DC* Updates DC* Updates

Vol.14 September 2012Vol.14 September 2012

• Rural India – Scaling the final frontier ……...……….…… 3

• Monthly Updates

– SEBI…...…………………………….……………….12

– RBI…………………………………..………….…... 12

• Deal Watch………………..………………………………...13

• Global Business and Finance Scenario……..…………. 14

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Contents

DC Updates Vol. 14 September 2012

Rural India – Scaling the Final Frontier

Rural India – Current Scenario

Rural India contributes close to 50% of India’s GDP and has close to

60% of India’s population.

Multinational and domestic companies are going back to their drawing

boards and are redrawing their plans for rural India. A decade back

rural India was seen as an ultimate platform for MNC’s to showcase

their Corporate Social Responsibility(CSR) but never as a market that

they would target. Though rural market was huge, even at that time the

infrastructure for a efficient supply chain such as distribution,

warehouses and communication facilities were unavailable. Telecom

has been a big enabler in bringing such facilities to even small villages

and towns.

However the times have changed and now rural India is seen as the

next growth engine. The rural per capita income increased by 21.5%

from Rs.40,465 – Rs. 60,972 during 2011-12 (latest available data).

The increase in per capita income and expenses in rural areas can be

attributed to two things – Job guarantee schemes and Inward

remittances made by people who have left their villages to cities in

search of better employment.

Decline of Dependence on Agriculture

Agriculture which provided jobs to close to 70% of rural population is

now providing jobs close to 50% of the rural population suggesting a

trend that people in rural areas are moving away from agriculture and

are moving towards urban areas in search of better paying jobs.

Nationwide developments in infrastructure projects have also helped

the migration to a greater extent as new jobs have been created by

them

Pharmaceuticals Growth projections on rural India

Indian rural markets are poised to grow ten-fold by 2025 to become

a US$ 100 billion proposition for retailer, according to the Chairman

of HUL.

Boston Consulting Group (BCG) and the CII project that consumers

from small and medium towns would be single largest market

segment – close to 36%

The GoI has increased its budgetary allocation from Rs. 10,000

Crores (US $1.8 Billion) to Rs,58,000 (US $ 10 Billion). This would

be spent on existing rural job guarantee schemes as well as other

rural development schemes.

Rural Urban

375,000

299,400

Additional Spending Rural Vs Urban between 2010-2012 (in Rs. Crores)

Between 2009-10 and 2011-12, rural consumption per person grew annually at 19 per cent — two percentage

points higher than its urban counterpart, according to preliminary data National Sample Survey Organization.

DC Updates Vol. 14 September 2012

Rural India – Scaling the Final Frontier

Making a Beeline

Recent growth has surely caught the eyes of many sectors and they

have started to make a beeline to get a share of the next fastest

growing market. India has a huge population at the bottom of the social

pyramid and even capturing a small piece of this pie will bring in huge

growth in sales volumes

Target – Rural India

In this article we will look at the strategies that are used by the

companies in these sectors to penetrate the rural market

FMCG

FMCG

Telecom

Telecom

E-commerce

E-commerce

Automobile

Automobile

CSR as a Tool

Companies have been rapidly expanding rural presence as well as their

strategy. CSR has become a important part of many companies as they

focus on triple bottom line – People, Planet and Profit than just profits

alone. Many multinationals have had presence in rural areas through

their CSR programs supporting various programs such as

environmental conservation or rural development. They have also used

this presence as a means to identify the taste of rural consumers and

have brought out products on those lines. Most of the CSR programs

have focused on community empowerment through education, health

and water conservation.

Few companies active in their CSR

DC Updates Vol. 14 September 2012

Rural India – Scaling the Final Frontier

FMCG in Rural India

“According to a recently published repot ‘India's huge

consumption market is expected to grow two-and-a-half times by

2025, from current Rs 43 trillion (US$ 777.85 billion) to Rs 110

trillion (US$ 2 trillion) ”

Companies in the FMCG space have been the one of the early movers

into rural India. Marketing in rural areas provides excellent value for

money as compared to urban areas as customers in rural areas can be

reached through non conventional ways which are inexpensive and

have more reach in rural areas.

Marketing and Distribution

Marketing and distribution in rural areas remain a key challenge and

success in rural India is not possible without an efficient distribution

network. FMCG’s have been wooing more distributors by offering

discounts sometime close to 5% (in addition to regular discount) on

bulk purchases as well sponsoring foreign trips for best performing

distributors.

HUL especially has used the village fairs, stage plays, mobile vans and

wall paintings to reach out to the clients and it has been able to reach

out to close to 10 million rural customers through this.

