Wal-Mart Entry Spurs TCI Spending on Logistics: Corporate India

By Karthikeyan Sundaram - Oct 23, 2012

Transport Corp. of India, the nation’s third-largest logistics company, plans its biggest investment in five years to prepare for a jump in freight demand as retailers such as Wal-Mart Stores Inc. (WMT) open stores.
The company will spend 1.5 billion rupees ($28 million) in the year to March 31 to add more trucks and build warehouses, Joint Managing Director Vineet Agarwal said in an interview. The spending may help Transport Corp.’s supply chain division, which offers warehousing and packaging, to expand more than 20 percent annually through 2017, he said.
The operator plans to add 1,000 more trucks in five years, Agarwal said, as India’s decision to allow foreign investment in retail stores will help create more supermarkets and boost transportation of farm and factory products. Deutsche Post AG (DPW)’s DHL Supply Chain last week said it would invest 100 million euros ($131 million) to strengthen operations in the country.
“Once overseas investments start coming into retail sector, it’ll help Transport Corp.,” said Rajni Ghildiyal, an analyst with Asit C. Mehta Investment Interrmediates Ltd. “The strategy to place itself as a supply chain solutions provider will help it exploit the potential.”
Transport Corp. fell as much as 1.7 percent to 63.2 rupees in Mumbai trading today. The stock declined 15 percent in the past year, making it the worst performer on the 29-company Bloomberg Industries Express & Courier Services index after Hanjin Transportation Co.
Sales at Transport Corp.’s supply chain division rose 21 percent to 5.8 billion rupees in the year ended March 31, data compiled by Bloomberg show. The business contributed about 30 percent of total sales, up from 14 percent four years ago.

‘Cold Reefers’

“There’ll be investments in farmgate infrastructure once foreign supermarkets set up shop,” Agarwal said in New Delhi. “At that point, certain amount of logistics, including cold reefers and dry goods movement, will be required. We’re prepared to handle that.”
Last month, Prime Minister Manmohan Singh’s government allowed overseas retailers such as Wal-Mart and Carrefour SA (CA) to own as much as 51 percent in supermarket ventures. Singh also cut energy subsidies, allowed foreign airlines to own as much as 49 percent in local carriers and permitted overseas investment of up to 49 percent in power exchanges, ending two years of policy gridlock.
Singh’s policy drive prompted ally Trinamool Congress to quit the alliance. Last year Singh put the plan to ease investment rules for overseas retailers on hold after opposition parties as well as Trinamool Congress chief Mamata Banerjee protested.
Wal-Mart may take about 12-18 months to open retail stores in India, Scott Price, its head of Asia operations, said Sept. 21. The world’s biggest retailer has been building a supply chain and logistics network in the country after forming a venture with billionaire Sunil Mittal’s Bharti Enterprises to operate wholesale outlets.

Computer Systems

Entry of foreign supermarket chains will spur investments in warehousing, inventory management and computer systems, according to Zenith International Research & Academic Foundation in India. This will help reduce cost for retailers and boost consumer spending, according to Zenith.
The size of logistics industry in the country is about $90 billion to $125 billion, according to a study by Deloitte in India and the Indian Chamber of Commerce. Investments in logistics infrastructure may drive economic growth this decade, according to the study. Logistics accounts for 13 percent of the nation’s gross domestic product.
DHL Supply Chain said Oct. 16 that it will add 5 million square feet of warehousing space in eight cities including Mumbai, Bangalore and Chennai. The company also plans to upgrade its fleet of vehicles, it said in a statement.

Congested Highways

Transport Corp.’s profit may rise as much as 15 percent this fiscal year, Agarwal said. That’ll be the slowest pace of growth in four years, according to Bloomberg data.
The company’s operating margin increased to 6.1 percent in the year ended March 31 from 5.8 percent a year earlier, according to data compiled by Bloomberg. Sales in the period expanded at 5.5 percent, slower than the 22 percent expansion in the year earlier period, the data shows.
Transporters have to contend with congested highways in India, where infrastructure is ranked worse than Guatemala’s by the World Economic Forum. Traffic snarls cost Asia’s third- biggest economy $5.5 billion annually, according to the Indian Institute of Management in Kolkata and Transport Corp. Trucks take 65 hours to travel the 1,374 kilometers (854 miles) between Mumbai and New Delhi because of traffic and stoppages at toll plazas and state borders.

