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Monday, January 31, 2011

Egypt unrest may fuel rally in oil & gas stocks Turmoil Could Trigger Oil Crisis, Benefit ONGC, RIL, Cairn, Say Analysts

 THE political unrest in Egypt, which threatens to destabilise the oil-rich Gulf region, fuelled a rally in oil and gas exploration company shares on Monday. Analysts expect the rally to continue over the next few days as they feel the Egyptian crisis, if not resolved peacefully, could hamper petroleum imports into the country.
    Brokers are recommending shares of oil exploration companies on expectations that the Egypt unrest could trigger an oil crisis. Most analysts ET spoke to believe that Brent crude global crude prices could breach $100 a barrel over the next few days. "Crude prices will spike in the short term... it will benefit oil exploration companies like ONGC, GAIL, OIL, Cairn India and Reliance Industries," said Deepak Darisi, oil analyst at LKP Securities. "The Egypt crisis has spawned negative sentiment in the global crude market. If the conflict goes out of control, it could impact oil supplies to Europe and Africa via the Suez Canal, but such a scenario is highly unlikely as there is too much at stake for developed countries. Egyptian authorities will be forced to
settle the issue before it gets out of hand."
    Countries around Egypt produce nearly a quarter of the world's oil supply, hold nearly all of its excess production capacity, and account for a majority of its proven oil reserves. Oil prices are highly sensitive to potential supply disruptions. This is even more in the case of Egypt because it is home to the Suez Canal, a shipping course that connects Asia to Africa and Eu
rope. An estimated 1.8 million barrels per day of crude oil and refined petroleum products flowed through the canal to the Mediterranean Sea in 2009, according to data collated by US Energy Information Administration.
    "Oil exporting countries in Europe and Africa are worried about an oil pipeline disruption (passing along the Suez) by angry protestors. They are also apprehensive about the possibilities of a Suez canal blockade," said Alex Mathews, head - research, BNP Paribas Financial Services. "In such cases, oil supply will decline and crude prices will shoot up, benefiting exploration companies," he said.
    Another factor going in favour of oil exploration companies is the payment imbroglio be
tween India and Iran. Iran, a major oil exporter, has been pressuring importing countries to pay in euro instead of US dollar. Iran has threatened to stop selling if its requirement is not met. India, which imports 18 million tonnes of crude from that country (overall crude requirement is 185 million tonnes per annum), is yet to reach a consensus on the payment issue.
    "The payment issue, if not settled, could create temporary crude shortage in the country. It could lead to capacity under-utilisation among oil refiners," said Alok Deshpande, oil analyst at Elara Capital. Mr Deshpande does not expect the Egypt crisis to have a major impact on supplies to India. However, he expects crude prices to move up in the interim.

Emerging market equities
downgraded on oil worry
BANGALORE: Credit Suisse downgraded its rating on emerging markets equities to 'neutral' from 'overweight' on increasing geopolitical risks in the Middle East and North Africa regions and increased uncertainty over oil prices. The brokerage said the threat to the region from the Egypt crisis was particularly a threat to the global oil supply. There are concerns that oil-producing states in the region that produces over a third of the world's oil may face similar protests. "This could cause an oil spike which could then threaten the global recovery," the brokerage said. –Reuters


CAG to question move to let RIL raise D-6 capex

Govt Act Drastically Reduces Its Own Revenues

 THE Comptroller and Auditor General of India (CAG) is finalising a report that questions the government's move to allow Reliance Industries (RIL) to increase its expenditure in developing the D-6 field in the Krishna-Godavari basin by over $6 billion, significantly reducing the state's share of revenues from the country's biggest gas field.
    Despite the higher expenditure, Reliance's gas output from D-6 has fallen to about 55 million cubic metres a day, well below the target of 80 million cubic metres, a performance the national auditor may criticise, a senior government official, who did not want to be identified, told ET.
    Analysts say concerns over gas output from the field have been a drag on RIL's shares, which have fallen from a peak of 1,187 in November to 919 on Monday.
    Goldman Sachs said in a recent report there was "uncertainty" about ramping up output while JPMorgan said after the company's quarterly earnings that "RIL management gave no guidance on time
lines for ramp-up in the D6 field".
    The official said the chief auditor's finding is likely to include an extensive account of lapses by the oil ministry, which abandoned its own procedures, and by Reliance, which the CAG feels did not comply with some provisions of the production sharing contract (PSC). Under the PSC, the company that is awarded the field recovers the cost of developing the field from sale of gas and the balance output, called profit petroleum, is shared between the government and the company.
    The report would be sent to the oil ministry before it is placed in Parliament, the official added.
    Reliance did not respond to a detailed questionnaire sent by ET. Murli Deora, who was petroleum minister when the higher costs were approved, did not respond to calls or messages sent by ET.
    The CAG report is not final and could undergo changes after being reviewed by the oil ministry. But if the report sticks to the conclusion described to ET, it could lead to a furore in Parliament.
Production plateau under scanner
    LATE last year, a report from the national auditor claimed the government had lost $39 billion (Rs 1,76,000 crore) in selling airwaves below market rates. The report famously led to the resignation of A Raja, the telecom minister at the time.
    But the quality of the report—in particular the calculations that led to the headline-grabbing figure of $39 billion—has been criticised by current Telecom Minister Kapil Sibal, and by independent observers. The CAG is auditing RIL's D-6 block in the KG basin in order to assess whether the government's revenues have been protected and if the costs have been inflated. The government is to get 10-90% of the revenues generated from the sale of gas over the life of the KG basin, after deducting the expenses incurred by the operator, RIL in this case.

    The auditor is first scrutinising operations in four blocks, including D-6. The Director General of Hydrocarbons (DGH) and oil ministry had approved the increase in capital expenditure by RIL from $2.4 billion to $8.8 billion between September and December 2006. According to officials, the CAG report is likely to say almost all the money has been spent but only half the work has been done. RIL has drilled only 18 out of a total 50 wells. Importantly, auditors say, despite a huge increase in capex, there is no commensurate increase in gas production. The issue of production plateau from D-6 has also been flagged by seven research reports, which
came out between January 17 and January 25, reviewed by ET.
    " The company is currently engaged in talks with the government/DGH on various technical and regulatory issues pertaining to all of their E&P blocks. Better clarity on E&P ramp-up will be possible only on conclusion of these talks," says JPMorgan.
    HSBC said there was no "near-term positive trigger," and there are "lingering concerns on future gas production". "However, we believe RIL is unlikely to ramp up its natural gas production from current levels of 52-53 million standard cubic metres per day (mmscmd) near term, in the absence of relevant regulatory approvals for new development, technical limitations with existing wells and long lead time for critical deepwater equipment.

