Billionaire-Backed Explorer to Revive Oil Hunt: Corporate India

By Rakteem Katakey - Feb 21, 2013

Cairn India Ltd. (CAIR), controlled by billionaire Anil Agarwal, will start drilling its first new well in five years to raise output and help bolster the best profit margin for an oil company in Asia.
The company, which got the Indian government’s approval last week to explore new oil pools in its biggest field in the western state of Rajasthan, is accelerating its plans to drill 30 wells in the year starting April 1 and a similar number in the following 12 months, Chief Executive Officer P. Elango, said. Cairn India says the new deposits may increase its reserves by as much as 50 percent to 1.5 billion barrels.
“Our primary focus is to increase production and for that we have to undertake great exploration activities,” Elango said at his office in Gurgaon, near New Delhi. “In the future, through additional capacities we can add more production at small incremental costs.”
Cairn India needs new reserves to meet its target of raising production by 71 percent to 300,000 barrels a day as rivals including state-owned Oil & Natural Gas Corp. (ONGC), the nation’s biggest explorer, report a drop in output. Agarwal acquired Cairn India from Edinburgh, Scotland-based Cairn Energy Plc (CNE) and other investors in 2011 for $8.67 billion to diversify into energy and tap Indian demand, which the U.S. Energy Information Administration estimates will grow 14 percent in the five years to 2015.

Profit Margin

Cairn India’s EBITDA margin, or earnings before interest, tax, depreciation and amortization as a percentage of sales, was 76.18 percent in the quarter ended Dec. 31, according to data compiled by Bloomberg. That’s the highest among Asia Pacific oil and gas companies with a market value of at least $5 billion and the most among the 50 companies in India’s Nifty Index.
The measure was 44 percent for ONGC and 50 percent for Cnooc Ltd. (883), China’s biggest offshore explorer, according to data compiled by Bloomberg.
“The exploration program and the plan for enhanced oil recovery is going to help Cairn maintain oil production for a long time,” said Neelabh Sharma, a Mumbai-based analyst with BOB Capital Markets Ltd., a unit of state-run Bank of Baroda, who upgraded the company’s shares to buy from hold on Feb. 20. “The company’s earnings are directly linked to the price of Brent crude and as economies emerge from a slowdown, oil price will rise, helping Cairn.”

Brent Crude

The explorer sells crude in India at rates linked to Brent oil prices, unlike state-owned ONGC, which is required to bear part of the country’s fuel subsidy.
Crude in London trading, a benchmark price for more than half of the world’s oil, has gained 3.2 percent this year, following a 3.5 percent increase last year. Average prices last year were a record $111.11 per barrel.
Cairn India, operator of the nation’s biggest oilfield on land, reported 48 percent higher profit at 33.4 billion rupees ($612 million), or 16.5 rupees a share, in the third quarter ended Dec. 31 after it increased production from the Rajasthan block.
Cairn India has fallen 3.8 percent this year, compared with a 0.5 percent decline in the benchmark S&P BSE Sensex. (SENSEX) The shares lost 0.1 percent to 306.85 rupees in Mumbai yesterday, giving it a market value equivalent to $10.8 billion.

Vedanta, Sesa

Agarwal’s Vedanta Resources Plc (VED) and unit Sesa Goa Ltd. (SESA) completed buying a 59 percent stake in Cairn India from Cairn Energy and other shareholders in December 2011. India’s cabinet approved the takeover on the condition royalty will be included in the cost of developing the Rajasthan field, which can be recovered from sales. ONGC, Cairn’s partner with a 30 percent stake in the block, paid the entire royalty since production started in August 2009.
Cairn India’s earnings is helping cut losses for iron-ore miner Sesa Goa after a court-ordered extraction ban last year.
The government approved Cairn India’s plan to raise production from the block in Barmer in Rajasthan state to 300,000 barrels a day, equivalent to about 40 percent of India’s current output. To reach that target, the company will need to find more oil in the area, Elango said. The block has proved reserves of 1 billion barrels.
Cairn India’s operating expenses in the Rajasthan block, including the cost of transporting crude to the coast for sale to refineries, is currently about $3 per barrel, Elango said. The company plans to start a project that will pump chemicals into producing oil wells to help flush out hard-to-extract crude from the reservoir in the year starting April 1, 2014. The operating cost to produce the additional crude will be in a range of $8 to $12 a barrel, he said.

