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Saturday, September 29, 2007
Mayawati - why not Reliance ?
The shutting of Reliance Retail within 24 hours of its launch in Uttar Pradesh has led industry leaders to ask why the company was singled out by Chief Minister Mayawati, who has openly given the nod for similar other ventures, including Spencer's of the RPG group.
Representatives of the industry, intellectuals and common consumers all have been making wild guesses about why Reliance outlets were closed down, which has dealt a big blow to the world's richest Indian Mukesh Ambani's first foray into Uttar Pradesh, which was projected as India's biggest market.
But the worst hit by the order are around 900 of the 2,000 employees who have been retrenched, while thousands of those who were looking up to the retail sector in general and Reliance in particular as a major source of employment see major disappointment in store.
Reliance Retail alone had projected a potential for providing direct and indirect employment to nearly 50,000 people, according to a highly placed company source. An investment of Rs.80 billion was also projected in the state by Reliance over a three-year span.
What seems to puzzle all is the "discriminatory attitude" of the government towards Reliance.
"If the government were to be believed that the decision was taken in the larger interest of vegetable growers and small time vendors, then the same should have been applied on Spencer's and Big Bazar, whose operations are no different from Reliance," a company official sought to point out.
"After all, the others too have vegetables and fruits as a component," he said.
"More than 90 percent of our trade at the proposed 300 Reliance Retail stores was non-agri, and vegetables and fruits formed only 8 percent of the retail business," he pointed out.
Meanwhile, Spencer's, Subhiksha and Vishal Mega Mart are already running 56 retail stores across the state, while 21 new ones are in the pipeline.
Industry and commerce representatives feel that if the government really felt that giant retail stores would adversely affect vegetable and fruit vendors then Reliance could have been asked to go ahead with other goods.
They also wondered why the present government, which believed in dealing firmly with all unlawful activity, had chosen to give in to a minor protest and that too by activists of its rival, the Samajwadi Party.
They were apprehensive that such an attitude of the government would discourage other prospective investors who otherwise see UP as a major potential state.
Referring to the protests, Punjab Haryana Delhi Chamber of Commerce state spokesman Anil Shukla said: "We have already said in a letter to the government that resistance is a natural response to every change."
Terming the protestors as protagonists of "middlemen", the letter states: "In case of the retail business too we understand the resistance has come from a handful of people, largely middlemen who account for less than one percent of the society."
It added: "Uttar Pradesh has abundant capacity to expand in the field of organized retail. This is the time to welcome businessmen in Uttar Pradesh. The benefits to state and public could be phenomenal and the state could witness new economic growth without having to make any investment; better price for the farmer for his produce, besides throwing open a vast new avenue for employment."
A similar letter has been sent to the government by the Confederation of Indian Industry (CII) state chief Deepak Malik, who sought to draw the government's attention to the fact that retail business "could ultimately bring investment to the tune of Rs.40,000 crore (Rs.400 billion) in Uttar Pradesh".
While no government official is willing to make a comment, there is also none to either lend an ear to their pleas, they lament.
A well known Kanpur based industrialist told IANS on the condition of anonymity, "by shutting Reliance, the government has killed the golden goose".
The state government shut Reliance Fresh outlets in the state in August following protests by the opposition Samajwadi Party.
IFCI soars after short-listing 8 bidders
Shares of IFCI shot up by more than 10% on Friday after a financial daily reported that the public sector term lender has shortlisted eight bidders for the proposed sale of a 26% stake.
The newspaper report says that the list of shortlisted bidders includes the consortiums led by Wilbur L Ross and Shinsei Bank. However, the names of those bidders who have been left out have not been disclosed.
At 12:56 p.m., IFCI was quoting at Rs98, up Rs5.20 or 5.6% over the previous close. The stock earlier touched an intra-day high of Rs102.45 and a low of Rs94.15. The stock has gained over 18% in the past one week and a whopping 58% in the past one month.
