United Spirits Jumps as Diageo Agrees to Buy Stake

By Malavika Sharma - Nov 11, 2012

United Spirits Ltd. (UNSP) surged the most in eight years in Mumbai trading after Diageo Plc (DGE) said it will buy a controlling stake in the Indian distiller for $2.04 billion.
United Spirits climbed as much as 20 percent to 1632.55 rupees, headed for the biggest gain since November 2004, before trading at 1552 rupees at 9:18 a.m local time. The stock was the biggest gainer on the 10-member BSE India Fast Moving Consumer Goods Index. (BSETMCG)
London-based Diageo will acquire a 53.4 percent stake in United Spirits for 111.7 billion rupees ($2.04 billion), it said in a statement on Nov. 9. The deal with the Johnnie Walker Scotch maker will help United Spirits compete in India’s premium whiskey market, analysts at Religare Capital Markets said in a research note today.
The cash infusion will help the Indian company controlled by Vijay Mallya “improve its capital structure as well as margin profile in the medium to long term through premiumisation and operational efficiencies,” the Religare analysts said.
India’s whiskey market may grow to $31 billion in 2016 from $21 billion in 2011, according to Euromonitor International estimates.
United Spirits’s net income for the three months ended September declined 73 percent to 392.7 million rupees as raw material costs surged, the company said in a separate statement to the stock exchange on Nov. 9. Net sales increased 24 percent to 22.2 billion rupees in the quarter.
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.

Diageo to Pay $2.04 Billion for Control of United Spirits

By George Smith Alexander and Malavika Sharma - Nov 9, 2012

Diageo Plc (DGE), the maker of Johnnie Walker Scotch, will buy a 53.4 percent stake in India’s United Spirits Ltd. (UNSP) for 111.7 billion rupees ($2.04 billion) to gain leadership in the world’s largest whiskey-consuming nation.
The U.K. distiller will acquire a 27.4 percent stake at 1,440 rupees per share and will then make an offer for a further 26 percent, the companies said today. They first disclosed that they were in discussions in September.
United Spirits Chairman Vijay Mallya and others are selling a 19.3 percent stake in the maker of McDowell’s No. 1 whiskey as his unprofitable Kingfisher Airlines Ltd. (KAIR) struggles with a cash shortage. The Indian distiller has a leading 43 percent share of the country’s whiskey market, which Euromonitor International estimates will grow by about 50 percent to $31.1 billion in the five years through 2016.
“It will be a win-win for both,” said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. in Mumbai ahead of the announcement. “Diageo will get a foothold into the company and the Indian market, and the Mallya group will get the money to pay the debt of Kingfisher.”
Diageo, which already sells its Johnnie Walker whiskey and Smirnoff vodka brands in India, will benefit from United Spirits’ distribution network and the company’s experience with negotiating complex rules that govern India’s liquor business, according to P. Phani Sekhar, a fund manager with Angel Broking.

Shares Gain

“The liquor business is a very high entry-barrier business because of the state-level regulations,” he said. “This business has been cracked by Mr. Mallya over a period of time.”
Diageo is paying about 20 times United Spirits earnings before interest, taxes, depreciation and amortization in the period ended March 31, 2012, it said. That compares with a median of about 17 times for comparable transactions in the last 10 years, according to data compiled by Bloomberg.
“If you look at emerging-market transactions in the consumer space, this multiple is not out of line,” Diageo Chief Financial Officer Deirdre Mahlan said on a conference call today. “There is no doubt that India is one of the most exciting, if not the most exciting market in Asia. So the multiple reflects the value we can deliver.”
The price is “high, but it’s not outrageous,” said Trevor Stirling, an analyst at Sanford C. Bernstein in London.
Diageo advanced 0.4 percent to 1,796 pence as of 3:30 p.m. in London trading. United Spirits’ shares rose 1.3 percent to 1,360.5 rupees at the close of trading in Mumbai, after gaining as much as 6.1 percent earlier in the day.

Emerging-Market Growth

Diageo is seeking growth in markets outside Europe, as part of its plan to get half of its net sales from developing markets by 2015. The distiller is keen to make acquisitions in the Asia- Pacific region, Gilbert Ghostine (BSETMCG), president for the region, said in an Oct. 1 interview. The company gets about 14 percent of sales from Asia-Pacific and is “on track” to raise emerging- markets revenue to 50 percent from 40 percent, he said then.
“This business has already got very good brands, and it’s got very good routes to market,” Diageo Chief Executive Officer Paul Walsh said in a Bloomberg TV interview. “But I do believe we can step up our expertise in marketing, in innovation and at the right time we can leverage those routes to markets for our global brands.”
Diageo had only 0.1 percent of the Indian whiskey market in 2011, behind Pernod Ricard SA’s 15 percent, Euromonitor said.

