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Monday, February 28, 2011

Stocks to Trail Gold, Bonds

Stocks may take a further hit as spike in crude prices could trigger more sell-offs, warn fund managers

INVESTORS MAY HAVE
    to brace for more turbulence in the stock market
    next financial year, as
    unyielding inflation coupled with rising interest rates could slow economic growth and spark corporate earnings downgrades. While volatile stock market conditions would give value-hunters an opportunity to identify winners for the next three years, investments in shortterm bonds and gold would help investors beat the possible gloom in the stock market this year.
"Equities look vulnerable from a one-year perspective, but investors should take advantage of this to buy quality stocks from a two or three year perspective," said Ashish Kehair, head, wealth management, ICICI Securities.
The benchmark Sensex closed 0.7% higher on Monday, before giving up on early gains as the Union Budget proposals for 2011-12 did not have enough steps to lift the sagging investor sentiment.
"There wasn't much in the Budget for us to change our view that there could be another 10-15% correction in the Sensex over the next three months," said Saurabh Mukherjea, equities head, Ambit Capital. "This correction will be driven by uncertainty on the political front, a growth scare in the fourth quarter of FY11 and compression of corporate profit margins in 2011-12 because high interest rates and input costs remain major concerns," he said.
The Sensex has fallen about 16% so far in 2011, led by foreign institutional investors selling equities worth 8,900 crore. Hopes of a rebound in the US economy, worries about a slowdown in India's economic and corporate earnings growth and corruption scandals involving ministers in the ruling coalition and top companies prompted foreign investors to pull money out of India after investing around $29 billion in 2010.
Fund managers and brokers warn the worst may not be over for Indian stocks as further spike in crude prices, in the event of more instances of political instability in oil-producing re
gions, could trigger more sell-offs.
Nandkumar Surti, chief investment officer at JP Morgan Asset Management India, said, equities would continue to be exposed to external challenges such as the US growth and rising oil prices. Crude oil prices hit a two-and-a-half-year high of $119.79 last week.
India, among other emerging markets, has been struggling to contain inflation, driven by higher food and commodity prices, forcing the Reserve Bank of India to raise policy rates seven times since March 2010. Finance minister Pranab Mukherjee said, in his Budget speech on Monday, inflation continues to remain a concern.
Ambit's Mukherjea recommends stocks of companies in consumer goods and durables, tobacco and paint sectors, which are less likely to be impacted by rising prices and would benefit from the government's rural spending. His least preferred
stock picks are in media and entertainment, power generation and distribution and construction sectors. Wealth managers, including ICICI Securities' Kehair, advises investors to stay away from stocks or bonds of real estate companies. Firm interest rates and high prices may force property buyers to defer purchases that may impact companies' earnings.
Investors should increase allocation to gold, but should not hope for great returns, Mr Kehair said. "It should be to hedge the portfolio against inflation," he said.
Most wealth and fund managers recommend locking money in shortterm mutual fund debt products, such as fixed maturity plans, to benefit from higher interest rates. "Investors can park lumpsum money in fixed income schemes of shorter tenure and avoid long-term bonds. But, if oil prices fall, long-term bonds may appear attractive," Mr Surti said.

BOLD FROM THE BLUE

It's a Tie Between Deficit & Growth

INANCE MINISTER Pranab Mukherjee's Budget lacks tax pyrotechnics, yet it reveals a remarkably improved fiscal position and a conceptual breakthrough in delivering subsidies through cash transfers for kerosene, fertilisers and cooking gas.
He has also boosted reform prospects, pledging to revive seven financial sector bills, including landmark ones to raise foreign direct investment (FDI) in insurance to 49% and lift voting rights of foreign investors in banks. Mukherjee says he did not highlight this in his Budget speech because his party lacks majority in both houses of parliament, but is optimistic of securing the cooperation of other parties. On FDI in retail, he is non-committal. A committee under UIDAI chief Nandan Nilekani will suggest ways to implement the proposed shift from physical subsidies to cash transfers, using smart cards. Come October, UIDAI will issue 10 lakh Aadhar (unique identity) numbers daily, and this should make it feasible to bring in cash transfers sometime in 2012. This reform has the potential to drastically curb leakages and malpractices in subsidies.
India's fiscal position has long worried foreign institutional investors (FIIs), the dominant players in the country's stock markets. The Budget claimed fiscal deficit was down this year to 5.1% of GDP against the targeted 5.5%, and would decline to 4.6% next year against 4.8% mapped out earlier. In response, the Sensex initially jumped nearly 600 points, but handed back much of the gains after investors realised some of the Budget's projections were based on statistical revisions and future optimism rather than fiscal stringency.
For instance, the oil subsidy is projected to fall to 23,640 crore next year from 38,386 crore this year, but there is no explanation how this will be managed in an environment of high global crude prices. Mukherjee may want high prices to be passed on to
consumers, but several of his cabinet colleagues are dead against this.
The food subsidy will be virtually unchanged next year at around 60,000 crore. The reason: the implementation of the Food Security Act has been postponed until 2012-13. The consequent hole in government finances has been postponed, not avoided.
Only a small part of the fiscal improvement in the Budget relates to tax buoyancy, with statistical revisions of GDP data producing much of the apparent improvement. Yet the fact is the central government's debt-to-GDP ratio, which the 13th Finance Commission had projected at 52.5% of GDP, is now only 44.2%. This is remarkable given that economies across the world are weighed down by large increases in this ratio.
Without the spectrum auction bonanza, fiscal deficit this year would have been 6.3% of GDP. Reducing this to 4.6% next year requires a massive effort to check spending. The Budget projects total spending to rise marginally to 12.57

lakh crore next year from 12.17 lakh crore this year, and such stringency will be politically tough.
Investors will be encouraged by the decision to permit foreign retail investors to invest in Indian mutual funds, and to raise the investment limit for foreign funds in infrastructure debt to $25 billion, raising the overall cap for FII investment in corporate debt to $40 billion.
But drafting footloose capital into debt has its risks. Devising clearsighted policies to attract FDI into infrastructure is far superior to FII flows. The government will allow state-run undertakings to raise up to 30,000 crore by way of tax-free infrastructure bonds, a boost for the sector, along with the proposed creation of tax-free debt funds.
The decision to press ahead with the Direct Taxes Code and transition to a countrywide Goods and Services Tax is a welcome reform intent. However, the sheer spread and number of indirect tax rates listed in the Budget gave out a whiff of the 1980s, rather than of futuristic reform.

SWAMINATHAN S ANKLESARIA AIYAR


O G I LVY
The battery ran out of the socialist clock in 1991. Two decades on, it surely is an exciting time for India and its hard-driving and globally expanding entrepreneurs. Gone are the hammer and sickle and even the last vestiges of a system of governance that dulled the Indian spirit and dimmed the hopes of millions. Now, in 2011, the Rupee rules, a strong symbol of a new and muscular India


Sunday, February 27, 2011

Your Family Budget 2011

On this Budget day, resolve to be the finance minister of your family. Make an annual household budget that will help you attain financial discipline and meet your goals, says Babar Zaidi

10 REASONS TO MAKE A BUDGET
Everyone needs to make a household budget but if you find yourself saying any of the following statements, you need one more than anybody else. "Spending money makes me feel good." "I let others handle my financial matters." "I rarely balance my bank account statement." "I often borrow small amounts for short-term needs." "If I lost my job today, I won't be able to pay my next EMI." "I don't know my total debt obligations." "There's nothing left to save after my expenses" "I don't know where all the money goes." "I am often slapped with late payment charges." "I have so many bills to pay I don't know where to start."

    Preparing the Union budget is an enormous responsibility. An army of officials led by the Finance Minister balances the income and expenses of the nation. You have a similar responsibility. As the finance minister of your house, you are answerable to your family about where and how every rupee entering the home coffers is utilised. You have to distribute resources optimally, avoiding wasteful expenses, yet ensuring that all the stakeholders get an adequate slice of the family money pie. To be able to do this, you need to draw up a family budget. The word budget immediately conjures up images of a frugal life devoid of any indulgences. Many see it as the financial equivalent of a diet plan, which cuts them off their favourite snacks. But it need not be so. A budget is not meant to restrict your spending, rather help you spend as per your plan. It tells you if you are overspending in
a particular area and prevent "deficits" from building up. Do you really need a budget? Find out by taking this test: How much did you spend on eating out last month? We did a dipstick survey and found that four out of every five people were not sure how much they had spent under this head. "People have a rough idea of how much they spend in a month on running the household, but the small discretionary spending escapes notice. This can add up to a neat sum in a month," says Mumbai-based financial planner Chhaya Kothari. Don't mistake eating out and takeaway meals for a minor expense. Over the past decade, its share in the wallet of the average urban consumer has increased and currently stands at 4-5%. In a year, it takes up more than half a month's income. According to a report by McKinsey & Company, such discretionary expenses will increase in the coming years and could reach almost 10-12% of the income by 2015.
    We are not suggesting that you stop eating out or reduce it to a bi-monthly outing to a dhaba. All we are saying is that you need to have a budget for it, as also for all other expenses. It will help you understand where your money is going and how you can allocate funds optimally. "Budgeting helps you set your financial goals and creates a mechanism for you to achieve them. Unless you know how much money you have and how it is spent, you will never be able to formulate an investment plan," says Mumbai-based financial planner Pankaaj Maalde.
Write it down
Start by writing down the various sources of income—salary, rent, interest on deposits, dividends, etc. Then make a list of expenses incurred in a month and allocate money to each of these heads. Include everything, from the grocery bill to what you pay the maid, from the fuel expenses to the EMI of the car. Anything and everything that is paid for should be in the list. For some expenses, such as school fee or insurance premium, which are paid every quarter or once a year, you may have to calculate the monthly figure.
    Be realistic in your allocation of funds. Cutting down on some discretionary expenses could create a stir in the household, which would defeat the purpose of the exercise. Just like the Finance Minister reaches out to the industry and other taxpayers before embarking on the budget preparations, you must also talk to the stakeholders and incorporate their views into your calculations. Here's a tip: if the teenager constituency is upset with cuts in spends on Domino's pizzas, assuage their feelings with higher allocations to gizmos and clothes. It's a neat trade-off between consumption and capital expenditure.
Balancing income with expenses
Then comes the difficult part of balancing the expenses against your income. If you are not servicing a big-ticket home loan, your
expenses should not be more than 70% of your income. This is important because at least 25-30% of your income should go into savings, with at least 10% out of this earmarked for retirement. No doubt, maintaining this savings rate may demand a few tough measures. Young consumers find it difficult to cut down on lifestyle expenses. But if sacrifices are not made at this point, they may have to make bigger compromises later in life.
    The budget will help you trim expenses to the desired level. Expenses are broadly divided into necessities and discretionary spending. There's not much elbow room when it comes to necessities such as food, clothing, housing, education and healthcare. The most one can do is pick up clothes during off-season sales or buy home brands of groceries. But there is plenty of scope in another necessity: insurance. The cost of insurance cover, including life, health and asset insurance, should ideally be 5-6% of your total income. This means a household with a monthly income of Rs 1 lakh should be spending about Rs 60,000-72,000 a year on insurance. If you are paying more, you have the wrong type of plan. Just as the government abolishes schemes that don't meet their objectives and are a drain on

