Slym Plans to ‘Break Out’ With Diesel Nano Car: Corporate India

By Siddharth Philip - Feb 14, 2013

Karl Slym, managing director of Tata Motors Ltd., said he’s planning to build a diesel version of the world’s cheapest car this year to revive vehicle sales, which have dropped for three straight quarters in India.
Tata Motors also plans a variant of the Nano, conceived by former Chairman Ratan Tata, that will be fueled by compressed natural gas, Slym said. The company yesterday reported profit, including that of unit Jaguar Land Rover Ltd., which missed analysts’ estimates by 44 percent. Slym is betting a 30 percent difference between diesel and gasoline prices at the pump will make the Nano a popular choice.
Slym is introducing new models of the $2,500 Nano, which according to Ratan Tata has failed to reach its “full potential,” and the Indica hatchback to help the company recover from the biggest loss in at least a decade at home. The poor performance in India will negate gains at the company’s luxury unit unless Chairman Cyrus Mistry revamps the local unit, said Mitul Shah, an analyst at Karvy Stock Broking Ltd.
“We had a quiet time and so now it’s time to break out,” Slym said in an interview in Mumbai. “You will see new products and an on-going portfolio. The Nano has a lot going on with it right now.”
Tata Motors shares dropped 1.8 percent to 291.80 rupees at 9:46 a.m. in Mumbai. The company’s American depositary receipts tumbled 4.9 percent to $27.25 in New York yesterday, the most since Jan. 23.

Change Focus

Third-quarter group net income fell 52 percent to 16.3 billion rupees ($302 million), the lowest in three years, India’s biggest automobile company said. That lagged behind the 29.3 billion-rupee median of 40 analysts’ estimates compiled by Bloomberg.
Profit at the luxury unit, which contributed 75 percent of Tata Motors operating income in the year ended March 31, declined 25 percent to 296 million pounds ($459 million). 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.
“The India business is loss making right now, which is unsustainable for the company,” said Kapil Singh, an analyst with Nomura Holdings Inc. in Mumbai. “The Nano has not met expectations so models such as the diesel Nano will help, but we’ll have to watch where they price it at.”
Slym plans to “dramatically” change customer focus to revive demand for the Nano, whose sales plunged and never fully recovered after at least three caught fire in 2010.

Family on Scooter

Instead of seeking to sell to motorcycle owners looking to upgrade, the company will market the car to customers “aspiring” to buy the Nano, said Slym, who joined from GM’s China unit, where he was executive vice-president at SAIC-GM- Wuling Automobile Co.
Ratan Tata decided to develop the Nano after seeing a family riding on a scooter. After the fires, the company in December 2010 extended warranties to four years or 60,000 kilometers (37,290 miles) and started offering as much as 90 percent financing through unit Tata Motors Finance Ltd.
Sales of the Nano plunged 81 percent to 1,504 units in January from a year earlier after peaking at 10,475 units in March 2012. The company chose the first 100,000 customers for the Nano through a lottery following a deluge of orders in 2009.
The current strategy of targeting a buyer of Hero MotoCorp Ltd.’s Splendor “hasn’t really worked,” said Deepesh Rathore, the New Delhi-based managing director for IHS Automotive in India. If Tata is fighting in the same space as Maruti Suzuki India Ltd.’s Alto or Hyundai Motor Co.’s Eon, “you definitely have a better chance at higher sales.”

