Industry Analysis-Food & Beverages

A Report on Industry analysis of

Indian Food and Beverages Industry

By Jobin Jose (1021357) 2nd year MBA M

Submitted on 04/07/11

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Industry Analysis-Food & Beverages Indian Food and Beverages Industry India is the world's second largest producer of food next to China, and has the potential of being the biggest with the food and agricultural sector. The total food production in India is likely to double in the next ten years and there is an opportunity for large investments in food and food processing technologies, skills and equipment, especially in areas of Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food/Refrigeration and Thermo Processing. Indias food industry is valued at US$ 180 billion of which the food processing industry is estimated at US$ 67 billion, according to a report Food Processing and Agri Business, done by KPMG. The industry size has been estimated at US$ 70 billion by the Ministry of Food Processing, Government of India. The food processing industry contributed 6.3 per cent to Indias GDP in 2003 and had a share of 6 per cent in total industrial production. The industry employs 1.6 million workers directly. The industry is estimated to be growing at 9-12 per cent during the period 2002 to 2007. Value addition of food products is expected to increase from the current 8 per cent to 35 per cent by the end of 2025. Fruit & vegetable processing, which is currently around 2 per cent of total production will increase to 10 per cent by 2010 and to 25 per cent by 2025. The highest share of processed food is in the dairy sector, where 37 per cent of the total produce is processed, of this only 15 per cent is processed by the organized sector. The food processing industry in the country is on track to ensure profitability in the coming decades. The sector is expected to attract phenomenal investments of about Rs 1,400 billion in the next decade. The major segments in food and beverages industry constitutes fruits and vegetables, dairy products, meat and poultry, edible oil, non alcoholic beverages, grain-based products, marine products, sugar and sugar-based products, alcoholic beverages, pulses, aerated beverages, malted beverages, spices and salt. Major segments in food and beverages industry
Aerated water / Fruits and soft drinks, 9% vegetables , 4% Alcoholic beverages, 3%

Bread & bakery, 20% Food grain milling, 34% Dairy production, 16% Fish processing, 4% Meat and paultry processing, 10%

(Source: Annual Survey of Industry (ASI), MOFPI and IMaCS analysis)

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Industry Analysis-Food & Beverages 1. At what stage is the industry?

Sales Growth
350000 300000 250000 200000 150000 100000 50000 0 2006-07 2007-08 2008-09 2009-10 2010-11

(All the figures are in INR crore) As the graph of last five year sales shows a growing trend, the industry is in growth stage. 2. How is the industry regulated? Foreign Direct Investments Automatic approval (including foreign technology agreements within specified norms) is permitted for FDI up to 100 percent equity of Indian companies, for all food and beverages except for alcoholic beverages and items reserved for small scale sector. Foreign equity ownership of up to 24 percent is allowed even in items reserved for small-scale sector. An industrial license carrying a mandatory export obligation of 50% would be required for equity beyond 24% equity.

Concessions Food processing industry declared a priority sector. New Exim Policy places greater thrust on Agro based Industries Fruits and vegetables products completely exempt from Central Excise Duty

(Source: http://mofpi.nic.in)

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Industry Analysis-Food & Beverages 3. How are the entry and exit barriers for the industry? 100% equity is allowed in food processing and beverages. So there is no entry barrier for this industry. During fiscal year 2011, the total FDI was Rs. 1,200 Cr which was 27% above the previous fiscal. Of the total FDI in food processing last fiscal, PepsiCo constituted about 40 per cent. (Source: http://www.indianexpress.com) 4. What is the nature of the industry? Food and beverages industry is a service oriented industry. 5. What is the demand / supply gap of the industry? Per capita net availability of cereals and pulses has stagnated to 450 gm against 475 gm per day in 1980s. Gross cropped area under cereals fell from 103.2 million hectares in 1990-91 to 100.2 hectares in 2006-07. These numbers indicate that there is a decrease in supply. Basic cause for the recent food inflation is nothing but the supply. 6. Is it export or import oriented? Food processing industry declared a priority sector. New Exim Policy places greater thrust on Agro based Industries Exclusive Agri Export Zones set up for end to end development for export of specific products from geographically contiguous areas

Exports Exports of agricultural products from India are expected to cross around US$ 22 billion mark by 2014 and account for 5 per cent of the worlds agriculture exports, according to the Agricultural and Processed Food Products Export Development Authority (APEDA). India will be setting up a global platform for spice trade. The organization named World Spice Organisation (WSO) will be headquartered in the Kochi, Kerela. Spice related organizations across the world will be coordinating prices across the world and address the issue of food safety regulations through WSO. Liberal corporate tax policy for export earnings as well as for domestic sale. Corporate tax reduced from 50% to 35%.