Diageo Deals

The U.K. company, which is funding the acquisition through existing cash resources and debt, has no plan to take its ownership of United Spirits to 100 percent or to integrate the businesses, Mahlan said on the call. “Given that we are acquiring a distinct and separate business, there is not a significant amount of cost synergies,” she said.
Before today’s agreement, Diageo had announced 12 deals valued at $2.87 billion over the last three years, including Turkey’s Mey Icki raki brand for about $2.1 billion last year. Walsh said today he would still like to gain control of tequila brand Jose Cuervo.
“In the last couple years this company has become much more acquisitive and people will have to say that that is a good thing,” said Chris Wickham, an analyst at Oriel Securities.
Over the last three years there were 223 deals announced globally with wine and spirits companies as targets, according to data compiled by Bloomberg. The average premium was 23.3 percent, according to that data.
United Spirits today reported second-quarter net income declined 73 percent to 392.7 million rupees, as the cost of raw materials increased. Revenue increased 24 percent to 22.2 billion rupees in the three months ended Sept. 30 from a year earlier, the company said in a statement.

Mallya

Speaking a conference call, Mallya said he wouldn’t comment on what the United Spirits deal means for Kingfisher Airlines. The airline’s largest lender this month said that the carrier should raise at least $1 billion of fresh capital. The airline, which halted flights in October, is also working on a turnaround plan as it seeks to persuade regulators to re-activate its suspended license.
Mallya has an option to sell his remaining shares to Diageo at the same price for the next seven years, according to the statement, provided that such a sale wouldn’t trigger Diageo needing to make a further tender offer for United Spirits.
The United Spirits chairman will hold 14.9 percent of the company after selling the 19.3 percent stake to Diageo.
JM Financial Ltd. (JM), Bank of America Merrill Lynch and UBS AG advised Diageo on the deal, while Citigroup Inc. and Ambit Corporate Finance Lts acted on behalf of United Spirits.
To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; 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.

Gold Traders More Bullish After Obama’s Re-Election: Commodities

By Nicholas Larkin - Nov 8, 2012

Gold traders are the most bullish in 11 weeks and investors accumulated record bullion holdings on speculation U.S. policy makers will add to stimulus following President Barack Obama’s re-election.
Twenty-five of 33 analysts surveyed by Bloomberg expect prices to rise next week and three were bearish. A further five were neutral, making the proportion of bulls the highest since Aug. 24. Investors boosted assets in gold-backed exchange-traded products to an all-time high of 2,592 metric tons on Nov. 7, valued at $143.1 billion, data compiled by Bloomberg show.
Obama won the Nov. 6 election against Mitt Romney, who had criticized the Federal Reserve’s policies and said he’d replace Chairman Ben S. Bernanke, whose second term expires in January 2014. The European Central Bank kept interest rates at a record low yesterday and nations from the U.S. to China have pledged more action to boost economies. Gold rose 70 percent as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011.
“Obama is a supporter of Bernanke and his re-election means that the ultra-loose monetary and fiscal policies by the Fed will continue,” said Daniel Briesemann, a commodities analyst at Commerzbank AG in Frankfurt. “More and more liquidity will be put into the system and therefore there’ll be inflation fears and concern about currency devaluation.”

Gold Prices

Gold rose 9.8 percent to $1,716.95 an ounce in London this year, heading for a 12th straight annual gain, the longest winning streak in at least nine decades. The Standard & Poor’s GSCI gauge of 24 commodities lost 2 percent and the MSCI All- Country World Index (MXWD) of equities climbed 9.1 percent. Treasuries returned 2.4 percent, a Bank of America Corp. index shows.
Bullion is heading for the first weekly gain in five as Obama was re-elected with the highest unemployment rate of any president returned to office since Franklin Roosevelt in 1936. The Fed said Oct. 24 it will maintain $40 billion in monthly purchases of mortgage debt and probably hold interest rates near zero until mid-2015.
Some investors buy bullion as a hedge against inflation and a weaker dollar, and the metal generally earns returns only through price gains, increasing its allure as interest rates decline. The Bank of Japan expanded its asset-purchase program on Oct. 30 for the second time in two months, increasing it by 11 trillion yen ($138 billion). The ECB said it’s ready to buy bonds of indebted nations and China approved a $158 billion subways-to-roads construction plan.

