Motilal Oswal Financial Services

23 June 2020

India Strategy

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Indo-China Conflict: A look at sectoral inter-linkages with China

Pharma, Auto, Consumer Durables, Telecom Equipment most exposed



Trade Deficit with China (USD b)

48.5 48.6



The recent border conflict with China in the Galwan valley of Ladakh is

unprecedented and has heightened geopolitical tensions. This has caused significant

backlash in India.

Further, the narrative of reducing trade dependence on China is gaining steam.

In this report, we look at key India-China macro trade metrics and highlight sector-

wise exposure to China on imports, supply-chains and raw materials.

India's trade deficit with China has doubled in the last decade. From sectoral

perspective, Pharma, Consumer Durable, Telecom Equipment and Automobiles will

be relatively more impacted along with a spill-over to stringent trade policy

actions/retaliations if the India-China conflict escalates further.

Unprecedented geopolitical flare-up in Indo-China relations

19.2

0.8 1.5

Trade Deficit with China (% of

GDP)

2.4

1.7

1.4

0.2 0.2

The recent (15-16

Jun’20) flare-up on the Indo-China border in the Galwan Valley

of Ladakh is unprecedented. It has heightened geopolitical tensions between the

two nations leading to reports of potential escalation. The situation is currently

fluid with diplomatic and political emphasis on disengagement and a desired return

to normalcy at the earliest. However, these events have caused significant backlash

in India, giving rise to a narrative of reducing dependence on China – both on

business and commercial fronts. Media reports suggest that the Government of

India has asked the industry to prepare a list of products imported from China; this

would help identify non-essential imports for which local substitutes could then be

made available (Refer

here).

Further, business contracts awarded to Chinese firms

have been cancelled by some state governments (Maharashtra and Haryana). While

we would not like to hypothesize on the possible future steps being contemplated,

in this note we look at key macro trade parameters between India and China and

the inter-linkages of different sectors with China in terms of sales, supply chains as

well as investments. Moreover, we have also highlighted sectors and companies,

which would get impacted in case of import curbs or tariffs.

Snapshot of key macro trade metrics between India-China

From barely any deficit in FY00, India ran a trade deficit of USD48.6b (1.7% of GDP)

with China in FY20. India’s imports from China have risen steeply from just 2.6% of

total imports in FY00 to an all-time high of 16.4% in FY18 before easing to 14%

(USD65.3b) in FY20. India’s exports to China, as a percent of total exports, have just

started picking up pace after touching 3.4% in FY16. In FY20, it stood at USD16.6b

or 5.3% of total exports from India. Finally, as per official data from the Department

of Industrial Policy and Promotion (DIPP), China’s FDI inflow over FY00-20 to India

stood at a mere USD2.4b out of India’s total FDI inflow of USD470.1b.

Several sectors have material linkages with China

From a sectoral perspective Auto, Consumer Durables, Pharmaceuticals, Telecom,

Chemicals and Renewable Power sector (Solar) seem to be the most dependent in

terms of sourcing from China. Also, in many cases there appears to be a lack of

alternative suppliers at the same scale or costs. While Consumer Durables is

dependent on China for components, Pharma is dependent for API sourcing.

Research Analyst: Gautam Duggad

(Gautam.Duggad@MotilalOswal.com); +91 22 6129 1522;

Nikhil Gupta

(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555

May 2020

Yaswi Agarwal

(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196;

Jayant Parasramka

(Jayant.Parasramka@motilaloswal.com)

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

India Strategy

Telecom is dependent on China from a network standpoint as well as for 4G

smartphone handsets as China caters to more than 75% of the Indian handset

demand. Various sectors have material inter-linkages with China and form a critical

part of the supply-chain for many firms in India. Any potential escalation between

the two nations could increase operational/supply-chain risks in the current

economic backdrop, even as economies look to recover from the pandemic.

Overall, it would be difficult and expensive for Indian firms to immediately find

alternative suppliers, in our view.

