India Seeks to Boost Inflows by Raising Debt Cap to $75 Billion

By V. Ramakrishnan and Jeanette Rodrigues - Jan 24, 2013

India took a step to spur capital inflows and avert a debt-rating downgrade by raising a limit on foreign investment in rupee bonds by $10 billion to $75 billion.
The nation boosted the cap on holdings of government debt yesterday to $25 billion from $20 billion while an ownership ceiling for corporate notes was increased to $50 billion from $45 billion, according to a statement on the Reserve Bank of India’s website. The rupee erased a 0.4 percent loss after the announcement. Bonds were little changed.
Prime Minister Manmohan Singh has boosted efforts to revive Asia’s third-largest economy since mid-September, cutting fuel subsidies and opening up more industries to overseas investment, after Standard & Poor’s and Fitch Ratings warned the nation’s investment-grade rating is at risk. The move to spur debt inflows comes after the rupee slid 3.9 percent last quarter as the current-account deficit widened to $22.4 billion.
“This will help increase inflows to India in the short-and medium-term, especially as sentiment towards the economy has been improving,” said Siddharth Mathur, strategist at UBS AG in Singapore. “But this is just a single measure that may help at the margin. It isn’t a silver bullet. I wouldn’t overplay its significance as India’s structural current-account deficit needs structural solutions.”

Rupee, Bonds

The rupee ended little changed yesterday in Mumbai at 53.685 a dollar, after having traded 0.1 percent stronger on the day earlier, according to data compiled by Bloomberg. The yield on the 8.15 percent government bonds maturing in June 2022 rose 1 basis point, or 0.01 percentage point, to 7.88 percent, according to the central bank’s trading system. Local bond and currency markets are shut today for a holiday.
Rupee-denominated debt returned 11 percent in the past year, the best performance among Asia’s biggest local-currency fixed-income markets, HSBC Holdings Plc data show. The yield on India’s 10-year sovereign notes dropped 69 basis points since the end of 2011, according to data compiled by Bloomberg. The securities still offer an extra 608 basis points over similar- maturity U.S. Treasuries.
Global funds bolstered holdings of rupee-denominated government and corporate bonds by 26 percent in 2012 to $32.9 billion. The amount reached a record $33.3 billion on Jan. 3 after central bank Governor Duvvuri Subbarao said last month policy makers need to focus on supporting the economy, fueling speculation the monetary authority will cut interest rates.

Interest Rates

The Reserve Bank of India will cut its repurchase rate by 25 basis points to 7.75 percent at its next review on Jan. 29, according to 22 of 26 analysts in a Bloomberg survey. Three predict a cut to 7.50 percent and one sees no change. The measure was last lowered by 50 basis points in April.
The RBI has some room to ease policy to spur growth, Raghuram Rajan, the top adviser in the nation’s finance ministry, said in an interview on Jan. 23. He spoke in Singapore, during an international tour by Finance Minister Palaniappan Chidambaram to woo investors as the government strives to revive growth. India’s economy will expand as little as 5.7 percent in the 12 months through March, the slowest pace in a decade, according to official estimates.
Chidambaram said this week fiscal prudence will be a key budget theme next month, pledging to reduce the government’s deficit to 4.8 percent of gross domestic product for the 12 months through March 2014. He vowed the gap won’t breach his target of 5.3 percent of GDP in the current fiscal year “under any circumstance.”

‘Path of Consolidation’

“It’s absolutely important to signal to the world that we are on the path of fiscal consolidation,” Chidambaram told investors in Hong Kong on Jan. 22. “In the last five and half months, we have addressed the problem in small but significant steps. Add all these together, and we will see we have traveled quite a distance. There’s no case at all to downgrade India.”
The government allowed state refiners last week to fix diesel prices on their own for the first time in more than a decade, a move aimed at reducing the government’s subsidy payments and improving public finances.
Bond risk in India fell this year. The cost to insure State Bank of India (SBIN)’s debt, considered a proxy for the sovereign by some investors, for five years against non-payment using credit- default swaps fell 20 basis points to 206, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

‘Ensuring Growth’

Option traders are the most bullish on India’s currency in four years. One-year contracts, conferring the right to sell the rupee against the dollar, cost 140 basis points more than those to buy yesterday, near the least since November 2008. The so- called risk reversal rate has slid 270 basis points in the past year.
“Where we can aid growth is through reforms,” Rajan said. “We play an enabling role. Ultimately, the economy itself, the private sector and the public sector, will play the dominant role in ensuring growth. But we can create the framework. We have done a fair amount and we will do more.”
To contact the reporters on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net; Jeanette Rodrigues in Mumbai at jrodrigues26@bloomberg.net
To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Jaguar Land Rover Profit Stalls on Cheaper Evoque Model

By Siddharth Philip - Jan 23, 2013

Tata Motors Ltd. (TTMT) fell the most since May in Mumbai trading after its Jaguar Land Rover Plc unit said profit growth probably stalled on currency shifts and as the cheaper Evoque model attracted a higher share of buyers.
Tata Motors, which derived three quarters of its operating income from Jaguar Land Rover in the last financial year, slumped as much as 10 percent and was trading 7.6 percent lower at 289.30 rupees as of 9:21 a.m., headed for the biggest decline in almost eight months.
Earnings before interest, taxes, depreciation and amortization in the three months through December were similar to figures during the preceding two quarters, and the margin relative to sales was probably “slightly lower,” the Gaydon, England-based division said yesterday in a U.S. filing. The Ebitda performance reflects “less favorable exchange rates” and higher mix of sales of the SUV, the manufacturer said.
“The company saying that margins will be lower is a big concern,” said Umesh Karne, an analyst with BRICS Securities Ltd. in Mumbai. “The indication that capital expenditure will be higher as well as about negative cash flow is a concern, as we factored positive cash flows into the share price.”

