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Sunday, July 25, 2010

The current stock rally reminds us of the euphoria at the end of 2007

 When the Sensex had outperformed its global peers.With clouds looming large over the world's leading economies, retail investors must not forget the lessons learnt from the last crash,


T'S NOT EASY BEING AN EQUITY investor in the current macroeconomic environment as the markets try to balance the domestic growth story with global uncertainties. This has translated into volatile markets and insipid
    performance by frontline stocks
    across sectors. Corporate results in
the past few quarters have been encouraging, monsoon rains are likely to be normal, the Indian economy is growing briskly, FII flows have been good and the Indian stock markets continue to outperform world's major indices by a comfortable margin. Everything appears perfect for the beginning of another bull-run on Dalal Street. But then, it was no different in the last quarter of 2007 and what followed it is part of folklore now. Will it be different this time?
    Not really! The storm clouds have already started gathering over the world economy and the risk of a small jolt snowballing into a full-fledged crash continues to grow. All the leading global economies from the US, Europe and Japan to China are facing their own
brands of troubles. As we learnt it the hard way in 2008, it doesn't take long for economic troubles to seize financial markets. This is why, it is the right time for Indian investors to hedge their bets and protect their portfolios — just as Noah built his Ark when it was still sunny — that can see them through even if a storm were to strike a few months down the line.
    In the past three years, the world has witnessed the cycle of over-optimism followed by over-pessimism that reached its trough in March 2009. The global economy as well as the markets have come a long way since then, however, as it often happens, the recovery in the equity markets has been disproportionate to rebound in the real economy.
    As investors wake up to the longforgotten fears of a double-dip recession in the US, the Indian markets curiously find themselves in a situation quite similar to that of the last quarter of 2007, when the investment euphoria was at its peak globally. Although it is still early to predict exactly, there are enough indications that

prompt retail investors to be careful going forward.
How the current situation resembles the last quarter of 2007?
Currently, India's BSE Sensex — the oldest benchmark index — is trading above a price-to-earnings multiple (P/E) of 21 consistently almost for a year. The last time it had traded so strongly and so consistently was in the 12-month period trailing September 2007. And just when a number of market players started getting worried about valuations, an investor frenzy — led by the conspicuous theory of decoupling — drove stock prices even
    higher. Four months later, when
    the meltdown struck, the
    Sensex was trading above a
    P/E of 27. In absolute valu
ation terms, the current market situation is similar to what we witnessed in September 2007 — and it is more than interesting that the decoupling theory is again gaining currency.
    In view of the better economic growth prospects, the BSE Sensex has outperformed the US market's benchmark index, the Dow Jones Industrial Average (DJIA), for the past several years. Accordingly, the Sensex has rightly enjoyed a premium valuation. However, the current level of premium — the difference between the P/E of Sensex and P/E of DJIA — has gone up so much that once again one is reminded of the last quarter of 2007. At present the Sensex is trading with a P/E above 21.5, as compared to 14.1 for the DJIA, or a difference of 7.4 points. In the past 10 years, it was only in the October 2007 to January 2008 period that the Sensex commanded such high premium over the DJIA.
    Strong FII flows had been a key characteristic of the period prior to December 2007. In the 18-month period leading to the peak of December 2007, FIIs had poured in almost Rs 100,000 crore in the Indian markets. In the past 18 months, since the bottom of March 2009, the net FII inflows were in excess of Rs 130,000 crore. Increasing FII investments in the Indian debt — both corporate as well as sovereign — have emerged as another important trend this time.
    And this time round, the markets have been bloated with huge amounts of speculative money floating around
driven by globally low interest rates and accommodating monetary policy by the world's key central banks. The substantial outperformance of risky small-caps over sturdy large-caps during this period could be taken as an indicator of this speculative investment trend. In the past one-and-a-half years, the Sensex has almost doubled, however, the BSE Small Cap Index has more than tripled. In comparison, a similar period leading to the peak of December 2007 was marked with more sober growth — Sensex doubled while BSE Small Cap Index had gained 125%.
    During that period, the rupee had appreciated nearly 15% to a high of 39.4 against the US dollar. Although in the current rally, the rupee has not reached those high levels seen in December 2007, it has appreciated consistently by over 8.5% from the trough of March 2009. It is mainly the economic turmoil in Europe, which is driving investors in search of a safe haven from the US dollar, preventing the rupee to appreciate further.
GLOBAL ECONOMIC TROUBLES
The stock markets tanked globally in May as the Greek sovereign debt problems brought back the memories of the sub-prime crisis of 2008. But the impact proved short-lived with the markets soaring up again in the past few weeks. This appears to be the initial phase of over optimism, which is disregarding the inherent troubles of the world's leading economies.
Turbulent Times Ahead
After a relatively strong initial recovery, the growth rates of most developed economies are already slowing, despite the immense previous stimulus. In the past three months, more or less universally in the developed world, there has been a disturbing slackening in the rate of economic recovery. As a result, stock markets in the developed countries have grossly underperformed those in the developing ones — notably India's.
    The developed countries such as the US, the UK and other European countries find themselves in a dilemma. At one end, the high level of personal and sovereign indebtedness is risking a debt-servicing problem. At the other end, an attempt to control the debt levels runs the risk of affecting the consumption demand and grounding the already fragile economic recovery.
    Amid this, the weak economic activity in these countries is leading to lower government revenues due to their higher dependence on real estate taxes and capital gains, which have been dampened due to falling asset prices. However, their commitments — particularly salary and pension — are hard to cut. As a result, sovereign debt has reached alarming highs. Besides, these economies are facing prospects of under-funded retirement benefits and healthcare costs as the numbers of beneficiaries grow faster than workers due to an ageing population.
    In the long run, these high debt levels will have to be curtailed to a more sustainable level, which will indeed be a long and painful process. The famous economist Nouriel Roubini recently mentioned that the advanced economies will "at best have a protracted period of anaemic, below trend growth" as deleveraging by households, financial institutions and governments starts to impact consumption and investments. The process has barely begun.
THE KEY CHANGES HAPPENING

The global economics are undergoing a paradigm shift. The way investors view the world is undergoing a change, which will continue well into the future and nobody knows exactly how things would stand a few months from today.
    US treasuries and US dollars — con
sidered as one of the safest places to park investments — could be in for a role reversal, if one looks at the country's burgeoning debt burden. Noted economist and investor, Mark Faber, recently compared the US government's current situation to a giant ponzi scheme, meaning the government will have to borrow increasingly more to meet the interest obligations, which would ultimately shake the confidence that investors keep in this asset class. While the reality may not turn out to be as grim as Faber has predicted, the US is indeed facing a problem the magnitude of which is unheard of.
    Just last week, the US Federal Reserve's chairman Ben Bernanke warned the US Congress against withdrawal of fiscal stimulus to bridge the budget deficit, insisting it was too risky for the recession-threatened US economy. The latest set of economic data from the world's biggest
economy showed an increase in weekly unemployment claims, a drop in home sales and easing of economic activity.
    At the same time, the equities, government bonds and currencies of the Asian countries are fast becoming "hedges against the global risks", something unimaginable in the past. By now, Asia has become the world's great hope for growth and this perception is, unsurprisingly, reflected in the equity market valuations.
    One major part of this Asian growth story — the Chinese economy — is also cooling off. Its government's efforts to curb overheating and contain the asset bubble are likely to result in the country's economic growth slowing to a range of 8-8.5% in 2010 from 11+% earlier. At the same time, experts believe China is set to enter the phase where incremental demand for labour will exceed incremental supply. Such a scenario
will basically end the era of low-cost labour enjoyed by the country. Such a transition would surely have far reaching effects on the country's economy in the years to come.
Conclusion: The wisdom that emerged after the large stock market shock of 2007-08 is that the decoupling only referred to the economic growth of various regions and that the financial markets the world over didn't really decouple. This is also applicable to the current scenario. Although India's economic growth should remain above 8-8.5% in the next couple of years regardless of the global economic slowdown and it remains an attractive destination for foreign investors, the same may not apply to Dalal Street.
    High valuations have increased the risk of an abrupt shock if any of the fears related to double-dip recession or European debt crisis become a reality. And the current indications are that the likelihood of these fears turning true — at least partially — is growing with every passing day.
    Several market gyrations have made it clear that it is the liquidity and investor confidence that drive the stock market performance — the economic growth plays only a supporting role. Needless to mention, both these factors are extremely finicky and can change tracks fast.
    It is, therefore, imperative that domestic investors keep a strict eye on global happenings and not get swayed by momentum when taking any longterm decision. Recommendation: The rangebound market offers retail investors an opportunity to churn portfolios and make them less risky. A global economic slowdown can greatly hurt commodity businesses and high-beta stocks while in the current scenario, where most advanced countries would rather depreciate their currencies, owning export-dependent companies may not be wise. In fact, despite the Shanghai Composite's underperformance since August 2009, most of the companies focusing on China's domestic economy have done well.
    An investor can avoid taking longterm bets for the time being and book profits on every market spurt. Investors should simultaneously also increase the proportion of less risky, most stable, India-centric companies that have history of generating strong cash flows and generous dividend payouts.
(With inputs from Ramnath Pai)

