Cotton Glut Seen Extending Slump as Levi’s Costs Slide By Marvin G. Perez, Whitney McFerron and Phoebe Sedgman - Sep 3, 2012

Cotton warehouses from China to Australia are bulging with the biggest-ever glut, a year after record prices spurred farmers to expand output.
Harvests will exceed demand for a third year, swelling stockpiles by 10 percent to 74.67 million 480-pound bales by August, the U.S. Department of Agriculture estimates. Inventories in China, the biggest user, will triple over two years to a record as domestic demand slumps to the lowest since 2005, USDA data show. Cotton may drop 12 percent to 67.87 cents a pound by the end of the year, according to the average of 20 analyst and merchant estimates compiled by Bloomberg.
Slowing economic growth means the surplus will widen even as China, Australia, Brazil and India produce less this season, leading to the first global output decline in three years, the USDA predicts. Prices already plunged 65 percent from last year’s peak of $2.197 a pound, reducing costs for buyers from Hanesbrands Inc. (HBI), the maker of Champion apparel, to San Francisco-based Levi Strauss & Co.
“There’s an awful lot of cotton around,” said David Wookey, a managing director and trader at Isis Commodities Ltd., a cotton merchant in Boston, England, founded 17 years ago. “You’ve got a large stocks situation that’s been coupled with weaker global consumption.”

Surplus Widens

Prices tumbled 16 percent this year on ICE Futures U.S. in New York, exceeded only by arabica coffee’s 27 percent decline among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index. The gauge rose 5.6 percent. The MSCI All-Country World Index of equities gained 7.8 percent. Treasuries returned 2.6 percent, according to Bank of America Corp.
The world’s farmers will produce 114.1 million bales in the year that began Aug. 1, 7 percent less than the record 122.7 million a year earlier, the USDA predicts. Demand will be 108.2 million, the second-lowest level in nine years, the agency estimates. A bale provides enough material for 1,217 men’s T- shirts, according to the National Cotton Council of America.
China will import 46 percent less cotton in the 12 months through July 31, according to USDA. Consumption in the country may drop 11 percent this year, Zhang Hongxia, the chairman of Hong Kong-listed Weiqiao Textile Co. (2698), China’s largest cotton- textile maker, said in an interview Aug. 20. Cotlook Ltd., the Birkenhead, England-based research company, boosted its surplus estimate by 55 percent on Aug. 23, citing the deceleration in Chinese demand.

Crop Switching

Smaller harvests may bolster prices that reached a 31-month low of 64.61 cents on June 4, said Jon Devine, an economist for Cotton Inc., an industry group in Cary, North Carolina. Hedge funds on Aug. 28 were the most bullish since February, holding a net-long position of 13,047 futures and options contracts, Commodity Futures Trading Commission data show. The December- delivery contract traded at 77.23 cents a pound today.
U.S. farmers, the largest exporters, can earn more planting crops including corn or soybeans, which reached record prices this year after a drought that T-Storm Weather LLC estimates was the most-severe since 1936, based on temperature and rainfall in June and July. A USDA report on May 1 showed cotton growers lost $154.17 an acre in 2011 and corn earned $194.52. While the agency won’t estimate this year’s returns until Oct. 1, cotton prices are 20 percent lower and corn is up 40 percent.

Indian Monsoon

Matt Huie, a farmer in Beeville, Texas, who planted 3,600 acres of the fiber last year, said he “probably would consider not planting cotton at all.”
“I would expect massive reductions of cotton acreage,” said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. “This should lead to a decline in supply and to rising cotton prices next year.”
The monsoon in India, the second-largest exporter, has been 12 percent below the 50-year average, the Meteorological Department said Aug. 30. The weather pattern accounts for about 70 percent of the country’s annual rainfall.
Plantings in Australia during the next three months may drop more than 12 percent, according to the government. Output in Brazil may tumble 26 percent as farmers shift to soybeans, the USDA’S Foreign Agricultural Service said in a report posted yesterday on its website.
Expectations for lower prices may spur traders to break $600 million of contracts this year, or 5 percent of global trade in the fiber, said Terry Townsend, the executive director of the International Cotton Advisory Committee in Washington. That’s down from about 20 percent in the past two years because prices are less volatile, he said.

