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Wednesday, November 30, 2011

Wear health on your sleeve!

Smart fabrics will be able to collect, store, send and receive information… the only limit is your imagination! Norbert Rego reports

WE have smartphones, smart TVs and smart cars, why not another everyday item — smart fabrics with a semblance of intelligence. This is any fabric that comes integrated with sensors, displays, transmitters or actuators. 

    According to Cornell University fibre scientist Juan Hines t r o z a , e ve r yd ay cotton can be turned into hi-tech f ab r i c, wh i c h c o u l d sense body temperature automatically heat up or cool down, track heart rate and blood pressure in high-risk patients, and monitor the physical effort of high-performance athletes. For instance, the ElectroScience Laboratory at Ohio State University is working on 'smart textiles', which comprise wearable fabrics embedded with electronics. These will be able to collect, store, send and receive information and their application depends on your imagination. 
The new mantra 
Wear your way to better health might be the new mantra. We wear clothes to look decent and to keep us warm or cool, but Celliant's responsive textile interacts with the body's electromagnetic emissions to induce increased oxygenation and blood flow. AT&T's E39 shirt tracks your heart rate, body temperature and other vital signs, uploading the results to a web portal whenever it falls under a Wi-Fi connection. The Intelligent Tshirt, designed by scientists at Spain's Universidad Carlos III de Madrid 
(UC3M), can remotely monitor your temperature, heart rate, activity level, position and location. 
In India, we have the Smart Vest, which has sensors and an electronic chip embedded to monitor the health of its wearer. The chip collects health data such as respiration pattern, body temperature, heart beat, blood pressure and ECG and sends it wirelessly to the designated instruments. These instruments can be the dongle attached to a PC, a mobile phone, etc. The chip can also store the information for later use. The Vest contains GPS, allowing the wearer to be tracked and evacuated during an 
emergency. Dr MP Agarwal, chairman and MD, Shri Lakshmi Cotsyn Ltd, says, "Doctors will be able to monitor patients sitting far away. Defence officials sitting at the control room will be able to monitor health of soldiers' in the frontline as well as identify their location. Depending on a soldier's health, the control room can direct medical aid or arrange evacuation. One can monitor one's own health or of family round-the-clock and in realtime — be it from home, office or even when on a trip. The electronic chips on the Vest can be linked to a physician's computer or mobile phone." 
Sleep well 
Nyx Devices has come out with a Somnus Sleep Shirt that measures the wearer's breathing as they move about the bed. Its sleep logger can record sleep data for up to five nights. 
    Basic smart fabrics, such as rollable keyboards and bio-monitoring clothing, are available, but full integration of smart fabrics into consumer and professional IT systems is a decade away. 
    Anshul Gupta, principal research an
alyst, Gartner, says, "Smart fabrics have the potential to revolutionise how we interact with data, applications and devices. Broader use of sensors that are fully integrated into the fabric, such as materials that measure stress and pressure, are still evolving. Most smart fabrics are currently at the stage of laboratory projects, concepts or niche applications. Consumer awareness of the concept, technologies and many applications is low and, where known, it is perceived as 'geeky' and futuristic." 
Real-world possibilities 
But public awareness of the real-world possibilities of smart fabrics is growing. "Advancements in smart fabric technology offer a variety of 
    applications —
medical, sport, c o n s u m e r electronics, space missions, etc," adds Gupta. For example, a car seat with an integrated pressure sensor could detect the presence of an individual driver, adjust to their seat position preference, pair up with their smartphone and start playing their favourite playlist through the vehicle's stereo. Inseat temperature monitoring could automatically regulate air-conditioning to keep the driver comfortable. Induction charging built into the leather armrest can charge the user's phone without need for a plug or plastic plate. 
    "At present, the market for smart fabric is fragmented and in its early stages, but is poised for growth over the next decade. We expect de
mand for smart fabric technology will escalate as new products and new application areas emerge and move beyond their current commercial niches," believes Gupta.



Sunday, November 27, 2011

Time to enter the market

Though the market is likely remain volatile due to global and domestic uncertainties, investors can consider entering the market gradually as the valuations have started becoming reasonable.