Emami, half of whose revenues are generated from rural India only,

has widened its distribution network from 0.5 million outlets in March

2012 to 0.6 million outlets

Preference

Rural area consumption differs from urban areas in certain ways. Small

packs sell a lot in rural areas. Taking stock of this fact all major FMCG

brands have introduced smaller packs for their talcum powders, soaps,

soft drinks etc .These small packs appeal to the taste of rural

customers as people in rural areas prefer to buy their supplies on a

daily or weekly need basis.

Price points

Pricing forms an important part of making your products to sell in rural

India. Almost all of them introduced products at key price points such

as Rs.2,5 and 10.

Rural India Contribution towards FMCG

40%

16%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Contribution to Revenues Growth in Sales

DC Updates Vol. 14 September 2012

Rural India – Scaling the Final Frontier

DC Updates Vol. 14 September 2012

Case in Point

Pepsi Co India introduced its Rs.5 “Nimbooz” soft drink in order to

shore up volumes in rural areas

Coke introduced a small sachet of “Fanta” - a ready to make drink

mix for Rs. 5

Brittania has 7 products that cater to the lower segment of the market

such – Tiger biscuits, 50:50 , Cream treat all of which retail at Rs.5

Tata global beverages is pushing its tea products in economical

packs to cater to the need of rural markets.

Telecom

“India's rural telecom sector is poised for explosive growth in the

next five to 10 years, grabbing a 40 per cent share of the new

market, according to a new study by FICCI and EY”

Rural areas account for close to 341 Million subscribers (roughly 36%

of the total subscribers) in India. Telecom companies can be attributed

to bringing significant developments to rural areas through their vast

expansion of mobile networks and they have been handsomely

rewarded for their efforts.

Teledensity in rural areas

Positives for Telecom Growth in rural areas

The next big wave of mobile growth will come from rural areas –

FICCI & Ernst & Young in their research report.

India’s urban teledensity stands at 164% as compared to 36% in

rural areas leaving a huge gap to be filled in

Tapping the rural market….. Rupee by rupee…..

Rural India – Scaling the Final Frontier

Call Pricing

Call rates have been one of the lowest in the world and this has

improved consumption of mobile minutes in the rural areas. Telecom

network operators depend on volume of calls to maintain their

profitability.

Taking cognizance of this fact telecom operators have introduced

pricing plans that specifically cater to the rural markets. All major

operators such as Airtel, Vodafone, Idea, Aircel follow a twin pricing

strategy and have special plans for rural areas where the demand is

growing and a more standardized plans for urban areas where the

growth has plateued mainly due to tremendous growth in subscribers

over the past few years.

Distribution

Mobile top-up and recharge cards are distributed in lower

denominations such as Rs.10,20 and sometimes in multiples of 5 and

10 to cater to the demands of rural customers. To effectively manage

distribution of recharge cards mobile phone operators have resorted to

non conventional business channels such as

Mobile vans

Self Help Groups (SHG’s)

Post Offices etc

DC Updates Vol. 14 September 2012

Mobile tariffs per minute in US$

Mobile Handset

Mobile handsets sales have soared due to the increased availability of

cell phone networks as well as cheaper call rates. Rural area currently

contributes close to 69% of new mobile phone handset sales and it is

expected to increase as even customers in the rural areas move on

from basic mobile phones to phones with higher features.

Mobile handset retailers have been benefitted immensely due to rural

expansion. Many of the have started to expand aggressively in rural

markets and have started branches even in small towns. Some of the

top players to expand their presence in rural areas include

Univercell

Sangeetha Mobile Phones

Hash 10

The Mobile Store

Rural India – Scaling the Final Frontier

Mobile handset distribution have also resorted to non-conventional

ways such as SHG”s and Post offices in areas where regular

connectivity is unavailable.

Rise of Low cost Handsets

Rural areas are expected to contribute the highest to the sales of

low cost handsets. To cater to that demand many homegrown and

multinational companies have introduced phones that cater

specifically to rural markets

Case in Point

Nokia offers a feature in its mobile phones which lets farmers

check the prices of their crop in the local market. Other

additional features include tips on agriculture as well as the

weather forecast.

Micromax an Indian mobile phone manufacturer introduced a

solar powered handset, 30 day battery backup phone as well

as low cost water proof mobiles to specifically cater the

demand of rural areas.

These features have been well received by the market and

excellent branding has helped recognized manufacturers regain

their market which was once lost to cheap Chinese phones.

DC Updates Vol. 14 September 2012

E-commerce

“According to eBay Census 2011, a study on the Indian e-

commerce landscape released last year, as many as 3,311

Indian cities shopped online between July 1, 2010, and June

30, 2011. Of this, over 1,267 were non-metro cities.”

