Sunday, June 22, 2008
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Finance Minister P Chidambaram on Sunday warned that high oil prices were threatening to wipe out economic gains made by the world in general and India in particular.
Addressing an International Energy Conference in Jeddah, the Finance Minister said “goals that we have set for ourselves are in grave peril”.
Chidambaram further called on oil producing nations to adopt a price band mechanism and wrest control over oil trading from speculators.
"The only way forward is for the both producers and consumers to find common ground... We propose that we adopt a price band mechanism," Chidambaram said at the meeting.
Rejecting suggestions that rising demand was leading to spurt in crude prices, he said, "The causes for the current pandemonium in oil prices lie elsewhere: in unregulated over the counter markets and future trading in oil."
The surge in global oil prices had prompted the government to increase fuel prices early this month that led to inflation surging to a 13-ear high at 11.05 percent in India.
"Three weeks ago, India passed on barely nine percent of the required price increase to the consumers: the result is that the inflation measured by wholesale prices has crossed 11 percent," he said, adding that even oil producers like Russia, Indonesia, Saudi Arabia and Venezuela faced double digit inflation rates.
Chidambaram warned the oil producing nations that "if the global economy slows down or slips into a recession due to high oil prices, that will eventually hurt all of us... We firmly believe that the current level of international oil prices is in the interest of neither oil producing countries nor the consuming countries."
The FM’s remarks came even as OPEC president Chakib Khelil opposed the demand to increase production in a bid to counter record oil costs. "The price is disconnected from fundamentals" of supply and demand, Khelil said as the international summit on the oil price crisis started in the Saudi city of Jeddah.
"We believe that the market is in equilibrium. The price is disconnected from fundamentals. It is not a problem of supply," he added.
Earlier, Chidambaram had asked the oil producing countries to increase supply to control oil prices, saying the present global inflation could not be tolerated.
"My presence in Jeddah emphasises the global nature of inflation. We cannot operate under these prices and oil producing countries need to calm oil markets," the minister told a private news channel.
On his part Saudi Oil Minister Ali-al Naimi said, "We have already increased our supplies substantially and the spurt in oil prices has nothing to do with oil supply in the global market."
Chidambaram and Petroleum Minister Murli Deora are in Saudi Arabia as part of efforts to address the issue of spurt in global oil crisis. The ministers held talks with Saudi officials yesterday over urgent steps to cool the escalating international crude oil prices.
The International Energy Conference in Jeddah is being attended by heads of state and ministers from 35 countries, top executives of 25 oil companies and seven international organizations.
Saudi Arabia is expected to coax its few OPEC peers who have spare production capacity to join the Kingdom in pumping more barrels, although some in the cartel have been openly skeptical that raising output will rein in prices they believe are driven more by speculation than market fundamentals.
While acknowledging the divide, officials said the meeting itself showed the growing will for a global effort to tackle oil`s rise, which has triggered protests from Brussels to Bangkok over record fuel costs that threaten the world`s economy.
"I really believe strongly that there is a political will of oil producers and consumers to lower the price and stabilize it, otherwise they would not have come," a Saudi oil source said late on Saturday. "There is no justification for this price."
Riyadh summoned both producers and consumers, plus chief executives from big oil firms, to the meeting after an unprecedented day of trading on June 6, when oil prices surged by USD 11 a barrel to a new peak, the largest ever one-day rise.
The price has doubled in a year to almost USD 140 a barrel, despite recent efforts to slow the ascent. Light, sweet US crude oil futures closed at USD 134.62 on Friday.
Saudi Arabia, the world`s biggest oil exporter, said in recent days it would raise output to 9.7 million barrels per day (bpd) in July, its highest rate in decades.
Major oil consumers in Asia, including the world`s number-two user China, have recently raised cheap domestic fuel prices that analysts say had aided rapid demand growth, while US regulators are seeking more oversight of futures market speculators.
