Tata Offers First Car Buyback as Sales Plummet: Corporate India

By Siddharth Philip - Mar 5, 2013

Tata Motors Ltd. (TTMT), India’s biggest automaker, has a new strategy to revive car sales from a decade low: the company is promising to buy back your Manza sedan.
The Mumbai-based carmaker said it will guarantee customers 60 percent of the purchase price after 3 years on cars they buy in the next two months, according to an e-mail response from the company. Tata Motors, led by Chairman Cyrus Mistry, also cut prices for some of its cars this week by as much as 50,000 rupees ($912). The Manza model will be about 8 percent cheaper.
The plan to repurchase cars shows the owner of Jaguar and Land Rover is “desperate” as it has lost market share in Asia’s third-largest car market to Toyota Motor Corp. (7203) and Mahindra & Mahindra Ltd. (MM), according to Deepesh Rathore, the India managing director of IHS Automotive. Passenger vehicle sales at the company plunged 70 percent last month to the lowest in a decade.
“Tata Motors has a big problem in the local car business,” said Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets. “Tata Motors needs to get its quality and design right.”
India’s automakers’ association in January lowered its full-year domestic car sales forecast for the third time in six months as slowing economic growth and high interest rates continue to keep buyers from showrooms. February passenger car sales at Tata dropped to 10,613 from 34,832 a year earlier. Deliveries at Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, fell 9 percent to 97,955.

Indica Hatchback

Former Chairman Ratan Tata hired Karl Slym as managing director to revive vehicle sales. Slym last month said he plans to build a diesel version of the Nano, the world’s cheapest car, as well as the Indica hatchback.
Tata Motors’ shares, which have gained 10 percent in the past year, rose 3.7 percent to 300.50 rupees in Mumbai, making it the best performer on the Bloomberg Asia Pacific Auto Manufacturer (BPRAUTM) index yesterday as Indian stocks had their biggest jump in more than three months.
Sales of the company’s trucks, buses and cars at home accounted for 36 percent of group revenue of 1.66 trillion rupees ($30.2 billion) in the year ended March 31, down from 43 percent in 2010, according to data compiled by Bloomberg.
Profit at the Jaguar Land Rover unit, which contributed 74 percent of Tata Motors’ operating income in the year ended March 31, declined 25 percent to 296 million pounds ($449 million) in the three months to Dec. 31. Tata Motors reported a loss of 4.6 billion rupees for its Indian business as sales at home dropped 21 percent to 105.3 billion rupees.

Maruti Sales

Tata sold 7,485 units of the Indigo and Indigo Manza sedans in the 10 months to January. That’s 6 percent of Maruti’s DZire sales in the same period.
Maruti sold 131,177 units of its DZire, according to data from the Society of Indian Automobile Manufacturers. Toyota’s sales including utility vehicles rose 6.4 percent to 133,296 in the 10 months to January.
“I doubt Tata Motors will be able to improve their market share,” Surjit Singh Arora, an analyst at Prabhudas Lilladher Pvt. in Mumbai. “Unless they upgrade their platforms, it looks difficult for Tata Motors.”
Maruti has seven versions, including gasoline and diesel options, of its DZire, while Tata sells 17 variants of the Indigo and more than 20 for the Indica, according to the companies’ websites.

‘Dead Cat Bounce’

“Tata continues to sell old generation models with the new. This is bad strategy,” said Mahantesh Sabarad, an analyst at Fortune Equity Brokers India Ltd. in Mumbai. When Honda Motor Co. or Maruti “introduces a new generation, they phase out the old ones.”
The company’s buyback offer will be valid for cars which haven’t had a major accident and carry a valid insurance policy, according to the e-mail from Tata Motors. The automaker doesn’t plan to extend the repurchase plan, which it says “will surely boost sales,” to other models.
The plan may help Tata see a “dead cat bounce in sales,” Sabarad said. “I don’t expect market share to increase.”
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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Birla Mulls U.S. Purchase Driven by Shale Gas: Corporate India

By Rakteem Katakey and Abhishek Shanker - Mar 4, 2013

Indian billionaire Kumar Mangalam Birla is considering buying his first fertilizer plant in the U.S. to benefit from a 55 percent drop in prices of natural gas used to fuel the factories.
His Aditya Birla Group (ABNL) is seeking a “mid-size acquisition” which has access to technology that can be used in the conglomerate’s operations, Birla said in an interview. The U.S. boom from hydraulic fracturing, or fracking, which uses pressurized water to drive gas and oil from shale rock has depressed energy prices, while an intelligence advisory panel said in December that the world’s biggest economy may achieve energy independence in as little as 10 years.
“There’s going to be a huge geopolitical shift with shale gas in America,” Birla told Bloomberg TV India. “This is an interesting opportunity, given the fact that we have a large exposure to manufacturing. I see companies in chemicals and fertilizer space or companies that give technology for the group’s business.”
Birla, 45, who controls India’s biggest cement producer Ultratech Ltd. (UTCEM) and the world’s largest rolled aluminum maker Novelis Inc., is joining other Indian companies including Welspun Corp., which is close to starting a $100 million pipe factory in the U.S. targeting shale gas clients. The American Chemistry Council estimates low-cost natural gas may generate $72 billion in capital investment as petrochemical companies relocate or boost spending in the U.S.

Revenue Goal

The Aditya Birla Group is targeting a 63 percent increase in revenue to $65 billion by 2016, and is also looking for acquisitions in Brazil, Thailand and Indonesia, Birla said. Half of the group’s current $40 billion turnover comes from overseas, he said.
A slump in local gas production is forcing Indian companies, including power stations and fertilizer makers, to import the fuel, which is more expensive. The government also controls prices of fertilizers, making use of costly fuel unviable.
“Energy cost would be about 60 percent of the total cost and it makes an obvious choice to have a U.S. presence,” said P.D. Samudra, executive director at Uhde India Pvt., a unit of ThyssenKrupp Uhde GmbH that undertakes projects for industries including fertilizers, petrochemicals and polymers. “In India, we also have subsidy issues.”
Shares of Aditya Birla Nuvo Ltd., a group company that produces fertilizer, rose as much as 1.1 percent to 1,057.95 rupees and traded at 1,056 rupees as of 9:42 a.m. in Mumbai. The stock has gained 21 percent in the past year, compared with a 9.5 percent rise in the benchmark Sensitive Index.

No Addition

India hasn’t added any urea manufacturing capacity since 1999, according to the fertilizer ministry’s annual report.
Aditya Birla Nuvo can produce 1.1 million metric tons annually at Jagdishpur in the state of Uttar Pradesh. The company’s fertilizer business earns about 20 billion rupees ($364 million) in revenue from sales in the eastern states of Bihar, Jharkhand and West Bengal, according to a corporate presentation on its website.
Natural gas production at Asia’s second-biggest energy consumer declined 14 percent to 34.6 billion cubic meters in the 10 months ended Jan. 31, according to data compiled by Bloomberg. Output has declined every month compared with a year earlier since November 2010, as the nation’s biggest field operated by Reliance Industries Ltd. slumps.
In the U.S., a surge in gas production from shale rocks from Texas to West Virginia made it the world’s biggest producer of the fuel in 2009, beating Russia. Gas futures reached a decade low of $1.91 per million British thermal units in April in New York trading. They’ve slid 55 percent since Jan. 1, 2008.

Expanding Abroad

“Lower energy costs will attract companies to the U.S. and the Aditya Birla group will look to take advantage of cheaper gas,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. at Kochi in southern India. “There’s a dearth of gas in India and imported gas is expensive.”
Gas in New York trading may reach $3.95 per million British thermal units by the end of this year, according to the median of 20 analyst estimates compiled by Bloomberg. Prices were at $3.55 per million Btu as of 12:12 p.m. in Singapore.
Birla has spent more than $1.5 billion in acquiring assets overseas in the past two years. Since January 2011, the group bought four companies in the chemical industry, including three overseas.
It agreed to buy Columbian Chemicals Co., a Georgia, U.S.- based carbon black maker, for $875 million on Jan. 31, 2011. Three months later, it bought Sweden’s Domsjo Fabriker AB for $340 million and followed it up in July with the purchase of Terrace Bay Pulp Inc., a paper pulp mill in Canada, to secure raw material supplies for its viscose staple fiber business.

