Graphite electrode manufacturers: Running ahead of fundamentals?

Recently, Indian graphite electrode manufacturers cornered investors’ attention with fundamentals pointing towards a turnaround in the sector. Key manufacturers in India – HEG and Graphite India — are up about 200 percent and 150 percent respectively in just three months.

Graphite electrode manufacturers are the key beneficiary of the improvement in its end market – global steel demand. Industry consolidation leading to lower supply and higher barriers to entry is also positive news.

However, a sharp surge in raw material prices and China exports are the factors to watch out for which can cap this upside. Further, our calculations suggest that stock prices of both HEG and Graphite India are trading ahead of the expected pricing dynamics in medium-term.

Industry-wide capacity consolidation – lower supply

In the last few years, global graphite electrode industry had witnessed curtailment of capacity (by 210 k tons) on account of weak profitability. Major companies like SGL Carbon and Graftech downsized their capacity by 100 kT and 60 kT, respectively. This has brought the global capacity (excluding China) to near 810 kT.

Key global graphite electrodes manufacturing companies (kT)

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Source: Graftech, Moneycontrol research

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Source: Graftech, Moneycontrol research

Improving supply-demand dynamics

Further, global demand for the graphite electrode is aided by improvement in end market. As per estimates from Graftech, approximately 1.7 to 1.8 kg of graphite electrodes are required to produce one ton of steel through the electric arc furnance route. Going by that, global demand for graphite electrode comes close to 742 kT. Now this is close to global capacity (excluding China) of about 810 kT which is of better quality compared to the one in China and considered better suited for high grade electrode manufacturing.

Graphite electrode demand in 2016

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Source: World Steel Association, Moneycontrol research

#EAF: Electric Arc Furnance

Chinese electrode exports remain a big swing factor

Having said that one of reasons behind recent rally in graphite electrode has been on the back of news flow that there has been a clamp-down in the graphite electrode manufacturing capacity in China on account of stringent pollution norms.

Platts had earlier reported that China is on its way to cut graphite electrode capacity by around 50 percent. However, what is noteworthy is that going by the data points a good chunk of capacity was already lying idle.

Further, the impact of such steps by Chinese government on the exports of graphite electrodes are yet to be seen. Latest data from UN Comtrade suggests that the export run rate in 2017 has actually increased to a level prevailing in 2015 (2016 was weak). Indian exports have also increased in terms of volume close to that prevailing in 2014.

Thus, Chinese exports would remain a key data to watch to assess if there is further upside left for the Graphite electrode prices on account of supply crunch.

Export share in terms of quantity

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Source: UN COMTRADE, Moneycontrol research

Shift in steel production from China to other regions is positive

However, demand-side tailwinds for graphite electrode can probably come from closure of inefficient/ polluting steel production units (mainly blast furnance) in China and replacement of this supply by increased capacity (both blast furnance and electric arc furnance) in other regions. As per HEG management estimates and based on our calculation, about 8-9 percent incremental increase in demand for graphite electrode is possible due to developments in China.

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Source: HEG

Needle coke shortage: both boon and bane

Needle coke (two-thirds of raw material cost) prices have also increased of late in tandem with improved steel industry dynamics and graphite electrodes prices. Supply constraint of needle coke has also contributed to the surge (USD 3200 from USD 450 a year ago). Recently, temporary shutdown in the Graftech needle coke manufacturing plant due to the Harvey hurricane also had an impact.

Limited availability of needle coke discourages the new capacity addition in graphite electrode industry and so benefits existing players. However, it doesn’t take away the fact that rising needle coke prices caps the margin expansion that graphite electrode manufacturers can expect in the current context.

Global needle coke capacity (kT)

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Source: Graftech, Moneycontrol research

Valuations expensive at consensus assumptions for pricing trends

Looking at the financials of Indian graphite electrode manufacturers, one finds that valuations are rich if we pencil in consensus expectations for graphite electrode and needle coke pricing contracts next year.