    The current gas production was not only well below the intended peak rate of 80 mmscmd but also sequentially lower. We believe this steady decline is a concern and could continue in the absence of remedial measures," the bank said. Goldman Sachs has also expressed concerns on the D-6 output stating that there is "uncertainty" on the ramp-up schedule of the project.
    The chief auditor also disagrees with the audit of D-6 by an entity approved by the DGH amid allegations that there was a conflict of interest and that the same auditor had audited some private investment firms of RIL's owners. Government officials said the audit was "very questionable", but there was no "documentary evidence" of any conflict of interest.
    VK Sibal, who was then the DGH, is
being investigated by the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI) for alleged wrongdoing in dealings with Reliance. The petroleum ministry had recommended an extension of Sibal's tenure beyond his retirement age, but the government rejected the proposal after objections from the chief vigilance commissioner.
    The report is also likely to observe many private firms in the exploration business had not complied with conditions in their production sharing contracts. The auditor is also expected to point out that the DGH and the petroleum ministry failed to serve either showcause notices or levy any penalties for these breaches, although staterun ONGC is frequently hauled up for similar lapses.

    The CAG had written several times to the oil ministry stating that documents and records were not being furnished by either the DGH or the ministry and, therefore, the audit would get delayed. It had also said RIL was not providing documents or giving incomplete documents. It had told the ministry the company was giving "limited access" to its systems to the auditors. At one point, the CAG also had to complain to the government about Sibal allegedly trying to limit the scope of the audit because of "concerns" expressed by private operators. "You would be aware that the CAG is an independent constitutional authority, and we would be entirely responsible for deciding the scope, extent and coverage of the audit," was CAG's reprimand to the oil ministry and Sibal.

Thursday, January 27, 2011

Cipla promoters in sale talks with global firms

Germany's Merck Currently Ahead In Race

 THE promoters of Cipla, India's second-largest drug maker by sales, are in negotiations to sell their stake to a global buyer, according to investment banking sources familiar with the situation. They have appointed Kotak Investment Bank and may conclude a deal some time this year, the officials said.
    Lucrative benchmark deals in the pharma industry over the last couple of years, such as Japanese company Daiichi Sankyo's buyout of Ranbaxy, and the purchase
of Piramal Healthcare's domestic formulations business by US pharma major Abbott, suggest there is no better time for Cipla to sell.
    Cipla's talks with Germany-based Merck seem to be most advanced, the banking officials said. Mails to Merck Germany went unanswered.
    Speculation that an MNC would emerge as the owner of Cipla has been doing the rounds for years, but has been vigorously denied by
the company. The denial was reiterated in response to a question from this paper.
    "We would like to reiterate the information on Cipla's stake sale is absolutely baseless and is purely speculative in nature and the company has no intention of any stake sale," said the Cipla spokesman.

    S Ramesh, Chief Operating Officer at Kotak Investment Banking, declined comment.
    Cipla, with over 5% market share, makes a good fit for any company looking for a sweet spot in the Indian pharma market. With shareholders of multinational companies urging them to expand in India, and relatively
few sellers here, buyers have been paying a handsome premium for available assets.
    Investment bankers said the promoter stake in the company is likely to be valued around 8,000 crore. If the promoter shares change hand, investors can expect an open offer to other shareholders under Indian regulations.
Sale talks doing rounds over 8 years
THEcompany has a large public shareholding, about 62%, so the tendering process may not mean as much for the average retail stock holders, one banker said.
    Another global company by the same name, Merck & Co Inc, is also said to be a potential buyer for the company. The company is also said to have met at least three other Indian pharma promoters to initiate talks. A Merck spokesperson declined to comment on the matter.
    Bankers said Watson Pharma and Boerhinger Ingelheim evaluated Cipla, but those talks are unlikely to work out.
    Yet, Cipla has long been the Patni—a software company whose promoters exited late last year after several aborted deals—of the pharma industry.
    Over the past eight years, talks of its sale have waxed and waned. This time, however, with chief executive Amar Lulla retiring due to health reasons, the buzz around the possible entry of a strategic investor is intense. YK Hamied, the company's charismatic promoter, is 72. "Every banker in town has pitched deals to Cipla. It is a company that has been rumoured to be on sale all through the last decade," said a senior investment banker.
    Two bankers advising foreign clients looking to buy pharma assets in India said Cipla may not fetch the same premium that Abbott paid for Piramal's generic business last year.
    Cipla has immense export potential to semi-regulated markets, bankers said. It also has a very strong product portfolio in the respiratory segment, one of them said. But, Cipla's plants are older, and its practices are less attuned to international standards compared with Piramal, they said. Also, Abbott may have been willing to pay more as it had reasonable free cash and is only expecting returns from its India acquisition over 10 years.
    Khwaja Abdul Hamied, the founder of Cipla, was a fierce nationalist. He set up The Chemical, Industrial & Pharmaceutical Laboratories in 1935, with a capital of Rs 6 lakh. The company has long been battling multinationals for the right to sell drugs at low prices in impoverished parts of the world. Hamied has won international acclaim for his efforts to sell anti-AIDS drugs in emerging nations, particularly in Africa, at a fraction of the prices charged by MNCs. This has brought him into conflict with MNCs, making Cipla's eventual exit in favour of a global giant deeply ironical.
    "It is a great company, but the owners are a hard bunch," said a banker whose firm had earlier worked closely with Cipla. "To start with, they are not capitalists." For the owners of Cipla, this may be an accolade.


Monday, January 24, 2011

RBI to tighten grip as inflation weighs heavy

Economists feel Subbarao must go for an aggressive hike today as high prices threaten to derail growth



    THE Reserve Bank of India (RBI) has hinted at further monetary tightening, saying containing inflation has become the dominant policy objective in the current environment.
    "Going forward, waning risks to the robust growth outlook and visible upside risks to the inflation outlook would shape the stance of monetary policy in the near term," the central bank said in its latest quarterly report card—Macro and Monetary Developments. "Persistence of inflation at a high level and widening current account deficit are the two
major policy concerns at the present juncture," it said, adding lower inflation is essential for sustainable high growth.
    This makes a strong case for tighter monetary policy measures. The market expects the central bank to further raise the benchmark policy rate—repo rate. This is the rate at which the central bank lends funds to banks against secu
rities. "I think RBI could raise policy rates by a quarter per cent. There is an outside chance that it would be half a per cent," said Jahangir Aziz, chief India economist, JPMorgan.
    Madan Sabnavis, chief economist at Care Ratings, said, "RBI is likely to raise interest rates by 50 basis points on January 25. Food inflation is extremely high and the government has given all the signs that on its part, it has done all it can to bring down prices and now the onus is on RBI to do its bit."

