that growth in school education in India will be very strong. The National Ministry of
Education estimates that India needs to build close to 200,000 new K-12 schools (or grow
the number of schools at present by approximately 20%) within the next five years to cater
to the expected increase in the student population, in addition to the capacity needed to
include those outside the school system. Education at all levels remains a key focus for
the government. Successive governments continue to emphasize education and to set
targets to increase spending on education to 6% of GDP, with enlarged public-private
partnerships at every level of the educational pyramid and with targets of nearly half of the
spend toward primary and secondary education. The FY2011 central government budget
allocated Rs31,036 crores for education translating to a 16% increase YoY. In addition,
states have access to Rs 3,675 crore for elementary education under the 13th Finance
Commission grants for 2010-11.

What Is Driving the Private Education Sector?

Increased Propensity To Spend On Quality Education
India for decades has seen poor educational standards and inadequate infrastructure.
However, rising income levels have boosted the propensity to spend on education. This is
evident from the fact that annual school fees have increased multifold across India. This
structural shift is expected to continue for few more years

Government Support and Newfound Willingness For Change In

Political Circles
The Indian Government is supporting the education sector in a larger way by
implementing many schemes for basic and technical education through various platforms.
The “Right to Education Bill 2009” makes it mandatory for government to ensure that all
children below 14 years of age are enrolled in schools; i.e., free and compulsory education
becomes a fundamental right. Currently, approximately 52 million children between ages
6-14 are not enrolled in any school. This alone will create an additional market of US$
12.5 billion in coming years.

PPP Model—More Food Than One Can Chew!

The government is involving the private sector in computer training for public school
children through ICT. This business is growing very fast. Similarly, new areas can open up

58
 INDIA

for PPP (public/private partnerships) like private school management of public schools,
build school infrastructure, teacher training etc. The model has been accepted by the
political circle and will be focused incrementally on new initiatives. This has the potential of
creating additional markets for all private players.

Structural Story On Favorable Demographics

India ranks second in the world in population. Of India’s population, 44% is below the age
of 19, making it the youngest nation in the world. This bodes extremely well for the
education sector. Demand for education will continue to increase over next decade at
surprising speed, we think.

Recession-proof Industry
In recessions, typically the last thing to get affected is the education budget. This is true
across the globe and more so in India because of social reasons. Last year, when globally
everything had fallen apart, the education sector in India bucked the trend, with very
respectable business growth

The Education Market

Shifting demographics, new education and communication technologies, governmental
and private focus, rising student expectations, and a host of new players are creating
profound and wide-sweeping changes in the Indian education landscape. We believe
these changes will trigger demand for educational services and educational infrastructure
of an unprecedented nature making education a big business in India and making it one of
the leading investment themes.

Pre-school—Nascent Opportunity
Pre-school education is still a relatively underdeveloped market in India but is likely to see
a change in market dynamics in the near future as new players target this space with
branded pre-school chains. More than 5 million children enter playschools in India every
year and stay for two years, paying around Rs15,000-18,000 in fees per annum, which
makes this an Rs150 billion market. We believe the opportunity is much larger. We note
that the economics of this business are very attractive and that a preschool with leased
real estate can be a profitable venture from the first year itself, unlike mainstream schools,
where profitability typically happens only after five years of operations.

Tutoring—Fragmented But Large Business Opportunity

Supplementary tutoring (designed to supplement large-scale teaching in schools) has
come to account for a significant portion of household spending in Indian households.
From board exams to school tuitions, IITs, medical, IIMs and now GRE, there is demand
at all education and income levels. Some of the big players have estimated the market
potential of organized coaching in India, for competitive exams alone, at Rs70 billion
(US$1.7 billion). Big private players — such as FIIT JEE, IMS, Career Launcher, and
Career Point — have nationwide franchise operations, and some of these have even
started offering coaching to students in the US.

The dependence on board percentages to secure entry into engineering or medical

colleges ensure high growth not only for players like Career Launcher, Chate Classes,
Vidyasagar Classes, and Aggarwal Classes but also for private tutors. We find that
spending levels for home based private tutoring are much higher than for classes at
coaching centers. Career Launcher offers online education to school students from class
VIII to class XII of India’s CBSE (Central Board of Secondary Education) and Maharashtra
SSC students. Chate Classes has more than 100 branches all over Maharashtra and up
to 50 branches in Mumbai. We do not find any large national player (like Kaplan or Sylvan
in the US) in the school tutoring space as school education varies across India.

59
INDIA

We believe that the emergence of mass private tutoring blurs the distinction between
school teaching and supplementary teaching. The growing dissatisfaction of parents with
the formal school system and the criticality of performance in a limited job market drive the
need for supplementary education. Though this continues to be a largely urban
phenomenon, private tutoring has made inroads in rural areas as well.

India Significantly Lagging In Secondary Education Attainment

India is at a big disadvantage to all other three BRIC countries in secondary school
enrolment in contrast to primary school participation, where India has a comparative lead.
Over the past two decades, education attainment to the secondary level has increased to
only 16% in 2004 from 8.5% in 1984. The gross enrollment rate in secondary education is
47%, which is much below the level predicted for a country of India's per capita income
level. According to the Seventh All India Education Survey, there were only one-fifth as
many secondary schools as the number of primary schools. However, despite this supply
constraint, we believe demand for secondary education will continue to rise as returns on
secondary and higher education are significantly higher.

Perceptible Shift in Mindset Toward Education Spending

Private share of spend on education in urban India has grown from 2.1% of per capita
income in 1983 to 6.3% in 2003. The average Indian middle-class household spends 15-
20% of its income on education/careers of its children, and we believe private education
spend will continue to rise at much higher pace. A recent McKinsey report projects
education and recreation spend to capture a larger share of wallet at 6% and 9% in 2015
and 2025, respectively, from 5% in 2005. Spend on education and recreation is expected
to rise at a CAGR of 6.1% over 2005-2025 as we see an increase in the purchasing
capacity of middle-income group families.

Private education spend is growing both in rural and urban India. The patterns of
expenditure in rural and urban areas are different. In rural areas, expenses are high for
uniforms, books and stationery, whereas in urban areas, expenditures are highest for
tuition fees and private coaching fees. However, research shows that while per capita
expenditure on education rose 12.4 times between 1983 and 1999 for the poorest 40% of
country's population, it rose 10.8 times for all income categories taken together. This
demand for education can be explained by the fact that wages are much higher for
workers with higher education levels.

Private Schooling A Strong Business Opportunity

The Indian Education Ministry believes there is a requirement of 200,000 K-12 schools in
the near term for meeting growing education needs. We believe increasing purchasing
capacities of mid-income families and higher skill requirements will put tremendous
expectations on the school system, both in terms of scale and innovations. We note that a
new private school reaches maturity in the seventh year, coinciding with peak revenue
status in the fifth year of operations. Break-even is achieved in three years of operations.
Operating margin for a school in a steady state can reach about 40-50%.