Profit Margins

Hanesbrands, the Winston-Salem, North Carolina-based maker of the Wonderbra, saw cotton costs jump by $200 million in 2011, Chief Executive Officer Rich Noll told analysts on a July 31 conference call. Margins have since returned to “historical levels,” he said.
Levi Strauss expects lower cotton costs in the third and fourth quarters, former Chief Financial Officer Blake Jorgensen told analysts on a conference call July 10. The company cut prices in some markets in the second quarter to reduce inventories and products being sold in the spring were the “tail end of the peak cotton prices in the products we sourced last year,” he said.
Cheaper cotton will mean improved margins at American Eagle Outfitters Inc., a Pittsburgh-based clothing retailer, in the second half, Chief Financial Officer Mary M. Boland told analysts on an Aug. 22 call. J. Crew Group Inc., a clothing retailer based in Lynchburg, Virginia, told shareholders Aug. 30 that margins are benefiting from declining prices for the fiber.

Cheaper Polyester

While global demand is forecast by the USDA to rise 2.6 percent in the 12 months through July, after slumping 11 percent in the previous two years, more textile makers are turning to cheaper synthetic fibers. Polyester cost 77.6 cents a pound in China on Aug. 24, according to Cotlook. Cotton traded at $1.61, the Cotton China Index reported that same day.
China mills about one-third of the world’s cotton and is the top producer of polyester, according to the Washington-based International Cotton Advisory Committee, which has 41 member states. The group projects global synthetic-fiber consumption at 47.2 million tons in 2012, 3.9 percent more than last year.
Manufacturing in China unexpectedly shrank in August for the first time in nine months, the National Bureau of Statistics and China Federation of Logistics and Purchasing said on Sept. 1 in Beijing.
“Cotton-market fundamentals are just awful,” said Sterling Smith, a futures specialist at Citigroup Inc. in Chicago. “Demand is quite low, and the heavy supplies will contain any rally. We will probably see a downward correction from the recent rally as new crops start to come to market.”
To contact the reporters on this story: Marvin G. Perez in New York at mperez71@bloomberg.net; Whitney McFerron in London at wmcferron1@bloomberg.net; Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

India Signals ‘Natural Death’ to Tax Plan Amid Downgrade Threat By Tushar Dhara and V. Ramakrishnan - Sep 2, 2012

A panel set up by India’s prime minister recommended deferring a proposal to crack down on tax avoidance by three years, a move investors said may help boost capital inflows amid the threat of a rating downgrade to junk.
The General Anti-Avoidance Rule, or GAAR, outlined by former finance minister Pranab Mukherjee in his March 16 budget spooked foreign investors and raised concerns that the crackdown with retrospective effect would indiscriminately apply to their holdings of stocks and bonds. A draft report released on Sept. 1 by the four-member committee, suggested delaying its implementation to the assessment year 2017-18 on “administrative grounds.”
“It is definitely good news and a sentimental boost,” said Ananth Narayan G., managing director and co-head of wholesale banking at Standard Chartered Plc in Mumbai. “Essentially the proposal will be on hold for the next three years and hopefully will die a natural death, at least the retrospective clause.”
Global funds turned net sellers of Indian stocks in April and May after the proposals, pushing the rupee down to a record low as Prime Minister Manmohan Singh grappled with corruption allegations, a record current-account deficit, and missed budget targets. Singh set up the panel in July to help “reverse the climate of pessimism” after Standard & Poor’s and Fitch Ratings cut the sovereign credit outlook to negative, a step closer to non-investment grade rating.
The tax panel led by Parthasarthi Shome, a former adviser to the finance minister, also suggested abolishing taxes on proceeds from the transfer of listed securities, whether they are from capital gains or business income, for both Indians and non-residents.