‘Not Enough’

Road construction is lagging behind an August 2009 target of 20 kilometers a day as slowing economic growth and high interest rates discourage builders from bidding for projects.
Prime Minister Singh’s government has targeted a spending of $1 trillion on roads, ports and railways in the five years through 2017. Authorities are also planning to award $2.3 billion of state-funded highway contracts this year.
“Whatever we’re doing is not enough,” Agarwal said. “Work on everything from roads, ports to railways is going very slowly.”
To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Suspends Kingfisher Airlines’ License Amid Strike By Karthikeyan Sundaram and Malavika Sharma - Oct 21, 2012

India suspended Kingfisher Airlines Ltd. (KAIR)’s operating license after the cash-strapped carrier failed to resume flights because of a strike by engineers and pilots demanding seven months of unpaid salaries.
The suspension will remain in effect until the airline submits a “concrete and reliable” revival plan to the Director General of Civil Aviation, the industry regulator, the Civil Aviation Ministry said in an Oct. 20 statement. Bangalore-based Kingfisher said in response that it’s halting all reservations until it can restore flights.
The move adds further pressure on Kingfisher’s billionaire Chairman Vijay Mallya as he seeks investments for an airline struggling with 86 billion rupees ($1.6 billion) of debt after five consecutive years of losses. The carrier hasn’t flown since a staff walkout began Oct. 1.
“They brought this situation on themselves after they ran out of cash,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “Unless the promoter comes up with more equity, I don’t think there will be any institutional or airline investor willing to put their money” into Kingfisher, he said.
Kingfisher failed to address any of the issues raised by the regulator in an Oct. 2 notice, the ministry said. The carrier hasn’t indicated when it will submit a detailed operational-preparedness plan, and the regulator couldn’t grant a request for more time to file a reply, it said. Prakash Mirpuri, a Kingfisher spokesman, didn’t respond to two calls to his mobile phone Oct. 20.
Shares of Kingfisher fell 4.6 percent to 11.40 rupees at the Oct. 19 close of trading in Mumbai. The stock has dropped 46 percent this year, after plunging 68 percent in 2011.

Investment Talks

Kingfisher is in talks with foreign airlines for a stake sale, Mallya said last month. Prime Minister Manmohan Singh’s government last month allowed airlines from outside India to own as much as 49 percent of carriers based in the country as part of a push to attract investment and boost growth.
The license suspension “will allow Kingfisher time to rethink about complete revival or assess damages due to possible closure rather than restarting a five-aircraft operation,” Kapil Kaul, head of the CAPA Centre for Aviation consulting company in India, said in an e-mail. A revival will be dependent on the founders raising a minimum of $600 million, which is highly unlikely, he said.

Loan Defaults

The airline defaulted on loans and interest payments on several occasions in the year ended March 31, the carrier’s auditor said in the company’s annual report. Mallya gave personal guarantees totaling 59 billion rupees for Kingfisher loans, according to the report.
On Oct. 12, a court in Hyderabad, southern India issued warrants against Mallya and four other Kingfisher officials for failing to appear at a hearing about the carrier bouncing checks issued to the city’s airport operator. The warrants and lawsuit were subsequently withdrawn after the carrier settled the payments.
Kingfisher has an operational fleet of seven Airbus SAS A320 jetliners and three Avions de Transport Regional turboprop aircraft. It has enough staff for 60 planes, according to Arun Mishra, the aviation regulator.
To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net; Malavika Sharma in New Delhi at msharma52@bloomberg.net
To contact the editors responsible for this story: Jim McDonald at jmcdonald8@bloomberg.net; Dick Schumacher at dschumacher@bloomberg.net