Flush with funds, almost to the tune of Rs 10,000 crore after selling family stake in Ranbaxy Laboratories to Japan's Daiichi Sankyo, Malvinder Singh plans to pump in money to Religare and Fortis to make them top firms in respective sectors, besides planning to list diagnostics subsidiary 'SRL Ranbaxy'.
"Healthcare and financial services are two areas where we have existing businesses, where we will make investments," Ranbaxy CEO and Managing Director Malvinder Singh said when asked how he planned to utilise proceeds of stake sale.
Earlier this month, Ranbaxy promoters had entered into an agreement with Daiichi Sankyo to sell off their 34.82 per cent stake in the pharmaceutical major, valued at around Rs 10,000 crore.
"I think for the next many years, our focus is clear to remain in healthcare and to make it number one healthcare firm in India," Singh said.
Elaborating on future plans for Fortis, Singh said, "In the next step, we would be looking at taking it to international level and have strong presence in Asia and then take it to other markets. That will happen in a phase manner."
Dispelling speculations of stake sale in Fortis Healthcare and link-up with Anil Ambani group, he said: "I am not talking to them and I welcome competition but there is absolutely no discussion at any place and I am not talking to anyone about this."
As for Religare, he said, "In terms of the financial services, we certainly want Religare to be in the financial services what Ranbaxy is in pharmaceutical sector."
Singh, however declined to divulge details of investments in the two firms.
"Till now, we haven't discussed it to decide what will go where," he said.
Asked if the funds from the Ranbaxy stake sale could be utilised by Fortis and Religare for mergers and acquisitions, he said, "It is an integral part of the growth of these companies."
Two-three months ago Religare picked up the oldest broking house in UK, which was the first acquisition by any financial company outside India, he said.
"We have done things and will keep doings which will continue to strengthen our business globally. We are always evaluating opportunity and it is difficult at this point of time to give definite answer," Singh said when asked if there could be any acquisition in the near future.
The Singh family had recently undertook a rebranding exercise to rechristening its diagnostics subsidiary SRL Ranbaxy under the Religare name and is planning to expand it further.
Asked if there was any plan to go public with the diagnostic arm, Singh replied in the affirmative.
"The company is doing well... we are the largest pathology company in the country and at some point, we would like to list it as a separate company in the Indian market," he said.
Under the new initiative, Singh said SRL Ranbaxy would be rebranded in terms of the growth and the business.
via Economic times
The soaring crude oil prices, high inflation and sustained selling by foreign institutional investors (FIIs) pulled the market down to its lowest level in calendar year 2008. Political concerns over the nuclear deal with US also weighed on the market sentiment. Sensex declined in 3 out of 5 trading sessions in the week ended Friday, 20 June 2008.
The BSE Sensex declined 618.33 points or 4.07% to 14,571.29 in the week ended Friday, 20 June 2008. S&P CNX Nifty lost 169.55 points or 3.75% to 4,347.55 in the week.
The BSE Mid-Cap index declined 195.74 points or 3.14% to 6,032.43. The BSE Small-Cap index slumped 184.06 points or 2.43% to 7,397.66.
Interest rate sensitive sectors bore major brunt of selling. BSE Bankex (down 3.56% to 6,804.78), BSE Auto index (down 2.1% to 4,042.86) and BSE Realty index (down 5.05% to 5,383.81) edged lower in the week.
Foreign institutional investors (FIIs) pressed heavy sales in the backdrop of a weakening rupee against the dollar. In June 2008, FIIs dumped shares worth Rs 7,477.80 crore (till 19 June 2008). FII outflow in calendar year 2008 totaled Rs 22,847.20 crore (till 19 June 2008). On the other hand, mutual funds were net buyers of shares to the tune of Rs 1,820.20 crore in the month of June 2008, till 19 June 2008.
