INDIAN COMPANIES SEE

INCREASING CAPITAL
EXPENDITURE
INDIA

The Indian economy has been on a fast growth track for the past few quarters. Despite the
recent poor monsoon, the latest economic growth indicators continue to look positive.
More importantly, the mood in corporate India is buoyant and optimistic.

According to the half-yearly Business Outlook Survey conducted by the Confederation of

Indian Industry (CII), the period from October 2004 to April 2005 is expected to show
significant investment activity from domestic industry. The survey showed that 83% of
the 210 companies covered across various manufacturing sectors are looking at additional
capital investments in manufacturing capacities in the next six months.

This increased investment expectation from the Indian corporate sector is linked to their
overall improved perspective on the business climate. Nearly 80% of the companies
surveyed expect an increase in manufacturing orders, while 65% said they saw a
continuation of high-capacity utilization.

Infosys Technologies, one of India's best-known companies, is also exhibiting clear signs
of optimism. India's third-largest software exporter is launching its third and largest ADS
issue yet, listing another 16 million shares on the Nasdaq.With each ADS valued at $65,
the sale should raise a little over $1 billion.

Unusually, the entire issue is an offer for sale, where existing domestic shareholders will
tender their shares to foreign investors; there is to be no fresh issue of capital. The aim is
to increase liquidity in the Infosys ADS, which already trades at a 50% premium over the
stock price in India. Currently just 8% of Infosys stock is owned by ADS holders, which
will rise to 14% post issue.

Reaping the benefits of its Indian investments, GE has sold a 60% stake in its privately
held Indian BPO company GE Capital International Services (GECIS) for $500 million to
two private equity firms. GECIS is the single largest BPO operation in India, with more
than 12,000 employees and revenues of $420 million. So far the company has been
offering captive services to GE group companies worldwide. With GE cashing out a part
of its stake, the company can now also offer services to other companies. -Aaron Chaze

India Inc steps up advertisement spending

Corporate India is rediscovering the power of publicity. As demand conditions eased out
in 2007-08 it stepped up advertisement expenditure to reap the benefits of higher demand.

The move has paid good dividend. It has achieved robust turnover growth last year
following buoyant demand conditions. An ET survey of 100 large private sector
companies finds that their aggregate sales turnover has increased 25.4% in 2007-08.

Apparently, much of the success in achieving higher topline growth in 2007-08 had its
origin in escalating advertising expenses. Aggregate ad spending of these companies
grew by a huge 22.4% last year over the previous year. And if the share of advertising
expenses in turnover has remained the same at around 2.6% during last two years, it was
due essentially to higher growth in turnover. The actual spending on publicity had
remained buoyant.

The move to escalate spending on publicity, however, has not come suddenly. May be the
sales promotion budgets have swelled somewhat more last year to take advantage of the
improved macro fundamentals and buoyancy in demand conditions, but the fact remains
that sales promotional activities have taken the centre-stage in the overall business
strategy of Corporate India right through the current decade.

The advertisement expenses of Hindustan Unilever, the biggest ad spender of India Inc,
for example, has more than doubled in the current decade from Rs 696.52 crore in 2000-
01 to Rs 1,422.90 crore last year. The ad spending of ITC, another big ad spender, has
increased 133% from Rs 183.32 crore to Rs 427.83 crore during the same period.

And why not! After all, there is a direct correlation between the magnitude of sales
promotional expenses and growth in sales turnover. The correlation coefficient between
the growth rate of ad spending and that of sales turnover was estimated at more than 0.7
last year. That is, companies with higher growth in sales promotional expenses have
generally witnessed greater turnover growth in 2007-08.

Bharti Airtel has witnessed 44.4% rise in sales in 2007-08 when its ad expenditure grew
by 40.7%. Sales turnover of Dabur India have grown by 29.6% following 25.6% increase
in ad spending and net sales of Cadbury grew by 25.4% during the same period following
29.2% rise in its ad expenditure.

And this was the general story. More than four-fifths of the sample companies have
witnessed a rise in sales turnover in 2007-08 following higher ad spending. In contrast,
TVS Motors and Ambuja Cements witnessed sharp fall in their sales turnover following a
cut in ad expenditure.

Net sales of TVS Motors have declined 17.7% last year when its ad spending was down
by 35.9%. Sales turnover of Ambuja Cements have fallen 8.2% during the same period
following a 14.4% reduction in ad expense.

What is surprising, however, is that while India Inc in general, has stepped up ad
spending to reap the benefits of easing demand conditions, MNCs, known for their hard
sales drive, for once looked the other way round. The aggregate ad spending of the 26
multinational companies in the list increased by just about 18.7% in 2007-08 compared to
25.1% of 74 Indian companies.