Asian Currencies Gain in Week on Recovery Optimism; Rupee Drops

By Kyoungwha Kim - Oct 20, 2012

South Korea’s won led a weekly advance in Asian currencies as signs of an improvement in the global economy brightened the outlook for the region’s exports and spurred demand for emerging-market assets.
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s most-active currencies, rose 0.1 percent and on Oct. 18 touched its highest level since February. The won strengthened the most this month and the yuan had an 11th weekly gain, the longest winning streak since March 2008. India’s rupee fell for a second week as the government announced a pickup in inflation. Hong Kong’s dollar touched the strong end of its permitted trading range, triggering intervention to maintain the peg.
China’s factory production, retail sales and fixed-asset investment accelerated in September, reports showed Oct. 18. Retail sales in the U.S., the world’s biggest economy, increased 1.1 percent in September while housing starts climbed 15 percent to a four-year high, reports showed this week. Europe’s leaders committed to their goal of creating a euro-area bank supervisor by year-end, according to officials at a European Union summit that took place in Brussels.
“The September data was clearly stronger than expected,” said Nizam Idris, head of Asian fixed income and currencies at Macquarie Bank Ltd. in Singapore. “The growth momentum will continue. Still, we are at a very early stage of the recovery so it’s too soon to expect” faster gains in Asian currencies, including the yuan, he said.
The won appreciated 0.7 percent this week to 1,103.45 per dollar in Seoul, according to data compiled by Bloomberg. The yuan rose 0.21 percent to 6.2538, touching a 19-year high of 6.2446 on Oct. 18. Taiwan’s dollar climbed 0.3 percent to NT$29.286.

Hong Kong Peg

Hong Kong’s dollar rose 0.02 percent to HK$7.7503. The Hong Kong Monetary Authority said yesterday it bought $603 million at HK$7.75 per dollar during New York trading hours on Oct. 19, intervening for the first time since 2009 to maintain a peg that requires the exchange rate to be kept in a range of HK$7.75 to HK$7.85.
The won touched 1,102.50 on Oct. 17, the strongest level since 0ct. 31, 2011. South Korea’s economy probably expanded 1.7 percent in the third quarter from a year earlier, the least in three years, a Bloomberg survey showed before data due Oct. 26.
“The won was strong this week on positive data from the U.S., but it seems some overseas investors are covering their short positions on the dollar,” said Lee Jung Hyun, a Seoul- based currency trader for Industrial Bank of Korea. (024110) A short position is a bet an asset will decline in value.

China Outlook

The yuan has extended its rebound from this year’s low of 6.3967 on July 25 to 2.3 percent after September data indicated growth is gathering pace in the world’s second-largest economy. Factory output grew 9.2 percent from a year earlier, compared with an 8.9 percent gain in August that was the smallest in three years, official figures showed Oct. 18. Retail sales advanced 14.2 percent, the most since March, while fixed-asset investment climbed 21 percent in the first three quarters.
“We believe China’s economy has bottomed out in August or September,” said Tommy Ong, a Hong Kong-based senior vice- president of treasury and markets at DBS Bank (Hong Kong) Ltd. “Improvement in global liquidity and calls for more appreciation from the U.S. presidential campaign trail are also supporting the yuan.”
The rupee fell 1.9 percent this week to 53.84 per dollar as faster inflation eroded the appeal of assets denominated in the currency. India’s benchmark price index increased 7.81 percent last month from a year earlier, the most since December, according to figures released Oct. 15.
Elsewhere, the Malaysian ringgit rose 0.1 percent this week to 3.0535 per dollar. Indonesia’s rupiah fell 0.1 percent to 9,593 from last week’s 9,588, prices from local banks compiled by Bloomberg show. The currency reached 9,657 on Oct. 11, the weakest level since October 2009. The Philippines peso appreciated 0.1 percent to 41.385. Vietnam’s dong climbed 0.1 percent to 20,843.
To contact the reporter on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net
To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Starbucks May Find Small Coffee More Profitable: Corporate India

By Malavika Sharma - Oct 19, 2012

Starbucks Corp. (SBUX), which today introduces India to its caramel macchiatos and espressos, may find smaller and cheaper beverages the fastest way to win local coffee drinkers from established rivals.
The world’s largest coffee chain will need options that are priced as much as 33 percent lower than its U.S. offerings to succeed in the Indian market, said Saloni Nangia, president at Gurgaon-based consultancy Technopak Advisors Pvt. The company opens its first outlet in the country today with partner Tata Global Beverages Ltd. (TGBL) in an upscale south Mumbai neighborhood that also boasts a Hermes store.
Starbucks is entering the world’s second-most populous nation as part of a plan to counter slowing growth in the U.S. and a recession in Europe. The U.S. accounted for less than 70 percent of its sales last fiscal, according to data compiled by Bloomberg. In India, where consumption of the drink has almost doubled in the decade through 2010 to 108,000 metric tons, the chain will compete with Barista Coffee Co., a unit of Italy’s Lavazza SpA, and Cafe Coffee Day, run by Amalgamated Bean Coffee Trading Co.
“It’s a great time for Starbucks to come in because some of the base is already here, in terms of cafes, in terms of people using them as socializing hotspots,” said Nangia. “The average Indian consumer, or the current cafe consumer, is happy to upgrade to a Starbucks environment.”