resources, you need to weed out such plans from your portfolio. One of Maalde's clients was paying Rs 4 lakh premium in a year, which was almost 20% of his total income. "We advised him to surrender some of the high-cost plans because they impinged on his ability to save and spend," says Maalde.
Track and control expenses
A traditional way to control household expenses is to use envelopes for different heads. Write the name of each expense on the envelope and put the budgeted amount in it. When you have to make a payment, take the money from the appropriate envelope. This might not apply to all the heads but can include at least certain small expenses that go unnoticed. When the money allocated to a certain head is finished, don't spend anymore till next month.
    There are also various money management software to track your income and monthly expenses. These software integrate the individual's finances, telling him exactly how much he has in his bank account, when an EMI is due, how much is his tax and where his money is going.
When spending exceeds income
If you spend more than you earn, you could be headed for trouble. But there are exceptions to this rule. After all, isn't the
government resorting to deficit financing and filling up the gap by borrowing? You do the same when you take a loan. However, financial prudence is crucial here. It's a good idea to leverage the future income to build an asset, such as real estate. Borrowing for a new set of wheels when your car is in good condition or zipping off on an overseas holiday is not.
    Planners says that your debt repayment should not exceed more than 40% of your total income. This is why lenders peek into your bank account to see how many EMIs you are servicing before extending a loan. It's okay if your EMIs are up to 50% of the income if they include one for a home loan.
How are consumers coping
Rising inflation has sent many household budgets awry in the past few months. According to the
Emerging Consumer Survey conducted by Credit Suisse in 2011, the rise in prices has dampened consumer sentiment in India and nudged people to focus on essential items. Another global survey by Nielsen identifies the areas where Indian consumers are planning to cut corners this year (see table). Most of these are discretionary expenses, but some essential costs can also be pruned by simple changes in habits. For instance, you can bring down your power bill by switching to compact fluorescent lamps and other energy efficient gadgets. Over time, this can translate into huge savings.
    In the end, a budget is only a document of intent. Its success lies in the way it is implemented by those who have prepared it. If they don't keep to the desired level of expenditure, governments often miss their targets. Make sure you don't miss yours.



Gaurav Tayal, 28 years | Mumbai
His budget: Tayal earns 50,000 a month and spends roughly 50% on essentials, such as rent, food, clothing, healthcare and insurance. Only 5% goes to entertainment, while the remaining 40% is invested.
Our assessment: He has maintained a high savings rate, which will prove helpful when he becomes a parent and essential expenses shoot up.










Bhavesh and Sonia Kumar, 44 and 38 years | Delhi
Their budget: The Kumars earn Rs 1.3 lakh a month and spends roughly 60% under essential heads. Almost 40% of the income goes into their savings every month. The education expenses of their teenaged sons will increase in the coming years but the couple has planned for that.
Our assessment: Their savings rate is healthy and will help them reach their goals. They must start budgeting their expenses.

10 small stocks that hold promise but are mostly untapped by analysts

With the stock market swinging wildly, choosing the right pick has become a tough job. Crystal Barretto and Kiran Kabtta Somvanshi bring you 10 small stocks that hold promise but are mostly untapped by analysts



    TAKING a call on whether a stock should or should not be part of your portfolio is a tough one. That's why most of us leave the job to bigwigs of Dalal Street, the over 1,500 brokerages in Mumbai collectively tracking a thousand stocks. These brokers offer a thorough analysis of how companies perform on a quarterly basis, thereby aiding your investment decisions. However, most of them have failed to detect a few stocks as these companies are either too small in size for analysts to track or they don't belong to mainstream sectors. Managements of some companies remain low-profile and are less media-savvy. In such cases, analysts do not track these companies due to lack of adequate information. ET Intelligence Group takes a thorough look at the universe of stocks to find such companies that have a good value and a promising growth but remained invisible on the analysts' radar. We analysed a list of almost 300 B-group shares, which were less tracked, and picked 10 stocks using certain valuation parameters. These parameters included debt-equity ratio less than 1, return on capital higher than 20%, price-earnings multiple not more than 15 and net sales and market capitalisation exceeding 100 crore. The companies that finally made it to our list have average daily trading volumes (over the past six months) of more than 5,000 shares and their free float (the percentage of shares available to the public for trading) ranged between 20% and 80%. All of the stocks, except one, outperformed the Sensex over the past one year and all but three outperformed their peers.

    DOS AND DON'TS
Investors should check the following parameters before investing in lesser-tracked companies

• Debt on books

• Cash-flow position

• Valuation parameters like P/E, market cap, book value.

• Promoter's history

• Margins and profitability vis-à-vis with peers

• Financials in the context of industry dynamics
Don't invest in companies that have

• Erratic movement in stock price

• Extra-ordinary elements frequently influencing quarterly results

• Very low or declining promoter holding

• History of underperforming peers

• Management that does not have clean record

ADITYA BIRLA CHEMICALS
Aditya Birla Chemicals is a 51% arm of Hindalco Industries with a 5% stake held by other promoter group entities. It is a leading producer of inorganic chemicals, such as caustic soda, chlorine, hydrogen and their derivatives. It has a history of generating strong cash flows resulting in a debt-free position by March 2010 end. During FY05-FY10 period, its sales grew at a CAGR of 15.5% while profits grew at 18.1%. The firm's results in the four quarters of 2010 were exceptionally superior to the year-ago period because of write-backs to the extent of 14 crore, which may not be available in future.
PROGRESS CARD
CMP: 127, up by 80% y-o-y Net sales: 235.2 crore, up by 6% y-o-y Net profit: 69.5 crore, up by 48% y-o-y D/E Ratio:0.17, ROCE: 24.12%, P/E: 4.3 Div Yield: 1.17%, Market cap: 299.04 crore
CLARIANT CHEMICALS
Clariant Chemicals, a 63% arm of Germany's Clariant, is India's leader in specialty chemicals. It has divested a few of its noncore businesses. In 2009, it sold flexible laminating adhesives business followed by disposing of its diketene and intermediate businesses in 2010. In August 2010, it has approved the sale of its land at Balkum, Thane, for a total consideration of 240 crore. In 2010, it seems to have run into a phase of stagnation, due to the sale of businesses. Its revenues grew 5.8% and net profit rose 3.9% in 2010. It has raised dividends to 30 per share in 2010, which is 5% dividend yield on its current market price.
PROGRESS CARD
CMP: 627.6, down by 37% y-o-y Net sales: 1,006.6 crore, down by 11% y-o-y Net profit: 133.85 crore, up by 43% y-o-y D/E Ratio: 0.01, ROCE: 56.01%, P/E: 14.17 Div Yield: 3.98%, Market cap: 1,673.1 crore
EXCEL CROP CARE
Excel Crop Care is an agrochemicals company. Over the past five quarters ended December 2010, it has posted a decent growth in its financials with September 2010 quarter being the strongest, showing the maximum growth. In FY10, Excel witnessed a 6% fall in annual revenue at 620 crore on slackening exports due to unfavorable climatic conditions in the geographies it operates in. However, the company holds a positive outlook for the current fiscal. During the first three quarters of FY11, Excel Crop Care has already achieved a turnover of 564 crore that indicates the company will post double-digit growth for the current fiscal (FY11) against the previous year.
PROGRESS CARD
CMP: 299, up by 65% y-o-y
Net sales: 737.7 crore, up by 17% y-o-y
Net profit: 52 crore, up by 45% y-o-y D/E Ratio: 0.95, ROCE: 21.8%, P/E: 4.8
Div Yield: 2.7%, Market cap: 252.5 crore
HONDA SIEL POWER PRODUCTS
Honda Siel Power Products, a part of the Honda Motor Company, makes portable generator sets, general-purpose engines, water pumps, lawn mowers and brush cutters. Its sales have grown at a CAGR of 8.2% over the past five years and it has given a return on capital of 20% for FY10. Honda Siel is debt free and has adequate cash for any further expansion. Given the power shortage in India, especially in the rural areas, the demand for generators remains robust. The company, however, faces competition from cheaper Chinese products in the market. Birla Power Solutions is its closest competitor among established players, though from an investment perspective, Honda Siel offers more value.
PROGRESS CARD
CMP: 350, no change y-o-y
Net sales: 413 crore, up by 36% y-o-y
Net profit: 36 crore, up by 42% y-o-y D/E Ratio: 0, ROCE: 20%, P/E: 9
Div Yield: 1.14%, Market cap: 355 crore
INEOS ABS INDIA
Ineos ABS India, which is an 83% subsidiary of Ineos Global Group, is India's leading maker of an engineering plastic named acrylonitrile butadiene styrene (ABS). It is a highperformance plastic, used predominantly in automobiles and consumer durables. After stagnating at the topline for four consecutive years the company achieved a 33% growth in 2010. In the meantime, its profit has been growing steadily year after year with the only exception of 2008. As a result, the 5-year CAGR in net sales is at 13% against 34% in profit. It has increased its ABS capacity to match rising domestic demand. During 2010, Ineos ABS India expanded its ABS capacity by 33% to 80,000 tonne per annum. The company remains a debtfree and cash-rich with a consistent dividend paying history.
PROGRESS CARD
CMP: 350, up by 98% y-o-y
Net sales: 743.1 crore, up by 33% y-o-y
Net profit: 70 crore, up by 43% y-o-y D/E Ratio: 0, ROCE: 30.3%, P/E: 8.8
Div Yield: 1%, Market cap: 617.23 crore
KABRA EXTRUSIONTECHNIK
Kabra Extrusiontechnik is maker of machinery used for producing plastic pipes, packaging films, window and door profiles. It has augmented its offering with a new plant that makes drip irrigation systems. To benefit from growing domestic demand of plastic products, it has embarked on a project investing 85 crore, which will double its gross block by FY12. Under this, the company has already added one assembly shop in Daman and another manufacturing unit is being set up by end 2011. KETL is a cash-rich, debtfree company with a history of strong operating cash flows. Its cash and equivalent investments have grown at a CAGR of 58% in the past five years to 46.3 crore as on March 31, 2010.
PROGRESS CARD
CMP: 52, up by 23% y-o-y
Net sales: 215.23 crore, up by 27% y-o-y
Net profit: 23.72 crore, up by 35% y-o-y D/E Ratio: 0.1, ROCE: 36.47%, P/E: 7.09
Div Yield: 3.32%, Market cap: 168.27 crore

