Hero MotoCorp Ltd. (HMCL), India’s biggest motorcycle maker, is in talks with bankers about buying Ducati Motor Holding SpA as it seeks technology to enhance its bikes and expand its business globally.
“Lots of people have been coming to us with Ducati: Not one banker but many bankers,” Pawan Kant Munjal, the managing director of Hero MotoCorp, said yesterday in an interview in New Delhi. “We’re talking to a lot of people. Not just Ducati, whoever comes to us, we talk to them.”
Hero, which in December 2010 decided to exit a 26-year partnership with Honda Motor Co. (7267), is looking to gain technology through partnerships and acquisitions after that licensing relationship ends in 2014. The company has cash reserves of about $1 billion, Munjal said.
Investindustrial SpA, the Milan-based private-equity firm that owns Ducati, may hold an initial public offering of the luxury-motorcycle maker in Hong Kong this year or sell it to a rival, two people familiar with the plans said last month, declining to be identified because the plans are private. A spokesman for Investindustrial wasn’t immediately available to comment late yesterday.
Motorcycle makers Hero and Bajaj Auto Ltd. (BJAUT) are looking to expand their markets amid increased competition in the world’s second-biggest motorcycle market as the Indian units of Honda, Yamaha Motor Co. and Suzuki Motor Co. expand capacity in the country. Only China buys more motorcycles.
Looking Overseas
Motorcycle sales in India grew 15 percent in 2011 to 9.95 million units, according to data from the Society of Indian Automobile Manufacturers. The industry body expects deliveries of two-wheelers, including motorcycles and scooters, in the year beginning April 1 will increase 11 percent to 14 percent, it said Jan. 10.
Hero is looking to begin sales in Africa and Latin America this year as it tries to mimic the strategy of its nearest domestic rival, Bajaj Auto. Bajaj sells more than 35 percent of its products overseas and expects to exceed its export target of 1.5 million units in the year ending March 31.
Hero aims to export 1 million units annually in five or six years, Munjal said.
“We’ve been seen as a utility-bike maker, fuel-efficient bikes, and somebody who’s at the lower level of the market, who’s more small-town and rural-market focused,” said Munjal. “So our ambition is to become one of the biggest global two- wheeler players and to do that, you cannot only be in one small segment.”
Ducati, whose bikes are owned by actors such as Brad Pitt and Tom Cruise, was delisted in 2008 from the Milan stock exchange.
Honda is expanding its operations in India after separating from Hero, and will spend as much as 10 billion rupees ($202 million) on its third factory near Bangalore in southern India that will be ready in 2013, the company said in August. When complete, Honda will have a capacity to build 4 million two-wheelers in India annually.
To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net
To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Friday, March 2, 2012
Thursday, March 1, 2012
BRIC Investors Lose Out as Statists Forgo Earnings By Michael Patterson and Leon Lazaroff - Mar 1, 2012
Investors in the biggest state- controlled companies are being punished with the lowest valuations in six years by emerging-market leaders putting public services ahead of shareholder profits as economies slow.
Brazil’s Petroleo Brasileiro SA (PETR4) posted a 52 percent drop in fourth-quarter earnings on Feb. 9 after government-imposed price caps led to losses on fuel sales. Russia’s OAO Gazprom (GAZP) said last month that tax increases will cut 2012 profit by $2 billion, while Coal India Ltd. (COAL) was ordered to sign supply agreements with the nation’s power companies. China’s banks trade near record lows versus net assets on concern local governments may default.
The average valuation of 47 state-owned firms in the so- called BRIC countries sank below that of the MSCI Emerging Markets Index (MXEF) in December for the first time since 2005, data compiled by Bloomberg show. The four biggest developing nations are growing at the slowest pace since 2009 just as Russian Prime Minister Vladimir Putin seeks to reclaim the presidency on March 4 and China hands power to new leaders later this year.
“You’re seeing more companies acting as facilitators for the rest of the economy,” said John-Paul Smith, the London- based strategist at Deutsche Bank AG who has “underweight” recommendations on Brazilian, Russian and Chinese shares partly because of the governments’ influence on businesses. “State- owned companies a lot of the time have different objectives than the objectives investors imagine they have.”
Putin Spending
Brazil’s price caps on fuel have helped the government reduce inflation from the fastest in six years in September, giving the central bank room to cut interest rates to an 18- month low. Higher taxes on Gazprom (GAZP) provide revenue for Putin’s campaign pledges, which Capital Economics Ltd. estimates may boost government spending by $164 billion. China cut banks’ reserve requirements last month to boost lending, even as UBS AG analysts estimate as much as $476 billion of local-government debt may go bad.
The 47 state-owned companies tracked by Bloomberg and Trusted Sources, a London-based emerging markets consulting firm, are valued at an average 1.7 times net assets, a 1 percent discount versus the MSCI gauge, monthly data compiled by Bloomberg show. The average price-to-book ratio for the BRIC firms slipped below the MSCI gauge in December for the first time since December 2005, after trading at a premium of about 25 percent a year ago.
China Model
Policy makers have become more willing to compel state- owned companies to support growth after government-directed lending and investment in China helped the world’s second- largest economy weather the global financial crisis, said Deutsche Bank’s Smith, who correctly predicted that emerging- market stocks would trail advanced-country equities last year.
President Hu Jintao’s administration maintained economic expansion of at least 6.2 percent during the crisis as Chinese (HSCEI) banks lent record amounts of money to fund infrastructure projects and real-estate development. In the U.S., gross domestic product shrank by as much as 5 percent.
“The Chinese model isn’t necessarily good for everybody,” said Gabriel Wallach, who manages $2.5 billion in emerging- market equities at BNP Paribas Investment Partners in Boston and is avoiding Chinese bank stocks partially because of the loans they issued during the financial crisis. “At the end of the day, they were misallocating capital in an attempt to grow at 9 percent or 10 percent.”
