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INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 479

JANUARY 2013

VOL 4, NO 9

ANALYSIS AND EVALUATION OF MARKET ATTRACTIVENESS FOR FISH

VACCINES IN INDIAN AQUACULTURE INDUSTRY

Mahendra Kumar Pallapothu

BioPro Scientific & Management Consulting, 29 Commonwealth Ave, Charlottetown, PE, C1E 2E7, Canada

Tel: 001-902-367-9890, Email: [email protected]

Abstract: Aquaculture in India is one of the fastest growing fishery segments with an average annual growth rate of

approximately 7.0%. Earlier it was shown that the macro-environmental factors in India are favorable for a fish

vaccines business. The purpose of this study is to determine the market attractiveness for fish vaccines in India using

the market assessment framework proposed by Natarajarathinam and Nepal (2012). The overall market potential for

fish vaccines in the Indian aquaculture industry is estimated, followed by the sales potential through the use of

qualitative and quantitative methods. Finally, a sensitivity analysis on financial scenarios is executed. The results

indicate that the fish vaccines market in India is moderately to highly attractive with overall weighted scores for

market attractiveness ranging from 3.75 to 4.17/5.00 depending on the sales potential micro factor score of the

partnering candidate under consideration. The net present value of USD 4.45 million and an internal rate of return of

37.5% in this opportunity are assumed to be enticing for a small or medium-size enterprise.

Keywords: Market attractiveness, Market potential, Sales potential, Aquaculture, Fish vaccines, Carp vaccines,

India

1. Introduction

In today‟s globalized economy, with Western markets becoming stagnant or shrinking and the emerging markets

booming, most of the Western investors and firms are looking beyond the home country markets for growth

opportunities (S. T. Cavusgil, 1997). Emerging markets such as Brazil, India, Indonesia, China, and South Africa, to

name a few, have been the targets for these firms. Incentives such as tax breaks, subsidized rates on utilities,

availability of skilled labor, cost advantages (Conway, Dougherty, & Radziwill, 2010), low cost of capital, fast

growing customer base, and attractive financial terms (Claessens & Schmukler, 2007) are encouraging the foreign

investors to tap into these emerging markets. In spite of these advantages and opportunities in emerging markets,

investors have to carefully evaluate the target industry and its market potential to assess the investment and hidden

return risks without which the investors may suffer significant losses (Henisz & Zelner, 2010). As a first step, the

macro-environmental factors exogenous to the firm in the entry country have to be evaluated. Once they are

determined conducive, then the next step is to quantify the country‟s competitiveness. Since the market potential is

directly impacted by the entry country‟s competitiveness, which in turn is influenced by the macro-environmental

factors, a market potential that is reasonably attractive must be realized. Similarly, the sales potential is influenced

by the internal capabilities and core competencies of a firm, which would determine the market share appropriation

and revenue generation to reap the return on its investments. One such opportunity was explored by Pallapothu &

Krause (2013) for the aquaculture industry in India. The researchers noted that although the macro-environmental

factors in India are improving there are still some bureaucratic hurdles (for example, evolving intellectual property

rights, poor governance, the lack of a business-friendly environment, bureaucratic hurdles etc.) to be overcome by a

potential entrant to ensure success. As a continuum of determining the feasibility of the fish vaccines business in

India, this research has been objectively focused on quantifying the overall market attractiveness for fish vaccines in

India to help a potential entrant make appropriate strategic decisions.

The paper is presented as follows: the first section includes a literature review on market assessment and a

framework suitable for this study. In the next section, a research methodology is described followed by the

qualitative analysis of the market potential and sales potential for the fish vaccines business, and quantitative

financial forecasts and returns on investments. Potential implications for an entrant are discussed and concluding

with inferences, future research topics are proposed.

mailto:[email protected]

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2. Literature Review

Most of the extant literature on market potential measurement is grounded on econometric resource-based theory

(Harris, 1954) and the competitiveness of the countries (Cho, Moon, & Kim, 2008; Moon, Rugman, & Verbeke,

1998; Porter, 1990; Rugman & D'Cruz, 1993) using either complex mathematical models (Amiti & Cameron, 2007;

Hanson, 2005) or a combination of country clustering and country ranking (S. T. Cavusgil, Kiyak, & Yeniyurt,

2004). Cavusgil (1997) defined three issues for capitalizing on the market potential in an entry country: market

potential estimation and access, market entry, and market establishment. Subsequently, Cavusgil, Kiyak, and

Yeniyurt (2004) included market dimensions of size, growth rate, intensity, receptivity, free market structure,

commercial infrastructure, and country risk in the market potential estimation and categorized countries into clusters

of similar commercial, economic, political, and cultural dimensions. Other scholars have demonstrated the need for

foreign direct investment (FDI) and the development of new resources and capabilities when entering an emerging

economy (Delios & Henisz, 2000). Additionally, one of the key determinants for the success in the foreign markets

is the level of control. Agarwal and Ramaswami (1992) provided strategies for mode of entry choices into new

markets with different levels of control, risk, and return in the foreign markets based on the factors of ownership

advantages of a firm, location advantages of a market, and internationalization advantages of integrating

interactions. Jones, Knotts, and Udell (2011) showed that the market attractiveness is affected by the stage of

product development. They concluded that the market attractiveness of innovation stage products is much higher

than invention stage products in a venture creation and the product‟s market viability. Natarajarathinam and Nepal

(2012) identified macro factors at the country and industry levels, and micro factors at the firm level as key drivers

in estimating the market attractiveness.