‘Long Journey’

“We’ll maintain this level of operating costs, which will incrementally go up when we deploy enhanced oil recovery methods to produce more oil,” Elango said. “We’re looking at how we can pull this deployment forward a bit. This project will help sustain the field’s production for a longer period.”
The explorer’s share of production from fields in India was 128,058 barrels of oil equivalent a day in the quarter, 29 percent higher than a year earlier and 1 percent lower than in the preceding quarter, the company said Jan. 21. Net production from the Rajasthan field averaged 118,984 barrels of oil equivalent per day in the three months, compared with 87,585 barrels a day a year earlier and 120,261 barrels a day in the previous quarter.
“Our vision is to take the 175,000 barrels a day to 300,000 barrels,” Elango said. “It’s a long journey in which we have to drill several exploration wells. We’re very confident about the volume increasing.”
To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net
To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Fernandes Lures Tata Into Air With Low Fares: Corporate India

By Siddharth Philip and Bhuma Shrivastava - Feb 20, 2013

Tata group, which started India’s first airline in 1932, is set to return to the industry as new Chairman Cyrus Mistry plans a budget carrier with Tony Fernandes’s AirAsia Bhd.
Southeast Asia’s biggest low-cost airline will own 49 percent of the venture. Tata Sons Ltd., the holding company of India’s biggest business group, will control 30 percent, while the balance will be owned by Arun Bhatia, whose son is married to the daughter of billionaire Lakshmi Mittal. Fernandes and Mittal own Queens Park Rangers Football Club.
Partnering with the $100 billion conglomerate, which controls Corus Plc and Jaguar Land Rover, will help AirAsia gain a foothold in a market that’s set to triple to 159 million passengers annually by 2021. The venture is the first to be announced after the government allowed foreign carriers to buy stakes in local airlines in September.
“We couldn’t have picked a better partner,” AirAsia Group Chief Executive Officer Fernandes said in an interview from London yesterday after the venture was announced. “We have a product which will have extremely low costs, have extremely low fares and will stimulate the market.”
The new airline plans to operate from Chennai in south India and will provide services to smaller cities in the country, AirAsia said in the statement. A carrier must complete five years of domestic operations before it can start overseas flights, according to Indian aviation rules.

‘Smart Move’

“Partnering with Tata is a very smart move by AirAsia,” said Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. “India is poised to drive a lot of international traffic and can be a hub in the future. That interests carriers like AirAsia” and Etihad Airways PJSC, he said.
AirAsia India will compete with billionaire Kalanithi Maran’s budget carrier SpiceJet Ltd., IndiGo, Go Airlines India Pvt. and Jet Airways (India) Ltd.’s JetKonnect. IndiGo, the low- cost carrier that placed an order for 180 Airbus SAS A320 planes, has grown to become India’s biggest airline, with a 27.3 percent market share in November.
SpiceJet, which has fallen 11 percent this year, dropped 3.6 percent to 39 rupees at 9:35 a.m. in Mumbai, the lowest since Nov. 22. Jet Airways lost 1.4 percent to 576.60 rupees, while AirAsia’s shares fell 0.8 percent to 2.58 ringgit at 12:56 p.m. in Kuala Lumpur trading. The stock has declined 5.1 percent this year.
“Life will become very competitive for Indigo and SpiceJet (SJET),” said Sabarad.

Return to Aviation

Chairman Mistry, who took over from Ratan Tata in December, returns the group to aviation after former Chairman J.R.D. Tata started an airline that later became state-owned Air India Ltd. In 1932, Tata Airlines began meeting Imperial Airways’ London- to-Karachi flight and then continued to Madras, now called Chennai, via Mumbai.
It used a de Havilland Puss Moth monoplane, which had a cabin instead of an open cockpit. J.R.D. Tata piloted the inaugural flight, which hauled mail.
More than a decade ago, Tata Group had teamed up with Singapore Airlines Ltd. (SIA) to bid for a stake in Air India when the then-government sought to sell shares in the state-owned carrier. The plan was later dropped because of political opposition.
The plan to allow foreign carriers to buy stakes in local airlines was revived and implemented by Prime Minister Manmohan Singh’s government to help an industry mired in debt and losses, prompting Jet Airways to start discussions with the Middle East’s Etihad Airways. Liquor baron Vijay Mallya’s Kingfisher Airlines Ltd. (KAIR) was forced to ground his carrier in October because of widening losses and debt.

‘Confidence Back’

“This shows that confidence is somewhat back in the sector,” India’s Civil Aviation Minister Ajit Singh said in an interview.
The deal will be Mistry’s first venture since taking the helm at the company, which also has a partnership with Starbucks Corp. (SBUX), owns Tata Consultancy Services Ltd. (TCS), India’s biggest company by market value, runs the nation’s biggest hotel operator and also makes salt. AirAsia will operate the venture, according to a statement from Tata Sons. Mistry’s group and Bhatia’s Telestra Tradeplace Pvt. won’t have an operating role, the companies said in separate statements.
The venture “will further grow aviation as a mode of transport” and lead to employment generation, Debasis Ray, a Tata Sons spokesman, wrote in the e-mail.