May Outperform
Earnings at the government-controlled firms averaged 5.4 percent during the past three years, versus 17 percent for the MSCI Emerging Markets Index. Their mean return on equity was 17 percent during the latest fiscal year, compared with 20 percent for stocks on the MSCI gauge and 25 percent for the world’s 20 biggest companies by market value, data compiled by Bloomberg show. The BRIC companies’ average revenue per 1,000 workers was $449,000, or about 40 percent less than in the MSCI index.
Shares of government-owned companies may outperform benchmark indexes should the global economic slowdown worsen.
A market-capitalization weighted gauge of state-owned companies in the BRICs compiled by Bloomberg and Trusted Sources beat the MSCI emerging-market measure by seven percentage points in the three months after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, as investors bet government backing would prevent the companies from collapsing. The government-owned index has since trailed by 40 percentage points.
Corporate Governance
Equity valuations for companies including Gazprom (GAZP) have already discounted the impact of state control and the stocks will rally when corporate governance improves, according to Aivaras Abromavicius, a money manager at East Capital, which oversees about $4.6 billion. The Stockholm-based firm owns Gazprom shares in part because they’re “cheap” and the company may return more cash to investors by raising its dividend, Abromavicius said.
Russia’s gas-export monopoly trades for 3.6 times reported profit, the third-lowest ratio among oil and gas companies in global MSCI indexes and 84 percent less than the industry average, according to data compiled by Bloomberg. Gazprom said in December it plans to distribute about $6.2 billion of dividends linked to its 2011 earnings, a payout that would amount to 4.3 percent of yesterday’s share price. The average dividend yield for global energy companies is 2.1 percent, data compiled by Bloomberg show.
‘Things Are Changing’
“Every asset has its price and Gazprom will only remain cheap as long as it has a low level of disclosure and corporate governance,” said Abromavicius. “It does appear that things are changing. A good, stable dividend policy is the first sign of good corporate governance.”
Ian Hague, who manages Russian equities as a partner at Firebird Management LLC in New York, said he’s avoiding shares of government-controlled companies such as Gazprom.
The Russian government, which has a controlling stake of more than 50 percent in Gazprom, is boosting taxes on the company to help fund an increase in social spending. The Finance Ministry raised the mineral-extraction tax for gas producers by 61 percent last year and the rate for Gazprom will more than double this year, according to the Kremlin website. The company said on Feb. 6 that higher extraction taxes will cut profit by $2 billion this year.
Income-Tax Expenses
Gazprom, whose $150 billion of revenue during the past 12 months amounts to about 10 percent of Russian GDP, recorded more than $11 billion of income-tax expenses during the period, according to data compiled by Bloomberg. That’s almost four times as much as state-owned oil producer OAO Rosneft (ROSN), which had tax expenses of $3.3 billion, the second-biggest bill among listed Russian firms tracked by Bloomberg.
Putin, who served as president from 2000 to 2008 and oversaw the government’s seizure and liquidation of Yukos Oil Co. in 2004, is seeking to return to the office in an election on March 4. Spending pledges made during his campaign may raise government outlays by $164 billion, or as much as 5 percent of economic output, through 2018, according to Capital Economics, an economics consulting firm in London.
“There are people who subscribe to the view that the Kremlin’s relationships are positive for the stocks they control,” said Hague, who founded Firebird in 1994 to buy shares in Russian companies that privatized after the collapse of the Soviet Union. “We don’t take that view.”
Sergei Kupriyanov, a spokesman at Gazprom in Moscow, didn’t return a voice message seeking comment.
VTB Ploy
A proposal by Putin for VTB Group (VTBR), Russia’s second-largest lender, to buy back shares from investors who lost money in the bank’s 2007 initial public offering has been denounced as a political maneuver by stockholders Charlemagne Capital Ltd. and Van Eck Associates. The buyback, which is capped at a level that would exclude most institutional investors, is a ploy that will dilute the value of their holdings, the firms said.
Common shares of Petrobras, the world’s fifth-largest oil producer by market value, plunged 8.3 percent on Feb. 10 after fourth-quarter earnings trailed analysts’ estimates because of higher costs for imported fuel.
The Brazilian government, which controls at least 51 percent of Petrobras’s voting shares, has allowed the company to increase domestic gasoline prices by about 15 percent since September 2005, compared with an 80 percent surge in U.S. prices, data compiled by Bloomberg show. Petrobras imported about 30,000 barrels of gasoline a day last year because its refineries can’t process enough of the fuel to meet demand. The company lost about $14 for every barrel of imported gas and diesel fuel sold in 2011, according to JPMorgan Chase & Co.
‘Worst Business’
“Refining is one of the worst businesses in the world,” said Kevin Shacknofsky, who manages the Alpine Dynamic Dividend Fund in New York and sold holdings of Petrobras at the end of 2010 because the company invested in its refining units instead of more profitable projects.
Brazilian President Dilma Rousseff prefers low inflation to “fantastic” earnings at Petrobras, Energy Minister Edison Lobao told O Estado de S.Paulo, a Brazilian newspaper, in an interview after the company’s earnings report.
Petrobras is valued at 9.2 times estimated profit, down from 11 times a year ago and less than the current multiple of 11 for Irving, Texas-based Exxon Mobil Corp., the world’s largest oil company by market value.
Vale Ouster
Petrobras “has strategic goals which need to balance the company’s remunerative endeavors with a social agenda,” John Herrlin, a Societe Generale SA analyst who cut his recommendation on Petrobras shares to “hold” from “buy” on Feb. 16, wrote in a report. “These goals on a short-term basis can be at cross purposes.”
Paula Almada, a spokeswoman for Petrobras in Rio de Janeiro, said in an e-mail that the company didn’t want to comment.
Rousseff, a former energy minister who took office in January 2011, has sought to boost mining taxes, a move that may erode profits at Rio de Janeiro-based Vale SA. (VALE) The iron-ore mining company ousted Chief Executive Officer Roger Agnelli last year after the government, which holds direct and indirect stakes in Vale, criticized management for not generating enough jobs.
China’s government has helped its banks grow earnings through interest-rate policy. The one-year deposit rate of 3.5 percent is less than the 6.56 percent lending rate and the gap has been at least three percentage points for most of the past decade, allowing banks to profit from the difference.
