Vol 8. Issue 2. 1 - 31 MAY 2021 | For Private Circulation Only

pg 4. From MAKE-IN- to MAKE-FOR-THE-WORLD

pg 60, 62, 78, 90. Interviews: Mr Krishan Sachdev, Mr Nipun Singhal, Mr Saurabh Gupta, Mr Maulesh Chhaya

pg 95. Indian Economy: Trend Indicators

pg 97. PhillipCapital Coverage Universe Ground View - Previous Issues

GROUND VIEW Vol 8. Issue 2. 1 - 31 MAY 2021

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2 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 3 Letter from the MD CONTENTS

I want to express my sincere gratitude to all the frontline COVID-19 warriors who continue to manage and fight the crisis, especially in this second wave. I am also proud to see how our country has successfully rolled out its vaccination strategy and hope that most of our people are vaccinated by the end of June, bringing an end to this dreaded second wave. Although the vaccination drive is in full swing, the threat is very real, so we need to take ample care of ourselves and our fellow human beings. There is no doubt that fighting and overcoming the pandemic is going to take collective effort. 4. COVER STORY The pandemic has caused an economic fallout across sectors. From MAKE-IN-INDIA to However, the industry has shown its resilience MAKE-FOR-THE-WORLD and has performed better than anticipated. As people were working By Deepak Agarwal, Vineet Shanker & from home, demand for products that offer convenience and provide a better life (such as washing machines, dryers, air conditioners, TVs, Keshav Bharadia and other home appliances) increased significantly. Traditionally, the INTERVIEWS Indian electronics industry, especially consumer electronics, has been largely dependent on imports. However, our government’s strong 60. INTERVIEW emphasis is on becoming self-reliant ‘Atmanirbhar’ and promoting Mr Krishan Sachdev, domestic manufacturing (by bringing in schemes like Production Chairman, Carrier Midea India Linked Incentives (PLI) and imposing import restrictions) – which has started leading to reduction in imports. 62. INTERVIEW The pandemic has exposed the frailties of the supply chain and the importance of de-risking it at a global scale; the world is keen to adopt Mr Nipun Singhal, a China +1 strategy in preparation of more challenging times. This, our MD and CEO, midcaps team believes, can lead to an unprecedented opportunity Amstrad (OVOT Pvt. Ltd for the Indian consumer electronics industry, especially for Electronic Manufacturing Services (EMS). Deepak Agarwal, Vineet Shanker, and 78. INTERVIEW Keshav Bharadia, our midcaps team members, dug deep into the electronics manufacturing industry from the perspective of its current Mr Saurabh Gupta, very-low global market share, and how India is likely to be a major CFO, electronics manufacturing hub in the future. In addition to this, the team interviewed Mr Krishan Sachdev, Chairman, 90. INTERVIEW Carrier Midea India, Mr Saurabh Gupta, CFO, Dixon Technologies, Mr Mr Maulesh Chhaya, Nipun Singhal, MD & CEO, Amstrad (OVOT Pvt. Ltd) and some other Industry Expert, Mentor industry leaders and experts – to understand how well electronics

manufacturing is positioned to capture domestic demand and increase value addition, and to gauge the global exports opportunity. 95. Indian Economy: Trend Indicators

97. PhillipCapital Coverage Universe Cheers and Best Wishes, Vineet Bhatnagar Valuation Summary

2 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 3 COVERCOVER STORY

BY DEEPAK AGARWAL, VINEET SHANKER, KESHAV BHARADIA

From MAKE-IN-INDIA to MAKE-FOR-THE-WORLD Manufacturing is the next big theme

India will see an increase in domestic value-addition across product segments (currently quite below the global average). With the setting up of a components ecosystem, and scaling up of large-scale electronics manufacturing capabilities in the country, this industry should see tremendous growth.

4 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 5 The Indian electronics industry is in a sweet spot because of the government’s initiatives such as Make-in-India, Aatmanirbhar Bharat, and the de-risking of the global supply chain coupled with an increased adoption of the China+1 strategy worldwide. India has essentially been a net importer of electronics goods and components in the past, due to drawbacks and challenges in local manufacturing. However, this is changing rapidly and experts believe that various government incentives such as PLI, EMC 2.0, SPECS, NPE, along with reformed labour laws, will prove conducive to manufacturing in India for the world. As a result, There is likely to be huge capex over the next 3-5 years in the electronics industry. India has already seen an influx of investments coming in to scale up manufacturing, from both domestic and international companies. The global supply chain disruption arising out of China last year has increased awareness amongst companies worldwide about the consequences of doing most of their manufacturing in China. This has led to companies relocating to other countries. India has the lowest penetration rates across consumer durables, a large domestic market, supportive government policies, lower tax rates and the lowest wages, making it a lucrative destination for many global giants and domestic companies. India will see an increase in domestic value-addition across product segments (currently quite below the global average). With the setting up of a components ecosystem, and scaling up of large-scale electronics manufacturing capabilities in the country, this industry should see tremendous growth.

pg. 6 INDIA’S ELECTRONICS INDUSTRY Eyeing a bigger share of the global supply chain ______pg. 17 GOVERNMENT’S INCENTIVES FOR INDIA INC Government is the catalyst that is driving growth ______pg. 31 CHINA + 1 STRATEGY De-risking the global supply chain ______pg. 46 PRODUCTS Lower penetration and a large domestic market = huge growth ______pg. 91 OUTLOOK Make in India! But how soon will India make for the world? ______

4 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 5 INDIA’S ELECTRONICS INDUSTRY Eyeing a bigger share of the global supply chain Contract manufacturers will support growth

Electronics: The fastest growing India’s electronics market size industry in the world • India’s electronics hardware production has increased from Rs 1.9tn in FY15 to touch an estimated Rs 5.46tn in Experts believe that the electronics industry will surpass the FY20. This includes production of consumer electronics, US$ 7.3tn mark by 2025. In fact, the Indian market is likely to electronics components, computers, strategic and be second only to China’s, followed by Vietnam, Thailand, industrial electronics (Source: MEITY Annual Report and Indonesia. India’s electronics industry has undergone FY20). drastic changes in the last 20 years, mostly in products, the • The Indian consumer electronics and consumer durables retail environment, and in terms of an evolving administrative market is likely to become the fifth-largest globally by landscape. Of late, innovation and technology changes have 2025. been rising, because of a shift in consumer behaviour and • Despite disruption due to covid, smartphone shipments changing business requirements. saw a decline of only 1.7% in CY20. The production worth These five factors will push the industry’s growth to the next of mobile phones in India reached US$ 30bn in FY20 level: from US$ 3bn in FY15, which should only increase from 1. Low penetration of products; much lower than the global here. India is focussing on manufacturing and becoming a average. global manufacturing hub. 2. Positive GDP growth outlook. • Under EMS, there is ESDM (Electronics System and 3. Huge push from the government to become self-reliant Design Manufacturing), which has two sub sections – (reduce import dependency) and to increase exports by electronics systems and electronics design. introducing various schemes (EMS is a big part of this). • In consumer durables, LCD/LED TVs grew more than two 4. Rising discretionary incomes. times in terms of volumes – from 5.2mn units in FY15 to 5. Evolving of physical and social infrastructure, better 12mn units in FY19. logistics, and an expanding e-commerce industry.

6 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 7 Work-from home culture is driving growth in electronics Companies have realised the drawbacks After the government lifted the lockdown in India, the of being dependant on only one consumer durables sector saw healthy growth, led by a nation (China) as a single source of strong surge in online sales across product categories. Restrictions and paranoia caused a drastic shift in the supply, as they faced disruptions to working style – which is now firmly work-from-home (WFH) the flow of materials from there for many job profiles. Compared to metros, consumer durables sales saw a sharper rise in non-metros due to lower consumer spending. penetration of appliances, combined with lower intensity of lockdowns, which resulted in many first-time buyers. Sales India can use this moment to emerge as a leading electronics of laptops and tablets saw a sharp uptick due to schooling and components manufacturer. COVID-19, along with the from home and WFH. TVs also saw robust sales, as majority anti-China sentiment is leading to a seismic shift in global houses had only one TV and found the need for a spare supply chains. Some of the factors that support India are as one, with more members spending most of their time at follows: home. The need for washing machines, air conditioners, • A post pandemic reality: There has been a change in dishwashers, microwaves increased for the same reasons. global supply chains due to the pandemic. Companies The fact that India’s nationwide penetration for consumer have realised the drawbacks of being dependant on durables is less than 10%, provides massive headroom for only one nation (China) as a single source of supply, growth. With an increasing shift towards work-from-home as they faced disruptions to the flow of materials from and bans on imports of ACs with refrigerants and ban on LED there. Trade tensions between the US and China have TV imports, domestic companies are set to gain. The uptrend added to diversification in supply chains. As multinational in growth of the consumer durables sector could continue, companies look for alternate destinations to set up their with increase in GDP per capita as shown in the figure given manufacturing bases, they view India as an attractive below, which could lead to higher consumption and higher option.

• Anti-China sentiment: The US-China trade and tariff Sales of laptops and tablets saw war and increasing anti-China sentiment offer India a sharp uptick due to schooling an ideal base to leverage the strong push by the Indian government for manufacturing and to attract from home and WFH multinational companies looking to set up new bases and to diversify their supply chains. Trend showing an increase in GDP per capita Ease of doing business and policy support: over the years • India has made significant progress in its ‘ease of doing business’ parameters in recent years. This, coupled with many new government initiatives towards boosting domestic manufacturing (PLI, SPECS. EMC (2.0), M-SIPS, NPE, PMP, Make in India, Digital India and Start-up India) should increase FDI inflows into electronics manufacturing.

The government expects PLI schemes for manufacturing, AC components, and LEDs to generate total revenues of around Rs 12tn Source: World World bank Source:

6 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 7 • PLI scheme for mobile manufacturing, AC, LED • Electronics is at the heart of world trade: Electronics lighting, laptops, tablets, etc.: The government will always remain an integral part of the global has cleared 16 proposals, both from domestic and manufacturing processes. India has given electronics and international companies, constituting an investment of Rs component manufacturing special attention through its 110bn under the PLI scheme for mobile manufacturing progressive policies and regulatory frameworks. worth Rs 10.5tn over the next five years. In the PLI • New labour codes: The Indian parliament has passed scheme for AC components and LED lights, the four codes on wages, industrial relations, social security, government has approved an outlay of Rs 62.4bn and and occupational safety and health (OSH), which will in the PLI for laptops, tablets, and for all-in-one PCs, it ultimately rationalize 44 central labour laws. The code on has approved Rs 73.2bn. The government expects PLI wages was passed in 2019, while the three other codes schemes for mobile phone manufacturing to bring in tax got clearance from both the Houses in 2020. These revenues of around Rs 800bn over the next five years, codes are favourable for both employers and employees; apart from making India a destination for manufacturing some of the provisions like 14 days of notice prior to electronic goods (exports hub) for global giants such as strikes remove the uncertainty in day-to-day operations, Apple and . It expects GST revenues of around and give some time to employers to come up with an Rs 720bn from Rs 4tn worth of domestically produced alternate plan of action, which was not there in previous mobile phones. It believes it can generate exports of c.Rs labour laws. Experts highlighted that with an increasing 6.5tn through the PLI scheme over the next five years. share of contract-labour under the new labour code, Recent PLI is looking to create component ecosystem in contract manufacturers can scale up manufacturing. India.

8 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 9 Structure of the industry In domestic electronics production, mobiles have The Indian electronics industry consists of consumer seen highest 64% CAGR over FY15-20 electronics, industrial electronics, electronic components, LED products, strategic electronics, computer hardware, and broadcasting electronics. Communication and broadcasting devices along with consumer electronics constitute c.40% of the revenues of the Indian electronics industry; industrial electronics make up 20.5% and electrical components 22%.

Communication and broadcasting devices along with consumer electronics constitute c.40% of the revenues of the Indian electronics industry Source: meity.gov.in Source:

Consumer electronics constitute 31% of the electronics industry

Source: meity.gov.in, PhillipCapital Estimates

8 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 9 Focus is on self-reliance via Why Atmanirbhar? Increasing trade deficit in a country ‘Atmanirbhar Bharat’ with a large work force, talent, and resources can negatively impact the country’s overall economic growth. India’s trade Imports fuel the electronics demand in India; the country deficit in the electronics sector is the second largest after imported c.40% of its electronic goods in FY20, but crude oil. It increased from US$ 34bn in 2015-16 to touch this number is lower than 54% in FY15. The reduction US$ 41bn in 2019-20. India has the highest dependency on is mainly due to the government’s phased Chinese manufacturers for electronics plans of imposing duties on imported goods goods and its components – such as and simultaneously promoting domestic compressors, PCBs (Printed Circuit manufacturing of electronics by incentivizing Boards) and open cells in manufacturing production. India exports c.16% of its total of ACs and TVs. However, India and electronics production. The Government China’s strained relationship (trade and of India is focused on the development of diplomatic) in FY20 cast a shadow on a component ecosystem in the country to domestic manufacturers, making the promote manufacturing, which will substantially need for a self-reliant India (Atmanirbhar reduce imports and increase exports. Over the Bharat) inevitable. India is focusing on next 2-3 years, we expect a sharp reduction in its own manufacturing, starting with mobile phones, TVs, ACs imports. assembling, and then manufacturing of critical components.

India has the highest dependency on Chinese Higher domestic value manufacturers for electronics goods and its components addition is not possible – such as compressors, PCBs (Printed Circuit Boards) without contract and open cells in manufacturing of ACs and TVs manufacturers

India’s electronics’ trade deficit in India imports c.Rs 4tn electronics FY20 touched US$ 41bn goods annually Source: Ministry of Commerce and Industry, PhillipCapital Research PhillipCapital Ministry of and Industry, Source: Commerce Source: PhillipCapital Research, Industry Research, PhillipCapital Source:

10 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 11 How does the government plan to reduce trade deficit in electronics?

The government wants to increase domestic value addition in electronics manufacturing. To develop a robust manufacturing base, it has started making Due to the Atmanirbhar the following moves – providing fiscal incentives to set up local manufacturing initiative, over next two facilities, large-scale cluster development, world-class testing facilities, and skilling ecosystems – to name a few. Higher domestic value addition is years, imports of products not possible without contract manufacturers. This is because, for OEMs it like air conditioners, LED becomes difficult to scale or integrate production of its components. Contract manufacturers offer skills beyond just manufacturing – in terms of design TVs, and mobile phones and other value-added services. Thus, a big part of the domestic electronics will significantly fall industry is likely to be in the form of Electronic Manufacturing Service (EMS) or contract manufacturing.

Domestic value addition to increase across product segments over the next 5-7 years

Product Domestic growth % Current domestic Domestic manufac- Domestic Market size Current India import (last 5 year CAGR) value addition (%) turing can increase (in Rs bn) % to % Mobile 47% 12-15% 30-35% 3165 50-60% TV 17% 12-15% 25-30% 694 70-80% RAC 16% 25-30% 70-75% 112 34% WM 15% 50%-70% 90% 104 15% Ref 15% 50%-70% 90% 120 35% LED Lighting 15% 70% 90% 201 22% Other Small Appliances* 16% 70-90% 90% 100 20-30% Source: PhillipCapital Estimates

• OEM (original equipment manufacturer): Produces parts and equipment that may be marketed and retailed by another manufacturer. Could also focus on product innovation and development, and outsource manufacturing to partners.

• ODM (original design manufacturer): Designs and manufactures a product that is subsequently rebranded and retailed by other companies that do not carry out their own manufacturing.

• EMS (electronics manufacturing services): Contract electronics manufacturer that makes products for OEMs; could also aid in design, software development, supply chain management, testing, distribution, and repairs. EMS is a generally an accepted term for contract manufacturers in the electronics field.

10 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 11 History of EMS (Electronics Manufacturing Services) The shift in manufacturing – from in-house to outsourced Contract manufacturing is projected to – began decades ago. Today, companies are extending grow at a rapid pace, outperforming their outsourcing to almost every aspect of production, from design manufacturing to final product assembly. They the entire electronics industry have extended the array of outsourcing activities, beyond just component manufacturing, to complete production of a branded product. EMS players have become active outperforming the entire electronics industry. Companies partners in product designing and development, including have now started focusing more on new, smaller, and online extension of the companies they service. In fact, top EMS brands. They focus more on marketing, and outsource executives say that the sustained growth of their companies manufacturing to EMS companies. This is likely to benefit depends on the ability to extend their responsibilities to OEM/ODM players of all sizes. running the complete supply chain for global players. At present, domestic EMS companies play a key role in reducing shipments into India.

However, it was not always like this. Initially, EMS providers EMS industry is becoming more difficult started providing services for PCBA (printed control board Getting a pie of the rapidly growing contract manufacturing assembly) and consignment work, where they did not own industry is more difficult than it seems, as economies of any material and just executed simple assembly operations. scale, purchasing power, and global logistics are making This industry saw substantial growth in the 1990s due to the business an increasingly concentrated one. Here, downsizing by many OEMs in the economic recession early in one must either be a big player or serve a niche market. that decade. During the recession, companies were strapped Historically, the preferred path in contract manufacturing for capital and were hence loath to invest in new equipment. was to grow with a major global client, but today, the capital However, cash-rich EMS providers were able to enhance investment required by an EMS provider is enormous. In and increase their production capabilities. They continued fact, the introduction of surface-mount technology in PCB investments in latest technologies and expanded their (printed control boards) assembly has increased the capital services within the industry. OEMs, starved of capital, started expenditure. Short product life cycles and declining prices focusing on becoming asset-light, which gave agility to their have prompted contract manufacturers to launch their business models, leading to high profitability and return on own products across geographies and to indulge in a capital employed. broad range of services, not just manufacturing. Many OEMs soon realized that hiring contract manufacturers for producing most of their components was viable, because with their large client bases, EMS providers were able to Electronics System Design and Manufacturing leverage the benefits of year-long full-volume productions (ESDM) and provide cheaper services. As a result, even after the Electronics hardware manufacturing is an integral part of economic recovery, global companies continued to shift the government’s Make in India, Digital India, and Start Up their business models towards more contract manufacturing, India initiatives. ESDM plays an imperative role, and has instead of ramping up their in-house manufacturing high weightage, in the government’s vision of garnering US$ Contract manufacturing is projected to grow at a rapid pace, 1tn economic value from the digital economy by 2025. The demand for electronics products has been rising in recent EMS companies are no longer just years, mainly due to the surge in the internet penetration vendors, but assume full responsibility rate in India. Manufacturing has gained traction in this segment, with increased production and product assembly for the engineering, production, taking place across consumer electronics. and distribution of products

12 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 13 Outlook of ESDM in India India has been one of the IBEF (Indian Brand Equity Foundation) predicts India’s largest consumers of electronics ESDM sector reaching US$ 220bn by 2025 expanding at a 16% CAGR between 2019 and 2025, fuelled by a pickup in goods in the past decade

public and private investments, rising demand for electronic imports decreases, its electronics industry’s contribution to Currently products, and a strong policy framework in place. GDP will also be in a similar range as these countries (over electronics manufacturing in India contributes to 1.7% the next 7-8 years). Industry watchers attribute the growth of the GDP, while in China, Taiwan, and South Korea, in the domestic consumption of electronics mainly to rising the sector’s contribution is significantly large at 12-15%; disposable incomes, an increasing middle-class population, as India’s consumption increases, and the dependency on and a drop in prices of need-based electronics in the country.

India has just 2% market share in EMS globally; The Indian electronics industry has the lowest China has the largest share contribution to GDP at 1.7% vs. 12.7% for China Source: Industry, PhillipCapital Research PhillipCapital Industry, Source: Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

India will see an increase in domestic value-addition across product segments (currently quite below the global average). With the setting up of a components ecosystem, and scaling up of large-scale electronics manufacturing capabilities in the country, this industry should see tremendous growth.

12 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 13 Domestic EMS market share in India Increasing localisation in supply chain and miniaturisation of electronic products have been the two main trends in Indian electronics market

Government measures to increase local ESDM manufacturing

The Government of India has allowed 100% FDI in the ESDM segment under the automatic route even for Original equipment manufacturers (OEMs) and Integrated Device Manufacturers (IDMs). PLI will also boost domestic manufacturing. *Note: we have taken only domestic contract manufacturing companies. Phillipcapital research Phillipcapital research

Top EMS companies of the world Name HQ Manufacturing locations Revenue (US $mn) HonHai Precision () Taiwan China, India, Japan, Vietnam, Malaysia, US 1,78,600 Taiwan China, Indonesia, US, Europe, India 45672 Taiwan US, Europe, China, Taiwan, India 29358 Jabil Inc US US, China, Malaysia, India, Europe 25282 Singapore US, China, India, Malaysia, Indonesia 24210 Sanmina US China, Canada, Europe, India, Malaysia, Thailand, US 8234 BYD Electronics China China 7616 Celestica Canada Canada, US, China, Malaysia, Europe, Thailand 5888 Universal Scientific Industrial China China, Taiwan, Mexico, Poland 5343 New Kinpo Group Taiwan US, China, Thailand, Malaysia, Brazil, Mexico, Philippines 4598 Kaga Electronics Japan Japan 4123 Plexus Corp US US, China, Malaysia, UK 3164 Venture Corporations Singapore Singapore, US, China, Malaysia 2702 Benchmark Electronics US US, China, Malaysia, Netherlands, Romania 2268 SIIX Corp Japan Japan, China, Thailand, Indonesia 2052 Shenzhen Kaifa China China, Malaysia, Philippines 1899 Fabrinet Cayman Islands China, Thailand, Japan, US 1584 UMC Electronics Japan Japan, China, Vietnam, Thailand 1310 Integrated Micro Electronics Philippines Philippines, China, Europe, Japan US 1250 Kimball Electronics US US Thailand, China and Poland 1182 Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

14 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 15 Domestic manufacturing will rise sharply as imports reduce and exports increase

Product India Market Domestic Brands Own Out- Imports (A) Current Value Expected Exports Size Manufactur- Manufactur- sourcing (in Rs bn) Addition Valuation (in Rs bn) (in Rs bn) ing ing Domestic Addition to increase Air conditioners 112 56 30-40% 60-70% 56 20-25% 70-75% 3 Refrigerators 120 78 70% 30% 42 50-70% 90% 12 Washing 104 88.4 60-70% 30-40% 15.6 50-70% 90% 4 machines LED TVs 694 138.8 10-15% 85-90% 555.2 12-15% 25-30% 11 Mobile phones 3165 2250 10% 90% 915 12-15% 30-35% 291 Lighting 201 157 50% 50% 44.22 70% 70% 4.2 Note: Industry estimates Source: Industry, PhillipCapital estimates

List of contract manufacturing companies in India (mobile phones, air conditioner, washing machine, TVs, etc.)

Source: Industry, PhillipCapital Research

14 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 15 Major contract manufacturers companies in India Mobile phone and component manufacturing ecosystem on the Indian map. A large numbers of contract manufacturers are located in and around the national capital region

Many global companies (Wistron, Foxconn, etc.) have started coming to India. Domestic manufacturers have increased their capacity significantly and are focusing on contract manufacturing Source: Industry, PhillipCapital Research

16 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 17 GOVERNMENT’S INCENTIVES FOR INDIA INC Government is the catalyst that is driving growth

It has implemented several policy measures to kick-start electronic manufacturing in India

Government’s push for domestic manufacturing

Electronics Development List of GoI schemes, funds, and cluster programs over the years Fund (EDF)

The Government of India set up EDF as a Fund of Fund (FOF), through which it has invested into several other funds (also known as Daughter Funds”). These daughter funds then invest in companies that have business around electronics. EDF enables creation of an ecosystem for providing risk capital to companies developing new technologies in the areas of electronics, nano-electronics, and IT. This fund fosters R&D and innovation in these technology sectors. This was one of the most important strategies to enable creating an electronics industry ecosystem in India.

Source: Company, PhillipCapital Research

16 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 17 Daughter funds, funded by Electronics Development Fund (EDF), set up by the GoI

Name of the daugh- Amount in- Total amount invested No of investee Portfolio Companies (Investee) ter fund vested by EDF by the daughter fund start-ups/ Compa- (in Rs mn) start-up/ companies nies of Daughter (in Rs mn.) fund Endiya Seed Co-cre- 243.3 1158.8 12 Steradian Semi, AiCS Advance AI Compute, Cell Propulsion ation fund KARSEMVEN Fund 131.1 441.5 10 Graphene, Prodigy Technoventions, SenseGiz, Pinaka, Greendzine, Remido, CNB Technologies, Aptener Mechatronics, Open Appliances, Bellatrix Aerospace and Bionic Yantra YourNest India VC 117.1 434 14 Argoid, Koinearth, Uptime AI, Xpedize, Lightspeed Labs, Dozee, Fund II Mauna.ai, Miko, Cron AI, Practically, Lavelle Networks, Trezi, CredRight, Orbo PI Venture Fund-1 70.1 872.3 10 Sigtuple, Ten3T Health (Cicer), Zenatix, Niramai, Customer Suc- cess Box, Locus, OweMe, True Lark, SwitchOn, Wysa, Agnikul, Pyxis Unicorn India 128.6 494.8 17 Boxx.ai, ChitMonks, Clootrack, Fedo, Finin, Finsall, Fund Our- Venture Fund selves, GamerJi, Genrobotics, GrabonRent, Goldex, Inc42, inntot, iDefigo, Libryo, Moteefe, SmartCoin, supplyCompass, Sascan, Sequretek, Probus, Perfit 3D Aaruha Technology 40.2 134.9 8 Aus, Aibono, Singularity, CloudSEK, Bellatrix, Anlyz, Aics, Steradi- Fund-I anSemi, SmarterBiz Venture East Proac- 448.4 2073.5 11 Infinite uptime, Acko, Moengage, Portea, Kissht, Sresta's 24 tive Fund II Mantra, Edge Networks, Seclore, Mardil Medical, Perpetual, Ben Franklin, iNurture, Boonbox, Indus OS, Orca System, ekincare, Iqlect, Bog Orchid, Orion Edutech, E2E Retail, Richcore, CPO, Diabetomics, iMedX, Onebreath Total 1178.8 5609.8 75

Source: MEITY Annual Report

Preference given to domestic manufacturers over importers

To promote ‘Make-in India’, the government issued a public procurement order, where it gives preference to ‘Class 1 local suppliers’ in procurement of all goods, services or works; the government defines these supplier or service providers as those whose goods, services, or work offered for procurement have local content equal to or more than 50%.