HEG, which is currently running at 71 percent capacity utilization, would also gain from operational leverage. Graphite India already running at 95 percent capacity would benefit from better operational efficiency and balance sheet.

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Having said that both HEG and Graphite India are currently running quite ahead of the median expectations for product and raw material prices. While both companies benefit from the tailwind of improving end market and supply demand imbalance, capacity curtailment in China and needle coke prices are the factors to watch out for.

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Hurricane Harvey: Sunny for petrochemicals but rainy for plastic processioning industry

Hurricane Harvey had a huge impact on the US refining capacity and the downstream petrochemical industry. With about 16 percent of refining capacity still shut down and expected to start functioning only after a hiatus, GRM (gross refining margin) is expected to remain high in near future. Indian petrochemical prices have recently firmed up which could impact plastic processing industries. In the meantime, stocks of the petrochemical manufacturers have benefitted from the tightness in the market.

Harvey impact and elevated GRM

IHS Markit estimates that about 60 percent of US ethylene capacity was hit by Hurricane Harvey. Current estimates suggest that about 54 percent (16.2mmtpa) of the total US ethylene capacity is still off the market. Within the refinery space, 60 percent of capacity hit by Harvey is still offline which is about 16 percent of US refining capacity.

Industry participants suggest that it might take another month or so for the pre-Harvey capacity to be fully operational.

For the time being regional GRM remains elevated. Singapore GRM is at 9.3 USD/ bbl, up 27 percent from the July numbers. Petrochemical prices have also surged with a lag. For instance, SE Asia polyproplene prices are up by about 5 percent.

Petrochemical market in India: Varied import dependence

While looking at some of the oil derivatives which were impacted by Hurricane Harvey, it may be pertinent to look at the demand-supply gap. In case of ethylene, India is nearly self-sufficient. In fact, for this product it is imperative to have it locally available as the transportation cost is high and require additional safety norms due to its inflammability.

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In case of petrochemicals, as per the data from CPM ( Chemicals and Petrochemicals Manufacturer’s Association, India), net imports as a percentage of consumption is higher for LDPE (Low Density Polyethylene), PVC, and HDPE (High Density Polyethylene) at 70 percent, 50 percent and 22 percent, respectively. In case of Polypropylene and Poly Styrene, India is nearly self-sufficient.

Though there is a variance across product categories as far as supply demand dynamics in India are concerned, price increase for the petrochemicals have been felt across the board due to the global dynamics.

Polymer prices up by 5-7 percent

Major petrochemical players in India raised their petrochemical prices by 5-7 percent in last two weeks. Interestingly, in the June quarter, some key refineries were shut down for a considerable period leading to a tight supply situation resulting in hardening of petrochemical prices. As these refineries are back to optimum operational capacity, some easing or at least stabilization of petrochemical prices was expected.

Pricing trend for polymers (Rs/MT) for Ahmedabad grade

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Source: RIL

However, Hurricane Harvey has changed the pricing dynamics for current quarter and prices are expected to remain elevated till the US oil downstream industry is back to pre-Harvey stage.

Petrochemical manufacturers gained

Not surprisingly, in last one month, petrochemical manufacturers of the country benefitted from the improved product spread. DCW has gained the most as it is not only a key manufacturer for PVC but also for caustic soda which is also one of the chemicals most impacted by the hurricane.

Price performance for the key chemical manufacturers

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Source: Capitaline

Down stream plastic processing industry earnings

Downstream plastic processing industry have been resilient so far. Interestingly, raw material (largely petrochemicals) constitute a large proportion in terms of sales (about 58 percent). Hence, any sustained increase in petrochemical prices would weigh on earnings.

Price performance for the key plastic manufacturers

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Source: Capitaline

Our back-of-the-envelope calculation suggests that 5 percent increase in raw material costs can impact the earnings of plastic processing industry by 20-25 percent during a given time period. Recent price hikes in petrochemicals, even if sustained for a month, can weigh on the annual earnings of plastic processing companies by 3-4 percent.

Given this context, stocks of plastic processing industry can adversely react if US oil downstream industry doesn’t get operational soon. Further, recent price hikes from the Indian petrochemical manufacturers weighs on the near term operational profitability of the plastic processors.