Local-Government Credit
Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. (939), both government-controlled, are the world’s most-profitable lenders, with combined 12-month earnings of about $55 billion, according to data compiled by Bloomberg.
Even as Chinese banks posted record profits, their shares retreated during the past 12 months on concern that loans extended to local governments and developers won’t be repaid. More than $4.3 trillion of new loans by Chinese banks since November 2008 have helped support growth as President Hu prepares to hand over leadership of the Communist Party to Vice President Xi Jinping, expected later this year.
As much as 30 percent of loans to local governments may eventually turn sour, according to estimates last month by UBS, Switzerland’s biggest bank. Economic growth in China dropped to 8.9 percent in the fourth quarter from 9.8 percent a year earlier.
ICBC Valuation Drops
ICBC (1398) trades for 7.9 times reported earnings, compared with 11 times a year ago, according to data compiled by Bloomberg. The government owns at least 67 percent of the Beijing-based bank’s shares through Central Huijin Investment Ltd., a unit of the nation’s sovereign wealth fund operator, and the Finance Ministry, according to ICBC’s semi-annual report.
The price-to-earnings multiple for Construction Bank, China’s second-largest lender by market value, has dropped to 8.1 from 11 a year ago. Huijin owned at least 57 percent of Beijing-based Construction Bank as of June 2011, according to the company’s semi-annual report.
Chinese borrowers are “going to have to defer repayments of lots of loans,” Jim Chanos, the president and founder of New York-based hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview. Chanos said he’s betting shares of Chinese banks will fall.
Construction Bank has high standards of risk control on loans to local governments and stock valuations don’t necessarily reflect the lender’s fundamentals, said Yu Baoyue, a Beijing-based press officer. Wang Zhenning, a press officer at ICBC also based in Beijing, declined to comment.
Long-Term Drag
Government-controlled companies may become a long-term drag on China’s economic growth, the World Bank said in a report last month titled “China 2030.” More than 25 percent of the country’s state-owned enterprises are unprofitable and their productivity growth has trailed that of private firms by about 66 percent during the past three decades, the World Bank said.
Coal India shares plunged 5.8 percent on Feb. 16 after Prime Minister Manmohan Singh’s administration ordered the company to sign supply agreements with utilities and import the fuel to overcome local production bottlenecks caused in part by heavy rains. The world’s largest coal producer will pay a fine should supplies fall short of commitments, the government said.
India, which owns about 90 percent of Coal India, is stepping up pressure on the company after a dearth of domestic fuel prompted power companies to halt plans to increase the electricity capacity needed to spur economic growth. Indian economic expansion decelerated to 6.1 percent in the fourth quarter from 6.9 percent in the previous three months.
Coal India shares trade for 14 times estimated profits, compared with 16 times for the benchmark BSE India Sensitive Index, according to data compiled by Bloomberg. Zohra Chatterji, the company’s chairman, didn’t return two calls and a text message seeking comment.
“It’s the nature of emerging markets, the state plays a bigger role,” said Sam Vecht, an emerging-market money manager in London at BlackRock Inc., which oversees about $3.5 trillion worldwide. “Whether they do better or worse over time depends on who’s running them and what are the interests of the state.”
To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Leon Lazaroff in New York at llazaroff@bloomberg.net
To contact the editors responsible for this story: Laura Zelenko at lzelenko@bloomberg.net; Emma O’Brien at eobrien6@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Brazil’s Petroleo Brasileiro SA (PETR4) posted a 52 percent drop in fourth-quarter earnings on Feb. 9 after government-imposed price caps led to losses on fuel sales. Russia’s OAO Gazprom (GAZP) said last month that tax increases will cut 2012 profit by $2 billion, while Coal India Ltd. (COAL) was ordered to sign supply agreements with the nation’s power companies. China’s banks trade near record lows versus net assets on concern local governments may default.
The average valuation of 47 state-owned firms in the so- called BRIC countries sank below that of the MSCI Emerging Markets Index (MXEF) in December for the first time since 2005, data compiled by Bloomberg show. The four biggest developing nations are growing at the slowest pace since 2009 just as Russian Prime Minister Vladimir Putin seeks to reclaim the presidency on March 4 and China hands power to new leaders later this year.
“You’re seeing more companies acting as facilitators for the rest of the economy,” said John-Paul Smith, the London- based strategist at Deutsche Bank AG who has “underweight” recommendations on Brazilian, Russian and Chinese shares partly because of the governments’ influence on businesses. “State- owned companies a lot of the time have different objectives than the objectives investors imagine they have.”
Putin Spending
Brazil’s price caps on fuel have helped the government reduce inflation from the fastest in six years in September, giving the central bank room to cut interest rates to an 18- month low. Higher taxes on Gazprom (GAZP) provide revenue for Putin’s campaign pledges, which Capital Economics Ltd. estimates may boost government spending by $164 billion. China cut banks’ reserve requirements last month to boost lending, even as UBS AG analysts estimate as much as $476 billion of local-government debt may go bad.
The 47 state-owned companies tracked by Bloomberg and Trusted Sources, a London-based emerging markets consulting firm, are valued at an average 1.7 times net assets, a 1 percent discount versus the MSCI gauge, monthly data compiled by Bloomberg show. The average price-to-book ratio for the BRIC firms slipped below the MSCI gauge in December for the first time since December 2005, after trading at a premium of about 25 percent a year ago.
China Model
Policy makers have become more willing to compel state- owned companies to support growth after government-directed lending and investment in China helped the world’s second- largest economy weather the global financial crisis, said Deutsche Bank’s Smith, who correctly predicted that emerging- market stocks would trail advanced-country equities last year.
President Hu Jintao’s administration maintained economic expansion of at least 6.2 percent during the crisis as Chinese (HSCEI) banks lent record amounts of money to fund infrastructure projects and real-estate development. In the U.S., gross domestic product shrank by as much as 5 percent.