18 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 19 National Policy on Electronics, 2019 Phased manufacturing plans in cell phones NPE, 2019 envisages India as a global hub for ESDM, with Year Sub-assembly Value Basic Cus- a thrust on exports, by encouraging and driving capabilities addition tom Duty in the country for developing core components, including (BCD) chipsets, and creating an enabling environment for the 2016-17 (i) Charger/ Adapter, (ii) Battery Low 15% industry to compete globally. The NPE aims to create a Pack, (iii) Wired Headset competitive electronic manufacturing sector and to achieve 2017-18 (iv) Mechanics, (v) Die Cut Parts, Moderate 15% a turnover of about US$ 400bn by 2025, and targets a (vi) Microphone and Receiver, production of 1bn mobile handsets for export. It also aims (vii) Key Pad, (viii) USB Cable to create 10mn employment opportunities in the country by 2018-19 (ix) Printed Circuit Board Assem- High 20% 2025. bly (PCBA) 2018-19 (x) Camera Module, (xi) High 10% Connectors NPE aims for a turnover of about US$ 2019-20 (xii) Display Assembly, (xiii) High 10% Touch Panel/ Cover Glass 400bn by 2025, and production of Assembly (xiv) Vibrator Motor 1bn mobile handsets for exports / Ringer Source: meity.gov.in

Tariff rationalization Phased manufacturing plans Rationalization of tariff structures is an ongoing process. The Phased manufacturing plans first introduced basic custom government rationalised tariff structures to promote domestic duty in products that can be easily sourced domestically manufacturing of electronic goods (such as cellular mobile and then in products that are difficult to source, and are handsets, , LED products). It started a phased high in terms of domestic value addition. Under this, in manufacturing programme (PMP) to promote domestic value the near term, products like display assemblies and PCBs addition in mobile handsets and air conditioners (including (printed circuit boards) that have lower domestic output, parts and components), manufacturing of mobile handsets large domestic opportunity, and high value addition – offer and their parts/ components has been steadily moving from the most obvious investment opportunities for domestic semi-knocked down (SKD) to completely-knocked down manufacturers. Although PCB manufacturing has already (CKD), increasing value addition. begun in India, it still needs to undergo changes to happen at a larger scale. Increase in BCD (Basic custom duty) in products, India has been investing in capabilities in the manufacturing which can be sourced/ assembled in India of cells and antennas over a longer period; these products could be the high value adding components and a realistic Item BCD up to 13.12.17 BCD w.e.f 14.12.17 long-term goal for the country. Manufacturers could Cellular Mobile 10% 15% (Further increased consider these products for sub-assembly in India. With the Handsets to 20% in FY19 budget) announcement of levies on imports of display units, India Set top box TV 10% 20% should witness a rise in domestic manufacturing. However, Colour TV 10% 20% components such as camera modules, ICs, semiconductors Microwave ovens 10% 20% require substantial investments and would most likely DVR/ Network Video 10% 15% (further increased continue to be imported. Domestic manufacturing in these Recorder to 20% in FY20 budget) components would take time and would need to develop CCTV Camera/ IP 10% 20% gradually over time. Camera LED Lamps 10% 20% Smart meters 10% 15% Power banks* 10% 20%

*w.e.f 30.01.2019, BCD on power banks has increased from 10% to 20%

18 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 19 Production Linked Incentives (PLI) scheme – a game Government of India announced an increase in changer duty on electronics goods in the Annual Budget FY22 The domestic electronics manufacturing sector in India is Rate of Duty not at par with competing nations, as it faces a ‘disability’ of around 8.5-11.0% due to the following – lack of proper Appliances From To infrastructure, logistics framework and domestic supply chain, Electronic goods, parts thereof high finance cost, lack of good quality power, insufficient Copper and articles thereof used in manu- Nil Applicable training in required skills, limited design capabilities, and facturing of specified electronic items BCD insufficient focus on R&D by the industry. PCBA of cellular mobile phones (with effect 10% 20% from 01.04.2020) To alleviate its debility, the government introduced the Fingerprint readers for use in cellular nil 15% PLI (Production Linked Incentive) scheme on 1 April mobile phones 2020, to boost manufacturing of electronics in India, Vibrator/ringer of cellular mobile phones nil 10% especially attracting large-scale investments in smartphone (with effect from 01.04.2020) manufacturing. PLI entails not just manufacturing, but also Display panel and touch assembly of nil 10% assembly, testing, marking, and packaging units. The scheme cellular mobile phones (with effect from has the potential to boost the domestic manufacturing 01.10.2020) of electronics in India and make the country globally Headphones and earphones Applicable 15% competitive. The scheme entails an incentive of 4-6% on BCD incremental sales of goods manufactured (over the base Following parts of microphone for use in 10% nil manufacture of microphone namely year) under target segments, to eligible companies, for a Source: meity.gov.in Source: duration of five years after the base year. Base year for the PLI scheme is 2019-2020 and the target segments covered Electronic Manufacturing Cluster (EMC 2.0) under the scheme include mobile phones, ACs, LED lighting, Purpose: To create and strengthen the infrastructure laptops/notebooks, computer hardware, and IoT devices. PLI ecosystem for electronics manufacturing and provide schemes could extend to other electronics categories with support for creating world-class infrastructure – for attracting high import dependency, if the response is encouraging. investments in the ESDM sector

• The scheme was notified in October 2012. Outlay for PLI - 5-year period

• It helps with projects in ‘greenfield electronics Sector Total outlay manufacturing clusters’ – here, aid is available up to 50% (in Rs bn) of the project cost, subject to a ceiling of Rs 500mn for Advanced cell chemistry battery storage 181 every 100acres of land. High efficiency solar PV modules 45 Large scale electronics manufacturing 410 • For brownfield EMC (common facility centre), it offers aid Electronics (Laptops/Notebooks, Server, IoT devices, 50 (as a grant) up to 75% of the cost of infrastructure, subject Computer Hardware) to a ceiling of Rs 500mn. Automobiles & Auto components 570 • EMCs are poised to attract an investment of over Rs Pharmaceutical drugs APIs and KSMs 56 548bn over the next 5-7 years, and are likely to generate Medical devices 34 employment opportunities for about 640,000 people Pharmaceutical drugs (Specialised pharma prod- 300 once fully operational. ucts, APIs/KSMs/Dis etc) Telecom & Networking products 152 Textiles 107 Food processing 154 EMCs are poised to attract an investment Specialty steel 63 of over Rs 548bn over the next 5-7 years White goods (Air conditioners & LED) 62 Total 2185 Source: meity.gov.in Source:

20 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 21 Electronics manufacturing cluster (EMC) sites approved by GoI

Uttar Pradesh government: In August 2020, the UP government unveiled a new electronics manufacturing policy to attract foreign investors willing to shift their production base to India, aiming to garner US$ 540bn in the next five years

Tamil Nadu: Electronics and Hardware Manufacturing

Source: meity.gov.in Policy aims at an output of US$ 100bn by 2025

20 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 21 Modified special incentive package scheme (M-SIPS)

To promote large-scale manufacturing in the country, the Government of India’s M-SIPS scheme will offset disability and attract investments in ESDM. The scheme entails incentives for investments on capital expenditure, of which 20% is for investments in Special Economic Zones (SEZs) and 25% for non-SEZs. The scheme provides incentives for both new and expanding units. For some high-capital-investment projects like fabrications, it reimburses central taxes and duties. The goal of this scheme is to reach net zero imports in electronics by creating an indigenous manufacturing ecosystem for electronics in India.

Mobile PLI AC / LED PLI

• Incentive: 4-6% PLI for 5 years. • Incentives are 4-6% on incremental sales for 5 years. • Outlay: Rs 409.95bn (US$ 5.5bn). • Effective 1 April 2021. • Tenure: 5 years. Base year FY19-20. Incentives applicable • Open for applications for 6 months. from 1 August 2020. • Expected incremental investment from AC / LED PLI is Rs • Despite recent challenging times, mobile PLI will lead 79.2bn for an incremental production of Rs 1.68tn over to production worth Rs 350bn and investments worth Rs five years. 130bn by applicant companies. • The export opportunity due to AC / LED PLI is of • Additional employment generation is 22,000 jobs. Rs 644bn over five years; it can create additional employment of 100,000 jobs. • Tax revenue likely at Rs 113bn in direct taxes and Rs 380bn through GST over the next five years

Mobile PLI will lead to production The export opportunity due to AC / LED worth Rs 350bn and investments worth PLI is of Rs 644bn over five years Rs 130bn by applicant companies

Companies approved under PLI for mobile Production-linked incentives scheme’s benefits phone manufacturing over the next 5 years

Domestic companies International com- Electronic component PLI highlights Benefits panies companies Incentives for ACs & LED 4-6% on incremental sales for 5 Lava Hon Hai Precision AT&S years Industry Co Ltd W.e. f 1/4/2021 Bhagwati Products Rising Star Ascent circuits Incremental investment Rs 79.2bn Ltd Incremental production Rs 1.7tn Padget Electronics Samsung Visicon Exports Rs 644bn UTL Neolyncs Wistron Walsin Incremental employment 1lakh jobs Optiemus Electronics Pegatron Sahasra Electronics Direct tax revenue Rs 113bn NeoLync GST Rs 380bn Source: meity.gov.in, media reports Source: meity.gov.in

22 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 23 The key objective of the PLI scheme is to increase the • Components of LED lighting will see higher domestic value addition in ACs to 75% from the current 25% manufacturing in India: in the next five years, and in LED lighting to 75% from the n LED lighting products (core components like LED current 40%. chip packaging, resisters, ICs, fuses and large-scale • This will lead to an increase in manufacturing of investments in other components, etc.) components of Air Conditioners: n Components of LED lighting products (like LED n Components include High Value / Low Value chips, LED drivers, LED engines, mechanicals, Intermediates or sub-assemblies or a combination packaging, modules, wire wound inductors and other thereof. components).

n High Value Intermediates: namely Copper Tubes, Overall, with this PLI, the industry will see a capex of more Aluminium Foil and Compressors. than Rs 80bn over the next 5-6 years in ACs and LED lighting. n Low Value Intermediates: namely PCB assembly for controllers, BLDC motors, Service Valves and Cross Flow fans for AC and other components.

PLI Scheme: Details of the next five years

Large Investment Normal Investments Segment & % of Total Total Total Avg. In- Invest- Sales/ Total Total Total Avg. In- Invest- Sales/ BOM Invest- Reve- Incen- centive ment/ Asset Invest- Reve- Incen- centive ment/ Asset ment nue (Rs tive (Rs (%) Incen- (x) ment nue (Rs tive (Rs (%) Incen- (x) (Rs mn) mn) -B mn) -C tive (x) (Rs mn) mn) mn) tive (x) -A (A/C) (A/C) AC ACs (Components)* 6,000 97,500 4,800 4.9% 1.3 3.82 3,000 41,250 1,988 4.8% 1.5 3.67 High Value inter- mediates of ACs** 40%-50% % of 4,000 53,750 2,575 4.8% 1.6 3.64 2,500 37,500 1,825 4.9% 1.4 3.75 BOM Lower Value intermediates of ACs*** 20% of BOM 1,000 15,000 730 4.9% 1.4 3.75 500 7,500 365 4.9% 1.4 3.75 LED light LED Lights # 3,000 60,000 2,970 5.0% 1.0 4.62 1,000 18,000 876 4.9% 1.1 4.50 Components of LED 250 4,500 219 4.9% 1.1 4.50 100 1,800 88 4.9% 1.1 4.50 Lights ##

Source: DPIIT, Ministry of Commerce and Industry, PhillipCapital India Research Note:AC: * High Value Intermediates or Low Value intermediates or sub-assemblies or a combination thereof. **Aluminum Foil, Cu tube, Compressor. ***PCB Assembly for Controllers, BLDC Motors, Service Valves for ACs, Cross Flow Fans and other components. LED light: # (Core Components like LED Chip Packaging, Resisters, ICs, Fuses and large scale investments in other components etc.) ## LED Chips, LED Drivers, LED Engines, Mechanicals, Packaging, Modules, Wire Wound Inductors and other components.

22 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 23 Revised PLI: c.40+ applications should come in if all segments receive applications

PLI Segment (in Rs mn) PC: est. no of Players each investment segment* Incentive Large Invest- Normal Invest- Total ment ment ACs (Components) 4 4,800 1,988 6,788 High Value intermediates of Acs 3 2,575 1,825 4,400 Lower value intermediates of Acs 9 730 365 1,095 LED Lights 3 2,970 876 3,846 Components of LED Lights 8 219 88 307 Total (A) 27 11,294 5,141 16,435 Government has approved the PLI for AC and LED Lights (B) 62,380 Average. No. of Players each segment & investment size 4 (B/A =C) Total Approx. players can apply (C*Segment*Investment type) 38 PC Estimates: In AC- Major Players in Lower Value intermedi- 53 ates & In Components of LEDs

Source: DPIIT, Ministry of Commerce and Industry, PhillipCapital Estimates Through this PLI we expect 40+ applications, companies globally will come to set up manufacturing for lower value intermediaries and components in AC and LED components. Indian manufacturers will form JVs with global companies to set up manufacturing for high value AC intermediaries.

• The government expects this PLI to reduce import PLI for solar PV modules dependency for IT hardware, which is currently at 80%. The government has extended the PLI scheme to the • It expects domestic value addition to rise from 5-10% at manufacturing of solar PV modules, with a budgetary outlay present to 20-25% by 2025. of Rs 45bn. The PLI scheme for solar photo voltaic modules • The scheme could generate 180,000 direct and indirect is expected to add 10,000 MW capacity of integrated solar jobs over the 4-year period. PV manufacturing plants and bring direct investment of around Rs 172bn, thus creating 30,000 direct jobs. The Making India a global hub of electronics scheme comes in the backdrop of India’s decision to impose (Production linked incentive (PLI) scheme for IT hardware approved) 40% BCD on solar modules and 25% on solar cells from 1st April 2022, a move that would make imports costlier and encourage local manufacturing.

PLI for IT hardware

• Incentive: 4-1% on net incremental sales over base year

of FY20 meity.gov.in Industry, Source: • Outlay: Rs 73.25bn • Duration: 4 years • 15 companies will benefit; 5 global players, 10 domestic PLI for IT hardware incentives will generate • PLI for IT hardware incentives will generate additional investments of Rs 27bn and incremental production of Rs additional investments of Rs 27bn and 3.26tn, of which 75% would be exported incremental production of Rs 3.26tn

24 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 25

100% for startups and MSMEs and mega 75% for large enterprises

Rebate on land cost Rebate Power subsidy is applicable Power for all KESDM registered companies 10% up to a max of Rs KESDM 100mn for registered companies Karnataka

50% exemption for A&B for 50% exemption for 100% exemption district. C district

Exemption ofExemption electricity cost for 5 years For large enterprises, 15% enterprises, large For 25% for C 20% for B, A, for with employment of over 500 mega enterprises, For people. 24% for B and 30% A, 18% for for C with employment of over 2,000 people Tamil Nadu Tamil

Eligible units exempted Eligible units exempted paying stamp duty for from acquiring land and for loan term purposes

Reimbursement for GST Reimbursement

Eligible new ESDM units paying electric - from exempt Power ity duty for 15 years. subsidy to the tune of Rs 1 per unit for a period of in 3 years in & B and 5 years A category others subject to ceiling.

Maharashtra 20% or a max of Rs 20mn for compa - first 25 eligible large Rs 5mn for first 50 small nies. companies and micro 100% reimbursement of100% reimbursement stamp duty Skill upgradation by provision by provision Skill upgradation of 75% of fee for training courses training 100% tax reimbursement for a 100% tax reimbursement period of and for micro 5 years small companies or max of is Reimbursement Rs 50mn. for large applicable for 7 years companies 25% rebate on land cost for a 25% rebate period of 10 years Exemption ofExemption electricity duty for a period of 10 years Capital subsidy ofCapital 20% with a ceiling of Rs 100mn per company in case of mobile manufacturing units Telangana 15% or Rs 100mn (maxi - mum) for investments up to Rs 2bn. 15% or Rs 1.5bn maximum Rs for investments from 2-10bn. Additional subsidy of 10% or Rs 1bn on FCI exceeding Rs 10bn.

100% reimbursement on 100% reimbursement stamp duty for individual ESDM units Skill upgradation up to 5% Skill upgradation of FCI - reimburse 100% state GST ment up to a max FCI of 100% land) (except 25% rebate on land cost 25% rebate

• • • Uttar Pradesh Uttar 20% limited to Rs 2mn for and additional 5% in - MSME, vestment subsidy for women/ entrepreneur SC/ST 100% reimbursement of100% reimbursement ofstamp duty on sale/lease and deeds on first transaction 50% thereof on the second transaction Skill upgradation training 50% training Skill upgradation with a cap reimbursements 100% tax reimbursement for 100% tax reimbursement a period of subject 10 years to a max of 100% FCI other than land 25% rebate on land cost 25% rebate limited to Rs 1mn per acre 50% to micro, 40% to small, 40% to small, 50% to micro, 25% to medium and 10% scale industry limited to large Rs 5mn for a period of 5 years the date offrom CoCO 10% of total investment up to Rs 50mn Andhra Pradesh Andhra - State policies for manufacturing of electronics and electronic components and electronic State policies for manufacturing of electronics Invest - ment subsidy Stamp Stamp duty ex emption Skill - Upgrada tion - Re Tax imburse - ment Land Power Power Subsidy Capital Capital Subsidy Incentive Note: Different districts in Tamil Nadu are segregated into different categories namely A, B and C Source: State govt., Industry. PhillipCapital research PhillipCapital Industry. govt., State B and C Source: A, categories namely into different segregated Nadu are Tamil districts in Note: Different

24 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 25 investments in scale. The number of units sold of ACs/ Impact of government policies washing machines/refrigerators in China are 19x/65x/9x • Private investment: The electronics sector has attracted those in India. China has the largest AC compressor US$ 14bn investment in the past five years for capacity manufacturing hub, with a total installed capacity of 86% expansion. The higher import percentage provides of the world. It has emerged as a low-cost manufacturing business opportunity to manufacture goods locally, which spot for consumer durables, and is responsible for 33.5% can attract even more investment from Indian players. of the global AC exports and 23% of global refrigerator • Employment opportunity: The sector employs close to exports. However, India will eventually secure a decent 300,000 people, across product categories, including air portion of the total global exports market for air conditioners, refrigerators, mobile phones and washing conditioners and other consumer durables. In the current machines. With an increase in localisation, it has the environment, when the world is looking for an alternate potential to employ additional 200,000 people in the hub, India is amongst the top countries that stand to next five years. India has a competitive advantage over benefit. The opportunity is ripe for Indian manufacturers other emerging market countries in Asia due to its wide to step up and make a dent at the global level in the availability of cheap labour. consumer durable industry.

• Positive impact on component manufacturers and • Becoming competitive in products like washing adjacent sectors: Localisation of components for air machines, refrigerators, etc., and mobile phones. With conditioners, mobile phones, refrigerators, etc, at scale, the government’s initiatives, Indian manufacturers have can help reduce the cost gap with China and can also a strong chance of becoming cost competitive in some help galvanize the micro, small, and medium enterprise products. Although, washing machines and refrigerators (MSME) sector. have no direct schemes (such as PLI), a robust electronics components ecosystem due to PLI in large-scale • Operational efficiencies:The Indian consumer durables electronics manufacturing will lead to the already industry has seen supply-chain disruption in all major indigenised product category, i.e., semi-automatic product categories due to heightened supply chain washing machines and refrigerators (of capacity below localization. However, dependency on external factors 300 litres) becoming competitive in terms of exports. can be reduced, achieving efficiencies in supply chain, operational procedures, inventory volumes, and logistics. • Economies of scale and automation: With more The number of units sold of ACs/ investments coming in, India’s economies of scale have the potential to mirror that of China’s, which is where washing machines/refrigerators in the world’s largest home-appliances manufacturing China are 19x/65x/9x those in India takes place. China is also the source of imports across the world, driven by its large domestic market and early

India aims to become a strong electronics component manufacturing base

26 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 27 Impact of new and existing schemes Mechanism Impact on disability Remarks Production linked incentives scheme 4%-6% Financial incentives on large scale production SPECS 0-1.6% 20% capex subsidy annualised on 8% capital cost EMC 2.0 1% Logistics, Plug and Play infrastructure RoDTEP 0.2%-0.7% In lieu of MEIS as a duty-free scrip administered by DGFT Concessional Rate of Income Tax 0.2%-0.9% Ease of doing business measure 0.50% Custom bonded warehouse, Port logistics, ECB reforms Total 5.9%-10.7% Source: Industry, PhillipCapital research

Recent investments in EMS in India • Aequs: In October 2020, it committed to an investment of Rs 35bn towards setting up of a consumer electronics The impact of the government’s policies has led to an cluster in Karnataka. increase in global interest, which in turn has boosted • Tata Group: Announced its plan to invest Rs 50bn in investments in the country. According to DPIIT (Department October 2020 to set up an Apple phone component for Promotion of Industry and Internal Trade), FDI inflows into plant in Hosur, Tamil Nadu. the electronics sector between FY01 and FY20 stood at US$ • Sahasra Electronics: In October 2020, it announced 2.91bn. plans to invest Rs 3.5bn in assembling mobile phone Some key investments and developments in the Indian memory chipsets, laptop hard drives, and motherboards ESDM and electronics segment are as follows: in India over the next four years. The company also set up two manufacturing facilities in UP and Rajasthan. • Apple’s contract manufacturers: In September 2020, • PG Electroplast: Started production at its AC ODU Wistron, Pegatron, and Foxconn announced investments (outdoor unit) assembly line in 2020; the complete of +US$ 900mn over the next five years. The investments ODU plant will begin manufacturing in 2021. The plant are mainly for capacity expansions and ramping up of is at Ahmednagar in and should generate domestic production of mobile phones. revenue of Rs 1bn for the company in the first year. • Samsung Electronics and Apple Inc.’s assembly • Phillips: In May 2020, it announced investments worth Rs partners: Announced investments worth US$ 110bn to 2.5-3.0bn to boost its manufacturing and R&D facilities in establish mobile-phone manufacturing units in August India. 2020. • : It partnered with Flipkart in November 2019 to • Hon Hai Precision Industry Co Ltd: Plans to invest US$ enter the consumer durables market in India. 1bn to ramp up production at its Sriperumbudur plant • Godrej Appliances: In January 2020, it announced plans in Tamil Nadu over the next three years and hopes to to foray into the air cooler segment with a target of generate 6,000 additional jobs. acquiring 15% market share in the next five years.

Government policies will lead to better in value addition, domestic production, and strong exports growth India Targeted Produc- Targeted Value Key Segments Global Market Size Market Size Exports tion in FY25 Addition by FY25 (USD Bn) 2019 2025 CAGR % 2019 2025 CAGR % 2019 2025 CAGR % Mobile Phone 495 640 4% 24 80 22% 0.16 110.0 197% 190 34% Personal Comput- 237 237 0% 5.53 5.5 0% 0.04 41.9 218% 47.4 25% ers & Monitors Network Equip- 49.7 112.27 15% 1.3 2.87 14% 0.01 13.8 229% 15.6 18% ment* Note: * Ethernet Switches, WLAN & Routers. Source: IT, Industry, PhillipCapital estimates

26 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 27 India will see total capex of Rs 323bn over the next 3-4 years in the electronics industry

Company name CAPEX For State Comments Capacity Date of ( in Rs PLI* Announce- mn.) ment Haier Appliances 4,000 Noida, NCR Refrigerators, washers, ACs are expected to start 1st phase by 2019 June'21 HP Ltd 36,000 South India Capex over the next 5 years for computers and laptops 2019 Godrej Appliances 11,000 Shirwal and Will invest till 2022; with this will be increasing capacity by 33% 6.5mn units 2019 Mohali for premium products p.a India 35,000 Noida, UP Xiaomi Corp (still on)* 2019 Jaina Group 10,000 Manufacturing hub for Sansui brand products; will export to 2019 other geographies, including the neighbouring South East Asian markets. Capex will be over the next 3 years. VIVO India 35,000 Smart phone (120mn annual capacity) 2019 Amber Enterprises 3,000 PLI Pune & South Greenfield facilities 3mn units p.a 2020 India Samsung India 48,250 NCR, Uttar Mobile and IT display production unit 2020 Pradesh 8,000 Shifting operation from China to India, capex will be over the 2020 next 5 years. Dixon Technologies 2,500 PLI South India Padget Electronics 2020 Thomson 10,000 Will invest in the next 5 year for home appliances. 2020 Daikin* 500 R&D 2020 GMCC 8,000 Compressor plants 2020 Highly* 500 Increasing the capacity of compressor plant 2020 TCL 24,000 Capex for TV plants 2020 ABAJ 1,000 For a manufacturing unit with a capacity of 2.5mn TVs and 2020 0.6mn ACs * 5,000 PLI Planning to set up an AC plant in South India 2020 3,000 Eight new SMT lines for TVs in Noida 2020 Tata Group 70,000 For mobile phones in south India 2020 Micromax 5,000 PLI For mobile phones, 2mn/month current capacity; increasing it to 2021 3mn/month. Pegatron Corporation 11,000 PLI Chennai Leased 500,000 sq. ft. of land 2021 Hon Hai Precision 39,000 PLI Tamil Nadu Expanding manufacturing capacity 2021 Industry Co Ltd Sahasra Semiconductors 1,500 ELCINA, Bhiwadi ELCINA 2021 ePack Durables Solution 1,000 PLI ELCINA, Bhiwadi ELCINA 2021 Havells India 2,500 PLI Sri city, Chittoor AC plant 0.56mn units 2021 p.a. PG Electroplast 1,000 PLI Ahmednagar AC plant AC: 0.9mn p.a. 2021 -IDU + 0.4mn -ODU Panasonic 3,000 Jhajjar Panasonic Technopark 2021 Super Plastronics 3,000 Building IOT capabilities 2021 SPPL - Kodak TV 3,000 Expanding capacity for TV assembly 2021 Bosch 8,000 Dishwashers, washers, refrigerators 2021 1,350 PLI Wada Capacity expansion 2021 Burly Home Appliances 500 Set up a manufacturing plant in Telangana for air coolers 2021 Total 394,600 Total Ex. Of Expected 323,250

PLI Research PhillipCapital media reports, Source: Note: * estimates .

28 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 29 Mobile PLI capex amount is Rs 110bn

Currently, + Total planned capex AC and AC components, expected amount is Rs LED PLI capex is Rs 99bn capex is 323.3bn* + Rs 565bn Laptop and tablet capex is Rs 33bn

Some industry views

“ICEA welcomes the new UP Electronics “Over the next five years, the PLI scheme is likely to Manufacturing Policy 2020, which is aligned lead to production of mobiles and components worth towards the fulfilment of the NPE 2019 goals. Rs 11.5 lakh crore (Rs 11.5tn). Of these over 7 lakh On the basis of such policies, India should crore (7tn) worth of products will be exported. This be able to focus its efforts on capturing the scheme is also expected to generate 3 lakh (300,000) investment opportunities from global as well direct jobs and over 9 lakh (900,000) indirect jobs in as domestic stakeholders to establish itself the country.” as the world’s number one mobile phone manufacturing destination. UP is already home to 60% of the total manufacturing units related to Ravi Shankar Prasad, mobile phones and components, and with such Minister for Electronics and Information Technology policy support the state would further witness (MeitY), Government of India accelerated establishment of units in the short to medium periods. These policy interventions would pave the way for shifting of production “Electronics manufacturing in India has registered 23 bases from China and elsewhere to UP and percent cumulative annual rate of growth over past India.” 5 years. The growth is likely to be 30% yoy for the next 5 years. Mobile manufacturing in the country has grown from 6 crore (60mn) handsets five years Pankaj Mohindroo, Chairman, ago to 33 crore (330mn) handsets at present, with Indian Cellular & Electronics Association (ICEA) 90% of the mobile phone requirements being met through domestic production. In next 5 years, growth in exports could be 40-50% at a bare minimum.”

Ajay Prakash Sawhney, Secretary, Electronics and Information technology (MeitY)

28 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 29 30 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 31 CHINA + 1 STRATEGY De-risking the global supply chain

India is the top choice when global players hedge their bets with a China +1 strategy

What made China an households to invest their savings in export hub and what are manufacturing and transport and lifted FDI restrictions. This, along with inclusion its policies? in the WTO, encouraged manufacturing. By 2003, China’s export growth rate China’s government removed red tape was 7 times higher than the rate of the and opened its financial markets to the whole world combined. Foreign direct world, which also contributed to the investment in the country has seen a upswing in growth. sharp rise, with presently over a billion A major part of China’s strategy is a focus dollars invested in China every week. on attracting foreign companies to set Initial conditions that favoured growth up manufacturing facilities in the country, included a large population base, a low which helps the local producers improve wage labour market and the location manufacturing efficiency, as they better of the country. Additionally, the country understand the production procedures went through many structural reforms, of foreign companies. For this, China which helped it boost its competitiveness provides incentives, based on the value and efficiency. It allowed its rural of investments. With different incentive structures in place for Total exports from China in absolute terms from different sectors, the 1990-2019 (USD bn) country’s focus has been on encouraging sectors that are employment-focused and technology-driven. The government has specific incentives designed for domestic producers as well.

In addition to tax incentives offered, support programs also included appropriations for capital and operational costs, for Source: World World bank Source:

30 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 31 e.g., financial aid for R&D, transport of workers by providing base knowledge in labour and workforce training, exemption supply management, manufacturing, and in costs for construction of dormitories, engineering. China has not only mustered etc. The Chinese government made sure huge capital by producing every tangible that the working conditions were safe, product possible, but also developed a robust infrastructure facilities were improved, industry framework. It has also developed land was easily available, good quality strong R&D capabilities that has allowed it to and reasonably priced power supply was expand the outsourcing of manufacturing to ensured, and that the location of the SEZs was usually close non-labour-intensive industries as well. to the airports. The government conducted periodic reviews Lower wages: Most of the Chinese were lower-middle class to examine the impact of its policies. and poor until late 20th century. The minimum wage was very low and people were willing to work for low wages and benefits. Factors that helped China become an exports hub Business ecosystem: A sustainable business ecosystem demands a nexus of suppliers, component manufacturers, distributors, government agencies and customers who all work in tandem. China has built an ecosystem to support the manufacturing supply chain, which includes low-cost workers, technical workforce, assembly suppliers and customers. Global companies took advantage of China’s supply chain efficiencies to keep their overheads low and margins high.

