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Thursday, November 27, 2008

India’s Financial Capital Mumbai Shut After Terrorist Attacks

By Saikat Chatterjee

Nov. 27 (Bloomberg) -- Hindustan Unilever Ltd. and Indian units of financial companies such as Merrill Lynch & Co. shut their Mumbai offices today after terrorists killed 101 people in the financial hub of the world's second-fastest growing economy.

India shut stock, bonds, currency and commodity exchanges, forcing brokerages and fund-management companies to close offices today. The Oberoi and Taj hotels that were attacked by the terrorists are close to the financial district, which houses the offices of Merrill Lynch, Morgan Stanley and HSBC Holdings Plc.

Terrorists armed with grenades and rifles stormed into the Taj Mahal Palace and Tower hotel and the Trident Oberoi complex late yesterday, saying they were targeting Americans and Britons, according to eyewitness reports. The attacks, the worst in the city since train blasts in July 2006, have focused on foreigners in India for the first time.

"This targeted attack on foreigners will have an incalculable impact on the investment climate and the tourism and hospitality industry," said Apurva Shah, head of research at Mumbai-based Prabhudas Lilladher Ltd. The brokerage shut its Mumbai office today.

The attacks come as India tries to boost its economy battered by the global financial crisis. Finance Minister Palaniappan Chidambaram has said economic growth this year will slow to 7.5 percent before rebounding to 9 percent next year.

Investors Exit

Overseas investors have pulled out a record $13.5 billion from Indian stocks in 2008 as of Nov. 25, causing the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, to slump 56 percent. Foreign investors bought a record $17.2 billion of local equities in 2007.

The Mumbai police cordoned off the area near the Taj and Oberoi hotels and commandos are in position. The attacks began at about 10 p.m. local time yesterday with explosions and gunfire ringing out across the city.

Unilever's top management including Chief Executive Officer Patrick Cescau are "absolutely safe," said R. Rammohan, a spokesman of the Indian unit of the company. Cescau and other top officials of the company were evacuated from the hotel last night, he said. They were in Mumbai for a business meeting.

Daiichi Sankyo Co., Japan's third-largest drugmaker, suspended travel to India. The company, which purchased a controlling stake in India's Ranbaxy Laboratories Ltd., said it will stop all travel to India until "safety is assured."

Dell Inc. and Hewlett-Packard Co., the world's two largest computer suppliers, limited their staff movement in India. Dell canceled all travel by employees into India for the next 48 hours. Hewlett-Packard closed its Mumbai office and prohibited staff from traveling to the city.

Foreigners Targeted

The terrorists targeted foreign nationals and landmark hotels, adding a new dimension to a wave of bombings in India this year that has killed more than 300 people. Multiple attacks have rocked India's cities with bombs planted in markets, theaters and near mosques.

A little-known Islamist group called the Deccan Mujahedeen claimed responsibility for the Mumbai attacks, the Press Trust of India reported. The attackers may have come from Pakistan, the Times Now television channel reported, citing an unidentified intelligence official.

Pakistan's Foreign Minister Shah Mahmood Qureshi condemned the terrorist attacks in Mumbai.

"Terrorism is a menace threatening humanity and humanity should join hands in fighting this scourge," according to a foreign ministry release citing the minister. "Pakistan condemns terrorism in all its forms and manifestations."

Office Closures

Reliance Industries, India's most valuable company, which has its main office in a building near the Oberoi hotel, may also shut some offices in Mumbai as the areas have been cordoned off, Paresh Chaudhry, spokesman of the company, said today.

Hotels across the nation have stepped up security with armed guards checking cars and setting up metal detectors.

The Imperial Hotel, a favorite destination for foreign tourists in New Delhi, wasn't allowing visitors without verifying credentials. The hotel is coordinating with police and residents.

Indian Hotels Co., which owns the Taj hotel in Mumbai, said it was cooperating with the police and the government authorities to ensure the safety and security of guests and employees.

Schools and colleges in Mumbai are closed today, the Press Trust of India reported.

To contact the reporter on this story: Saikat Chatterjee in New Delhi at schatterjee4@bloomberg.net.

Last Updated: November 27, 2008 02:36 EST

Wednesday, November 26, 2008

Blackstone buys majority stake in CMS Comp for Rs 250 crore

AFTER nearly eight months of negotiations, CMS Computers has clinched a deal to sell a majority stake to private equity firm Blackstone for over Rs 250 crore. An investment banker familiar with the deal said an announcement is expected this week and Avendus was one of the advisors to CMS. There was no response to calls made to the company's founder promoter, R D Grover. ET had reported in June about the company's plan to raise money from PE players.
    The CMS group is one of the oldest business groups in the country with interests in IT. It is also one of few firms with a significant presence in the domestic IT business.
    Mr Grover has been in negotiations with Blackstone for several months. Industry sources said one of the key issues, apart from the valuation, was that Blackstone was only interested in domestic IT business. Apart from domestic IT and IT ex
ports, CMS group is also present in IT-enabled services and IT-related areas such as traffic and security systems. Collectively, the group's revenues are over Rs 1,000 crore.
Mr Grover is a first-generation entrepreneur and those familiar with the group said his son was leading the IT export business under Systime Computers.
"There was a need to bring in someone for the domestic IT business, which Mr Grover was handling himself," said an industry hand. The domestic IT business consists of the training business and the systems integration business.

The group had hired KPMG to advise it on a re-structuring exercise and was keen on raising funds to invest its other businesses to grow them. Some of the other private equity players that had shown interest in the firm were 3I, Carlyle, TPG, and Standard Chartered.

Sun Pharma buys
    US co Chattem
Ahmedabad: Sun Pharmaceutical Industries has acquired 100% ownership in a USbased Chattem Chemicals (Chattem) from Elcat. The terms of the transaction were not disclosed. The company will apply to regulatory authorities for appropriate clearances. Roughly, the market size of controlled substances formulation product is $6 billion. According to the company, the acquisition brings a business that holds import licences for concentrated poppy straw (CPS), among several other narcotic products. Chattem is registered with the US Drug Enforcement Administration (DEA) as a narcotic raw material importer. This import registration includes four controlled substance products listed in Schedule 2—methamphetamine, phenylacetone, raw opium and concentrate poppy straw. Additionally, it is also licensed by the DEA to manufacture Schedule 1 to 5 controlled substances.— Our Bureau

For Tata Steel, it’s yesterday once more

   THE year 2001 was bad for the global steel industry. Most of the US and European markets were out of reach for Indian companies. Chinese and CIS steel was flooding the country and a severe downturn was making things difficult for most companies, with large majors falling like nine pins. It was during this time that Tata Steel managed to make a small profit of Rs 205 crore, one of the very few Indian companies to have done so, and one among the top five steel companies globally to have achieved the same.
    Cut to 2008, and the signs are familiar. The steel industry is bracing itself for yet another steep slide and companies are again cutting production, slashing prices and generally worrying about where the next supply of cheaper ore would come from. But it doesn't surprise one to learn that Tata Steel is busy charting out a vision plan, quite similar to the one it had devised to ride out the 2001 slump.

    How does the company insulate itself from the fluctuations of the commodity world which have claimed large and venerable steel companies globally?
    B Muthuraman, the 63-year old managing director of Tata Steel, attributes it to the "Tatas' core values of involving everyone and working through a consensus". He should know — Mr Muthuraman was appointed MD in 2001 when the industry was in the middle of a big downturn and yet managed to steer the company to profitability in the seven years that he has been at the helm, and also crowned his term so far, with the $13-billion acquisition of Corus.
    Mr Muthuraman recollects the time in July 2001 when, after assuming charge, he realised that it wasn't going to be a smooth ride — the industry was going through one of its lowest phases. Prices of hot rolled coils (a base category steel) were at all-time lows of $180 per tonne (below the average cost of production) and most companies were making huge losses, not to talk of mills in US and Europe shutting down.
    It was at this time that Mr Muthuraman decided to involve everybody. "I still remember... we had this three-day workshop at Jamshedpur at our guesthouse on the banks of the Dimna Lake, jointly with Boston Consultancy Group, where
we came up with a plan to counter the situation through a simple exercise: increasing capacity and controlling costs. I put this up immediately on the intranet and invited suggestions from my employees. Within days I received responses from about 8,000 employees, half of which were from workers. That was the most exciting moment in my life... to see everybody chipping in."
    Philosophy apart, what also worked in Tata Steel's favour were its inherent strengths of captive iron ore resources and coal mines, two key inputs that make the 100-year old Tata Steel one of the lowest-cost producers in the world. Also, realising earlier on that improved cost structures was the key to success, the company started pruning its workforce — it has managed to halve its workforce in 13 years — mainly through innovative VRS schemes and now has a lean team of 35,870 employees.