“The Chinese model isn’t necessarily good for everybody,” said Gabriel Wallach, who manages $2.5 billion in emerging- market equities at BNP Paribas Investment Partners in Boston and is avoiding Chinese bank stocks partially because of the loans they issued during the financial crisis. “At the end of the day, they were misallocating capital in an attempt to grow at 9 percent or 10 percent.”
May Outperform
Earnings at the government-controlled firms averaged 5.4 percent during the past three years, versus 17 percent for the MSCI Emerging Markets Index. Their mean return on equity was 17 percent during the latest fiscal year, compared with 20 percent for stocks on the MSCI gauge and 25 percent for the world’s 20 biggest companies by market value, data compiled by Bloomberg show. The BRIC companies’ average revenue per 1,000 workers was $449,000, or about 40 percent less than in the MSCI index.
Shares of government-owned companies may outperform benchmark indexes should the global economic slowdown worsen.
A market-capitalization weighted gauge of state-owned companies in the BRICs compiled by Bloomberg and Trusted Sources beat the MSCI emerging-market measure by seven percentage points in the three months after Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, as investors bet government backing would prevent the companies from collapsing. The government-owned index has since trailed by 40 percentage points.
Corporate Governance
Equity valuations for companies including Gazprom (GAZP) have already discounted the impact of state control and the stocks will rally when corporate governance improves, according to Aivaras Abromavicius, a money manager at East Capital, which oversees about $4.6 billion. The Stockholm-based firm owns Gazprom shares in part because they’re “cheap” and the company may return more cash to investors by raising its dividend, Abromavicius said.
Russia’s gas-export monopoly trades for 3.6 times reported profit, the third-lowest ratio among oil and gas companies in global MSCI indexes and 84 percent less than the industry average, according to data compiled by Bloomberg. Gazprom said in December it plans to distribute about $6.2 billion of dividends linked to its 2011 earnings, a payout that would amount to 4.3 percent of yesterday’s share price. The average dividend yield for global energy companies is 2.1 percent, data compiled by Bloomberg show.
‘Things Are Changing’
“Every asset has its price and Gazprom will only remain cheap as long as it has a low level of disclosure and corporate governance,” said Abromavicius. “It does appear that things are changing. A good, stable dividend policy is the first sign of good corporate governance.”
Ian Hague, who manages Russian equities as a partner at Firebird Management LLC in New York, said he’s avoiding shares of government-controlled companies such as Gazprom.
The Russian government, which has a controlling stake of more than 50 percent in Gazprom, is boosting taxes on the company to help fund an increase in social spending. The Finance Ministry raised the mineral-extraction tax for gas producers by 61 percent last year and the rate for Gazprom will more than double this year, according to the Kremlin website. The company said on Feb. 6 that higher extraction taxes will cut profit by $2 billion this year.
Income-Tax Expenses
Gazprom, whose $150 billion of revenue during the past 12 months amounts to about 10 percent of Russian GDP, recorded more than $11 billion of income-tax expenses during the period, according to data compiled by Bloomberg. That’s almost four times as much as state-owned oil producer OAO Rosneft (ROSN), which had tax expenses of $3.3 billion, the second-biggest bill among listed Russian firms tracked by Bloomberg.
Putin, who served as president from 2000 to 2008 and oversaw the government’s seizure and liquidation of Yukos Oil Co. in 2004, is seeking to return to the office in an election on March 4. Spending pledges made during his campaign may raise government outlays by $164 billion, or as much as 5 percent of economic output, through 2018, according to Capital Economics, an economics consulting firm in London.
“There are people who subscribe to the view that the Kremlin’s relationships are positive for the stocks they control,” said Hague, who founded Firebird in 1994 to buy shares in Russian companies that privatized after the collapse of the Soviet Union. “We don’t take that view.”
Sergei Kupriyanov, a spokesman at Gazprom in Moscow, didn’t return a voice message seeking comment.
VTB Ploy
A proposal by Putin for VTB Group (VTBR), Russia’s second-largest lender, to buy back shares from investors who lost money in the bank’s 2007 initial public offering has been denounced as a political maneuver by stockholders Charlemagne Capital Ltd. and Van Eck Associates. The buyback, which is capped at a level that would exclude most institutional investors, is a ploy that will dilute the value of their holdings, the firms said.
Common shares of Petrobras, the world’s fifth-largest oil producer by market value, plunged 8.3 percent on Feb. 10 after fourth-quarter earnings trailed analysts’ estimates because of higher costs for imported fuel.
The Brazilian government, which controls at least 51 percent of Petrobras’s voting shares, has allowed the company to increase domestic gasoline prices by about 15 percent since September 2005, compared with an 80 percent surge in U.S. prices, data compiled by Bloomberg show. Petrobras imported about 30,000 barrels of gasoline a day last year because its refineries can’t process enough of the fuel to meet demand. The company lost about $14 for every barrel of imported gas and diesel fuel sold in 2011, according to JPMorgan Chase & Co.
‘Worst Business’
“Refining is one of the worst businesses in the world,” said Kevin Shacknofsky, who manages the Alpine Dynamic Dividend Fund in New York and sold holdings of Petrobras at the end of 2010 because the company invested in its refining units instead of more profitable projects.
Brazilian President Dilma Rousseff prefers low inflation to “fantastic” earnings at Petrobras, Energy Minister Edison Lobao told O Estado de S.Paulo, a Brazilian newspaper, in an interview after the company’s earnings report.
Petrobras is valued at 9.2 times estimated profit, down from 11 times a year ago and less than the current multiple of 11 for Irving, Texas-based Exxon Mobil Corp., the world’s largest oil company by market value.
Vale Ouster
Petrobras “has strategic goals which need to balance the company’s remunerative endeavors with a social agenda,” John Herrlin, a Societe Generale SA analyst who cut his recommendation on Petrobras shares to “hold” from “buy” on Feb. 16, wrote in a report. “These goals on a short-term basis can be at cross purposes.”
Paula Almada, a spokeswoman for Petrobras in Rio de Janeiro, said in an e-mail that the company didn’t want to comment.