Lower compliance: Chinese companies kept long shift hours, sometimes employed under-age labour, and were Chinese people from Hong Kong and Taiwan were the first not required to provide their workers with reimbursement to open factories in China. They gradually learned and insurance. Some factories even had policies where the conquered mass manufacturing. They had a large domestic workers were paid only once a year – which prevented them workforce, many of whom aspired to jobs in foreign factories. from quitting before the year was over. The Chinese government became involved in motivating its Taxes and duties: Exported goods were liable to zero VAT; citizens to work in factories and loosened controls on them, few input materials in the production of consumer goods allowing them to move around the country and find their were exempted from import duties. The lower tax rates own jobs. helped to keep the cost of production low, enabling the American corporations that were pro-outsourcing moved country to attract investors and global companies looking to their manufacturing bases to China in the early 1990s. make inexpensive goods. Wall Street fostered globalization and outsourcing as Currency: China kept the currency from appreciating by captivating world trends – which further helped the buying dollars and selling yuan. country achieve great export growth. China attracted a lot of foreign investment from the US, Japan, and other developed economies through Hong Kong or Taiwan. In Policy interventions that helped boost exports exchange for paying lower wages, these companies trained China implemented export promotion measures such as tax rebate, export subsidy, and foreign-exchange retention quotas – nationwide. Its central government China attracted a lot of foreign investment rolled out a series of massive reforms across sectors, from the US, Japan, and other developed including finance, banking, taxation, budget, etc. It began economies through Hong Kong or Taiwan formal talks with GATT (General Agreement on Tariffs and Trade), contracting parties to get legal inclusion in the WTO (World Trade Organization). It became a formal member of

32 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 33 strategy was focused on promoting exports by reducing import dependency and practicing import substitution. It China’s strategy was focused on promoting encouraged new ‘interest groups’ of export sectors to exports by reducing import dependency grow while it safeguarded state-owned industrial sectors from external competition. and practicing import substitution After the global financial crisis of 2008, China took steps to stabilize exports by promoting trade financing and trade facilitation, and loosening export control. It changed its trade the WTO in 2001. In the years that followed, it implemented policy to stabilizing external demand and stimulating internal all WTO commitments and promoted market-oriented demand. It relaxed its regulation of FDI and simplified it economic and trade liberalization, which led to an increase further. Central ministries and state governments act as in transparency in trade laws. Producers could calculate their special kinds of pressure groups in China. State owned and input and output costs at international prices. private enterprises enjoy government backing, and usually influence the designated authority in an informal behind- China amended its Foreign Trade Law, which led to all the-scene style. With an increasing integration into the world domestic companies and individuals enjoying trading rights economy, China is confronted with increased challenges of of exports and imports (earlier limited to foreign enterprises foreign interests, including an institutionalized world trading and large government owned companies). It periodically system, bilateral dialogues, and trade negotiations. All these reviewed and revised many other trade-related laws and parties have a profound impact on China’s trade policy. regulations. It also drove significant reforms in foreign exchange and abolished the dual exchange rate system. At the same time, it kept import trade barriers high. China’s

Major electronics companies, in the last few years, have shifted their base from China to India, Thailand, Malaysia, Indonesia, Vietnam, Taiwan, etc. Samsung Electronics shut its smartphone factory in China and shifted its base to Vietnam. LG and Apple have partly shifted their base from China to India (through Hon Hai Precision and Pegatron) and Vietnam. GoPro relocated its manufacturing from China to Mexico

32 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 33 Cheap labour, low costs, and rising government support through various incentives has attracted a lot of global attention for India

different economies, there arose tremendous opportunity out of the supply-chain disruption in China that followed. India China + 1: A new global trade did well in gaining from this disarray, as did others. However, while many other countries possess better infrastructure and strategy ease of doing business, India’s unique advantage is that it The pandemic has caused major world powers to rethink has a large domestic market. their dependency on one nation for manufacturing – a As per the WEF, China has 28% share in the total global strategy which is equal to risking everything on the success manufacturing output while India is at the sixth position, with of one venture. When lockdowns across the world led to only 3%. The supply chain disruption out of China due to a complete halt in trade of goods and services between the pandemic, coupled with the trade war between USA and China, led to a change in many global companies’ priorities and them investing in other (more democratic) countries – India’s unique advantage is that it presenting opportunities for countries like India. has a large domestic market China has become the leading manufacturer of goods in the world – in fact, it is called ‘the world’s factory’, but economic

Companies moving out of China, over last 2-3 years

Samsung has significant share in Vietnam’s economy and contributes +20% to its GDP

34 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 35 electronic exports rose from US$ 47.3bn to US$ 96.9bn in 2019, whereas its electronic imports have nearly doubled Outsourcing production to contract from 2015 to 2019. Electronics exports made up 36% of manufacturers (in India) helps rationalise total exports from Vietnam, an increase of 1.15% over 2018. Electronics imports accounted for 30% of total imports, costs and achieve economies of scale increasing by 2.01% over 2018. Sales of electronics in the country have also increased by 12.1% over 2018. Export share of foreign-based electronics companies accounted for over 90% of total exports and covered 80% of the domestic changes in the country are causing a shift in its priorities demand. As of June 2020, many notable global giants have and are reducing its earlier advantages. Wages have tripled finished relocating to Vietnam; LG’s smartphone production in the past decade, along with a substantial increase in the has moved entirely from South Korea to Hai Phong; Apple cost of production; these factors are causing manufacturers moved part of its AirPods production, and Nintendo has to shift to other low-wage countries; this is where India shifted a part of its Switch Lite game console to Vietnam. stands to gain. India has the second-largest population in the Only Singapore and Hong Kong rank higher overall than world with relatively lower penetration, which provides huge Taiwan on ease of doing business in East Asia. There are headroom for growth. Cheap labour, low costs, and rising better considerations for manufacturers in Taiwan like paying government support through various incentives has attracted taxes, enforcing contracts, and getting electricity. China a lot of global attention for India. ranks 10th overall in East Asia for ease of doing business The trade war has led to reallocation of supply chains from after Malaysia, Thailand, Vietnam, and Indonesia (ranked 4th, China to India. Many global companies are interested in 5th, 8th and 9th respectively). Although prices in China are setting up a manufacturing base in India. For companies, cheaper, manufacturing in Taiwan is better in terms of lead outsourcing production to contract manufacturers (in India) times and trade-related overhead costs. helps rationalise costs and achieve economies of scale. In February 2021, production by electronic component A ban on imports of consumer durables and an increase makers rose 16% over the previous year, marking it the 15th in the basic customs duties has helped boost India’s successive month of double-digit increase in the light of domestic manufacturing. The government has been working rising shipments of tech devices such as 5G communications hard on providing the required infrastructure for global and HPC devices, automotive electronics, and the IoT. Flat manufacturing, by setting up manufacturing clusters that are panel suppliers enjoyed a 49.81% yoy increase in production conducive for production. in February, as a booming stay-at-home economy boosted demand for screens for IT products and TV use.

Vietnam has been one of the key beneficiaries of the Now, going forward, we can expect a massive uptick in China +1 strategy, and has seen a massive scale up in its electronics production in India as well, as India is fully electronics production focused towards ramping up its large-scale electronics Vietnam has been one of the key beneficiaries of the China manufacturing with several global giants coming in to the +1 strategy, and has seen a massive scale up in its electronics country. production

The US-China trade war and the rising costs of manufacturing in China have been beneficial for Vietnam, which has taken full advantage by participating in regional and global supply chains. Mobile exports from Vietnam stood at over US$ 50bn in 2019, ranked second worldwide, and the country has established itself as a key electronics exporter; it went from 47th place in 2001 to 12th place in 2019. Vietnam’s

34 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 35 Vietnam export-import share; highest share with China

China USA South Korea Hong Kong Japan Commodities Exports from Vietnam 19.30% 18.20% 9.10% 4.90% 4.89% Transmission apparatus Mobile phones TVs Cameras (41%) Electrical apparatus (18.2%) Electronic integrated circuits Micro assemblies (11.9%) Imports to Vietnam 33% 6.52% 31% - 7.99% Electronic integrated circuits Micro assemblies (40%) Electrical apparatus (17%) Semiconductor devices (6%)

Not only does Taiwan rank better than China in the above metrics, but is also a leader in South East Asia in this regard Source: Industry, PhillipCapital Research

Not only does Taiwan rank better than China in the above metrics, but is also a leader in South East Asia in this regard

Taiwan ranks higher than China in every single metric related to trading across borders in the world

Ease of doing business metric Mainland China Taiwan Ease of doing business rank (out of 190 economies) 78 15 Trading across borders rank (out of 190 economies) 97 55 Time to export: Border compliance (hours) 23 17 Cost to export: Border compliance (USD) 533 335 Time to export: Documentary compliance (hours) 14 5 Cost to export: Documentary compliance (USD) 90 84 Source: Industry, PhillipCapital Research

36 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 37 Why does the world need a China +1 strategy? to other countries can help prevent this. 4) Access to new markets: In selecting a country for 1) Risk diversification:Chinese operations face several manufacturing, global players do not just look at potential risks. Therefore, operations in other countries business environment sustainability for manufacturing, can safeguard from any such losses. Problems of quality but also the size of the new market, the opportunities concern can also be offset by diversifying operations to for growth, etc. While China was once seen as just a other countries. Political, social, and economic changes low-cost site, it has developed into one of the most can further hurt the production processes, thus by important markets in the world, which consideration can diversifying, companies can protect themselves against be applied for all the “plus-one” candidates. such risks. 5) Disappearing tax incentives: Since 2009, most tax 2) Lower costs: China no longer provides the lowest incentives offered to foreign enterprises have expired. costs for many goods and services. Wages have tripled China’s unification of its corporate tax system has led to in the country over the past decade, and the average an increase in tax outgo for some enterprises operating age of the population is rising. The “one family one in the country. child” policy has created labour shortages due to no 6) Knowledge transfer: The China’s plus-one strategy replacement for old workers. Government reforms can help in identifying potential important markets. (covering pension and insurance compensation) have Companies can apply valuable lessons learnt in also added to the wage bills of international companies. production processes in China to other geographically 3) Reducing overdependence: Over reliance on one or culturally similar economies, as they could throw up country for production of all goods and services is similar challenges. The transfer of learning is particularly a concern – business activities become too heavily valuable where the second economy is an attractive one concentrated. Any disruption in production processes and has huge headroom for growth. can lead to a global shortage. Expanding manufacturing

Why is India the chosen one in the China +1 strategy?

In the +1 strategy, India’s closest competitors are Indonesia, Thailand, Philippines, Vietnam, and Bangladesh. However, among these, India ranks either #1 or #2 in factors such as institutions (skill development, professionalism, etc), infrastructure, macro stability, financial system, and market size.

Indicators comparing competitive strength of China, Brazil, Vietnam, and Indonesia

Key indicators comparison for global manufacturing opportunity China India Brazil Vietnam Indonesia Domestic market consumption Export market opportunity Smartphone user penetration Average wage (manufacturing) Barriers to entry for new players Barriers to entry for manufacturing AC penetration White goods penetration High Mid Low Note: 1 being the best. Source: competitive index, WEF, PhillipCapital Research

36 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 37 close to 30%. There is huge legroom available to India India’s rank among its closest competitors: to boost its GDP through an increase in manufacturing. Indonesia, Thailand, Philippines, Vietnam, In addition, India has a large domestic market with and Bangladesh significantly lower penetration compared to the global average, this provides an incentive to global firms to set up manufacturing units in the country.

• One of the major reasons in picking China was the low wage structure, which does not apply anymore. China’s cost of production and minimum wage levels have increased significantly in the last decade. India’s labour costs are about half of China’s labour costs.

• Due to the lack of focus on manufacturing, India has lagged in its share of exports compared with its peers. Improper policies, lack of ease in doing business, and procedural complexities, were all reasons due to which India could not expand its export footprint. With its Source: Industry, PhillipCapital Research PhillipCapital Industry, Source: recent jump to 63rd position in Ease of Doing Business Advantages of choosing India as a manufacturing and strong government-backed incentives such as PLI, destination EMC, SPECS, India could attract the investments required for it to become a major global player. • Investments in making India an export hub can provide an exports opportunity, as well as the chance to cater • With the recent advent of the EMS industry in India, to the huge Indian market: India caters to only 3% of companies who want to relocate to India without the total global exports market, while China contributes making significant investments can outsource their

Can India mirror China in becoming a manufacturing/export hub?

With the recent advent of the EMS industry in India, companies who want to relocate to India without making significant investments can outsource their manufacturing and reduce their capital risk. This can help them achieve economies of scale and be assured of the quality standard of products

38 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 39 Can India mirror China in becoming a India’s domestic production has seen 25% manufacturing/export hub? CAGR over FY15-19 India is the sixth largest economy and one of the most populous countries in the world, with a population of 1.3 bn. As per the WEF, India’s share in total world export stood at 3-4% in 2019 whereas China was responsible for 30% of the total manufacturing output – which shows huge headroom for growth. India has one of the largest domestic markets and has improved its rankings by 79 positions in the last five years in terms of ease of doing business. The country ranks 63rd among 190 nations. The pandemic and the trade war have led to a shift in thought towards expanding manufacturing to more countries to not be overdependent on China. India could achieve its goal of becoming a manufacturing hub and gain sizeable market share in total world exports. Source: Meity Annual Report FY20 Annual Report Meity Source: India has a large domestic market

manufacturing and reduce their capital risk. This can help Globally, companies have been looking to expand their them achieve economies of scale and be assured of the manufacturing bases to more South East Asian countries, quality standard of products. Outsourcing manufacturing to offset risks posed by over-dependency on just one can help them direct their focus towards innovation, country. In selecting a destination to conduct operations marketing, and sales. Outsourcing also helps companies in, a company not only makes decisions based on the cost bring down other production-related costs and provides an array of customized manufacturing designs to choose from. India has the largest domestic market

• India has been working on developing a component after China and the penetration of ecosystem to boost domestic manufacturing of consumer appliances is low, which electronics. This could help in increasing domestic value provides a huge headroom for growth addition to the tune of 50% (from the current 34%) in the next five years. India’s consumer durables and electronics • Political disengagement with China, along with an anti- penetration (%) China sentiment is compelling many global players to find alternate destinations for their supply chains.

India aims to cater to its demand of electronics via domestic manufacturing by FY25. The country’s demand currently outstrips its manufacturing; majority of its electronics are imported. This has led to widening of the fiscal deficit. With import bans and hike in custom duties, and demand expected to more than triple by FY25, companies looking to move to India could be huge beneficiaries. Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

38 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 39 in India. Special clusters are being set up with adequate India AC penetration vs. other countries infrastructure facilities and proper power supply to ensure there is no disruption in the production process. It has offered incentives under PLI and SPECS on incremental sales of goods, which had led to a surge in global interest. It passed NPE in October 2019 and introduced M-SIPS, which should fuel the growth of the consumer durables industry.

Outsourcing or contract manufacturing is a new concept that is gaining traction in India

Outsourcing of manufacturing helps companies to focus more on marketing, sales, and the innovation aspect of their businesses. Many well-established companies have been outsourcing their production activities to contract manufacturers – to focus on other integral parts of their of production, policies, etc., but also on the opportunity Source: IBEF, PhillipCapital research PhillipCapital IBEF, Source: businesses. Contract manufacturing can help companies the country presents. India has the largest domestic market reduce costs and save time by manufacturing only those after China and the penetration of consumer appliances is products bearing the highest margins. They can outsource low, which provides a huge headroom for growth. There other production activities. India has seen its share of has been an increasing interest in companies globally to set manufacturing through ODMs increase, where companies up manufacturing units and supply chains out of India, to have outsourced their entire end-to-end production cycle. grab the opportunity domestically and internationally. The It is a significant leap for Indian contract manufacturers, as penetration across consumer durables is relatively lower large electronics enterprises have started believing in the than the global average, thus providing huge headroom for skills of Indian ODMs and their capabilities. Going ahead, growth. the share of ODMs in contract manufacturing will increase, as they provide contract manufacturers higher margins and profitability. The increasing trend of outsourcing is Indian government’s incentives also supporting established companies such as Lloyd, India has come a long way from the 1900s, when there was IFB Industries, MIRC Electronics, etc., with huge installed a system of licenses and permits required for companies to capacity, as they are using their unutilized capacity to manufacture goods and set up production units (License manufacture for other companies, leading to improvement Raj), to 2020, where the government is coming out with in their operating efficiencies. Also, online and modern incentives across sectors to boost domestic manufacturing trade companies (and their respective brands) are increasing through import substitution. India’s government, in recent their share in India; these companies will continue focus on years, has been hiking import duties and banning imports branding, distribution, and selling. For manufacturing, they of many products – to achieve self-reliance and boost will depend on outsourcing partners. domestic manufacturing. In the last two years, it has come out with schemes such as PLI, SPECS, and EMC 2.0 which Technical skill development is essential for improving offer various incentives to companies wanting to manufacture overall factor productivity

To increase the share of manufacturing the government must India’s government, in recent years, has conduct nationwide training camps to help develop the been hiking import duties and banning technical skills required for manufacturing under electronics, biotechnology, healthcare etc. Investments by the private imports of many products – to achieve self- sector in skill training can increase productivity and reduce reliance and boost domestic manufacturing the skill gap between India’s labour and China’s labour.

40 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 41 Tax reforms to boost manufacturing Other factors

To boost manufacturing, the Indian government has worked Improvement in ease of doing business, conducive proactively towards a more business-friendly tax structure. environment for manufacturing, focus on skill development, Last year the government slashed corporate taxes from 25% availability of land, proper supply of power, creation of SEZ’s, to 15% for all manufacturing firms incorporated after October reforms in labour and tax laws, and proper policy structuring 2019 and beginning operations before March 31, 2023. India can help India become an export hub to the world. has one of the lowest corporate tax rates globally. This move • FDI reforms – Government allowed 100% FDI has helped India to compete with other ASEAN countries through the automatic route in electronics hardware such as Thailand, Vietnam, and Indonesia for a greater manufacturing and 51% in multi-brands. These reforms market share of total manufacturing. State governments have will attract more investments, which should boost also been providing tax incentives to specific sectors, for manufacturing. which there is no major capital outgo. • Replacement market – With disposable incomes rising, and easier financing options available, the consumer durables industry has seen a shortened product cycle, New labour codes which had led to growth in the replacement market for The Indian parliament has passed four codes on wages, consumer durables, which provides further opportunities industrial relations, social security and Occupational Safety for growth. and Health (OSH), which will ultimately rationalize 44 central • Rising exports – Steps taken towards boosting labour laws. The code on wages was passed by Parliament manufacturing has led to a steady growth in consumer in 2019, while the three other codes got clearance from both durables, with exports rising year-on-year and imports the Houses in 2020. These codes are favourable for both staying relatively flat. employers and employees; some of the provisions like 14 days of notice prior to strikes remove uncertainty in day to day operations and give some time to employers to have an alternate plan of action, which wasn’t there in previous labour laws.

Price difference between India and China is likely to narrow FY14 FY17 FY21 Mobile Phone India China India China India China Raw material 70% 60% 65% 55% 55% 53% Utilities 12% 13% 12% 14% 13% 15% Labour and Over heads 12% 13% 13% 18% 13% 20%

FY14 FY17 FY21 Washing machines India China India China India China Raw material 58% 54% 54% 52% 45% 50% Utilities 13% 12% 12% 13% 12% 14% Labour and overheads 12% 13% 13% 16% 13% 18%

FY14 FY17 FY21 LED Lamps India China India China India China Raw material 70% 65% 60% 50% 50% 48% Utilities 12% 13% 12% 14% 13% 15% Labour and overheads 12% 13% 12.50% 16% 13% 18%

Source: Dixon DRHP

40 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 41 India’s disability

Theme Disability % Reason Factors to consider Local supply 3-4% 1) Limited raw material available in India. India needs larger availability of components; needs to build a chain 2) Limited component suppliers/distributors. component ecosystem. Transportation 2% 1) India has 13 major ports and less than 200 minor ports; China has 1) Private public partnerships are necessary for expediting the 30 major ports and 2,000 minor ports. India’s minor ports are under- development of the transport infrastructure. performing because of serious logistical and connectivity problems. 2) Supply chains vary from state to state, and depend on the availabil- 2) India does not have international transhipment ports. It depends ity of raw material, local talent, and govt. support. Greater focus on Oman and Sri Lanka (GoI has recently announced its plan for should be given to regional and cluster development. building a transhipment port in the Nicobar Islands).

Power The cost of power in India remains lower than that of other Southeast Asian countries. Labour India lacks a skilled workforce that can be scaled to meet the electron- India should focus on increasing the pace of skilling its workforce. ics industry’s demands. India’s cost of labour is lower than China, but China’s labour quality and efficiency is far higher. Custom 1% In this, India is below the world’s standards. These are major challenges: (1) Uncertainty of the head under which clearance new products are to be cleared and (2) duty claims with retrospective effect. Tax 2-3% India's tax rate is significantly high. Corporate tax rate in India is In Sept 2019, GoI introduced a favourable tax regime for new manu- 25%; it is 17% in Singapore; 20% in Vietnam, Thailand, and the facturing companies - offering an effective tax rate of 17%. Philippines. Source: Industry, MAIT, PhillipCapital Research PhillipCapital MAIT, Industry, Source:

Comparing India’s manufacturing environment with other global manufacturing hubs

Theme China Vietnam Malaysia Taiwan Brazil India Freight (as % of cost 1% 8-10% NA NA NA 13-15% of production) Turnaround time 0.5-1.0% 2.5% 0.5-1.0% 0.5-1.0% 1.5% 2.0-10.0% (TAT) (in days) Direct tax 25% Tax exemption and 24% 20% 15% 25% overall, for new 10% for high-tech manufacturing units manufacturing at 17% Indirect tax 0% on exports, refund- Import tax holiday Tax exemption - 20- Exported goods do not 1) Expenses carried Exported goods do not able VAT 70% for increased attract tax out for technological attract tax. value exported goods. research and innova- tion are deductible from income tax. 2) Expenses carried out for technological research and innova- tion are deductible from income tax. Cost of borrowing 4.30% 4% 5.52% 2.30% NA 8-10% Cost of labour (in 950-1,200 237-350 1,000-1,100 1,800 750-950 250-300 USD per month) Availability of power Uninterrupted Uninterrupted Uninterrupted Uninterrupted Interrupted Uninterrupted Component eco- Localised Import dependent Semi- localized Localized Import dependent Import dependent system Incentives 1) Rebate of 17% to 1) Import tax breaks. 1) Allowance on 1) Tax incentives for Exemption from the 2-5% MEIS scheme, export companies, ECR 2) Offsets in the form increased exports. exporting in free trade taxes levied on import 4-6% PLI scheme companies exempted of refunds on import 2) Income tax exemp- zones. of certain products from paying VAT. duties. tion for significant 2) R&D tax credit up to used for the final 2) Exempts exported 3) Exemption from VAT increase in exports. 15% of the total R&D exported product. goods from any kind for exporters. expenditures. of consumption tax. 3) Tax deduction on R&D expenses for small and medium technology-based

enterprises. Research PhillipCapital MAIT, Industry, Source:

42 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 43 Inputs from industry experts

POSITIVE • Global component manufacturing and brick and mortar stores. companies are planning to shift These chains have the advantage • Some Japanese companies are to India. Like TCL (putting up an of sourcing at better prices. planning for higher backward open cell plant), Samsung (mobile integration. They are planning • In Modern Retail, Reliance open-cell plant), and GMCC to set up critical AC components Digital is seeing higher growth, (compressor) etc. in India. With this, India can see increasing its presence, and significant improvement in value • Exports: Expect middle-east to be gaining market share. Exclusive addition. low hanging fruit for exports. tie-ups with brands such as BPL and Kelvinator are helping • Although self-reliance is far • In TVs, India already has higher Reliance to offer products at away, this time, the industry/ installed capacity for assembly; competitive rates. government is walking towards it. currently players are operating at We are starting with assembling 50% CUF. • For Samsung, a change in management in Korea has led and then will move towards • E-com players and modern retail to a higher focus on driving manufacturing. channel partners are gaining its appliance business in India. • Ban on imports is helping to market share in the consumer Samsung is committed to make improve domestic manufacturing, durables industry, as they are huge investments in mobile panel but also resulting in an increase selling under own brands or have manufacturing in India, as it will in costs, as customs duty has tied-up with national brands assemble LCMs in India. ACs are increased on components. such as BPL, Kelvinator, Nokia, now seeing very high production Component manufacturing should , etc. in-house. be the first aim of Atmanirbhar • Modern Retail (MR)/E-com Bharat. gaining share from regional retail

NEGATIVE keep costs maintained. manufacturing shifts to India there • Contract manufacturing • Getting the right costs and will be no breakthrough in the is a service industry. Such converting these into right industry, as there will be no cost manufacturers must provide timely pricing and margins is very benefit. service to companies. Costs are important. Companies chose • Companies has seen a sharp secondary; everyone knows the China for manufacturing due to increase in the waiting period for cost matrix. the low costs of manufacturing availability of containers for critical • Top priority in OEM activity is that it offered. If India can components such as compressors to reduce operating costs and manufacture at better costs than or microprocessors, even after improve operating efficiency . China, only then is there merit in paying 2-3 times more than the OEMs need constant innovation manufacturing in the country. actual costs. and efficiency improvement to • Unless and until component

42 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 43 an MoU with the Tamil Nadu government to set up a facility for manufacturing mobile Capex is the buzz components. The company is keen to invest Rs 46.84bn for its on the ground new plant in Krishnagiri. • Panasonic: Is betting big on India by ensuring 90-100% of each of its products sold in India are locally built. The company is already exporting ACs and some other products, and plans to double its RACs business in the next three years. The company is looking to collaborate with component manufacturers for In the last 2-3 months, several also tied up with BYD and DBG parts such as motors, aluminium, companies have made for smartphones and Radiant will and compressors. announcements in line with their help augment the capacity of • MeitY has recently invited vision of making India a global hub smart TVs in India. expressions of interest by for electronics. The excitement in • Foxconn India: Its country head companies who wish to set up a this sector is still intact, and the is very bullish on India, as he display fabrication unit in India. companies are aggressively targeting expects local manufacturing and Displays account for over 25% of increased localization in the country. product designing in the country the BoM in case of smartphones • Samsung Electronics: Is likely to increase substantially, to meet and over 50% in the case of LCD/ to apply for the Rs 121.95bn the goal of becoming a US$ LED TV’s. India’s panel market PLI for telecom gear and other 400bn electronics manufacturing is expected to grow from $7bn equipment. The company has tied industry by 2025. He expects presently to $15bn by 2025 while up with Reliance Jio for the supply exports and increased domestic current requirements are met of telecom gear from its factory consumption to fuel growth. mostly through exports. coming up in Uttar Pradesh. The • Apple: It announced plans to investment entailed within the • Xiaomi has pledged Rs 1bn to manufacture and assemble iPads scheme will be Rs 1bn towards expand its offline retail presence. in India and is expected to take machinery and setting up of The company aims to double benefits of the PLI scheme for production lines. its exclusive store count from laptops, notebooks, and servers. 3000 currently to 6000+ in the • Xiaomi India: Has deferred Apple has been lobbying for a next 2 years, generating direct its plans to export to other bigger budgetary outlay of Rs employment for 10,000 people in countries due to a huge spurt in 200bn to scale up manufacturing domestic demand. The company and has been pushing for this its offline retail channel. is looking to take advantage of at a time when Wistron is just • Samsung Electronics is the the PLI program to scale up its resuming production at its south only company among 16 that manufacturing capabilities, as it India plant. has surpassed both investment has been unable to fulfil the rising • Tata Sons: Recently announced and output targets under the domestic demand. Xiaomi has PLI scheme for handsets and

44 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 45 The Government of India has started inviting applications for the second round of large-scale electronics manufacturing under PLI with a focus on electronics components such as motherboards and semiconductor devices among others. The second round has expanded the window for up to 30 eligible companies and the new guidelines have identified components like transistors, diodes, resistors, capacitors, PCBs, and ATMP

components this year. manufacturers, the government the 16 companies achieved the is also planning PLI for wearable targets for FY21. • Apple is looking to expand its devices such as smart watches. retail presence in India on the back • Nineteen companies including of strong demand. The company • Government of India has approved , Foxconn, Dixon Technologies, has already announced 7 new the PLI scheme for LED lights and Lava, and Micromax have applied store openings across North and AC’s with a budgetary outlay of Rs under the PLI scheme for IT West India. Apple sold nearly 62.38bn. hardware to avail incentives. 2.8mn iPhones in 2020, a growth Domestic value addition in IT • The new PLI scheme for AC’s may rate of 93% despite nationwide hardware is expected to rise from have long term potential to boost lockdowns. 5-12% currently to 16-35% in the the local component ecosystem in next 4 years. • India is offering more than $1bn the country as the manufacturers in cash to each semiconductor will receive 4-6% incentive on • The TV prices are expected to rise company that sets up incremental production, only by 3-5% by October 2021, as the manufacturing units in the if they add value by growing government is planning to hike country as it seeks to build on its component production. Mere customs duty on open cell panels. smartphone assembly industry and assembly of finished goods will not The plan is to increase the import strengthen its electronics supply be incentivized. duty gradually to 10-12%, which chain. is currently at 5%, over the next 3 • Mobile manufacturers shortlisted years. • The worldwide shortage of under PLI invested Rs 13bn and components has made it produced goods worth Rs350bn in • The government has come out difficult for companies to meet Q3FY21. with EOIs to incentivise setting output targets set by the Indian up of display fabrication units in • Electronic manufacturers such government under its new PLI India. Display FAB manufacturing as HP, Dell, Wistron, Foxconn scheme. Foxconn expects the requires an investment of Rs 750bn and Samsung have requested component shortage to continue over 2-3 years. The government the government to revise the till mid-2022. expects the Indian display panel targets and extend the timelines market to grow from US$ 7bn • Apple and Samsung are expanding in the upcoming PLI scheme for presently to US$ 15bn by 2025. their production of mobile phones hardware, to avoid the situation from their Indian plants. Buoyed mobile phone manufacturers found by the surge in interest from global themselves in, where only one of

44 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 45 PRODUCTS Lower penetration and a large domestic market = huge growth

Increasing share of outsourcing and surplus capacity will make India export-ready

India’s large population base and favourable demographic higher scale than premium- and mid-premium products. profile (more than 50% is below 25 years of age, and more Contract manufacturers have a higher share of mass- than 65% is below 35) makes the country an attractive segment products and low share of premium luxury investment destination for foreign capital. Aware of its products. Companies majorly outsource production of advantages over other countries, the Government of semi-automatic washing machines while they manufacture India has taken several initiatives to make India a global fully-automatic machines in-house. However, few companies manufacturing destination. India’s per capita income is have started outsourcing even fully automatic machines, as significantly low compared to other nations; thereby, Indian contract manufacturers are scaling up and up-skilling Indian consumers spend more towards basic needs than their manufacturing capabilities. With a growing affluent on premium luxury products. In India’s consumer-durables class, and increasing disposable income of India’s middle- market, the share of companies with more mass-category income group, the trend for high-end premium products products with wide and deep distribution reach (greater rural is visible, but those products are mostly imported – such penetration) is higher. as dishwashers, dryers, side by side refrigerators – as completely built units (CBUs). However, because of rising Domestic manufacturing of mass-segment products is import duty, uncertainty in the cost structure, and incentives more viable for companies, as these offer lower risk and by the government, domestic manufacturing will increase.

