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PROJECT REPORT

Food Processing Industry in India

July 2011

Dun & Bradstreet

Contents

INDUSTRY OVERVIEW ............................................................................................................ 3 Industry Structure ................................................................................................................................... 4 Risks ......................................................................................................................................................... 5 Outlook ..................................................................................................................................................... 5 INDUSTRY STRUCTURE .......................................................................................................... 7 The Segments......................................................................................................................................... 7 REGULATORY & POLICY ENVIRONMENT ............................................................................11 Major Policy Initiatives ......................................................................................................................... 11 Sector Specific Government Policies ................................................................................................ 14 Fruits and Vegetables ...................................................................................................................... 14 Fisheries ............................................................................................................................................ 15 Meat and Poultry .............................................................................................................................. 15 Dairy Products .................................................................................................................................. 15 Duty Structure ....................................................................................................................................... 16 Foreign Direct Investment in the Industry ......................................................................................... 17 Steps taken to attract FDI ............................................................................................................... 17 SEGMENT ANALYSIS .............................................................................................................18 Dairy Products ...................................................................................................................................... 18 Marine Products ................................................................................................................................... 19 Fruits and Vegetables.......................................................................................................................... 20 Meat & Poultry Sector .......................................................................................................................... 22 Market Growth Drivers......................................................................................................................... 23 Methods of Processing Food .............................................................................................................. 26 Dairy Sector........................................................................................................................................... 27 Marine Sector........................................................................................................................................ 29 Meat and poultry sector ....................................................................................................................... 30 1

Indian Firms need to strengthen R&D base ..................................................................................... 31 Emerging Business Models ................................................................................................................ 32 Terminal Market ................................................................................................................................. 32 Contract Farming ................................................................................................................................ 32 COMPANY PROFILES .............................................................................................................34 Hindustan Unilever Limited (HUL) ..................................................................................................... 34 Dabur India Ltd. .................................................................................................................................... 38 ITC Limited ............................................................................................................................................ 41 INTERNATIONAL SCENARIO .................................................................................................44 Fruits and vegetables .......................................................................................................................... 45 Dairy Sector........................................................................................................................................... 45 Meat and poultry Sector ...................................................................................................................... 46 Global vs. emerging markets .............................................................................................................. 48 COMPETITIVE LANDSCAPE ...................................................................................................49 RISK ASSESSMENT ................................................................................................................51 OUTLOOK ................................................................................................................................54

INDUSTRY OVERVIEW
According to Ministry of Food Processing in India, the food processing industry is ranked 5 largest sector in terms of production, consumption, export and expected growth in India. The food processing industry in India is over 200 years old. The Food Processing Industry sector in India is one of the largest industries in terms of production, consumption, export and growth prospects. It contributed 6.0 per cent to Indias GDP in 2010. The industry's size is estimated at US $ 70 billion by the Ministry of Food Processing in India as in 2009. Nearly, one third of the entire Indian food market share comprises of processed food. Changing lifestyles, food habits, organized food retail and urbanization are the key factors for processed foods in India, these are post-liberalization trends and they give boost to the sector. Output (000tons)
th

3500 3000 2500 2000 1500 1000 500


1709 1772
13.68%

3246 2502

0
2001-02
Source: Ministry of Food Processing in India

2002-03

2003-04

2004-05

India's food processing sector covers a wide range of products fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, Soya-based products, mineral water, high protein foods and so on. Post 21
st

century, food processing was largely confined to the food preservation, packaging and

transportation, which mainly involved salting, curdling, drying, pickling, etc. However, over the years, with emerging technologies, the sector has widened its scope. It has started producing many new items like ready-to-eat food, beverages, processed and frozen fruit and vegetable products, marine and meat products, etc. In 2008, the turnover of the total food market was approximately Rs.250, 000 crores (US $ 69.4 billion) out of which value-added food products comprised Rs.80,000 crores (US $ 22.2 billion).

The government has accorded it a high priority, with a number of fiscal reliefs and incentives, to encourage commercialization and value addition to agricultural produce, for minimizing pre/post harvest wastage, generating employment and export growth. India's food processing sector covers a wide range of products fruit and vegetables; meat and poultry; milk and milk products, alcoholic beverages, fisheries, plantation, grain processing and other consumer product groups like confectionery, chocolates and cocoa products, Soya-based products, mineral water, high protein foods and so on.

Industry Structure
An extensive and highly fragmented industry, the food processing sector largely comprises of the following sub-segments: fruits & vegetables, milk and milk products, beer & alcoholic beverages, meat and poultry, marine products, grain processing, packaged/convenience food and packaged drinks. A large number of players in this industry are small sized companies, and are largely concentrated in the unorganized segment. This segment accounts for more than 70% of the output in volume terms and 50% in value terms. However, though the organized sector is comparatively small, it is growing at a much faster pace. Structure of Indian Food Processing Industry

25% 42%

33%

Unorganised

Small Scale Industries

Organised

Source: FAIDA/ Ministry of Food Processing in India

Currently there are over two dozen players in the food processing market. Several global majors are present in the industry. Despite the entry of new players in the previous years, market shares continue to remain concentrated with top companies like ITC Limited, Agro Tech Foods, Cadbury India Ltd., PepsiCo India, Holdings Nestle India Pvt. Ltd., Britannia Industries Ltd. and Hindustan Lever Limited, MTR foods limited. The food processing industry is characterized by intense competition and escalating price wars. Dairy sector accounts for majority of the consumers in the industry.

Risks
The industry faces various risks, chief amongst them being: Field losses (Pest, diseases, rodents, etc.); Pre- Processing (Inefficient harvesting, drying and milling); Storage (Technical difficulties) and wastage by consumers. Poor road conditions and inadequate port facilities are also adversely affects transportation and causes delays in exports. Inadequate cold storage facility in the country is cited as a reason for the wastage of food items. India is one of the worlds largest producers of fruits and vegetables but nearly 30 percent of this production is lost due to inadequate cold chain facilities. With a long coastline of 3650 miles, the Indian marine product industry is growing rapidly, but large quantities of marine products are wasted because of lack of storage facilities. Other food segments like dairy products, and processed meat, also require cold storage facilities.

Outlook
India has the potential to become the leading food supplier to the world and at the same time it has vast growing domestic market with over a billion people and population growing at a CAGR of 1.6% per annum with food being the single largest component of private consumption expenditure accounting for 53% of the total expenditure. Indias large market size, ravenous appetite for food with growing incomes and changing life styles create incredible market opportunities for food producers, Food processors, machinery makers, food technology and service providers.

India has a Competitive Advantage in Food Processing India stands strong on the Global front Factor Arable Land (Million Hectares) Irrigated Lines (Million Hectares) Coast Line (Km) Major Food Crops (Million Tons) Fruits (Metric tons) Vegetables (Metric Tons) Cattle (Million) India 161 55 8041 35 47 82 226 Global Rank 2 1 19 3 1 2 1 4% 10% 10% 20% Share in Global Production

Source: MOFPI annual report, India Food Processing Sector, 2005

The UK, the US and Japan are processing 80 per cent, 70 per cent, 75 per cent (of food), whereas India is processing just 7 per cent. This shows a tremendous growth potential in the country. Percentage of products processed by various countries 100% 80% 80% 60% 40% 20% 0% UK US Japan India 7% 70% 75%

Source: United States Department of Agriculture, USDA

According to market sources, opportunities and investment opportunities in the Indian food industry are set to shoot up by a huge 42.5% to US$181 billion in 2015 and to US$318 billion by 2020. India is one of the fastest growing economies in the world. Huge untapped potential in food processing, rising concerns over food safety, increasing level of disposable income is expected to lead the industry growth in upcoming years. The industry would create 9 million employment opportunities from the current 1.6 m and investment of Rs 1, 50,000 crore in the coming 10 years.

INDUSTRY STRUCTURE
Indian food processing sector is highly fragmented industry, it widely comprises of the following sub segments: fruits and vegetables, milk and milk products, beer and alcoholic beverages, meat and poultry, marine products, grain processing, packaged or convenience food and packaged drinks. A huge number of entrepreneurs in this industry are small in terms of their production and operations, and are largely concentrated in the unorganized segment. This segment accounts for more than 70% of the output in terms of volume and 50% in terms of value. Though the organized sector seems comparatively small, it is growing at a much faster pace. The food processing industry in India is a sunrise sector that has gained prominence in recent years. Availability of raw materials, changing lifestyles and relaxation in policies has given a considerable push to the industrys growth. In India, most foods are consumed in the fresh form and a small quantity is processed for value addition. In recent years, however, the market for branded processed food products has expanded. As per a study conducted by the Confederation of Indian Industry, the total food market turnover is over Rs. 2,500 billion (US$ 69.4 billion). Of this, value-added food market comprises Rs. 800 billion (US$ 22.2 billion).