    Tata Steel's strong technological expertise, mainly in-house and some through collaborations, has also enabled the company to diversify its product portfolio by making more of high value products. "Since hot rolled coils were the most vulnerable to price movements, we decided to lessen our exposure to them and moved up the value chain," said Mr Muthuraman, who is backed by an able team that he always mentions: CEO HM Nerurkar, CFO Koushik Chatterjee and other members of the core team that are involved with strategising for the company.
    The workshop at Dimna Lake resulted in a vision road map, which Mr Muthuraman, says should be a priority for any company. It was this love for the big picture that led a young Muthuraman to turn down a lucrative $400-a-month scholarship at UCLA in 1966, after passing out of IIT Madras, and opt for Tata Steel. Almost 42 years down the line, Mr Muthuraman says he tries to instil this need for vision in everybody.
    The current situation is probably more severe than that seen in 2001, says Mr Muthuraman. Companies have been hit by rising inventory and slow demand due to reduced liquidity, and this implies that people are buying lesser cars and consumer goods. This is forcing steel com
panies to slash production and cut prices. Although Tata Steel hasn't yet reached the stage of production cuts, it has been able to limit tough measures to its international unit Corus, where production has been reduced by 30% and about 400 jobs have been cut at the distribution units.
    Going by the current situation, the vision this time is more strict. "There are some new sets of actions that need to be taken — more emphasis on costs, operational efficiency, ensuring cheaper resources, enhancing revenue through better premium in products and the like," says the Tata Steel MD.
    But it is easier said than done. How do you ensure premiums when everybody is cutting prices and how do you focus on auto grade when car companies are slashing production? The company has also recently taken realistic decisions. It has pushed back grandiose plans of building large steel plants and has instead stuck to vital expansion programmes in deference to the tight liquidity condition.

    "Only those that are on the fast revenue track for us, we'll go ahead... rest are on the backburner," says Mr Muthuraman. So, while the company will go ahead with a Rs 27,000-crore investment plan at Jamshedpur and a new unit in Orissa, it hasn't shied away from admitting that the Rs 58,000-crore steel projects it had planned in Chattisgarh and Jharkhand have been pushed back.
    The move is also in line with what chairman Ratan Tata outlined in a recent communication to his CEOs on the need to relook at large projects given the trying times.
    Tata Steel, however, intends to retain its thrust on owning raw material assets across the world. Primarily driven by the fact that Corus doesn't have captive resources, Tata Steel has accorded priority to this and has formed an international company to consolidate its raw material assets and is also exploring options to list overseas to part-finance the acquisitions of resources. The company currently owns stakes in resource assets spread across Africa and Australia and plans to increase this profile.
    TEAM ET