New products, segments & digital push to prime Nestle’s next leg of growth

Nestle has been working on revamping its image as well as products ever since the Maggi noodles crises. Setting up a Rs 7 crore food safety institute in Haryana can be partially attributed to that.

Crisis has also been the catalyst for change in the company. The focus areas of future are volume growth, portfolio innovations and digital push. While Nestle has recouped a large part of market share lost in instant noodles, its incremental growth will increasingly come from new products where its digital push will help in getting aligned with the end target market.

In its recent analyst meet, the company also hinted at new categories under evaluation. Given this changing landscape, it may be worth taking a look at the evolving Nestle.

New product launches add 25 percent of incremental growth

New product share in the domestic sales has increased consistently from 0.7 percent of domestic sales in H1 2016 to 2.8 percent in H1 2017. Out of 43 new launches during January-May 2017, 36 were in the value-up/ mainstream category.

Reported H1 2017 sales growth (9.3 percent) break-up

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Source: Nestle, Moneycontrol research

In terms of contribution towards incremental revenue growth, new products account for 25 percent. Clearly, this emphasis is well articulated as it talks about allocating 20-25 percent of ad spend for the new launches.

Focus on digital channel for advertising

Nestle mentioned that there is a significant transition in terms of media consumption by the some of the target groups (like millennials) it is catering to. As a result, spend on advertising through the digital route has increased to the range of 15-50 percent for a given brand.

In fact, the campaign for some of the product offerings (Nutrilicious Maggi) going through the e-commerce route (Amazon) would exclusively be available in the digital format (and not TV medium).

So while the advertising spend growth is just 6 percent YoY in H1 2017, a part of it is explained by higher contribution of digital medium which is 35-40 percent cheaper than TV ad spends.

New categories under radar

Nestle’s global management team had recently identified core categories of growth like water, coffee and pet care for their global operations. Management of the Indian operations has clarified that while their focus on coffee and beverages segment remains and would grow, the other two categories are still getting evaluated.

Pet Care: A high growth market

It’s worthwhile to note that, pet care (14 percent of H1 2017 global sales of Nestle group) and water (9 percent) segments are a significant part of Nestles global operations. In particular, pet care, is a USD 70 billion market wherein Nestle commands a global market share of 18 percent and competes closely with Mars.

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Source: Nestle, Euromonitor, TechSci Research, Moneycontrol research

The Indian pet care market size is estimated to be about Rs 1700 crore and if Nestle is able to garner market share similar to the global average, sales contribution of this new category would be about 3 percent of sales.

Though prima facie, in terms of market size, it may not appear as lucrative but the pet food category is expected to clock 40 percent CAGR (2016-20) and so for Nestle, participation in a high growth segment wherein it has a global expertise may make sense.

Shift to healthy and safe food options

Another growing area in the Nestle’s portfolio is shift towards healthier products. Last week, the company agreed to buy Sweet Earth – a US-based maker of meatless frozen foods and decided to sell confectionary business in the US (brands like Butterfinger, Baby Ruth bars).

News flow from the Indian unit is mimicking this trend. Nestle India is, reportedly, focusing on supporting home cooking with healthier options by introducing initiatives such as simplifying ingredients, reducing sodium, increasing micronutrient fortification etc.

Valuation and recommendation

Overall, we like the Nestle’s transformational story post the food safety crises with respect to its key product in India – Maggi. Since then Nestle’s share in instant noodles space has crawled back to the range of 60 percent (Under 50 percent in Q1 2016). Though it is still way off from the dominance it enjoyed (75-80 percent) before the crises, Nestle is repositioning itself with a broader portfolio of value added products.

Further, new product launches along with a changed strategy with respect to promotion and channel (e-commerce) should yield results. While topline growth would be driven by market share consolidation in existing categories and foray into newer segments, margin expansion is expected on account of digital initiatives and value-added products.

