Mistry at Tata Helm as Investors Query $500 Billion Goal By Bhuma Shrivastava and Siddharth Philip - Dec 28, 2012

Cyrus Mistry, who takes charge today at Tata, India’s biggest business group, may face an uphill battle if he is to meet his predecessor’s vision of boosting revenue fivefold to $500 billion in the next decade.
Mistry, 44, becomes chairman of Tata Sons Ltd., the holding company for the salt-to-software group, just as slower economic growth damps demand for products from steel to cars. Ratan Tata, who steps down on turning 75 after two decades at the helm, built the business into a $100 billion global conglomerate through acquisitions including the U.K.’s Corus Group Plc and Jaguar Land Rover. Tata succeeded his uncle in 1991 as India’s economy was opening up.
“It is not an easy task to grow fivefold in this global economic scenario,” said Shishir Bajpai, senior vice president at IIFL Wealth Management Ltd. in Mumbai. “The bar is set high for Mistry to deliver. Ratan Tata took a group well known in the domestic markets global, now Mistry has to take it forward.”
The change of guard marks a rare opportunity to shape the group of more than 100 companies, whose expansion has mirrored India’s emergence as a global economic power and ranks Tata above Japan’s Panasonic Corp. and Swiss food giant Nestle SA by sales. At stake is the equivalent of about 6 percent of India’s gross domestic product, and the future of firms including Tata Steel Ltd. (TATA), India’s biggest producer of the alloy, and Tata Motors (TTMT) Ltd., the nation’s No. 1 automaker by revenue.

Biggest Shareholder

Mistry’s performance could also weigh on his family’s fortune: along with his billionaire father, Pallonji Shapoorji Mistry, and his brother, the chairman’s family owns about 18 percent of Tata Sons. Little is known about the London Business School management postgraduate’s leadership style or strategic vision, and the man chosen by a select search panel in November 2011 has so far shied away from the media and investors.
“I haven’t heard from him on company plans, so I don’t know” how Mistry will lead, Koen Vanderauwera, a Luxembourg- based bond-fund manager at KBC Asset Management SA that holds the debt of Tata Steel and Tata Power Ltd., said in a phone interview. “I’ll wait and see what kind of announcements he makes, how he comments.”
The $500 billion revenue vision for Tata in 2021 was outlined by Ratan while addressing his top executives in April, and confirmed by Tata Sons director R. Gopalakrishnan. Group spokesman Debasis Ray declined to comment on the vision or Mistry’s plans for Tata. “Such matters are internal to the company,” Ray said in an e-mailed reply to a query.

Textile Trading

Mistry and the Tatas follow the Zoroastrian religion and belong to the small Parsi community, which originated in Persia and found sanctuary centuries ago in India. The Tata group was founded by Ratan’s great grandfather Jamsetji Nusserwanji Tata, who started a textile-trading business in 1868 and then built the country’s first steel mill and hydroelectric plant. He also built the Taj Mahal Palace & Tower hotel in Mumbai, which was damaged in the November 2008 terrorist attacks.
Mistry will also need all the project-handling skills honed at running the construction business at his family’s Shapoorji Pallonji & Co. to sustain profitability even as many of Tata’s key companies battle adverse market conditions or regulatory changes.
“Revenue without sustained profits and a high return on invested capital is of no use,” Neeraj Monga, head of research at Toronto-based Veritas Investment Research Corp., said by e- mail. The group’s biggest businesses, steel and automobiles, are both cyclical industries and maintaining profitability is a challenge, said Monga.

Steel, Autos

For a group that includes Tata Consultancy Services Ltd. (TCS), India’s largest software company, Tata Motors, owner of the Jaguar and Land Rover luxury marques, and Tata Global Beverages Ltd., the local partner of Starbucks Corp., sales and profit growth is slowing at its biggest businesses.
Profit growth at Tata Motors decelerated to the slowest pace in four quarters in the three months ended Sept. 30 and sales growth slowed to the least in three years amid waning demand for luxury vehicles in Europe. Tata Steel posted an unexpected loss even as sales growth stayed below 5 percent for the third straight quarter.
“It’s not easy to grow fivefold organically, so Mistry at some point will have to pull a multibillion dollar surprise acquisition,” said Jagannadham Thunuguntla, head of research at New Delhi-based SMC Global Securities Ltd. “He has to be careful because the group’s experience on this front has been mixed.”

