February 2015
Post Conference Update
Make in India: Moving from why to how
Research Team (Rajat@MotilalOswal.com)

Make in India: Moving from why to how
Imperatives, Challenges & Opportunities
Indian Defense: Make in India emerges as important priority
Indian Railways: DFC an important Game Changer
Port logistics: Lifting the national trade
Enabling Indirect Tax Environment
Measures being taken towards labour reform
Dr. Ajay Dua,
Ex-Secretary, Ministry of
Heavy Industries & Commerce
Mr. Jayant D Patil,
Executive Vice
President, Defense and Aerospace, Larsen
& Toubro Limited and Member of the
Board, Heavy Engineering
Nikhil Gandhi,
Chairman, SKIL
Mr. Adesh Sharma,
Dedicated Freight
Corridor Corporation of India Limited;
Managing Director
Mr. Prakash Tulsiani,
Managing Director,
Gujarat Pipavav
Mr. Rajiv Jalota,
Commissioner of Sales
Tax; Maharashtra
Mr B K Sanwariya,
Ex-Chairman, Indian
Labour Board
Imperatives, Challenges & Opportunities
India Defense: Make in India emerges as
important priority
India Railways: DFCC an important Game
Port logistics: Lifting the national trade
Enabling Indirect Tax Environment
Measures being taken towards labor reform
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
Bloomberg, Thomson Reuters, Factset and S&P Capital.
February, 2015

Make in India: Moving from why to how
(Please refer to our update
on Make in India dated
September 27, 2014)
The question, ‘Why Make in India?’ has been answered comprehensively in various
forums. A quick rundown: (1) very low share of manufacturing in India, (2) global
competition, (3) higher trade deficit, and (4) need to employ 15m addition to labor
force every year. The question of the moment is: ‘What are the preconditions for
the success of Make in India?’ We discuss three.
Doing business parameters:
Most of the difficulties related to doing business in
India pertain to the state governments. At the outset, the attitude towards the
private sector needs to change. A pragmatic approach is required to deal with
logjams. For example, an easier solution for the land question could be to
release the huge land available with the public sector (notably, the Indian
Railways). The PPP framework, which has been tried only in the infrastructure
sector, can be extended to manufacturing, with the government playing a key
role in setting up facilities but staying away from operation and maintenance.
High speed trains can be explored vigorously instead of prohibitively costly
bullet trains. A suitable IPR regime may be put in place, balancing India’s
considerations. Tax sops, however, barely provide long-term sustainability and
should be avoided.
Nation-wide mobility:
This essentially involves two aspects – robust logistics
support through improved transportation and creating a unified market by GST
implementation. India is making significant progress on ports and railway freight
infrastructure to address the logistics issue.
Ports in India present a huge opportunity,
given its 7,500km coastline.
Volumes handled are set to grow at 6% per annum in the next 20 years.
Putting in place the necessary evacuation infrastructure through rail
connectivity would not only enable efficient cargo handling but also lead to
development of industrial corridors and smart cities.
Work on the
Dedicated Freight Corridor (DFC)
is ongoing, with INR300b
contracts to be awarded in the next one year. DFC would enable one train to
run in every 10 minutes and also reduce transport time between Delhi and
Mumbai to just 18 hours from the current 60 hours. The project is likely to
be substantially completed by December 2018. Strikingly, the cost would be
lower too, with marked improvement in the operating ratio despite the
overhead of a new network. Four more corridors are being explored in
addition to the western and eastern corridors already under
A simplified, rule-based, pan-India
Goods and Services Tax
(GST) is being
implemented. India would become a common market, enabling free
movement of goods across the country. This would reduce tax cascading,
lower compliance and legal costs, homogenize tax laws, and enable IT-based
administration. The Constitutional Amendment Bill has already been
introduced in Parliament.
Click here
February, 2015

A whole lot of labor reform has been initiated recently both through
legislative initiative to impart greater flexibility but also through the launch of
skilling and training programs. This would help India build on the low cost of labor.
While a whole lot of strength can be built on ‘frugal engineering’, India has also
demonstrated its capabilities at the higher end of technology. The opening up of the
defense sector has provided a lot of opportunity at the cutting edge of technology.
Indian manufacturers are producing advanced weaponry, substantially reducing
import dependence. Facilitating this process are measures such as (a) deserving
projects from ‘buy global’ categories, (b) embedding quality considerations in the
bid process, moving away from just L1, and (c) significant step-up in defense orders.
In this backdrop, we recently hosted the ‘Make in India’ conference in Mumbai, with
participation from key sectors like Defense, Railways (Dedicated Freight Corridor),
and Port logistics apart from experts in the areas of doing business, taxation and
labour. The speakers included both bureaucrats and industry experts.
February, 2015

