pg 22. interview: dr. ganesh natarajan, vc & ceo...
TRANSCRIPT
1ST - 30TH Apr 2015 . Vol 2 Issue 3 . For Private Circulation Only
pg 22. INTERVIEW: Dr. Ganesh Natarajan, VC & CEO, Zensar Tech.
pg 24. Indian Economy – Trend indicators
3GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 2
VOL 2 . ISSUE 3 . 1ST - 30TH APR 2015
Vineet Bhatnagar- Managing Director and CEO
EDITORIAL BOARD:Naveen Kulkarni, Manish Agarwalla, Kinshuk Bharti Tiwari
COVER & MAGAZINE DESIGN Chaitanya Modak, www.inhousedesign.co.in
FOR EDITORIAL QUERIES:PhillipCapital (India) Private LimitedNo. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400 013
RESEARCH Automobiles Dhawal Doshi, Priya Ranjan
Banking, NBFCs Manish Agarwalla, Pradeep Agrawal, Paresh Jain
Consumer, Media, Telecom Naveen Kulkarni, Jubil Jain, Manoj Behera
Cement Vaibhav Agarwal
Economics Anjali Verma
Engineering, Capital Goods Ankur Sharma, Hrishikesh Bhagat
Infrastructure & IT Services Vibhor Singhal, Deepan Kapadia
Metals Dhawal Doshi, Ankit Gor
Mid-caps Vikram Suryavanshi
Oil & Gas, Agri Inputs Gauri Anand, Deepak Pareek
Pharmaceuticals Surya Patra, Mehul Sheth
Retail, Real Estate Abhishek Ranganathan, Rohit Shroff
Portfolio Strategy Anindya Bhowmik
Technicals Subodh Gupta
Production Manager Ganesh Deorukhkar
Database Manager Deepak Agrawal
Sr. Manager – Equities Support Rosie Ferns
SALES & DISTRIBUTION Ashvin Patil, Shubhangi Agrawal, Kishor Binwal, Sidharth Agrawal, Bhavin Shah, Varun Kumar, Narayan Mulchandani
CORPORATE COMMUNICATIONS Zarine Damania
GROUND VIEW - PREVIOUS ISSUES
1st Sep 2014 Issue 9
15th Nov 2014 Issue 11
1st Feb 2015 Issue 2 1st Jan 2015 Issue 1
1st Oct 2014 Issue 10
16th Dec 2014 Issue 12
3GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 2
4. COVER STORY: Not enough credit in the wallet
Ground View explores the opportunity ahead for payment banks and its impact on existing industry players like commercial bank and NBFCs
22. INTERVIEW: Dr. Ganesh Natarajan
Is ex-chairman of NASSCOM and currently the Vice Chairman & CEO of Zensar Technologies. We spoke to him about the growth prospects of the Indian IT Services companies, NASSCOM annual growth estimates and overall trends in the industry.
24. Indian Economy – Trend indicators
26. PhillipCapital Coverage Universe: Valuation Summary
LETTER FROM THE MANAGING DIRECTORIn an endeavour to provide ubiquitous access of
payment Services and deposit Products to small
businesses and low income households, the central
bank’s initiated to add new vertical in the banking
value chain called “payment bank”. This vertical will
include large section of population, especially the
low income household, migrant labour force and
economically weaker section under the net of basic
banking services and financial products. Along with
financial inclusion, the primary objective of pay-
ment banks will also be to facilitate high volume
and low value transactions in deposit, remittance
and payments, that will be driven through cost
efficient technology.
The payment bank’s business model would evolve
around payment solution as the restriction on
lending activity would put a cap on its intermedia-
tion business. The sheer size of market opportunity
available in payment services vertical and com-
pressed intermediation margin does not seem to
be a very exciting proposition. Despites this, the
level of participation for payment bank license is
immense. The advent of new vertical in financial
value chain would complement commercial bank’s
presence in the market. Our cover story on Pay-
ment Bank penned by analyst Manish Agarwalla
explores the opportunity ahead for payment banks
and its impact on existing industry players like com-
mercial bank and NBFCs.
Also read in this issue discussion with Dr. Ganesh
Natarajan, ex-chairman of NASSCOM and currently
the Vice Chairman & CEO of Zensar Technologies.
We spoke to him about the growth prospects of the
Indian IT Services companies, NASSCOM annual
growth estimates and overall trends in the industry.
Best Wishes
Vineet
CONTENTS
5GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 4
COVER STORY
Umesh Bhatka, a migrant worker in the textile mills in the industrial city of Surat sends
money to its native village in Ganjam district in Orissa. The money takes a time consuming
complicated route to reach his family. The money is dispatched through people from his
community who travel to his village. Many a times some amount goes missing. Ramadhir
kumar again a migrant worker at a construction site, keeps his wage with the contractor (for
safe keeping), which he draws when he visits his native place. The contractor charges undue
amount for just safe keeping. There are many such cases as migrant workers do not visit
bank branch due to limited financial literacy; lack of proper documentation;complexity; and
inaccessibility.
There is a need for commercial bank to shift the bulk of low-value transactions to a much
lower-cost and more ubiquitous retail channel, which makes for a significantly more
compelling business case to serve the poor. The key is to leverage corner shops/merchant
establishment that can be found in every village and in every neighbourhood. The payment
bank initiative by the central bank is an attempt to provide Ubiquitous Access to Payment
Services and Deposit Products at Reasonable Charges. “Not enough credit in the wallet”
is an indepth study of the potential opportunity for payment banks and its impact on other
participants in financial value chain like commercial banks and NBFCs
pg. 6 Financial Inclusion Foremost priority of policy maker___________________________________________________pg.8 Payment Bank Model An endeavour to provide Ubiquitous Access to basic banking services___________________________________________________pg.18 Potential market size Payment bank – enticing interest across industry segment – However motive defers___________________________________________________pg.19 Challenges and Key Success factors Little margin of error___________________________________________________
BY MANISH AGARWALLA, PRADEEP AGRAWAL & PARESH JAIN
7GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 6
Providing low-income households and
small businesses with access to financial
services is not a new goal for India. Policy
makers are well aware of its importance
and have been very willing to learn from the
successful experiences of other countries and
to experiment with new ideas. However, pro-
F I N A N C I A L I N C L U S I O N
Foremost priority of policy maker
gress on this front leaves much to be desired.
When financial inclusion goals are specified and
strategies articulated, there is little consideration
of credit risk and cost to serve. Consequently,
the Nachiket Mor Committee report aimed to
address issues of credit risks and costs to serve
for providing better access of financial services
The banking system design in any economy can be char-
acterised asa horizontally differentiated banking system
(HDBS) and a vertically differentiated banking system
(VDBS). A well-functioning financial system has insti-
tutions that collectively meet the needs of the country
while enhancing the stability of the system as a whole.
Fortunately, in India, many elements referred to and ex-
perience with multiple kinds of banking system designs
exist. For example, India has significant experience of
both the national bank and the regional bank design.
There is a robust set of NBFCs and several PPIs are
active. What is required is to evaluate these experiences
systematically and accelerate the growth of the designs
that seem to hold promise for financial inclusion and that
are consistent with the design principles. Additionally,
there is need to enable significant partnerships between
institution types that leverage each of their strengths
Banking system design
Categories Characteristics Example
National bank with Branches / agents Deposit, Credit, payment, etc (full service) PAN India SCBs like SBI, ICICI Bank, HDFC Bank, PNB, BOB etc
Regional Banks Deposit, Credit, payment, etc (full service) RRBs, Old private sector banks
National - Consumer Bank Deposit, Credit NBFCs like Bajaj finance, STFC etc & Housing finance companies
National - Wholesale Bank Deposit, Credit IDFC, PFC, REC etc
Horizontally differentiated banking system
Categories Characteristics Example
Payment network operators Payments VISA, MasterCard, FINO, NPCI, BCs, Whitelevel ATMs
Payment Banks Payments M-Pesa, Airtel Money, Oxigen (in India these are nested payment banks)
Full service Banks Deposit, Credit, payment, etc (full service) PAN India SCBs like SBI, ICICI Bank, HDFC Bank, PNB, BOB etc
National - Consumer Bank Deposit, Credit NBFCs like Bajaj finance, STFC etc & Housing finance companies
National - Wholesale Bank Deposit, Credit IDFC, PFC, REC etc
Vertically differentiated banking system
7GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 6
to small businesses and low-income households.