Overseas Acquisitions

Tata Steel, which acquired Corus for $12.9 billion in 2007, making it the group’s biggest overseas purchase, reported a loss of 3.64 billion rupees ($66 million) in the three months ended Sept. 30 as weak demand in Europe and China cut prices of the alloy. The steelmaker plans to restructure its U.K. business, cutting 900 jobs and closing 12 sites, it said in a Nov. 23 statement, to shore up margins in a market dogged by overcapacity.
In contrast, Tata Motors’ 2008 acquisition of Jaguar Land Rover from Ford Motor Co. for $2.3 billion helped boost the Indian automaker’s sales almost fivefold over four years. That pace of growth may be hard to sustain as Europe struggles to recover from a debt crisis.
Tata Steel shares have climbed 28 percent in Mumbai trading this year, outperforming the BSE India Sensitive Index’s 26 percent advance. The steelmaker’s shares fell 0.5 percent to close at 428.55 rupees in Mumbai trading. Tata Motors has surged 74 percent, making it the best performer on the 30-company benchmark index. The automaker’s shares gained 0.3 percent to close at 310.05 rupees.

‘Minds Open’

“We should always keep our minds open to acquisitions,” Mistry told recruits in comments that were viewable in a video on one of the group’s websites. “We would, in each company as part of its own strategy, look at M&A for growth but not as a must have.”
Purchases overseas have also proved harder in the past year with Tata’s recent attempts failing to clinch a deal.
Orient-Express Hotels Ltd. (OEH), owner of New York’s 21 Club restaurant and Hotel Cipriani in Venice, last month rejected a takeover offer by Tata’s Indian Hotels Co., saying the bid undervalues the company. In April, Tata Communications Ltd. (TCOM) decided against making an offer for Cable & Wireless Worldwide Plc after failing to agree on a price.
Mistry can look to fund acquisitions by tapping the cash pile at Tata Consultancy Services, the group’s most valuable company by market value, in which Tata Sons holds 74 percent. The Mumbai-based software exporter had 79.2 billion rupees in cash and short-term investments on Sept. 30, according to data compiled by Bloomberg.
Still, Tata’s new head may opt to look within and consolidate holdings to bolster profitability instead of continuing to pursue acquisitions, according to Tarun Kataria, chief executive officer at Religare Capital Markets Ltd.
“Cyrus takes over the reigns of a highly regarded but sprawling conglomerate at a time of great global uncertainty and muted economic growth,” Mumbai-based Kataria said in an e-mail. “His very deliberate focus will likely be on consolidation, deleveraging, exiting certain businesses and bringing related businesses under a unified whole.”
To contact the reporters on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net; Siddharth Philip in Mumbai at sphilip3@bloomberg.net
To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net

Tata, Birla May Lead $9 Billion Urea Spending: Corporate India

By Abhishek Shanker - Dec 25, 2012

Aditya Birla Nuvo Ltd. (ABNL) and Tata Chemicals Ltd. (TTCH) may lead $9 billion of spending to increase India’s urea capacity by almost 50 percent, spurred by a government policy guaranteeing returns on investments.
Producers of the nitrogen-based soil nutrient including state-run companies and co-operatives may add 10 million metric tons of capacity over the next five years, said S.C. Sharma, an officer at the Planning Commission, which assesses and allocates the nation’s resources. The government will assure new urea units a profit margin 12 percent to 20 percent, Food Minister K.V. Thomas said in New Delhi on Dec. 13.
“As much as 500 billion rupees ($9 billion) of investments could come,” Sharma said in an interview in Mumbai. “They’ll start flowing in after this policy change.”
Government control on the price of urea and ambiguity over natural gas feedstock costs have deterred new investments in the sector for more than 10 years, leading to an increase in imports and state subsidies. An increase in urea capacity will also boost agricultural productivity, helping feed two-thirds of India’s 1.2 billion people that live on less than $2 a day and contain inflation that averaged 7.5 percent in 2012.
“India has to support a large population base on a small land area, so the use of fertilizers like urea is critical and will only rise,” said Apurva Shah, an analyst at Dalal & Broacha Stock Broking Pvt. Ltd. in Mumbai. “Other fertilizer makers not present in urea may plan setting up a unit to expand their product base. In three to four years, there’s bound to be large-scale investments in this sector.”