The Segments
An extensive and highly fragmented industry, the food processing sector largely comprises of the following sub-segments: fruits & vegetables, milk and milk products, beer & alcoholic beverages, meat and poultry, marine products, grain processing, packaged/convenience food and packaged drinks. A large number of players in this industry are small sized companies, and are largely concentrated in the unorganized segment. This segment accounts for more than 70% of the output in volume terms and 50% in value terms. However, though the organized sector is comparatively small, it is growing at a much faster pace.

Despite being the one of the largest producers of agricultural commodities, India does not figure among the top twenty exports of such commodities or their processed products. For example, the country is amongst the largest producers of the primary products listed above but is not a large exporter of cereal preparations, cheese of skimmed cow milk, chicken meat, citrus fruits, fresh cream, wheat flour or food preparations, frozen potatoes, fruit juices and preparations, tropical dried fruits, ice cream and edible ice, juices of tomatoes and vegetables, concentrated lemon juices, lemons and limes or even mango juice. While agricultural production is significant, the food processing industry is still under developed. Of the countrys total agriculture and food produce, only around 2% is processed. The highest share of the processed food is in the dairy sector, where 35% of the total produce is processed, of which only 13% is processed by the organised sector. The processing level is around 2.2% in fruits and vegetables, 21% in meat and 6% in poultry products.

Sector wise share in the Food processing industry


Meat Dairy products Poultry 3% Fruits and Vegetables

25% 31%

41%

Source: D&B Research

The Fruits and Vegetables sector is processed the least. This is because these are too perishable and most of them cannot be stored for many days. On the other hand, milk and dairy products, Meat and Poultry products are processed more because they can be stored in refrigeration for long periods of time.

Segment

Dairy Sector 15% Value added milk products like butter, cheese and ghee

Fruits & Meat Vegetables Poultry 20% Raw fruit and vegetables, fruit pulps, canned fruits and pickles 10%

& Fisheries

Packaged Foods 8% Noodles/ vermicelli

Growth Rate Key Segments

20% Marine fisheries, frozen products and minced fish products

Cattle, buffalo and poultry

Share of Organised Sector

15%

48%

5%

80%

Source- D & B Research 9

In India, most foods are consumed in the fresh form and a small quantity is processed for value addition. In recent years, however, the market for branded processed food products has expanded. As per a study conducted by the Confederation of Indian Industry, the total food market turnover is over Rs. 2,500 billion (US$ 69.4 billion). Of this, value-added food market comprises Rs. 800 billion (US$ 22.2 billion). Growing at about 14%, the processed food industry has started attracting increased investment to cater to both, the domestic and export demand.

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REGULATORY & POLICY ENVIRONMENT


The Ministry of Food Processing Industries (MFPI) is a ministry of the Government of India is responsible for formulation and administration of the rules and regulations and laws relating to food processing in India. The ministry was set up in the year 1988, with a view to develop a strong and vibrant food processing industry, to create increased employment in rural sector and enable farmers to reap the benefits of modern technology and to create a of surplus for exports and stimulating demand for processed food. The ministry is currently headed by Sharad Pawar, a Minister of State with Independent Charge. Its main functions are: Policy support and developmental Promotional and technical Advisory and regulatory

The goals of MFPI are as following: Better utilization and value addition of agricultural produce for enhancement of income of farmers. Minimizing wastage at all stages in the food processing chain by the development of infrastructure for storage, transportation and processing of agro-food produce. Induction of modern technology into the food processing industries from both domestic and external sources. Maximum utilization of agricultural residues and by-products of the primary agricultural produce as also of the processed industry. To encourage R&D in food processing for product and process development and improved packaging. To provide policy support, promotional initiatives and physical facilities to promote value added export.

Major Policy Initiatives


The Government has formulated and implemented several schemes to provide financial assistance for setting up and modernizing of food processing units, creation of infrastructure, support for research and development and human resource development in addition to other promotional measures to encourage the growth of the processed food sector.

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Time Period
Pre 19
th

POLICIES/ INITIATIVES

IMPACT/ PROVISIONS

Food processing industry is declared a priority sector. New Trade Policy places greater thrust on Agro-based industries.

The Food processing industry which was new to India started getting famous. With government initiatives it became a major sector of the agricultural industry.

century

Fruits & vegetables products, condensed milk, Ice cream, Meat preparation, Fish/Poultry,

With the removal of Central excise duty, purchasing powers of consumers

Pectin, Pasta, dairy machineries completely exempt from Central Excise Duty. 2005 -Custom duty on Packaging Machine reduced. -Zero duty import of capital goods and raw material for 100 per cent export oriented units

increased. Now, one could buy these machineries at a cheaper price. At this time technology was poor in India. Importing machinery from other countries was too expensive. With the reduction of custom duty, imports of Packaging Machinery increased and the industry developed even more.

2005

Income Tax rebate allowed (100% of profits for 5 years and 25% of profits for the next 5 years) for new industries in fruits and vegetables.

As the income tax rebate was allowed, the income of players increased and at the same time, motivated them to invest more in the food processing industry.

2006

Food Safety and Standard Act

FSSA was aided by several scientific panels and a central advisory committee to lay down standards for food safety. These standards included specifications for ingredients, contaminants, pesticide residue, biological hazards and labels. Now the consumers could buy

processed food commodities without risking their health. 2007 Eleventh Five Year Plan Strategic intervention with redesigned schemes and strong implementation

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arrangements

at

food

parks,

cold

chains, street food and abattoirs. 2008 Mega Food Park Scheme Small and medium entrepreneurs found it easy to invest in capital intensive activities. The scheme also included cold storage facilities and training

facilities. 2008 Integrated Cold Chain Facility The scheme was intended to improve viability of cold storages and enhance cold storage capacity. Assistance at 25 per cent of the project cost in general areas and 33.33 per cent in difficult areas subject to a maximum of Rs. 7.5 million was provided for establishment of cold chain facilities.

In the Budget for 2007-08, the following fiscal incentives were announced: Exemption limit of excise duty for small scale Industry (SSI) rose from Rs.1 crore to Rs.1.5 crores. Excise duty on biscuits reduced from 8% to 0% whose retail price does not exceed Rs.100 per Kg. Excise duty reduced from 8% to 0% on all kinds of food mixes including instant mixes. Soya Bari (food supplements) and ready to eat packaged foods fully exempt from excise duty. Excise duty on reefer vans (refrigerated motor vehicles) reduced from 16% to 8%. Customs duty also cut. Custom duty on food processing machinery reduced from 7.5% to 5%. Custom duty on sunflower oil (crude) reduced from 65% to 50% and of sunflower oil (refined) reduced from 75% to 60%. Special additional duty of 4% waived in the case of refined edible oil. Central sales tax reduced from 4% to 3% from April, 2007.

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All services provided by Technology Business Incubators exempted from service tax. Similarly their Incubates whose annual business turnover does not exceed Rs.50 lakh exempted from service tax for the first three years.

Sector Specific Government Policies


Fruits and Vegetables

Policy/ Initiative
Though no industrial license is required for setting up Fruits & Vegetable Processing industries, setting-up 100 per cent Export Oriented Units require specific Govt. approvals. Many Fruits & Vegetables Processing industries are eligible for automatic approval of foreign technology agreement and up to 51 per cent foreign equity participation. This sector is regulated by the Fruit Products Order, 1955 (FPO), issued under the Essential Commodities Act

Impact
Since, no license is required; more people find it easy to set up fruits and vegetables industries. The 51% equity motivates more industries setting up.

Licensing under this Order lays down the minimum requirements for: Sanitary and hygienic conditions of premises, surroundings and personnel. Water to be used for processing, Machinery and equipments, Product standards.

Some items like: pickles & chutneys, tapioca sago and tapioca flour are reserved for exclusive manufacture in the small scale sector Export of fruit & vegetable products is freely allowed.

By providing license of such products to exclusive companies, small scale firms started rising up and the market became even more competitive. Free trade leads to economic efficiency. The initiative also led to small scale firms rising up.

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Fisheries

Policy/ Initiative

Impact

Foreign equity is permitted in fish Fish processing projects with a minimum of 20 processing sector. Fish processing per cent value addition can be set up as 100 per cent Export Oriented Units projects with a minimum of 20 per cent value addition can be set up as 100 per cent Export Oriented Units All items can be exported freely except Free trade leads to economic efficiency. The for silver pomfrets of weight less than initiative also led to small scale firms rising up. 300 grams Export of marine products is allowed Registration did away from the huge no. Of only after registration of the units as an illegal marine products exports being done till 1978. exporter with the MPEDA.
Meat and Poultry The Meat Products Control Order, 1973 under the Essential Commodities Act, 1954 regulates the manufacture, quality and sale of all meat products A license is required under this order to set up of a factory for producing/processing meat products Export of meat is subjected to pre-shipment inspection and a certificate is required from State Animal Husbandry Department/Directorate of Marketing and Inspection Slaughter of cows is banned in most of the States. Export of beef is prohibited Permission from the civic bodies/State Government (Department of Animal Husbandry) is also required before setting up a meat processing unit integrated with a slaughter house

Dairy Products Milk and Milk Products Order (MMPO) regulates milk and milk products production in the country. The order requires no permission for units handling less than 10,000 liters of liquid milk per day or milk solids up to 500 tons per annum All the milk products except malted foods are covered in the category of industries for which foreign equity participation up to 51 per cent is automatically allowed.