Expect domestic value addition to increase across consumer electronics Source: Industry PhillipCapital estimates Industry PhillipCapital Source:

46 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 47 ACs: To see higher localization Growth of India’s AC industry and rapid growth due to lower penetration

Despite the pandemic, which led to lockdowns, and the economic slowdown in 2019-20, it was a good time for the air-conditioning industry. India’s air-conditioning market in FY20 was an estimated Rs 175bn, of which central air- conditioning, including central plants, packaged and ducted systems, and VRFs was c.Rs 32.5bn; other ancillary equipment was c.Rs 30.5bn, and RACs was the highest segment at Rs 112bn.

Demand for ACs is growing at 15-20% annually. A tropical climate, large population, increasing discretionary income, low penetration, reduction in operating cost, easy finance, Source: Industry, Phillip Capital Research Phillip Capital Industry, Source: and rising aspirations of millions of households (to own room air conditioners) are all factors driving demand for ACs in India. It remains very difficult for such a large tropical of the global air-cooling demand by 2050. From roughly population to upgrade their lifestyle without air conditioners 8% of households air conditioned in March 2018, it is likely – therefore, in anticipation of the expected rise in demand, to rise to 50% by 2050. Better data collection on cooling India remains a crucial market for the AC industry and global needs across different sections of the society, urban and rural AC companies. Rapid urbanization and a growing population areas, commercial and residential areas will lead to more have created demand for sustainable, clean, and energy reliable estimates of cooling requirements, energy demand efficient cooling solutions in India. projections, and appropriate technical solutions. With the right steps, in the coming decade, it is possible that India will become home to the most efficient air-cooling technologies Demand scenario for ACs deployed at scale.

A major chunk of the demand for air cooling solutions comes from emerging populous economies such as India, China, AC penetration in India and Indonesia. These three are predicted to account for half AC penetration in India is still low at around 5% and consumers no longer view RACs are as luxury products entirely but more as necessities. Due to the scorching summers, demand comes from not only metros, but also tier-2 and 3 cities, where heightened economic activity has created affordability. Additionally, energy-efficient norms have helped cut operating costs of ACs, and easy financing has supported demand. Newer product features and technological advancement in RACs have created a replacement demand for products, with people upgrading ACs every seven odd years. However, the Indian market remains sub-par; global penetration is close to 30%. This provides sufficient headroom for growth. Market penetration should improve with an increase in rural penetration and increasing affordability.

46 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 47 China domestic consumption at Energy-efficient norms have helped 100% penetration is 60-65mn units cut operating costs of ACs, and easy and India’s domestic consumption financing has supported demand at 5% penetration level is 7mn

China’s penetration of RACs has gone up to 100% in 2017 Developments in urban spaces has led to reduced greenery from 54% in 2008, a significant growth rate compared to and an increase in dark roofs, which contributes to the ‘urban other home appliances. The potential for RACs in India is heat island’ effect, thus raising temperatures around the huge; should see substantial increases in the coming years globe. This has contributed to RACs’ demand. Increasing due to relatively lower penetration. customer awareness about the benefits of efficient RACs has resulted in a manufacturing shift to split ACs from window ACs. AC penetration world-wide

AC industry overview amid the pandemic

The industry achieved normalised inventory levels on sustained retail and OEM demand between October to December 2020. Demand in metros and tier-1 cities showed resilience, while uptick in demand for ACs continued from tier-2 and tier-3 cities. Import bans placed on refrigerants by the government created a plethora of opportunities for domestic manufacturers. Over Rs 400bn of RACs were imported into India (1.5-2mn units) of which 70-75% consisted of CBUs (completely built units) with refrigerants, and the remaining were IDUs (indoor units). The import ban will boost domestic manufacturing of CBUs and components Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

India’s per-capita consumption for cooling is RAC remains under-penetrated in rural 69Kwh, below the world’s average of 272Kwh households

Source: PhillipCapital Research, Industry Research, PhillipCapital Source: India Cooling Action Plan (ICAP) report 2019 Action Plan (ICAP) report India Cooling

48 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 49 Urban households with RACs to surpass those without by 2037-38 An urban heat island occurs when a metropolitan city experiences much warmer temperatures than nearby rural areas. The difference between urban and rural areas has to do with how well surfaces in each environment absorb and hold heat

sustainable. Rural areas have led the demand surge for consumer appliances due to relatively low penetration and increasing discretionary incomes. Source: PhillipCapital estimates PhillipCapital Source:

Government’s initiatives for increasing local for RACs in the country. The pandemic has led to the manufacturing in ACs complete disruption in brick-and-mortar store sales, as the customers are increasingly wary of touching anything; this The ease in import availability has kept the manufacturing has provided a boost to e-commerce sales, with an ever- of RACs in India at low levels. In RACs localisation is around increasing number of purchases being made online. 30% as compressors are imported.

The pandemic has caused a significant increase in demand The Government of India introduced various schemes and for consumer appliances, especially RACs. The ratio of RACs duties to increase domestic value addition in air conditioning. per household was 1, which has increased due to social Currently, domestic value addition in room air conditioners is distancing and work-from-home. There has been a significant c.25%, which, according to checks, will reach 75% over the demand for branded and high-quality products which seems next 5-7 years.

Rural and urban to see sharp growth in AC Bill of material break-up of RACs stocks in the next 6-7 years Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

48 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 49 Split AC imports in India Out of the 6mn ACs in India, in 2019, c.1mn ACs had locally manufactured compressors. Component manufacturing is still lacking and needs to pick up to really boost manufacturing in India. Component manufacturing requires larger investments and incentives

Ban on imports of refrigerant or gas-filled ACs

GoI banned completely built air conditioner units or refrigerants – to boost domestic manufacturing and prevent

Source: commerce.gov.in Source: Chinese companies from disrupting the local markets by taking business away from local players. This move is Imports of compressors (AC+Ref) consistent with the government’s self-reliance vision and should help India to gain a greater share of the global AC market and create additional jobs. Domestic companies have cheered this move, and expect it to significantly increase domestic production. Companies such as GMCC, Highly and Hitachi are dedicated to making investments in manufacturing of motors and compressors to further reduce import dependency.

Currently, India imports Rs 30bn worth of ACs, 30% of the total market. Of this, 75-80% are refrigerant filled CBU/ODU and the balance are IDU units without refrigerants. The top-5 brands make up 40-50% of the total 2mn CBU units imported into India. The ban on refrigerants should increase the share of outsourcing in India, which is currently at 38-40%.

Source: commerce.gov.in Source:

Players like Amber Enterprises, PG Electroplast, and Mirc Electronics have put up lines for gas charging. As India scales up its domestic manufacturing, the industry expects imports to come down to 500,000- 600,000 units from 1.5-2mn units

50 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 51 Increase in BCD on compressors and motors

GoI increased customs duty on imports of compressors for ACs – to 15% from 12.5%, and AC motors to 15% from 10%. This move is likely to reduce import dependency and boost manufacturing of ACs locally and to bring investments in component manufacturing into India. Compressors make up 25-30% of total AC costs. Investments in compressor manufacturing can provide a much-needed fillip to AC manufacturing in the country.

Sharp reduction in imports because ACs with refrigerants face import restrictions PLI: The expenditure committee has approved the PLI scheme for ACs, which will extend an incentive of 4-6% to eligible companies on incremental sales of goods over five years to boost domestic manufacturing of ACs and components. Finished goods imports of RACs should reduce sharply, as the government imposed a ban on refrigerant-fill ACs. Also, higher duties and logistics costs are making

Source: commerce.gov.in Source: importing costlier than local sourcing

Price difference in sourcing from China vs. India

Ex. factory - Final cost to India Landing cost: China cost the company (Rs 18,500-19,000) (Rs 14,500-15,000) (Rs 20,000-21,000) 20% import duty + Gas charging + sharp increase in packing and unpacking Domestic contract freight cost. + logistic = 1,000-1,500 additional manufacturers are cost offering at Rs 18,000- 19,000

50 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 51 AC/LED lighting PLI: The objective is to more than just The cabinet has recently approved the PLI scheme for room assemble in India air conditioners. The scheme will have long term potential to boost the local component ecosystem in India. The • Incentives are 4-6% on incremental sales for 5 years. manufacturers will receive 4-6% incentive on incremental • Effective 1 April 2021. production, only if they add value by growing component • Open for applications for 6 months. production. The selection of companies for the scheme shall • Expected incremental investment from AC / LED PLI is Rs be done, so as to incentivise manufacturing of components 79.2bn for an incremental production of Rs 1.68tn over or sub-assemblies which are not manufactured in India five years. presently with sufficient capacity. “Mere assembly of finished • The export opportunity due to AC / LED PLI is of goods shall not be incentivised”, says the government. This Rs 644bn over five years; it can create additional scheme is expected to help India in growing the local AC employment of 100,000 jobs. manufacturing base and make India more competitive in the • Tax revenue likely at Rs 113bn in direct taxes and Rs global market. 380bn through GST over the next five years. Currently, in the Rs 180bn local AC market, 70% of the cost material used in assembly is imported. Key parts like Production-linked incentives scheme’s benefits compressors, variable speed motors in IDU’s, and high over the next five years quality copper pipes, among others, are imported. Please PLI highlights Benefits click here for our recent report on PLI. Incentives for ACs & LED 4-6% on incremental sales for 5 years W.e. f 1/4/2021 Incremental investment Rs 79.2bn Incremental production Rs 1.7tn The exports opportunity due to AC / Exports Rs 644bn LED PLI is of Rs 644bn over five year Incremental employment 1lakh jobs Direct tax revenue Rs 113bn GST Rs 380bn Source: meity.gov.in

PLI Scheme: Details over the next five years

Segment Large Investment Normal Investment % of BOM Total Total Total Avg. Invest- Sales/As- Total Total Total Avg. Invest- Sales/As- Invest- Revenue Incen- Incen- ment/In- set (x) Invest- Revenue Incen- Incen- ment/In- set (x) ment (Rs (Rs mn) tive (Rs tive (%) centive ment (Rs (Rs mn) tive (Rs tive (%) centive mn) -A -B mn) -C (x) (A/C) mn) mn) (x) (A/C) AC ACs (Components) 6,000 97,500 4,800 4.9% 1.3 3.82 3,000 41,250 1,988 4.8% 1.5 3.67 ACs High Value 40%-50% 4,000 53,750 2,575 4.8% 1.6 3.64 2,500 37,500 1,825 4.9% 1.4 3.75 intermediates ACs Lower value 15% - 20% 1,000 15,000 730 4.9% 1.4 3.75 500 7,500 365 4.9% 1.4 3.75 intermediates Source: DPIIT, Ministry of Commerce and Industry, PhillipCapital India Research Note:AC: * High Value Intermediates or Low Value intermediates or sub-assemblies or a combination thereof.**Aluminum Foil, Cu tube, Compressor.***PCB Assembly for Controllers, BLDC Motors, Service Valves for ACs, Cross Flow Fans and other components.

52 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 53 This PLI could receive c.20+ applications. If all segments receive applications, more applicants would be in lower-value intermediates PLI Segment PC: est. no of Players Incentive each investment Large Invest- Normal Invest- Total segment* ment ment ACs (Components) 4 4,800 1,988 6,788 High Value intermediates of Acs 3 2,575 1,825 4,400 Lower value intermediates of Acs 9 730 365 1,095 Source: PhillipCapital estimates

In high value goods, the industry expects. players such as GMCC, Highly, Daikin to apply for compressors; Hindalco and Mettube could apply for aluminium and copper

Average capex in different product segments of AC

Actual Capex Required Product Segment % of BOM Capex (Rs mn) ACs (Components) Sub-assemblies 20% 1500-2000 High Value intermediates of Acs Aluminium Foil 5-10% 5,000 Copper Tube 12-15% 5,000-6,000 Compressor 22-25% 6,000 Lower value intermediates of Acs PCB Assembly for Controllers 15-18% 500 BLDC Motors 8-10% 1000-1500 Service Valves for Acs 3%* 500 Cross Flow Fans and other components 2%* 500 Source: PhillipCapital estimates

India has higher raw material import dependency at 60%; expected to come down by c.20% over 2-3 years

Rs/Unit* Bill of Material Imported RM Copper Aluminium Compressor PCBs Total % of Total BOM Fixed Speed 14,000 2500 1100 3750 n.a. 7350 53% Invertor 17,000 2500 1100 3750 3000 10350 61% Source: PhillipCapital estimates

52 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 53 Major raw-material sourcing countries are China (majority share) Thailand, and Malaysia Source: Industry, PhillipCapital research PhillipCapital Industry, Source:

Manufacturers are hedging their bets through India Historically, capacity utilization for RACs has been at c.60%/ lower with dependency on imports for addressing the RAC companies have been setting up manufacturing remaining demand. As the need for localization grows facilities in India due to increasing duties and a recent ban stronger, players will try full-fledged manufacturing (vs on the import of refrigerant or gas-fill ACs. China, which assembly). Imports are seen declining, as local manufacturers had the lowest manufacturing costs, has seen costs rising and OEMs/ODMs ramp up capacities. Currently, the total due to supply-chain issues, logistics costs, rising wages, AC industry size is c.6.5-7.0mn units, of which the industry and increase in duties. Therefore, manufacturers have been imported c.2m units in FY20. Total installed capacity is hedging their bets through India. Global RAC companies sufficient to make c.10mn units. With the government’s push now prefer India for exports and domestic demand. Local for domestic manufacturing and attractive schemes like PLI, manufacturing through OEMs/ODMs or in-house has led more capacities will be added in component manufacturing to competitiveness. Branded companies are trying to find and assembly. Total capacities will increase to c.12-15mn the right proportion between manufacturing in house and units. through contract manufacturers.

Manufacturers have been hedging In the past, contract manufacturing their bets through India. Global for air conditioners was limited RAC companies now prefer India for to 5-6 players; now the number exports and domestic demand has almost doubled to 9-10

54 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 55 ACs: India is ready for domestic manufacturing; total installed capacity of 6.9mn units in IDUs and 9.3mn in ODUs. Now brands will be going slow on assembly capex, focusing more on components

Win- In-House - Installed Planned Capaci- Total Expected Expected Companies Sales dow Split Production Out-Sourced Capacity ty Expansion# production* Out-Sourcing Units in Lac. Total AC AC IDU ODUs W -AC IDU ODUs IDU ODUs IDU ODUs IDU ODUs IDU ODUs Brands Voltas 12-15 1.1 11.5 - 10.0 1.1. 11.0 - - 12.0 6.0 6.0 4.2 14.2 12.8 - LG 7.0 0.4 6.6 10.0 10.0 0.4 - - 18.0 18.0 - - 10.0 10.0 - - Blue Star 6.0 1.1 4.9 3.9 2.9 0.3 1.0 1.0 4.5 4.5 6.0 6.0 8.1 7.1 - - Daikin AC 8.0 0.6 7.4 6.4 6.4 0.6 1.0 1.0 12.0 12.0 6.0 6.0 10.6 10.6 - - Johnson Con- 7.0 0.8 6.2 7.0 7.0 0.8 - - 10.0 10.0 - - 7.0 7.0 - - trols- Hitachi Lloyd 6.0 0.7 5.3 6.0 6.0 - - - 12.0 12.0 6.0 6.0 10.2 10.2 - - Carrier Midea 5.0 0.6 4.4 - 4.4 - 4.4 - - 12.0 - - - 4.4 6.0 - Samsung 2.0 0.3 1.7 1.7 1.7 - - - 6.0 6.0 6.0 6.0 5.9 5.9 - - Panasonic 3.5 0.2 3.3 2.1 2.1 0.2 1.2 1.2 3.0 3.0 - - 2.1 2.1 2.1 2.1 Godrej 4.0 0.4 3.6 1.1 1.1 0.4 2.5 2.5 3.0 3.0 - - 2.6 2.6 1.0 1.0 Appliances Others 8.5 0.8 7.7 1.0 1.0 1.0 1.0 9.2 9.2 Total 70.0 7.0 62.6 68.5 92.5 30 30 61.7 75.1 31.1 12.3 Source: Channel check, Industry, PhillipCapital research # Capacity expansion over the next 2-3 years

ACs: Total production from contract manufacturers to reach 5.4mn units in IDUs and 4.6mn units in ODUs Installed Capacity Planned Capacity Expansion# Total Expected production* Companies Units in Lac. IDU ODUs IDU ODUs IDU ODUs Contract Manufacturers IFB Industries 4.2 4.2 6.0 6.0 7.1 7.1 Amber Enterprises 22.8 22.8 10.0 10.0 23.0 23.0 PG Electroplast 6.0 6.0 6.0 - 8.4 4.2 ePack Durables Solutions 6.5 6.5 6.0 8.7 4.5 Subros 4.0 4.0 2.8 2.8 And others include ABAJ, Mirc, Panasonic, etc 6.0 6.0 4.2 4.2 Total 43.5 43.5 34.0 22.0 54.2 45.8 #Capacity expansion in 2-3 years. Source: Industry, *PhillipCapital Research

Over the next 2-3 years, India may see capacity addition in components. Small and new OEMs will apply under lower value intermediates in PLI

54 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 55 Chat with industry experts

• The capacity expansion investments have been increasing focused in the past decade, has announced by branded month on month, which shows been targeting the mass market companies is not entirely through that demand is robust and growth aggressively with a vision of the PLI program, but also to cater prospects are favourable. gaining a larger piece of the to the high demand witnessed mass-market globally. • Any company that is looking to across consumer durables. be a significant player in the AC • Inverter ACs were 15% of the • Companies that have been industry, must have a full focus on high-wall category in the past few announcing fresh investments in the HVAC range of products. decades, and have jumped to India for manufacturing are more 50% at present, mainly driven by • ACs manufactured in India are focused on manufacturing for regulations. comparable to those in any other their own brands. country in terms of product quality • The entire investment in the • Demand across product segments and efficiency; in terms of IoT- AC manufacturing capacity has continues to be so strong that based technology, China has the been done by multinational despite the capacity expansion edge. corporations, with domestic measures taken by several companies missing this altogether. • Installed capacity in companies, dependence on manufacturing in India is majorly • Voltas is known to be able to contract manufacturers may not done by multinational companies source products locally or from reduce any time soon. and Amber Enterprises. overseas at the best possible • The Government of India has kept prices, which is one of its core • 2019 was a great year for the a strict control on FDI into India strengths. AC industry due to scorching by neighbouring countries. This is summers; the industry grew by 10- • China’s market is roughly 70- to not lose control of operations 15% reaching the size of 7.5-8mn 80mn units, while India (the to overseas companies. Despite units in a year. second largest) is 7-8mn, which this, excitement in the consumer shows huge potential for the AC electronics sector is palpable, and • Daikin, which was more premium- business.

Increasing focus on exports

Over the next 2-3 years, India could have surplus capacity in ACs for the domestic market, which will be used for global Many global branded companies such demand. India’s RAC exports are currently insignificant compared to China’s total RAC exports of c.65mn units. as Hitachi, Daikin, Haier, Carrier Midea, Many global branded companies such as Hitachi, Daikin, Mitsubishi, Panasonic, and , with Haier, Carrier Midea, Mitsubishi, Panasonic, and Toshiba, with strong global distribution and product strong global distribution and product knowhow, are getting into agreements with Indian ODMs/OEMs for manufacturing knowhow, are getting into agreements with – as the country is seen as an exports source for many Indian ODMs/OEMs for manufacturing countries in the Middle East, South Asia, and Africa. The trend should expand domestic manufacturing capabilities. Domestic branded companies such as Lloyd are also talking about white-label exports. PLI focus on component manufacturing, this will add in increasing exports.

56 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 57 Countries such as South Korea, US, and Japan have Exports trend of ACs already shown interest in shifting their production facilities to India. Vietnam, Thailand, and Indonesia are constantly competing with India for a piece of the global supply chain, but India ranks higher than its competitors in each of the important parameters in the GCI (Global Competitive Index). The country’s large domestic market provides not just the advantage of cheaper exports, but would also allow companies to benefit from domestic consumption.

India is working towards an enabling environment for manufacturing for the world

India’s exports are likely to contribute to c.8% of the total global consumption. GoI has taken certain steps that

Source: commerce.gov.in Source: directly/indirectly support AC manufacturers in exporting – from lowering corporate tax to 17% and looking for an area of 461,589 hectares across the country for foreign Global exports market, China has the biggest share manufacturing – India is working towards an enabling environment for manufacturing for the world.

Here are some ways how:

• The country is committed to making investments worth US$ 1.4tn in 2021-2025 to improve last-mile connectivity, which will bring transportation time to hours from days.

• To achieve effective integration, India is developing DFCs (Dedicated Freight Corridors).

Source: Industry, PhillipCapital estimates PhillipCapital Industry, Source: • It is likely to be home to a billion digital users by 2028.

• The country also has a domestic advantage over China India gaining share in the exports market and many other economies at the average population age is 28.4 years (China’s is 38.4 years).

Source: Industry, PhillipCapital estimates PhillipCapital Industry, Source:

56 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 57 OEMs dominate outsourced manufacturing, ODMs JCHAC imports around 40% of its ACs, of emerge well which 50% are China-sourced. It will focus • ODMs provides benefits of faster product development and design support. on cutting down imports by half over • RAC companies save on R&D costs by partnering with the next one year (FY22) and double its ODM players. exports to c.50,000 units (from the present • Newer market participants find ODMs an attractive c.25,000) to the Middle East and Africa option for faster penetration. • OEM collaboration is more transactional while ODM collaboration is more strategic.

Countries that have an export presence • ODMs gain the confidence of consumer durables companies, thereby acquiring a higher wallet share Countries Export markets Johnson control - UAE, Qatar, Oman, Bahrain, Iraq, Kuwait, Saudi Hitachi Arabia Way forward for air conditioner companies in India Daikin Air-condition- Middle East, SAARC, East Africa, Bangladesh, ing Nepal, Sri Lanka Not only could India be the largest growth market for air Voltas Middle East, South East Asia, and Africa conditioner companies, it is likely to become the largest in the world. GoI should develop a sustainable cooling- Blue Star Middle East, SAARC, Africa, and ASEAN markets challenge program in partnership with the private sector to LG India Middle East, Africa create meaningful air-cooling solutions that would deliver Lloyd Exploring market for exports massive reductions in cooling wastage. This, combined with Source: Company, PhillipCapital Research Make in India type of incentives would not only create jobs, but also give a much-needed boost to the manufacturing Why do AC companies outsource? sector, and thus, a boost to the Indian economy. Also, with • Outsourcing allows companies to focus on differentiation, PLI and higher focus on increasing value addition in India, marketing, innovation, and distribution. the country can become an exports hub for ACs. Companies focussing on exports will provide a huge delta, as this is • Partnering with ODMs and OEMs for lowering logistics a huge opportunity. In terms of pricing, with PLI coming and warehousing costs. in, companies will increase capacity, and to achieve the • There is a substantial reduction in working capital cycles. threshold revenue, they will pass on incentives to consumers,

• Flexibility in offering multiple RAC models with a quick which will put realisations under pressure. The recent turnaround time. government notification approving PLI scheme for ACs will help in creating a component ecosystem in India. Local value • Economies of scale – another advantage provided by addition is expected to go up from current 25% to 75% in OEM/ODM players; leading companies will partner with the coming years with critical components coming in India. these players for design, manufacturing, and reverse- logistics requirements.

• Innovation as a function to enhance productivity and profitability is propelling the consumer durables (branded) companies to embrace the services of OEM/ ODM players.

58 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 59 “To make the AC industry reach Rs 1tn from the current size of Rs 160bn, 35% of industry demand should be coming out of exports, and the remaining from domestic consumption. The first objective is to manufacture, not assemble in India, as currently a lot of product components still come from elsewhere. Before the ban on import of ACs with refrigerants, 1.5mn units of ACs were coming from elsewhere, which is almost 30% of the total ACs sold in the country, whereas 70% were getting produced in the country. The second objective is to take the current value addition of 25% – to 75% in the next five years, and backward integrate. The market size in India for air conditioners is just above 7.5mn units. China is 120mn units and out of this, it exports 50mn units. It is the responsibility of multinational companies to ensure that they establish the global supply chain footprint in the country. And that is Panasonic’s objective too – to make India an exports destination.”

– Mr Manish Sharma, President and CEO, Panasonic India, and Chairperson, FICCI Electronics and White Goods Manufacturing Committee.

Source: Media reports

Steps towards cleaner technologies

A focus on clean and energy-efficient solutions will not only save the customers’ money, but also reduce overall energy consumption and emit less carbon dioxide over products’ lifetimes. ICAP (India cooling action plan) highlights the importance of an accelerated HFC (hydro-fluorocarbon) phasedown process, and further development of cooling technologies to tackle the rise in demand. The current range of high-efficiency ACs are either unaffordable to the Indian consumer, or their benefits are unknown to most. There is also a need for a systematic scaling down of HFC usage in a way that best suits India’s economic conditions. Policy reforms should ideally focus on controlling the use of refrigerants with high GWP and promote the use of natural refrigerants.

The councils should amend building codes to ensure all new buildings are designed such that a passive design is incorporated – passively cooled buildings help reduce cooling loads and minimize peak-power requirements.

58 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 59 INTERVIEW – Mr Krishan Sachdev, Chairman, Carrier Midea India

Carrier Midea India is a joint venture between Carrier and Midea Group Co. Ltd. While Carrier is a leading provider of heating, ventilating, air conditioning, and refrigeration solutions, the Midea group is a high- technology holding, specializing in HVAC, home appliances, robotics and automation, smart home and IoT, and smart logistics and components. Carrier Midea India has manufacturing facilities in SUPA, Ahmednagar, and Maharashtra, and exclusive rights to manufacture and sell Carrier and Midea brand room air conditioners and Midea brand light commercial air conditioners in India. With offices in 21 cities across India, Carrier Midea India has a pan-India presence.