Double Capacity

Billionaire Kumar Mangalam Birla may spend as much as $1 billion to double Aditya Birla Nuvo’s urea capacity after the government approves the new policy, Managing Director Rakesh Jain said in an interview on Nov. 8.
Tata Chemicals planned to double urea capacity at its unit in the northern state of Uttar Pradesh at an estimated cost of 35 billion rupees, it said in October 2010. The company was waiting for government assurances on supplies of natural gas, the main fuel used to produce urea, it had said.
Other planned urea projects include Rashtriya Chemicals & Fertilizers Ltd. (RCF)’s 1.15 million ton unit, for which it secured environment approval in 2006, in western Maharashtra state. Chambal Fertilisers & Chemicals Ltd. plans to build a similar- sized factory in the northern state of Rajasthan.
State-owned GAIL India Ltd. (GAIL), Coal India Ltd. (COAL) and Rashtriya Chemicals have planned a venture to build a coal gasification and fertilizer project in eastern Odisha state at an estimated cost of 80 billion rupees, while Oil & Natural Gas Corp. is seeking a partner to build a urea factory in the eastern part of the country.

Rising Imports

India imports about 33 percent of the 28 million metric tons of urea it needs and the quantity is increasing by about 1 million tons each year, according to a Planning Commission report last year. Supply shortages may widen to 12 million tons by March 2017 should new capacities fail to be added, the commission said.
The government’s subsidy burden increased as urea prices surged to a 3 1/2-year high of $515 in April. Urea imports are estimated to have risen to about 7 million tons in the year ended March 31, inflating the subsidy by 21 percent to 294 billion rupees from a year earlier, according to the report.
The new policy will save 47.6 billion rupees of subsidies and reimburse producers the cost of natural gas, which comprises about 80 percent of the input cost, Dalal & Broacha’s Shah said.

Pending Plans

Plans to expand the nation’s urea capacity by 50 percent to 34 million metric tons have been held back by companies, pending a well-defined state policy. The reopening of a unit in the eastern state of Assam was the only major urea project to come on stream since 1999, according to the fertilizer ministry’s annual report.
At a conservative estimate, urea units will need at least 72 million metric standard cubic meters of gas fuel daily by March 2017, compared with the current availability and demand of 41 mmscmd and 43 mmscmd, respectively, according to the commission report. Should all plans to start new plants, expand existing facilities and resume closed units be implemented, the required quantity may exceed 100 mmscmd.
“India needs a robust pipeline network to carry natural gas for urea and other industries,” said Ashok Kumar Balyan, managing director at Petronet LNG Ltd. (PLNG), the state-owned owner of LNG terminals in the western and southern coast of India. “While our Kochi terminal is ready, the lack of a pipeline network is a constraint.”

Gas Terminal

Petronet is planning to set up a 5 million metric ton LNG terminal by 2016 at a cost of 45 billion rupees in the east coast to meet demand in the eastern part of the country.
“We’re prepared to supply LNG to urea makers as and when capacities come up,” Balyan said on Dec. 19 on the sidelines of an energy conference in Mumbai. “The new policy will boost investments in urea capacity expansion and boost demand for natural gas.
Aditya Birla Nuvo, the $4 billion company present in businesses like financial services, fashion and information technology, plans to sell the increased output in the eastern states of Bihar, Jharkhand, West Bengal, the eastern region of Uttar Pradesh and in the central state of Chhattisgarh, Jain said last month. The company declined to comment after the new policy was approved.
The government will provide financial support to private entrepreneurs for making capital investments in the fertilizer sector, the then Finance Minister Pranab Mukherjee had said in his budget speech in March. On Oct. 11, the cabinet increased urea prices by 50 rupees a ton and approved direct transfer of the fertilizer subsidy to the farmers.
“At current prices, it is better to import liquefied natural gas and produce urea locally,” Planning Commission’s Sharma said. “There should be higher activity in this industry that has not seen much interest.”
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 Steps Up Policy Overhaul With Land Law Approval: Economy By Abhijit Roy Chowdhury and Bibhudatta Pradhan - Dec 13, 2012