The stock market mood has changed dramatically again and the Sensex has lost more than 2,000 points in less than a month, taking it to a new two-year low. More importantly, the current Sensex value of 15,858 is significantly lower than 19,248 four years ago, which means investors have lost 18% even after a decent holding period. The wealth destruction in the midand small-cap counters in the past month has been worse and several stocks from these segments have fallen by over 50%. With this, more stocks have fallen below the 2008-9 lows, when the Sensex was quoting at 7,700 levels, increasing the gloom among retail investors. 

Attractive valuations 
Amid this dismay, there is a silver lining. The 
trailing 12-months PE of the Sensex has entered the 'slightly undervalued zone' after a gap of 30 months. Though it's a difficult task, stock market investing is all about buying when it's cheap and selling when it's expensive. So the time has come for the smart players to get back to the market. As is evident from the chart (Sensex trailing EPS), the investors who start accumulating from these levels can reap a good return in the next 3-4 years. 
    However, the valuations have not yet reached the bear market bottoms, that is when the Sensex PE goes below 12, marked as 'grossly undervalued zone' in the chart. So, you should be able to withstand heavy volatility in the middle. In other words, don't expect any risk-free returns. Staggering your investment is one way to reduce volatility. "The market may bottom out in the next 3-6 months, so people should consider 2 4 6 
investing in a staggered manner," says Prasun Gajri, CIO, HDFC Life. To increase efficiency, you can hike the frequency of investing, say, from monthly to weekly. More savvy investors can take the help of futures and options to wade through this difficult period. "The turbulence may continue for some more time and the investors who enter the market now need to protect themselves by going for put options," says Swapnil Pawar, CIO, Karvy Private Wealth. Since the market is in a downward mode, you can also wait a little longer for better valuations. "If the current decline takes the Sensex to around 14,500 levels, long-term investors with a 3-4-year time frame can consider getting in because the forward PE will touch 12," says Anand Tandon, CEO, JRG Group. 
    Since the impending volatility will be triggered by several global and domestic events, investors should be ready to modify their strategies based on how these play out. Let us consider these. 
Global factors 
Though the US and Europe face the risk of a recession, the market is more worried about the possible sovereign 
default or break-up of the Euro zone because its impact will be catastrophic. As of now, no immediate solution is in sight. Though a common Euro zone bond has been suggested as one, it may not come through due to Germany's opposition. In fact, if Germany doesn't back up with unconventional methods like common bonds, the euro may collapse, but supporting these measures will amount to transferring liabilities to Germany and affecting its credit rating. So the best scenario involves a continued postponement of the default, hoping that time will solve the problem. 
Rupee depreciation 
The fall in rupee is another worry for the Indian investors (see page 12). However, the sudden deprecation has had a positive impact. "The rupee fall was very fast and the FIIs did not get enough time to get out, otherwise the outflow would have been much more," says Chokkalingam C, Group CIO, Centrum Wealth. This explains why the FII withdrawal is relatively low compared to the massive $10 billion outflow during the rupee depreciation in 2008 which lasted 7 months. So the FII outflow may not be too high because the market is already down 22% and rupee has fallen by 18%, and FIIs don't have much option but to remain invested. 
Interest rate cycle 
Though the sudden depreciation in rupee will increase the inflationary pressure and may force the RBI to continue with a tight monetary policy for some more time, experts are hopeful that we are already at the peak of the cycle. "The RBI is expected to start liquidity measures like reduction in CRR from March and rate cuts from June,"




Natural Gas Cos Under Pressure as Output’s on the Decline

SECTOR ANALYSIS NATURAL GAS INDUSTRY

Indian companies in the natural gas industry have underperformed the broader market in last three months in spite of healthy quarterly numbers as stagnant domestic gas volumes raise concerns over their future growth. Domestic production of natural gas has been on a steady decline after reaching a peak in the March 2010 quarter. While both the public sector oil majors — ONGC and Oil India — have increased their output since then, that raise was unable to compensate for the nearly 27% decline in production from the private sector — mainly represented by the KG basin production from Reliance Industries' block. ONGC's production of natural gas has been stagnant at the current level for the last decade or so with new wells compensating for the natural decline from ageing fields. On the other hand, Oil India has been steadily growing its gas production, which reached a historical high level of 228 million cubic metres in September 2011. 