250 Manufacturing Cos Post 22% Net Rise Against 50% In Past 3 Qtrs

Input costs chip away at profit margins

 EARNINGS growth for manufacturing sector remains robust due to higher demand, even as spiralling input costs ate into margins for the quarter-ended June, with net profit rise skidding to the slowest pace in the past four quarters, an ETstudy shows.
    The 250 manufacturing companies that have declared quarterly results have collectively posted a net profit growth of 22%, led by capital goods maker Bhel, two-wheeler firm Bajaj Auto, Sesa Goa, Coromandel International, TVS Motor, Whirlpool, Vardhman Textile, Escorts, Thermax and UB. The same set of companies had reported an aggregate 50%-plus growth in earnings for the past three quarters, compared to the corresponding period the previous year.
    What's keeping the good times alive is high demand. Although at 23%, sales growth for the past quarter was a tad lower than for the three months ended March 2010, it propped up earnings for the early clump of manufacturing companies.

    But analysts are already seeing moderation in industrial expansion, which could impact future sales growth and, in turn, decelerate earnings growth. The index of industrial production, a barometer of manufacturing activity in the country, grew 11.5% for May over the same month last year, much below expectation of around 16%.
    "While the numbers are lower-thanexpected, we see no need for undue concern, as data trends both at the macro
and sectoral fronts are healthy," said a Citigroup report dated July 12. "We were expecting the numbers to moderate from June, due to a fading base effect, but May data indicates that the moderation has already begun. This is reflected across segments, though it is more prominent in capital and consumer goods," said Rohini Malkani and Anushka Shah, co-authors of the report. Raw material prices jump 29%
POOR performance of the country's largest carmaker Maruti Suzuki, besides cement major ACC and Kesoram Industries, pulled down aggregate profit growth for the manufacturers. While Maruti Suzuki reported 20% drop in profit due to higher royalty payments, forex fluctuations and hardening commodity costs, ACC's earnings were hit by lower realisations, higher fuel and power costs and freight charges.
    Overall, the firms in the study saw a 29% jump in raw material expenses during the quarter over the year-ago period, similar to the previous quarter that ended March 2010 and relatively faster than the sales growth. This means companies were unable to pass on the entire rise in input costs to the consumers.
    Although increase in interest costs has not started biting yet, it has inched up and is now bordering the double-digit mark, after two consecutive quarters of slow growth. It could well start eating into margins in the coming quarters, if the central bank raises rates at its monetary policy review on Tuesday.
    Meanwhile, nearly a third of companies that constitute Nifty, the benchmark 50-stock index, which have declared results have thrown a negative picture, with earnings growth slowing to just 11%, the slowest pace in at least six quarters. This was largely due to lower standalone earnings of Infosys, Wipro and Idea Cellular as also ACC and Maruti Suzuki over the quarter ended June '09. Analysts are expecting earnings growth of around 20% for the Nifty companies.
    "If the aggregate earnings growth is less than consensus figures, it would be disappointing for the markets, though we need to watch out for numbers from metal companies," said Tarun Sisodia, head of research at Anand Rathi Financial Services. "Numbers from Tata Motors and Tata Steel would be the key," he said.
    Both the firms had reported consolidated net loss in the June quarter last year due to bottomline pressure from their global businesses: Jaguar Land Rover and Corus, respectively. Analysts expect both the overseas companies to improve their performance that could impact overall earnings of the Nifty pack.
    vivek.sinha@timesgroup.com 

Maruti skids in June, net profit down 20%


COUNTRY'Slargest passenger car maker Maruti Suzuki is heading for tougher times after posting a decline in net profit for the quarter ended June over the year ago period and the pressure on bottomline is expected to continue in the current fiscal due to increased local competition, declining exports and higher raw material costs.
    Maruti Suzuki's net profit shrunk 20% to 465.36 crore for the three months to end June, declining the first time it last five quarters. Maruti officially preferred to remain silent on the issue but senior executives said that
they expect the current fiscal to be difficult.
    "These are tough times faced by the company as our export earning have shrinked due to fluctuations in Euro currency and shrinking share in the domestic market is impacting our profit margins," a senior Maruti executive said on condition of anonymity.Profits shrunk largely due to higher commodity prices that bloated its input costs bill almost 25% besides higher royalty payment to parent Suzuki Motor and drop in export income from Europe due to weakening of the Euro.
    Royalty payment to Japanese parent totalled 188.7 crore including 65.15 crore for the period December 16, 2009, to March 31, 2010. Its
other income more than halved to 100.2 crore for the quarter that took out the cushion from the earnings performance. The total income from operations, increased 26.78% to 8,231.53 crore from 6,493 crore in the yearago period. Although car sales grew 23% to 242,887 units for the quarter, it was not enough and the company's market share fell below the 50% mark for the first time in its 26-year operations in India. During the quarter, Maruti's market share declined to 47.59% from over 55% in the local market.
    Analyst tracking the company echoed negative sentiments on its performance. Maruti is facing the real-test with falling market share as
higher outgo on commodity purchases and royalty payments have impacted margin, Vaishali Jajoo auto sector analyst with brokerage firm Angel Broking said. "We expect Maruti to underperform in FY' 2011 as the company would face cost pressures from inputs and increase spending on marketing," she said. Maruti's decline in net profit in Q1 of this fiscal is in contrast to 105% jump in 2009-10 fiscal when it had posted a bottomline of 2,497.6 crore.
    Maruti has not launched any new model or car after Ecco that was introduced during the Auto Expo in January 2010 even as its market share is stagnating with other car makers gaining with their new products.

IOC posts 3,388 cr loss in Q1

STATE-OWNED Indian Oil Corporation (IOC) has posted a net loss of 3,388 crore in the first quarter (Q1) of 2010-11 due to selling key petroleum products below market prices. The country's largest refiner had made a net profit of 3,683 crore in the same quarter of previous fiscal year.
    IOC chairman BM Bansal said, "The under-recovery (revenue loss) on account of non-realisation of market-related prices for petrol, diesel, PDS kerosene and LPG (cooking gas) for the quarter was 7,343 crore." It was 2,961 crore in the same quarter of 2009-10.
    State-owned oil companies are forced to sell petrol, diesel, kerosene and cooking gas at government-determined rates which are often below cost. On June 25, the government announced freeing pump price of petrol but has forced them to revise prices only once in a month.
    IOC's revenue loss would have been higher but for the 3,671 crore contributions from upstream firms — Oil & Natural Gas Corp (ONGC), GAIL India and Oil India.

The government is silent on paying any compensation to the oil company losing revenues due to selling key petroleum products
at controlled prices. Until recently it used to partially compensate public sector oil companies for their losses by issuing oil bonds or paying cash. It is yet to announce a mechanism to meet over 20,000 crore revenue losses of the three oil companies (IOC, BPCL and HPCL) in the first quarter of 2010-11.
    Poor refining margin and loss due to variations in foreign exchange rates also contributed in the sharp decline in company's financial performance. IOC's gross refining margin slipped from $7.36 per barrel in April-June 2009 to $3 per barrel in the first quarter this year, signifying a difference of 2,272 crore.
    "The decrease in refining margin in Q1 (2010-11) was due to reasons beyond our control. Inventory loss and foreign exchange fluctuations were major contributors otherwise physical performance (of refineries) was very good. Capacity utilisation was 104% and we made 10 cent extra on every barrel this quarter compared to previous year," IOC director (refinery) BN Bankapur told ET.
    During April-June 2010 IOC's inventory gains slipped to Rs 517 crore (compared to Rs 1,733 crore in Q1 of previous year) and it lost about Rs 176 crore due to currency fluctuations (compared to a gain of 390
crore in Q1 previous year). IOC's turnover, however, went up by 23% to 77,965 crore in first quarter this financial year compared to Rs 63,530 crore during the previous year.
BM Bansal