E-commerce though at a very nascent stage in India has garnered

lots of interest in tier I and tier II towns. It might be surprising to

know that according to e-bay 1 out of every 10 sales that happens

on its website is from rural areas.

Tier I and Tier II towns seems to be generating lots of interest

online mainly as their local stores do not stock or sell a wide range

of products. Jewellery, Apparels and Electronic equipment account

for a majority of the demand indicating a change in way people in

spend – from necessity to discretionary.

E-commerce companies have also been helped immensely by

country’s ever growing courier network. Few e-commerce

companies have a delivery network of their own – a well known

example being Flipkart (They use private courier for Tier II and Tier

II towns and utilize their own for delivery within major cities)

Rural India – Scaling the Final Frontier

Growth Facts -Online Retail in Rural India

Government’s push for broadband access as well as spread of

mobile internet. India is expected to leapfrog the brick and mortar

retail revolution and embrace the online revolution.

GoI has come out with a Rs.20,000 crore National Optic Fibre

Cable to connect 2,50,000 villages and towns

Net banking and mobile banking facilities is slowly gaining

acceptance even among rural crowd however Cash-on-Delivery

schemes offered by various sites seem to have become a

favourite among rural crowd as it involves payment of cash only

on delivery of goods.

DC Updates Vol. 14 September 2012

Metro, 51%

Tier II & III, 41%

Rural, 8%

Demand Distribution - Online Retail

Marketing

E-commerce companies have predominantly used conventional

medium such as television and print ads as a medium of reaching to

people in rural areas. Facilties such as cash-on-delivery is very well-

advertised. In addition to it e-commerce companies connect with

customers through social networks and emails making the reach more

personal.

Pricing

Another reason why e-commerce have been a success in the rural

market is mainly due to its low price and a selection of wide variety of

products.

Discounts

Online retailers have been ready to throw away discounts and deals.

This strategy attracts customers both from rural and urban areas

however rural areas seem to be making the most of such deals and

discounts – a clear indication that rural buyers are still price value

conscious

Choices

Online retail offers more choice to rural buyers are they do not many

places to buy electronic goods of their choice. Buying such items

involve travelling or restricting your choice to what is available in the

local area.

Rural India – Scaling the Final Frontier

DC Updates Vol. 14 September 2012

Automobile

“Though India is the world’s second-fastest growing car market

after China, passenger vehicle ownership here is among the

lowest in the world, at 12 vehicles for every 1,000 people. While

nearly a third of people living in metros own personal transport,

the penetration in rural areas is half, at 15 percent”

Car makers now have sharply defined strategies for selling in rural and

semi-urban locations.

Key Factors of Growth in Rural Areas

Minimum Support Prices (MSP) have increased disposable incomes

with farmers

New factories and manufacturing plants have been setup and

farmers who have given up their land have been handsomely

rewarded. This trend is prevalent especially in states of Haryna, Punjab

and areas around Delhi.

Another important factor is the low ownership of vehicle in these

areas which leaves a huge market to be tapped

Marketing and Distribution

Hyundai, when it came out with Eon, asked its dealers to identify five

probable semi-urban and rural sites for selling the 800cc car around

their outlets. The company set up three kinds of touch points at these

locations. At some places, it engaged salespersons with mobile vans to

offer demonstrations and test drives. At other places, Hyundai either

put up small sales branches which could display up to two cars or two-

way sales and service workshops.

Maruti has followed a different strategy through ‘clustered marketing’-

Maruti identified nearly 270 small clusters – turmeric farmers in

Tiruchengode in Tamil Nadu, apple growers in Himachal Pradesh and

the like. It made concentrated efforts to sell to these groups and it has

been pretty successful. Sales from these account for close to 20-25

cars each month.

Hyundai had launched promotional scheme for rural areas titled “Ghar

Ghar ki Pehchan”, under which special schemes for government

employees in rural areas and members of gram panchayats on the

purchase of Hyundai Santro.

Two wheeler manufacturers not to be left behind have had rural

strategies of their own . Honda and Hero who parted ways last year

have started introducing mass market commuter bikes which has done

well in rural areas more than in cities

Rural India – Scaling the Final Frontier

DC Updates Vol. 14 September 2012

Affordable Pricing

Local Taste and

Preference

Efficient Distribution

Off beat Marketing

Preference

Traditionally rural areas have been the largest customer of LCV’s and

tractors as one would expect from an agriculture based economy. One

would often witness tractors attached to a trailer serve as a quick mode

of transport for a small group of people albeit a dangerous one. Such

facts have been taken into consideration and many companies have

introduced passenger vehicles which can carry a group of 8-10 people

TATA Motors introduced its “Magic “ lines of Light passenger vehicles

as well as Nano touted to be the world’s cheapest car and Mahindra too

has introduced its own line of light passenger vehicles to cater to this

market.