We believe private education in India is expected to grow at the pace China saw over the
past couple of decades. From being banned until the mid-1980s and with virtually no
private schools in China until 1989, private education has grown dramatically since in that
nation. Currently, 54% of tertiary institutions, 20% of pre-schools, 9% of vocational high
schools, 3% of middle schools and 0.4% of elementary schools are in China's private
sector.

60
 INDIA

Key Challenges

Business Requires Capital Expenditures

Those in the business of creating the school infrastructure face limitations on capital
available for expanding. This had been the apparent problem with a few players last year.
Balance sheets have become heavy with debt, reducing the ability to scale up fast to a
few players.

Execution
Execution remains a big challenge as the sector is throwing off opportunities, but how
much can be grabbed is a matter of how much can be implemented. School ecosystems
such as infrastructure, well-trained teachers, better content etc., will take time to build.
And the scarcity of infrastructure can leave the opportunity untapped.

Momentum May Fizzle

In the past, the Indian Government has declared its intention to revolutionize the system,
but the talk remained talk, and nothing materialized. This time, momentum has picked up,
but there always has a risk of this fizzling out halfway.

Lack of Experience for Private Players

Private-sector players without much experience in education are venturing into many new
areas. This could lead to some avoidable mistakes.

Increased Competition From Regional Players In Government

Business
ICT (information and communication technologies) has experienced strong competition
from regional players, reducing margins in the business for all players. There is a fear of
margin pressure in general for the sector.

Budget 2010-11
The Indian Government has increased the planned allocation for school education by 16%
from Rs. 26,800 crore (US$5.81 billion) in 2009-10 to Rs. 31,036 crore (US$6.72 billion) in
2010-11.

In addition, Indian states will have access to Rs. 3,675 crore (US$796.1 billion) for
elementary education under the Thirteenth Finance Commission grants for 2010-11.

61
INDIA

Retail Sector

Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Pantaloon Retail 523574-IN 402 $8.94 87,306 $19,401 528 323 136 3.0 9 43.4
Shopper's Stop 532638-IN 728 $16.17 25,479 $5,662 776 320 75 9.6 14 50.6
Provogue India 532647-IN 65 $1.43 7,376 $1,639 83 41 73 0.9 2 26.1
Source: FactSet. Pricing as of 12/03/2010.

Retail Opportunity
A recent BMI India Retail Report forecasts that the total retail sales should grow from
US$353 billion in 2010 to US$543.2 billion by 2014. With the expanding middle and upper
class consumer base, there will also be opportunities in India's tier II and III cities. The
greater availability of personal credit and a growing vehicle population to improve mobility
also help contribute to retail sales growth of 11.4%. Mass grocery retail (MGR) sales in
India are forecast to undergo enormous growth over the forecast period. BMI further
predicts that sales through MGR outlets will increase by 154% to reach US$ 15.29 billion
by 2014. This is a consequence of India's dramatic, rapid shift from small independent
retailers to large, modern outlets.

India continues to be among the most attractive countries for global retailers. Foreign
direct investment inflows between April 2000 and April 2010, in single-brand retail trading,
stood at US$ 194.69 million, according to the Department of Industrial Policy and
Promotion (DIPP). Jones Lang LaSalle Meghraj forecasts ~47m sq ft of retail space to
operationalize over the next 3 years.

Status Check
After 3 years of rampant roll-out, deteriorating business economics, leveraged growth and
a few casualties, Indian organized retail is coming back on the right track. The cost of
doing business is falling, with reduced competitive intensity. Access to key resources like
people and property is becoming easier. On the other hand, retailers are in course-
correction mode and reducing excesses—closing down nonviable stores and formats,
exiting noncore businesses, cutting down on inventory levels, etc. These moves should
ease pressure on Indian retailers’ balance sheets. While the cost reduction drive, margin
expansion and lower capital requirements improve balance sheet health, organized retail
is back on a growth path with a recovery in consumer sentiment. After having seen same-
store sales decline and overall industry growth dipping to 4-5% in FY09, even as the
sector grew 3x in size between FY06-09 (for a US$18 billion industry), organized retail is
likely to get back to double digit growth in 2009 with bigger players growing faster.
Organized retail is set to witness the sharpest earnings improvement over the next couple
of years.

What Is Driving Indian Modern Retail?

Strong Economic Growth Driving Modern Retail
India’s consumer mindset has undergone a radical change in the last decade with higher
disposable income, free media, introduction of international brands and changing lifestyles
in urban India. ”Mall culture” started in India in the last 4 to 5 years and has created strong
62
 INDIA

awareness about modern retail. Sustained strong economic growth is leading to changing
consumption pattern of India.

Structural Story On Favorable Demographics

th
India ranks second in the world in population. Until the 20 century, this very fact was
considered a big liability, yet it has turned into a big opportunity especially for the retail
market. Of the population, 70% is below 35 years of age, making it the youngest nation in
the world. This bodes well for modern retail, which largely targets these customers with a
higher propensity to consume.

Rural India Provides Latent Demand

Of India’s population, 65% depends directly or indirectly on agriculture. This again
provides a latent source of demand for modern retail as aspiration levels and appetite to
spend are growing very fast in rural India due to higher agriculture related profits, which in
turn lead to higher disposable incomes.

New Emerging Trends In Sector:

Demand Revival after a Tough Year

Most retailers experienced their worst year ever in 2008-09 (especially given that Indian
organized retail is still in its infancy) with changing consumer preferences and general
down-trading habits. But there are early signs of demand recovery. Same store sales
growth (SSS) is a good indicator of consumer sentiment. SSS bottomed out at 4-5% in
FY09 and is now showing a positive trend in the last few months. Market/industry
researchers expect SSS levels to range between 7-12% over the next 2 years. Store
traffic is increasing, which again is a good indicator of better sentiment. Another factor that
gives us comfort in the growth story is job market revival, which gives us further
confidence in the overall consumption theme.

Disciplined Retailers

In the low margin retail business, managing the cost structure remains the biggest
challenge. However, too much competitive clutter in the last few years had created
excessive demand for key resources like people and property. This had pushed up cost
structures multifold. While lease rental costs had increased by 70-100%, employee cost
per sq. ft. of retail operations had increased by almost 1.5x. This cost pressure made retail
businesses nonviable. However, now that retailers are in the process of rightsizing their
operations, demand for retail resources has eased. While lease rentals have corrected by
30-50% from the peak, anchor retailers are entering into attractive sales-linked rental
models. Employee costs are correcting as retailers go bottom-heavy, take pay cuts at the
top level, integrate the support functions and man the staff efficiently at the floor level. We
expect 300-600bp of margin improvement for retailers.

Capital Efficiency—Cut The Flab

As external capital becomes scarce, retailers are focusing on trimming their balance
sheets and funding growth through internal accruals. Retailers are focused on improving
capital efficiency through multiple ways—inventory management, space rightsizing and
cutting down on investments in noncore activities.