Malaysian Roots

AirAsia (AIRA) is among the 50 low-fare airlines that started in the Asia-Pacific region in the past decade to compete with full- service carriers as first-time travel surges in India, Indonesia and other developing economies. Singapore Airlines started Scoot and Tiger Airways Ltd. while Qantas Airways Ltd. (QAN) started Jetstar Airways Pty.
AirAsia has set up ventures in the Philippines, Japan, Thailand and Indonesia as part of a strategy to expand in the region from its Malaysian roots. In December, the carrier ordered 100 Airbus SAS A320s valued at $9.4 billion, in addition to the 200 it had agreed in 2011 to purchase.
The Malaysian carrier has applied to India’s Foreign Investment Promotion Board for approval and will apply for an air operators permit from the regulator, AirAsia said in the statement.
“India was not ready for a true low-cost carrier,” AirAsia’s Fernandes said. “It is now.”
To contact the reporters on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net
To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Headache Cure Seen Helping Sanofi Gain Market: Corporate India

By Ganesh Nagarajan - Feb 19, 2013

Sanofi India Ltd., a unit of France’s largest drugmaker, is adding over-the-counter products to help double its share of the $5.1 billion local market and revive profit, which has dropped for four straight quarters.
The company will introduce as many as 10 new products to treat ailments that won’t require a prescription, such as headaches, to target a 4 percent market share in the next five years, Anindya Chowdhury, senior director of Sanofi India’s consumer health-care division, said in an interview in Chennai. It will also boost sales of its existing portfolio that includes products from acquisitions, he said.
Sanofi India is joining GlaxoSmithKline Consumer Healthcare Ltd. and Cipla Ltd. in targeting a segment that KPMG estimates is expanding at a faster pace than the nation’s drug industry. Fewer regulatory restrictions, increased health-care awareness and the freedom to advertise products such as Sanofi’s Combiflam Plus help such products generate a 25 percent profit margin, according to KPMG.
“In India, people are increasingly focused on wellness, be it their fitness regime, diet or nutritional supplements,” said Chowdhury. “This has fueled the growth in the consumer health segment.”
Sanofi India, which has advanced 0.8 percent this year, was little changed at 2,320 rupees in Mumbai as of 9:59 a.m. The BSE India Healthcare Index has declined 1.7 percent this year.

Profitable Segment

Companies are widening their portfolio of over-the-counter products as these can be sold without a prescription, allowing drugmakers to market them and access patients directly, according to Amit Mookim, national industry head for health care at KPMG in India. The segment faces less impact of the government’s pricing policy and the earnings margin before interest, tax and depreciation is about 25 percent, he said.
Sanofi India posted an Ebitda margin of 20.1 percent in 2011, according to data compiled by Bloomberg.
Foreign drugmakers “will be able to utilize the distribution channel more effectively and profitably by launching a drug in the OTC segment,” said Mookim. “MNCs will find it easier to leverage the brand name more effectively.”
In December, India announced details of a policy aimed at making drugs more affordable. Prices of 348 medicines deemed essential, including antibiotics, blood pressure drugs and cancer medicines, will be capped at the average price of all brands that have a market share exceeding 1 percent, the department of pharmaceuticals said.
Majority of Sanofi India’s over-the-counter medicines are not likely to come under price controls, according to Ranjit Kapadia, senior vice president at Centrum Broking Ltd. in Mumbai.

Acquisition Benefits

The company has benefited from the acquisition of a unit of Universal Medicare Ltd., Kapadia said. The purchase gave Sanofi a portfolio of branded formulations including vitamins, antioxidants, mineral supplements and liver tonics.
“You cannot expect all the 40 products will grow more than the industry,” said Kapadia. “On an average for the entire basket, if it is growing more than the industry then it is very good.”
The drugmaker doesn’t provide a breakup of its segment revenue and profit.
Sanofi India has posted four consecutive quarters of decline in net income. Profit would probably have dropped 9 percent to 1.74 billion rupees in 2012, according to the median of eight analysts’ estimates compiled by Bloomberg.

Under Pressure

“The company’s margins are under pressure because of increased marketing spend,” said Rahul Sharma, an analyst with Karvy Stock Broking Ltd., who recommends selling the stock. “Once the new pricing policy comes into effect, Sanofi’s earnings will be impacted by 20 percent,” he said, referring to some of Sanofi India’s prescription drugs likely coming under the new pricing regime.
Sanofi India this month unveiled Combiflam Plus, a headache treatment that combines paracetamol and caffeine, in the country. It has been selling Combiflam, a pain relief medicine, for more than two decades in India.
“Data suggests that over 70 percent of men and women experience an episode of headache every month and 36 percent suffer from it weekly,” said Chowdhury. “That’s why we said that if it is such a big problem, then we should be there.”
In addition to Combiflam Plus, Sanofi is focusing on Combiflam cream, for local pain relief, and Seacod, a health supplement.