The committee recommends six vision statements
on financial inclusion.
1. Universal Electronic Bank Account (UEBA)
2. Ubiquitous Access to Payment Services and
Deposit Products at Reasonable Charges
3. Sufficient Access to Affordable Formal Credit
4. Universal Access to a Range of Deposit and
Investment Products at Reasonable Charges
5. Universal Access to a Range of Insurance and
Risk Management Products at Reasonable
Charges
6. Right to Suitability
The vision statement for Ubiquitous Access to
Payment Services and Deposit Products at
Vision Goal
A Universal Electronic Bank Account Each Indian resident, above the age of 18
Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges
Full services access point within a fifteen minute walking distance from every household in India
Reasonable Charges
At least one product with positive real returns
Sufficient Access to Affordable Formal Credit Credit to GDP Ratio in every District of India to cross 10%
Credit to GDP Ratio in every District of India to cross 50%
Credit to GDP Ratio for every \significant. sector of the economy to cross 10%
Credit to GDP Ratio for every \significant. sector of the economy to cross 50%
Convenient Access
Affordable Rates
Universal Access to a Range of Deposit and Investment Products at Reasonable Charges
Deposit & Investments to GDP Ratio in every District of India to cross 15%
Deposit & Investments to GDP Ratio in every District of India to cross 65%
Reasonable Charges
Universal Access to a Range of Insurance and Risk Man-agement Products at Reasonable Charges
Total Term Life Sum Assured to GDP Ratio in every District of India to cross 30%
Total Term Life Sum Assured to GDP Ratio in every District of India to cross 80%
Reasonable Charges
Right to Suitability
All financial institutions to have a Board approved Suitability Policy.
Presence of district level redressal offices for all customers availing any financial service
Vision statement on financial inclusion - Nachiket Mor Committee recommendation
Reasonable Charges for small businesses and
low-income households is as follows.
By January 1, 2016, the number and distribution
of electronic payment access points would be such
that every resident would be within a 15-minute
walking distance from such a point anywhere in
the country. Each such point would allow residents
to deposit and withdraw cash to and from their
bank accounts and transfer balances from one
bank account to another, in a secure environment,
for both very small and very large amounts, and
pay reasonable charges for all of these services.
At least one of the deposit products accessible to
every resident through the payment access points
would offer a positive real rate of return over the
consumer price index.
9GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 8
the payment bank. The goal of the central bank
is to provide basic banking services to 450,000
unbanked villages. The payment bank will des-
ignate merchant establishments / corner shop
as its access points on the pay- and-use model.
This access point will address the issue of costly
brick-and-mortar branches and offer low cost and
easy access to the customer. From the merchant
establishments’ point of view it is an additional
source of revenue and increase in footfalls in his
establishment.
1. Acceptance of demand deposits (current de-
posits, and savings bank deposits). Payments
banks will initially be restricted to holding a
maximum balance of Rs. 100,000 per customer.
After the performance of the Payments bank is
gauged by the RBI, the maximum balance can
be raised. KYC norms are also simplified for
small value transaction limited transaction.
2. Payments and remittance services through
various channels including branches, BCs
and mobile banking. The payments / remit-
tance services would include acceptance of
funds at one end through various channels
including branches and BCs and payments of
cash at the other end, through branches, BCs,
and Automated Teller Machines (ATMs) and
point of sale terminal.
3. Issuance of PPIs as per instructions issued
from time to time under the PSS Act.
Umesh Bhatka, a migrant worker in the
textile mills in the industrial city of
Surat sends money to its native village
in Ganjam district in Orissa. The mon-
ey takes a time consuming complicated route
to reach his family. The money is dispatched
through people from his community who travel
to his village. Many a times some amount goes
missing. Ramadhir kumar again a migrant worker
at a construction site, keeps his wage with the
contractor (for safe keeping), which he draws
when he visits his native place. The contractor
charges undue amount for just safe keeping.
There are many such cases as migrant workers do
not visit bank branch due to limited financial lit-
eracy; lack of proper documentation;complexity;
and inaccessibility (due to limited banking hour).
In an endeavour to provide ubiquitous access of
payment services and deposit products to small
businesses and low-income households, the
central bank initiated a vertical in the banking
value chain called “payment bank”. This vertical
aims to cover a large section of the population,
especially low-income households, migrant labour
and economically weaker sections under the net
of basic banking services and financial products.
Along with financial inclusion, the primary ob-
jective of payment banks will also be to facilitate
high volume and low value transactions in deposit,
remittance and payments, driven through cost-effi-
cient technology.
The concept of the payment bank in not new in
India and some of its basic functions are similar to
pre-paid payment instruments or the business-cor-
respondent model. Due to difficulties faced by
such entities and the risk associated with the
model, the central bank promoted the concept of
PA Y M E N T B A N K M O D E L
An endeavour to provide Ubiquitous Access to basic banking services
Scope of payment bank
9GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 8
4. Internet banking - The RBI is also open to
applicants transacting primarily using the Inter-
net.
5. Functioning as Business Correspondent
(BC) of other banks – A Payments bank may
choose to become a BC of another bank for
credit and other services which it cannot offer.
6. The Payments bank cannot undertake lend-
ing activities. Apart from amounts maintained
as Cash Reserve Ratio (CRR) with RBI, it will be
required to invest all its monies in Government
securities/Treasury Bills with maturity up to one
year that are recognized by RBI as eligible se-
curities for maintenance of Statutory Liquidity
Ratio (SLR).
Capital requirement. Since the payment banks
will not be allowed to assume any credit risk,
and if its investments are held to maturity, such
investments need not be marked to market and
there may not be need for capital for market risk.
However, the payment banks will be exposed to
operational risks. They will also be required to
invest heavily in technological infrastructure for
operations. The capital will be used to create such
fixed assets. Therefore, the minimum paid-up
voting equity capital of a payment bank shall be
Rs1 bn. The payment bank shall be required to
maintain a minimum capital adequacy ratio of 15%
of its risk weighted assets (RWAs) on a continuous
basis, subject to any higher percentage as may be
prescribed by the RBI from time to time. However,
as payment banks are not expected to deal with
sophisticated products, the capital adequacy ratio
will be computed under simplified Basel I stand-
ards.
As payment banks will have almost zero or negligi-
ble RWAs, its compliance with a minimum capital
adequacy ratio of 15% would not reflect the true
risk. Therefore, the bank should have a leverage
ratio of not less than 5%—its outside liabilities
should not exceed 20 times its networth/paid-up
capital and reserves.
Promoter’s contribution. The promoter’s min-
imum initial contribution to the paid-up voting
equity capital of a payment bank shall be at least
40%, which shall be locked in for five years from
the date of commencement of business of the
bank. Shareholding by promoters in the bank in
excess of 40% shall be brought down to 40% with-
in three years of the date of commencement of
business of the bank. Further, the promoter’s stake
should be reduced to 30% of the paid-up voting
equity capital of the bank within 10years, and to
26 % within 12 years from the date of commence-
ment of business of the bank. Proposals with a
diversified shareholding and time frame for listing
are preferred.
Foreign shareholding. The foreign shareholding
in the bank would be as per the extant FDI policy.
Voting rights and transfer/acquisition of shares.
As per Section 12 (2) of the Banking Regulation
Act, 1949, voting rights in private sector banks are
capped at 10%, which can be raised to 26% in a
phased manner by the RBI. Further, as per Section
12B of the Act, any acquisition of 5% or more of
voting equity shares in a private sector bank will
require prior approval of the RBI. This will also
apply to payment banks.
Prudential norms. As payment banks will not have
loans and advances in their portfolios, they will
not be exposed to credit risks and the prudential
norms and regulations of the RBI as applicable
to loans and advances, will therefore not apply
to them. However, the banks will be exposed to
operational risks and should establish a robust op-
erational risk-management system. They may face
liquidity risks and therefore are required to follow
the RBI’s guidelines on liquidity-risk management,
to the extent applicable.
Regulatory norms
11GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 10
There is need for transactions and savings ac-
counts for the under-served in the population.