Structural reforms crucial for manufacturing competitiveness/reducing

long-term dependence on China

In the short-to-medium term, we believe the deep inter-linkages of several sectors

preclude any meaningful retaliation on the trade front. However, as the world looks

to de-risk its supply-chain from China given the backdrop of the COVID-19

pandemic, from a long-term perspective, the need for emphasis on Indian

Manufacturing gets reinforced now. Further, the Indian government has also

announced several measures to drive self-dependence in various aspects

(Atmanirbhar Bharat). For sustained change, however, we believe structural

reforms encouraging manufacturing (ease of doing business, ease of compliance

burden, etc.) and market reforms (land, labor and capital) would augur well to

augment India’s manufacturing competitiveness.

SECTOR-WISE IMPACT FROM DEPENDENCE/INTER-LINKAGES WITH CHINA

AUTOS



Tata Motors, Motherson Sumi

and

Bharat Forge

would be the

least impacted

due to

their business’ diversified nature and global operations. The tyre industry has already

seen multiple increases in anti-dumping duties, which has benefited tyre companies.



Havells

and

Crompton Greaves

would be the

least impacted

due to low exposure to

China.

Voltas

would be the most affected in case of tariff hikes.



Dependency on China is ~60-70% for key starting materials. In case of any tariff or

import curbs,

Sun Pharma

and

Cipla

would be the

least impacted

as they are fully

integrated and have considerable exposure to the branded business.



Vodafone

and

Bharti Airtel

would be the

most impacted

in case of tariff or import

curbs on telecom network equipment providers.

Reliance Jio

would be the

least

impacted

as it has no exposure to China in the network equipment space.



Higher impact: Rallis, Dhanuka, Sumitomo India, Insecticide India.



Lower impact: PI Industries, UPL, Coromandel

(at company level),

Bayer India.



Potential beneficiaries: SRF, Aarti Industries, Atul Ltd, Bharat Rasayan, Excel Industries.

CONSUMER

DURABLES

PHARMA

TELECOM

CHEMICAL AND

AGRO CHEMICAL

E-COMMERCE



Info Edge

would be impacted as its investee companies – Zomato and Policy Bazaar –

have exposure to investments from China. Indian tech and E-commerce start-ups like

Paytm, Snapdeal, Ola, Swiggy, BigBasket

and

Byju

have significant investments from

Chinese companies.



Within our coverage universe,

Tata Power

has exposure to execution and

commissioning of solar power plants.

UTILITIES

23 June 2020

India Strategy

Exhibit 1:

Sector-wise exposure to China – Summary

Sector

Autos

Comments



27% of total import content is from China with the country being a key supplier of sub-components used in

engine, electrical/electronics, alloy wheels, tyres, etc.



It would be difficult to replace Chinese suppliers in certain segments like electrical and semi-conductors as the

required scale and skill is not available at the moment.



The government should focus on enabling a policy framework to increase localization of imported content.

Consequently, once scale has been achieved, globalization should be pursued.



Chinese brands in goods like TV and mobiles have strong presence in Indian markets while they are looking to

increase their presence in ACs, refrigerators and washing machines.



Supply chain dependence on China for Indian brands is also high. It would be difficult to replace Chinese

suppliers in critical components like compressors, LED chips, motors, mobile displays, etc.



90% of Havells manufacturing is in-house (may be dependent on some intermediary goods from China). For

other companies, in-house manufacturing stands at 20-60%.



Dependency on China for key starting materials is ~60-70%. A ban on imports from China could lead to supply-

chain disruption in the Indian Pharma industry.



Due to economy of scale, raw materials procured from China are estimated ~20-30% cheaper than those

manufactured domestically.



Meaningful investment for setting up facilities in India to replace Chinese supply would be needed, which

requires time as well as regulatory approvals.



Telcos are dependent on network equipment providers like Huawei and ZTE for network access, which includes

front-end telecom sites as well as backhaul network.



Out of 22 circles, Bharti/VIL use Huawei telecom equipment in ~3/7 circles. Bharti and VIL incur ~INR100-200b

annual capex in India toward (a) adding access sites, and (b) improving backhaul – transport and core capacity.



China services 75% of handset demand in India and is deeply entrenched in the global smartphone supply

chain. Any disruption in Chinese products may have a major impact on 4G adoption in India.