B MUTHURAMAN: MD, Tata Steel COMPANY OF THE YEAR


Tuesday, November 25, 2008

Private equity to drive PHARMA


Private equity (PE) firms seem to be bullish on selected opportunities in the Indian pharmaceutical industry. Adopting Big Pharma strategies may take it to new heights. Arshiya Khan analyses
Corporatisation of the healthcare sector ushered in private equity (PE) investments in India. However, in the pharmaceutical sector, it was the high margins in Contract Research and Manufacturing Services (CRAMS) that triggered PE investments. Even though the segment has not shown results as per expectations, it has still been attracting investments primarily because it fetches more stable returns, as the deals that happen are long term, and on contractual basis, avers Vikram Gupta, Chief Operating Officer, IndiaVenture Advisors.
The numbers game
Speaking in terms of numbers, estimates by Datamonitor Financial Deals database from January 2007 to October 2008, the Indian healthcare and pharma sector has recorded 23 PE transactions in 2008 so far (till October), an increase of 9.5 percent when compared to the total number of transactions recorded in 2007. In value terms, PE players invested $473.6 million in 2008 (till October 2008), which was an increase of 14.45 percent over the aggregate value of PE investments from India in 2007. However, after Q1 08 PE investment in value terms has declined rapidly, a trend which is likely to continue in short term.
Out of this, the healthcare sector has attracted majority PE investments followed by the pharma sector.
And the key drivers for the same include strong economic growth, huge population, raising income levels and standard of living, and commitment to increase government spending on healthcare, which has tripled now.
Speaking in terms of the pharma sector, eight transactions worth $142.1 million were recorded in 2008 (till October) against seven transactions worth $96.7 million in 2007. And the PE interest in the pharma sector was driven by the attractive compounded annual growth rate (CAGR) of 12.3 percent against the global CAGR of nine percent (Nectar Life Sciences Annual report 2007-2008). Given the above growth rate the pharma segment is likely to reach $20 billion by 2015 from the current $8 billion. In addition, given the current crisis in the global economy, defensive sectors such as pharma in an emerging market would provide good investment opportunity. Dr Amit Rangenekar, Centaur Pharmaceuticals, highlights, "The meltdown will be an opportunity for PE funding, as going to the market will not give companies the desired premium, and hence, PE would be a good option."
PE investment in the pharma sector has focused on small companies which have own brands/products and/or contract manufacturing capabilities. Besides, they also favoured bulk drug and active pharmaceutical ingredients (APIs) manufacturers as they are low risk. Also the interest in this segment has been driven by diverse business models, diversified revenue streams (own product sales and contract manufacturing), exposure to international markets (contract manufacturing for MNCs), ability to cater the increasing demand in the domestic market (CAGR of 12.3 percent), to benefit from the increased government spending (commitment to increase spending on healthcare to two-three percent against the current 0.9-1 percent), low gestation period, low risk and investment as research and development (R&D) is limited and lesser marketing expenditure (which is a significant costs element for pharma companies).
Shy no more
"The need of the hour is to have our own innovation engine. Had India built up its innovation pipeline in the last decade it would have had that competitive advantage today to leverage and position itself in the global market"
- Vikram GuptaChief Operating OfficerIndiaVenture Advisors
"The key difference in the mature markets of US and EU is that they are more focused on biotechnology and are mostly venture capital (VC) funded, whereas in India the case is otherwise, they don't focus much on biotech, but on the pharma side"
- Naveen Reddy Kalluri Project ManagerFinancial DealsDatamonitor India
"In the current bull run, the attention of most PE players has been on exponential growth sectors such as capital goods, construction, telecom etc, so they kept away from pharma, however, this would change as markets become more favourably disposed to sectors such as consumer and pharma"
- Navroz Mahudawala Associate DirectorHealthsciences PracticeErnst & Young
Of late PE players have kept away from Indian pharma companies due to various reasons. Firstly, results in the drug discovery space are yet to be proven by some companies and until those results are out, probably, the investments till then will come in bits and pieces. PE players, being quite selective and choosy about investing in a company due to high risks involved in the R&D model, will pick up success areas. PE firms typically work on minimising the risks and maximising returns. The high risk in the R&D model and perhaps the limited choice kept PE players away from pharma. Now they have different strategies before deciding upon investments in pharma. "They either do it by working on a pro drug, viz a similar drug that has already been tested and marketed. Secondly, they may outsource molecules to a partner in India, thereby minimising the risks. This has already been done by companies like Pfizer, Merck, Lilly, GSK etc," informs Gupta.
But the current financial crisis seems to be an opportunity for PE players. Speaking on the current scenario, Nitin Deshmukh, Head-Private Equity, Kotak Mahindra, adds, "Pharma in the healthcare space is totally down and out. It has become a commodity all over the world. Observing the performance of pharma companies, except for the last few months wherein it seems to be slightly above average vis a vis the other sectors, as pharma on the stock market has been the core performing sectors."
Secondly, as drug discovery is yet to be proven, the valuations have to be materialised in the true sense, once certain progress happens in the drug discovery space, PE would automatically scale up, he feels.
However, Navroz Mahudawala, Associate Director, Healthsciences Practice, Ernst & Young, cites another reason, "In the current bull run, the attention of most PE players has been on exponential growth sectors such as capital goods, construction, telecom etc, so they kept away from pharma. However, this would change as markets become more favourably disposed to sectors such as consumer and pharma." Also, a portion of the business plans of Indian pharma (i.e. regulated market generics) was perceived as risky. But, majority of PE investments have been either in domestic business plans or CRAMS, he highlights. Going forward, this will change, avers Rajeev Raju, Vice President and Sales Leader, Corporate Finance, Healthcare Financial Services, GE Healthcare, "Pharma companies have significantly de-risked their business models by segregating R&D from core manufacturing. Also, with more order flows into India across products and across various business segments in both large/mid-cap companies, risks are better spread with managements, understanding the need to be better governed in their business operations."
However, Rangenekar offers a different view. He states, "Only those PE players that were not focused on pharma were shying away. There were a few who were bullish on pharma who have stayed back." And this is evident from the recent deals in the pharma space—Citi Venture Capital International (CVCI), a PE firm, and Everest Capital, a hedge fund, have invested $23.6 million in Nectar Lifesciences; Kotak Private Equity Group, a PE arm of Kotak Mahindra Bank, agreed to invest $10 million in Intas Biopharmaceuticals. Century Pharmaceuticals secured $12.7 million from Gujarat Biotech Venture Fund managed by Gujarat Venture Finance; and SME Growth Fund, a fund managed by SIDBI Venture Capital, has invested $7 million in Centaur Group, a pharmaceutical and speciality chemicals company to name a few.
Indian business models vs US and EU
Fundamentally, the market structure in India is completely different from that of US and Europe. In US and EU, most companies are mature and publicly listed, so PE investments are mostly in the private sector. However, this is not the case in India. Hence, if Indian companies build competencies in different sectors and increase their focus more on things which they are good at, for example, API manufacturing, contract manufacturing, etc, the scene may change. Speaking on the key differentiation in the Indian market Naveen Reddy Kalluri, Project Manager-Financial Deals, Datamonitor India, highlights, "The key difference in the mature markets of US and EU is that they are more focused on biotechnology and are mostly venture capital (VC) funded, whereas in India the case is otherwise, they don't focus much on biotech, but on the pharma side." Besides, there is limited or negligible VC investment witnessed in this sector unlike in the US wherein early stage funding has prospered. Low buyout activity witnessed in India and limited number of Private Investment in Public Equity (PIPE) deals in larger companies are some other differences in the pharma PE scenario in India when compared with the US or EU. Raju cites another reason. "The US and EU are highly regulated markets, whereas India is still evolving slowly across business segments and operational dynamics. PE deals in pharma tend to be largely passive than strategic in the developed markets. It is only in emerging markets like India where PE players look for a more active role in the pharma/life sciences space by seemingly adding value to the business in terms of market/product expansion and/or enabling growth ideas."
With changing dynamics and fluctuations in the market, PE investment in pharma companies will primarily be driven by the changing business models of Indian pharma companies. And this is evident from the fact that pharma companies in India are reducing the risk in their businesses by hiving off business units, unless they have sufficient resources/capabilities to manage them (Eg Piramal and Sun Pharmaceuticals hived off R&D divisions); diversifying revenues streams; and optimising manufacturing capacity by entering into contract manufacturing deals. In addition, the fact that a significant number of drugs are to go off-patent in the next five years it will offer a sizeable market for the players involved.
Therefore, the need of the hour is to have our own innovation engine. Had India built up its innovation pipeline in the last decade it would have had that competitive advantage today to be able to leverage and position itself in the global market, remarks Gupta. It is only now that companies like Sun Pharma (SPAARC) and the Piramal Group have hived of their R&D business, and the primary reason for doing that was the risk return profile of an investor. They have understood the difference between an R&D kind of investor and an investor in pharma and healthcare or a custom manufacturing space where certainty of success is more as compared to the former, and now they feel that the model of de-merging R&D will attract investors.
On the other hand, in PE models that exist in US and EU, in companies like Pfizer, Merck, Lilly, GSK etc, growth has been through their research engine and their model has been that of targeting a blockbuster drug. Even if these companies have X number of drugs in their pipeline and one of them scales up the ladder, then it will be a billion dollar drug and that is how these companies have made money. Also, as there are quite a few molecules in the pipeline of these big pharma companies that typically need investments to take them forward, due to limited resources they prefer PE funding or joining hands with other pharma companies and take up out-licensing and in-licensing arrangements, which has been a success model in the global markets, explains Gupta.
This is now being witnessed in India. Companies like Sun, the Piramal Group and Glenmark Pharmaceuticals have also tied up with global companies to work collaboratively on molecules, where they will be working on these molecules in their own R&D engines, thus sharing the risks and rewards. Also, a third partner in this model could be a PE investor, who provides funding to set up a different subsidiary or a different entity. But this largely depends on the confidence of the investor in a company, a particular molecule or the therapeutic area. This is what PE firms have been doing globally. However, according to Gupta, in India the concept is relatively new and not many companies understand the same in terms of how to structure such deals.
Secondly, there are not many molecules in the pipeline from Indian pharma companies. Its just a few companies like Glenmark which have about 35 molecules in the pipeline, Piramal with 13 molecules etc. But as these molecules enter into the pre-clinical phase there will be many PE firms who will want to pick and choose and structure deals around that, in the next three four years, he adds. But Deshmukh contradicts this business model. He avers, "If you look at the market caps of companies who have hived off their business, they are performing ridiculously low. So why would anybody want to invest in these companies. People still do not believe in the drug discovery model." According to him, business models that will work out are—one is pure business pharma formulations (domestic and international) in which India has proven itself. The moment they went into generics, the margins reduced and they became unattractive. He elaborates with the help of an example—Sun Pharma has a very attractive business model; focused significantly on formulations, and has attracted one of the best market caps in the industry. Glenmark, which is focused on formulations with a separate drug discovery model, has shown progress, and therefore is attracting significant valuations in spite of the size of the company.
Besides business model, technology plays an important role in motivating PE players to invest in pharma companies, which acts as a differentiator. Adding to it, US Food and Drug Administration (FDA) pproved facilities may also attract PE, because there may be quite a few companies performing well in the less regulated markets and are looking for funding and seeking an opportunity to explore the US markets, thereby minimising the risks. Funding US FDA approved plants will help these players market their products in the US and EU.
Besides this, business models which have a low spend on R&D, marketing etc will work, thereby, making the CRAMS segment more visible in particular. There is a global shift which has happened of late in PE investments; they are not looking at investing in hard core R&D and there will be long periods which will burn more cash without returns, highlights Kalluri.
Strategies of Indian companies
Most owners/promoters of pharma companies now recognise the critical attributes required for attracting PE ie. professional management, good accounting practices and high standards of corporate governance. As pharma companies in India have excellent management, an attribute which most funds value and appreciate, they may be able to attract PE.
However, witnessing the current market turmoil, PE transactions have slowed down because of the uncertainty and valuation issues resulting in a delay in the promoters' plans. Piramal Lifesciences is a case in point. However as the market conditions improve there will be domestic and international players looking for various possible transactions. The only challenge in India is the limited choice so people who understand the domain and know how to structure and exit the deal will exist. "The irony being in US, they understand the concept of structuring deals but are facing turmoil in their own country, so they may not have the liquidity to bring to this country," highlights Kalluri.
Looking at the impact of the slowdown, pharma will not be affected largely as it is not a cyclical industry, it is completely recession proof. And therefore, the industry will continue to do well, feels Deshmukh.
Witnessing the nature of stocks, pharma stocks are hardly affected over all other industries today. So pharma and healthcare will continue to attract investments. It's a large domestic play in India and people will continue to spend money, rather, have to spend money, therefore, it will continue to do well, he adds.
Rising above all challenges and hurdles, Indian pharma segment according to various estimates and projections is likely to fetch PE funding worth $500 million. And analysts believe this is reasonable, given the marked potential for Indian businesses to tap more export markets, grow domestic market and diversify into other allied operations like distribution, etc. Besides, as pharma remains insulated from the market turmoil it will enable PE investments in a very challenging environment. Avers Gupta, "It is akin to pharma companies trying to justify to their shareholders the need to expand aggressively in this scenario. A temporary dip is expected just as with several other sectors of the economy. However, we are witnessing far more funds interested in the sector than a year back." He says that in the long run, Indian pharma would only benefit from cost rationalisation exercises in the Western world.
Going ahead
"I think it will move into drug discovery, and it will have to move at some point of time. What has happened in US and EU will eventually happen in India," believes Deshmukh. And this holds true considering the fact that there is limited choice because unless Indian pharma companies innovate, they have a very poor future. So there is no option but to invest and innovate in drug discovery, and eventually, as one or two companies show results, significant investments will start pouring into drug discovery in India.
Focus will be on companies offering APIs and CRAMS. And preference will be given to companies with home products. Going ahead, it will become more and more specialised, because of the diverse nature of the industry. There will also be division based on therapeutic areas like diabetes, Cardiovascular diseases (CVD) etc. As companies now consider R&D in pharma as one business, they have also figured out that there are two diverse set of investors. And this gives them a reason to de-merge their business and make them two entities. This points to the fact that gradually Indian pharma companies will follow the global trends ie US and EU.
So, three to five years down the line there will be a lot of standardisation, integration and consolidation that will drive this sector.
arshiya.khan@expressindia.com