Stock is currently trading at 47x 2018 earnings. While it is ahead of both its long-term average and the sector average, for long-term investors, the journey of Nestle to rediscover itself beckons attention.

Trump reforms: Banking deregulation gets centre stage as US Fed undergoes rejig

US Fed’s Vice-Chair Stanley Fischer decided to step down well before his Vice-Chair term ends in June 2018. With this it creates four vacancies in the 7-member board of governors in Federal Reserve and gives enough leeway to President Trump. The stage looks set for President’s pet banking deregulation agenda. Indian IT sector with significant exposure to US BFSI needs to watch out carefully as higher profitability of the US financial sector leading to higher IT spends do have a positive rub off on demand.

Federal Reserve Board (The Board of Governors) – Constitution & Appointment

Federal Reserve Board is the governing body of the Federal Reserve System and consist of seven members. They are nominated by the President of the United States and confirmed in their positions by the US Senate. All the members of the Board serve on the FOMC (Federal Open Market Committee), which is the body within the Federal Reserve that sets the monetary policy.

The Board members are appointed for a 14-year term. The Chair and Vice Chair of the Board are also appointed by the President and confirmed by the Senate, but serve only four-year terms. They may be reappointed for additional four-year terms. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board.

Current mix of Federal Reserve board

Janet Yellen’s term as a board member remains till January 2024; however her current term as the Fed Chairwoman gets over by Feb 3, 2018. Though her candidature for the second term as the Fed Chairwoman is under consideration, a low probability is assigned by the market participants to the event.

With Stanley Fischer opting to move out in October this year, there would now be four vacancies (out of seven) in the board. US President has already nominated Randal Quarles and his confirmation is pending at the Senate.

Randal Quarles is the founder of private investment firm Cynosure and had earlier served as a treasury official during George W Bush’s administration.

His recent statement suggests he favours some refinement in the banking regulation, which is being construed as a gradual roll-back of regulations.

In recent times, both Yellen and Stanley Fischer have been quite vocal about defending post-crisis regulations. In the recent Jackson Hole symposium, Yellen forcefully defended the regulatory structure. Since both Yellen and Stanley would vacate their positions in the board of governors, Trump administration would have the free hand to nominate members as per their agenda.

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Banking deregulation – Trump too close yet so far

While banking de-regulation has been a key reform agenda for Trump, little success has been achieved so far. Recently, a bill named Financial CHOICE has been introduced in the US Congress targeting a roll-back of many features of Dodd-Frank Act. It has already been passed in the House of Representatives and is awaiting Senate’s approval.

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# CCAR: The Comprehensive Capital Analysis and Review

US Treasury has also released its proposal to roll back Dodd-Franck Act. Among its key proposals are that banks with less than USD 50 billion in assets would be exempted from federal stress tests. A current limit as per the Dodd-Frank Act is USD 10 billion. Most of its proposals are similar to the one proposed by the Financial CHOICE bill and focus on scrapping Volcker’s rule and curbing CFPB’s authority.

However, it’s noteworthy that political commentators are not very optimistic about the passage of CHOICE bill in the Senate on account of thin Republican majority (52 percent).

US financials outperform on banking deregulation news flow

On expected lines, banking stocks have reacted positively to the developments which indicate that sooner or later, banking deregulation would be on the cards.

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While, generally, US financials mimic the movement in US yield curve (difference between 10 year and 2 year US treasury yields), since June 2017 US financials have bucked the trend and held up even when US treasury 10 year yields have fallen, thanks to news flow pertaining to banking deregulation.

Third rate hike less likely this year

While the Trump administration’s focus in the interim has shifted to banking deregulation, Fed’s own priority is not likely to be an early rate hike. Consensus expectations for a December rate hike hover around 27 percent. Fed Governor Lael Brainard reiterated that Fed should be cautious about a rate hike unless confident about inflation trajectory.

Thus, most likely, for the rest of the year, Fed would oversee unwinding of balance sheet and most of the policy actions could be visible elsewhere.