India Demand

Tata Motors last month started selling a new version of its Indica Vista hatchback. The variant, that’s priced almost 100,000 rupees cheaper than Maruti’s best-selling Swift model, includes a higher-powered engine and satellite navigation.
Reviving demand in India may also boost profitability at the company, which started as Tata Engineering & Locomotive Co. in 1945, as increased sales for its lower-priced Range Rover Evoque model cut earnings at the Jaguar Land Rover unit, said Umesh Karne, an analyst with Brics Securities Ltd. in Mumbai.
The average selling price of vehicles such as the Jaguar XF, Land Rover Freelander and the best-selling Evoque is about 30,000 pounds compared with the 42,000-pound average for its other models, Vijay Somaiya, head of treasury at Tata Motors, said in a briefing on Jan. 24.
Earnings margin before interest, taxes, depreciation and amortization at the unit was 14 percent in the quarter, lower than 17 percent a year earlier, reflecting the product mix and higher marketing costs, Tata Motors said. The cost of introducing new models also eroded profitability.
“The losses at the domestic business is a major concern,” said Karne. “If they don’t improve from these levels, the impact on the company’s profitability will get bigger.”
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

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Bond Traders Whip CPI Angst as India to Hungary Cut Rates By Ye Xie and David Yong - Feb 13, 2013

From Mexico to Poland, bond investors are lowering their outlook for inflation in developing markets to a nine-month low, giving central bankers room to cut interest rates and boost their economies.
The difference between fixed-rate bond yields and those indexed to consumer prices show investors expect Mexico’s inflation to average 3.22 percent in the next two years, near the slowest since May. A similar Polish measure fell to 2.09 percent last month, the lowest since at least April. Emerging- market bonds gained 5 percent in dollar terms during the three months through yesterday, the most in a year, compared with 0.1 percent for government securities worldwide, JPMorgan Chase & Co. and Bank of America Corp. indexes show.
“We see only moderate growth compared to recent years, and these solid but hardly effervescent economic conditions should keep inflation in check,” Alessandro Bee, an economist and fixed-income strategist in Zurich at Bank Sarasin & Cie AG, which oversees 99 billion Swiss francs ($108 billion), said in a phone interview on Feb. 4. “That’s a really nice environment for local bond markets.”
While investors see inflation in the biggest emerging markets such as China and Brazil rising, the tame outlook elsewhere will allow policy makers to focus on bolstering the weakest economic growth since 2009 through lower rates, according to Bank of America.

IMF View

The rate of inflation in developing markets will remain at 6.1 percent in 2013, slowing from a four-year high of 7.2 percent in 2011, the International Monetary Fund in Washington said last month.
India, Poland, Colombia and Hungary have cut borrowing costs this year, in part because consumer prices are under control. Traders anticipate looser monetary policy in South Korea, Poland, Colombia and Hungary, according to a Morgan Stanley model that tracks interest-rate swaps.
That’s a reversal from two years ago, when a 55 percent jump in the Standard & Poor’s GSCI index of 24 raw materials in 11 months through April 2011 pushed up consumer prices and led central banks from China to Brazil to raise borrowing costs.
Brazil boosted rates 3.75 percentage points to 12.5 percent in the 15 months through July 2011. China lifted its one-year lending rate five times in nine months starting October 2010.

Growth Throttled

Those moves throttled emerging-market growth to 6.3 percent in 2011 from 7.4 percent the year before, and punished bond investors, with JPMorgan’s GBI-EM Global Diversified Index losing 4.9 percent in dollar terms between mid-October 2010 and mid-January. That was worse than the loss of 3.6 percent for government securities worldwide, according to the Bank of America Merrill Lynch Global Government Index.
In Mexico, central bank board members led by Governor Agustin Carstens unanimously decided to leave the benchmark interest rate at a record low 4.5 percent on Jan. 18, and signaled this month that they may lower borrowing costs for the first time since 2009 as inflation moderates.
Consumer prices in Mexico rose at a 3.25 percent annualized rate in January, the slowest pace since October 2011, after falling within the central bank’s target range of 2 percent to 4 percent in December for the first time since May.