Sunday, November 16, 2008

Falling Like Ninepins

THE MARKET'S brief but substantial winning run ended last week, with the Bombay Stock Exchange (BSE) Sensitive Index finishing 5.81%, or 578.87 points, lower and the National Stock Exchange (NSE) Nifty ending 5.47% down. The CNX Midcap index was the better performing index during the decline as well, with a smaller loss of 3.53%.
    Tata Power was the biggest winner among index stocks with a gain of 1.2%. The only other index stocks to go up were TCS and Bharti Airtel with gains of 0.9% and 0.02%, respectively.
    Jaiprakash Associates was the biggest loser among the index stocks with a 16.2% loss. The other index stocks to go down included DLF, Tata Motors, ACC and Mahindra & Mahindra (M&M) with losses falling between 14.2% and 11.2%.
    Tata Teleservices was the biggest winner among the more heavily traded non-index stocks with a 26.2% gain. The other non-index stocks to go up included National Aluminium Company (Nalco), Glenmark Pharmaceuticals, Jindal Steel & Power, Idea Cellular, Union Bank, Bombay Dyeing and IDBI Bank, with gains falling between 6.1% and 2.3%.
    Indiabulls Real Estate was the biggest loser among the more heavily traded non-index stocks with a 30.4% loss. The other nonindex stocks to go down included Alkali Metals, Suzlon Energy, Zee Entertainment, Steel Authority of India, IVRCL Infrastructures, Crompton Greaves and Lupin, with losses falling between 23.2% and 15.9%.
INTERMEDIATE TREND: The intermediate downtrend that began on September 8 continues. The level above which an intermediate uptrend will be triggered has moved down since last week to 10,571. The equivalent for the Nifty is 3,161, and that for the CNX Midcap index is 3,868.
    Quite a few stocks and a couple of indices have briefly entered uptrends during the rally, but most are back in downtrends now. Most global markets are also in in
termediate downtrends.
LONG-TERM TREND: The market's long-term (major) trend remains down. The Sensitive Index was down 63.7% at its October 27 low, making this the worst bear market since the index was launched. It will be best to take the level to be crossed for a major uptrend (i.e. a bull market) as the last but one intermediate top of 15,580, made on August 12. This is because the more recent intermediate top of 15,107 (September 8) is just 3% below that level. The Nifty's equivalent is 4,650, and that for the CNX Midcap is 6,016.
    It is unlikely that the next intermediate uptrend will be able to reach that far up, and the level at which it tops out will become the new trigger.

TRADING & INVESTING STRATEGIES: A buy-ondeclines strategy should continue to work reasonably well for longer-term portfolios. Purchases should be made in increments, as this will reduce the downside risk considerably. The portfolio-building exercise has not been suggested in anticipation of an early end to the bear market, but simply because the downside risk is substantially lower when the indices are well below their bull market tops.
    Banks, FMCG, some of the
pharmaceuticals, and petroleum majors continue to look the safest. Technology stocks are also stable now. Real estate, steel and metals, finance and broking stocks should be avoided until the existence of a bull market is confirmed.
GLOBAL PERSPECTIVE:
Most global markets are back in intermediate downtrends now, with the Dow and most of Europe falling into one last week. Some markets — including ours — did not enter intermediate uptrends at all, despite rallying quite strongly. The Dow will enter an intermediate uptrend should it

cross 9,213. The recently established downtrend will have to be ignored if this happens in the next day or two. If an intermediate downtrend is established for the Dow, the bull market trigger level will come down from 12,000 to 10,000.
    The BSE Sensitive Index had lost 52.2% in the 12 months that ended on Thursday, down two positions to the 27th place among 35 well-known global indices considered for the study.
    Slovakia continues to head the list, but with an 18.1% loss. Spain, Chile, Belgium and Karachi follow. The Dow Jones Industrial Average has lost 33.2% and the Nasdaq Composite lost 39.6% over the same period. (These rankings do not take exchange rate effects into consideration).
(The author is an independent technical analyst)





Dow Has Bottomed, Maybe

 IT'S COMMON knowledge that picking the bottom of a bear market is the most dangerous thing that one can ever attempt to do. And more than anyone else, this column has consistently asked readers to abstain from doing it. However, for purely academic reasons — if one were allowed to be brave and guaranteed that one would not be burned up the stake for being wrong — I am ready to say that the Dow Jones Industrial Average may have already bottomed out.
    Above all else, the most compelling reason to believe (rather pray) that the Dow has hit a permanent bottom is that any further losses will take us to unchartered territories and will signal nothing short of a Great Depression — which, I am sure, none of us wants to see in our lifetime. And if the Dow has bottomed out, there's a fairly good chance that the Nifty may have already hit a bottom.
WHY HOPE? Let me make it further clear that at the time of this edition going to the press, the Dow was trading with losses of over 240 points. So, it is very much possible that it collapses big time on Friday, making this article the most ridiculous in history. However, ignoring these consequences, let me tell you why I would like to believe that the Dow's bottom is already in place. As is evident from the adjacent chart, since the beginning of the 20th century, the Dow has never lost 50% of its value from a bull market high to the following bear market low, except of course, during the mother of all crashes — the 1929-32 Great Depression.
    More importantly, during seven of the 11 bear markets (defined by a 20% fall from the peak), the Dow has bottomed out, with losses between 40% and 50%. And at its panic bottoms made on October 10, the Dow has lost slightly over 44% from its highs made in '07. So, there's a strong reason to believe that the bottom is in place, for any further loss will take us into the Depression zone, which although possible, is difficult to imagine in an era when governments are more
proactive in economic management.
    The other reason to believe that the bottom is already in place is that after last Thursday's dramatic recovery, in which the Dow rallied over 800 points — that's over 10% in a matter of a couple of hours — a classical double-bottom seems to be in place. As is clearly evident in the second chart, a clear double-bottom is in place, with the lows of the second leg slightly off the lows of the first leg.
    What further strengthens the case for this is that even volumes seem to validate the double-bottom, with way higherthan-average volumes on the two bottom days. So, if you go by classical technical analysis, the bottom was formed on October 10, with massive volumes. Then there was a consolidation for about a month, with very low volumes, and then the bottom was successfully retested — again with massive volumes. So, let's hope and pray that the worst is over for world equities and the consolidation phase has started. For,
even the perma-bulls on business TV and in brokerages have now turned bearish and there is no way that the market will let them, for a change, be right!
ONCE BITTEN TWICE SHY: While all the above was a frantic and desperate attempt to find the bottom of world equities, which at the moment, looks to be non-existent, it is not of much help to anyone trying to take a trading decision. But unfortunately, we are not going through normal times and the typical indicators have all become useless. In fact, other than telling us that no major shorting has happened and that the nimble-footed bulls have already exited, derivative indicators don't say much.
    For, if Tuesday and Friday saw virtually no change in open interest in Nifty November futures, most of the long positions that were built on Monday chickened out on Wednesday. This is clearly reflected by the fact that while
Monday's gains saw Nifty November futures add over 13.5 lakh shares in open interest, Wednesday's losses saw them shedding over 12.5 lakh of these. However, this was ironical in many ways, since Wednesday's losses were not even half of what the Nifty lost on Tuesday, which saw almost a negligible unwinding in long positions. However, the fact that even with Tuesday's losses, the Nifty was holding on to the support of 2936 and the twin bottoms of 2860 (made on November 6 and 7) means that for a Nifty bull, Wednesday's relatively lower losses were more damaging than the massive 6% losses of Tuesday.
    At the same time, ETIG's smart money ratio (SMR) has successfully

tested support around 60 and is now, once again, headed for the moon. So, the best a bull can hope for is for it to make some kind of a lower high, which will also mean the Nifty makes a higher low. Until then, there doesn't seem to be any case for a long trade, all the above pep talk about the Dow's bottom, notwithstanding. FRESH TRADE: Ironically, even with all the blood bath around, the Nifty is by no way, oversold. So, a dead cat bounce, solely on the basis of an oversold market, doesn't look possible — this further rules out a long trade. Hence, until 2936 is recaptured, the way to go about it is to go short, with the first stop-loss at 2860 and the second one at 2936. However, if all the above analysis about the Dow means anything, then the best things to do, in the order of preference, are: stay out, just day-trade or go long above 2860, with a stop-loss at it.
    shakti.patra@timesgroup.com 