Raw material imports from China for Indian agrochemical industry ranges between 10-50% depending on the

product portfolio.



Over the past 3-4 years, Indian agrochemical players are trying to diversify their sourcing requirement i.e.

identifying other countries to source from.



The specialty chemical sector has relatively lower dependency on China for raw material.



Chinese companies have high investment exposure to some key start-ups in India.



With the pre-screening of Chinese investments in India, some Indian tech start-ups could face a supply crunch

in funds from new as well as existing investors.



India is highly dependent on Chinese solar modules for construction of solar capacities.



80% of solar module requirement is met from China. Any decision to curb imports for existing projects under

construction is likely to result in tariff revisions (pass-through on costs).



Certain thermal plants too have Chinese equipment suppliers.

Source: MOFSL

Consumer Durables

Pharmaceuticals

Telecom

Chemical and Agro

Chemicals

E-Commerce

Utilities

23 June 2020

India Strategy

India’s trade deficit with China doubles in less than a decade

India cannot give China the cold shoulder unless dependence is reduced

Exports to China stable in last

couple of years…

Exports to China, USD b

% YoY

16.6

150

100



-50

…but share of total exports (%)

increased marginally

China export, % of total export

7777 6



4 4



Following the border skirmishes between India and China, the recent narrative

has sparked debate around India’s boycott of Chinese products. To understand

if such a boycott is feasible currently, we carried out a simple analysis of India’s

trade with China.

From a deficit of just USD0.8b in FY00, India ran a trade deficit of USD48.6b

(1.7% of GDP) with China in FY20. Trade deficit has hovered around the

USD50b mark since the past six years; however, FY18 was an exception with

trade deficit of USD63b. In fact, India’s trade deficit with China has more than

doubled from USD20b (1.4% of GDP) in FY10 to USD48.6b in FY20, implying

massive surge in dependence on Chinese products

(Exhibit 2).

India’s imports from China have risen steeply – from just 2.6% of total imports

in FY00 to all-time high of 16.4% in FY18 before easing to 14% in FY20.

Interestingly, in the first decade of the new century, Chinese imports grew

aggressively in high double-digits (ranging between 15-75% YoY).

Moreover, India’s exports to China, as a percent of total exports, have just

started picking up pace after touching 3.4% in FY16 (third lowest share in 20

years after 2.2% in FY02 and 1.9% in FY01). In FY20, it stood at USD16.6b or

5.3% of total exports, higher than 5.1% in FY19 but lower than the peak of

6.7% achieved in FY08.

Out of the 99 double-digit Harmonized Systemic (HS) coded items

exported/imported to/from China, top 15 products accounted for 87.8%/85.1%

of total exports/imports in FY20. India’s highest exported product in FY20 was

organic chemicals, followed by iron ore and its components; mineral oils and

bituminous substances (including petroleum products) and various kinds of

fish. These 4 items constituted 51.4% of total exports to China.

Cotton, the top-most exported item in FY15 (19.1% of total exports),

constituted only 4.7% of total exports in FY20. Similarly, copper and articles,

accounting for 15.8% of total exports in FY15, now forms only 1.6% of total

exports

(Exhibit 4 on page 5).

Three broad categories – all kinds of electrical and telecom equipment,

machinery and nuclear reactors and organic chemicals – constituted 60.6% of

total imports in FY20. Other majorly imported items such as iron and steel,

plastics and fertilizers add an additional 9-10% to total imports

(Exhibit 5 on

page 6).

Notably, a Feb’20 research

report

by Gateway House on ‘Chinese

Investments

in India’

suggests that 18 out of the 30 Indian unicorns (valuation more than

USD1b) have total Chinese investment of more than >USD3.6b. This indicates

deep-rooted Chinese presence in the start-up space, the loss of which could

lead many of these companies awry.

Finally, of all the countries having substantial FDI equity positions in India,

China has one of the lowest. Official data from the Department of Industrial

Policy and Promotion (DIPP) shows China’s FDI equity inflow was USD2.4b out

of the total FDI equity inflow of USD470.1b during FY00-20. Therefore, China

accounts for only 0.5% of total FDI equity inflows into India. The top-20

countries constitute 93% of total FDI equity inflows to India during the same

period (Exhibit

3).