Slower Pace

Banco de Mexico may cut rates “if we keep advancing in this convergence process” with inflation moving closer to 3 percent in a “sustainable way,” Carstens said told reporters in Mexico City today.
The two-year breakeven rate in Mexico narrowed from a 16- month high of 4.54 percentage points in July, according to data compiled by Bloomberg. The rate averaged 4.04 percentage points since October 2006, when Bloomberg started compiling the data.
Peso-denominated bonds returned 4.5 percent in January, the most since June, Bank of America indexes show. The 21 percent gain last year was the most since 2002, and exceeded the 4.54 percent for government bonds globally.
Colombia’s 10-year breakeven rate fell to 2.7 percent on Jan. 23, the lowest level since February 2012, when Bloomberg started compiling the data. Colombia’s bonds gained 8 percent in the past three months, the most since February 2012, JPMorgan data show.
South Korea’s policy makers may cut the nation’s benchmark to 2.5 percent from 2.75 percent in six months, while Poland’s central bank will lower its rate by a half-percentage point to a record low 3.25 percent, Morgan Stanley data show.

Opposite Direction

At the same time inflation is slowing, so is the economy. The IMF cut its growth forecast for emerging markets this year by 0.1 percentage point to 5.5 percent on Jan. 23, citing weaker demand from advanced economies. That compares with an average growth rate of 6.6 percent over the past decade.
In developed economies, the outlook for inflation is moving in the opposite direction as central banks attempting to stimulate growth buy sovereign-debt securities to pump money into the financial system and contain long-term borrowing costs.
The U.S. five-year breakeven rate reached a four-month high of 2.36 percentage points on Feb. 1, above the average of 1.96 percentage points in the 10 years through 2012.
The gauge for the U.K. climbed today to 2.88 percentage points, the highest since April 2011. Britain faces a further bout of inflation and a muted economic recovery, Bank of England Governor Mervyn King said in London.
Inflation in emerging markets won’t accelerate in a “particularly strong way,” making bonds from these regions more attractive than those in the developed world, Phillip Apel, the head of diversified fixed income and rates at Henderson Global Investors Ltd., said in an interview from Singapore on Jan. 25.

Little Protection

“Government bonds in developed markets are out of favor,” said Apel, who manages about $105 billion from London. They offer “little protection against a rise in yields.”
Emerging-market bonds returned 17 percent in dollar terms last year, the most since 2009. Yields average 3.47 percentage points above Treasuries on Feb 1, the least since April 2011. The spread is 0.18 percentage point above the average over the past decade.
Investors poured a record $1.3 billion into funds dedicated to emerging-market local-currency bonds in the week through Feb. 6, according to Morgan Stanley, citing data compiled by EPFR Global. They withdrew $300 million out of dollar-denominated bond funds, the bank said in a Feb. 7 report.
Brazil is one emerging market that will see elevated inflation, based on bond yields. The nation’s consumer price index will average 5.5 percent by 2014, according to breakeven data compiled by Bloomberg. The gauge reached 6.12 percent on Jan. 8, the highest level since September.

Prices Jump

Brazil’s consumer prices jumped 6.15 percent in the year through January, the fastest pace in a year. Inflation has been above 4.5 percent, the midpoint of the central bank’s target of 2.5 percent to 6.5 percent for the last 29 months even as the economy expanded at the second slowest pace since 1999. Inflation is at a high level that requires attention, the central bank said Feb. 7.
Turkey’s inflation will average 6.1 percent in two years, compared with the government’s target of 5 percent, breakeven rates show. In Asia, rising exports and a growing Chinese economy is lifting inflation estimates in the region.
The Philippines will raise benchmark rates three times this year to stem inflation, according to Michael Spencer, Deutsche Bank AG’s chief Asia economist.
“The world has priced in for permanently low inflation,” Paul McNamara, who oversees $9 billion in emerging-market debt at GAM Investment in London, said in a telephone interview on Jan. 28. “There’s no question that it is going to shoot up. Is it going to be a big problem? No. Normalization? Yes.”
McNamara said he’s reducing holdings of longer-dated fixed- rate bonds and buying inflation-linked debt securities.