Also, remittances have both macro-economic
benefits for the region receiving them as well as
micro-economic benefits for the recipients. Higher
transaction costs of making remittances diminish
these benefits. Therefore, the primary objective
of setting up of payment banks is to enhance
financial inclusion by providing (i) small savings ac-
counts and (ii) payments/remittance services to the
migrant labour workforce, low-income households,
small businesses, other unorganised-sector enti-
ties and other users, by enabling high volume and
low value transactions in deposits and payment/
remittance services in a secured technology-driven
environment.
Apart from web-based and mobile app-based
banking services, the payment bank would des-
ignate various merchant establishments / corner
stores as its access points on the pay-and-use
model. The merchant establishments / corner
stores, unlike costly brick-and-mortar branches,
will offer easy and low cost access to the customer.
From the merchant establishments’ point of view,
it is an additional source of revenue and increase
in footfalls in his establishment.
Banking beyond branches is about shifting the
bulk of low-value transactions to a much low-
er-cost and more ubiquitous retail channel, which
makes for a significantly more compelling business
case to serve the poor. The key is to leverage
corner shops/merchant establishment that can
be found in every village and in every neighbour-
hood. In much the same way as shops exchange
their pre-purchased inventory of rice or cooking
oil against cash, they can also exchange their own
bank balance against cash (and vice versa). This
can be done safely as long as the store takes in
and pays back customers’ cash against an equal
and simultaneous electronic transfer of value
between the bank accounts of the customer and
the store. The payment bank must put in place
a technology platform (which can be based on
cards, biometrics or mobile phones) through which
it can authorize and record each transaction in real
time, thereby ensuring that all client transactions
are fully funded before the customer leaves the
store.
A retail store’s business is to buy a stock of a good
that people want –let’s call it rice—and to resell it
in smaller amounts. Through this process, it stead-
ily reduces its stock of rice and increases its stock
of cash. When the cash inventory is depleted, the
store needs to take some of its cash and exchange
it for a fresh supply or rice.
Substituting “electronic money” or “bank bal-
ance” for rice, and the same mechanics apply for
its bank reselling business. The store starts with a
balance of electronic money in its bank account,
and when a customer walks into the store to make
a deposit, the store transfers electronic value to
the customer in exchange for cash. When it runs
out of bank balance, the store can no longer fund
more customer deposits and it must go to the
bank to re-stock on electronic money using the
cash it has received from customers. A customer
withdrawal is the same operation but in reverse.
Thus, the only difference with the rice merchant is
that the cash merchant can buy as well as sell elec-
tronic money for cash, i.e. it can conduct deposits
as well as withdrawals.
Normal stores can thus act as cash merchants,
aggregating the cash needs of customers so that
only the shopkeeper, and not the entire commu-
nity, has to travel to a branch in order to service
their account. Cash merchants handle the logistics
of local cash distribution, in effect bridging the
distance between the bank branch (acting as a
kind of wholesale cash aggregation point for cash
merchants) and the places where poor people live
and work. The store is paid a small commission
per transaction served, making this a variable-cost
transactional channel for the bank and at the
same time a profitable new line of business for the
shopkeeper / merchant establishment. The bank
retains full control over the customer proposition,
the marketing of the service, and in ensuring the
safety and soundness of the IT platform and risk
management policies.
Business model
11GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 10
Currently PPI issuers and business correspondents
use biometric scanners to allow their customers to
make remittances. A customer who wants to remit
funds to another individual (receiver), needs to
walk into the centre and authenticate his identity
by using the thumb impression in a biometric
scanner. After verification, the customer deposits
the money at the centre and in turn the centre
manager will credit the receiver’s wallet from his
own wallet and later deposit the money re-
ceived in his account. Another way of making the
remittance is that the customer directly transfers
the money from his own wallet to the intended
receiver’s wallet after the identity is authenticated.
In this process, there is no handling of cash by the
centre manager, only the customer’s wallet is deb-
ited and the intended receiver’s wallet is credited
immediately.
Due to restriction in lending activity, the spread
earned by payment banks is expected to be very
thin and hence the entire business model would
evolve around payment services. In order to
enable a low cost easy access to the customer, the
model would be similar to a banking correspond-
ent model, wherein the payment bank would
appoint merchant establishments / corner shops
as its access point enabled by strong IT support.
The advantage which payment banks would have
compared to business correspondents or PPIs is
that, under payment bank model cash out from
merchant establishments / corner shops would be
allowed, thus removing the major hindrance faced
by BCs & PPIs.
Thin Intermediation margin
A competitive deposit product is a pre-requisite
for customer acquisition, which is crucial to a
stable remittance business. But the restriction on
lending activity would put a cap on its ability to
provide higher interest on its deposit product.
However the deposit product offered by payment
banks is expected to provide interest rates higher
than the prevailing market rate in savings deposits.
Large commercial banks provide 4.5% interest on
saving deposits.
Theoretically, a payment banks margin should not
be more than margin of SCB adjusted for credit
risk, tenure premium and high operating cost.
Long term credit risk adjusted margin of top six
commercial banks is averaged at 230bps. The
seven year average tenure premium between 1
year and 5 year corporate bond is 40bps. Oper-
ating cost of SCBs would average at 2% of asset.
The transaction cost in alternate banking model is
30%-40% of cost incurred under branch banking
model. Hence opex under agency / franchisee
model can be around 80bps compared to 200bps
opex (operating cost to asset ratio) under branch
banking model. The upper limit of margin for
payment bank is expected to around 100bps (i.e.
230bps credit risk adjusted margin - 40bps tenure
premium - 100bps opex). However the actual
margin would depend on the individual company’s
business model and market dynamics (which again
will depend on number of new licensees).
Current shortcomings of existing Pre-paid Instrument Issuer (PPI) model and business correspondent model1. The most important concerns pertaining to PPI model is the opacity of the Nested business model. Currently, the PPI are
not required to maintain any capital requirement. In addition the PPIs runs the risk of the sponsor bank getting insolvent with which it holds the escrow account and on the other and the sponsor bank runs the risk of operating quality and the likelihood of a run on its PPIs banking system design.
2. PPIdoesn’tofferinteresttothecustomersonthebalancesmaintainedinthewallet/Account.Sothereforefromafinancialinclusion point of view, this doesn’t help the poor people and small businessmen save their money.
3. Business correspondent model also faces the similar risk. In the absence of a regulator for BCs and capital requirement, the trust of the sponsor bank has always been low. Also, the sponsor bank does not control the pricing of the product and services offered by the BC, thus exposing them to criticism by the regulator. Past experience puts a question mark on the scalability of both the models.
13GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 12
Strong reliance on payment solution
The payment bank model would revolve around
low cost payment solution for small ticket transac-
tion. Payment solution would include
a. Domestic remittance services
b. Cash ins and Cash outs services
c. Airtime top-up and related recharge services
d. Utility bill payments
Domestic household remittance market is pegged
at Rs2000bn per annum, growing at CAGR of
~12%. According to industry surveys, 40% of
the domestic remittance business is channelized
through formal sources like commercial banks;
banking correspond (BC) and post office etc.
The informal system which operates primarily
through friends and family, couriers, bus services,
hawala channels and in-person transfers, is still
Payment bank NIM Scenario
Leverage (times networth)
10x 15x 20x
Interest on deposit (%)
5 1.95 1.79 1.7
6 1.04 0.85 0.75
7 0.13 -0.09 -0.2Source: PhillipCapital India Research
A scenario analysis
Major route Estimated migrant workers
(mn)
Annual remittance by migrant
workers (Rsbn)
Average Montly
remittance per worker
(Rs)
Surat/Daman - Orissa 2.0 168 7000
Mumbai - Bihar / UP 10.0 720 6000
Delhi - Bihar / UP 8.0 576 6000
Kerala - West Bengal 0.2 18 6500
Tamil Nadu - Orissa / Bihar 0.3 20 6000Source: Oxygen
Major household remittance route in India
widely preferred over the formal financial system.
Migrants prefer informal channels for a variety
of reasons which among others include costs in-
curred in making transfers, and opportunity costs.
