India Stock Futures Swing Between Gains and Losses By Rajhkumar K Shaaw - Jun 8, 2012

Indian stocks had the year’s best weekly rally amid expectation the nation’s central bank will join regional peers in slashing borrowing costs to boost growth.

Larsen & Toubro Ltd. (LT), the largest engineering company, climbed to a seven-week high. Reliance Industries Ltd. (RIL), owner of the world’s largest refining complex, advanced for a fifth day. Sterlite Industries (India) Ltd. (STLT) soared 3.5 percent. The BSE India Sensitive Index (SENSEX) increased 0.4 percent to 16,718.87 at close. The gauge rallied 4.7 percent this week, the most since the 7.3 percent gain in the five-day period ended Dec. 2.

The People’s Bank of China yesterday cut its interest rate for the first time since 2008, fanning optimism policy makers around the world will do more to support growth. The move came a day after Prime Minister Manmohan Singh outlined projects to revive growth that slowed to a near-decade low in the last quarter. The Reserve Bank of India reviews policy on June 18.

“It is important to revive growth and get some confidence back in the economy,” Sandip Sabharwal, chief executive officer of portfolio management services at Prabhudas Lilladher in Mumbai, said by telephone. “The RBI must step in and push growth.” A rate cut will “start a virtuous cycle,” he said.

Growth concerns have dragged down the Sensex 9.3 percent from its 2012 high on Feb. 21. The gauge declined 6.4 percent last month, its worst May performance since 2006, and is valued at 13 times estimated earnings, its lowest in about three years.

India’s gross domestic product expanded 5.3 percent last quarter, stoking concern the economic outlook has deteriorated as policy gridlock deters investment and Europe’s debt crisis crimps exports. The slowdown and an oil-price drop suggest more room for rate cuts even as inflation risks remain, RBI Deputy Governor Subir Gokarn said June 1 and reiterated on June 4.

‘Rate Sensitives’

The RBI cut rates on April 17 for the first time in three years, after raising it a record 13 times from mid-March 2010 to October last year to cool accelerating prices. Inflation averaged 7.1 percent in the first four months of this year, compared with 9.5 percent in the whole of 2011.

The Sensex rebounded from an intraday drop of 1 percent as the expectation of a rate cut forced traders to close bearish bets in companies most tied to the economy, Shankar Char, vice president at ICICI Securities Ltd., a unit of India’s biggest private lender, said by e-mail.

“Interest-rate sensitives were in the limelight and some like Larsen & Toubro benefited from short covering,” he said.

Larsen & Toubro surged 2.7 percent to 1,309.45 rupees, extending this week’s rally to 15 percent, the most among the 30 companies on the Sensex. Bharat Heavy Electricals Ltd. (BHEL), the top power-equipment maker, climbed 1.4 percent to 221.2 rupees. Reliance advanced 1.2 percent to 729.7 rupees.

200-Day Average

India VIX, which measures the cost of protection against losses in the S&P CNX Nifty Index, fell 0.7 percent to 23.47. The Nifty increased 0.4 percent to 5,068.35, closing above its 200-day moving average of 5,006.

Sterlite jumped surged 3.5 percent to 100.6 rupees. The stock has soared 10.4 percent this week, its steepest climb since the five days ended Oct. 28.

Overseas investors purchased a net $134 million of stocks yesterday, extending and total investment this year to $8.4 billion, data from the regulator show. Foreigners cut holdings by $273 million in May, a second month of net sales.

To contact the reporter on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India’s Richest Seek New Fortunes in Arms Amid China Race By Ruth David and Karthikeyan Sundaram - Jun 8, 2012

Indian billionaires Mukesh Ambani, Azim Premji and Adi Godrej made their fortunes in refining, software and toilet soaps. These days the moguls see big money in bullets, bombs and ballistics.

India is the world’s largest weapons importer, depending on foreign companies including Boeing Co. (BA) and MiG Russian Aircraft Corp. for about 70 percent of its $35 billion military budget. Now Asia’s third-biggest economy is revising its rules to give domestic private-sector companies a better shot at more of the spending. That’s got big Indian companies such as Premji’s Wipro Ltd. (WPRO), the country’s third-largest software exporter, setting up weapon-making units, forming new partnerships with foreign defense companies or eyeing acquisitions overseas.