    "Higher interest rates will affect credit growth. If taking an anti-inflationary stance is the objective, then raising interest rates by 25 basis points would be too weak a measure. RBI should go in for a CRR cut, but it's unlikely to. RBI has been fairly aggressive in as far as taming demand-side inflation is concerned. Deposits have grown by 9.5% in the last eight months," he added.
    RBI has, however, not succeeded in taming inflation despite raising rates six times last year. It says sensitivity of inflation to past monetary policy measures has remained subdued due to the very nature of the inflation process.
    Aziz said, "It was neither large enough nor was sufficiently aggressive. They needed to
do more earlier. RBI has to hike rates aggressively if it is to bring down inflation."
    In its assessment of inflation, though the central bank has spoken at length on the supply-side constraints, it has after a long time acknowledged that high food and fuel inflation pose a risk of spillover to core inflation through higher input costs and inflation expectations.

    Its various forward-looking surveys also indicate receding downside risks to growth in the near term. The economy is expected to clock a higher growth than earlier estimated as professional economists have pegged growth forecast for FY11 at 8.7%, against 8.5% reported in the previous survey. A survey of over 1,500 firms by RBI shows though they are optimistic about the outlook for the current quarter ending March '11, there is a slight moderation in their optimism.


Thursday, January 20, 2011

ONGC public issue may slip to next fiscal

OIL and Natural Gas Corp's (ONGC) 13,000-crore public issue is likely to be deferred to the next fiscal, making it the second equity offering to be a casualty of crude oil's ascent to nearly $100 barrel.
    IndianOil's planned 20,000-crore offering has already been postponed to 2011-12 as the government's decision to freeze diesel rates despite soaring crude prices clouded the company's earnings outlook and valuation.
    ONGC, which will have to foot a big chunk of the fuel subsidy bill, is facing a similar situation, although the timing of its issue will be decided by the cabinet.
    "This is not the right time for the public issue. We will not get its right valuation," a cabinet minister, who did not want to be named, said.
'Not the right time'
WE MUST not go for distress sale, especially when we have substantial collection from the auction of spectrum," the minister added, referring to the auction that fetched over 1 lakh crore for the exchequer. The setback for the issue comes just days after leading bankers made a presentation to get the mandate to manage the offer. ONGC has shortlisted Morgan Stanley, HSBC, Nomura, Citigroup, Bank of America Merrill Lynch and JM Financial Services for the mandate. ONGC's subsidy burden in 2009-10 is estimated to rise over 50% to about 22,000 crore in this financial year.
    Experts do not see this as the appropriate time to get better value for India's blue-chip company. The subsidy burden would impact its overall profitability and valuation for the purpose of FPO, KPMG director for tax & regulatory services Nabin Ballodia said.
    Earlier this month, ONGC chairman & managing director RS Sharma said a higher subsidy payout would hit the company's third-quarter profits. According to ONGC officials, India's largest oil producer finds optimum comfort level at a crude oil price of $70-80 per barrel. Beyond this level, the company's net realisation decreases due to higher subsidy outgo.

Thursday, January 13, 2011

Lifts Ban On Non-Voice Services, But Asks Telcos To Offer Interception Capabilities For Them

Now, make video calls on mobiles as govt allows full 3G data service

 MOBILE phone companies can offer on mobiles video calls and other third generation (3G) services such as high-speed internet and chat, on the condition that they provide interception capabilities for these services by July 31, the telecom ministry said on Thursday.
    Reliance Communications and Tata Teleservices that have already launched 3G — high-end data services on mobiles — can therefore offer unrestricted services now. Last month, the government had asked mobile phone companies not to offer non-voice third generation mobile services unless they demonstrate that these facilities can be tapped live.
    This temporary ban on 3G services had threatened to dent the first mover advantage enjoyed by Reliance Communications (RCOM), Tata Teleservices, and the state-run companies, in addition to delaying plans of Bharti Airtel, Vodafone, Idea Cellular and Aircel to launch these high
end services on mobile.
    An RCOM spokesperson said the company welcomed the telecom ministry's clearance for providing all 3G services. RCOM also said it would provide monitoring capability for video calls with the support of global vendors by the July 31 dead
line. "RCOM has been eagerly waiting for the past six weeks, having completed the testing successfully in compliance to global standards and practices for such monitoring," the company added.
    The telecom ministry, in a statement said that service providers must develop
required technical capabilities and submit them for testing in advance so that the evaluation process is complete well within the July 31 deadline.
    Bharti Airtel's chief executive Sanjay Kapoor said on Wednesday that the company, which was earlier slated to offer 3G services by December-end, would launch these facilities "soon".
    In December, the Intelligence Bureau objected to 3G data services on handsets because the agency was unable to tap these facilities live, or on a real time basis.
    Private operators paid 51,000 crore to the government for the 3G airwaves after an auction held in May 2010. BSNL and MTNL were allotted 3G spectrum earlier, but the companies had to match the price paid by private competitors for the airwaves.
    An intensely competitive environment has more than halved call tariffs in the Indian telecom space since late-2008, putting pressure on profitability. Companies paid a high price to get airwaves for 3G services with which they hope to catch premium customers

Infosys Q3 net rises14.2% to 1,780 crore

Lower-than-expected earnings blamed on wage costs, currency fluctuation & European woes