Even access to the formal financial system is not
sufficient to ensure its usage. Migrants may simply
refuse to use the channel due to low levels of fi-
nancial literacy, lack of penetration in the home re-
gion, and time consuming process. Intuitively, the
lower a person is placed in the income distribution
ladder the more likely is he/she to be excluded
from the financial system or be more dependent
on the informal system.
Transferring money through informal sources is
inconvenient and more time consuming and risky.
Rural Urban All India
Friend/family member 30.8 18.8 29.2
Money transfer (Western Union) 2.2 4.4 2.5
Bank 36 53.8 38.3
Post office 5.2 3.3 4.9
Courier 2.4 0.2 2.1
Bus service 0.2 0 0.2
In person 22.8 19.2 22.4
Others 0.4 0.3 0.4
All 100 100 100Source: NCAER
Mode of money transfer
Average Number of days taken for the money to reach the recipient
Source: NCAER
13GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 12
For example, money is transferred free of charge
through friends or relatives who are travelling back
to a migrant’s home town. Similarly, cash couriers
operating in specific migration corridors whose
livelihood are to travel and physically deliver cash
for migrants are another choice for making the
transfers. Migrants may also prefer to transfer the
amount themselves during trips to their own vil-
lages and towns for social occasions and between
Received Sent
Bihar 46 21
Uttar Pradesh 29 15
Uttarakhand 4 5
West Bengal 4 2
Rajasthan 3 5
Jharkhand 3 6
Orissa 2 5
Punjab 1 1
Maharashtra 1 8
Madhya Pradesh 1 7
Tamil Nadu 1 7
Rest 4 18Source: NCAER
Distribution of Remittent Households across Major States
STATES Sent Received
Punjab 1.7 0.5
Rajasthan 0.2 0.3
Uttar Pradesh 0.1 0.2
Bihar 1 1
West Bengal 0.4 0.3
Jharkhand 0.8 0.5
Orissa 1.2 0.6
Madhya Pradesh 0.1 0.2
Total 0.7 0.6Source: NCAER
Cost of Money transfer (percent to amount remitted)
Vvarious channels (remittance cost on Rs5000)
% to transaction value
Money Order, India Post 0.50%
Business correspondent of SBI 2%
Airtel Money 0.50%Source: RBI
Indicative cost of transaction on domestic remittance
The domestic household remittance market
offers a market opportunity of Rs20bn in terms of
revenue, factoring a commission rate of 1% (0.5%
on both side of the transaction sender & receiver).
The Rs12bn( 60%) unorganised market remains
the potential market for payment bank and other
organised player in the financial value chain like
PPIs, business correspondent, small banks etc.
Customer queue at SBI Tatkal
jobs. Although the formal financial
system does offer security, speed, and
cost effectiveness, attributes that are
cherished by the migrants, the system
has cumbersome documentation
procedures, is often inconvenient and
does not have deep enough penetra-
tion.
15GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 14
The only other comparable country of India’s size
with a large internal migrant population is China.
A few studies estimate that the Chinese domestic
remittances market is nearly three times the size of
the Indian market. However, the crucial point that
needs to be mentioned is that the formal sector
in China accounts for 75% of the total remittances
market transactions as opposed to less than 40%
Key Services offered Commission rates
BFSI
Deposit 0.30%
Withdrawal 0.30%
Fund transfer Rs8 Per transfer
B2C
Light Bill Rs3/ Bill
DTH Customers 0.30%
Mobile Recharge 0.30%
G2C
Gas Subsidy -
Indra Awas Yojna -
NAREGA Job Card -
Financial products
LIC -
Total Earning/ Rural centre Rs 5000-20000Source: Vakrangee
Various financial services and commission rate charged by a retail centre of a business correspondent in a village with population of 5000
PPI (Paytm) offers various payment solutions
15GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 14
M-Pesa, a mobile money transfer service, innovated
by the Vodafone group, was first launched in Kenya in
March 2007 through Safaricom, a leading mobile oper-
ator in Kenya. It was initially designed to facilitate dis-
bursement and repayment of microfinance loans through
the mobile phone to reduce the cost associated with
handling cash and increasing efficiency. After the com-
pletion of pilot testing M-Pesa services were launched to
facilitate money transfers.
How M-Pesa works
M-Pesa is an SMS-based system that enables users to
deposit, send and withdraw funds, using their mobile
phones. It does not pay interest on deposits maintained
in the account and does not offer loans. Customers are
not required to have a bank account and can open an
account, transact with agents appointed by M-Pesa to
deposit and withdraw money. Customers find it conven-
ient to transact though M-Pesa, given the network of
over 80,000 agents.
M-Pesa initially started basic services like domestic and
International remittances, bill payments and airtime top-
ups. Subsequently it evolved into a complete mobile
money service with facilities such as
• ATM withdrawals
• Opening of interest paying savings accounts
• Offering other financial products like insurance and
credit facilities
• Making on-premise retail payments for buying goods
and services
• Mobile ticketing and payment of services for con-
certs and events
• Offering accounts to companies with higher trans-
action limits, which can be used to make bulk B2C
payments and through which they can receive funds
and bill payments.
Reasons for the acceptance of M-Pesa
Lower access to financial services. The access to finan-
cial services in Kenya has been low. During the launch
of the service only 19% of the population had access to
formal financial services. The country’s 31 mn people
had about five million accounts.
Huge demand for remittance services. Due to lack of
availability of remittance services at a reasonable cost
and need for reduced dependence on cash for security
reasons, the acceptability of M-Pesa services was a suc-
cess. Also it is a common practice in Kenya for migrant
workers in urban places to send back money to their
families in villages.
Adoption of technology. Prior to the launch of M-Pesa
services mobile phone penetration was considerable,
with 83% of the population aged above 15 years having
access to mobile phone technology and most being
familiar with the basic operations of making voice calls
and texting.
First mover advantage. Safaricom, being a familiar and
trusted brand, was the first telecom operator to launch
a mobile technology-based banking service in Kenya,
making it easy for the telecom operator to capture a
large market share.
Conducive regulatory environment. The Central Bank
of Kenya understood the need for efficient and low cost
remittance services, so it allowed telecom operators to
offer banking services without partnering with banks.
Advantages of M-Pesamobile money services to
financial institutions
• M-Pesa services enabled financial institutions like
banks and micro-finance institutions (MFIs) to achieve
considerable reduction in transaction costs and
increase staff efficiency. Earlier an MFI disbursing
loans though branches/groups had to bear huge cost
on cash logistics and insurance. An MFI disbursing
loans through cheque is charged for each clearing.
Through the B2C service, MFIs need to deposit
the money in their M-Pesa accounts and can easily
disburse the loan amount at a lower cost. Similarly,
bank branches can accept deposits or receive loan
repayments through M-Pesa and reduce or avoid ex-
Case study: M-Pesa
17GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 16
penses for branch infrastructure, manpower,
equipment and security expenses.
• The M-Pesa platform allows FIs to de-con-
gest their banking offices, allowing the
staff more time to focus on product sales,
business development, customer acquisition
and related activities, without worrying much
about cash management, deposits, with-
drawals and disbursement services.
Advantages of M-Pesa to customers
• Customers availing of M-Pesa services can
avoid travelling long distances to transaction
their account or to fill in bank forms and
queue up to deal with tellers and cashiers.
They just need to deposit the money in their
M-Pesa account at the nearest M-Pesa agent
and transfer money to their bank accounts.
This helps users to save time and travel
expenses and avoid the risk of carrying cash.
Challenges faced by FIs of M-Pesa to FIs and
customers
• A few FIs claim that one of the biggest
challenges has been in reconciling M-Pesa
deposits in their customers’ accounts, fol-
lowed by a lag in Safaricom crediting funds,
resulting in customers being unable to with-
draw money. The reconciling problem occurs
mainly due to system errors and poor integration of software
between the Safaricom and the FIs.
• Sometimes, customers key-in the wrong account number and
their money is transferred to an unintended account. If customers
type out an invalid account number, the money is credited to a
suspended account. Either way, customers cannot access their
deposits.
in India. Roughly 45% of the remittances are chan-
nelled through China Post, while 25% are handled
by the commercial banks.