Fiscal Cliff

Investors may now focus on the so-called U.S. fiscal cliff, a combination of automatic spending reductions and expiring tax cuts that amounts to $607 billion in 2013. Democrat and Republican lawmakers say they want to avoid the recession- causing cliff, though have yet to reach a compromise. That may boost gold’s appeal as a protector of wealth, Commerzbank’s Briesemann said.
Hedge funds’ bets on a rally declined for three weeks after reaching the highest since August 2011 on Oct. 9, U.S. Commodity Futures Trading Commission data show. Speculators cut their net- long position by 7.5 percent in the week ended Oct. 30 to the lowest since Sept. 4, the data show.
While physical gold purchases in India, last year’s biggest buyer, will be stronger this quarter compared with the previous three months, demand will probably decline for several weeks after the Diwali festival on Nov. 13, Edel Tully, an analyst at UBS AG in London, wrote in a Nov. 7 report.

Physical Demand

Higher prices may curb demand, Tully said in a report yesterday. While the metal slid for four consecutive weeks through Nov. 2, the longest losing streak in more than a year, this year’s average of $1,663 is set to be a record. Bullion reached an all-time high in India in September and consumers there usually boost purchases before the wedding season and religious festivals later in the year.
ETP investors remained bullish, buying metal in 13 of the previous 14 weeks and added 193 tons in the three months through October, the longest monthly run since August 2011. The holdings now account for almost a year of mine production, according to data compiled by Bloomberg and Barclays Plc.
In other commodities, nine of 18 traders and analysts surveyed expect copper to gain next week and seven were bearish. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, added 0.2 percent to $7,614.25 a ton this year.

Sugar Survey

Six of 14 people surveyed said raw sugar will rise next week and the same amount expected a decline. The commodity slid 19 percent to 18.76 cents a pound since the end of December on the ICE Futures U.S. exchange in New York.
Thirteen of 27 people surveyed anticipate higher corn prices next week and 11 were bearish, while 12 of 28 said soybeans will climb and the same amount predicted a drop. Corn rallied 15 percent to $7.43 a bushel in Chicago trading this year as soybeans rose 24 percent to $15.0125 a bushel. Both crops reached records since August as the worst U.S. drought in a half century hurt crops.
The S&P GSCI gauge of raw materials fell to a three-month low on Nov. 5. Money managers reduced net-long positions across 18 U.S. commodity futures and options by 11 percent in the week ended Oct. 30 to the lowest since July, CFTC data show. The International Monetary Fund cut its global growth forecast for next year to 3.6 percent from 3.9 percent on Oct. 9.
“It’s very difficult for cyclical commodities to rally just on liquidity, I think you need real growth as well, and what we’ve seen broadly is a slowdown in growth,” said Michael Widmer, an analyst at Bank of America Merrill Lynch in London. “There’s a few green shoots out there. Demand in some places is starting to turn around, but you won’t get a strong price reaction until next year.”

Gold survey results: Bullish: 25 Bearish: 3 Hold: 5
Copper survey results: Bullish: 9 Bearish: 7 Hold: 2
Corn survey results: Bullish: 13 Bearish: 11 Hold: 3
Soybean survey results: Bullish: 12 Bearish: 12 Hold: 4
Raw sugar survey results: Bullish: 6 Bearish: 6 Hold: 2
White sugar survey results: Bullish: 5 Bearish: 5 Hold: 4
White sugar premium results: Widen: 4 Narrow: 1 Neutral: 9

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net
To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Essar Said to Plan $4.8 Billion Debt Refinance: Corporate India

By George Smith Alexander and Abhishek Shanker - Nov 7, 2012

Essar Group, controlled by billionaire Indian brothers Shashikant and Ravikant Ruia, is in talks with banks to refinance as much as $4.8 billion of debt, two people with direct knowledge of the matter said.
Essar Global Ltd. (3271), the holding company of the owners, plans to refinance $3.5 billion of overseas loans, while Essar Steel Ltd. will take on new debt to repay as much as 70 billion rupees ($1.3 billion) of borrowing, the people said, asking not to be identified because the matter is private.
The group plans to roll over maturities on overseas loans and switch some of the rupee debt into dollar-denominated obligations to reduce interest costs, the people said. Essar used short-term borrowings to finance part of its $18 billion expansion since 2008 that has yet to operate at its full capacity, putting pressure on the group’s cash flow, they said.
“Right now the debt levels are at a peak,” said Puneet Bhatia, an analyst at Credit Analysis & Research Ltd., or CARE, in Mumbai. “With the commencement of new projects and expected incremental cash flow, resources available for debt servicing stand augmented.”
Switching from rupee to dollar-denominated debt may help the company, which also earns in the U.S. currency, reduce costs. Average yields on Indian dollar debt are 4.33 percent, according to HSBC Holdings Plc indexes. That compares with State Bank of India’s prime lending rate of 14.5 percent, according to data compiled by Bloomberg.