Imperatives, Challenges & Opportunities
Represented by:
Dr. Ajay Dua
Ex-Secretary, Ministry of Heavy
Industries & Commerce
Key takeaways
Needed pragmatic steps for ‘Make in India’ to work
With a new and more assertive government in place, many measures can be taken
to improve the ‘ease of doing business’ parameters.
The background to Make in India Campaign:
Stagnated share of manufacturing.
Formal employment crunch, 15m addition to labor force every year.
Increase in capital intensity of manufacturing.
Rising import bill.
The new government’s contribution:
A more assertive majority powered government.
Return of investors’ confidence.
Foreign investors started having a relook.
Identification of 25 verticals for Make in India push.
How to improve upon ease of doing business parameters?:
Deteriorating rank every year; 52 ranks below China.
Most of the challenges related to doing business pertain to State
Attitude toward private sector need to improve.
A lot of land with public sector (notably Railways) can be released.
PPP should be tried not only in infrastructure but also in manufacturing.
Government has to play a role in setting up of facilities. However, operation
and maintenance should be exclusively in private sector domain.
Commercial viability of a bullet train is under question but DFC would
IPR regime needs to be appropriate for FDI to succeed especially in the area
of railways and defense. However, need to resist bullying on IPR by
advanced countries.
No tax sops should be granted, as no sustainable advantage can be built
through that.
Need to provide good facilities and ensure low cost of energy.
Build upon India’s strength in low labor cost, frugal engineering.
Attempt at massive skill building of workforce (only 10% of the labor force
found to go beyond primary schooling)
Covering analyst(s)
Dipankar Mitra
+91 22 3982 5405
February, 2015

Indian Defense: Make in India emerges as important priority
(Please refer to our update on
Indian Defense sector for a
complete listing of the various
projects cleared by the
Key takeaways
With new government in place, Defense sector has witnessed a strong sense of
urgency to accelerate project award and Make in India has emerged as a key
priority. Several large orders earlier reserved for ‘Buy Global’ category have been
shifted to
‘Make and Buy Indian’
Key change in approach post the induction of new government
Proactive interactions with the industry, including meeting private sector
delegations every month.
Policy change expected shortly towards moving to L1-T1 approach for project
awards (taking into consideration both financial and execution superiority)
versus just L1 method earlier which was the key lacuna in defense
Streamlining the defense export policy.
Several large projects earlier reserved for ‘Buy Global’ category have been
shifted to ‘Make and Buy Indian’ category; also, for the first time, projects worth
INR400b have been reserved exclusively for the private sector.
Short and medium term plan in place to develop domestic defense sector
The next 1-year plan is to initiate the process to launch ~25 acquisition
programs per year under the ‘Buy Indian’ and ‘Buy and Make Indian’ categories.
The five Defense Acquisition Council meetings since August 2014 have cleared
INR1.4t of projects. As these projects get awarded, the industry will get a robust
pipeline of orders over the next 1.5-2 years. Government budget on defense
entails cash flow accounting and capital spend of INR950b could mean projects
of INR5t+ in progress, given that a typical project takes 5-8 years to be executed.
The medium-term plan (~3 years) is to launch 8-10 ‘Make’ category projects
every year. These are projects where development would be carried out in India
by consortiums that are technically pre-qualified, with the government financing
80% of the development cost and award of production orders in the ratio of
70:30 (between L1/L2 bidders). Since initiation in 2006, no ‘Make’ category
projects have been awarded. Policy review is expected shortly, and three large
projects are in advanced stages: (i) Tactical Communication System: INR200b
(Bharat Electronics and L&T-Tata Power-HCL Technologies are the two
consortiums), (ii) Battlefield Management System: INR400b (Bharat Electronics,
Rolta-L&T, and Tata Power), and (iii) Future Infantry Combat Vehicle: INR500b
(Tata, Mahindra, and L&T, among others).
Key projects pipeline for the domestic players
The six nuclear submarines (Project 75i) entail a cost of INR530b; this is the
largest project cleared for award to the Indian industry. Based on our
interactions with various industry experts, we believe that the entire order
could be awarded to a single yard. Mazgaon Dock is already constructing six
submarines in India and economies of scale do not justify more than two yards
manufacturing submarines in India. Countries like the US and China have 1-2
Click here
Covering analyst(s)
Satyam Agarwal
+91 22 3982 5410
Amit Shah
+91 22 3029 5126
Nirav Vasa
+91 22 3982 5422
February, 2015

shipyards manufacturing submarines. Possible companies in the fray include
L&T, Pipavav, and consortium of Hindustan Shipyard – BHEL – MIDHANI.
Offset policy is coming up for review shortly. Offsets will be an important play
for mid-sized players in the Defense industry, as they can become part of the
global supply chain for various players.
February, 2015