Crash Of The Titans

Funds of funds were supposed to be the safe choice for wealthy investors and big institutions. But they were leveraged beyond the maximum limit


HEDGE FUNDS, already suffering from an ill-fated love affair with leverage, are finding themselves haunted by another problem. It turns out many socalled funds of hedge funds, portfolios with stakes in multiple hedge funds, also depended on borrowed money. Now, with lenders retracting credit, fundsof-funds managers are being forced to dump assets, putting further pressure on the hedge funds and the markets generally. It's "a vicious circle," says Kate Hollis, director of fund research at Standard & Poor's.
    As the great edifice of leverage crumbles, funds of funds are faring worse than hedge funds. They're off 18.7% this year, versus 15.5% for individual hedge funds. Among the funds of funds hit hard: some run by Fix Asset Management, Ontario Partners, and HRJ Capital, co-founded by former football star Ronnie Lott.
    Funds of funds were supposed to be the safer choice for high-net-worth individuals and big institutions. By spreading their bets across dozens of investments, managers assured clients they didn't have to worry about a blow-up in any single portfolio. It was the sort of flawed diversification argument used to justify many speculative investments during the boom, including those notorious collateralised debt obligations stuffed with subprime mortgage securities. The pitch fuelled explosive growth: By the end of '07, funds of funds accounted for 43%, or $747 billion, of the hedge fund industry, up from 19%, or $103
billion, in '01, according to Hedge Fund Research.
OVERLOADED: Roughly half of that universe employed leverage. Some funds of funds borrowed directly from banks to buy $2 of assets for every $1 of investors' money. Brokers, meanwhile, encouraged wealthy customers to finance their fundof-funds purchases on credit. Big banks sold 'principal protection products', derivatives that supposedly guaranteed clients wouldn't lose a cent of their initial investment — and the banks in effect used leverage to create those insurance policies.
    The funds of funds were layering leverage upon leverage. They owned hedge funds already loaded up with debt, roughly $6 for each $1 of capital. When credit seized up, the process began to reverse. "Once things start to deliver, everything contracts," says Andrea S Kramer, a lawyer at Mc-Dermott Will & Emery who represents hedge funds.
    To protect themselves, such big global banks as France's BNP Paribas, KBC Group of Belgium, and the Royal Bank of Canada are now charging higher fees on loans they extended to funds of funds, or pulling the loans entirely. The tight credit is compelling fund-offunds managers to sell their holdings, which is driving individual funds to dump stocks, bonds, and commodities.
    The situation shows no sign of stabilising. Consider CMA Global Hedge PCC, a $360-million fund of funds. The portfolio, which over the years used financing from JPMorgan Chase, Société
Générale, and HSBC, is currently relying on credit from Citigroup. Its holdings — 47 hedge funds — are down 11%. Add in leverage, which amplifies losses, and CMA Global is off 25%.
    Wary of Citi charging more for the fund's loan, manager Sabby Mionis is trying to sell
hedge fund stakes to reduce debt. But a number of the funds have suspended redemptions, making it tough. Mionis is now working on a plan to return some money to investors: "For the foreseeable future, leveraged funds of funds are dead."
    businessweek

Bank On The Desi Brigade

Foreign banks are more vulnerable to the credit crisis than Indian banks. Hence, the latter can be attractive long-term bets

DEVANGI JOSHI & KARAN SEHGAL ET INTELLIGENCE GROU P

IN THE past one-and-a-half years, the global banking sector has succumbed to the credit crisis, and the domestic banking industry has also felt its tremors. Following the global stock market crash, led by a plunge in banking stocks, Indian banking companies also lost significant value. However, a comparison of the Indian banking index with the indices of developed economies (based on market cap) shows that structural and regulatory differences caused the domestic banking industry to display resilience amidst the turbulence since July '07.
    The chart above compares ET's banking index with global bank indices since July '07. The ET Bankex comprises India's 15 largest banks. The euro zone bank index
includes scrips of ING, Societe General, Deutsche, BNP Paribas, UBS and Credit Suisse. The US bank index includes Citibank, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley and JPMorgan, while the UK bank index comprises Barclays, HSBC, RBS and Lloyds TSB.
    While global indices have lost nearly 50-60% of their value since the troubles related to subprime mortgages and subsequent writedowns started emerging, the Indian banking sector has lost about a quarter of its value in the past 15 months. This is logical, as banks in the West were struggling to remain solvent, while the struggle in India was only limited to the slowdown in growth. The y-o-y profit growth of Indian banks has fallen from 31% in the March '08 quarter to 25% in the September '08 quarter. Thus, so far, the slowdown has not been too painful.
    The domestic banking sector is a tightly governed business, as banks have to invest almost a quarter of their deposits in government securities and the cash reserve ratio is at 5.5%. These conditions make it
necessary for domestic banks to park around 30% of their deposits either in government bonds or in cash. Moreover, commercial banks make money by borrowing and lending, unlike foreign banks like Citibank, which make money through asset market activities which include investment banking and mortgage structuring. Hence, foreign banks are more vulnerable to the slowdown in capital markets than Indian banks.
    The Indian economy, which is expected to grow at over 7% per annum, provides better growth prospects for banks than Europe and the US — where the economy is on the verge of recession. The market has obviously over-reacted to the financial crisis and domestic banks can be attractive bets for long-term investors.
    devangi.joshi@timesgroup.com 


Pop This Growth Pill

Investors interested in steady capital returns and consistent dividend income should accumulate GSK Pharma's stock

 WHILE MOST companies prefer to toe the line of the leaders in their pack, there are a few companies who choose to do business differently. It is the latter types that emerge winners. GlaxoSmithKline (GSK) Pharma is one such company, which has fairly outperformed its peers. Compared to a 53% fall in the Sensex, GSK's stock has logged a price appreciation of 3%. This makes it an attractive defensive bet for investors in the current uncertain times.
BUSINESS:GSK Pharma, the Indian subsidiary of US-based innovator major GlaxoSmithKline Worldwide, functions like an Indian generic player for all practical purposes. This is the company's biggest strength. While Indian subsidiaries of most global innovator companies have restricted themselves to selling their parents' patented products, GSK has ventured into branded authorised generics and in-licensing of products. It also differs from its MNC peers in its growth plans. Unlike its peers, which are beefing up their product portfolio in high-margin chronic therapeutic areas, 90% of
GSK's product portfolio comprises acute therapeutic areas, which are under price control. The company's bias towards mass-market products, strong brand equity and a rich product pipeline have helped it to become one of the top three players in the domestic pharma market. GSK has been in a transformation phase since the past couple of years. It divested two of its non-core businesses — animal healthcare and fine chemicals — in '06 and '07, respectively. The company has recently re-organised its business units to focus on three major areas of mass-market products, vaccines and chronic therapy products.
GROWTH STRATEGY:The company plans to tap growth in acute therapeutic segments at lower levels of the pyramid as well as semiurban areas and small towns. It also intends to grow its chronic therapeutic product portfolio, primarily supplemented by in-licensing products from other companies.
    It is also de-risking its business by reducing emphasis on pricecontrolled products and focusing on priority products, which are nonregulated products outside price control. In '00-01, price-controlled products constituted 40% of GSK's product portfolio. This figure has now come down to 27%. The company is also bullish on its vaccines business, which currently contributes 11-12% to its topline. GSK is present in all types of vaccines, and this business segment is growing at 15% p.a. Riding on its reputation, the company is focusing on hospitals to tap institutional business. It is also looking at in-licensing seriously to enrich its product pipeline. Currently, revenues from in-licensing account for just 2-3% of the company's total revenues. GSK plans to increase this to 5-6% in 2-3 years.
FINANCIALS:GSK is conservative in its finances and has been debt-free. It has also been consistently rewarding its shareholders with high dividends. In the past five years, its dividend payment per share has jumped by over five times to Rs 36 per share in CY07, against Rs 7
per share in CY02. Sales have seen a CAGR of 8.2% over the five-year period ended December '07 to Rs 1,602.2 crore. Net profit (adjusted for extraordinary items) posted a CAGR of 23.5% to Rs 365.2 crore during this period. GSK has been steadily increasing its operating profit margin (OPM) over the past five years; its OPM for CY08 was 31% — much higher than that of most domestic pharma companies.
CONCERNS:While GSK has been aggressive in maintaining a healthy growth in its bottomline, its topline growth has suffered. The company expects to use the excess cash on its books for possible brand acquisitions, buyback schemes and paying special dividends. But GSK has made no brand acquisitions since 1999. The company is more interested in distributing its funds in the form of dividends, rather than pumping them back into the business.
VALUATIONS:Unlike other MNC pharma companies, GSK is one of the most premium stocks in its segment. It is trading at over 20 times its trailing earnings — much less than that of fast-growing domestic peers like Cipla and Sun Pharma. The company expects to break into double-digit revenue growth by CY10. Assuming that GSK maintains its growth in sales and profits, its valuations will be fairly comparable with that of its peers. GSK is a classic case of a defensive stock. Investors interested in steady capital returns, along with consistent dividend income, should accumulate the stock at its current price.