AC Industry received a set-back due optimistic about consumer sentiments supporting domestic manufacturing. to the lockdown during the peak and are anticipating a strong year. Carrier Midea India has also shifted season. But it showed resilience and its manufacturing base from Bawal, performed better than expected. Haryana, to SUPA, Maharashtra, last How is RAC demand shaping up There is a strong push from the year. This is one of the largest room air currently and what do you expect government towards domestic conditioner factories in India spread from the upcoming season? manufacturing – Make-in-India across 25 acres. The initial capacity and Atmanirbhar Bharat. Do you is 0.8mn air conditioners per year. There is an air of optimism in the expect India to become self-reliant, Phase two will take this capacity up market. All economic indicators and be able to do significant value to 1.5mn. Carrier Midea’s predilection suggest a strong year ahead. For the addition in RACs over the next 3-5 for maintaining a local presence in HVAC industry in particular, all reports years? What steps do you think the every aspect of its operations sets it are pointing towards a strong season. industry and the government should apart, and has been the company’s Summer has already set in in many take in order to promote domestic focus for years. But it is particularly parts of the country, with the south and manufacturing? applicable in the new facility in SUPA, central region seeing temperatures where some of the company’s suppliers rising in February, while the rest of the While various RAC companies have are also establishing new facilities to country is warming up in March. We are set up their manufacturing units in India, the government is also streamline logistics and production

60 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 61 for both sides of the supply chain. production hub. The second issue is economies will also support local Recently, the govt. has also announced the higher cost of commodities in India exports development. the production linked incentive (PLI) such as steel. There is also the issue of scheme, which is aimed at boosting components/SKD/units coming in duty- domestic component manufacturing free from some FTA countries. India’s penetration in ACs is 5% and exports. The key to becoming while China’s is above 100%. What self-reliant for India is to promote kind of realistic penetration level component manufacturing for items What level of capacity addition do can we expect in next 5-6 years, such as compressors, controls, and you expect the industry to see over once there is a ramp up in local others. Capacity of AC assembly is very the next 2-3 years? And with these manufacturing of the necessary high even at present. additions, how much would our total components? domestic installed capacity for ACs With the govt. encouraging local reach? Will the capacity be sufficient manufacturing, we expect a gradual Few global AC and AC component to fulfil domestic demand, and by increase to double digits in a span giants have set up their any chance, could installed capacity of five years. The increase in AC manufacturing units in India and be in surplus? penetration also depends on per capita many global AC giants are viewing The AC industry is expected to see income. India as an attractive manufacturing a CAGR of c.10% after it catches destination, do you think in next few back volume (from last year’s COVID years some part of the global AC issues) significantly this year as per Traditional distribution channel is supply chain can shift to India? our estimates. Although the installed being disrupted by e-commerce and Yes, with the setting up of more and capacity is higher than the domestic modern retail, which is providing more RAC manufacturing units in demand even today, the industry is new and smaller players a channel India, the global AC supply chain unable to make use of this capacity to enter the market. Can small should follow, and shift to India. For because of the cost competitiveness new players with their asset-light e.g., GMCC, one of the world’s largest offered by other countries. In the business models, entering through manufacturer of compressors, has longer term, we should focus on e-commerce and modern retail, already established its manufacturing making local industry competitive provide strong competition, and unit in SUPA, Maharashtra, and is rather than using tariff and other do they have the potential to gain expected to start production later this barriers to make imports uncompetitive decent market share? year. or difficult. As of now, the contribution of the traditional retail/distribution channel is more than 60% for RACs, while the What do you think are the major What kind of exports opportunity e-commerce contribution is under 10%, challenges being faced by AC exists in the AC segment, and any though growing. With the impending industry currently in India and steps in your opinion that could help increase in the overall market for RACs, the steps that need to be taken India take full benefit of the exports there will be enough volumes to keep to be competitive with the likes opportunity? all channels fully occupied. While of Vietnam, Taiwan, and other The growth of the local market will e-commerce may be an entry route competitors? add scale to make India more exports for new players, the real success will The AC industry in India is dependent competitive. Countries with similar probably depend on their presence in on other countries for key components weather conditions like Sri Lanka, all significant channel segments. But i.e. compressors, motors, PCB and Nepal, Middle East, and African it is too early to make any statement IGT Copper. Localization of key countries need to be targeted for about their market share. components is missing as of now. export. Special support on exports Carrier Midea India is also reaching out agreements will be helpful to take to it’s suppliers to consider India as a the benefit; FTA’s with importing Note: This interview was taken in March 2021

60 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 61 INTERVIEW – Mr Nipun Singhal, MD and CEO, Amstrad (OVOT Pvt. Ltd)

How is demand shaping as we are getting ready plants for critical AC components, which will also for the upcoming season? increase domestic value addition. At domestic value addition of 25-30%, India needs to build a strong ACs have seen c.15% price increase in the last few component ecosystem to become Atmanirbhar; months due to commodity inflation. India is a price until then, the industry will continue to import. sensitive country; demand could be impacted in the short term due to these increases. This can be seen in other consumer products too, where the price What about in other consumer durables products increase have taken place. such as refrigerators and washing machines – are we self-reliant in these categories?

AC imports have sharply reduced in the last Semi-automatic washing machines and refrigerators 6-9 months over the corresponding period; (direct cool and frost free till capacity of 300ltrs) are does it indicate India is on the path to become all indigenized. Even compressors, fabrication, and Atmanirbhar soon? other key products all are made in India. Only few components like glass door are imported. Prohibition on imports of ACs with refrigerants, has led to a reduction in imports; however, the import of components hasn’t changed, rather it has increased. How are you planning to scale? Do you have any The industry has shifted from importing completely plans to set up any manufacturing unit? built units (CBUs) to importing components, effective reduction in imports will be 15-20%. Yes, we are planning to set up a manufacturing India will become self-sufficient in the assembly unit – we will be manufacturing sheet metals, plastic of ACs first, which will lead to 100% localization injection moulding, and gas charging along with of sheet metals, plastic injection moulding, and assembling of components. gas charging. All 3 combined is 25% of total bill of Note: This interview was taken in March 2021 materials. Global companies are setting up their

Amstrad is marketed by OVOT Pvt. Ltd, derived from the concept of One Vision One Team. It is a unique creation by channel partners and experienced industry veterans to give the best product, services, and prices on consumer electronics to Indian consumers. OVOT is head quartered in Pune, and its distribution network is spread across the country.

62 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 63 Mobile phones: Making India a Handset and component manufacturing in India global hub The annual production of mobile phones in India has grown over five times – from 60mn units valued at Rs 189bn in Mobile technologies and services contributed US$ 4.1tn FY15 to 320mn units valued at Rs 2.25tn in FY20. Mobile to the world GDP in 2019. As at June 2020, there were manufacturing in India started with Nokia, Samsung, 8bn smartphone users globally, which are likely to reach Motorola, LG, and Sony Ericsson in the mid-2000s and grew 8.9bn by the end of 2025. The unique number of mobile steadily between 2008 and 2012, reaching over 155mn subscribers makes up around 81% of the world’s population. handsets per annum. India exported nearly 70% of the Smartphones have become an everyday need for people of mobile phones it manufactured, valued at Rs 122bn as of all ages, cultures, and economic statuses. Rapid technology 2012. However, due to a freeze on assets because of a tax advancements, increasingly available content, rising dispute, Nokia stopped production in 2014. As a result, the discretionary incomes, and numerous use-cases have all component ecosystem that Nokia had built in India had to contributed to making this product an important everyday shut down. In 2014, India’s production dipped to just 58mn lifestyle device. units, with marginal exports.

From SKD to CKD – progress Mobile phones production in India has seen At present, India has significantly upped its mobile-phone 64% CAGR manufacturing capabilities, fuelled by constant policy support from the government and a growing domestic handset manufacturing market. Domestic manufacturing of handsets and its components has emerged as one of the flagship sectors of the “Make in India” initiative. The implementation of the phased manufacturing plan (PMP) has helped the sector move from Semi Knocked Down (SKD) to Completely Knocked Down (CKD) level of manufacturing.

Top global handset manufacturers have set up rigorous assembly operations in India but the component manufacturing remains nascent. India still imports a significant number of components and raw materials required for the manufacturing of mobile phones, due to limited Source: IBEF Source: Source: MIETY Annual Report FY20 Annual Report MIETY Source:

62 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 63 India’s disability vs. Vietnam and China in mobile-phone manufacturing; PLI is an attempt to fill the gap

Factors that lead to cost reduction in mobile phone mfg. India Vietnam China Cost of power 0% 1% 1% Interest subvention on working capital 0% 1.5-2% 3-3.5% Logistics 0% 0.50% 1% Labour subsidy Negligible 0.50% 2% Corporate income tax exemption/ reduction 0.73-0.95% 1.5-2% 2% Subsidy for machinery and equipment Nil 0.20% 3% R&D Subsidy 0.15% 0.4%-1% 3-3.5% Exemption/reduction of land rental 0% 0.50% 0.60% Incentive for supporting industry 0% 0.5-1% 0% Production Linked Incentive scheme 4-6%* 0% 1to 2% Total 5-7% 7-9% 17-18%

Source: Industry, PhillipCapital Research availability locally. However, the sector has seen an increasing programming, testing, and packaging), chargers, USB share of its imports to be SKDs or small components, rather cables, battery packs, chargers, die-cut parts, mechanics, than completely built units (CBUs). This which signals a shift keypads, and PCB assembly already exist in India. These consumption to manufacturing. sub-assemblies contribute around 67.5% to the BoM (bill of materials) of an average-priced smartphone. Localisation at Currently, the manufacturing capabilities for mobile- the component level remains much lower when compared to phone components such as gift boxes, APTP (assembly, the sub-assembly level. Components such as PCBs, display assemblies, image sensors, and camera modules contribute India still imports a significant number of significantly to the Bill of Materials of the handset and India does not manufacture them, rather it imports these components and raw materials required components from countries such as China, Vietnam, USA, for the manufacturing of mobile phones, South Korea, and Japan. due to limited availability locally

Mobile phone key component share of bill of materials (BoM%) Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

64 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 65 Factors in favour of making India a global manufacturing hub for mobile phones

Global electronics giants are putting up manufacturing units for key components in India; Samsung Electronics has invested Rs 40bn for manufacturing of display units

Mobile PLI

To boost domestic manufacturing of mobile phone and its components, the government introduced production linked Domestic value addition in mobile phones incentives scheme for production of mobile phones under Rs 15,000 and over Rs 15,000. It has approved a total 16 is expected to grow to 35-40% from 15-20% companies under the scheme. Key highlights of the PLI scheme:

• Incentive: 4-6% PLI for five years. Industry expect strong exports with • Outlay: Rs 409.95bn (US$ 5.5bn). improvement in value addition Particular USD Bn • Tenure: 5 years. Base year FY19-20. Incentives applicable Global Market CAGR over Next 5 years 4% from 1 August 2020. India Market CAGR over Next 5 years 22% • Despite recent challenging times, mobile PLI will lead India Market by FY25 (USD Bn) 80 to production worth Rs 350bn and investments worth Rs India Exports CAGR over next 5 years 197% 130bn by applicant companies. India Exports by FY25 (USD Bn) 110 • Additional employment generation is 22,000 jobs. Targeted Production in FY25 (USD Bn) 190

• Domestic value addition in mobile phones is expected to Targeted Value Addition by FY25 34% Source: Industry, PhillipCapital estimates grow from 15-20% to 35-40%

64 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 65 Companies approved under PLI for Mobile total India industry (Smart Phones c.160mn) mobile phone manufacturing (Features phones c.120mn units)

Domestic companies International Electronic Company name (Units mn) Current Capacity Sales % Share companies component Capacity Addition## Volumes companies Brands Lava Hon Hai Preci- AT&S Samsung India 80-100 0 42.4 27% sion Industry MI 2.-3 1-2 48 30% Co Ltd , Vivo & 1+ 40-60 20-30# 44 28% Bhagwati Products Rising Star Ascent Lava International 36 100 3.2 2% (Micromax) circuits Apple 3.2 2% Padget Electronics Samsung Visicon Others# 1-2 5 19.2 12% UTL Neolyncs (Kar- Wistron Walsin (OEMs)** Expected Capacity Total based on % Share Total 160-200 125-130 160 100% bonn) OEM’s % Share** Optiemus Electronics Pegatron Sahasra Electronics Dixon Technologies* 3 15 3 8% NeoLync Bhagwati Products 10 5 0.9 7% Source: meity.gov.in, media reports Optiemus Electronics# 18 3 0.5 9% Hon Hai Precision Industry (Foxconn) 50 72 45 54% Pegatron n.a. 5 0 2% Wistron 2.5 2.4 2.5 2% UTL Neolyncs (Karbonn)# 26.4 13.2 25 18%

Total 109.9 115.6 76.9 100% estimates Phillipcapital research Source: Note: # PC estimates. ## Over next 2-3 years ** Market share will change with capacity addition. share ** Market 2-3 years ## Over next Note: # PC estimates.

Working of Mobile PLI capex

Min/Threshold Max/Ceiling Companies No of Capex/ Com- Revenue Total Revenue/ Total Revenue Total Capex/ Com- Total Capex Cos. pany (Over (per Com- Revenue Capex (x) Capex (per Com- Revenue pany (Over 3 3 years) pany) pany) years) Global Cos. 5 10,000 250,000 1,250,000 25 50000 500,000 2,500,000 20,000 100,000 Domestic Cos. 5 2,500 50000 250,000 20 12500 100,000 500,000 5,000 25,000 Component 6 1000 5000 30,000 5 6000 30000 180,000 6,000 36,000 Total 16 1,530,000 68,500 3,180,000 161,000 Source: MEITY, Phillipcapital research MEITY, Source:

Capex announced by companies: Capacity expansion will help to increase domestic value addition

Company name CAPEX State Type of CAPEX Date of ( in Rs mn.) Announcement Samsung India 49150 Noida, Uttar Pradesh Samsung (South Korea) Optiemus Electronics 2850 Sale of commercial property in Noida 2020 Samsung India 48250 NCR, Uttar Pradesh Mobile and IT display production unit 2020 Lava international 8000 2021 Pegatron corporation 11000 Chennai Leased 500,000 sq. feet of land 2021 Hon Hai Precision Industry Co Ltd 39000 Tamil Nadu Expanding manufacturing capacity 2021 Dixon Technologies 2500 South India Padget Electronics 2021 600 Technology software and IoT start-ups 2018 6510 Consumer electronics 2020 Tata Electronics 46840 Krishnagiri, Tamil Nadu Plant for manufacturing mobile components 2018 Source: Media reports, PhillipCapital Research PhillipCapital Media reports, Source:

66 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 67 Mobile phone exports monthly data: Exports Mobile phone shipment data: Market share reached pre-pandemic levels in Nov/Dec 2020 of major brands in India Source: commerce.gov.in Source: Source: Counterpoint research Counterpoint Source:

high-value-added components for mobile handsets. There Rising exports of mobile phones are many entry barriers for new players who want to start manufacturing in India.

Lack of an integrated supply chain: One of the major barriers to indigenous manufacturing in the country is an inadequate supply chain. Despite a large domestic market and an enabling regulatory environment, the growth of this sector is highly dependent on this factor.

Infrastructure and resource unavailability: Uninterrupted supply of power, clean water, and infrastructure are imperative for producing mobile handsets in India.

Financial setbacks: High-value-added components (that India currently imports) require huge investments to be produced locally, in terms of installation of large manufacturing plants and purchase of costly machineries.

Source: commerce.gov.in Source: The ROCE is also generally lower due to lower productivity and there is a dire need for financial incentives by the government to raise the required funding from the private Challenges faced by mobile and mobile component sector. manufacturers Unavailability of skilled labour: India needs to focus on Low value addition: Despite the presence of global handset up-skilling its labour if it wants to set up large manufacturing makers in India and a rise in domestic demand, the country plants and complex machineries. There is a huge gap still does not manufacture high-value components such as between the skills required for manufacturing of electronics camera modules and display units. It manufactures only low- in India and other countries, which the country needs to value-added components such as batteries and chargers. cover to become an exports hub. Fierce global competition: Many nations are fighting for investments into their economies for the manufacturing of

66 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 67 TVs: Looking at becoming a global used in manufacturing LCD/LED screens for televisions), manufacturing hub… and a spike in freight charges to c.Rs 320,000 per container from c.Rs 65,000 – added to the disruption. Most brands took price increases of more than 30%. The pandemic also disrupted the launches of new TV technologies scheduled for TVs: Industry overview 2020. The colour televisions market in India was c.18mn sets Currently, the Indian TV manufacturing industry largely in 2020 – 12.5mn smart TVs, 3mn analog sets from the assembles TVs, with most of the high-value components organised market, and 2.5mn from the unorganized segment. coming from Vietnam and China. To provide a fillip to TV manufacturers faced difficulties and had huge inventories domestic manufacturing and to emerge as a global hub for stockpiled when the pandemic hit, leading to a total televisions, India needs to start producing open cells, among washout in terms of sales. When the lockdown was gradually other components that are crucial to produce TVs. lifted, work-from-home and school-from-home led to an unprecedented increase in demand, with growth coming from tier-3 and 4 cities. Households across the country were inclined to upgrade their TV sets, as most of their time was Open cell is a part of an TV panel without being spent at home.

This excess demand outstripped supply and the prices of the back-light. India needs to manufacture ICs (integrated circuits), panels, commodities, transportation, open cells, which are 65-70% of Bill of and freight increased considerably. The squeeze in supply Materials (BOM), to increase its domestic led to rising prices throughout the sector. Increases in prices of steel, copper, and aluminium, the re-imposition of basic value addition. This would require high custom duty of 5% on open-cells (open-cell panels are investments of Rs 8-10bn. TCL is putting up an open-cell facility in India

Smart TVs dominate the market with c.69% market share

Domestic value addition in TVs is

c. 15-20%, which will increase to research PhillipCapital TVJ, Source: 30% over the next two years

68 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 69 TVs: Market share Demand for TVs

Samsung, LG, and Xiaomi hold a combined market share of Penetration for TVs has crossed more than 99mn homes 64%, with Samsung at the #1 position, and LG and Xiaomi in rural India; it is no longer just an urban phenomenon. almost neck-to-neck in 2019. Sony slipped by quite a bit in Decreasing prices of TVs has created a replacement market 2019. Panasonic, Haier, and TCL have established a strong for TVs with an average replacement cycle of 5 years. foothold for themselves. The unorganized segment and Increased innovation in this segment along with lower price regional companies’ brands have also been gaining some points has augmented the penetration of TVs across all market share – from 10% in 2017 to touch 16.5% in 2019. income groups in the country. Some of the smaller TV players include Onida Electronics, The exponential growth of internet connectivity across Wybor, Intex Technologies, Micromax Informatics, Mitashi, the country, especially in tier 2 and 3 regions is another Lloyd, Sharp, Sansui, Phillips, Veira Electronics, BPL, Sanyo, contributor to demand as it gives more access to OTT T-series and some companies that have just forayed into platforms to the tech-savvy generation. 2019 saw an increase the Indian market are OnePlus, Motorola, Nokia, and Hero in demand for Korean and Chinese brands, with innovations Electronics. and newer product offerings in different price segments to cater to the mass market. Gradually, with a drop in prices, demand was seen shifting towards large screen premium TV market share in India TVs. Sales from e-commerce segment have been gaining traction, with companies gradually foraying into smart televisions. Looking at the steep growth in demand, OnePlus plans to leverage its position of being a leading mid- premium mobile-phone company and brand to gain some market share in the 18mn-units Indian TV industry. OnePlus also plans to set up a production hub for global supply of TVs, by manufacturing its televisions in India.

2019 saw an increase in demand for Korean

Source: TVJ, PhillipCapital Research PhillipCapital TVJ, Source: and Chinese brands, with innovations and newer product offerings in different price segments to cater to the mass market

68 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 69 Government initiatives like import Pre-covid prices of 32’’ TVs were at Rs duties and license will result in a 12,000 and due to a sharp increase in open- third of imports being sourced from cell panels, prices have reached Rs 20,000 domestic contract manufacturers

OEM market for TVs supplies. The government has been supporting domestic manufacturing by imposing tariff hikes, schemes, and The OEM market for colour televisions is estimated at initiatives. GoI imposed import duties on many LCD sets in 6.5mn sets in 2020, up 44% yoy. Few players such as Dixon July 2020, as part of the Aatmanirbhar campaign. Moreover, Technologies are expanding their production, and are all the DGFT (Directorate General of Foreign Trade) has geared up for higher numbers going forward. The Indian mandated an import license for importing sets. OEM market in 2019 was pegged at 4.5mn sets. It witnessed a 12% yoy rise in 2017, 22% in 2018, and a whopping 59% rise in 2019. SVL and Dixon Technologies were the biggest benefactors of this jump in production. Many companies had Mirc Electronics (ONIDA) is increasing shut their plants due to the imposition of BCD on open-cell panels, which the government eventually revoked. However, its capacity; its current capacity in the interim period, OEMs such as Dixon saw an upsurge is 1mn units. Its key customers in orders. In November 2020, the government re-imposed BCD on open-cell panels. We believe OEMs are set to include BPL, Reliance and TCL benefit again from the re-imposition of BCDs.

In case of supplies to Indian television makers, panel suppliers preferred to go with large OEM players, and there Dixon Technologies, market leader with 51% share has been an increase in the trend of advance payments for

Panel suppliers preferred to go with large OEM players Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

PG Electroplast, a contract manufacturer for ACs and washing machines, is also planning to manufacture TVs

70 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 71 List of leading TV contract manufacturers and their major customers

Mfg. Own brand Major Customers Dixon Technologies NA Xiaomi, Panasonic, Reconnect, Koryo, Phillips, Croma, Sanyo, Intex Technologies, Akai and Lloyd Hon Hai Precision Industry Co Ltd NA Sony MEPL Wybor, Ego-Vision Akai, Panorama, Intex Technologies, HOM, Truvision, Abaj, Nextview, Hyundai, Dyanora, Blueberry, VG, and BPL Noble Moulds Daenyx and Golf Haier and regional brands SVL Group Suzlon, Suntek, SVL Kodak (online and offline) and Thomson (online) Veira Electronics Iconic JVC, T-series, Noble, Abaj and Crown Videotex International Daiwa, Telefunction and T-series, Intex Technologies, Hyundai, Sansui, Haier and Lloyd. Shinco (only online) Skyworth NA Panasonic (32”) MIRC electronics Onida Reliance, BPL, TCL, others etc Source: Industry, PhillipCapital estimates PhillipCapital Industry, Source:

responsiveness, decrease the time-to-market, consolidate OEM volume for TVs in FY20 was up 44% suppliers, and lower logistics cost. yoy to 6.5mn sets • In July 2020, to promote domestic manufacturing, the government imposed restrictions on imports of TVs.

Together, these schemes will help enable large-scale electronics manufacturing, domestic supply chain of components/state-of-the-art infrastructure, and common facilities for large anchor units and their supply-chain partners. The PLI outlay has provided incentives for setting up new factories for home-grown TV manufacturers. However, for such a large scheme to work, it needs the centre and the states to be aligned in terms of vision. States such as Maharashtra, Andhra Pradesh, Karnataka, Tamil Nadu, Telangana, and Uttar Pradesh have provided support in terms of capital and power subsidies, tax reimbursement, and skilling. Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

Government intervention for the TV industry

Government initiatives are the key drivers that will drive domestic electronics manufacturing in India. Production Linked Incentive scheme (PLI), Scheme for Promotion of Manufacturing of Electronics Components and Semi- conductor (SPECS) and EMC 2.0 (Electronics Manufacturing Cluster) are some of the initiatives that are making large-scale domestic manufacturing of electronics attractive for investors. • PLI includes semiconductor fab (fabrication) and display fab. • SPECS is aimed at helping eliminate the disability of domestic manufacturing of electronic components and semiconductors. • EMC 2.0 is likely to strengthen the supply-chain

70 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 71 Recent ban on imports of CBUs of TVs and Strong demand resulted in supply shortages of higher import duties on open cell will lead to open cell, impacting the volumes reduction in import Source: commerce.gov.in Source:

TV CBUs have seen a sharp reduction in imports due to restrictions

TV assembly plants require a lower capex of Rs 300-350mn, but it is imperative to reach high utilisation levels Company name CAPEX ( in State Comments Capacity Date of Rs mn.) Announcement Haier appliances 500 Noida, NCR TV plant 2019 Jaina Group 10,000 Manufacturing hub for Sansui brand products; will ex- 2019 port to other geographies, including neighbouring South East Asian markets. Capex is for the next three years. Dixon Technolo- 500 Tirupati Padget Electronics 2020 gies Thomson 10,000 Will invest in the next five years for home appliances. 2020 TCL 24,000 Capex for TV 2020 ABAJ 500 For manufacturing of 2.5mn TVs 2020 PG Electroplast 300 Pune TV plant AC: 0.9mn p.a. 2021 -IDU + 0.4mn -ODU SPPL - Kodak TV 3,000 To increase the capacity 2021 Mirc Electronics 300 Maharashtra TV Source: Industry, PhillipCapital estimates

72 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 73 Massive capacity addition taking place The pandemic and TV prices

The government’s initiatives for increasing domestic value In FY20, LCD TV panels had a rollercoaster of a year, with addition have allowed domestic contract manufacturers three inflection points in the H12020 and huge increases such as Dixon Technologies, PG Electroplast, MIRC, Kodak, in prices in the second half. Samsung, LG, and other TV and ABAJ to increase manufacturing capacities. Over the manufacturers’ announcements of shutting down their plants next two years, India will see a massive capacity addition in LED TVs by companies (with own brands) and OEMs for assembling. This aggressive capacity addition by brand- Leading TV brands are reducing name companies and OEMs will help in increasing exports from India. However, value addition will remain a challenge production of 32 inch and 43 inch TVs as India depends on imports for open cells. as it is unprofitable for them. Small players will continue to make smaller TVs while bigger brands will produce more high-end and premium TVs

Current capacity and additional capacity announced by TV makers

Company name Brands/OEM Current capacity (mn) Additional capacity Production (mn)## announced Samsung India Brand 0.5 0.45 LG Brand 2 1.8 Panasonic India Brand 0.5 0.45 Haier India Brand 1 Added 0.4 Onida Electronics/MIRC Brand 0.2 0.18 Total 4.2 3.28 Dixon technologies OEM 4.4 1.1 2.275 MEPL (Trader+Small Assem.) OEM 0.5 -1.0 0.6 SVL Group (Sunteck Vision) OEM 0.5 -1.0 0.375 Foxconn OEM 0.5 -1.0 0.45 Noble Moulds OEM 0.5 -1.0 0.05 Videotex International OEM 2 2 0.3 Veira Electronics OEM 1.2 0.2 Genus Electronics OEM 0.5 0.5 Onida Electronics OEM 1.2 1.2 0.4 Micromax (Bhagwati products) OEM 0.5 -1.0 0.5 Super Plastronics OEM 0.5-1 0.2 Beston Electronic OEM 0.5-1 0.2 ABAJ – ABZ OEM 1 0 TCL OEM 0 4-5 PG Electroplast OEM 0 0.5 Skyworth (Brand+OEM) New OEM 1.-2 3-4 Others OEM 0.45 Total 6.5 Total Domestic Manufacturing OEM + Brands 9.78 Source: PhillipCapital Research and Channel Checks Note: ## PC Estimates and Channel Checks Research PhillipCapital Source:

72 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 73 (US, Europe, and China) partly contributed to an increase Trade war and TV prices in prices. The pandemic led to chaos and panicked price Fear and uncertainty due to the trade war between the US reductions, as the whole world saw an eventual collapse in and China, and a much-anticipated tariff hike by the US in demand, but then it surged due to stay-at-home orders and the second half of 2019, pushed branded TV companies to lockdowns. From February 2020 to Q4FY21 prices for open move panel orders to the first half of 2019. Fears that TV cell increased 2-3x. prices would rise due to tariffs led to reduced panel demand and increasing inventories. Panel prices also started falling. By the end of FY19, supply outstripped demand. Fierce competition led to massive reductions in panel prices, pushing prices below even cash costs for some products.

TV exports from India TV prices monthly trend Source: commerce.gov.in Source: Source: Industry, DSCC, PhillipCapital Research PhillipCapital DSCC, Industry, Source:

TV exports monthly data TV prices saw sharp rise in FY21 Source: Industry, DSCC, PhillipCapital Research PhillipCapital DSCC, Industry, Source: Source: Ministry of commerce and Industry, Govt. of India Govt. Ministry ofSource: and Industry, commerce

74 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 75 Technology adding value year, bringing the market close to 11.5mn units by 2023. Mini LEDs These currently make up a mere 1-2% of overall global TV sales, but 30-34% of the premium segment. These 2021 is likely to be a good year for the mini-LED technology, shipments were at 3.2mn units in 2019, and so far, remain as it is introduced in multiple applications. It will compete the exclusive domain of LG Display, one of the world’s fiercely with OLED technology. Samsung has targeted 2mn largest manufacturer and supplier of LCD, OLED, and flexible unit’s shipment of mini-LEDs in 2021. LG introduced its mini- displays, although new players have entered OLED in 2020, LED TVs at the CES (Consumer Electronics Show) in January and many more are likely to enter ahead. The price of an 2021. TCL has been shipping LCDs with mini-LEDs and has OLED TV has dropped significantly over the years, and has expanded its range with lower-priced models. now become a viable option for more consumers.

Smart TVs volume grow – 4% CAGR over 2019-25 64-inch trumps 55-inch for the first time

The global market for OLED TVs should reach US$ 18.6bn by 2027, 16% CAGR over 2020-2027. It currently occupies 30-34% of the premium category global TV sales. These TV shipments rose to 3.38mn units in 2020; 65-inch OLED TVs were 41% of the global OLED TV market; 55-inch were 39%. For the first time, 65-inch shipments surpassed 55-inch shipments, as people increasingly prefer larger screens in their homes. Up until 2019, 55-inch made up 49% of the annual OLED TV production, but in 2021, 65-inch is set to reach 49% of total shipments (55-inch at 36%). Although branded companies are setting ambitious targets for OLED TV production, this segment might not have an entirely optimistic demand outlook for high-end TVs. Aside from pandemic-induced lockdowns that are hurting demand, Source: Industry, PhillipCapital Research PhillipCapital Industry, Source: flexible pricing of QLEDs is a potential threat to OLEDs.

Smart TVs The global unit shipments of smart TVs are likely to increase For the first time, 65-inch shipments from 209mn in 2019 to 267mn in 2025, a 4.1% CAGR. Falling prices and the demand for next-generation features, such surpassed 55-inch shipments, as 4K and HDR continue to be the strongest drivers for TV as people increasingly prefer sales. Even as the price of high-end models continues to soar as screen sizes and device sophistication at the high larger screens in their homes end continues to grow, there is a falling disparity between traditional and smart TV price points at the lower end of QLED TVs the product lines. Manufacturers are trying to drive up Owing to its technology and cost advantages, QLED TVs interest among content creators and consumers for the have grown 230% over 2019-20. Global shipments of these next technological breakthrough after 4K, such as HDR and were 5.83mn units in FY20 and even with the downturn, the quantum dots. market for OLED products thrived on a flourishing stay-at- home economy, which resulted in retail price cuts of more than 20% for 65-inch QLEDs in the North American market, OLED technology creating a wave of replacement demand for TV sets. OLED is an important step towards the future of the Most QLED TVs have leveraged their existing LCD designs, television industry. OLED sales should add 2mn units each where the quantum dots are embedded within the filtering

74 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 75 The 4K and 8K wave Global OLED TV market share (size wise) Customers have been prioritising their purchase of appliances; smartphones shipments are losing steam, while TVs have seen their sales increase. This phenomenon has given a boost to sales of 4K TVs, according to Onida Electronics. The pandemic has impacted 4K sales in some parts, as customers have been buying small non-4K TVs in rural regions. Onida Electronics expects 800mn 4K-enabled homes by 2024. While the number of 4K channels has been growing, launches are delayed, in part due to the Tokyo Olympics.

