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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.