The 30-share BSE Sensex rose 206.20 points or 1.36% at 15,395.82 on Monday, 16 June 2008. The market ended on a firm note on the back of firm global markets. However, a rebound in global crude oil prices pared strong intra-day gains on that day. Banking and information technology stocks rallied. However, automobile stocks declined after the Union government raised excise duty on large cars, multi-utility vehicles and sports utility vehicles with an engine cubic capacity exceeding 1500.
The 30-share BSE Sensex gained 301.08 points or 1.96% at 15,696.90 on Tuesday, 17 June 2008. Bulls had an upper hand over bears for a second day in a row with market sentiment boosted by reports of higher advance tax payment by top Indian firms in the first installment of 15 June 2008, reports of good monsoon in the initial phase and easing of oil prices from record high.
The 30-share BSE Sensex lost 274.59 points or 1.75% at 15,422.31 on Wednesday, 18 June 2008. Bears struck back with a vengeance on the bourses after a sharp rally in the past two days. Bears used the ploy of weak European markets and deferral of a crucial UPA-Left coordination committee meeting on Indo-US nuclear deal scheduled to bring share prices down. The decline followed a range bound movement on the bourses for a better part of the day till early afternoon trade.
The 30-share BSE Sensex lost 334.32 points or 2.17% at 15,087.99 on Thursday, 19 June 2008. The market succumbed to selling pressure for the second consecutive day. Political concerns and weak Asian markets weighed on the investor sentiments. Banking, realty and capital goods stocks were hurt the most. All the sectoral indices on BSE ended in red.
The 30 share BSE Sensex declined 516.70 points or 3.42% to 14,571.29 on Friday, 20 June 2008. The two key indices, Sensex and Nifty hit their lowest level of calendar year 2008 on that day. The market tumbled after the latest data showed India’s inflation soared to a 13-year high early this month. High inflation sparked fears of tighter monetary policy by the Reserve Bank of India.
India's largest aluminium producer by sales Hindalco Industries declined 8.21% to Rs 161 in the week . Its board on 20 June 2008 approved raising up to Rs 5000 crore by way of a rights issue to redeem a bridge loan it had taken for acquisition of Novelis Inc. The ratio for the rights issue will be 1:3, i.e. one right of Rs 1 each for every three equity shares of Rs 1 each held by the shareholder as on the record date.
India’s biggest engineering and construction firm in terms of revenue Larsen & Toubro rose 0.8% to Rs 2637.80 The company on 20 June 2008 said its heavy engineering division had crossed Rs 1000 crore of order booking for supply of high tech equipment and systems in the first two months of the current financial year.
India’s second largest telecom services provider by sales Reliance Communications plunged 9.58% to Rs 491.30 in the week. In another family feud between Ambani brothers, Mukesh ambani controlled Reliance Industries claimed a right of first refusal to buy a controlling stake in Reliance Communications. Meanwhile, Reliance Communications (RCom) said, in a mala fide effort to disrupt the talks, Reliance Industries (RIL) has sent a communication to MTN, making a false claim of an alleged right of first refusal to buy a controlling stake in RCom.
Reliance Communications (RCom) also threatened to claim damages from Reliance Industries, in case the latter choses to take legal action against RCom. It added that RIL's claim is legally and factually untenable, baseless, and misconceived. Earlier on 26 May 2008, Reliance Communications (RCom) had informed the bourses that it has entered into exclusive negotiations with MTN Group for 45 days soon after the South African giant aborted its talks with the Sunil Mittal-controlled Bharti group. As part of a tie-up, Anil Ambani would likely swap his controlling stake in Reliance Communications to become the largest shareholder in MTN.
World’s sixth largest steel producer Tata Steel declined 7.58% to Rs 777.60. The company said it has formed a joint venture with Jasper Industries to set up a 135 megawatt power plant in Orissa. Tata Steel along with its wholly owned subsidiary Rawmet Ferrous Industries will hold 26% in the project and Japser Industries will hold the remaining 74%.