“This is a sexy market with a huge capital acquisition program,” said Dhiraj Mathur, an executive director at PricewaterhouseCoopers LLP’s India unit. “The advantage the big players have is that they are large, have deep pockets and the resources.”

The tilt to domestic companies comes as India ramps up its defense budget, looking beyond its traditional rivalry with Pakistan to counter China’s rising power. India tripled military outlay over the last decade to become the world’s seventh- largest defense spender in 2011. China is the second largest at $105 billion. In the next five years, KPMG International estimates, India will seek bids for $42 billion of military hardware -- from fighter jets to artillery guns.

‘Major Area’

“Defense will be a major area of expansion” for Indian companies in the next few years, said Godrej, chairman of Mumbai-based Godrej Group, whose consumer unit is India’s third- largest maker of personal-care products, such as deodorants and soaps. “We are looking at all opportunities” to expand into the segment and discussing partnership possibilities, he said, declining to name companies.

Billionaires such as Godrej, Ambani and Premji accumulated their fortunes as India started opening its economy in 1991, ending decades of license requirements, scrapping state monopolies in industries ranging from telecommunications to aviation and allowing foreign investments and ownership.

Last year the government revised its policy on military procurement, opening the door for private-sector companies to expand into a new market. They now account for only 10 percent of India’s defense spending, mostly as sub-contractors to state- owned entities, which contribute about 20 percent, according to a March report by Boston Consulting Group Inc. Foreign suppliers account for the remaining 70 percent.

Advantage Locals

The new procedures added a “buy and make Indian” provision. For contracts that require certain expertise, only local companies, including joint ventures with overseas companies, can enter bids.

India also tweaked rules governing local purchase requirements. Foreign suppliers were required to source at least 30 percent of a defense contract from local companies, a rule known as the offset policy. The scope of that has been expanded to allow foreign arms makers to purchase civil aerospace components, and offer weapons and services for homeland security, to meet the obligation.

Lacking extensive military-manufacturing expertise, Indian companies are forming partnerships with foreign defense contractors to take advantage of the new rules. That will benefit both local and overseas companies, said Nidhi Goyal, director of the aerospace and defense team at Deloitte Touche Tohmatsu Ltd. in India.

Naval Weapons

The State Department approved a record number of export licenses, estimated at a value of $44.3 billion, last year for weapons and military parts and services sold overseas by U.S. companies, according to an annual report to Congress yesterday. It approved licenses valued at $217.3 million for sales to India, up from $154.5 million in fiscal 2010.

Mahindra & Mahindra Ltd. (MM), India’s biggest tractor maker, has set up several joint ventures including one in March with Israel-based Rafael Advanced Defense Systems Ltd. for naval weapon systems.

Mahindra expects sales of about $500 million in 10 years for its defense business, up from zero now, Vice Chairman and Managing Director Anand Mahindra said in March.

Premji’s Wipro last year agreed with a European Aeronautic, Defense & Space Co. (EAD) unit to manufacture aerospace actuators, a controlling system, and related precision engineering components. The work will be done at a factory Wipro is building in India, said Sunil Rajagopalan, who heads aerospace and defense at Wipro Infrastructure Engineering. Premji ranks 37 on the Bloomberg Billionaires Index with a $15.9 billion net worth as of June 6.

Fighter Jets

Ambani’s Reliance Industries Ltd. (RIL), the Mumbai-based operator of the world’s biggest refinery complex, signed an agreement this year with Dassault Aviation SA (AM) to explore defense projects. India is negotiating with Dassault, based in Paris, to buy 126 Rafale warplanes in the world’s biggest fighter-jet purchase in 15 years, estimated to cost at least $11 billion.

Tushar Pania, a Reliance spokesman, declined to comment. Ambani, Reliance’s chairman, is the world’s 23rd richest person, with a $20.4 billion net worth as of June 6, according to the Bloomberg Billionaires Index. Mathieu Durand, a spokesperson at Dassault, also declined to comment.

Shares of Reliance rose 1.2 percent to 729.70 rupees at the close in Mumbai. Wipro added 0.6 percent to 403.35 rupees. The benchmark BSE India Sensitive Index gained 0.4 percent.