India's biggest gas importer —Petronet LNG — has done well to mitigate the shortfall from dwindling domestic production. Its imports in the September '11 quarter were 47% higher at 3,825 million metric standard cubic metres (MMSCM) compared to the March 2010 quarter. In the last one year alone, its volumes jumped 35% as it commissioned expanded capacities. Petronet will see a further substantial jump in its volumes only after its Kochi terminal commences operations in 2013. Till then increase in the imports of LNG, if any, will remain limited. 
After reaching a peak of 60 MMSCMD in September 2010 
quarter, RIL's natural gas output has declined steadily. According to recent media reports, it has now fallen to 35 MMSCM per day. 
We are today seeing a situation where the domestic natural gas availability is gradually going down even as there is little visibility on improvements in the near future. This has impacted the performance of domestic natural gas players over the last three months on the bourses. Companies like Gail, Gujarat State Petronet, Gujarat Gas and Indraprastha Gas have lost between 7% and 14%, while the BSE Sensex lost just 2%. This is in contrast to the group's outperformance in the 12-month period till date. 
The natural gas companies have embarked on a capex binge since a couple of years in anticipation of higher gas volumes. With the volume growth not materialising, investors are worried about the utilisation levels of their proposed gas pipelines and return on investment. Regulatory uncertainties pertaining to transportation tariffs have added further to their woes. However, the companies retain their inherent strengths and healthy financials, and long-term investors need not worry too much over these mediumterm volatilities.




On a Wing and a Pledge: The falling rupee and volatile stock markets have added to India Inc’s woes.

The debt problems in Europe and the global downturn are taking a heavy toll on industry.  Fund raising has not only become difficult, but more expensive too. For many promoters, the only way to raise more money has been to pledge their shares. This can prove to be a double-edged sword if the share prices fall further and trigger margin calls, points out the ET Intelligence Group


Tough times call for tough measures. Since January 2011 stock markets across the globe have been reeling under pressure as a result of fiscal and debt concerns in the US as well as the Euro zone. Markets have become very volatile, inflation pressures have risen and more recently, India has also had to deal with a sharp fall in the rupee. Raising funds from the capital markets in such an environment has become increasingly difficult. Costs for borrowing from banks and other financial institutions have also risen. This could be one of the reasons that the number of pledged shares by promoters to raise funds have risen to such a great extent over the past few months. 
Promoters may pledge shares for numerous reasons ranging from personal needs to business expansion and acquisitions. However, there are risks involved. As per Sebi regulations, it is mandatory for a company to disclose the number of shares pledged, but it is not mandatory to disclose the price, the reason for which the shares have been pledged or at what price a margin call will be triggered. 
In volatile market conditions such as those prevailing now, a sharp drop in the share price increases the likelihood of a margin call getting triggered. This means that the promoter either has to make a payment or pledge more shares. If the promoter doesn't have the ability to do either, the bank or financial institution has the right to sell the pledged shares. 
The case of GTL is one such recent example. In July 2011, the company informed the exchanges that ICICI Bank had acquired a 29.3% stake in the company after taking over the pledged shares from its promoter. 
Amid a sharp rise in the number of media reports on promoters of listed companies pledging their shares, we at ETIG decided to take a closer look. From a universe of all the companies listed on the Bombay Stock Exchange and the National Stock Exchange, we examined the change in the number of pledged shares during the July to September 2011 period. We found that the total number of shares pledged by promoters has risen 12%, reinforcing the fact that promoters are facing problems in raising funds. 
After narrowing down our sample by excluding all companies with a market capitalisation of less than 1,000 crore, we have fea
tured 10 companies where the promoters have pledged over 70% of their holdings. The companies have been listed in descending order of percentage of promoter holdings pledged. Apart from the companies discussed below promoters of companies like Suzlon Energy, DB Realty, NIIT Technologies, Strides Arcolab, TV18 Broadcast, Omaxe, Era Infra Engineering, Plethico Pharma, Parsvnath Developers, Indiabulls Power, India Cements, Jaiprakash Power Ventures, Videocon Industries, Alok Industries, Religare Enterprises, Apollo Hospitals Enterprise, Lanco Infratech, Fortis Healthcare and Adani Power have all pledged over 50% of their holdings. 