Dunkin’ Donuts

Seattle-based Starbucks is among the latest entrants into the country of 1.2 billion people as chains including Dunkin’ Brands Group Inc., the owner of Dunkin’ Donut shops, and Krispy Kreme Doughnuts Inc. (KKD) are chasing emerging markets for growth. Higher disposable incomes and a growing, young population will boost the fast-food market in India to 146 billion rupees ($2.7 billion) in 2014 from 47 billion rupees in 2010, estimates by researcher RNCOS E-Services Pvt. show.
Café Coffee Day, the nation’s biggest chain with 1,360 stores across the country, sells a regular cup of cappuccino for 61 rupees ($1.14) in Mumbai, while its closest competitor Barista with 318 stores, sells for 69 rupees, in a nation where the World Bank says about two-thirds of the people live on less than $2 a day.
That may prompt Starbucks to sell its drinks for about $2 to $2.50 a cup, Nangia said, compared with about $4 in Beijing and $3.50 in the U.S.
Though India is a different market than other countries, the U.S. chain founded by Howard Schultz, may not price its products lower as it wants to be perceived as a premium brand, said Larry Miller, an Atlanta-based analyst at RBC Capital Markets Corp.

Similar Prices

“I wouldn’t be surprised to see similar levels to other markets around the world, which would be a pretty expensive proposition for the Indian consumer,” he said in a telephone interview yesterday. “In China, their products are just as expensive as they are in the U.S.”
Starbucks on Jan. 30 announced an equal venture with Tata Global Beverages, and said it plans to open as many as 50 stores in Mumbai and New Delhi in its first year. The first outlet in Mumbai’s Horniman Circle is two months behind schedule. Tata Global Vice Chairman R.K. Krishna Kumar was unavailable for comments.
“We are looking at this venture from a long-term point of view,” John Culver, president of Starbucks’s Asia-Pacific business told reporters in September. “We will open a series of stores and monitor consumer response and focus on the experience we provide.”

Price Sensitive

While India’s gross domestic product has grown an average 8.3 percent in the seven years through March 31 to about $1.8 trillion, the fastest pace of inflation among the BRIC countries at 9 percent since the start of 2010 makes the market more price sensitive, said V. Srinivasan, an analyst at Angel Broking Ltd. in Mumbai who tracks Tata Global. The pace of economic expansion is set to slow to 4.9 percent in 2012, the least in a decade, the International Monetary Fund said Oct. 9.
“Given the impact the macro-economic environment is having on discretionary spending, it remains to be seen what sort of a pricing premium they have over the other players,” Srinivasan said. “They will be at the high end of the spectrum.”
The entry of Starbucks won’t dent the prospects of Café Coffee Day, said K. Ramakrishnan, president of marketing at the closely held Indian chain.
Café Coffee Day, which also offers local dishes including samosas or savory pastries catering to Indian palates, plans to expand its stores to 2,000 by the end of 2014 that would serve all segments of consumers - teenagers, students, office goers and families, he said in a telephone interview yesterday.

Lot of Room

“This isn’t a market so saturated that one player will end up trampling others,” he said. “There’s a lot of room here to grow in this business. There’s a strong and positive demographic story here and the economy is what is attracting people.”
Tata Global shares have rallied 66 percent since making its Starbucks association public, the best performance on the BSE Ltd. FMCG Index (BSETMCG) after liquor maker United Spirits Ltd. The stock gained as much as 1.1 percent to 163.80 rupees in Mumbai trading today, and traded at 162.5 rupees at 11:04 a.m.
The U.S. coffee chain in January last year signed a deal to buy coffee beans from Tata Global’s unit Tata Coffee Ltd. (TCO), whose shares have climbed 35 percent this year, compared with a 21 percent gain in the benchmark Sensitive Index. (SENSEX)
Tata Global stock’s present value has fully priced in the partnership, Angel Broking’s Srinivasan said.
“Starbucks opening just one outlet needn’t add any value to the financials of Tata Global,” he said. “Turning the hype into actual performance will be a challenge. It will take some time, say at least about six to 12 months before they have a meaningful presence.”