India’s largest commercial bank State Bank of India declined 6.52% to Rs 1,247.50. The country's largest lender, on Saturday, 14 June 2008, decided not to raise its prime-lending rate. The decision was taken at a meeting of the assets-liability committee (Alco) of the bank
India’s largest tractor maker by sales Mahindra & Mahindra gained 0.84% to Rs 575.20. The Union government raised excise duty on large cars, multi-utility vehicles and sports utility vehicles with an engine cubic capacity exceeding 1500. As per reports, the additional excise duty will be applicable on Mahindra & Mahindra’s Renault-Logan, Mahindra Scorpio and Bolero, Maruti Suzuki India’s Maruti SX4, and Tata Motor’s Tata Safari, Tata Sumo
India’s largest car maker by sales Maruti Suzuki India gained 0.82% to Rs 727.80 in the week.
ICICI Bank (down 3.94% to Rs 734.65), Infosys (down 1.93% to Rs 1,827.60), Satyam Computer Services (down 5.37% to Rs 455.05), Tata Consultancy Services (down 4.88% to Rs 863.40), HDFC Bank (down 2.17% to Rs 1,099), Reliance Industries (down 7.57% to Rs 2,096.60) edged lower in the week.
The infrastructure sector output rose 3.6% in April 2008 from a year earlier, much lower than an unrevised 9.6% growth in March 2008, government data showed on Wednesday, 18 June 2008. The infrastructure sector accounts for 26.68% of industrial output.
The direct tax collections recorded strong growth in the first two months of this fiscal. As per the Finance Ministry data, direct tax collections jumped 71.28% to Rs.22840 crore in April-May 2008 over April-May 2007. The growth in personal income tax was 73.05% at Rs.14690 crore in April-May 2008 over April-May 2007. Corporate tax collection rose 68% to Rs 8126 crore in April-May 2008 over April-May 2007.
The wholesale price index rose 11.05% in the 12 months to 7 June 2008, government data released on Friday, 20 June 2008, showed. The rate was above market expectation of about 10% rise. The reading was the highest in 13 years since 6 May 1995, when it was 11.11%.
The June-September south west monsoon has been 45% above average so far this season, the Indian Meteorological Department said on 19 June 2008. Rainfall in the four-month rainy season this year will be near-normal, or 99% of the average between 1941 and 1990, the weather office had said in April 2008. The department classifies rainfall as near normal when it's between 96% and 104% of the 50-year average. Good rains will bolster farm production which in turn may help rein in inflation.
A key UPA-Left coordination committee meeting on Indo-US nuclear deal, which was scheduled on 18 June 2008, was postponed due to absence of leaders. The meeting is now likely to be held on 25 June 2008.
Sustained selling by foreign funds, rising inflation, high crude oil prices and political uncertainty will weigh on the sentiment of the investors in the near term. However, expectations of good Q1 June 2008 results may trigger a recovery from lower level after a recent steep fall in share prices. The two key indices – BSE Sensex and Nifty – struck their lowest level of calendar 2008 on Friday, 20 June 2008.
The government’s advance tax collections are estimated to have grown at close to 40% in the April-June 2008 quarter. Advance taxes are a good indicator of the corporate India’s profitability and healthy collections reflect the bottomline growth. Companies have to pay advance tax in four installments – the first, accounting for 15% of the estimated tax liability for the entire year. The government has received the first installment of the advance tax for corporate taxpayers by 16 June 2008.
Reserve Bank might intervene to contain inflation, which reached highest level in 13 years early this month. The wholesale price index rose 11.05% in the 12 months to 7 June 2008, government data released on Friday, 20 June 2008, showed. The rate was above market expectation of about 10% rise. The reading was the highest in 13 years since 6 May 1995, when it was 11.11%.
The quarterly monetary policy review of RBI is scheduled on 29 July 2008 but it may take a call much earlier with inflation hitting the roof. Reserve Bank of India had on Wednesday, 11 June 2008, hiked repo rate by 25 basis points to 8% with immediate effect in an effort to contain rising inflation.
A further hike in rates would impact bottomline of Indian companies. Also high interest rates may delay expansion plans of corporates, which in turn may impact future earnings growth.