FDI and its Possible Impact

Introduction of foreign direct investment in retail is a hotly debated topic in India these
days. FDI is presently not allowed in the retail sector, except through the cash-and-carry
wholesale trading route. The government allowed 51% FDI in ”single brand” retailing three
years ago. There were no FDI restrictions in the retail sector prior to 1997. Entities that
63
INDIA

were established before 1997, like Mc Donald’s and Foodworld, were allowed to continue
with their foreign equity participation.

If FDI were to be permitted, besides increased competition, there could be significant

investment in the supply chain to meet the needs of increasing scale and maintain
efficiencies. Exports, too, are expected to increase multifold as foreign players start
sourcing from Indian markets. This would most likely result in higher employment
generation. The boom witnessed in the Chinese retail industry after FDI was permitted is
strong evidence in favor of FDI. In China, retail sales have grown at a CAGR of 13.5%
since FDI was permitted in 1992. Another noteworthy point is that traditional stores have
grown along with the modern formats in China.

The Indian government may relax FDI norms for the retail sector in a phased manner, so
that domestic retailers are given enough time to achieve scale and have a firm structure in
place before facing foreign competition. We have already seen the likes of Wal-Mart tying
up with Bharti to have an exposure to the retail segment (via cash-and-carry).

Key Challenges:
Inefficient Supply Chain And Logistics Management

Most retailers are engaged in retail space expansion. Moreover, they are committing to
faster replacement of merchandise in stores. All these activities require significant
investment in the supply chain. Considering that Indian retailers do not have deep
pockets, we believe that supply chain investment is likely to lag investment in stores. Most
retailers have yet to integrate themselves with their suppliers, so that stock replenishment
and additions can happen in an organized manner. In our opinion, this underinvestment
could become a bottleneck for retailers in coming years if steps to improve the supply
chain are not taken.

Lack of Experience

Customer tastes and preferences are in a constant state of flux. This tends to be
multiplied in emerging economies. We believe that Indian retailers also need to go through
2 to 3 more business cycles, before they achieve meaningful stability.

64
 INDIA

Media Sector

Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Zee Entertainment 505537-IN 148 $3.28 144,421 $32,094 162 121 42 3.6 4 41.4
Television Eighteen 532299-IN 72 $1.61 13,158 $2,924 99 66 52 1.4 2 43.9
Sun TV 532733-IN 520 $11.56 204,924 $45,539 547 319 48 10.9 14 36.1
IBN18 BROADCAST 532800-IN 94 $2.08 22,272 $4,949 135 75 39 2.4 -5 -20.7
NDTV 532529-IN 90 $2.00 5,802 $1,289 172 85 56 1.6 0 -310.3
Source: FactSet. Pricing as of 12/03/2010.
Low Ad Spend As A Percentage of GDP Promises Huge Growth
Potential
Total ad spending, as a percentage of India’s GDP, stands at around 0.47%, which is
quite low in comparison to 1.34% for the US, 0.95% for UK and 0.54% for China.

We believe that India’s ad spend, as a percentage of the GDP, will rise going forward, on
the back of the country’s economic growth, increasing disposable income, growing
consumerism, and changing demographics. The Indian television advertising industry is
estimated to have achieved a size of Rs.82.5 billion in CY08 and is expected to grow at a
CAGR of 13.5% to Rs.155.5 billion by CY13 (source: FICCI—Federation of Indian
Chambers of Commerce and Industry).

Exhibit 40: Advertising Spend By Medium

Television Out of Home

Advertising, 41. Advertising, 6.4
0% %

Print
Advetising, 48.0
%

Radio
Advertising, 3.2
Online %
Advertising, 1.4
%

Source: Federation of Indian Chambers of Commerce and Industry (FICCI)

Arrival of New Delivery Platforms To Drive Faster Growth In

Subscription Revenues
Subscription revenues are expected to grow at a faster pace than advertising revenues,
on the back of the government-mandated transition to conditional access systems (CAS)
in cable and the emergence of the direct-to-home (DTH) satellite industry. The transition
to digital provides a solution to the perennial underdeclaration of subscribers (i.e., video
piracy), which has been negatively impacting broadcasters for years.

65
INDIA

Merely 10% of subscription revenues reach the broadcaster, while cable operators pocket
the remaining amount. The arrival of new delivery platforms, such as CAS and DTH,
provides broadcasters with the chance to cash in on the lost opportunity.

As per the Telecommunications Regulatory Authority of India's (TRAI’s) notification on

interconnection agreements in the CAS notified areas, broadcasters will receive 45% of
subscription revenues, while multisystem operators (MSOs) will receive 30% and local
cable operators (LCOs) will receive 25%. The move likely will lead to an increase in the
revenue streams for broadcasters, as the precise number of subscribers will be revealed,
and broadcasters will also command a higher revenue share.

Intense Competition In News Space

The news space in both English as well as in Hindi in both general and business
categories is witnessing intense competition, both from existing players, as well as new
satellite channels being launched. Of the total market, Hindi News, Hindi Business News,
English News and English Business News command a viewership share of 3.8%, 0.2%,
0.5% and 0.2%, respectively, and there is intense competition within these segments.
Such intense competition raises concerns over the business model of new players, and
we believe that only those with deep pockets and quality news content will be able to
survive.

Subscription Fees Capped by TRAI

Broadcasters receive subscription fees from subscribers through cable operators, DTH
operators, and IPTV operators. Currently, the TRAI has fixed subscription fees for pay
channels at up to Rs.5.35 per channel on á la carte basis for cable operators providing
service through CAS. However, broadcasters are charging higher subscription fees to
DTH operators for providing their channels. Following the failure to come up with any
solution on pricing of channels to DTH operators, the TRAI recently issued a notification
stating that broadcasters cannot charge over 50% of the price that they charge cable
operators in non-CAS areas. Any further intervention could lead to more price control by
the TRAI, which would further cap subscription revenues for broadcasters.

66
 INDIA

Auto Sector

Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Maruti Suzuki 532500-IN 1,400 $31.10 404,387 $89,864 1,648 1,171 422 3.3 86 16.2
Hero Honda 500182-IN 1,832 $40.72 365,917 $81,315 2,094 1,497 223 8.2 64 28.5
Bajaj Auto 532977-IN 1,596 $35.48 461,565 $102,570 1,663 810 94 17.0 59 27.1
Tata Motors 500570-IN 1,315 $29.22 750,188 $166,708 1,350 645 220 6.0 44 29.7
Mahindra & Mahindra 500520-IN 799 $17.75 439,949 $97,767 826 475 180 4.4 36 22.1
Exide Industries 500086-IN 170 $3.78 144,713 $32,158 180 102 23 7.6 6 26.9
Ashok Leyland 500477-IN 73 $1.61 96,583 $21,463 82 46 30 2.5 3 22.8
Swaraj Mazda 505192-IN 411 $9.14 5,954 $1,323 437 211 141 2.9 15 27.6
Source: FactSet. Pricing as of 12/03/2010.
Auto sector stocks have recorded the most impressive return performance since the
Indian market indices bottomed in March 2009. Since then, the BSE Auto Sector is up a
whopping 355%. Over the past 12 months, the sector is up 51%.

