Tuesday, July 31, 2012

Anatomies of some towering newcomers

At the Sensex, change is the only constant factor. B&E presents a quick analysis of some new behemoths, those whose positions are under threat & some potential new entrants

We take detours, we halt, but we continue to move forward. And a decade is some time on the calendar. This is as true about the grieving families of those 9/11 victims, as much as it is about elements in the circle we call India Inc. And what better an acceptably accurate mirror of India Inc. than the Sensex? Change is the word. First, you had 20 names that were left out of the Sensex in the decade leading to 2001. The next decade saw almost a repeat, with 17 names wiped off. Harsh. What is however encouraging is the sight of a newbie storming into the Sensex, every time a name loses out. The current list has quite a few of them. We call them the ‘towering newcomers’.

Coal India is the freshest and the biggest of the new entrants. Ever since it first featured on the Sensex (August 8, 2011), it has made waves, even temporarily dethroning RIL as the largest in m-cap (August 24, 2011). In fact, it created a sweeping impact the very first day it went public in October 21, 2010. It was oversubscribed 15.2 times and raised Rs.2361.48 billion – the second highest in the history of India Inc. (after R-Power in January 2008). Until late last year, CIL was considered an averagely performing PSU. But the company has today mixed well its present public status with the virtual monopoly it possesses for coal mining that serves the purpose of other private and public power generating companies in India. Currently, CIL has under it coal mines with reserves of 65 billion tonne of coal. But it will not use only this to fulfil the supply-demand gap that exists in the country. The company already has bagged 27 proposals from 16 companies for importing coal at discounted prices. As far as the future is concerned, with coal imports scheduled to touch 84 million tonne in FY2010-11 (a y-o-y rise of 15.07%) and estimated to reach 137 million tonne by FY2011-12 (total projected demand of 731 million tonne as per the BP World Energy Report), the company will continue to remain a common noun on the trading floors for years to come. Remember, coal contributes to 54% of India’s overall power needs and to 75% of power generation needs (as per IEA), and with coal demand and prices going nowhere but up, the growing demand-supply mismatch will only play in CIL’s favour. [Until the government allows private players like R-Power, Adani Enterprises, Lanco et al, to participate in the commercial supply of coal, CIL shareholders will continue having the last laugh.]


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Monday, July 30, 2012

Is India on The Verge of an Export Miracle?

When bad news comes cascading down like torrential rainfall during monsoon, it is very easy to ignore good news. Something similar is happening in India where scams, scandals, political logjams and widespread fears of an economic slowdown – even as inflation rages on – have become the staple of media outlets. So it was not very surprising when the phenomenal growth delivered on the export front was reported in a matter of fact manner, and then consigned to that dustbin called stale news! But I personally think that the export performance delivered by the Indian economy is not just a silver lining; it holds the promise of transforming India’s economy and its employment generation potential in this decade.

The facts first. In June 2011, the value of exports from India virtually touched $30 billion – up more than 46% compared to the same month in 2010. If you take the first quarter as a whole, the value of exports from India approached $80 billion – an increase of about 45% as compared to the April-June quarter last year. Even die-hard pessimists now agree that Indian exports will cross $300 billion in the current fiscal. This spectacular performance despite two powerfully inhibiting factors: the uncertainty and continued sluggishness in the global economy, particularly Europe and North America and the high rates of inflation in India that should make Indian exports less competitive.

There are two potentially game changing trends visible if you examine the trade figures a little closely. The first: Europe and America now account for just one-third of the total value of exports from India. Clearly, Indian exporters have been smart and have diversified their portfolio of destinations. The second, even more important trend is the fact that exports of products were double the exports of services in the April-June quarter. For long, everyone seems to have swallowed the myth that India will forever be the back office of the world, even as China continues to be the factory. There definitely was some merit in that argument in the past, but you cannot deny facts which indicate a startling structural change in the Indian economy. The fact is that manufacturing is growing and at a healthy rate. This is absolutely crucial for employment generation.
Just one policy announcement from the Prime Minister Dr. Manmohan Singh can make this export miracle a genuine and sustainable reality for this decade and beyond. Labour reforms in India have been largely stuck for about two decades because they are politically sensitive and pampered and powerful unions (that account for just about 3% of the total work force in India) have stalled them. Yet, imagine what could happen if Dr. Manmohan Singh announces that his government will guarantee the salaries of workers in key export industries like textiles, readymade garments, leather and others? The actual cost to the government will not be huge; but there will be a massive increase in investments in these key sectors to propel exports. Just the number of new jobs that will be created as a result – along with schemes like NREGA – will ensure that the UPA will continue to lord it over India.