Name Changes

Sanofi’s Combiflam Plus will compete with GlaxoSmithKline’s Crocin Pain Relief and analgesics sold by other companies.
Sanofi India was incorporated in May 1956 under the name Hoechst Fedco Pharma Pvt. Over the years, its name has changed several times and in May 2012 its name was changed from Aventis Pharma Ltd. It has manufacturing plants in Ankleshwar, in western Gujarat state, and Goa, on the west coast, according to its website.
Sanofi, based in Paris, operates in India through five entities including Sanofi-Synthelabo (India) Ltd., Sanofi Pasteur India Pvt., Shantha Biotechnics Ltd. and Genzyme India Pvt. Asia accounted for 8.1 percent of Sanofi’s 34.95 billion euros ($46.6 billion) of sales in 2012. It didn’t provide a breakdown for India.
In the initial years after an over-the-counter medicine is introduced, money is invested on building the brand, said Sujay Shetty, pharma leader at PricewaterhouseCoopers in India.
“Once you build brands it generates steady amount of volume and cash flow and is not subjected to as much competition,” said Shetty. “Revenues are sticky. They do not go away so easily.”
To contact the reporter on this story: Ganesh Nagarajan in Chennai at gnagarajan1@bloomberg.net
To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India Cuts Borrowing Program as Chidambaram Curbs Spending

By Siddhartha Singh and V. Ramakrishnan - Feb 19, 2013

India cut its annual borrowing program as Finance Minister Palaniappan Chidambaram reined in spending and raised as much as 220 billion rupees ($4 billion) selling stakes in state companies.
The finance ministry canceled a 120 billion rupee bond sale previously scheduled for Feb. 22, the last for the year ending March 31, “on review of the government’s cash position and funding requirement,” it said in a statement yesterday. Prime Minister Manmohan Singh’s administration planned to borrow a record 5.69 trillion rupees this fiscal year before scrapping this week’s debt auction, according to budget documents.
Chidambaram, scheduled to present the federal budget later this month, is under pressure to curb spending and keep his pledge to cut the deficit to 3 percent of gross domestic product in four years, from a targeted 5.3 percent in the 12 months ending March 31. Officials are trying to avert a credit downgrade after Standard & Poor’s and Fitch Ratings said in 2012 that they may demote India to junk status, citing the shortfall and a widening current-account gap.
“Fiscal consolidation is the driving story,” said Shubhada Rao, the Mumbai-based chief economist at Yes Bank Ltd. “There would be prudent expansion of the government balance sheet next year” as Chidambaram seeks to reduce the budget gap to 4.8 percent of GDP, she said.

Asset Sales

The government’s cash position may have improved after increasing revenue collection and raising about 220 billion rupees in the year that started April 1 from sales of stakes in companies including NTPC Ltd., the nation’s biggest power producer, and NMDC Ltd., the biggest iron ore miner.
Net direct tax collection in the April-January period rose 12.5 percent from a year earlier to 3.9 trillion rupees, the finance ministry said in a statement on Feb. 6.
The auction cancellation will help ease a cash squeeze in the banking system caused by slower government spending, according to Nomura Holdings Inc. Lenders borrowed an average of 1.03 trillion rupees a day from the central bank via repurchase contracts this month to meet shortages, compared with 941 billion in January.
The Reserve Bank of India bought 1.3 trillion rupees of government securities this fiscal year via open-market auctions to boost cash at banks, up from 336 billion rupees a year earlier, according to data compiled by Bloomberg.

‘Positive Signal’

“This is a positive signal for the markets,” said Vivek Rajpal, a Mumbai-based strategist at Nomura. “Huge government balances were straining liquidity and policy makers had an option to either cancel the auction or prompt the central bank to purchase more debt.”
Benchmark 10-year bond yields dropped 22 basis points this year, and the 8.15 percent note due in June 2022 was at 7.83 percent yesterday in Mumbai, according to data compiled by Bloomberg. Indian government notes returned 2.4 percent in the past 12 months, the best performance in Asia, according to indexes compiled by HSBC Holdings Plc. Local fixed-income and foreign-exchange markets are closed for a public holiday today.
Rajpal predicted the 10-year yield will move in the coming days toward 7.75 percent, a level not seen since July 2010, and estimated the government’s surplus cash at 900 billion rupees.
The debt-sale cancellation is “slightly positive” for the bond market, said Rajeev Radhakrishnan, head of fixed income at SBI Funds Management Pvt. that manages the equivalent of $10 billion in Indian assets. The central bank may conduct at least two more open-market debt-purchase auctions in the coming month to improve funding availability, he said.

