kbuzz issue 18

7/29/2019 Kbuzz Issue 18

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KBuzzSector InsightsIssue 18 June 2012


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1 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliatedwith KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Pending

2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

1. The Economic Times, GDP growth for January-March at 5.3% Y-o-Y: Analysts take, May 31, 2012

2. Financial Express, India's GDP growth rate plunges to 5.3%, May 31, 2012

3. The Economic Times, May CPI inflation stands at 10.36 percent year on year: Government, June 18, 2012

4. CRISIL, CRISIL First Cut, June 2012

5. Standard and Poor, Will India Be The First BRIC Fallen Angel?, June 8, 2012

6. The Economic Times, RBI keeps CRR unchanged at 4.75%. no cut in repo rate, June 18, 2012

7. The Economic Times, RBI hikes ECR limit to 50% as an alternative to CRR cut, June 18, 2012

Largely driven by a contracting manufacturing sector and a widening investment and trade gap,

the Indian economy has weakened at an unusual degree1. It has slipped further on the growth

scale, touching a historical low at 5.3 percent in Q4 12. As a result, the countrys annual growth

rate also declined to 6.5 percent in FY12, the lowest in nine years. The growth rate has been well

below expectations, even falling short of the lowest forecast by a Reuters poll, which indicated a

median of 6.1 percent from predictions ranging between 5.5 percent and 7.3 percent2.

Conventional theories emphasize a positive relationship between economic activity and inflation.

Yet, contrary to this notion, increasing price pressures have accompanied deteriorating economic

activity in India in recent times. The countrys annual Consumer Price Inflation (CPI) remained

unchanged at 10.36 percent in May; in fact, inflation touched 10.66 percent in May 2012, as

compared to 10.18 percent in April 20123. This suggests that while inflation may not be driven by

demand-side pressures, costlier imports such as fuel and supply-side constraints are likely to

affect prices4.

Amid declining growth and high inflation, analysts have observed that the Indian economy seems

to be moving towards a stagflationary mode. The economy is also fraught with policy paralysis

and the implementation of key reforms, which now appear to be the only solution. Reacting to

such conditions, rating agencies Standard & Poors and Fitch have downgraded Indias sovereign

credit rating from stable to negative5.

Further, the Reserve Bank of India (RBI)s decision to retain key rates came as a surprise to many

economists and analysts advocating a policy change as a key step toward stimulating growth.

The RBI, in its monetary policy review of June 2012, cited inflation at above-comfort levels as the

key reason behind its decision. The central bank has also affirmed that factors other than interest

rates have been contributing to the growth decline and rate cuts at this juncture could heighten

inflationary pressures6. The bank, however, has decided to enhance the Export Credit Refinance

(ECR) limit to 50 percent of the outstanding rupee export credit for banks from 15 percent a

move expected to inject INR 300 billion into the system7.

As analysts begin to drift in their characterization of Indias slowdown from being cyclical to

systemic and structural in nature it is imperative that impending reforms directed at

stimulating investment are implemented. The successful execution of these reforms and a

favorable turnaround in the Euro zone crisis could bring resolve to the economic debacle thatIndia currently faces.

I hope you find this issue of KBuzz engaging and insightful.

Regards,

Rajesh Jain

Head Markets

KPMG in India


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2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated

with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Indian Economy 03

The India growth story - miracle or mirage?

Education 07

Tracking future leaders of global higher education

Financi al Services 10

Mid-quarter review of Monetary policy, 2012 -

Over to you, Mr. Finance Minister

Government 13

PSUs and public expenditure

IT - BPO 17

Growing role of PE firms in Indias BPO sector

M edia and Entertainment 21

The rise of the Indian consumer - looking beyond metros

Pharmaceuticals 24

Indias clinical trials industry - in detraction mode

Real Estate and Construc ti on 27Real Estate Accounting - same transaction, different practices

Transportation and Logisti cs 30

Opportunities in road transportation


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IndianEconomy



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Rohit Bammi

Head

Financial Risk Management

[email protected]

The need for the next

generation of economic

reforms has never been

more urgent, and it is now

that the government needs

to demonstrate resolute

decision making to silence

the soothsayers who areraising the stagflation flag.

Rohit Bammi

Head

Financial Risk Management

KPMG in India


The free fall in the economic indicators that India has been witnessing over the

last few months has led to growing doubts on the credibility of the India

Shining story a story line that once characterized the economy for foreign

investors. From an economic miracle that promised high growth (89 percent),

high returns on capital and a burgeoning domestic market, to a mirage

where 56 percent seems to be the new normal the India growth story now

seems, at best, a thing of the past1.

While many people are ambiguous about the growth trajectory India will likely

assume in the days to come, some have begun to question the average 8.7percent growth the country witnessed during 2004082. This is now being

credited to an exceptional period of global boom and liquidity rather than

strong domestic fundamentals3. A close look at GDP growth over the years,

however, reveals that in the post-liberalization period, India experienced a

marked acceleration in its economic growth during the early 1990s and 2004

08. For the latter part of the India Shining decade, India did not particularly

shine but showcased average growth of 6.6 percent1. Many have argued that

the period of high growth in between was driven by exceptionally high investor

sentiment leading to abnormally high foreign investment inflows.

There is little doubt that the period of global bloom has played a significant role

in the uptrend India witnessed. However, a closer look at the performance of

other economic variables such as saving and investment indicates that

domestic factors also significantly drove growth. For instance, the domesticsavings rate increased from 29 percent of GDP in 200304 to 36.8 percent of

GDP in 200708; investment increased from 26.9 percent to 38.1 percent of

GDP during the same period1. This suggests that on the strong performance of

domestic indicators, India does hold the potential of posting around 8 percent

growth.

1. KPMG in India Analysis based on : Central Statistical Organization Database, June 2012

2. The Economist, A BRIC hits the wall, May 31, 2012

3. Economic Times, Pre 2003 growth rates to be new normal for Indian economy: Ruchir Sharma, Morgan Stanley, June 11, 2012

GDP grow th and its proponents(saving and investment as a perc entage of the GDP)

Source: Central Statistical Organization Database, June 2012


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4. KPMG in India Analysis based on CSO data

5. Standard and Poors, Will India Be The First BRIC Fallen Angel?, 8 June 2012

6. CSO and Office of the Economic Advisor

7. Union Budget 201213


Accordingly, it may be premature to say that India only grew because of aglobal boom and that 6 percent growth will be the new normal.Nevertheless, it would not be an exaggeration to deduce that the Indianeconomy is going through one of its lowest phases in the last decade,estimated to register 6.5 percent growth in FY12 the lowest in nineyears4. Issues causing concern include a near-stagnant reform processleading to a deterioration in its investment climate; a global risk-off scenariodriven by events out of Europe and a consequent outflow of foreigninvestment; and poor sentiment affecting investors globally.