Thursday, July 22, 2010

CITIFINANCIAL TO EXIT LOW-INCOME SEGMENT

Lakshmi Vilas Bank eyes ailing Citi NBFC

Deal May Be Carried Out Via Housing Finance Subsidiary


LAKSHMI Vilas Bank (LVB), the southbased, old private sector lender, is in talks with Citigroup to acquire CitiFinancial Consumer Finance India, the struggling non-banking finance company which gives retail loans to low-income borrowers.
    LVB has hired investment bank JM Financial to carry out due diligence of Citi-Financial, which has a 9,000-crore balance sheet, 116 branches and close to 1,600 employees.
    "It's an interesting move for a conservative mid-sized bank which has stayed away from acquisitions," said a person familiar with the proposal. The LVB board recently cleared a proposal to float a wholly-owned housing finance subsidiary. This new outfit intends to acquire CitiFinancial.
    A Citi spokesperson declined to comment. CitiFinancial is part of Citi Holdings, which houses the non-core businesses of the global banking and financial services group. Citicorp, meanwhile, controls core divisions such as Citibank, the investment banking arm Citigroup Global Markets and the private equity arm CVC. In early 2009, Citi took a deci
sion to identify non-core businesses which would be hived off over time.
    A few months ago, Citi had negotiations with Kotak Bank to sell CitiFinancial, but talks fell through with Kotak unwilling to pay the price Citi sought.
    "CitiFinancial, like some of the other consumer finance firms, wants to get out of the low-income borrower segment. Many non-banking companies have burnt fingers due to a high loan delinquency level," said a senior official of a private bank. "But Citibank India does businesses like personal loans, mortgage, loan against shares and properties, and it possibly makes a greater sense to give retail loans through the bank rather than the finance company," he said.

    At a recent townhall meeting, Citi country officer Pramit Jhaveri said the group aims to increase business by $8 billion in the next three-to-five years. The size of Citi's current business in India would be around $20 billion.
    For the 80-year-old LVB, an entity like CitiFinancial would give it access to 58 locations and help the bank, which currently focuses on Tamil Nadu and other southern states, reach out to other states.
    According to a recent news agency report, LVB shored up its top management by inducting two senior personnel from ICICI Bank and Citibank. "The bank also plans to beef up its presence by adding 35 branches to its existing network of 271 by end-FY11," said the report.

Tuesday, July 20, 2010

Port au Prince! Adani anchors Rs 30kcr empire

SMOOTH SAILING

Gautam Adani has seen his ventures prosper at a brisk rate over 3 decades

ENTREPRENEURS Gautam Adani and the late Dhirubhai Ambani have more in common than just home state Gujarat — the former shares with the Reliance patriarch the art of correctly reading India's political tea leaves.
    It is common knowledge that bureaucrats and politicians have to be kept in good humour if entrepreneurs have to achieve what they aim for, even when what they do is per
fectly legal. But only a few succeed at this, the trick lying in how one approaches the powerful. Even seasoned businessmen such as Lakshmi Mittal and Ratan Tata indulge in the occasional outburst against the bureaucracy for inordinate delays. But not Gautam Adani, despite facing similar hurdles.
    The 48-year old may appear soft, but plays hardball. If all goes as planned, by 2020, the matriculate's ventures would produce 20,000 MW of power, handle 200 million tonnes of cargo at his port in Mundra and mine 200 million tonnes of coal and other ores.
    Adani, who started dealing in diamonds in Mumbai in 1980 has come
to be worth more than Rs 30,000 crore in three decades. He did not make his money from the fancy 21st century businesses such as software or telecom, like NR Narayana Murthy of Infosys or Sunil Mittal at Bharti Airtel.
    Instead, the burly Adani ventured into what merchants during the Chola empire a thousand years ago and the British East India Company did: Build ports to facilitate trade. It did not require great technical knowledge, or massive funds. All that was needed was skills to persuade the bureaucracy to allot land
and guide policies.
    "If you look at the group, there is nothing innovative," says Sanjay Gupta, former chief executive, infrastructure, at
the Adani group, who brought some method to the madness of making money at Adani Enterprises, the group holding company.
    The company, founded with a capital of Rs 5 lakh in 1988 to trade, manages ports, develops real estate, produces electricity, trades in agricultural commodities and explores oil. In a matter of months, it would have raised Rs 5,500 crore, including the current share sale to funds.
Adani's new ventures a leap in the dark
ADANIturned to the raw material of the main business, a method similar to that adopted by Dhirubhai Ambani. With Ambani, it was going back to oil from textiles, and for Adani it was to build ports to ship the commodities he traded in.
    "Since we were in import and export, we realised that there are congestion in ports," says Gautam Adani in an interview in his third floor office in Ahmedabad. "The BJP government came out with a white paper on ports, formulated the port policy and in 1998, they allowed us and we started construction."
    The execution was not that simple. The Adanis, who formed a joint venture with global trading company Cargill for salt exports, were left high and dry when management control issues led to the trading giant quitting the venture.
    It was out of necessity to find use for the land he owned which drove him to think of a port. But he had no idea where he would go for more land or who would build the port. The Adanis had no knowledge of building ports, and there were no construction companies specialising in it at that time.
    "I had no experience even in building a house then," says Adani who first visited the port in Kandla on an excursion as a fourth class student.
    He sought 5,000 acres for the port which sounded scandalous to bureaucrats in the Gujarat government who knew that the biggest port in the state, Kandla, was on 500 acres. This was key for all his future plans. But convincing the bureaucracy was a Herculean task and he almost gave up the idea, before something struck him. He bundled a bunch of officers and flew them over the barren land in Mundra and told them, "You lose nothing by giving this land to me. Only gains." And the rest, as they say, is history.
    "Gautambhai is able to understand the government and can see what lies ahead," says Gupta. "He has a remarkable ability to deal with government."
    Mundra is now an Adani province. Nearly 7,000 hectacres of a special economic zone, three terminals to handle cargo and two power units of 330 MW each. What was once arid land is now a port from which Maruti Suzuki exports thousands of cars.
    "The villagers here had nothing much to do," said Niranjan Engineer, a senior group executive posted in Mundra. "But now these drivers, who have been trained by expert drivers from Jawaharlal Nehru Port Trust, earn about Rs 8,000 to 9,000 a month." Mundra now boasts of a railway station, automated teller machines of major banks, a small mall and even an airport which is mainly used by the Adanis.
    The businesses of the group were not planned with excel sheet analysis and power point presentations. It was mostly a leap
in the dark, egged on by entrepreneurial passion. The construction of ports and power plants is on in full swing well before the scores of government departments clear the proposals which professionals may hesitate to do. Getting all the clearances before construction would be like waiting for Godot.
    "There are many bottlenecks," says Adani. "So the promoter should stick his neck out... for professionals, it is difficult....so here the promoter has to take the call, whether to move ahead. Let risk remain and in due course we will mitigate it."
    He is pushing ahead with the construction of the 1,980 MW power plant in Maharashtra which has run into environmental trouble with regard to coal mining. "The governments have constraints, but we feel they are positive about infrastructure," he says, with one eye on a muted business television channel. "We feel the government will find some amicable solution and we should move ahead. The lenders might stop disbursing funds... it may have a cascading effect... which is not in the interest of the nation and the project."
    He has tasted success so far with this approach when it came to the ports. There are some issues that are yet to be settled with the state government. "We only look at our side of the story. But, on the other side, the government has to see what are the larger benefits to the people. Promoters feel the government is not taking decisions fast...but every time, the delay is not intentional."
    Compare this to what Dhirubhai had said about a quarter of a century ago. "The most important external environment is the government of India," he had said in the early 1980s. "You have to sell your ideas to the government... And for that I'd meet anybody in the government. I'm willing to salaam anyone. One thing you won't find in me is ego." Small wonder that today's investors see a sort of Dhirubhai in Gautam Adani.
    UK-based private equity fund 3i was the first among interna
tional investors to place bets on Adani, when most dismissed him as yet another small time trader with sky-high ambitions that may never take off. "He is not one who would haggle for small things, and does not get bogged down by hurdles," says Anil Ahuja, head, Asia Business at 3i Group Plc. "He is bold and his pace is measured. He has clarity of vision which is necessary when one moves from point A to point B." 3i invested $50 million in the port project and $227 million in Adani Power.
    Adani's bed of roses has not been without thorns. There were failed businesses, agonising moments and financial distress. Like many, Adani was also bitten by the business process outsourcing (BPO) and retail bugs. But he did not realise that handling customers in these areas is not like handling bureaucrats.
    The BPO unit was sold after two years and the retail unit merged with Reliance Retail, which after many years is yet to earn profits. "Sometimes you enter without a proper strategy," Adani says. "I admit that we entered retail and IT without a long-term strategy. If I am not giving enough time, no business will grow the way I want it to grow. So it is always necessary to quit in time."
    There were many occasions where the group was on edge when it came to finances. It sold a terminal in the Mundra Port for $195 million in 2003 to Peninsular & Occidental, now owned by Dubai Ports, to tide over a financial crisis. Another slippery slope was when the stock markets collapsed in 2008 following the credit crisis. All his electricity generation plans were about to get short circuited, if the market did not recover. When the stock markets showed signs of recovery, he was the first off the block to float an initial public offering. He did not wait or wrangle with investment bankers for valuations, aware that a bird in the hand is worth two in the bush.
    Both Adani and investors have benefited, at least for now. But for all his entrepreneurial acumen, he lags in long-term planning of
managerial structure for the group. For outsiders, it looks like a one-man show, with very little professional management.
    "I really appreciate the way the group has grown and admire its risk-taking abilities, but most of the eggs are in one basket," says a chief executive of a city-based company, who did not want to be identified. "After all, governments change. At the moment, one man is doing all the thinking. If he were to take a break, the system would collapse."
    3i's Ahuja is the only professionally qualified manager on the board of Adani Enterprises, and there are a few professional accountants. The Mundra Port board has three former Indian Administrative Service officers, reflecting Adani's priorities.
    MBA graduates are not lining up to join the group, despite it being headquartered in a city which is home to the country's best management institute. Budding managers would naturally prefer to trade in derivatives from the swanky offices of Morgan Stanley and Goldman Sachs rather than sweat it out in the heat and dust of a port, amid dirty coal.
    But Adani does not miss them. Arts and science graduates perform a good job, at less than half the price, at least to begin with, and they are responsible for what the group is today. To prove his theory, he recalls a commerce graduate who rings in crores of rupees as a commodities trader. "I don't regret not having had a formal education," says Adani. "Our HR people threw a candidate out because he was not proficient with computers. He returned in three months for a salary of Rs 8,000 and seven years later, he is earning Rs 70-80 lakh a year. Today, he is the best trader in Adani Wilmer."
    There is no clear-cut succession plan. But it is also a family business. There are relatives roaming around the modest office in Ahmedabad with gun-wielding body guards and at power plant sites, which resemble a mini China, with signs in Mandarin.
    Rajesh Adani, the younger brother of Gautam Adani who was briefly in police custody for an alleged Customs violation, manages the day-to-day affairs as managing director at Adani Enterprises. He may succeed his brother. Karan Adani, the eldest of Gautam Adani's two sons, with an MBA from Purdue University in the US, is being trained at the Mundra Port for a bigger role.
    Ask him about his succession plan and Gautam Adani switches to philosophy. He says he does not get disturbed by events, even one like the infamous terrorist attack on Mumbai's Taj Palace, where he was locked up. Neither was he afraid when he was kidnapped by underworld don Anees Ibrahim in 1999. "I was playing cards with those fellows who kidnapped me. Whatever has to happen will happen and nothing can be done about it."