Cash ins and Cash outs services
Transaction fee from cash ins and cash outs can be
source of revenue for the payment bank. A rough
estimate suggests that India has 100mn migrant
workers. As per NCAER survey, average house-
hold food expenditure of remittent households is
Rs34057 per annum. This translates into annual
cash out of Rs3406bn for these households. The
cash ins and cash outs are chargeable due to infra-
structure and working capital cost. The transaction
charge varies between 2% to 3% depending on
the volume. Thus the domestic migrant worker
cash ins – cash outs market size can be pegged at
Rs3trn, offering a revenue potential of Rs85bn.
Airtime top ups, related recharge services and
utility bill payments
The overall mobile recharge market is about
Rs1,000 bn a year. Around 95% of the recharge
is done at retailer outlets on a cash basis. These
offer opportunities for payment banks by offering
recharge solutions at their access points (mobile,
Internet, or franchise outlet) by aggregating the
recharge facility for multiple telecom service
providers. Similarly, the DTH recharge market is
pegged at Rs74 bn annually. Utility bill payment
facility can also be sources of revenue.
17GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 16
CBS of respective Banks
FI Servers of respective Banks
PTS (server of PPIs or BCs)
V-SAT
Retail access point
The franchise manager of the rural / urban branch will connect to the respective servers through VSAT, and will generate receipt.
G2C Partner Systems
B2C Partner Systems (Mo-bile, DTH Company Server
Once a customer comes to a retail access point (merchant
establishment / corner shop), the merchant manager
initiates the transaction on a laptop, which is connected to
the bank and its partner servers through VSAT/data card.
For example, if a customer came to deposit money in its
account, he/she first needs to authenticate his/her identity
through the thumb impression scanner at the centre.
Once the person is verified, the centre manger will con-
nect its system to the branch server through VSAT/data
card device. He will then transfer the amount from his set-
tlement account (rural manager’s current account) which
he maintains with the bank, to the depositors account.
Once the amount is credited in the customer’s account, a
slip is generated with transaction details. If the transaction
fails, the slip will not be generated. Similarly, if it is a with-
drawal, the centre manager debits the customer account
and credits his settlement account and pays cash to the
customer. The merchant establishment will have to keep
cash to pay for withdrawals. While for banking transaction
it needs to maintain a current account with the bank, for
utility bill payments he maintains an online wallet. All the
utility bill payments are done through this wallet.
How merchant establishment works as a designated access point
19GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 18
Applicant for Payment Bank Bank as JV partner
Reliance Industries ltd State Bank Of India
Airtel M commerce Kotak Mahindra Bank
Oxigen services Ratnakar Bank
Commercial banks partnering for payment bank
P O T E N T I A L M A R K E T S I Z E
Payment bank – enticing interest across industry segment – However motive defers
The concept of the payment bank is
unique and offers an opportunity in
a huge, untapped market for basic
banking services. But the initial journey
is expected to be painful due to intense competi-
tiveness and the limited scope of operations. The
space is expected to be crowded with different
players focusing on the space – not necessarily
with an aim of profitability.
Various banks have partnered with either telecom
service providers or pre-paid instrument issuers for
payment bank licences (banks can only become
an equity partner with maximum equity holding
of 30%). Interest is seen across industries like
telecom service providers (Airtel, Vodafone, Idea,
Reliance Jio); NBFCs (Cholamandalam, Muthoot);
business correspondents (Vakrangee) ; IT ser-
vices (Tech Mahindra), PPIs (Oxygen, Itzcash, GI
Technology), India Post etc. Banks like ICICI bank;
Axis bank and Yes bank are also in discussions with
various applicants for a possible tie up.
Business potential not exciting
The potential market opportunity for payment
bank in remittance and cash in – cash outs can be
pegged at Rs100bn (domestic remittance market
Rs20bn and cash ins – cash outs Rs85bn). The
intermediation business would earn a wafer thin
margin, which can be anything between 50bps
to 100bps based on industry dynamics. The total
opportunity for payment banks does not seem too
exciting. The moot question remains, than why so
many applicant – RBI received 41 application for
payment bank license.
Deep pocket players - profitability not the sole
motive
Despite a not-so-encouraging market potential
for payment banks, interest seems to be immense
from deep pocket players like Reliance, SBI,
Airtel, Vodafone, Idea and Tech Mahindra etc. The
potential opportunity is insignificant for these play-
ers in the overall scheme of things. The primary
motive for telecom operators can be customer
stickiness whereas for PPI issuers and BCs it is a
natural upgrading. PPIs and BCs have been facing
challenges due to restrictions on cash out at points
of sale. Also due to lack of control by sponsor
banks in pricing of services by BCs, the scalability
of the model has been in question. Banks’ motive
in payment bank is to ensure captive customers for
loan products and de-congest branch.
Barring PPIs and BCs, where the upgrading to a
payment bank is driven by commercial motives,
the motive of other participants is to ensure cus-
tomer stickiness or customer acquisition. In such
a scenario, the industry will be impacted by fierce
competition.
19GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 18
C H A L L E N G E S A N D K E Y S U C C E S S F A C T O R S
Little margin of error
The multiplicity of market players. Payment
banks will be competing with different participants
in the financial value chain (like banks, PPIs, BCs,
small banks, RRBs, Cooperative bank etc) for
same set of customer. The regulatory frame work,
corporate objective and goal would differ amongst
various participants. This could create chaos and
fierce competition leading significant pricing
pressure.
Robust risk management process. Dealing with
small ticket multiple transactions would require
robust IT infrastructure. The customer transaction
would largely be biometric enabled which would
require superior infrastructure to process this.
Since the access point would not be owned by the
bank, ensuring quality customer services would
remain a key challenge
Rising customer expectations. Customer expec-
tations are currently being shaped by experiences
outside of the banking industry, where content,
ease of use, interactions and features deliver a
more engaging and rewarding experience. This
means that new services and related technology
would need to work properly once launched, as
any technical issue potentially leading to fraudu-
lent activity or data leakage, could have a sig-
nificant impact on the reputation of the financial
institution.
Device fragmentation and tablet popularity.
Mobile banking platforms will need to continue to
be developed for multiple platforms, supported
by the current and future smart-phone market.
Apart from the established operating systems iOS,
Android, as well as Windows and Blackberry, new
operating systems such as Tizen are emerging.
Depending on their market success, these plat-
forms will also need to be serviced. In addition,
the growing success of tablets means that mobile
app developers will also need to adapt the bank-
ing solutions to the tablet experience of a wider
screen, similar to that of a PC.
Lack of lending activity. Restriction in lending
activity would keep the compress the margin.
Also from customer point of view, absence of loan
product may hinder customer acquisition. Though
payment banks can act as a business correspond-
ent for loan product but this would throw up other
challenges.
Market segmentation and understanding
customer needs. Banking needs of urban areas
would be different from those of rural areas. Ser-
vices such as tailor-made reporting and real-time
information, provided by a client-relationship
manager should help a bank to differentiate itself
from its competitors. Retail banks could primarily
consider the development of solutions to auto-
mate common banking activities such as transfer
payments, transaction histories and automated
notifications related to negative account balances
or security concerns.
Brand protection. Trust and good service are
fundamental brand values of any bank. Payment
banks appointing merchant establishment / corner
shop as cash merchants are not only delegating
the handling of customer transactions to third
parties, but also placing their brand logo in an
environment they don’t directly control. They must
find ways to ensure that trust is never undermined.
In return for the use of the logo and access to
its transactional platforms, banks must insist on
proper contractual terms with cash merchants.
The contract should define the roles and responsi-
Challenges
Key success factors
21GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 20
bilities of both bank and store. The establishment /
shops must be required to maintain confidentiality of
customers’ transactional data, and to post adequate
information so that customers are informed of ser-
vices available, fees, customer complaint procedures
and the like. The bank will need to supervise compli-
ance with contractual terms and monitor the levels
of customer service attained, both through frequent
scheduled visits and mystery shopping programs.
The bank must also put in place information systems
to track reported incidents at cash merchants, and
must be prepared to take prompt action (including
contract termination) when a pattern of misbehav-
iour or abuse emerges. Beyond ensuring the safety
of transactions, managing store branding and agent
processes is essential to maintain a consistent cus-
tomer experience and build trust in the new channel.