‘Dovish Stance’

Most emerging-market central banks will delay raising borrowing costs and tolerate faster price increases to cement the economic recovery, benefiting inflation-linked bonds over fixed-rated securities, according to Koon Chow, the head of emerging-market strategy in London at Barclays Plc.
“Emerging market central banks will be reluctant to change course on monetary policy,” Chow, who recommends buying Polish CPI-linked bonds, wrote in a Jan. 25 e-mail message. “This will probably help a majority of central banks hold a more dovish stance.”
Central bankers see little chance of a repeat of 2010. The S&P index of commodities is 11 percent below its peak in August 2011. Food prices tracked by the United Nations fell 0.5 percent last year, extending its drop to 12 percent since the peak in February 2011. Food costs accounted for 27 percent of consumer price indexes in developing nations, compared with 16 percent in developed economies, according to Bank of America.

Surprise Index

Citigroup’s surprise index tracking average consumer price increases in emerging markets relative to economists’ forecasts fell to minus 18.9 in January, the lowest reading since November 2009. A negative reading indicates the actual inflation report trails economists’ forecasts, while a positive number indicates higher-than-expected consumer price increases. The measure reached 7.4 in March 2011, the highest since October 2008.
India lowered its benchmark repurchase rate on Jan. 29 to 7.75 percent from 8 percent, marking the first cut since April, as inflation fell to a three-year low.
Hours later, Hungarian policy makers lowered their main rate for a sixth month, reducing the two-week deposit rate by a quarter-point to 5.5 percent, the lowest since March 2010.

‘Too Early’

It would take greater-than-forecast growth and a 25 percent surge in food prices to really “get inflation going,” according to Alberto Ades, head of emerging-market fixed-income strategy at Bank of America. Even in that scenario, inflation will be 1.1 percentage points lower than the July 2011 peak, strategists led by Ades wrote in a note on Jan. 24.
“We like emerging-market local bonds,” Lazlo Belgrado, a money manager who helps oversees about $20 billion in emerging- market debt at KBC Asset Management SA, said by phone from Luxembourg. ‘It’s too early for the growth-driven inflation scare.’’
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net
To contact the editors responsible for this story: Robert Burgess at bburgess@bloomberg.net; James Regan at jregan19@bloomberg.net

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Bird’s Nest Cream to Drive Wipro’s China Growth: Corporate India

By Adi Narayan - Feb 12, 2013

Wipro Ltd., the Indian software-to- soaps company controlled by billionaire Azim Premji, says Chinese demand for cosmetics containing bird’s nest extracts will help its consumer unit counter slowing growth at home.
Wipro’s acquisition of Singapore-based L.D. Waxson Group will aid the company to tap demand for luxury skincare products among China’s growing middle class, said Vineet Agrawal, president of the Bangalore-based company’s consumer unit. L.D. Waxson’s Bio-essence range includes creams that contain bird’s nest, used in traditional Chinese medicine for its anti-ageing and tissue repair properties, according to Agrawal.
The $144 million purchase, announced in December, offers Wipro access to the premium skincare market in China, which Euromonitor International estimates will grow to 38.2 billion yuan ($6.1 billion) in 2016 from 22.1 billion yuan last year and is dominated by Procter & Gamble Co. and Mary Kay Inc. The deal also helps the unit tap skincare demand in Southeast Asian markets with sizable ethnic Chinese populations, Agrawal said.
“Bio-essence is a skincare brand focused on products with Chinese ingredients,” Agrawal said in a telephone interview yesterday. “Wherever the Chinese ethnic population is there, we think we can expand - like in Vietnam and Indonesia.”