‘Pruning Cost’

“The swapping of rupee debt with foreign debt is a beginning toward” aligning financing costs with global levels, Essar spokesman Manish Kedia said in an e-mail response. “These efforts are neither driven by any compulsion to refinance or restructure but by the strategy of pruning financing cost as much as possible.”
Closely held Essar Steel has a total debt of about 230 billion rupees, the people said. It has spent most of the funds to more than double capacity to 10 million metric tons at Hazira in Gujarat state and in setting up a pellet plant in the eastern state of Odisha. Essar Oil Ltd. (ESOIL) increased its refining capacity to 20 million tons from 10.5 million tons this year.
India’s central bank has approved the steel unit’s proposal to switch about $430 million of its rupee loans into dollar debt, the people said. It also plans to borrow the maximum $750 million loan allowed by the Reserve Bank of India under the automatic approval route for importing equipment, one person said.
“As a policy, we do not comment on any specific transaction,” Kedia said. CARE on Aug. 24 cut its long-term bank facilities rating for Essar Steel three levels to BBB-, citing worsening margins and rising debt.

Steel Prices

A drop in steel prices is affecting the company’s revenue. Global benchmark hot-rolled coils that Essar Steel produces, used in making cars and home appliances, declined more than 13 percent since April 1 following a slowdown in Europe and weakening demand in China and India.
Essar Steel’s loss widened to 8.81 billion rupees in the year ended March 31 from 1.66 billion rupees, according to provisional results provided to CARE.
The company, which started operations in 1969 by building a barrier to reduce wave intensity in Chennai port, is also in talks with Indian banks for short-term dollar denominated borrowing backed by the company’s receivables to help manage its working capital financing at a lower cost, the people said. It has also sought rupee funding and refinancing of as much as 30 billion rupees from the Indian banks, one person said.

Stake Sale

Essar Steel in 2003, under the Corporate Debt Restructuring Mechanism, extended the term of the loans, reduced interest charges and converted loans into equity, helping cut liabilities by 20 percent to 43 billion rupees, according to an exchange filing.
The company doesn’t plan to use the mechanism to revamp its debt, the people said.
The Ruias may sell a stake in their U.S. steel unit or in other group companies including Essar Energy Plc (ESSR), Essar Ports Ltd. (ESRS) and Essar Shipping Ltd. (ESL) to reduce debt at Essar Global, the people said.
Essar group, which bought Minnesota Steel Industries LLC for an undisclosed price in 2007, is in talks with banks for an initial public offering for the U.S. steel unit, Chief Executive Officer Prashant Ruia said in June. “Over the next two to three years, we are focusing on sweating the assets which will result in a significant volume and margin growth.”

Revenue Target

In the past five years, the group has expanded its power generating capabilities by more than four times to 4,500 megawatts. Coal mining plans for its power plant in the central state of Madhya Pradesh have been delayed following the federal government’s decision to refer the matter to a ministers’ panel.
Essar Oil said on Oct. 9 it may raise as much as $1.5 billion in overseas loans after it received the Reserve Bank of India’s approval and plans to seek more so-called external commercial borrowings. Essar Oil had 156.3 billion rupees in debt and 20.6 billion rupees of cash and equivalents as of March 31, according to data compiled by Bloomberg.
The group is targeting $35 billion in revenue in three years, a 30 percent rise, as it taps demand for infrastructure in Asia’s third-largest economy, Prashant Ruia had said. Essar’s investments have come at a cost lower than the industry average, leaving the group with less debt than competitors with similar expansion plans, he said.
Essar Oil, which will announce its second-quarter earnings tomorrow, posted a wider-than-expected loss in the three months ended June. 30. The shares of the company have climbed 31 percent in Mumbai this year, while parent Essar Energy fell 19 percent in London in the same period.
To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Abhishek Shanker in Mumbai at ashanker1@bloomberg.net
To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Steel Authority Said to Close Odisha Mine, Cutting Output