Scouting for Acquisitions

Indian companies are also scouting for acquisitions, targeting small military-equipment makers in the U.S., U.K. or Europe.

Ajay Piramal, who controls drugmaker Piramal Healthcare Ltd. (PIHC), reiterated May 16 he is considering a defense acquisition and other defense projects.

“We currently have more requests from Indian companies interested to buy overseas than in the last two years,” said Nicolas Ribollet, a Mumbai-based partner at Mazars LLP, an accounting and consulting group in Paris.

Kalyani Group, which makes machined components, is going it alone. Controlled by billionaire Baba Kalyani, it is spending 1 billion rupees over the next two to three years on new defense projects including bombs, shells and a 155 millimeter towed artillery gun, according to Amit Kalyani, executive director of Bharat Forge Ltd. (BHFC), the flagship firm.

Kalyani said the growth of a homegrown military industry will take a long time, in part due to regulatory uncertainty and India’s bureaucracy. “As an entrepreneur it can be quite deterring,” he said.

Richer Margins

Yet richer operating margins in defense contracts is luring companies, according to Alok Deshpande, a Mumbai-based analyst at Elara Securities Ltd.

Reliance posted an operating margin of 6.4 percent in the year ended March 31, according to data compiled by Bloomberg-- about half the margin reported for 2011 by Northrop Grumman Corp. (NOC), maker of the U.S. military’s Global Hawk drone.

“Anybody with anything in their pocket is talking defense now,” said Neelu Khatri, a defense analyst at KPMG. “I get calls every day from companies in all kinds of manufacturing fields, wanting to find out how they can enter the space.”

To contact the reporters on this story: Ruth David in Mumbai at rdavid9@bloomberg.net; Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India’s Richest Seek New Fortunes in Arms Amid China Race By Ruth David and Karthikeyan Sundaram - Jun 7, 2012

Indian billionaires Mukesh Ambani, Azim Premji and Adi Godrej made their fortunes in refining, software and toilet soaps. These days the moguls see big money in bullets, bombs and ballistics.

India is the world’s largest weapons importer, depending on foreign companies including Boeing Co. (BA) and MiG Russian Aircraft Corp. for about 70 percent of its $35 billion military budget. Now Asia’s third-biggest economy is revising its rules to give domestic private-sector companies a better shot at more of the spending. That’s got big Indian companies such as Premji’s Wipro Ltd. (WPRO), the country’s third-largest software exporter, setting up weapon-making units, forming new partnerships with foreign defense companies or eyeing acquisitions overseas.

“This is a sexy market with a huge capital acquisition program,” said Dhiraj Mathur, an executive director at PricewaterhouseCoopers LLP’s India unit. “The advantage the big players have is that they are large, have deep pockets and the resources.”

The tilt to domestic companies comes as India ramps up its defense budget, looking beyond its traditional rivalry with Pakistan to counter China’s rising power. India tripled military outlay over the last decade to become the world’s seventh- largest defense spender in 2011. China is the second largest at $105 billion. In the next five years, KPMG International estimates, India will seek bids for $42 billion of military hardware -- from fighter jets to artillery guns.

‘Major Area’

“Defense will be a major area of expansion” for Indian companies in the next few years, said Godrej, chairman of Mumbai-based Godrej Group, whose consumer unit is India’s third- largest maker of personal-care products, such as deodorants and soaps. “We are looking at all opportunities” to expand into the segment and discussing partnership possibilities, he said, declining to name companies.

Billionaires such as Godrej, Ambani and Premji accumulated their fortunes as India started opening its economy in 1991, ending decades of license requirements, scrapping state monopolies in industries ranging from telecommunications to aviation and allowing foreign investments and ownership.

Last year the government revised its policy on military procurement, opening the door for private-sector companies to expand into a new market. They now account for only 10 percent of India’s defense spending, mostly as sub-contractors to state- owned entities, which contribute about 20 percent, according to a March report by Boston Consulting Group Inc. Foreign suppliers account for the remaining 70 percent.

Advantage Locals

The new procedures added a “buy and make Indian” provision. For contracts that require certain expertise, only local companies, including joint ventures with overseas companies, can enter bids.