Country Risk

Birla would rather invest in countries including Brazil and Indonesia than back home as frequent policy changes in India discourage companies from spending in Asia’s third-biggest economy, he said in the interview.
India slipped three levels in the 2013 World Economic Forum’s Global Competitiveness Index from a year earlier, to 59. Brazil was ranked 48, while Indonesia was in the 50th position.
“Country risk for India just now is pretty elevated and chances are that for deployment of capital, you would look to see if there is an asset overseas rather than in India,” Birla said. “We are in 36 countries around the world. We haven’t seen such uncertainty and lack of transparency in policy anywhere.”
A report on Feb. 28 showed India’s $1.8 trillion economy rose 4.5 percent in the three months to Dec. 31 from a year earlier, lower than forecast and the weakest pace in almost four years, as cooling investment, a drop in exports and government spending cuts sapped growth.

Net Worth

Birla has a net worth of $8.7 billion, according to the Bloomberg Billionaires Index. His wealth has declined 4.5 percent this year.
Birla’s plans to invest in the U.S. follows announcements by Austrian steelmaker Voestalpine AG to Singapore-based Indorama Group, which are hoping to benefit from cheap gas. Nucor Corp. (NUE), the biggest U.S. steelmaker, plans to start up a $750 million Louisiana project in mid-2013. This is among at least five U.S. plants under consideration or being built that would use gas instead of coal.
Indorama Group, a polyester maker operating in more than 20 nations, plans to spend $4 billion on chemical plants in gas- producing countries, including the U.S.
“A lot of manufacturing will come back into North America,” Birla said. The U.S. looks very attractive from a manufacturing point of view, he said.
To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net; Abhishek Shanker in Mumbai at ashanker1@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Biggest Fund Manager Jain Sees Value in Banks: Corporate India

By Anto Antony and Santanu Chakraborty - Mar 3, 2013

Prashant Jain, chief investment officer at India’s biggest money manager, said he sees value in some of the nation’s biggest lenders amid prospects of a reduction in bad loans that have made them Asia’s worst- performing banking stocks in the past year.
Jain, who manages $18.6 billion at HDFC Asset Management Co., also runs HDFC Top 200 (ITCT200), India’s largest equity fund. Banks account for about 29 percent of HDFC Top 200’s assets, according to data compiled by Bloomberg. The fund owns state-run Canara Bank, Bank of Baroda (BOB) and Bank of India (BOI), the three worst performers on the 88-company MSCI AC Asia Banks Index (MXAS0BK) in the past 12 months.
Finance Minister Palaniappan Chidambaram’s budget pledge to add 140 billion rupees ($2.6 billion) to boost capital at banks will help state-run lenders increase credit and revive Asia’s third-largest economy forecast to expand at the slowest pace in a decade in the year ending March 31. A drop in delinquent debt from a five-year high will lure investors to the nation’s lenders, according to Diwakar Gupta, chief financial officer at State Bank of India (SBIN), the country’s biggest financial services company.
“At some point non-performing assets have to moderate,” Jain, 45, said in an interview to Bloomberg TV India. “Last quarter was better than the previous quarter and there is expectation this quarter will again be better than the last.”
HDFC Top 200 is India’s best performing large-cap fund in the past decade. It has returned 28 percent annually compared with the 21 percent gain at the S&P BSE Sensex index in the same period.

‘Punished Enough’

Apple Threatened With Higher Smartphone Tax: Corporate India

By Kartikay Mehrotra - Mar 1, 2013

Smartphone sales in India may suffer from a higher tax on handsets costing more than $37 just as Apple Inc. (AAPL) steps up efforts to tap demand for data services in the world’s second-largest mobile-phone market.
Finance Minister Palaniappan Chidambaram yesterday said he would raise the excise tax on high-end phones to 6 percent from 1 percent to help finance welfare programs for the country’s poor and fund the widest budget deficit among the largest emerging economies. Samsung Electronics Co. (005930), which sells the Galaxy range of smartphones, said the move “won’t have a positive impact” on the mobile-phone industry and will force customers to pay more.
India’s government, after attempting to squeeze wireless operators including Vodafone Group Plc (VOD) and Bharti Airtel Ltd. (BHARTI) with higher license fees and airwave tariffs, is now targeting handsets for revenue from an industry that has boomed since Prime Minister Manmohan Singh opened the economy more than two decades ago. Chidambaram also increased tax on high earners, luxury cars and yachts.
“This is a bit over the top,” said Rajan Bharti Mittal, vice chairman and managing director of Bharti Enterprises Ltd. that controls Bharti, which operates the nation’s biggest cellular network. “Mobile handsets and smartphones are hardly luxury items. This should be reviewed.”

Rural Jobs

Chidambaram said he needs to raise 16.7 trillion rupees ($306 billion) in the 12 months starting April 1, 16 percent more than the revised estimates for the current fiscal year, to meet expenditure and rein in the deficit at 4.8 percent of gross domestic product.
He allocated 330 billion rupees for his government’s flagship rural jobs program and 100 billion rupees for a plan to give the poor low-price food grains as the ruling coalition faces nationwide elections by May 2014.
The higher tax will hurt Apple, BlackBerry and Samsung because the top-end models will appear overpriced to buyers, said Mittal.
Apple, which hasn’t treated the Indian market as top priority until recently, is seeing its efforts pay off since introducing its iTunes store in the South Asian country and slashing prices on older models like the iPhone 4. Shipments rose to a record 254,000 in the fourth quarter, from 52,000 in the third quarter, according to data provided by Framingham, Massachusetts-based researcher IDC.

Not Favorable

Apple’s London-based spokesman Alan Hely declined to comment on the increase in excise tax.
Waterloo, Ontario-based BlackBerry (BB), formerly known as Research in Motion Ltd., which introduced its latest Z10 model in the country last month for $800, said the tax measure could deter consumers who aspire to own smartphones.
“India is on its way to becoming the world’s third-largest smartphone market,” said Sunil Dutt, managing director of BlackBerry in India. “This isn’t favorable to the growth of the segment.”
Phones that cost below 2,000 rupees, which Chidambaram has exempted from the excise tax, account for 75 percent of India’s market, according to Gartner Inc. Cheaper phones are popular in the country, where the World Bank estimates more than 800 million people live on less than $2 a day. The Galaxy S3 costs about 29,000 rupees, while the iPhone 5 starts at 45,500 rupees.

Erode Margins

While the higher tax may erode margins for phone makers, it may not dent demand, said T.M. Ramakrishnan, chief executive officer for devices at S Mobility Ltd. (SPCEM), a local company that imports handsets from Asia and sells them under its brand.
“It will surely impact the industry’s focus on making smartphones more affordable,” he said. “Also, it may get that much more difficult for smartphones to penetrate rural areas.”
S Mobility shares in Mumbai slumped 6.5 percent, the biggest loss since May 4, to 25.3 rupees, according to Bloomberg Data.
Apple, Samsung and BlackBerry are counting on the growth of data services in the country after carriers started offering third-generation services in 2011. The market for smartphones in India is set to grow 50 percent in 2013, according to IDC, while in China the rate is set to slow to as low as 40 percent from as high as 150 percent in 2012.
Mobile data traffic surged as much as 300 percent in the last 12 months, while revenue grew 50 percent from the previous year, according to Mohammad Chowdhury, leader of telecommunications practice at PricewaterhouseCoopers in Mumbai.

Damp Sales

“We will see some damping in consumer sales,” Chowdhury said. “In turn this will impact negatively the uptake of data services in India, and in all likelihood slow it down just at a time when it has begun to gain momentum.”
The government’s efforts to raise 400 billion rupees from the sale of airwaves in the year ending March 31 failed after carriers balked at the fees set by the nation’s telecommunications regulator in the first round of auctions in November. Instead, it met only 25 percent of that goal.
Mobile connections in the country fell to 725 million in January from as high as 1.01 billion in June, according to data provided by the Cellular Operators Association of India and the Association of Unified Telecom Service Providers of India.
“The government has targeted another successful industry to raise revenue,” said Anshul Gupta, a Mumbai-based analyst with Gartner. “This will trigger a price rise, meaning people will have to pay more, especially for mid-tier and high-end phones.”
To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Chidambaram Eyes IPhone, Z10 to Plug Budget Gap: Corporate India

By Kartikay Mehrotra - Feb 28, 2013

Smartphone sales in India may suffer from a higher tax on handsets costing more than $37 just as Apple Inc. (AAPL) steps up efforts to tap demand for data services in the world’s second-largest mobile-phone market.
Finance Minister Palaniappan Chidambaram yesterday said he would raise the excise tax on high-end phones to 6 percent from 1 percent to help finance welfare programs for the country’s poor and fund the widest budget deficit among the largest emerging economies. Samsung Electronics Co. (005930), which sells the Galaxy range of smartphones, said the move “won’t have a positive impact” on the mobile-phone industry and will force customers to pay more.
India’s government, after attempting to squeeze wireless operators including Vodafone Group Plc (VOD) and Bharti Airtel Ltd. (BHARTI) with higher license fees and airwave tariffs, is now targeting handsets for revenue from an industry that has boomed since Prime Minister Manmohan Singh opened the economy more than two decades ago. Chidambaram also increased tax on high earners, luxury cars and yachts.
“This is a bit over the top,” said Rajan Bharti Mittal, vice chairman and managing director of Bharti Enterprises Ltd. that controls Bharti, which operates the nation’s biggest cellular network. “Mobile handsets and smartphones are hardly luxury items. This should be reviewed.”