3. Methodology

The framework proposed by Natarajarathinam and Nepal (2012) is employed in this research. The modified flow

chart of the process is outlined in Figure 1 and the focus of this research paper in assessing the market attractiveness

of the fish vaccines business is highlighted in broken-line insert. Future research topics are also presented as a

separate insert as a continuum in estimating the industry competitive forces and formulating a strategy. Briefly, the

framework covers the exogenous factors of an entry country in terms of market potential and then assesses the sales

potential of the region by qualitatively measuring the macro and micro factors that drive the sales potential. Since a

return on investment is important to make an investment decision, the framework allows the quantitative

measurement of the same with a sensitivity analysis to measure the risks if any. However, this paper takes a different

approach to determine the sensitivity of the revenue forecasts as it is a start up organization that is influenced by

several factors that are different from an established firm entering a new market. These differences from the original

framework will be described in the relevant sections below. The rationale for choosing Natarajarathinam and

Nepal‟s (2012) framework is that it uses data sources that are accessible to the managers and/or analysts who are

engaged in foreign market assessments and employs simple computational techniques to derive meaningful figures.

Market attractiveness was assessed in three steps: (1) the national market potential and sales potential scores for fish

vaccines in the Indian aquaculture segment are determined using the formula:

n

∑ Wi Fi

i=1

Where Wi and Fi are weight and score for a factor type „i,’ respectively. Factor types such as market size, market

growth rate (including aquaculture market growth rate), country risk, economic freedom and commercial

infrastructure were chosen to measure the market potential while the sector specific factors such as number of

potential customers, clusters, and geographic concentration of biotechnology firms etc. were chosen to assess the

sales potential macro factors. To estimate the sales potential micro factors, at least three potential candidate partners

for a joint venture with the entrant were ranked based on the capabilities offered by each of them. To gather the data,

the author relied on secondary sources such as peer reviewed journals, articles, expert commentaries, consultancy

reports, country reports, company financial reports, government reports, and budget plans etc. The overall sales

potential was computed as:

(Total weighted score of sales potential macro factors × 0.6) + (Total weighted score of sales potential micro

factors × 0.4)

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In step (2), the overall market attractiveness was computed (with an assumption of the higher influence of the sales

potential score in decision making) with a ratio of 70:30 for the sales potential score to the market potential score as

follows:

(Total weighted score of sales potential × 0.7) + (Total weighted score of market potential × 0.3)

Subsequently, in step (3), revenues were forecasted from the sale of vaccines. The Net Present Value (NPV) and the

Internal Rate of Return (IRR) were determined from the revenue forecasts, followed by a sensitivity analysis of

NPV and IRR to the identified variables.

4. Analysis

4.1. Market potential assessment for fish vaccines in India

The market assessment to determine the aquaculture market potential in India is presented in Table 1. To determine

India‟s value, the total market size was estimated based on 100% carp produced being available for vaccination at a

maximum market share appropriation projected in the base scenario of Table 2. This resulted in a total market size

of USD 18.35 million. Refer to Table 2 for financial analysis. A threshold value for the market size for fish vaccines

in India is determined based on an assumption that the target market is comprised of big fish farms that contribute

up to 40% of total carp production and the entrant achieving a market share projected in the base scenario which,

when realized, would lead to an NPV of USD 4.45 million that may sufficiently be attractive to a small or medium

size enterprise (SME). The factor score for market size for India was assigned as 3.0 and considered as “meeting

threshold.” Market growth rate was estimated using the combination of five year average growth rates of the Indian

aquaculture industry provided by the Food and Agricultural Organization (FAO) (FAO-Statistics, 2010), real gross

domestic production (GDP) growth rate provided by The World Bank (The World Bank, 2012) and the primary

energy use reported by the U.S. Energy Information Administration (USEIA, 2009). India experienced a very

attractive AAGR of 9.94% between 2006 and 2010 in the aquaculture segment (FAO-Statistics, 2010). This AAGR,

when compared to Norway and China, the leaders in salmon production, showed rates of 8.95% and 4.93%,

respectively during the same time frame. The threshold value was chosen as a minimum of 5% for this factor and as

this is a major driver for entry decisions, this factor was assigned a weight of 60%. The GDP growth rate, although it

reached 8.4% in 2009 and 2010, has declined to 6.9% in 2012 due to residual consequences of global economic

meltdown in 2008. However, the GDP is forecasted to reach 7.5% in 2013 (The World Bank, 2012). Since the GDP

is a good indicator of the overall growth of an economy, a weight of 30% was assigned to this factor while 10%

weight was assigned to the energy consumption factor as it is one of the drivers of the overall GDP. Each factor

measure in the market growth rate was assigned a factor score of 5.0 (as all the three parameters of growth rates

exceeded the threshold limit of 5.0%) and the combined factor score was calculated as [(0.6 × 5) + (0.3 × 5) + (0.1 ×