Imports Imports of capital goods and raw materials permitted at zero percent import duty for 100% Export Oriented Units.
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Industry Analysis-Food & Beverages Import of food processing machinery allowed freely with low level of duties (25-30%). Custom duty under Export Promotion Capital Goods (EPCG) Scheme with specific export commitments is only 5%.

(Source: http://www.indianfoodindustry.net, http://www.ibef.org) 7. Are the raw materials and products sensitive to commodities and price cycle? Yes. As the raw materials are basically from agricultural sector and other natural resources, products are highly sensitive to commodity and price cycle. Because of inflation, the raw material spending of the companies has increased heavily. 8. Is it power sensitive? Yes. 9. What are the key drivers for the industry? The key demand drivers for this industry are increasing income level fueled by continuing GDP growth. India is the only country in BRIC forecasted to maintain GDP growth rates between 5% and 6% continuously till 2050. Changing profile of Indias household sector (million households)
250 Destitutes (<16000) 200 23.4 150 33 44 71.6 54.1 54.2 0 32.5 1 1997-98 2 2000-01 6 2006-07 90.9 Consumers (45000 to 215000) Rich (>215000) 28.1 12.8 15.3

Aspirants (16000 to 22000) Climbers (22000 to 45000)

74.1

100

50

(Source: NCAER and IMaCS analysis)

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Industry Analysis-Food & Beverages All these are expected to lead to increased consumption of food. The following are the some demand drivers specific to some segments: Fruit and beverages With expanding middle income groups and increasing disposable income, spending on food is increasing. More Indians are becoming health conscious, but because of time lag, they prefer processed fruit and vegetables which will trigger the demand. Export-led growth, increasing demand for fresh fruits and vegetables, rising preference for organic produce, demand for sauces and concentrates with changing life style and convenience.

Dairy products Domestic and export demand led growth for curd, yoghurt and milk protein. Meat and poultry Only 20% people in India are vegetarians. As people get more money for spending, they will move to poultry and then to meat. Further, preference for fresh meat and demand for high-vale frozen foods in export market will trigger growth. Beverages Changing perception about alcoholic beverages from prohibited to socially acceptable has led immense demand growth, new product ranges and new distribution channels supported by soft drinks. 10. How are the operating margins for the industry? to

Operating margin
11.00% 10.90% 10.80% 10.70% 10.60% 10.50% 10.40% 10.30% 10.20% 10.10% 10.93% 10.70% 10.48% 10.39% 10.53%

2006-07

2007-08

2008-09

2009-10

2010-11

(Operating margin = operating profit / net sales)

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Industry Analysis-Food & Beverages 11. Is the industry interest rate sensitive? Interest rates are related to inflation, WPI and CPI. As the companies depend on borrowings for investments, the industry is sensitive to interest rate. 12. What is the growth record of the industry during the past two business cycles?

Sales Growth
350000 300000 250000 200000 150000 100000 50000 0 2006-07 2007-08 2008-09 2009-10 2010-11

13. What are the growth (top line and bottom line) projections for the industry?
Segment Fruit and vegetables Dairy Meat and Poultry Marine products Beverages-alcoholic & malted Market size Rs. Billion (2008) 80 1,800 50 121 420 expected growth 2022-CAGR 13% 11.50% 16.30% 14.80% 14.10%

(Source: http://www.nsdcindia.org) 14. What are the substitutes for the industry products? As the products are processed food items, there is no specific substitute for this industry. Homemade fruits, vegetables, wines, meat, fish etc can be considered as a substitute.

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Industry Analysis-Food & Beverages 15. How is the future for their products? Indians per capita income is increasing and the difference between rich and poor is decreasing. Middle class is a wide category where companies can find market. People are more interested to packaged and processed food items. Concerns on hygiene, lack of time tend people to use processed food. All these factors says that food and beverages industry has a bright future in India. 16. Is the industry sensitive to global factors? The industry is sensitive to global factors like crude oil price. India is dependent on imports for its crude oil needs. So any fluctuation in crude oil price will increase the cost of supply chain. Tariffs of transportation is subjected to changes in crude oil price. 17. Who are the major players in the industry? Income created by the major companies (Rs. crore)
Company 1. I T C Ltd. 2. Ruchi Soya Inds. Ltd. 3. United Spirits Ltd. 4. Adani Wilmar Ltd. 5. Nestle India Ltd. 6. Shree Renuka Sugars Ltd. 7. K S Oils Ltd. 8. Allanasons Ltd. 9. Rei Agro Ltd. 10. Britannia Industries Ltd. 2006-07 20007.43 7623.62 3649.74 2698.35 3001.43 839.67 571.43 1495.77 958.97 1859.35 2007-08 22131.92 8732.92 5023.12 3458.03 3731.67 778.06 1071.96 2532.79 1085.91 2421.09 2008-09 23827.27 11186.79 5561.56 5878.66 4504.95 1816.36 2058.4 3023.74 1738.6 2673.21 2009-10 27062.55 12482.07 7523.49 6143.43 5267.16 2326.24 3179.4 3581.3 2452.09 3311.85 2010-11 31506.56 13750.66 9315.67 8587.13 6419.24 5720.77 4102.23 3730.55 3702.93 3572.54