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Duty Structure
Government policies have played an important role in shaping the size and structure of the industry. A gradual reduction in excise and custom duties over the years has translated into greater demands for processed food products and the resultant increasing production volumes. Indian Excise Duty Structure Products Fruits and Vegetables Milk and Milk Products (with a few exceptions) Malted Foods Other Processed Foods Packaging Materials for Packaging Food Packaging Machinery/ Equipment Breads, Biscuits and other bakery products Source- Rabobank Excise Duty Exempt Exempt 16% 16% 16% 16% 8%

Indian Custom Duty Structure Products Fruit, Pulps, juices, fruit based drinks Custom Duty 30%

Milk and Milk products (with a few exceptions) Packed preparation of meat, fish and poultry

30% 100%

Other food products

30%

Source- Rabobank

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Foreign Direct Investment in the Industry


The Indian food processing market is one of the largest in terms of production and growth prospects. Since, India is one of the major food producers worldwide, with new reforms ruling the roost, it encourages commercialization. The country's food processing market is opening up to a wide range of investors across the globe. In fact, in the last decade, India moved from an era of scarcity to surplus, in the area of food production. Consequently, analysts are of the opinion that the Food Processing Industry in India is on an assured track of growth and profitability over the next five years. It is also estimated that food-processing market in India will attract a phenomenal investment, in the form of capital, human, technological, and financial, of over US$32.1 million by 2010. Foreign Direct Investment in India in past years (in millions) 700 600 500 400 300 200 100 0 2004-05 Source- MOFPI Annual Report 2005-06 2006-07 2007-08 2008-09

Steps taken to attract FDI


Rural connectivity to unconnected habitations with population of 500 persons or more by 2007 Infrastructure for post harvest management, logistics (including cold chain), markets, retailing, food processing- are priority areas Plan to set up modern markets with auction centres Attracting FDI & private sector investment in infrastructure

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SEGMENT ANALYSIS
Dairy Products
Dairy products form an integral component of the human diet. The different products obtained from the dairy spread from milk to beef. This spread is interspersed by a host of products suited to the various ages, tastes and nutritional needs of the humans. Dairy industry is one of the most important agroprocessing industries worldwide. According to Ministry of Food Processing in India, India stands first in the world in terms of milk production in the world and is expected to grow at 15-20 per cent. The current size of the Indian dairy sector is Rs.3133.5 billion (2009) and has been growing at 5 per cent a year. India has the highest and ever increasing livestock population in the world with 50% of the buffaloes and 20% of the worlds cattle population, most of which are milch cows and milch buffaloes. Indias dairy industry is considered as one of the most successful development programmes in the post-Independence period. Livestock Population (In Millions)

600 500 400 300 200 100 0 1951 1961 1972 1982 1992 2003 292.9 336.5 353.3 470.9 419.6 485

Source- Livestock Census 2003 conducted by Department of Animal Husbandry, Dairying & Fisheries

India has emerged as the largest milk producing country in the world with present level of annual milk production estimated as 94.5 million tonnes. Government expects a production level of 135 million tonnes by the year 2015. The major dairy processing states are Uttar Pradesh, Gujarat, Punjab, Haryana and Maharashtra.

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Milk Production 120 100 80 60 40 20 0


3.32%

Source- Department of Animal Husbandry, Dairying and Fishing

Marine Products
Fish production plays an important role in the socio- economic life of India. It is a rich source of protein and high quality food. It is also an important source for income and employment to millions of rural farmers, particularly women. The 8,000 km coastline from inland and marine resources, 3 million hectares of reservoirs, 1.4 million hectares of brackish water, 50,600 sq km of continental shelf area and 2.2 million sq km of exclusive economic zone are Indias vast potential resources for fish producti on. With a large human population in India and over 250 million economically strong potential consumers of food and those who have an adequate purchasing power, the domestic demand for the fish and processed fish food is increasing very rapidly. Marine products have created a huge demand in the world market. With the high unit value, seafood has been acclaimed as one of the fastest moving commodity in the world market. The world market for seafood has doubled within the last decade reaching US $49.32 billion in 2005. India's share is only 2.4% at present; it is mainly dependant on shrimp as a product. However, the situation is changing due to the increased attention/ demand for other fishery resources like squid, cuttlefish, fin fish, etc. and is being exported to the markets of Western Europe and South East Asia. This segment also provides employment to 11 million people engaged fully, partially or in subsidiary activities pertaining to the sector.

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The production increased from 0.75 million metric tons in 1950-51 to 6.40 million metric tons in year 2003-04. A particularly significant progress in production is noticed from year 2001-2002 onwards. The share of marine product exports has steadily grown over the years; from a mere Rs 3.92 crore in 1961-62 to Rs 6,292.04 crore in 2005-06, accounting for approximately 1.5% of the total exports from India. Japan, USA and the Western European countries are the principal buyers of Indian frozen shrimp. Japan retained its position as the single largest buyer for Indian marine products till 2001-02 accounting for about 31% in the total export value. Major Fish processing states in India are Kerala, Maharashtra and West Bengal. Exports of Marine Products to other countries by India 600000 500000 400000 300000 200000 100000 0 1970-711980-811990-912000-012001-022002-032003-042004-052005-06 Source- MOFPI, Annual Report 2006 Marine products have created a sensation in the world market because of their high health attributes. With the high unit value, seafood has been acclaimed as one of the fastest moving commodity in the world market. The world market for seafood has doubled within the last decade reaching US $49.32 billion mark India's share is 2.4%, dependence on shrimp as a product and is changing due to the increased attention given on other fishery resource like squid, cuttlefish, fin fish, etc. and penetrating into markets of Western Europe and South East Asia.

Fruits and Vegetables


Fruits and vegetables is one of the most important and fast growing sub-sectors of the food processing sector, as fruits and vegetables form an indispensable part of healthy diet. India accounts for 13% of vegetables and 12% of fruits production globally, with an enviable share in few categories like Mango, Banana, Cashew, Green Peas and Onion. The major exporters of fruits are the USA, Spain and Italy. India has a 1% share in the export market of the world trade.

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Exports of Fruits and Vegetables % by various countries 40 35 30 25 20 15 10 5 0 36

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12

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Source- Technology Exports Development Organization Report India produces the widest range of fruits and vegetables in the world. It is the second largest vegetable and third largest fruit producer accounting for 8.4% of the worlds food and vegetable production. Indias share(%) in Global Production of Fruits and Vegetables 120 100 80 59 60 40 20 0 Mango Source- EXIM Bank Banana Green Peas 41 23 24 10 Onion 77 76 90 World India

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Meat & Poultry Sector


It is believed that the Indian Poultry Industry is 5,000 years old, since last 4 decades it began to witness remarkable growth from backyard to poultry industry. In 2003 India had a livestock population of 470 million that included 205 mn cattle and 90 million buffaloes. The country produces about 450 mn broilers and 30 billion eggs annually. Cattle, buffaloes, sheep and goat, pigs and poultry are the types of animals, which are generally used for production of meat. Slaughter rate for cattle as a whole is 20%, for buffaloes it is 41%, pigs 99%, sheep 30% and 40% for goats. The country has 3,600 slaughterhouses, 9 modern abattoirs and 171 meat-processing units licensed under the meat products order. Category wise share of Meat and Poultry Products

23 11 10 24

32

Beef Poultry Pork Sheep Mutton Goat

Source- National Meat and Poultry Processing Board

The poultry industry is among the faster growing sectors rising at a rate of 8% per year. Vertical integration of poultry production and marketing has lowered costs of production, marketing margins and consumer prices of poultry meat. There are eight integrated poultry processing units in the country, which hold a significant share in the industry.
Indian Broiler Meat(Poultry) Production

3000 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source- USDA Report 2011

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Market Growth Drivers

1) Changing demographic profile: There is a shift in the demographic profile of the country. The literacy rates, educational level, composition of population, low rate of fertility and morality increases the population of old age persons. There is an increased participation of the young people in work force which has a stimulating aftermath in more and more number of people shifting to processed food for convenience.