A LOT VENTURED, EVEN MORE GAINED: Gautam Adani


Gautam Adani

Monday, July 19, 2010

Investors Wait For Rate Hike

AMID the volatility in various asset markets such as equity and commodities, retail investors may prefer to go for fixed income avenues. But the situation is not very encouraging there as well. Banks' deposit rates are currently at 5-year low and real rate of return (adjusted for inflation) is negative.
    All these coupled with the talk about interest rate hikes by the Reserve Bank of India has raised hopes for rise in deposit rates. A round of small increase in deposit rates by March end by most nationalised banks supported the sentiments. But it was quite minimal and not exactly a turnaround. So the question lingering on retail investor's mind is when the deposit rates are going to rise?
    To get a clear picture on deposit
rates, there is a need to understand the liquidity situation prevailing in the economy. It is known fact that the auction of 3G spectrum and advance tax outflow has mopped up the liquidity from the system. The situation was so tight that the RBI had to intervene by injecting money into the system through bond purchase. But is the macroeconomic situation ripe for a sustainable increase in interest rates and hence deposit rates up?
    The answer is a cautious yes. Once the government begins its expenditure programme in coming months, the liquidity situation will ease. Nonetheless, it is unlikely to be as comfortable as observed before June. It is because the gap between the credit disbursement and deposit accretion is shrinking.
    Sharp surge in incremental credit deposit ratio confirms the same. The ratio was around 40% during October-November 2009. Now it was more than doubled and stood at 98% as on June 18, 2010. While non-food bank credit has grown by 19.6% as on June 18, 2010, the term deposits
recorded growth of 13.9% in the same period.
    Going forward, this gap between the deposit and credit growth is likely to widen. With resilient consumption demand and increased business
optimism, the industrial activity is gathering speed. It was clearly revealed in unabated growth in the industrial production.
    The industrial growth for FY10 was 10% and anticipated to continue at the same pace. As a result, the demand for working capital and long-term investment credit demand is likely to pick up. The effects will be seen once the busy season sets in since October.

    The bankers are expecting credit growth of 20% for FY11. Unlike to the previous credit cycle observed during 2004-2008, the investment-deposit ratio of banks was relatively low this time. It provides a little scope
to redeem their investments to meet increasing credit demand. Thus the banks will leave with no option but to increase deposit rates.
    The flattening yield curve suggests the same (see chart). The yield on short-term maturity has already gone up in the first quarter of FY11.
    But the pace of increase in deposit rates will be gradual. Unless the credit demand gathers momentum followed by liquidity crunch, the deposit rates are unlikely to see rapid movement. Considering the current environment and fears regarding moderation in global economic growth, the domestic investment or industrial activity is unlikely to be robust. Once the clouds get over in the coming 2-3 months, the tone will be set in and deposit rates may move in the first quarter of CY2011. Till then one needs to wait and watch.
    pallavi.mulay@timesgroup.com 





Good fortune

MID-tier financial technology company, Polaris Software Lab, reported a decent performance during the June '10 quarter. Also, the company's elevated revenue and improved operating margin substantiate its annual net profit guidance of Rs 20.2-20.5 per share for FY11.
    During the period, the company's consolidated topline grew 18% to Rs 368 crore from a year-ago on account of better volume growth. Operating profit grew

at a faster pace of 33% to Rs 55.6 crore on account of lower increase in operating costs. Net profit shot up 46% to Rs 46 crore, boosted by higher other income.
    The US market contributed 46% of the company's total revenue. The rest came from the Asia-Pacific and EMEA (Europe, Middle East and Africa). BFSI is the single largest vertical for Polaris, with 94% share in revenue during the first quarter.
    Operating margin expanded 170 basis points (bps) to 15.1% year-on-year due to the higher scale of operations and better cost control. The company also fended off the impact of cross currency fluctuations due to the favourable forex hedging positions.
    However, the growing attrition from 18% in the March quarter to 20% is a cause for concern. To curtail the attrition, Polaris plans to raise salaries across the board in the current quarter. This is expected to pull its margins down. The company has added 23 clients during the quarter. It is also focusing on the cloud computing technologies to improve demand momentum. With the strong demand scenario and sturdy production volumes, the company is expected to fare
well in the following quarters.
    At Friday's close of Rs 190.4, the stock of Polaris traded at nine times its FY11 earnings per share guidance of Rs 20.5 on the higher side of estimates. The valuation sounds fair given the P/E range of 8-10 for mid-tier IT exporters.
Focus on gaming business

The financial performance of entertainment major UTV Software Communications for June '10 quarter saw an extraordinary jump of 132% in operating revenues mainly due to the low base of the June '09 quarter. The movies business, which had taken a backseat in the year-ago period due to the tussle between the producer-distributor lobby and exhibitors, made a turnaround to quadruple. The company's consolidated net profit stood at Rs 40.2 crore as against a net loss of Rs 31.8 crore.
    The company's film business still forms a substantial chunk of revenues contributing 56% to the topline of the company in the June quarter. The contribution of the company's broadcasting and television businesses was 24% and 12% respectively.
    The growth of the film business depends on several uncertain factors such as cast, content and promotion making the revenue flows highly volatile. Sensing this, UTV Software Communications is trying to reduce its dependency on this segment to generate its future revenues. With this in mind, the company has been consistently investing heavily in its gaming business, which still remains at a very nascent stage of revenue generation.
    For the June '10 quarter, the company's capital employed for this segment alone stood at around Rs 555 crore, which was more than Rs 545 crore of capital employed in its film business that generates its bread and butter. The company is targetting its gaming business for international markets-the US, Europe and the UK, which is generating around 6% of the company's revenues. Despite all the investment boosters, the revenues from this segment are unlikely to overtake the films business in next few years.
    Very high competition in the gaming market and long gestation period in building the customer base are the key reasons for the expected slow growth. It is claimed that globally the gaming market is three times bigger than the film business market and hence it remains to be seen how much share the company is able to get in this.