FDC
FDC (Foods, Drugs & Chemicals) is a player in oral rehydration salts, opthalmics and paediatrics. It earns over 90% of its revenues from the domestic market. It has launched products in various therapeutic areas and has opned commissioned a novel drug delivery research laboratory to focus on research in areas like anti-infectives, respiratory and anti-inflammatory agents. It generates a positive cash flow and has a strong balance sheet. Its revenues and profits have doubled in the past five fiscal years. Valued at over three times its sales, the company's stock is commanding fair valuations on the bourses. The company has announced a buyback of up to 9.8% of its equity and free reserves at a price not exceeding 135.
PROGRESS CARD
CMP: 104, up by 45% y-o-y
Net sales: 684 crore, up by 9% y-o-y
Net profit: 151 crore, up by 23% y-o-y D/E Ratio: 0.01, ROCE: 38.2%, P/E: 12
Div Yield: 1.7%, Market cap: 1,960.92 crore
IFB INDUSTRIES
IFB Industries is a consumer goods company. It's more profitable engineering segment contributes nearly 20% to its total revenues. Its home appliances business of washing machines, dryers, microwave ovens and dishwashers is steadily gaining momentum in revenues and profits. A strong brand equity, high product quality and latest technical know-how are its strengths. The 650-crore company is investing into modernising and expanding its capacities in appliances and engineering segments. Due to this, the appliances division is expected to achieve a 20% growth in sales and sales of the engineering division are likely to double by the end of FY12. At a market cap of 377 crore, the company is valued at a little over half its sales.
PROGRESS CARD
CMP: 100, up by 27% y-o-y
Net sales: 657.5 crore, up by 30% y-o-y
Net profit: 58.4 crore, down by 33% y-o-y D/E Ratio: 0, ROCE: 21.7%, P/E: 6
Div Yield: 0%, Market cap: 355.4 crore
INSECTICIDES INDIA
Insecticides India (IIL) is an agro-chemicals and pesticides company. It has posted a robust growth in its financials. In the past seven quarters, its operating profit margin has been in the range of 8-10%. It may continue operating at similar margin level in future. This fiscal, IIL expects an annual turnover of 550 crore, nearly 40% growth. This implies an almost 50% sequential growth in the March 2010 quarter topline to 135 crore on the back of the opeing of its units in Udhampur and Dahej. IIL's production capacity of technical grade pesticides is expected to go up by six times to 12,000 tpa. It also expects to expand its reach in the southern India and intends to develop its exports market in the next 2-3 years.
PROGRESS CARD
CMP: 282, up by 224% y-o-y
Net sales: 464.2 crore, up by 7% y-o-y
Net profit: 32.5 crore, up by 10% y-o-y D/E Ratio: 0.16, ROCE: 27.68%, P/E: 11.03
Div Yield: 0.71%, Market cap: 358.4 crore
RICOH INDIA
Ricoh India makes photocopiers, fax machines, printers and other digital multifunction products. Its revenues have been growing at a very slow pace since FY05. It plans to expand its portfolio, geographic footprint and business areas. It has earmarked 100 crore for organic expansion and is also increasing its man power to 1,000 by September 2011. It is also eyeing acquisitions in the IT services space. Even without any acquisition, the company intends to treble the revenues to 1,000 crore by FY13. The company has zero debt and is generating positive cash flows. It has better financials than its listed peers. It is valued at less than half of its revenues of the past four quarters. As its financial performance improves, its valuations are likely to increase.
PROGRESS CARD
CMP: 33, down by 23% y-o-y
Net sales: 281.6 crore, down by 7% y-o-y
Net profit: 16.9 crore, up by 4% y-o-y D/E Ratio: 0, ROCE: 26.8%, P/E: 7.68
Div Yield: 0%, Market cap: 129.8 crore
(Inputs from Ramkrishna Kashelkar and Parul Bhatnagar)
crystal.barretto@timesgroup.com 






















RIL Talking to Orix to Buy IL&FS Holding for $1.2 b

Deal to pave way for Mukesh Ambani firm's entry into financial services

 The Reliance Industries group, owned by billionaire Mukesh Ambani, is negotiating with Japan's Orix Corporation to acquire its 23.87% stake in Infrastructure Leasing & Financial Services (IL&FS), one of India's leading infrastructure developers and financiers, for around $1.2 billion, said two persons familiar with the development.
If the deal materialises, it will make Reliance the secondlargest investor in IL&FS after Life Insurance Corporation of India (LIC) and will pave the way for its entry into the financial services business.
"The two sides (Reliance and Orix) had signed a non-disclosure agreement in December. The negotiations are at an ad
vanced stage," said one of the persons on condition of anonymity. Both sides have appointed three-member negotiating teams to structure the transaction.
Ambani's close confidant Manoj Modi is heading the Reliance team while the Orix team is headed by its vicechairman Yukio Yanase, said the second person familiar with the development. It is not yet clear whether the deal will be executed by private investment companies of Ambani or
whether RIL, the listed flagship of the group, too will participate in the transaction.
In the last week of N ove m b e r, Ambani met chairman of
Orix Corp Yoshihiko Miyauchi in Tokyo, said the two persons quoted earlier. Early this month, Orix Vice-Chairman Yukio Yanase visited India and had a detailed discussion with senior officials of the Reliance group.
When asked to comment, a spokesman for Reliance said as a matter of policy, the company did not respond to what it termed as speculation. An email sent to Orix's headquarters in Tokyo on Saturday evening did not elicit a response.
Orix India head Makoto Shioda said Yanase did visit India this month but said "no such negotiations" were underway. IL&FS Chairman Ravi Parthsarathy did not respond to an e-mailed questionnaire. The financial services business had been out of bounds for the older Ambani brother as
part of a non-compete pact with younger sibling Anil Ambani. But following a settlement last May, this pact was scrapped and group companies of both brothers are free to pursue any business they wish.
Subsequently, the Reliance Industries board had approved investments in new businesses such as telecom, power, pharmaceuticals and financial services. RIL has acquired licences to offer wireless broadband services across India marking its re-entry into telecom.
Orix Will Make a Killing on its Investment
Last month IL&FS completed the purchase of a 45% stake in Reliance's Model Economic Township (MET) comprising 10,000 acre in Jhajjar, Haryana. "MET equity valuation should be close to $1.5 billion, but Reliance sold 45% stake to IL&FS at a much lower price," said a third person, who is involved in the township project.
IL&FS was set up in late 1980s by Central Bank of India, HDFC and the erstwhile Unit Trust of India to focus on financing and developing infrastructure projects and creating value-added financial services.
It owns four listed entities — IL&FS Engineering (formerly Maytas Infrastructure), IL&FS Transportation, IL&FS Investment Managers and NOIDA Toll Road. It also owns 41% stake in the prestigious $100-billion Delhi-Mumbai Industrial Corridor project.
IL&FS is also the promoter of IL&FS Investment Managers that runs the country's largest private equity firm with assets under management of $3 billion. In 2009 and 2010, the non-banking financial institution had acquired, through court orders, the Ramalinga Raju-promoted Maytas Infrastructure (now IL&FS Engineering) and Maytas Properties.
Orix has been an investor in IL&FS since 1994 and, if this transaction is concluded, it will make a killing on its original investment of less than $25 million. This money will come in handy for the Japanese financial services company which has seen its market cap severely erode after 2008. Orix has assets of around $83 billion and a debt of around $69 billion. In 2010, the company earned a profit of $406 million on revenues of $10 billion.
Apart from Orix and LIC, IL&FS' large shareholders include Abu Dhabi Investment Authority, India's largest home loan provider HDFC Ltd, state-run banks Central Bank of India and State Bank of India, as well as IL&FS Employee Welfare Trust.
A senior executive with a private equity firm said another large investor, apart from Orix, is looking at selling out and there is a good opportunity for Reliance to later increase its shareholding further.