Rising crude oil remains a major worry as India imports close to 70% of its crude requirements. US crude for July delivery settled down $4.75, or 3.48%, at $131.93 per barrel on the New York Mercantile Exchange on Thursday, 19 June 2008. The oil price has surged about 40% in this calendar year so far.
The market will closely watch the policy statement of the US Federal Reserve to gauge the outlook on US interest rates. The Fed is widely expected to keep interest rates unchanged at its two-day meeting on 24 June 2008-25 June 2008.There had been speculation that the Fed may start lifting interest rates steeply as soon as August 2008 to rein growth in prices. But such expectations were trimmed after a series of media reports earlier this week cast doubt on how aggressively the Fed may raise rates this year, and whether the central bank will boost rates in the near term.
Political uncertainty may continue to haunt the bourses. As per reports, CPM, a key left party, may be working on a plan to pull out support to the Congress-led UPA government at the Centre. Left parties have threatened to pull support to the government if it took further steps on the Indo-US nuclear deal. Left parties are opposing the agreement, saying it undermines India's independent foreign policy and nuclear weapons program.
A good news is that the June-September southwest monsoon has been 45% above average so far this season. Rainfall in the four-month rainy season this year will be near-normal, or 99% of the average between 1941 and 1990, the weather office had said in April 2008. The department classifies rainfall as near normal when it's between 96% and 104% of the 50-year average. Good rains will bolster farm production which in turn may help rein in inflation.
Foreign institutional investors (FIIs) have pressed heavy sales of Indian stocks this month in the backdrop of a weakening rupee against the dollar. In June 2008, FIIs dumped shares worth Rs 7,125.20 crore (till 18 June 2008). FII outflow in calendar year 2008 totaled Rs 22,494.60 crore (till 18 June 2008). On the other hand, mutual funds were net buyers of shares to the tune of Rs 1,919.90 crore in the month of June 2008, till 18 June 2008.
Investors can stay away from the initial public offering of KSK Energy Ventures Ltd. (KSK). The offer appears expensively priced (PEM of 42-44 times on consolidated earnings) even as revenue and earning visibility is low in the medium to long-term.
The kind of earnings necessary to justify the asking price in the IPO is unlikely to come in before 2012-13. That the company has no experience in managing projects of the size that it now plans to implement is also a source of concern.
Outsourced power developer
KSK is an outsourced power developer that builds and operates small-sized captive power plants for either a single customer or a cluster of buyers. It now has three operational power plants adding up to a total capacity of 144 MW, but if its plans are executed without any glitches, it could achieve a capacity of over 9,000 MW in the next six years.
As with other power generating companies, KSK has structured each of its projects as a separate subsidiary. As per regulations, captive power buyers should own a minimum of 26 per cent equity in the company supplying the power and they should consume at least 51 per cent of the power generated. Thus, KSK shares equity ownership with its buyers in all its captive power supplying companies. For instance, cement manufacturer, Lafarge India, owns 49 per cent equity in the 43 MW Arasmeta project that supplies power to it.
The equity-sharing agreement is such that a majority of the economic benefits of equity ownership flows to KSK. In the case of Arasmeta, Lafarge has preferential dividend rights of just 0.1 per cent of the face value of the shares.
Where Lafarge gains is in lower tariff and in the assurance of uninterrupted supply of quality power. It pays just Rs 2.65 per unit for the power it buys from Arasmeta.
The tariff is so structured that increase in fuel costs are passed on to Lafarge but KSK has to bear increases in other expenses such as finance costs, taxes and duties, and maintenance.
From these modest beginnings, KSK now aims to become a large-sized power developer and the proceeds of this IPO will fuel a part of this ambition.
Under construction now are two projects aggregating 675 MW; the first, of 135 MW will be commissioned by the end of this calendar year, while the second and bigger one of 540 MW is slated for commissioning by the end of 2009.