This is creating an environment where even cash-rich Indian industrialistsare contemplating expansion overseas, despite the interesting marketplaceIndia is. This, combined with a delicate trade-off between growth andpersistently high inflation, is leading to the RBIs continued focus on inflationcontrol. This, in turn impacts their ability to lower interest rates to stimulategrowth.

An erosion in Indias economic profile can be seen from a downgrade in thecountrys sovereign credit rating from stable to negative by rating agenciesStandard & Poors (S&P) and Fitch. According to S&P, the outlook revisionreflects at least a one-in-three chance of a downgrade in the next two yearsif India's external position continues to deteriorate, its GDP growthprospects diminish, or if progress on fiscal reforms remains slow5.

Several analysts have pointed out that India runs the risk of slipping into astagflationary mode a combination of stagnating growth, high inflationand high unemployment5. After registering 5.3 percent growth in 4Q12, theeconomy clocked inflation growth (WPI) at 7.5 percent in May 2012 ascompared to the previous month6. Food inflation particularly remained in thedouble-digit zone for the third consecutive month. While demand-sidepressures have eased, rising inflation can be attributed to fuel and foodinflation leading to increased import bills, adding to the already expandingcurrent account deficit6.

KPMG in Indias point of viewThere is a marked slowdown in growth and a high inflationary environmentpersists; however, the RBIs stance to tackle inflation head on and its refusalto deliver on the rate cuts demanded by the popular press and industry areencouraging. The RBIs arguments on low real interest rates are valid, as aretheir observations that the exports should benefit from a relatively

inexpensive rupee. To this end, they have hiked the refinance limit availableto the banking system, releasing approximately USD 5 billion, which wouldbe equivalent to a 50 bps cut in the CRR.

In the event that the economy slips into a stagflationary mode, it is possiblethat exiting the stagflationary mode would need increased governmentexpenditure. However, as the government is already running an expandingfiscal deficit that touched 5.9 percent of GDP in FY12 as compared to 4.9percent in FY11, elbow room for any fiscal stimulus is very limited7. Anadditional decline in capital inflow over the past few months has also left theeconomy needing cover for an expanding trade and current account deficit.

As such, it is imperative that the government accelerates the momentum forimplementing economic/second-generation reforms that could stimulateinvestment and help reverse the recent decline in investor confidence in theprivate sector. While the dynamics of coalition politics has made it difficult

for the government to implement much-needed reforms, it is critical that theruling party demonstrates leadership and overcomes these obstacles.


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Some of these reforms include:

Raising caps on FDI in multi-brand retail

Raising caps on FDI in insurance

Raising caps on FDI in aviation

Introduction of pension reforms

Introduction of Goods and Services Tax (GST)

Any positive development around these or other reforms, along with modest

progress in containing structural fiscal deficit, is expected to be significant for apossible turnaround in investor sentiment toward the Indian economy. Further,

positive developments in the Euro zone can also be expected to boost buoyancy

in foreign inflow to India.


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Education



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Overview

Times Higher Education (THE)s ranking of the worlds top 100 universitiesless than 50 years old released on 31 May, 2012 reveals insights on therising hubs of higher education across the globe and, in particular, the recentcrop of Indian private universities. In ways more than one, the publicationenlists some of the ingredients that have created the rising stars on theglobal higher education stage. According to Jamil Salmi, the former head oftertiary education at the World Bank, academic excellence has traditionallyrequired care and long periods of maturing. Today, this notion is being

challenged. To understand why, it is important to understand themethodology and results of the THE top 100 under-50 rankings1.

THEs traditional top 400 universities ranking parameters and weights one-third of the weights has been assigned to subjective parameters(reputational surveys) that perpetuate the status and reputation universitieshave built over several years,

THEs top 100 under-50 ranking parameters and weights retaining thesame parameters from the traditional rankings, weights assigned tosubjective parameters linked to reputation have been reduced to a little overone-fifth of the total. The focus on tangible/measurable performance thatyoung universities have demonstrated in recent times has increased.

Narayanan Ramaswamy

Head

Education

[email protected]

The country is already

supported by macro

factors such as an

economy that is

performing well relative to

other countries and a

largely well-established

government policy. What

is left, therefore, is for its

universities to pursue the

excellence required to join

the ranks of the worlds

best universities.

Narayanan Ramaswamy

Head

Education

KPMG in India


Source: KPMG in India analysis, 2012


1. Times Higher Education: 100 Under 50, 2012


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THEs top 100 under 50 the verdict and message

1. European Renaissance: If the top 100 under 50 is an indication of future dominance inhigher education, there is indication that Europe (and the UK, in particular) will eventuallytake over the US as a preferred global destination for higher education. The share of thetop 100 by region: Europe -51, Australia, New Zealand, Japan-17, US, Canada, Brazil-15,East and Southeast Asia -13, Middle East - 4

2. The golden age: Some spectacular performers have entered the ranking within threedecades (and some even within two decades). However, it appears that universities

between 40 and 50 years of age proliferate across the ranking ranges:

3. Message from the top: Case studies of select universities from the top 100 under 50showcase what goes into making a high-quality academic institution that can rise rapidly inglobal stature:

Best attracts best - Skilled faculty that joins during the formative stage of a university, inturn, attracts outstanding students. Sourcing high-quality faculty often encouragesoverseas scholars to return to their countries of origin. To retain such students, onemust have a merit-based and transparent management system and provide academicfreedom.

Attract significant investment from the private sector (e.g., Pohang) and/or governments(e.g., HKUST) and leverage to ones benefit macroeconomic factors such as healthygrowth in the home countrys economy.

Institute good leadership and develop a long-term vision for the university that canguide strategic choices. Adopt a conscious strategy. A selection and concentrationstrategy to focus on niche areas (often in technology streams) can often stretch limitedresources and the time available to new universities to their benefit.

KPMG in Indias point of view

India is conspicuous by its absence in the top 100 under-50 lists. The country is alreadysupported by macro factors such as an economy that is performing well relative to othercountries and a largely well-established government policy. What is left, therefore, is for itsuniversities to pursue the excellence required to join the ranks of the worlds best universitiesThe fact that research at Indian universities is not always recognized globally can no longer bea hurdle to establishing an international reputation (this assumes importance, as rankings suchas THE place a dominant focus on the quality of research at higher education institutions).Private institutions such as the Indian School of Business (ISB) have already proven that it ispossible to develop research capabilities and global positioning in a short span of time. Hubsof excellence such as the Indian Institutes of Technology (IITs), National Institutes ofTechnology (NITs) and Indian Institutes of Management (IIMs) on one hand, and privateuniversities with corporate backing on the other, are Indias tickets to the greater heights inglobal education.