• TATA COFFEE 
The entire 57% promoter holding in Tata Coffee is pledged. The company which is in the coffee and tea plantation business has a high working capital requirement. Its net working capital to sales ratio for FY11 was 0.5. Also, the debt to equity ratio as on September 30, 2011, was 1.7 which has decreased from 2.0 last year. 
Tea and coffee prices are volatile, and this means that its net profit margin is volatile too. For the September quarter, the net profit margin was 4% against 6% last year. Given the cyclical nature of the business, considering growth in net sales would be more appropriate. And net sales have been growing consistently. 
Considering this and the strong financial standing of its parent — the Tata group, investors can overlook the high percentage of shares pledged. 

• GUJARAT PIPAVAV PORT 
Gujarat Pipavav Port, promoted by APM Terminals, had pledged its entire stake as collateral for loans taken in 2009. As of June 2011, the company has a comfortable debt-to-equity ratio of 0.5:1, and debt of 765.4 crore. In December 2010 quarter, the company made a turnaround by reporting profits for the first time since going public. Since then, the company has shown a steady growth in profits. 
As the major ports in Mumbai and 
Gujarat are operating at near 100% capacity, any incremental growth in volumes is likely to move towards private ports like Mundra and Pipavav. Also, coal-fired power plants with a capacity of over 3,000 MW are expected to be commissioned near Pipavav in the coming years. The coal for these plants would be handled by Pipavav Port. With this expected growth, the company will be able to meet its debt obligations in future. 

• PIPAVAV DEFENCE & OFFSHORE 
The company had pledged its shares for long-term debt to build a ship-repair unit. The company presently has an order book of 7,000 crore which gives revenue visibility for the next two years. The company recently formed a joint venture with Mazagaon Dock to build warships for the Indian Navy. As on date, Mazagaon Dock has an order book of nearly 1 lakh crore and Pipavav expects some of these orders to flow to the JV. It plans to build its second dry dock, which will require capital expenditure of around 3,000 crore over the next three years. The recent announcement regarding preferential allotment to an overseas investor provides breather to the company which is in dire need of cash. 

• KINGFISHER AIRLINES 
Losses for the debt-laden led airline, which is led by Vijay Mallya, doubled in the July-September 2011 quarter sending smoke signals out to investors. The company cited high fuel costs and increased operating expenses as a cause for the same. 
Its debt has risen 1.2 times in the past two years and operating cash flows have been negative. The company also had plans to launch a GDR issue, but this had to be shelved on account of hostile market conditions. 
Its promoters pledged 90% of their shares in July 2011. At the time, the company had a market capitalisation of about 1,969 crore. Its share price has fallen 36% since then. The promoter holds a 59% stake in the company. It has already pledged almost this entire stake. With no rescue plans in the offing so far, if the share price of Kingfisher Airlines falls 
further there is a strong chance of a margin call being triggered. 

• UNITED SPIRITS 
Unlike its cash-strapped cousin from the airline industry, United Spirits had not faced as many hardships… until recently. Profits have grown at 25% CAGR over the past three years. Until March 2011, operating cash flows were up 44%. The company has accumulated huge debt due to the numerous acquisitions it has made over the years. On September 30, 2011, its debt stood at 4169.7 crore. 
United Breweries (Holdings) pledged its shares in United Spirits in two tranches on June 28 and July 13, respectively. At that time the stock was trading at around 955. It now trades at 740, a decline of 22%. The promoter group holds 28% in the company, which is not high. It has already pledged 89.64% of this stake which doesn't leave the promoters with much to spare in case of a margin call. 