Chinese Delicacy

Almost 60 percent of Bio-essence products contain ingredients derived from bird’s nest, according to Agrawal. The nests, made mostly of the swiftlet’s saliva, are found in the mountains around Southeast Asia including in Vietnam, Thailand, Indonesia and Malaysia, according to L.D. Waxson’s website.
The nest of a few species of swiftlets is also the key ingredient in bird’s nest soup, a Chinese delicacy, the Food & Agriculture Organization says on its website. Malaysia is the major producer and exporter of the nests, according to the FAO.
“These products have an advantage in markets where there’s an awareness, like in eastern Asia,” said Shushmul Maheshwari, chief executive officer at RNCOS E-Services Pvt., a market research company based in New Delhi. “In India, herbal products are always perceived as safe.”
The shortage of bird’s nests in China isn’t hurting Wipro’s supplies of the commodity, Agrawal said. “We do long-term purchases for everything,” he said. “As of now, we don’t have any problems ensuring supply.”

‘Optimal Use’

Wipro is among Indian firms acquiring companies overseas to boost sales as growth slows in India, where the government estimates the $1.8 trillion economy is set to expand 5 percent in the year ending March 31, the least in a decade.
Revenue growth at Wipro’s consumer care and lighting business slowed to 18 percent in the 12 months ended March 31, 2012, from a 26 percent pace a year earlier. Hindustan Unilever Ltd., the Indian unit of the world’s second-biggest consumer- goods company, last month reported third-quarter profit and sales that missed analysts’ estimates.
Godrej Consumer Products Ltd., controlled by billionaire Adi Godrej, has acquired at least five companies in the last three years, including Indonesian insecticide maker PT Megasari Makmur and Argentinian hair-color maker Argencos SA.
Indian consumer companies’ strategy of acquiring assets in other emerging markets will help future growth and is an “optimal use of cash,” said Nitin Mathur, a Mumbai-based research analyst at Espirito Santo Investment Bank.

Second Best

Godrej’s share of overseas sales increased to 43 percent in the year ended March from 23 percent two years earlier, according to data compiled by Bloomberg. The company’s 12-month total return, which includes share price gains and dividend payout, is the second-highest among the 10 companies on the BSE India Fast Moving Consumer Goods Index, and trails only India’s biggest distiller, United Spirits Ltd.
Marico Ltd. got almost a fourth of its annual revenue from its international business, which includes Bangladesh, Vietnam and South Africa, and 43 percent of Godrej’s overseas sales last quarter came from Indonesia.
“Indian consumer companies have a strong presence in Asian developing markets because the sales environment there is very similar to India,” said Sachin Bobade, an analyst at Brics Securities Ltd. “There is a lot of growth potential in these markets.”
In November, Wipro’s board agreed to set apart its consumer, infrastructure engineering and medical diagnostics businesses into a separate, closely held company, according to an exchange filing. Wipro will focus exclusively on information technology and software services and the new company, named Wipro Enterprises, will be an unlisted entity.

Yardley Brand

The consumer unit, which includes lighting products, had sales of 10.3 billion rupees ($191 million), or 9.3 percent of Wipro’s net revenue from operations, in the three months ended Dec. 31, compared with 8.79 billion rupees a year earlier. The bulk of the unit’s revenue comes from sales of the Santoor bath soap and Yardley range of soaps and deodorants, Agrawal said.
Premji, with a net worth of $16.4 billion and ranked 46th on the Bloomberg Billionaire’s Index, and his family control about 78 percent of Wipro.
Shares of Wipro rose 0.5 percent to 414.05 rupees as of 9:56 a.m. in Mumbai trading, extending its gains this year to 5 percent. The benchmark BSE India Sensitive Index has advanced 1.3 percent in the period.
In 2009, Wipro acquired rights to the Yardley of London brand of beauty products in Asia, Middle East and parts of Africa from the U.K.’s Lornamead Group for about $45.5 million. The acquisition gave Wipro an entry into the more profitable business of selling premium cosmetics. In July, the unit acquired the rights to the brand for the U.K. and most of Europe, it said in a statement.