By Rajesh Kumar Singh - Nov 6, 2012

Steel Authority of India Ltd., the country’s second-biggest maker of the alloy, will stop work at an iron ore mine in the eastern state of Odisha to make way for an elephant corridor, two people familiar with the matter said.
The environment ministry won’t renew the state-owned company’s permit after a two-year extension expires on Nov. 10, the people said yesterday, asking not to be identified as they aren’t authorized to speak to the media. Odisha, where a government panel is currently reviewing illegal mining and environmental damages, plans to set up a passage way for the pachyderms near Steel Authority’s mine, the people said.
The stoppage at the Bolani mine will cut the New Delhi- based company’s iron ore output by almost 20 percent and impair 2.8 million tons of steelmaking capacity. Buying the raw material from the market may raise costs by $70 a ton, said Ravindra Deshpande, an analyst at Elara Securities Ltd., further eroding profit that has declined in eight of the past nine quarters.
“Captive iron ore is Steel Authority’s biggest advantage and the closure is certainly a big hit to profitability,” Mumbai-based Deshpande said in an interview yesterday.
At an average price of 35,000 rupees ($643) per ton of steel, the shutdown may result in an average revenue loss of 98 billion rupees, imperiling the company’s expansion. New Delhi- based Steel Authority plans to spend $13 billion to boost steelmaking capacity by 60 percent to 21.4 million tons annually, improve products and develop mines.

Maoist Rebels

Steel Authority will attempt to make up for the closure by raising output at other mines and by using low-grade ore, the people said. Steel Authority’s spokeswoman Arti Luniya didn’t answer two calls to her office.
The company, which has the capacity to extract about 25 million tons of iron ore at its mines, is already struggling to tap a reserve in the central state of Chhattisgarh in the face of attacks by Maoist rebels.
New Delhi-based Steel Authority’s shares rose as much as 0.9 percent to 83.15 rupees and traded 0.4 percent higher as of 9:30 a.m. in Mumbai. The stock has climbed 1.5 percent this year, compared with a 22 percent gain in the benchmark BSE Ltd. Sensitive Index (SENSEX) and a 20 percent advance in the shares of the nation’s No. 1 Tata Steel Ltd. (TATA)
Of the 50 analysts that track Steel Authority shares, 17 recommend buying them, while 19 advise selling, according to data compiled by Bloomberg. The rest have a hold rating.

Illegal Mining

India’s federal government is cracking down on illegal mining and has set up a panel to probe extraction in seven mineral-rich states including Goa, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha and Karnataka.
“A comprehensive audit of mining across the country is necessary to assess the impact on environment, lives and also the extent of illegality,” former Mines Secretary Vishwapati Trivedi said in September.
Getting environment and forest clearances for projects can take as long as seven to eight years, according to N.C. Jha, head of mining at Monnet Ispat & Energy Ltd. (MISP) and former chairman of Coal India Ltd. (COAL) The environment ministry has stepped up vigilance in recent years, with violations leading to restrictions and bans by the Supreme Court and local administrations.
India had 27,694 elephants as of 2008, according to data on the website of the Ministry of Environment and Forests. In Odisha, almost 5,000 hectares (12,355 acres) of prime elephant habitat is encroached by mines, erasing corridors used by the animals for thousands of years, according to the website of the Wildlife Protection Society of India.

‘Irreversible Change’

“Elephants don’t need a very large area to move, but they need forest cover for a sense of security,” said Dipankar Ghose, New Delhi-based director of species and landscapes program at WWF-India. “The associated development around the corridor makes them insecure and makes them react violently to the environment. If an animal species is exterminated from a place, it’s an irreversible change.”
The federal government, the main shareholder of Steel Authority, will do everything to resolve the issue as it needs to raise money by selling a stake to narrow its budget deficit, said Niraj Shah, an analyst at Fortune Equity Brokers India Ltd. in Mumbai.
“There’s a lot at stake here,” he said. “It’s not just about SAIL’s profitability, but it can also affect the government’s disinvestment plan.”