Rousseff, a former energy minister who took office in January 2011, has sought to boost mining taxes, a move that may erode profits at Rio de Janeiro-based Vale SA. (VALE) The iron-ore mining company ousted Chief Executive Officer Roger Agnelli last year after the government, which holds direct and indirect stakes in Vale, criticized management for not generating enough jobs.
China’s government has helped its banks grow earnings through interest-rate policy. The one-year deposit rate of 3.5 percent is less than the 6.56 percent lending rate and the gap has been at least three percentage points for most of the past decade, allowing banks to profit from the difference.
Local-Government Credit
Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. (939), both government-controlled, are the world’s most-profitable lenders, with combined 12-month earnings of about $55 billion, according to data compiled by Bloomberg.
Even as Chinese banks posted record profits, their shares retreated during the past 12 months on concern that loans extended to local governments and developers won’t be repaid. More than $4.3 trillion of new loans by Chinese banks since November 2008 have helped support growth as President Hu prepares to hand over leadership of the Communist Party to Vice President Xi Jinping, expected later this year.
As much as 30 percent of loans to local governments may eventually turn sour, according to estimates last month by UBS, Switzerland’s biggest bank. Economic growth in China dropped to 8.9 percent in the fourth quarter from 9.8 percent a year earlier.
ICBC Valuation Drops
ICBC (1398) trades for 7.9 times reported earnings, compared with 11 times a year ago, according to data compiled by Bloomberg. The government owns at least 67 percent of the Beijing-based bank’s shares through Central Huijin Investment Ltd., a unit of the nation’s sovereign wealth fund operator, and the Finance Ministry, according to ICBC’s semi-annual report.
The price-to-earnings multiple for Construction Bank, China’s second-largest lender by market value, has dropped to 8.1 from 11 a year ago. Huijin owned at least 57 percent of Beijing-based Construction Bank as of June 2011, according to the company’s semi-annual report.
Chinese borrowers are “going to have to defer repayments of lots of loans,” Jim Chanos, the president and founder of New York-based hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview. Chanos said he’s betting shares of Chinese banks will fall.
Construction Bank has high standards of risk control on loans to local governments and stock valuations don’t necessarily reflect the lender’s fundamentals, said Yu Baoyue, a Beijing-based press officer. Wang Zhenning, a press officer at ICBC also based in Beijing, declined to comment.
Long-Term Drag
Government-controlled companies may become a long-term drag on China’s economic growth, the World Bank said in a report last month titled “China 2030.” More than 25 percent of the country’s state-owned enterprises are unprofitable and their productivity growth has trailed that of private firms by about 66 percent during the past three decades, the World Bank said.
Coal India shares plunged 5.8 percent on Feb. 16 after Prime Minister Manmohan Singh’s administration ordered the company to sign supply agreements with utilities and import the fuel to overcome local production bottlenecks caused in part by heavy rains. The world’s largest coal producer will pay a fine should supplies fall short of commitments, the government said.
India, which owns about 90 percent of Coal India, is stepping up pressure on the company after a dearth of domestic fuel prompted power companies to halt plans to increase the electricity capacity needed to spur economic growth. Indian economic expansion decelerated to 6.1 percent in the fourth quarter from 6.9 percent in the previous three months.
Coal India shares trade for 14 times estimated profits, compared with 16 times for the benchmark BSE India Sensitive Index, according to data compiled by Bloomberg. Zohra Chatterji, the company’s chairman, didn’t return two calls and a text message seeking comment.
“It’s the nature of emerging markets, the state plays a bigger role,” said Sam Vecht, an emerging-market money manager in London at BlackRock Inc., which oversees about $3.5 trillion worldwide. “Whether they do better or worse over time depends on who’s running them and what are the interests of the state.”
To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Leon Lazaroff in New York at llazaroff@bloomberg.net
To contact the editors responsible for this story: Laura Zelenko at lzelenko@bloomberg.net; Emma O’Brien at eobrien6@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Wednesday, February 29, 2012
Sri Lanka’s Biggest Policy Overhaul Since Civil War Risks Inflation Bump By Anusha Ondaatjie - Feb 29, 2012
Sri Lanka’s biggest overhaul of economic policy since the end of its civil war risks a bump in inflation while auguring increased stability by aiming to curb the island’s trade deficit.
In less than two weeks last month, Sri Lanka let its currency weaken to a record low by shifting toward a more freely floating exchange rate, raised fuel prices and boosted interest rates for the first time since 2007 to damp credit growth. The moves aim to curb an excess of imports such as oil over exports, as Sri Lanka’s post-conflict resurgence buoys domestic demand.
“Although inflation could spike, the measures taken are good in order to ensure longer-term economic stability,” said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers Pvt. in Colombo. “It’s the biggest monetary and fiscal policy overhaul since the end of the war” in 2009, he said.
Sri Lanka’s foreign reserves have fallen about 25 percent from almost $8.1 billion in July as the trade gap swelled, prompting Standard & Poor’s to lower the island’s sovereign rating outlook to stable from positive yesterday. Fitch Ratings said this week that the depleted reserves have increased balance-of-payments risks.
Consumer prices may rise 6.7 percent on average in 2012 as a result of last month’s policy steps, according to Standard Chartered Plc. They climbed 2.7 percent year-on-year in February, the slowest pace in 28 months. Price pressures are expected to build during 2012 because of “strong growth and imported inflation,” HSBC Holdings Plc said in a note yesterday.
Currency Decline
The policy steps began with the rate actions on Feb. 3, the scrapping of the rupee’s trading band on Feb. 9 and the increase in energy costs from Feb. 12.
The local currency has declined 6.5 percent against the dollar so far this year, the worst performance in the world after Iran’s rial. It slid to a record-low 122.35 per dollar yesterday. The Colombo All-Share index is down 10.2 percent in 2012, the most in Asia.
Governor Ajith Nivard Cabraal’s decision to raise the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent contrasts with cuts in nations from Indonesia to Brazil, as Europe’s protracted debt crisis pressures officials to shield growth.