India approved changes to a century-old land law and set up a panel to speed up infrastructure projects as Prime Minister Manmohan Singh extends a policy overhaul to revive economic growth.
Amendments to the colonial-era Land Acquisition Act may help the government curb often violent protests that have stalled projects for industry and highways. The cabinet committee also allowed the establishment of an infrastructure panel and a 30 percent reduction in the sale of airwaves.
The approvals add momentum to Singh’s policy agenda by addressing transportation and energy bottlenecks that have handicapped growth in Asia’s third-largest economy. The prime minister has already won support to open the economy to overseas retailers, the biggest embrace of foreign investment in a decade, as he bids to repair the government’s reform credentials before national elections in 2014.
“The key here is that the government clearly wants to keep up the reform momentum,” said Robert Prior-Wandesforde, an economist in Singapore at Credit Suisse Group AG, who has covered the Indian economy for almost seven years. “It wants to signal to the Reserve Bank of India, as well, that it’s committed to a series of economic reforms of the sort that the RBI would appreciate.”
The economy expanded 5.3 percent in the three months ended Sept. 30 from a year earlier, slowing to match a three-year low. Central bank Governor Duvvuri Subbarao, in the last policy meeting in October, resisted calls from Finance Minister Palaniappan Chidambaram for lower interest rates to spur growth.

Stalled Investments

Singh will head a new panel aimed at speeding up approvals of infrastructure projects. The prime minister is seeking $1 trillion in investments for highways, ports and power plants from 2012 to 2017 to spur development.
After at least two years of debate, the cabinet yesterday agreed to make it mandatory for companies buying land to win the approval of 80 percent of landholders. For public-private partnership projects, 70 percent of the landowners need to give consent, according to Parliamentary Affairs Minister Kamal Nath.
Abuse of the 1894 law that allowed the state to seize land at cheap rates if it believes there’s a larger public benefit, such as the creation of jobs, has led to clashes between farmers and provincial administrations, and fueled Maoist rebellions in some mineral-rich states, including Chhattisgarh and Odisha. Among investments postponed is a $12 billion project first proposed by South Korean steelmaker Posco in 2005.
The law will be applied retrospectively in certain cases and also seeks to boost the money paid to farmers. Rahul Gandhi, who will lead the Congress party’s election campaign ahead of parliamentary polls in 2014, has championed the land law changes.

Most Pessimistic

India may report inflation accelerated in November, according to a Bloomberg survey ahead of the release of the benchmark wholesale-price index today. Big Japanese manufacturers are the most pessimistic in almost three years, the Bank of Japan’s quarterly Tankan index showed today.
The Reserve Bank of Australia may need to cut its benchmark rate further as the local dollar’s resilience impedes growth, the Organization for Economic Cooperation and Development said. While in China, a preliminary reading for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics showed manufacturing may expand at a faster pace this month.
Euro-area inflation data for November and employment figures for the third quarter are due today. In the U.S., industrial production probably climbed 0.3 percent in November from a month earlier, according to a Bloomberg survey.

Slowest Pace

India’s monetary authority predicts the $1.8 trillion economy will expand 5.8 percent in the year ending March 31, which would be the slowest pace since 2003, according to government data. Growth will rebound to 6.7 percent in the year through March 2014 from an estimated 5.5 percent in the current fiscal year, according to Goldman Sachs Group Inc.
Singh’s minority government needs the backing of regional parties to secure approval for the land acquisition legislation. The prime minister in mid-September curbed fuel subsidies, allowed foreign investment in aviation, and last week won votes in both houses of parliament over his plans to permit the entry of foreign supermarket chains.
“The prime minister is beginning to think more and more about his legacy,” Prior-Wandesforde said. “The measures we saw in September and these more limited steps yesterday in part are an attempt to signal that he is a reformist, has been a reformist and that is what he wants his legacy to be.”
To contact the reporters on this story: Abhijit Roy Chowdhury in New Delhi at achowdhury11@bloomberg.net; Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Top Seller Helps Maruti Buck Falling Deliveries: Corporate India By Siddharth Philip - Dec 12, 2012

Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker, forecasts deliveries will rebound from the first drop in eight years, led by surging demand for the latest version of its best-selling car.
Sales at the unit of Suzuki Motor Corp. (7269) may rise as much as 6 percent in the year ending March 31 after dropping 11 percent in the same period a year earlier, said Mayank Pareek, the managing executive officer for sales. The Society of Indian Automobile Manufacturers forecasts car deliveries will expand as little as 1 percent this year.
Maruti has orders for 52,000 units of the new version of the Alto, which it started selling in October. That’s almost equivalent to the sales of Ford Motor Co. (F) in Asia’s third- largest automobile market this year. Cheap parts and easy availability of service stations in the world’s seventh-largest landmass has kept customers “loyal” to Maruti amid four shutdowns due to labor strife, said Umesh Karne, an analyst with Brics Securities Ltd. in Mumbai.
“The value proposition that Maruti offers is something the competition can’t match, which is why Maruti has waiting lists on its models while rivals are offering discounts,” said Kapil Singh, a Mumbai-based analyst at Nomura Holdings Inc., who recommends investors buy the stock. “Maruti will certainly outperform the market.”
Maruti’s shares have risen 60 percent this year, India’s best performing auto stock. They fell 0.1 percent to 1,476 rupees in Mumbai yesterday.

