FSM ASSIGNMENT

ECONOMIC ANALYSIS, CONSUMER ELECTRONICS INDUSTRY ANALYSIS AND COMPANY ANALYSIS (SAMSUNG ELECTRONICS INDIA)

SUBMITTED BY: DHEERAJ SHARMA 04911809910

SUBMITTED TO: MS. SWATI BHATT LEC. CDAC SOM

Economic analysis
Here is the synopsis from the detailed report published by Economic Advisory Council to the Prime Minister on the Economic Outlook for FY 2010-2011 in India Growth Prospects 1. The performance of the Indian economy in 2009/10 greatly exceeded expectations. The farm sector which was expected to contract showed resilience, growing by 0.2 per cent despite the weak South West monsoon. The non-farm sector also did well. It is the assessment of the Council that the Indian economy would grow at 8.5 per cent in 2010/11 and 9.0 per cent in 2011/12. In the current fiscal year, agriculture will grow at 4.5 per cent, industry at 9.7 per cent and services at 8.9 per cent. Global Prospects 2. The global economic and financial situation is recovering slowly. The large fiscal deficits and high debt ratios coupled with slow economic growth have created unsettling conditions for business and have potential for causing great volatility in financial markets. It is hard to visualize strong economic growth in the advanced economies in 2010 and to a large extent in 2011. The implications of this, for Indias strategy to return to the 9.0 per cent growth trajectory, are that public policy must promote business confidence and facilitate increased investment. Structural Factors 3. In 2008/09 the investment rate fell on account of the drawdown of inventories. This trend has reversed and the Council expects the investment rate to be higher at 36 per cent (of GDP) in 2009/10, rising to 37 per cent in 2010/11 and 38.4 per cent in 2011/12. Similarly we expect the domestic savings rate to pick up and reach 33.4 per cent in 2009/10, 34.3 per cent in 2010/11 and 35.5 per cent in 2011/12. These rates should enable the economy to grow in a sustained manner at 9.0 per cent. 4. Private corporate investment and total investment in fixed assets is expected to recover strongly but will not reach the previous high levels. Government Final Consumption Expenditure to GDP which hit a peak of 12.3 per cent in 2009/10 is expected to fall to 10.3 per cent in 2011/12. On the contrary, Private Final Consumption Expenditure which declined in 2008/09 and 2009/10 is expected to increase in the current and next fiscal year. Since 2001-02 the progressive decline in the Private Final Consumption Expenditure has been accompanied by a matching increase in the investment expenditure component of GDP. Sectorial Growth Projections 5. In the backdrop of a weak South West (SW) monsoon in 2009, the Council had expected the farm sector GDP to decline by 2 per cent. However, the actual loss in farm sector output was less. The strength in horticulture, animal husbandry and fisheries, as well as higher cotton output, helped farm sector GDP to ultimately register a marginally positive growth of 0.2 per cent.

6. On the basis of a normal SW monsoon forecast by the Meteorological Department, one may reasonably expect a strong rebound in crop output in Kharif and Rabi in 2010/11. The better seed and fertilizer availability and the construction of a large number of water harvesting structures through the MNREGA lend strength to these expectations. Moreover, the expansion in horticulture and animal husbandry and a low base effect should generate a farm sector GDP growth of around 4.5 per cent in the current fiscal. 7. Industrial sector recovery became evident in June 2009 and by August 2009 the General Index of Industrial Production (IIP) registered double digit growth rate driven by similar growth rates in output in the manufacturing and mining sector. The service sector has also shown strong recovery with GDP originating in the important sub-sector of trade, hotels, restaurant, transport & communication surging in the second half of 2009/10. The impact of the civil service pay hike and the arrears lifted growth of the community personal services sub-sector in the first half, but eased up in the second. Export related service activity (software and Business Process Outsourcing) was sluggish throughout 2009/10 but was more than offset by the recovery in domestic-oriented service activity. Overall, non-farm sector GDP grew by 8.8 per cent in 2009/10. 8. In 2009/10 the mining sector output grew at 10 per cent but a slowdown is expected in 2010/11 with a projected growth of 8.0 per cent in both output and GDP arising in the sector. Manufacturing output growth in 2009/10 was strong in all the quarters, especially in the case of capital goods and durable consumer goods. The only exception to this was non-durable consumer goods which were impacted by poor export growth and a lower output of sugar. Even though the manufacturing sector has recorded strong growth rate in April and May 2010, we expect this to ease as the base effect wears off. The projected growth rate in the manufacturing sector and the general index (IIP) is expected at 10 per cent in 2010/11. 9. The expected expansion of investment in physical infrastructure, including housing will drive the construction sector. Accordingly, the GDP arising in the construction sub-sector would rise by 10 per cent in 2010/11, which is likely to inch up to 11 per cent in 2011/12. In the trade, hotel, restaurants, transport & communication sub sector, growth picked up in the last two quarters of the year. We expect this trend to be reinforced with 10 per cent growth in both 2010/11 as well as 2011/12. There will be no contribution to expansion from civil service pay in the current year but the private sector component of the sub-sector community and personnel services will continue to register strong expansion in line with the rest of the economy. Software and BPO activity is expected to expand significantly in 2010/11, both in the domestic and export sectors. Alongwith steady expansion in the financial industry we expect this sub-sector to record growth of 9.5 per cent in 2010/11 which will rise further in 2011/12. 10. Overall, we expect GDP arising in the industrial sector to expand 9.6 per cent in 2010/11, rising to 10.3 per cent in 2011/12. The expansion in the services sector is expected to approach 9 per cent in 2010/11 and inch up to 9.6 per cent in 2011/12. Over all, the non-farm sector is expected to grow by 9.2 per cent in 2010/11 and 9.8 per cent in 2011/12.