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Saturday, July 28, 2012

Metals, Mines and Troubled Minds

After Nearly two years of Discussions and Delays, The revised MMDR Bill is likely to be placed in The Parliament. Will the protesting locals and industry elements finally find peace? Doubts remain.

After several rounds of deliberations, discussions and interactions, a Group of Ministers (EGoM) headed by Finance Minister Pranab Mukherjee on July 7, 2011, cleared the draft Mines & Minerals (Development & Regulation) Bill. As per government sources privy to the development, the Mines ministry plans to introduce the bill in the Winter session of Parliament. If passed, the new Mines & Mineral Development & Regulation (MMDR) Act will replace the existing MMDR Act, 1957.

As per the Bill recently cleared by the GoM, the Centre and states can levy cess on all minerals – 2.5% of the royalty in case of the Centre and 10% in case of the states. In addition, mining companies will now have to pay four times the money they presently pay to the states as contribution towards sustainable mine closure plans. The 10-member ministerial panel has said that coal miners should pay 26% of their profits, while other mineral mining firms should give an equivalent of 100% of the royalty they pay the government to compensate people displaced by these projects. However, the mining firms want a royalty-based sharing formula wherein they will have to pay only 26% of the royalty equivalent to the displaced. Sources say the proposal will be discussed further.

Miners in India, who have recently come out of a commodity slump have always been wary that the provisions of the new MMDR Bill, if legislated into an act, will spell doom for the Indian mineral resource industry. If it was any indication, shares of mining firms fell sharply after the panel approved the draft mining Bill, indicating a negative sentiment that the proposed provision for profit-sharing would have a negative impact on the companies’ profits. While Coal India fell 8.2%, Jindal Steel and Power declined by 2.5%, Hindustan Zinc and Sesa Goa by 4.2% each, NMDC by 2.5%, SAIL by 3.7% and Tata Steel by 2%, soon after the GoM paved way for the Bill to be put before the Cabinet.

In an important development, the GoM which vetted the draft Bill, has also given its nod for authorising and incentivising state governments to take up “prospecting and exploration, so that adequately prospected ore bodies can be put on bid.” The new Mining bill will empower state governments to hand out leases, take up prospecting and exploration activities before mines and call for bids for commercial utilisation of mineral deposits such as coal and iron ore. If the proposals become law, companies would need to make an annual cash contribution of Rs.100,000 per hectare to the state government over the life of a mine. This amount would go as contribution for implementing the mine closure plan, key for environmental rehabilitation and in providing succour to workers and communities dependent on mining activity for sustenance. Additionally, the Bill also proposes to give the states a free hand to levy cess on both major and minor minerals by a sum not exceeding 10% of the amount of royalty paid by companies for a particular mineral. Several states including West Bengal were already levying cess and local taxes on minerals at differential rates. The Centre had initially challenged the West Bengal’s move to levy state-specific taxes on coal produced in the state, but a few years ago, a Supreme Court ruling had gone in favour of the state. The Centre therefore, does not share coal royalty proceeds with Bengal. It is pertinent to note here that although the royalty on minerals are levied and collected under the central law, the process of appropriation is actually carried out by the states. As per the GoM, the proposed central cess on minerals would be used for better administration of mining activities.


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Friday, July 27, 2012

From #32 in 2010 to #62 in 2011! Is all Well at Grasim?

Although Grasim Posted its lowest Profit in Five Years, most of The Factors Responsible for this De-Growth were Industry Specific.