Incentivizing the channel of cash merchants. Pay-
ment banks need to incentivize the cash merchant
channel adequately in order to ensure that the stores
maintain a proper level of liquidity at all times, vis-
ually protect the bank’s brand presence within their
store, actively promote the service with the public,
and take the time to train customers unfamiliar with
electronic transactions. If the bank has a transac-
tion-based revenue model, customer transaction
fees can be used to compensate the cash merchant.
Increased foot-traffic and branding advantages from
this new line of business may help the store, but it
will still expect to be directly and sufficiently com-
pensated for the service.
Channel management hierarchy. Payment banks
will need an effective channel to select, sign up,
train, manage and monitor a rapidly expanding net-
work of stores. One approach is to manage the new
merchant channel in a decentralized fashion through
the existing branch management structure. In this
case regional and branch managers’ targets and
reward structures will need to incorporate adequate
performance measures for the new cash merchants.
If the payment bank does not have enough staff at
branch level to be able to take on this additional role
effectively, a second approach is to have the new
cash merchant channel managed by a centralized
team set up in parallel to the branch management
structure. In this case there will need to be an effec-
tive mechanism for capital allocation and business
planning to trade off the capabilities and aspirations
of the competing channels. Alternatively, the man-
agement of the cash merchant channel itself may be
outsourced to one or more third parties. In this case,
the payment bank will need to ensure contractually
sufficient control over the character and growth of
the channel.
Speed of roll-out. Payment banks will have sub-
stantial flexibility in terms of how to sequence the
roll-out of cash merchants, in terms of speed to scale
and geographic coverage strategy. They might start
with a presence in the vicinity of areas with migrant
workers. The experience gained can help them to
spread.
Account opening and product sales. Beyond the
provision of liquidity, cash merchants will likely play
a significant role in facilitating account opening for
prospective bank clients. The new channel will not
result in rapid market expansion if account opening
is onerous and limited. It is important to make ac-
count opening as easy and quick as possible. Going
a step further, thinking through the mechanism for
product cross-selling and up-selling is necessary
from the start, as new product placement is a key
revenue driver. Separating the sales and service
channels is one of the reasons the use of cash mer-
chants is appealing, and it is possible payment banks
may decide cash merchants play no role in product
sales initially, strictly processing deposits and with-
drawals. Nevertheless, payment banks should con-
sider to what extent cash merchants could support
the product sales process, if at all.
Strategic partnership. Strategic cooperation could
be considered for specific projects. For example
banks could join forces to identify a suitable IT
supplier to provide an established mobile banking
platform and share the development costs and
resources necessary for the development of new
solutions.
Ongoing assessment and continuous improve-
ment through customer feedback. Seeking direct
feedback from customers via a mobile banking app
or social media platforms is a crucial source of infor-
mation to assess if expectations are met. Individuals
use them to express their opinion, which should help
banking institutions to continuously improve their
services.
21GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 20
Conclusion
The idea of payment banks was mooted with the sole objective of including small businesses and low income households in formalised banking channels. The previous experience of SCBs, RRB, co-operative banks, and business correspondents has not been very encouraging owing to credit risks and the high cost of service. The objective of the payment bank is to provide basic deposit and payment solutions in a cost effective manner.
The payment bank’s business model would evolve around payment solution. The total market opportunity in remittance and cash ins-cash outs is pegged at Rs100bn. The margin from intermediation business will remain narrow ranging from 50bps to 100bps. Given the number of interested applicant, the sheer size of market opportunity does not seem to be very exciting. The object differs amongst various applicant of payment bank license. The telco and banks objective will be customer stickiness or customer acquisition and branch de-congestion whereas it will be a natural upgradation for pre-paid payment instrument (PPIs) and business correspond-ent (BCs). In such a scenario, the industry will be impacted by fierce competition.
Payment Bank a boon to commercial bank
Focus on developing business in new locations. Signing up merchant establishment is a low-investment, low-risk way to test the waters in new geographic markets. Payment bank can act as business correspondent of commercial banks for loan product but is not allowed to carry lending operation on its own. This would provide commercial bank access to potential customer segment for loan product.
De-congest Branches. Crowded banking halls and long queues are a common part of customers’ experience in India. Commercial banks can offer a better service to their existing customers by allowing them to conduct basic transactions at a range of merchant establishments / corner shops. In this fashion, commercial banks can offer more choice and con-venience to their customers; they can make their branches more appealing for higher-end customers with more sophis-ticated needs; and they can reduce the average per-trans-action cost by shifting low-value transactions (including over-the-counter bill-pay transactions of non-customers) to a cheaper, variable cost channel. Today commercial banks see transactions largely as a cost and operational burden, while most corner stores / merchant establishments would like more transactions to increase foot traffic. It’s a win-win for
corner stores / merchant establishment, commercial banks and their customers. Increased rural outreach by payment banks can provide a platform to commercial banks to shift its low value high volume transaction and focus on core activity. Cost per transaction through alternate channel is 30%-40% of cost per transaction through brick and mortar branch. The cost to asset ratio of payment banks is expected to be 0.6%-0.8% compared to ~2% for public sector bank like State bank of India. State bank of India has highest operating cost amongst public sector bank owing to its wide presence in un-banked area. De-congested branches will improve efficiency and aid the public sector giant to cut operating costs. If State Bank of India can shift even 30% of its transaction to alter-nate channel like payment bank, it can reduce its overall cost by huge margin. Rough estimates suggest that cost to asset ratio of public sector giant State Bank of India, can decline by 35bps to 40bps aiding to its return ratio.
Payment bank saving deposit offering will not impact ex-isting interest rate in saving deposit. A competitive depos-it product is a pre-requisite for customer acquisition, which is a key for a stable remittance business. The deposit product offered by payment banks is expected to provide interest rate higher than the prevailing market rate in saving deposit. Depending upon individual’s entities competitive intensity and objective, the interest rate which is likely to be offered by payment banks on its saving product can be anywhere between 5% to 6%. This will not distort the market pricing of saving deposit product as payment bank will not be able to command significant market share due to late entrant in the deposit acquisition space and operational challenges.
Pose risk to micro finance institute
The outreach to small businesses and low income household by payment bank will provide an access to commercial banks to market micro credit product. The low cost of transac-tion, proximity to customer will address the larger issue of reaching out these customer segments. Payment bank can act as collecting agents for commercial bank which will bring down the cost of operations. The loan origination can still be done by commercial bank in order to reduce credit risk. As commercial banks enjoys advantage in terms of funding cost, micro finance institutes cannot compete in terms of pricing.
The government’s thrust to include the small businesses and low income household to formal channel will create competi-tion for micro finance model. Major reason why MFIs are de-siring to enter the mainstream banking channel. Bandhan has secured universal licence and SKS Micro intends to apply for small banking license. Securing a small bank licence will be
crucial to SKS Microfinance’s long-term business prospects.
23GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 22
BY VIBHOR SINGHAL
Dr. Ganesh Natarajan a Vice Chairman and CEO, Zensar Technologies
Dr. Ganesh Natarajan is Vice Chairman & CEO of Zensar Technologies. He was the Chairman of NASSCOM in 2008-09. He is also a Founder and Board Member of Global Talent Track, a pioneer in Employability Skills Training in Asia. Ganesh’s industry responsibilities include leadership of the HBS Club of India, Chairman of the National Committee on Knowledge Management and Business Transformation and the Western Region Committee on Skills for the Confederation of In-dian Industry. He is a member of the Chairmen’s Council of NASSCOM. He is also a fellow of the Computer Society of India. Ganesh is a Director of Social Venture Partners India and Convener of SVP Pune. He has been appointed the Chairman of NASSCOM Foundation for 2014-16.
NASSCOM estimates are out. The industry expects
growth to accelerate compared to last year. What do you
think about them.
NASSCOM estimates 12-14% dollar revenue growth for the
sector. I’m confident about the acceleration in growth for the
industry due to improvement in demand scenario in US. Re-
tail sales for this quarter has improved and employment data
hints of lower unemployment which should translates into
higher confidence for companies to invest. We are witnessing
strong deal pipeline and shorter decision making cycles.
How does NASSCOM arrive at its estimates, and what
are the chances of it being close/far from the actual
numbers?