Beta: 0.32 Institutional Holding: 40.7% Dividend Yield: 3.4% P/E: 20.2 M-Cap: Rs 9,062.9 cr CMP: Rs 1,070






BULL'S EYE

ONGC
RESEARCH: CITIGROUP RATING: BUY CMP: RS 694

CITIGROUP maintains 'buy' rating on Oil & Natural Gas Corporation (ONGC) with a target price of Rs 850. Citigroup has adjusted its estimates for ONGC on the back of a revision in its global oil forecasts to $101/bbl ($105/bbl earlier) for '08E, $65/bbl ($90/bbl) for '09E, $75/bbl ($90/bbl) for '10E, $80/bbl ($95/bbl) for '11E, and long-term crude assumption ('12E onwards) at $85/bbl ($100/bbl). Despite significant weakening in crude prices recently, FY09E net realisations are unchanged at $52.5, given lack of clarity on subsidy-sharing for the rest of FY09 (assumed at Rs 47,000 crore, higher than the cap). However, the continued weakness in the rupee offers some cushion to FY09 estimates. The target price is based on price-to-earnings (P/E) multiple of 7x FY09E. This is at the lower end of ONGC's historical trading band of 7-12x, which adequately captures: (i) Lack of clarity on subsidy-sharing for the rest of FY09 and FY10-11; (ii) The government's attitude towards retail price cuts in the next three months; and (iii) Likely policy direction of the next government in FY10.

SHREE RENUKA SUGARS
RESEARCH: MERRILL LYNCH RATING: BUY CMP: RS 57

MERRILL Lynch has cut its target price for Shree Renuka Sugars by 56% to Rs 71 per share. The reduction is due to: (1) 20% cut in FY09E earnings per share (EPS) on account of higher interest and sugarcane costs; and (2) Cut in price objective (PO) basis to 6x FY09E EV/EBITDA, equivalent to the long-term average of the sector since 1996. The key driver for 'buy' rating is the likelihood of 117% growth in FY09E EPS. Merrill Lynch expects FY09 EPS to double on: (1) 54% increase in sugar sales to 0.9 million tonnes, including 0.35 million tonnes from the Haldia sugar refinery; (2) 35% increase in sale of power; (3) Doubling of ethanol sales to 120 million litres; and (4) Jump in cane crushing capacity by 49%. However, Merrill Lynch has cut FY09E EPS by 20%, driven by the likely rise in sugarcane cost to Rs 1,500/tonne in FY09E, compared to the previous assumption of Rs 1,400/tonne. Shree Renuka Sugars may go slow in setting up its proposed Rs 350-crore white sugar refinery at Mundra to avoid a cash crunch following refinancing of Rs 120 crore worth of longterm loans. This could also mean no dilution in equity in FY09E from conversion of 20 million warrants issued to promoters at Rs114 per share, contrary to Merrill Lynch's earlier assumption.

SUZLON ENERGY
RESEARCH: MORGAN STANLEY RATING: EQUAL WEIGHT CMP: RS 55

WITH the massive downturn in oil prices, delay in renewal of permit to construct (PTC) in the US, and difficulty in financing wind power projects, Morgan Stanley has lowered its growth forecast for the wind energy sector to 5% for '09E. On the back of low visibility in a slowing market, Morgan Stanley has cut its volume estimate for Suzlon Energy by 17% and 24% in FY09 and FY10, respectively, resulting in a 29% and 40% drop in EPS in that order. Suzlon has decided not to try to exercise the domination and profit transfer agreement with REpower, due to opposition from lenders who will be financing the next rounds of growth for REpower. However, with Suzlon struggling to bag any orders in the past six months, Morgan Stanley believes that the next stage of growth in Suzlon will be powered by REpower's technology (3-mw, 5-mw and 6-mw turbines), which looks unlikely in the short term. With the cancellation of the rights issue, debt will become the primary source of funding Suzlon's growth. Morgan Stanley believes that Suzlon is correct in trying to delay the purchase of Martifer's stake in REpower and cutting back on capital expenditure (capex).

TATA POWER
RESEARCH: UBS INVESTMENT RATING: NEUTRAL CMP: RS 746

UBS Investment has downgraded Tata Power to 'neutral' rating with a target price of Rs 825. UBS has cut its target price by 36% as Tata Power's stake in two Indonesian coal mines is not value-accretive at the current market price (CMP) of Bumi Resources. In the past three months, Tata Power has corrected 30% and UBS still doesn't think the valuations are attractive enough in the absence of a clear driver for the stock. In UBS' view, a long-term coal price of $65/tonne, which is a reasonable assumption, will imply a fair value of Rs 1,300 for Tata Power. However, UBS has arrived at a target price of Rs 825 if it uses Bumi's CMP of Rs 1,450. The fair value for Tata Power is Rs 1,015, if it uses UBS' target price on Bumi (Rs 3,000). Bumi's covering analyst at UBS, Andreas Bokkenheuser, has cut his coal price estimates to $75/79/80 per tonne from $79/112/125 per tonne for CY08/09/10, respectively. After incorporating these changes in UBS' Tata Power estimates, the company's revenues are lower by 2-10% over FY09-11E and EPS by 19-46% to Rs 57.6/62.7/84.6 for FY09/10/11E, respectively.

ESSEL PROPACK
RESEARCH: GOLDMAN SACHS RATING: NEUTRAL CMP: RS 13

ESSEL Propack recorded a net loss of Rs 26.6 crore on a consolidated basis for the first three quarters of '08, mainly due to operational inefficiencies at its plastic tube operations in Europe and the US, compounded by slower growth in its target markets. A steep increase in polymer prices in H108 had a significant impact on the company's margins. However, polymer prices have reduced by more than 40% since their July '08 peaks and the company is set to benefit from this in subsequent quarters. Goldman Sachs foresees the company returning to profitability only in the second half of '09, driven by a decrease in raw material prices and improved efficiency levels at its overseas subsidiaries. Given the pressure on margins, Goldman Sachs is lowering its 12-month target price to Rs 19 (from Rs 40), which implies a potential upside of 41% from current levels. The target price is derived using a discounted cash flow (DCF) methodology with a cross-check against three shorter duration ratios. The stock currently trades at a '09 P/E multiple of 7.5x. Goldman Sachs believes current valuations adequately reflect the business prospects of the company and maintains 'neutral' rating on the stock.

Bold. But Beautiful?