What started just 10 days after India became independent is now the global leader in Viscose Staple Fibre (VSF, a semi-synthetic fibre made from naturally occurring polymers) – the company holds 21% global market share in the category. And not just VSF, it’s today the country’s largest merchant producer of sponge iron, the second-largest caustic soda maker and the eight-largest cement manufacturer in the world. Grasim Industries, one of the flagship companies of Aditya Birla Group, has certainly come a long way since its inception in 1948.

However, it seems that the last fiscal didn’t turn out to be a usual lucky year for the company which contributes about 15% to the conglomerates’ (read: Aditya Birla Group) total turnover. Reason: For FY 2011, Grasim Industries reported a massive 43.5% decline in its net profit, from Rs.20.92 billion in FY2010 to Rs.11.82 billion in FY2011. This, in turn forced the company to decent to rank 62 in the B&E Power 100 list for 2011 from 32 last year.

Although this was the company’s lowest profit figure in the last five years, most of the factors responsible for this de-growth were industry specific. The decline in profit had nothing to do with the operational performance. In fact, if analysts are to be believed, the company posted yet another year of splendid growth, as it has been doing over the last many years. For instance, over the last decade, the production of VSF has risen from 218,000 tonnes to 302,000 tonnes. Even the production scale for Grey Cement has grown from 9.10 million tonnes to 9.54 million tonnes during the same decade. As for the Ready Mix Concrete, its production has also sprung from a mere 0.10 million cubic metres to 1.08 million cubic metres in the last 10 fiscal years. Agrees J. Radhakrishnan, Research Analyst at IIFL as he tells B&E, “Grasim Industries has performed very well in the last fiscal, particularly on the VSF front.”

Buoyed by a global shortage in cotton and revival in the textile industry, the VSF business posted 17% y-o-y topline growth, from Rs.35.74 billion in FY2010 to Rs.41.70 in FY2011. Although the sales volume went down slightly, from 308,431 tonnes in FY2010 to 305,072 tonnes in FY 2011, realisations improved by 17%. However, operating profit margin (OPM) of the VSF business declined by 750 basis points y-o-y due to a substantial increase in input costs as they could not be passed on entirely. During the year, costs of major inputs such as pulp, sulphur and energy increased by 35%, 119% and 17%, respectively and this made a major dent in the company’s bottomline. In fact, analysts fear that the trend might continue in the near future as well.


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Thursday, July 26, 2012

“A 100% Safe Facility is Impossible”

Gullen Argues that in The Longer Term, we have to go Beyond Nuclear

B&E: Do you think India is ready for nuclear proliferation for civilian use?
MG: India will need a lot of energy. It is investing in renewables (wind in particular) and it seems nuclear may have to play a role. Since Fukushima, however, the world has turned relatively wary of nuclear energy.

B&E: Are countries pursuing nuclear proliferation ready to face a Chernobyl kind of disaster? What possibilities are there that can ensure civilian safety in case of a nuclear leak?
MG: It is impossible to design a 100% safe industrial facility. Within nuclear power, there are many designs being used. The French, in spite of generating 70% of their power with nuclear, have not had a serious accident. Technology cannot answer all questions and address all eventualities, but it seems that good design can make a difference.

B&E: Do you see a growing need for the world to move towards a prohibitive nuclear and a proliferating solar energy model?
MG: I think all energy sources and technologies need to be pursued. We cannot ignore any one of them. We need more research. I think even coal has a future, as long as we find a way to burn it without releasing gases that warm up the world.

B&E: Is it still costly and uncommon to implement solar power projects in developing economies?
MG: Solar power is not yet competitive anywhere, and it is years, perhaps decades, away from being so.

B&E: Depending on the investment and its return, how do you think solar energy will be able to compete with nuclear?
MG: It will be hard, unless there is a real breakthrough.

B&E: So the challenges that both these technologies face towards becoming major sources of energy in the near future relate to...
MG: It’s a matter of cost, in the long run.




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Wednesday, July 25, 2012

Back to The Golden 100s!

In Order to Fight Illegal cash Transaction, The Government should Immediately ban Rs.1000 and Rs.500 Currency Notes

Cash transactions are the most difficult ones to trace. And this is the most important reason behind the success of hawala or money laundering. Today, hawala is not only used to transfer funds from one place to other to avoid taxes, but is also widely used to fund a gamut of illegal activities ranging from a variety of small crimes to even terror funding.