As many as 10 bidders had submitted bids for acquiring a 26% stake in IFCI. Other members of the consortium led by Wilbur Ross include Standard Chartered Bank, HDFC and Goldman Sachs. Punjab National Bank (PNB) and JC Flowers are part of the consortium led by Shinsei Bank.
Others who had submitted EoIs included Blackstone, IDFC, Kotak Mahindra Bank, GE Capital, Cargill, Newbridge Asia, Natixis and a consortium between Sterlite and Morgan Stanley.
IFCI sources have been quoted as saying that, at this stage, it would not make sense to reduce the number significantly and therefore impact the competitive pricing of the valuation.
The shortlisted bidders would be informed latest by October 1. A pre-bid conference is scheduled for October 3. Thereafter, the shortlisted suitors would be asked to undertake due diligence.
Requests for Proposal (RFP) would be issued a week later. By November, financial bids would be submitted. The Board would then finalise the name of the strategic investor.
There is a lock-in period of three years for the entity or the consortium that would be selected. In addition, the bidders should be in the business of financial services with a long-term interest in the institution.
Rupee and the IT sector
The hardening rupee has been one of the major focal points of the IT industry of late. A 10% appreciation in the last one year has made a serious dent on the global competitiveness of the Indian IT sector.
Apprehensions that some segments of the IT/BPO business may be flying out of India has made the industry bigwigs somewhat nervous.
In a bid to combat their growing concerns about the rupee appreciation, some of the industry leaders have even called for slowing down the rate of salary hike in the sector, and of course as expected, others have reiterated their right to peg the salaries wherever they wish. Free market, etc. Thus increasingly, there is a tacit expectation, if not a strident demand, from the sector that the government should manage the appreciation of the rupee better. Never mind its impact on inflation and interest rates.
Well, no harm in having one’s expectations and hopes and sending some gentle signals along those lines. But even as those gentle signals are finding their audience, there are certain aspects of the issue everybody connected should take note of.
From a mere 5% of a $33 billion total Indian exports in 1996-97, today (2006-07) the IT sector accounts for a hefty 25% of the $120 billion total exports from India. This represents a compounded annual growth of 35% for the IT sector over a 10-year period, making IT the fastest growing and the biggest export-oriented sector in the country. Clearly then, if the rupee is getting steadily stronger, the Indian IT sector has had a strong hand in making it so! In short, the IT sector has become a victim of its own success.
After all, if the IT exports rode on a historically weak rupee, it is only natural that in due course, the forces of international markets will bring about a correction. That’s international territory in the financial markets.
That is how industries and nations grow up and learn to cope, as well as find, develop or invent other strengths to stay afloat in a competitive market. And the Indian IT sector can be no exception to this standard rule. It only stands to reason that after decades of reigning strong, the hardest currencies of yesteryears like the US dollar, the Deutsche mark, the pound sterling, the yen or the French franc give way to currencies of the emerging economies.
There was a time when the Japanese automakers faced the same problem as the Indian IT sector today, only much worse — namely that of a super hard yen. Their companies would struggle to spend millions in R&D for devising a superior carburettor design that would bring the cost of a car down by $85, only to see a strong yen push the car price up by $300 the next morning. But the Japanese auto industry learnt to cope. That’s when they unleashed their Lexuses, Accuras and Infinities into the western world.
Clearly, our IT sector needs to find similar market solutions, rather than seriously expect or hope for a government handholding. You either have a free market or you do not. The sector will have to reduce its dependence on conventional export markets; tap hitherto untapped markets, say, among the rapidly emerging east European countries; negotiate their contracts in rupee rather than dollars; get a lot more India-centric; move up the value chain; draw in work-force from the fringe states to bring about superior wage arbitrage and do a whole lot of other things so that the sector is driven more by quality and value than by the softness of the rupee.