Media companies could be looking at better days as FMCG loosens purse strings

Media companies could be looking at better days as FMCG loosens purse strings

In recent months, headwinds ranging from cost inflation to demonetisation and GST implementation forced fast-moving consumer goods (FMCG) companies to defer product launches and cut promotional spends. Now, with these factors largely out of the way, companies are looking at a promising second half, likely heralding better days for media companies.

In CY 2016, the Indian advertising market growth had slowed down to 12.5 percent growth from 17.6 percent the previous year, largely on account of demonetisation and moderate end-market demand in some sectors. As per a report from the Madison group, in 2017, the ad market is expected to witness a moderate uptick (13.5 percent growth) mainly on the back of growth during the festive period (November-December 2017: 24 percent YoY).

Chart: Indian advertising market growth rate

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Source: Pitch Madison AD report 2017, moneycontrol research

FMCG: largest contributor but advertising spending growth tapered recently

Looking at the advertising spending trend in TV, print and radio media, the FMCG sector has the largest contribution (32 percent in CY 2016). This is especially true for the TV industry, where the contribution of FMCG advertising spending is even higher at 51 percent in 2016. Other media segments, like print and radio have a limited FMCG contribution of 15 percent and 9 percent, respectively.

In CY 2016, the FMCG sector’s ad spend growth was a moderate 7 percent YoY, lower than the overall ad spend growth. In fact, other consumption-oriented sectors like e-commerce reported a steeper decline in ad spending (-26 percent) on account of prevalent sales sluggishness due to competition and demonetization. It is estimated that there was a decline in ad spending by FMCG players, to the tune of Rs 500 crore during November-December 2016 compared to the previous year.

Chart: Indian advertising spending contribution

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Source: Pitch Madison AD report 2017, moneycontrol research

FMCG sales and ad spend trend/management outlook

The Indian FMCG sector posted an improved sales growth performance in FY17. However, it is still way off the low double-digit growth rate witnessed before. As we have highlighted in our earlier articles, a slowdown in sales growth can be partially attributed to competition from unlisted manufacturers.

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Source: moneycontrol research

Intense competition had a bearing on margins and led to a slugfest to maintain market share. Additionally, there was a rise in raw material costs, particularly crude oil prices, which led to higher packaging costs. In a bid to protect profitability, a few of the FMCG companies had resorted to spending cuts, and ad spending was one of the areas affected.

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Source: capitaline, moneycontrol research

Media companies recent earnings impacted

Media companies have been impacted by the reduced spending by the FMCG sector. In the broadcasting industry, advertisement revenue constitutes 65 percent of total revenue. Though the industry has been a net beneficiary of digitization leading to higher subscription growth, advertisement revenue have lagged a bit in recent times.

For instance, Zee Entertainment witnessed a moderate 7 percent advertising revenue growth in 2017. Domestic advertising revenue growth in the past few quarters was weak, particularly in Q3 2017 (demonetization) and Q1 2018 (GST destocking by end markets). Sun TV Network also faced a decline in advertisement revenue by 4 percent in FY17.

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Source: moneycontrol research

In the recent quarterly earnings calls, media companies mentioned that advertisers had reduced ad spends on the current portfolio and launched fewer products, on account of GST transition, as the distribution chain was not fully prepared.

Optimistic management outlook of FMCG companies

While the current quarter is witnessing a speeding up of GST transition and restocking, improved ad spending is expected only in Q3 2017. FMCG companies are positioning for the festive season in the next quarter, a period which is also likely to benefit from a lower base leading to higher growth numbers.

Factoring this in, media agency Madison expects 24 percent advertising spending growth during November-December 2017.

Further, FMCG companies in the earnings calls have highlighted that ad spending would improve in the coming months. Some have cited GST-related transition as the reason to hold back ad spending and delay new launches. However, this is likely to change.

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Source: company reports, moneycontrol research

In addition, responding to the Patanjali challenge, a few have revamped their strategies to come up with new products in the herbal theme (Red Gel, Vedshakti, White ayurvedic paste, Ayush etc.). On account of this change as well, a pickup in promotional spending is expected.