Today, hawala is executed through multiple routes; be it through postal deliveries, rail transport, water transport or air transport. However, with the introduction of Rs.1000 currency notes, both the volume and value of hawala transactions have increased exponentially.

In order to reduce this illegal practice, it’s important for the government to immediately ban Rs.500 and Rs.1000 notes from normal circulation. Most of the countries across the world have 100 as their highest denominations in currency notes. Even the United States retired their currency notes of $500, $1000, $5000 and $10,000 way back in 1969 and today have $100 as their highest valued currency.

In the case of India where the inflation doesn’t allow things to be purchased at low price (in rupee terms), one does require higher value currency notes. But more than 90% of the people in India rarely use the bigger bills, and the 3-4% highly fortunate people rely on plastic money for high value transactions. Thus, banning of these notes will largely affect those who are into illegal trade or tax evasions. In any case, high volume transactions should never be undertaken through the cash route.

The government should concurrently give an event window for those with black money to deposit the same back with the tax authorities on payment of a pre-decided fine amount.


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Tuesday, July 24, 2012

Stratagem-INTERNATIONAL-MCDONALD’S VS. SUBWAY: IS BIGGER BETTER?

Despite Losing out to Rival Subway on The Number Global Outlets, McDonald’s still Scores on Key Business Metrics and is Easily Winning The Palate game in key Emerging markets. B&E gets through to Subway and Global Analysts for an Insider into The Famed Rivalry. 

But McDonald’s clearly scores with a more winnable business model that aims to foster trust among franchisees. Analysts like Equity Research Vice President and Restaurants Analyst Steve West from Stifel Nicolaus tells B&E, “McDonald’s isn’t ‘worried’ about any competitor. They note what the competition is doing, but they focus more on looking ahead and executing their own growth strategy.” But there’s another key difference here too. While Subway works entirely on a franchise model (there’re no company-owned restaurants), McDonald’s owns 20% of its restaurants. This enables McDonald’s to create newer benchmarks in best practices and to replicate these best practices to all its franchisees globally, which helps to drive innovation, menu expansion, management practices, and better quality control. So far, both models have worked – but the Mac has worked clearly better. The number of customers coming to McDonald’s is constantly increasing, with over 62 million people trying out its products daily. The average spend per customer visit at McDonald’s restaurant has also increased from $2.79 in 2006 to $3.28 in 2010, and could rise further due to increasing spend from emerging markets (McDonald’s is planning to open at 490 new locations across Asia, the Middle East, Africa and Australia, a figure equal to its rest of the world new location plans). The chain forecasts that its expansion effort could drive sales growth up by 5% and income up by 7%. And they’re not even looking at Subway while telling that. No kidding...

“In 2010, we Sold 2.5 billion Sandwiches Globally”
Les Winograd, Public Relations Specialist, Subway

B&E: Congrats on Subway becoming the largest QSR chain globally. What does this signify for the food services industry in general and Subway in particular? Les Winograd (LW): We are proud of the efforts of everyone on Team Subway for making us one of the largest and most recognisable brands in the world. Becoming the largest QSR signifies that the franchise model works well. There are many people out there looking for career opportunities who are very interested in joining an established team and a well recognised brand. And particularly at Subway, it confirms that our franchisees not only are hard working and dedicated, but that they also strongly believe in the brand, the products and their ability to grow within the Subway system. Without the franchisees, the Subway chain would not be where it is today.

B&E: What will be your next challenge?
LW: The Subway team has a history of setting and reaching goals. While we are continuously focused on providing franchise opportunities and great tasting food at a good value with exceptional service, our short term goal for 2011 is to open more than 2,000 new locations around the world.

B&E: In terms of revenue and profits McDonald’s is still the leader. How do you plan to close this revenue gap?
LW: Ours are two different business models. While it is exciting to have more locations than anyone else in the QSR industry, our focus has been and remains to offer great tasting products to consumers at a good value and to work with our franchisees to provide a support system that will help them run a successful business. Our growth is a result of our ability to offer franchisees the opportunity to own and operate their own businesses that follow a proven and simple operational model, coupled with all the hard work, dedication and support provided by our team members around the world. Out goal has remained the same as it was 46 years ago: to provide a delicious sandwich, at a great value, in a comfortable environment with exceptional customer service.