5)] = 5.00. Therefore, the market growth rate in India is designated as „highly attractive‟.

The country risk rating, [which provides an estimate of the political and economic forces that impact the business

environment which in turn affect the profit potential of a firm (Robock, 1971)], was derived from the Euromoney

Country Risk Rating Survey (Euromoney, 2012). India‟s risk rating was 52.68 while the threshold was 55 out of

100. Since India‟s value was slightly lower than the threshold, the factor score was assigned as 2.80. The political

structure and systems are key drivers of policy and incentive creation for entrepreneurs to select an entry country

(Keren, 2009). The political weakness of the government, due to unstable coalitions, is causing the difficulty to

tailor policies to recognized needs such as the creation of a business-friendly national policy (ICON Group, 2007)

and modernization of the Indian economy. The efforts of weakening the country‟s „Permit-License-Quota Raj‟ (rent-

seeking society) (Weede, 2010) that were aimed to reduce the bureaucratic processes in starting businesses have also

been slowed (Keren, 2009). A number of changes in taxation policy have been enacted to attract FDI into the

country. Additionally, the improved credit rating for India from „negative‟ to „stable‟ in March 2010 by Standard &

Poor (S&P) has helped. However, S&P still retained its long-term and short-term sovereign rating at „BBB minus‟

and „A-3,‟ respectively, due to high debt burden and fiscal deficit. It is envisioned that the access to capital

markets/banks, debt indicators and credit ratings to improve further as several of the policies are being carefully

considered in the Indian Parliament in the interest of national economy (Pallapothu & Krause, 2013).

“Economic freedom is an essential aspect of human liberty, without which a person‟s rights to life, liberty, and the

pursuit of happiness may be fundamentally compromised” (Miller, Holmes, & Feulner, 2012, p. 13). The Heritage

Foundation publishes economic freedom indices for various countries which takes into account the freedom of doing

business and trade, fiscal freedom, government spending, monetary freedom, investment freedom, financial

freedom, property rights, freedom from corruption, and labor freedom. Thus, the higher the economic freedom in a

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country, the higher the attractiveness for entry of international firms (EF-Index, 2012). The rating for India in the

2012 index was 54.6 out of 179 countries. The threshold rating for this factor was 55. Therefore, the factor score for

India was determined as 2.90, as it was close to meeting the threshold.

Commercial infrastructure such as paved roads, and Information and Communication Technologies are vital for the

industries to thrive. In this factor, India excelled in paved road density and telephone subscribers but the number of

internet users per every 10 habitants was far below the threshold. Since reaching the customers could be attained

through text messaging or mobile telephone services and through paper-based newsletters, lack of meeting the

internet user threshold is assumed to have little impact (with the exception of increasing marketing costs) on the

business development for fish vaccines. Therefore, the factor score for the combined commercial infrastructure was

assigned as 4.00.

The final weighted score for the overall market potential is 3.42 for the fish vaccines business in India. It is just

above the „meets threshold‟ criteria of 3.00 and hence considered moderately attractive. The two factors that

influenced this low overall weighted score were the country risk rating and economic freedom index.

4.2. Sales potential assessment for fish vaccines in India

The sales potential assessment was carried out using qualitative measures. A scale of 1 to 5 was employed to rate

India‟s macro and micro factors similar to market potential assessment. The factor weights were determined based

on the author‟s experience in both Western and Indian aquaculture industries. Finally, to determine the overall sales

potential in India, the macro and micro factor scores are combined with a weight of 60% and 40%, respectively. If

this final score is greater than or equal to 4.00, the sales potential is deemed „highly attractive.‟ The factor scores for

macro and micro sales potential factors are provided in Tables 3 and 4, respectively. To maintain confidentiality, the

potential candidates for partnering were coded with the names of the states where their main animal health

businesses are located. The macro factor score for sales potential was determined as „highly attractive‟ as it was

4.63/5.00 while the micro factors yielded highly attractive to moderately attractive final weighted scores depending

on the candidate partner in question. For example, the potential partner in the state of AP resulted in a sales potential

micro factor weighted score of 4.28/5.00 while the candidates in Maharashtra and Gujarat have yielded 3.29 and