• JSL STAINLESS 
The Ratan Jindal-controlled company had borrowed heavily over the years in order to finance its expansion plans. As the expansion did not yield the expected results due to harsh market conditions, the company opted to restructure its debt with the CDR (corporate debt restructuring) cell. As part of the scheme, the promoters had to pledge their shares with the lenders. Currently, 87.7% of their shares are pledged. 
As of September 2011, the company's debt stood at 9,569.4 crore. It has a low interest coverage ratio of 1.93 times which makes it look difficult for the company to pay back its debt even though the management stated recently that it plans to exit its corporate debt restructuring plan ahead of schedule. At the time the shares were pledged, they were quoting at about 104. But even though the shares have fallen 33% since then, the likelihood of a margin call is relatively less since the company is undergoing debt restructuring. 

• WOCKHARDT 
Due to wrong bets on currency derivatives, Wockhardt posted losses for three consecutive years from FY08 to FY10. This led to a sharp correction in the company stock price. Also, the debt on the company's books — raised to make acquisitions in the past — is very high at around 3,800 crore, The promoters hold a 74% stake in the company. But equity dilution at the current low valuation is not a lucrative option. The promoter group has pledged shares as a security against the loan taken for short-term working capital as well as long-term debt. 
The company has turned profitable from the last three quarters and is seeing strong operating cash flow and most of its existing debt has been restructured. With 1,300 crore plus that it will receive from the Danone deal and 1,200 crore operating cash flow in the current fiscal, the compa
ny will be in a position to clear its debt which is mainly payable after FY13 as per the restructuring. 

• STERLING BIOTECH 
Sterling Biotech is a highly over-leveraged company. It has a debt 3,750 crore. The interest paid by it for the September quarter was 82% of earnings before interest and tax. As a result of this high interest outgo, the company's net profit margin has declined from 11.7% to 2.4% in the last six months. Its profit after tax was only 11 crore, down by 67% quarter-on-quarter and interest paid was 72 crore. 
The biotech company has spent a huge amount on research and development which is capitalised till now and not recognised as expense. The big worry is that the promoter share holding in the company is only 33%. Out of this 85% is pledged, reducing the option of further fund raising by pledging shares or offering more shares as collateral in case the share price corrects. 

• ORCHID CHEMICALS AND PHARMACEUTICALS 
K Raghvendra Rao, R Vijayalakshmi, R Divya and R Sowmya hold 29.8% in Orchid Chemicals. In July 2011, they pledged 77% of their holdings in the Chennai-based drug manufacturing company. The price and reasons for the same have not been disclosed. 
Since the announcement, shares of Orchid Chemicals have fallen almost 50%. Given that the promoters have already pledged 77% of their shares, there's little they can do in case the share price falls further. They even run the risk of losing control over their company. 
While the company has achieved a major turnaround in operations and has promising growth prospects, its balance sheet still needs to improve. As on September 2011, the company's debt stood at 2,076.2 crore, which includes FCCBs of 530 crore due in February 2012. 

• UNITECH 
Unitech's earnings have gradually declined over the last three years from 1,625 crore in FY08 to 567.7 crore in FY11. Due to this, funding and debt repayment have impacted execution over the last few quarters. The promoter has pledged 72% of his stake in order to raise funds to complete the current projects. 
The company is currently facing a crash crunch and it is very critical for the company to finish its projects at the earliest in order to improve its cash flows. Revenue recognition is likely to increase only when some of its FY10 projects are completed and this looks unlikely before the end of the current fiscal. 
Though operationally the company is not doing so well, the risk of pledged shares being sold is less as in the real estate business, many a time shares are offered as collateral along with real estate assets thus reducing the risk of bank or financier dumping the shares in the open market.