‘Fiscal Consolidation’

RBI Governor Duvvuri Subbarao, who cut the benchmark interest rate by 25 basis points last month to 7.75 percent in the first reduction since April, has cited budget and current- account deficits along with inflation among those constraining further cuts in borrowing costs.
“We have taken note of the road map for fiscal consolidation put out by the finance minister,” Subbarao said on Feb. 7 in Guwahati in the eastern state of Assam. “We are also looking forward to the budget to get a better understanding of how fiscal consolidation will be done.”
Inflation, based on wholesale prices, declined to a 38- month low of 6.62 percent in January while the government predicts the $1.8 trillion economy will expand 5 percent in the year to March 31, the least in a decade.
To contact the reporters on this story: Siddhartha Singh in New Delhi at ssingh283@bloomberg.net; V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Porsche Vendor Eyes Brazil for $5 Billion Sales: Corporate India

By Siddharth Philip - Feb 17, 2013

Motherson Sumi Systems Ltd., India’s biggest auto parts maker, is targeting emerging markets including Brazil and China to meet its $5 billion sales target as vehicle deliveries at home drop.
The company that’s 25 percent owned by Sumitomo Electric Industries Ltd. forecasts sales will increase 84 percent in the year starting April 1 from 147.8 billion rupees ($2.7 billion) in the 12 months ended March 31, according to Chief Operating Officer Pankaj Mital.
The supplier of rear view mirrors, bumpers and body panels to Porsche Automobil Holding SE and Volkswagen AG is adding capacity in China, Thailand, Mexico and Brazil to reduce dependence in Europe and in India, where vehicle sales are poised to drop for the first time in a decade. Motherson is following its clients including Volkswagen and Bayerische Motoren Werke AG to Brazil where vehicle production capacity is set to rise 50 percent by 2014.
“We are growing our facilities in developing countries,” Mital said in an interview. “While there will be replacement in developed countries, new volumes will come from developing countries.”
Automakers last year delivered 3.8 million vehicles in Brazil, the world’s fourth-largest auto market, and the country’s sales have grown at an average annual rate of more than 9 percent the last five years, according to Brazil’s auto manufacturer association Anfavea. The group is forecasting growth of at least 4 percent this year.

Chinese Sales

Auto sales in China, including those of cars and buses, may accelerate this year and surpass 20 million units for the first time, spurred by a rebound in economic growth and urbanization, state-backed China Association of Automobile Manufacturers said last month. Passenger vehicle sales in China are expected to gain 8.5 percent to 16.8 million units in 2013, the group said.
Motherson Sumi’s shares have risen 68 percent in the past year making it the second-best performing stock in the Bloomberg Asia Pacific Auto Parts & Equipment Index. They gained 0.1 percent to 200.1 rupees at 9:22 a.m. in Mumbai.
The shares trade at a price-to-earnings ratio of 14.3 times, compared with 10.4 for Johnson Controls Inc., the largest U.S. auto parts maker and 14 for Japan’s Denso Corp.
Chairman Vivek Chaand Sehgal’s acquisition of German bumper and dashboard maker Peguform Group from Austria’s Cross Industries AG for 321.5 million euros ($429 million) in 2011 and U.K. rear-view mirror maker Visiocorp Plc in 2009 is helping the company’s drive to boost revenue from overseas.

Loss Narrows

Sales at its units including those abroad, now called Samvardhana Motherson Peguform and Samvardhana Motherson Reflectec, accounted for 74 percent of revenue in the year ended March 31, according to data compiled by Bloomberg.
Peguform’s loss narrowed to 5.6 million euros in the three months ended Dec. 31 from 16.2 million euros a year earlier, according to a company filing. Reflectec turned to a profit of 4.17 million euros in the nine months to December from a loss of 1.2 million euros in the earlier period.
The company’s ability to revive the unprofitable overseas units may help it to increase its return on capital employed to 40 percent in the year ending March 31, 2015, from 14 percent in the 12 months to March 31, according to its annual report.
“Globally, they’re becoming one of the biggest suppliers to carmakers,” said Surjit Singh Arora, an analyst with Prabhudas Lilladher Pvt. in Mumbai. “They’re on a strong footing as I believe that going forward, their profitability will improve.”