B&E: Where does Subway see itself in the next five years?
LW: Our largest area of growth and opportunity today is in the International market. We have five regional offices and numerous country offices equipped to attract franchisees and provide support for their stores. We have a very strong international team in place that know the territories. Our success is on two levels wherever we go. First our business model attracts people with an entrepreneurial spirit - people who want to succeed at owning and operating their own business. And we have a strong support staff in place to help franchisees reach their goals. The second is the product itself. At Subway restaurants we provide a choice for people. And with that choice are a number of healthier options made exactly the way you want them.

B&E: What is the average footfall per day in Subway restaurants globally?
LW: Unfortunately, we cannot provide statistical information on customer visits. However, we can tell you that in 2010 we sold approximately 2.5 billion sandwiches around the globe.

B&E: What will be the winning business model for QSRs in the future, takeaways or the proper dine-in experience?
LW: It is not proper for us to speculate as to what will work for others, however, we feel that our model, which includes 100% franchised locations, food customised to order right in front of each customer, minimal equipment and space requirements, flexibility in floor plans and a focus on service, value and healthier options, is what worked well for us.


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Friday, July 20, 2012

It’s a Dry World, Literally

Desertification of World’s arable land poses a Great Threat to Human Civilization, and Coordinated Action is a must

By the year 1994, when the UN General Assembly declared ‘June 17’ as the “World Day to Combat Desertification and Drought,” one-third of the earth was converted into desert. Shockingly, desertification of the world’s arable land since decades has been slowly and steadily threatening and endangering livelihoods of millions of inhabitants, benefitted by relative ignominy in the minds of global leadership. It first came to public notice during 1968-1974, when the great Sahelian drought and famine in Africa killed 2,00,000 people and millions of their animals. This forced UN to initiate actions to combat desertification, particularly in Africa.

UN responded and addressed the issue of desertification of arable land on a global scale 34 years ago in 1977, by organising the first international conference in Nairobi, Kenya to promote public awareness and the implementation of the UN Convention to Combat Desertification. Since then, efforts have been taken up globally as well as by nations individually, yet fertile dry lands have been continuously becoming deserts at an alarming clip.

The United Nations Environment Programme (UNEP) has indicated a serious threat from desertification. Horrifyingly, according to the US Bureau of Land Management study, over 40% of continental American land is at risk of desertification. Over the last five decades, over 1.2 billion hectares of land – equivalent to the area of China and India combined, has experienced soil deterioration in developing countries. Another research by the journal of Life Cycle Assessment (LCA) that measured the degradation of the planet’s soil concluded that 38% of the world is made up of arid regions at risk of desertification. What is more shocking is that more than 20,000 square miles of land worldwide is getting converted into desert land annually.

This poses the greatest danger to inhabitants as well as to ecology. UNEP has estimated that the livelihoods of over 1 billion people are in danger in over 100 countries, due to arable lands transforming into deserts. Gradual desertification is forcing thousands of people from Africa to migrate to Europe. Researches show that a prime reason for Mexicans to migrate to US is that their dry lands are fast turning into deserts. Over 16.66% of the population of Mali and Burkina Faso has already been displaced due to desertification. Moreover, the economic impact is huge. As per UNEP, it costs the world around $42 billion every year. Desertification in the poorest continent Africa costs some $9 billion per year and a whopping $21 billion per year in Asia. It costs some $5 billion in North America, $3 billion each in Australia & South America and $1 billion in Europe.
 

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Thursday, July 19, 2012

Rise now, but Shine Later!

After Hitting The Bottom in 2009, The Global Aviation Industry finally retuned to black in 2010 across all Continents. But with fuel Prices Posing a threat, can The Industry Sustain it’s Profitability in 2011?