India also tweaked rules governing local purchase requirements. Foreign suppliers were required to source at least 30 percent of a defense contract from local companies, a rule known as the offset policy. The scope of that has been expanded to allow foreign arms makers to purchase civil aerospace components, and offer weapons and services for homeland security, to meet the obligation.

Lacking extensive military-manufacturing expertise, Indian companies are forming partnerships with foreign defense contractors to take advantage of the new rules. That will benefit both local and overseas companies, said Nidhi Goyal, director of the aerospace and defense team at Deloitte Touche Tohmatsu Ltd. in India.

Naval Weapons

Mahindra & Mahindra Ltd. (MM), India’s biggest tractor maker, has set up several joint ventures including one in March with Israel-based Rafael Advanced Defense Systems Ltd. for naval weapon systems.

Mahindra expects sales of about $500 million in 10 years for its defense business, up from zero now, Vice Chairman and Managing Director Anand Mahindra said in March.

Premji’s Wipro last year agreed with a European Aeronautic, Defense & Space Co. (EAD) unit to manufacture aerospace actuators, a controlling system, and related precision engineering components. The work will be done at a factory Wipro is building in India, said Sunil Rajagopalan, who heads aerospace and defense at Wipro Infrastructure Engineering. Premji ranks 37 on the Bloomberg Billionaires Index with a $15.9 billion net worth as of June 6.

Fighter Jets

Ambani’s Reliance Industries Ltd. (RIL), the Mumbai-based operator of the world’s biggest refinery complex, signed an agreement this year with Dassault Aviation SA (AM) to explore defense projects. India is negotiating with Dassault, based in Paris, to buy 126 Rafale warplanes in the world’s biggest fighter-jet purchase in 15 years, estimated to cost at least $11 billion.

Tushar Pania, a Reliance spokesman, declined to comment. Ambani, Reliance’s chairman, is the world’s 23rd richest person, with a $20.4 billion net worth as of June 6, according to the Bloomberg Billionaires Index. Mathieu Durand, a spokesperson at Dassault, also declined to comment.

Indian companies are also scouting for acquisitions, targeting small military-equipment makers in the U.S., U.K. or Europe.

Ajay Piramal, who controls drugmaker Piramal Healthcare Ltd. (PIHC), reiterated May 16 he is considering a defense acquisition and other defense projects.

“We currently have more requests from Indian companies interested to buy overseas than in the last two years,” said Nicolas Ribollet, a Mumbai-based partner at Mazars LLC, an accounting and consulting group in Paris.

Towed Guns

Kalyani Group, which makes machined components, is going it alone. Controlled by billionaire Baba Kalyani, it is spending 1 billion rupees over the next two to three years on new defense projects including bombs, shells and a 155 millimeter towed artillery gun, according to Amit Kalyani, executive director of Bharat Forge Ltd. (BHFC), the flagship firm.

Kalyani said the growth of a homegrown military industry will take a long time, in part due to regulatory uncertainty and India’s bureaucracy. “As an entrepreneur it can be quite deterring,” he said.

Yet richer operating margins in defense contracts is luring companies, according to Alok Deshpande, a Mumbai-based analyst at Elara Securities Ltd.

Reliance posted an operating margin of 6.4 percent in the year ended March 31, according to data compiled by Bloomberg-- about half the margin reported for 2011 by Northrop Grumman Corp. (NOC), maker of the U.S. military’s Global Hawk drone.

“Anybody with anything in their pocket is talking defense now,” said Neelu Khatri, a defense analyst at KPMG. “I get calls every day from companies in all kinds of manufacturing fields, wanting to find out how they can enter the space.”

To contact the reporters on this story: Ruth David in Mumbai at rdavid9@bloomberg.net; Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Bank of Baroda Tops Record Dollar Debt Redemptions: India Credit By Anoop Agrawal - Jun 6, 2012

Indian companies face rising costs to refinance record redemptions of U.S. dollar-denominated debt as yields on their securities surge and the rupee declines to an all-time low.

Bank of Baroda and Bank of India lead more than 39 companies with $10.6 billion of debt due this year, more than double last year’s total, data compiled by Bloomberg show. While benchmark 10-year Treasury yields fell to record lows and U.S. corporate notes pay 3.46 percent, according to Bank of America Merrill Lynch indexes, costs for Indian borrowers are surging. Yields on dollar-denominated bonds rose 42 basis points to 6.03 percent in May, according to HSBC Holdings Plc indexes.