Good Fit

Wipro’s Chinese consumer business currently contributes about $40 million in sales, or 5 percent of the unit’s total revenue, Agrawal said. The company sells shampoos, soaps and moisturizing creams under its Unza brand, and its sales are mostly concentrated in Guangdong, Hainan and Guangxi provinces in southern China. Wipro bought Singapore’s Unza Holdings Ltd. in July 2007 for 10.1 billion rupees to add customers and factories in Malaysia, Vietnam, China and Indonesia.
Wipro, which posted third-quarter revenue growth of 32 percent at its consumer business in China, 26 percent in Indonesia and 24 percent in Vietnam, expects the L.D. Waxson acquisition to help maintain its growth momentum in Southeast Asia, Chairman Premji said on a conference call last month.
L.D. Waxson “is a good strategic fit,” Premji said. “The transaction helps us to consolidate our successful facial skincare business in Malaysia to a dominant leadership position and moves us to market leadership in Singapore as well.”
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

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Protests as Royalties Surge to Unilever, Holcim: Corporate India

By Bhuma Shrivastava and Santanu Chakraborty - Feb 11, 2013

Holcim Ltd., the world’s largest cement maker, and Unilever are seeking higher royalty from their units in emerging markets as business slows at home, spurring protests by minority investors.
Holcim’s two Indian units, ACC Ltd. and Ambuja Cements Ltd., are seeking shareholder consent to almost double fees to the parent, after the Switzerland-based company signed a similar agreement with its Indonesian unit. Hindustan Unilever Ltd., controlled by the world’s second-biggest consumer-goods company, last month said it will pay a higher fee to its parent.
The increase in the fees, meant to compensate the controlling shareholder for providing technology and expertise, comes as India prepares to enact a law requiring approval from 75 percent of minority investors for transactions with related parties. Local units of two dozen overseas companies have doubled the fees in the past four years after Asia’s third- largest economy eased rules to spur technology transfers, according to Institutional Investor Advisory Services.
“The small investor is simply left in the lurch,” said Prateek Agrawal, chief investment officer at Mumbai-based ASK Investment Managers Pvt., with 16 billion rupees ($299 million) under management. “We should not be accepting this as fait accompli.”
Hindustan Unilever had its recommendations cut by at least 11 brokerages on Jan. 23 after saying it will double fees to Unilever. The stock had its biggest two-day drop in two years after announcing the plan, which Chief Financial Officer Sridhar Ramamurthy said was “designed to help us grow competitively.”

Related Party

Mumbai-based Hindustan Unilever’s shares rose 1.7 percent to 460.55 rupees yesterday. They have dropped 12 percent this year compared with a 0.2 percent increase in the benchmark Sensex index.
Related-party transactions “ought to be transparent and where necessary, or of a certain size, be put to vote,” Hugh Young, who helps manage about $70 billion of Asian equities including Hindustan Unilever and Ambuja Cements at Aberdeen Asset Management Asia Ltd. in Singapore, said in an e-mail. “We have raised this at various levels, not just in India. To the company, to the parent, to independent directors.”
ACC, which reported its slowest sales growth in two years in the three months to Dec. 31 and a 46 percent drop in profit, and Ambuja Cements are asking shareholders for approval to boost the “Technology and Knowhow Fee.” Voting rights for both companies are controlled by Holcim.

‘Majority of Minorities’

The voting exercise “does not serve any purpose unless Holcim chooses not to vote,” said Amit Tandon, managing director of Institutional Investor Advisory Services, a proxy adviser. Companies should either seek approval from “majority of minorities” or from 75 percent of investors through a special resolution, he said.
R. Nand Kumar, a spokesman for ACC, and Doris Rao, a spokeswoman for Ambuja Cements, didn’t respond to e-mails seeking comment.
Maruti Suzuki India Ltd. paid 18 billion rupees as royalty to its parent Suzuki Motor Corp. in the year ended March 31, exceeding the company’s 16.8 billion rupee profit in the period. Suzuki’s 54.2 percent stake in Maruti also entitled it to 1.17 billion rupees of dividend, according to data compiled by Bloomberg.
Total payout by the 25 highest royalty-paying companies for the year ended March 31 more than doubled to 36.4 billion rupees from 15.3 billion rupees in 2008, according to a Dec. 11 report by Mumbai-based Institutional Investor Advisory.