Exhibit 41: BSE Auto Sector

11000
10500
10000
9500
9000
8500
8000
7500
7000
6500
6000
1/13/2010
1/29/2010
2/16/2010

3/18/2010

4/20/2010

5/20/2010

6/22/2010

7/23/2010

8/24/2010

9/24/2010
11/24/2009
12/10/2009
12/28/2009

10/11/2010
10/26/2010
11/10/2010
11/26/2010
3/3/2010

4/5/2010

5/5/2010

6/7/2010

7/8/2010

8/9/2010

9/9/2010

Source:
Factset Data Systems and Oppenheimer & Co

67
INDIA

Exhibit 42: Auto Market Share 2009-2010

Passenger
Vehicles, 15.86%

Commercial
Vehicles, 4.32%
Two
Wheelers, 76.23%
Three
Wheelers, 3.58%

Source: SIAM, Oppenheimer & Co

Exhibit 43: Auto Sales Trends FY03-FY10

14000000 Passenger Vehicles Commercial Vehicles Three Wheelers Two Wheelers

12000000

10000000

8000000

6000000

4000000

2000000

0
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Source: SIAM, Oppenheimer & Co

Ownership Density Portends Strong Visibility and Growth

The uniquely strong visibility of India’s auto sector earnings outlook versus that of global
sector peers is best illustrated by the country’s light auto ownership density. For example:
there are only 7 cars per 1,000 people in India as opposed to 202 cars per 1,000 people in
Malaysia, 186 in Korea, 91 in Brazil and 46 in Thailand (source: KPMG). As a result,
barring substantial infrastructure bottlenecks, the potential for continued volume growth is
immense.

Cost of Financing Expected To Move North

In India, financed sales in the passenger car segment play a vital role as ~70% of sales
done are on credit basis. During 2HFY09, on-credit car sales fell sharply, which in turn
impacted overall sales growth for the industry. At the same time, the RBI started lowering
key policy rates and reserve ratios in order to lower the cost of funds and to infuse liquidity
into the system. Accordingly, banks lowered the cost of financing and started providing
various schemes for passenger car buyers. We believe this to be one of the factors that
contributed to the strong growth in demand for passenger cars over the past year.

68
 INDIA

Seasonality Very Evident

Seasonality plays a strong role in the auto sector especially for passenger auto and 2-
wheeler sales. Industry passenger vehicle sales (cars plus UVs, or utility vehicles) are
expected to show strong growth, driven by improving economic fundamentals, easier
availability of finance, lower finance rates and new products. Stock-building ahead of the
festival season and easy year-ago comparisons also help.

Domestic Players Better Positioned Than New Entrants

We don’t expect to see major shifts in the industry’s competitive structure over the next
one to two years, given the long lead time nature of the industry. Homegrown automakers
such as Maruti, Tata Motors, Mahindra and Hyundai likely will continue to operate at much
higher utilization levels than newer entrants. Achieving higher “indigenization” (local
content) levels is seemingly the key to gain market share in the Indian market.

India remains one of the least competitive automotive markets. Limited market size
leading to lack of scale for new entrants, existence of strong homegrown players, high
import tariffs and differential tax structure all serve to keep barriers to entry high.

Potential Market Size Too Tempting to Ignore

Despite excise constraints, we have seen global auto majors such as Volkswagen,
Hyundai, Toyota, Honda, BMW, and Ford entering the Indian market. With over 200
million households and rising income levels, India is a difficult market to ignore.

Government Initiatives on Road Buildout Help

Kamal Nath, India’s minister of road transport and highways, has indicated in the past that
the government remains focused on road building with a target of 20 kilometers a day,
given the employment potential arising from it and associated benefits to semi-urban and
rural areas that fall in-between connected major cities. A strong road network and
infrastructure are essential for the auto industry to maintain its growth momentum. While
we don’t believe 20 kms per day is a realistic target, even 10km per day would be vast
improvement over the 4km per day average between 2004-09.

Global Majors Excited About India

Global auto manufacturers remain upbeat about the Indian auto market’s potential and are
bringing out more relevant products in the compact segment for the Indian market over the
next couple of years. Most of these automakers already have the capacity in place. With
over 50% of vehicle buyers being first-time buyers, the compact segment likely will remain
dominant and could surpass China’s compact market.

69
INDIA

Infrastructure Sector
Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
IVRCL 530773-IN 130 $2.89 34,671 $7,705 198 110 101 1.3 8 16.4
BHEL 500103-IN 2,210 $49.10 1,081,693 $240,376 2,695 2,060 325 6.8 47 47.4
Larsen & Toubro 500510-IN 2,020 $44.89 1,218,423 $270,761 2,212 1,371 349 5.8 73 27.8
Patel Engineering 531120-IN 331 $7.36 23,127 $5,139 500 304 210 1.6 19 17.7
Lanco Infratech 532778-IN 62 $1.38 149,645 $33,254 75 41 15 4.2 1 69.1
GMR Infra 532754-IN 49 $1.08 189,367 $42,082 74 41 21 2.3 0 1216.3
Punj Lloyd 532693-IN 106 $2.35 35,152 $7,812 226 81 91 1.2 10 10.6
Mundra Ports 532921-IN 147 $3.26 294,298 $65,400 185 96 17 8.5 2 61.0

Source: FactSet. Pricing as of 12/03/2010.

India’s Growth Leading to Infrastructural Strains

India’s rapid economic growth over the last few years has put heavy stress on the nation's
infrastructure. We believe further expansion in key areas could put a heavy strain on the
already overburdened lines of transportation unless massive programs of expansion and
modernization are put in place. Strains on India’s infrastructure include

• Power demand shortfall.

• Capacity constraints on port traffic leading to bottlenecks at the ports.

• Underdeveloped roads.

Pro-Reform Government—A Positive for Infrastructure

Post March-2009 lows, infrastructure stocks have far outpaced the rise in the Sensex in
some cases by more than twice that, with most of the impetus stemming from the
favorable election results. Investors likely have marked up the stocks in the hope that the
unencumbered pro-reform government in place could boost spending on infrastructure,
eliminate policy bottlenecks, and accelerate the time line for project approvals through
simplification of procedures.

Additionally, sector visibility remains promising with the government outlining close to
th
US$500 billion in Infrastructure spending in its 11 Five-Year Plan (2007-2012).

We believe the presence of a stable government led by the incumbent UPA party is a key
positive for the infrastructure sector in the longer term. Infrastructure investments in the
th
11th Five Year Plan are expected to be around ~US$ 500 billion (twice that of the 10
plan) with an emphasis on areas like roads, power, irrigation and water supply. Per the
plan outline, ~70% of the investment is expected to come from government spending, with
the Central Government contributing ~37% and state governments ~33%.

The government aims to increase infrastructure spending to over 9% of GDP by 2014

from the current 5.8%, per the RBI. With the private sector expected to invest ~30% of
projected expenditures, the public-private-partnership model should gain traction.