Companies are also hopeful of a recovery in rural demand post two consecutive normal monsoon seasons.

Against this backdrop, should ad spend revive, it is likely to benefit industry participants in the broadcasting industry like Zee and Sun TV.

Doklam done & terrorists named, but Korea and OBOR will ensure India watches China

While the defusing of Doklam provided a conducive context for the BRICS summit, a flare-up in the Korean peninsula, internal politics and China’s economic imperatives make it worthwhile to read the signals emerging from our eastern neighbour in the coming days.

The BRICS summit declaration provided an early victory for Indian diplomacy. Further, in the bilateral meet between Modi & Xi, China reaffirmed following principles of “Panchsheel” treaty and emphasized on not letting differences become disputes.

While we take a note of this forward-looking development, in the medium term, some other bigger issues on economics (One Belt One Road) and geo-politics (North Korea) are likely to guide diplomatic deliberations, in our view.

BRICS pitch for more global economic cooperation

While the event backdrop of Brexit and then the US Presidential elections made the case for an insular protectionist world, voices from Euro area of late and now the BRICS suggest that trade liberalisation and global economic rebalancing are gaining ground. Interestingly, while Trump remains steadfast on building a wall at the border with Mexico, China is exploring a free trade agreement with the central American country.

Not surprisingly, the Chinese invited Mexican President Enrique Pena Nieto to the BRICS summit.

Another plus for Indian diplomacy

In the summit joint declaration, BRICS leaders condemned terrorism and named terror groups of concern to India, Lashkar-e-Taiba, Jaish-e-Mohammad and the Haqqani network.

It is worth noting that China had been hesitant about using the summit for discussing cross-border terror from Pakistan to India. Further, China itself has repeatedly blocked the UN Security Council move to ban Masood Azhar – Chief of Jaish-e-Mohammad.

Xi-Modi meet

On the sidelines of the summit, PM Modi’s bilateral with Chinese President Xi Jinping can be seen as a positive development that brings back the status quo prevailing before Doklam.

While the agenda of the talks was apparently limited, in coming days diplomatic exchanges might have to focus also on issues related to geo-political fault lines (N. Korea) and economic interest (One belt one road).

N.Korea: relative economic linkage with India is negligible

N.Korea’s biggest trade partner is China constituting about 90 percent of its total exports (US 2.9 billion in 2016). Amusingly, India is the second biggest trade partner for N Korea exporting about 3 percent of the total. However, from the India’s point of view trade dependence is miniscule.

Out of India’s USD 276 billion export in 2016-17, North Korea constitutes about 0.016 percent (USD 45 million) and out of India’ USD 384 billion imports, North Korea share is just 0.022 percent (USD 85 million).

The rogue state’s belligerent acts every day can push regional geo-politics to a tipping point. And so China’s ability and willingness to contain North Korea would be tested more than ever before.

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Table: Top five exports and imports from India to North Korea (FY17)

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One Belt One Road: Sovereignty vs trade access

China’s most ambitious connectivity initiative having a trade objective is One Belt One Road (OBOR). Announced in 2013, this USD 1 trillion project subsumes the Silk Road Economic Belt and 21st Century Maritime Silk Road and aims for a series of transport projects and includes about 68 countries.

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However, India is in opposition to it. In general, India objects to implications of such a connectivity project on environment, sovereignty and financial sustainability. In particular, India has reservation against China-Pakistan Economic Corridor (USD 50 billion) which passes through Pak-occupied Kashmir.

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China would obviously attach a lot of strategic importance to the China-Pakistan Economic Corridor, as it would provide shorter access to end markets of Africa and Europe (Suez route) for its eastern territories. As a comparison, the new access route from Kashgar to Gwadar would reduce China’s trade route from about 12,000 km (via sea), to 2,000km (via land).

19th Congress for the Communist Party of China

Further, recent political developments in Asia and China’s assertiveness (border issues in South China Sea) should also be seen from the angle of domestic events in China. The Communist Party of China’s 19th congress is on October 18.