Rural Jobs

Chidambaram said he needs to raise 16.7 trillion rupees ($306 billion) in the 12 months starting April 1, 16 percent more than the revised estimates for the current fiscal year, to meet expenditure and rein in the deficit at 4.8 percent of gross domestic product.
He allocated 330 billion rupees for his government’s flagship rural jobs program and 100 billion rupees for a plan to give the poor low-price food grains as the ruling coalition faces nationwide elections by May 2014.
The higher tax will hurt Apple, BlackBerry and Samsung because the top-end models will appear overpriced to buyers, said Mittal.
Apple, which hasn’t treated the Indian market as top priority until recently, is seeing its efforts pay off since introducing its iTunes store in the South Asian country and slashing prices on older models like the iPhone 4. Shipments rose to a record 254,000 in the fourth quarter, from 52,000 in the third quarter, according to data provided by Framingham, Massachusetts-based researcher IDC.

Not Favorable

Apple’s London-based spokesman Alan Hely declined to comment on the increase in excise tax.
Waterloo, Ontario-based BlackBerry (BB), formerly known as Research in Motion Ltd., which introduced its latest Z10 model in the country last month for $800, said the tax measure could deter consumers who aspire to own smartphones.
“India is on its way to becoming the world’s third-largest smartphone market,” said Sunil Dutt, managing director of BlackBerry in India. “This isn’t favorable to the growth of the segment.”
Phones that cost below 2,000 rupees, which Chidambaram has exempted from the excise tax, account for 75 percent of India’s market, according to Gartner Inc. Cheaper phones are popular in the country, where the World Bank estimates more than 800 million people live on less than $2 a day. The Galaxy S3 costs about 29,000 rupees, while the iPhone 5 starts at 45,500 rupees.

Erode Margins

While the higher tax may erode margins for phone makers, it may not dent demand, said T.M. Ramakrishnan, chief executive officer for devices at S Mobility Ltd. (SPCEM), a local company that imports handsets from Asia and sells them under its brand.
“It will surely impact the industry’s focus on making smartphones more affordable,” he said. “Also, it may get that much more difficult for smartphones to penetrate rural areas.”
Apple, Samsung and BlackBerry are counting on the growth of data services in the country after carriers started offering third-generation services in 2011. The market for smartphones in India is set to grow 50 percent in 2013, according to IDC, while in China the rate is set to slow to as low as 40 percent from as high as 150 percent in 2012.
Mobile data traffic surged as much as 300 percent in the last 12 months, while revenue grew 50 percent from the previous year, according to Mohammad Chowdhury, leader of telecommunications practice at PricewaterhouseCoopers in Mumbai.

Damp Sales

“We will see some damping in consumer sales,” Chowdhury said. “In turn this will impact negatively the uptake of data services in India, and in all likelihood slow it down just at a time when it has begun to gain momentum.”
The government’s efforts to raise 400 billion rupees from the sale of airwaves in the year ending March 31 failed after carriers balked at the fees set by the nation’s telecommunications regulator in the first round of auctions in November. Instead, it met only 25 percent of that goal.
“The government has targeted another successful industry to raise revenue,” said Anshul Gupta, a Mumbai-based analyst with Gartner. “This will trigger a price rise, meaning people will have to pay more, especially for mid-tier and high-end phones.”
To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

NEVER BEFORE HAS A finance minister rejected populist giveaways so decisively in an election year. Never before has a finance minister sought to win the next elections not through tax breaks and freebies, but by accelerating GDP growth and taming inflation through fiscal consolidation. Palaniappan Chidambaram has gambled on good economics proving to be good politics too. This is risky, but admirably bold. Stock ma rkets crashed, fearing that fine print in the Finance Bill implied capital gains tax on investors coming through Mauritius and other countries with which India has a Double Taxation Avoidance Agreement. However, finance ministry officials later clarified that capital gains through Mauritius would not be affected. If so, stock markets should rise sharply on Friday. How has Chidambaram delivered on his promise of fiscal prudence (restricting fiscal deficit to 5.2% of GDP this year and 4.8% next year), yet provided for a 29% rise in Plan spending next year? By assuming very high tax buoyancy. Against nominal GDP growth of 13.4%, he hopes tax revenue will rise 19%, a very optimistic estimate. He will fall short on this, and will surely also fall short on the 29% rise in Plan spending. Ministries are simply not geared for such acceleration. So the planned fiscal consolidation can indeed happen. The finance minister will get much additional revenue by accelerating GDP growth from 5% this year to around 6.5% next year. He has proposed no new taxes, only a temporary surcharge of 10% on high-income individuals and corporates for one year. That sits well with his commitment to tax stability. What’s in it for the aam aadmi? Or shall we say the aam voter? Chidambaram’s implicit promise is that he will conquer the high inflation that has dogged the economy for three years. The big electoral danger earlier was a credit downgrade by rating agencies. This would have meant an outflow of billions of dollars, causing the exchange rate to crash to maybe 60 to the dollar and inducing a big jump in prices of imported items. That would have sent inflation soaring to 15%, and doomed the UPA to a massive defeat in the next elections. His Budget now staves off any possibility of a ratings downgrade. Dollars should f low in, not out. That should help strengthen the rupee and put downward pressure on import prices. The consequent fall in inflation should then lead to a cut in interest rates, sparking fresh investment as well as reducing EMIs. A budget is just one element in the broad framework needed to improve the investment climate and rejuvenate growth. Much more is needed outside the budget to cut red tape, expedite clearances and improve governance. This Budget is low on election slogans, but aims to provide concrete outcomes in the form of faster growth and lower inflation. Success on these counts will win votes in the coming elections. It is a less showy approach than a farm loan waiver, but could be as effective. SWAMINATHAN S ANKLESARIA AIYAR IS NITISH SENDING OUT A SIGNAL? In his specially written piece for ET (P 13), Bihar CM Nitish Kumar has set Delhi’s grapevine abuzz by giving a thumbs-up to the Budget. Is a political realignment on the cards? PAGE 20

By Kartikay Mehrotra - Feb 28, 2013

Smartphone sales in India may suffer from a higher tax on handsets costing more than $37 just as Apple Inc. (AAPL) steps up efforts to tap demand for data services in the world’s second-largest mobile-phone market.
Finance Minister Palaniappan Chidambaram yesterday said he would raise the excise tax on high-end phones to 6 percent from 1 percent to help finance welfare programs for the country’s poor and fund the widest budget deficit among the largest emerging economies. Samsung Electronics Co. (005930), which sells the Galaxy range of smartphones, said the move “won’t have a positive impact” on the mobile-phone industry and will force customers to pay more.
India’s government, after attempting to squeeze wireless operators including Vodafone Group Plc (VOD) and Bharti Airtel Ltd. (BHARTI) with higher license fees and airwave tariffs, is now targeting handsets for revenue from an industry that has boomed since Prime Minister Manmohan Singh opened the economy more than two decades ago. Chidambaram also increased tax on high earners, luxury cars and yachts.
“This is a bit over the top,” said Rajan Bharti Mittal, vice chairman and managing director of Bharti Enterprises Ltd. that controls Bharti, which operates the nation’s biggest cellular network. “Mobile handsets and smartphones are hardly luxury items. This should be reviewed.”