2) Changing life style: In the past few decades, there is a tremendous change in the life style of the Indian population. The Indian culture has been shifting from joint families to nuclear family. There is a substantial increase in the literacy rate and educational level. Due to the urbanization and more no of women participating in the work force, there is a gradual shift to processed foods. Again with the emergence of MNCs and BPOs the western culture is proliferating which has changed the demand patterns and provided the much needed impetus to the processed foods. In addition, more people are now days demanding quality and salubrious foods, which ultimately hinges on processed foods.

3) Government support: Since the independence, GOI has been giving much importance to the food industry due to its competitiveness. Now the government is looking for tax sops for the growing industry.

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4) Urbanization: The economically active population in the country has led to the increased requirement for processed foods. As a report from the Working Commission on Urban Development, urban population is expected to reach 433 million by 2021, taking the level of urbanization to about 32%. This augurs well for food processing Indian players as urbanization is one of the factors driving demand in this sector. Urban Population in Millions 500 400 300 200 100 0 1951 1991 2001 2011 P 2021 P
47.04%

Source- Planning Commission, Compiled by D&B research service

5) Road Infrastructure: The quality of roads also influences the decision making process in the purchase of a processed food product. Often, poor road infrastructure acts as a deterrent to buying a car, especially when it comes to investing in high end machinery. At the same time, good quality and manageable traffic conditions prompts one to buy more processed foods and a producer to invest in modern machinery. The government thrust on infrastructure development across the country is expected to lower incidences of postponed processed food purchase decisions, though not in the immediate future. To add to the problems, the cost of transportation of processed foods is extremely high. 6) COLD STORAGE FACILITIES: In spite of constant steps by government, the cold storage facility remains to be a key failure of the sector. In the industry, cold storage is the most vital thing required to provide storage for foods which otherwise are very highly perishable.

7) INADEQUATE QUALITY CONTROL AND TESTING INFRASTRUCURE: Due to inadequate institutions and standards, consumers find it difficult to trust on the company. These standards include specifications for ingredients, contaminants, pesticide residue, biological hazards and labels.

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8) HIGH PACKAGING COSTS: Packaging is another vital part of the food processing industry. Packaging of foods is a bit costly which refrains many of the consumers from this sector from buying processed foods. 9) COST AND ACCESS TO FINANCE: One of the key factors responsible for the healthy sales of automobiles in recent years has been falling interest rates. This augurs well for the growth in demand for passenger vehicles. 10) Rising Income Levels: With rising income levels and the consequent increase in disposable income, purchasing processed foods is not a matter of luxury now, for at least a part of the population. Food processing sector has strong correlation with economic growth. Personal disposable income in the hands of the consumer determines their purchasing power and thus, their ability to purchase. 11) Increasing food retailing in India: Modern food formats like Food Bazaar and Spencer's have their eye on the unbranded part of the consumer's shopping basket. This constitutes as much as 60% of the total purchases and growing sharply, says AC Nielsen estimates. Retailers are offering a package of convenience and freshness, and have an edge over manufacturers that focus mainly on packaged conveniences. 12) Growth in terminal Markets: A terminal market is a central site, often in a metropolitan area, that serves as an assembly and trading place for commodities. Terminal markets for agricultural commodities are usually at or near major transportation hubs.

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Methods of Processing Food

Pasteurisation: Pasteurization is a process of heating a food, usually liquid, to a specific temperature for a definite length of time, and then cooling it immediately. This process slows microbial growth in food. Pasteurization is typically associated with milk; pasteurization of milk was first suggested by Franz von Soxhlet in 1886. It is the main reason for milk's extended shelf life. High Temperature Short Time (HTST) pasteurized milk typically has a refrigerated shelf life of two to three weeks, whereas ultra pasteurized milk can last much longer, sometimes two to three months. When ultra heat treatment (UHT) is combined with sterile handling and container technology (such as aseptic packaging), it can even be stored unrefrigerated for 69 months. Canning: Canning is a method of preserving food in which the food contents are processed and sealed in an airtight container. Canning provides a typical shelf life ranging from one to five years, although under specific circumstances a freeze-dried canned product can last as long as 30 years in an edible state. Cans are cheaper and quicker to make, and much less fragile than glass jars. Glass jars have remained popular for some high-value products and in home canning. Fermentation: Fermentation in food processing typically is the conversion

of carbohydrates to alcohols and carbon dioxide or organic acids using yeasts, bacteria, or a combination thereof, under anaerobic conditions. A more restricted definition of fermentation is the chemical conversion of sugars into ethanol. The science of fermentation is known as zymurgy. Fermentation usually implies that the action of microorganisms is desirable, and the process is used to produce alcoholic beverages such as wine, beer, and cider. Fermentation is also employed in the leavening of bread, and for preservation techniques to create lactic acid in sour foods such as sauerkraut, dry sausages, kimchi and yogurt, or vinegar (acetic acid) for use in pickling foods. Sterilisation: Thorough cooking (applying a suitable amount of heat over a suitable period of time) slowed the decay of foods and various liquids, preserving them for safe consumption for a longer time than was typical. Canning of foods is an extension of the same principle, and has helped to reduce food borne illness ("food poisoning"). Other methods of sterilizing foods include food irradiation and pascalization (the use of high pressure to kill microorganisms). Drying: Drying is a method of food preservation that works by removing water from the food, which inhibits the growth of microorganisms and hinders quality decay. Drying food using sun and wind to prevent spoilage has been practiced since ancient times. Water is usually removed by evaporation (air drying, sun drying, smoking or wind drying) but, in the case of freeze-drying, food is first frozen and then the water is removed by sublimation. Bacteria, yeasts and moulds need the water in the food to grow. Drying effectively prevents them from surviving in the food. Example is meat. Freezing: Freezing food preserves food from the time it is prepared to the time it is eaten. Since early times, farmers, fishermen, and trappers have preserved their game in unheated buildings during the

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winter season. Freezing food slows down decomposition by turning water to ice, making it unavailable for most bacterial growth. In the food commodity industry, the process is called IQF or Individually Quick Frozen. Freezing is an effective form of food preservation because the pathogens that cause food spoilage are killed or do not grow very rapidly at reduced temperatures. Examples are fisheries, dairy products, meat and others. Dairy Sector India has emerged as the largest milk producing country in the world with present level of annual milk production estimated as 94.5 million tonnes. Government expects a production level of 135 million tonnes by the year 2015. Milk Production in million tons 120 100 80 60 40 20 0 78.3 80.6 84.4 86.2 88.1 92.5 97.1 108.5 100.9 104.8

Source- Department of Animal Husbandry, Dairying and Fishing Eggs Production Year 2001-02 2002-03 2003-04 2004-05 2005-06 Source- State/UT Animal Husbandry Departments Eggs 38729 29823 40403 41005 45200

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Weaknesses of the Dairy Sector: Perishability: Pasteurization has overcome this weakness partially. UHT gives milk long life. Surely, many new processes will follow to improve milk quality and extend its shelf life. Lack of control over yield: Theoretically, there is little control over milk yield. However, increased awareness of developments like embryo transplant, artificial insemination and properly managed animal husbandry practices, coupled with higher income to rural milk producers should automatically lead to improvement in milk yields. Logistics of procurement: Woes of bad roads and inadequate transportation facility make milk procurement problematic. But with the overall economic improvement in India, these problems would also get solved. Problematic distribution: Yes, all is not well with distribution. But then if ice creams can be sold virtually at every nook and corner, why cant we sell other dairy products too? Moreover, it is only a matter of time before we see the emergence of a cold chain linking the producer to the refrigerator at the consumers home. Competition: With so many newcomers entering this industry, competition is becoming tougher day by day. But then competition has to be faced as a ground reality. The market is large enough for many to carve out their niche.

Market Shares of major Dairy Sector companies (On Sales Basis)

Karnataka Co-operative Milk Federation Ltd. 27.10% 26% Gujrat Co- operative Milk Federation Ltd Tamil Nadu Co- operative Milk Federation Ltd Nestle India Ltd 10% 14% Mother Dairy Ltd 13% 10% Others

Source- Ministry of Food Processing

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Marine Sector
The Marine Sector has grown at a CAGR of 8.73%. Fish Production in India in Million Tons 9 8 7 6 5 4 3 2 1 0
22.98%

Source- DAHD&F; CSO 2005

Weaknesses of the Marine Sector: The fish farmers/fishermen as well as the middlemen and end retailers involved in the trade are mostly illiterate, it is important to introduce the importance of hygienic handling right from the production stage itself. Only then the success in value addition in the end product will be ensured. There are no organized and coherent efforts in the country to formulate and implement policies for the processed fish/fishery products for domestic markets. A separate national fish processing development board is required on a priority basis. Efforts are lacking at the national level to coordinate all activities and programs for production, processing, handling, packaging and marketing of fishery products for the domestic and international markets. An independent national board is therefore necessary. The standards for quality of processed fishery products have not been well established. Proper standards for labeling are also not available. The marine fish catch is stagnating. Therefore it is imperative to utilize maximum amount of available resource with minimum wastage. The major players are Trimbak Sons and Aquarium Paradise.