Winning investor's confidence
LIC Housing Finance ended the June '10 quarter with a high growth in its bottomline that grew 71% as against the year-ago period to Rs 212 crore. The net profit growth was driven by a high growth in its topline. The company's total income grew by about 30%, which was considerably higher than the average 17% growth in its total income over the previous three quarters.
    The June '10 quarter saw a growth of 51% and 40% in the company's loans approved and loans disbursed respectively. The company's conversion ratio - disbursements as a proportion of approvals - stood at 63%. This was considerably lower than the conversion ratio of housing finance major HDFC that hovers around 80% to 85%.
    Meanwhile, the company has ensured tight control over its asset quality. Net non-performing assets (NPAs) of the company stood at 0.35% of its total advances. This is outstanding considering that most non-banking financial companies (NBFCs) strive to achieve 1% benchmark.
    The company's net interest income (NII) grew 69% in the June '10 quarter compared to the same quarter of last year. NII is the difference between the interest earned and interest expended by the company. This boosted the company's net interest margin (NIM) by about 55 basis points. NIM stood at 3% at the end of the June '10 quarter.
    The company's stock rose to a 52-week high to Rs 1,085 on the day the results were announced. The surge in the stock price shows that the positive results in the quarter have increased investor's confidence in the company.
    (Contributed by Parul Bhatnagar, Rajesh Naidu
    and Jigar Desai)




Stock prices of FMCG and pharma cos are believed to be overheated.

However, the majority of these defensive stocks are still fairly valued and quite a few of them look cheaper than their historic valuations. An

 WHEN a stock becomes too hot to handle, stay away. This is the advice of most analysts and fund managers. And right now, it's considered that stocks of fast moving consumer goods (FMCG) companies and drug makers are overheated. But we differ. An analysis by ET Intelligence Group shows that despite the recent rally in their stock prices, majority of defensive stocks are still fairly valued and quite a few of them look cheaper than their historic valuations. A handful of the 29-odd stocks in our sample do look expensive based on their long-term ratios, but the premium is reasonable and nowhere near the bubble zone visible, in case of growth stocks in late-2007 and early-2008.
    For over three years in a row, the FMCG companies and pharma manufacturers have been outperforming the broader market. The rally in these two defensive sectors have been especially sharp in the past six months with the ET FMCG and the ET Pharma Index appreciating by 15% each since the beginning of this year — much higher than 3.5% rise in the Sensex during the period. A
majority of leading companies in these two sectors now rank among some of the most expensive stocks in the market as measured by their price-to-earning multiple. But investment in these stocks can still fetch you handsome returns as their premium valuation is more than justified. The earning growth in most of the companies in our sample has kept pace with the rise in their market capitalisation. Besides the broader market continues to be volatile, FMCG and pharma stocks offer the most stable earnings growth in the forthcoming quarters.
    There's nothing novel about the premium valuation of defensive stocks. Our analysis shows that historically, FMCG and pharma stocks have always traded at a premium to the market, except for two brief occasions in 2003 and 2007, respectively. (See Always Been Expensive). If anything, the valuation gap between the defensive sectors and the broader market has only narrowed in favour of the latter in recent years. While the Nifty is currently 10% lower than its all-time valuation touched in December 2007, ETIG's defensive index is still over 25% below it's all-time high reached in March 2006. This opens up the possibility of another rally in
the stock price of defensive stocks.
    Our analysis is based on the financial and the market performance of a mix of top 29 companies from FMCG and pharma sectors for the past 11 years. Some of the leading stocks in our sample include ITC, Hindustan Unilever, Dabur, Nestle, Marico, GSK Pharma, GSK Consumer, Cipla, Tata Tea, Sun Pharma, Asian Paints, Britannia, Colgate Palmolive, Castrol, Novartis, Pfizer, P&G Hygiene, Piramal Healthcare, Lupin and Gillette India among others. We dropped companies such as Dr Reddy's Lab and Ranbaxy Lab from our sample as their earnings are highly volatile and may have skewed the results.
    On an average, these stocks are currently trading at around 24.5 times their net profit during the year ended March 2010. The current valuations are not much higher than their 11-year average P/E multiple of 23.2x. The trend doesn't change much, if we consider the sam
ple's valuation in the past five years (22.6x).
    In the past 11 years, the combined market capitalisation of the 29 stocks in our sample has jumped by 3.35 times from Rs 1.21 lakh crore in June 1999 to around Rs 4.4 lakh crore in June 2010. This compares favourably with the 337% growth in their net profit and a 330% growth in net sales during the period. So despite being expensive, the rally in their stock price is fully justified. (See Getting better with time )
FMCG SECTOR
In the past 11 years, the earning growth of top 16 FMCG companies in our sample has outpaced the rise in their market capitalisation except for the three paint companies — Asian Paints, Berger Paints and Kansai Nerolac. The combined earnings of these companies have grown by 375%, but the market capitalisation
of these stocks has only increased by 185% during the period.
    The most surprising thing is that the FMCG giants that form 85% of the FMCG market capitalisation have not been given a valuation they should get, despite their earning growth and risk premium that they deserve. Major players — ITC, Hindustan Unilever (HUL), Nestle and Colgate-Palmolive — have shown double-digit growth in their earning growth as against the increase in their market cap.
    Among these, HUL and Colgate Palmolive are trading at a discount to their previous five-year median price-to-earning (P/E) multiples. For instance, HUL is trading at a P/E of around 24 while it previous five years median P/E is 28.2. All the above mentioned paint companies, besides ITC and Marico, have maintained their valuations and not seen much volatility in their valuation ratios in the past five years.
    However, other companies that include Nestle, Dabur, P&G, GSK Consumer Healthcare and Castrol, which are trading at multiples higher than their trailing five years median ratios, will have to show higher earning growth in subsequent quarters to sustain the premium that they are receiving at this point of time. Any slippage in earning growth may mean a sharp correction in their stock price.
    Tata Global Beverages (formerly Tata Tea) is currently trading at a P/E of 15x, which is much higher than its five years median P/E of 12. The company however deserves the premium and may in fact witness a further rise in its valuation, if it could sustain its growth momentum. TGB's market cap has gone up only by 2.6 times in last 11 years compared to 31 times jump in its earnings during the period.
PHARMA
As in FMCG, even in the pharma sector, the earnings have outpaced the growth in the market cap. The earnings of the top 13 companies have jumped by 11 times while the market cap has increased only by six times. But the pharma space has been very active and varied in terms of the way each company has performed and rewarded by the market.
INVESTORS have been more careful than before and the market capitalisation have increased with the same pace as that of their earnings, though there have been some outliers, such as Aurbindo, Glenmark, Lupin and Torrent Pharma that have seen their earnings increasing much faster than their valuations.
    These companies have shown a very high growth in earning in the past five years, which also is due to the small earnings base back then.
    As far the valuations of these pharma companies are concerned, Aurbindo, Glennmark, and Pfizer are trading at a lower P/E multiples than their past five years median and average multiples.
    Aventis pharmaceutical, IPCA and Sun Pharmaceutical are trading at much higher valuations than their previous five-year median and average valuations.
FUTURE OUTLOOK
When the street goes short on these stocks, we take a contrarian view and
say that these stocks are still the best bet for retail investors given the macroeconomic uncertainty arising from sovereign debt crisis in Europe and doubtful recovery in the US economy. Most of the defensive stocks in our sample rely on domestic consumption growth and are mostly self funded. This makes them impervious to the gyrations in the global economy or the volatility in the financial markets. While their domestic focus and strong balance sheet protect them from turbulence of the global economy, their earning growth is ensured given the continued buoyancy in consumer demand. In the past 12 years ended March 2010, the private final consumption expenditure (PFCE) at current prices has grown at compounded annual rate of 10.8% and has kept pace with the increase in GDP.
    In recent years, consumption demand has marginally lagged behind GDP growth, but that is because of rapid expansion in fixed capital formation, which is natural in a fast-growing and capital hungry economy like India.
    krishna.kant@timesgroup.com 











Friday, July 9, 2010

RIL may run for Bombay Dyeing biz

Likely To Compete With Indo Rama & JBF Industries To Buy Loss-Making Polyester Plant

THE Wadia-Ambani feud of three decades may end in a bittersweet deal. The possible sale of Bombay Dyeing's polyester plant to Mukesh Ambani, scion of the polyester prince who vanquished the Wadias in the battle for a petrochemical empire.
    Reliance Industries (RIL) may compete with Indo Rama and JBF Industries to buy the loss-making plant of Bombay Dyeing, which is on its way out of a business that led to a spectacular public fight in the 80s with Reliance founder Dhirubhai Ambani, said two persons familiar with the developments.
    Bombay Dyeing & Manufacturing Co, born as The Spring Mills in 1903, may seek shareholders' nod next month to sell the plant that can produce 165,000 tonnes a year, they said.