Friday, February 25, 2011

2G Probe Fears Hit ADAG Cos Again

Most of ADAG companies, led by RCOM, slipped 4-5% to underperform the broader market as rising concerns over 2G scam probe returned to haunt after the recent relief rally in ADAG stocks. The fall wiped off most of the gains recorded by these shares early this week.
The bearish market outlook over macroeconomics concerns triggered by surging oil prices in the international market, and 2G scam related worries prompted investors to adopt a cautious approach and to book profit in ADAG stocks after recent gains, according to brokers. "The impact of 2G scam on the market sentiment will continue to linger for some time. The shares of companies whose names have cropped
up in the scam will remain under pressure till JPC gets into action and some clarity emerges on the extent of their involvement," said Anagram Stockbroking CEO Mayank Shah while declining to comment on specific company or group.
Leading the pack of ADAG losers is RCOM which touched a new low of . 85.2 before closing 5.4% down at . 87.9 on Friday. Reliance Infra-structure lost 4.6% to end at . 638 while Reliance Mediaworks fell 4% to . 133.
Reliance Power was down 1.6% at . 109 on the BSE. Of these stocks, Reliance Infrastructure had climbed 12% on Wednesday after Anil Ambani met Maharashtra chief Minister Prithviraj Chavan to discuss the state government's coastal road plan and also to appraise him on the status of the . 5,000-crore project to extend
Bandra-Worli Sealink to Haji Ali. The CBI has questioned ADAG's officials as part of its investigation into 2G spectrum allocation initiated after the CAG found irregularities in spectrum allocation to telecom operators that is expected to have caused the government a multi-billion revenue loss.
The auditor's report has accused RCOM, through its Reliance Telecom unit, of violating licensing rules by holding over 10% of Swan Telecom, which applied for a 2G licence in 2007.
RCOM, however, has clarified to the media that it had not violated any of its licence conditions at any stage by having cross-holdings of 10% or more in any other licensee and the company is in full compliance with all applicable DoT guidelines, rules and regulations.



Didi Budgets for Elections on Poll Eve

Showers goodies on West Bengal even as Railways slips into financial sinkhole

Railway Minister Mamata Banerjee showered goodies on her native land, promising new trains and projects ahead of assembly elections, but the cost of her populism is bleeding the finances of the network that is the country's biggest employer.
The firebrand politician from West Bengal said the government would introduce a new super-AC class of travel, consider running trains at speeds of 200 km an hour and launch a series of new trains, projects and collaborations, many in her home state.
But the Railways has not raised fares for the 22 million passengers that use its over 7,000 stations or freight rates for the 2.5 million tonnes of goods it carries every day.
The populist agenda, along with the heavy burden of higher wages because of the Sixth Pay Commission, meant that staff costs accounted for 42% of its expenditure. Its costs as a percentage of revenue, called the operating ratio, has risen to 92%, which analysts say is alarming.
"The high operating ratio shows perilous health of railway finances which requires immediate attention," said Abhaya Agarwal, executive director at Ernst & Young.
Banerjee said she was trying to balance the needs of an efficient railway network in an economy that is growing at 8-9% and the aspirations of millions of people it serves.
"In this budget we have attempted to combine a strong economic focus with an equal emphasis on social inclusion with a human face… Our lines
touch the lives of humble people in tiny villages, as they touch the lives of those in the bustling metropolises," she said.
The railway budget for 2011-12 also announced plans to purchase 18,000 wagons, surpassing the current fiscal year's record procurement of 16,500 wagons. She also said that work on dedicated freight corridors would be completed on schedule.

More Bang, More Bucks

57,630 cr
Record plan investment
20,000 cr
Budget support

• No Increase in passenger fares and freights rates

• 68 new passenger trains to be introduced
Rlys fail to generate surplus
    The Railways will count on budgetary support of 20,000 crore and market borrowings of 20,594 crore through Indian Railway Finance Corp, besides 10,000 crore from tax-free bonds. The Railways is borrowing heavily as it has failed to generate enough surplus. Shares of companies that count on railways for business plummeted after the budget. Kalindi Rail Nirman fell by more than 13%. Titagarh Wagons also dropped 13%, while Texmaco fell 8%.
Banerjee used her budget speech to score a point over the communist rulers of West Bengal, whom she hopes to dislodge in assembly elections this year. "As per my announcement to set up a coach factory at Singur, land has not been made available by the state government. However, several landowners have volunteered to sell their land directly to the Railways. In order to fulfill this commitment, I propose to set up a metro coach factory on the land purchased from willing sellers at Singur/adjacent Polba," she said.

Indian Railways expects freight loading to rise 6.4% to 993 million tonnes from the current year's reduced target of 924 million tonnes. Its working expenses overshot the budget estimate by 2,000 crore and the disruption of train movement caused a loss of 1,500 crore. The network also took a 2,000-crore hit due to the halt in iron ore exports.
The railway minister promised to reward states which protect trains from protests and "rail roko" agitation. In the current fiscal year, 1,500 trains were cancelled, another 1,500 were diverted and more than 3,500 rescheduled because of agitations.
"I am now making an offer that whichever state ensures trouble-free train running for the whole year shall be given two new trains and two projects as a special package," she said. But there were no such riders for projects in West Bengal. The minister announced 34 new services for the Kolkata Metro and said a committee had been set up to closely monitor progress of ongoing works there. In addition, seven new survey works for the Kolkata
Metro Railway would be taken up, she said. Fifty new suburban services would be introduced in Kolkata region, while 47 would be started for the Mumbai suburban region and nine in Chennai. To expand the railway infrastructure, the government will complete 700 km of new lines, double 700 km of tracks and electrify 1,000 km. Banerjee also promised to set up a 'bridge factory' in Jammu & Kashmir as the railway project in the state involves a lot of bridges. For northeastern India, which she said was a priority area, the Railways will set up a diesel locomotive centre in Manipur, which will soon be connected to the railway network. The minister said the government wanted to ensure railway safety with the use of anti-collision devices and a 'fog safe' device. She said two incidents of sabotage and suspected sabotage killed 216 people, while the country's network of roads claim more than 1.30 lakh lives every year.
"Railways is passenger-friendly, safe and a cheap mode of transport. Rail fares are close to one-fourth that of road," she said.



All Hunky Dory, Survey Sees India Back on 9% Growth Path in FY12

Services, demography & higher core spend to drive growth as fiscal virtue returns

The annual Economic Survey could have been written by Aamir Khan and titled "Aal Izz Well". It is gung ho about GDP growth rising to 9% next year, and staying there in the medium term. Services (which now have a 57.3% share in GDP) will be the main locomotive of the economy. This, plus the coming demographic dividend, will offset many policy flaws and sustain fast growth. The Survey cites a new Index of Government Economic Power, showing India is now the fifth-biggest global economic power after the US, China, Japan and Germany, and is well ahead of Britain or France. Analysts may worry about fiscal deficit, but the Survey declares India is galloping down the road to fiscal virtue. Fiscal deficit in the first three quarters of this year was just 44.8% of the level in the previous year. The Survey says the ratio of consolidated government debt to GDP, which touched 79.3% of GDP in 2004-05, will fall to 68.7% by 2013-14 and 65% by 2014-15. The recent revision of GDP data shows we have underestimated true GDP for many years, and hence have overestimated fiscal deficit. This, plus high inflation this year (nominal GDP will rise 20.3% against the expected 12.5%), means the budget estimate of fiscal deficit at 5.5% of GDP now translates into just 4.8%.
This actually reveals a dirty economic secret: inflation can in the short run be good for the government's books. Inflation erodes the real value of debt, and the government is the biggest debtor of all. However, inflation will with a lag also increase government spending. Neither this nor the prospect of rising subsidies (implied by the Food Security Act and spike in oil prices) disturbs the Survey's fiscal optimism. It does not hint at any painful fiscal squeeze to come, either on the tax or spending side. What will the government do to
bring down prices? The Survey analyses the contribution of supply, demand and i n t e r n at i o n a l trends to inflation, but spells out no new initiatives. It describes the spike in vegetable prices as temporary bad behaviour, which will soon be checked by a reversion to more normal behaviour. Going forward, it expects monetary tightening and other steps to bring down inflation. Rising oil prices pose a challenge, and the Survey says India must adjust to the reality of expensive energy.
Higher infrastructure spending is another reason cited by the Survey for optimism about future growth.
However, tucked away in small print is the dismal information that losses of state electricity boards are 1% of GDP (which means Rs 76,000 crore). Unaccounted leakages of electricity (theft and transmission losses) are a whopping 35% of electricity generated. No wonder, power continues to be a constraint on growth. Cost overruns in public sector projects had come down to a reasonable 12% in March 2008, but rose to 20.7% by October 2010, thanks partly to higher steel and cement prices. Land acquisition and environmental clearance need to be streamlined to expedite infrastructure, along with standardised contracts and better designed projects. Industrial production has dipped in recent months, and capital goods production has crashed. The Survey indicates gross capital formation will rise only 8.8% in 2010-11, against 13.8% in the preceding year. Yet it maintains the future is bright since the savings rate is well above 33% and so the investment rate can easily be 36.5%. Assuming an incremental capital output ratio of 4.1 (achieved in the 11th Plan), these factors alone should ensure a GDP growth of 9% in the coming years. The demographic dividend should raise savings (which tend to be especially high for people in their 30s and 40s).
The Survey adds once an economy operates close to capacity, growth depends more on skill development and innovation. It says patent applications are up from 17,466 to 36,812, and patents granted up from 1,911 to 16,061 between 2004-05 and 2008-09.