Indian companies are being hit by a double whammy as the rupee’s 6.4 percent tumble last month raises their costs in dollars to pay off maturing debt. At the same time, the government is urging companies to boost spending on infrastructure needed to support the growth of Asia’s third- largest economy, which has slowed to a nine-year low.

“The rupee’s drop has been unprecedented, and therefore there’s an unprecedented increase in costs for us to refinance,” Rajiv Kumar Bakshi, executive director at Bank of Baroda (BOB), said in a telephone interview from Mumbai on June 4. “The high cost structure will have a bearing on performance and there is little issuers can do in the present global and domestic macroeconomic conditions.”

Companies ‘Suffering’

The rupee posted the worst performance last month of the 11 most-traded currencies in Asia, as foreign funds pulled $262 million from the nation’s stocks in April and May, according to data from the stock market regulator compiled by Bloomberg.

“Risk aversion globally and inflationary pressures at home have had the biggest bearing on the rupee, and companies are suffering,” said Jani Kurppa, a fund manager in Helsinki at EQ Asset Management Ltd., which manages $4.7 billion in debt. “These pressures will persist and corporates will have to pay more for funds.”

Standard & Poor’s said on April 25 that India needs to cut its current-account and budget deficits for investors to regain confidence. The rupee dropped to a record low of 56.515 against the dollar on May 31 amid concern Europe’s debt crisis will slow growth in the South Asian economy.

The extra yield investors seek to hold Indian company dollar-denominated bonds widened to 548 basis points, or 5.48 percentage points, on June 5, from 488 at the start of May, HSBC indexes show. The spread on comparable U.S. notes increased 30 basis points to 233 in the same period, according to Bank of America Merrill Lynch indexes.

Bank of India

Of the borrowers with debt due this year, Bank of Baroda has $1.36 billion maturing, and Bank of India has $1.18 billion to refinance, the data show. State Bank of India has $1.09 billion due, Tata Motors Ltd. (TTMT) $473 million, and Suzlon Energy Ltd. $389 million, according to the data.

“There is a significant impact of the rupee’s fall, not just not on performance but also on sentiment,” N. Seshadri, executive director of Bank of India, said in telephone interview from Mumbai June 4. “The increase in costs is going to compel lenders to re-visit overseas operations.”

Gross domestic product expanded 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter, the government said May 31.

Earnings Estimates

Thirty percent of companies in India’s benchmark stock index posted March-quarter profits below analyst estimates, due to the highest borrowing costs among the biggest economies in Asia. Analysts cut their earnings forecasts for the year to March 2013 by 14 percent since April 2011 to 1,281 rupees per share, the most since the 2009 financial crisis, according to 1,600 estimates compiled by Bloomberg.

Elsewhere in the markets, yields on 10-year government bonds have dropped 30 basis points since May 1 after the Reserve Bank of India in April lowered the benchmark interest rate to 8 percent. The yield on the 8.79 percent note due November 2021 rose four basis points yesterday to 8.37 percent, according to the central bank’s trading system.

The cost of protecting State Bank of India debt against non-payment climbed 1.9 basis points yesterday, and 68 basis points in the past month, to 388.9 percentage points, according to data provider CMA. State Bank is regarded as a proxy for the nation in the credit-default swap market.

Default swaps insuring the sovereign debt of the biggest emerging-market nations also advanced. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Brazil, China

Contracts on Brazil rose 46 basis points to 168.5 in the past month, while those on China jumped 36 basis points to 140.3, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Russia’s are up 91 to 281.1.

Rising Indian corporate dollar financing costs come as rupee-denominated bond yields increased, limiting options for borrowers. The extra yield investors seek for top-rated five- year rupee debt compared with similar-maturity government notes advanced 17 basis points in May, the biggest gain in at least a year, according to data compiled by Bloomberg.

“The availability of funds domestically or overseas is going to be a constraint for Indian companies,” EQ Asset’s Kurppa said. He declined to comment on his investments.

Indian companies issued the equivalent of $2.5 billion of international bonds this year, compared with $7.85 billion in the same period of 2011, data compiled by Bloomberg show.