Quite a few companies are commanding triple-digit P/Es even in these turbulent times. Are they really worth it? Ramkrishna Kashelkar explores

EQUITY MARKETS across the globe, including India, have gone into a tailspin following the subprime implosion in the US. The plunge in the Indian stock market has been more or less in line with what is happening everywhere.
    Although the earnings of Indian companies haven't taken a major hit, their valuations have crashed. So, a leading company like Reliance Industries (RIL), which commanded a price-toearnings (P/E) multiple above 30 in January, is now being valued at just nine times its earnings, despite a steady rise in its profits over the past four quarters.
    The P/E multiple is the most widely tracked indicator, reflecting how much premium an investor attaches to a company's trailing earnings or net profits. It also captures the expectations of investors about the company's future growth. Hence, it is but natural that the P/E multiples of most companies have crashed in the current uncertain times.
    But surprisingly, quite a few companies are still commanding triple-digit P/Es. Though a number of BSE 'A' group companies too figure in this list, one wonders if these are instances of high investor confidence or just speculative interest.
    MMTC — a public sector company where the government holds 99.33% of its 5 crore equity shares — has a public shareholding of less than 11,000 equity shares, or 0.02% of the total. For the past one year, the average daily volume in this scrip has been just 541. It is this
illiquidity which has enabled the stock to soar beyond what its current fundamentals support. Reliance Natural Resources (RNRL) and Adlabs Films are two companies from the Anil Dhirubhai Ambani group which figure in the list of richly-valued companies.
    RNRL is fighting a court case over the supply of natural gas from RIL and only a win there will help it generate substantial revenues and profits. But excluding this, its existing business model cannot justify the current valuations.
    Adlabs Films had posted healthy profits in
FY08, but its numbers in the first half of FY09 are significantly lower due to the amalgamation of its radio business. Although its current market price is just 1.25 times its book value, the return on capital employed (RoCE) has steeply fallen over the past four years and is a major cause for concern for the company.
    Essar Oil commissioned commercial production at its 10.5
million tonne per annum (mtpa) refinery only in May '08. Hence, its earnings for the trailing 12 months appear low, bloating up its P/E multiple. The company has posted a net profit of Rs 56 crore in the first half of FY09.
    The economics of the global refining industry have worsened significantly of late and even if the company is able to repeat this performance in the second half, its current market price will be 90 times its full-year earnings.
    Ispat Industries is highly leveraged, with its debt component being 4.5 times its equity. The
company posted a minuscule profit in FY08 after a gap of two years. With interest costs soaring in the September '08 quarter, it again reported a loss. Despite all these factors, the company continues to be one of the favourites among derivatives traders, which has helped the stock remain at high levels.
    There are quite a few companies with net losses in the trailing 12 months which are trading at high prices. Most of them are assetrich companies with high brand value. Since these assets have a certain replacement cost, their market capitalisation is not likely to fall below a certain level, even in difficult times. Some of them are even making healthy cash profits, but high depreciation is pushing them in the red. These include companies such as the three oil marketing companies IndianOil, HPCL and BPCL, Aditya Birla Nuvo, Tata Teleservices Maharashtra and GTL Infra.
    Jet Airways, which was cash positive in FY08 despite a net loss, incurred heavy cash losses in the quarter ended September '08 due to high fuel and operating costs and a weak economic environment. A downturn in textiles and real estate industries hit Bombay Dyeing, which posted losses in three of the four preceding quarters.
    Dozens of companies are trading above P/E of 100 — or even 1,000 in some cases — among the smaller ones. But they continue to remain much more obscure compared to the larger 'A' group companies. Even among these 'A' group companies, we find little justification for such high valuations in most cases.
    However, in some cases, the asset-rich nature of business, positive cash flows and high brand value support the valuations of these companies. Investors should exercise caution while picking up such scrips.
    ramkrishna.kashelkar@timesgroup.com 




Closer To The Ring

This week, ETIG takes a look at the two giants in the telecom space — Bharti Airtel and Reliance Communications. Investors looking for steady growth credentials can bank on Bharti Airtel, while those with a taste for the dramatic can go for Reliance Communications. Santanu Mishra elaborates


BHARTI AIRTEL
    BHARTI AIRTEL is the largest GSM (global system for mobile communications) operator in India with an overall market share of around 25% in the mobile telephony space. From the very beginning, Bharti has exclusively focused on the GSM technology and this turned out to be the right bet, as now, even non-GSM players are making a beeline for this segment. The company is present in all the 23 telecom circles in the country and has a subscriber base of close to 80 million. To diversify its business risk, it has invested in other areas like retail broadband, enterprise services and direct to home (DTH). These new business lines now contribute around one-fourth to the company's total revenue. Bharti has been successful in adding new subscribers to its network and the numbers keep growing.
FINANCIALS: Bharti's operating revenue has more than trebled over the past three years to around Rs 27,000 crore. Its net profit grew by more than five times to Rs 6,400 crore during the same period. The company's operating margin, which has remained at 40%, has come down marginally in the past few quarters. Its return on capital employed (RoCE) has gone down to 34% from

41% one year ago.
    However, the RoCE for the mobile services business segment has actually increased from 50% to more than 100% during the same period. Bharti has been a front-runner in the mobile business in India and has invested early, ahead of its competitors. And this growing RoCE is bearing fruits of the same.
GROWTH DRIVERS: Bharti has been focusing on different non-voice businesses. Once the company is allocated 3G spectrum, it will further help it in offering better value-added services. This will drive the average revenue per user (ARPU) and hence, the topline growth. The company has also taken initiatives in areas like DTH and IPTV (internet protocol television), which can become additional growth drivers.
RISKS: Bharti continues to be successful in its GSM business. We believe it will face lesser risk in its core business, at least in the medium term. However,

its investment in new business areas like DTH IPTV bears some degree of risk. OUR TAKE: Bharti has a quality subscriber
base, which generates higher revenues for the company and its ARPU is among the highest for listed telecom companies in India. Secondly, its strategy of sticking to the GSM platform has worked well. Unlike CDMA (code division multiple access) players such as Reliance Communications (RCom), which are now diversifying into GSM, the company's first-mover advantage will definitely reap better results than its peers.
    We believe that Bharti will face fewer challenges in terms of adding subscribers and will continue with its steady growth in operating cash flows. So, investors who are willing to take less risk can consider this stock for their portfolio.

    The enterprise value per subscriber (EV/subscriber) for Bharti Airtel and RCom is around Rs 15,500 and Rs 7,000, respectively. The market has probably taken this into account; hence, Bharti trades at a higher priceearnings (P/E) multiple than RCom. In fact, Bharti has remained an outperformer vis-àvis the Sensex for the past one year.

Beta: 0.85 Institutional Holding: 28.7% Dividend Yield: 0% P/E: 17.2 M-Cap: Rs 123,407 cr CMP: Rs 650
RELIANCE COMM
    RELIANCE COMMUNICATIONS (RCom) is the largest CDMA player in India with a subscriber base of 46.2 million. It also offers GSM services in eight circles and has a subscriber base of around 9.8
million. It plans to expand its GSM network across the country. It has an overall market share of 18% in the wireless telephony space. It also offers a host of other related services in and outside the country. In India, it offers broadband services to companies and data-card internet services to retail customers. It has a very strong fibre optic network in India and offers services like virtual private network (VPN), audio and video conferencing among others.
    Outside India, it offers voice and data services across geographies. Its international calling cards are very popular among Indians residing outside the country. The company also offers voice traffic to corporate customers and has a 30% share of wholesale in-bound traffic. It has made a number of acquisitions internationally to strengthen its position in international voice, data and managed net
work services, among others. Recently, it entered the direct-to-home (DTH) business under the 'Big TV' brand. FINANCIALS: The company's operating revenue for the financial year '07-08 grew at around 32% to Rs 18,827 crore, while the operating profit increased by a little over 44% to Rs 7,960 crore. It maintained a steady growth in operating margin till the quarter ended March '08. However, the margin has declined slightly since then and it currently stands at a little below 40%.
    The company's RoCE is a little lower (~10%) because of higher capital employed in operation. Its global and broadband businesses, which account for around onethird of its consolidated revenues, is growing at a faster rate than its wireless business. But one of the main concerns is its volatile operating cash flow.
    Its consolidated net debt has almost increased by 50% in the past six months, though the debt-equity ratio is still at a

comfortable level of 0.5. GROWTH DRIVERS: RCom has a diversified presence across different service lines. The
immediate growth driver could come from its pan-India presence in the GSM service. At the same time, it can also be a challenge for the company to attract new GSM subscribers, as the competition in the segment is increasing by the day with the entry of new players. The company has been investing heavily in different value-added and allied services. If RCom manages to get 3G spectrum, that will help it in offering better products. Reliance Big TV is another growth driver for the company.
RISKS: The company's trying to move from CDMA to GSM space and there's chance of cannibalisation.

OUR TAKE: RCom is venturing into a number of segments which, if executed successfully, will generate higher operating cash flows. Further, the new GSM business lines, if successful, will also help it to gain higher subscriber market share. This may be a better bet for investors who love courting risks.