The Estimates SERVICES TO BE MAIN ENGINE

    
• 8.6% growth in '10-11, 9% in '11-12
    
• Fiscal deficit at 4.8% in '10-11
    
• 7% inflation by March end
    
• Investments to grow 8.4% in '10-11
The Proposals ROLL OUT REFORMS

• Allow multi-brand retail FDI

• Streamline land buys & environment nod for core projects

• Auction road projects
Inclusive Growth ALLEVIATE POVERTY
    
• Create a National Forest Land Bank
    
• Second green revolution takes off
    
• Privatise state-run SEZs
    
• Transfer cash directly to cut leakage
Worry Points INFLATION RISK LOOMS
    
• Unrest in the Middle East
    
• Widening current account deficit
    
• A crisis in developed nations
    
• Volatile capital flows
Strong Attack on Subsidies
Actually, a better measure of innovation might be that global business journals have now started citing "jugaad" as a driver of Indian business success. Jugaad is simply the ability to extract more out of less in difficult conditions, and may be more important for productivity than just patents.
The Survey mounts a strong attack on subsidies for an array of goods and services, which result in huge leakages and waste. It cites studies showing 40-55% of food supplied to the pub
lic distribution system is diverted by ration shops. In effect, the Survey criticises the proposal for a Food Security Act operating through the PDS. It calls for a new approach that transfers cash to the needy-using the new technology of smart cards-instead of subsidising sundry goods and services. It suggests a start may be made by providing a cash subsidy through smart cards to kerosene beneficiaries, and then freeing kerosene prices.
The poor might not use this cash for kerosene, but that will still be better than let
ting the subsidy leak to shopkeepers and adulterators. The Survey emphasises it is important to treat all economic players, including the policeman, shopkeeper and citizen, as rational self-seeking agents.
If they can make some money on the side with little effort, many will do so. Many noble plans fail because of the assumption that they can be carried out by morally flawless agents or perfectly programmed robots. The problem with such programmes is not just faulty implementation but faulty conception.

Thursday, February 24, 2011

HUL Brews Plan to Open Coffee Shop

Rolls out Bru World Café outlet on a pilot basis at Juhu, Mumbai

The country's largest consumer products company Hindustan Unilever is testing waters in the coffee shop market even as US giants Starbucks and Dunkin' Donuts finalise plans to tap into increasing out-of-home consumption of coffee in the country. Hindustan Unilever has quietly opened a 'Bru World Café' outlet on a pilot basis at Juhu, an upmarket western suburb of Mumbai.
"Bru World Café will be bringing various coffee experiences across the globe to the Indian palette," HUL's beverages category head Arun Srinivas said.
Rising affluence in the country and the fact that consumers now spend more time out of home point to the high potential of coffee retailing business, he said.
The organized coffee market in India is around . 600 crore, or 20% of the total domestic coffee consumption of . 3,000 crore. Launched in 1962, Bru is Unilever's only coffee brand and is sold only in India.
Experts say the café entry will help Hindustan Unilever boost its coffee powder sale. "Once scaled up, their coffee shops can serve as a point of purchase and help create brand recall for in-house consumption of its Bru brand," brand advisory firm Harish Bijoor Consults Founder Harish Bijoor said.
With coffee prices at an all time high, brand visibility could allow Hindustan Unilever a better pricing power for Bru coffee, feel analysts. Nestle, Hindustan Unilever's arch rival and leader in the . 800-crore instant coffee segment, has a similar format—Café Nescafe. But it has not made any remarkable progress till now.
Hindustan Unilever has been un
der pressure to maintain its margins in its core businesses and has been trying to build a portfolio of premium brands to negate rising input cost. Its beverages business accounted for 11.9% of its sales in calendar 2010, while profit contribution was around 12.6%.
Hindustan Unilever is the market leader in the overall coffee segment with a range of products in conventional coffee, ice and hot cappuccino and out-of-home vending space. It has roped in Bollywood actors Shahid Kapoor and Priyanka Chopra as brand ambassadors to push its Bru brand.
Yet, it won't be easy for the company to tap into a market that is increasingly getting cluttered by coffee shops. Established coffee
chains such as Cafe Coffee Day, Lavazza-Barista and Costa Coffee have plans to flood the Indian street with hundreds of outlets over the next few years to cash in on their increasing popularity among young Indian consumers, who have more disposable income than their previous generations. "We are a platform for hangout and in the process drive sales of not just coffee but also tea," said K Ramakrishnan, the marketing president of Bangalore-based Amalgamated Bean Coffee Trading Company, which runs 1,072 Café Coffe Day outlets. "Macro-economic factors like higher per capita and disposable income are key sales trigger for coffee chains in the country," Ramakrishnan added.

Budget May Lay Ground For FDI in Multi-Brand Retail

Move to tame surging food prices & fetch better returns for farmers

Finance Minister Pranab Mukherjee is likely to announce a road map for foreign investment in multi-brand retail in the union budget after getting positive response from other ministries, a government official said.
Entry of foreign retailers such as Wal-Mart, Carrefour and Tesco will help tame surging food prices and ensure farmers get better prices for their produce as they will be able to remove inefficiencies in the supply chain and procure directly from farmers, at least two policy makers said. "An announcement related to FDI in multi-brand retail is expected in the budget as views of all ministries have favoured it," a government official said, requesting anonymity.
The country's existing foreign investment policy, aimed at protecting owners of kirana shops, bars global re
tailers from setting up retail chains in India. The country allows 100% foreign investment in wholesale business and 51% FDI in single-brand retailing. If the proposal is announced in the union budget, it will satisfy a longstanding demand of multinational retailers like Wal-Mart and Carrefour that have been seeking to enter one of the fastest-growing economies in the world for several years now.
The Indian retail industry is estimated at $500 billion, of which organised retail accounts for only $25 billion. "We are hopeful the finance minister will announce a road map for FDI in multi-brand retail in the budget," Bharti Enterprises MD Rajan Bharti Mittal said.
Bharti has an equal joint venture with the world's largest retailer, Wal-Mart, for a cash-and-carry chain and also operates multi-brand retail chain Easyday on its own.

MNC retailers waiting in queue to enter India
$25 billion
SIZE OF ORGANISED RETAIL WHEREAS INDIAN RETAIL SECTOR IS ESTIMATED AT $500 BILLION

• ARGUMENTS AGAINST FDI
Deep discount sales by foreign retailers will put at risk the livelihoods of kirana stores

• RETAIL FDI STATUS
India allows 100% foreign investment in wholesale biz and 51% FDI in single-brand retail
Allowing FDI in Retail is a Politically Sensitive Issue
Mittal said modern retail, with its linkages and sourcing, will benefit farmers, small manufacturers and consumers.
It can cut food inflation by 50-70 basis points by reducing wastage and improving efficiency through supply chain management, he said.
Allowing foreign direct investment in retail is a politically sensitive issue as it might turn hundreds of thousands of pop-and-mom store owners in every nook and corner against the government. The Department of Industrial Policy and Promotion last year floated a consultation paper on the issue, inviting comments from all stakeholders. Minister of State for Commerce & Industry Jyotiraditya M Scindia said the
government has received comments on the proposed policy reform from stakeholders such as ministries and states.
"Some state governments have supported allowing FDI in retail on the ground that it will encourage investments in backend infrastructure, reduce wastage and provide better price to farmers," he told Rajya Sabha on Wednesday. As per industry estimates, lack of back-end infrastructure results in wastage of about 40% of farm produce, worth 50,000 crore, every year. Among those supporting foreign retailers' entry is Haryana Chief Minister Bhupinder Singh Hooda. In a letter to Prime Minister Manmohan Singh, dated January 29, Hooda said India's current policies are not attracting adequate investments to create an efficient supply
chain infrastructure, food processing capabilities and direct farm procurement. "It (building adequate infrastructure) can happen if FDI policy is amended," he said.
Last month, Cabinet Secretary KM Chandrasekhar had suggested FDI in multi-brand retail could be a remedy for spiralling food prices.
The argument against it is deep discount sales by foreign retailers will put at risk the livelihoods of neighbourhood mom-and-pop stores. Wal-Mart chief Doug McMillon, however, said FDI in multi-brand retail would not kill mom-and-pop shops, citing the example of Mexico where it entered in 1991. Even today, 50% of retailing there is done informally (kirana stores), he had said at the World Economic Forum in Davos last month.

Middle-East Tremors Felt in India, Sensex Sinks 546 Pts

Investors fear boiling crude will hit economic growth & corporate earnings

Indian shares fell the most in 15 months, making them the worst performers in Asia, as the Middle-East civil strife-fuelled rally in crude oil prices can tear up
the nation's economic fabric.
Surging oil prices will amplify inflation and interest rates that are dominating the minds of everyone, from Prime Minister Manmohan Singh to thousands of common men, who are publicly protesting months of stubbornly high prices.
"The jump in crude oil prices is the biggest concern for investors for now, because this could lead to contraction in economic growth and corporate earnings growth," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance. "If political unrest in Libya spreads to other oil producers, the global economic recovery would be at a bigger risk."
Benchmark Sensex tumbled 3%, or 546 points, to 17,632 led by ICICI Bank and Tata Motors. Twenty-eight constituents fell barring Hero Honda and Hindustan Unilever. NSE's 50-share Nifty slid 175 points, or
3.2%, to 5,263. More than three shares lost, for every gaining share. The MSCI Asia Pacific Index fell 0.9%.
Foreign funds sold shares worth 2,702 crore on Thursday, provisional data from BSE show. After investing $29 billion in 2010, they have pulled out 7,300 crore in less than two months, dragging the Sensex down 14% this
year, with Reliance Communications topping the list with a 36% slump.
Trickling in forecast of crude oil at $200 due to potential supply shocks, though maybe far fetched at this point, are worrying investors who are just recovering from the worst recession since Great Depression. India, which imports more than two-thirds of its needs, will be worst hit given its already high current account deficit—the excess of imports of goods and services over exports.