Indian Railway

The last borrower to sell dollar-denominated bonds was Axis Bank Ltd., which raised $500 million in March. Yields on the 5 1/8 percent of September 2017 notes rose 15 basis points to 5.23 percent yesterday, from 5.08 percent at the start of May, according to Royal Bank of Scotland Group Plc prices.

Indian Railway Finance Corp Ltd. plans to sell as much as $300 million of bonds overseas by July 25 should dollar rates be favorable, Managing Director Rajiv Datt said in a phone interview on June 5.

“The premium for funds has increased because the outlook on fundamentals has weakened in the last few weeks,” said Ganti N. Murthy, head of fixed income at Peerless Mutual Fund, which oversees the equivalent of $900 million. “Corporates are going to suffer the most and so will the economy.”

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net

To contact the editors responsible for this story: Hari Govind at hgovind@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Asian Stocks Rise on Australian GDP; Aussie, Oil Gain By Richard Frost - Jun 5, 2012

Asian stocks gained for a second day while the Australian dollar and oil advanced after the southern country’s economy expanded at twice the rate economists estimated and the U.S. services-industry unexpectedly grew. Aluminum rose as metals in London traded for the first time this week.

The MSCI Asia Pacific Index (MXAP) added 0.6 percent at 10:56 a.m. in Tokyo. The Nikkei 225 Stock Average climbed 0.7 percent. Standard & Poor’s 500 Index futures advanced 0.4 percent. The so-called Aussie strengthened 1.1 percent against the U.S. dollar, poised for the biggest gain in almost two months, after a report showed the nation’s economy grew 1.3 percent last quarter. Oil rose 0.6 percent in New York. Aluminum increased 0.6 percent following a two-day holiday in the U.K.

Australia’s gross domestic product advanced 1.3 percent from the previous three months, a Bureau of Statistics report showed, compared with the median 0.6 percent gain predicted by economists in a Bloomberg News survey. U.S. service industries sustained their pace of growth in May, showing the biggest part of the U.S. economy is withstanding the impact of the European debt crisis.

The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and damped European demand for foreign goods. European representatives “said they will speed up their efforts to resolve those problems, which was encouraging to us,” Japanese Finance Minister Jun Azumi told reporters in Tokyo.

Stock Valuations

The MSCI Asia Pacific Index trades at 11.2 times its companies’ estimated earnings, the lowest valuation since October 2008, weekly data compiled by Bloomberg show. The gauge plunged 15 percent from a six-month high in February through June 4 as U.S. economic data trailed estimates and concern grew about Greece’s future in the euro and Spain’s deteriorating national finances.

The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, unexpectedly increased to 53.7, topping the median projection of economists for a reading of 53.4.

Spain may receive a precautionary credit line from the European Financial Stability Facility, Germany’s Die Welt newspaper reported in a preview of a story that will run today, citing unidentified people familiar with talks about the possible option.

Commerzbank AG, Germany’s second-largest bank, had its credit rating cut one level today as Europe’s debt crisis prompted Moody’s Investors Service to downgrade seven lenders in the nation and three in Austria. Commerzbank, based in Frankfurt, was reduced to A3 from A2, Moody’s said in a statement. A review of Deutsche Bank AG, the nation’s largest lender, will be concluded later, Moody’s said.

To contact the reporter on this story: Richard Frost in Hong Kong at rfrost4@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Steel Authority Expansion Delay to Erode Profit: Corporate India By Rajesh Kumar Singh - Jun 4, 2012

Steel Authority of India Ltd., the nation’s second-biggest maker of the alloy, may fail to revive profit from an eight-year low as project delays more than double the cost of a planned capacity expansion to $13 billion.

Contractor disputes, holdups and rising equipment prices have inflated the bill for increasing the capacity by 59 percent to 21.4 million tons, Chairman C.S. Verma said in an interview. The original estimate in 2006 was $6.3 billion. The overrun may shrink earnings by 36 percent to 5.5 rupees per share this year, said Ravindra Deshpande, a Mumbai-based analyst at Elara Securities Ltd.