A known narrative is that Xi Jinping would use this opportunity to consolidate its position in the party and the government. This, he might do while getting loyalists into the Politburo standing committee and by exercising increased influence over the armed forces.

This could influence how Xi handles the North Korea situation, especially if the United States is drawn in. Indian diplomats should be braced for more assertiveness from China in the weeks to come.

Coke, Tatas watch out: Patanjali’s bottled water plan could create a splash

Coke, Tatas watch out: Patanjali’s bottled water plan could create a splash

Baba Ramdev’s Patanjali is making headlines once again. This time it is entering the underpenetrated but promising product category of bottled water. But the targets are by no means fluid: on the contrary, the company is targeting a well-defined — and chunky — market share.

Incumbents have reasons to feel uncomfortable, given the experience in other product categories where the company has made a foray. They include two giant MNCs (Coca-Cola and Pepsi), one large unlisted Indian firm (Bisleri) and Tata Global Beverages.

Patanjali’s entry into water will be under the brand name “Divya Jal”. Never short of ambition or hyperbole, the group has set itself a sales target of Rs 1,000 crore for FY19 suggesting a grand execution plan.

This target translates to 6% share of the total turnover (estimated sales: Rs 17,000 crore) in the first year of operations. It has hinted at economical pricing catering to a broad range of “masses to classes”.

It is expected that by Diwali, the packaged water would be available in North India and within six months it would be available pan-India. The product, which the company is positioning as Himalayan water, would be bottled from its Haridwar and Lucknow plants.

Secular growth — lack of availability of drinking water

As per Euromonitor (2015), India’s per capita consumption is about 13 litres — about 1/5th of China’s per capita consumption (62 litres). While this in itself underlines the potential growth opportunity for the bottled drinking water, increasing health awareness and lack of availability of clean drinking water are the key factors to support its secular growth.

Bottled water industry size to grow by 25% CAGR

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Source: Moneycontrol, Euromonitor

In the year 2016, bottled water sales in India were estimated to be Rs 7,040 crore with the trade volume of 4.4 billion litres. As per Euromonitor, the Indian bottled water industry is expected to grow at 20% CAGR (2016-21) in volume terms. In value terms, as per our assessment, this segment is expected to post a CAGR of 25% for the same period leading to a market size of Rs, 21,500 crore. Going by this measure, in the calendar year 2018, the industry could clock about Rs 11,000 crore in sales and Patanjali in its first full year of operations could capture about 9% of the market share.

Who would feel the heat?

Currently, industry estimates suggest Bisleri continues to be the leading brand in Indian bottled water industry with about 40% market share. Together with Kinley (Coca Cola) and Aquafina (Pepsi), these three brands have a cumulative market share of 65%. The remaining 35% market is quite fragmented and ruled by unorganised players in tier-2, tier-3 cities.

Going by Patanjali’s product positioning, “Divya Jal” is expected to be a value play with a strong positioning on its natural/herbal theme.

Predatory pricing strategy can’t be ruled out

Patanjali’s pricing strategy has been varied depending on the product category under question. While for Ghee, Patanjali enjoys a certain premium pricing with respect to other national players. In case of honey, Patanjali has resorted to predatory pricing. In case of bottled drinking water, we expect Patanjali to opt for the latter, as the product segment is reasonably commoditised.

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Premiumisation could partially rescue

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A few of the major industry players in the segment have moved up the value chain by offerings value-added products like enriched vitamins, flavoured drinks and so on. While such premiumisation could help in defending margins to an extent, incumbents should brace for tough competition, especially in the value segment.

Currently, NourishCo (a JV between Tata Global Beverages and PepsiCo) has a similar offering under the brand “Himalayan”, with the same being bottled in Himachal Pradesh. Tata Global Beverages has recently introduced new variants and entered new markets (including the USA). However, this JV of Tata is still waiting to turn profitable (loss of Rs 21 crore in FY17).

In the coming days, it won’t be surprising if we witness a significant change in the 3Ps of marketing for the bottled water category — which is in terms of product pricing, place (distribution, logistics) and brand promotions.