2.78, respectively. The overall weighted scores on sales potential assessments (qualitative assessment) for potential

candidate partners are 4.49, 4.09 and 3.89 for AP, Maharashtra and Gujarat candidates, respectively. Therefore, the

AP and Maharashtra partners are highly attractive as they both have shown higher than set criteria of 4.00. The

reason for the AP candidate to have demonstrated a higher result was due to broad experience in serving various

segments of animal vaccines, strong customer relationship management system, wide distribution channels and

marketing capabilities. The candidate firm in Gujarat is especially lagging behind compared to the other two in the

areas as outlined previously as it has just started its animal health products in the region with initial focus in the

poultry segment. In the following section, the sales potential is measured quantitatively with some assumptions as

there is no published information available on the latent demand for (unmet need due to lack of satisfactory good or

service) fish vaccines in India. In the absence of such direct data for demand from the end user, the author takes a

conservative step in estimating the revenues based on assumptions.

4.3 Overall market attractiveness of fish vaccines in Indian aquaculture industry

The overall weighted scores for the market potential was determined as 3.42 and sales potential (macro + micro) for

the three candidates were 4.49, 4.09, and 3.89. The overall market attractiveness was computed as (with an

assumption of the 70% weight given to the total weighted score of sales potential plus a 30% weight assigned to the

total weighted score of market potential) 4.17 (Highly attractive), 3.89 (Moderately attractive), and 3.75 (Moderately

attractive) for AP, Maharashtra, and Gujarat candidates, respectively.

4.4 Financial analysis and internal rate of return

Revenues were forecasted using an incremental appropriation of the market share by the Joint Venture (JV) firm

from the extrapolated AAGR of aquaculture production in India from 2010 through to 2045 with an intermediate

target production estimate available for 2020 (8-10 million tons) from Paroda and Praduman (2000). Initial

production growth rate between 2011 and 2020 was estimated at 7.0% per annum, and subsequent to 2020, the

annual market growth rate was forecasted to decline and reach 2.5% by 2045. Value-based pricing was proposed at

an initial average dose price of INR 1.0 (USD 0.0182) to encourage aquaculturists to switch from conventional

substitutes and to make vaccines available at an affordable price. The After Tax Cash Operating Earnings (ATCOE)

were derived by using a progressive increase of market share of the entry firm from 5% in year three (2016) of JV

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to peak share of 42% in year 11 (2024) over a 32 year horizon (2014-2045) while the first two years are dedicated to

partnership, licensing, development, and registration of product(s). The current corporate tax rate stands at 37.5%

for domestic corporations but the tax calculation takes into consideration the Direct Tax Code (DTC) which will be

effective this year. Hence, a tax rate of 30% was used in the pro-forma income statement. The terminal value of the

business was calculated from the present values of ATCOE during 2021 and 2045, which is then used in the NPV

calculation, while the ATCOE for the entire 32 year horizon (data not shown) was used in the calculation of IRR.

The NPV of initial investment into this business was assumed at USD 4.3 million with the entry firm joint venturing

with an established partner who has the required infrastructure and incremental investments totaling USD 8.5

million between 2021 and 2045. These incremental investments were netted out in the respective year‟s ATCOE for

the sake of simplicity in calculating the IRR.

Return on investment proposed by the original framework (Natarajarathinam & Nepal, 2012) was replaced with the

IRR in the present research, as IRR takes into consideration those future investments that are highly likely in a start

up organization. Also, IRR has gained reputation in the business world for reducing a capital budgeting project to a

percentage return that is easy to understand and communicate. The criteria in decision making is that if the IRR for a

project is greater than or equal to a company‟s cost of capital, then the project should be accepted for

implementation (Gitman & Hennessey, 2008).

As there is no competition in the market at this point in time (Pallapothu & Krause, 2013), a progressive increase of

market share from 5% in year three to 42% peak market share in year eleven was envisioned. Since the financial

forecasts were projected using only the cost of equity [cost of capital (COC)] as a means of financing the business in

the form of FDI by a foreign investor group, a COC of 25% was assumed for this case. The reasons for the COC of

25% is that the opportunity cost of investing is slightly higher in India due to market potential being moderately

attractive and the borrowing costs being high due to inflation (Pallapothu & Krause, 2013) and informal payments

(Prime, Subrahmanyam, & Lin, 2012). Based on this assumption, the base scenario yielded an NPV of USD 4.45

million and an IRR of 37.5%. Refer to Table-2 for base scenario of revenue analysis. Furthermore, India‟s value for

the total market size could be estimated as an NPV of USD 18.35 million (data not shown) if the total Indian Carp

production between 2014 and 2045 is used in the calculation at a market share appropriation rate projected in the

base case scenario.