To illustrate one of the above points, let us see how our IT sector can become more India-centric. Take Cambodia. For tourists visiting Cambodia, the visa is on arrival. And the software and the system installed at the beautiful Siem Reap airport is so advanced that visas for an entire plane load of tourists is cleared in 15 minutes flat. IT is on its best display here, including the computers on the immigration desk taking your picture on the spot. The same is true of the passes issued as you enter Angkor Vat. The column of vehicles at the entry gate moves faster than our vehicles do at most of our Toll Gates.
During the few seconds a car stops at the entry to Angkor Vat, the tourist’s picture is taken and the laminated pass issued for one or three days as required, complete with his or her picture and other details, such as, name, date, time, etc. Don’t we have enough and more scope in our own country for our IT sector to address, without worrying excessively about exports? We are a big enough country to do much of our ‘exports’ out of Bangalore and Hyderabad to a couple of dozen of states within the country.
BPL Communications licence application under scrutiny
BPL Communication’s (the Mumbai-based operator which was bought out by Essar Group) application for a pan India telecom licence has come under the scrutiny of the Department of Telecom for a possible violation of the cross holding norms with Essar’s equity in Vodafone Essar Ltd.
BPL’s applications were made in the name of Shipping Stop Dot Com in which BPL Communications holds about 74 per cent stake while the Ruias directly own 9.9 per cent stake through an Essar Group subsidiary. At the same time, the Ruias promoted Essar Group also holds 33 per cent stake in Vodafone Essar, which has presence in all the 22 circles for which BPL has also applied.
As per the cross holding norms stipulated in the unified access licence conditions, a single company or an individual cannot hold more than 10 per cent equity stake in two different companies in the same circle. The norms also say that promoter company or an individual may not hold even a single share in more than one company in the same circle. “Clause 1.4 (ii) of the unified access licence states that no single company/legal person, either directly or through its associates, shall have substantial equity holding in more than one licensee company in the same service area. Substantial equity means an equity of 10 per cent or more. Also a promoter company/legal person cannot have stakes in more than one licensee company for the same service area. We are going to scrutinize all applications including that of BPL to check if they are consistent with these norms,” said a senior DoT official.
When contacted an Essar Group spokesperson said, “The applications are fully compliant with the DoT norms.” Sources in Essar Group added that DoT norms did not apply to BPL since the Ruias had reduced their stake to less than 10 per cent stake in BPL. They also said that there was no common promoter company between Essar Vodafone and BPL and therefore there was no question of any violation.
However DoT officials said that they would ask the company to give details of the equity structure of Shipping Stop Dot Com including those held by BPL Communications and Capital Global before taking a decision on the application. Earlier a similar controversy had arisen when the Birla Group had alleged that Tata Group was violating cross holding norms by holding more than 33 per cent stake in Idea Cellular even as Tata Teleservices had rolled out a pan India mobile service.
Reliance Power plans $3.5 bn IPO
Reliance Power Ltd, a company of the Reliance-Anil Dhirubhai Ambani Group or R-ADAG, is planning an initial public offering (IPO) aiming to raise $3.5 billion, or nearly Rs14,000 crore, selling shares equivalent to around 30% stake, two persons close to the plan said.
If the share sale goes through, it could be India’s biggest IPO ever, ahead of a float by realty firm DLF Ltd earlier this year.
Reliance Power, a unit of the Bombay Stock Exchange-listed Reliance Energy Ltd, has been valued at $11 billion, an investment banker said, asking not to be named.
Shares of Reliance Energy rose 7.89% to end Friday’s trading at Rs1,205.50 each—close to its highest traded price of Rs1,220—with a market capitalization of about Rs27,550 crore. BSE’s 30-share indicative Sensex expanded 0.8% to 17,291.10 points.
Reliance Energy, led by billionaire businessman Anil Ambani, declined comment. “We do not wish to comment on market speculation,” a spokesman said.
Reliance Power is expected to file the prospectus with market regulator Securities and Exchange Board of India or Sebi next week. Kotak Mahindra Capital Co. and the local unit of JPMorgan Chase & Co. are among the investment banks with a mandate for the sale.