Liquidity Drought in FY09

In FY09, the lack of liquidity and as a result the increased cost of debt proved to be a
detriment for infrastructure projects, which tend to be capital intensive. Lack of liquidity
affected project returns and viability. However, government stimulus packages announced

70
 INDIA

early this year (FY10), coupled with RBI monetary measures, have alleviated liquidity
concerns to a great extent.

Monetary Measures Injected Liquidity Into The Banking system

Since October 2008, the RBI has reduced the cash reserve ratio (CRR) for banks by
400bps to 5% and has lowered the statutory liquidity ratio (SLR) by 100bps to 24%,
thereby injecting liquidity into the system. It also reduced repo rates by 425bps to 4.75%.
These aggressive measures led to a significant improvement in the liquidity situation with
wholesale interest rates declining sharply over the last nine months.

One-third of Planned Investment to Come From Private Sector

Of the 11th Plan’s investment of Rs 20,562B (close to US$500B at the time), ~30% is
expected from private participation as against 20% in the 10th plan. The role of private
players is much more prominent in current central projects. In FY09, the severe liquidity
crisis hampered the ability of private players to generate funds required for investment.
The power and road segments in particular witnessed a sharp slowdown as a mix of
macro and sector specific constraints induced a sharp deceleration in private participation
for new project tenders. Now, however, we expect greater participation from the private
sector and the process of project awards to be expedited, given the following:

• A marked improvement in the Indian economy along with reviving global macro.

• A softer interest rate regime leading to easier access to liquidity and a lower cost of
debt.

• Softening of commodity prices.

Road Development
We welcome the government’s recent efforts to increase spending on roads. The
Transportation Ministry is targeting building 7,000 kilometers of roads every year (20 km
per day). We believe the ministry’s road building targets to be a bit too optimistic, but the
fact that the focus remains on road buildout and improving the condition of existing roads
is a positive.

Railways
The Indian Railways hold the distinction of being the world’s second-largest rail network
and the principal mode of transportation for bulk freight and long distance passenger
traffic, with a total route length of 63,000 kms. The total investment earmarked for the
Railways in the 11th Five –year plan is Rs. 2,618 billion (US$57 billion), or a doubling of
the 10th plan expenditure.

Key Opportunities for Private Players

Development of the Freight Corridor is the biggest opportunity in the sector. With an
estimated cost of Rs 500 billion (US$11 billion), the government is looking to involve
private investment in some segments of the project.

The Indian Ministry of Railways plans to construct a new Dedicated Freight Corridor
(DFC), covering about 2762 kms along two corridors, the Eastern Corridor from Ludhiana
to Haldia, and the Western Corridor, from Jawahar Lal Nehru Port, Mumbai to
Tughlakabad/Dadri, along with interlinking of the two corridors at Khurja. Upgrading
transportation technology, an increase in productivity and a reduction in unit transportation
cost are the focus areas for the project. The DFC has been further necessitated by growth
of 8 to 11% in railway freight traffic over the last three years; freight traffic is projected to
cross 1,100 million tonnes by the end of 11th Five Year Plan.

71
INDIA

Airports
Air passenger growth in India has been one of the highest in the world. India’s civil
aviation market has grown at a CAGR of 18%, reaching US$5.6 billion in 2008. The
Centre for Asia Pacific Aviation (CAPA) has forecast a market of more than 100 million
passengers along with ~3.4mt of cargo per annum by 2010.

Investment of Rs 310 Billion in 11th Plan Period

The Financing Plan for Airports has estimated an investment of ~Rs 400 billion (US$8.7
billion) over 2005–14. During the 11th plan, the Airports Authority of India (AAI) will
undertake the development of 35 non-metro airports and 13 other airports; upgrades of
technology from ground-based communication, navigation, and surveillance-air traffic
management (CNS-ATM) to satellite-based CNS-ATM facilities; installation of new
facilities including security equipment at various airports; installation of safety and
facilitation equipment; development of airspace capacity enhancement; and development
of IT.

Ports
Close to 95% of the volume and 70% by value of the country’s international trade is
conducted through its 12 major and 187 minor/intermediate (non-major) ports.
Collectively, the major ports handle ~75% of India’s maritime cargo. Investment of Rs 880
billion (US$19.1 billion) has been earmarked for ports in the 11th plan.

Power
India is among the world’s largest power-producing and -consuming nations, with a total
generation capacity of 150,323MW as of June 2009. The Ministry of Power has projected
annual growth of 9% in electricity demand over the 11th Plan period and has thus set itself
a target of augmenting India’s capacity by 78,700MW. The key drivers of increasing
demand are growth in household consumption, electrification of rural areas, the rapid
growth of manufacturing and realization of demand suppressed due to load-shedding.

India’s power supply capability has always lagged behind its power demands with current
total shortfall of ~8%, and peak shortfall ~12%.

We believe the following prevailing factors to be positives for the sector:

• Healthy liquidity conditions,

• Softening commodity prices,

• Lower interest rates, given that the sector tends to be capital intensive,

• Healthy political climate.

Severe Demand–supply Mismatch

India has been facing a demand–supply mismatch, not just at peak demand levels but
also at the base level. With healthy economic growth expected to continue over the next
few years, infrastructure augmentation especially in the power sector is imperative.

32% of Infra Spending Earmarked For Power Sector

Power is clearly the focus area of the government with ~32% of budgeted infrastructure
spending earmarked for the sector. The planned outlay for power has been doubled in the
11th plan period to Rs 6,665 billion (US$145 billion), with the central government expected
to contribute 38.3% and states 33.9%.

72
 INDIA

Travel Sector
Major Players
Company Ticker Price Market Capitalization 52 Week Book P/BV EPS P/E
INR US$ (INR Crore) (US$Mill) High Low Value TTM
Cox & Kings 533144-BOM 528 $11.73 36,026 $8,006 660 304 171 3.1 0 #DIV/0!
Thomas Cook 500413-IN 59 $1.30 12,431 $2,762 79 56 325 0.2 1 55.9
International Travel House500213-IN 257 $5.72 2,056 $457 316 113 104 2.5 10 25.7
Indian Hotels 500850-IN 95 $2.11 68,585 $15,241 118 85 34 2.8 10 9.5
Hotel Leela Venture 500193-IN 45 $1.01 17,134 $3,808 59 40 54 0.8 10 4.5
Taj GVK Hotels 532390-IN 136 $3.02 8,509 $1,891 179 115 49 2.7 10 13.6
Advani Hotels 523269-IN 42 $0.92 1,918 $426 65 37 5 7.6 10 4.2
Pride Hotels Private
Lemontree Hotels Private
MMYT MMYT 1,260 $27.99 $955 $42.88 $20.75 2.1 601.4 #N/A #N/A
Yatra Private
Cleartrip Private
Via Private

Source: FactSet. Pricing as of 12/03/2010.