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FinancialServices

10 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated withKPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.


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Central bankers across the world face a tough choice between

maintaining inflation in acceptable limits and growth. For the Reserve

Bank of India (RBI), the equation becomes even more complex due to the

countrys emerging economy status, its rapidly evolving market scenario

and delay in policy reforms. RBIs recent mid quarter review of the

monetary and credit policy the first one in FY13 further highlights

this anomaly. Despite a lot of expectations to reduce the short-term

interest rates (repo rate) and/or cash reserve ratio (CRR), RBI decided tomaintain the status quo.

Expectation of a rate cut were even stronger in view of the fact that the

RBI reduced the repo rate by 50 basis points (bps) to 8 percent in its

annual monetary and credit policy review in April, 2012. This was

perceived to herald a trend of gradual monetary easing1.

Some of the key reasons cited for RBIs decision are as follows:

Decline in growth rates not due to high interest rates: The

estimated economic growth has declined to a low of 5.3 percent

during fourth quarter of FY12 (6.5 percent in FY12) and the Index of

Industrial Production (IIP) increased marginally by 0.1 percent in April

20122,3. However, the manufacturing Purchasing Managers Index

(PMI) for May 2012 indicated expansionary industrial activity4. Further,

According to the CMIE, none of the shelved projects worth INR2,861

billion are as a result of high interest rates but predominantly due to

policy-related hurdles (such as those related to land buys and

environment-related issues).

No fiscal consolidation: The RBI has been quite categorical in

indicating that reducing policy rates has to be supplemented with

concrete action by the Government towards fiscal consolidation,

easing supply-side constraints and reviving the investment climate in

the country. With Presidents election around the corner, the main

agenda for growth keeps getting deferred.

High inflation: Despite a consistent increase in repo rates during

March 2010-April 2012, headline wholesale price index (WPI) basedinflation rate has not exhibited a consistent decline. Although it

moderated from a peak of 10.0 percent in September 2011 to 7.7

percent in March 2012, according to provisional data, it increased from

7.2 percent in April, 2012 to 7.6 percent in May, 2012. Inflation based

on the consumer price index (CPI) for industrial workers has also

increased from 5.3 percent in January 2012 to 10.2 percent in April

2012 after declining in 20115. Reasons for this rise could vary from

scanty rain, high oil prices and governments inaction on supply

bottlenecks.

Akeel Master

Head

Financial Services

[email protected]

RBI has handed over the

baton of responsibility to

uplift the economic growth

to the Government of

India. It expects the

Government to take strong

measures to address thestructural issues of supply-

side bottlenecks and take

the road to fiscal

consolidation.

Akeel Master

Head

Financial Services

KPMG in India

Mid-quarter review of Monetary policy, 2012 -


1. Annual Monetary Policy Review, FY12, Reserve Bank of India, April 2012

2. India food supply key to halting rising prices finmin, Reuters News, 16 June 2012

3. All eyes on RBI governor as rate cut expectations rise, The Statesman, 17 June 2012

4. High interest rates don't stall projects: CMIE, Financial Express, 18 June 2012

5. Ministry of Labour, Government of India


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RBI has not been alone in grappling with the complex equation of growth

and price stability. Chinas central bank, Peoples Bank of China (PBC) tamed

the inflation through a series of rate increases from 5.31 percent in

October 2010 to 6.56 percent in July 2011 which helped reduce CPI

inflation from 5.09 percent in November 2010 to 3.03 percent in May 2012.

It was only when the inflation remained below the comfort zone (of 4

percent) consistently for four months (FebruaryMay 2012), PBC proceeded

with rate cuts in June 2012, from 6.56 percent to 6.31 percent. This alsoratifies the cautious stand the RBI has taken in the policy review6, 7.

Brazil, on the other hand, has essayed a different story. Here, a gradual cut

in interest rates was accompanied by a reduction in the inflation. The Banco

Central do Brasil, the countrys central bank, cut the Selic interest rate from

12.5 percent in August 2011 to historical lows of 8.5 percent in May 2012.

The period also witnessed a decline in CPI inflation, from 7.31 percent in

September 2011 to 4.99 percent in May 2012. What worked in Brazil was

that the central bank used regulations to directly reach the credit channel to

spur economic growth. It is expected to improve monetary transmission,

making even a small reduction in rates effective8.

RBI has clearly highlighted its independence in framing the monetary policy

and has handed over the baton of responsibility to uplift the economic

growth to the Government of India. It expects the Government to take

strong measures to address the structural issues of supply-side bottlenecks

and take the road to fiscal consolidationDeregulation of diesel prices,

reducing subsidies on oil, fertilizers and food and reducing its wasteful

expenditure are some of the keenly awaited steps to achieve fiscal

consolidation. Some of the much-awaited reforms such as amendments to

the Banking Regulation Act, Pension Bill, Goods and Services Tax and Direct

Tax Code are enough to restore investors confidence in Indian economy

and put it back on the growth trajectory. It is time for the Government to act

now.

Mid-quarter review of Monetary policy, 2012-


6. China's monetary policy , The Economist online, June 12, 2012

7. PBC Decides to Raise RMB Benchmark Deposit and Loan Rates, Peoples Bank of China, October 21, 2010

8. Challenges and Change in Brazil, Beyond Bulls and Bears, March 28, 2012


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Government



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Stagnant growth in the

manufacturing sector can

be attributed to low

technological depth and

low public expenditures in

this sector. Indian PSUs in

line with their growth

plans should find out ways

to increase their spending

on R&D and skill

development in the priority

areas of Indian

manufacturing sector. It

will enhance the share of

manufacturing in Indian

GDP and will create a large

pool of jobs.

Navin Agarwal

Partner

Government

KPMG in India


Government focus - the manufacturing sector

India is considered to be among the fastest-growing economies of the world

over the last two decades. This growth can be primarily attributed to the

countrys dynamic service sector. However, the manufacturing sectors

contribution to the national GDP, currently at around 16 percent, has

stagnated, which raises questions around Indias development model.

Currently, Indias share in global manufacturing is only 1.8 percent as

compared to Chinas significant contribution of 13.7 percent. Although

Indias high growth can be attributed to its booming services sector, its

manufacturing sector also needs to grow more rapidly than its current pace.