Mitigation, Avoidance

The committee said tax mitigation using legal means should be distinguished from tax avoidance, and the GAAR rules must be invoked only in cases of “abusive, contrived and artificial arrangements.” The rule must not override an international tax treaty with provisions for anti-avoidance, the panel said.
The recommendations also included a monetary threshold of 30 million rupees ($539,268) per taxpayer in a year under the GAAR rule, according to the report. Singh set up the four member panel, consisting of tax experts and government officials, in July to seek suggestions and submit their final recommendations by the end of September.
Investor concerns that foreign investments will decline prompted Mukherjee to retreat in May and delay the implementation of the rule to April 2013. Standard & Poor’s cut its credit outlook to negative on April 25, citing diminishing growth prospects and slow progress on fiscal reforms. Fitch followed on June 18.

BlackRock’s iShares

Mukherjee resigned as finance minister on June 26 to become the president of India a month later, while Palaniappan Chidambaram took charge from Singh, who held the portfolio until July 31.
The rupee has declined 17 percent against the dollar in the past year, and touched an all-time low of 57.3275 on June 22. India attracted $10.1 billion worth of foreign direct investment in the six months to June 30 compared to $15.6 billion in the same period a year ago.
The proposed tax avoidance rules prompted BlackRock Inc., the world’s biggest money manager, to tell investors of its iShares BSE Sensex India Index ETF (2836) to “carefully consider their position and seek advice as necessary,” according to the exchange-traded fund’s 2012 semi-annual report on June 30.
Ishares BSE has gained 7.3 percent this year in Hong Kong, compared with a 13 percent increase in the Sensex index.
“The GAAR issue was hanging like a sword over foreign investors,” Kishor Ostwal, managing director of Mumbai-based equities research provider CNI Research (India) Ltd., said by phone on Sept. 2. “The announcement will clear a lot of doubts and accelerate foreign inflows into the stock market.”

Retrograde Steps

A rebound in purchases of stocks by overseas investors is crucial to reverse the slide in the rupee and fund the current account deficit that widened to a record 4.2 percent of gross domestic product in the financial year ended March 31. The $1.8 trillion economy expanded 5.3 percent in the first quarter of 2012, the slowest pace in three years, and 5.5 percent in the following three months. Growth averaged 7.5 percent in 2011.
Finance Minister Chidambaram on Aug. 7 said he will unveil a plan to contain India’s fiscal deficit and clarify tax laws to “regain” investor confidence.
“Our policy actions should match our long term economic objectives, although in the past year, certain retrograde measures reversed the economic reforms process,” said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance Co. in a telephone interview. “The government should make more such efforts to attract foreign investments as we are starved of capital. We need policies that deepen our market and encourage overseas investments.”
The chances the panel’s recommendations won’t be implemented in the final report are “fairly” remote, Satya Poddar, a Gurgaon-based tax partner with Ernst & Young said on Sept. 1.
“Essentially what they’re saying is that India is not ready for GAAR and if it is applied, it should be severely constrained,” he said.
To contact the reporters on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net; V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; James Regan at jregan19@bloomberg.net