Indian Railways: DFC an important Game Changer
Represented by:
Mr. Adesh Sharma
Corporation of India Limited;
Managing Director
Key takeaways
Dedicated Freight Corridor (DFC) promises to be a ‘game changer’ for improving the
competitiveness of Indian manufacturing. DFC plans to run freight trains in India on
time tables. Travel time for goods transportation between Mumbai – Delhi would
decline from 60 hours currently to just 18 hours. In addition, there will be multiplier
effects by setting up various Industrial Corridors through the route length.
Key Highlights of the DFC program
DFC promises to be a ‘game changer’ for improving the competitiveness of
Indian manufacturing. The share of Indian Railways in freight traffic has declined
to just 36% (v/s ~70% in several other countries) and the Dedicated Freight
Corridor Corporation of India (DFCC) intends to improve the ratio to 50% over
the next few years.
One of the key advantages of DFC is that freight trains in India could be run on
time tables similar to passenger trains currently; the frequency can be
theoretically increased to one train in 10 minutes. As a result, travel time for
goods transportation between Mumbai and Delhi would decline from 60 hours
currently to just 18 hours. Setting up of various industrial corridors along the
route length would result in a multiplier effect.
Despite being a greenfield network, freight charges in the system will not
increase. DFCC’s operating ratio would be just 45% against the Indian Railways’
98%. Also, DFCC’s maintenance and operational costs would be just 33% of
Indian Railways’ current costs primarily driven by ‘Faster-Longer-Heavier’ trains,
which would significantly increase operational efficiency.
Post the western and eastern DFCs, four new freight corridors are being
planned: Delhi-Chennai (2173km; USD22b), Mumbai-Kolkata (2,000km;
USD21b), Kharagpur-Vijayawada (1,100km; USD12b), Chennai-Goa (890km;
USD10b). The surveys have been recently completed and suggest an IRR of
18%+ for several of these networks.
Covering analyst(s)
Satyam Agarwal
+91 22 3982 5410
Amit Shah
+91 22 3029 5126
Nirav Vasa
+91 22 3982 5422
Project Cost and timelines details
The intent is to complete the project by December 2018, and there is strong
confidence that deadlines would be met. The western and eastern (till Khurja)
DFCs would be completed by December 2018. The Khurja-Ludhiana section
would be completed by December 2019.
Total project cost for the western and eastern DFCs is estimated at ~INR820b, of
which construction cost (including civil, tracks, electrical, signaling) would be
INR560b. Contracts worth INR260b have been awarded (including ~INR90b to
L&T consortium, INR50b to GMR consortium, and INR33b to Tata Projects-led
consortium). The balance contracts of INR300b are targeted to be awarded by
March 2016, which entails a strong pipeline of project awards for equipment
February, 2015

Port logistics: Lifting the national trade
Company represented by:
Mr. Prakash Tulsiani
Managing Director,
Gujarat Pipavav
Key takeaways
Ports represents gateway for a country’s EXIM trade. Long coastline of India
provides opportunity to create enabling infrastructure to aid manufacturing growth.
Key ingredient in place
India has 7,500kms of coastline with 12 major ports and 60 non-major ports.
Seaborne trade accounts for 90-95% of volumes and 70% of total EXIM trade.
This compares with 2x long coastline for China, but with ~2000 ports.
India’s cargo traffic is set to treble over FY12-FY32, at a CAGR of 6%. However,
the acceleration in GDP could positively surprise.
Container traffic would grow from 10m TEUs in FY12-13 to 14m TEUs in FY17-18
and would continue to grow at 6% pa from thereon.
Port utilization is already high at 80-85% and 4 out of 12 major ports are running
at 100%+ utilization – suggesting urgent need to put enabling infrastructure to
realize manufacturing growth.
Challenges on evacuation, regulation key impediments
Evacuation infrastructure is a key for successful boost to cargo handling and
seaside capacity (mushrooming of port) will not help. Accessibility to hinterland,
faster turnaround of cargo is crucial for manufacturing boost.
Under investment in railways has led to stiff constraints on cargo movement.
Few corridors operate at 130%+ utilization and preference for freight train
movement is secondary.
Traffic has thus shifted to road network, which is not economical for long haul.
Moreover, the condition of road and network is poor further impacting swifter
Lack of standard policies and regulations on concession period, land acquisition,
clearance has further slowed down investment in building infrastructure.
Steps initiated, focus on smart cities important
DFC is vital step towards easing cargo movement. While important, it is facing
delays and thus, it calls for rapid action/monitoring on part of government.
Concept of setting up industrial corridors (Delhi-Mumbai), creation of smart
cities (Dholera) are steps in right direction. This would boost manufacturing
GPPV best placed to leverage growth opportunity
Best evacuation (dedicated railway line with double stacking option), superior
efficiency (vessel turnaround and in crane movement) and availability of water
front opens up huge scope of growth for GPPV.
GPPV has initiated expansion of container capacity to 1.3m TEUs (from 0.85m
TEUs), while it is debt free as of now.
We currently expect GPPV to deliver 29% earnings CAGR over FY15-17E. Stock
trades at PER of 19x and P/B of 3.6x (RoE of 22%).
Covering analyst(s)
Nalin Bhatt
+91 22 3982 5429
February, 2015