Expanding

Chief Executive Officer Schultz said in an interview on Oct. 4 that his company plans to add 1,000 stores in the U.S. in the next five years. Starbucks said in July that it will open as many as 500 new stores in the Asia-Pacific region this year, more than of half of which will be in China.
Schultz will open the store in Mumbai today after third- quarter sales at outlets open for at least 13 months in Europe, the Middle East and Africa were unchanged.
India now is “what the U.S. may have been in the 1960s or 1970s in terms of coffee culture,” Nangia said. “The right- sizing for India could mean right pricing as well. In the U.S., the average size is much bigger and one has to see how Indians consume.”
To contact the reporter on this story: Malavika Sharma in New Delhi at msharma52@bloomberg.net
To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Starbucks May Find Small Coffee More Profitable: Corporate India By Malavika Sharma - Oct 18, 2012

Starbucks Corp. (SBUX), which today introduces India to its caramel macchiatos and espressos, may find smaller and cheaper beverages the fastest way to win local coffee drinkers from established rivals.
The world’s largest coffee chain will need options that are priced as much as 33 percent lower than its U.S. offerings to succeed in the Indian market, said Saloni Nangia, president at Gurgaon-based consultancy Technopak Advisors Pvt. The company opens its first outlet in the country today with partner Tata Global Beverages Ltd. (TGBL) in an upscale south Mumbai neighborhood that also boasts a Hermes store.
Starbucks is entering the world’s second-most populous nation as part of a plan to counter slowing growth in the U.S. and a recession in Europe. The U.S. accounted for less than 70 percent of its sales last fiscal, according to data compiled by Bloomberg. In India, where consumption of the drink has almost doubled in the decade through 2010 to 108,000 metric tons, the chain will compete with Barista Coffee Co., a unit of Italy’s Lavazza SpA, and Cafe Coffee Day, run by Amalgamated Bean Coffee Trading Co.
“It’s a great time for Starbucks to come in because some of the base is already here, in terms of cafes, in terms of people using them as socializing hotspots,” said Nangia. “The average Indian consumer, or the current cafe consumer, is happy to upgrade to a Starbucks environment.”

Dunkin’ Donuts

Seattle-based Starbucks is among the latest entrants into the country of 1.2 billion people as chains including Dunkin’ Brands Group Inc., the owner of Dunkin’ Donut shops, and Krispy Kreme Doughnuts Inc. (KKD) are chasing emerging markets for growth. Higher disposable incomes and a growing, young population will boost the fast-food market in India to 146 billion rupees ($2.7 billion) in 2014 from 47 billion rupees in 2010, estimates by researcher RNCOS E-Services Pvt. show.
Café Coffee Day, the nation’s biggest chain with 1,360 stores across the country, sells a regular cup of cappuccino for 61 rupees ($1.14) in Mumbai, while its closest competitor Barista with 318 stores, sells for 69 rupees, in a nation where the World Bank says about two-thirds of the people live on less than $2 a day.
That may prompt Starbucks to sell its drinks for about $2 to $2.50 a cup, Nangia said, compared with about $4 in Beijing and $3.50 in the U.S.
Though India is a different market than other countries, the U.S. chain founded by Howard Schultz, may not price its products lower as it wants to be perceived as a premium brand, said Larry Miller, an Atlanta-based analyst at RBC Capital Markets Corp.

Similar Prices

“I wouldn’t be surprised to see similar levels to other markets around the world, which would be a pretty expensive proposition for the Indian consumer,” he said in a telephone interview yesterday. “In China, their products are just as expensive as they are in the U.S.”
Starbucks on Jan. 30 announced an equal venture with Tata Global Beverages, and said it plans to open as many as 50 stores in Mumbai and New Delhi in its first year. The first outlet in Mumbai’s Horniman Circle is two months behind schedule. Tata Global Vice Chairman R.K. Krishna Kumar was unavailable for comments.
“We are looking at this venture from a long-term point of view,” John Culver, president of Starbucks’s Asia-Pacific business told reporters in September. “We will open a series of stores and monitor consumer response and focus on the experience we provide.”