Currency Move

The pound dropped after a 0.1 percent decline in retail sales last month added to signs the U.K.’s economy is struggling to recover. The euro has gained more than 3 percent against the pound this month.
Jaguar Land Rover’s margins had declined in the two earlier quarters, according to data compiled by Bloomberg. The lower- priced Evoque sport-utility vehicle accounted for almost 30 percent of Land Rover’s wholesale deliveries in the six months ended Sept. 30.
The Evoque, which began deliveries in September 2011, sells for just under 29,200 pounds ($46,300), versus the 38,825-pound starting price for Land Rover’s Discovery 4, a larger SUV, according to the brand’s website.
Jaguar Land Rover may have negative free cash flow in the year beginning April 1 as the unit raises annual capital spending to 2.75 billion pounds from 2 billion pounds to develop models and build a factory in China. Free cash flow was probably also negative in the third quarter, it said.
The luxury division, which has 2.18 billion pounds in cash, may raise additional funds for investments from capital markets and through bank loans, it said.
Detailed fiscal third-quarter figures will be released with Mumbai-based Tata Motors’ earnings statement in February, the division said.
To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net
To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Hindustan Unilever Cut at Credit Suisse, Emkay on Royalty

By Adi Narayan - Jan 22, 2013

Hindustan Unilever Ltd. (HUVR), the Indian unit of the world’s second-biggest consumer-goods company, was downgraded by at least two brokerages amid concern that higher royalty payments to its parent will shrink profits.
Credit Suisse Group AG cut its rating to neutral from outperform and Emkay Global Financial Services Ltd. lowered its recommendation to reduce from hold. The Mumbai-based maker of Dove shampoo said royalty payments to Unilever will rise to about 3.15 percent of revenue from the current 1.4 percent.
Such an increase in royalties is a “big negative” because it would reduce profit margins without leading to any significant gains for the company, Nitin Mathur, an analyst with Espirito Santo Securities Ltd. said. Hindustan Unilever’s sales of shampoo and skincare products are slowing and the increased payment will make things worse, he said.
“This is absolute bad timing,” Mathur, who has a sell rating on the stock, said in an interview. “When your domestic business is suffering you are actually increasing royalty.”
The royalty Hindustan Unilever pays will increase in phases through the year ending March 2018, the company said in a statement yesterday.
The new agreement will be take effect Feb. 1 and the royalty increase in the period through March 2014 is estimated to be 0.5 percent of revenue, it said.

Shares Fall

“The company could theoretically raise royalty again in 2019 once this phased increase in royalty payments has been carried out, which would be a concern,” Arnab Mitra and Akshay Saxena, analysts at Credit Suisse in Mumbai, said in a note to clients. “This will lower fiscal 2015 earnings by 6 percent,” they wrote.
The seller of Surf detergent already has access to its parent’s global portfolio and it’s unlikely that increased payments would automatically lead to new and better products for India, Sachin Bobade, analyst at Brics Securities Ltd. said.
Shares of Hindustan Unilever fell 3.3 percent to close at 480.90 rupees yesterday, the lowest level since Aug. 8. India’s benchmark BSE India Sensitive Index fell 0.6 percent.
“The royalty agreement is designed to help us grow competitively,” Chief Financial Officer Sridhar Ramamurthy said in a conference call. “Given the increased intensity of competition particularly from global players, it is absolutely critical that we have access to world class innovations and superior best practices.”
This will be the second Asian unit of Unilever, which is based in London and Rotterdam, to increase royalty payments in the past two months. PT Unilever Indonesia on Dec. 12 said that total royalties would increase to 5 percent of its revenue beginning 2013, compared with 3.5 percent last year.
Hindustan Unilever yesterday reported third-quarter profit that missed analysts’ estimates, as competition reduced sales of shampoos and skincare products.
Unilever owns about 52 percent of the Indian company, according to its website.
To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net
To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Ambani Said to Mull $2 Billion Venezuela Spend: Corporate India