No Dividend

“We can have a look at it,” U.K. Sinha, chairman of the Securities & Exchange Board of India, the nation’s market regulator, said when asked about royalty payments. The assessments would have to be on a case-by-case basis “to see whether the royalty is by way of some special relationship with the promoter company or it is genuine.”
The Institutional Investor’s report found that since 2008, at least three companies, Whirlpool of India Ltd., Asahi India Glass Ltd. and 3M India Ltd., haven’t paid dividends, which would have been shared by all shareholders as against royalty fees that accrue only to the overseas parent.
Asahi India Glass, which reported a loss of 651 million rupees in the year ended March 31, paid 205 million rupees as royalty fees in the year.
“The basis of charging of royalty should also be questioned,” said ASK’s Agrawal. “Shouldn’t royalty be levied only on incremental operating profits rather than on whole of sales, which can create issues when the business may actually be making a loss.”

‘Pension Plan’

Spokesmen for Asahi India and Whirlpool of India as well as the spokeswoman for 3M didn’t respond to e-mails seeking comment.
The levies have increased amid slowing global sales. Holcim has accelerated a European cost-saving program to counter weak demand. Asahi Glass Co.’s profit plunged 67 percent to 12.7 billion yen in the six months ended Dec. 31, while Benton Harbor, Michigan-based Whirlpool Corp.’s net income dropped 40 percent to $122 million in the three months ended Dec. 31.
“It’s a pension plan for” the biggest shareholder, said Jitendra Nath Gupta, founder of Stakeholders Empowerment Services. “That is why clear deliverables have to be negotiated when royalty payments are increased.”
Maruti’s royalty “payments will stay at these levels,” Chairman R.C. Bhargava said last month. The company last year paid 5.1 percent of its sales to its parent.

‘Requires Explanation’

“Mass market auto companies would typically spend 2.5 percent to 4 percent of revenue on engineering research & development,” said Vikas Sehgal, managing director and global head for automotive sector at Rothschild in London. “So anything north of 5 percent requires explanation,” especially when Maruti has some in-house research already, he said.
The levy charged by the overseas parents of Indian units jumped after the government in December 2009 removed caps on royalties, allowing companies to pay their foreign sponsors any amount their board approved without seeking government approval, a move Bhargava termed a “watershed” development.
“The thought then was to attract foreign investment and facilitate technology transfer without going through the administrative hoops,” said Tandon. The payout spike was “an unintended consequence.”
India’s Lok Sabha, the lower house of parliament, on Dec. 18 passed a bill making it mandatory to seek approvals by a special resolution for related-party transactions.

Vote on Proposal

The law will be applicable depending on the amount of the transaction or size of the company’s capital. The amounts are yet to be determined.
The rules, which also stipulate the controlling shareholder won’t be eligible to vote for such resolutions, will be enacted once the president signs the bill following an endorsement by the upper house of parliament.
“As shareholders, we would like to have a vote on royalty proposals when they come up,” Debasish Mallick, chief executive officer at IDBI Asset Management Ltd. in Mumbai said in a phone interview on Feb. 8. “Royalty is a matter of concern for investors as it hurts company profits and dividend payments.”
To contact the reporters on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net; Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net
To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net

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Coal Miner’s $1.4 Billion Rail to End Imports: Corporate India