“Crisis is part of the airline industry’s genetic profile. And still it survives, more or less intact,” stated Peter Harbison, Executive Chairman, Centre for Asia Pacific Aviation (CAPA) when the industry body released its outlook for the global aviation industry for 2009 titled, “A Year of Great Opportunities. Don’t waste it!”. But little did Harbison or CAPA know that the series of events thereafter would ensure that the industry dips down to a historic low, in terms of demand. While the man made disaster (read global financial melt down) started it all, nature wasn’t too kind to the aviators either. Volcanic ash to heavy snow-fall, every event took its toll on the industry. As per calculations put forward by International Air Transport Association (IATA), the global industry lost a mind-boggling $81 billion in terms of revenue in 2009. However, with green shoots of recovery (from recession) germinating across the world, the aviators have managed to turn the demand for mobility into unexpected profits. Though the growth is based on a lower base of 2009, it’s certainly a welcome trend reversal for the industry.

Estimates suggest that in 2010, Asia Pacific carriers recorded a 9% year-on-year increase in passenger demand, while European carriers grew by 5.1%, North American carriers by 7.4%, Middle Eastern airlines by 17.8% (on back of a 13.2% capacity increase), Latin American airlines 8.2% (despite a 1.1% decrease in December) and African Airlines by 12.9%. What makes this growth more worthwhile is that it has not only brought the financial statements of most of the carriers back in black, but has also helped them outperform the market benchmarks with a 28% rise (IATA data). And most importantly, they have achieved this despite sharp rise in fuel prices. But the salient question remains, can the sector manage to sustain the positive bottom-line that it has witnessed after a lot of struggle and hardship?

Before getting into the possibilities of bottom-line sustainability, one first needs to recognise what could be the challenges for the industry in 2011. The airline business is highly exposed to unanticipated shocks and air travel demand fluctuates with economic cycles and environmental factors. At the same time, travellers’ expectations are changing faster than ever, calling for improvements in business models. As such, aviation is an industry, which yields one of the lowest returns on equity even in the best of times.

Apart from economic conditions, government regulations, unionisation & infrastructural problems, the other biggest near term risk looming large is on the oil price front. On the back of recovering global demand and thus economy, fuel prices have again started heading north in leaps and bounds. Considering aviation fuel price, the IATA index shows a 33.1% rise in the same over the past 12 months, and it is expected to escalate further. Airlines are planning to levy additional charges to make up for the loss from high fuel prices, but there is no doubt that this phenomenon is going to hurt the operations of air carriers; for free fares, if not for anything else.


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Wednesday, July 18, 2012

Are Poor Allowed to File Cases Free?

Monetary aid for Legal Cases needs to be Urgently taken to More People

Chief Justice A. P. Shah once said that “it would take the court approximately 466 years” to clear pending criminal cases alone! The number of cases pending in our country was over a staggering 31.1 million as of June 30, 2009; including 27 million pending in subordinate courts, 4 million in High Courts and 50,659 cases in the Supreme Court. A large section of India’s poor is involved in many such cases in the HC and SC. But legal expenditures incurred in fighting such cases have long shattered the ceiling and are only moving upwards. This makes it imperative that the underprivileged multitudes be provided with more legal and monetary aid.

While the Supreme Court has such provisions under the National Legal services Authority (NALSA) established in 1987 – where the lower income groups and weaker sections of the society can fight cases free of cost – this service is applicable only to people whose annual income is less than Rs.50,000. It is provided to industrial workmen, beggars, disabled people, victims of natural calamities, SC/ST, et al. For those who do not fall under NALSA – and whose sum of dispute is below Rs.20, 000 – a minimum court fee of Rs.250 is charged. For every increase of Rs.1,000, an added 0.5% is charged as court fee (for example, the overall revenue from court-fees for 2007-08, 2008-09 and 2009-10 in SC amounted to Rs.11.9 million, Rs.128 million and Rs.133 million respectively. The budgetary allocation to the SC in 2009 was above Rs.1 billion).

There is a definite case for taking the benefit of the NALSA service beyond its traditional target audience. It’s naive for instance, to keep Rs.50,000 as the legal dividing line for assistance. For a family of four with one earning member, even a Rs.200,000 annual income is in reality equivalent to being as poor, yet not getting the NALSA service.

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