The 8K made its debut at CES 2019, but has made up a very minor portion of the premium TV sales, as they come with hefty price tags. These sets’ sales are likely to reach US$ 5bn by 2021, with larger TV sets becoming a standard. Also, sales of equipment related to the creation and production Source: TVJ, Industry TVJ, Source: of 8K content could generate hundreds of millions of dollars globally in next 2-3 years. Indian TVs: Screen-wise market share Source: TVJ, Industry TVJ, Source:

layers comprising the stack. A few manufacturers are looking at integration of QDs (quantum dots display) into OLED TVs in a unique hybrid system that combines the flawless black uniformity of OLEDs with the efficiency and vivid colours of quantum dots.

76 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 77 Takeaways from interactions with a TV industry expert

• For CY20, the industry size is c.12mn units. its plants in Vietnam, Korea, etc. But OLED The industry has seen a decline of 20-30%, TV prices are very high; for e.g., a 55” TV mainly because of COVID-19. India has costs Rs 150,000 vs. a normal LED at Rs banned imports of LEDs (TVs). The industry 60,000. imports in the SKD format at present. In • For LED assembly, India has huge capacity. CY19, it imported 7-8mn units as FG; industry Currently, companies are operating at lower size was c.14mn units. Companies like Sony utilization levels. Dixon has c. 4mn, Onida and Samsung were primarily big importers at 1.5-3.0mn (underutilised), ABZ c.0.5mn, c.3-4mn units. Videotex c.1mn, etc. Additionally, some • The bigger challenge currently is importing companies are also putting up assembling open-cells for LEDs. The industry is seeing plant (such as Haier), increasing capacity to a supply chain issue. Open-cell prices have 1mn, TCL 4-5mn units etc (expected to start drastically increased. Last year’s 32” panel in June 2021). open cell at c.US$ 32 now going for c.US$ • In terms of demand for 2021, there will 96. This has resulted in a sharp increase be growth, but it might still be lower than in LED prices. Majority of the sourcing for 2019. Value growth may be higher, as open-cell is done from China; c.80% of big-screen TVs are seeing more demand global supply. Prices have increased mainly than smaller screens. 2021 is a game of because of strong demand, and reduction supply-chain management, as sourcing is a in capacity of open cells from 4.8bn to 4.5bn challenge. Large players are having benefit units (as manufacturers are not making vs. small players in sourcing and some price money, because panel prices have gone difference. down sharply. Dependency on China for TVs is very high as panels and IC manufacturing is mostly done there.

• Companies like LG are shifting to OLED technology. This is a premium product (supply is not an issue), as it can source from

76 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 77 INTERVIEW – Mr Saurabh Gupta, CFO, Dixon Technologies

Dixon Technologies Ltd. is a leading electronics manufacturing services (EMS) provider in India. A home- grown manufacturing company, Dixon Technologies provides design- focused EMS solutions in consumer durables, home appliances, lighting, mobile phones, and security devices to customers across the globe.

Will Make in India and Atmanirbhar Bharat lead to significant value addition in India over the next 3-5 years?

We at Dixon have a very strong conviction that the consumer durables and electronic goods sold in India will be manufactured largely in India after the government’s ‘vocal for local’ theme. As more companies are focusing on branding, distribution, and technological upgradation, manufacturing of a critical part of the value chain will see an increase in outsourcing in coming years. Even the designing aspect of mass products will see higher OEM participation.

Over the last three years, the tariff structures in electronics imports have been rationalized, one to promote domestic manufacturing in India, and two, to deepen the level of manufacturing locally. As part of the government’s Phased Manufacturing Programme, duties are being levied or increased on various components of the electronics goods which were majorly imported in India a move that will increase the domestic value addition in India. As far as the components ecosystem is concerned, it is a journey, and I am sure that in the next 2-3 years, we will have a large component ecosystem in the country, starting with manufacturing of finished goods, where the import intensity is relatively higher. Once the industry acquires economies of scale, the component ecosystem will grow domestically.

78 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 79 Also, to become 100% self-reliant, what steps do you take a lead in this? expect India to work on? It is India’s turn to ramp up its R&D, technology, The government needs to formalize and rationalise land manufacturing, and innovation, which will help to create and labour reforms in the country in order to complement more jobs, improve workforce efficiency, and attract larger the recent tax cuts, and to remove structural hindrances to cost savings in manufacturing, logistics, and the technology capital investments, higher focus has to be on infrastructure employed. With the intellectual capital available in the and logistics. The government should continue to focus on country, and competitive talent costs, global and domestic the “Make in India” theme and provide further incentives companies have the opportunity to establish their R&D for investment to companies setting up manufacturing centres in India, which can ultimately drive localisation. units, including for the electronics industry. Also, another

issue that requires policy attention is foreign trade strategy. India’s competitiveness can help it to become an integral How big is the exports opportunity? In what products part of the global supply chain at a time when international can India look for exports and in which markets? companies are looking at expanding their footprint beyond In the electronics sector, I feel confident that we are currently China, and locating to other markets. Some additional steps sitting on an inflexion point, where we can think of new include the actual realization of ease of doing business, investments and expanding our capacities; over a period strong skilled resources base, and promotion of R&D of time, I am confident that India will emerge not only as a initiatives. contract manufacturing base for serving domestic markets, but also for the exports markets, because once scale kicks in, and operating leverage comes into the system, the With a higher focus on domestic manufacturing, do you country becomes globally competitive – both in terms of expect global manufacturers to move towards India? productivity and skill sets. Government policies are aimed at India’s suffers from a disability of about 6-7% in various creating global champions out of Indian manufacturing. sectors as compared to China, which we can attribute to lack of adequate infrastructure, domestic supply chain and logistics issues, high cost of financing, inadequate The government has imposed restrictions on the availability of quality power, limited design capabilities and import of TV sets; how do you see this panning out for limited focus on R&D by the industry, and inadequacies contract manufacturers such as yourself? How big is the in skill development. The government is trying to address opportunity size? these through the Production-Linked Incentive (PLI) scheme As per government data, TVs worth Rs 72.2bn were in various sectors. Global manufacturers have jumped on the imported in 2018-19 out of the total market size of Rs 250bn opportunity to set up manufacturing bases in India, and are – from China and other Asean countries such as Vietnam, optimistic about the kind of incentives proposed under the Hong Kong, Malaysia, Korea, Indonesia, and Thailand. LED PLI scheme. The schemes will attract large-scale investments TVs were being imported at reduced/zero duty under the and generate huge employment. In the current scenario, the Asean-India FTA and such imports could not be controlled PLI scheme will provide a huge thrust to companies that are through increased duty. Hence, non-duty actions, like import looking at relocating beyond China. restrictions, were one of the main actions available to the However, the government of India has to ensure that government. Putting LED TVs under the restricted category – companies incurring capex to set up manufacturing will not only boost domestic manufacturing but will largely do not face delays and capital cost overruns, effective accelerate sourcing by companies from domestic contract scheme implementation, and business sustainability. The manufacturers that provide Indian-designed solutions, which government needs to promise foreign companies stability, will be a significant positive for the contract manufacturing predictability, and continuity in the wide policy stance. industry. It will also help deepen the level of manufacturing in India. In Dixon, we are strengthening our R&D and trying to get a larger share of customers’ business to our self- How important is R&D now that India is expected to designed solutions. grow its manufacturing for the next 5-6 years? Can India

78 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 79 Open cells, which make up a majority of BOM (bill of machines. We have set up a plant in Tirupati (Andhra materials) in TVs, are completely sourced from China. Pradesh), just 120kms from the Chennai port, for easier What steps are being taken by the government to access to exports. increase local manufacturing of components? What We have requested the government to choose consumption- challenges do Indian manufacturers and companies face? based countries and not manufacturing-based countries Open cell contributes more than 60% of the BOM in LED while signing FTAs (free trade agreements), as they would TVs and with no localisation in India, the government is keen then boost our manufacturing. Since logistics costs are on expanding domestic production of critical components high in washing machines, and Indian manufacturers have such as open cells, but this entails huge capex. And If a huge disability due to the logistics costs, there should India wants to become a manufacturing hub for LED TVs, be a compensation framework in place to overcome this the government will have to set up an ecosystem that impediment. Also, the government should encourage SMEs manufactures open cells. As part of the government’s Phased to set up factories for manufacturing of components such as Manufacturing Programme, it is increasing duties on various motors, timers, and gearboxes – which account for 30% of components of the LED TVs, which will eventually lead to BOM and are presently imported. higher domestic value addition in India, and is in line with its We are creating a capacity of 700,000 direct-cool vision of creating a component eco-system in India. As per refrigerators, and we expect to go on stream in the first recent news articles, the Vedanta Group is in talks with the half of FY23. The total market for refrigerators is 14mn government for setting up a display fabrication plant. units, with direct cool contributing more than 70% at The biggest challenges that LED TV manufacturers and 10mn. Refrigerators also have huge exports potential in brands are facing at present are – 28% GST on LED TVs of the next 2-3 years, and are similar to washing machines. more than 32 inches, a 5% duty on importing open cells, Manufacturing of key components for refrigerators – and prices of open cells rising by more than 3x in the last six compressors, steel sheets, PCM, PCB-assembly, dryer, months. chemicals – etc. should be incentivised in India.

Washing machines and refrigerators are majorly The size of the Indian mobile-phone market is c.280mn indigenized (domestic value addition of c.70%); do phones, of which 120mn phones are feature and 160mn you think it is a potential category for exports? What phones are smart phones. Given that our country is a challenges are we facing in tapping the larger exports growing economy with 65% population under 35 years markets? of age, where do you see the mobile phone market in the next 5-7 years? The total washing-machine market in India is around 7mn units per annum and Dixon is the leader in manufacturing India is the world’s second-largest smartphone market with the largest capacity of 2.1mn units (semi and fully with annual volumes of around 160m units. It is growing automatic top-loading machines). We provide 100% own- faster than the overall global smartphone market. All major design solutions with the largest product basket and we smartphone makers are present in India. The Indian mobile have a presence both in north and south India. phones market was valued at Rs 1.6tn in FY19-20 and is estimated to touch Rs 2tn by FY23 at a CAGR of 6%. The In semi-automatic washing machines, Dixon has the largest industry believes 5G will be the next big trigger for growth. capacity of 1.5mn per annum and has the largest portfolio of 150 models ranging from 6-10kg. Our top-loading fully Exports are also supporting domestic mobile phone automatic washing machines plant construction is on time manufacturers. Over FY15-20, India saw a sharp reduction in and almost complete; mass production is expected to start mobile phone imports led by global brands gradually setting from Q2FY22 this year. We will have c.40 variants ranging up manufacturing plants in India. Imports have declined from 6-10kg and will create an annual capacity of 600,000 to Rs 74bn in FY20 from Rs 486bn in FY15, and exports of units per annum. We have already closed an agreement with mobile phones have increased manifold to Rs 272bn in the a large MNC brand for this. In another 12-15 months, we same period from Rs 15bn. will become competitive globally in fully automatic washing

80 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 81 Under PLI, many global and domestic contract The government has announced a PLI scheme in laptops manufacturing companies are expanding their capacities, and IT hardware as well. What opportunity size are we which should reduce shipments into India. However, looking for in laptops and IT hardware manufacturing? our current domestic value addition in mobile phones is What are Dixon’s plans for this segment? only c.20%. Where do you see this going and in which According to IDC, the market size for laptops in India was components we will start localising? approximately 7.5mn units in 2019-20 valued at Rs 339.5bn Even for high-volume products such as smartphones, (US$ 4.85bn). Similarly, the market size for tablets was localisation is low, largely involving PCB assembly, final around 2.4mn units, valued at Rs 35bn (US$ 0.5bn). The assembly, and accessories. The increase in localisation in server market stood at 200,000 units valued at Rs 91bn (US$ recent years has been due to the government’s differential 1.3bn). duty structure strategy under PMP. The next leg of Currently, laptop and tablet demand in India is largely localisation will have to be fuelled by investments in critical catered to through imports valued at US$ 4.21bn and US$ components manufacturing, and we can see that there are 0.41bn, respectively, in 2019-20. The unutilized installed early signs of positive developments, with announcements manufacturing capacity is an impediment to scaling up from Samsung Display, Holitech, and Salcomp etc. In the manufacturing in the country. next 4-5 years, domestic value addition is likely to grow to 35-40% from the current 15-20% in case of mobile phones, ICEA estimates that India has a US$ 100bn opportunity to and to 45-50% for electronics components. manufacture laptops and tablets in the country over the next five years, which can contribute 18% to global exports of these devices. How is the demand for wearables in India currently? The total budgetary outlay is Rs 73.3bn over the PLI period What can we expect out of this segment in the long of four years, with higher incentives for the domestic sector. term, and does it have the potential to gain sizeable For a domestic company such as ours, the investment market share in the overall electronics industry? required is Rs 200mn, with a maximum incentive of Rs 1.1bn India’s wearable’s market is approximately Rs 5bn, and on the max revenue potential of Rs 49bn over a period of has been one of the most rapidly growing ones in India. the PLI. There are guidelines laid down for value addition According to a report by International Data Corporation relating to PCB assembly, battery packs, power adapters, (IDC), the Indian wearables market posted 144% yoy growth and cabinets over the PLI period. It is our core target in 2020, in which year shipments from India were 36.4mn segment, and we will pursue it quite aggressively. units. Further, India was the only country in the top-20 to see triple-digit growth in wearables last year, and continues to be the third-largest wearables market globally. TWS (twin wireless speakers) earbuds also saw the highest gains in exports, with a total of 11.3mn units shipped in 2020.

We have started manufacturing TWS for boAt and we see the relationship getting stronger every month with manufacturing of more products for them. This is an opportunity for us to back an emerging brand not only for India, but for a global market. The government is in discussions to come up with a PLI scheme for this category, to increase domestic manufacturing.

80 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 81 Washing machines: Huge potential and a possible exports opportunity

The Indian washing machines market was estimated at 7mn units in 2019-20, valued at Rs 104bn. Despite the pandemic, E-commerce was limited to sale of front- this product segment is not likely to decline in 2020-21. The increase in number of dual-income households, along with loading washing machines, but the insufficient time for doing laundry, has driven the demand for pandemic has changed that, and almost this under-penetrated product. Manufacturers are focusing all categories are now sold online on increasing capacity, new product developments, and adoption of advanced technologies. Haier’s second facility (being set up in Noida) is enhancing its capacity. This Semi-automatic dominates the washing machines provides an opportunity to vendors and leading OEMs to market with 57% market share scale and expand their business. Currently, the OEM market is mostly catered by Dixon Technologies, PG Electroplast, Noble Group, and Empire Home Appliances. Other small companies with installed capacity are also planning to enter the OEM model for better capacity utilization.

Market composition of washing machines

The semi-automatic segment has 57% volume market share, and 56% value share, largely because it is cheaper than the front-loading segment or the fully automatic top loading one. LG dominates this segment, but it has lost some market share to Bosch, Whirlpool of India, and Haier in recent years. Godrej Appliances and Samsung have gained some share as well. IFB Industries holds 6% share (only present in FA-TL: Fully Automatic Top Load, FA-FL: Fully Automatic Front Load fully automatic machines). Panasonic, Carrier Midea, Onida Source: Media reports, PhillipCapital Research Electronics, Lloyd, Toshiba, TCL, Voltas Beko have their own Own manufacturing and outsourcing mix in niche clientele – which is the middle-income group. Xiaomi, washing machines Thomson, and Sansui have forayed into the semi-automatic washing machine segment due to demand coming in from Brands Own Manufac- Out Sourc- Out-sourcing Partners tier-2 and tier-3 cities. E-commerce front was limited to sale turing ing % (Name) of front-loading washing machines, but the pandemic has LG 100% 0 changed that, and almost all categories are now sold online. Whirlpool of 100% 0 PG Electroplast for India components Currently, major brands are sourcing semi-automatic washing Samsung 50-60% 40%-50% Dixon Technologies machines from the domestic contract manufacturers and for Haier 80% 20% PG Electroplast for fully automatic, they have their own manufacturing facilities. components However, many brands have started contracting to ODMs Onida Elec- 100% 0% like Dixon Technologies and PG Electroplast, even for fully tronics automatic machines. Private 0% 100% Dixon, PG, Mirc, Noble labels and others Lloyd 0% 100% PG Electroplast Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

82 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 83 Market share of companies across product segments Source: Media reports, PhillipCapital Research PhillipCapital Media reports, Source:

Over the next few years, these contract Domestic value addition is c.70% in manufacturing companies will build up washing machines, which will increase capacity for automatic washing machines to 80-85% over the next two years

Washing machines imports in India; China is a major All major companies are manufacturing automatic washing exporter to India, followed by Thailand and Korea machines in-house. Players such as Whirlpool of India, IFB Industries, Bosch, LG, and Samsung have a very strong domestic in-house manufacturing presence. Currently, India does not possess the outsourcing capabilities in semi-automatic washing machines, but Dixon Technologies and PG Electroplast are some players that are building up capabilities to produce automatic washing machines in India. Industry experts believe that over the next few years, these contract manufacturing companies will build up capacity for automatic washing machines, which will help smaller players and domestic companies to source locally. Source: Ministry of and Industry Source: Commerce

82 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 83 this investment, it expects to boost its capacity to 6.5mn units annually.

Exports will rise due to increasing • Haier: Expanded its product portfolio with 83 new domestic manufacturing capabilities, models, betting big on smart home solutions. The and brands increasing their distribution company announced 8 new SKUs in the washing machines segment, including Wi-Fi enabled front network in overseas markets load smart washing machine with a super drum. The company also introduced its Wi-Fi enabled front-load dual drum washing machine, which can be operated through the Haier Smart home app. Latest industry updates and trends in washing • IFB Industries: Range of washing machines introduced machines in 2018-19 offer deep-clean technology, wash programs • LG Electronics: Advanced innovation in laundry; for delicate clothes, intuitive user interfaces, and smart deploying AI to deliver precision washing. mobile-based technologies. New product developments • Samsung: Connected products, ecosystem of intelligent continue to focus on IoT capabilities and water and products. All Samsung’s devices offer customers control energy efficiencies. Expects the category to be a over their devices. revenue and margin driver along with the front-load category. Expanded capacity in 2018-19 when IFB’s top- • Panasonic: Strengthened its washing machines portfolio load capacity was stretched and it was unable to supply by introducing 38 new models; 23 fully automatic top- to the market in full. loading, 15 semi-automatic. Built in water heaters, water re-use technology. • Bosch: Markets a wide range of top loaders and front loaders, featuring Allergy Plus Programs, which • Godrej Appliances: Plans to introduce a new product line washes laundry at 60 degrees Celsius, giving germ-free of fully automatic front-load washing machines with an and clean laundry; German-engineered ‘anti tangle’ annual capacity of 400,000. Plans to double its capacity at technology and ‘wash forward’ program offers cleaning both its Shirwal (Maharashtra) and Mohali (Punjab) plants. results in 60 minutes. The company is planning to invest Rs 7bn by 2022. With

Current planned capacity expansion

Company name CAPEX (in Rs mn.) State Type of CAPEX Capacity Product offerings Date of Announcement Voltas 10000 Sanand Arcelik (VoltBek) 2.5mn units p.a. Home appliances 2020 Haier appliances 3700 Ranjangaon, Pune 1mn units p.a. Consumer durables 2019 Godrej appliances 7000 Shirwal and Mohali 65mn units p.a Consumer durables 2019 Source: Media reports, PhillipCapital Research

Industry expects India to become an exports hub for fully automatic washing machines. Whirlpool recently set up a manufacturing plant for making front-load machines in South India

84 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 85 to use products which are energy-efficient (Bureau of Energy Current capacity and additional capacity Efficiency – BEE rated). This has led to manufacturing of announced by washing machine makers more energy-efficient technologies. Globally, the front-load Company name Capacity Capacity Addition segment enjoys the highest market share as it requires less (Units mn) S.A. AUTO S.A. AUTO## space, is efficient, and has the best performance. The semi- Brands automatic machines are simple to use, very affordable, and LG 1.7-2.0 1.00 - can handle laundry in two drums for washing and drying. The Whirlpool 1.0-1.5 0.5-0.7 - fully automatic machine segment has shown decent growth Samsung 0.5-1.0 0.5-0.7 - as well, due to its price, convenience, and wide range of Godrej Appliances 0.5-1.0 0.10 - options. Haier India 0.5-0.6 - 1.00 Leading companies in the market have been investing IFB - 0.5-0.7 in smarter AI-based technologies. Key market players Bosch - 0.35 - 0.5-1.0 are developing voice control integration with Alexa and Other Brands - - Google assistant to help control a combination of washers OEM’s and dryers. One of the trends seen in the market is the Dixon Technologies 1.20 0.30 0.60 use of technology that reduces the water for washing. The PG Electroplast 0.80-1.0 - 0.50 realisation that water is limited has compelled manufacture to Mirc Electronics 0.25-0.30 - 0.2-0.5 develop solutions that minimise the use of water. Noble 0.25-0.35 Vimal 0.25-0.30 Smart washing machines Others 0.25-0.30 Source: PhillipCapital research estimates research PhillipCapital Source: The global smart washing machines market is likely to see Global market scenario in washing machines 21% CAGR in 2020-27. Technological advancements in

Increasing globalization will play an important role in driving the smart home category are causing a rise in demand for the demand for washing machines ahead. connected washing machines. Growing scarcity of water across the globe is compelling manufacturers to make Factors driving the demand for automatic washing products with technologies that restrict the use of water. machines: Globally, smart washing machines with a capacity of 6-10kg • Increasing female labour-force participation held the largest share of 66% in 2019. Rapid nuclearization • Increasing middle class populations of families due to increasing urbanisation increased the need • Nuclear families rising for washing machines with capacity of 7.5 kg. A wash cycle • Increasing media participation of 7.5 kg uses less water, electricity and detergent when • Growing awareness about technology compared to two cycles of 3.5 kg.

Newer technologies have taken over old technologies to Industry experts believe that smart-washing-machines in address the demand for energy-efficient new-generation countries such as India, China, Vietnam, and Indonesia are products. Governments the world over are urging consumers likely to see the fastest expansion at 21% CAGR. Increasing internet penetration and technological advancements in countries like China and India are likely to fuel product demand. Increased adoption of automatic washing process as an essential part of everyday housekeeping activity has created lucrative growth prospects in Asia.

84 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 85 Refrigerators: Premiumization to drive growth

In frost free, 241-270 litre capacity is most sold; 190-199 litre in direct cool

Frost free capacity-wise market share

The Indian market for refrigerators was valued at Rs 120bn in 2019-20, a 12.5% rise over the previous year; 14.2mn units were sold, up 15%. LG, Samsung, and Whirlpool of India have been dominating the washing-machines segment Direct cool / FF market share in India since last 10-15 years. Panasonic and Hitachi cater mostly to the premium segment; LG, Samsung, Haier, Godrej Appliances, and Whirlpool of India cater pre-dominantly to the mass segment, with an aggressive stance. Bosch, Liebherr, Mitashi, BPL, Intex Technologies, TCL, Siemens, Carrier Midea, Electrolux, and many other players have less than 15-20% market share. Samsung has started counting on India’s small towns and rural cities to consolidate its position as the leader in the refrigerator segment.

There has been constant innovation and change in consumer preferences in the refrigeration segment over the years. While single-door products constitute most refrigerator sales, double-door refrigerators have been gaining market DC vs. FF capacity-wise market share share consistently. New product offerings in this segment are focused on energy efficiency. Refrigerators fall under the mandatory ‘standard’ and ‘labelling’ program, introduced by the BEE under the Ministry of Power. Prices of refrigerators rose by 3-8% in 2020 varying from model to model as new energy norms were introduced. Prices of high-end refrigerators increased by Rs 5,000-8,000 as manufacturers were compelled to shift to vacuum panels (from traditional foams) to attain higher energy efficiency. Source: Industry, PhillipCapital Research PhillipCapital Industry, Source:

86 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 87 Refrigerators: Pandemic-driven changes in buying Refrigerator monthly exports: Remained steady There has been a major shift in the way consumers are since May 2020 buying appliances now. Traditionally, customers preferred buying refrigerators with long replacement cycles from brick- and-mortar stores; the need to see and feel products first- hand played an imperative role. Dealers had huge inventory levels and were eager to liquidate their inventory during the lockdown.

A clear demand shift from ‘want’ to ‘need’ was evident during the pandemic. As people stockpiled food, the need for more storage, thus higher-capacity refrigerators, was noticeable. The trend for eating at home contributed to this upsurge in demand considerably. During the pandemic, e-commerce sales saw a huge uptick, as people were forced to shop online due to closure of brick-and-mortar stores. The global percent of online sales for domestic appliances – small and large – rose 10% over 2019. Online growth did not Ministry of and Industry Source: Commerce stop once the retail stores opened, showing a change in in consumer buying habits. Consumers preferred to buy those Refrigerator monthly imports solutions which would support them and save time in a busy work and schooling from home scenario, which drove the demand for high-quality and energy-efficient products.

Manufacturing status: Majorly in-house manufacturing, low share of out-sourcing

Industry pegs the production volume of refrigerators in India at over 12mn units in FY20; 27% of the total consumer appliances market.

Refrigerators imports in FY20 were Rs 42bn, saw CAGR of 9% over FY13-20 to Rs 42bn Source: Ministry of and Industry Source: Commerce

EMS providers like Dixon are looking to add refrigerators in their manufacturing bucket Source: Ministry of and Industry Source: Commerce

86 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 87 Currently, major brands are manufacturing refrigerators in-house; some premium refrigerators (such as side-by-side and frost-free) are imported. Small brands are majorly sourcing direct-cool refrigerators from the domestic market

Increasing focus on domestic manufacturing: Capacity expansion

Due to the recent surge fuelled by the pandemic and the trade war, refrigerator manufacturers have gone on a localisation drive. Rs 75bn worth of investments were made in the past five years for capacity expansion, and new capacity deployment has started in the industry. The government’s improved duty structure has also led to encouragement of backward-integration of the production component amongst manufacturers, with a stronger push towards in house manufacturing.

Most companies are making investment commitments towards energy-efficient technologies, including inverter Global market dynamics in refrigerators technology. The thermocouple, which senses the The global household refrigerators market is likely to expand temperature inside the refrigerator, plays an important role in at a CAGR of 5% between 2019 and 2023 – to a size of these technologies. Refrigerators built in the past and built US$ 42.9bn by 2023. The French-door bottom-freezer (also now differ greatly in terms of the energy they use, which has known as bottom-mounted refrigerators) segment accounts led to a replacement market, as more consumers switch to for a majority share, whereas side-by-side refrigerators the latest technology. Manufacturers are hustling to meet are likely to see the highest rate of growth among all the standards, thus making energy efficient products. Companies categories due to the low base and increasing need of have been providing user-friendly features like water tap on higher capacity. The need for higher capacity and frost-free the door, door through the ice, and other such technological products has been driving demand and manufacturers have advancements.

In recent media interviews, Whirlpool Contract manufacturing will increase their of India’s MD evinced an interest to game by adding frost free in their portfolio, make India an export hub for washing supplying to white label and small brands machines and refrigerators

Capex announced by branded companies in the refrigerator segment

Company name CAPEX State Type of CAPEX Capacity Product offerings Date of (Rs mn) Announcement Voltas 10000 Sanand Arcelik (VoltBek) 2.5mn units p.a. Home appliances 2020 Whirlpool of India 5900 Puducherry, Faridabad 2mn p.a. Refrigerators 2019 Haier 40000 Noida Refrigerators Refrigerators, WM 2019 Panasonic 3000 Jhajjar Panasonic Technopark Refrigerators Source: Media reports, PhillipCapital Research

88 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 89 IoT-enabled refrigerators

Refrigerators built in the past and built now The advent of IoT and AI technology has brought in a differ greatly in terms of the energy they new wave of innovation to create a smart refrigerator. The integration of IoT to produce refrigerators will lead to a use, which has led to a replacement market higher quality product and a more convenient life. Unlike a traditional refrigerator, smart refrigerators can remind users of food stored, prompt maintenance, and help them use it been focusing on premium and high-end spectrum products in a much-more efficient way, thus making lives easier. The to generate a higher profit. smart refrigerator market is likely to expand at a CAGR of 17% between 2019 and 2026. Global shipments are likely Sale of refrigerators through e-commerce has been gaining to reach 2mn units by 2026. Growing smart households, every year and is likely to gain higher market share by 2026 increasing demand for intelligent appliances, and a higher due to higher sales and better incentives offered through the standard of living are driving the smart refrigerator sales e-commerce platforms and company portals. Companies are globally. Smartphone connectivity allows users to operate devoted to providing advanced offerings, faster delivery, and these appliances even from distant locations. Technologically convenience. advanced product launches, coupled with regional expansion by refrigerator manufacturers, has created opportunities for this market.