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Meat and poultry sector


Meat Production in 000Tons 7000 6000
3.39%

5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source- FAOSTAT

India produces approx. 304.77 crore birds on an annual basis, majority (95%) of which is consumed in the fresh slaughtered form and the remaining 5% is consumed in processed form. Only about 1-2 per cent of the total meat is converted into value added products.

Market Shares of major Meat processing companies Al Kabeer Allanasons Limited Amigo Foods Others

7% 18% 35%

40%

Source- MOFPI

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Indian Firms need to strengthen R&D base


The Ministry of Food Processing Industries gives special emphasis on supporting Research & Development (R&D) activity in the food-processing sector. Efforts have been made to widen the R&D base in food processing by involvement of various R&D institutions and by funding of laboratory/industry projects as well as purely industry projects. The thrust areas for R & D activities are as follows: Upgrading of traditional food technologies to ensure greater productivity, wider acceptability and

quality assurance; Energy saving technologies. Improved and more precise methods to assess quality, safety and nutrition parameters in foods; Import substitution for packaging materials and food additives; Development of intermediate products and dehydrated products with superior shelf-life

characteristics; Development of newer and safer chemical / biological preservations with lesser costs; Ways and means to economize on use of costly edible oils in food preparations; Development of cost effective and efficient food processing machinery;

Convenience oriented intermediate products in the entire range of traditional foods, which need minimum preparation in the kitchen to make them ready-to-eat. Specialty foods to meet the needs like low calorie, high calorie, high protein, lactose free, high

fibre, low sodium, sugar free, geriatric, pediatric, pregnant & lactating, recuperating populations; Frozen foods; Modified atmosphere packed dressed vegetables, fruits, meat and fish; Economic processing of industrial waste and recovery of by-products.

R&D Expenses by major players Name of the company Dabur India Limited Britannia Industries Limited Hindustan Unilever Limited Parle Agro Private Limited Source- Annual Reports 2009-2010 % share of sales in R&D expenses 0.4 0.135 1.7 3.0

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Emerging Business Models


The generic value chain of the food processing industry from raw materials to retail to the consumer is shown below. Traditionally, different players across the value chain played the different roles and worked more or less independently. Recently, the trend has been towards increasing integration and collaboration across players in the value chain, to garner mutual benefits. Such integration is being driven by the manufacturers, who are looking to integrate backward and establish linkages with both raw material producers (farmers) and aggregators/logistics providers. These links have led to two new models emerging in the sector Contract Farming and Terminal Markets. These are further discussed below.

Terminal Market A Terminal market is a central site, often in a metropolitan area, that serves as an assembly and trading place for agricultural commodities. Here there are different options for disposing off the produce. It can either be sold to the end consumer, or to the processor, or packed for export, or even stored for disposal at a future date. It thus offers different options to farmers under a single roof. Typically, terminal markets operate on a hub and spoke model where the markets form the hubs, and are linked to different collection centers (spokes) that are located close to the production centers. The typical value chain structure for a terminal market, as well as the key activities and corresponding infrastructure requirements at each level, are depicted in the figure below: The Government of India is looking to promote terminal markets, as a means of integrating domestic produce with retail chains. There are plans to set up such markets in eight cities across five states, at a cost of US$ 131 million. The cities being considered are Mumbai, Nasik, Nagpur, Chandigarh, Rai, Patna, Bhopal and Kolkata. The perishable horticultural produce is cleaned at the collection centers and transported to the terminal markets through reefer vans thereby reducing post harvest losses. The produce arriving in the terminal market is graded and stored in the cold storage till it is auctioned through electronic auction system or direct selling.

Contract Farming Contract Farming is an agreement between the food processor (contractor), who is typically a large organised player, and the farmer, whereby the farmer is contracted to plant the contracto rs crop on his land. He also agrees to harvest and deliver to the contractor a quantum of produce, based upon anticipated yield and contracted acreage at a pre-agreed price. The food processor provides inputs in terms of technology and training to the farmer, to improve the yield and quality of the produce. This results in a win-win situation that generates a steady source of income for the farmer and eliminates supply shocks and assures good quality farm inputs which are crucial for the processor. The Government

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of India has been actively encouraging contract farming endeavors. The National Agricultural Policy envisages that private sector participation will be encouraged through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production. A good example in this area has been Pepsi Foods experience with contract farming for its tomato processing plant at Hoshiarpur in Punjab. Through transfer of technology and providing good quality seeds and inputs to farmers, Pepsi was able to substantially increase both quality and quantity of tomato production in the area, so as to meet the demands of its plant. A key aspect of Pepsis approach was its partnership with local bodies such as the Punjab Agricultural University and Punjab Agro Industries Corporation Limited, which went a long way in getting the farmers buy-in and ensuring success of the venture.

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COMPANY PROFILES
The chapter profiles the leading players in the Indian Food processing industry, analyzing their financial performance in the recent past, and discussing their future plans and outlook. The companies profiled are Hindustan Unilever Limited, Dabur India Limited and ITC Limited.

Hindustan Unilever Limited (HUL)


Hindustan Unilever Limited (HUL) is India's largest fast moving consumer goods company. The AngloDutch company Unilever owns a 52% majority stake. HUL was formed in 1933 as Lever Brothers India Limited and came into being in 1956 as Hindustan Lever Limited through a merger of Lever Brothers, Hindustan Vanaspati Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and has employee strength of over 15,000 employees and contributes to indirect employment of over 52,000 people. The company was renamed in June 2007 as Hindustan Unilever Limited.

Year of Incorporation CEO & MD Outstanding shares (FY10) Listing Details Face Value (Rs) Market capitalization (Rs million) 52- week high/low (Rs) Year ending

1933 Nitin Paranjpe 2181.7 Million as on 31 December, 2010 BSE, NSE 1.00 64,961.71 as in December, 2010 306.7/218.0 March 31
st

Hindustan Unilever's distribution covers over 1 million retail outlets across India directly and its products are available in over 6.3 million outlets in the country, which equals nearly 80% of all retail outlets in India. It estimates that two out of three Indians use its many home and personal care products, food and beverages.

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HUL is the market leader in Indian consumer products with presence in over 20 consumer categories such as soaps, tea, detergents and shampoos amongst others with over 700 million Indian consumers using its products. Sixteen of HULs brands featured in the ACNielsen Brand Equity list of 100 Most Trusted Brands Annual Survey (2008). According to Brand Equity, HUL has the largest number of brands in the Most Trusted Brands List. It has consistently had the largest number of brands in the Top 50, and in the Top 10 (with 4 brands). The company has a distribution channel of 6.3 million outlets and owns 35 major Indian brands like Kwality walls, Red Label, Lakme, Dove and Close up to name a few.

HULs shareholding pattern as of December 2010

15% 17% 9%

6% 53%

Indian Promoters Financial Institutes FII's General Public Others

Source: Annual Report 2010

Product Portfolio The company has a distribution channel of 6.3 million outlets and owns 35 major Indian brands. Its brands include Kwality Wall's ice cream, Knorr soups & meal makers, Lifebuoy, Lux, Pears,
[4]

Breeze, Liril, Rexona, Hamam and Moti soaps, Pureit water purifier, Lipton tea, Brooke Bond (3 Roses, Taj Mahal, Taaza, Red Label) tea, Bru coffee, Pepsodent and Close Up toothpaste and brushes, and Surf, Rin and Wheel laundry detergents, Kissan squashes and jams, Annapurna salt and

Atta, Pond's talc and creams, Vaseline lotions, Fair and Lovely creams, Lakme beauty products, etc. HULs Segment wise sales in 2010

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2% 20% 48%

Soaps and Household Care Personal Products Foods

30%

Others

Source: Annual Report 2010 Financial Summary (In Rs crore) 2008-09 2003 2004 2005 2006 2007 (15month s) 2009-10 (12month s)

Indicator/ Year

Gross Sales*(In Rs crore) Net Profit(In Rs crore) Earnings per share (Rs) Investme nt(In Rs crore) Fixed Assets(In Rs crore) Exports(In Rs crore) 1,369.47 1,517.56 1,483.53 1,511.01 1,708.14 2,078.84 2,436.07 11,096.02 10,888.38 11,975.53 13,035.06 14,715.10 21,649.51 18,220.27

1,804.34

1,99.28

1,354.51

1,539.67

1,743.12

2,500.71

2,102.68

8.05

5.44

6.40

8.41

8.73

11.46

10.10

2,574.93

2,229.56

2,104.20

2,413.93

1,440.80

332.62

1,264.08

1,416

1,459

1,461

1,369

1,413

1,638

1,066

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Hindustan Unilever has been consistently recognized within India and globally by eminent organizations and the government for its achievements in various fields. The organization has been recognized among others by TERI, Far East Economic Review, Asian Wall Street Journal and Business world. More recently, Hewitt Associates ranked Hindustan Unilever among the top four companies globally in the list of Global Top Companies for Leaders. The Company was ranked number one in the Asia-Pacific region and in India. During 2008, Unilever announced its collaboration with the Indian Dental Association (IDA) in conjunction with World Dental Federation (FDI) through its Pepsodent, leading oral care brand to help improve the oral health and hygiene standards in India. The Demerger and transfer of certain immoveable properties of Hindustan Unilever Limited to Brooke Bond Real Estates Private Limited was an event of the company on April 2008.