India’s JSW Steel Agrees to Absorb Ispat Unit

By Abhishek Shanker - Sep 1, 2012

JSW Steel Ltd. (JSTL), India’s third- largest steelmaker, will absorb its JSW Ispat Ltd. unit, almost two years after agreeing to buy a majority stake in the company to boost earnings through tax benefits.
Investors will get one JSW Steel share for every 72 shares of JSW Ispat that they own, according to an e-mailed statement from JSW Steel. The transaction “will help in realization of integration benefits of the two companies,” Sajjan Jindal, chairman and managing director of JSW Steel said.
JSW Steel’s founders will own 35.12 percent of the merged company, according to the statement. JFE Holdings Inc. (5411) of Japan, which owns a 15 percent stake in JSW Steel, will own 14.92 percent of the combined entity.
JSW held about 47 percent of Ispat (JSWI) before today’s announcement. The Mumbai-based company paid 21.6 billion rupees ($389 million) excluding debt for Ispat Industries Ltd. in December 2010. Renamed JSW Ispat, the steelmaker which owns a 3.2 million metric ton factory in the western state of Maharashtra, refinanced its debt in August last year, lowering its interest cost.
“A potential merger of JSW Ispat and JSW Steel would lead to a spike in net debt and deterioration of leverage ratios of JSW Steel,” Bijal Shah and Jaykumar Doshi, analysts at India Infoline Ltd. (IIFL) in Mumbai, said in a report on Aug. 30. “Carried- forward tax losses of JSW Ispat would reduce tax expense and boost earnings. The impact of tax benefit would far outweigh the 100 percent consolidation of Ispat’s losses.”
The net debt of the combined entity will jump 40 percent to 232 billion rupees, according to the analysts. JSW Ispat has carried forward tax losses of about 75 billion rupees, equivalent to a tax shield of approximately 25 billion rupees, which JSW Steel may use to cut its tax expenses, they said in the report.
JSW Steel fell 0.2 percent to 693.7 rupees in Mumbai yesterday, while the shares of JSW Ispat remained unchanged at 9.55 rupees. The Bombay Stock Exchange’s benchmark Sensitive Index dropped 0.6 percent yesterday.
To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Growth Beats Estimates After Rate Cut to Aid Spending

By Unni Krishnan and Kartik Goyal - Aug 31, 2012

India’s economy grew more than estimated last quarter after the central bank cut interest rates to support spending at home as Europe’s debt crisis crimped export growth. Bonds fell and the rupee pared losses.

Gross domestic product rose 5.5 percent in the three months through June from a year earlier, faster than the three-year low of 5.3 percent in the previous quarter, data from the Central Statistical Office in New Delhi showed today. The median of 39 estimates in a Bloomberg News survey was for a 5.2 percent gain.

“Despite slightly higher growth, the underlying momentum remains weak,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “India needs a faster expansion to cut poverty and accelerate development, but its economic performance is likely to remain below potential.”

Prime Minister Manmohan Singh faces pressure to rejuvenate a development agenda hampered by graft allegations and political gridlock, as inflation near 7 percent limits the central bank’s room to lower rates further to revive investment. India and BRIC peers China, Russia and Brazil are relying on domestic demand as Europe’s woes dim the outlook for overseas sales.

Inflation has been fanned by food costs and a 17 percent drop in the rupee against the dollar in the past year that made imports such as oil costlier. A below-average monsoon threatens to exacerbate price increases and weigh on growth by crimping farm output.

Rupee, Stocks

The yield on the 8.15 percent bond due June 2022 rose to 8.23 percent as of 3:19 p.m. in Mumbai from 8.19 percent yesterday. The rupee little changed at 55.655 per dollar, after sliding as much as 0.3 percent earlier. The BSE India Sensitive Index fell 0.8 percent.

GDP rose 3.9 percent last quarter from a year earlier, the slowest pace since 2009, based on an alternative estimate using expenditures on goods and services, according to calculations by Bloomberg.

India’s wholesale-price index rose 6.87 percent last month from a year earlier, the fastest inflation in the BRIC group even as the pace eased to a 32-month low. India also faces record borrowing needs to plug the widest BRIC budget deficit and a trade shortfall that has pressured the rupee.

The nation is “somewhat of an outlier in the world” as inflation remains above a comfort level of about 5 percent even as GDP growth moderates, according to Reserve Bank of India Governor Duvvuri Subbarao. He left borrowing costs unchanged at 8 percent in July for a second meeting, after a 0.5 percentage point cut on April 17.

Faster Development

Brazil lowered its lending rate for the ninth straight meeting this week to a record low 7.5 percent. The nation’s GDP growth probably slowed to 0.7 percent in the second quarter from a year earlier, the weakest pace since 2009, according to the median estimate in a Bloomberg News survey before a report today.

India’s central bank predicts a 6.5 percent GDP climb in the 12 months that began April 1, matching last year’s pace, which was a nine-year low following a moderation in investment.