The increases in borrowing costs, a more than 20 percent rise in transport and electricity prices and a shift toward a “largely floating exchange rate” make up a “bold” package of measures, said Sajjid Chinoy, an economist at JPMorgan Chase & Co. in Mumbai.
‘Unambiguously Positive’
While they will probably crimp growth and spur inflation in the “near term,” the “reforms are unambiguously positive in the medium term, and will likely ensure that growth is rendered more sustainable going forward,” he said in a note.
Sri Lanka’s $50 billion economy may expand 7.1 percent in 2012, according to Standard Chartered, less than its earlier estimate of 7.5 percent. Gross domestic product rose an estimated 8.3 percent last year, Cabraal has said.
The central bank said last month it aims to keep inflation in the “mid-single digit levels” in the second half of 2012. Credit granted by commercial banks to private businesses jumped by 34.5 percent in December from a year earlier, “substantially” exceeding projections, it said.
February’s steps will help bring down the trade and current-account deficits, Cabraal said on Feb. 14. The International Monetary Fund welcomed the move toward greater exchange rate flexibility in a Feb. 9 e-mail. It has disbursed $1.75 billion from a $2.6 billion program to boost the Sri Lankan central bank’s reserves.
Sri Lanka’s trade deficit exceeded $1 billion in both November and December. Its reserves fell to three months coverage of current-account payments at the end of 2011, from roughly four months in the middle of last year, S&P said.
To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net
To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Stephanie Phang at sphang@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
In less than two weeks last month, Sri Lanka let its currency weaken to a record low by shifting toward a more freely floating exchange rate, raised fuel prices and boosted interest rates for the first time since 2007 to damp credit growth. The moves aim to curb an excess of imports such as oil over exports, as Sri Lanka’s post-conflict resurgence buoys domestic demand.
“Although inflation could spike, the measures taken are good in order to ensure longer-term economic stability,” said Sanjeewa Fernando, an analyst at CT Smith Stockbrokers Pvt. in Colombo. “It’s the biggest monetary and fiscal policy overhaul since the end of the war” in 2009, he said.
Sri Lanka’s foreign reserves have fallen about 25 percent from almost $8.1 billion in July as the trade gap swelled, prompting Standard & Poor’s to lower the island’s sovereign rating outlook to stable from positive yesterday. Fitch Ratings said this week that the depleted reserves have increased balance-of-payments risks.
Consumer prices may rise 6.7 percent on average in 2012 as a result of last month’s policy steps, according to Standard Chartered Plc. They climbed 2.7 percent year-on-year in February, the slowest pace in 28 months. Price pressures are expected to build during 2012 because of “strong growth and imported inflation,” HSBC Holdings Plc said in a note yesterday.
Currency Decline
The policy steps began with the rate actions on Feb. 3, the scrapping of the rupee’s trading band on Feb. 9 and the increase in energy costs from Feb. 12.
The local currency has declined 6.5 percent against the dollar so far this year, the worst performance in the world after Iran’s rial. It slid to a record-low 122.35 per dollar yesterday. The Colombo All-Share index is down 10.2 percent in 2012, the most in Asia.
Governor Ajith Nivard Cabraal’s decision to raise the reverse repurchase rate to 9 percent from 8.5 percent and the repurchase rate to 7.5 percent from 7 percent contrasts with cuts in nations from Indonesia to Brazil, as Europe’s protracted debt crisis pressures officials to shield growth.
The increases in borrowing costs, a more than 20 percent rise in transport and electricity prices and a shift toward a “largely floating exchange rate” make up a “bold” package of measures, said Sajjid Chinoy, an economist at JPMorgan Chase & Co. in Mumbai.
‘Unambiguously Positive’
While they will probably crimp growth and spur inflation in the “near term,” the “reforms are unambiguously positive in the medium term, and will likely ensure that growth is rendered more sustainable going forward,” he said in a note.
Sri Lanka’s $50 billion economy may expand 7.1 percent in 2012, according to Standard Chartered, less than its earlier estimate of 7.5 percent. Gross domestic product rose an estimated 8.3 percent last year, Cabraal has said.
The central bank said last month it aims to keep inflation in the “mid-single digit levels” in the second half of 2012. Credit granted by commercial banks to private businesses jumped by 34.5 percent in December from a year earlier, “substantially” exceeding projections, it said.
February’s steps will help bring down the trade and current-account deficits, Cabraal said on Feb. 14. The International Monetary Fund welcomed the move toward greater exchange rate flexibility in a Feb. 9 e-mail. It has disbursed $1.75 billion from a $2.6 billion program to boost the Sri Lankan central bank’s reserves.
Sri Lanka’s trade deficit exceeded $1 billion in both November and December. Its reserves fell to three months coverage of current-account payments at the end of 2011, from roughly four months in the middle of last year, S&P said.
To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net
To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Stephanie Phang at sphang@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Tuesday, February 28, 2012
India to Auction 5% ONGC Stake in ‘Next Couple of Days,’ Oil Minister Says By Rakteem Katakey and Anto Antony - Feb 28, 2012
India plans to auction a stake in Oil & Natural Gas Corp. (ONGC) in the “next couple of days” after failing to meet a revenue target from public offerings of shares in state-owned companies this year.
A panel of ministers, which met today, decided on the sale of a 5 percent stake in ONGC and set a minimum price for the shares, Oil Minister S. Jaipal Reddy told reporters in New Delhi today, without giving more information. The state owns 74 percent of the nation’s biggest energy explorer.
The stock exchanges will be notified tonight about the auction, Reddy said. The sale will be open for one day, he said.
A 25 percent slump in the benchmark Sensitive Index (SENSEX) in 2011 undermined efforts to sell shares of state-owned companies, with the government meeting 3 percent of its 400 billion rupee ($8.1 billion) target for the year ending March 31. The budget shortfall may widen beyond Finance Minister Pranab Mukherjee’s goal of 4.6 percent as slowing economic growth reduces revenue receipts.
ONGC shares rose 0.8 percent to 283.40 rupees at close in Mumbai, valuing the 5 percent stake at 121.3 billion rupees. The Sensex index has rebounded 15 percent this year.