India’s Travel Market

As recently as the mid1990s, the Indian aviation and rail industries were government
owned monopolies. The entry of low-cost carriers (LCCs) transformed the marketplace in
2005. The India travel ecosystem consists of various industry suppliers, distributors and
agencies. The fragmented nature of the travel industry has created an opportunity for
distributors to capture value by developing and managing efficient systems that are
capable of bridging travel supply and demand on a nationwide, real-time basis. As
consumers navigate online travel sites, they dive into the online travel ecosystem. While a
majority of travel booking in India today is done the traditional way offline through a retail
travel outlet, there are a growing number of online choices for consumers including
supplier websites and online travel agencies (OTAs).

The entire travel ecosystem in India, including air, hotel, OTAs, bus, and rail is seeing
innovation. Surprisingly, the first real online catalyst came from the government-owned
Indian railways which started offering online bookings back in 2005. The growth of LCCs,
which have now grown from just a single one back in 2004 to seven in 2010, have also
given a major boost to the online travel market.

73
INDIA

Exhibit 44: LCCs as a Percentage of India’s Airline Mix

Source: TRAI

Exhibit 45: India Domestic Airline Market Share July 2010

Paramount, 0.3
0% Spicejet, 13.20
%
Go
Air, 5.60% Jet
Airways, 26.60%

IndiGo, 16.90%

Kingfisher, 20%

NACIL, 17.30%

Source: TRAI

The Indian travel and tourism industry is large and growing rapidly. According to the World
Travel & Tourism Council (WTTC), the contribution of travel & tourism to GDP is expected
to rise from 8.6% (Rs.5532 billion, or US$118billion) in 2010 to 9.0% (Rs.18544billion, or
US$330billion) by 2020. India is one of the fastest-growing countries in the world in terms
of its travel and tourism industry. Real GDP growth for the travel & tourism section of the
economy is expected to be 6.7% in 2010 and to average 8.5% per annum over the coming
10 years. Further, the WTTC expects that, as a result of the strong growth rate in the
Indian travel and tourism industry, over the next 10 years, India will become one of the top
10 travel and tourism markets in the world in terms of the absolute size of its market.
Internet penetration levels remain abysmally low in India with current estimates putting it
at a mere 7% (81 million users).

74
 INDIA

Exhibit 46: Travel and Tourism GDP in 2020

1000

900

800

700

600

500
917
400

300
501
200

100 216
148 143 124 122 111 104 80
0

Source: WTTC

According to PhoCusWright, the Indian online travel market grew 11% to reach $3.4 billion
in 2009. Netscribes has cited sources stating that, in 2009, approximately 34% of air
tickets and 14% of train tickets booked in India were sold online. Many travelers also
utilize online travel agency websites for travel-related research and information. Per
PhoCusWright, air ticket bookings contributed to approximately 70% of the online travel
market in India in 2009. However, the non-air ticket segments are also growing in the
Indian online travel market. Online rail revenues grew in excess of 25% in 2008-2009.

The Government of India has also recognized the importance of the travel and tourism
industry and has over the past several years enacted or announced several initiatives to
give further impetus to the industry:

• The “Incredible India” campaign helps showcase India as a leading tourist

destination globally;

• The provision of one-month tourist visas on arrival for citizens of five countries
(Japan, Finland, New Zealand, Singapore and Luxembourg);

• An expenditure budget of Rs. 11.2 billion allocated to the Ministry of Tourism in

the 2010 Indian government budget (a 9.7% increase over the previous year) of
which about Rs. 4.7 billion has been earmarked for building new infrastructure
facilities such as tourist reception centers and refurbishing monuments;

• Support of an “open-skies” policy in India which has led to the rise in LCCs;

• Upgrade of existing or construction of new airports in major cities, including

Mumbai, Delhi, Chennai, Hyderabad and Bangalore;

75
INDIA

• The construction of international convention centers in cities including Delhi,

Mumbai, Goa, Jodhpur, Udaipur, Cochin, Agra and Jaipur to attract more
business travelers to India; and

• Air transportation policies permitting airlines in India which have been in

operation on domestic routes for over five years to fly on international routes

The Indian travel market, we believe, is poised for growth given a strong domestic
economy, growth in the LCC market and a highly fragment lodging industry. Government
spending is evident on airports and roads, and we believe OTAs can capitalize on the
opportunities presented by this Asian behemoth.

Travel Distribution Channels in India

OTAs in India: PhoCusWright estimates that the total “business-to-customer” online travel
agency market (i.e., businesses serving end consumers with travel products and/or
services through an online channel) in India is valued at $1 billion and is dominated by
four players—MakeMyTrip, Yatra, Cleartrip and Travelguru (which was acquired by
Travelocity in August 2009). Of these, MakeMyTrip commands a market share of 48%,
followed by Yatra at 24% and Cleartrip at 18%, based on gross bookings for 2009.

Travel Suppliers: Generally, at the top of the travel distribution value chain are suppliers
that seek cost-effective ways to reach end-user travelers. Historically, these suppliers
relied largely on traditional GDS (global distribution systems) to connect their inventory of
products and services with travel agencies, which in turn distribute the products and
services to travelers.

Meta Travel Search Engines: These are online travel search sites such as Ixigo,
Ezeego1, Zoomtra and Kayak.com, and travel research sites that have search
functionality, such as TripAdvisor (Expedia owned).

Supplier Websites: Recently, travel suppliers have begun to utilize other forms of
distribution, including direct distribution via their own websites. Many travel suppliers such
as airlines and hotel companies have their own branded websites to drive business

Traditional Travel Agencies: Traditional retail travel agencies, supplier reservation

centers and ticket offices remain the largest distribution channels for travel in India. While
the emergence of the Internet has added additional channels for travel fulfillment,
penetration remains low due to the nascent nature of this channel.

76
 INDIA

Exhibit 47: OTA Market Share in India as of 2009

Others, 10%

Cleartrip, 18%

MakeMyTrip, 48%

Yatra, 24%

Source: PhocusWright & Oppenheimer & Co

Hotel Industry
FY10 was a challenging year for the hotel industry, but we believe rising occupancies
could now boost revenues and profits. Current growth of the Indian hospitality sector is
12% and according to PhocusWright expected to rise to at least 20% over the next few
years.

Major sporting events such as the recently concluded Commonwealth Games in Delhi, the
ICC Cricket World Cup in 2011 and Formula 1 in 2011 with India’s hosting its First formula
1 race in Chennai should help in boosting India’s profile as a tourist destination worldwide
and should attract both domestic and foreign tourists.

The positive outlook of strong GDP growth, improving infrastructure, the “Incredible India”
campaign and the recently launched ADB campaign should improve the outlook for tourist
arrivals in key destinations both from overseas and domestic tourists. Rising disposable
incomes, cheaper airfares and better connectivity should continue to increase demand for
rooms.

