Wednesday 20 April 2016

Tata’s Port Talbot steelworks in possible management buyout

Reports say that Stuart Wilkie, managing director of Tata Strip Products UK, has been named the leader of a group of managers looking for private investors for buyout plan


Mumbai: Senior executives at Tata Steel Ltd’s Port Talbot factory in the UK are expected to announce a management buyout plan for the ailing plant on Wednesday.
According to various UK media reports, Stuart Wilkie, managing director of Tata Strip Products UK, was named the leader of a group of managers looking for private investors and government support for their plan.
Senior managers at Tata’s South Wales plant were said to be called for an emergency meeting chaired by Wilkie, Sky News reported on Tuesday.
The so-called proposal is based on a ‘turnaround plan’ presented to but rejected by the board of Tata, according to ITV News, which said that the bid would require funding of £100m.
Employees could be asked to invest as much as £10,000 each, the report said.
On 18 April, Tata Steel said it has reached out to 190 potential investors for its UK assets as the Tata Group company initiated the sale process for its UK assets and appointed KPMG Llp as an adviser for the divestment of its entire shareholding in its subsidiary Tata Steel UK.
On 30 March, Tata Steel directed its subsidiary Tata Steel Europe to consider various restructuring options for its UK steel assets, including a sale in parts or whole.
On 11 April, Tata Steel announced the sale of its long products division to Greybull Capital for a nominal amount and on a debt-free basis. Analysts expect the sale of the remaining UK assets to attract a similar valuation.
As of September 2015, Tata Steel had consolidated debt ofRs.71,798 crore—most of it associated with the global operations. The stand-alone debt of Tata Steel India was atRs.25,332 crore.
Commodity tycoon Sanjeev Gupta-led Liberty House has been one of the early investors to express interest in these assets, but is unwilling to take on the liabilities related to these assets.

Six lessons that Patanjali teaches India's FMCG sector

A decade ago it was modern trade which changed the way Indians shopped. Then came e-commerce and online shopping. And this time around it is Patanjali Ayurveda - the latest force to disrupt the branded consumer goods sector. Its raging popularity and strong brand resonance have some incisive lessons for the Indian fast moving consumer goods (FMCG) sector.


Brand Premium - What's that?
A brand doesn't have to charge a premium to resonate better with its consumers. Patanjali products are cheaper than its peers in the same category. "The whole logic of brands charging premium and using that premium to advertise more has been turned upside down by Patanjali products", says Milind Sarwate, former CFO of Marico and founder of Increate Value Advisors.

Product Efficacy - the ultimate USP
Patanjali has brought the focus back on product efficacy. Rising above the noise of advertising, products have to first deliver value to the consumers. Ghee and tooth paste are the two most popular products of Patanjali - even though both of these have enough local and multinational competitors in the organised sector. According to a recent sector report by Spark Capital, while disruption is painful in the short term, it is slated to bring back a key value proposition of FMCG products - product's efficacy.

A Strong Brand Ambassador
The fact that Baba Ramdev, a yoga guru himself, promoting the herbal and organic Patanjali products - has proved that celebrity endorsements work if there is a high connect between the endorser and thfeatures of the brand. The Maggi ban last year had showed how brand ambassadors can receive flak in case the brand falters.

Consumers have the last laugh
Emergence of Patanjali helps keep the established players on their toes and provides the consumer the benefit of more efficacious products at lower prices. It reminds the FMCG companies that peak margins cannot be sustained at the cost of the consumers.

Scope for Innovation or Disruption
Patanjali has reinforced that there is scope for disruption at any point in the industry. Despite the high clutter & penetration and subdued consumer demand, Patanjali products could make a mark. "This shows that there is always scope for creating new moats - which are not easy to replicate or compete with", says an analyst tracking the FMCG industry.

Formal managements can over-sophisticate
The swift rise of Patanjali in becoming a Rs 5000 crore FMCbusiness in the past few three years dwarfs the performance of FMCG companies that took several years to reach a similar size. "Formal management structure can at times slow down the growth of the business due to over sophistication

Sun Capital

Indian economy can grow at 8.5% in 2016-17: Arun Jaitley

Finance minister Arun Jaitley said in New York that India can grow faster than expected if forecasts of normal monsoon rainfall prove correct.