Apart from this, there are three more projects under development adding up to 1973 MW. The IPO proceeds will be used to finance the biggest of the three — the 1,800 MW coal-fired project in Chattisgarh being implemented by Wardha Power Company Pvt. Ltd.
Besides these, there are projects, a mix of thermal and hydel, adding up to 6,345 MW in the planning stages now.
KSK’s strategy is to tie up with state mineral development corporations (SMDC) for coal supply.
Assuming that it is able to successfully tie-up agreements with such SMDCs and the latter follow those agreements in letter and spirit, KSK should not have a problem in fuel supply for its planned projects.
It has entered into an agreement with Gujarat Mineral Development Corporation (GMDC) for coal supply for the Chattisgarh project. GMDC will be acquiring 26 per cent equity in Wardha Power Company which will supply up to 1,010 MW to it at a fixed price of Rs 1.92 a unit. Importantly, there will be no increases in tariff during the term of the PPA, including for fuel cost increase.
Apart from this, KSK will also have to supply 540 MW to the Chattisgarh government as its share, leaving it with 250 MW to sell to other consumers at higher prices. The company is also negotiating with other state mineral development corporations such as in Madhya Pradesh and Puducherry for tying up coal supply for its other projects adding up to 3,600 MW capacity.
What troubles us
While there is a reasonable visibility in earnings in the near-term when the under-construction projects will be commissioned, the same cannot be said of the long-term.
There is not enough clarity on the pricing or on the quantum of free power available to KSK for sale to the market after accounting for the supplies to the host government and to the fuel supplier, as these are yet to be negotiated.
Besides, the company will have to raise almost Rs 22,000 crore in debt over the next five years to finance the projects that are in the planning stage.
How efficiently the company manages this exercise and how much of the interest cost it is able to build into the power tariff from each of those projects, will determine its earnings growth in the next five years.
Here, the lack of experience in managing large-sized projects is a definite cause for worry.
Besides, creating the management bandwidth required to simultaneously manage such large, diverse projects will be a major challenge, especially given the sharp ramp-up in the size of the overall business in a relatively short period of time.
The offer is priced aggressively with the company being valued at Rs 8,826 crore at the upper end of the price band. The PEM of 42-44 at the price band (based on consolidated 2007-08 EPS) is higher than what NTPC (18 times) and Tata Power (38 times) command. Given that there is clear visibility only to the extent of 992 MW of different projects that will be commissioned by 2011-12, the price being asked of investors does appear on the high side.
The prevailing market conditions anyway do not offer any comfort of gains either on listing or in the period immediately after that.
There are also a couple of other factors that trouble us. There appear to be too many companies in the group with complex holding patterns.
The holding company of KSK Energy Ventures is KSK Energy Ltd. which is registered in Mauritius.
This company is, in turn, a wholly-owned subsidiary of KSK Power Ventur Plc, registered in the Isle of Man. A few group companies with operating power plants and generating cash flows were transferred to another outfit owned by the promoters a few months ahead of the IPO.
Though power projects are typically housed in independent special purpose vehicles with a holding company, in KSK’s case, the presence of a wholly-promoter-owned company in the midst and the possible conflict of interests that could arise because of thi,s are a cause for concern.
Also worrying is a recent communication from GMDC that the fuel supply agreement that it signed with KSK for the 1,800 MW Chattisgarh project is subject to government approval (which is awaited).
What this communication means to the agreement for fuel supply and power offtake is not known at this point in time.
Offer details: KSK is offering 3.46 crore shares in the band of Rs 240-255 a share. The offer, lead-managed by Kotak Investment Banking and IDFC-SSKI, is open between June 23-25.
Investment can be avoided in the initial public offer (IPO) of Somi Conveyor Beltings (SCB), which makes rubber conveyor belts for industries such as cement, sugar and coal. Although the company’s revenue prospects appear healthy, the low barriers to entry in SCB’s business and the lack of significant competitive advantage and pricing power make investments in this offer unattractive. At Rs 35, the offer appears expensively priced at about 28 times its likely FY-09 per share earnings on a post-offer equity base. Investors may be better off adopting a wait-and-watch approach to this offer since there may be better opportunities to enter the stock once listed.