Excerpts from interaction with the sourcing head of a leading consumer durables company

• The industry restored its or domestic sourcing this year And (3) if there is over capacity, production in August 2020 (post (Samsung is increasing in-house even then contract manufacturers lockdown). From then, production production for ACs). All companies have tremendous scope in terms and demand for home appliances are producing higher than last of component manufacturing. has been increasing every year. • The government will come up with month, as people are working • Contract manufacturers are also a PLI for electronics components. from home and most students increasing capacity. A leading Companies as well as ODMs will are being schooled online. Also, contract manufacturer has apply. the government has taken up increased the capacity of TVs and • Supply chain issue: Saw some many reforms (PLI, etc.) to push has started a new line for washing disruption initially in November domestic manufacturing over the machines and looking to add a and December due to logistics. last 7-8 months. refrigerator plant in south India. But current issues are about • The industry expects huge capex/ In ACs, contract manufacturers availability of raw material/ production, as companies have such as Amber, PG Electroplast, components; micro-controller increased capacity, as they have and E-durables are increasing their shortages have led to some supply taken a positive call on local capacity. Amber is highly backward issues in the market. Impact was manufacturing and aim for 30-40% integrated in terms of board also seen in refrigerators and localization. All OEMs are ramping manufacturing. washing machines due to higher up in-house production/capacity; • The contract manufacturing model input prices. The worry is not LG and Samsung have ramped is here to stay based on the about costs, but about shortages up capacity. However, companies following: (1) Entry-level models due to insufficient availability of won’t take an aggressive call on are not sustainable to be made raw materials such as ICs, steel, capacity expansion till the market in house, so ODM expertise is and styrene are facing a shortage is highly volatile and unpredictable needed for such products, which in the market. and dependency on ODMs will have thin margins. (2) Small players be quite high. In ACs, companies will not put up capacity; they will that imported last year are focus on marketing and selling. planning in-house production

88 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 89 INTERVIEW – Mr Maulesh Chhaya, Industry Expert, Mentor

Interview with industry expert – Mr Maulesh Chhaya – Mentor, The White Lotus Consultants; Ex- regional manager (Gujarat, Madhya Pradesh and Chhattisgarh,) LG Electronics.

The White Lotus Consultants provide consulting programs for MSME in core business domains

What is your view on the future of imports will reduce significantly? factories for mobile phones to ensure electronics manufacturing in India? What value addition (in %) do you India does not play a key role – are Do you think it will contribute largely expect in electronics going ahead? worrying. to the economic growth of the PLI scheme for electronics is good, and country? has again shifted CKD supplies to India Combining the push from the It has huge potential to boost from China, Korea and Vietnam, and a government for domestic economic growth for the country, majority of the conversion to finished manufacturing and building considering the penetration levels of products is happening in India, barring an ecosystem for component TVs, and the younger generation – who ultra-premium products that are still manufacturing, which product is consuming electronics every minute. supplied as CBUs, mainly from Korea category will see exports increasing We are the largest suppliers of mobiles for Samsung, LG Electronics, and Sony. first? globally. Maximum value addition will be 10- 15% in the near future. Mobile and TVs will be the first We can be largest suppliers of mobiles, products that would see immediate but not the largest manufacturers, as exports to other countries. most of the current manufacturing Major global companies are de- is conversion of CKDs received from risking their supply chain and looking China happening in India. for alternate countries to China, Can you give some insight on We are yet to create a component- such as India, Thailand, Malaysia, the current demand scenario into suppliers’ eco system in India. We Vietnam, etc. What is your view on electronics, and the growth expected are dependent on China, Taiwan, and India increasing its share in global over the next 5-7 years? Vietnam for this. electronics manufacturing? TV will see moderate growth of 8-10% In case of TVs, we do not have any With focused PLI schemes by GOI, in the near future. To push demand, open-cell manufacturers, as it is highly there are chances for India to play a manufacturers, GoI, and Indian retailers capital intensive and needs a huge major role in the global supply chain, need to work on bringing down the R&D base to support it. TCL was about but the most important is to get the cost to end consumers. 28% GST + to start manufacturing of open cells of core technologies and R&D to India for 15% overheads for brands + retailers TVs in India, but the India-China issues global manufacturers. GOI needs to margins of 25% totals 60%, which delayed this. incentivise and work on labour reforms should be brought down to 40% to aggressively to attract this, else they boost local consumption and become will settle down in other countries like globally competitive. Given the government push Malaysia, Vietnam, Thailand. Recent Mobiles could see growth of 10%+, to domestic manufacturing, by reports – that China is helping Pakistan as 5G would drive the growth for the imposing bans on few products, and Bangladesh to establish the industry. and introducing PLIs, do you think

90 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 91 OUTLOOK Make in India! But how soon will India make for the world?

Extensive interactions with companies However, critical components remain with many companies announcing (both listed and unlisted), channel a challenge and this is why India will fresh investments and relocation partners, and industry observers first focus on assembling, and then of their production bases to the indicates that Indian electronics turn to component manufacturing. In country, although the country still contract manufacturing is bound to the medium term, due to supply chain lacks the necessary resources (to an grow exponentially, given the efforts disruption (as capacities shift to India) extent) that it needs to become a being taken by the government the industry could go through some global export hub. Increased global and large industry bodies. The real price instability (prices could rise across attention towards India will lead to questions are about the extent and the consumer durables products). further contraction of the disability timing – when will the industry hit a gap between India and its competition tipping point? as the government will focus on India will become an attractive creating the required infrastructure destination for global giants for large-scale manufacturing in the Short/mid term Due to the trade war between USA country. Necessary steps will be taken to address the water, power supply, Increased localization will boost and China, and the pandemic, many , and infrastructure issues; necessary domestic manufacturing, reducing companies globally have realized the technical skills will be instilled in the import dependency pitfalls of their overdependence on one nation (China) for manufacturing workforce. for manufacturing. Incentives offered by the government electronics. Growing anti-china in the form of PLI, SPECS, EMC 2.0 will sentiment has led to many companies provide a necessary boost to the much- hedging, by shifting a part of their Mid/long term required localization in India. In the production to other countries such as High domestic value addition last few months, imports of consumer Vietnam, Thailand, India, Indonesia, electronics have been decreasing and Taiwan, and Malaysia. India is ahead of Current domestic value addition is exports have been rising, and this much of its competition, as it not only under 25-30% in product categories trend will continue. Many companies, provides a favourable environment for such as air conditioners, TVs, mobile domestic and international, have large scale electronics manufacturing phones, and small appliances. As the made considerable investments in but also has a large domestic market disability decreases and domestic setting up manufacturing bases in which is largely untapped. Many companies invest in adding capacities India, to cater to the large domestic companies have announced fresh and increasing capabilities, the market and to take part in the global investments in India and the trend is component manufacturing ecosystem supply chain. Higher tariffs imposed likely to continue, going forward. in the country is expected to see on imports of goods from China have robustness in output. Also, the reduced India’s import dependency, global component manufacturers giving local companies an opportunity Bridging the disability gap between would be looking to come to India. to ramp up their manufacturing and India and its competitors Domestic contract manufacturing, cater to the large domestic market. which currently assembles and India has had a rollercoaster of a year,

90 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 91 sources key components from outside lifestyle, many global companies have which bridges the disability gap India, will source components within found India an attractive destination. with competing nations such as India. In the mid- to long-term, Moreover, factors supporting domestic Vietnam and China. Currently, Indian except for raw materials, majority of contract manufacturing such as PLI manufacturers are far from achieving input components will be sourced schemes and capacity addition, is the dream of make for the world, as domestically. As the industry sees expected to increase at a higher rate certain challenges such as raw-material domestic manufacturing of key than in the past. Robust supply, and sourcing, skilled labour, and import components such as compressors, a majority of the supply chain being dependency in key components motors, etc., within 5-7 years, current within India, will support the durables lies. However, given the push by the value addition is expected to increase industry in bringing costs down, which government in terms of bringing from 25% to 80-90% over 5-7 years. in turn will make products affordable in schemes, companies’ de-risking Similarly, in mobile phones and TVs, to the country’s middle-income group China+1 strategy, India’s favourable with domestic manufacturing of and push up demand for products. In demographic, and lower penetration components like display and open cell key product categories such as ACs, in consumer durables gives investment over the next 5-7 years, the industry penetration level is expected to see comfort to foreign capital. India’s will see value addition of c.50%-70% low double-digit penetration within few make-in-India to ‘make-for-the-world’ from current 12-15%. years of the government introducing dream isn’t far. Global giants will schemes, and high penetration levels in invest in critical components in India the mid to long term. and making it an exports hub. Indian High penetration across product electronics manufacturing’s contribution categories to the GDP currently stands low, and India becoming an export hub, India has relatively low penetration in with all efforts being made, over the making for the world: The consumer durables compared to its next 5-7 years, its contribution to GDP Government of India and domestic peers. In air conditioners, penetration and India’s share in global electronics electronics industry has a strong is only 5%, which is significantly exports are bound to increase. intention to make India not just self- lower compared to 100% in China. reliant, but also globally competitive, Given the current lower penetration, and this reflects in government India’s demography, and improving schemes such as PLI, SPEC, etc.,

92 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 93 India moving towards Atmanirbhar

92 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 93 Channel Check

Interaction with one of the largest electrical regional retail chains of Andhra Pradesh

• AC is doing better than refrigerators and washing machines. • In ACs, we are stocking up from December 2020, but from March 2021 secondary sales are picking up. • This time, Samsung is going aggressive; offering good prices and products. In refrigerators and washing machines, the brand has not taken any price hikes. • Now, all companies are focusing on volume push, so price hike is not on the cards.

Interaction with regional retail chain (westzone )

• In ACs, channel has not stocked up much. Secondary sales growth is equal to primary sales growth. Over the last two months, this segment has seen 10-15% volume growth. Companies like Voltas and LG saw higher growth. Some supply-chain issues by companies such as Mitsubishi, etc. Overall industry price hike is c.8% over the last two months. • In refrigerators, higher growth in FF (above 350ltrs) of 15-20%. DC flat yoy. • In washing machines, higher growth in automatic at 15-20%; semi-automatic at c.10% • Voltas-Beko: This is the first year for DC, so there is higher focus on placement. • Samsung is aggressive in all products; higher focus on placement and price.

Interaction with one of the largest distributors from north India

• Refrigerator sales are hurt mainly because of the wedding season getting impacted. But we expect a strong season for ACs. Already, companies are seeing supply shortages. • In ACs, branded companies have hiked prices by 8-10% over the last two months.

Interaction with residential air conditioner distributor in Madhya Pradesh

• In ACs, banned imports of air conditioners with refrigerants has resulted in shortages. Some small companies are not able to import. Expects this to help Voltas, Lloyd, and Midea in gaining market share. • In January and February 2020, the AC industry saw a growth of 10-15% in volumes; increase in RM costs has resulted in a price hike of 10-12%.

Second wave of Covid impacted secondary sales of consumer durables in the month of April, channel expects c.40-60% impact on sales. Cooling products have seen a higher impact with inventories hovering at 3-4 weeks. Lower demand has led manufacturers and brands to cut their production by 20-30%

94 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 95 Indian Economy – Trend Indicators

Monthly Economic Indicators

Growth Rates (%) Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 IIP 5.2 -18.7 -57.3 -33.4 -16.6 -10.5 -7.1 1.0 4.5 -1.6 1.6 -0.9 -3.6 PMI 54.5 51.8 27.4 30.8 47.2 46.0 52.0 56.8 58.9 56.3 56.4 57.7 57.5 55.4 Core sector 6.4 -8.6 -37.9 -21.4 -12.4 -7.6 -6.9 0.6 -0.5 -1.1 0.2 0.9 -4.6 WPI 2.3 0.4 -1.6 -3.4 -1.8 -0.2 0.4 1.3 1.3 2.3 2.0 2.5 4.2 7.4 CPI 6.6 5.8 7.2 6.3 6.2 6.7 6.7 7.3 7.6 6.9 4.6 4.1 5.0 5.5 Money Supply 10.2 8.8 10.7 11.7 12.3 13.2 12.6 12.2 11.6 12.5 12.4 12.1 12.7 11.8 Deposit 10.0 7.9 9.8 10.7 11.0 12.0 10.9 10.5 10.1 10.9 11.3 11.1 12.0 11.4 Credit 7.5 6.2 6.7 6.2 6.2 6.3 5.5 5.1 5.1 5.8 6.1 6.0 6.6 5.6 Exports 3.2 -34.3 -60.3 -36.5 -12.4 -10.2 -12.7 6.0 -5.1 -8.7 0.1 6.2 0.7 60.3 Imports 3.6 -28.0 -58.6 -51.0 -47.6 -28.4 -26.0 -19.6 -11.5 -13.3 7.6 2.0 7.0 53.7 Trade deficit(USD Bn) 4.5 -9.2 -55.9 -79.5 -105.2 -64.0 -51.2 -76.6 -25.9 -22.6 23.7 -5.0 24.1 39.4 Net FDI (USD Bn) 2.7 4.0 0.2 -0.2 -0.8 3.5 18.2 2.9 4.6 5.7 6.5 3.5 -2.9 FII (USD Bn) -1.5 -15.0 -1.8 -0.4 3.3 0.7 5.6 1.4 3.0 9.8 8.6 1.2 2.7 ECB (USD Bn) 4.2 7.4 1.0 1.5 1.0 2.1 1.8 5.2 2.0 2.0 3.0 3.7 2.6 Dollar-Rupee 71.5 74.4 76.2 75.7 75.7 75.0 74.6 73.5 73.5 74.3 73.6 73.1 72.8 72.8 FOREX Reserves (USD Bn) 481.5 475.6 479.5 493.5 506.8 534.6 541.4 542.0 560.7 574.8 580.8 590.2 584.6 579.3 NRI Deposits (USD Bn) 132.5 130.6 129.3 131.1 132.7 135.1 137.8 137.3 138.0 139.3 140.5 142.2 142.4

Quarterly Economic Indicators

Balance of Payment (USD Bn) Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Exports 83.1 87.4 82.7 80.0 81.2 76.5 52.4 75.6 77.2 Imports 132.4 122.6 129.5 119.6 117.3 111.6 63.2 90.4 111.8 Trade deficit -49.3 -35.2 -46.8 -39.6 -36.0 -35.0 -10.8 -14.8 -34.5 Net Invisibles 31.5 30.6 31.8 32.1 33.4 35.6 29.8 29.9 47.4 CAD -17.8 -4.6 -15.0 -7.6 -2.6 0.6 19.0 15.1 -1.7 CAD (% of GDP) -2.7 -0.7 -2.1 -1.1 -0.4 0.1 3.7 2.4 0.2 Capital Account 13.8 19.2 28.6 13.6 23.6 17.4 1.2 16.1 33.5 BoP -4.3 14.2 14.0 5.1 21.6 18.8 19.8 31.6 32.5

GDP and its Components (YoY, %) Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Agriculture & allied activities 2.6 1.6 3.3 3.5 3.4 5.9 3.3 3.0 3.9 Industry 4.3 1.4 1.0 -2.7 -3.0 0.0 -31.1 -1.6 1.4 Mining & Quarrying -7.3 -4.8 -1.3 -5.2 -3.6 5.2 -18.0 -7.6 -5.9 Manufacturing 5.6 2.1 0.6 -3.0 -2.9 -1.4 -35.9 -1.5 1.6 Electricity, Gas & Water Supply 8.7 5.5 6.9 1.7 -3.1 4.5 -9.9 2.3 7.3 Services 6.5 8.3 6.8 7.3 5.8 3.5 -24.8 -10.9 0.0 Construction 7.0 6.0 3.7 1.0 -1.3 -2.2 -49.4 -7.2 6.2 Trade, Hotel, Transport and Communications 9.7 6.9 6.2 6.8 7.0 2.6 -47.6 -15.3 -7.7 Finance, Insurance, Real-Estate & Business Services 4.5 8.7 8.8 8.9 5.5 2.4 -5.4 -9.5 6.6 Community, Social & Personal Services 4.7 11.6 5.6 8.8 8.9 10.1 -9.7 -9.3 -1.5 GDP at FC 5.3 5.6 5.0 4.6 3.4 3.0 -22.4 -7.3 1.0

94 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 95 Annual Economic Indicators and Forecasts

Indicators Units FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23

Real GDP/GVA growth % 6.1 7.2 8.0 8.0 6.6 6.0 3.9 -6.0 11.5-12.5 5-6

Agriculture % 5.6 -0.2 0.6 6.8 5.9 2.4 4.0 3.6 3.5-4.0 3.5-4

Industry % 4.2 8.1 11.9 8.4 6.8 4.5 0.8 -6.3 11.5-12.5 5-5.5

Services % 6.9 9.0 8.6 8.1 7.8 7.7 6.4 -8.2 13-14 5.5-6

Real GDP ` Bn 90636 97121 104919 113190 121042 128031 133011 123392 138199 145800

Real GDP US$ Bn 1499 1588 1603 1687 1878 1844 1887 1667 1919 2083

Nominal GDP ` Bn 112335 124680 137719 153624 170950 189712 203398 194820 227696 248644

Nominal GDP US$ Bn 13.0 11.0 10.5 11.5 11.3 11.0 7.2 -4.2 16.9 9.2

WPI (Average) % 1858 2039 2104 2290 2652 2714 2885 2633 3162 3552

CPI (Average) 9.5 6.4 4.9 4.5 3.6 3.4 4.8 6.1 5-5.5 4.5-5

Money Supply % 13.5 12.0 10.3 7.3 9.6 10.6 8.8 12.7 8.5-9.5 9-10

CRR % 4.00 4.0 4.0 4.0 4.0 4.0 3.0 3.5 4.0 4.0

Repo rate % 8.00 7.50 6.75 6.25 6.00 6.25 4.40 4.0 4.0 4.0

Reverse repo rate % 7.00 6.50 5.75 5.75 5.75 6.00 4.00 3.35 3.75 3.75

Bank Deposit growth % 14.6 12.1 9.7 11.2 6.2 9.6 8.3 12.7 8.5-9.5 9-10

Bank Credit growth % 13.5 12.5 10.7 4.7 9.8 13.0 7.5 6.6 '10-11 9-10

Centre Fiscal Deficit ` Bn 5245 5107 5328 5356 5911 6494 9356 18486 15068 14919

Centre Fiscal Deficit % of GDP 4.6 4.1 3.9 3.5 3.5 3.4 4.6 9.5 6.8 6.0

State Fiscal Deficit % of GDP 2.2 2.6 3.1 3.5 2.4 2.9 3.2 4.5 3.5 3.2

Consolidated Fiscal Deficit % of GDP 7.1 6.6 7.0 7.0 5.9 6.3 7.8 14.0 10.3 9.2

Exports US$ Bn 318.6 316.7 266.4 280.1 309.0 337.2 320.4 290.0 339.3 352.9

YoY Growth % 3.9 -0.6 -15.9 5.2 10.3 9.1 -5.0 -9.5 17.0 4.0

Imports US$ Bn 466.2 460.9 396.4 392.6 469.0 517.5 477.9 391.9 501.6 526.7

YoY Growth % -7.2 -1.1 -14.0 -1.0 19.5 10.3 -7.6 -18.0 28.0 5.0

Trade Balance US$ Bn -147.6 -144.2 -130.1 -112.4 -160.0 -180.3 -157.5 -101.9 -162.4 -173.9

Net Invisibles US$ Bn 115.2 116.2 107.9 97.1 111.3 123.0 132.8 128.0 143.5 151.2

Current Account Deficit US$ Bn -32.4 -27.9 -22.2 -15.3 -48.7 -57.3 -24.7 26.1 -18.8 -22.7

CAD (% of GDP) % -1.7 -1.4 -1.1 -0.7 -1.8 -2.1 -0.9 1.0 -0.6 -0.6

Capital Account Balance US$ Bn 48.8 90.0 41.1 36.5 91.4 54.4 83.2 56.5 71.5 80.0

Dollar-Rupee (Average) 60.5 61.2 65.5 67.1 64.5 69.9 70.5 72-76 70-74 68-73

Source: RBI, CSO, CGA, Ministry of Agriculture, Ministry of commerce, Bloomberg, PhillipCapital India Research

96 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 97 6.0 8.1 23.8 16.2 19.3 20.0 22.8 43.7 37.3 48.1 12.9 10.1 21.5 24.8 36.7 40.4 26.7 24.7 13.0 23.1 24.9 49.3 12.9 16.1 10.1 FY23E 5.5 9.7 5.5 9.9 8.3 ROCE (%) 23.9 14.5 18.8 18.8 22.5 39.5 49.5 37.4 13.4 19.3 22.8 30.5 42.3 27.6 25.0 13.2 23.5 45.7 18.3 10.4 FY22E 9.0 22.9 16.5 18.6 21.9 21.8 45.9 47.8 34.6 13.9 22.0 25.0 11.6 33.8 22.3 65.3 24.7 24.1 12.2 34.3 24.5 34.3 15.5 17.9 12.4 FY23E 8.3 9.4 7.9 ROE (%) 23.1 15.1 18.6 21.1 21.6 47.2 50.2 34.8 14.6 19.8 23.0 10.9 29.3 14.8 72.5 25.6 24.7 20.7 23.9 29.8 17.5 15.2 FY22E 6.0 9.7 7.7 3.3 9.8 9.9 34.8 15.7 11.7 22.7 14.2 27.5 26.0 24.2 32.3 11.3 19.8 36.2 12.2 17.3 32.3 25.8 13.5 14.1 38.5 FY23E 6.8 8.7 4.4 39.4 20.0 13.5 25.4 17.3 32.9 28.3 27.4 37.2 12.7 10.8 22.3 42.2 14.6 11.3 24.0 16.9 40.6 32.9 14.8 18.3 50.6 EV/EBITDA (x) EV/EBITDA FY22E 9.6 3.4 4.3 6.9 3.5 1.1 3.5 2.2 1.6 9.6 1.0 3.5 3.2 3.7 5.9 2.7 4.1 17.0 19.4 11.8 10.4 35.4 12.1 20.5 12.0 FY23E P/B (x) 3.9 5.0 7.5 4.1 1.2 3.7 2.4 1.8 1.3 4.2 3.7 4.2 7.1 3.2 4.9 20.9 22.0 13.4 10.7 11.7 45.9 10.9 14.7 24.7 13.3 FY22E 4.6 20.8 22.9 31.5 16.0 12.4 37.1 40.6 34.1 47.1 14.1 15.5 14.0 28.3 54.2 14.3 13.1 42.0 30.7 17.1 49.2 59.6 17.6 23.0 96.6 FY23E P/E (x) 8.8 25.6 26.8 35.5 18.8 14.6 44.4 43.9 38.5 54.2 15.9 16.8 16.7 40.0 63.3 16.5 15.0 47.3 44.8 34.3 61.8 82.9 18.4 32.1 169.1 FY22E 8 8 5 23 17 13 18 17 20 13 15 13 19 41 17 92 16 14 12 46 26 39 40 75 100 FY23E 5 0 8 -1 65 65 14 21 27 14 20 22 32 25 18 47 11 28 13 457 105 206 -474 -228 1,554 FY22E EPS Growth (%) EPS Growth 7 9 61 22 19 93 12 40 47 15 55 17 69 19 12 27 30 50 79 27 341 234 115 308 255 FY23E 4 5 53 19 16 77 10 37 41 13 51 97 12 36 16 11 18 24 36 75 19 EPS ( ` ) 277 199 264 223 FY22E 653 8,633 4,647 7,646 2,794 6,572 9,386 3,227 FY23E 22,248 11,021 67,753 22,247 14,921 10,878 65,647 29,718 50,942 21,995 20,898 26,727 12,475 1,02,954 1,09,937 1,78,309 2,14,403 ` mn) 447 PAT ( 7,393 9,401 3,915 5,419 2,411 4,728 8,964 8,934 1,843 FY22E 83,805 19,752 57,623 18,588 13,203 10,047 95,579 60,735 25,456 44,621 19,558 10,456 21,292 1,57,909 1,11,789 2,903 1,094 8,760 FY23E 15,934 30,885 73,908 30,691 30,378 20,622 16,453 95,337 10,708 10,596 43,319 66,571 25,738 35,447 39,416 14,545 12,227 22,458 1,27,948 2,16,184 1,55,972 6,33,668 ` mn) 812 9,661 9,585 2,548 6,606 FY22E EBIDTA ( 14,107 27,823 61,520 28,493 25,602 18,353 15,238 90,339 37,504 58,587 22,998 21,976 31,867 11,540 11,675 17,611 1,02,824 1,91,872 1,35,946 4,69,307 FY23E 91,312 87,096 98,292 56,583 33,542 10,158 10,971 56,192 54,216 82,047 1,31,903 9,41,840 3,66,000 1,96,040 1,53,137 6,32,971 5,48,198 1,67,435 5,90,525 4,15,968 1,16,963 2,82,815 2,89,585 1,07,548 39,06,561 9,346 9,775 FY22E 81,299 80,195 88,897 51,944 30,429 90,736 45,524 43,577 79,460 Net Sales ( ` mn) 1,19,682 8,48,143 3,22,631 1,83,272 1,35,625 5,82,097 4,93,230 1,49,222 5,24,963 3,78,643 1,06,051 2,18,290 2,43,852 32,71,940 40 702 198 152 827 509 441 217 669 925 358 287 392 312 186 65.3 20.0 ` bn 2,144 1,084 1,064 1,124 2,526 1,612 5,180 1,316 Mkt Cap ` 686 239 856 394 487 318 205 270 523 822 122 617 877 CMP 7,096 3,746 1,408 3,434 1,613 1,622 2,205 3,351 1,483 2,972 1,381 16,722 FMCG Automobiles Automobiles Automobiles Automobiles FMCG Automobiles Automobiles Sector FMCG FMCG FMCG Automobiles FMCG FMCG FMCG FMCG Automobiles FMCG FMCG Automobiles Retail Automobiles Retail Retail Automobiles - Godrej Consumer Consumer Godrej Products Maruti Suzuki ogies Bajaj Auto Apollo Tyres Britannia Mahindra & Mahindra Mahindra Ceat Marico Industries Colgate Emami Name of company Tata Motors Tata Hindustan Unilever ITC Nestle Bajaj Corp Hero MotoCorp Hero Dabur India Agro Tech Foods Tech Agro Ashok Leyland Titan Company Titan Bharat Forge Bharat Jubilant Foodworks Trent* Escorts Technol Endurance Valuation Summary PhillipCapital India Coverage Universe: Valuation