Tuesday, November 22, 2011

India Re dives to lifetime low of 52.73

Oil Cos Stack Up Dollar, RBI & Govt Indicate Inability To Prop Up Rupee


New Delhi/Mumbai: The rupee continued its free fall and touched a nadir of 52.73 against the dollar, before recovering a little to close at 52.32, amid indications from RBI and the government that there was little that authorities could do to prop up the currency. 
    The Indian currency closed 16 paise lower compared to Tuesday's close which was a record low. The steep fall on Monday morning trade was due to heavy dollar demand from oil companies. Expectations of a further decline are also prompting importers to buy dollars, dealers said. There are clear indications from the market that the falling trend is going to last for a while. In the offshore market, three-month forward contracts traded at 53.46 to the dollar, compared with 53.05 on Monday. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars. 
    Even in the futures market, which is used by companies to
hedge their currency risks against a steep appreciation or depreciation, traders were betting on the rupee trading at 52.80 in late January. The rupee is among the most depreciated currencies this year, having lost close to 15% in 2011, and is the worst performer among the 10 most-traded currencies in Asia. 
    "The present situation is 
worse than the 2008 crisis which was essentially a problem faced by corporates. This time it is countries that are at risk which is a more serious problem. There is complete negativity on all fronts and it is not possible to forecast how low it can fall," said K N Dey, director at Basix Forex. Although RBI described the continuous slide as "disruptive", it indicated that there waslittle it could do. "We expect that a reverse adjustment (in the rupee) will take place when the European situation resolves itself," governor D Subbarao told reporters in Hyderabad. 
    Finance minister Pranab Mukherjee was blunt, and said, "RBI intervention may not help." RBI typically steps in through public sector banks such as SBI to either sell or buy
dollars and check extreme volatility in the currency. Typically, in a situation like this, the central bank would sell dollars. But fearing that its actions could suck out Indian currency from the system and put further pressure on interest rates, the central bank has been selling the greenback in small lots. But that has not helped. "Our policy is that if the macro-economic situation is impacted due to the exchange rate fluctuation or undue volatility, we will have to
intervene. We are yet to decide whether to intervene or not at the moment," Subbarao said. 
    The fall in the currency has sparked fresh pessimism in the market and even Mukherjee recognized that inflation management efforts would be hit. "As a result (of depreciation) whatever little benefit could have been derived from the softening of international commodity prices, has been wiped out," the FM said. 

WHAT POLICYMAKERS SAY 
RBI reserves firepower for the worst Subbarao Says Rupee Will Firm Only After Europe Resolves Its Problems 
Mumbai: One aspect of the rupee's sharp fall last week that has surprised markets is the Reserve Bank of India's muted response during the week. Dealers feel that the central bank is reserving its firepower as the global situation could worsen. 
    On Tuesday, RBI governor D Subbarao told newspersons in Bangalore that the rupee would firm only after Europe resolves its problems. "We expect the reverse adjustment will take place when the European situation resolves itself. Until then, obviously, I can't comment whether RBI is intervening or not but we are watching the market," he said. 
    Dealers feel that although 
the central bank is sitting on forex reserves of over $300 billlon they are not free reserves as they represents liability towards portfolio investors. "Last time when the rupee had crossed 50 the sensex had dropped below 8,500. This time the sensex is at 16,000, if the central bank were to support the rupee at this level it may encourage portfolio investors to further book profits," said a dealer. 
    According to Subbarao, the central bank will intervene when it is consistent with RBI's policy. "Our policy remains the same, which is to manage volatility in exchange rate and to ensure that exchange-rate volatility does not impair macroeconomic stability." 
    Subbarao's stance was reit
erated by deputy governor Subir Gokaran in Mumbai. Speaking to reporters, Gokarn said that RBI did not have any target for the rupee but any action by the central bank must factor medium-term risks. He added that RBI was weighing possible actions on the rupee. 
    Subbarao said the proposed legislation on food security may result in pushing up prices. The governor also said that higher 
income was driving an increase in protein consumption adding to demand pressures. 
    Delivering a speech at the Indian Society of Agricultural Marketing in Hyderabad, Subbarao said: "The National Food Security Bill, 2011 is another potential source of pressure on inflation, and its inflationary impact will depend on the extent to which it will raise demand for food grains relative to the normal increase in supply." The proposed bill targets two categories of households—priority households and general households—which covers 75% of rural population and 50% of the urban population. The price restrictions are quite exacting and failure by 
the government to meet the obligations entails payment of a food security allowance to the beneficiary. "Estimates suggest that 68% of the country's 1.2 billion population will get a legal entitlement for food grains after the bill is enacted, significantly raising the annual grain procurement demand even as the available marketed surplus would not increase correspondingly.