Rating Threat

Finance Minister Palaniappan Chidambaram plans to raise at least 300 billion rupees from the sale of state-owned shares in companies including Steel Authority to bolster strained finances after Standard & Poor’s and Fitch Ratings earlier this year cut the credit outlook for local sovereign debt to negative, a step away from lowering the rating to junk status.
Steel Authority’s profitability is derived from its own sources of iron ore for its entire need, though it depends on imports of coking coal to meet 70 percent of its requirements, making it the second-biggest spender on raw material among the three biggest steelmakers in the country.
The company’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 Fortune’s Shah. Tata Steel incurred 21,703 rupees.
A shutdown of the mine may help smaller makers of the alloy to gain market share. NMDC Ltd. (NMDC), India’s largest iron ore producer, may increase prices more frequently if more mines across the country are closed, Shah said.
In addition to higher costs of procuring ore, steel prices that have remained little changed locally will also hurt Steel Authority, Elara’s Deshpande said.
Producers in India have been holding prices, waiting for the festive season to boost demand. Steel Authority kept prices unchanged this month, Chairman C.S. Verma said on Nov. 1, adding the company will review prices in a week. The slowing pace of construction and high interest rates are not allowing prices to rise, he said.
Sourcing ore externally “isn’t a good choice when steel prices are weak,” Deshpande said.
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

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Bharti, Idea Users to Fund Chidambaram Deficit: Corporate India

By Kartikay Mehrotra - Nov 5, 2012

Mobile phone customers of Bharti Airtel Ltd. (BHARTI) and Idea Cellular Ltd. (IDEA) may face surging tariffs as Indian Finance Minister Palaniappan Chidambaram counts on airwave auctions to help narrow a $95 billion budget deficit.
Carriers may need to pay as much as nine times the original rate to buy airwaves at auctions starting next week and to retain permits expiring in 2014, forcing a “significant” increase in call charges as early as the second quarter of 2013, according to Rajan Mathews, director general of the Cellular Operators Association of India. Higher costs may almost triple rates to 2.5 cents a minute, according to UBS AG.
“The government needs to fill its budget gap - that’s their single most compelling imperative that has caused a significant shift in their priorities and approach to the industry,” New Delhi-based Mathews said in a phone interview. “Clearly, we’re seeing pressure on these operators that will push up rates.”
The government’s efforts to bolster its finances and avert a junk rating are weighing on the biggest phone operators amid mounting debt and a drop in net income. Chidambaram unveiled a road map last week to cut the budget shortfall, which includes a revenue target of $7.3 billion from spectrum sales in the year to March 31. Bharti, the nation’s biggest carrier, is the worst performer this year on the benchmark Sensitive Index (SENSEX) as profit shrank for nine consecutive quarters.

Unprecedented, Unsustainable

“The way the industry is performing and the way prices have gone up, it’s unprecedented compared to any other part of the world and it’s unsustainable for most of the industry,” Bharti Airtel CEO Sanjay Kapoor said Oct. 31 in reply to a query. “Is there a need to take tariffs up? Absolutely, yes.”
India is shifting focus to maximizing revenue from sales of airwaves after the Supreme Court in February said spectrum must be auctioned and canceled 122 licenses awarded in 2008, saying their allocation was corrupted by “money power” and some buyers’ “ability to manipulate the system.”
A group of ministers decided on Nov. 1 to force operators to return some of their lowest-frequency airwaves to the government, which will re-auction them by March, according to Kapil Sibal, the minister in charge of telecommunications.
The canceled airwaves will be sold back, starting Nov. 12, at a reserve price of 140 billion rupees ($2.6 billion), compared with the 16.6 billion rupees operators paid in 2008. The final auction price determined by the sale of 1800 Mhz airwaves this month will serve as the opening bid for the 900 Mhz spectrum to be sold by the end of March, Sibal said.

Swing Back

“After 17 years of falling prices, the government’s new priorities will force the pricing pendulum to swing back the other way,” said Suresh Mahadevan, managing director at UBS Securities India Pvt. in Mumbai. “Subscribers can expect to face a big readjustment in pricing over the next few quarters.”
If operators participate in the auctions, the expenditure could increase call rates to 2.5 cents a minute from less than a penny. Competition and price wars have forced voice rates down to as low as 50 paise (0.9 cent) from as high as 16 rupees in 1995, helping add 900 million subscribers and making India the second-largest mobile market in the world. China Unicom Ltd. (762) charges 0.1 yuan (1.6 cents) for pre-paid local calls, according to its website.
Tata Teleservices Ltd. (TTLS) withdrew from an auction of CDMA airwaves, Bloomberg TV India reported yesterday without citing anyone, while the Economic Times said Nov. 3 Videocon Industries Ltd. (VCLF) pulled out, leaving no buyers for 800 Mhz.