The sector, which currently employs only 9 percent of Indian population, will

need to serve as a catalyst of employment opportunities over the next

decade1.

PSUs to increase public expenditure

Gauging these trends, the Government of India has asked PSUs to increase

their public expenditure and contribute increasingly toward the

manufacturing sector and the national GDP.

The Indian Prime Minister, Manmohan Singh, in his address to the CEOs of

central public sector enterprises (CPSEs), also emphasized on increasing the

share of the manufacturing sector in the countrys GDP from 15 percentcurrently. CPSEs have a significant presence in areas such as machine tools,

heavy transport, earth-moving and mining equipment, shipbuilding, defense

equipment, aerospace, heavy electrical equipment and nuclear power

generation. Further, the Prime Minister urged CPSEs in these segments to

develop ambitious expansion plans to achieve 1214 percent growth in the

manufacturing sector2.

All these sectors have been identified as priority sectors under the National

Manufacturing Plan. Together with the private sector including micro,

small and medium enterprises the government is eyeing a 25 percent

share of manufacturing sector by 20252.

The table below depicts the current production capacities of strategic

sectors and the governments projected production at the end of Twelfth

Five Year Plan.

All PSUs should increase their investments and find ways to expand and

diversify to achieve such high rates of growth.

Navin Agrawal

PartnerGovernment

[email protected]

1. The Manufacturing Plan Planning Commission, Government of India

2. Press Information Bureau Release Id: 83875

Sector Domestic productionin 201011

Projected productionin 201617

Require d CAGR inTwel fth Plan

Machine tools 36.24 138 25

Heavy transport 73.33 349 17.4

Shipbuilding 7.34 25 23

Defense equipment 386.22 2,200 34

Heavy electrical 1,100 2,570 15.2

*(All figures are in INR billion)


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Sector-specific highlights3:

Defense equipment (Excluding aerospace and shipbuilding):

Large-scale investment plans ensuring domestic procurement of up to

75 percent

Government of Indias defense budget estimated at USD 80100 billion

in the next five years

Ensuring that 810 large weapon programs have large percentage of

locally manufactured content Enabling the creation of a million direct and indirect jobs in the defense

manufacturing space

PSUs under this industry: OFB, BEL, BDL.

Aerospace:

Investments to strengthen design and manufacturing capabilities

To become a global player in supplying advanced technology in the

space sector

To become the international hub of maintenance, repair and overhaul

needs

HAL: the biggest exporter since 20092010 with exports of INR7.83

billion under DPSUs category.

Shipbuilding and ship repair:

Expanding capacities substantially with a target of 45 million DWT by

2020 from 0.25 million DWT currently

To achieve shares of 5 percent and 10 percent in the shipbuilding and

ship-repair industries, respectively, by 2020

To generate 2.5 million additional direct and indirect jobs by 2020 in

both core and supporting industries

PSUs under this industry: Cochin Shipyard, Hindustan Shipyard,

Mazgaon Dock and GRSE.

Machine tools: Indias share in world production: 0.8 percent; only 30 percent demand

met through domestic production

Potential to grow at 1215 percent annually, with significant scope for

new investments

Around INR150 billion in investment required to increase capacity and

cater to 50 percent of domestic demand

In absence of proper investments, market share may drop to 1015

percent.

Heavy electrical equipment and nuclear power plants:

Market size of around INR1210 billion with a CAGR of 14 percent

To increase capacity and set up high-efficiency power plants, domesticmanufacturers forming JVs with foreign companies

Capacity, at 7080 percent, mostly underutilized.



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Earth-moving and mining equipment:

Market size of INR40 billion with imports and domestic production both

at 50 percent

Planned investment and growing urbanization to drive the construction

industry to grow at a CAGR of 1617 percent over the next 10 years

BEML to be strengthened and needs to be provided support for

technology transfer through diplomatic route.

Conclusions:

An increased share of the manufacturing sector is essential for the

sustainable growth of the Indian economy. The Government of India is

encouraging PSUs in priority sectors to find ways to expand and develop

self-reliance. The government envisions a 25 percent share of the

manufacturing sector in Indias GDP by 2025 through increased spending in

the sector. The countrys manufacturing plan is aimed at producing 100

million additional jobs by strengthening the manufacturing sector4. Every job

created in the sector has a multiplier effect of creating two or three

additional jobs in related sectors. Therefore, an increased share of

manufacturing in the GDP would entail the creation of 220 million jobs by

the end of 2025 and result in consequent inclusive economic growth5.


5. Press Information Bureau Release Id: 83875


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IT - BPO



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Times have changed for Indias business process outsourcing (BPO) industry.

Right from its humble beginnings with a few modest call centers in the late

1990s providing customer support, the industry has evolved into a global

phenomenon that services the entire spectrum of the outsourcing clients.

According to NASSCOM, the BPO industry accounts for 2.5 percent of India's

GDP for export earnings1.

The initial years

For more than a decade, private equity (PE) firms have been investing inIndias BPO industry and have been integral to its growth. During the early

part of the last decade, PE firms essayed the role of early investors in BPO

start-ups. One of the earliest PE investors in India was Citibank Private Equity,

which, in 2001, invested USD 6 million in Daksh eServices2.

Capital-raising avenues at the time were extremely limited given the newness

of the industry, limited tangible assets and the shortage of risk capital to fund

operations. Thus, PE provided promoters with much-needed initial capital.

Further, in the case of the Blackstone-funded Intelenet Global Services,

Blackstone provided significant value addition through access to its portfolio

companies and their knowledge of customer needs3.

Changing role of PE in the industry

As the BPO industry gained scale and individual firms eyed global expansion,

PE firms resurfaced as central components of the emerging industry. As a

whole, the industry faced two major issues during the middle part of the last

decade.