Rural Jobs

Chidambaram said he needs to raise 16.7 trillion rupees ($306 billion) in the 12 months starting April 1, 16 percent more than the revised estimates for the current fiscal year, to meet expenditure and rein in the deficit at 4.8 percent of gross domestic product.
He allocated 330 billion rupees for his government’s flagship rural jobs program and 100 billion rupees for a plan to give the poor low-price food grains as the ruling coalition faces nationwide elections by May 2014.
The higher tax will hurt Apple, BlackBerry and Samsung because the top-end models will appear overpriced to buyers, said Mittal.
Apple, which hasn’t treated the Indian market as top priority until recently, is seeing its efforts pay off since introducing its iTunes store in the South Asian country and slashing prices on older models like the iPhone 4. Shipments rose to a record 254,000 in the fourth quarter, from 52,000 in the third quarter, according to data provided by Framingham, Massachusetts-based researcher IDC.

Not Favorable

Apple’s London-based spokesman Alan Hely declined to comment on the increase in excise tax.
Waterloo, Ontario-based BlackBerry (BB), formerly known as Research in Motion Ltd., which introduced its latest Z10 model in the country last month for $800, said the tax measure could deter consumers who aspire to own smartphones.
“India is on its way to becoming the world’s third-largest smartphone market,” said Sunil Dutt, managing director of BlackBerry in India. “This isn’t favorable to the growth of the segment.”
Phones that cost below 2,000 rupees, which Chidambaram has exempted from the excise tax, account for 75 percent of India’s market, according to Gartner Inc. Cheaper phones are popular in the country, where the World Bank estimates more than 800 million people live on less than $2 a day. The Galaxy S3 costs about 29,000 rupees, while the iPhone 5 starts at 45,500 rupees.

Erode Margins

While the higher tax may erode margins for phone makers, it may not dent demand, said T.M. Ramakrishnan, chief executive officer for devices at S Mobility Ltd. (SPCEM), a local company that imports handsets from Asia and sells them under its brand.
“It will surely impact the industry’s focus on making smartphones more affordable,” he said. “Also, it may get that much more difficult for smartphones to penetrate rural areas.”
Apple, Samsung and BlackBerry are counting on the growth of data services in the country after carriers started offering third-generation services in 2011. The market for smartphones in India is set to grow 50 percent in 2013, according to IDC, while in China the rate is set to slow to as low as 40 percent from as high as 150 percent in 2012.
Mobile data traffic surged as much as 300 percent in the last 12 months, while revenue grew 50 percent from the previous year, according to Mohammad Chowdhury, leader of telecommunications practice at PricewaterhouseCoopers in Mumbai.

Damp Sales

“We will see some damping in consumer sales,” Chowdhury said. “In turn this will impact negatively the uptake of data services in India, and in all likelihood slow it down just at a time when it has begun to gain momentum.”
The government’s efforts to raise 400 billion rupees from the sale of airwaves in the year ending March 31 failed after carriers balked at the fees set by the nation’s telecommunications regulator in the first round of auctions in November. Instead, it met only 25 percent of that goal.
“The government has targeted another successful industry to raise revenue,” said Anshul Gupta, a Mumbai-based analyst with Gartner. “This will trigger a price rise, meaning people will have to pay more, especially for mid-tier and high-end phones.”
To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Mylan to Buy Strides Injectables Unit for $1.6 Billion

By Drew Armstrong - Feb 27, 2013

Mylan Inc. (MYL), the world’s second- biggest stand-alone generic drugmaker, agreed to buy India’s Strides Arcolab Ltd. (STR)’s injectable drug unit Agila Specialties for $1.6 billion.
The cash deal will broaden Mylan’s portfolio with off- patent injectable medicines that are in high demand because of supply shortages in the U.S. Mylan wants to be among the top three global injectable drug companies, said Heather Bresch, chief executive officer of the Canonsburg, Pennsylvania-based company.
The deal will “immediately create a new, powerful global leader in this fast-growing, attractive market segment,” Bresch said in a statement announcing the agreement. The company said it will add to earnings immediately after closing.
The U.S. Food and Drug Administration listed more than 120 medicines as being in short supply as of Nov. 28, including the sedative injection propofol and the ovarian cancer treatment Doxil. The shortages are caused by manufacturing issues and decisions by companies to stop production of some generic therapies deemed no longer profitable.
In November, Strides received FDA approval for an oxaliplatin injection used to treat advanced cancer, which will be distributed in the U.S. by New York-based Pfizer Inc. (PFE) The Agila unit also has partnerships with London-based GlaxoSmithKline Plc (GSK) and Basel, Switzerland-based Novartis AG, according its website.

Most Approvals

Agila, based in Bangalore, had the highest number of injectable-medicine approvals by the FDA for generic drugs, with 32 from 2008 to 2010, compared with 23 at Hospira Inc. (HSP) of Lake Forest, Illinois, according to a May presentation. The company has eight manufacturing facilities in India, Brazil and Poland, according to its website.
The deal will boost Mylan’s portfolio of injectable drugs from 500 to 700, with another 350 awaiting approval around the world. The company projects the generic-drug market to grow at about 13 percent a year through 2017, and the deal will give it entry into new markets including Brazil.
“We believe that risks are well taken in that arena,” Bill Smead, chief executive officer of Seattle-based Smead Capital Management, said of Mylan’s plans. “They’re creating quite a powerhouse.” His fund owned 317,000 shares of Mylan as of December, according to filings.
Mylan shares rose 2.4 percent to $29.25 in extended trading at 5:41 p.m. New York time yesterday after the market closed. The company gained 23 percent in the past 12 months through yesterday.

Company Growth

Started in 1990 by Arun Kumar and K.R. Ravishankar, Strides began manufacturing injectable drugs five years later and entered the U.S. market for sterile products in 2004. The business was renamed Agila in 2010 and reported earnings before interest, taxes, depreciation and amortization of 2.7 billion rupees in 2011, accounting for more than half of Strides earnings, according to a company presentation in May.
Mylan may pay Agila another $250 million based on certain conditions, the companies said, without detailing what those were. The deal is expected to close in the fourth quarter, the companies said.
Morgan Stanley is Mylan’s financial adviser, while Milford Skadden, Arps, Slate, Meagher & Flom LLC served as legal adviser.
To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net;
To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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India May Curb Widest BRIC Budget Gap for Rate-Cut Room: Economy

By Unni Krishnan and Kartik Goyal - Feb 26, 2013

India’s government may curb spending growth in the budget tomorrow to pare the widest fiscal deficit in major emerging nations, seeking to boost the central bank’s scope to reduce interest rates as the economy falters.
Finance Minister Palaniappan Chidambaram will keep deficit goals set in October of 4.8 percent of gross domestic product for the year through March 2014 and 5.3 percent in 2012-2013, Goldman Sachs Group Inc. and Credit Suisse Group AG said.
The government has stepped up efforts to avert a credit- rating downgrade and damp inflation of almost 7 percent under policy changes since September. To avoid political repercussions from restrained expenditure, Chidambaram could allocate initial funds for a plan to give poor people cheap food, according to State Bank of India, the nation’s largest lender by assets.
“Moderating the subsidy bill will help the Reserve Bank of India to lower rates, boosting private-sector borrowing,” said Taimur Baig, the director of Asia economics at Deutsche Bank AG, who previously worked at the International Monetary Fund. “But we need to see if the government keeps to its fiscal road map as the year progresses.”
Benchmark 10-year bond yields have slid 23 basis points in 2013 to 7.82 percent as Chidambaram strives to preserve India’s investment-grade rating. The rupee has strengthened 1.7 percent versus the dollar in the period to 54.095, paring its loss in the past 12 months to 9 percent. The BSE India Sensitive Index (SENSEX) of stocks has slipped 2.1 percent this year.
Chidambaram’s target is a 3 percent shortfall by 2017. He is due to present at 11 a.m. tomorrow the government’s last full budget ahead of a general election due by 2014. The finance minister will unveil his plan in parliament in New Delhi.