RBI is monitoring the situation closely and will take the required action in light of the international developments as situation unfolds. However, RBI intervention (in the forex market) will not help Pranab Mukherjee | FINANCE MINISTER


Our policy is that if the 
macro-economic situation 
is impacted due to the 
exchange rate fluctuation or undue volatility, we will have to intervene. We are yet to decide whether to intervene or not at the moment. The intervention in the forex market will be in accordance with the RBI's policy. But in real terms I cannot tell (when the central bank will intervene) 
D Subbarao | RBI GOVERNOR


We should not overreact to movements in the exchange rate. But, also understand that there are good reasons for what is happening. 
Expectations of economic events in certain parts of the developed world together with asset preferences are driving investors into taking decisions, which affect not only exchange rates but the prices of commodities 
Rahul Khullar | COMMERCE SECRETARY





Monday, November 21, 2011

Rupeeat all-time low of 52.15, to impact everyday life

Imports Cost More; Overseas Travel, Edu Hurt


Mumbai/New Delhi: The rupee hit a low of 52.15 against the US dollar on Monday, making imports, overseas travel and studies at foreign universities more expensive but cheered exporters and families that depend on remittances. 
    Based on Monday's closing price, the rupee has never been cheaper 

against the dollar, although it had flirted with the 52.20 mark in March 2009 following the global financial crisis. But unlike then, when the slide halted as global markets recovered, this time round, foreign exchange dealers are betting on a further fall. 
    There are projections of the currency falling to 55 against the greenback as economic fundamentals stay weak. If the doomsayers get it right, 
life isn't going to be easy. The sharp fall evoked an almost immediate response from edible oil company Adani Wilmar, which raised prices, while those selling palm and other oils that are mainly imported are expected to follow suit. White goods and phone makers are mulling a 2-10% hike. 
SOME GAIN, LOTS OF PAIN 

WINNERS 
Families of those working overseas will get more rupees for dollars remitted by them Exporters get more rupees for the same price in dollars Tourism may get small boost as foreigners will have to pay fewer dollars for vacationing in India Companies that manufacture export substitutes will get protection through cheap imports 

LOSERS 
Students will have to pay higher fee and living charges in rupee terms. Medicare to also get 
more expensive 
Overseas travel to get more expensive as you will have to shell out more rupees for the same amount of dollars 
Imports to get costlier, hit oil and commodities. Adani Wilmar hikes edible oil prices 
Hampers govt's efforts to use imports to tame inflation 

Companies will have to pay more for repaying foreign debt. They also stand to lose if they had not hedged properly—the likely scenario since few would have foreseen the rupee hitting 52/$ 
Higher oil import bill could put greater strain on govt finances, given clamour for higher subsidies 

WHY DID IT HAPPEN? 
Investors rushing to US dollar in flight for safety. Other currencies, including rupee, have plummeted as demand for dollar has soared FIIs exiting Indian stocks to put money in US T-bills 