Consumer electronics goods Industry analysis

The Indian consumer electronics industry has been growing at a double-digit growth rate since past few years. Higher disposable income, increased product awareness, affordable pricing, and shift in lifestyles have together been instrumental in changing the amount and pattern of consumer spending; thereby, resulting in strong growth in the consumer electronics industry. But still, the consumer electronics goods, like refrigerators, televisions and air conditioners, have low penetration in the country, leaving vast room for future growth. According to this new research report, Booming Consumer Electronics Market in India, the Indian consumer electronics industry will grow at a CAGR of around 18% during 2011 2014. During this time period, we expect that LCD TV will capture majority of the television market share as it will replace Colour televisions market to a large extent. Moreover, we observed that the air-conditioner (AC) segment is one of the most important product segments driving the overall growth of the Indian home appliances market. Introduction of innovative features and technology coupled with the expansion of distribution network is helping the market to grow at a faster rate. Further, this report reveals that, the market will witness a dramatic change in the competitive landscape over the next few years. A large number of companies will foray into the lucrative Indian consumer electronics market with their diversified product portfolio. This will lead the incumbent players to invest heavily in establishing their stores across different states of the country. This analytical research, Booming Consumer Electronics Market in India thoroughly evaluates the Indian consumer electronics industry. It briefly discusses about the current and emerging trends in the industry, underlining the future potential areas and key issues crucial for the development of the industry. The research also evaluates the behavioural aspect of the Indian consumers, their price sensitivity, distribution channel analysis, and future prospects of the consumer electronics market in rural India. Besides, this report also offers rational analysis on the key consumer electronics companies operating in the country, which includes their strength and weakness analysis.

Company analysis
Year on year Samsung Electronics Co Ltd grew revenues 13.43% from 136.32tn to 154.63tn while net income improved 65.06% from 9.57tn to 15.80tn.

Fiscal Year Ending Dec 31 2010 2010 2009 2008 REVENUE AND GROSS PROFIT Total revenue 154,630,328 136,323,670 121,294,319 OPERATING EXPENSES Cost of revenue total 102,666,824 94,594,863 89,762,355 Selling, general and admin. expenses, total 15,696,695 14,055,042 12,412,505 Depreciation/amortization 578,280 399,530 389,269 Unusual expense(income) (186,279) 65,609 -Other operating expenses, total 569,738 654,547 -Total operating expense 137,333,792 125,398,411 115,262,456 Operating income 17,296,536 10,925,259 6,031,863 Other, net --470,548 INCOME TAXES, MINORITY INTEREST AND EXTRA ITEMS Net income before taxes 19,328,656 12,191,596 6,577,775 Provision for income taxes 3,182,131 2,431,046 687,561 Net income after taxes 16,146,525 9,760,550 5,890,214 Minority interest (347,490) (188,952) (364,310) Net income before extra. Items 15,799,035 9,571,598 5,525,904 Total extraordinary items ---Net income 15,799,035 9,571,598 5,525,904 Inc.avail. to common excl. extra. Items 13,702,618 8,287,748 4,778,160 Inc.avail. to common incl. extra. Items 13,702,618 8,287,748 4,778,160 EPS RECONCILIATION Basic/primary weighted average shares 129 128 127 Basic/primary eps excl. extra items 105,992 64,888 37,684 Basic/primary eps incl. extra items 105,992 64,888 37,684 Dilution adjustment 0 0 0 Diluted weighted average shares 130 128 128 Diluted eps excl. extra items 105,672 64,586 37,340 Diluted eps incl. extra items 105,672 64,586 37,340 COMMON STOCK DIVIDENDS DPS - common stock primary issue 10,000 8,000 5,500 Gross dividend - common stock 1,297,010 1,025,615 698,664 PRO FORMA INCOME Pro forma net income ----