Price Sensitive

While India’s gross domestic product has grown an average 8.3 percent in the seven years through March 31 to about $1.8 trillion, the fastest pace of inflation among the BRIC countries at 9 percent since the start of 2010 makes the market more price sensitive, said V. Srinivasan, an analyst at Angel Broking Ltd. in Mumbai who tracks Tata Global. The pace of economic expansion is set to slow to 4.9 percent in 2012, the least in a decade, the International Monetary Fund said Oct. 9.
“Given the impact the macro-economic environment is having on discretionary spending, it remains to be seen what sort of a pricing premium they have over the other players,” Srinivasan said. “They will be at the high end of the spectrum.”
The entry of Starbucks won’t dent the prospects of Café Coffee Day, said K. Ramakrishnan, president of marketing at the closely held Indian chain.
Café Coffee Day, which also offers local dishes including samosas or savory pastries catering to Indian palates, plans to expand its stores to 2,000 by the end of 2014 that would serve all segments of consumers - teenagers, students, office goers and families, he said in a telephone interview yesterday.

Lot of Room

“This isn’t a market so saturated that one player will end up trampling others,” he said. “There’s a lot of room here to grow in this business. There’s a strong and positive demographic story here and the economy is what is attracting people.”
Tata Global shares have rallied 66 percent since making its Starbucks association public, the best performance on the BSE Ltd. FMCG Index (BSETMCG) after liquor maker United Spirits Ltd. The stock slipped 0.3 percent yesterday to 162.05 rupees in Mumbai.
The U.S. coffee chain in January last year signed a deal to buy coffee beans from Tata Global’s unit Tata Coffee Ltd. (TCO), whose shares have climbed 35 percent this year, compared with a 22 percent gain in the benchmark Sensitive Index. (SENSEX)
Tata Global stock’s present value has fully priced in the partnership, Angel Broking’s Srinivasan said.
“Starbucks opening just one outlet needn’t add any value to the financials of Tata Global,” he said. “Turning the hype into actual performance will be a challenge. It will take some time, say at least about six to 12 months before they have a meaningful presence.”

Expanding

Chief Executive Officer Schultz said in an interview on Oct. 4 that his company plans to add 1,000 stores in the U.S. in the next five years. Starbucks said in July that it will open as many as 500 new stores in the Asia-Pacific region this year, more than of half of which will be in China.
Schultz will open the store in Mumbai today after third- quarter sales at outlets open for at least 13 months in Europe, the Middle East and Africa were unchanged.
India now is “what the U.S. may have been in the 1960s or 1970s in terms of coffee culture,” Nangia said. “The right- sizing for India could mean right pricing as well. In the U.S., the average size is much bigger and one has to see how Indians consume.”
To contact the reporter on this story: Malavika Sharma in New Delhi at msharma52@bloomberg.net
To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

Top Mortgage Lender Holding Rates as Banks Cut: Corporate India

By Pooja Thakur and Anto Antony - Oct 17, 2012

Housing Development Finance Corp. (HDFC), the world’s biggest mortgage company by value, said it will refrain from matching interest rate reductions by banks in India to protect margins that are at a 12-year high.
The Mumbai-based lender may keep rates at 10.25 percent for credit of less than 3 million rupees ($56,800), Keki Mistry, chief executive officer of the company known as HDFC, said in an interview. The lender reduced interest rates by quarter point on Oct. 1. State Bank of India, the nation’s largest lender, is offering home loans at 10 percent.
A slowdown in demand for credit to build factories and roads in Asia’s third-largest economy is prompting banks to switch focus to mortgages, intensifying competition with HDFC and LIC Housing Finance Ltd. (LICHF) State Bank has seen home loan applications double after it cut borrowing costs in a nation that has the fastest pace of inflation among BRIC countries, according to Managing Director A. Krishna Kumar.
“Our rates are a function of our cost of funds and we will bring it down when our cost of funds comes down,” Mistry, 57, said. “Some banks focus on the mortgage business for some time and then shift focus to other banking products. This is our core business and we are here to stay.”
HDFC has gained 15 percent this year, giving it a market value of 1.15 trillion rupees ($21.9 billion). The shares rose 1.2 percent to 752.85 rupees in Mumbai yesterday.
Fannie Mae (FNMA), the biggest mortgage company in the U.S., had a market value of $1.55 billion. Total loans at the lender dropped by 0.075 percent to $2.99 trillion, while they grew 7.7 percent to $29 billion at HDFC.