HULs Total Expenditure distribution in 2010

6% 1%

7%

Carriage and Frieght 6% 6% Depriciation Others Staff Costs Rent, Repairing etc. Advertising Costs Materials

58%

16%

Source: Annual Report 2010

HUL has more than 670 live patents and 700 million consumers use HUL brands in India as part of their daily lives. The company moves with the mission of 'add vitality to life' through its presence in over 20 distinct categories in Home & Personal Care Products and Foods & Beverages. HUL identified five key platforms and have articulated goals, both short term and long term goals, stretching to 2015, would work in areas of health & nutrition & women empowerment on the social front, the economic agenda would be to enhance livelihoods and the environmental agenda would focus on water conservation and cutting green house gases.

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Dabur India Ltd.


Dabur India Limited (DIL) is an Ayurvedic and natural health care company. It is engaged in manufacturing and marketing fast moving consumer goods and Ayurvedic products. It operates through three business units: consumer care division, international business division and consumer healthcare division. It has manufacturing facilities in eight states of India. As of March 31, 2010, it also had manufacturing facilities in eight countries: India, Bangladesh, Nepal, Dubai, Sarah, Ras-Al-Khaima, Egypt and Nigeria.

Year of Incorporation CEO & MD Outstanding shares (FY10) Listing Details Face Value (Rs) Market capitalization (Rs million) 52- week high/low (Rs) Year ending

1884 Sunil Duggar 1740.7 Million as on 31 December, 2010 BSE, NSE 1.00 19809.17as in December, 2010 218.95 /121 March 31
st

Daburs shareholding pattern as of December 2010

6% 2% 17% 69% Indian Promoters Financial Institutes FII's General Public Others 6%

Source: Annual Report 2010

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Product Portfolio It is well equipped for the cut throat competition. The company's success rests on the 13 of its superbly equipped ultra modern manufacturing facilities. Its products are marketed in more than 50 countries. The company is powered by a management team of highly qualified experts experienced in this field. Leading brands of the Dabur India Limited: Dabur: It is the health care brand. These include Dabur Chyawanprash, Dabur Honey, Dabur Real fruit juices Vatika: It is the personal care brand. The Vatika Hair Oil & Shampoo the high growth brand Anmol: It is the value for money brand Hajmola Tasty: It is the digestive brand Daburs Segment wise sales in 2010

20%

18% 5%

Oral Care Home Care Foods Skin Care

31% 3%

23%

Health Supplements Hair Care

Source: Annual Report 2010 Financial Summary Indicator/ Year Sales(In Rs crore) Net Profits(In Rs crore) 156 214 282 333 391 501

2005

2006

2007

2008

2009

2010

1417

1757

2080

2396

2834

3417

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Fixed Assets(In Rs crore) Net Earnings per share (Rs) 5.4 3.7 3.3 3.9 4.5 5.8 295 512 379 465 559 677

Daburs Total Expenditure distribution in 2010 Power 5% 7% 25% 15% 3% 47% Repair and Maintenance Processing charges Plant and Machinery Others Store and Spares

Source: Annual Report 2010

Expenditure in India is growing in the band of 12-14% and this is accompanied by a healthy rate of household savings of about 24-25% of the GDP, which points to a sustained growth in consumption over the next couple of decades making India one of top 5 consuming economies of the world .

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ITC Limited
The company has its registered office in Kolkata. It started off as the Imperial Tobacco Company, and shares ancestry with Imperial Tobacco of the United Kingdom, but it is now fully independent, and was rechristened to Indian Tobacco Company in 1970 and then to I.T.C. Limited in 1974 The company is currently headed by Yogesh Chander Deveshwar. It employs over 26,000 people at more than 60 locations across India and is listed on Forbes 2000. ITC Limited completed 300 years on 24 August 2010. ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, AgriBusiness, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.

Year of Incorporation CEO & MD Outstanding shares (FY10) Listing Details Face Value (Rs) Market capitalization (Rs crore) 52- week high/low (Rs) Year ending

1974 Y. C. Deveshwar 1269.7Million as in December, 2010 BSE, NSE 1.00 149770.93 as in December, 2010 197.90 /133.20 March 31

ITC's aspiration to be an exemplar in sustainability practices is manifest in its status as the only company in the world of its size and diversity to be 'carbon positive', 'water positive' and 'solid waste recycling positive.' In addition, ITC's businesses have created sustainable livelihoods for more than 5 million people, a majority of whom represent the poorest in rural India.

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ITC Ltds shareholding pattern as of December 2010

22% 11% 14%

32%

NRI's etc Financial Institutes FII's

21%

General Public Others

Source: Annual Report 2010

Product profile In FMCG, ITC has a strong presence in: Cigarettes: W. D. & H. O. Wills, Gold Flake Kings, Gold Flake Premium, Navy Cut, Insignia, India Kings, Classic (Verve, Menthol, Menthol Rush, Regular, Mild & Ultra Mild), 555, Benson & Hedges, Silk Cut, Scissors, Capstan, Berkeley, Bristol, Lucky Strike, Players and Flake. Foods: (Kitchens of India; Ashirvaad; Minto; Sunfeast; Candyman; Bingo; Yippee, Sunfeast Pasta brands in Ready to Eat, Staples, Biscuits, Confectionery, Noodles and Snack Foods); Apparel: (Wills Lifestyle and John Players brands); Personal care: (Fiama di Wills; Vivel; Essenza di Wills; Superia; Vivel di Wills brands of products in perfumes, haircare and skincare)
[2]

Stationery: (Classmate and Paperkraft brands) Other businesses Hotels: ITC's hotels (under brands including ITC Hotel /Welcome hotel) have evolved into being India's second largest hotel chain with over 80 hotels throughout the country. Paperboard, Specialty Paper, Graphic and other Paper; Packaging and Printing for diverse international and Indian clientele. InfoTech (through its fully owned subsidiary ITC InfoTech India Limited which is a SEI CMM Level 5 company)

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Financial Summary: Indicator/ Year Sales(In Rs crore) Net Income(In Rs crore) Fixed Assets(In Rs crore) 4136.91 4405.13 5610.91 7295.65 8485.97 9151.39 7875.26 10076.61 12500.78 14558.43 16146.85 18756.57

2005

2006

2007

2008

2009

2010

12994.51

13578.32

14003.76

14654.32

15611.92

18153.19

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INTERNATIONAL SCENARIO
The food processing industry is one of the pivotal sectors of world economy. It is one of the largest sources of employment, with strong backward and forward linkages. In developed economies like US and UK, the food processing industry contributes to about 3-4% in the countrys GDP.

Continent wise share of Processing food Europe North America 1% 6% 17% 68% South America 3% 5% Africa Australia Asia

Source- United States Department of Agriculture

Sector wise shares of Food Processing

23%

Agricultral Crops Beverages Meat

7% 5% 5% 10%

50%

Fish Semi processed products Dairy

Source- United States Department of Agriculture

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Fruits and vegetables


Fruits and vegetables is one of the most important and fast growing sub-sectors of the food processing sector, as fruits and vegetables form an indispensable part of healthy diet. Medical research has established that intake of fruits and vegetables in the requisite measure help prevent cardio vascular disease and obesity. Asia dominates the world vegetables scene accounting for nearly 60% of global production, with China and India ranking as 1st and 2nd European Union and U.S.A follow next. Fruit and vegetable products (both fresh and processed) accounted for 22% of total agricultural exports from developing countries. Fruit trade is heavily concentrated in Bananas, Citrus, Grapes and Apples. Fresh produce comprising citrus, pears, peaches, nectarines, plums and kiwi fruit, and processed produce comprising tomato based products, fruit juices and concentrates, packed vegetables as well as tinned and frozen fruits are mostly certified under Protected Geographical Indication status. Over the last quarter of a century (1980-2004), the fruit and vegetable market has been one of the fastest growing of all agricultural markets as could be observed from the data presented in table:Year 1982-84 1992-94 2002-04 Production 691 899 1342 Consumption 782 1189

Global fruit and vegetables consumption increased by an average of 4.5% per annum between 1990 and 2004. This was higher than the world population growth rate, meaning that the global per capita consumption of fruit and vegetables has also increased. According to World Health Organization, for the prevention of chronic diseases such as heart diseases, cancer, diabetes and obesity, fruit and vegetable consumption should be at least 400g per day per capita. If in 1992-94 only 40% of the countries reached this level, almost half of them did so in 2002 04.