Volatile economic

scenario has led to lower

valuations of many BPO

assets. This is presenting

significant growth

opportunity for PE firms to

jump on to the BPO

bandwagon

Pradeep Udhas

Head

IT-BPO

KPMG in India

Pradeep Udhas

Head

IT-BPO

[email protected]


1. NASSCOM Strategic Review 2011, NASSCOM, February 2011

2. The FIR heard round the world, Business Today, http://businesstoday.intoday.in/story/business-leaders/1/12492.html, February 2011 issue

3. KPMG in India Analysis; Why Blackstone and Intelenet Make A Hit Pair, Forbes India, http://forbesindia.com/article/boardroom/why-blackstone-and-intelenet-make-

a-hit-pair/26122/1, June 2011 issue

Changing rol e of PE in the B PO industry

Source: KPMG in India Analysis

1999-2003 2010-20122004-2009

Earl y InvestorsGlobal Expansion/Buy-outs

Strategic Investors/Ow ners

Early

investors

Name

recognition

Management

advice

Captive buy-

outsGain scal e

Accelerated

M&As

Long-term

ow nership

PE was one

of the limited

avenues of

capital

PE investments

helped the BPO

industry gain

recognition in US

and Europe

Experienced PE

advisors provided

valuable counsel

to BPO

management

PEs buy out

captive

operations

PE firms provide

strategic insights

to help BPOs

expand globally

and gain scale

PE firms have

accelerated the

pace of M&As

in the BPO

industry

PE firms now

believe in

holding on to

their BPO assets

for the long run


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4 GAP, Oak Hill buy 60% in Gecis for $500 m, Financial Express, http://www.financialexpress.com/news/gap-oak-hill-buy-60-in-gecis-for-500-m/118390/, November

9, 2004

5 Investments WNS, Warburg Pincus website, http://www.warburgpincus.com/portfolio/ViewCompany,id,532.aspx, June 20, 2012

6 Apax, Bain eye $1.4 billion Genpact stake, Times of India, http://timesofindia.indiatimes.com/business/india-business/Apax-Bain-eye-1-4-billion-Genpact-

stake/articleshow/14040755.cms, June 12, 2012

7 Khazanah, Baring jointly offer $800m for Aegis, AVCJ, http://www.avcj.com/avcj/news/2182927/khazanah-baring-jointly-offer-usd800m-aegis, June 8, 2012

Early investors looking to exit

Many BPO firms were launched as captive arms of global corporations such

as GE, British Airways and Citibank. After their initial five or six years, it was

felt that these captives had hit a wall and needed to look outside their parent

firms to expand. The parent firms also felt they could achieve attractive

valuations due to the rapidly expanding off-shoring industry during 200407.

PE firms emerged as buyers of these captives, and one of the major deals of

this period was General Atlantic/Oak Hill Partner acquiring GEs 60 percent

stake in GE Capital Information Services (GECIS) for USD 500 million in20044.

BPO firms looking to gain scale

Firms such as WNS (the captive arm of British Airways) were looking at

entering the next tier of mid-sized BPO firms. For such firms, the PE firm

Warburg Pincus provided support in making acquisitions for inorganic

growth. Warburg also helped WNS get listed on the NYSE and further

utilized its network to the benefit of WNS business development efforts5.

PE becomes an integral part of the BPO industry

Since 2010, PE firms have emerged from the shadows and have become

key drivers of change in the BPO sector. As the industry is a highly

fragmented space, a number of PE buyers have recognized the substantialupside to be gained from buy-and-build plays.

According to recent news reports, BPO major Genpact is on the block, with

leading PE firms such as Apax Partners and Bain Capital in the race for the

41 percent stake existing investors Oak Hill Capital and General Atlantic

Partners currently hold. The transaction would value Genpact at

approximately USD 3.4 billion, with the stake around USD 1.4 billion6.

Similarly, Malaysian PE firm Khazanah Group is in the race for Aegis BPO7.


PE in vestment s in Ind ia n BPO sector, 2008-11

Source: Venture Intelligence


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KPMG in India's point of view

PE firms are no longer content with playing a limited role in the BPO

industry. They have emerged as leaders in generating change in an industry

that was beginning to rest on its laurels.

While PE firms see significant traction in the BPO arena, some challenges

continue to plague the overall attractiveness of the sector: Lack of interest from IT firms: Strategic buyers have considered

acquiring BPO assets in the past, but they seem to have dropped their

plans to invest significantly toward this purpose. Pure-play BPOs no

longer appear to be attractive to IT firms as it they are for PE.

Lack of a premium in BPO deals: The lack of a premium in most BPO

acquisitions reflects the not-so-rosy outlook for pure-play BPO,

irrespective of the firms size or client base.

Nonetheless, it would not be wrong to say that Indias BPO industry is going

through some interesting times. As the industry transforming itself to enter

the next phase of growth, PE firms are likely to continue playing a pivotal

role in the sector.


Factors att racti ng PE to BPO

Source: KPMG in India Analysis

Recurri ng revenue streams

Factorsatt

ractingPEtoBPO

Predict abili ty of cash flow s

Buy and build potential

Wi der trend tow ards outsourcing

The India fact or


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Media andEntertainment



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The rapidly growing Indian economy is witnessing the emergence of new

economic centers of consumption. So far the countrys metros and tier-I

cities were the hubs of economic activity; however, the focus is now

shifting to the next 40 cities1 that are experiencing rapid urbanization and

economic growth.

A surge in consumerism, the desire to experience superior lifestyles and

own global brands are creating opportunities for both national and

international brands to establish a presence in these centers. As brick and

mortar players build a presence, e-commerce players have gained a first-mover advantage by catering to this unmet demand. It is estimated that non-

metro cities generate around 4045 percent of business for e-commerce

portals2.

Jones Lang LaSalle Indias 2011 study highlights the retail attractiveness and

market potential of some of the emerging centers of consumption.

Jehil ThakkarHead

Media and

Entertainment

[email protected]

1. Digital Dawn The metamorphosis begins, KPMG-FICCI, 2012

2. E-commerce cos eyeing small cities to expand biz, Indiatimes.com, http://articles.timesofindia.indiatimes.com/2012-02-06/services-apps/31029755_1_online-

shopping-metros-e-commerce, accessed May 2012

3. Retail Attractiveness Index, JLL India, 2011

If the industry pulls the

right levers to extend its

market reach in the tier-II

and tier-III cities, these

cities could play an

increasingly pivotal role in

the economy in the not-so-

distant future.

Jehil Thakkar

Head

Media and Entertainment

KPMG in India


Retail Attrac tiveness Index 20113

City Attractiveness City Attractiveness

Ahmedabad Its the eighth-most populous city in India. It is the sixth-highest office in terms of stock per

capita.

Ludhiana Ludhiana has higher migration rate to keep its retailspaces in demand.

Chandigarh It is home to the highest number of cars perperson in the country.

It ranks second in terms of per capita expenditureof TIG (Target income group).

Lucknow Lucknow has the second-highest proportion ofgraduates after Kolkata.

It ranks sixteenth in terms of per capita expenditure ofTIG.

Amritsar Amritsar ranks seventh on the retail stock percapita parameter.

Jaipur Despite a high SEC A population, Jaipur has the second-lowest number of TIG households.