Fiscal Year Ending Dec 31 2010 2010 Interest expense, supplemental 581,091 SUPPLEMENTAL INCOME Depreciation, supplemental 10,847,374 Total special items (186,279) NORMALIZED INCOME Normalized income before taxes 19,142,377 Effect of special items on income taxes (30,668) Income tax excluding impact of special items 3,151,463 Normalized income after tax 15,990,914 Normalized income avail. to common 13,547,007 Basic normalized EPS 104,788 Diluted normalized EPS 104,472 REVENUE Gross margin Net profit margin Operating margin

2009 535,287

2008 670,271

10,771,334 9,855,529 65,609 (48,670) 12,257,205 13,083 2,444,129 9,813,076 8,340,274 65,299 64,995 6,529,105 (5,087) 682,474 5,846,631 4,734,577 37,340 36,999

31.86% 8.94% 9.20%

NET INCOME Return on assets Return on equity Return on investment

10.75% 14.18% 15.59%

Growth Rates in KRW

Year on year, both dividends per share and earnings per share excluding extraordinary items growth increased 25.00% and 63.61%, respectively. The positive trend in dividend payments is noteworthy since very few companies in the Audio & Video Equipment industry pay a dividend. Additionally when measured on a five year annualized basis, both dividend per share and earnings per share growth ranked in-line with the industry average relative to its peers. DIVIDEND PER SHARE Div yield(5 year avg) Div growth rate (5 year) Payout ratio (TTM)

-12.70 % 5.98%

EARNINGS PER SHARE EPS growth(5 years) EPS (TTM) vs TTM 1 year ago

16.55 -8.1491

In 2010, Samsung Electronics Co Ltd did not generate a significant amount of cash. However, the company earned 23.83tn from its operations for a Cash Flow Margin of 15.41%. In addition the company used 23.98tn on investing activities and also paid 152.30bn in financing cash flows.

CASH FLOW Cash flow per share 188,871 Price/Cash flow per share 5.35 CASH

In millions of KRW (except for per share items) Annual data Interim data Fiscal Year Ending Dec 31 2010 2010 2009 2008 OPERATIONS Net income 16,146,525 9,760,550 5,890,214 Depreciation/depletion 10,847,374 10,771,334 9,855,529 Non-Cash items 8,120,858 5,825,730 1,900,468 Cash taxes paid, supplemental 2,135,287 1,974,573 -Cash interest paid, supplemental 582,292 546,000 -Changes in working capital (11,834,500) (8,201,548) (4,525,798) Total cash from operations 23,826,779 18,522,468 13,360,075 INVESTING Capital expenditures (22,879,139) (8,622,218) (14,302,438) Other investing and cash flow items, total (1,105,738) (5,555,042) 1,174,014 Total cash from investing (23,984,877) (14,177,260) (13,128,424) FINANCING Financing cash flow items (120,677) (248,390) 1,127,838 Total cash dividends paid (1,917,637) (823,627) (1,315,486) Issuance (retirement) of stock, net 184,291 330,738 165,994 Issuance (retirement) of debt, net 1,701,728 (622,360) 2,772,652 Total cash from financing (152,295) (1,363,639) 2,750,998 NET CHANGE IN CASH Foreign exchange effects (48,118) 263,995 -Net change in cash (358,511) 3,245,564 2,982,649 Net cash-begin balance/reserved for future use 10,149,930 6,904,366 5,831,989

Fiscal Year Ending Dec 31 2010 Net cash-end balance/reserved for future use SUPPLEMENTAL INCOME Depreciation, supplemental Cash interest paid, supplemental Cash taxes paid, supplemental

2010 9,791,419

2009 2008 10,149,930 8,814,638

10,847,374 10,771,334 9,855,529 582,292 546,000 -2,135,287 1,974,573 --

TOTAL ASSETS Current ratio Quick ratio 1.6 3 1.2 1

TOTAL DEBT Total debt/total equity Total debt/total capital

0.121 0.103 9

Performance In the past 10 years, the global market has witnessed a surge in demand as economies such as Brazil, Mexico, India and China have opened up and begun rapid development, welcoming globalization with lan. The consumer durables industry has always exhibited impressive growth despite strong competition and constant price cutting, and the first contraction since the 2001 dot-com bust has been due to the global recession. Given the strong correlation between demand for durables (both new and replacements) and income, the industry naturally suffered during the 2008-2009 period. However, projections for current year going forward are very optimistic, as consumers resume spending, and producers launch new enticing variants to grab new customers. Samsung is the leading player here. Developing countries such as India and China have largely been shielded from the backlash of the recession, as consumers continued to buy basic appliances. In fact, China has been ranked the second-biggest market in the world for consumer electronics. Despite the recession, their strong domestic economy and growing high-income population have buoyed demand leading to aggressive market growth. There is growing interest for new age products such as LCD-TVs and DVD players. Meanwhile, the penetration of the basic, largest dollar items such as ovens, washing machines and refrigerators is also increasing. India too, has witnessed a similar phenomenon, with the urban consumer durables market growing at almost 10 %p.a., and the rural durables market growing at 25% p.a. Some high-growth categories within this segment include mobile phones, TVs and music systems. The Indian consumer durables industry has witnessed a considerable change in the past couple of years. Changing lifestyle, higher disposable income coupled with greater affordability and a surge in advertising has been instrumental in bringing about a sea change in the consumer behavior pattern. Apart from steady income gains, consumer financing and hire-purchase schemes have become a major driver in the consumer durables industry.