INFOSYS Technologies raised fresh concerns over the pace and depth of recovery in the IT sector by reporting lower-than-expected third quarter earnings due to wage costs, currency fluctuations and sluggish European economic growth.
    The first among its peers Tata Consultancy Services and Wipro to announce earnings, investors and experts tracking the sector take cues from Infosys' performance, which in many ways sets the agenda for the entire industry. While rival TCS will announce its December quarter earnings on Monday, Wipro is set to report its third quarter results on January 21.
    "There is an overhang of sovereign debt in Europe, uncertainty over economic environment, unemployment is high," said Infosys CEO S Gopalakrishnan. "In Europe the volatility is high, reflected in the currency and if something bad happens the repercussions are global like when Lehman
failed. So that's what we have to worry about and what we are seeing because of that is project sizes coming down and clients focusing on the short term," Gopalakrishnan added.
    In rupee terms, Infosys posted October to December quarter revenues of 7,106 crore, lower than 7,241 crore Morgan Stanley had forecast.
    Investors, alarmed by the company's comments on a weak economic recovery, dragged Infosys shares on the BSE during morning trade on Thursday by nearly 4% to 3,232.10. Infosys shares closed down by 4.82% at 3,212.30 on the BSE. Shares in TCS closed at 1,124.20, down by 1%. The third-biggest software exporter Wipro also saw its shares drop by almost 2.67% to 455.
    Top outsourcing customers such as JP Morgan and Bank of America, apart from automakers, are struggling to grow business and are turning cautious in their spending.
Infosys numbers a 'negative surprise'
    THE company posted lower-thanexpected 2.5% growth in net profit to 1,780 crore for the third quarter ending December. From a year earlier, the net profit grew by 14.2%. Top analyst firms and brokerage houses had forecast 3-5% rise in net profit. The company reported third quarter revenues of $1.585 billion, lower than $1.606 billion expected by brokerage firms. Some analysts, such as Rumit Dugar, Manoj Singla and Udit Garg of Religare, said Infosys numbers brought a negative surprise. "Infosys results and management commentary highlight the macro risks and soft volume traction is a negative surprise," the Religare analysts said in their note after the company announced its results.
    They added that even TCS and Wipro could provide similar commentary. "We believe that TCS and Wipro could see similar volume challenges and EPS growth to be largely in line with Infosys. Additionally we believe results also indicate that earnings expectations remain high," they added.
    Others such as Ganesh Duvvuri, VP, institutional equities (research) at Edelweiss Capital, said third quarter volume growth of 3.1% was the lowest for the company in the past five quarters.
    "As it managed to get pricing increases, it seems like it is focusing yet again on profitability as against growth. Its Q4FY11 revenue growth guidance of 2% quarter-on-quarter in dollar terms also seems to indicate that it is probably walking away from some existing large client, which is not meeting its margin threshold," Duvvuri said.
    Infosys also revised its revenue guidance for the year upwards, and said the revenues for year ending March 2011 would be in the range of 27,408-27,481 crore, as it hopes that customers will give more outsourcing orders after the vacation. Since April last year, Infosys has revised its revenue guidance every financial quarter.
    "For a stock touching new life highs every day, results need to come at the top end of street expectations, not struggle to meet them. By that yardstick, Infosys' December quarter report leaves much to be desired," CLSA analysts said in a report after the company an
nounced its earnings.
    Coming out of last year's recession, investors were hoping Infosys to grow its December quarter revenues by 5-7% and also improve operating margins. This could have set the tone for the entire industry. "Somewhere, the order flow bullishness from the sector has been lost in translation when we compare Infosys numbers to what could have been, or what we reasonably expect from its larger peer TCS come Monday evening," the CLSA analysts said. "Firstly, it quietens things down somewhat. We have noticed an urge to not only invest in the toptier stocks in the sector, but also go down the chain to mid-caps. A dose of realism comes handy here. Secondly, making money in Indian IT is a longer waiting game than before," the analysts added. Infosys, which counts BT among its top customers, saw its revenues from telecom clients drop to 12.5% of the total revenues, much lower than 16.2% such customers contributed a year ago.
    Despite an overall recovery in outsourcing spend predicted by top analysts, Europe continues to drag prospects of vendors such as Infosys. The company, which counts ABN Amro and BP Plc among its top customers from the region, was hit by 6.3% growth in business from Europe — lower than 18% growth during the September quarter last year. Brokerage firms Citi and Kotak expect the top three Indian software exporters to register 5-7% sequential revenue growth. Investors had forecast TCS and Infosys to post 27-28% and 31-33% operating margin, respectively, for the quarter ending December. An appreciating rupee, which rose by 3.5% against the US dollar ensured that Infosys' operating margin, a measure of profitability, remained unchanged from the second quarter. The company's margins have come down from almost 35.5% during the December quarter of 2009 to 30.2% in the third quarter this year. Brokerage firms such as CLSA had expected Infosys' margins to improve by around 0.7% during the period.
    With around 1,27,779 employees on its payroll, Infosys will decide on wage hikes over the next three months. Last year, the company had given 17% hikes. The company added 5,311 new staff during the third quarter.

Wednesday, January 12, 2011

Rel Infra, RNRL close to deal with Sebi

TO SETTLE CHARGE OF SECURITIES NORMS BREACH

RELIANCE Infrastructure and Reliance Natural Resources are close to reaching a settlement with market regulator Sebi by paying consent fees, ending a long-running investigation into alleged violations of foreign portfolio investment regulations.
    The companies, part of the Anil Dhirubhai Ambani Group, and their top executives have also agreed to abide by conditions set out by Sebi, four persons with knowledge of the development told ET.
    The move will remove a persistent source of uncertainty that has dogged the companies for years. "The move is positive for Reliance Infra because the company will be able to access the capital markets without this shadow of regulatory uncertainty. The company could have litigated all the way to the Supreme Court but that could have dragged
on for years and simply made no sense," said one of the four people. RNRL is in the process of being merged into Reliance Power, another ADAG company. So the proposed settlement is not particularly consequential for it. Conditions are mainly pledges for R-Infra, RNRL
THESE conditions are mainly pledges to tighten internal processes and are not particularly onerous, the people said. They are a standard part of any consent agreement.
    The settlement, which will involve a total payment of close to `50 crore by the two companies, is close to being concluded after the consent terms were accepted by a three-member internal Sebi committee headed by retired Mumbai High Court judge Hosbet Suresh.
    The panel's conclusions are likely to be endorsed by two whole-time members of the Sebi board, three of the four persons mentioned earlier said. The ruling of the two board members is final. ADAG officials declined comment for the story.

    Reliance Infrastructure, which distributes electricity in the suburbs of Mumbai and in parts of Delhi, is one of the flagship companies of the Anil Ambani Group. It also owns close to 45% of Reliance Power, which is implementing 25,000 mw of projects.
    If the final figure endorsed by the regulator is close to 50 crore, it will be among the highest fees to be paid since it was introduced in 2007.
These negotiated settlements are common in the US where the Securities & Exchange Commission, or SEC, approves a large number of consent orders every year. In India, a firm or person facing a probe can submit an application seeking a consent order, without admission of guilt and without denial of liability. Sebi has the right to refuse to enter into consent proceedings if the violations are be particularly egregious.
    If the regulator agrees, the entity facing the probe has to finalise the terms with Sebi officials. These terms then go through a two-stage vetting.
    First, they have to be endorsed by a panel headed by a retired high court judge, currently Hosbet Suresh. The panel's conclusion then has to be endorsed by two full-time members of
the Sebi board. Full-time members are officials in charge of executive functions as distinct from part-time board members.
COMPLEX CASE
At the heart of this case is a showcause notice issued on June 7, 2010, by Sebi to the two companies and their top executives.
    The notice came in the wake of a probe by the regulator and government agencies into dealings of Pluri Emerging Companies, an obscure foreign portfolio investor, which purchased participatory notes with stocks such as RNRL and Reliance Infrastructure as the underlying.
    Participatory notes are derivative instruments that allow offshore entities to trade in Indian stocks anonymously.
    Pluri had bought the participatory notes from Hythe Securities, another FII, which in turn had bought them from Barclays Bank, a British bank.
    At that point, the Enforcement Directorate was probing Pluri for a series of allegedly fraudulent transactions involving the siphoning off of funds from the accounts of two Anil Ambani-promoted firms in the London branch of UBS and the use of
these funds to buy shares in India. The proceeds of foreign loans raised by the ADAG firms were parked in these accounts.
    Sebi had also pulled up Societe Generale, the French financial services group, and Barclays in connection with the dealings with Pluri. Both foreign banks were exonerated by Sebi after they strengthened internal processes. They did not have to pay any penalty.
    Sandeep Parekh, Founder, Finsec Law Advisors, and a former executive director of Sebi said consent proceedings provide a wide range of options to the regulator to fashion a remedy.
    "In a given case where the severity of the crime is high, the regulator is free to adopt measures beyond the usual penalty. For instance, there could be consent bar from raising capital, consent bar from acting as a director of a listed company,
consent disgorgement or consent freezing of voting rights, to name a few," he said.
    However, such conditions are not part of the consent order in case of the two ADAG entities, the people with knowledge of the proceedings said.