Railway Fares

The administration said yesterday it intends to link rail passenger fares and freight rates to fuel prices for the first time, in a bid to reduce more than $4.5 billion of losses at Indian Railways, Asia’s oldest network.
Morgan Stanley estimates total government expenditure will climb 9.5 percent to 16.1 trillion rupees ($298 billion) in 2013-2014, less than the 12.9 percent increase in the current fiscal year. It predicts subsidies will fall 8.6 percent to 2.6 trillion rupees.
Sales of shares in state-owned companies, auctions of telecom spectrum and a climb in tax revenues will also help contain the deficit, according to Morgan Stanley’s projections.
India intends to raise 350 billion rupees next fiscal year by disposing of stakes in companies including Coal India Ltd., Indian Oil Corp., Engineers India Ltd., Power Grid Corp. of India Ltd. and Bharat Heavy Electricals Ltd., two Finance Ministry officials said this month, asking not to be identified as the plan isn’t public.

Record Borrowing

The nation plans gross market borrowing of about 6 trillion rupees in 2013-2014, a record high, according to three Finance Ministry officials with knowledge of initial estimates. They also requested anonymity as the details aren’t public.
Oil subsidies will drop 41 percent after diesel prices were partially freed from state control last month, Morgan Stanley’s figures show. The savings may help fund supplies of rice, wheat and millet in the pending National Food Security Bill.
The bill aims to provide grains to more than 60 percent of India’s 1.2 billion people. About two-thirds of the population lives on less than $2 per day, based on World Bank data.
India’s GDP will rise 5 percent in 2012-2013, the weakest pace in a decade, the statistics agency forecasts. Price pressures, a drop in exports and cooling investment hurt growth.

Credit Rating

“The government should, and I guess will, resist any temptation to be overly populist as the chips are stacked against them,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. Excessive spending may threaten India’s investment-grade credit rating, he said.
India has the widest fiscal gap in the BRIC group of large emerging countries, which also includes Brazil, Russia and China. Standard & Poor’s and Fitch Ratings warned last year they may strip the nation of its investment-grade rating.
The Reserve Bank has signaled the fiscal gap and a record shortfall in the current account limit its room to lower borrowing costs. It reduced the repurchase rate to 7.75 percent from 8 percent on Jan. 29, the first cut since April 2012.
The central bank in a Jan. 28 report indicated a push to pare the deficit that increasingly relies on sales of shares in state-owned companies and one-off auctions of telecom permits may be unsustainable.
Prime Minister Manmohan Singh has changed policies since September to revive expansion, including steps to open retail and aviation to more foreign investment, ease caps on capital inflows and accelerate infrastructure projects.

Policy Momentum

The reforms will help boost Indian expansion to 6 percent in the year through March 2014, the IMF forecasts. That would remain below the past decade’s average of about 8 percent.
“The current macro backdrop warrants a reduction in the fiscal deficit,” said Chetan Ahya, an economist at Morgan Stanley in Hong Kong. “The government also needs to ensure momentum in policy measures to accelerate investment.”
Elsewhere in the region, New Zealand’s annual trade deficit unexpectedly widened in January on reduced sales of dairy products, a report showed today.
Hong Kong may report economic growth accelerated to 2.4 percent in the fourth quarter from a year earlier, rising from 1.3 percent in the previous three months, according to a Bloomberg survey ahead of a report due today. Thailand may say exports gained for a fifth straight month in January, according to a separate survey.
In Europe, Italian business confidence figures for February are due, while France will release its consumer confidence indicator. The U.S. will report data for durable goods orders in January and mortgage applications for the week ended Feb. 22.
To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Lanco Seeks Investors to Boost Solar Capacity: Corporate India

By Archana Chaudhary - Feb 25, 2013

Lanco Infratech Ltd. (LANCI), India’s second-biggest non-state power generator, is seeking private- equity investors to help expand its solar capacity fivefold as a coal shortage roils its thermal business and payment defaults by state utilities widen the group’s losses.
Lanco needs funds to meet a plan of adding 500 megawatts annually in three years, with 350 megawatts to be built for customers and the rest coming from its own plants, V. Saibaba, chief executive officer of the New Delhi-based company’s Lanco Solar unit said in a telephone interview. Government policies to promote alternative energy sources will make the investment attractive, he said.
“The political intent in India is very strong,” Saibaba said, speaking from his office in Gurgaon near New Delhi. “Constraints like coal availability and fuel import bills will ensure India will have to focus on renewable energy.”
Lanco is joining Tata Power Co. (TPWR), India’s biggest non-state utility, which said Feb. 5 that it is scouting for investors and planning to sell shares at its solar unit as India extends grants to cut solar project costs and ease curbs on equipment imports. A plan announced last year by the Lanco group to raise $750 million selling stake in its conventional power unit to private-equity funds has stalled amid losses that have surged nine times in the first three quarters of the financial year.

Losses Widen

Shares of the New Delhi-based company have slumped 86 percent from a record reached on Dec. 28, 2007 to 11.50 rupees in Mumbai, according to data compiled by Bloomberg. The slide in the value has eroded the wealth of Chairman L. Madhusudhan Rao, who was a billionaire as late as January last year, according to data compiled by Bloomberg.
“Lanco hasn’t done well when it comes to the power business,” which suffers from fuel supply problems, said Gaurav Oza, Mumbai-based analyst at GEPL Capital Pvt. “They seem to have done much worse in managing utilities as compared to their earlier success in construction.”
Lanco reported an annual loss of 1.1 billion rupees ($21 million) for the group in the year ended March 31, its first since its shares started trading in November 2006. The combined loss in the three quarters ended Dec. 31 climbed to 9.9 billion rupees, according to data compiled by Bloomberg.
State-owned regional electricity distributors, often forced to sell energy below costs, are unable to pay producers as the difference between the cost of supply and average tariff has widened. The utilities had debt of 1.9 trillion rupees as of March 2011, government estimates show, even as lenders tightened credit. That has resulted in poor cash flows for Lanco.

Debt Outstanding

The company has 35 billion rupees of receivables, Rohit Sanghvi, an analyst with Prime Broking Co. in Mumbai, wrote in a Feb. 15 report. The outstanding amount is more than Lanco’s market value. Total debt stood at 95.7 billion rupees, of which the solar unit accounted for 5.5 billion rupees.
Lanco may be counting on interest in solar projects as the government targets to build 9,000 megawatts of grid-connected solar plants by 2017, more than eight times its current capacity. Solar-power producers are assured payments through letters of credit and escrow mechanisms set up by state governments, according to Saibaba.
With costs for alternative energy projects coming down, the tariff for solar and thermally produced electricity may reach parity in about three years, Saibaba said.

Interest Costs

Better potential realization is also helping lenders offer cheaper credit for solar producers, said Satnam Singh, chairman of Power Finance Corp. (POWF), India’s biggest state lender to electricity utilities.
“We cut lending rates for renewables this month because we see better returns in the near future,” Singh said in an interview. Of the 23.7 billion rupees sanctioned by Power Finance to renewable companies in the year ending March 31, 15.8 billion rupees was to Lanco Solar, he said.
Solar companies have to pay interest rates as high as 13.5 percent to 14 percent in India, Saibaba said. The weighted average cost of debt for NTPC Ltd. (NTPC), the nation’s biggest power producer, was 8.6 percent according to data compiled by Bloomberg.
India’s policy draft released in December said the government would for the first time fund the solar industry with direct grants covering as much as 40 percent of the upfront cost of building projects. That model has previously been used to build roads, ports, railways and fossil-fuel power plants in India.

Slow to Fund

Private lenders have been slow to fund solar because of a lack of confidence in the technology, according to the draft. Solar companies in India sell power to state utilities which in turn cannot recover their costs from customers who buy power at lower rates.
Lanco will add 90 megawatts of solar capacity by the end of the fiscal year ending March, including a delayed 75-megawatt photovoltaic project for the local state-owned utility in the western Maharashtra state that it won in May 2011, he said.
Another 100 megawatts of capacity being built using solar- thermal technology in northern Rajasthan state has been delayed by a year, Saibaba said. The project, awarded under the first phase of India’s solar auctions in 2010, had to be reengineered to make allowances for differences in radiation levels and delays in getting heat-transfer fluid from U.S. suppliers, he said.