“Today’s growth rate was driven by the construction sector and other services,” said Suvodeep Rakshit, an economist at Kotak Securities Ltd. in Mumbai. “But the weak growth story still continues. The Reserve Bank of India’s priority remains inflation, so the onus is on the government to accelerate reforms.”

Farm output rose 2.9 percent in the three months through June from a year earlier, compared with a 1.7 percent gain in the previous quarter, today’s report showed. Manufacturing expanded 0.2 percent, while construction jumped 10.9 percent.

Budget Deficit

Singh is under pressure to achieve faster growth in a nation where the majority of people live on less than $2 per day, according to World Bank estimates.

The Reserve Bank has cited India’s fiscal gap as among inflation risks. Singh’s administration is struggling to rein in spending on a subsidy program ranging from diesel to fertilizers even as weaker expansion crimps tax revenues.

The government’s goal is to narrow the budget shortfall to 5.1 percent of GDP in the fiscal year through March 2013, from 5.8 percent. Forecasters including Citigroup Inc. predict the deficit will instead widen as expansion falters.

S&P and Fitch have said they may strip India of its investment-grade rating because of such risks. Companies such as Tata Motors Ltd. (TTMT) have felt the impact of slower growth. Deliveries from its Indian business declined 3.6 percent in the three months ended June.

Finance Minister Palaniappan Chidambaram has pledged to unveil a road map for fiscal consolidation to assuage concern that policy missteps are clouding India’s outlook.

The government has forgone increased foreign investment in industries from retailing to insurance in recent months, in part as coalition allies objected. Legislation to revamp taxes to bolster expansion is also stalled.

“The government has its back to the wall,” said N. Bhaskara Rao, chairman of the New Delhi-based Centre for Media Studies. “There is little possibility of it hitting back and taking any meaningful reforms.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net;

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Nadar’s HCL Cuts Rates to Tap $15 Billion Deals: Corporate India

By Jonathan Browning and Ketaki Gokhale - Aug 31, 2012

HCL Technologies Ltd. (HCLT), the Indian software developer founded by billionaire Shiv Nadar, plans to cut prices to tap $15 billion of orders as companies switch suppliers of information technology to save cash.

“Today the customer is very angry with the existing vendors and very unhappy with their level of service and support,” HCL’s Chief Executive Officer Vineet Nayar said in an interview in London. The contracts were written before the economic crisis in 2008 “and therefore their terms were one- sided, pro-vendor,” he said.

HCL’s strategy to offer lower rates to lure clients in the U.S. and Europe helped the company post record sales and profit in the year ended June 30. Customers may seek new information technology suppliers for about 30 percent of the $45 billion of orders up for renewal this year, offering business to vendors who are open to changing contract terms, Nayar said.

HCL beat analysts’ estimates by 25 percent in the three months to June 30, exceeding forecasts for the seventh straight quarter. Larger rival Infosys Ltd. (INFO) missed earnings predictions in four of the past eight reporting periods, and on July 12 said sales in the year ending March may rise to at least $7.34 billion, lower than the $7.55 billion forecast in April.

“Clients are becoming more cost conscious,” said Manoj Behera, an analyst at Equirus Securities Pvt. HCL’s global peers are “generally price insensitive. This is something that is driving sales for HCL at this point in time.”

Global spending on information technology may grow at a 3 percent pace in 2012 to $3.6 trillion this year, Gartner said in a July 9 report. That’s slower than 7.9 percent last year as the euro area crisis, a weaker U.S. recovery and a slowdown in China curb economic growth, the researcher said.

‘Crying Wolf’

Nayar said the company, spun off from computer maker HCL in 1997, won customers in 2008 after agreeing to slash its annual charge for a Boston-based client by 62 percent to $25 million after the customer’s revenue dropped to $700 million from $1.8 billion. Nayar didn’t identify the company.

“We saw it as an opportunity of getting into more doors than ever before,” Nayar, 50, said. As customers change vendors, “depending on where you’re sitting, you’re either gaining from it, which is what’s happening with HCL, or you are crying wolf and saying recession.”