State-run (SAIL) Steel Authority is counting on higher capacity to compete with Tata Steel Ltd. (TATA) as demand for the alloy is forecast to grow 8 percent in India this fiscal year, driven by public works spending and purchases of cars, homes and appliances. The shares fell 37 percent in the past year, making the company the worst performing steel stock on the BSE Metal Index (BSEMETL), after a 36 percent increase in the number of analysts recommending a sell from a year earlier, according to data compiled by Bloomberg.

“After Steel Authority’s expansion, the return on equity will be low, so the stock is being downgraded,” said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Securities Ltd., which has kept a sell rating since July last year. “The cost is abnormally high and will only increase from here.”

Rising Interest

Typically, the cost of building a steel mill is about $1 billion per million ton, while Steel Authority will pay $1.6 billion, according to Niraj Shah, an analyst at Mumbai-based Fortune Equity Brokers India Ltd.

The stock rose 0.7 percent to 92 rupees yesterday in Mumbai, extending gains this year to 13 percent. The benchmark Sensitive Index (SENSEX) has risen 3.5 percent in 2012.

Interest costs for New Delhi-based Steel Authority have almost tripled in five years to 6.8 billion rupees ($122 million), while net income dropped to 35.5 billion rupees in the 12 months ended March 31, the least since 2004, according to data compiled by Bloomberg. The stock is rated a hold by 14 of 51 analysts. Nineteen rate it a sell and 18 a buy.

The company’s expansion program, which includes raising steelmaking and iron-ore mining capacities and also refurbishing old equipment to boost efficiency, has been delayed. The first estimate in March 2006 envisaged completion by 2012. The steelmaker will be able to increase its capacity to 18 million tons by the end of the current financial year, Verma said, without giving a timeframe for the full expansion.

“There’ll always be issues with such a huge project,” he said.

Inflated Plan

Steel Authority, which has spent 403.2 billion rupees on its expansion plans, expects to invest 120 billion rupees this financial year. It had 163.2 billion rupees of debt as of March 31, Verma told reporters in New Delhi on May 29.

“The delayed as well as inflated capital-expenditure plan will continue to put pressure on the balance sheet of the company,” Elara’s Deshpande said.

Still, project delays aren’t exclusive to Steel Authority as every company faces these issues, said Anubhav Gupta, an analyst at Kim Eng Securities Pvt. in Mumbai, who rates the stock a buy. ArcelorMittal (MT), the world’s biggest steelmaker, and South Korea’s Posco, the fourth biggest, have been waiting for almost seven years to begin construction of their combined $36 billion projects in eastern India.

“If someone believes in India’s metals consumption story, one could consider buying Steel Authority,” Gupta said.

Coking Coal

A decline in prices of coking coal, a key ingredient in making steel, will help increase profit at Steel Authority, he said. Contract coking coal prices dropped to $206 a ton for the quarter ending June 30, a 36 percent decline from their record a year ago. A spurt in the fuel price last year led to a 29 percent drop in profit in the financial year to March 31.

The benefits of the expansion won’t be seen for at least another two years, said Ritesh Shah, an analyst at Espirito Santo Securities in Mumbai. A proposed mining bill will further erode the company’s earnings, he said.

A planned change in India’s five-decade old mining law will need coal miners to give away an amount equal to the royalty payments for local welfare, while miners of other minerals will have to part with 26 percent of their profit. The bill is being studied by a parliamentary committee.

“We see disappointments on too many fronts in Steel Authority,” said Chirag Shah, a Mumbai-based analyst at Barclays Bank Plc. “We have been negative on the stock and continue to be so.”

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

ITC to Raise Some Food Prices on Edible Oil Import Costs By Malavika Sharma and Pratik Parija - Jun 3, 2012

ITC Ltd. (ITC), India’s biggest tobacco company and a maker of cookies and potato chips, will increase prices of some food products as the rupee’s plunge to a record low threatens its highest profit margin in nine years.

The rupee has weakened 19 percent against the dollar in the past year, making it the worst performer among Asia’s 11 most- traded currencies. The depreciation has prevented ITC, Britannia Industries Ltd. (BRIT) and other makers of processed foods from benefiting from an 11 percent drop in prices of edible oil imported from Indonesia and Malaysia. The commodity is used to prepare cookies, instant noodles and pasta.