‘Fool’s Paradise’

Qualified bidders for the first two auctions on the GSM platform include Bharti, Idea, and Vodafone Group Plc (VOD), according to the Department of Telecommunications. Idea’s spokesman Rajat Mukarji and Vodafone’s spokesman in Mumbai Suresh Rangarajan declined to comment on their companies’ tariff plans.
Paying for new airwaves may not be the operators’ only expense. Existing service providers with more than 6.2 Mhz per circle may pay a combined 100 billion rupees surcharge to continue operating. Those acquiring more than 4.4 Mhz may have to pay an additional fee, according to proposals under consideration by Prime Minister Manmohan Singh’s cabinet.
“The government has created a fool’s paradise where they think they can jack up the base price and mint money,” said Harit Shah, an analyst with Mumbai-based Nirmal Bang Institutional Equities. “I don’t see this plan as producing a great win for the government.”
The government will disclose the final list of bidders today, according to the Department of Telecommunications.

Fairly, Equitably

Finance Minister Chidambaram is seeking to curb the budget deficit to an almost decade low in five years as Standard & Poor’s and Fitch Ratings reduced the outlook on India’s credit rating to negative from stable earlier in 2012, bringing the nation a step closer to non-investment grade.
He told reporters on Oct. 29 that the government will reduce the gap to 3 percent of gross domestic product by March 2017, starting from 5.3 percent in the current year. He expects to raise 400 billion rupees from the sale of airwaves in the current year and 300 billion rupees from the sales of stakes owned by the government in state companies.
“The burden of fiscal consolidation should be shared fairly and equitably by different classes of stakeholders,” Chidambaram said last week. “The poor should be protected and others must bear their fair share of the burden.”
Bharti, which will announce its earnings tomorrow for the quarter ended Sept. 30, has slumped 20 percent this year, the most among the 30 stocks that make up the Sensitive Index, according to data compiled by Bloomberg. It fell 0.5 percent to 273.50 rupees yesterday in Mumbai.

Sliding Growth

Billionaire Anil Ambani-controlled Reliance Communications Ltd. (RCOM) has slumped 20 percent in the same period, while billionaire Kumar Mangalam Birla-owned Idea Cellular has risen 4.7 percent.
Reliance Communications’ profit dropped 85 percent from three years ago in the 12 months ended March 31. Earnings at Idea have declined in the last two financial years, according to data compiled by Bloomberg.
Their average sales growth has slowed to 10 percent from 37 percent in 2009, taking their combined debt to $23 billion after two spectrum sales in 2008 and 2010.
“Our intention and the government’s in the National Telecom Policy 2012 is to keep call rates low and affordable for the entire country,” said COAI’s Mathews. “But the decisions that have been made will force our hand to increase rates or spoil the market, those are the choices.”
To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net
To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

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Canada Lures Petronet With Gas as Ambani Fails: Corporate India By James Paton and Rakteem Katakey - Nov 4, 2012

Petronet LNG Ltd. (PLNG), India’s biggest liquefied natural gas importer, plans to buy the fuel from Canada to meet surging demand as output from a block operated by billionaire Mukesh Ambani’s company falls.
Petronet, based in New Delhi, is looking to Canada as Prime Minister Stephen Harper visits India this week to attract buyers and investors in Asia. Petronet has met Canada’s Natural Resources Minister Joe Oliver and wants to buy the fuel from projects on the North American nation’s east coast, Chief Executive Officer A.K. Balyan said in an interview in Sydney.
Petronet is seeking contracts from Australia to Russia to meet India’s energy demand that is estimated to more than double by 2035. The expansion has acquired urgency after gas production at Ambani-controlled Reliance Industries Ltd. (RIL)’s biggest field dropped 70 percent in about two years slashing supplies to power stations and fertilizer plants in the world’s fourth-biggest fuel consumer.
“We are looking for additional supplies,” Balyan said on Nov. 2. Canada has recognized “India as a preferred nation to deal with and we have indicated our desire to participate,” he said.
India’s energy demand is forecast to more than double by 2035 to 49.2 quadrillion British thermal units from 21.1 quadrillion Btu in 2008, according to the U.S. Energy Information Administration. The share of gas in India’s power generation mix will expand from 11 percent in 2008 to 16 percent in 2035, according to the EIA.