NASSCOM estimates are based on survey of industry partic-
ipants ranging from Indian IT company, MNCs and captives.
There is fair amount of data that is available for the publicly
listed companies. NASSCOM also polls companies regarding
their growth estimates for the next year. Left are GIC (Global
In-house Centres) which might not reveal that data but there
you also get some idea using their hiring numbers.
23GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 22
sourcing has three important stakeholders – CIO: decision
maker for Run the Business (RTB), Functional Head and
CTO: Change the business (CTB) especially SMAC strategies
and Chief Digital Officer (CDO) for digital transformation of
legacy systems. Vendors are actively trying to explore all the
three avenues to increase share of wallet.
SMAC is the new buzz word in the industry. How can it
cannibalise IMS?
Cannibalisation of IMS due to cloud isn’t big. It has impacted
data centre project marginally. However even large organisa-
tion are yet to completely configure their digital IT strategies.
Helping them to migrate to cloud can easily mitigate large
part of the cannibalisation impact.
Do MNC have competitive advantage in SMAC and what
is the competitive positioning among Indian IT company.
Well in consulting MNC do have a managerial advantage
however Indian It companies strategy have to dual in nature.
Agile for development of SMAC related projects and inte-
grate with the old legacy systems and as well as help them
move to cloud. The client’s comfort across incumbent is more
important as deliver capabilities across companies remain
same. Having said that, the MNCs do have better board
room access, and are able to influence decisions more – but
Indian companies are not far in terms of delivery capabilities.
Which other regions apart from US and Europe, do you
see outsourcing opportunity opening up, for Indian IT
companies?
Africa as a continent offers tremendous opportunity – Zensar
is doing really well in South Africa and Kenya. Verticals like
BFSI and retail, and mining (esp in South Africa) offer huge
growth potential. Apart from that, Australia too appears to
be attractive destination.
Talk us through what strategy Zensar is adopting, in or-
der to gain market-share in various verticals and geogra-
phies?
Zensar has partnered with BCG in the digital transformation
practice, where BCG will general management and functional
advisory part, and Zensar will be responsible for the tech-
nology part. Today Zensar operates in a 3x3x3 cube: Geog-
raphies of US, UK and Africa; Service lines of Application ,
Infrastructure and E-commerce; and verticals of Manufactur-
ing, Retail and Insurance. So almost 95% of Zensar’s reve-
nues come from within this cube and that is what we remain
focussed on.
How is the overall demand environment looking, esp in
US, and also Europe, which is now being touted as the
next big outsourcing destination?
Demand is good for companies with good business models.
Domains like SMAC are offering tremendous opportunities
and so companies with presence in those fields will benefit
from the demand environment – irrespective of the geo-
graphical presence.
Which pockets in US are witnessing strong growth and
why does Europe not form integral part of your confi-
dence.
US growth is stronger than Europe as economic revival in US
is faster. Also the markets are more open to outsourcing than
Europe. Insurance and Banking are showing signs of revival
with increase in discretionary spends towards digital and
stable budget for run the budget business. Manufacturing
firms are investing in improving data collection from external
sources as well as shop floors to increase efficiency and thus
the throughput. Retail is investing in upgrading the supply
chain of brick and mortar store as well as integrating it to
online through click and collect model. Retail companies are
also investing in creating e-commerce presence. Europe on
the other hand is suffering from slower growth and also have
varied cultural outlook across every country having different
perspective to outsourcing.
So what, according to you, are the challenges for the
Indian companies as they try to penetrate European
conglomerates?
The economic reality of European countries is quite different
and you can’t paint the whole region with same brush. So
unlike US, which one large homogeneous market, penetrat-
ing Europe is more difficult where the language and culture
changes in every 30 min flight. UK and Switzerland are fairly
mature markets, and have traditionally been awarding large
outsourcing contracts. Germany, Netherland and France have
large organisations that have already outsourced and few
other large organisations are ready to outsourcing in retail
and manufacturing industries. Spain, if you see, is trying to
portray itself as outsourcing destination rather than outsourc-
ing country. So pretty diverse region in terms of outsourcing
potential, and hence it will have to be tackled accordingly.
How has outsourcing changed over the last few years
and how do you see it transforming over the next few?
Outsourcing has undergone radical changes. Adaptive
outsourcing is replacing pure play advisors. Adaptive out-
25GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 24
Indian Economy – Trend Indicators
Monthly Economic Indicators
Quarterly Economic Indicators
Growth Rates (%) Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15
IIP 1.1 -2.0 -0.5 3.7 5.6 4.3 0.9 0.5 2.6 -2.7 3.9 3.2 2.6 4.7
PMI 51.4 52.5 51.3 51.3 51.4 51.5 53.0 52.4 51.0 51.6 53.3 54.5 52.9 51.2
Core sector 3.7 6.1 2.5 4.3 2.3 7.2 2.6 5.8 1.9 6.3 6.7 2.4 1.8 1.4
WPI 5.1 5.0 6.0 5.5 6.2 5.7 5.4 3.9 2.4 1.7 -0.2 -0.5 -0.4 -2.1
CPI 9.9 8.8 8.0 8.3 8.6 8.3 7.5 8.0 7.7 6.5 5.5 4.4 5.0 5.2
Money Supply 14.5 14.5 13.5 13.9 13.2 12.2 12.7 13.0 12.7 12.0 11.4 10.2 11.5 11.4
Deposit 15.7 15.9 14.6 15.1 13.8 12.2 12.7 13.2 13.0 12.4 12.2 10.6 11.9 11.8
Credit 14.7 14.4 14.3 14.1 12.8 13.1 13.1 10.6 9.4 10.8 10.7 10.6 10.4 10.1
Exports 4.3 -4.9 -3.2 5.3 12.4 10.2 7.3 2.4 2.7 -5.0 7.3 -3.8 -11.2 -15.0
Imports -18.8 -17.5 -2.1 -15.0 -11.4 8.3 4.3 2.1 26.0 3.6 26.8 -4.8 -11.4 -15.7
Trade deficit (USD Bn) -9.5 -8.3 -10.5 -10.1 -11.2 -11.8 -12.2 -10.8 -14.2 -13.4 -16.9 -9.4 -8.3 -6.8
Net FDI (USD Bn) -0.6 -0.1 2.1 2.0 4.8 2.4 3.6 2.5 2.9 2.8 1.8 4.0 5.5 0.0
FII (USD Bn) 2.6 1.5 5.4 -0.1 7.7 4.8 5.4 2.1 2.4 1.7 4.8 -0.4 6.6 0.0
ECB (USD Bn) 1.8 4.3 3.6 3.2 1.5 1.9 3.7 0.5 3.2 2.8 3.5 0.6 2.6 0.0
NRI Deposits (USD Bn) 62.1 62.2 61.0 60.4 59.3 60.2 60.1 60.9 61.8 61.4 62.0 63.0 61.9 61.8
Dollar-Rupee 292.2 294.4 303.7 309.9 312.4 315.8 320.6 318.6 314.2 315.9 316.3 319.7 327.9 338.1
FOREX Reserves (USD Bn) 295.8 291.9 293.4 296.4 287.9 284.6 280.2 275.5 276.3 283.0 291.3 295.7 292.2 294.4
Balance of Payment (USD Bn) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15Exports 72.6 74.2 84.8 73.9 81.2 79.8 83.7 81.7 85.3Imports 120.4 132.6 130.4 124.4 114.5 112.9 114.3 116.4 123.8Trade deficit (47.8) (58.4) (45.6) (50.5) (33.3) (33.2) (30.7) -34.6 -38.6Net Invisibles 26.7 26.6 27.5 28.7 28.1 29.1 29.3 26.8 28.5CAD (21.1) (31.8) (18.2) (21.8) (5.2) (4.1) (1.3) -7.9 -10.1CAD (% of GDP) 5.1 6.5 3.5 4.9 1.2 0.8 0.3 1.7 2.1Capital Account 20.7 31.5 20.5 20.6 (4.8) 23.8 9.2 19.8 18.7BoP (0.2) 0.8 2.7 (0.3) (10.4) 19.1 7.1 11.2 6.9
GDP and its Components (YoY, %) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15Agriculture & allied activities 1.8 0.8 1.6 4.0 5.0 3.7 6.3 3.8 3.2 Industry 0.1 2.0 2.0 (0.9) 1.8 (0.9) (0.5) 4.0 1.2 Mining & Quarrying (0.1) (2.0) (4.8) (3.9) - (1.2) (0.4) 2.1 1.9 Manufacturing (0.0) 2.5 3.0 (1.2) 1.3 (1.5) (1.4) 3.5 0.1 Electricity, Gas & Water Supply 1.3 2.6 0.9 3.8 7.8 5.0 7.2 10.2 8.7 Services 6.5 6.1 5.8 6.5 6.1 6.4 5.8 6.6 6.8 Construction (1.9) 1.0 2.4 1.1 4.4 0.6 0.7 4.8 4.6 Trade, Hotel, Transport and Communications 5.6 5.9 4.8 1.6 3.6 2.9 3.9 2.8 3.8 Finance, Insurance, Real Estate & Business Services 10.6 10.2 11.2 12.9 12.1 14.1 12.4 10.4 9.5 Community, Social & Personal Services 7.4 4.0 2.8 10.6 3.6 5.7 3.3 9.1 9.6 GDP at FC 4.6 4.4 4.4 4.7 5.2 4.6 4.6 5.7 5.3
25GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 24
Annual Economic Indicators and Forecasts Indicators Units FY6 FY7 FY8 FY9 FY10 FY11 FY12 FY13 FY14E FY15E
Real GDP growth % 9.5 9.6 9.3 6.7 8.6 8.9 6.7 4.5 4.7 5.5