23 June 2020

India Strategy

Can India afford to materialize the ‘Boycott China’ movement?



While letting go of equity FDI from China might not translate into a marked

change in the overall FDI equity inflows to India, our dependence on Chinese

imports and the recent surge in their investments in Indian firms indicate that

we are not yet in a position to claim bilateral self-sufficiency against China.

Exhibit 2:

India’s trade deficit with China has hovered around USD50b in the past six years

Trade deficit with China (USD b)

1.9

0.8

0.2

0.7 1.1

0.1

0.2

0.8 1.1

0.2 0.2

1.5

0.2

0.5

4.1

9.2 16.3 23.1 19.2 28.0 37.2 38.7 36.2 48.5 52.7 51.1 63.0 53.6 48.6

1.0

1.3

1.4

% of GDP

2.0

2.1

2.4

1.9

2.5

2.2

2.4

2.0

1.6

1.7

0.1 0.2

0.4

0.7

Source: CEIC, MOFSL

Exhibit 3:

China’s share in equity FDI inflows to India has been negligible during FY00-20

30.4

20.8

7.2

7.1

6.3

6.0

FDI inflows in FY20, % in total

2.6

2.3

1.8

1.6

1.5

1.0

0.9

0.7

0.6

0.5

0.4

Source: DIPP, MOFSL

Exhibit 4:

Top-15 items exported accounted for 87.8% of India’s total exports to China in FY20

FY20

Prepared Feathers, Human Hair

Copper and Articles

Dyeing Extracts, Dyes, Paints

Vegetable Fats, Oils and Waxes

Cofee, Tea, Mate and Spices

Iron and Steel

Graphites

Cotton

Nuclear Reactors and other Mach

Plastics and Articles

Electrical Mach, Telecom equip

Fish and Crustaceans

Mineral Fuels, Bituminous Subs.

Ores, Slag and Ash

Organic Chemicals

SHARE OF TOP 15 EXPORTED ITEMS, %

1.1

1.6

1.9

2.4

2.8

3.1

3.7

4.7

4.8

5.1

5.2

8.0

12.9

14.2

16.3

Gems & Jewelery

Raw Hides & Skins and Leather

Aircraft, Spacecraft and Parts

Prepared Feathers, Human Hair

Inorganic Chems, Precious…

Vegetable Fats, Oils and Waxes

Electrical Mach, Telecom equip

Plastics and Articles

Nuclear Reactors & other Mach.

Ores, Slag and Ash

Graphites

Organic Chemicals

Mineral Fuels, Bituminous Subs.

Copper and Articles

Cotton

1.2

1.3

1.4

2.1

2.3

3.0

4.2

4.3

5.2

8.8

10.8

15.8

19.1

FY15

Source: CEIC, MOFSL

23 June 2020

India Strategy

Exhibit 5:

Top-15 items imported accounted for 85.1% of India’s total imports from China in FY20

FY20

Glass and Glassware

Furniture, Bedding, lamps etc

Mineral Fuels, Bituminous Subs

Inorganic Chems, Precious Metals

Aluminum and Articles

Miscellaneous Chemical Products

Iron and Steel

Vechicles except Railway

Optical, Photographic items

Articles of Iron and Steel

Fertilizers

Plastics and Articles

Organic Chemicals

Nuclear Reactors & other Mach

Electrical Machinery, Telecom Eq

0.9

1.4

1.5

1.7

1.8

2.0

2.2

2.3

2.5

2.9

3.9

12.2

19.0

29.3

SHARE OF TOP 15 IMPORTED ITEMS, %

Furniture, Bedding, Lamps etc

Mineral Fuels, Bituminous Subs

Misc Chemical Products

Ships, Boats etc

Vechicles except Railway

Optical, Photographic items

Gems & Jewelery

Articles of Iron and Steel

Project Goods, Some Special Uses

Plastics and Articles

Articles of Iron and Steel

Fertilizers

Organic Chemicals

Nuclear Reactors & other Mach

Electrical Mach, Telecom Eq

1.2

1.3

1.9

2.0

2.3

2.4

2.8

4.5

5.2

10.5

16.8

FY15

27.7

Source: CEIC, MOFSL

Exhibit 6:

India needs to pursue structural reforms to drive manufacturing competitiveness

Global Competitiveness Index Ranking (2019)

Source: World Economic Forum, MOFSL

23 June 2020

India Strategy

Sector-wise

Autos

Autos: 27% of imports from China; limited alternative sources available



Import content (including vendor imports) ranges between 15-20% for key

Auto OEMs. Large part of these imports is from China (~27% of imports), EU

incl. the UK (~23%), South Korea (~10%), Japan (~9%) and the US (~7%).



China is the key supplier for sub-components used in engine,

electrical/electronics, alloy wheels, tyres, etc. Also, it supplies key components

for EVs, including li-ion battery cells. Large parts of these imports from China

(except alloy wheels) are sourced by vendors, whereas tyres are sold in the

aftermarket.



For most components, there are limited cost-competitive sources available.



Any tariff or non-tariff barriers to import would push OEMs for localization of

these components in the long term. While we have seen localization drives in

components like alloy wheels over the last few years, we still do not have the

requisite scale/skills in certain segments like electrical and semi-conductors.



With a policy framework in place, Indian auto component players should focus

on capitalizing the import substitution opportunity. This can be done by first

localizing imported components. Consequently, once scale is attained from

domestic consumption, globalization should be pursued for the same

components.



Tata Motors, Motherson Sumi

and

Bharat Forge

would be the

least impacted

due to their business’ diversified nature and global operations. The tyre

industry has already seen multiple increases in anti-dumping duties, which in

turn have benefited tyre companies.

Exhibit 7:

Auto component imports at ~30% of domestic

consumption…

Domestic (INR b)

Imports (% of total)

30.1

23.1 24.0

29.2 31.3

Imports (INR b)

33.9 33.3 32.9

29.3 29.5 29.9

906

1,067 1,237

21.0

Exhibit 8:

…with China having ~27% share of imports

China (% of total auto comp imports)

27.0

360

2,551 2,899

376

1,847 2,191

1,578 1,619 1,634 1,503 1,663

872 1,197

FY14

FY19

Source: ACMA, MOFSL

907

497 669 745 772 829

23 June 2020

India Strategy

Exhibit 10:

Over 60% of imported components are in

transmission and steering, engine and electrical

Transm. & Steering

7.4

China

27.0

6.4

9.8

8.9

South Korea

10.0

Germany

14.0

Source: ACMA, MOFSL

13.6

4.72.2

29.9

Engine Comp.

Electricals

Suspen. & Braking

Body/Chassis

Consumables

17.0

Interiors

Cooling sys.

Rubber comp.

Source: UN Comtrade, ACMA, MOFSL

Exhibit 9:

Break-up of origin for auto component imports

UKFrance

Italy 3.0 2.0

4.0

Singapore

5.0

Thailand

5.0

USA

7.0

Japan

9.0

Exhibit 11:

With right policy support, India can gain share in global auto supply chain

Source: ACMA, MOFSL

Consumer Durables

The Indian consumer electronics and appliances industry is highly integrated with

China. Lately, Chinese brands are looking to increase their presence in the Indian

market. Also, China plays a crucial role in the supply chain for various end products.

Chinese brands making inroads in Indian market:

Over the past 4-5 years, there

has been an increase in Chinese investments in the Indian CEA market.



According to latest data from IDC, in

LED TVs, Xiaomi

commands 33%

market share, which is almost at par with the cumulative share of the other

three brands, i.e. LG, Sony and Samsung.



Chinese brands like

Xiaomi, Vivo, Realme and Oppo

together command

~75% of the Indian

mobile handset

market.



ACs:

Chinese brands like

Haier, Midea, Xiaomi,

and

TCL

are looking to

expand their presence in the air conditioner (AC) market in India, although

they are yet to make their presence felt.



Refrigerators

and

Washing Machines: Haier

has its presence in both

categories, but lags in market share v/s the top-3 players.