4.5 Sensitivity analysis

The base case scenario of financial forecast was built on several assumptions and found to be attractive with a, NPV

of USD 4.45 million and an IRR of 37.5%. However, to capture any deviations from the base case scenario, few

variables, namely ± 5% Cost of Capital (COC), 20% less dose price, 20% less market share, and 20% higher

operating costs, were identified as the variables that may have an impact on the NPV and IRR which were used

either individually or in combinations to determine the sensitivity of the NPV and IRR.

As per the sensitivity analysis presented in Table 5, it is evident that all the variables chosen (except COC of -5%

and its combination with other variables), have a negative impact on the NPV and IRR either individually or in

combination with other variables. The highest impact was observed with the COC of +5% in combination with 20%

higher operating costs, where the NPV decreased substantially from USD 4.45 million to USD 0.072 million, a 98%

decrease in NPV from the base scenario. Considering the optimistic scenario where the COC is -5%, even if the dose

price and market share are reduced by 20% and operating costs increased by 20% from the base case, the IRR would

range between 31% and 33% which is considered „attractive.‟ Similarly, if the COC is increased by 5%, then the

scenario would turn negatively with the IRR dropping to a range of 30% to 32% depending on the combination of

the variables considered. Therefore, given the inherent uncertainties in the financial forecasts, with all the likely

variables considered, the IRR demonstrates that the project of fish vaccines business in India is still attractive and of

a strong opportunity. This sensitivity analysis thus provides the upper and lower boundaries of the project financials

in order for the decision makers to take appropriate measure. For example, if the COC is greater and the market

share realized is lower than the base case, then the managers may develop a strategy to increase efforts in aggressive

marketing and sales to encourage the product adoption by the customer.

5. Managerial Implications

In today‟s globalized economy, investors and firms are looking beyond their home countries for opportunities to

expand. Identifying such opportunities outside a home country is challenging, especially in developing countries

where some of the vital information required for analysis is limited. Utilizing Natarajarathinam and Nepal‟s (2012)

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framework, the author attempted to identify a new opportunity (fish vaccines business in India) and determine its

attractiveness using the data available from secondary sources. The market and sales potential factor analysis,

coupled with financial analysis, revealed that the Indian aquaculture market is highly attractive for a potential

vaccines business.

In the author‟s estimation, an NPV of an initial investment of USD 4.3 million is required for salaries, licensing of

technologies, purchase of automated vaccination machines, and regulatory and operational expenses during the first

two years only if it is a JV with an established veterinary vaccine partner in India. The analysis suggests that the JV

partners secure capital that costs below 25% while maintaining other variables (discussed in Table 5) as close to the

base scenario as possible to maximize the NPV. The opportunity described in this paper with an NPV of USD 4.45

million over a 32 year period is presumed to be enticing to a SME partnering firm in India that is interested in

adding new products to its portfolio, thus increasing its bottom and top line growth. Therefore, an entry mode of

choice for the fish vaccines business in India could be a JV, which Johnson and Tellis (2008) reported as one of the

successful ways of establishing business in the Indian market. In this mode, the entrant could not only avoid

corporate taxes of up to seven percent as per current taxation system imposed by India on a sole-venture owned by

foreign enterprise, but also can accelerate the speed to market. Since the partnering firm is assumed to have

established infrastructure, distribution, and marketing channels, as well as an established relationship with the

regulators, the firm could realize the revenues in the earliest time possible, which in this case is expected to be two

years (by 2016). Also, the partners can expand business to supply products to a secondary market comprising of

small fish farms to realize the upside potential or export products to neighboring countries like Sri Lanka and

Bangladesh. Since there is no direct competition in this segment and the likely competition is from the substitute

manufacturers, a window of opportunity exists for first mover advantages like securing higher market share in fish

vaccines while also setting value-based but affordable pricing for the vaccines, such that the initial entrant could

impose entry barriers on the potential future entrants into the market place. In one of the studies, Chakraborty and

Agoramoorthy (2010) noted that although the Indian biopharmaceutical industry is steadily increasing, the industry

is facing limitations in attracting funding in the form of government grants. They quoted one of the company

founder‟s on the risk sharing approach and reported that the Indian entrepreneurs are willing to share the risk if

foreign partners are prepared to take a higher share of the risk in a new venture. This would mean that the animal

health segment, in spite of its fastest growth rates with about USD 200 million revenues (Chakraborty &

Agoramoorthy, 2010), is constrained by limited funding sources as the major focus today in India is on human

health segment. Therefore, the willingness to participate in a JV creation is highly likely with established animal

health firms if the risk is skewed to foreign investors. This entry mode also holds true for a foreign investor group

that has experience in foreign markets but does not have the necessary resources to start up a firm right from scratch

by itself (Agarwal & Ramaswami, 1992).