To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Anto Antony in New Delhi at aantony1@bloomberg.net
To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
A panel of ministers, which met today, decided on the sale of a 5 percent stake in ONGC and set a minimum price for the shares, Oil Minister S. Jaipal Reddy told reporters in New Delhi today, without giving more information. The state owns 74 percent of the nation’s biggest energy explorer.
The stock exchanges will be notified tonight about the auction, Reddy said. The sale will be open for one day, he said.
A 25 percent slump in the benchmark Sensitive Index (SENSEX) in 2011 undermined efforts to sell shares of state-owned companies, with the government meeting 3 percent of its 400 billion rupee ($8.1 billion) target for the year ending March 31. The budget shortfall may widen beyond Finance Minister Pranab Mukherjee’s goal of 4.6 percent as slowing economic growth reduces revenue receipts.
ONGC shares rose 0.8 percent to 283.40 rupees at close in Mumbai, valuing the 5 percent stake at 121.3 billion rupees. The Sensex index has rebounded 15 percent this year.
To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Anto Antony in New Delhi at aantony1@bloomberg.net
To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Monday, February 27, 2012
Indian Road-Building Hits Record Pace as Contractors Pay to Work: Freight By Karthikeyan Sundaram - Feb 27, 2012
India is awarding highway- construction contracts at a record pace, and saving taxpayers money, as builders stop asking for subsidies and instead offer fees to lay and operate new toll roads.
Competition among builders such as GMR Infrastructure Ltd. (GMRI), Larsen & Toubro Ltd. and IRB Infrastructure Developers Ltd. (IRB) has helped the National Highways Authority of India win payments, or premiums, for at least 23 of the 35 projects it has offered since April 1, said G. Suresh, its chief general manager for finance. He didn’t elaborate. The body will award tenders for 7,300 kilometer-lanes of highways this fiscal year, worth about 570 billion rupees ($12 billion), and 9,000 kilometers next year.
“Many of the projects where we thought we’ll have to pay subsidies, we actually got premiums,” said B.K. Chaturvedi, who headed a government committee on highway development and a member of the state Planning Commission. “It’s a good thing there’s competition.”
Construction companies have stepped up bids for highways as growing vehicle ownership is spurring traffic and because of a slowdown in other sectors such as building power plants. The work will improve roads (LT) ranked worse than Botswana’s by the World Economic Forum and ease congestion that contributes to about 440 billion rupees of harvested foods going to waste each year, according to government estimates.
“India’s road network is barely adequate to maintain its current growth trajectory,” said Shailesh Kanani, an analyst with Angel Broking Ltd. in Mumbai. “Positively, the political will to acknowledge and address this issue is now visible.”
$1 Trillion Spending
India’s investments in roads could rise to $145 billion in the five years to 2017 from about $69.8 billion in the previous five years, according to a PricewaterhouseCoopers LLP. study. The country plans to spend a total of $1 trillion on roads, railways, airports and other infrastructure in the period.
The national highway system, a predominately two-lane network linking major cities, carries 65 percent of India’s freight and 80 percent of passenger traffic. In about six years through October 2011, the highway agency oversaw 5,182 kilometers of construction, including new highways and improvements.
Prime Minister Manmohan Singh in August 2009 set a goal of building 20 kilometers of highways a day. The nation has added 823 kilometers, or about 2 kilometers a day, since then as construction slowed, Tushar A. Chaudhary, junior road transport and highways minister, told lawmakers in parliament Dec. 12.
Tenders Online
Construction is now speeding up, partly because the agency has made it easier for builders to compete for projects by accepting tenders online and by creating a list of prequalified bidders. Winning bidders get to collect tolls for as long as 30 years before transferring the highways to the state, Suresh said. Toll fees are decided by the National Highways Authority.
The highways have become more lucrative for builders and the government as the rising number of cars and trucks boosts traffic and tolls. India’s car sales in the year ended in March jumped 30 percent, the biggest gain in at least nine years, according to Society of Indian Automobile Manufacturers. Sales may triple to more than six million by 2018, Rothschild forecast in a December report.
“Traffic risk is something to be taken on by the developer,” said Virendra Mhaiskar, chairman of IRB Infrastructure, which has constructed roads including the Mumbai-Pune highway. If the builder is confident of generating enough tolls to cover costs and make a profit, it can offer the extra anticipated funds to the government as premiums to secure the contract, he said.
Overestimating Traffic
Builders run the risk of overestimating future traffic and tolls, which could cause them to pledge unprofitable levels of fees, said Parvesh Minocha, managing director, transport division at Feedback Infrastructure Services Pvt., which advises clients on construction projects.
“The premium bids are increasingly becoming a cause for worry,” he said. “The worry will start manifesting a couple of years down the line when you have to give the NHAI what you promised and also put in money to build the roads.”
L&T, the nation’s biggest engineering company, decides to make premium bids for projects based on factors including traffic expectations, competition from other roads, the type of traffic the highway will attract and the ease of construction, said S.N. Subrahmanyan, director and senior executive vice president of its construction division. He didn’t say how much premiums the company has so far paid.
The builder fell 3.5 percent to 1,301.9 rupees at close of Mumbai trading. It’s fallen 14 percent in the past year. IRB Infrastructure declined 2.9 percent and GMR Infrastructure dropped 5.3 percent today.
Reliance, Adani
Builders may also be chasing road projects to help replenish orderbooks amid a slowdown in power-plant orders, said Manish Agarwal, an executive director at the Indian unit of PwC. Reliance Power Ltd. (RPWR), Adani Power Ltd. and other electricity generators have delayed building $36 billion of power stations because of concerns about coal supply.
L&T, based in Mumbai, has orders to build 100 billion rupees of roads, Subrahmanyan said. The builder boosted the number of road projects to 7,171 lane-kilometers in the first nine months of this fiscal year from 5,701 lane-kilometers a year ago, according to company presentations on its website. The number of power projects remained unchanged at 5 during this period.