‘Still Grasping’

Lanco Solar is completing a manufacturing plant that will be able to produce 1,800 tons of polysilicon, 100 megawatts of ingots and wafers and 75 megawatts of modules a year, Saibaba said. The company expects to increase that capacity to 250 megawatts of modules annually in three years, he said. The total cost of this plant is 13.4 billion rupees of which 70 percent has been funded by loans, he said.
Private investors may look at the government’s commitment to support alternative energy sources before pledging any funds, said Mahesh Patil, who manages $2.5 billion in equity as co- chief investment officer at Birla Sun Life Asset Management Co. in Mumbai.
“Investors the world over are still in the process of grasping the business dynamics of solar-power developers,” Patil said. “Secondary markets, at least in India, aren’t yet ready to support share sales by renewable-energy companies.”
To contact the reporter on this story: Archana Chaudhary in New Delhi at achaudhary2@bloomberg.net
To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

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Birla to Vie With Billionaire Ambani for Setting Up Indian Banks

By Anto Antony and Bhuma Shrivastava - Feb 24, 2013

Indian billionaires Kumar Mangalam Birla and Anil Ambani may set up banks in the world’s second- most populous nation after rules for procuring licenses were eased to allow new entrants.
Companies with a 10-year track record and “sound credentials” can apply by July 1, the Reserve Bank of India said in a statement on Feb. 22. Foreign ownership will be capped at 49 percent for the first five years, and the lenders are required to set up one-in-four of their branches in villages with less than 10,000 people, according to the statement.
New banks may help Prime Minister Manmohan Singh, who resumed opening up the $1.8 trillion economy in September, to boost credit growth in rural areas as he seeks to revive a market expanding at the slowest pace in a decade. Only 35 percent of India’s adult population has accounts with lenders and other financial institutions, according to the World Bank, compared with the global average of 50 percent.
“Total banking licenses are likely to be limited,” Siddharth Teli, an analyst at Religare Capital Markets Ltd. in Mumbai, said in a note to clients yesterday. “Companies with strong non-financial promoters, a diversified shareholding and a niche retail presence in semi-urban areas have an edge.”
Birla’s Aditya Birla Group and Religare Enterprises Ltd., controlled by the billionaire brothers Malvinder and Shivinder Singh, said they will apply for licenses. Ambani’s Reliance Capital Ltd. (RCAPT) also plans to apply for the permits, Chief Executive Officer Sam Ghosh said.

Increasing Money-Flow

“The only purpose of the banking system is to increase the flow of money into the system,” Shachindra Nath, group chief executive officer at Religare, said in an interview with Bloomberg TV India last week. “It’s genuine for the government and RBI to expect that newcomers bring that in.”
Srei Infrastructure Finance Ltd. (SREI) also plans to apply for a banking permit, Chairman and Managing Director Hemant Kanoria said in an interview. Setting up lending operations would help Srei “substantially” because of its rural operations, he said.
Mahindra & Mahindra Financial Services Ltd. (MMFS), a unit of India’s largest tractor maker, is keen to set up a bank, said Managing Director Ramesh Iyer.
“With the economy growing, rural India is emerging as the new frontier,” Ajit Mittal, a director at Indiabulls Group, said in a telephone interview. “Setting up branches there will be a good proposition for groups with requisite skill sets.”

Public Sector

State-run companies will also be allowed to set up banks, according to the rules. Still, the licenses are unlikely to be issued until late 2014 or early 2015, said A.S.V. Krishnan, a Mumbai-based analyst at Ambit Capital Pvt.
India has 26 state-run banks, accounting for 76 percent of outstanding loans as of March 31, according to the central bank. The country’s 20 private lenders, led by ICICI Bank Ltd. (ICICIBC), held 19 percent of bank credit, while 40 foreign banks accounted for the rest.
Banks operating in India collectively have 49.6 trillion rupees ($915 billion) in outstanding loans as of Oct. 31, data compiled by the RBI shows. In an Oct. 30 statement, the Reserve Bank projected loan growth of 16 percent and deposit growth of 15 percent for the financial year ending March 31.
Bank loans, excluding advances made to state agencies for food procurement, expanded 16 percent in the year to Jan. 25, according to the RBI.

Market Opening

India’s economy will expand 5 percent in the year ending March 31, the least in a decade, government data shows. Singh in September eased rules for foreign direct investment in retail and airlines. He also raised fuel prices to reduce the government’s subsidy burden.
The RBI established guidelines that would open up the nation’s banking system to more private-sector firms in 1993 amid reforms that included liberalizing interest rates and setting standards for measuring non-performing loans. Based on those guidelines, the central bank granted licenses to 10 lenders, including ICICI, HDFC Bank Ltd. (HDFCB) and IndusInd Bank Ltd. (IIB)
It revised those rules in 2001 and gave permits to Kotak Mahindra Bank Ltd. (KMB) and Yes Bank Ltd. over the following three years. In August 2010, the RBI said it would issue new guidelines for licensing more banks and began seeking feedback from existing lenders and industry groups.
“The Indian banking industry can do with a little bit more competition,” Uday Kotak, managing director of Kotak Mahindra Bank, said in an interview last month. Regulators need to ensure that “some of the issues faced in other sectors, which have led to a perception of cronyism, do not get repeated when banking licenses are issued.”

Going Public

Firms will have to set up a wholly owned, non-operative financial holding company and undergo a so-called fit and proper test to win permits. The holding company will own 40 percent of the bank, which will have to be reduced to 15 percent in 12 years, according to the statement. The lenders will have to sell shares within three years of starting operations.
The holding companies won’t be allowed to lend to firms owned by their founders under the new rules, which also don’t permit the banks to invest in any financial firms owned by their parent.
New banks will need to maintain a 13 percent capital adequacy ratio for three years, compared with the 10 percent mandated by the regulator when it set guidelines for new lenders in 2001.
“In India, there isn’t a lot of difference in the strategy and business model of banks because these are as per the guidelines of the regulator,” Shinjini Kumar, a director at PricewaterhouseCoopers, said in an interview to Bloomberg TV India. “The only differentiator is the corporate governance and credibility of the entity.”
To contact the reporters on this story: Anto Antony in Mumbai at aantony1@bloomberg.net; Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net
To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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Billionaire-Backed Explorer to Revive Oil Hunt: Corporate India

By Rakteem Katakey - Feb 21, 2013

Cairn India Ltd. (CAIR), controlled by billionaire Anil Agarwal, will start drilling its first new well in five years to raise output and help bolster the best profit margin for an oil company in Asia.
The company, which got the Indian government’s approval last week to explore new oil pools in its biggest field in the western state of Rajasthan, is accelerating its plans to drill 30 wells in the year starting April 1 and a similar number in the following 12 months, Chief Executive Officer P. Elango, said. Cairn India says the new deposits may increase its reserves by as much as 50 percent to 1.5 billion barrels.
“Our primary focus is to increase production and for that we have to undertake great exploration activities,” Elango said at his office in Gurgaon, near New Delhi. “In the future, through additional capacities we can add more production at small incremental costs.”
Cairn India needs new reserves to meet its target of raising production by 71 percent to 300,000 barrels a day as rivals including state-owned Oil & Natural Gas Corp. (ONGC), the nation’s biggest explorer, report a drop in output. Agarwal acquired Cairn India from Edinburgh, Scotland-based Cairn Energy Plc (CNE) and other investors in 2011 for $8.67 billion to diversify into energy and tap Indian demand, which the U.S. Energy Information Administration estimates will grow 14 percent in the five years to 2015.

Profit Margin

Cairn India’s EBITDA margin, or earnings before interest, tax, depreciation and amortization as a percentage of sales, was 76.18 percent in the quarter ended Dec. 31, according to data compiled by Bloomberg. That’s the highest among Asia Pacific oil and gas companies with a market value of at least $5 billion and the most among the 50 companies in India’s Nifty Index.
The measure was 44 percent for ONGC and 50 percent for Cnooc Ltd. (883), China’s biggest offshore explorer, according to data compiled by Bloomberg.
“The exploration program and the plan for enhanced oil recovery is going to help Cairn maintain oil production for a long time,” said Neelabh Sharma, a Mumbai-based analyst with BOB Capital Markets Ltd., a unit of state-run Bank of Baroda, who upgraded the company’s shares to buy from hold on Feb. 20. “The company’s earnings are directly linked to the price of Brent crude and as economies emerge from a slowdown, oil price will rise, helping Cairn.”

Brent Crude

The explorer sells crude in India at rates linked to Brent oil prices, unlike state-owned ONGC, which is required to bear part of the country’s fuel subsidy.
Crude in London trading, a benchmark price for more than half of the world’s oil, has gained 3.2 percent this year, following a 3.5 percent increase last year. Average prices last year were a record $111.11 per barrel.
Cairn India, operator of the nation’s biggest oilfield on land, reported 48 percent higher profit at 33.4 billion rupees ($612 million), or 16.5 rupees a share, in the third quarter ended Dec. 31 after it increased production from the Rajasthan block.
Cairn India has fallen 3.8 percent this year, compared with a 0.5 percent decline in the benchmark S&P BSE Sensex. (SENSEX) The shares lost 0.1 percent to 306.85 rupees in Mumbai yesterday, giving it a market value equivalent to $10.8 billion.