    The Wadias are metamorphosing into builders of homes and offices from selling textiles and petrochemicals, where prospects are dimming. This follows their failure to establish in the petrochemical business, where Reliance has taken giant strides in the last three decades after choosing a different ingredient to make polyester. In the 1980s, both the business houses accused each other of manipulating government policy to suit their interests. Ultimately, the Ambanis won.
    "There is no proposal with the board to sell the PSF business,'' Durgesh Mehta, joint MD of Bombay Dyeing, said in an email.
    A Reliance spokesperson said: "As a policy, we do not comment on speculations."
    Although petrochemicals and textiles contribute about two-thirds of Bombay Dyeing's revenues, they lost more than Rs 100 crore in fiscal 2010. The real estate divi
sion made a pre-tax profit of Rs 346.45 crore.
    The group's petrochemicals problems started with it choosing dimethyl terephthalate to make polyester while Reliance preferred purified terephthalic acid. In a controlled socialistic economy and small market, duty structures can make all the difference. Duty on these goods were dynamic, which some say favoured Reliance.
    In the 80s and 90s, Reliance marched ahead with increasing capacities, by gobbling up smaller rivals, while the Wadias lost.
    "The polyester unit could now be valued at about Rs 300 crore," said an investment banker close to the transaction.
    RIL chairman Mukesh Ambani recently told shareholders that polyester capacities will be increased.
Acquisition to boost capacity
ANY purchase of Bombay Dyeing's polyester business will boost RIL's capacity above 9 lakh tonnes per annum. If Indo Rama gets it, its capacity would go beyond 4 lakh tonnes.
    An Indo Rama spokesman said, `There has been no such discussions or developments in the matter that you have mentioned." A JBF official, who did not want to be identified, said it is evaluating proposals, including Bombay Dyeing's. Getting out of a business that does not make sense is not unusual for the Wadias. It began the journey building ships two-and-a-half centuries ago, including the ones on which the US national anthem was composed, and the deck on which China signed off Hong Kong to England, in the Treaty of Nanking. It doesn't build ships now.

    It also does not hesitate to jump on to the business that shows promise. When Bombay became the second-biggest cotton port in the world in the 19th century after New Orleans, it began dip-dyeing yarn by hand.
    The link with that business may thin with the sale of polyester plant in Patalganga, Maharashtra, which if Reliance buys can annexe with its own by just demolishing the compound wall. But Bombay Dyeing is expanding the construction business with its huge swathe of land in Mumbai, the financial capital.
    It has hired four expatriates, who cut their teeth in the Middle-East property market, to head project and design teams. It has built the corporate headquarters for nation's third most-valuable private lender, Axis Bank, in a land where a textile mill once stood.
(With inputs from Pradeep Pandey)


Monday, July 5, 2010

GM wants to do a China in India

ED WHITACRE CHAIRMAN & CEO, GENERAL MOTORS

   THE last couple of years have not been easy for Ann Arbor, Michigan-headquartered General Motors Corp. The once-iconic company went through a Chapter 11 bankruptcy, followed by a controversial restructuring that saw the government assume majority stake. This was followed by quicksilver top-level changes. First Rick Wagoner, the company's CEO since June 2000, stepped down in March 2009 at the request of President Obama. His successor, Fritz Henderson, lasted only till December. The new boss, Ed Whitacre, like his compatriot Alan Mullaly, CEO of fellow Detroit biggie Ford, is not an automobile man.
    Mr Whitacre, former chairman
and CEO of AT&T, can take comfort from the fact that while the North American business has struggled, GM's star has been shining brightly in the east, culminating with sales in China overtaking that of the US in the first half of 2010. "We know that to remain a global leader, we have to maintain our commitment to expanding GM's presence and success in critical markets such as India and China," he told ET in an email interview from Detroit, his first to a non-American publication.
    Part of that plan is to repeat the China story in India. "Our business in China has been growing according to plan, driven by an outstanding product lineup that grows stronger with each new introduction. Our strategy in India will be to repeat that business model."

Shell-shocked investors dump RNRL

SCRIP PLUMMETS 27%

Slide To Continue On Short Selling

TRADERS and investors in Reliance Natural Resources, or RNRL, watched in dismay on Monday as more than a fourth of the company's market capitalisation was wiped out in what is being seen as a strong response to an unfavourable share-swap ratio with group firm Reliance Power.
    The stock crashed 27% to close at Rs 46.40 as investors reacted to Sunday's announcement that shareholders of RNRL would get one share in Reliance Power, also controlled by billionaire Anil Ambani, for every four shares they hold in the natural gas supplier. Most RNRL shareholders and analysts had counted on a swap ratio of one share of Reliance Power for every three they held in RNRL.
    RNRL's fall on Monday figures high in the list of stocks that have been pummelled the most in a single trading session. Realty firm Unitech is perched on top with its stock having slid 51% in October 2008 followed by Chennai-based pharma company Orchid, which slumped 39%.
    Brokers say the stock could be under further pressure in the near term as many traders have heavily short sold the July futures. In short selling, an investor or trader sells a stock he does not own, betting on buying it later when the price slides.
    Interestingly, the outstanding positions in RNRL July futures declined 7% while the futures closed at a premium of Rs 0.15 to the spot price. According to market participants, this indicates that many traders had squared off their short positions by purchasing the falling futures. They added these traders would have short sold the futures last week, in anticipation of an unfavourable merger ratio.
'RNRL investors stand to gain'
THESE traders are upset at what they reckon is an attempt by promoters to place their interests ahead of minority shareholders. Promoters control close to 85% in Reliance Power, and about 55% in RNRL.
    Reliance Power CEO JP Chalasani told television channels that RNRL shareholders would benefit in the long run because of their exposure to the generation portfolio of R-Power.
    At the end of March 31, 2010, there were a little over 25 lakh individual shareholders in RNRL while Reliance Power had close to 35 lakh individual shareholders. In FY10, Reliance Power had a book value of Rs 58.69, and RNRL Rs 11.47. A merger based on book value would have thrown up a swap ratio of 1: 5.
    Some market participants say the ratio is not unfair, considering pa
rameters such as book value and business fundamentals.
    "If the promoters had strictly gone by book value, RNRL shareholders would have suffered further. Besides RNRL's existence had been undermined by the recent court (Supreme Court) verdict," said a BSE broker. What he meant was that after the Supreme Court ruled that the government had the last word in the pricing and distribution of natural gas, RNRL had little reason to exist in its present form. However, veteran brokers on Dalal Street say the merger ratio would have been influenced by minority shareholding in the respective companies.
    The original shareholders of RNRL had received shares free during the demerger of the Reliance group businesses in 2005 after the two Ambani brothers split.
    Reliance Power shares were sold
to investors through a highly publicised initial public offering in January 2008, which bombed. The promoters later tried to assuage minority shareholders by approving a bonus issue, which excluded the owners. The stock has consistently underperformed the market since it debuted and brokers say a re-rating is likely only when the company starts generating meaningful revenues.
    In financial year 2009-10, the company reported a revenue of Rs 8.55 crore and an earning per share of Rs 1.14, according to the BSE website.
    Interestingly, institutional investors hold just over 4% in Reliance Power—half of the institutional holding in RNRL—although the company has a sounder business model compared to RNRL, which was to eventually trade in the gas it expected to procure from
Reliance Industries.
    In May this year, RNRL shares had crashed 23% after the Supreme Court ruled that its memorandum of understanding with Reliance Industries for sharing gas was not valid. Quite a few domestic mutual funds had punted on the company just before the Supreme Court judgement, hoping for a verdict favouring RNRL. At a broader level, domestic institutions have been steadily paring their exposure to RNRL. At the end of June 2009, they held 3.74% in the company. This has come down to 2.61% as on March 31, 2010.
    However, for shareholders of Reliance Power, there is some cheer as the dilution resulting from the merger will be lower than what they had feared. Reliance Power shares rose nearly 4% to close at Rs 181.40 after touching a 52-week high of Rs 190 earlier in the day.