Power Plants
That means power plants now account for 29 percent of L&T’s orderbook, compared with 37 percent a year ago. Roads and other building projects’ share has jumped to 40 percent from 32 percent.
“For investors, a company’s valuation seems to be driven by its orderbook,” said Agarwal. “If a company wins a bid, they see it as fantastic.”
Welspun Infratech Ltd., a unit of JPMorgan Chase & Co.- backed Welspun Corp. (WLCO), has won road projects worth 10 billion rupees since 1999, including a 185-kilometer stretch in the central Indian state of Madhya Pradesh, without offering premiums, said Assistant Vice President Rajeev Kumar. Still, the company is willing to offer fees.
“We aren’t averse to offering a premium to win a deal,” he said. “If the deal is good, why not?”
To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Competition among builders such as GMR Infrastructure Ltd. (GMRI), Larsen & Toubro Ltd. and IRB Infrastructure Developers Ltd. (IRB) has helped the National Highways Authority of India win payments, or premiums, for at least 23 of the 35 projects it has offered since April 1, said G. Suresh, its chief general manager for finance. He didn’t elaborate. The body will award tenders for 7,300 kilometer-lanes of highways this fiscal year, worth about 570 billion rupees ($12 billion), and 9,000 kilometers next year.
“Many of the projects where we thought we’ll have to pay subsidies, we actually got premiums,” said B.K. Chaturvedi, who headed a government committee on highway development and a member of the state Planning Commission. “It’s a good thing there’s competition.”
Construction companies have stepped up bids for highways as growing vehicle ownership is spurring traffic and because of a slowdown in other sectors such as building power plants. The work will improve roads (LT) ranked worse than Botswana’s by the World Economic Forum and ease congestion that contributes to about 440 billion rupees of harvested foods going to waste each year, according to government estimates.
“India’s road network is barely adequate to maintain its current growth trajectory,” said Shailesh Kanani, an analyst with Angel Broking Ltd. in Mumbai. “Positively, the political will to acknowledge and address this issue is now visible.”
$1 Trillion Spending
India’s investments in roads could rise to $145 billion in the five years to 2017 from about $69.8 billion in the previous five years, according to a PricewaterhouseCoopers LLP. study. The country plans to spend a total of $1 trillion on roads, railways, airports and other infrastructure in the period.
The national highway system, a predominately two-lane network linking major cities, carries 65 percent of India’s freight and 80 percent of passenger traffic. In about six years through October 2011, the highway agency oversaw 5,182 kilometers of construction, including new highways and improvements.
Prime Minister Manmohan Singh in August 2009 set a goal of building 20 kilometers of highways a day. The nation has added 823 kilometers, or about 2 kilometers a day, since then as construction slowed, Tushar A. Chaudhary, junior road transport and highways minister, told lawmakers in parliament Dec. 12.
Tenders Online
Construction is now speeding up, partly because the agency has made it easier for builders to compete for projects by accepting tenders online and by creating a list of prequalified bidders. Winning bidders get to collect tolls for as long as 30 years before transferring the highways to the state, Suresh said. Toll fees are decided by the National Highways Authority.
The highways have become more lucrative for builders and the government as the rising number of cars and trucks boosts traffic and tolls. India’s car sales in the year ended in March jumped 30 percent, the biggest gain in at least nine years, according to Society of Indian Automobile Manufacturers. Sales may triple to more than six million by 2018, Rothschild forecast in a December report.
“Traffic risk is something to be taken on by the developer,” said Virendra Mhaiskar, chairman of IRB Infrastructure, which has constructed roads including the Mumbai-Pune highway. If the builder is confident of generating enough tolls to cover costs and make a profit, it can offer the extra anticipated funds to the government as premiums to secure the contract, he said.
Overestimating Traffic
Builders run the risk of overestimating future traffic and tolls, which could cause them to pledge unprofitable levels of fees, said Parvesh Minocha, managing director, transport division at Feedback Infrastructure Services Pvt., which advises clients on construction projects.
“The premium bids are increasingly becoming a cause for worry,” he said. “The worry will start manifesting a couple of years down the line when you have to give the NHAI what you promised and also put in money to build the roads.”
L&T, the nation’s biggest engineering company, decides to make premium bids for projects based on factors including traffic expectations, competition from other roads, the type of traffic the highway will attract and the ease of construction, said S.N. Subrahmanyan, director and senior executive vice president of its construction division. He didn’t say how much premiums the company has so far paid.
The builder fell 3.5 percent to 1,301.9 rupees at close of Mumbai trading. It’s fallen 14 percent in the past year. IRB Infrastructure declined 2.9 percent and GMR Infrastructure dropped 5.3 percent today.
Reliance, Adani
Builders may also be chasing road projects to help replenish orderbooks amid a slowdown in power-plant orders, said Manish Agarwal, an executive director at the Indian unit of PwC. Reliance Power Ltd. (RPWR), Adani Power Ltd. and other electricity generators have delayed building $36 billion of power stations because of concerns about coal supply.
L&T, based in Mumbai, has orders to build 100 billion rupees of roads, Subrahmanyan said. The builder boosted the number of road projects to 7,171 lane-kilometers in the first nine months of this fiscal year from 5,701 lane-kilometers a year ago, according to company presentations on its website. The number of power projects remained unchanged at 5 during this period.
Power Plants
That means power plants now account for 29 percent of L&T’s orderbook, compared with 37 percent a year ago. Roads and other building projects’ share has jumped to 40 percent from 32 percent.
“For investors, a company’s valuation seems to be driven by its orderbook,” said Agarwal. “If a company wins a bid, they see it as fantastic.”
Welspun Infratech Ltd., a unit of JPMorgan Chase & Co.- backed Welspun Corp. (WLCO), has won road projects worth 10 billion rupees since 1999, including a 185-kilometer stretch in the central Indian state of Madhya Pradesh, without offering premiums, said Assistant Vice President Rajeev Kumar. Still, the company is willing to offer fees.
“We aren’t averse to offering a premium to win a deal,” he said. “If the deal is good, why not?”
To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.
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