The company has signed $2.5 billion of deals in the last six months, he said. HCL has gained 33 percent in the past year compared with a 2.1 percent increase at Infosys. HCL, based in the New Delhi suburb of Noida, fell 0.3 percent to 544.9 rupees at 9:42 a.m. in Mumbai.

Earnings Margin

The company, that sold shares in an initial public offering in 1999, had an earnings margin before interest and taxes of 16.5 percent, lower than the average of 19.5 percent margin among the 10-company BSE IT Index (BSET), according to data compiled by Bloomberg.

The measure for the year ended March 31 was 29 percent at Infosys, the highest among India’s four largest software exporters. Tata Consultancy Services Ltd. (TCS) reported a margin of 28 percent, data show.

“HCL’s volatile margin history makes us wary,” Abhiram Eleswarapu, a Mumbai-based analyst with BNP Paribas Securities India Pvt. said in a July 26 note to clients. “HCL expects to maintain an annual EBIT margin of 16.5 percent at current foreign-exchange rates. However, its margins have historically been volatile, making extrapolations risky.”

Eleswarapu recommends investors reduce their holdings in HCL’s stock and has a hold rating for Infosys.

Cheaper Locations

To maintain margins HCL may propose billing the client on a fixed-price rather than time-and-materials basis or moving work to cheaper locations such as the Philippines from Singapore, as well as automating more processes, Nayar said.

HCL also plans to reevaluate its acquisition strategy to boost growth and be “relevant in 2015,” Nayar said. The company may purchase rivals that will help give it a new technology platform, or expand its geographical presence.

In 2008, HCL outbid Infosys to buy Axon Group Plc, a U.K. business management software provider by agreeing to pay 407 million pounds ($644 million). Nadar, the company’s founder, set up Hindustan Computers Ltd. in 1976 and began selling micro- computers two years later.

“If as an IT services company you’re not going to keep yourself current and you believe that your business model or your technology competence are going to continue to be relevant, then you’re going to become obsolete,” Nayar said. “Your perception of your invincibility is your biggest threat and your biggest competition.”

To contact the reporters on this story: Jonathan Browning in London at jbrowning9@bloomberg.net; Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Infosys Seeks Product Deals as Customers Delay: Corporate India By Ketaki Gokhale - Aug 29, 2012

Infosys Ltd. (INFO), India’s second-largest software developer by value, needs to make acquisitions to meet a goal of earning a third of its revenue from products in five years as clients delay new projects.
The company’s “aspiration” is to boost business selling banking products such as Finacle and WalletEdge, used to transfer money over mobile phones, from 6.1 percent of sales in the three months ended June 30, Chief Executive Officer S.D. Shibulal said. Infosys in July cut its sales forecast for the year that began April 1 amid weaker spending by customers.
Infosys, which has 151,151 employees, is targeting software products to help it reduce its dependence on writing customized code to boost revenue, said Ankur Rudra, an analyst with Ambit Capital Pvt. in Mumbai. The first Indian company to sell shares on the Nasdaq is open to purchasing a firm that’s a 10th of its size in revenue, Shibulal said. Infosys’s sales rose 22 percent to $7 billion in the year ended March 31.
“It’s about increasing our revenue share from non- commoditized areas,” Shibulal, 57, said in an interview at Bloomberg’s office in Mumbai yesterday, adding that boosting product revenue wasn’t in his plan 18 months ago. The company will this year “hire 35,000 people, if you continue on this path in about seven years we’ll be recruiting about 200,000 people. This is not a viable option.”
Infosys shares have dropped 14 percent this year, compared with a 16 percent increase at larger rival Tata Consultancy Services Ltd. The benchmark BSE India Sensitive Index has risen 13 percent. Infosys, based in Bangalore, fell 1.4 percent to 2,388.3 rupees in Mumbai yesterday.