Reliance Power, earlier known as Reliance Energy Generation Co. Ltd, won the mandate to develop a 4,000MW ultra mega power project at Sasan in eastern Madhya Pradesh this June. The so-called ultra mega power project is estimated to cost around Rs20,000 crore.
It could not be immediately ascertained which of Reliance Energy’s other power projects and assets would be farmed off to its unit Reliance Power. About 60% of Reliance Energy’s Rs6,500 crore revenues in fiscal 2007 came from its power business. Stock broking firm Prabhudas Liladhar had estimated the enterprise value of the power business at Rs1.02 trillion in a recent report.
The parent company had stated in the past that it has plans of setting up 20,000MW capacity by 2015. Some among the new projects could be handled by Reliance Power, an R-ADAG official said, preferring to remain unnamed.
Apart from Sasan, Reliance Energy is building a 1,200MW power plant at Rosa in Uttar Pradesh that it bought from the Aditya Birla Group last year and is also developing a 4,000MW project at Shahapur in Maharashtra. Other projects include the 7,800MW Dadri power project that has been mired in controversy over the supply of fuel from Reliance Industries Ltd, which is run by Anil Ambani’s elder brother, Mukesh.
The capacity of Reliance Energy’s Dahanu power station is being raised to 1,700MW from the current 500MW. The Anil Ambani firm also distributes electricity in parts of Mumbai city.
The share sale in Reliance Power is part of a plan to restructure Reliance Energy into three distinct businesses in power, real estate and infrastructure, sectors in which the Mumbai firm is consolidating its presence. Each of these businesses could be listed at a later date, the R-ADAG executive said. Reliance Energy’s engineering and construction business accounts for two-fifths of its revenues and the company has a small presence in real estate, with an 80-acre development near Hyderabad’s upcoming airport.
A sector expert said the proposed share sale and restructuring could be driven by easing finances for the mega projects. “It looks like they are putting their generation projects into one company, which would make it easier for them to raise money for these capital-intensive projects,” said Arvind Mahajan, executive director and head (energy, government and infrastructure) at the local unit of consulting firm KPMG International.
It is not yet clear whether Reliance Energy would finally emerge as the holding company for all the power projects, Mahajan added. “As of now, it looks like it could be a three-tier structure: with individual projects being held by special purpose vehicles, which in turn is held by the company (Reliance Power) and in turn the group holding company (Reliance Energy),” he said.
Stock Picks
Sobha Developers
CMP: Rs 914.50
Target Price: Rs 870
Kotak Securities has downgraded its rating on Sobha Developers from ‘outperform’ to ‘in-line’, citing a cautious view on the real estate sector as a whole. “We believe current expectations of high volume growth and high price of real estate are unlikely to pan out. We expect residential property prices to see a 10% correction over the next few months,” said Kotak Securities in a note to clients. “We rework our net asset value estimate for Sobha for a 10% reduction in selling price in the next 12 months. Our new fair price for the company, based on March 2009 NAV, is Rs 870 per share,” the note added.
HLL
CMP: Rs 219.35
Target Price: NA
CLSA Securities has downgraded its rating on Hindustan Unilever to ‘outperformer’ from ‘buy’, citing ITC’s impending entry into the personal care segment as one of the triggers. “HUL’s market share trend is improving in certain categories, detergents in particular. While the input prices remain high, price hikes have helped HUL’s margins,” the CLSA note to clients said. “However, the going may get tough with the entry of ITC into personal care segment. While competition is nothing new for HUL, and ITC is not known to compete on price, ITC’s financial muscle and ability to withstand losses for a longer period of time could potentially hurt HUL’s bottomline,” the note added.