Dairy Sector
In many respects the dairy industry occupies a special position among the other sectors of agriculture. Milk is produced everyday and gives a regular income to the numerous small producers. Milk production is highly labor-intensive and provides a lot of employment. For many dairy farmers and companies 2009 was a remarkable year. The financial crisis in the global economy caused international demand for dairy produce to decline in late 2008 and had a dramatic impact on product prices during the first half year of 2009. For the first time since the mid-nineties global consumption per capita declined. The financial crisis impacted on every aspect of the dairy business: production, trade, consumption and prices. The general trend was stagnation but it turned out different per region. Chinese non-skimmed milk powder (WMP)

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demand in the second half year was a key driver of rising dairy commodity prices and recovery of the world dairy market. Asia acted as an engine for the global dairy industry. As a consequence of the general recession, most companies experienced a decrease in their turnover in 2009 primarily due to the sharp decrease in product prices. But this situation certainly does not hold for every company and every country. China is an exception. A number of Chinese companies showed remarkable growth and the Chinese dairy processing industry started to invest abroad. Growth of world milk production slowed down in 2009. Low milk prices and high input costs discouraged many farmers around the globe. Meanwhile buffalo milk production is still growing at a higher pace than cow milk production. During the first half-year of 2010 prices recovered. This recovery will stimulate milk production for the rest of the year. World output for dairy produce increased last year for all products except for WMP. This is remarkable since production of WMP increased steadily between 2000 and 2008. The decline resulted from a huge drop in milk production in many parts of the world, including China. World butter production kept growing in 2009, mainly due to India. World cheese production developed slowly. For the second consecutive year production of skim milk powder (SMP) showed strong growth, whereas production had been stable at the beginning of the decade. World dairy trade increased rather slowly during the first part of 2009 but showed a remarkable recovery during the second part, led by Chinese imports. Chinas solid demand for foreign produce, following the melamine crisis, coincided with the generally low price levels that were typical for international markets during most of 2009. World dairy trade increased rather slowly during the first part of 2009 but showed a remarkable recovery during the second part, led by Chinese imports. Chinas solid demand for foreign produce, following the melamine crisis, coincided with the generally low price levels that were typical for international markets during most of 2009. World trade is still not more than 7% of world production but it is increasing. Chinese buying accounted for most of the increase in international dairy trade growth in 2009. The driving force was trade in WMP. Beyond 2010 milk production is expected to grow on average by more than 2% annually during the next decade; Asia will account for most of it

Meat and poultry Sector


The structure of the world meat market is affected basically by three factors: resource endowment (as manifested by, among others, agro-climatic conditions, and the availability and cost of major inputs such as land, capital, labor, feed, and technology), consumer preferences, and government policy. In terms of resource endowment, given that broilers are sensitive to changes in temperature and humidity, the matter of ensuring maximum productivity would require that these conditions be inherently favorable to lower the cost of controlling diseases and the environment.

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Moreover, since feed costs make up about 70% of the total cost of intensive poultry production systems, the availability of cheap feeds is one of the most important factors for industry development. For example, the worlds two most efficient broiler producers, the United States and Brazil, are also major grain producers. In addition, access to advanced technology, which is also necessary to achieve a high level of efficiency, is another factor that strongly influences industry performance. As expected, broiler industries in major exporting countries are characterized by modern technologies and a high level of vertical integration. Government policies, both domestic and trade related, also have a significant impact on industry development and trade flow. Despite the World Trade Organization (WTO) and other regional trade agreements, varying degrees of trade and government intervention, such as tariffs, quotas, import taxes, and subsidies, still exist. These barriers play a major role in determining the performance of the poultry industries of some Western and Asian countries. In some cases, domestic industries have remained viable only because they have been protected through government interventions. Disparities in resource endowment and government policy have helped in differentiating nations as self-sufficient, net exporters, or net importers of broiler meat.

Market shares of major Food processing countries (In terms of production) USA China Brazil European countries Mexico India Others

21% 3% 4% 11% 14%

28%

19%

Source- Foreign Agriculture Service, USDA

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Global vs. emerging markets

Source: USDA and D&B Industry Research Service

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COMPETITIVE LANDSCAPE
The food processing industry is among the most competitive industries in India. The market has been witnessing a sharp increase in the annual sales of processed food products since the past few years. The huge growth potential in the Indian market, and the near- saturation demand for vehicles in US and European markets, have resulted in most global players foraying into the Indian market. The food processing industry in India is highly concentrated with top three players- Hindustan Unilever Limited, Dabur India Limited and ITC Limited accounting for majority share of 56% in the sales volume (FY07). In the market, the nature and extent of competition are similar to an extent. The food processing industry in India has high as well as various entry barriers. The industry is highly capital intensive. Huge investments are involved in setting up manufacturing facilities. Other than huge investments in terms of capital and time required to set up manufacturing facilities, investments are also required to establish a strong vendor network, sales network and service network. This also is the reason for some new entrants to tie- up with the existing players to leverage the latters established sales/distribution network. For example, Milkfood tied up with LP Investment Ltd to enter the Indian market. Also, Vista food products tied up with McDonalds as their frozen food manufacturers. High duties imposed on the import also act as entry barrier in the food processing industry. This is to encourage local production instead of merely importing and selling in the domestic market. Apart from governments restriction on imports by way of high import duties, government policies are no longer entry barriers for the processing industry. Progressive government policies have resulted in large scale production capacities in the industry, access to modern technology from abroad, and availability of plethora of products. Although firms in the market manufacture similar products, there is a high differentiation based on style, price, brand image, quality, performance, after sales service and other features such as safety, comfort etc. companies differentiate their products in terms of features or the technology used in the product. However, most companies are backed by their foreign partner/parent and have access to sophisticated technology, and also have the capability to offer similar features. Thus, product differentiation in terms of features and technology is somewhat blurred. Advertising and promotion is a key method to achieve product differentiation. The industry remains one of the most competitive. Expenditure on advertising and marketing typically increases sharply when a new product is launched. With players lining up with new products, competition is likely to intensify further, as also the advertising spends. According to sources, six leading listed food processing companies spent Rs 1,043 crore on advertising in the latest March quarter. Companies use superstar effect for advertising their products. These might be film stars, sportsmen etc. They are highly paid in return. Some of the famous examples of brand ambassadors of some companies are:

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Dabur India Ltd Hindustan Unilever Ltd ITC Limited Cadbury India Ltd Britannia Ltd

Sonakshi Sinha Priyanka Chopra, Shruti Hasan, Kajol Sharukh Khan, Deepika Padukone, Yuvraj Singh Amitabh Bachan Rahul Dravid

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RISK ASSESSMENT
The food processing industry in India has been growing at healthy rates since the past few years; however, it remains vulnerable to a multitude of risk factors, which could upset the industrys growth story going forward. While some of these risk factors are inherent to the nature of the industry, some are beyond its control. The chapter discusses the types of risks that the industry faces, and also analyses the extent of risk posed by these factors on the industrys performance, survival and growth prospects.

Field Losses: High Risk Every year, the food processing industry suffers huge losses due to field losses. These field losses occur due to pests and rodents. Storage: Medium Risk Once the crops or other products are ready, the major challenge face is storing them. Every year huge amounts of such products are wasted due to poor storage facilities in India. In 2010, the Indian

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government acknowledged that the country wasted Rs 58,000 crore worth of food items every year due to lack of or poor storage facilities. Some recent examples of food wastage in India are as following: 4.5 LAKH SACKS OF WHEAT in Uttar Pradesh, estimated to be worth Rs 25 crore, were damaged due to rains at the Food Corporation of India (FCI) godown in Ghaziabad, while more than 1 lakh sacks were left in the open despite enough space available in the Allahabad godown 3 LAKH SACKS OF WHEAT in Haryana were destroyed in Sirsa warehouse due to floods. Despite flood warnings from the weatherman, no precautions were taken and the food grain continued to lie in the open and low-lying area 56,000 SACKS OF GRAIN in Gondia district of Maharashtra are left to rot in the open despite plenty of space available inside the FCI godown. According to officials, the grain was stored outside the warehouse because there was a space crunch when the shipment arrived in May.

Wastage by consumers: High Risk Pre Processing Losses: Medium Risk Inefficient harvesting has been a major setback for the food industry. These losses also occur due to poor drying and milling techniques.

Cold Storage: Low Risk While the refrigeration system is available within the country, some critical items like compressors, rack systems are being imported from Europe and Japan. The material handling systems and the grading lines for the perishables essentially need technological support from abroad, mainly Europe.