Record LNG Imports

The country’s LNG imports climbed to a record 10.13 million metric tons in the year ended March 31, according to oil ministry data. Overseas purchases were 4.4 million metric tons in the five months through August, the data show.
“Many factories, power and fertilizer plants are suffering because of erratic and uncertain gas supply,” said K.K. Mital, a New-Delhi based fund manager at Globe Capital Market Ltd. “Reliance’s production is also falling sharply, and that adds to the problem. More and more will need to be imported.”
Natural gas production from Reliance’s two main areas in the KG-D6 block is 20.5 million cubic meters a day and should have reached 81 million this year, the oil ministry said in a Nov. 1 statement. It has been dropping after production peaked at 67 million in the year ended March 2010. Reliance has said technical difficulties have affected production.
Tushar Pania, a spokesman for Reliance, didn’t reply to an e-mail seeking comment. Ambani is Asia’s second-richest man with a net worth of $23.7 billion, according to the Bloomberg Billionaires Index.

‘Underutilize Capacity’

Petronet is increasing import capacity two-and-a-half times to 25 million metric tons a year by expanding an existing plant at Dahej in the west Indian state of Gujarat to 15 million tons a year from 10 million tons and starting a new 5 million-ton project in the south Indian town of Kochi in the first quarter of 2013. It will set up a new terminal on the country’s east coast by 2016.
The projects will require more than $1 billion of debt, finance director R.K. Garg said in June.
“As Petronet ramps up import capacity, its very important they don’t underutilize it because they will be spending a lot to build them,” said Alok Deshpande, a Mumbai-based analyst with Elara Securities Ltd., who recommends investors accumulate the stock. “That is going to make them go out and aggressively get a lot of supply contracts.”
Petronet’s shares have increased 12 percent this year, lagging behind a 22 percent surge in the benchmark Sensitive Index. The stock rose 1.4 percent to 174.50 rupees as of 9:45 a.m. in Mumbai, its highest level in almost a month. Of the 59 analysts who rate the company’s stock, 44 recommend a buy, according to data compiled by Bloomberg.

‘Energy Superpower’

The company’s quarterly profit rose to a record 3.1 billion rupees ($58 million) in the three months ended Sept. 30, after its LNG margin rose, Mayur Matani and Nishit Zota, analysts at ICICIdirect.com, wrote in an Oct. 22 report.
Canada, home to the world’s third-biggest oil reserves, will require almost C$650 billion ($652 billion) of investments to develop the country’s biggest resource projects over the next decade, according to Natural Resources Minister Oliver. Prime Minister Harper, who has touted Canada as an emerging “energy superpower,” has called it a national priority to build infrastructure that will let Canada diversify energy exports away from the U.S. and ship oil and gas to Asia.
Still, Canada blocked a C$5.2 billion bid by Petroliam Nasional Bhd. for Calgary-based Progress Energy Resources Corp. (PRQ), according to a Oct. 19 statement. Petronas, as Malaysia’s state- owned oil company is called, was given 30 days to appeal or make concessions.

‘Good Friend’

Prime Minister Harper’s government on Nov. 3 also extended its review of Beijing-based Cnooc Ltd. (883)’s $15.1 billion takeover of Nexen Inc. (NXY) for a second time, re-setting the deadline to Dec. 10. Canada’s government reviews foreign takeovers valued at more than C$330 million and considers six main factors in determining whether an acquisition provides a “net benefit.”
Harper plans to travel to India, the Philippines and Hong Kong from Nov. 4 to Nov. 11. Tomorrow, he’s scheduled to meet India’s Prime Minister Manmohan Singh, who he says is “one of Canada’s good friends and partners,” according to the text of a prepared speech Nov.1

Gazprom Contract

Petronet has a 20-year contract to buy 1.5 million tons of LNG a year from Chevron Corp. (CVX)’s A$43 billion ($45 billion) Gorgon development off the northwest coast of Australia beginning in about 2015, Balyan said in Sydney. Gorgon is scheduled to start production in late 2014, Chevron said in September.
“We need to have gas for the next three years, so we are in discussions with several suppliers for the short term to start with, and perhaps for the long term too,” Balyan said.
The Indian LNG buyer has met several “major companies” operating in Australia and is interested in acquiring more gas contracts or a stake in a project, he said.
“Today we have different options coming up,” he said. “New projects in new countries.”
Petronet on June 1 signed a preliminary agreement with OAO Gazprom, the world’s largest gas exporter, to buy 2.5 million tons annually of the fuel for two decades. GAIL India Ltd. (GAIL), a shareholder in Petronet, agreed to buy LNG from the Moscow-based company for 20 years starting in 2018 or 2019, according to an Oct. 1 statement.
Petronet is in “advanced discussions” with Gazprom to complete the deal, Balyan said.
To contact the reporters on this story: James Paton in Sydney at jpaton4@bloomberg.net; Rakteem Katakey in New Delhi at rkatakey@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net