UNCERTAINTY ENDS: Anil Ambani

Industrial output in Nov slows to 18-mth low


New Delhi: The country's industrial output in November slowed to an 18-month low of 2.7%. A sluggish 2.3% expansion in the manufacturing sector was mainly responsible for the slump.
    The latest industrial data heaped more pressure on the government already battling high food prices, as worries about a possible industrial slowdown gathered pace and posed a dilemma for the Reserve Bank of India which is widely expected to raise interest

rates to calm rising inflation.
    Industrial production data has displayed volatility in recent months but policymakers said the November data needed to be examined in detail before drawing any conclusion.
Prices of cooking oil, spices soar in city T he common man is being hit from all sides. After onions and vegetables, prices of edible oils have gone up by as much as Rs 15 a litre in Mumbai in the last two months. Spices like red chilli, turmeric , cardamom now cost a packet. P 2 IIP slump does not alarm economists
    If IIP (index of industrial production) goes down and inflation goes up, it will have an adverse impact but I am not coming to any premature conclusion," finance minister Pranab Mukherjee told reporters. "We will have to look into the corrective measures so that IIP numbers revive in the coming months."
    Planning Commission deputy chairman Montek Singh Ahluwalia, however, sought to play down concerns saying the economy was on track to grow 8.5% during 2010-11 and the low IIP numbers in November did not pose any concern.
    "I am not concerned about the low November number. There is month-to-month volatility. The cumulative industrial growth number is about 9.5%. That is very reasonable considering the overall GDP growth target we have," Ahluwalia said.

Economists said they were
not alarmed by the drastic slowdown in the November
IIP number and attributed the
moderation in manufacturing activity to rising input costs
and possible impact of interest rate tightening. "Am I alarmed? No, not terribly alarmed but certainly there is some concern," Shubhada Rao, chief economist at Yes Bank said.
    But she said soft patches in the data such as the decline in consumer goods and consumer non-durables need to be examined as other data show a different trend.
    Economists said despite the dramatic slowdown in November IIP, the RBI will raise interest rates by at least 25 basis points as inflation is a bigger concern than growth.
    State Bank of India chairman O P Bhatt expects the central bank to raise key interest rates by 25 basis points. Price pressures have risen in recent months and food price inflation shot up to 18.32% in the week to December 25 on the back of soaring onion, vegetable and fruit prices. RBI has raised interest rates six times in 2010 to
tame inflation. Electricity and mining sectors remained buoyant in November rising 4.6% and 6% respectively from as year-ago. The capital good sector, a key gauge of industrial activity, remained buoyant growing 12.6% while consumer goods declined 3.1% in November and consumer non-durables fell 6% compared to the same year-ago period.
    Barclays Capital said the decline in the consumer durables output in November could be on the back of a reduction in festival-related buying, smaller number of working days and ongoing tightening of interest rates.
    But it expects industrial production data to remain soft in the months ahead. "On balance, while overall activity levels are expected to remain steady, we expect headline IIP growth numbers to remain soft with a high level of volatility," Barclays Capital said in a research note.

Tuesday, January 11, 2011

Infosys losing margin edge as rivals catch up

As clients get cost-wary, it's getting hard for Infy to sustain profitability gap over rivals

AFTER years of commanding up to 15% better rates for outsourcing projects than domestic peers, Infosys Technologies now sees its premium pricing erode, raising concerns about whether India's most profitable software company can sustain its high operating margins.
    With customers such as BT giving more work to fewer vendors at lower rates, it's becoming difficult for Infosys to sustain the profitability gap it used to have over bigger and aggressive rivals such as Tata Consultancy Services (TCS).
    During the second quarter ended September last year, TCS reported operating margins of 28%, quite close to Infosys' 30% margins during the same period.
    "In my mind the premium pricing for us was 10-15%, it would have come down a bit, but we still command premium. Today it's definitely not 15%," Infosys COO SD Shibulal said in an interview last month. "The fact is that it's a treadmill, and you have to keep at it, and that's where the aspiration comes in," he added.
    "Factors that got Infosys ahead of peers on pricing in the past will not take it ahead today. This is a departure from the past when Infosys drew on a combination of both volume growth and meaningful price rises to drive performance," JP Morgan Analysts Viju K George and Nishit Jasani said in their report.
    In many ways, Infosys' relationship with large customers such as BT and Goldman Sachs helped it build its premium positioning in the past.
    However, during the past 2-3 years, when customers, including BT, started looking beyond just a few vendors to further squeeze costs, that positioning was threatened.

    BT, for instance, is now working with both TCS and Wipro apart from Infosys. Clearly, the challenge Infosys faces is more of inventing newer models and service lines to keep widening the gap.
    "The only problem is that whatever distance you create, it keeps coming down, so you have to keep building that distance," Shibulal had said.
    Infosys — the first among peers to announce earnings every quarter — will report results for the third quarter ended December on Thursday.
    Brokerage firms such as Citi and Kotak expect the top three Indian software exporters to register 5-7% sequential revenue growth. Investors forecast TCS and Infosys to post 27-28% and 31-33% operating margins, respectively, for the quarter ending December.
Infy margins may shrink to 32%
INFOSYS' margins have shrunk from almost 35.5% during the December quarter of 2009. Kotak analysts expect the margins to drop to around 32% during the year ending March 2011.
    The problem for Infosys has been accentuated by the fact that last year's recession has brought cost back on the agenda for many customers - they still want the best, but are questioning every extra buck they have to pay for 'premium services'. "Historical premiums, enjoyed in the past on certain accounts such as BT by Infosys may still exist, but stand considerably diminished today relative to where they stood. In other words, we do not see a case for pricing premium in favour of any one player in
this industry, going forward, unless companies differentiate on clear parameters," the JP Morgan analysts said.
    Rivals say as lines of differentiation between the top three Indian software exporters blur, the gaps would fade away.