77
INDIA

Stock prices of other companies mentioned in this report (as of 12/03/2010)

Aditya Birla Nuvo (500303-IN, Rs. 745.9, Not Rated)

Advani Hotels (523269-IN, Rs. 41.5, Not Rated)
Andhra Bank (532418-IN, Rs. 160.6, Not Rated)
Ashok Leyland (500477-IN, Rs. 72.6, Not Rated)
Aurobindo Pharma (524804-IN, Rs. 1,288.4, Not Rated)
Axis Bank (532215-IN, Rs. 1,409.6, Not Rated)
Bajaj Auto (532977-IN, Rs. 1,596.5, Not Rated)
Bank of India (532149-IN, Rs. 480.4, Not Rated)
BHEL (500103-IN, Rs. 2,209.7, Not Rated)
BMW (BMW-ETR, $63.69, Not Rated)
Cadila Health. (532321-IN, Rs. 770.6, Not Rated)
Canara Bank (532483-IN, Rs. 728.7, Not Rated)
Cipla (500087-IN, Rs. 370.5, Not Rated)
Core Projects (512199-IN, Rs. 241.0, Not Rated)
Cox & Kings (533144-BOM, Rs. 527.8, Not Rated)
Dr Reddy's Labs (500124-IN, Rs. 1,826.5, Not Rated)
eClerx Services (532927-IN, Rs. 726.8, Not Rated)
Educomp (532696-IN, Rs. 569.6, Not Rated)
Everonn Systems (532876-IN, Rs. 628.0, Not Rated)
Exide Industries (500086-IN, Rs. 170.3, Not Rated)
ExlService Holdings (EXLS, $21.60, Not Rated)
Firstsour.Solu. (532809-IN, Rs. 21.9, Not Rated)
Ford (F, $16.80, Not Rated)
Genpact (G, $14.81, Not Rated)
Glenmark Pharma. (532296-IN, Rs. 373.7, Not Rated)
GMR Infrastructure (532754-IN, Rs. 48.7, Not Rated)
HCL Technologies (532281-IN, Rs. 423.4, Not Rated)
HDFC Bank (500180-IN, Rs. 2,392.5, Not Rated)
Hero Honda (500182-IN, Rs. 1,832.5, Not Rated)
Hexaware Tech (532129-IN, Rs. 88.0, Not Rated)
Honda (HMC, $38.20, Not Rated)
Hotel Leela Venture (500193-IN, Rs. 45.4, Not Rated)
Hyundai (005380-KRX, $145.43, Not Rated)
IBN18 BROADCAST (532800-IN, Rs. 93.8, Not Rated)
ICICI Bank (532174-IN, Rs. 1,182.0, Not Rated)
IDBI Bank (500116-IN, Rs. 168.4, Not Rated)
Indian Hotels (500850-IN, Rs. 94.8, Not Rated)
IndusInd Bank (532187-IN, Rs. 291.2, Not Rated)
International Travel House (500213-IN, Rs. 257.2, Not Rated)
IOB (532388-IN, Rs. 149.7, Not Rated)
IVRCL (530773-IN, Rs. 129.9, Not Rated)
Jubilant (530019-IN, Rs. 288.3, Not Rated)
Kotak Mahindra Bank (500247-IN, Rs. 485.5, Not Rated)
Lanco Infratech (532778-IN, Rs. 62.2, Not Rated)
Larsen & Toubro (500510-IN, Rs. 2,020.1, Not Rated)
Lupin (500257-IN, Rs. 496.0, Not Rated)
Mahindra & Mahindra (500520-IN, Rs. 798.8, Not Rated)
Maruti Suzuki (532500-IN, Rs. 1,399.7, Not Rated)
Max India (500271-IN, Rs. 155.4, Not Rated)
Mindtree (532819-IN, Rs. 500.7, Not Rated)
Mundra Ports (532921-IN, Rs. 146.9, Not Rated)
NDTV (532529-IN, Rs. 90.0, Not Rated)
NIIT (500304-IN, Rs. 59.0, Not Rated)
Pantaloon Retail (523574-IN, Rs. 402.2, Not Rated)

78
 INDIA

Patel Engineering (531120-IN, Rs. 331.2, Not Rated)

Patni Computer (532517-IN, Rs. 466.3, Not Rated)
Piramal Health (500302-IN, Rs. 441.0, Not Rated)
PNB (532461-IN, Rs. 1,272.4, Not Rated)
Polaris Soft. (532254-IN, Rs. 157.8, Not Rated)
Provogue India (532647-IN, Rs. 64.5, Not Rated)
Punj Lloyd (532693-IN, Rs. 105.9, Not Rated)
Ranbaxy Labs. (500359-IN, Rs. 573.7, Not Rated)
Reliance Capital (500111-IN, Rs. 708.5, Not Rated)
Satyam Computer (500376-IN, Rs. 64.3, Not Rated)
SBI (500112-IN, Rs. 3,071.3, Not Rated)
Shopper's Stop (532638-IN, Rs. 727.5, Not Rated)
Sun Pharma.Inds. (524715-IN, Rs. 447.2, Not Rated)
Sun TV (532733-IN, Rs. 520.0, Not Rated)
Swaraj Mazda (505192-IN, Rs. 411.4, Not Rated)
Syndicate Bank (532276-IN, Rs. 136.8, Not Rated)
Taj GVK Hotels (532390-IN, Rs. 135.7, Not Rated)
Tata Motors (500570-IN, Rs. 1,314.9, Not Rated)
TCS (532540-IN, Rs. 1,095.5, Not Rated)
Tech Mahindra (532755-IN, Rs. 667.2, Not Rated)
Television Eighteen (532299-IN, Rs. 72.4, Not Rated)
Thomas Cook (500413-IN, Rs. 58.7, Not Rated)
Torrent Pharma. (500420-IN, Rs. 567.5, Not Rated)
Toyota Motors (TM, $79.05, Not Rated)
Unichem Labs. (506690-IN, Rs. 248.9, Not Rated)
Vishal Info.Tec. (533011-IN, Rs. 4.5, Not Rated)
Volkswagen (VOW-ETR, $114.80, Not Rated)
Wipro (507685-IN, Rs. 428.1, Not Rated)
WNS Holdings (WNS, $12.76, Not Rated)
Wockhardt (532300-IN, Rs. 358.5, Not Rated)
Yes Bank (532648-IN, Rs. 330.1, Not Rated)
Zee Entertainment (505537-IN, Rs. 147.7, Not Rated)

Source for p. 2 photo: Oppenheimer & Co. Inc.