Street slumps to 15-month low Foreign funds sold shares worth 2,702 cr

Why did stocks tumble
Rising crude oil prices due to unrest in Arab countries will further push up inflation. Oilcos may pass on part of the rise. Since transportation costs will rise, manufacturers will pass on the hike, which will slow demand and corporate earnings growth. Market has also been uneasy about the state of the fisc and fears of further rate hikes

What could be next in store
Downtrend may continue if the finance minister does not impress investors with reform measures in the budget. Investors expect a cut in subsidies, reduction in fiscal deficit and measures to limit current account deficit. If FM delivers on some of these, there could be a short rally. If geopolitical risks intensify in Middle-East and oil spirals to $200, slide could continue
Fuel Subsidy to Push up Fiscal Deficit
    The government may subsidise fuel, but it would show up on fiscal deficit which will crowd out private investment.
Crude oil futures flirted with $120 a barrel after protests in Libya to overthrow dictator Muammar Gaddafi raised oil supply worries. This revived concerns that the government may reveal a higher borrowing target for 2011-12 in the Union Budget on Monday to subsidise fuel prices, throwing to winds of expectations that subsidies may be cut. Brent crude, a benchmark for Indian purchases, is up 20% in a month. The government estimates total loss to state-owned oil marketing companies could be Rs1 lakh crore this fiscal on selling diesel, domestic cooking gas and
kerosene below cost, which is at least one-third more than initial estimates. Analysts believe it could go over Rs 1.3 lakh crore. Investors are worried the revolt in Libya, which contributes 2% to the global daily oil output, could spread to other suppliers in the region. Nomura International in a report forecast oil prices could climb to $220 a barrel, if Libya and Algeria were to halt oil production together. Worries about oil joins the raging food inflation , which rose an annual 11.49% in the week ended February 12 from 11.05% a week earlier. RBI governor D Subbarao has reportedly said the central bank can act at any time to deal with the evolving macroeconomic situation. It has raised the inflation target for the year to 7% from 5.5%, and has raised policy rates seven times in 12 months. Policy actions have led to borrowers paying high rates for funds, and depositors are being lured with interest rates as high as 10.5% a year from just 6% about 15 months ago for oneyear deposits. RBI reviews monetary policy on March 17.
This could strain government finances, which got a boost from a one-time income of more than Rs1 lakh crore from sale of spectrum to telecom companies. Gross fiscal deficit is estimated at 5.3% of GDP in 2011-12 and the government's net market borrowing is expected at 4.2 lakh crore, which takes the gross borrowing requirement close to 5 lakh crore, according to Barclays Capital. "The government's budget projections can be based on more optimistic assumptions, and show a fiscal deficit target of 4.8-5% of GDP and net borrowing of 3.8-4 lakh crore in FY 11-12," the investment bank said.

Tuesday, February 22, 2011

Banks Ride Rate Arbitrage

Banks borrow At 6.5% from RBI and lend in call money market where rates are 6.75-6.85%

Banks are borrowing from RBI to lend in the money market, taking advantage of a rate arbitrage opportunity. Funds are available at 6.5% from the central bank under its liquidity adjustment facility (LAF) while rates in the call money market, where banks borrow from each other, are at 6.75-6.85%.
"Banks with excess government bonds are resorting to arbitrage deals," said a treasury official of the state-owned Corporation Bank. Banks pledge government securities with RBI to raise shortterm money, and are required to
hold gilts as part of their statutory liquidity ratio (SLR). The banking system has 4% excess SLR holding.
However, banks are not buying securities to take advantage of the arbitrage. "Investment in government bonds does not look attractive, but short-term rates look good," said a trader.
Banks will fatten their balance sheets to meet their targets by end March and this is pushing up short-term rates. Certificate of deposits of six months have touched 10%, inching closer to 12-month CD yields at 10.10%. The threemonth commercial paper is in double digits at 10.38% while 6-month CPs are being issued to banks at 10.58%, the highest since June 2009. But these rates are lower than the levels touched in the second half of 2008.
Bankers said there was little buying interest among banks at such rates. "Term deposit rates and CD rates are above 10%. At current rates, I don't know how many investors are willing to pick up com
mercial papers, even the ones with good credit rating. So volumes remain low," said Manish Saraf, treasury head of Dhanlaxmi Bank.
A slow growth in bank deposits has also tightened liquidity. According to the weekly statistical report published by RBI, bank depos
its grew at 10.9% in 2010-11 against 12.1% in the previous financial year. According to Mr Saraf, "The slowdown in deposit growth rate could be due to two reasons. Depositors are holding out in the hope that rates will rise further. Banks are not yet going all out in raising high-cost deposits."
Bankers say, the tightness in liquidity has worked well in the favour of RBI in the monetary policy transmission. "It is a matter of higher demand and less supply, which has led to proper transmission of rates. So it is not the change in interest rates that has affected
the transmission of the policy, but sucking out the liquidity in the system which has led to real transmission of rates," said, Moses Harding, head-global markets, IndusInd bank.
RBI has mentioned in its monetary policy report that liquidity is likely to ease by April first week. Close to . 17,000-crore government bonds will be redeemed next week but liquidity will be under pressure mid-March when banks face an outflow due to advance tax.
ruchira.roy@timesgroup.com 


Sunday, February 20, 2011

Essar to Offer $1-b Bank Guarantee to Close Shell Deal

The bank guarantee would be over & above $350 m that co agreed to offer for assets of Stanlow refinery

Essar Energy will provide a bank guarantee of $1 billion to close the offer it made to acquire Shell's Stanlow refinery in the UK, according to a person, who is part of ongoing negotiations with banks. This bank guarantee would be over and above the $350 million that Essar Energy agreed to offer for the assets of the Stanlow refinery.
"The company (Essar) will finalise the bankers that will furnish the guarantee in the next three to four months," said the person who requested anonymity as the transaction is still underway. Typically, the purchase price of a functional refinery consists of the asset cost plus an amount for working capital which includes inventory. The value of the inventory, in the case of a refinery, is determined at the close of the deal to reflect the latest price of crude.
On February 18, Essar Energy made the offer to buy Shell's 272,000 barrel-a-day refinery and the associated local marketing businesses for a total expected consideration of about $1.3 billion. Essar Energy's deal value of $1.13 billion includes $780 million for the inventory with the UK refinery. Shell agreed in principle to the offer made by Essar Energy and has granted exclusivity to the offer until April 1, 2011. "Crude and processed products have to be valued on the completion of the acquisition, based on prevailing market prices. As of now it has been estimated to be around $780 million," said an Essar spokesperson. Under the terms of the asset purchase agreement, the company will make the payment in two stages: $175 million payable on completion of the acquisition and a deferred payment of $175 million plus interest after a year of acquisition.
In addition, Essar will have to
make a separate payment for the crude oil, refined products other inventory with Stanlow.
Essar Oil UK and Shell will enter into agreements where Essar will buy crude and feedstock exclusively from Shell for a five-year period at spot prices for Stanlow refinery, and Shell will buy refined products for its retail and other businesses from Stanlow for durations of up to 10 years. About half of Stanlow's output will be picked up by Shell, including supply of diesel, petrol and aviation fuel for a period of five years following completion. Essar has been in talks with Shell for more than two years to buy its Stanlow refinery, as well as two others in Germany.

Setting The Deal In Motion
PICK & CHOOSE
Essar will finalise the bankers that will furnish the guarantee in the next three to four months
CRUDE MATTER
The value of the inventory, in the case of a refinery, is determined at the close of the deal to reflect the latest price of crude
FAIR VALUE
On February 18, Essar Energy made the offer to buy Shell's 272,000 barrel-a-day refinery and the associated local marketing businesses for a total expected consideration of about $1.3 billion

DB in Talks With Oberoi Realty to Sell 30k sq mtr of TDRs

DB Realty, which has been in the news for its promoter Shahid Balwa, is in advanced negotiations with Oberoi Realty to sell nearly 30,000 sq metre of transferable development rights (TDR) for around 2,300 per sq ft, 20% lower than the current market price, sources close to the development told ET.
The discount being offered is attributed to DB's efforts to mop up liquidity through sale of TDRs and the other realtors' rush to sell available TDRs before the implementation of the amendment in the Maharashtra Regional and Town Planning Act that will allow allotment of 33% floor space index (FSI) in the city's suburbs against a premium.
TDRs are tradeable certificates awarded by the state government to a developer to undertake slum rehabilitation projects. The FSI shows the proportion of permissible development on any plot. DB Realty denied the story saying the company has not sold any TDR to Oberoi Realty in the last 40 days. "We are not selling any TDRs below 2,800 per sq ft.
Smaller deals of around 500,000 sq ft are still done at 3,000 a sq ft, while large ones are being done at a slightly discounted price," said N Sridhar, group director, DB Realty.
Oberoi Realty officials declined to comment. DB Realty is expected to pay 802 crore to the Maharashtra government for a 57-acre part of government colony redevelopment project off the Western Express highway at Bandra in Mumbai. Recently, the company also walked out of a possible deal to buy a 108-acre owned by Bayer Crop Science in Thane, citing landtitle issue. The deal was believed to be valued at around 1,500 crore.
"As a developer, one would prefer to sell available TDRs to improve cash flow than offloading inventory at lower prices. It's just a matter of time before the government implements the additional 0.33 FSI against premium and TDR price will have to correct," said an industry official.
In a recent statement, DB Realty main
tained its stance that the company is well capitalised and has sufficient resources to continue with all its projects under construction. "The consolidated debt of 387.7 crore in the balance sheet represents a negligible debt-equity ratio of 0.12 as of December 31, 2010," the company said in a release.
In early January and for most part of the October-December quarter, TDR prices were hovering around 3,000 per sq ft. DB Realty and Housing Development and Infrastructure are major players in the TDR market and according to industry officials, the two account for over 80% of this market.According to industry sources, Oberoi Realty has also recently bought 400,000 sq ft of TDRs from Housing Development and Infrastructure. In its recent letter to chief minister Prithviraj Chavan, Maharashtra Chamber of Housing Industry urged operationalising the MRTP Act amendment that was passed in December to offer an additional 0.33 FSI on premium to developers.

The FSI allotment against premium will result in more housing supply and lower developers' dependency on TDRs, thereby easing prices of TDR itself. Currently, realty developers in suburbs get an FSI of 1 with the cap of 2 for total development. The balance of allowed FSI and total development cap is then procured through purchase of TDRs. However, with additional FSI allotment for premium, developers' requirement for TDR will ease in the same proportion and, therefore, its prices will fall.