It has a high percentage of youth to drive consumption.

Surat It accounts for the highest percentage of Indiasyoung population due to large-scale migration.

It ranks sixth in terms of mall space per capita.

Indore Indore already has operational high-quality malls. The city ranks high on the young population parameter

as well as existing office stock.

Vadodara The city accounts for the highest expenditure percapita among 20 cities.

Kanpur Kanpur is the tenth-most populous city in India. It has a low rating on consumer preferences due to

social and cultural factors.

Nagpur Nagpur is the ninth-most populous city in India. It has the second-highest supply of office space

per capita.

Raipur Raipurs TIG Per capita expenditure is the tenth-highestin India.

Raipurs strong young population could drive demandfor retail spaces.

Note: TIG represents households with income exceeding INR 500,000.


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4. KPMG in India analysis

5. Watch, eat, play, spend, Hindubusinessline.com, http://www.thehindubusinessline.com/features/brandline/article2735254.ece, accessed May 2012; KPMG in India analysis

6. TAM Annual Universe Update - 2012, TAMs survey, January 2012, p18.

7. Digital Dawn The metamorphosis begins, KPMG-FICCI, 2012

8. FM players expect boom in small-town India, mxmindia.com, http://www.mxmindia.com/2012/02/radio-players-expect-boom-in-small-town-india, accessed May 2012


The media industry is recognizing this potential and increasingly focusing onthese centers of economic activity. Tier-II and tier-III cities such as Jaipur,Indore, Ranchi and Vadodara are now on the must cover list of film distributorsas part of their promotion strategies for any big-budget Indian film4. Leadingmultiplex chains are also moving to these cities, and despite offering affordabletickets priced between INR50 and INR120, they are able to earn healthymargins on the back of low real estate rental costs5.

The TV industry is also witnessing strong growth from tier-III cities. TAM datasuggests that among all TV platforms, growth in 0.11 million-population cities

exceeds that in the metros and other 1 million+ cities 6. The pace of cabledigitization is expected to be much faster in Phase II, III and IV cities than inPhase I cities. The penetration of the digital C&S platform has already exceeded40 percent7 in Phase IV cities, driven by rising DTH penetration.

Competition among English print media players has now moved into tier-II andtier-III markets with leading English-language dailies launching their editions incities such as Coimbatore, Madurai, Bhopal and Indore. Some players are alsosetting up printing facilities near these markets to manage their printingoperations.

With the radio market saturating in metros and advertisers seeking to expandtheir reach, the next phase of growth in FM radio is expected to come from thetier II and tier III cities. The effectiveness of radio in these cities is expected tobe much greater than in metros. A surge in the number of FM-enabledhandsets has increased the consumption of radio in small towns. The radiomeasurement survey conducted by RAM indicates that the average time spentlistening to the radio daily is 244 minutes in Nagpur and 206 minutes in Jaipur,as compared to only127 minutes in Mumbai and 124 minutes in Delhi 8. Thepotential of these emerging centers will be further strengthened once Phase 3comes into play.

With growth being witnessed across almost al l industry verticals, nationaladvertisers are increasingly flocking to tier-II and tier-III markets, focusing theirmarketing spend and campaigns on these cities. Players are tapping heavily onout of home (OOH) advertising in these markets due to their relatively lowdegree of dependence on electronic media. Due to low OOH media clutter insuch markets, innovations are easily highlighted and effectively reach targetgroups. While hoardings, buses and mall media are popular OOH campaignformats in cities, wall paintings (graffiti) command the most attention in smalltowns.

KPMG in Indias point of view

The playing field in emerging cities is quite different from their urbancounterparts. Urban centers observe high media penetration, the rapid adoptionof technology, extensive reach of the internet and mobile platforms and rapidlyevolving consumer behavior and media consumption patterns. On the otherhand, tier-II and tier-III cities are emerging as attractive markets due to theirheightened affluence and a consumerist outlook.

As such, the industry will have to connect with the consumer in these marketsby establishing strong relationships through local language content, qualityservice, innovative business models and bringing comfort of familiarity. If theindustry pulls the right levers to extend its market reach, these cities could playan increasingly pivotal role in the economy in the not-so-distant future.


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Pharmaceuticals



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Rajesh Jain

Head

Markets

[email protected]

1. KPMG in India Analysis

2. India is trailing China- Biospectrum 11 May 2012

3. ICMR Guidelines

4. WHO guidelines

The clinical trials industry which analysts have previously dubbed as the

'sunshine sector' and perceived as a potentially upcoming segment is at

a crossroads today. Among its many challenges is the lack of a standardized

and balanced regulatory structure, along with an increasing number of data-

compromise allegations. Clinical-trial approvals have faced significant delays,

which has led to a scenario where the very future of the industry is now

uncertain 1.

Various factors contribute to this uncertainty. For instance, the Drug

Controller General of India (DCGI) usually takes 12 to 16 weeks to approvetrials as against six to eight weeks in the US1. The industry is also becoming

progressively competitive, with countries such as China, Korea and

Singapore emerging as fierce competitors. Meanwhile, MNCs are reportedly

lowering their budgets while focusing on bringing drugs to the market

quickly. Manufacturing is becoming the key focus of most companies, and

CROs (especially CMOs) could benefit from this development. The decline

in clinical trials in the US has led to an increase in trials across emerging

countries.

While India holds a market share of 2.20 percent, China accounts for 2.83

percent. Between 2008 and 2009, the Indian clinical research market

registered a 9.60 percent decline in revenues, while China's grew by 15.30

percent. India is yet to recover from this decline; the decreasing number of

clinical trial approvals in 2011 has further compounded the situation2.

Regulatory challenges

Currently, the Indian Council of Medical Research (ICMR)s and the office of

the DCGIs guidelines govern clinical trials in India. In 2005, India amended

Schedule Y of the Drugs and Cosmetics Act to create an environment

conducive to conducting trials; however, concrete laws are yet to be

introduced in this regard3. It is now a regulatory mandate that a drug can be

launched in India only if its trial is conducted in the country. This is a

potential concern for MNCs due to the complexities involved in the

international launch of drugs.

Thus, a meticulous regulatory framework for clinical trials is imperative in

India. Otherwise, countries with strict regulations and supervision onadherence are likely to have an edge over the country.

Ethical challenges

Indias credibility as an outsourcing destination has been a matter of global

speculation. Institutional Ethics Committees (IECs) primarily oversee the

ethical execution of a clinical trial in the country at present. IECs are

decentralized, and no independent authority for their management exists.