By Rajesh Kumar Singh - Feb 10, 2013

Coal India Ltd., set to build a $1.4 billion railway link through its three richest mining regions, said the untapped pits will help the world’s second-biggest thermal coal importing nation end overseas purchases.
The 203-mile (327-kilometer) network, to be funded by the company and built by Indian Railways in five years, will free up 300 million metric tons of coal annually in the states of Odisha, Jharkhand and Chhattisgarh, Coal India Chairman S. Narsing Rao said in an interview. Indian power companies pay about 40 percent more than local prices to import 70 million tons of coal, about 20 percent of their annual consumption.
“The railway line can eliminate the need for imports of thermal coal in five years,” Rao said in an interview from his office in Kolkata. “Given the reserves we have, we should not have to depend on other countries for electricity generation.”
The state-owned company, which is the world’s biggest producer of the fuel, needs to step up output to comply with Prime Minister Manmohan Singh’s 2012 directive to ensure adequate supply and prevent blackouts in an economy expanding at the slowest pace in a decade. Failure to guarantee supplies to utilities will result in a penalty for the firm whose production growth has stalled in the past three years.

Stalled Projects

Coal India shares have advanced 4 percent in the past year, compared with an 11 percent gain in the benchmark Sensitive Index, according to data compiled by Bloomberg. The stock fell 1.5 percent to 338.75 rupees on Feb. 8 in Mumbai.
Power projects worth at least $35 billion announced by billionaires including Anil Ambani and Gautam Adani, have stalled because of fuel shortages. A peak shortfall of 9 percent in electricity supplies leads to outages that shave about 1.2 percentage points off India’s annual economic growth, according to government estimates.
The company’s proposal for the railway link has been delayed for more than six years, pending approval from the railway and environment ministries. The government last year formed an inter-ministerial panel to push the project following Singh’s order.
“The heavy penalty Coal India has to pay if it fails to supply its customers is driving it to do everything it can to boost production,” said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. in Mumbai.

Volumes, Prices

Coal India, which must pay as much as 40 percent of the value of any supply shortfall as penalty, reported a 19 percent increase in profit to 30.8 billion rupees ($575 million) for the second quarter ended Sept. 30. A rising wage bill suppressed revenue gains and led to earnings missing analyst estimates.
Coal India, which accounts for more than 80 percent of the nation’s output, last raised prices two years ago. It had cash worth more than $12 billion as of Sept. 30.
“The company’s sales volumes are not increasing the way they should and there’s no visibility on prices,” said Rahul Jain, an analyst at CIMB Securities India Pvt. in Mumbai, who has an equivalent of a sell rating for the stock. “For commodity stocks, you need to have good volumes and prices. Both are missing here.”
Of the 52 analysts that cover the company, 35 recommend purchasing the stock, while five advise selling it, according to data compiled by Bloomberg.

Social Unrest

India’s annual thermal coal demand is expected to climb 43 percent to 730 million tons by 2017, while supplies from local mines may increase 38 percent to 565 million tons, the Planning Commission’s energy adviser I.A. Khan said in an interview. Cheaper local coal will lower the cost at existing plants, while ensuring energy security to upcoming projects.
Coal India has said it will start importing to meet its supply contracts. While the company’s output is forecast to rise 6.4 percent this year to a record 464 million tons, it will still fail to meet demand.
“Law and order issues have been the biggest impediment to output,” Coal Minister Sriprakash Jaiswal said last month.
Some mines in the eastern states of Odisha and Jharkhand on an average remain shut for three days in a month because of social unrest, Coal India Personnel Director R. Mohan Das said in an interview, without elaborating on the loss. Delays in environment approvals and difficulties in acquiring land have also affected production, he said.
India, which generates 57 percent of its electricity from coal, plans to add 118 gigawatts of generation capacity in the five years ending March 2017, Khan said. Power companies added about 55,000 megawatts in the five years ended March 31, the most in a five-year period. The country has installed generation capacity of 211 gigawatts.
“India is doing everything to increase coal production,” said Debasish Mishra, a partner at Deloitte Touche Tohmatsu India Pvt. in Mumbai. “The railway plan needs to be supplemented with speedy approvals and efficient project management.”
To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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