    "We have been catching up, and it's no secret. Some customers have now realised that they were paying for brand, when in fact they should be paying for services being offered," said a senior executive at one of the top five Indian software exporters. "We now work with at least two of large Infosys customers," he added.
    Some customers are also questioning high margins enjoyed by vendors such as Infosys, as they struggle to cope with pressures of their business amid a jobless recovery in the US.
    "I know of at least 3-4 customer discussions during the past few months where the high margin of vendors was used as a tool to negotiate better, lower rates," said an outsourcing consultant based in the US who helps mid-sized customers plan their outsourcing strategy.
    Analysts tracking TCS and Infosys say India's biggest software exporter has been reducing wage costs, among other
initiatives, to narrow its profitability gap with Infosys.
    "TCS' strong margin performance through the last 3-4 quarters can be traced to a series of steps that began in early 2009. The key focus of margin defence has revolved around controlling the manpower costs, which form 75-80% of total costs for Indian techs," CLSA Analysts Bhavtosh Vajpayee and Nimish Joshi said in a report.
    Other cost-cutting initiatives to increase margins include closing redundant offices. "It (TCS) had four times as many offices as Infosys at one time - raising overhead costs," the CLSA analysts said.
    On its part, Infosys still sees scope for premium pricing though this is being driven more by aspiration than anything else. The company is pushing harder to
increase its revenues from newer areas that are not commoditised. Infosys plans to have a third of its total revenues coming from new services, including cloud computing and platform-based offerings, over the next few years, even as such engagements mean lower profitability to begin with. The company has already started serving four customers using these models of delivering services, and derives nearly 5% of its revenues from such services currently.
    In a cloud computing or platformbased model, Infosys can serve multiple customers using same set of services developed for an existing customer such as Royal Philips Electronics.
    But rivals TCS and Wipro are already offering similar services to customers who are seeking to lower their capital expenditure by adopting pay-as-you-go model. "Profitability is more about aspirations than anything else; you have to have high aspirations. Profitability is your cost of production and what a customer is willing to pay for it, the more unique you are, the more intellectual properties you have, customer would be willing to pay for it," said Shibulal.



Gopalakrishnan & Murthy

Ghost of 2008 haunts Street as bears party

Investors Jittery As Macro Situation Threatens To Go Out Of Control

THE two-year investor ecstasy over India's macroeconomic growth is slowly giving way to agonising cries over inflation and interest rates, reviving memories of the 2008 savage collapse in equities that wiped out many investors.
    As the noise on soaring cost of funds and increasing commodity and crude oil prices gets louder, analysts are preparing to cut corporate earnings estimates for the first time in nearly two years. This could pressure stock prices that are already at a premium to emerging market peers.
    Two years of excesses with stimulus, topped with nature's fury—one year of the worst drought in three decades, the next of unseasonal rains—are triggering concerns among investors that macroeconomic health may deteriorate.
    Foreign investments in India are poised to slow from the record $29 billion in 2009 as overseas investors prepare to benefit from safer developed markets, with demand reviving in the US, including corporate action in the form of takeovers.
    "The current situation looks similar to that in 2008, when inflation had to be contained by raising interest rates," said V Anantha Nageswaran of Bank Julius Baer. "This risk is real and we suspect the repeat of a similar situation."

    Indian benchmarks have underperformed major developed and emerging markets since the macro situation turned shaky in the past few months. Suddenly, investors are worried about soaring prices that could force a reluctant Reserve Bank of India to resume raising rates. The currency looks wobbly as imports far outstrip exports, threatening to take the current account deficit ratio to 1991 crisis levels, a contrast to China's. Fiscal deficit, forecast at 5.5% in 2010-11, may not come under control next year as the Centre is tempted to spend more on welfare schemes with an eye on state elections. And, with about two months to go, the privatisation target of 40,000 crore remains just half achieved.
    "Macro concerns regarding inflation, fiscal and current account deficits, and potential earnings disappointments could lead to significant multiple compression from the current levels, which we see as elevated," Parul Saini of Royal Bank of Scotland says.
    Sensex is down 5.7% since November when the US' S&P 500 rose 7.2% and the MSCI world index gained 4.3%. The MSCI Emerging Markets is up 1.4%. India remains the most expensive among Bric nations, a moniker for the uniquely fastgrowing Brazil, Russia, China and India.
Emerging markets stand to lose
WHILE India is trading at 22 times companies' forecast earnings, Brazil and Russia are at 14.1 times and China at 17.9, which may lead to global investors choosing rivals over India.
    Signs of revival in the US economy and higher returns in developed nations could divert funds away from India. Foreign funds have sold Rs 1,152 crore worth of Indian shares this year. They may lower their investments in emerging markets as a whole.
    `For the last two months, what we have seen is that some of these longer dated investors, who have found themselves to be overweight in the developing markets simply because they let it go higher and higher, will put less and less money," said Abby Joseph Cohen, Managing Director and Senior Investment Strategist at Goldman Sachs. ``It doesn't mean they'll withdraw but it is just that they'll put lesser money as they see opportunities in the developed markets. The slowdown in overseas fund flows, with bearish outlook for corporate earnings due to input costs eating into profits, may make India underperform for a few quarters.
    Analysts predict headline inflation, or wholesale price inflation, to touch 7% by March 2011 because of higher food prices. This is significantly above RBI's target of 5.5%, and also above the finance minister's recent expectation of 6.5%. Current commodity prices (as measured by the CRB Metals Index, a barometer for base metal price movement) are up 45% this year than last years' levels while interest rates (as measured by three-month CP rates) are 88% higher.
    "We could see some earnings downgrades this year as higher costs lead to margin pressure," said Jyotivardhan Jaipuria, MD and head of India research at DSP Merrill Lynch. "It will be a year of very low returns in markets which will largely be rangebound. India is facing a problem of inflation, which will lead to higher interest rates. So near-term lower industrial production may also worry the market."
    Maruti Suzuki, Samsung, Tata Steel and Sterlite Industries have all raised prices to partly protect their margins due to a jump in their product prices. That is spreading in the system that could change the demand outlook. Food prices are jumping with essentials such as onions and garlic at multi-year highs on supply shortfall.
    "We expect lower earnings growth for fiscal 2012 and 2013 primarily due to less optimistic assumptions on margin expansion," wrote RBS' Saini.
    (With inputs from Nishanth Vasudevan)

Monday, January 10, 2011

ALL IN THE RED: SENSEX SHEDS 468 PTS

Global investors flee Street as rate hike fears loom

HDFC Bank and developer DLF led the fifth straight day of declines in equities as global investors fret over the potential increase in interest rates by the central bank to tame price rise.
    With global commodity and crude oil prices rising on revival of demand in the US, analysts believe that Indian companies' earnings would be hit due to high input costs.
    "Unrelenting inflation and high oil prices are the real concerns which will continue to weigh on the sentiment in next two-three months," said Edelweiss Capital Chairman and Managing Director Rashesh Shah. The government is trying hard to remove supply bottlenecks in its attempt to control soaring prices, he said.
    The benchmark Sensex fell 2.4% to 19,224.12 and the S&P CNX Nifty shed 142 points. The benchmarks are off 8.5% since their peaks last November. All sectoral indices on BSE fell. An average of 3.4 shares declined for every share that rose. As many as 28 of the 30 Sensex components fell.
    Foreign funds sold shares worth 1,139 crore on Monday, taking their total sale this month to 1,747 crore, data with exchanges show.
    Indian shares are more affected than other emerging markets because they are trading at a premium to others after a record $29-billion in
vestment by overseas funds in 2010. Their earnings growth could slow in the quarters ahead as they pay more for raw materials and for funds.
    The Reserve Bank of India, in its review on January 25, may raise borrowing costs again after increasing it six times last year to battle inflation. The repo rate—the rate at which the central bank lends to banks—is at 6.25%.
    The food price index soared to a 23-week high to 18.3% for the week ended December 25 with no signs of any easing after unseasonal rains hurt crops. This is leading to a price rise spiral extending to manufacturing goods too.
    Manufacturers of cars and motorcycles, and restaurateurs are raising prices across the board as they attempt to remain profitable.
    The Sensex is now at a one-month low after the second biggest fall this year. Among sectoral indices, BSE's realty index tumbled 3.6%, followed by capital goods, consumer durables and banking that fell more than 3%.