Maruti Suzuki
CMP: Rs 999.55
Target Price: Rs 820
Deutsche Equities has retained its ‘sell’ recommendation on Maruti Suzuki with a price target of Rs 820. The brokerage has cited four factors for its negative view -- stretched valuations, rising capex, intense competition, and less scope for further cost cutting. “Rapid strides in indigenisation in the past five years have helped the company improve margins in the past, but this trend is unlikely to continue further. Further, we expect Maruti Suzuki to trade market share for margins with rising competitive intensity,” the Deutsche Equities note to clients said. “Overall, we estimate operating margins to fall by 100 basis points to 13.3% by FY10 (estimated),” the note added. The brokerage has lowered its forecast earning per share for the company for 2008-09 to Rs 58.55 from Rs 60.78 earlier.
Vaibhav Gems
CMP: Rs 204.45
Target Price: NA
SSKI Securities has assigned an ‘outperformer’ rating to Vaibhav Gems, citing upside from new ventures as one of the key triggers. “From being a key jewellery supplier to global retailers, Vaibhav now reaches the end customer directly via TV and direct retailing. The TV channel business has witnessed a quick ramp-up to three geographies within a span of two years,” the SSKI note to clients said. “While a cloud of uncertainty still hangs over the wholesale business, we see immense value being created in the ‘direct sales’ business. Though profitability would remain muted in the near term with large one-off expenses related to start-up cost in new ventures, operating leverage would drive up profits (Rs 70.7 crore in FY09E) as businesses scale up,” the note added.
Petronet LNG
CMP: Rs 80.50
Target Price: NA
MF Global Sify Securities has downgraded its rating on Petronet LNG to ‘underperformer’ from ‘buy’, citing stretched valuations. “We believe that the stock price is running ahead of its fair value,” the MF Global note to clients said. The brokerage has forecast the company’s EPS for 2007-08 and 2008-09 at Rs 5.9 and Rs 6.3, respectively. “Sourcing of LNG at competitive rates would be critical for the viability of Petronet LNG’s expansion plan. The company is likely to face few hurdles as global LNG prices are moving upwards in tandem with the strength in crude oil prices. We expect the financial performance beyond H1FY08 to be tepid as the de-bottlenecked capacity would be utilised to the hilt, limiting any upside until new capacities go on stream,” the note added.
Grey Market - Consolidated, Dhanus, Saamya, Maytas
Power Grid Corporation 44 to 52 24.5 to 25
Dhanus Tech. 280 to 295 55 to 60 (IMPORTANT - See our note)
Koutons Retail 370 to 415 80 to 85
Consolidated Construction 460 to 510 165 to 170
Supreme Infra 95 to 108 55 to 60
Saamya Biotech 10 4 to 5
MAYTAS Infra 320 to 370 165 to 170
Circuit Systems (India) Ltd. 35 3.5 to 4
Kaveri Seeds 150 to 170 22 to 24
Market may undergo correction
In the near term, profit taking cannot be ruled out given that the market has witnessed sharp and swift surge over the past few days.
Q2 September 2007 results is the next major trigger for the market. Figures of advance tax suggest that earnings will be decent to strong. Stock specific activity may take place in the near term on the bourses ahead of the earnings-reporting season, based on result expectations. IT bellwether Infosys Technologies kickstarts reporting season on 11 October 2007.
FII inflow remains robust and inflow may continue in the backdrop of ample global liquidity. A sharp correction, if any, will attract bargain hunters given that domestic liquidity, too, remains strong. Domestic private insurance firms have been channelising money raised through unit linked insurance plans (with a high weightage for equities).
The market will be keenly watching developments on the political front as the government wants the Indo-US nuclear deal to go through. While the operationaslisation of the Indo-US deal has been put on hold by the government pending the findings of a committee, it cannot be stalled forever. A flashpoint may come sooner or later. The four Communist parties have 60 members of parliament (MPs) in the 545-member lower house of parliament. Prime Minister Manmohan Singh's government could fall or be reduced to a minority if the Left withdraws support.
Yet, analysts reckon that political turmoil arising from nuke deal will not impact India’s basic economic fundamentals though some infrastructure projects may get delayed. India’s economy is expected to post strong growth for a long period of time mainly due to favourable demographics.
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