96 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 97 - 8.5 2.1 3.1 2.3 6.8 0.8 1.5 1.6 14.0 28.6 14.3 15.2 16.8 18.2 17.1 27.3 17.1 12.8 24.3 14.2 19.0 16.4 22.9 -12.0 FY23E 7.3 2.0 3.0 2.2 5.0 0.8 1.5 1.4 ROCE (%) 12.1 30.0 12.4 14.5 19.2 11.1 19.4 19.0 26.5 16.7 10.5 22.4 13.5 19.6 16.9 22.8 -13.9 FY22E - 8.0 9.0 15.2 25.3 14.2 16.8 30.8 15.2 17.4 23.9 13.9 13.8 26.7 14.1 17.5 14.1 12.1 13.5 24.7 13.3 17.7 15.8 21.7 -11.7 FY23E 5.8 5.1 3.7 ROE (%) 13.4 26.2 12.6 16.2 19.3 16.7 17.2 25.6 13.4 13.2 26.0 14.3 17.3 13.8 10.9 10.6 23.3 12.5 18.2 16.3 21.6 -13.5 FY22E - 6.1 6.6 4.5 9.7 4.7 4.6 7.1 6.1 8.3 7.2 25.8 20.4 14.2 29.8 18.5 11.1 23.4 35.7 22.6 31.6 39.1 13.1 29.8 -12.9 FY23E 5.6 7.6 7.0 5.5 5.5 4.8 8.1 6.5 8.3 23.8 16.4 36.4 22.6 13.1 10.9 28.1 41.9 25.7 10.6 38.2 47.0 15.1 33.0 31.8 -12.1 EV/EBITDA (x) EV/EBITDA FY22E - 9.0 5.7 7.9 8.4 1.5 3.1 1.7 2.4 4.7 1.7 1.2 6.4 1.8 1.5 2.3 6.2 3.4 6.7 1.8 1.6 5.4 11.6 14.3 11.0 FY23E P/B (x) 6.2 9.1 2.1 1.8 3.7 2.1 2.7 5.4 1.8 1.4 7.2 2.1 1.7 2.6 6.9 3.9 7.6 1.9 1.9 6.1 11.0 10.0 15.9 16.5 12.6 FY22E - 7.0 8.8 7.4 35.6 70.5 55.7 50.0 37.8 10.0 19.3 17.4 36.2 19.0 53.4 36.8 13.8 13.2 17.4 44.6 46.7 19.0 42.4 35.5 -15.1 FY23E P/E (x) 8.3 9.9 8.8 41.9 72.6 61.7 10.7 10.6 22.9 20.3 43.3 49.1 63.4 41.9 15.8 16.6 24.8 54.3 54.7 21.5 46.7 45.6 -14.3 106.9 310.5 FY22E - 6 -5 18 52 30 23 18 19 17 20 19 12 14 14 25 43 22 17 13 10 19 28 722 159 FY23E 1 33 24 19 11 32 30 18 78 30 60 62 21 35 21 21 76 66 -76 313 144 -136 -498 -103 -176 FY22E EPS Growth (%) EPS Growth - 8 3 6 5 49 57 12 80 88 35 53 15 45 43 27 54 77 25 25 23 71 67 29 -27 FY23E 7 2 1 6 5 37 46 26 12 68 74 30 45 38 38 24 47 62 18 20 19 63 57 23 EPS ( ` ) -28 FY22E - 686 175 1,759 2,909 1,323 1,028 2,426 1,204 4,322 1,064 7,457 2,318 5,256 2,928 FY23E -4,077 43,122 59,698 15,446 10,643 4,40,192 2,44,343 1,05,795 3,85,276 1,68,486 ` mn) 84 68 834 747 PAT ( 1,494 1,917 1,015 1,962 2,292 1,008 3,793 6,367 9,419 2,108 4,428 2,280 FY22E -4,298 88,377 36,324 47,604 12,703 3,71,524 2,08,882 3,42,672 1,46,524 - 984 3,004 2,495 3,251 6,264 3,900 2,029 6,786 2,432 8,825 3,243 6,409 4,573 FY23E -3,915 16,657 62,876 21,534 15,152 7,70,754 4,36,216 1,64,031 7,42,463 3,22,785 1,27,370 ` mn) 852 2,595 2,060 2,652 3,816 5,384 3,686 1,731 6,047 1,996 7,398 2,914 5,573 3,741 FY22E -4,273 EBIDTA ( 14,422 54,031 17,907 13,227 6,52,590 3,87,566 1,36,360 7,05,092 2,84,566 1,19,030 - 7,102 FY23E 26,526 26,756 23,597 33,232 26,541 27,075 35,815 21,289 99,451 30,014 24,393 57,373 59,785 1,04,405 9,11,903 5,13,734 2,03,321 2,72,156 3,94,158 1,62,875 1,44,596 1,14,749 13,20,109 6,203 FY22E 23,344 92,845 23,569 18,887 32,209 29,868 25,540 23,576 32,112 18,773 87,747 27,471 21,778 50,916 53,700 Net Sales ( ` mn) 7,77,517 4,50,208 1,76,277 2,36,140 3,45,127 1,45,680 1,25,654 1,02,212 12,24,968 8 63 74 56 21 26 99 62 44 3.3 202 159 775 691 348 203 117 ` bn 24.3 18.5 8,553 4,237 3,835 2,303 3,401 2,299 Mkt Cap ` 295 219 278 237 123 612 613 285 381 751 436 230 403 495 CMP 2,711 2,834 1,552 1,935 2,401 1,000 1,023 1,103 1,053 1,360 1,025 Con Electricals Con Retail Sector Con Electricals Con Retail Packaging Retail Consumer- Ot Consumer- Retail Banks Banks Retail Banks Banks Paints/Tiles Paints/Tiles Banks Paints/Tiles Banks Con Electricals Con Con Electricals Con Con Electricals Con Con Electricals Con Con Electricals Con Con Electricals Con Con Electricals Con Orient Electric Ltd ABFRL* Name of company Johnson Control Hitach Johnson Control V-Mart* Huhtamaki PPL Ltd Huhtamaki PPL Shoppers Stop* Indo Count Industries Indo Count Thangamayil Thangamayil HDFC Bank ICICI Bank KDDL Kotak Mahindra Bank Mahindra Kotak State Bank ofState India Asian Paints Kajaria Ceramics Kajaria AXIS Bank Somany Ceramics Indusind Bank Havells India Voltas Polycab VGuard Industries VGuard Finolex Cables Cables Finolex KEI Industries Bajaj Electricals Valuation Summary PhillipCapital India Coverage Universe: Valuation

98 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 99 ------1.2 2.1 8.1 8.0 1.5 9.7 9.9 29.6 14.1 15.3 16.3 FY23E ------0.4 0.6 1.1 2.1 8.8 8.0 1.5 2.6 ROCE (%) 25.2 14.2 15.4 20.3 11.3 11.4 FY22E - - - - 9.6 8.9 9.4 22.6 16.5 32.5 11.7 13.3 15.8 21.1 15.3 17.5 10.1 19.1 15.9 16.2 23.4 10.1 13.1 20.7 32.7 FY23E 7.6 9.0 ROE (%) 24.6 17.8 22.7 10.9 27.8 10.3 12.7 17.1 24.4 15.8 16.3 11.2 19.1 10.3 16.2 19.9 12.1 24.8 12.9 13.4 15.0 20.6 35.6 FY22E - - - 4.0 7.3 3.5 5.9 8.7 4.1 3.9 5.1 9.5 5.8 3.6 4.9 5.6 3.7 3.9 4.6 3.5 21.0 30.5 22.5 22.9 25.8 FY23E 2.0 4.9 1.3 7.8 3.8 6.7 8.9 4.3 4.5 5.3 6.3 4.0 4.3 6.0 3.9 4.5 4.5 3.9 4.6 35.5 25.8 11.2 26.9 30.6 23.4 EV/EBITDA (x) EV/EBITDA FY22E - - - 6.5 1.3 3.9 0.7 3.6 1.7 2.4 1.3 1.6 0.9 3.4 0.9 0.8 1.1 2.1 0.7 1.3 0.5 1.0 6.2 6.7 14.5 FY23E P/B (x) 7.5 0.5 1.5 0.4 3.7 0.8 3.9 2.0 2.8 1.4 1.9 0.9 4.1 1.1 0.9 1.2 2.1 0.8 1.6 0.6 1.1 0.9 7.4 7.3 15.1 FY22E - - - - 6.6 8.4 1.6 8.5 3.4 9.6 5.3 7.1 7.3 5.9 5.2 39.2 10.7 12.0 31.1 10.7 12.2 17.5 32.6 48.1 31.1 FY23E P/E (x) 6.8 4.1 8.6 8.6 1.9 8.4 4.1 6.0 6.1 6.2 6.9 4.5 8.8 6.7 42.0 14.5 13.4 35.5 11.6 12.6 10.2 18.5 38.5 51.6 31.3 FY22E - - 7 8 3 2 6 6 7 1 -1 35 11 29 14 15 20 13 16 18 -13 -15 -13 -100 -100 FY23E 6 -4 -6 13 74 99 27 11 33 26 23 15 31 26 33 19 14 84 12 30 15 36 63 150 104 FY22E EPS Growth (%) EPS Growth - - - - 23 12 25 17 83 39 26 85 35 81 19 12 44 28 14 45 64 11 105 818 154 FY23E 9 11 22 32 23 13 72 36 26 86 32 71 22 11 51 24 16 52 38 59 11 EPS ( ` ) 102 712 128 173 FY22E - - - 3,341 5,393 FY23E 21,783 93,962 42,071 97,933 45,347 24,447 76,765 40,745 55,566 14,759 44,391 23,336 12,523 58,090 29,260 25,268 10,111 1,06,104 1,47,497 1,01,943 ` mn) PAT ( 2,472 4,179 3,264 9,094 FY22E 52,687 19,302 36,118 95,335 86,713 40,739 96,190 36,922 20,411 72,263 36,037 64,161 13,937 51,975 20,061 11,441 66,841 24,896 21,289 1,29,470 1,03,348 - - - 9,082 FY23E 29,933 10,288 59,240 85,781 45,978 60,678 75,049 46,023 35,539 28,431 29,260 25,268 10,111 1,57,009 2,05,363 2,45,694 3,02,004 2,86,771 2,02,683 1,26,030 1,36,899 ` mn) 7,359 9,397 4,766 9,094 FY22E EBIDTA ( 25,743 57,525 73,927 38,899 53,823 85,538 42,809 30,713 25,556 24,896 21,289 2,03,808 1,16,000 1,44,441 1,79,327 2,23,772 2,93,230 2,95,876 1,96,154 1,36,413 1,48,344 - - - FY23E 14,302 16,337 84,561 62,181 67,991 64,388 49,348 43,535 29,790 16,223 1,49,517 2,84,533 1,88,430 9,77,281 1,08,048 1,62,067 4,30,131 7,80,307 1,28,523 10,19,242 15,26,887 14,75,683 5,610 FY22E 11,698 14,628 79,458 93,476 52,390 60,475 59,350 43,504 38,845 25,445 14,389 Net Sales ( ` mn) 1,30,015 3,25,156 1,82,415 2,60,004 8,95,255 1,68,755 9,56,172 1,62,089 4,41,429 7,70,648 1,14,493 15,39,250 14,39,455 36 36 22 914 400 149 513 823 335 830 436 742 217 393 258 324 139 100 301 669 652 212 ` bn 1,276 1,012 4,630 Mkt Cap ` 77 73 914 133 132 302 115 419 221 720 532 330 430 134 209 318 164 347 347 CMP 2,568 1,278 1,325 1,521 1,471 3,063 NBFC Banks Sector NBFC Banks Metals Banks Metals NBFC NBFC Metals NBFC Metals NBFC Metals NBFC Metals NBFC Metals NBFC Metals NBFC NBFC NBFC NBFC NBFC SBI Life Bank of Baroda Name of company Magma Fincorp Indian Bank Hindustan Zinc DCB Bank JSW Steel JSW HDFC Limited Muthoot Finance Vedanta Shriram Transport Fin Transport Shriram Tata Steel Tata Cholamandalam Fin Hindalco LIC Housing Finance NMDC Mah & Finance Jindal Steel & power Jindal Steel Manappuram Finance Manappuram SAIL Shriram City Union Fin Shriram Repco Home Finance Home Finance Repco ICICI Lombard HDFC AMC Nippon Life AMC Valuation Summary PhillipCapital India Coverage Universe: Valuation

98 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 99 - 8.1 6.5 3.3 7.9 8.6 -0.7 17.0 17.6 10.6 12.4 15.4 10.4 12.1 19.1 10.2 15.7 10.3 13.4 13.9 12.6 23.8 10.7 17.3 -50.3 FY23E 7.0 5.5 8.9 6.7 6.1 9.3 2.5 5.9 8.9 ROCE (%) 12.1 11.0 15.8 10.1 10.4 19.4 11.5 14.3 12.8 11.0 13.3 23.8 11.7 13.9 13.0 -49.0 FY22E - - 7.5 9.7 3.7 8.8 9.2 15.2 16.9 13.7 12.0 14.2 11.2 12.0 18.4 10.9 16.8 10.8 17.4 14.2 15.5 20.6 11.7 17.6 -71.2 FY23E 5.2 6.4 5.2 7.7 9.4 2.7 6.7 9.3 ROE (%) 11.9 13.1 11.0 15.3 10.8 10.4 18.7 11.9 15.6 17.3 11.3 16.8 20.4 12.3 14.3 14.1 -87.0 FY22E - - 3.9 6.0 8.7 4.3 9.8 9.3 3.8 6.4 7.1 8.7 6.6 8.1 -9.2 10.4 15.7 13.3 16.3 18.1 36.3 42.1 10.0 25.8 28.7 FY23E 7.2 4.5 7.6 9.8 9.9 7.6 4.9 7.7 8.3 9.2 8.3 5.7 -9.4 25.1 15.4 18.7 20.0 42.5 59.3 10.4 30.7 11.1 35.8 10.6 20.3 EV/EBITDA (x) EV/EBITDA FY22E - - 3.8 0.4 3.4 1.0 2.4 5.1 6.0 7.2 2.5 2.2 0.6 4.9 2.2 4.4 4.6 2.6 1.2 2.3 2.2 1.8 1.9 1.0 2.8 FY23E P/B (x) 1.1 4.2 0.4 3.9 1.1 2.7 5.8 6.6 2.4 8.0 2.8 2.4 0.6 5.2 2.3 4.8 5.6 3.1 1.3 2.7 2.3 1.9 2.1 1.1 3.3 FY22E - - 5.2 8.3 -6.4 22.2 24.7 10.5 20.1 35.8 54.0 60.2 14.5 20.2 16.6 30.2 24.4 40.9 15.1 14.9 10.9 15.0 10.6 11.4 18.6 FY23E P/E (x) 8.1 7.8 -6.5 16.6 35.5 29.7 14.4 24.2 38.2 61.1 23.5 85.4 15.9 20.1 23.9 34.7 35.0 51.8 17.7 11.9 16.2 11.8 15.8 14.9 62.9 FY22E - - 6 0 9 8 5 -0 60 56 20 37 20 13 42 10 44 15 43 27 18 43 41 -31 238 FY23E 4 5 33 65 39 57 29 42 48 30 84 22 16 41 32 21 24 24 13 52 16 20 -387 -227 FY22E -4,226 EPS Growth (%) EPS Growth - - 8 4 3 8 7 7 25 75 36 24 10 89 29 60 34 31 48 15 34 33 268 773 -453 FY23E 4 5 3 9 2 7 6 2 18 63 12 31 17 89 42 25 27 26 14 33 24 49 EPS ( ` ) 223 726 -453 FY22E - 562 1,505 1,543 5,175 8,117 4,076 7,868 3,463 7,124 4,257 2,759 6,291 4,406 1,820 FY23E -2,700 77,420 27,893 12,642 16,652 23,604 11,230 11,256 -35,041 1,06,314 ` mn) 938 360 538 PAT ( 6,588 1,128 3,650 7,794 7,856 7,056 3,217 6,694 3,176 4,979 3,948 2,617 4,466 6,422 FY22E 64,487 88,251 26,191 24,502 11,175 16,730 21,418 -35,007 - - 2,079 1,957 2,790 6,864 8,762 5,531 6,047 4,323 5,152 8,048 5,648 3,326 FY23E 50,859 17,490 27,641 35,080 18,694 28,672 15,131 17,076 -24,707 1,42,416 2,02,559 ` mn) 1,309 1,622 2,167 4,929 7,465 4,421 5,550 3,775 4,626 5,360 7,486 1,777 FY22E EBIDTA ( 12,037 46,492 53,667 15,172 25,852 32,109 15,300 26,405 13,418 14,707 -25,455 1,26,677 1,75,618 - n.a. n.a. FY23E 18,819 21,583 31,548 75,943 58,578 63,742 74,021 25,133 30,442 28,821 39,199 39,129 39,910 6,06,732 1,92,989 1,44,640 1,63,257 1,68,065 2,72,203 1,47,055 1,50,935 1,49,007 17,24,932 FY22E 89,804 14,401 19,385 26,626 66,348 52,628 53,768 69,845 23,455 31,843 25,688 27,823 40,139 33,541 Net Sales ( ` mn) 5,36,818 1,70,631 1,27,319 2,88,159 1,58,665 1,53,155 2,48,260 1,27,009 1,40,939 1,38,394 15,48,528 3 33 16 52 59 52 41 66 50 34 109 999 683 575 312 336 341 186 275 245 167 226 118 ` bn 2,126 1,914 Mkt Cap ` 59 21 53 83 182 261 290 140 884 461 227 397 100 363 382 132 CMP 1,514 6,638 1,919 1,471 1,788 1,475 1,399 2,925 27,702 Cap Goods Cap Metals Metals Sector Cap Goods Cap Cap Goods Cap Cement Cement Cap Goods Cap Cement Cap Goods Cap Cement Cap Goods Cap Cap Goods Cap Cement Cap Goods Cap Cap Goods Cap Cement Cap Goods Cap Cement Cap Goods Cap Cap Goods Cap Cement Cap Goods Cap Cap Goods Cap Cap Goods Cap Praj Inds. Praj NALCO Pennar Inds. Pennar Name of company VA Tech Wabag Tech VA Larsen & Toubro Ultratech Cement Ultratech Cement Shree Siemens Ambuja Cement ABB India ACC Bharat BHEL Dalmia Bharat Cummins India Thermax JK Cement JK KEC International HeidelbergCement HeidelbergCement Kalpataru power Kalpataru Engineers India Star Cement Star Bharat Dynamics Bharat Cochin Shipyard Cochin GE T&D

Valuation Summary PhillipCapital India Coverage Universe: Valuation

100 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 101 - 9.9 7.0 12.6 21.8 13.3 13.7 27.7 16.1 21.9 21.9 41.4 27.7 17.3 18.0 16.8 17.8 12.9 13.2 21.4 24.0 23.8 22.6 23.1 15.8 FY23E 9.4 4.9 5.8 ROCE (%) 12.5 20.8 13.0 11.0 26.9 14.0 16.8 16.8 43.1 28.3 13.5 18.4 17.2 18.4 13.2 12.4 20.4 24.6 23.5 23.9 22.9 15.9 FY22E - 6.7 12.9 23.2 16.1 11.0 17.0 21.7 17.9 17.2 12.0 41.8 26.0 17.7 18.0 14.8 17.7 16.5 17.5 21.3 24.6 22.6 21.7 22.5 15.8 FY23E 5.0 5.0 ROE (%) 12.9 21.7 15.9 10.6 14.1 20.9 16.2 13.3 11.0 44.5 26.5 14.6 18.5 15.5 18.3 17.4 17.4 20.8 25.6 22.4 23.2 22.2 16.0 FY22E - 9.3 6.3 6.4 2.4 9.8 7.0 12.4 12.9 10.8 22.2 12.5 19.3 15.6 14.0 10.9 14.3 12.9 11.5 11.3 20.8 20.5 15.0 13.4 15.2 FY23E 7.5 9.0 7.3 3.2 8.3 10.3 13.8 15.1 14.8 28.5 14.3 14.7 22.0 17.1 19.1 12.2 15.4 13.7 13.2 14.6 24.0 23.8 17.1 16.0 17.3 EV/EBITDA (x) EV/EBITDA FY22E

4.4 1.9 2.4 3.3 0.6 6.9 0.7 2.8 2.9 6.0 4.6 3.0 1.8 3.5 2.8 3.1 3.5 6.8 6.3 4.9 5.3 3.6 2.1 10.7 FY23E P/B (x) 4.7 2.2 2.6 1.0 3.9 0.6 8.6 0.9 3.3 3.2 6.9 5.6 3.6 2.1 4.0 3.2 3.5 4.4 8.3 7.4 6.0 6.3 4.2 2.3 13.0 FY22E

8.4 4.1 19.1 11.9 21.6 19.7 32.0 16.5 23.9 25.6 23.0 26.2 16.8 12.1 19.7 17.3 17.3 16.5 27.7 27.8 22.4 23.4 23.0 16.4 FY23E P/E (x) 5.5 21.7 14.0 24.9 19.2 27.9 11.8 41.2 24.8 29.1 29.3 25.9 38.1 19.2 13.5 21.8 18.7 19.7 20.9 32.4 33.0 25.7 28.1 26.0 18.1 FY22E - 8 13 18 16 42 42 29 34 50 22 15 13 45 14 11 11 14 27 17 18 15 20 13 11 FY23E 1 3 5 3 3 8 -1 14 14 84 14 85 18 22 45 21 13 64 17 14 29 10 23 20 12 FY22E EPS Growth (%) EPS Growth - 5 85 36 28 69 49 44 60 15 58 70 22 58 26 98 83 78 42 225 110 120 118 145 116 FY23E 9 4 75 31 25 85 51 32 36 53 11 51 63 19 54 22 93 83 73 97 68 37 EPS ( ` ) 159 104 124 FY22E - 4,250 1,330 1,835 7,039 5,928 4,569 FY23E 15,892 68,302 38,371 29,124 39,256 19,851 18,321 40,759 50,695 26,153 14,943 25,222 10,394 13,733 4,48,405 2,54,577 1,58,062 1,22,600 ` mn) 939 PAT ( 3,614 2,788 1,374 8,773 5,860 5,231 4,120 FY22E 14,031 59,121 27,017 22,650 26,091 16,338 12,604 36,604 46,803 22,985 11,779 21,582 11,974 3,90,796 2,25,523 1,38,533 1,10,865 - 4,016 3,329 8,089 6,947 FY23E 22,295 10,597 65,509 41,359 62,666 38,617 35,153 64,903 74,777 42,278 20,291 32,991 14,079 20,041 10,753 1,02,679 5,80,150 3,54,127 2,40,125 1,60,314 ` mn) 9,287 9,081 3,525 2,788 9,305 7,241 6,433 FY22E EBIDTA ( 20,221 91,784 49,300 32,425 45,201 33,666 26,193 58,573 70,668 37,719 16,303 28,863 12,167 17,750 5,11,561 3,15,570 2,15,136 1,48,526 - FY23E 53,573 18,085 15,964 74,684 69,992 99,713 60,468 51,598 48,683 1,22,300 4,01,874 2,48,138 1,06,048 2,55,779 1,95,109 1,17,401 9,56,877 2,82,185 7,26,611 4,42,751 1,84,220 1,62,466 20,52,423 13,02,640 FY22E 46,584 60,019 16,191 85,104 13,661 96,528 63,548 62,012 89,260 53,271 46,123 44,674 Net Sales ( ` mn) 1,09,511 3,71,108 2,14,350 2,15,242 1,77,370 8,58,430 2,62,660 6,68,645 4,10,018 1,65,827 1,41,883 18,41,165 11,58,270 8 50 53 11 75 302 736 932 650 476 480 497 971 453 702 248 288 308 165 136 ` bn 1,472 5,857 2,657 2,330 11,312 Mkt Cap ` 44 429 614 172 285 806 400 979 848 425 443 680 CMP 1,617 4,427 3,512 3,058 1,050 1,375 1,003 4,016 1,953 2,742 1,872 2,722 1,783 Cement IT Services IT Sector Pharma Cement Pharma Cement Pharma Cement Pharma IT Services IT Pharma Pharma IT Services IT IT Services IT Pharma IT Services IT Pharma IT Services IT IT Services IT Pharma IT Services IT IT Services IT IT Services IT IT Services IT IT Services IT JK Lakshmi Cement Lakshmi JK Mphasis Ltd Name of company Sun Pharma India Cement Dr Reddy's Labs. Dr Reddy's Sanghi Cement Divi's Laboratories Mangalam Cement Cipla Tata Consultancy Tata Lupin Biocon Infosys Technologies HCL Technologies HCL Aurobindo Pharma Aurobindo Cadila Healthcare Cadila Tech Mahindra Tech L&T Infotech L&T Ipca Laboratories L&T Technology Technology L&T Services Mindtree Mindtree NIIT Technologies NIIT Persistent Systems Persistent Cyient Limited Cyient Valuation Summary PhillipCapital India Coverage Universe: Valuation

100 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 101 4.3 2.3 4.9 8.2 17.3 10.6 11.5 15.8 11.6 11.2 14.7 18.1 27.9 13.4 24.8 12.5 17.2 22.9 19.1 28.8 12.7 19.6 12.7 13.2 11.4 21.6 FY23E 3.6 9.8 2.7 4.1 9.4 7.9 9.4 ROCE (%) 14.7 10.3 11.6 15.1 10.1 13.4 17.1 30.3 12.4 25.5 11.4 15.6 22.9 14.8 26.6 11.3 17.6 12.1 19.2 FY22E 3.9 4.8 9.8 9.0 -2.7 17.5 16.5 13.4 15.8 10.3 13.7 14.0 18.1 19.2 12.8 20.3 16.1 18.5 17.9 18.4 22.4 11.2 19.9 12.4 16.1 20.1 FY23E 2.9 8.3 3.3 9.2 9.1 9.4 7.0 -0.5 ROE (%) 14.7 16.8 13.4 15.0 13.1 12.9 16.9 20.9 11.9 23.6 14.9 28.0 17.9 13.7 20.9 19.0 14.8 18.6 FY22E Source: PhillipCapital India Research Estimates India Research PhillipCapital Source: 7.0 6.9 5.5 4.9 5.7 7.6 8.6 5.0 6.8 4.4 7.6 5.2 4.3 5.7 6.4 5.5 6.9 13.9 13.9 22.7 14.1 14.7 14.5 23.0 14.6 13.8 FY23E 7.6 8.2 6.5 6.0 6.9 9.6 6.4 7.3 5.2 9.2 7.9 5.2 7.6 7.4 5.9 8.2 17.9 16.0 28.5 10.1 17.4 17.8 17.3 30.0 20.7 17.3 EV/EBITDA (x) EV/EBITDA FY22E 3.4 1.2 1.7 0.3 0.8 1.7 5.0 2.3 2.7 0.8 0.6 1.4 3.7 0.7 4.3 4.0 1.7 7.2 1.1 2.3 3.0 2.6 1.3 2.6 4.3 5.4 FY23E P/B (x) 4.1 1.4 2.0 0.3 0.9 1.9 5.7 2.7 3.3 0.9 0.6 1.7 4.4 0.7 5.1 4.7 2.0 8.8 1.3 2.9 3.2 2.9 1.4 2.6 5.1 6.3 FY22E 9.4 8.6 8.2 6.3 6.7 20.9 11.6 11.0 35.4 13.7 14.3 23.3 13.9 23.3 22.6 10.0 32.4 10.0 11.5 24.6 15.9 13.1 15.4 21.2 30.8 -21.3 FY23E P/E (x) 7.8 7.1 24.2 10.6 14.2 11.7 11.3 13.2 44.2 17.4 16.0 29.5 20.8 30.1 26.3 15.7 42.0 13.8 15.1 35.4 19.8 14.6 20.7 27.6 43.2 FY22E -106.7 6 16 13 22 36 37 21 25 27 12 23 27 50 29 17 57 30 38 31 44 24 12 34 30 40 400 FY23E 9 9 7 5 35 24 30 55 15 28 11 40 18 87 27 46 40 12 64 30 144 128 135 -139 1,012 FY22E -1,103 EPS Growth (%) EPS Growth 5 5 8 -6 35 26 22 11 56 64 15 54 17 35 55 30 45 12 24 15 10 12 14 18 240 301 FY23E 4 8 4 6 9 9 9 -1 30 23 18 47 51 12 48 14 33 43 19 35 16 12 11 13 EPS ( ` ) 190 258 FY22E 747 2,007 5,743 6,474 9,633 4,351 4,865 1,098 9,586 8,928 2,017 4,622 1,433 1,904 1,382 2,512 1,503 5,089 1,307 FY23E -2,007 70,807 43,208 15,790 14,578 14,461 14,320 ` mn) 549 731 932 PAT ( -401 1,770 4,701 4,722 7,717 3,429 3,945 7,433 7,648 1,281 3,563 1,041 1,456 9,924 1,112 2,240 1,118 3,907 FY22E 61,097 35,850 14,138 13,760 11,431 3,200 1,987 7,421 6,668 3,891 3,290 6,350 4,055 3,556 3,853 7,371 3,749 7,850 2,897 FY23E 10,039 13,847 99,703 14,686 23,113 27,055 23,486 25,725 16,734 12,835 22,228 1,21,472 ` mn) 2,918 8,366 1,733 6,133 5,325 3,242 2,265 4,944 3,379 2,868 3,388 7,019 3,253 6,365 2,283 FY22E EBIDTA ( 11,539 89,158 11,867 20,833 25,450 22,690 20,879 13,687 11,087 16,031 1,08,413 8,529 FY23E 34,973 71,706 37,105 63,248 55,565 57,932 32,424 74,373 51,341 26,321 17,437 38,620 17,694 87,415 24,642 15,180 69,380 47,590 1,81,880 1,15,392 4,47,097 1,54,392 1,34,058 1,07,188 1,11,297 7,472 FY22E 31,614 59,755 96,160 30,665 52,245 46,304 55,926 88,846 27,020 63,076 44,705 21,575 13,026 32,183 15,421 72,125 22,076 13,207 59,754 40,331 Net Sales ( ` mn) 1,63,095 4,14,690 1,47,203 1,30,629 1,04,767 6 19 67 53 60 31 98 43 13 20 14 18 22 33 23 41 474 341 227 332 224 201 150 352 107 ` bn 1,479 Mkt Cap ` 43 87 73 84 728 244 260 620 212 773 109 235 122 300 140 577 244 133 185 305 566 CMP 2,248 5,599 1,284 6,784 1,457 Infrastructure Logistics Sector Infrastructure Logistics Infrastructure Agri Input Infrastructure Agri Input Agri Input Infrastructure Agri Input Infrastructure Infrastructure Sp Chemicals Sp Chemicals Infrastructure Sp Chemicals Sp Chemicals Infrastructure Sp Chemicals Logistics Logistics Logistics Logistics Logistics Logistics Adani Ports & SEZ Adani Ports Transport Corporation Corporation Transport Name of company PNC Infratech PNC Infratech Navkar NCC UPL KNR Construction PI Industries Coromandel Inter Coromandel Ashoka Buildcon Ashoka Chambal Fertiliser IRB Infrastructure Sadbhav Engineering SRF Aarti Industries Ahluwalia Contracts Atul Vinati Organics ITD Cementation ITD Cementation Camlin Fine Sciences Fine Camlin Container Corp Of Corp India Container VRL Logistics Logistics VRL Allcargo Logistics Allcargo Gateway Distriparks Aegis Logistics Aegis Logistics Mahindra Logistics Logistics Mahindra Limited Valuation Summary PhillipCapital India Coverage Universe: Valuation

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102 GROUND VIEW 1 - 31 MAY 2021 1 - 31 MAY 2021 GROUND VIEW 103