Beta: 1.3 Institutional Holding: 18.5% Dividend Yield: 0.35% P/E: 7.7 M-Cap: Rs 45,356 cr CMP: Rs 220




There are some stocks which have fared better than the stock market

There are some stocks which have fared better than the stock market even in these days of gloom and doom. But can the outperformers continue to bring smiles to investors' faces? Karan Sehgal explores  GONE ARE the days when good stocks used to beat the stock market and bad ones used to underperform. If you find this too hard to believe, then randomly select a stock and compare its movement with that of the broader market. You will be surprised to see the uniformity of the movement between the two. The oft-repeated argument that the stock is down, but its fundamentals are in place, does not attract hordes of investors like it used to some time ago.
    The unprecedented crash has left stocks languishing at only a fraction of their peak value. In this 'sea of red' there are certain stocks, which have fallen, but not as much as the market. Of course, there are a number of stocks from the FMCG and pharma industry in the list, but life does not end there. There are many stocks from other industries too, which have outperformed the broader market.
ET Intelligence Group attempts to find out whether the stock market is justified in giving a fairer treatment to these stocks.
    It is rather surprising that two stocks related to the auto industry — Hero Honda and Exide Industries — have fared better than the market. In fact, Hero Honda is one of the rare stocks to have actually posted positive returns since January 8, when the market had peaked. The company has performed much better than its rival Bajaj Auto on all counts. Its topline growth has been robust as the sales of entry-level bikes — Hero Honda's stronghold — do not depend much on the availability of finance, which has almost dried up. The company has managed to control its costs even as rising metal prices were giving sleepless nights to auto manufacturers. The meltdown in metal prices will definitely help the company to improve its margins. The worry for investors is that though the company has
been able to sell more motorcycles than its competitors, it is doing this in a market, which is passing through a rough patch. The company may find things challenging, going ahead.
    Exide Industries, the leading manufacturer of batteries, does not face as big a challenge as Hero Honda, since it supplies batteries to auto manufacturers and other industries like power and telecom. Auto contributes 60% of the company's sales. However, an auto slowdown will not hit the company too hard, as a huge chunk of its sale flow from the replacement market. Given that the past 3-4 years have seen an unprecedented bull run in auto sales, the replacement market will surely bear fruits in future. Moreover, there is no such slowdown expected in industries like power and telecom. In fact, as new telecom players come in and the existing ones increase their reach, the demand for batteries for
their networks will increase.
    Exide's stock price has fallen to Rs 45.90 from the peak of Rs 91. It is interesting to notice that the stock more than doubled in '07; hence, the fall in '08 appears too steep. Without any significant change in fundamentals and with such a low price, Exide provides an attractive opportunity for investors. Hero Honda's stock rose this year, while it did not move much last year. This may indicate that the market has now factored its performance in valuations and though there is headroom to generate returns, it is not as high as in the case of Exide.
    Two software giants, too, fall in the list — Infosys Technologies and Satyam Computer Services. The stock prices of software companies started cooling off in '07 itself. Therefore, this year, their stock prices obviously fared better than the market. What must not be overlooked is that these two companies performed much better than their peers. So, the fundamentals of their business support the relative treatment given to their stock prices in '08.
    For instance, Infosys managed to escape any trouble from its client base in the US. Its topline has seen a modest growth rate, and in fact, its operating margin has increased in the September '08 quarter. Its net employee addition, an indicator of the confidence of the company to get future projects, has also remained strong. Satyam Computer, too, has seen robust growth in topline. However, its net employee addition in the past few quarters has remained volatile and does not give a clear picture about the company's confidence regarding future projects. At current levels, Infosys provides attractive opportunities to investors, so fresh exposures can be considered. Satyam Computer is not as attractive a buy as Infosys. Therefore, investors can hold, but not increase their exposure to this stock.
    The largest telecom services provider, Bharti Airtel, too, has bucked the trend and outperformed the market. At current valuations of 17.5 times price-toearnings, investors should consider fresh exposure, as the company has a track record of posting high earnings growth. There is a tremendous scope for growth as telecom penetration is just 30% in India, which is one of the largest growing telecom markets in the world. Moreover, Bharti has established itself within the GSM segment for a long time. At a time when other CDMA players are trying to enter the GSM segment, Bharti has already invested in the same. Therefore, it bears little risk in terms of customer addition and has better visibility in cash flows. If it manages a 3G spectrum (which is very likely), that will further enhance its GSM service offerings.

    Two oil marketing companies — HPCL and BPCL — have also outperformed the markets. Given that oil prices have come down by more than 60% since they reached their peaks in July '08, it is expected that these two companies will do better in the near future. This is because these companies have already started making small profits on sale of transport fuels like petrol and diesel, which account for nearly half of India's petroleum consumption. The losses on LPG and kerosene continue, but they together represent less than 15% of India's petroleum consumption. This change of fortunes is helping the share

prices of these oil marketing companies. Investors can consider exposure to these companies, but they should keep an eye on oil prices, as their fortunes are closely linked.
    Fertiliser companies are another surprise, as they have also outperformed the market. The government's policy change in July '08, wherein it linked the subsidy to import parity prices, was a substantial development for fertiliser companies, which had been facing tough times, as subsidy was linked to the old cost plus method. Coromandel Fertilisers, which is one of the leading phosphatic fertiliser manufacturers, and Chambal Fertilisers, which is the largest urea producer in the private sector, are set to perform much better in the days to come and investors can consider fresh exposures to these stocks.
    It is clear that a few of these outperformers like Exide, Infosys
and Bharti Airtel provide very good entry points to investors today, than they ever have in the past 2-3 years. This is because today, their stock prices are taking a beating, even as their fundamentals are in shape. The risk is relatively more in the case of Hero Honda, which is performing well, but its future is challenging. Similarly, investments in stocks of fertiliser and oil marketing companies come at a higher risk as these sectors are heavily regulated.
    (With inputs by Ramkrishna Kashelkar
    and Santanu Mishra)






Promoters may have to buy 50% of public stake for delisting

PROMOTERS of listed Indian companies may have to acquire at least half the public shareholding in their firms to become eligible for delisting, going by a proposal being considered by capital markets regulator Sebi.
    The proposed norms for delisting by companies, which are expected to be approved by the regulator shortly and then notified, will mean that promoters will have to buy at least half the non-promoter holding, keeping the threshold limit of 90% intact. The rules now in vogue allow a company to opt out from listing its shares on an exchange or delist if promoters acquire 90% of the share capital of the company. The new regulations being considered effectively implies that a promoter with a shareholding of over 80% will have to not just acquire another 10% to delist shares but an additional half of the remaining public holding after the 90% threshold limit. In other words, once the promoter has acquired control of the 90% of the share capital of a company, he will have to still buy out 5% of the remaining 10% public shareholding.
    However, for promoters holding up to 80%, the new rule will not make much of a change from the existing delisting rule, while those holding more than 80% will have to buy more shares to abide by the new rule. The new rules will, however, retain the two crucial criteria of the existing regulations — the minimum threshold level for opting out of listing on an exchange will continue to be 90% promoter holding and the price discovery through a reverse book building mechanism.

    "The new delisting norms will be introduced very soon. We have sent the new proposed delisting norms to the law ministry for approval, which is expected to come shortly," said a top finance ministry official. According to sources, under the new rules, the acquisition of shares by promoters for their companies to qualify for delisting is likely to hinge on their shareholding levels. Incidentally, this will ensure that more shares will have to be obtained from public shareholders before delisting. Sebi has also decided to retain the present reverse book building exercise, rejecting an alternative price mechanism based on a fair value determined by a rating agency plus a premium of 25%.
    The reverse book building method is followed only in India. Reverse book building allows shareholders to tender their shares at a price of their choice while providing the acquirer the freedom to accept or reject the offer. Once the reverse book building process is completed, the final price is determined as the price at which the maximum shares are tendered. According to the listing agreement, all companies are required to maintain a public holding of 25% for continuous listing. However, some companies have been allowed to maintain a public holding of minimum 10% if their market capitalisation is more than Rs 1,000 crore and their share capital is more than 2 crore shares or such companies that have diluted less than 25% of their equity at the time of their IPO. Under the current rules, the minimum promoter shareholding threshold for delisting a company is 90% and 75%.

    Next week, the reverse book building for Mather & Patt Pumps will open for delisting, where the delisting threshold limit is 75%. Some other companies which got recently delisted are Rayban, Syngenta and Panasonic AVC Network. Sebi is also likely to allow easy delisting norms for small companies. This will enable them to get listed on the regional stock exchange, whereby they can get into bilateral agreements with public shareholders to fix the delisting price of the shares. "It will provide more clarity in the exact delisting threshold for a company compared to the current norms," said Ripplewave Equity CEO Mehul Shah.
    reena.zachariah@timesgroup.com 


 

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