The value creation for the firm in serving the latent demand in aquaculture segment is by volume-driven business

via collaboration with experienced or knowledgeable external partners (domestic or foreign), who may help reduce

the innovation risk. To be successful, the investor group has to choose between an invention-based (idea) or

innovation-based (market-ready product) business model before entering into India. Jones, Knotts, and Udell (2011)

empirically confirmed that an innovation approach would likely have better chances to succeed in a new venture

creation, and the product as late in the stage of development has much influence on market viability. This approach

specifically applies to India (Reid & Ramani, 2012). In one of the previous works (Pallapothu & Krause, 2013), this

strategy was suggested by in-licensing the products that have already been tested in target animals by which the risk

in attrition of a new invention could be mitigated and speed-to-market can be accelerated which aligns with the

approach suggested by Jones, Knotts, and Udell (2011), and Reid and Ramani (2012).

The location advantages in high market potential countries like India enable the entrant to reach economies of scale

with lower marginal cost of production leading to long-term profitability. The JV mode also allows the entrant to

satisfy the lower investment needs and gain control over the venture by increasing the proportion of equity

participation (Agarwal & Ramaswami, 1992). Internalization advantage lies in partnering with firms that have the

successful track record of collaboration with foreign enterprises. To identify such partnering candidates, the author

assessed the sales potential micro factors of three candidates in India. Based on the analysis, the descending order of

choice of selecting a partner by the entrant is as follows: (1) AP candidate, (2) Maharashtra candidate and (3)

Gujarat candidate. Although other animal health firms are available in India, only the above three candidate firms

have been found to have experience in animal vaccines. However, the author disclaims any preference to a particular

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candidate but suggests the entrant to conduct thorough due-diligence to understand the alignment of interests

between the entrant and the candidate partner.

6. Conclusion

In conclusion, the overall market attractiveness for fish vaccines was determined as „moderately to highly

attractive.‟ Although the market potentials was 3.42 (moderately attractive), the author is optimistic on the

improvements in the market in the near future (based on the positive changes that are occurring in the Indian

political system and economic landscape). The overall sales potential macro factor score was found to be „highly

attractive‟ with a factor score of 4.63 as the latent demand is not being met with suitable products. The candidate

partners for the proposed JV are also suitable (in the order of their attractiveness) for this venture as they have

diverse experience in other segments of the animal health industry and capabilities in expediting new product

development processes for the fish segment and reaching customers. With diverse levels of expertise, the total

weighted score of sales potential micro factors for three of the partnering candidates were determined as 4.28, 3.29,

and 2.78 for AP, Maharashtra, and Gujarat candidates, respectively. Factoring these scores into the estimations of

overall market attractiveness resulted in scores of 4.17, 3.89, and 3.75 depending on the candidate partner

experience. The revenue forecasts also confirm the qualitative assessments of market attractiveness with an NPV of

USD 4.45 million and an IRR of 37.5%. However, these financial forecasts built on secondary data warrant

confirmation by gathering data from end users through a survey instrument, which the author recommends as the

next step for the entrant. As with any research, this research is limited in addressing the competitive forces within

the aquaculture segment and the formulation of a suitable strategy to maintain competitive position within India.

These topics could be of interest for future researchers.

Finally, the author attempted to evaluate the attractiveness of Indian market for a specific segment, thus validating

the utility and value of the framework developed by Natarajarathinam and Nepal (2012) in a different industry than

the one being studied earlier.

7. Acknowledgements

The author acknowledges and extends his gratitude to Dr. Sean Hennessey, Professor, Corporate Finance, UPEI, for

excellent guidance in financial analysis, and Dr. Robin Sutherland and Mr. Damon Ansems for assistance in English

language review.

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Table 1. Market potential assessment for fish vaccines in India.

Macro Factor (i) Factor Measure India's

Value

Factor

Weight

(Wi)

Threshold

value

Factor

Score a

(Fi)

Market Size Total fish vaccine doses in India (between

2016 and 2045) (NPV million) (Table-2)

$ 18.35 30% $4.45 3.00

Market Growth

Rate (Higher the

risk score lower

the country‟s risk)

1. Indian aquaculture market growth rate

between 2006 and 2010 (FAO-Statistics,

2010)

9.94% 20% 5% 5.00

2. Real GDP growth rate between 2008 and

2012 (The World Bank, 2012).

7.60% 20% 5% 5.00

3. AAGR of primary energy use between

2004 and 2009 (USEIA, 2009).

7.10%

Country Risk

Rating (Higher

the risk score

lower the

country‟s risk)

Political risk; Overall economic; Access to

banks/capital markets performance; Debt in

default or rescheduled; Debt indicator; Credit

rating (Euromoney, 2012).

52.7 20% 55/100 2.70

Economic

freedom

Economic Freedom Index (EF-Index, 2012) 54.6 20% 55/100 2.90

Commercial

Infrastructure

Paved road density (km per million habitants)

(GOI-MoRTH, 2012).