Supply chain dependence is high:

India is highly dependent on China for supply

of critical components across key product categories:



23 June 2020

India Strategy



ACs:

Compressors form 30% of the total cost of ACs and are largely

imported from China.



Refrigerators:

In this segment too, India is dependent on China for

compressors.



Lighting:

The key component, LED chip, gets imported from China.



Washing Machines:

Dependent on China for motors.



Immune/lower dependency categories are few:

Very few categories boast of

high local manufacturing content. These include fans, pumps, air coolers, etc.

Even in mobiles, a segment where India is a net exporter now, there is

dependency on China for mobile displays.



Higher local manufacturing content companies/ supply chains:

Very few

companies have higher in-house manufacturing content. In fact, barring Havells,

which has >90% of its content manufactured in-house, for other companies in

the sector, it ranges between 20-60%. Even Havells is dependent on China for

some intermediary components, but the overall proportion is quite low

compared to peers. Even Amber is looking to increase local manufacturing

content; however, this step would increase its capex intensity and weigh on

RoCEs. Dixon is a beneficiary of increasing local assembling for various product

categories. However, the company is dependent on China for critical supplies as

well as key clients, which includes Xiaomi.

Exhibit 13:

India TV industry – Chinese brands command

~50% market share

Exhibit 12:

India TV industry – market share of key players

Xiaomi

33%

10%

13%

14%

Samsung

Sony

TCL

Others

Source: MOFSL

22%

51%

49%

Chinese brands

Others

Source: MOFSL

Exhibit 14:

India mobile industry – market share of key

players

13%

31%

Xiaomi

Vivo

Samsung

11%

Oppo

Realme

16%

21%

Others

Exhibit 15:

India mobile industry – Chinese brands command

~75% market share

24%

Chinese brands

Others

76%

Source: IDC, MOFSL

23 June 2020

India Strategy

Pharmaceuticals

60-70% dependency on China for key starting materials

Pricing – key concern area with short-term impact on availability of raw materials:

A ban on imports from China could lead to supply-chain disruption in the Indian

Pharma industry. According to trade data from the Ministry of Commerce, GoI, India

imported ~USD3.5b worth bulk drugs/drug intermediates from across the world in

CY2019, of which, 67% (USD2.4b) was from China. The proportion of imports from

China rose higher to 70% in 1QCY20, which we believe was due to the stocking up in

preparation for supply disruptions due to COVID. Dependence on China is

particularly high for products like Antibiotics/Penicillin, for which, more than 90% of

imports are from China. Even for APIs/drug intermediates manufactured in-house or

imported from other countries, an estimated 80-85% of the key starting materials

(KSMs) and chemicals are imported from China.

Not so easy to replace China:

Due to economy of scale, raw material procured from

China is estimated to be ~20-30% cheaper v/s those manufactured domestically.

Also, meaningful investment for setting up facilities in India to replace the Chinese

supply is required. Also, lead time for setting up API/KSM facilities and subsequent

regulatory approvals are additional hurdles before commercialization kicks in.

Accordingly, we expect plans to reduce dependency on China to be gradual rather

than adhoc.

Advantage China – few factors that make manufacturing attractive:

Geographic

conditions such as low temperature in the Inner Mongolia region of China are

conducive for manufacturing of antibiotics. Replicating such conditions in India

would lead to significant increase in energy costs, making these products unviable.

Further, the limited alternative supply source would lead to an increase in demand

from other sources. Also, re-routing of manufactured products in China through

countries that are not under the import ban would effectively reduce the impact of

the ban on China. While such measures would ensure supply of APIs/intermediates,

these would come at a higher cost due to increase in transportation costs, custom

duties at different countries and various administrative costs.

In short, an import ban on China would lead to an increase in raw material costs for

Indian pharma companies in the short-to-medium term, till domestic facilities begin

operations. However, it is unlikely to result in unavailability of APIs and plant

shutdowns.