SCB’s products are likely to enjoy healthy growth in demand driven by the ongoing capex boom across industries such as coal, mining, sugar and cement. And since rubber tends to wear itself out over time, SCB also enjoys a large replacement market for its products.
Notwithstanding this, SCB’s future earnings growth may be subject to uncertainty. Firm price trends of its key raw materials — natural rubber and carbon black — may exert pressure on the company’s profitability since it may not be able to pass on the higher input costs completely to its clients.
Moreover, given the current supply shortage of rubber, SCB’s ability to procure adequate supply of this raw material may also be put to test. The government’s steps to curb the rise in the price of natural rubber by imposing a ban on its futures trading, may offer little respite for SCB on the cost front. Domestic rubber prices have continued to rise despite the futures trading ban.
Over the last three years, the company’s revenues and earnings have grown at a compounded rate of over 62 per cent and 177 per cent respectively, on a low base. Operating profit margins have also improved over the years to the current levels of about 18 per cent.
Business and proceeds
SCB makes rubber conveyor belts of various sizes used for industrial applications in various industries such as coal, lignite and steel.
The company proposes to use the offer proceeds to set up new manufacturing unit, purchase land and building for office use, meet the margin money requirement for enhanced working capital and interest cost during the construction period. The offer is open from June 24-27.
The company seeks to raise Rs 21.8 crore through this offer. Ashika Capital is the lead manager to the issue and Mondkar Computers is the registrar.
A double-digit inflation rate has been a rarity in Indian economy and it was only in early 1990s and during 1994\95 that inflation hovered above the ten per cent mark, according to the website of Reserve Bank of India.
The RBI website, which gives average monthly inflation figures with the base of 1993\94, tells that the last time inflation was in double digit was in April-May 1995 when it ruled above 11 per cent. The mid 1990s saw a very high inflation and for 12 months in a row from June 1994 till May 1995, the rate of inflation was in double digits.
Prior to that, there was a period when the economy witnessed double digit inflation for a period of 21 months, from November 1990 till July 1992 with a high of 16.3 per cent recorded in September 1991. However, the base year for calculating the inflation numbers at that dime was the year 1981\82. The all-time high for inflation was recorded in February and March of 1995 when it hit 16.9 per cent. Given the current inflation rate at 11 per cent, Uv are still far away from going anywhere near the all-time high level9.
The mid 1990s was also the period when inflation went down dramatically . The RBI data suggests that inflation dropped gradually from 11 per cent plus in May of 1995 t4.5 per cent in February 1996. Subsequently, it was a period of low inflation with only occasional blips. The lowest level was in February 2002 when it was only 1.4 per cent.
A day after India’s inflation rate touched its 13-year high of 11.05%, Finance Minister P Chidambaram on Saturday sought to restore calm, assuring the government was taking necessary steps to quell inflationary trends.
Immediately after meeting RBI Governor Y V Reddy, who also met Prime Minister Manmohan Singh, Chidambaram said, "We should not give room for panic.”
The minister said the food situation in the country was comfortable, adding the government will use wheat, rice stocks to help bring down food prices. The government will provide enough wheat and rice through PDS, he assured.
The FM noted that it was soaring global crude oil prices that were driving India’s inflation up.
Finance Secretary D Subba Rao too tried to pacify concerns saying the pace of inflation was coming down, noting manufacturing inflation was rising by only 0.3%. Government figures showed manufacturing inflation was at modest 3 percent. Also, inflation excluding oil had slowed to 0.2% from 2.6%.
The Finance Ministry said inflationary pressures would persist for some more months even if prices didn’t go up. Price management will be priority in a trade-off between growth and inflation, the ministry added.