Mirror Factory

BMW, the world’s largest maker of luxury vehicles, plans to invest 200 million euros in a Brazil factory, while Volkswagen is investing 3.4 billion euros to upgrade its model lineup and factories in the South American nation through 2016.
The company is adding capacity at its new mirror factories in Brazil and Thailand and is also setting up a plant in China, Mital said. The mirror unit, which counts Ford Motor Co., General Motors Co., Fiat SpA and Daimler AG as its customers, is Motherson’s second-biggest division, Mital said.
The company, which started making cables in 1977, partnered with Sumitomo Electric in 1986. Motherson has been involved in 11 merger and acquisition transactions since 2005, according to data compiled by Bloomberg.
“Motherson has done a lot of backward integration and they also supply to luxury carmakers where margins are much higher, so even when the market is declining, they continue to grow,” said Rupin Shah, an analyst at BP Equities Pvt. in Mumbai. “I expect this performance to continue.”
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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Slym Plans to ‘Break Out’ With Diesel Nano Car: Corporate India

By Siddharth Philip - Feb 14, 2013

Karl Slym, managing director of Tata Motors Ltd., said he’s planning to build a diesel version of the world’s cheapest car this year to revive vehicle sales, which have dropped for three straight quarters in India.
Tata Motors also plans a variant of the Nano, conceived by former Chairman Ratan Tata, that will be fueled by compressed natural gas, Slym said. The company yesterday reported profit, including that of unit Jaguar Land Rover Ltd., which missed analysts’ estimates by 44 percent. Slym is betting a 30 percent difference between diesel and gasoline prices at the pump will make the Nano a popular choice.
Slym is introducing new models of the $2,500 Nano, which according to Ratan Tata has failed to reach its “full potential,” and the Indica hatchback to help the company recover from the biggest loss in at least a decade at home. The poor performance in India will negate gains at the company’s luxury unit unless Chairman Cyrus Mistry revamps the local unit, said Mitul Shah, an analyst at Karvy Stock Broking Ltd.
“We had a quiet time and so now it’s time to break out,” Slym said in an interview in Mumbai. “You will see new products and an on-going portfolio. The Nano has a lot going on with it right now.”
Tata Motors shares dropped 1.8 percent to 291.80 rupees at 9:46 a.m. in Mumbai. The company’s American depositary receipts tumbled 4.9 percent to $27.25 in New York yesterday, the most since Jan. 23.

Change Focus

Third-quarter group net income fell 52 percent to 16.3 billion rupees ($302 million), the lowest in three years, India’s biggest automobile company said. That lagged behind the 29.3 billion-rupee median of 40 analysts’ estimates compiled by Bloomberg.
Profit at the luxury unit, which contributed 75 percent of Tata Motors operating income in the year ended March 31, declined 25 percent to 296 million pounds ($459 million). Tata Motors reported a loss of 4.6 billion rupees for its Indian business as sales at home dropped 21 percent to 105.3 billion rupees.
“The India business is loss making right now, which is unsustainable for the company,” said Kapil Singh, an analyst with Nomura Holdings Inc. in Mumbai. “The Nano has not met expectations so models such as the diesel Nano will help, but we’ll have to watch where they price it at.”
Slym plans to “dramatically” change customer focus to revive demand for the Nano, whose sales plunged and never fully recovered after at least three caught fire in 2010.

Family on Scooter

Instead of seeking to sell to motorcycle owners looking to upgrade, the company will market the car to customers “aspiring” to buy the Nano, said Slym, who joined from GM’s China unit, where he was executive vice-president at SAIC-GM- Wuling Automobile Co.
Ratan Tata decided to develop the Nano after seeing a family riding on a scooter. After the fires, the company in December 2010 extended 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.
Sales of the Nano plunged 81 percent to 1,504 units in January from a year earlier after peaking at 10,475 units in March 2012. The company chose the first 100,000 customers for the Nano through a lottery following a deluge of orders in 2009.
The current strategy of targeting a buyer of Hero MotoCorp Ltd.’s Splendor “hasn’t really worked,” said Deepesh Rathore, the New Delhi-based managing director for IHS Automotive in India. If Tata is fighting in the same space as Maruti Suzuki India Ltd.’s Alto or Hyundai Motor Co.’s Eon, “you definitely have a better chance at higher sales.”

India Demand

Tata Motors last month started selling a new version of its Indica Vista hatchback. The variant, that’s priced almost 100,000 rupees cheaper than Maruti’s best-selling Swift model, includes a higher-powered engine and satellite navigation.
Reviving demand in India may also boost profitability at the company, which started as Tata Engineering & Locomotive Co. in 1945, as increased sales for its lower-priced Range Rover Evoque model cut earnings at the Jaguar Land Rover unit, said Umesh Karne, an analyst with Brics Securities Ltd. in Mumbai.
The average selling price of vehicles such as the Jaguar XF, Land Rover Freelander and the best-selling Evoque is about 30,000 pounds compared with the 42,000-pound average for its other models, Vijay Somaiya, head of treasury at Tata Motors, said in a briefing on Jan. 24.
Earnings margin before interest, taxes, depreciation and amortization at the unit was 14 percent in the quarter, lower than 17 percent a year earlier, reflecting the product mix and higher marketing costs, Tata Motors said. The cost of introducing new models also eroded profitability.
“The losses at the domestic business is a major concern,” said Karne. “If they don’t improve from these levels, the impact on the company’s profitability will get bigger.”
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