3,424 10% 1000 4.00

Internet users (per 10 habitants) (GOI-MoCIT,

2012).

0.3 6.0

Telephone subscribers (per 10 habitants)

(GOI-DOT, 2012; ITU, 2012).

7.8 7.0

Total weighted score for market potential 100%

3.42

Overall market potential attractiveness Moderate a Scale of 1 = unattractive and 5 = highly attractive

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Table 2. Revenue forecast and pro-forma income statement for fish vaccines business in India.

Worksheet

Production Year 2013 2014 2015 2016 2017 2018 2019 2020 2021-2045

Market annual growth rate 7% 7% 7% 7% 7% 7% 7% 7%

Total fish production (tons) 5 327 326 5 700 238 6 099 255 6 526 203 6 983 037 7 471 850 7 994 879 8 554 521

Total fish production (kg) 5 327 325 630 5 700 238 424 6 099 255 114 6 526 202 972 6 983 037 180 7 471 849 782 7 994 879 267 8 554 520 816

Total carp production (1kg at harvest)

(87% of total fish production) 4 634 773 298 4 959 207 429 5 306 351 949 5 677 796 585 6 075 242 346 6 500 509 311 6 955 544 962 7 442 433 110

Proportion of fish available for

vaccination from big fish farms (40%) 1 853 909 319 1 983 682 972 2 122 540 780 2 271 118 634 2 430 096 939 2 600 203 724 2 782 217 985 2 976 973 244

Dose Price (USD) a 0.01818 0.01818 0.01818 0.01818 0.01818 0.01818 0.02273 0.02273

Market Potential (USD) 33 707 442 36 066 963 38 591 651 41 293 066 44 183 581 47 276 431 63 232 227 67 658 483

Market Share

5% 8% 15% 25% 35%

Direct Costs as % of sales

10% 10% 10% 12% 12%

Operating Costs as % of sales b

50% 50% 50% 50% 50%

Tax rate

30% 30% 30% 30% 28%

Cost of Capital

25%

Investment (USD)

-3 750 000 -2 000 000

Pro-Forma Income Statement (All in USD)

Project's

Terminal Value

Sales

2 064 653 3 534 686 7 091 465 15 808 057 23 680 469

Direct Costs

-206 465 -353 469 -709 146 -1 896 967 -2 841 656

Gross Margin 1 858 188 3 181 218 6 382 318 13 911 090 20 838 813

Operating Costs

-1 032 327 -1 767 343 -3 545 732 -7 904 028 -11 840 234

Cash Operating Earnings 825 861 1 413 875 2 836 586 6 007 062 8 998 578

Taxes -247 758 -424 162 -850 976 -1 802 118 -2 519 602

ATCOE -3 750 000 -2 000 000 578 103 989 712 1 985 610 4 204 943 6 478 976 23 450 411

Present Value of ATCOE 295 989 405 386 650 645 1 102 301 1 358 740 4 917 908

Present Value of Investments -3 000 000 -1 280 000

NPV 4 450 968

IRR 37.5%

Notes: a Average weight of fish at harvest = 1kg; Price per vaccine dose = INR 1.0 (~USD 0.01818); Wholesale price of 1kg fish INR 40-50 (~USD 0.73-0.91); and Cost of production INR 15-25

per kg fish (~USD 0.27-0.45) (Jha, 2009). Initial investment is estimated based on the need to pay licensing fee to secure existing vaccine technologies from research institutes in India, where as

the expenses included variable costs and operating costs (cost of sales, salaries, taxes, interest expenses etc). b Excluding amortization. Product mix is not included in the study which may further

add to upside potential.

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Table 3. Sales potential macro factors for fish vaccines in India.

Macro Factors (i) Indian Market Situation

Factor

Weight

(Wi)

Factor

Scorea

(Fi)

Number of potential

core customers

A minimum of 153 customers are available in Andhra Pradesh

and West Bengal states (Abraham, Sil, & Vineetha, 2010).

20% 4.50

Clustering and

geographic

concentration

Major biotechnology industrial clusters are located in

Maharashtra, Karnataka, AP, Gujarat and National Capital

Region (Prahalathan, Kumar, & Mazumdar, 2010).

20% 4.50

Special Economic

Zones

158 operational SEZ of which 4 in Biotechnology. In total,

588 SEZ are formally approved of which 32 in Biotechnology

(GOI-MoCI, 2005; GOI-MoCI, 2012). This may enable the

entrant to reduce costs in logistics.

10% 4.50

Advertisement intensity

in population

Direct advertisement in biologics is regulated and hence

informal product awareness through scientific conferences is

possible and the cost is negligible.

3% 5.00

Number of major

aquaculture farms

WB is the leader followed by AP in aquaculture. In addition,

other states namely, Haryana, Karnataka, Orissa, Uttar

Pradesh, Tamil Nadu, Kerala etc are also major producers.