Such factors have hampered Indias credibility as an ethical site to conduct

clinical trials4.

Further, data compromise and breach of confidentiality allegations have

plagued Indian CROs. Data protection has always been a concern,

considering Indias weak intellectual property structure; however, allegations

of data compromise and fraud have only added fuel to the fire.


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Another important mechanism for overseeing GCP guideline compliance is

the process of clinical trials auditing. It is considered mandatory in the EU

and by the US Food and Drug Administration (FDA). However, the Indian

Drug Law merely states that an audit certificate should be included in a new

drug dossier if available5.

Impact on the industry

Regulatory and ethical challenges are among the many challenges that

continue to hamper the growth of the Indian clinical trials industry. Lack ofskilled technicians, competence in various other therapeutic areas (Indias

domain knowledge is primarily in oncology and cardiovascular treatment)

and lack of adequate infrastructure are other issues that require immediate

attention. A key requirement is the need to heighten awareness through

training and communication.

Amendments in drug laws to make GCP assessments mandatory in

dossiers compiled for New Drug Approvals (NDAs) could also help

strengthen the regulatory framework. The need for auditing should be

understood and appreciated, so that quality assurance makes it easy for a

CRO to showcase its strength globally6.

Without a Fraud Minimization Framework (FMF) in place, the incidence of

wilful misconduct cannot be ascertained. Sponsors and regulators have

resource limitations to conduct a 100 percent inspection of all trial sites. An

independent agency which can design such a framework and implement it

would help the industry gain the credibility that it currently lacks6.

At every level the sponsor, monitor, regulator, inspector, investigator,

clinical coordinator there should be a clear focus on integrity and quality

for Indias clinical trials industry to flourish.

5. India is trailing China- Biospectrum 11 May 2012

6. KPMG in India Analysis


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Real Estate andConstruction



29/34

28 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firmsaffiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Sachin Menon

Partner

Real Estate and

Construction

[email protected]

Even though the revised

GN has its own

implementation challenges

and is inconsistent with

the IFRS converged

standards announced by

the Ministry of Corporate

Affairs, the revised GN isexpected to reduce the

current diversity in

accounting practices

Sachin Menon

Partner

Real Estate and

Construction

KPMG in India

Currently, there is no separate Accounting Standard (AS) in India for

recognition of revenue from real estate sale transactions and accordingly, in

practice, the accounting and reporting for such transactions has historically

been based on certain principles specified in AS 9, Revenue Recognition

and AS 7, Construction Contracts, as supplemented by the Guidance Note

(2006 GN) on Recognition of Revenue by Real Estate Developers, which

was issued by the Institute of Chartered Accountants of India (ICAI) in June

2006.

The 2006 GN of ICAI required certain principle based conditions (risk and

reward of ownership and effective control being transferred, revenue being

measurable and no significant uncertainty on ultimate collection) and specific

conditions (price risk being transferred to the buyer, and buyer being able to

transfer right in the property during construction period) to be met before

any revenue is recognized from real estate transactions. These principle

based conditions have resulted in diversity in practice since these principles

are interpreted and applied very differently by different real estate

developers in deciding and applying their accounting policies. The increase

in complexity of real estate transactions have also contributed to the

increased diversity. This article discusses some of the diverse practices.

Method of revenue recognitionWhile most listed real estate developers recognize revenue based on the

Percentage of Completion (POC) method, several unlisted developers follow

the completed contract method. This decision is largely driven by tax

considerations. Companies following the POC method determine the stage

of completion at every reporting period and recognize project revenue and

costs based on that. As against that, companies that follow the completed

contract method generally accumulate project costs as work in progress in

their balance sheet and recognize project revenue and profits only when the

construction is complete and possession is handed over to the buyers.

Point of revenue recognition

Diversity exists even in application of the POC method. For example, most

real estate companies have set minimum thresholds for recognition ofrevenue and costs under POC. Accordingly, no project revenue and profits

get recognized in profit and loss until these thresholds are met. The

percentages used as minimum threshold by companies differ considerably

and may range from 20 percent to 35 percent. Thus, for a similar project,

Company A may recognize revenues when 20 percent of the project is

complete, while Company B may not recognize revenues until 35 percent of

the project is complete.

Determination of percentage completion

This is another area of diversity. Some companies consider cost of land,

development rights and borrowing costs as costs incurred to determine the

POC, while others only consider actual construction costs. Further, some

companies recognize administrative and general overheads as period costs

and charge them to profit and loss account, while others recognize them as

project costs and include them in application of the POC. Lastly, while most

companies capitalize borrowing costs as part of the project costs, a few

companies charge them to profit and loss as incurred.

Real Estate Accounting - same transaction, different

practices


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29 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firmsaffiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Real Estate Accounting - same transaction, different

practices

Sale of undivided interest in land

Some companies treat the sale of undivided interest in land as a part of the

overall contract for sale of the apartment unit, and hence apply the

completed contract or POC method as discussed above to the total

revenues from the customer. Other companies treat the undivided interest

as a separate component and recognize the sale value of this component

upfront even though construction of the apartment may span over a long

period.

Because of the above diversity the users of financial statements, right from

retail investors to institutional investors often struggle in interpreting or

comparing the financial statements of companies in this sector. Lack of

specific disclosures on the application of policies has also added to the

uncertainty. Most companies generally disclose broad accounting policies

and do not address specific application policies.

To achieve uniformity in the above areas, the ICAI issued a revised GN on

Accounting for Real Estate Transactions (revised GN) in February 2012. The

revised GN mandates the application of the POC method in most cases and

gives certain bright-lines for determining the eligibility of real estate

transactions for revenue recognition. The revised GN applies to real estate

projects where revenues have not been recognized prior to 1 April 2012.

Even though the revised GN has its own implementation challenges and is

inconsistent with the IFRS converged standards announced by the Ministry

of Corporate Affairs, the revised GN is expected to reduce the current

diversity in accounting practices. It is now up to all stakeholders (companies,

auditors, investors and regulators) to ensure and monitor that the principles

of the revised GN are being correctly applied in practice. A final

determination of the tax treatment in this area (through the issuance of the

proposed Tax Accounting Standards) may also reduce diversity.


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Transportationand Logistics



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Introduction

The road transportation industry has been the most significant constituent of

the Indian logistics industry. However, the segment continues to struggle to

cater to the countrys size and widely spread consumption hubs.

This report attempts to delve deep into the market opportunities, key

drivers, challenges and, most significantly, the outlook for trucking segment

in India.