18. Are the industry players scattered or consolidated? Association of food processing companies is called All India Food Processors Association (AIFPA) established in 1943. Objectives of AIFPA are; To promote, encourage and support Indian Food Processing Industries and raise the technical standards of product quality to match global standards. To seek redressal of the problems faced by the Food Processing Industries in India, which are presumed to impede their growth.

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Industry Analysis-Food & Beverages To collect, classify and circulate statistics and other information relating to Food Processing Industries, Agri-Exports etc. To encourage and finance research projects to study technical problems relating to the Industry. To conduct, promote and finance market research/market studies in India and abroad on processed food products. To render technical, social and financial help to families of disabled or deceased technical consultants, scientists, food technologists, experts in agriculture, horticulture, marketing etc. as related to Food Processing Industry. To institute Awards and Scholarships to encourage scientists, food technologists, administrators, consultants and executives who help in the growth and development of the Food Processing Industry. To publish a bimonthly Journal i.e. "Indian Food Packer" as a non-profit activity, which aims to keep the food processing units abreast of the latest worldwide developments in Food Processing Industries.

(Source: http://www.aifpa.net) 19. Is the industry undergoing major overhaul due to competition domestically or from overseas? Indian government allows 100% equity investment in food and beverages. Hence multinational players like Nestle, Pepsico and Glaxosmithcline started their business in India. As a result many Indian companies faced tight competition and could not survive. Mineral water and soft drink segments are dominated by multinational players like pepsico and coca cola. 20. How is the domestic market for the industry? Price of agricultural products are rising because of poor supply. Hence the cost of production is increasing for the companies in food and beverages industry. During FY 2006-07, companies spent Rs. 63,449 Cr for purchase of raw materials. It increased to Rs. 143,149 Cr during FY 2010-11. A 125% rise in spending on raw material procurement. In the same period, sales have increased by 115%. It clearly indicates the price rise in agricultural products. 21. Will the product of the industry fall into essential or luxury category? Essential category

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Industry Analysis-Food & Beverages 22. What are the growth ratios of the industry for the past five years?
14000 12000 10000 8000 6000 5160.6 4000 2000 0 2006-07 2007-08 2008-09 2009-10 2010-11 2465.4 2900.52 3393.58 3745.63 7410.8 7918.61 6955.75 PAT Dividend 9429.47 11994.27

(All the figures are in INR crore) 23. What are the profitability ratios for the past five years?
12 10.15 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11 5.9 3.74 6.31 5.61 4.31 3.77 5.49 3.68 5.87 PAT/Total income 4.04 PBT/Total income PBDITA/Total income

10.62

10.2

10.27

10.47

(All the figures are in INR crore)

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Industry Analysis-Food & Beverages 24. What are the returns ratios for the past five years?
16 14 12.01 12 10 8.1 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11 8.14 10.2 10.77 8.56 ROE ROCE 14.86 15.15 12.29 13.12

25. How are the cash surpluses during the past two business cycles? Cash and bank balances with companies
20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2006-07 2007-08 2008-09 2009-10 2010-11 6606.98 9158.33 9851.31 12691.67 17658.02

(All the figures are in INR crore)

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Industry Analysis-Food & Beverages 26. How are the capital investments during the past two business cycles?

Capital employed
160000 140000 120000 100000 80000 60000 40000 20000 0 2006-07 2007-08 2008-09 2009-10 2010-11 59150.49 79741.25 98698.07 118422.6 140881.03

(All the figures are in INR crore) Reasons for investment growth Due to large and diverse agricultural and climatic conditions, it has a wide raw material base suitable for food and beverages industries. Presently a small portion of these are processed into value added products. It is one of the biggest emerging markets with population 1.2 billion Rapid growth in urbanization, literacy, per capital income and demand pattern leading to new opportunities for exploiting markets. Constant rise in demand for processed or convenient food and beverages. Comparatively cheap workforce can be used to set up low cost production bases for domestic and export purposes. Liberalized policy regime. No industrial license required for food and agro processing industries except for alcoholic beverages and items reserved for small scale sector. Automatic approval (including foreign technology agreements within specified norms) is permitted for FDI up to 100 percent equity of Indian companies, for all food and beverages except for alcoholic beverages and items reserved for small scale sector. Setting up of food parks to enable food and beverage units to use capital intensive facilities, such as cold storage, warehouse, quality control labs, effluent treatment plant etc Agro based 100% Export Oriented Units allowed sales up to 50% in Domestic Tariff Area. Fruits and vegetables products completely exempt from Central Excise Duty 10 year tax holiday for Industrial Parks having Food Processing activities during initial 15 years
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Industry Analysis-Food & Beverages 27. Is the industry capital intensive?

