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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