Risk from fiscal policies: Low Risk The parameters evaluate the risk arising from changes in fiscal policies on the industrys performance. The governments fiscal policies have aimed at boosting demand for processed food items in the country and to develop India as the preferred destination for sourcing processed food products. The government has been steadily bringing down excise duty rates on specialized machinery. R&D remains conducive for the industrys growth. Thus, industry faces low risk from the fiscal policies.

Threat of rivalry: High Risk Market competition is intense, and going forward, it is expected to heat up further as the existing players have planned several new launches in the next 2-3 years. Also a few foreign firms are expected to enter

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the Indian food processing industry with aggressive launch plans. This ultimately indicates greater pressure on business margins and hence, the industry is likely to face high risk from the increasing levels of rivalry.

Threats of buyers: Low Risk This factor assesses the risks faced by the industry due to the bargaining powers of the consumers. However, on account of the large market size, the industry as a whole faces a low risk from buyers.

Macroeconomic Scenario: Low Risk This parameter assesses the industrys vulnerability to the macroeconomic situation in the country. The Indian economy has been growing at healthy rate since the past few years. The industry has been affected by the appreciation of the rupee against the US dollar over the recent months. However, we do not expect the rupee to be appreciated further, and expect the domestic market to continue to be the primary focus for buyers. Hence the exchange rate scenario is not likely to have any major impact on overall industry revenues.

Infrastructure: Medium Risk The parameter assesses the risk arising from the state of infrastructure in the country and its impact on industrys functioning as well as growth prospects. Infrastructure in India is highly inadequate and poorly maintained. Currently, Indian ports are congested and incapable of handling high volumes. While the road infrastructure is undergoing a revamp, the pace is extremely slow. Industry faces a medium risk from it.

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OUTLOOK
The decade-and-a-half of Indian economic reforms have now reached a stage where it is bringing about changes in the agriculture and food processing sectors. Reforms had more or less bypassed the agriculture sector till recently. However, demographic factors, changing lifestyles and consumer demand for greater variety has increased pressures on the food processing sector to provide products at competitive prices. Experience of large developed agricultural economies has proven that the integration of production and processing stages are a universal feature of efficient food marketing systems in the advanced stages of economic development. The Indian food market is set to more than double by 2025. The market size for the food consumption category in India is expected to grow from US$ 155 billion in 2005 to US$ 344 billion in 2025 at a compound annual growth rate of 4.1 per cent. In India, the food processing industry is one of the largest in terms of production, consumption and export prospects. As the country's Gross Domestic Product (GDP) growth rate had increased from 3.5 per cent in 2002-03 to 9 per cent in 2006-07, the foodprocessing sector had grown from 7 per cent to 13.1 per cent during the same period. The Government has set an investment target of Rs 1, 00,000 crore for the food processing sector by 2015. This is expected to almost double the countrys presence in the global f ood trade to three per cent. The investments of one lakh crore, as estimated by the government will, undoubtedly, catapult the growth of this sector, and put it at the higher growth trajectory. Among the emerging business avenues and growth options in the diverse Indian agribusiness sector, the food-processing sector is particularly promising and is undoubtedly one of the largest potential markets for processed foods. The segments with the largest growth potential for processing are dairy, fruits and vegetables, wine, confectionary, poultry, convenience food and drinks and milk products. Products that have growing demand in the export market are pickles, chutneys, fruit pulp, canned fruits and vegetables, concentrated pulps and juices, dehydrated vegetables and frozen fruits and vegetables along with processed animal based products. As India is world's third largest producer of agricultural products and large production base for a variety of raw materials covering food crops, commercial crops and fibres. Due to Indias diverse agro-climatic conditions, it has a wideranging and large raw material base suitable for food processing industries. Presently a very small percentage of these are processed into value added products. And demand for processed/convenience food/ ready to- cook/ ready- to- eat is constantly on the rise. Moreover, urbanization and nuclear families are becoming the norm. The market size for the processed foods is bound to increase from INR 4,600 bn ($102 bn) to INR 13,500 bn ($ 330 bn) by 2014-15, assumed to grow at 10%, and the share of the value added products in processed foods would grow from INR 2800 bn ($44 bn) to INR 5700 bn, growing at the rate of 15%. The growth witnessed by the sector in the last decade and further improvement in growth rate expected in the years to come, presents innumerable opportunities for investment. In this backdrop, the Government of

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India is already in the midst of a vision, strategy and action plan for the food processing sector. This strategy addresses issues of taxation, organised retail, infrastructure development, marketing interventions and regulations, strengthening of institutions and issues of food safety and regulations. The Vision 2015 strategy released in 2003-04 envisages: Trebling the size of the processed food sector to close to US$ 300 bn by 2015 Increasing level of processing of perishables from 6% to 20% Value addition to increase from 20% to 35% Increase share in global food trade from 1.5% to 3% Increase the share of value added products in food consumption from the current 16% to 50%. Realizing this vision entails an investment of US$ 24 bn over the decade of 2004-2015. Acquiring global competitiveness implies building-in efficiencies into the agricultural production and processing systems. For the agriculture sector, the state Governments will have to play a critical role in raising yields and improving quality of agricultural produce. This would require improving infrastructure for warehouses, cold storage, access roads, creating facilities for primary grading/sorting, improving access to price and market information to farmers, contract farming and supply chain management. Policy reforms in the food processing sector are already in their advanced phase, and have prompted several corporate to invest in the sector. Among the food processing segments, progress has been preeminent in the grain processing sector with the extensive branding of processed end-products like wheat flour and processed rice. A few prominent companies XXIX investing in this segment include ITC, HLL and Cargill. The other growing segment is poultry and meat, where too significant progress has taken place in terms of branding and marketing of products. This is among the faster growing segments in the industry, and will continue to witness significant changes in the next few years. Key players in this segment include Venkys India and Godrej. The fruits and vegetables segment is still localized in its operations, and largely unbranded. However, several companies have already made foray into this segment, and are backward integrating their operations. The products that would see remarkable growth include pickles, fruit pulps, canned and frozen fruits and vegetables. Organised food retailing is likely to play an important role in increasing the consumption of processed food items. The retail format reduces the number of intermediaries and transaction costs. It also aids better understanding of consumer preferences as it is a vital link between the processors and consumers. The Ministry of Food Processing, GoI, has projected the organised food retail industry to grow by 30% for the next five years. Among the key categories that constitute the organised retail market, the food and beverages segment make up a high 29%. Though current sales of processed foods through retail outlets are hardly 1% of total food sales, it is estimated to grow at an annual rate of 40% in the near future. Indian corporate who has already ventured into this segment includes ITC, Bharti, Reliance, Aditya Birla Group, Subhiksha and Future Group. Studies on the impact of organised food retailing on the supply chain have shown that it

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helps in consolidation among farmers towards meeting consumer requirements, investments in infrastructure and a shift towards centralized distribution centres from the traditional wholesale markets. The food processing industry in India has taken off substantially and will continue to grow rapidly considering the untapped potential in the sector. The growth in this segment not only indicates the changing development patterns of the country, similar to the developed nations, but also the promise it holds in driving growth of a certain section of society that has remained marginalized for a long time. More than just demand and supply dynamics, stakeholders in the food processing sector of India have a social responsibility to fulfill. Indian Food Processing Industry- Size and Growth (INR Billion) 6000 5000 4188 4000 3000 2000 1000 0 2010 (Est) 2011 (Est) 2012 (Est) 3680 4784

Source- MOFPI of Food Processing Industry, India

An important factor expected to add to the demand for processed food items is the slew of new products and versions lined up for the coming years. According to MOFPI, the industry will see a great increase in sales with development of new products and innovations in the packaging technology. This increased availability of products is expected to drive sales in the coming years. The availability of multiple products, along with variants, within the same category, has led to competitive pricing and intensified competition among players in the last few years. Many food companies are now investing in nanotechnology research that could provide us with safer, healthier, more nutritious and tastier food in the future. Food production costs are expected to fall as techniques become more efficient, using less energy, water and chemicals, and producing less waste.

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Some of the key areas in which this emerging science will play a valuable role include food packaging and food safety, and interactive foods such as an ice-cream that has the taste and texture of ice-cream without the use of fat or the use of nanotechnology to produce low-sodium foods that will still taste salty due to interactions with the tongue, and nutrient delivery systems that use nanocapsules to deliver micronutrients, antioxidants or even drugs to specific target areas of the body at designated times. Nanosensors could be developed that detect an individuals personal profile and trigger the release of appropriate molecules from the product. In this way, foods could be customized according to the specific taste and smell preferences of the consumer, along with their needs related to health status, nutrient deficiencies or allergies. Potential applications include foods that can release an appropriate amount of calcium in consumers with early osteoporosis, or those with smart filters that are shaped to trap molecules that might cause an allergic reaction. No. of companies involved in Nano Food Market 4000 3500 3500 3000 2500 2000 2000 1500 1000 500 69 0 2002 2004 2010 2015 (Est) 200

Source-USDA, India

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