Thursday, February 17, 2011

Nifty Has Support at 5300-5400 Range

Nifty February Future opened the week on a positive note at 5346 and short covering was seen on Monday and Tuesday. On Wednesday, long build-up was seen. On Thursday, Nifty February future made high at 5550 and closed in the green at 5543.3, with 61.05 points gain and 1.15% increase in open interest. Clearly, long build-up was seen on Thursday too. Nifty February future closed with 0.15 point discount. Nifty PCR (V) has been trading at 1.06 levels on Thursday, which is healthier.
During the week, max open interest (OI) was seen in 5400/5500 and 5300 put. On Thursday, short build-up was seen in 5600 and 5500 put, with 50.85% and 26.96% increase in OI respectively. Long unwinding was seen in 5400 put. On the call side, maximum OI was seen in 5600/5500 and 5700 calls. On Thursday, short covering was seen in 5700 and 5500 calls, with
2.15% and 13.21% decrease in OI and long build-up was seen in 5600 calls with 6.21% increase in OI. Overall scenario shows Nifty has good support in 5300-5400 zone and Resistance may be seen in 5600-5700 zones.
Decrease in OI and positive price movement i.e. short covering was seen in Century Textile and HDFC. Short build-up was seen in ONGC. As per sector performance, capital goods and banking sectors have been major outperformers, while realty, healthcare and IT sectors have been major underperformers on Thursday. Although short covering was seen in Century Textile, the scrip managed to breakout above the support at 330 and a rally up to 360-365 may be seen in the next few days. ONGC, which has been trading in a short-term downtrend, showed short build-up from resistance near 280-285. Below 285, weakness may continue and the stock may decline up to 265-272.

Sensex’s 5-Day Rally is Longest Since Sept

The BSE Sensex climbed for a fifth consecutive session on Thursday, its longest winning run in five months, as investors picked bargains in a market that is still among the worst performers in emerging regions. Financials powered the main index up more than 1% after food inflation eased to a two-month low in early February on moderating prices of onions and other vegetables.
Analysts said the market was still not out of the woods, with foreign institutional investors (FIIs) turning net sellers this year following a spate of political corruption scandals and rising interest rates. Reliance Communications fell as much as 2.8% after Anil Ambani, who controls the No 2 mobile carrier, was questioned on Wednesday in a widening corruption investigation that has battered the government. The stock recovered later and ended up 0.3% at Rs 99.95.
The 30-share BSE index rose 1.13% or 205.92 points to 18,506.82, its highest close in three weeks. Nineteen of its components closed in the green.
The benchmark has risen nearly 6% over five sessions, but is still down 9.7%
in 2011, as foreign funds pulled out $1.7 billion. "Food inflation coming off a bit has provided some relief," said RK Gupta, managing director of Taurus Mutual Fund, but added there was strong resistance for the broader 50-share Nifty index at around 5,600 points.
The Nifty, or NSE index, closed up 1.2% at 5,546.45 points. "If FIIs end up as net buyers for a couple of more sessions and if we are able to hold on above 5,600 level, the downside risk will be limited," Mr Gupta said. Foreign funds had bought a record $29.3 billion of stocks in 2010 and helped the BSE index rally 17.4%.
The market breadth was positive almost through the day, with advancing shares outpacing declining ones in a ratio of 1.5:1. Around 278 million shares changed hands on the BSE, lower than the 30-day average daily volume of 307 million shares. —Reuters


Expectations - Union Budget 2011-12

Union Budget 2011-12 Expectations: Unicon Investment


India was among the few countries in the world to implement a broad-based counter-cyclic policy package to respond to the negative fallout of the global slowdown. These policy actions has helped Indian Economy to clock a growth of 8.6% in FY11 (advance estimates). While rising strongly in the world economic order, India faces the most critical challenge of crossing the 'double digit growth barrier'. Current macroeconomic challenges are manifold 1. Controlling inflation, including that for essential commodities, 2. Maintaining fiscal deficit amongst rising oil prices, 3. Absence of one-time revenues such as 3G, WiMax license fees, 4. Allocation & channelising investment in Infrastructure, 5. Domestic financial sector liquidity management with large government borrowing can potentially be a dampener for private investments, 6. Reducing current account deficit from current elevated levels, 7. Over and above, handling corruption issues. The upcoming elections in some of the major states may prompt the government to continue to take some populist measures.

Union Budget 2011-12 - Focus on Agriculture & Infrastructure sector

On backdrop of higher inflation (supply side constraints), lower industrial growth & infrastructure investments, Union Budget 2011-12 is likely to undertake measures to ease such constraints in the form of reforms in Agriculture & Infrastructure sector.

A) Agriculture sector
1. Larger Investments in Agriculture sector,
2. Improvement in the Agri logistics & cold storage chains,
3. Steps towards reduction in essential commodities hoarding,
4. Investment in R&D in agriculture.
5. Irrigation and water management
6. Related to agri inputs

B) The lower growth in the industrial production last year is also likely to be addressed; to sustain the growth momentum and expand manufacturing base of the economy over medium term, the government is likely to look at addressing the challenges of land acquisition, infrastructure bottlenecks and infrastructure financing, among others. Besides agriculture, & infrastructure sector, power, rural electrification, education, logistic and rural oriented sectors will be the main focus of the budget, as it would be the main participants in the acceleration of GDP growth of country. In addition, we are likely to see relaxation of FDI norms further in Retail, Insurance and FDI procedures.

C) Inclusive agenda: After years of substantial expansion in the social sector spending, the government is likely to go relatively slower on its inclusive growth agenda, given limited fiscal headroom. No major change in the prevailing tax regime is expected; due to fears of a slower GDP growth in 2011-12. Moreover, any major tinkering in the indirect tax rates is unlikely as the government is targeting rollout of the integrated goods and service tax (GST) in a year. Similarly, changes in direct tax regime may be limited to aligning it with the upcoming direct tax code (DTC).

One of the problems is funding revenue expenditure through capital receipts and, thus, bringing in greater inter-generational inequalities. In the process, we run the risk of prioritising the immediate problems at the cost of our longer-term policy objectives (reforms and infrastructure creation). Unfortunately, we are, once again, likely to get stuck in addressing only the near-term problems in the coming budget too!

Capital Goods & Infrastructure: Infrastructure spending is the backbone of any economy especially in a developing country like India. With end of XI five year plan and missing targets, focus would remain on infra sector. Currently, the sector faces issues like higher commodity prices, higher funding cost and over and above slow pace of award win. At operational level difficulties are faced in obtaining several clearances for land, environment etc causing further delay in project execution and cost over run.

Given the recent reshuffling in the cabinet, low pace of award win activities and dismal IIP data over last couple of months, the thrust would be to accelerate the infrastructure spending and promote private participation to achieve inclusive growth of the economy. Emphasis would be towards higher infrastructure spending both from public and private participants in order to achieve higher GDP growth rate of 8.5%+. We expect higher fund allocation to various infrastructure development schemes (like Bharat Nirman, JNNURM, APDRP, RGGVY etc.) & focus on higher social spending benefitting construction and water & rural infrastructure taking front seat while allocation. Formalization of Public Private Partnership for Infra projects is also likely.

Cement: Cement industry currently faces multiple challenges both internal and external. On one hand, demand is moderating especially in the North region and muted to negative growth in Southern region, industry is also facing higher input and fuel costs. The situation was also aggravated due to hike in diesel prices, making transport cost (freight) dearer. With low demand in over supply regime, industry is unable to pass on the higher costs to end user thereby keeping their margin under pressure or voluntarily opt to keep volume low. Given the backdrop of Government thrust to accelerate economic growth, industry expectations are high to reduce excise duty on cement which in our view is unlikely.

With country's GDP pegged to grow ~8%+ annually going forward, cement industry is likely to grow in double digit over long term and outlook for demand remains positive. With a view to have inclusive growth of all sectors, emphasis would be to create demand for real estate sector with focus on affordable housing, Govt. led higher infra spending in the form of higher fund allocation and incentive for public private partnership (PPP) to keep robust demand for cement. Sector specific, we do not expect material changes.

Metals / Mining: Metal prices have been in an uptrend on the back of rising input costs. Recent disruption in coking coal and iron ore supply due to floods in Australia have been responsible for the rising prices of steel. Spot prices of 63.5 Fe grade iron ore have risen sharply from ~USD 125 / MT in July 2010 to ~USD 196 / MT currently. China coking coal prices have increased from ~USD 265 / MT in July 2010 to ~USD 320 / MT currently. This steep rise in input costs have resulted in compression of margins for non integrated players such as JSW Steel and SAIL while it has helped the integrated players such as Tata Steel and Jindal Steel & Power and mining companies like NMDC and Sesa Goa to improve their profitability.

Going forward we expect steel prices to remain firm on account of strong demand lead by recovering global economies. However we believe iron ore prices would come under pressure going forward on account of high inventory levels. Iron ore inventory in China's ports has reached 82.8 MT, record high in three years. With the resumption of supplies from Australia, prices of coking coal would also normalize from their highs. We believe this scenario would be positive for steel companies.

Oil & Gas: The International Energy Agency (IEA) estimates global oil demand at 89.1 million barrels per day (mb/d) for CY11, an increase of 1.4mb/d over CY10. Asia and the Middle East would account for a major portion of the increase with an expected rise in demand by 1 mb/d. Per capita consumption of energy in India is still one of the lowest in the world (around 0.3 tonnes of oil equivalent compared to world average of l .8). The rise in oil demand can be attributed to a buoyant economic recovery globally. To cater to this demand, IEA estimates OPEC supply at 29.9 mb/d, non-OPEC supply at 53.4mb/d and OPEC NGLs to contribute 5.8 mb/d in 2011.