The impact was visible in their turnover growth, the aggregate sales turnover of the 26
sample MNCs has increased by only 16.3%. Many of them have done even worse. The
sales turnover of Hindustan Unilever, the leader, for example, has grown only 13.2% in
2007-08 over the previous year. The aggregate turnover of the Indian companies in the
list in contrast, has grown 29.7% during the same period.

India has been among the fastest growing economies in the world, with a nominal GDP
CAGR of 9.94% over the last 10 years (1995-2005). The nominal GDP for fiscal 2005
was Rs. 30,636 billion. According to CSO estimates, nominal GDP growth for fiscal
2006 is estimated at 10.9%. There is a correlation between the economic growth rates of
a country i.e. the nominal GDP growth rate, and growth rates of the advertising industry.

Indian Advertising Industry

The Indian advertising spends, as a percentage of GDP, is 0.34%, which lags behind
other developed and developing countries.

Note: All figures are for the calendar year ending 2004.
Source: Advertising Expenditure Forecasts, October 2004 by Zenith Optimedia.

During fiscal 2005, the gross advertising spend in India is estimated at Rs 111 billion,
and is expected to grow at 14.2% to reach Rs. 127 billion by fiscal 2006.
Source: Central Statistical Organization, India, Advertising Expenditure Forecasts,
October 2004 by Zenith Optimedia

The key factors which have contributed to growth of the Indian advertising industry
include:
 Rapid economic growth of the country on the back of economic liberalization and
deregulation

 Increase in consumer prosperity

 Entry of global consumer companies with large advertising budgets

 Higher degree of competitive intensity among consumer companies; and

 Growth in media vehicles leading to increase in media penetration.

Segmentation of Advertising Spends

The five key industry segments comprise print, television, radio, cinema, and outdoor.
These different segments within the industry are at varying stages of growth and
corporatization.

Media Spends as % of Total Ad Spend

Year Print TV Radio Cinema Outdoor Internet

2000 49.0% 39.3% 2.5% 0.5% 8.4% 0.3%
2001 48.4% 40.6% 2.7% 0.4% 7.5% 0.4%
2002 47.2% 41.9% 2.9% 0.7% 7.0% 0.4%
2003 46.6% 43.0% 2.9% 0.7% 6.5% 0.4%
2004 46.3% 43.7% 2.9% 0.6% 6.0% 0.3%
Source: Central Statistical Organization, India, Advertising Expenditure Forecasts,
October 2004 by Zenith Optimedia

The Indian television industry has grown rapidly, especially since 1991, which saw the
beginning of satellite broadcasting in India. This growth was also aided by the economic
liberalization program of the Government. The growth of the satellite television audience
saw proliferation of a number of satellite television channels offering more choices to
media buyers and consumers of entertainment. Thus, the television broadcasting
business, which started off as a single government controlled television channel, now has
over 300 channels covering the Indian footprint, resulting in growing ad spends on this
medium. Reforms and proliferation of private players were the key reasons for this rapid
growth of the share of television in the advertising industry.

Similarly, sectoral reforms and increased number of players could drive market
expansion for emerging media segments including radio, outdoor, cinema and internet.

Realty slowdown hits ad industry

If you thought that only the real estate values are witnessing a dip, think twice. Even the
advertising industry is also feeling the realty heat. According to industry sources, it is
estimated that all major developers such as DLF, Omaxe, Ansals and Parsvnath have
decided to cut down on their advertising budgets by around 5%.

The advertising industry in India is estimated at Rs 10,000 crore. While analysts attribute
this trend to dampening spirits of potential buyers, real estate companies prefer to call
this a reality check on their advertising budgets.

A report from Adex India, a division of TAM Media Research, shows that the share of
real estate advertisements in print media saw a drop of 2 % during 2007 compared to
2006. According to Adex, the share of real estate advertisement in overall print and TV
advertising last year was 4% and 1%, respectively.

Says S K Sayal CEO, Alpha G Corp: “Infrastructure and real estate companies have
primarily been responsible for the advertising industry sustaining its double-digit growth
rate.

However, in general, companies and brands have been increasing their expenditure on
advertising. But a recent dip in the realty sector has made things worse for the advertising
industry. Many real estate companies, this fiscal, have cut down on their advertising
budgets.”