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Bond Traders Whip CPI Angst as India to Hungary Cut Rates By Ye Xie and David Yong - Feb 13, 2013

From Mexico to Poland, bond investors are lowering their outlook for inflation in developing markets to a nine-month low, giving central bankers room to cut interest rates and boost their economies.
The difference between fixed-rate bond yields and those indexed to consumer prices show investors expect Mexico’s inflation to average 3.22 percent in the next two years, near the slowest since May. A similar Polish measure fell to 2.09 percent last month, the lowest since at least April. Emerging- market bonds gained 5 percent in dollar terms during the three months through yesterday, the most in a year, compared with 0.1 percent for government securities worldwide, JPMorgan Chase & Co. and Bank of America Corp. indexes show.
“We see only moderate growth compared to recent years, and these solid but hardly effervescent economic conditions should keep inflation in check,” Alessandro Bee, an economist and fixed-income strategist in Zurich at Bank Sarasin & Cie AG, which oversees 99 billion Swiss francs ($108 billion), said in a phone interview on Feb. 4. “That’s a really nice environment for local bond markets.”
While investors see inflation in the biggest emerging markets such as China and Brazil rising, the tame outlook elsewhere will allow policy makers to focus on bolstering the weakest economic growth since 2009 through lower rates, according to Bank of America.

IMF View

The rate of inflation in developing markets will remain at 6.1 percent in 2013, slowing from a four-year high of 7.2 percent in 2011, the International Monetary Fund in Washington said last month.
India, Poland, Colombia and Hungary have cut borrowing costs this year, in part because consumer prices are under control. Traders anticipate looser monetary policy in South Korea, Poland, Colombia and Hungary, according to a Morgan Stanley model that tracks interest-rate swaps.
That’s a reversal from two years ago, when a 55 percent jump in the Standard & Poor’s GSCI index of 24 raw materials in 11 months through April 2011 pushed up consumer prices and led central banks from China to Brazil to raise borrowing costs.
Brazil boosted rates 3.75 percentage points to 12.5 percent in the 15 months through July 2011. China lifted its one-year lending rate five times in nine months starting October 2010.

Growth Throttled

Those moves throttled emerging-market growth to 6.3 percent in 2011 from 7.4 percent the year before, and punished bond investors, with JPMorgan’s GBI-EM Global Diversified Index losing 4.9 percent in dollar terms between mid-October 2010 and mid-January. That was worse than the loss of 3.6 percent for government securities worldwide, according to the Bank of America Merrill Lynch Global Government Index.
In Mexico, central bank board members led by Governor Agustin Carstens unanimously decided to leave the benchmark interest rate at a record low 4.5 percent on Jan. 18, and signaled this month that they may lower borrowing costs for the first time since 2009 as inflation moderates.
Consumer prices in Mexico rose at a 3.25 percent annualized rate in January, the slowest pace since October 2011, after falling within the central bank’s target range of 2 percent to 4 percent in December for the first time since May.

Slower Pace

Banco de Mexico may cut rates “if we keep advancing in this convergence process” with inflation moving closer to 3 percent in a “sustainable way,” Carstens said told reporters in Mexico City today.
The two-year breakeven rate in Mexico narrowed from a 16- month high of 4.54 percentage points in July, according to data compiled by Bloomberg. The rate averaged 4.04 percentage points since October 2006, when Bloomberg started compiling the data.
Peso-denominated bonds returned 4.5 percent in January, the most since June, Bank of America indexes show. The 21 percent gain last year was the most since 2002, and exceeded the 4.54 percent for government bonds globally.
Colombia’s 10-year breakeven rate fell to 2.7 percent on Jan. 23, the lowest level since February 2012, when Bloomberg started compiling the data. Colombia’s bonds gained 8 percent in the past three months, the most since February 2012, JPMorgan data show.
South Korea’s policy makers may cut the nation’s benchmark to 2.5 percent from 2.75 percent in six months, while Poland’s central bank will lower its rate by a half-percentage point to a record low 3.25 percent, Morgan Stanley data show.

Opposite Direction

At the same time inflation is slowing, so is the economy. The IMF cut its growth forecast for emerging markets this year by 0.1 percentage point to 5.5 percent on Jan. 23, citing weaker demand from advanced economies. That compares with an average growth rate of 6.6 percent over the past decade.
In developed economies, the outlook for inflation is moving in the opposite direction as central banks attempting to stimulate growth buy sovereign-debt securities to pump money into the financial system and contain long-term borrowing costs.
The U.S. five-year breakeven rate reached a four-month high of 2.36 percentage points on Feb. 1, above the average of 1.96 percentage points in the 10 years through 2012.
The gauge for the U.K. climbed today to 2.88 percentage points, the highest since April 2011. Britain faces a further bout of inflation and a muted economic recovery, Bank of England Governor Mervyn King said in London.
Inflation in emerging markets won’t accelerate in a “particularly strong way,” making bonds from these regions more attractive than those in the developed world, Phillip Apel, the head of diversified fixed income and rates at Henderson Global Investors Ltd., said in an interview from Singapore on Jan. 25.