Labor Agitation

Maruti, faced with a labor agitation in July that left one person dead and caused it to close one of its factories for about a month, has seen sales rise for three straight months. Deliveries at Ford, General Motors Co. (GM) and Volkswagen AG (VOW) have dropped in the same period. The company also increased deliveries of diesel-run vehicles in a country where the price of the fuel is capped by the government.
“A coming together of many factors has helped us increase sales,” Pareek said in an interview. “Our new models have gained a lot of traction in the market and we have also had an increased supply of diesel engines.”
Sales of diesel-powered models including the Swift, DZire and Ertiga rose to 45 percent of total dispatches this year compared with about 35 percent last year, Pareek said.
The industry association slashed its forecast for deliveries for a second time this year on Oct. 10. That may prompt Maruti and its rivals to offer discounts to attract buyers, said Deepesh Rathore, the New Delhi-based managing director of IHS Automotive in India.

Earnings Margin

Hyundai Motor Co. (005380), India’s second-largest carmaker, said on Dec. 1 its Indian sales last month dropped 0.7 percent, while Tata Motors Ltd. (TTMT), the maker of the Nano car, reported a 19 percent drop in passenger vehicle dispatches in November.
Maruti’s earnings margin before interest, taxes, depreciation and amortization may narrow for a third straight year, according to data compiled by Bloomberg. The company reported a margin of 7.8 percent in the year ended March 31.
“The overall car market is weakening and Maruti will be affected,” said Mahantesh Sabarad, an analyst with Fortune Financial Services Ltd. in Mumbai. “They have a serious underutilization of their petrol engine capacity while their diesel engine capacity is overburdened.”
Another strike at the company’s main plant in Manesar near New Delhi may also sour customer loyalty should deliveries be delayed again. A general manager was killed and dozens of executives injured when the riot erupted in July, its most violent labor strife, prompting Maruti to announce a lockout.

Services Terminated

The automaker terminated services of 500 regular workers at the Manesar plant, where a total of 3,300 workers were employed. Police arrested workers, including union leaders, following the riot, provoking protests as recently as Dec. 9.
Maruti, named after the son of the wind god in Hindu mythology, has seen its market share dwindle to about 40 percent from as high as 87 percent in 1998. Closest rival Hyundai commands 19 percent, 15 years after starting production in the southern city of Chennai.
Maruti first started selling the Alto in September 2000, priced at 300,000 rupees to compete against Hyundai’s Santro model and defunct Daewoo Motor Co.’s Matiz hatchback. The new version, introduced on Oct. 16, is 19 percent cheaper at 244,000 rupees in New Delhi, making it the company’s least expensive hatchback after the Maruti 800, which it has been producing since 1983.

Kilometer Per Liter

The company says the Alto runs 22.7 kilometers (14.1 miles) on a liter of gasoline in a nation where the fuel is 40 percent costlier than diesel, making it attractive for buyers, Brics’ Karne said. Huyndai’s Eon model offers 21.1 kilometers for every liter, while GM’s Chevrolet Spark goes 18 kilometers.
Maruti’s nearly 3,000 service centers, compared with 800 for Hyundai and 241 sales and service centers for Ford, also help lure customers.
“The satisfaction with the brand is why Maruti continues to dominate the market,” said Rathore. “Maruti’s sales and service network is a kind of machine that it has set up and it works very well.”
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