‘Risky Business’

“Infosys’s focus on growing its products and platform- based businesses is risky,” said Rod Bourgeois, a New York- based analyst at Sanford C. Bernstein & Co. “If Infosys were thriving better in its core services businesses, it would have less need for products and platform-based growth.”
Finacle, used by companies including Rabobank Groep of the Netherlands and Denmark’s Nykredit Group, accounts for the majority of Infosys’s product revenue.
The software has approximately 70 percent market share in India, Chief Financial Office V. Balakrishnan said in an interview in February. Revenue from the 15-year-old product rose 7.8 percent to $318.75 million in the year ended March 31, from $295.6 million the year before.
The company, started by seven people including Shibulal with $250 borrowed from their wives in 1981, is targeting emerging markets for its products and platforms including WalletEdge.

Cash Pile

GlaxoSmithKline Plc uses Infosys’s marketing tool BrandEdge, which competes with Sapient Corp. (SAPE)’s SapientNitro, Accenture’s Accenture Interactive and a digital advertising suite from Adobe Systems Inc. (ADBE)
Reaching the company’s goal “isn’t going to happen overnight, unless we do an acquisition,” Shibulal, who took over as head in August last year, said. Infosys had a cash pile of 206 billion rupees ($3.7 billion) as of June 30, the largest among Indian software developers.
Buying a product company may be expensive, said Ambit’s Rudra.
“They will have to pay a massive premium to acquire anything of size and scale,” said Rudra, who recommends investors sell the stock. “One would imagine they would not be ready to spend as much, given their relatively conservative track record.”
In 2008, Infosys decided against pursuing a plan to buy Axon Group Plc for 407 million pounds ($644 million) after its bid was trumped by New Delhi-based HCL Technologies Ltd. (HCLT) In 2006, Infosys spent $115 million to purchase Citigroup Inc.’s stake in Progeon Ltd., a back-office service provider controlled by Infosys.

Missed Estimates

The company, which has missed earnings estimates for four of the past eight quarters, on July 12 said sales in the year ending March may rise to at least $7.34 billion, lower than the $7.55 billion forecast in April. In contrast, Tata Consultancy’s earnings lagged behind analysts’ forecasts twice in the past eight quarters.
Shibulal blamed the difference on Infosys’s portfolio and the company’s dependence on so-called discretionary spending by companies, which has slowed.
Customers are facing “a lack of confidence about where to invest,” Shibulal said. “I don’t see any events on the horizon which will build confidence.”
For the year ending March, Infosys has forecast dollar- denominated sales growth below an estimate of 14 percent expansion for the Indian information technology services industry by the National Association of Software & Services Companies.
“In our 30-year history, one year and one quarter doesn’t mean much,” Shibulal said. “You don’t go in and reassess the entire strategy of a corporation and what we have achieved just because of a couple quarters.”
To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net
To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

Maoist Hideout Threatens $3 Billion Steel Plant: Corporate India By Rajesh Kumar Singh - Aug 28, 2012

Attacks by Maoist rebels in India are preventing the nation’s second-largest maker of steel from mining an iron-ore reserve it says is vital to feed a planned $3 billion expansion of its biggest plant.
The Rowghat mine in the central state of Chhattisgarh is crucial for Steel Authority of India Ltd.’s adjacent Bhilai plant, which will run out of ore in about five years, Chairman C.S. Verma said. The company has failed to remove forest cover to mine the 2,030 hectares (5,016 acres) of deposit because of “violent reprisals” from Maoist rebels who, according to Jitendra Singh, junior minister for home affairs, use the area as their hideout.
“It’s hard to imagine running the plant without this mine,” Verma said in an interview. “We’re doing everything possible to increase security to start work. Rowghat will be the lifeline for Bhilai.”
Steel Authority’s challenge will be to secure an alternate supply of iron ore should it fail to start Rowghat in time for the expanded production at Bhilai. Rowghat is one of several industrial projects that have been stymied by the Maoists, who run a parallel regime in some of India’s richest mining regions, as lack of jobs and poverty draws locals to their ranks.
“The clock is ticking,” said Giriraj Daga, an analyst at Nirmal Bang Equities Pvt. in Mumbai. “Steel Authority’s earnings will be at stake if Rowghat is not ready in time.”
Rowghat will produce 12 million tons of ore a year, making it the company’s biggest mine, according to Steel Authority’s website.
Steel Authority shares declined 1.1 percent to 82.85 rupees in Mumbai yesterday, the lowest level in a month. The stock has risen 1.7 percent this year, compared with a 14 percent gain in the benchmark Sensitive Index. (SENSEX)