THE BIG EROSION
RNRL shareholders and analysts expected the merger swap ratio with R-Power to be 3:1, not 4:1 as announced. Traders are angry at what they perceive as an attempt by the promoters to place their interests ahead of the minority shareholders. Promoters control close to 85% in R-Power and roughly 55% in RNRL.


Veteran brokers feel the merger ratio may have been influenced by minority shareholding in the respective companies. As on March 31, 2010, there were a little over 25 lakh individual shareholders in RNRL, compared to nearly 35 lakh for R-Power.

Thursday, July 1, 2010

Govt approves $5.25 per mmBtu for ONGC gas

Govt approves $5.25 per mmBtu for ONGC gas

THE government has approved a higher price of gas for ONGC's C-Series fields in Mumbai offshore taking a step forward in its policy to bring all gas prices closer to market-determined rates. The C-Series gas priced has been fixed at $ 5.25 per million British thermal unit (mmscmd), which almost a dollar higher than the price at which Reliance Industries sells gas from the its fields in Krishna Godavari basin. Reliance gets $ 4.215 per mmBtu for the gas it produces from KG-D6 fields. The price for ONGC is a tad lower than $ 5.5 per mmBtu which it had sought earlier, said a oil and gas ministry official.
    The government had recently increased the price of gas sold at controlled price (administered price mechanism or APM gas ) by state owned upstream oil companies to $ 4.2 per mmBtu bringing it at par with KG D-6 gas.
    Natural gas produced from C-Series fields is sold to Gail which further markets it to end users. ONGC began production from C-Series fields last month and is currently producing between 0.8 to 1.2 million standard cubic meters per day from the wells drilled so far.
    The peak output from the field is expected to be 2.8 mmscmd after all the 15 wells are drilled after monsoon season.

Ballarpur Ind appoints JPMorgan, Citi to manage Dutch unit’s listing

BILT plans to increase its production capacity to more than two million tonne per anum in the next five years and is also looking at acquisition opportunities in the packaging and container boxes segment in the Asia Pacific region.

AVANTHA group flagship Ballarpur Industries (BILT) has appointed JPMorgan and Citigroup to handle the planned flotation of its Dutch unit Ballarpur International Graphic Paper Holdings BV (BIGPH).
    The Gautam Thapar-led group is exploring a Singapore or London listing for the company, although it is more inclined towards London, Avantha's finance director B Hariharan told ET NOW. The
group, according to people familiar with the listing plans, is targeting a valuation of more than $1 billion for the Dutch firm.
    Nearly 80% is owned by BILT
subsidiary, Ballarpur International Holdings (BIH) BV. The company also counts JP Morgan and the Government of Singapore Investment Corporation (GIC) as its shareholders. JP Morgan and GIC own 7.6% and 12.9% of the company respectively, after they collectively invested $175 million in 2008, giving BIGPH an equity valuation of $825 million.
    "For our investors to make a profitable exit through the listing, we should be able to command a much higher valuation than that," said Mr Hariharan.

    BILT could use proceeds from the proposed listing to expand its Malaysian subsidiary Sabah Forest Industries (SFI), which it acquired in 2007 for $261 million. It will also use some of the money to expand capacity at its Ballarpur, Bhigwan and Kamalpuram plants and to retire some of its debt.

Carmakers celebrate June Sales Boom

   COME rain or sun, carmakers are in no mood to slow down as sales continued to boom in June, riding on high domestic demand and new launches.
    Tata Motors led the charge with a 63% jump in passenger car sales in June that helped it overtake Hyundai Motors as the second-largest player in the domestic market.
    Maruti Suzuki, the country's largest carmaker, posted a lower-than-expected 18% growth in June. "New launches, competitive prices, easy availability of finance and the growing economy will help sustain the growth," said Jatin Chawla, analyst at brokerage firm India Infoline. He said the only area of concern is the supply of certain components, which may hit auto manufacturers in the short-run.
    Abdul Majeed, auto practice leader at consulting firm PwC, said passenger car sales will grow 15-20% in the financial year ending March 2011.
    South Korean carmaker Hyundai, which reported a 19% increase in its domestic sales, however, suffered a 22% drop in exports in June at 18,888 cars due to poor demand in Europe.
    "The domestic market continues to show a steady growth but exports have slowed down especially in the EU countries in the absence of any fresh incentives from the respective governments," said Arvind Saxena, director (marketing & sales) at Hyundai Motors, the country's largest car exporter. Maruti Suzuki, whose production was partly affected due to a weeklong factory shutdown for annual maintenance, however, recorded a 15% increase in exports.
    Tata Motors sold close to 28,000 passenger cars in June on rising volumes of small car Nano and doubling of sales of the Indigo range.
    Utility vehicle maker Mahindra & Mahindra's sales rose 20% to 27,562 units in June over last year but its passenger vehicle sales (Scorpio, Bolero & Logan sedan) dropped 3% to 17,573 units partly due to factory maintenance shutdown.
    In the two-wheeler segment, market leader Hero Honda sales rose 16% to 4.26 lakh units, helping it to post its best quarter ever for the three months ended June 30. Honda Motorcycle & Scooter India reported a 42% growth in sales at 1.46 lakh units in June 2010.

Non-finance cos’ MF foray gets tougher

CONDITIONAL ACCESS

 CAPITAL market regulator Sebi has just made it tougher for non-finance business houses to set up mutual funds, mirroring the central bank's aversion to business conglomerates handling the common man's money.
    No business house without at least five years of experience in financial services will be permitted to own stake in an asset management company, said a person close to the development who did not want to be identified.
    Anyone who owns over a 10% stake in the fund house would be deemed a sponsor, and will have to go through ``tough screening'' before getting an approval, the person said. Some subjective measures such as past customer service record will also be applied while giving out new licences.
    "Corporates who wanted to fly below the radar with less than a 40% stake can no longer do so,'' said the official. "They would be evaluated as a sponsor if they have more than 10%, use the brand name, or have a board position."
    Sebi, which has been cracking the whip
on mutual funds for more than a year now, is determined to let only serious investors into the business, instead of short-term ones who lend their names in the beginning and exit later. Despite nearly two decades of existence, these asset management companies are seen as lazy intermediaries concentrating in cities, plucking the low-hanging fruit, instead of reaching out to investors in the hinterland who need them.
    Sebi chairman CB Bhave recently said, "You need to question what the rationale for the industry is... If we have not been able to convince investors even with thousands of schemes, there is some problem with the products."
    The new rule has already had its first victim in Delhi-based real estate developer DLF pulling out of a joint venture with Prudential Financial of the US, named Pramerica Asset Managers.
    "The entry norms for mutual funds had definitely resulted in DLF moving out of the joint venture business," says Vijai Mantri, MD & CEO of Pramerica Asset Managers.

CHECKS & BALANCES

What's New
No business house without a five-year financial services experience will be permitted to own stake in an asset management company. Corporates would also be evaluated as a sponsor if they have more than 10% stake, use the brand name, or have a board position
What's the rationale
Sebi wants only serious
investors to get into the business, instead of short-term ones who lend their name at the beginning and exit later
What's the impact
Experts said the move is likely to boost investor confidence in a fund. Already, the new norm has prompted realty major DLF to drop plans to start an AMC in partnership with US-based Prudential Financial
DLF pulls out of joint venture
"THE entry norms for mutual funds had definitely resulted in DLF moving out of the joint venture business," says Vijai Mantri, MD & CEO of Pramerica Asset Managers. ``Investors get an impression that if a brand is associated with the mutual fund, then that brand is being approved by Sebi, which is now not possible until and unless the brand goes through the due diligence process."
    About 38 mutual funds had aggregate assets under management of Rs 8 lakh crore in June 2010, up 26% from a year earlier, according to the Association of Mutual Funds in India. More than two-thirds of the assets are in income funds, mostly from companies, and just a quarter of them in equity, reflecting a modest retail participation.
    Although some business houses' mutual funds have been performing well, others have been lagging.
    In the past, business houses such as the Kotharis and the Sun group of the Khemkas have sold stake in mutual fund businesses.
    Also, there have been allegations of business houses investing their own funds in mutual funds, boosting the
total asset size, a popular marketing tool.
    RBI had ordered the Anil Dhirubhai Ambani Group to pay Rs 125 crore as compounding fees for parking its foreign loan proceeds worth $300 million in its Indian mutual fund for 315 days, and then repatriating it to a joint venture company. That was treated as a violation of the foreign exchange act.
    For its part, the central bank had barred any single entity from owning more than 10% in a bank. There has also been a resistance to business houses owning banks.
    But the recent rules may not be a total stopper for companies that want to diversify. "We had applied through L&T Finance, so we got the approval," said N Sivaraman, senior vice-president-financial services, Larsen & Toubro, the nation's biggest engineering company.
    About 22 asset management companies, including Schroder Investment Management(Singapore) Ltd, Union Bank of India-KBC Asset Management, Global Investment House and Enam Asset Management are seeking regulatory approval to start mutual fund businesses.