Kingfisher Airlines in Talks With Etihad to Sell Stake

By Niveditha Ravi - Dec 11, 2012

Kingfisher Airlines Ltd. (KAIR), the Indian carrier that halted flights because of a cash crunch, said Etihad Airways PJSC is among possible investors it’s talking to as it seeks to raise funds though a stake sale.
Discussions are only at the “negotiation stages” and no agreement has been reached with Abu Dhabi-based Etihad or any other airline, the Bangalore-based carrier said in a filing yesterday. It didn’t name any other potential investors or give further details on the talks. Etihad declined to comment.
Kingfisher, which grounded flights in October, jumped by its 5 percent daily limit in Mumbai trading yesterday after Mumbai Mirror newspaper said Etihad had agreed to buy a 48 percent stake. The Indian carrier’s chairman, liquor tycoon Vijay Mallya, has been trying to raise capital for more than two years to help ease an 86 billion-rupee ($1.6 billion) debt pile.
Etihad is in due diligence with a “couple” of Indian carriers, Chief Executive Officer James Hogan said last week in an interview. The carrier already has stakes in Virgin Australia Holdings Ltd. (VAH), Aer Lingus Group Plc and Air Berlin Plc. (AB1)
The airline is in talks to buy as much as 24 percent of Jet Airways (India) Ltd. (JETIN), the nation’s biggest listed carrier, an Indian government official said earlier this month. Jet may raise about 16 billion rupees from the sale, said the official, who declined to be identified citing rules.

Mallya’s Birthday

Etihad agreed to purchase the Kingfisher stake for more than 30 billion rupees, Mirror newspaper reported, citing airlines’ officials it didn’t identify. That’s more than double Kingfisher’s market value. A deal may be announced around Dec. 18, Mallya’s birthday, according to the report.
Kingfisher closed in Mumbai trading yesterday at 15.60 rupees, the highest since Sept. 28. The stock has slumped 26 percent this year.
Kingfisher also needs funds to convince India’s aviation regulator to re-active its license, which was suspended following the service disruptions in October.
India in September ended a ban on local airlines selling stakes to overseas operators to help them raise funds amid industrywide losses. The investments can be as big as 49 percent shareholdings.
To contact the reporter on this story: Niveditha Ravi in Mumbai at nravi2@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Asian Stocks Outside Japan Rise Before U.S. Fed Meeting

By Jonathan Burgos and Adam Haigh - Dec 10, 2012

Asian stocks rose, with a regional index excluding Japan heading for its highest close in 16 months, ahead of a Federal Reserve policy meeting and as investors await progress on U.S. budget talks.
BHP Billiton Ltd., the world’s biggest mining company, added 1.4 percent in Sydney after metal prices rose. Renesas Electronics Corp. jumped 4.2 percent as the Japanese chipmaker said it will sell at least 150 billion yen ($1.8 billion) of new shares to a government-backed fund and customers as part of a bailout plan. Kansai Electric Power Co. sank 5.9 percent to lead Japanese utilities lower after regulators said an active earthquake fault may be running under a nuclear reactor.
The MSCI Asia Pacific Excluding Japan Index (MXAPJ) added 0.2 percent to 459.95 as of 1:08 p.m. Tokyo time, heading for its highest close since Aug. 3, 2011. About four shares rose for every three that fell. The gauge climbed the past three weeks on signs of recovery in the world’s two largest economies and optimism U.S. lawmakers will make a budget deal to avert the so- called fiscal cliff.
“The only risk would be is if there’s no resolution of the U.S. fiscal cliff, but I think that’s unlikely,” said Shane Oliver, Sydney-based head of strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “The more likely scenario is that shares continue to rise next year as the U.S. economy picks up momentum.”
Australia’s S&P/ASX 200 Index (AS51) gained 0.4 percent, while Singapore’s Straits Times Index advanced 0.5 percent. South Korea’s Kospi Index added 0.1 percent. Hong Kong’s Hang Seng Index climbed 0.2 percent, erasing losses of 0.2 percent. Japan’s Nikkei 225 Stock Average slipped 0.3 percent.

Chinese Loans

China’s Shanghai Composite Index (SHCOMP) slid 0.4 percent after climbing 2.7 percent the past two days. New lending by the country’s banks increased to 522.9 billion yuan ($84 billion) in November. That compares with 562.2 billion yuan a year earlier and the 550 billion yuan median estimate by 30 economists surveyed by Bloomberg.
“The market needs to take a breather here after its decent rally,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The market will probably continue to go up after the consolidation given the recent positive signs that the economy is bottoming out.”
Indicators are giving a mixed picture of the outlook for the world’s second-biggest economy, with China’s exports rising less than forecast last month even as industrial output accelerated.