With demand expected to remain strong we expect crude prices to remain high going forward which is negative for the sector, especially the downstream players. Uncertainty regarding subsidy continues to bleed the oil marketing companies. The three OMCs will end the fiscal with around INR 800 bn of revenue losses on selling diesel, domestic LPG and kerosene below cost, compared to ~INR 440 bn last year. The focus on laying of natural gas and gas transmission pipelines continues with transmission and distribution companies like GSPL, IGL, GAIL and GGCL having performed very well over the last year. With issue of coal availability, ramp up of KG basin production and government's thrust on cleaner fuels, natural gas business is expected to grow very rapidly.

Power: Investments in power transmission & distribution (T&D) are currently lagging behind compared to investments in power generation and are expected to play catch up in the coming years. Given the heavy investment (INR 8370 bn for XIth Plan) requirement in this sector, we believe that the thrust on spending will be maintained. We expect the incentives to continue and in a best case scenario, there could be some more positive surprises as well. Incase of customs duty exemption, there would be reduction in the cost of power generation which will help our economy at large besides encouraging more industries to come forward to set up power plants. All initiatives from industries to set up Independent, Merchant and Captive Power Plants are expected to be encouraged by Government of India. Focus of the budget is expected to be on improving the T&D infrastructure in the country & promoting renewable energy.

Auto: The budget last year had partially rolled back the stimulus provided to the auto players by increasing the excise duty to 10%. We may see a complete withdrawal of the stimulus with excise duties on two wheelers and small cars back to 12%. The auto industry has begun showing signs of a slowdown, imminent on the back of a high base due to strong growth last year on account of pent up demand post the recession. Increasing input costs, rising vehicle & crude prices, general inflationand an upward spiral in interest rates have also resulted in moderating the auto demand. Most auto majors have expressed their concerns and we expect the industry to grow at 10-12% in CY11 compared to 31% in CY10.

Textiles: Indian Textile industry contributes 14% of the total industrial output and 15% of exports. The Industry ranked second in terms of employement generation employing more than 35 mn people. The industry is going through major technology upgradtion to increase the productivity during the last few year to counter global competiton. The Government expects the industry numbers to triple by the next decade to USD 220 bn from the current USD 70 bn considering the rising demand from the western countries. With the US economy showing good signs of recovery, textile demand would increase at a rapid pace going forward. The textile industry with help from TUFs scheme has already modernised with a lot of textile majors now having integrated business models right from raw materials to garments. To further support the growth story of the industry there are favourable expectation from the union budget.

Paper: The Indian paper industry is currently passing through a very difficult phase due to high input cost of raw materials. Since the industry is highly fragmented in nature, it has not been able to take advantages economies of scale as has been the case with its global counterparts. As a result, production in India is very low at 14% compared to 60% in developed countries with high cost of production. Paper industry in India depends on import of waste paper for manufacture of paper/paperboards, as there is a huge shortage of the raw material domestically. We think the government will provide releif to the paper industry by reducing the customs duty on waste paper and pulp which would be positive for the paper companies.

FMCG: FMCG companies witnessed growth in volumes across product categories. However, rise in raw material costs took a toll on the operating margins across companies, with margins contracting by ~ 200 bps to 500 bps. The increasing competition among players also resulted in greater Advertising & Promotion (A&P) expenses of majority FMCG companies barring a few. The companies in this space either, have already taken price hikes during the quarter or are planning to rise prices to protect margins from erosion.

The recent correction in FMCG stocks has made them attractive, given the fact that underlying consumption story remains intact. Rural sector accounts for about 33% of sector's total revenue. The rural FMCG market is growing on the back of rising demand driven by rising income levels, changing lifestyles and favorable demographics. The pace of rural consumption is growing much faster than urban areas. The acquisitions by FMCG companies in other emerging as well as developed markets would also be earnings accretive in the long run. The sector is expected to be a market performer. Overall, we remain positive about the sectors prospects given the acceleration in rural spend and urbanization.

Pharmaceuticals: The domestic pharma industry continues to grow at 11-12%, dwarfing the global average of five-six percent. Similarly, improved traction in productivity trends has prevented margin pressures, notwithstanding the intensifying competitive landscape domestically. The government's Vision 2015 statement indicates an 18% plus CAGR for the pharma sector, translating to a doubling of revenues to USD40 bn over the next five years. Growth will be driven by all verticals: domestic formulations, generics exports, and outsourcing (CRAMS). The government has recently announced the setting up of a venture fund that will target the infusion of INR 20 bn into the sector.

Fertilizers: Urea has taken centre stage in fertiliser sector in Budget 2011-12. Urea represents almost 50% of all fertiliser products consumed in the country with an annual consumption of 27mn tonnes (mt), of a total fertiliser consumption of 55 mt. The Committee of Secretaries is currently working out a viable model to determine how the subsidy component would be fixed, as urea production is based on different forms of feedstock such as gas, naphtha, fuel oil and coal. The government was also working at raising the urea prices by 2-5% in 2011-2012. De-canalisation of urea imports would also take place once urea comes under the NBS regime. At present, only authorised agencies can import urea. The industry is also eyeing upgradation of investment policy for urea by the government. The fertilizer industry expects Rs 50,000 crore in cash for FY12 by way of subsidies. It also expects further cushioning for FY11 subsidy. The sector has also sought removal of import and export restrictions.

Banking, Financial Services & Insurance: Banking sector being a backbone of the economy has shown a strong growth in the FY11; especially the robust results in the last few quarters have bestowed strength in the banking sector. In the first half of the financial year 2011 the credit growth has been subdue but later it improved on back of strong demand for capex, infrastructure and agriculture. Due to inflationary pressures in the economy RBI has raised repo & reverse repo rate six times in last financial year. Despite this bank's have improved their performance on all fronts like NII, NIMs, CASA etc. Going ahead, banks are likely to focus more on CASA growth by expanding there branch network (rural and unbanked areas), improvement in NIMs & reduction in NPA's. We believe the sector will continue to remain under pressure in the near term until a sharp uptick in credit and deposits growth alongside pressure on yields easing off. We have seen interest rates on the deposits side, money markets, etc. inching up at a much faster pace on account of continued liquidity shortfall which would affect banks NIMs. Banks with higher CASA will be able to ride the wave better and protect NIMs. However, the inherent strengths of the Indian banking industry is likely to offset this impact.

Information Technology: While earnings of the companies have been positive so far, revenue growth is a concern for IT companies. Volume growth has been slower than expected. The managements of IT companies are confident that future outlook would be better with increasing IT budgets. Also discretionary spending is witnessing a revival. While the big-players are not facing problems currently, the small and mid-sized ones are struggling to grow post the recession, and so a slew of measures such as the STPI extension and tax clarifications would provide an improvement in their bottom-lines that would fuel future growth.

Telecom: Indian mobile market has undergone revolutionary change during the past few years to become one of the leading mobile markets on the global map. The number of mobile subscribers stands at 752.19 mn in December 2010. With this the sector has become hyper competitive market with ~12-13 players as compared to ~3-4 in most other developed markets. Thus is expected to witness consolidation in near term. Mobile number portability could affect the subscription figures of some companies but established player may not feel the pinch. Companies are expected to roll out 3G services (Rcom , Bharti and Tata have already started) but the traction generated by it is still to be seen. Moreover, recent regulator recommendation has stimulated some uncertainty in the sector, especially with regards to recent 2G pricing and license renewal fees. However, increasing rural penetration and data services offers immense potential going forward.

Media: The Indian Media & Entertainment industry (television, film, radio, print, music, the internet, animation, gaming and outdoor media) offers attractive growth potential as compared to both developed and other emerging markets. The entertainment sector is expected to grow at 10 .7% in 2009-13. Rapid urbanisation and an increase in disposable income have accelerated the addition of new viewers driving the viewership number. The Media and Entertainment sector is witnessing continues increase in media spends by various industries. A rapid adoption of satellite based television services via DTH and digital cable augurs well for the Television industry. Regional print is expected, to continue to show strength backed by increasing regional demand however, rising newsprint prices could play a spoiler going forward. Phase-III licenses are expected to give a boost to the radio industry.

Hotels: An improvement in the macro environment and the consequential improvement in foreign tourist arrivals and domestic corporate travel have aided a rebound in the hotel Industry. Occupancies have shown a remarkable improvement and this is likely to be followed by an improvement in average room rates (ARRs). The tourism industry is expected to grow at a CAGR of 7.6% for the next 10 years. With increase in disposable incomes and favorable demography domestic leisure travel is set to grow at a healthy pace. Growth in demand is seen across business as well as leisure destinations and we maintain our positive stance on the hotel industry, on the back of the improving dynamics despite huge inventory lined up and foreign players also queuing up to be a part of domestic hospitality growth saga. There might be some rate corrections across hotel categories owing to competition from leading international and domestic brands entering the market as well as the availability of quality options in the mid-market and budget category.

Shipping / Ports / Logistics: India suffers from an inefficient modal mix in its transport landscape, because its share of roads over more operationally as well as cost effective modes like rail or coastal shipping is large. The Indian transportation & logistics sector is increasingly attractive to foreign and domestic operators as well as strategic and financial investors. To build a strong platform for driving long-term economic growth, an increase in the government's thrust on this sector is vital. The domestic shipping industry is burdened by severe competition on the one hand and taxes on the other vis-a-vis global players operating from tax neutral jurisdictions. The ports sector is anticipating rapid growth and considerable investor interest. This would entail major investment in initiatives to expand capacity of major ports and make improvements to their facilities. There is an urgent need for measures to facilitate growth in ground logistics (warehousing, rail freight and cold chain logistics) and we expect some solid reforms to be announced in the budget. 

Retail: With the improving economic scenario, purchasing power of consumers is on the rise. However the recent inflation shock is denting this purchasing power. While retail companies have so far produced good results, the future outlook would be under pressure if inflation continues unchecked. While little can be done on the global commodity front, improved FDI in retail could help bring down prices of consumer goods, thus fueling growth.

In the short-term, given the inflationary scenario, we don't expect Retail to outperform, as people's daily necessities will take over a large part of their spending budget. However over the long term, since the economy is growing, we expect the Retail Sector to perform well.

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