The Adex report indicates that the top 10 advertisers shared an aggregate of 16% of
overall ad volumes of real estate advertising in print during 2007. The list include names
such as DLF Group, Parsvnath, Sahara, HDIL and Omaxe group.
However, the real estate had maximum share in South India publications followed by
North and West publications with 52% and 26% share, respectively, during 2007.

“This is because all real estate companies want a national footprint. Also, these
companies are now turning professional. They’re setting standards when it comes to
managing their A2S (advertising to sales) ratio,” says Jagdeep Kapur, CMD, Samsika
Marketing Consultants.

According to a Ficci-PricewaterhouseCoopers study on the Indian Entertainment and

Media (E&M) industry, the year 2007 saw the advertising industry contribute 38% of the
overall industry revenues of 2007, recording a growth of 22 % over the previous year.

Internet advertising is expected to reach Rs 420 crore in 2008, and Rs 1,100 crore by
2012, with a compound annual growth rate (CAGR) of 32%. Harish Bijoor, CEO, Harish
Bijoor Consults, feels that print’s loss has been television’s gain. “There has been a
number of IPOs of real estate companies in the recent past. The print advertisement gives
you the immediacy factor, while the theme is built by a television commercial,” he says.

Bijoor believes that if at all there has been any dip, it has been in the B2B real estate
advertisements. Adds Kamal Taneja, MD, TDI Group: “There has been a little over-
spend by the real estate industry in the advertising sector in the last three to five years.
Now that the realty sector is looking at various ad avenues, it is certain that the industry is
going to witness a dip.”

Real estate cos sustain ad industry growth

Mumbai: Infrastructure and real estate companies have been primarily responsible for the
advertising industry sustaining its double digit growth rate estimated at 15 and 20 per
cent this year. However, in general, companies and brands have been increasing their
expenditure on advertising.

“It has been a fantastic year for advertising as business has been phenomenal. This has
been due to the fact that there have been a number of companies, which have begun to
advertise for the first time. At the same time, expenditure on advertising has gone up by
over 20 per cent and that’s my conservative estimate,” states Mr. R. Balakrishnan (Balki),
newly-designated Chairman of Lowe India.

New companies, especially in the infrastructure sector, have begun to advertise. They
include companies ranging from those building airports such as GMR to a real estate
major such as India Bulls. While unconventional advertisers in the construction and real
estate sector have jumped on to the advertising bandwagon, the FMCG industry, which
has always relied on advertising to build its brands has raised its spends in the past year.

As Mr. Balakrishnan observes, HUL has increased its ad spends this year. “We continue
to have 35 per cent of the revenues contributed by the FMCG companies.” So while the
usual advertisers have been increasing their ad spends, there are exceptions such as
consumer durable players who have been conservative this year. “The ad spends by
durable brands has remained constant this year although high spends have been made by
financial services, infrastructure, insurance and FMCG companies,” says Balakrishnan.

INVESTMENT

On the year gone by, Mr. M.G. Parameswaran, Executive Director, Draft FCB Ulka,
says: “The overall advertising business has grown by about 12 to 15 per cent this year,
driven by telecom, financial services, auto and infrastructure. Clients are willing to invest
in advertising given the robust growth in many sectors.

“The industry growth has been driven by new categories and inherent market momentum.
However, talent shortage is not a new issue and it will become better in the short run.
Companies need to evolve systems to ensure that there is a flow of talent into the system.
Besides, India is on the global map of all advertising majors. Not only is India seen as a
big emerging advertising market, Indian talent and management is seen as very good.

So, we have seen some of our key managers taking on greater global roles and this is
going to increase over the years.”

GOOD YEAR

Describing the year gone by as a “good” one, Mr. Sam Balsara, Chairman and Managing
Director, Madison Group, says: “At the beginning of this year, we had projected that the
industry would grow at 18 per cent. I think it has managed to grow at 20 per cent. The
Indian economy has been on a roll and that has formed the backbone of the advertising
industry. In fact, individual companies are setting ambitious targets and getting optimistic
about the future and that is good for the advertising industry.

Real estate companies were the new big boys on the block this year.” However, talent has
been steadily moving away from the advertising to more lucrative industries such as
telecom and films. As Mr. Balsara says, “One of the key things this year has been the
constant movement of people from advertising to more remunerative pastures.”

GROWTH

According to an advertising outlook report released by the London-based Zenith Opti-

media, India’s total advertising expenditure will be Rs 26,532 crore in 2008 in
comparison with Rs 22,721 crore this year, recording a 17 per cent growth.

However, Madison’s Balsara predicts 2008 will see slower growth rates. He says “In
absolute terms 2008 might have similar levels of growth and it could even be a
percentage lower as the base is getting larger for the industry.”