79
INDIA

Important Disclosures and Certifications

Analyst Certification - The author certifies that this research report accurately states his/her personal views about the
subject securities, which are reflected in the ratings as well as in the substance of this report.The author certifies that no
part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views
contained in this research report.
Potential Conflicts of Interest:
Equity research analysts employed by Oppenheimer & Co. Inc. are compensated from revenues generated by the firm
including the Oppenheimer & Co. Inc. Investment Banking Department. Research analysts do not receive compensation
based upon revenues from specific investment banking transactions. Oppenheimer & Co. Inc. generally prohibits any
research analyst and any member of his or her household from executing trades in the securities of a company that such
research analyst covers. Additionally, Oppenheimer & Co. Inc. generally prohibits any research analyst from serving as an
officer, director or advisory board member of a company that such analyst covers. In addition to 1% ownership positions in
covered companies that are required to be specifically disclosed in this report, Oppenheimer & Co. Inc. may have a long
position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in
options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the
foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of
interest.
Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by
Oppenheimer & Co. Inc:
Stock Prices as of December 7, 2010
Infosys Technologies Limited (INFY - OTC, 69.48, PERFORM)
Cognizant Technology Solutions (CTSH - Nasdaq, 69.80, OUTPERFORM)
MakeMyTrip Limited (MMYT - Nasdaq, 27.37, PERFORM)

Rating and Price Target History for: Infosys Technologies Limited (INFY) as of 12-03-2010

01/14/08 03/17/08
I:O:$60 P:NA

75

60

45

30

15

0
2008 2009 2010 2011

Created by BlueMatrix

80
 INDIA

Rating and Price Target History for: Cognizant Technology Solutions (CTSH) as of 12-03-2010

01/14/08 05/08/08 11/05/08 02/10/09 08/04/09 10/27/09 01/28/10 04/26/10 08/03/10 09/21/10 12/01/10
I:O:$50 O:$45 O:$35 O:$33 O:$40 O:$45 O:$50 O:$58 O:$67 O:$70 O:$75

75

60

45

30

15

0
2008 2009 2010 2011

Created by BlueMatrix

Rating and Price Target History for: MakeMyTrip Limited (MMYT) as of 12-03-2010

09/23/10
I:P:NA

45

40

35

30

25

20
2008 2009 2010 2011

Created by BlueMatrix

All price targets displayed in the chart above are for a 12- to- 18-month period. Prior to March 30, 2004, Oppenheimer &
Co. Inc. used 6-, 12-, 12- to 18-, and 12- to 24-month price targets and ranges. For more information about target price
histories, please write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017, Attention: Equity Research
Department, Business Manager.

Oppenheimer & Co. Inc. Rating System as of January 14th, 2008:

Outperform(O) - Stock expected to outperform the S&P 500 within the next 12-18 months.

81
INDIA

Perform (P) - Stock expected to perform in line with the S&P 500 within the next 12-18 months.

Underperform (U) - Stock expected to underperform the S&P 500 within the next 12-18 months.

Not Rated (NR) - Oppenheimer & Co. Inc. does not maintain coverage of the stock or is restricted from doing so due to a potential
conflict of interest.

Oppenheimer & Co. Inc. Rating System prior to January 14th, 2008:

Buy - anticipates appreciation of 10% or more within the next 12 months, and/or a total return of 10% including dividend payments,
and/or the ability of the shares to perform better than the leading stock market averages or stocks within its particular industry sector.

Neutral - anticipates that the shares will trade at or near their current price and generally in line with the leading market averages due to
a perceived absence of strong dynamics that would cause volatility either to the upside or downside, and/or will perform less well than
higher rated companies within its peer group. Our readers should be aware that when a rating change occurs to Neutral from Buy,
aggressive trading accounts might decide to liquidate their positions to employ the funds elsewhere.

Sell - anticipates that the shares will depreciate 10% or more in price within the next 12 months, due to fundamental weakness
perceived in the company or for valuation reasons, or are expected to perform significantly worse than equities within the peer group.

Distribution of Ratings/IB Services Firmwide

IB Serv/Past 12 Mos.

Rating Count Percent Count Percent

OUTPERFORM [O] 327 50.50 137 41.90

PERFORM [P] 305 47.10 83 27.21
UNDERPERFORM [U] 16 2.50 3 18.75

Although the investment recommendations within the three-tiered, relative stock rating system utilized by Oppenheimer & Co. Inc. do not
correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, Oppenheimer & Co. Inc. has assigned
buy ratings to securities rated Outperform, hold ratings to securities rated Perform, and sell ratings to securities rated Underperform.

Company Specific Disclosures

In the past 12 months Oppenheimer & Co. Inc. has provided investment banking services for MMYT.

Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3
months from MMYT.

In the past 12 months Oppenheimer & Co. Inc. has managed or co-managed a public offering of securities for MMYT.

In the past 12 months Oppenheimer & Co. Inc. has received compensation for investment banking services from MMYT.

Oppenheimer & Co. Inc. makes a market in the securities of INFY, CTSH, MMYT, and EXLS.

82
 INDIA

Additional Information Available

Please log on to http://www.opco.com or write to Oppenheimer & Co. Inc., 300 Madison Avenue, New York, NY 10017,
Attention: Equity Research Department, Business Manager.

Other Disclosures
This report is issued and approved for distribution by Oppenheimer & Co. Inc., a member of all Principal Exchanges and SIPC. This
report is provided, for informational purposes only, to institutional and retail investor clients of Oppenheimer & Co. Inc. and does not
constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be
prohibited. The securities mentioned in this report may not be suitable for all types of investors. This report does not take into account
the investment objectives, financial situation or specific needs of any particular client of Oppenheimer & Co. Inc. Recipients should
consider this report as only a single factor in making an investment decision and should not rely solely on investment recommendations
contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments. The analyst
writing the report is not a person or company with actual, implied or apparent authority to act on behalf of any issuer mentioned in the
report. Before making an investment decision with respect to any security recommended in this report, the recipient should consider
whether such recommendation is appropriate given the recipient's particular investment needs, objectives and financial circumstances.
We recommend that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice
of a financial advisor.Oppenheimer & Co. Inc. will not treat non-client recipients as its clients solely by virtue of their receiving this
report.Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding
future performance of any security mentioned in this report. The price of the securities mentioned in this report and the income they
produce may fluctuate and/or be adversely affected by exchange rates, and investors may realize losses on investments in such
securities, including the loss of investment principal. Oppenheimer & Co. Inc. accepts no liability for any loss arising from the use of
information contained in this report, except to the extent that liability may arise under specific statutes or regulations applicable to
Oppenheimer & Co. Inc.All information, opinions and statistical data contained in this report were obtained or derived from public
sources believed to be reliable, but Oppenheimer & Co. Inc. does not represent that any such information, opinion or statistical data is
accurate or complete (with the exception of information contained in the Important Disclosures section of this report provided by
Oppenheimer & Co. Inc. or individual research analysts), and they should not be relied upon as such. All estimates, opinions and
recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice.Nothing
in this report constitutes legal, accounting or tax advice. Since the levels and bases of taxation can change, any reference in this report
to the impact of taxation should not be construed as offering tax advice on the tax consequences of investments. As with any investment
having potential tax implications, clients should consult with their own independent tax adviser.This report may provide addresses of, or
contain hyperlinks to, Internet web sites. Oppenheimer & Co. Inc. has not reviewed the linked Internet web site of any third party and
takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the recipient's convenience and
information, and the content of linked third party web sites is not in any way incorporated into this document. Recipients who choose to
access such third-party web sites or follow such hyperlinks do so at their own risk.

This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Oppenheimer & Co. Inc.
Copyright © Oppenheimer & Co. Inc. 2010.

83