By Rakteem Katakey - Jan 20, 2013

Reliance Industries Ltd. (RIL) plans to spend more than $2 billion on Venezuelan oil fields, betting President Hugo Chavez’s failing health won’t lead to political upheaval, said a person with direct knowledge of the decision.
The operator of the world’s biggest refining complex is jointly assessing investments in four oilfields in the South American nation with state-run company Petroleos de Venezuela SA, said the person, who asked not to be identified, citing confidentiality terms. Reliance is waiting for data on the blocks from PDVSA, as Petroleos de Venezuela is called, to start the due diligence process, the person said.
Venezuela, which holds the world’s biggest proved oil reserves, produces cheaper, heavier grades of crude, ideal for processing at the two adjacent refineries run by Reliance, which posted its first profit increase in a year last quarter. Chavez, who was re-elected in October to a third six-year term, is fighting cancer in a hospital in Cuba and hasn’t been seen or heard since Dec. 10 when he reached Havana for a fourth surgery.
“It’s unlikely there will be a major change in policy after Chavez, unless it’s accompanied by some kind of regime change,” Pierre Noel, a senior fellow for economic and energy security at The International Institute for Strategic Studies, said by phone from Singapore. “Under Chavez, Venezuela has linked its oil policy with its broader foreign policy and this has been supportive of Asian investments.”

Shares Gain

Reliance, controlled by billionaire Mukesh Ambani, climbed as much as 6.1 percent to 955 rupees in Mumbai, headed for its highest close in more than 19 months. The shares, which traded at 936.60 rupees as of 9:22 a.m. local time, have gained 12 percent this year, compared with a 3.4 percent increase in the key Sensitive Index. (SENSEX)
Tushar Pania, a spokesman for Reliance, didn’t reply to an e-mail seeking comments on the company’s Venezuelan investments. PDVSA spokesman Alfredo Carquez didn’t return calls to his mobile phone or answer e-mails.
Reliance’s planned investment in Venezuela comes at a time when the company is struggling to reverse a drop in natural gas production from its biggest field in India. Gas production from the KG-D6 block in the Bay of Bengal declined 37 percent to 275 billion cubic feet in the nine months ended Dec. 31 from a year earlier, Reliance said Jan. 18. The drop was because of reservoir complexity and a natural decline in output, it said.
Net income rose 24 percent to 55 billion rupees ($1 billion), the biggest increase in two years, in the period ended Dec. 31 compared with a year earlier, Reliance said Jan. 18 in a filing. The company earned $9.6 for every barrel of crude it processed in the quarter, compared with $6.8 a year earlier and $9.5 a barrel in the previous three months.

‘Improve Margins’

“Processing heavier grade of Venezuelan crude will allow Reliance to improve margins at its refineries,” Ehsan Ul-Haq, senior market consultant at KBC Energy Economics, said by phone from London. “Reliance will depend on countries like Venezuela for heavy crude supplies as the Middle East refiners use more and more of their own heavy varieties.”
China has lent Venezuela more than $36 billion since 2007 to invest in infrastructure projects, some of which Venezuela is repaying through crude supplies to the world’s biggest energy consumer. China Petroleum & Chemical Corp. and China National Oil Offshore Ltd. own stakes in Venezuelan fields.

India, Japan

Besides the Chinese, Indian and Japanese companies have signed contracts with PDVSA. India’s biggest energy explorer Oil & Natural Gas Corp. (ONGC) acquired a stake in the San Cristobal project in 2008 and is a partner in the Carabobo 1 project that started producing oil last month. Inpex Corp., Japan’s biggest energy explorer, owns 70 percent of the Copa Macoya and the Guarico Oriental fields.
India’s government said in July it planned to invest $2.2 billion in the Carabobo 1 block.
PDVSA is in investment talks with India’s state-run energy explorer ONGC and Reliance, the Caracas-based company’s Planning Director Fadi Kabboul said in New Delhi on Oct. 17.
Venezuela wants to increase ties with India to tap the South Asian nation’s rising demand and capacity to process heavy crude, Venezuelan Oil Minister Rafael Ramirez said on Sept. 26. PDVSA signed a long-term supply agreement with Reliance to boost exports of heavy crude to Asia and an accord to develop offshore natural-gas projects -- the Boyaca 4 block and a section in the Ayacucho area of the Orinoco belt, he said.

Essar Refinery

Essar Oil Ltd. (ESOIL), controlled by billionaire brothers Shashi and Ravi Ruia, also imports crude oil from Venezuela for its 405,000 barrels-a-day refinery in western Gujarat state. The plant is about 8 miles (13 kilometers) away from the Reliance complex, which has a daily capacity of 1.24 million barrels.
“We don’t expect any disruptions because we have supply contracts with the national oil company,” Essar Chief Executive Officer Lalit Kumar Gupta said on a conference call on Jan. 15.
The average price of the basket of crude oil handled by PDVSA was $99.25 a barrel in 2012, 11 percent cheaper than the average Brent key oil price, according to data compiled by Bloomberg.
Venezuelan Vice President Nicolas Maduro said the head of the national assembly would assume power and call elections to be held within 30 days if Chavez dies or steps down before he is sworn into his new term. Maduro, in an interview with the Spanish newswire EFE published Jan. 17, said Venezuela’s constitution is clear about the succession process.
“I don’t expect an Arab springs in Venezuela,” said Jagannadham Thunuguntla, head of research at New Delhi-based SMC Global Securities Ltd., referring to a surge of protests that began in Egypt against governments and spread to other parts of the Middle East, including Libya. “Venezuela has the oil, and India needs it. It’s an opportunity.”
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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.