Rao further said they were expecting the RBI to take monetary policy action to curb inflation. There is no painless adjustment, somebody has to bear the cost, he added.
In a statement circulated to the media by the Finance Secretary, Chidmabaram said he had met the Prime Minister last night even as the political parties, including the Left allies, pilloried for what they called failure in management of prices.
Chidambaram also met Congress president Sonia Gandhi today to appraise her of the situation and the steps that were being taken to tackle inflation, 94 percent increase in which was due to hike in fuel prices.
During his meeting with the Prime Minister, RBI Governor Y V Reddy is understood to have discussed steps needed to be taken to control the prices.
Reddy’s meeting with Singh lasted for about 15-20 minutes, sources said, but details were not available.
Shareholders can consider booking profits in the stock of Vishal Retail. Investors who subscribed to the company’s initial public offer last June are still sitting on a 160 per cent return on the offer price, though the stock has corrected substantially from its highs. The current market price of Rs 689 values the stock at about 25 times its likely FY-09 earnings, assuming the company delivers on its guidance.
The valuation is slightly stiff, in our view, as it factors in sustained ramp up in new stores. We are somewhat sceptical of the company’s ability to meet its expansion target for FY-09, as it is not yet adequately funded for the expansion. Even if it manages to raise equity worth Rs 200 crore through private placement, as proposed, with the balance to be funded by debt, higher interest costs are likely to be a drain on earnings over the next year. As a slower-than-expected pace of rollout could lead to a de-rating of valuations, shareholders can consider booking profits at least partially on the stock.
Progress so far
Vishal Retail operates a chain of stores that sell apparel, FMCG and other consumer products at discounted prices to value conscious customers. The company focuseson small towns and cities where aspirational spending is on the rise.
Vishal Retail reported a 67 per cent growth in revenues and a 62 per cent rise in profits in 2007-08, on the back of a significant ramp up in retail space. Vishal Retail beat its expansion target for FY 08, opening 50 stores as against the proposed 32. It now has over a 100 stores and a retail space of 2.3 million sq ft.
The company’s operating margins improved 1.2 percentage points to 12.7 per cent in FY-08, on the strength of an increasing share of private labels. The company has also managed to improve the share of FMCG sales in the revenue mix (18.6 per cent versus 15 per cent earlier), as part of its strategy to attract footfalls.
Interest costs have, however, jumped to about 3.8 per cent of sales from 2.4 per cent earlier. This may be on account of higher debt used to fund burgeoning inventory costs, now at Rs 2,500 per sq ft. The high inventory poses a strain on working capital requirements and is a cause for concern.
Same-store sales (sales of existing stores, excluding openings) growth has slowed further to 7 per cent in FY-08 from 11 per cent in FY-07. This means that high revenue growth has been driven significantly by store expansion, rather than growth from existing stores. Competitors such as Big Bazaar have managed to maintain at least low double-digit same-store growth.
Ambitious growth plans…
Vishal Retail continues to have ambitious growth plans, targeting 190 stores with over 3.7 million square feet by FY-09 and over 500 stores with 10 million sq ft by FY-11. It also intends to invest in logistics, restaurants and consumer PE fund (similar to that run by Pantaloon).
Expansion is to be led by Tier-3 and Tier-4 towns, which might mean lower ticket sizes and average sales per sq ft, although profitability may remain at the same levels due to lower rent and employee costs.
....but funding a constraint
If the company manages to ramp up retail space at the rate it has in the past, revenues and earnings could grow at a strong pace.
However, funding remains a niggling worry. While funding has not been a cause for concern in the past, we adopt a more cautious view in the current liquidity environment.
To meet its expansion plans for the next three years, Vishal would have to invest about Rs 2,500 crore. The company has little by way of internal accruals. Vishal intends to fund its expansion plans through a 2:1 combination of debt and equity. It is already heavily leveraged and bears an interest cost of 11.75 per cent on its loans. This could go up in a rising interest rate environment. These circumstances call for a moderation in growth expectations.