2011: Street Signals
FOR ANY investor globally, the start of each year gives rise to hope and fear on the returns they will make on investments. Read on to know what 2011 has in store for us. PAGE 15 

Friday, January 7, 2011

CRZ altered, Mumbai set for sea change

Mumbai: The city's sea skyline is set for a makeover. Construction along the coastline could pick up pace with the Union environment ministry on Friday notifying new coastal zone regulations, lifting the restrictions on floor space index (FSI) for the redevelopment of slum colonies and dilapidated cessed buildings under the Coastal Regulation Zone (CRZ).
    There are over 80 large slum pockets and 300 small ones on the coast between Cuffe Parade and Dahisar. Most builders were not interested in redeveloping these pockets primarily because the FSI—the permissible built-up area to the size of the plot—was restricted to between 1.25 and 1.6. The new notification, which came into effect on Friday, allows such slum projects to get an FSI of 2.5 to 4.
    The new regulations, however, do not give slum developers a carte blanche. The state government will have to partner with builders in redeveloping these slums and hold a minimum stake of 51%. A senior state official said he was hopeful this would give a fillip to affordable housing.
    Also benefiting from the additional FSI will be more than 4,000 dilapidated cessed properties in the island city, and other "unsafe buildings" falling under the CRZ.

BUILDERS' BOON

• Extra FSI for slum redevpt and old buildings under CRZ. Construction boom expected along city coastline

• No-development zone reduced from 200 m to 100 m from high tide line. Move will benefit fisherfolk

• Open spaces, parks and gardens in CRZ classified no-development zones

• All projects more than 2 lakh sq ft require clearance from the Centre
Builders must seek tenants' consent sooner Union Environment Ministry Rains FSI On Structures In CRZ II, But Introduces Safeguards For Project Approval
    Under the new norms, builders redeveloping these structures will get an FSI of between 2.5 and 3, instead of an FSI of 2 that was allowed by Coastal Zone Regulations, 1991.
    As an ostensible safeguard, the environment ministry has mandated that these projects can be executed only after public consultation. From now on, the builder has to get the consent of the legally entitled slum dweller or tenants of dilapidated cessed buildings before approaching the environment ministry for project clearance.
    Besides this, the ministry has streamlined the procedure for project approvals following complaints. Earlier, a redevelopment project in a CRZ II area of less than Rs 5

crore was approved by the state, while those above the amount had to seek the Centre's nod. Removing the old condition, the ministry has now stipulated that projects above 2 lakh sq ft (built-up area) will need its sanction. But before the MoEF comes into the picture, the state Coastal Zone Management Authority will have to evaluate the projects and recommend them to the Centre. Government sources said the ministry changed the Rs 5-crore clause after it found that many builders undervalued their projects to avoid the Centre's clearance.
    Insisting that redevelopment projects be carried out in an "accountable and transparent manner", the MoEF has ruled that the Right To Information Act shall apply to all redevelopment or recon
struction projects granted clearance by the authorities. Also, in future, details of the slum rehabilitation scheme, including names of eligible slum dwellers, will have to be revealed a month before approving the project.
    The new notification reduced by half the minimum no-development zone of 200 m from the high tide line. The ministry said the change is meant to meet the "increased demands of housing for fishing and other traditional coastal communities". There are 43 Koliwadas in the city, housing around 1 lakh fishermen.
    "Fishing settlement areas, identified under the development plan of 1981 or under records of the state government, shall be mapped and declared CRZ III so that any development, including construction and reconstruction, shall be undertaken in accordance with local Town and Country Planning Regulations," said the new notification.
    Under the new coastal norms, open spaces, parks, gardens and playgrounds indicated in developments plans within CRZ II shall be categorized 'no-development zones'. No residential or commercial use of such open spaces will be allowed. However, an FSI of up to 15% will be permitted for the construction of civic amenities, stadiums and gymnasiums meant for recreational or sports-related activities on such plots.
    An area of up to 12 nautical miles into the sea will be used for traditional fishing and related activities by local communities. "No untreated sewage, effluents, fly ash or solid waste shall be let off or dumped. A comprehensive plan for treatment of sewage generating from coastal towns and cities shall be formulated within one year in consultation with stakeholders including traditional coastal communities, and implemented," the notification said.
    The ministry directed all state governments to demarcate all CRZ areas using satellite maps.

Mapping Mangroves
The norms require the state Coastal Zone Management Authority to classify CRZ areas and map mangroves falling under CRZ-I. Also, a 1,000-sq-m buffer zone along mangrove areas has to be colour-coded

Sand Mining, Groundwater Digging
Barring for rare minerals and oil exploration, mining has been banned. Construction industry experts said that the move could affect the pace and cost of projects

Sea Link phase II
The norms permit construction of roads, approach roads and missing links in Mumbai's CRZ-I areas. The permission will help the second phase of the Sea Link

Discharge of Waste
Restrictions have been placed on coastline development and on throwing untreated waste and effluents up to 12 nautical miles into the sea

Mapping Sea-Level Rise
Besides tidal currents, the state has to include hazard mapping based on sea-level rise and shoreline changes




Sunday, January 2, 2011

Steel may cost 5% more from this week

Increase In Key Input Cost, Huge Chinese Demand Pushing Up Price

 STEEL prices are set to go up by about 5% later this week due to higher raw material costs, making it the second price hike in two months in the world's fastest-growing steel market after China. This is likely to increase the price of cars and consumer goods, which are among the largest users of steel.
    Steel companies, including JSW, Tata Steel, SAIL, RINL and a host of medium and small producers, could be raising product prices anywhere between 1,000 and 1,500 per tonne, depending on specific grades, a senior executive in a large steel company said. SAIL and JSW Steel had increased product prices in December by an average of 500 per tonne.
    Last month, contract prices of two key steelmaking inputs rose sharply — coal prices went up to $240 per tonne, while that of iron ore is up at $150 a tonne. They were at $230 and $130 per tonne respectively. "With input costs going up sharply, the possibility of a moderate price increase is very much on the cards," said the executive mentioned earlier. "We should be able to take a call on the extent of price hike in a day or two," he added, asking not to be named as price hikes are market sensitive.