Challenges The biggest threats to the local industry going forward are supply-related issues pertaining to distribution and infrastructure, as well as demand issues due to competition from imported goods. The lack of well-developed distribution networks makes it especially challenging to penetrate the fastest growing rural areas economically. In addition, regular power cuts and poor road linkages make systematic production, assembly and delivery problematic. On the demand side, customers have increasing choice from both domestically produced and imported goods, with similar features. This homogeneity makes it difficult for players to remain ahead of the competition. MNCs hold an edge over their Indian counterparts in terms of superior technology combined with a steady flow of capital, while domestic companies compete on the basis of their wellacknowledged brands, an extensive distribution network and an insight in local market conditions. The largest MNCs incorporated in India are Whirlpool India, LG India, Sony India and home-grown brands are Videocon, Godrej Industries and IFB.

Future prospects Emergence of India as a major alternative export hub for Samsung Electronics, South Koreas largest electronics manufacturer, for colour TVs, home appliances and mobile handsets, as a result of possible export restrictions on China by Europe and the US. China is currently Samsungs largest export hub with six manufacturing units. A new 80-acre plant is being set up near the companys present plant in Chennai, 30 acres of which will be in a special economic zone (SEZ), at an investment of $100 million. Initial annual capacities include 1.5 million colour TV sets, 2,00,000 LCD TVs, and 3,00,000 LCD monitors and an undisclosed home appliances capacity. Samsung has also set up a new plant at Manesar near Delhi to initially manufacture 1.5 million phones annually. The hubs will feed Europe, US and the Gulf. Countries like the US and Europe could have quotas for exports from China, so India is surely an attractive country that can provide products to these markets, said Hyun Bong Lee, president and CEO of Samsung Electronics, South West Asia. Lee said the main issue currently is to get international quality material supplies and the company is already working with Indian vendors in this connection. For instance, we need international quality steel, and our policy is to develop local vendors rather than getting them from Korea. Six Indian vendors that manufacture products like plastics and moulds for Samsungs existing plant at Noida are also setting up manufacturing bases in Chennai. The existing plant has an annual capacity of over 1.5 million TV sets, 0.8 million refrigerators and over half a million home appliances.

ECONOMIC ANALYSIS
Government of India today released its much awaited Economic Outlook for 2011-12 that pegs the Indias GDP growth rate for 2011-12 at 8.2% as compared to 8.5% registered last year. Given the current adverse global circumstances and high Inflation to boot, expected growth rate of 8.2% looks quite good! Important highlights of Economic Outlook 2011-12

Agriculture grew at 6.6% in 2010-11. This years monsoon is projected to be in the range of 90 to 96 per cent, based on which Agriculture sector is pegged to grow at 3.0% in 2011-12! Industry grew at 7.9% in 2010-11. Projected to grow at 7.1% in 2011-12 Services grew at 9.4% in 2009-10. Projected to grow at 10.0% in 201112 Investment rate projected at 36.4% in 2010-11 and 36.7% in 2011-12 Domestic savings rate as ratio of GDP projected at 33.8% in 2010-11 & 34.0% in 2011-12 Current Account deficit is $44.3 billion (2.6% of GDP) in 2010-11 and projected at $54.0 billion (2.7% of GDP) in 2011-12 Merchandise trade deficit is $ 130.5 billion or 7.59% of the GDP in 2010-11 and projected at $154.0 billion or 7.7% of GDP in 2011-12 Invisibles trade surplus is $ 86.2 billion or 5.0% of the GDP in 2010-11 and projected at $100.0 billion or 5.0% in 2011-12 Capital flows at $61.9 billion in 2010-11 and projected at $72.0 billion in 2011-12 FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11 FII inflows projected to be $14 billion which is less than half that of the last year i.e $30.3 billion Accretion to reserves was $15.2 billion in 2010-11. Projected at $18.0 billion in 2011-12 Inflation rate would continue to be at 9 per cent in the month of JulyOctober 2011. There will be some relief starting from November and will decline to 6.5% in March 2012.

GDP Growth Actual & Projected