India Inc’s billion-dollar buyouts turn the corner

ICONIC BUYS CORUS, JLR, NOVELIS RETURN TO PROFITABILITY

THREE iconic global acquisitions of India Inc, which had turned in combined losses of over $3 billion in FY09, are now on their way to a turnaround—raising hopes that payback for the $74.9 billion India has invested in 955 global buyouts since 2005 is round the corner.
    Corus, Novelis and Jaguar-Land Rover (JLR) were acquired by Tata Steel, Hindalco and Tata Motors, respectively. Each is at a different point in its turnaround and all three are expected to show further improvements in profitability when results for the first quarter of FY11 are announced a few weeks from now.
    Canadian aluminium can maker Novelis, a Hindalco acquisition that had recorded a $1.9-billion loss in FY09, was the first off the block with a $195-million net profit in the quarter ended September 2009. It went on to post a $405-million profit in FY10. Tata Motor's Jaguar-Land Rover (JLR), which had posted a £306-million
loss in the nine months to March 2009, made its first profit of £57 million in December 2009. JLR had reportedly recorded combined losses of an estimated $10 billion over a 19-year period under former owner Ford Motor. And Corus, now renamed Tata Steel Europe, reported an earnings before interest, depreciation, taxes and amortisation (Ebidta) of $513 million during the second half of FY10, as opposed to a loss of $814 million in the first.
    With this, India Inc will breathe a collective sigh of relief. Only a year ago, it seemed that India's global buyout binge was going awry. At one point, Ratan Tata, the flagbearer of India Inc's global push, even admitted that the group's two acquisitions may have been done at an inopportune time.
    The story goes back to a furious 15-month period starting 2007, when India Inc stunned the world by putting over $20 billion on the table for these three big acquisitions.

TURNAROUND STORY

NOVELIS: Bought by Hindalco for $6 billion in February 2007

FY09: $1.9 billion loss Q2 of 2009: $195 million net profit FY10: $405 million profit

JAGUAR-LAND ROVER:
Acquired by Tata Motors for $2.3 billion in June 2008
July-March 2009: Loss of £306 million December 2009: Profit of £57 million
CORUS: Bought by Tata Steel for $12 billion in Jan 2007

First half of FY10: Loss of $814 million Second half of FY10: Ebidta of $513 million
How the cookie crumbled
THIS triggered a global rush—local companies went on to acquire 422 international enterprises worth over $44.7 billion in 2007 and 2008, according to data provided by Venture Intelligence. For a while, it seemed India Inc was ready to conquer the world. And then, the cookie crumbled.
    The world slipped into a recession and Wall Street tripped on a minefield of its own making. Demand slackened. Corporate profitability went into a tailspin globally. Suddenly, the three iconic buyouts became dead weight.
    Both groups plunged into turnaround exercises, cuttings costs, shutting plants, laying off staff where required, and restructuring operations in a desperate attempt to stay afloat. There was an urgency behind all this—a mountain of borrowings that were taken to fund these buyouts became a huge load on the parent company's balance sheets.
    Over the last three quarters, there are some remarkable similarities in the way the turnaround has played out in these companies. All three have seen a sharp drop in revenues. Tata Steel Europe was the worst hit, with sales of $14.96 billion in FY10, down from $24.4 billion in FY09. And yet, all three have clawed back cutting costs and improving profit margins despite the lower economies of scale.

    JLR is revving up as a result of new car launches and a successful entry into China. Novelis finally shed the baggage of illadvised contracts that forced it to sell cans to customers at prices lower than its raw material costs. It also reduced raw material costs by recycling a million tonnes of scrap. Tata Steel Europe reduced employee costs, and shipped ore from its mines in the US to feed the European steel plants. It cut costs by Rs 2,300 crore in FY10 and is looking to slash another $250 million this year.
    Of the three, Novelis has made more progress on the path to profitability. JLR is also making profits at a net level, but its product categories are still vulnerable to the economic environment, particularly in Europe and the US. The turnaround at Tata Steel Europe, though, is still in its early stages.
    The JLR turnaround was driven by some tough measures: it cut production by almost 100,000 units since the acquisition, dropped unsuccessful models and focused on a smaller portfolio of models like the Jaguar XF. This helped it pare inventory from 162 days' sales in December 2008 to 79 days in March 2010, saving precious working capital.
    "The fortunes of JLR have certainly improved and the operations are benefiting from the combined impact of restructuring and cost reduction measures, a revival from the depressed levels of 2009 in the
US market plus a healthy growth in China," said Ashvin Chotai, MD, Intelligence Automotive Asia, a consulting firm.
    China has been a success story. JLR hardly sold anything in the middle kingdom at the time of the Tata acquisition. But sales in the country went up to 12,630 units in 2009 and in the first months of this year, it has already crossed 10,300 units. The company is looking to sell 20,000 Land Rovers and 5,000 Jaguars in China this financial year. This would mean that this new market will account for 12-13% of JLR's estimated worldwide production of 200,000 units this year.
    Still, JLR lags behind other competitors like BMW (it hopes to sell 120,000 BMW, Mini, and Rolls-Royce vehicles) and Mercedes-Benz (sales target of 100,000 units). Unlike JLR, which imports cars into China, these rivals make their cars locally. JLR will also start assembling cars in China soon and is setting up a national sales company, two people familiar with the development said.
    Worldwide, JLR sales have grown 70% since early 2010, but are still well below peak figures seen earlier. JLR is hoping that new launches like the new Jaguar XJ, unveiled in late 2009, and the 2010 Land Rover, particularly Discovery 4 (LR4 in the US) and Range Rover Sport 2010 will help it move to the next gear.
    The Novelis turnaround started on the
back of unexpected strong sales in Asia and South America. "In Asia, we are doing well in India and China. So is South America, which is a big market for us," Novelis vice-chairman and Hindalco managing director Debu Bhattacharya told ET.
    The return to profitability was also possible once the company decided to focus on a small base of customers who needed high-value products like flat rolled products (used in cars, aircraft etc) and were able to offer better margins and faster payment. It also took the tough decision to close down units, said Mr Bhattacharya. In March 2009, Novelis shut the Rogerstone unit in the UK that pared 440 jobs.
    But the big improvement happened only when the unfavourable can supply contracts were wound up. "We tried to complete the supply contract (unfavourably locked in by the previous management) and each year pared our exposure," said Mr Bhattacharya.
    Tata Steel's efforts to revive Corus followed a three-pronged approach: cut costs by focusing on intermediate steel products, reduce production in sync with demand, and slash manpower.
    Earlier, Corus was primarily making long steel, a final product in the steelmaking process, used in the construction sector. Post-acquisition, it decided to add flat more products to its portfolio. Flats, used by consumer product companies,
sell at a premium of about 30% over base-grade steel. (Both longs and flats are made from slabs, an intermediary product.) This enabled it to win new customer segments like automotive and consumer products.
    "Making intermediates or slabs has another advantage—they can be converted into making either flat products or long steel," says Chintan Mehta, a research analyst with Mumbai-based Sunidhi Finance. This gives it more flexibility in adapting to demand patterns.
    It has also temporarily shutdown the Teesside plant, which accounts for fifth of its output, a bold decision made despite political opposition. The workforce cuts have been relentless. Since 2009, Corus has cut more than 5,000 jobs, mainly from the UK. The steel company also has units in the Netherlands.
    Having cut costs, the company is now hoping to do better as demand improves. Capacity utilisation has already increased to 81% in the second half of last year, compared to 64% in the first. This is expected to increase to 84%, according to a presentation the company made to analysts.
    Tata Steel Europe still makes a loss at the net level, and the management is noncommittal about a likely timeframe for a complete turnaround. Only when that happens will the success of India Inc's big three global acquisitions be complete.

 

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