These customers not only serve local markets but also export

to other Indian states (Kumar, Datta, Reddy & Menon, 2010).

4% 5.00

Local import,

legislation and trends

Large international fish vaccines firms do not export to India

due to several constraints (Walker, Lester, & Bondad-

Reantaso, 2005) including their required price margins to

cover overheads to remain profitable which deter the price

sensitive customers (Pallapothu & Krause, 2013). Legislation

is supportive of imports and several import-export tariffs have

been slashed since 1991 (The Economist, 2009).

14% 4.50

Market share from

established companies

of the same industry

No competition in fish vaccines and the Indian government is

open for new product and industry development,

20% 5.00

Market experience with

new foreign companies

In the past, economic nationalism hindered the foreign

companies but since India‟s economic reform in 1991, the

situation has improved significantly with international firms

setting up subsidiaries in India.

10% 4.50

Total weighted score for sales potential 100% 4.63

Overall sales potential attractiveness based on macro factors High a Scale of 1 = unattractive and 5 = highly attractive

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Table 4. Sales potential micro factors for fish vaccines in India.

Potential Partnering

Candidate

AP MH GJ

Micro Factors Potential Candidate Partner

Situation

Factor

Weight

(Wi)

Factor

Score a

(Fi)

Factor

Scorea (Fi)

Factor

Score a

(Fi)

Brand name/value Positive brand name in their

respective segments

10% 4.50 3.00 2.50

Experience in foreign

markets

Experience both in domestic and

foreign animal health markets

5% 4.00 2.00 1.00

Established

distribution channels

Established distribution channels

through institutions and retail line

of business

20% 4.50 3.00 3.00

Degree of innovation

and quality of product

Successful innovators but with

different levels of innovations

serving different segments. Quality

is considered equal as it is highly

regulated.

15% 4.00 3.00 2.00

Price of the product

and price elasticity

Providing affordable products to

different industry segments

20% 4.00 4.00 3.00

Firm's in-house

marketing ability and

strategy

While the foreign entrant is

assumed to have a strong

capability in developing marketing

and overall strategy, the candidate

partners in India have various

levels of international marketing

experiences in animal health

industry

10% 4.50 4.00 3.50

Management

capability

Knowledgeable management teams

with the candidate partners

5% 4.00 3.80 3.50

Customer retention

and relationship

management

Strong relationships with customer

in government agencies,

cooperatives and retail segments

15% 4.50 3.00 3.00

Total weighted score for sales potential 100% 4.28 3.29 2.78

Overall sales potential attractiveness based on micro factors High Moderate Low

Overall weighted score for sales potential (60% macro + 40% micro) 4.49 4.09 3.89

Overall Sales Potential Attractiveness High High Moderate a Scale of 1 = unattractive and 5 = highly attractive (AP = Andhra Pradesh, MH = Maharashtra, GJ = Gujarat)

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Table 5. Sensitivity analysis of the revenue forecasts for fish vaccines business in India.

NPV (USD)

IRRa (%)

COC

(+5%)

Market Share

(-20%)

Dose Price

(-20%)

Operating

Cost

(+20%)

COC

(-5%)

Base

Scenario Constant

COC (-5%) $6 103 526 $6 103 526 $5 045 046 $8 929 054

33.36% 33.36% 31.28% 38.07%

COC (+5%) $1 873 253 $587 137 $587 137 $71 661

36.88% 32.31% 32.31% 30.29%

Market Share

(-20%)

$2 596 640 $1 113 178 $528 501 COC 25%

32.83% 28.60% 26.75%

Dose Price

(-20%)

$2 596 640 $528 501 COC 25%

32.83% 26.75%

Operating

Cost (+20%)

$1 865 794 COC 25%

30.78%

Base Scenario $4 450 968

COC 25% 37.46%

a The percentage presented in parenthesis represent either higher (+) or lower (-) value than that of the base scenario

for the respective variable.

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Figure 1: Process of market assessment and future research topics [Adapted from Natarajarathinam and Nepal

(2012)].

Assessment of macro-environmental factors of an entry country (Pallapothu & Krause, 2013).

Is the country attractive?

Step-1a: Qualitative assessment of market potential at the

country level considering macro factors

Yes (Pallapothu & Krause, 2013)

No

Explore

alternate

markets Is the market

attractive?

Yes

No

Step 1b: Qualitative assessment of sales potential for the firm.

(Sales potential macro and micro factors)

Is qualitative sales assessment attractive?

Yes

No

Step-2: Overall market attractiveness

(Qualitative market potential + sales potential)

Yes

Yes

Step-3: Quantitative estimation of sales potential

(Analysis of NPV, IRR & Sensitivity)

Assessment of competitive forces in the target

industry

Strategy Formulation and implementation

Future Research Topics

analysis and evaluation of market attractiveness …journal-archieves27.webs.com/479-494.pdf ·...

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