HOW FAR WILL IT FALL? 
Expected to decline to around 52.50 against dollar. Traders say it may hit 55 next year, given the weak fundamentals of the economy 
Hike in short-term rates may not helpAweakening rupee is also eating into the gains 
of falling international 
commodity prices with markets staying edgy due to fresh talk of recession and the inability of US lawmakers to push through a $1.2 trillion spending cut. 
    Reflecting the nervousness, the BSE sensex slumped 425 points and fell below the 16,000 mark to close at 15,946. The last time the sensex closed below 16,000 was on October 5, 2011 after Moody's downgraded SBI's credit rating. 
    With the global economic forecast remaining bleak, foreign investors are pulling out of risky and emerging market assets and embracing safe haven options such as the dollar and US treasury bonds. 
    Following Monday's fall, the rupee has declined more than seven rupees against the dollar since August 1. A weak
er rupee adds to inflation by pushing up cost of imports, particularly crude. Every weakening rupee adds Rs 8,000 crore to the crude bill. 
    The slide adds to the government's policy worries given the high inflation level, a slowing economy and rising trade deficit. 
    It's just not oil and other imports, you will have to shell out more Indian currency for foreign travel, overseas education and medical treatment abroad. For companies, the increase in dollar value pushes up the cost of imports and of dollar funding. Exporters who have hedged by selling dollars in the forward market will take a mark-to-market hit as their dollars will fetch less than what they have promised to sell it at. 
    Monday's trigger for the currency market turmoil was pessimism over a senate deal to cut the US deficit. Bankers are anticipating a shortage in dollar funding and are hoarding
cash by parking them in shortterm US treasuries which are the most liquid of all investments. Compared to the 8.5% returns that banks receive in Indian markets, lenders receive almost zero interest on three-year treasuries. 
    Dealers say that because of the risk aversion, a hike in short-term rates—RBI's traditional tool for stabilizing the rupee—may not work. 
    "RBI can address this problem in the short term by opening up the capital account. But a long-term solution will require structural reforms that will lead to a positive current account and trade balance," said Ashish Vaidya, head of fixed income currency and commodities at UBS India. 
    He added that since most international financial institutions were shrinking their balance sheets it was unlikely that even capital account easing would bring in more dollars.




BIG INDIAN BANKS KEEN TO PICK UP ASSETS

EU Banks Put Fx Loans to Indian Firms on Sale

    Several high-street European banks have hit the market in the past few weeks to sell some of their foreign currency loans to Indian firms as these lenders focus on preserving capital in the midst of a sovereign debt crisis. 

BNP, RBS, Credit Agricole and Societe Generale are among the lenders that are believed to be looking for buyers for these assets. A few large Indian banks with offshore offices may be interested, provided they have adequate dollar liquidity, said bankers. 
As most of these loans were given to Indian companies with good credit record, and some with top-notch ratings, it may be a buying opportunity for asset managers and large Asian banks. 
"Portfolios comprising loans to companies such as Bharti, HPCL, Vedanta, JSW and Amtek Auto are in the market. These are good assets and there are more. If the pricing is attractive, we are interested," said a senior official of a large Indian bank. 
Asset buyers will fish for discounts to protect yields on these loans which carry lower coupons as they were given when the interest rate regime was benign. 
European banks, particularly some French lenders, have to recapitalise 
themselves, which can be done either through new capital or shrinking asset books. Since raising equity in a turbulent market is tough and European officials are discouraging financial institutions from cutting loans to European borrowers, parts of Indian and Korean assets are being put on the block. 
"This trend may continue to haunt many Asian companies for the next few months. Incremental loan syndications can be more and more difficult. While Japanese banks and a few Mid-East 
banks are stepping in to lend, they are unlikely to fill the gap caused by European banks," said the person. According to him, asset managers and hedge funds may look at buying some of these loan, bond and structured assets. 
The European banks mentioned here confirmed the development. The RBS spokesperson said: "The bank continually engages in primary and secondary buying and selling of all types of assets (including foreign currency loans) as part of business as usual activities." A spokesperson for BNP said the bank does not want to comment. 
Borrowing Abroad Gets Expensive for Banks, Companies 
The Credit Agricole spokesperson did not respond to ET's query, while SocGen officials could not be contacted. 
Borrowing in the overseas market has become more expensive for local companies as well banks. For a five-year loan, an In
dian company will have to pay 450-500 basis points above the bulk money benchmark rate Libor (London Inter-bank Offered Rate), against a spread of 250 basis points a year ago. For companieswithlower ratings,the markup could be as high as 650-700 basis points. 
What has added to borrowing 
costs is a squeeze in liquidity as investors, companies and banks stack up dollars amid uncertainty and fear of sovereign defaults. 
"Theliquidity situation is not as bad as in 2008 when the RBI had to open a dollar window to ensure foreign branches of Indian banks did not face a crunch. But there 
have been occasions in the past four months when banks generated dollar liquidity through swap deals," said a treasurer with a domestic bank. In such transactions, banks buy dollars in the spot market and simultaneously sell the US currency forward and keep on repeating it to tide over a possible crunch.


 

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