Campaign of Violence

The Maoist guerrillas are active in a dozen of India’s 28 states, many of which are rich in iron ore, coal, bauxite, manganese and other minerals. The rebels have pressed a campaign of violence against the government, police and landowners since a peasant uprising in the eastern state of West Bengal in 1967. They have been accused of raising funds through extortion.
Maoist rebels killed 15 members of India’s security forces in two attacks in June last year in Chhattisgarh. In April the previous year, the rebels killed 76 policemen in the same Dantewada district, the deadliest attack on security forces in the decades-long conflict.
Bhilai accounts for 36 percent of Steel Authority’s 13.4 million metric ton capacity and about 35 percent of its profit, according to the company’s website. The plant, which started production in 1961, makes rails, steel plates as well as rods.
New Delhi-based Steel Authority is investing 172.7 billion rupees ($3 billion) to expand Bhilai, part of a $13 billion plan to increase capacity 60 percent, improve products and develop mines. The company spent 403.2 billion rupees as of March 31 on the expansion, which has been delayed by at least two years.

Own Ore

Steel Authority’s profitability emanates from its own source of iron ore for its entire requirement. The company imports almost 70 percent of its coking coal, which makes it the second-biggest spender on raw material among the three biggest steelmakers in the country.
“The company’s profits have already borne the brunt of the increase in coking coal prices,” said Niraj Shah, an analyst at Fortune Equity Brokers India Ltd. in Mumbai. “The absence of iron ore mines can further dent margins, especially because its conversion cost is fairly high.”
Steel Authority’s cost of turning iron ore into a ton of steel was 16,464 rupees in the year ended March 31, more than double that of JSW Steel Ltd. (JSTL)’s 8,105 rupees, according to Shah. Tata Steel Ltd. (TATA), the country’s largest producer of the alloy, incurred 21,703 rupees.

Falling Profit

Steel Authority’s profit fell in eight of the past nine quarters on higher import costs of coking coal and currency losses on overseas loans taken to buy fuel and plant equipment.
India could lose $80 billion of investment in developing mineral deposits should the government fail to stop rebel violence, London-based investment banking and securities firm Execution Noble Ltd. has said.
Inventories piled up at NMDC Ltd. (NMDC), which runs the biggest iron ore deposit in Chhattisgarh, after Maoists in 2009 blew up an underground pipeline that transported iron ore to Essar Steel Ltd.’s pellet plant in the adjoining state of Andhra Pradesh. The repaired pipeline was damaged again last year.
State-run National Aluminium Co. (NACL)’s expansion of its alumina refinery suffered delays, after Maoists invaded the company’s bauxite mines in 2009 and captured workers to grab explosives used in mining. The incident spread fear among workers, who would not turn up for work until the police declared the area safe almost after two weeks, C.R. Pradhan, then chairman of the company, said yesterday in a phone interview.

‘Fear of Life’

“Even after the area was declared safe, mine workers stopped work after sunset,” Pradhan said. “Almost 5,000 construction workers at the refinery site fled to their native places fearing for their lives.”
Such threats have often deprived Indian companies of the resources the land holds. Local steelmakers have started importing iron ore, despite the country’s capacity to produce almost twice its requirements.
Spot prices of iron ore with 62 percent metal content at China’s Tianjin port have declined 32 percent this year to $94.8 a ton a yesterday, the lowest level in almost 34 months, according to data compiled by Bloomberg.
“Imports of iron ore will increase in times to come,” said Shah of Fortune Equity Brokers. “It’s the most plausible solution.”
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