Mortgage Forecast

Mistry forecasts loan growth will expand as much as 20 percent for the next few years as India is an “underpenetrated” mortgage market. Bank credit may grow 17 percent in the year ending March 31 from 19.4 percent a year earlier, according to the Reserve Bank of India.
“If HDFC has to maintain the growth at current levels, they cannot charge a significant premium over State Bank of India (SBIN),” said Pankaj Agarwal, an analyst with Ambit Capital Pvt., who recommends investors sell the stock. “Banks have just started focusing on retail loans and their market share and growth rate will be higher.”
State Bank has a 16 percent share in the home loan market, while HDFC follows with 15 percent, Barclays Plc’s Mumbai-based analysts led by Anish Tawakley said in an Aug. 9 note to clients. ICICI Bank Ltd. (ICICIBC) and LIC Housing control 9 percent each, according to Tawakley.
Banks, which are now focusing on mortgages, will “muddy the waters,” LIC Housing’s Chief Executive Officer V.K. Sharma said in an interview last month.

AAA Rating

Access to cheaper funds is helping banks win customers. Banks pay as little as 4 percent on their savings deposits, while finance companies such as HDFC borrow at about 9 percent, said Nitin Kumar, an analyst with Quant Broking Pvt. in Mumbai.
“We have raised funds through bonds this year as the term loans were costlier,” Mistry said. A ruling to allow debt mutual funds to invest 10 percent of their assets in housing finance companies will increase availability of funds, he said.
HDFC, which has 318 offices across India, has sold 177 billion rupees of bonds this year, making it India’s third- biggest local-currency debt issuer. The company’s domestic debt is rated AAA by Standard & Poor’s Indian unit.
The mortgage company, founded by Hasmukh Thakordas Parekh in 1977, reported a net interest margin of 4.03 percent in the year ended March 31, the highest since 2000. The measure was 3.85 percent at State Bank and 2.47 percent at ICICI Bank.

Bad Loans

Bad loans at the lender have declined for 30 straight quarters and may fall further, according to Mistry. The company is scheduled to report its second-quarter earnings on Oct. 22.
Mortgage loans accounted for 59 percent of HDFC’s revenue in the year ended March 31, while the life insurance business was 34 percent of the total.
Loans to homebuyers contributed 67 percent of total credit as of June 30, HDFC said. Borrowings by companies made up 13 percent, while an equal percentage was lent to developers for financing construction, according to a company filing.
A slowing economy may prompt India’s central bank to cut its benchmark rate, helping reduce bad loans as well as HDFC’s cost of funds. The Reserve Bank may lower the repurchase rate to 7.5 percent from 8 percent by the fourth quarter, according to the median estimate of 18 economists surveyed by Bloomberg.
Mistry predicts the central bank will cut borrowing costs by as much as 75 basis points by March.
“As the corporate bond rates soften, the mortgage lender will be able to cut the rates if needed,” Quant’s Kumar said. “HDFC has always managed their spreads well and there is no reason to believe that they won’t be able to maintain it now.”
To contact the reporters on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net; Anto Antony in Mumbai at aantony1@bloomberg.net
To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Slym Plans to Pare Models to Salvage Tata Sales: Corporate India