Capital intensity
37.50% 37.00% 36.50% 36.00% 35.50% 35.00% 34.50% 34.00% 33.50% 2006-07 2007-08 2008-09 2009-10 2010-11 34.81% 36.42% 35.75% 35.02% 37.10%

(Capital intensity = net worth / total assets) 28. How is the industry leveraged in general? Operating leverage

Operating leverage
1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2006-07 2007-08 2008-09 2009-10 0.71 1.06 1.31 1.14

(Operating leverage = EBIT / Sales)

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Industry Analysis-Food & Beverages 29. How has the leverage of the company changed over a period of two business cycles?

Borrowings
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 92202.55 77200.66 67477.6 51827.34 37840.37

2006-07

2007-08

2008-09

2009-10

2010-11

(All the figures are in INR crore)

10 9 8 7 6 5 4 3 2 1 0 2006-07 2007-08 2008-09 2009-10 2010-11 Interest cover Operating Leverage Debt to Equity Ratio

(Interest cover = EBIDTA / interest payments Operating leverage = EBIT / Sales) 30. How is the order book for the companies in the industry? No data available.

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Industry Analysis-Food & Beverages 31. What is the projected capacity addition during the next two to three years for the industry? For the analysis purpose, sales are considered as the capacity of the industry. During FY 2008 to 2010, sales of the industry grew by more than 20% in each year. In FY 2011, the growth rate was 16%. Considering the average rate of growth, the food and beverages industry is expected to grow by 21% in each year. So the capacity is projected to reach Rs. 622,819 Cr which would reach Rs. 1.6 million by 2020. 32. Do the Porters five forces analysis.

Threat of new entrants

HIGH

Bargaining power of supplier

Competitive rivalry

Bargaining power of customer

LOW

MEDIUM

HIGH

Threat of substitutes

LOW

Bargaining power of the supplier Suppliers for the industry are farmers or small cooperative societies of farmers and middle men. Bargaining power of farmers are less because of their unorganised nature. But most of the companies deal with middle men who got high bargaining power. During natural calamities, supply shrinks and suppliers earn more power.

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Industry Analysis-Food & Beverages Bargaining power of the customer Customers bargaining power is less as there is no absolute substitute for the products. But because of the number of players increasing, customers bargaining power is also increasing. Threat of new entrants Threat to new entrants is high. As there is no entry barrier for foreign players, threat from domestic as well as foreign players can enter the market easily. Threat of substitute products Threat of substitute is very less. People having fondness towards a particular food will definitely go for it. Competitive rivalry within the industry Competitive rivalry within the industry is high. Rivalry between Pepsico and Coca cola is the best example. 33. What are the people skill set requirements of the industry? Current employment
Sector Organised Unorganised Total Number of persons (million) 1.53 7.00 8.53 Share (%) 18% 82% 100%

(Source: annual survey of industry, NSSO 62nd round, IMaCS analysis)

Functional distribution of human resources across segments

Function Procurement Testing & Quality Production R&D Storage Other % of employees 10% 20% 55% 1-2% 2-3% 10% Page 16

Industry Analysis-Food & Beverages

Compensation to employees
14000 12000 10000 8000 6000 4000 2000 0 2006-07 2007-08 2008-09 2009-10 2010-11 7869.32 6574.74 8948.04 10753.7 12143.29

(All the figures are in INR crore) Learning and findings Major portion of the industry - 34% - is dependent on food grain and milling. This sector is maintained by farmers of the country. So food and beverages industry is a source of income for the major population of our country. The industry is in a growth stage with an average sales growth of 21% per year. A lot of foreign direct investment is happening in this industry and government give many concessions for starting business in this sector. In 2011-12 FDI is expected to reach Rs. 1200 Cr which is 27% higher than 2010-11. Demand-supply gap is increasing. Government encourages export by allowing tax rate waivers. It also allows import of machinery with zero percent import duty. Operating margin was decreased to 10.48% during 2008-09 due to global recession but returned to increasing trend with 10.53% during 2010-11. The industry is expected to grow by 15% by 2022. PAT and dividend of the industry is increasing continuously since FY 2007. Return on equity reduced to 12.01% in FY 2009 from 15.5% in FY 2008. But it has increased to 12.29% in FY 2010 and 13.12% in FY 2011. A lot of capital investment are coming into the industry. Total capital employed in FY 2007 was Rs.59,150 Cr and it increased to Rs.140,881 Cr in FY 2011.

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