Vedanta, Sesa

Agarwal’s Vedanta Resources Plc (VED) and unit Sesa Goa Ltd. (SESA) completed buying a 59 percent stake in Cairn India from Cairn Energy and other shareholders in December 2011. India’s cabinet approved the takeover on the condition royalty will be included in the cost of developing the Rajasthan field, which can be recovered from sales. ONGC, Cairn’s partner with a 30 percent stake in the block, paid the entire royalty since production started in August 2009.
Cairn India’s earnings is helping cut losses for iron-ore miner Sesa Goa after a court-ordered extraction ban last year.
The government approved Cairn India’s plan to raise production from the block in Barmer in Rajasthan state to 300,000 barrels a day, equivalent to about 40 percent of India’s current output. To reach that target, the company will need to find more oil in the area, Elango said. The block has proved reserves of 1 billion barrels.
Cairn India’s operating expenses in the Rajasthan block, including the cost of transporting crude to the coast for sale to refineries, is currently about $3 per barrel, Elango said. The company plans to start a project that will pump chemicals into producing oil wells to help flush out hard-to-extract crude from the reservoir in the year starting April 1, 2014. The operating cost to produce the additional crude will be in a range of $8 to $12 a barrel, he said.

‘Long Journey’

“We’ll maintain this level of operating costs, which will incrementally go up when we deploy enhanced oil recovery methods to produce more oil,” Elango said. “We’re looking at how we can pull this deployment forward a bit. This project will help sustain the field’s production for a longer period.”
The explorer’s share of production from fields in India was 128,058 barrels of oil equivalent a day in the quarter, 29 percent higher than a year earlier and 1 percent lower than in the preceding quarter, the company said Jan. 21. Net production from the Rajasthan field averaged 118,984 barrels of oil equivalent per day in the three months, compared with 87,585 barrels a day a year earlier and 120,261 barrels a day in the previous quarter.
“Our vision is to take the 175,000 barrels a day to 300,000 barrels,” Elango said. “It’s a long journey in which we have to drill several exploration wells. We’re very confident about the volume increasing.”
To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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Fernandes Lures Tata Into Air With Low Fares: Corporate India

By Siddharth Philip and Bhuma Shrivastava - Feb 20, 2013

Tata group, which started India’s first airline in 1932, is set to return to the industry as new Chairman Cyrus Mistry plans a budget carrier with Tony Fernandes’s AirAsia Bhd.
Southeast Asia’s biggest low-cost airline will own 49 percent of the venture. Tata Sons Ltd., the holding company of India’s biggest business group, will control 30 percent, while the balance will be owned by Arun Bhatia, whose son is married to the daughter of billionaire Lakshmi Mittal. Fernandes and Mittal own Queens Park Rangers Football Club.
Partnering with the $100 billion conglomerate, which controls Corus Plc and Jaguar Land Rover, will help AirAsia gain a foothold in a market that’s set to triple to 159 million passengers annually by 2021. The venture is the first to be announced after the government allowed foreign carriers to buy stakes in local airlines in September.
“We couldn’t have picked a better partner,” AirAsia Group Chief Executive Officer Fernandes said in an interview from London yesterday after the venture was announced. “We have a product which will have extremely low costs, have extremely low fares and will stimulate the market.”
The new airline plans to operate from Chennai in south India and will provide services to smaller cities in the country, AirAsia said in the statement. A carrier must complete five years of domestic operations before it can start overseas flights, according to Indian aviation rules.

‘Smart Move’

“Partnering with Tata is a very smart move by AirAsia,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. “India is poised to drive a lot of international traffic and can be a hub in the future. That interests carriers like AirAsia” and Etihad Airways PJSC, he said.
AirAsia India will compete with billionaire Kalanithi Maran’s budget carrier SpiceJet Ltd., IndiGo, Go Airlines India Pvt. and Jet Airways (India) Ltd.’s JetKonnect. IndiGo, the low- cost carrier that placed an order for 180 Airbus SAS A320 planes, has grown to become India’s biggest airline, with a 27.3 percent market share in November.
SpiceJet, which has fallen 11 percent this year, dropped 3.6 percent to 39 rupees at 9:35 a.m. in Mumbai, the lowest since Nov. 22. Jet Airways lost 1.4 percent to 576.60 rupees, while AirAsia’s shares fell 0.8 percent to 2.58 ringgit at 12:56 p.m. in Kuala Lumpur trading. The stock has declined 5.1 percent this year.
“Life will become very competitive for Indigo and SpiceJet (SJET),” said Sabarad.

Return to Aviation

Chairman Mistry, who took over from Ratan Tata in December, returns the group to aviation after former Chairman J.R.D. Tata started an airline that later became state-owned Air India Ltd. In 1932, Tata Airlines began meeting Imperial Airways’ London- to-Karachi flight and then continued to Madras, now called Chennai, via Mumbai.
It used a de Havilland Puss Moth monoplane, which had a cabin instead of an open cockpit. J.R.D. Tata piloted the inaugural flight, which hauled mail.
More than a decade ago, Tata Group had teamed up with Singapore Airlines Ltd. (SIA) to bid for a stake in Air India when the then-government sought to sell shares in the state-owned carrier. The plan was later dropped because of political opposition.
The plan to allow foreign carriers to buy stakes in local airlines was revived and implemented by Prime Minister Manmohan Singh’s government to help an industry mired in debt and losses, prompting Jet Airways to start discussions with the Middle East’s Etihad Airways. Liquor baron Vijay Mallya’s Kingfisher Airlines Ltd. (KAIR) was forced to ground his carrier in October because of widening losses and debt.

‘Confidence Back’

“This shows that confidence is somewhat back in the sector,” India’s Civil Aviation Minister Ajit Singh said in an interview.
The deal will be Mistry’s first venture since taking the helm at the company, which also has a partnership with Starbucks Corp. (SBUX), owns Tata Consultancy Services Ltd. (TCS), India’s biggest company by market value, runs the nation’s biggest hotel operator and also makes salt. AirAsia will operate the venture, according to a statement from Tata Sons. Mistry’s group and Bhatia’s Telestra Tradeplace Pvt. won’t have an operating role, the companies said in separate statements.
The venture “will further grow aviation as a mode of transport” and lead to employment generation, Debasis Ray, a Tata Sons spokesman, wrote in the e-mail.

Malaysian Roots

AirAsia (AIRA) is among the 50 low-fare airlines that started in the Asia-Pacific region in the past decade to compete with full- service carriers as first-time travel surges in India, Indonesia and other developing economies. Singapore Airlines started Scoot and Tiger Airways Ltd. while Qantas Airways Ltd. (QAN) started Jetstar Airways Pty.
AirAsia has set up ventures in the Philippines, Japan, Thailand and Indonesia as part of a strategy to expand in the region from its Malaysian roots. In December, the carrier ordered 100 Airbus SAS A320s valued at $9.4 billion, in addition to the 200 it had agreed in 2011 to purchase.
The Malaysian carrier has applied to India’s Foreign Investment Promotion Board for approval and will apply for an air operators permit from the regulator, AirAsia said in the statement.
“India was not ready for a true low-cost carrier,” AirAsia’s Fernandes said. “It is now.”
To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net
To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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Headache Cure Seen Helping Sanofi Gain Market: Corporate India

By Ganesh Nagarajan - Feb 19, 2013

Sanofi India Ltd., a unit of France’s largest drugmaker, is adding over-the-counter products to help double its share of the $5.1 billion local market and revive profit, which has dropped for four straight quarters.
The company will introduce as many as 10 new products to treat ailments that won’t require a prescription, such as headaches, to target a 4 percent market share in the next five years, Anindya Chowdhury, senior director of Sanofi India’s consumer health-care division, said in an interview in Chennai. It will also boost sales of its existing portfolio that includes products from acquisitions, he said.
Sanofi India is joining GlaxoSmithKline Consumer Healthcare Ltd. and Cipla Ltd. in targeting a segment that KPMG estimates is expanding at a faster pace than the nation’s drug industry. Fewer regulatory restrictions, increased health-care awareness and the freedom to advertise products such as Sanofi’s Combiflam Plus help such products generate a 25 percent profit margin, according to KPMG.
“In India, people are increasingly focused on wellness, be it their fitness regime, diet or nutritional supplements,” said Chowdhury. “This has fueled the growth in the consumer health segment.”
Sanofi India, which has advanced 0.8 percent this year, was little changed at 2,320 rupees in Mumbai as of 9:59 a.m. The BSE India Healthcare Index has declined 1.7 percent this year.