U.S. Futures

Futures on the Standard & Poor’s 500 Index fell 0.2 percent today. The gauge gained less than 0.1 percent yesterday as economic data in China beat estimates and investors weighed prospects for a U.S. budget deal.
Federal Reserve policy makers begin a two-day meeting today that will be followed by updated projections on economic growth, unemployment, inflation and interest rates on Dec. 12. Fed officials are considering whether to supplement $40 billion a month of mortgage-bond purchases with Treasury purchases when their Operation Twist program expires at the end of the month.
Separately, U.S. lawmakers need to agree on a budget to prevent more than $600 billion of automatic tax increases and spending cuts from coming into effect next year. President Barack Obama and Republican House Speaker John Boehner met one- on-one at the weekend at the White House. Representatives for the two said in statements afterward that “the lines of communication remain open.”

Budget Negotiations

“The market now seems stuck in a trading range until news from Washington about any progress or deterioration in budget negotiations is released,” said Matthew Sherwood, head of markets research at Perpetual Investment, which manages about $25 billion in Sydney.
Raw-material producers advanced. The London Metals Exchange Index (LMEX), which tracks the prices of commodities from aluminum to copper, climbed 1.9 percent yesterday, extending gains for a second day.
BHP Billiton gained 1.4 percent to A$35.445 in Sydney. Rio Tinto Group, the world’s second-biggest mining company, added 0.8 percent to A$61.81.
Renesas advanced 4.2 percent to 321 yen in Tokyo. The chipmaker will sell 150 billion yen of new shares to a group led by Innovation Network Corp. of Japan, making the government- backed fund its biggest shareholder with a 69 percent stake, as part of a bailout plan.
Skyworth Digital Holdings Ltd. (751) rose 3.2 percent to HK$4.22 in Hong Kong after saying total television sales increased 44 percent in November from a year earlier.

Earthquake Risk

The MSCI Asia Pacific Index advanced 11 percent this year through yesterday as central banks from Europe, the U.S., Japan and China took steps to support economic growth. That compares with a 13 percent gain for the S&P 500 and 14 percent for the Stoxx Europe 600 Index. The Asian gauge traded at 14.2 times estimated earnings, compared with 13.7 times for the S&P 500 Index and 12.6 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.
Japanese utilities declined. The Nuclear Regulation Authority said earthquake risk may prevent the restart of a reactor operated by the Japan Atomic Power Co.
Kansai Electric dropped 5.9 percent to 730 yen. Chubu Electric Power Co. slid 4.9 percent to 1,032 yen. Tokyo Electric Power Co. (9501), owner of the power plant at the center of last year’s nuclear disaster, fell 2.1 percent to 137 yen.
“Prospects for restarting the nuclear reactors are slowly being squashed, and that’s going to increase the cost of electricity,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo, which has about $400 billion in assets.
To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Adam Haigh in Sydney at ahaigh1@bloomberg.net
To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Options Trade Grows Fastest in World as Sensex Tops BRICs

By Santanu Chakraborty and Michael Patterson - Dec 9, 2012

India’s options market is growing at the fastest pace in the world, helping restore investor confidence in a stock market yet to recover from a 52 percent plunge during the global financial crisis.
Equity options traded on the National Stock Exchange of India Ltd. rose 36 percent in the first half, the most among the 10 largest bourses, according to the World Federation of Exchanges. The BSE India Sensitive Index’s volatility has dropped below measures in Brazil, Russia and China to the lowest level since at least 1993, data compiled by Bloomberg show.
Foreigners bought a net $21 billion of local equities this year, pushing the Sensex up 26 percent, the most of the so- called BRIC markets. While the increase in options reflects speculation by Indian investors, it also provides international money managers with the opportunity to hedge their bets. In 2008, when the crisis sparked a record plunge in the Sensex, options trading was 92 percent below today’s level.
“Indian options have given sophisticated investors the flexibility to protect themselves from volatility and also profit from it,” Manoj Murlidharan Vayalar, the associate vice president of derivatives at India Infoline Ltd. (IIFL), said in a phone interview on Dec. 7 from Mumbai.
Options trading may grow at a 20 percent annual pace during the next four years as Asia’s fifth-biggest equity market matures, said Rakesh Somani, the president of the Association of National Exchanges Members of India and a director at Eureka Stock & Share Broking Services Ltd., in a Nov. 23 interview. Options give investors the right, without the obligation, to buy or sell assets at a fixed price by a specific date.

Volumes Surge

Volumes began rising in 2008 after the government reduced taxes on the contracts. Trading on the NSE and BSE Ltd.’s bourse in Mumbai exploded to a notional value of about $468 billion in October, or about eight times the value of traded shares, data compiled by the WFE and Bloomberg show. In Brazil, the value of options was about twice that of stocks. A total 23.7 million equity options traded on the NSE in the first six months of 2012.
Average daily trading in options of Mumbai-based State Bank of India, the nation’s largest lender, climbed to about 74,000 contracts in November from 2,200 four years ago, according to data compiled by Bloomberg. Volumes for Bangalore-based Infosys Ltd. (INFY), India’s second-largest software services exporter, increased to about 14,000 from 800.