Exhibit 16:

Considerable dependency on China for bulk drug and intermediates

Bulk Drug and Drug Intermediaries imports (USDm)

China

Rest of the World

1,109

1,136

2,385

2,352

228

534

CY2018

CY2019

Q1, CY20

Source: Ministry of Commerce, Government of India

23 June 2020

India Strategy

Exhibit 17:

Company wise snapshot of direct/indirect sourcing from China

Companies

Ajanta

Alkem

Aurobindo

Cadila Healthcare

Cipla

DRRD

JLS

Laurus labs

Strides

Sun

TRP

Remarks



~100% of API requirement is outsourced. Total import itself is 7-8% of raw material requirement



~70% of API requirement is outsourced



~50% of the raw material requirement is dependant on China



~45% of API requirement is outsourced



Except Oncology and respiratory, all the API requirement is outsourced



40-45% of API is outsourced. High single digit direct dependance on China



Some of the KSM for API (~7% of total sales) is directly procured from China



Considerable dependancy on KSM/intermediates from China



~100% of API requirement is outsourced. About 35-40% of requirement is fulfilled by Solara



~45% of API requirement is outsourced



~70% of API requirement is outsourced

Source: MOFSL, Industry. * We need further product specific clarity to study the impact on each company’s operations

Telecom

1) Dependence on network equipment

Telcos are dependent for network equipment on providers like Huawei and ZTE. In

India, Chinese player’s telecom equipment is used in access network – both front-

end telecom sites as well as backhaul network. Huawei’s telecom equipment is used

in Bharti/VIL’s ~3/7 circles out of 22 circles, while the backhaul equipment is far

deeply deployed across India. On the other hand, RJio sources its complete

equipment from Samsung (South Korea). After consolidation in the telecom

equipment market, globally there are 4-5 major network equipment producers –

Huawei is one of the largest players along with Ericsson, Nokia Siemens, Samsung

and ZTE.

High magnitude of requirement; Low fungibility:

Bharti and VIL incur about

INR100-200b annual capex in India. Bharti and VIL incur ~INR100-200b annual

capex in India toward (a) adding access sites, and (b) improving backhaul –

transport and core capacity. While Bharti and VIL procure equipment from large

vendors like Huawei, Ericsson and Nokia Siemens, RJio buys it from Samsung.

Telcos may find it commercially unviable and difficult to switch their network

equipment requirement for maintenance and upgrade from an incumbent

vendor in respective circles to other players like Ericsson and Nokia Siemens.

This includes the 3/7 circles where currently sourcing is done from Chinese

vendors.

Make in India, by replicating China story:

Chinese equipment providers have

been at the forefront of network deployment by telecom operators in China.

Over time, Huawei and ZTE have become a dominant force in China

due to

extensive R&Ds and scale. Since India has historically sourced network

equipment from foreign players, the current network ecosystem makes it

difficult for Indian companies to gain relevance. For an Indian player to become

a dominant force, a longer gestation of R&D investment and scale to

bring

profitability may be required.

2) Majority of smartphones are produced in China; could jeopardize 4G

penetration

The smartphone market globally is largely dependent on China. The country has

among the largest handset companies servicing ~50%/75% of the global/India

handset demand. Additionally, even non-Chinese handset players like Apple and

23 June 2020

India Strategy

Samsung source parts for their handsets from Chinese vendors and only assemble in

other locations. Thus, China is deeply entrenched in the global smartphone market.

India is currently adding ~10-12m 4G subscribers on a monthly basis i.e. nearly 120-

150m annually (10-12% subscribers). Any disruption of Chinese products may have a

major impact on the 4G adoption in the country, jeopardizing digital growth and

data consumption in India.

Chemicals and Agrochemicals



Chemicals are a significant part of India’s overall trade flow – India has

consistently ranked third in imports (USD46b, ~9% of total imports) and fourth

in exports (USD30b, ~9% of total export) over the past five years. Thus, India has

a chemical trade deficit of USD15b. Raw material import from China is

particularly high for the Indian agrochemical industry; it ranges between 10-50%

depending on the product portfolio. The companies with generic product

portfolios have higher dependency for raw material from China. However,

Indian agrochemical players are trying to de-risk their sourcing from China over

the next 3-4 years through diversifying sourcing from other countries. The

government is also trying to encourage domestic manufacturing through ‘Make

in India’ initiatives. The Specialty chemical sector has relatively lower

dependency on China for raw material.