Market opportunityHistorically, road freight in India has increased since its 195051 level of 6

billion tonne kilometers (BTKMs) to 1,086 BTKMs in 20092010, witnessing

a CAGR of 9.21 percent during this period. However, the market scenario is

uncertain in future, given the uncertainly in global and domestic economies.

Hence, several possible scenarios have been considered to plot market

projections for the next few years. While the optimistic scenario assumes

GDP growth of 6.1 percent implying a freight CAGR ~ 7.6 percent the

optimistic scenario assumes a GDP of 9.0 percent, implying a freight CAGR

~ 9.6 percent2. The resulting road freight opportunity is estimated to range

from about 1,300 BTKMs in 201213 to more than 2,000 BTKMs in 2016

172.

Given the road

transportations share of

about 60 percent in

Indians overall freight, it is

imperative to improve its

efficiency and efficacy in

the interest of the larger

industry as well as the

economy

Manish Saigal

Head

Transportation and

Logistics

KPMG in India

Manish Saigal

Head

Transportation and

Logistics

[email protected]


Projected road freight market

Scenario GDP grow th Freight CAGR

1 6.1% 7.3%

2 8.0% 9.6%

3 8.5% 10.2%

4 9.0% 10.8%

Note: Road Freight Elasticity with respect to GDP = 1.2Source: Passenger and Freight Traffic Assessment in the Twelfth Five Year Plan ,Ministry of Road Transport &

Highways Report, Sept ember2011; KPMG in India analysis

Market dynamics

Multiple factors particularly rising domestic consumption are driving

growth in the Indian road transportation segment. Road transports

distinguishing advantage of last-mile connectivity has been driving the

emergence of multiple tier-II cities and penetration in rural markets. An

estimated over 2.6 million light commercial vehicles (CVs, up to 3.5 tons) and

over 2.8 million medium and heavy CVs (more than 3.5 tons) were needed in

20113.

Further, improvement in the quality of road infrastructure has played a critical

role. For instance, the total length of the countrys National Highways hasincreased from 22,200 km4 in the First Five Year Plan (195156) to over

71,700 km5 currently.

1. Road Cargo Year Book 2006-07, Ministry of Road Transport & Highways Report; Domestic Freight Transportation , Crisil , July 2011; KPMG in India analysis

2. Passenger and Freight Traffic Assessment in the Twelfth Five Year Plan, Ministry of Road Transport & Highways, September 2011; KPMG in India analysis

3. Crisil, KPMG in India analysis

4. Industry Statistics, Crisil, July 2011

5. National Highway Authority of India


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6. Industry Statistics, Crisil , July 2011

7. Investing in the Indian transportation & logistics industry, KPMG in India, December 2010

8. Domestic Freight Transportation, Crisil, February 2010

9. Prices of non-branded diesel in metro-cities, Indian Oil Corporation website, http://www.iocl.com/Products/DieselDomesticPrices.aspx, accessed 15/05/2012

10. Crisil Domestic Freight Transportation, August 2010

11. Road Ministry yet to achieve 20 km target; built 10.39 km/day in FY12, The Economic Times website, http://articles.economictimes.indiatimes.com/2012-05-

03/news/31558923_1_road-ministry-nhai-roads-in-five-years , accessed 15/06/2012


Lack of suitable rail infrastructure is also driving the growth of road freight. Sub-optimal rail

capacity, difficulty in last-mile reach and commodity-dependent cost economics have been

pushing the share of road from around 60 percent in 200506 (in BTKM units) to more than

64 percent in 200920106.

Despite significant improvement in road transportation, the sector has been witnessing

several challenges:

Infrastructure constraints: The National Highways, which constitute 1.7 percent of the

total road network, carry 40 percent of total road traffic; meanwhile, Indias four-lanenational highways of about 16,200 km6constitute less than 1 percent of the total road

network. The low average trucking speed of 3040 kilometers per hour (kmph) against

the global average of 6080 kmph7 can, thus, be attributed to the constrained and poor

quality of the countrys road network.

High level of fragmentation: Around 7075 percent truck operators have a maximum of

five trucks each, while operators owning more than 20 trucks each constitute just about

911 percent of the ownership pie; the remaining share of 1520 percent belongs to

operators owning 620 trucks. Also, of the total trucking capacity, almost 47 percent

alone belongs to light CVs8,the rest majorly belonging to medium and heavy CV

category. Such a fragmented ownership structure and capacity availability fuels intense

price competitiveness, in turn, hinders service quality and the overall economics of

transportation.

Rising fuel prices: Between 1 June 2009 and 1 June 2012, the cost of non-branded

diesel in the Delhi NCR region, for instance, has risen by 33 percent, from INR30.86 per

liter to INR40.91 per liter9. As road transportation is a low-margin business, the

unfavorable trend of rising fuel prices (estimated to constitute 5060 percent of total

transportation expenditure10) critically affects operator profitability.

Market outlook

The transportation market in India is expected to continue offering significant opportunities

to all concerned stakeholders. However, for the sector to reach its full potential, the timing

and economics would depend on how the various drivers and inhibitors evolve in future.

While the quality of road infrastructure is certainly likely to improve, the pace of

infrastructure development is critical to minimize losses, both economic and

environmental. In particular, delays in meeting project timelines should be minimized,

given that only around 52 percent (10.39 km as against the target 20 km in 20111211) ofthe daily target of average road length to be constructed has been met.

However, not only has the demand for road connectivity been rising, focus on improving

basic road infrastructure as well as technology adoption has also increased in recent years.

The number of expressways and highways have increased; many roads have been

widened; electronic toll collection is becoming increasingly common; the green channel

concept is gaining ground, and inter-state check posts are becoming automated, with

Gujarat serving as an example. Other examples of key progressive measures include the

development of Indian Road Transportation Exchange (IRTEX) and gradual fleet

modernization. This has been driven by the ironic scenario that while road transportation is

the key to reach out to Indias deep hinterlands, it is usually uneconomical and inefficient in

the Indian context and also environmentally unfriendly. Thus, against the backdrop of

positive initiatives led by industry stakeholders, the industry, as a whole, needs to continue

tapping the advantages of road transportation more efficiently and optimally than everbefore.


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The information contained herein is of a general nature and is not intended to address the circumstancesof any particular individual or entity. Although we endeavor to provide accurate and timely information,there can be no guarantee that such information is accurate as of the date it is received or that it willcontinue to be accurate in the future. No one should act on such information without appropriateprofessional advice after a thorough examination of the particular situation

This document has been compiled by the Research, Analytics, and

Knowledge (RAK) team at KPMG in India.

kbuzz issue 18

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