Profitable Segment

Companies are widening their portfolio of over-the-counter products as these can be sold without a prescription, allowing drugmakers to market them and access patients directly, according to Amit Mookim, national industry head for health care at KPMG in India. The segment faces less impact of the government’s pricing policy and the earnings margin before interest, tax and depreciation is about 25 percent, he said.
Sanofi India posted an Ebitda margin of 20.1 percent in 2011, according to data compiled by Bloomberg.
Foreign drugmakers “will be able to utilize the distribution channel more effectively and profitably by launching a drug in the OTC segment,” said Mookim. “MNCs will find it easier to leverage the brand name more effectively.”
In December, India announced details of a policy aimed at making drugs more affordable. Prices of 348 medicines deemed essential, including antibiotics, blood pressure drugs and cancer medicines, will be capped at the average price of all brands that have a market share exceeding 1 percent, the department of pharmaceuticals said.
Majority of Sanofi India’s over-the-counter medicines are not likely to come under price controls, according to Ranjit Kapadia, senior vice president at Centrum Broking Ltd. in Mumbai.

Acquisition Benefits

The company has benefited from the acquisition of a unit of Universal Medicare Ltd., Kapadia said. The purchase gave Sanofi a portfolio of branded formulations including vitamins, antioxidants, mineral supplements and liver tonics.
“You cannot expect all the 40 products will grow more than the industry,” said Kapadia. “On an average for the entire basket, if it is growing more than the industry then it is very good.”
The drugmaker doesn’t provide a breakup of its segment revenue and profit.
Sanofi India has posted four consecutive quarters of decline in net income. Profit would probably have dropped 9 percent to 1.74 billion rupees in 2012, according to the median of eight analysts’ estimates compiled by Bloomberg.

Under Pressure

“The company’s margins are under pressure because of increased marketing spend,” said Rahul Sharma, an analyst with Karvy Stock Broking Ltd., who recommends selling the stock. “Once the new pricing policy comes into effect, Sanofi’s earnings will be impacted by 20 percent,” he said, referring to some of Sanofi India’s prescription drugs likely coming under the new pricing regime.
Sanofi India this month unveiled Combiflam Plus, a headache treatment that combines paracetamol and caffeine, in the country. It has been selling Combiflam, a pain relief medicine, for more than two decades in India.
“Data suggests that over 70 percent of men and women experience an episode of headache every month and 36 percent suffer from it weekly,” said Chowdhury. “That’s why we said that if it is such a big problem, then we should be there.”
In addition to Combiflam Plus, Sanofi is focusing on Combiflam cream, for local pain relief, and Seacod, a health supplement.

Name Changes

Sanofi’s Combiflam Plus will compete with GlaxoSmithKline’s Crocin Pain Relief and analgesics sold by other companies.
Sanofi India was incorporated in May 1956 under the name Hoechst Fedco Pharma Pvt. Over the years, its name has changed several times and in May 2012 its name was changed from Aventis Pharma Ltd. It has manufacturing plants in Ankleshwar, in western Gujarat state, and Goa, on the west coast, according to its website.
Sanofi, based in Paris, operates in India through five entities including Sanofi-Synthelabo (India) Ltd., Sanofi Pasteur India Pvt., Shantha Biotechnics Ltd. and Genzyme India Pvt. Asia accounted for 8.1 percent of Sanofi’s 34.95 billion euros ($46.6 billion) of sales in 2012. It didn’t provide a breakdown for India.
In the initial years after an over-the-counter medicine is introduced, money is invested on building the brand, said Sujay Shetty, pharma leader at PricewaterhouseCoopers in India.
“Once you build brands it generates steady amount of volume and cash flow and is not subjected to as much competition,” said Shetty. “Revenues are sticky. They do not go away so easily.”
To contact the reporter on this story: Ganesh Nagarajan in Chennai at gnagarajan1@bloomberg.net
To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Cuts Borrowing Program as Chidambaram Curbs Spending

By Siddhartha Singh and V. Ramakrishnan - Feb 19, 2013

India cut its annual borrowing program as Finance Minister Palaniappan Chidambaram reined in spending and raised as much as 220 billion rupees ($4 billion) selling stakes in state companies.
The finance ministry canceled a 120 billion rupee bond sale previously scheduled for Feb. 22, the last for the year ending March 31, “on review of the government’s cash position and funding requirement,” it said in a statement yesterday. Prime Minister Manmohan Singh’s administration planned to borrow a record 5.69 trillion rupees this fiscal year before scrapping this week’s debt auction, according to budget documents.
Chidambaram, scheduled to present the federal budget later this month, is under pressure to curb spending and keep his pledge to cut the deficit to 3 percent of gross domestic product in four years, from a targeted 5.3 percent in the 12 months ending March 31. Officials are trying to avert a credit downgrade after Standard & Poor’s and Fitch Ratings said in 2012 that they may demote India to junk status, citing the shortfall and a widening current-account gap.
“Fiscal consolidation is the driving story,” said Shubhada Rao, the Mumbai-based chief economist at Yes Bank Ltd. “There would be prudent expansion of the government balance sheet next year” as Chidambaram seeks to reduce the budget gap to 4.8 percent of GDP, she said.

Asset Sales

The government’s cash position may have improved after increasing revenue collection and raising about 220 billion rupees in the year that started April 1 from sales of stakes in companies including NTPC Ltd., the nation’s biggest power producer, and NMDC Ltd., the biggest iron ore miner.
Net direct tax collection in the April-January period rose 12.5 percent from a year earlier to 3.9 trillion rupees, the finance ministry said in a statement on Feb. 6.
The auction cancellation will help ease a cash squeeze in the banking system caused by slower government spending, according to Nomura Holdings Inc. Lenders borrowed an average of 1.03 trillion rupees a day from the central bank via repurchase contracts this month to meet shortages, compared with 941 billion in January.
The Reserve Bank of India bought 1.3 trillion rupees of government securities this fiscal year via open-market auctions to boost cash at banks, up from 336 billion rupees a year earlier, according to data compiled by Bloomberg.

‘Positive Signal’

“This is a positive signal for the markets,” said Vivek Rajpal, a Mumbai-based strategist at Nomura. “Huge government balances were straining liquidity and policy makers had an option to either cancel the auction or prompt the central bank to purchase more debt.”
Benchmark 10-year bond yields dropped 22 basis points this year, and the 8.15 percent note due in June 2022 was at 7.83 percent yesterday in Mumbai, according to data compiled by Bloomberg. Indian government notes returned 2.4 percent in the past 12 months, the best performance in Asia, according to indexes compiled by HSBC Holdings Plc. Local fixed-income and foreign-exchange markets are closed for a public holiday today.
Rajpal predicted the 10-year yield will move in the coming days toward 7.75 percent, a level not seen since July 2010, and estimated the government’s surplus cash at 900 billion rupees.
The debt-sale cancellation is “slightly positive” for the bond market, said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management Pvt. that manages the equivalent of $10 billion in Indian assets. The central bank may conduct at least two more open-market debt-purchase auctions in the coming month to improve funding availability, he said.

‘Fiscal Consolidation’

RBI Governor Duvvuri Subbarao, who cut the benchmark interest rate by 25 basis points last month to 7.75 percent in the first reduction since April, has cited budget and current- account deficits along with inflation among those constraining further cuts in borrowing costs.
“We have taken note of the road map for fiscal consolidation put out by the finance minister,” Subbarao said on Feb. 7 in Guwahati in the eastern state of Assam. “We are also looking forward to the budget to get a better understanding of how fiscal consolidation will be done.”
Inflation, based on wholesale prices, declined to a 38- month low of 6.62 percent in January while the government predicts the $1.8 trillion economy will expand 5 percent in the year to March 31, the least in a decade.
To contact the reporters on this story: Siddhartha Singh in New Delhi at ssingh283@bloomberg.net; V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.