We believe active ingredient/intermediate manufacturers in the Indian

agrochemical industry would benefit in case of an import ban. This is because

agrochemical formulators would resort to domestic manufacturers for material

sourcing. Over FY16-20, agrochemical formulators increased their raw material

sourcing from the domestic market. Companies are also looking to create

alternative sources (domestic and global) and backward integration.

Unorganized/smaller players that majorly import raw material from China would

face difficulties; however, organized players would benefit.

India imports just 4-5% of its total soda ash requirement from China, and hence,

benefits of soda ash manufacturing would be minimal for India.

Higher impact:

Rallis, Dhanuka, Sumitomo India and Insecticide India.

Lower impact:

PI industries, UPL, Coromandel (company level) and Bayer India.

Potential beneficiaries:

SRF, Aarti Industries, Atul Ltd, Bharat Rasayan and Excel

Industries.

E-Commerce

With the pre-screening of Chinese investments in India, some Indian tech start-ups

could face a supply crunch in funds from new as well as existing investors. There is

already shortage of funds at premium valuations due to the COVID-19 crisis, this

could further add to the pain of tech start-ups. Two of the largest investee

companies of Info-Edge i.e. Zomato and Policybazaar are backed by Chinese

investors Ant Financials (~23% stake) and Tencent Holdings (~10% stake). Zomato is

in talks for additional capital with 4 other investors, of which 2 are Chinese. Total

Chinese investment in Indian tech start-ups is estimated at USD5b.

23 June 2020

India Strategy

Exhibit 18:

Investments into Info-Edge investee companies

Zomato

Policybazaar

Info Edge stake

22.70%

15.90%

Primary Chinese Investor

Ant Financials

Tencent Holdings

% stake

23%

10%

Valuation as per last funding round (USD B)

3.3

1.5

Source: MOFSL

Exhibit 19:

Chinese investors in some key start-ups

Chinese Investors

Ant Financial/Alibaba

Tencent

Shunwei Capital

Hillhouse Capital

TR Capital

Investment in key internet companies

Paytm, Snapdeal, Zomato, Big Basket

Policybazaar, Ola, Udaan, Flipkart, Byju, Dream 11, Hike, Swiggy

Zomato, Meesho

Swiggy, Udaan, Cred

Flipkart, Lenskart, Urban Ladder, Big Basket

Total Indian Investments

(USD B) (Estimated)

2.7

0.13

0.16

0.11

Source: MOFSL

Utilities



India’s power generation sector is dependent on China for (a) modules from

China used in the construction of solar capacities (within renewables), and (b)

equipment supplies t to certain thermal plants. If Chinese imports are restricted,

it could affect execution. However, we do not expect a major impact on the

earnings of companies under our coverage.

India sources ~80% of its solar module requirements from China. We believe any

move to thwart imports from China would likely apply to future awarding, and

thus, would get captured in the bids. If there is a move to curb imports for

under-construction solar projects, it would likely result in tariff revisions (with

pass-through of costs). With respect to thermal plants, key equipment suppliers

for NTPC’s upcoming plants are BHEL and Indian JVs/ non-China foreign arms

such as Alstom-Bharat Forge, L&T and Doosan-Hitachi. We note that any change

in the capital cost for NTPC would likely be a pass-through, compensated by

higher regulated equity. Other thermal generation players within our coverage –

Torrent Power, JSW Energy, Tata Power and CESC – are currently not executing

new thermal projects.

Most companies within our coverage universe have steady-state business

models (JSW Energy, CESC and Power Grid) that generate and distribute

electricity within the confines of the country. JSW Energy and Tata Power import

coal; however, they are not dependent on China for coal imports.

Four

countries – Indonesia, South Africa, Australia and the USA – account for ~90%

of India’s thermal coal imports.

With little dependence on China for imports,

Coal India is unlikely to get affected or reap any benefits.

23 June 2020

India Strategy

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

Expected return (over 12-month)

>=15%

< - 10%

> - 10 % to 15%

Rating may undergo a change

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In

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Disclosure of Interest Statement

Analyst ownership of the stock

Companies where there is interest

23 June 2020