Little Protection

“Government bonds in developed markets are out of favor,” said Apel, who manages about $105 billion from London. They offer “little protection against a rise in yields.”
Emerging-market bonds returned 17 percent in dollar terms last year, the most since 2009. Yields average 3.47 percentage points above Treasuries on Feb 1, the least since April 2011. The spread is 0.18 percentage point above the average over the past decade.
Investors poured a record $1.3 billion into funds dedicated to emerging-market local-currency bonds in the week through Feb. 6, according to Morgan Stanley, citing data compiled by EPFR Global. They withdrew $300 million out of dollar-denominated bond funds, the bank said in a Feb. 7 report.
Brazil is one emerging market that will see elevated inflation, based on bond yields. The nation’s consumer price index will average 5.5 percent by 2014, according to breakeven data compiled by Bloomberg. The gauge reached 6.12 percent on Jan. 8, the highest level since September.

Prices Jump

Brazil’s consumer prices jumped 6.15 percent in the year through January, the fastest pace in a year. Inflation has been above 4.5 percent, the midpoint of the central bank’s target of 2.5 percent to 6.5 percent for the last 29 months even as the economy expanded at the second slowest pace since 1999. Inflation is at a high level that requires attention, the central bank said Feb. 7.
Turkey’s inflation will average 6.1 percent in two years, compared with the government’s target of 5 percent, breakeven rates show. In Asia, rising exports and a growing Chinese economy is lifting inflation estimates in the region.
The Philippines will raise benchmark rates three times this year to stem inflation, according to Michael Spencer, Deutsche Bank AG’s chief Asia economist.
“The world has priced in for permanently low inflation,” Paul McNamara, who oversees $9 billion in emerging-market debt at GAM Investment in London, said in a telephone interview on Jan. 28. “There’s no question that it is going to shoot up. Is it going to be a big problem? No. Normalization? Yes.”
McNamara said he’s reducing holdings of longer-dated fixed- rate bonds and buying inflation-linked debt securities.

‘Dovish Stance’

Most emerging-market central banks will delay raising borrowing costs and tolerate faster price increases to cement the economic recovery, benefiting inflation-linked bonds over fixed-rated securities, according to Koon Chow, the head of emerging-market strategy in London at Barclays Plc.
“Emerging market central banks will be reluctant to change course on monetary policy,” Chow, who recommends buying Polish CPI-linked bonds, wrote in a Jan. 25 e-mail message. “This will probably help a majority of central banks hold a more dovish stance.”
Central bankers see little chance of a repeat of 2010. The S&P index of commodities is 11 percent below its peak in August 2011. Food prices tracked by the United Nations fell 0.5 percent last year, extending its drop to 12 percent since the peak in February 2011. Food costs accounted for 27 percent of consumer price indexes in developing nations, compared with 16 percent in developed economies, according to Bank of America.

Surprise Index

Citigroup’s surprise index tracking average consumer price increases in emerging markets relative to economists’ forecasts fell to minus 18.9 in January, the lowest reading since November 2009. A negative reading indicates the actual inflation report trails economists’ forecasts, while a positive number indicates higher-than-expected consumer price increases. The measure reached 7.4 in March 2011, the highest since October 2008.
India lowered its benchmark repurchase rate on Jan. 29 to 7.75 percent from 8 percent, marking the first cut since April, as inflation fell to a three-year low.
Hours later, Hungarian policy makers lowered their main rate for a sixth month, reducing the two-week deposit rate by a quarter-point to 5.5 percent, the lowest since March 2010.

‘Too Early’

It would take greater-than-forecast growth and a 25 percent surge in food prices to really “get inflation going,” according to Alberto Ades, head of emerging-market fixed-income strategy at Bank of America. Even in that scenario, inflation will be 1.1 percentage points lower than the July 2011 peak, strategists led by Ades wrote in a note on Jan. 24.
“We like emerging-market local bonds,” Lazlo Belgrado, a money manager who helps oversees about $20 billion in emerging- market debt at KBC Asset Management SA, said by phone from Luxembourg. ‘It’s too early for the growth-driven inflation scare.’’
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net
To contact the editors responsible for this story: Robert Burgess at bburgess@bloomberg.net; James Regan at jregan19@bloomberg.net

®2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.