Enabling Indirect Tax Environment
Represented by:
Mr. Rajiv Jalota
Commissioner of Sales Tax
Key takeaways
Covering Analyst(s):
Ashish Gupta
+91 22 3982 5544
Dipankar Mitra
+91 22 3982 5405
GST – a revolutionary change:
The implementation of GST will be a
revolutionary change as it will reduce various shortcomings of the current
indirect tax regime, especially on cascading effect of taxes. It is estimated that
~10% of the existing tax collections are due to the cascading effect of taxes. GST
will also result in lower compliance and administration cost, consequently,
reducing the ultimate cost of the goods/services. Various forms in which
cascading effect of taxes is witnessed are:
Non-inclusion of certain state level taxes such as luxury tax and
entertainment tax under VAT.
VAT being levied on the price inclusive of excise duty, no credit available for
CST on inter-state transfer of goods, no credit of Cenvat (Excise and service
tax) for local dealers.
Different VAT rates for products under different states.
Proposed GST model:
Under the proposed GST regime, GST is divided into two
components: State GST (SGST) and Central GST (CGST). Further, taxes are
proposed to be levied on inter-state transfer of goods and services in the form
of integrated GST (IGST).
Proposed rate structure:
The government has proposed a GST Council which
will decide the likely Revenue Neutral Rate (RNR) under the GST regime. GST is
likely to be segregated into three different tax rates, namely:
Nil rate
Low rate
Standard rate
IT Infrastructure:
The most important task under GST lies in integrating all the
taxes and making it user-friendly through digitization. This has been achieved
through ‘GST-N’ (IT infrastructure of GST). The registration and filing of returns
across the country would be done through GST-N. A significant amount of work
has already been done under GST-N.
Major challenges/hurdles:
GST bill has to be approved by each House of Parliament with 2/3 majority
and 50% of the state legislatures.
Compensating the State governments for any loss of revenue on account of
shift to GST.
February, 2015

Measures being taken towards labour reform
Represented by:
Mr B K Sanwariya
Indian Labour Board
Key takeaways
Many measures taken recently toward labour reform
The new government has taken various measures to simplify labor laws aimed at
helping ease of doing business. Following are the examples.
Covering analyst(s)
Dipankar Mitra
+91 22 3982 5405
Shram Suvidha Portal:
Unified web portal with the following four features to
benefit 0.6m-0.7m industrial units.
Unique labour identification number (LIN) to facilitate registration.
Filing of self-certified and simplified Single Online Return (in place of 16
separate returns earlier).
Inspection reports within 72 hours by the labour inspectors.
Timely redressal of grievances.
Labour Inspection Scheme:
To cut down over 0.3m inspection annually by way
of i) list of inspections to be computer generated randomly based on risk based
algorithm and ii) complaints based inspections to be determined centrally.
The Laws (Exemption …) Act, 1988:
Made applicable for establishments employing between 10-40 workers as
against the existing provision of 10-19.
To maintain only two registers (in place of one).
Allow maintaining registers in e-mode and submit return through e-mail.
Amendments in Apprentices Act, 1961:
Apprentices can be engaged in any trade within a % band of total workers.
Can engage apprentices in optional trades which are not designated.
Scope extended to non-engineering at diploma and degree level.
Penalties in the form of fine only.
Permission to outsource basic training in an institute of their choice.
Apprentices could also be from other states.
Employment and Training:
Raise apprentice training to 2m from current 0.3m.
Double the stipend to apprentices with 50% subsidy.
Scheme of National Brand Ambassadors for Vocational Training.
Initiatives in Progress:
The Factories Act, 1948 Amendment Bill referred to Standing Committee.
Comprehensive amendment to the Employees’ Provident Fund and
Miscellaneous Provisions Act, 1952.
Draft Small Factory Bill to regulate factories employing less than 40 workers
Codification of Labour Laws into five groups, i.e., i) industrial relations, ii)
wages, iii) social security, iv) safety and welfare, v) working conditions.
February, 2015

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