Speculative Trades

“Options are wonderful instruments as they add to the liquidity, functionality and trading choices,” Sunil Singhania, who helps oversee about $16 billion as the head of equities at Mumbai-based Reliance Capital Asset Management Ltd., India’s second-biggest mutual fund manager, said in an interview at his office on Dec. 7. The growing market “attracts long-term money from both India and abroad.”
Options trading has hurt India’s capital markets by encouraging speculation instead of long-term equity investment, said Jignesh Shah, the vice chairman of MCX Stock Exchange Ltd., which plans to start trading stocks and equity derivatives next year.
The 30-day average value of shares traded on the NSE and BSE has dropped to the equivalent of about $2.4 billion from $4.6 billion three years ago, data compiled by Bloomberg show.
“Giving excessive focus on a single segment like derivatives and a few speculative products has caused great harm to the overall balance of Indian capital markets,” Shah said in an interview in Mumbai on Nov. 19. “The fundamental approach we have is to create an investment culture.”

Leveraged Products

India’s stock market regulator prevented the creation of so-called mini-derivatives linked to the Nifty and Sensex (SENSEX) indexes last month. The Nov. 20 ban is meant to keep individuals from trading the securities, which have a smaller notional value than standard contracts, the Securities & Exchange Board of India said in the order.
“Small investors were not aware of the various nuances and the fact that mini-derivatives were leveraged products,” SEBI Chairman U.K. Sinha said in Mumbai on Nov. 23. “But by no means should options be done away with. Derivatives are not weapons of mass destruction. They serve a legitimate function of providing liquidity and hedging risks.”
The growth is prompting brokerages that dominate trading to shift staff.
Religare Capital Markets Ltd. has moved employees to its options business from equities this year, said Gautam Trivedi, the head of equities at the unit of Religare Enterprises Ltd. (RELG), the nation’s largest securities firm by market value. Motilal Oswal Financial Services Ltd. (MOFS) is increasing options training for research and sales staff, said Sameer Kamath, the chief financial officer at the Mumbai-based broker.

Foreign Buyers

“Domestic brokerages are increasingly selling more derivatives products to offshore clients,” said R.K. Gupta, who helps oversee about $645 million as a New Delhi-based managing director at Taurus Asset Management Ltd.
Foreign purchases of Indian shares this year were the biggest among 10 Asian markets tracked by Bloomberg. The Sensex index is valued at 16 times reported earnings, compared with 20 for Brazil’s Bovespa Index, 11 for China’s Shanghai Composite Index and 5.8 for Russia’s Micex Index.
Options are also becoming more popular because they allow speculators to leverage bets, according to Gupta. Options typically cost a fraction of stocks and prices for contracts approaching expiration often fluctuate more than the underlying shares, data compiled by Bloomberg show.

Strike Price

Call options that expire this month on Reliance Industries Ltd. (RIL), India’s largest company by market value, traded at 15.4 rupees on Nov. 20. The contracts, which have a strike price of 780 rupees, jumped 15 percent to 17.65 rupees the next day as the underlying shares gained 0.8 percent to 771 rupees.
The 90-day historical volatility of the Sensex index fell to a record low of 11.8 on Dec. 7, data compiled by Bloomberg show. Brazil’s Bovespa has a volatility reading of 20, versus 16 for the Micex and the Shanghai Composite, and 11.7 for the Standard & Poor’s 500 Index.
The India VIX, a measure of options prices, dropped to 13.04 on Oct. 22, the lowest level on record, and traded at 14.96 on Dec. 7.
Dalton Capital Advisors India Pvt., a unit of London-based Dalton Strategic Partnership LLP, buys options to protect stock holdings from declines before market-moving events. The contracts are cheap after a drop in volatility, U.R. Bhat, a Mumbai-based managing director at Dalton Capital, whose parent has $2 billion of global assets, said by phone on Dec. 7.
“Most institutions are increasingly using more options,” Bhat said. “Growth of the options market has been aided by a rise in liquidity.”
To contact the reporters on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net; Michael Patterson in Hong Kong at mpatterson10@bloomberg.net
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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