Pricing

Two wheelers and four wheelers have been priced aggressively in rural

areas and buyers have been showered with good discounts in order for

them to buy.

Two wheeler accounts for close to 70% of India’s automobile market

and manufacturers especially have been more focused on introducing

cost effective motor bikes which offer better mileage and a bit of

premium features such as stylish looks and color.

Selling in rural India is not without its challenges there are a fair share

of them which sometimes make a company think twice before entering

into the rural market – Poor road connectivity, adapting to local

preference, low margins etc. These challenges however are not

insurmountable – companies who braved all these have in fact been

rewarded with growing top lines and geographical diversification.

Telecom for example is one such example of how rural strategy might

pay off well in the long run.

4 success factors for rural India

Updates – SEBI and RBI

SEBI Updates

Manner of Dealing with Audit Reports filed by Listed companies

SEBI simplifies DMA facility for institutional investors

SEBI – Activation of ISIN in case of additional issue of shares/

securities

RBI Updates

Documentation for Foreign Direct Investment (FDI) Reporting

Banks to pay compensation for delay in Clearance of Local Cheques

Banks to allow saving account without requirement of minimum

balance

Revised guideline on Priority Sector Lending

DC Updates Vol. 14 September 2012

MCA Updates

Different Dimensions of Mergers & Demergers

Overview of Annual eFiling under the Companies Act, 1956

Penalties for Non Compliance with Appointment of Cost Auditor

Companies need Central Govt approval to pay over 10% of net profit

to directors

Company employee holding upto 0.50% shareholding in company

covered under the category of persons not having any interest in the

capital of the company

Clarification on Applicability of AS-11 & AS-16 to Companies

No statutory compulsion on companies to declare and pay dividends

every year

Deal Watch

Automobile

• Honda acquires Usha International's stake In JV

• Hero MotoCorp invests in Erik Buell Racing of U.S

Defence

• SAAB - Pipavav enter into a strategic investment partnership

• Piramal Enterprises acquires stake in Bluebird Aero Systems

Education

• Everonn acquires Centum Learning

Engineering

• Elgi Equipments Acquires Rotair S.p.a

• L&T Divests plastic machinery business to Toshiba

Food and Beverages

• Tata Global acquires Russian Firm - SuntyCo Holding

Hospitality

• Club Mahindra acquires Royal Courts Jaisalmer

IT/ Technology

• HCL Infosystems acquires NTS stake in Dubai Entity

• Aurionpro acquires communication solution provider SEEinfobiz

• Japanese Nippon Magnetic invests in Ecoreco

Media

• Altruist Technologies acquires Teligent Telecom -

• Dentsu acquires majority stake in Taproot

• Pole To Win acquires India and UK's interactive entertainment business of e4e

• Aegis Media acquires search marketing firm - Communicate2

Pharmaceuticals

• Hospira Acquires Orchid's API Facility

• Sun Pharma completes buyout of Taro Pharma

Retail

• FashionAndYou acquires online fashion accessories provider – UrbanTouch

Ashoka Buildcon's arm

raises funds from SBI

Macquarie

Star Deals

DC Updates Vol. 14 September 2012

Global Business and Finance Scenario

Europe

•Too central a banker

• In Victory for Merkel, German Court Backs Euro Rescue Fund

•One firm economy – the Nokia effect

•Powering Down – Euro Economy

ME and Africa

•U.S., too, wants to Bolster Investment in Africa’s economic promise

•With slow growth, jobs elusive for many in South Africa, Report Says

•With $20 Billion Loan Pledge, China Strengthens Its Ties to African Nations

International

•Goodbye Doha!!! Hello Bali!!!

•The fog of LIBOR

•More Soot Than Sparks From This Fire

•Zuckerberg Acknowledges 'Disappointing' I.P.O. Performance

•Some websites require registration to read articles. All the articles are owned by the respective owners.

Asia and Oceania

•Indian patent rules infuriate big Pharmaceuticals

•RBI’s lonely fight against Inflation

•China’s Capital Controls

•Asian welfare states

•PE in China

Americas and Canada

•My Dollars My Rules

•Dimon Defends Big Banks

•Too Much Protection for Derivatives in Bankruptcy

•HSBC’s grilling

•Economic Stimulus as the Election Nears? It’s Been Done Before

•Morgan Stanley to Take Over Smith Barney, With Citigroup's Blessing

DC Updates Vol. 14 September 2012

Thank you

Vignesh Shankar Director and Principal Consultant

Hand phone : +91 94455 66386

vignesh@dandekercapital.com

K.J.Dandeker Executive Director

Phone : +91 4425220721

kjdandeker@dandekercapital.com

DC Updates Vol. 14 September 2012