    The price hike will be applicable on flat steel products, like hot rolled and cold rolled steel items, which are used in consumer durables and cars. Auto makers like Tata Motors, for instance, have already announced price hike on commercial vehicles.
    This could lead other makers of passenger cars like Maruti, General Motors and Hyundai Motor to follow suit. The rise in raw material prices is also likely to push up prices of long products of steel, which are typically used in construction and in
frastructure projects like roads, bridges and airports.
    Raw material prices have become dearer due to a number of factors. While domestic demand is strong, increased purchases by China, the largest steel producer, has pushed up prices.
    According to the European Confederation of Iron & Steel Industries outlook for 2010-11, steel market in Europe is also expected to sustain signs of a recovery in consumption in 2011.

STEEL FRAME
This is the second price hike in two months in the world's fastest-growing steel market after China
Cars and consumer good are set to cost more as these are among the largest users of steel
Last month, the contract prices of two key steelmaking inputs — coal and iron ore — rose sharply
Increased purchases by China, the largest steel producer, has been the main reason for the price rises

Tata Steel in talks to extend
tie-up with Canadian firm
TATA Steel is in talks with Canada's New Millennium Capital to extend an existing agreement to develop iron ore mines in Canada. Its current agreement with New Millennium expired on December 31, 2010. The Jamshedpur-based steelmaker also plans to ink an agreement with Japan-based Nippon Steel by this
month end to set up a 2,400-crore steel plant for producing auto-grade steel. Tata Steel owns 27.3% of New Millennium, which controls the emerging Millennium Iron Range in the province of Newfoundland and Labrador and in the province of Quebec, that holds the world's largest undeveloped magnetic iron ore deposits. Tata Steel also has an exclusive right to negotiate and settle a proposed transaction on the LabMag and KeMag projects. The Millennium Iron Range currently includes LabMag with 3.5 billion tonnes of proven and probable iron ore reserves. New Millennium's direct shipping ore project contains 64.1 million tonnes of proven reserves The company's proposed 50:50 JV facility with Nippon is expected to commence operation by early 2013 at the Tata Steel's unit in Jamshedpur. The facility's initial capacity would be 0.6 million tonnes (MT) per year. It aims to capture the growing demand for high-tensile auto-grade steel in India, Tata Steel managing director HM Nerurkar said. Nippon will transfer its technology for producing auto-grade steel. —Our Bureau & Agencies

2011 may be a choppy ride on Dalal Street

WARNING FOREIGN FUND FLOWS MAY SLOW

LAST Friday, most retired people had their best New Year eve in three years with banks promising them 9.25% for deposits. That should ring alarm bells for the young who plan an early retirement with bountiful returns from equity investments.
    Nine per cent growth hysteria notwithstanding, stock investors would do well to look at factors that lurk — rising borrowing costs, soaring commodity prices, poor infrastructure, pressure on profit margins, expensive share valuations, fiscal profligacy, early revival in the US and a likely slowdown in overseas fund flows because of all these.
    Indian equities have had a dream run over the past two
years since the credit crisis when yield-chasing global investors poured in record funds. That made the benchmark Sensex one of the best performers in the past two years, and also the most expensive among peers.
    More than $45 billion in overseas equity investments in two years and cheap domestic funds helped many, including investors. Companies on the brink of collapse got their lives back, the government's tax revenues accelerated and incomes rose for most.
    All that had an unintended, but well-known fallout — soaring prices that now threaten the very growth that made investors fancy Indian equities.
    "It will be a challenging year," said Dharmesh Mehta, Head (equities) at Enam Securities.
Challenging Year: Many adverse factors loom
IT WILL be a challenging year due to rising inflation, higher interest rates, record crude oil price, large money-raising target, political pressures and volatile global markets against India's strong domestic consumption and 8%-plus growth story," said Dharmesh Mehta, Head (equities) at Enam Securities.
    Reserve Bank of India Governor Duvvuri Subbarao, who signalled that he may be through with raising policy rates after doing it six times to 6.25%, may reverse his stance due to reemergence of inflation that was expected to cool after the monsoon.
    Inflation, as measured by the Wholesale Price Index in November was at 7.5% compared with 4.5% a year earlier. The RBI's estimates put it at 5.5% by March. Food price inflation averaged 16.9% in April-November, compared with 12.4% a year ago. The UBS Commodity index rose by a quarter in 2010. Even if domestic factors are tamed over the year, the loose monetary policies of the US Federal Reserve and the European Central Bank for a long time could cost emerging markets such as India dear.
    The easy availability of money has led to many commodities such as copper, rubber, coffee and gold trading at record highs. That could slow the profit growth of companies, leading to investors cutting equities. Crude is racing to $100 a barrel threatening India's current and fiscal deficits.
    That would be a bigger drag on Indian shares which are already trading at a valuation that is more than peers such as Brazil and China.
    "The Indian market appears to be fully valued on a number of metrics," Saurabh Mukherjea of Ambit Capital wrote in a report. "Even after the scam-induced correction, India is one of the most expensive."
    Indian shares returned 17.6% in 2010, more than the 81% a year earlier. That compares with 15% negative returns for Shanghai and 1% gain for Brazil. That performance pushed India's shares to a forward year price-toearnings multiple of 19.42 times, compared to Brazil's Bovespa at 12.94
times and China's at 15.95 times. Russia is at 8.69 times. Weak fundamentals could be worsened by fiscal issues too. The government, which got more than Rs 1 lakh crore as a one-time revenue from auctioning 3G telecom spectrum, seems to be headed towards spending more next fiscal, worsening its fiscal deficit forecast at 5.5% of gross domestic product.
    With assembly elections scheduled in major states such as West Bengal, the government may be generous with welfare spending.
    "With the rise in government revenues, we are raising this (for welfare schemes) allocation further," Finance Minister Pranab Mukherjee said last week. "The government income will increase once investment increases."
    Higher borrowings because of welfare programmes and fuel subsidies to oil marketing PSUs would put further pressure on interest rates which have firmed up in the last six months.
    With the Manmohan Singh government close to paralysis due to the telecom scandal, it may not move much on economic reforms such as higher foreign direct investment in insurance, that have been pending for years. The government has missed its target in many sectors, including power generation, road building and mining. "The complexity of doing business in India, high levels of bureaucracy and opaque processes contribute to high corruption," Sanjeev Prasad of Kotak Securities wrote in a report. "India may need to overhaul some of its current practices and strengthen its institutions to sustain a high level of GDP growth for an extended period of time." Overseas investors could take a dim view of investing in India after a spate of scandals such as the arrest of eight finance executives in the bribes-for-loans scandal.
    With the US recovery still fragile and European sovereign crisis in headlines, international investors may play safe with US treasuries, which yield 3.5% now. "This may impact the FII/FDI flows to India, which is critically dependent on them today as we run a high current account deficit of almost 3.5%," Edelweiss said in a recent report.

 

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