“It’s imperative to increase prices because inflation is eroding margins,” Chitranjan Dar, who heads ITC’s food business, said in a telephone interview from Bangalore. “The real concern is edible oil. It’s something we are not comfortable with.”

ITC Chairman Yogesh Deveshwar has over the past decade expanded into new businesses including food, matches and apparel to cut dependence on tobacco as India tightens rules to discourage smoking. With Indian consumers living with the highest rate of inflation among the largest emerging markets, ITC is betting it can retain customers for its Sunfeast cookies and Bingo! potato chips even as the economy expands at its slowest pace in nine years.

“If they raise the prices at a nominal level of 8 to 10 percent, we don’t think that is going to impact,” sales, said Ajay Jaiswal, head of research at Microsec Capital Ltd. in Kolkata. “Brand loyalty is definitely one thing that is major source of confidence for the company.”

ITC, which is 31 percent owned by British American Tobacco Plc (BATS), has gained 16 percent this year, compared with a 3.3 percent advance for the benchmark BSE India Sensitive Index. The shares rose 2 percent to 233.85 rupees in Mumbai on June 1.

Additional Burden

The Kolkata-based company’s operating profit margin widened to 32.3 percent in the year ended March 31, the highest since 2003, when ITC started selling cookies and snacks. The division, which includes personal care products has yet to post operating profit, according to data compiled by Bloomberg.

India, the world’s second-biggest vegetable oil user, imports about 55 percent of its requirement of 16 million tons. The cost of importing refined, bleached, deodorized palmolein oil has risen, according to the Solvent Extractors’ Association. The landed cost increased to 58,410 rupees ($1,055) a metric ton on average in May, compared with 53,323.9 rupees in June last year, B.V. Mehta, executive director of the association, said by phone from Mumbai. The weakening rupee has put an “additional burden” on imports, he said.

Smoking Control

Slowing growth in Asia’s third-largest economy may affect demand for ITC’s products. India’s gross domestic product expanded at 5.3 percent last quarter, the slowest pace in nine years and below the median estimate of 6.1 percent growth in a Bloomberg survey of 31 economists.

Inflation in the country, at 7.23 percent, is the highest among the BRIC nations. Goldman Sachs Group Inc. boosted its estimate for the benchmark wholesale price gauge to a 6.5 percent gain for the fiscal year that began April 1, from 5 percent previously.

Boosting margins at ITC’s non-tobacco businesses may be key to growth as India toughens smoking control. The Indian health ministry banned tobacco advertising in 2004, making it harder for ITC to promote new and existing brands. States such as New Delhi have prohibited smoking in public places, including railway stations.

ITC, which was set up in 1910, started selling ready-to-eat foods under its Kitchen of India brand in August 2001. It added confectionery, staples and snack foods in 2003. The company got 24 percent of its revenue from the sale of consumer products including cookies, pasta, shampoo and soap, in the quarter ended March 31, according to data compiled by Bloomberg.

Market Share

Revenue at ITC’s consumer products business, which includes Fiama di Wills shampoo and Sunfeast cookies, jumped 24 percent in the quarter ended March 31, outpacing the 17 percent increase in cigarette sales. Profit before taxes from cigarettes rose 20 percent, while losses from the other consumer goods business narrowed.

ITC’s earnings may increase 14 percent to 71.8 billion rupees in the year ending March 31, according to the median of 12 analysts’ estimates compiled by Bloomberg. That’s the slowest pace of growth in four years.

The market for cookies in the world’s second-most populous nation is estimated to increase to 266 billion rupees in 2015 from 156 billion rupees last year, according to Euromonitor International.

ITC, with a 13.2 percent share of the market, was India’s third-largest cookie-maker in 2010 after closely held Parle Products Pvt. and Britannia, both held 33 percent share of the market each, Euromonitor said. ITC’s market share was 7.9 percent in 2006, while Britannia’s share was 36 percent.

ITC, which sells its food products through 2.5 million outlets, plans to increase this reach by as much as 10 percent, said Dar. Modest price increases in packaged foods will not hurt growth in the segment, he said.

To contact the reporters on this story: Malavika Sharma in New Delhi at msharma52@bloomberg.net; Pratik Parija in New Delhi at pparija@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; James Poole at jpoole4@bloomberg.net

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