Agriculture % 5.1 4.2 5.8 0.1 0.8 8.6 5 1.4 4.7 2.0
Industry % 8.5 12.9 9.2 4.1 10.2 8.3 6.7 0.9 (0.1) 3.0
Services % 11.1 10.1 10.3 9.4 10 9.2 7.1 6.2 6.0 6.9
Real GDP Rs Bn 32,531 35,644 38,966 41,587 45,161 49,185 52,475 54,821 57,418 60,576
Real GDP US$ Bn 733 787 967 908 953 1,079 1,096 1,008 950 993
Nominal GDP Rs Bn 36,925 42,937 49,864 56,301 64,778 77,841 90,097 101,133 113,551 125,424
Nominal GDP US$ Bn 832 948 1,237 1,229 1,367 1,707 1,881 1,859 1,878 2,056
Population Mn 1,106 1,122 1,138 1,154 1,170 1,186 1,202 1,219 1,236 1,254
Per Capita Income US$ 753 845 1,087 1,065 1,168 1,439 1,565 1,525 1,519 1,640
WPI (Average) % 4.5 6.6 4.7 8.1 3.8 9.6 8.7 7.4 6.0 3.0
CPI (Average) % 4.2 6.8 6.4 9 12.4 10.4 8.3 10.2 9.5 6.6
Money Supply % 15.5 20 22.1 20.5 19.2 16.2 15.8 13.6 13.5 12.0
CRR % 5 6 7.5 5 5.75 6 4.75 4.0 4.0 4.0
Repo rate % 6.5 7.5 7.75 5 5 6.75 8.5 7.5 8.0 8.0
Reverse repo rate % 5.5 6 6 3.5 3.5 5.75 7.5 6.5 7.0 7.0
Bank Deposit growth % 24 23.8 22.4 19.9 17.2 15.9 13.5 14.4 14.6 15.0
Bank Credit growth % 37 28.1 22.3 17.5 16.9 21.5 17.0 15.0 14.3 16.0
Centre Fiscal Deficit Rs Bn 1,464 1,426 1,437 3,370 4,140 3,736 5,160 5,209 5,245 5,136
Centre Fiscal Deficit % of GDP 4 3.3 2.9 6 6.4 4.8 5.7 5.2 4.8 4.1
Gross Central Govt Borrowings Rs Bn 1,310 1,460 1,681 2,730 4,510 4,370 5,098 5,580 5,639 5,970
Net Central Govt Borrowings Rs Bn 954 1,104 1,318 2,336 3,984 3,254 4,362 4,674 4,689 4,573
State Fiscal Deficit % of GDP 2.4 1.8 1.5 2.4 2.9 2.1 2.3 2.2 2.2 2.5
Consolidted Fiscal Deficit % of GDP 6.4 5.1 4.4 8.4 9.3 6.9 8.1 7.4 7.0 6.6
Exports US$ Bn 105.2 128.9 166.2 189.0 182.4 251.1 309.8 306.6 318.6 328.2
YoY Growth % 23.4 22.6 28.9 13.7 -3.5 37.6 23.4 -1.0 3.9 3.0
Imports US$ Bn 157.1 190.7 257.6 308.5 300.6 381.1 499.5 502.2 466.2 473.0
YoY Growth % 32.1 21.4 35.1 19.7 -2.5 26.7 31.1 0.5 -7.2 1.5
Trade Balance US$ Bn -51.9 -61.8 -91.5 -119.5 -118.2 -129.9 -189.8 -195.6 -147.6 -144.8
Net Invisibles US$ Bn 42.0 52.2 75.7 91.6 80.0 84.6 111.6 107.5 115.2 113.8
Current Account Deficit US$ Bn -9.9 -9.6 -15.7 -27.9 -38.2 -45.3 -78.2 -88.2 -32.4 -31.1
CAD (% of GDP) % -1.2 -1.0 -1.3 -2.3 -2.8 -2.6 -4.2 -4.7 -1.7 -1.5
Capital Account Balance US$ Bn 25.5 45.2 106.6 7.8 51.6 62.0 67.8 89.3 48.8 59.5
Dollar-Rupee (Average) 44.4 45.3 40.3 45.8 47.4 45.6 47.9 54.4 60.5 60.0
Source: RBI, CSO, CGA, Ministry of Agriculture, Ministry of commerce, Bloomberg, PhillipCapital India Research
27GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 26
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rnat
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ods
85 2
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52
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314
1.4
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Tata
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mica
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ri In
puts
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119
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2
27GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 26
Note
: For
ban
ks, E
BITD
A is
pre-
prov
ision
pro
fit
Phill
ipC
apita
l Ind
ia C
over
age
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vers
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Ne
t Sal
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s mn)
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mn)
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n)EP
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Grow
th (%
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pany
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d Ph
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puts
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cials
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12,
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Bank
of B
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n Ba
nk
Finan
cials
169
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cials
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lopm
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7
AXIS
Ban
kFin
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4 3
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41,6
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Shrir
am Tr
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inFin
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LIC
Hous
ing
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nce
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cials
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Micr
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nanc
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usta
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Mar
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lant
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50
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1
43,7
34
95,
074
97,
245
11.9
12.2
7.2
2.3
31.2
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8.6
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31.3
28.2
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24.3
Nest
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98 6
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3
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5 8
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1
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3 5
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7
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40
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Glax
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40.2
36.5
11.3
10.1
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Agro
Tech
Food
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8
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9
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29GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 28
Note
: For
ban
ks, E
BITD
A is
pre-
prov
ision
pro
fit
Phill
ipC
apita
l Ind
ia C
over
age
Uni
vers
e: V
alua
tio
n Su
mm
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CMP
Mkt
Cap
Ne
t Sal
es (R
s mn)
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IDTA
(Rs
mn)
PAT (
Rs m
n)EP
S (R
s)
EPS
Grow
th (%
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) P
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) EV
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TDA
(x)
ROE
(%)
ROCE
(%)
Nam
e of
com
pany
Sect
orRs
Rs m
nFY
15E
FY16
EFY
15E
FY16
EFY
15E
FY16
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EFY
15E
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EFY
15E
FY16
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nnia
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231
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IRB
Infra
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6 1
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HCL T
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IT Se
rvice
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Info
sys
IT Se
rvice
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2
29GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 28
Note
: For
ban
ks, E
BITD
A is
pre-
prov
ision
pro
fit
Phill
ipC
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over
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Mkt
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PAT (
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Grow
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15E
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15E
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EFY
15E
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EFY
15E
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EFY
15E
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EFY
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FY16
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ONGC
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346
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31GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 30
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31GROUND VIEW GROUND VIEW 1 - 30 Apr 2015 1 - 30 Apr 2015 30
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