By Siddharth Philip - Oct 16, 2012

Two weeks into his new role, Karl Slym, managing director of Tata Motors Ltd. (TTMT) plans to scrap models and change perceptions about quality as India’s biggest automaker struggles to stem losses in market share.
The company, which chose the first 100,000 customers for the Nano, the world’s cheapest car, through a lottery following a deluge of orders in 2009, lost buyers after at least three Nanos caught fire. The company’s market share in the utility vehicle segment has also plummeted to 9 percent, according to data from the industry association.
“There’s potential for pruning as we bring in new products, as well as to make sure we have a portfolio that is all performing,” Slym, the second General Motors Co. (GM) executive hired to run the Mumbai-based company by Chairman Ratan Tata, said in an interview. “We suffer from a little bit of perception of poor quality from previous years. We will continue to impact those concerns.”
Tata, which is also faced with slowing sales at its Jaguar Land Rover unit, plans to improve features and add variants of its more popular models at home to rival Maruti Suzuki India Ltd. (MSIL) and Toyota Motor Corp. (7203) in Asia’s third-largest car market. Tata’s utility vehicle Sumo and sedan Indigo had more quality problems than the average compared with similar products from Toyota and Maruti, JD Power & Associates said in a report.
“Quality is among the top five reasons of purchase and Tata Motors loses out on both quality as well as the lack of new variants,” said Mohit Arora, executive director at the Asian unit of researcher JD Power in Singapore. Rival Mahindra (MM) & Mahindra Ltd. “too has issues with quality but they have managed to offset that with new launches,” he said.

Unexpected Drop

Tata Motors has risen 49 percent in the past year making it the best performer in the 10-company BSE Auto index. It rose 1.4 percent to 266 rupees at 9:26 a.m. in Mumbai, the biggest gainer on the 30-company BSE India Sensitive Index.
The company on Oct. 15 reported Jaguar Land Rover sales fell 4.3 percent to 26,461 units last month. That missed the 30,000 median estimate of 20 analysts surveyed by Bloomberg News.
In India, Slym, who joined from GM’s China unit, where he was executive vice-president at SAIC-GM-Wuling Automobile Co., will have to snare customers rushing to buy rival products.
Sales of five models of utility vehicles at Tata Motors, which began selling the cars in 1994, rose 16 percent to 23,008 in the six months to Sept. 30, while industry volumes jumped 56 percent. Deliveries of Maruti’s Ertiga surged 10-fold to 40,366 since April when it began sales. Mahindra led the utility market with a demand of 121,367 units.

Sumo Problems

Customers reported 145 problems per 100 Sumo vehicles, compared with an average of 135 in the segment that was led by Toyota Innova with 45 quality issues, according to JD Power. Tata Indigo had a score of 162, higher than the mean 138.
“Tata Motors needs needs to realize that customers have more choice today and the competition is only going to get tougher, especially in SUVs, where every manufacturer is looking at bringing in models,” said Deepesh Rathore, the New Delhi- based managing director of IHS Automotive in India. “They need to look at what Mahindra has been able to do.”
Mahindra had to close bookings twice after getting swamped with orders following the introduction of its XUV500 SUV last year. The vehicle initially received 8,000 orders in 10 days, and led Mahindra to increase production to 5,000 a month, from the initial 3,000 unit capacity.
Last month the company started selling a smaller and cheaper version of its Xylo model named the Quanto, which got 5,000 bookings in three weeks. By 2015, Mahindra will unveil its first jointly developed platform with its Ssangyong Motor Co. (003620) unit, which it acquired last year.

Aria SUV

In contrast, Tata Motors’ new utility vehicles have failed to evoke the response generated by Maruti’s Ertiga and Mahindra’s XUV500. Total sales of the company’s Aria SUV and Xenon pick up truck plunged 82 percent to 329 in the six months though Sept. 30, while combined deliveries of Tata Safari and the Grande dropped 39 percent in the period.
“The Aria is something that is definitely a good example of a great product that is missing the consumer,” Slym, 50, who joined the company on Oct. 1 said yesterday. He didn’t identify models that might be scrapped.
Tata Motors started as Tata Engineering & Locomotive Co. in 1945. It partnered Daimler AG in 1954 to produce trucks and moved into making passenger cars in 1991. The company first displayed the Nano at the New Delhi auto show in 2008.

China Experience

After the fires, the company in December 2010 lengthened 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. It has sold 214,932 Nanos since 2009.
Yesterday it started selling an updated version of its Manza sedan and will today introduce its new Safari Storme. Tata Motors will offer dedicated service advisers for the Manza Club Class that starts at 570,000 rupees in New Delhi.
Slym’s experience in China, the world’s biggest automobile market, may help in changing perception, which is “dependent on marketing,” said Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai, who recommends investors buy Tata Motors.
“I have to blend the international experience I’ve got with working for multi-national companies with Tata’s local strengths,” Slym, who has also worked with Toyota, said. “Our aspirations are to grow domestically as well as to grow internationally.”
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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