New Delhi: Finance minister Arun Jaitley said on Tuesday that India’s economic growth this year could outpace estimates and accelerate to as much as 8.5% if the monsoon keeps its date with the country after back-to-back years of drought.
At a meeting with investors in New York, Jaitley also spoke about the government’s reforms agenda and the challenges the economy confronts in sustaining high growth.
India’s economy could grow by 8-8.5% in 2016-17, if forecasts of normal monsoon rainfall prove correct, Jaitley said at the meeting organized by Citigroup Inc.
The India Meteorological Department (IMD) last week projected monsoon rainfall this year at 106% of the long-term average after two consecutive years of below-normal rainfall in many parts of the country.
The Economic Survey projected India’s economic growth to remain within a range of 7-7.75% in 2016-17 against an estimated 7.6% growth in 2015-16.
A normal monsoon can provide a one-time push to economic growth in 2016-17 given the low base of agricultural production, said D.K. Joshi, chief economist at rating company Crisil Ltd.
“Beyond 2016-17, we have to rely on private investment to pick up for sustainable growth,” he added.
Crisil has projected gross domestic product (GDP) to grow 7.9% in 2016-17, assuming a normal monsoon. Joshi said he will wait until August to revise his growth projection.
“If IMD retains its normal monsoon projection in June, then we will stick to our growth estimate. In August, we will have a fresh look at the GDP number,” Joshi said.
Jaitley, however, cautioned about some potential risks to growth.
The risks highlighted by the minister include global headwinds that may hurt demand for exports, high oil prices and the June-September monsoon belying the forecasts of normal rainfall, Citibank NA, a unit of Citigroup, said in a note.
“However, the government doesn’t see $50 (per barrel) oil price as a significant problem. In the event oil prices go up, the main beneficiaries thus far (consumers, oil marketing companies and fiscal) will need to surrender part of the benefit,” Citibank said.
After falling below $30 per barrel in January for the first time in 12 years, crude oil prices have bounced back to above $40 per barrel. Brent crude, the international benchmark, was trading at $44.20 per barrel, up $1.29.
A collapse in the price of crude has helped reduce India’s trade deficit and keep the fiscal deficit in check.
India’s exports, meanwhile, fell 15.9% to $261.1 billion in 2015-16 while imports contracted by 15.3% to $379.6 billion. The trade deficit for the year was $118.5 billion.
Giving its own take on the economy, Citibank said recent macro data indicate a reversal of soft third-quarter data in 2015-16 and support its view that a gradual cyclical recovery will push gross domestic product (GDP) growth to 7.7% in 2016-17.
“Delayed salary hikes in the public sector are a risk to our consumption forecast but hopes of ‘normal’ monsoon bode well for rural demand. Consolidating fiscal might not be able to support public capex enough but some private-activity indicators are turning a corner. Overall, India’s relative macro outperformance continues in a difficult global environment. Stability worries recede with fiscal and inflation under control,” it said.
In his interaction with investors, Jaitley said he expects to table the bankruptcy code bill in the second part of the budget session, which resumes on 25 April.
The bill is currently before a joint parliamentary committee that is expected to submit its report shortly. Jaitley said he does not expect any major opposition to the bill.
“GST (goods and services tax) has been cleared in the lower House and the numbers are shaping up in favour of the bill for passage in the upper House,” Jaitley was cited as saying by the Citibank note.
On consolidation of the banking industry and stake sales in public sector banks, Jaitley said the government will look at reducing its stake in state-run banks to 52%, once the financial health of the banks is restored.
“Also, the FM does not believe that the current political climate in India is ready for government to reduce ownership in PSU (public-sector undertaking) banks to below 51%, as an amendment to current banking act will need to be passed,” the Citibank note said.
India’s banks are weighed down by non-performing assets (NPAs)—the result of an economic downturn and delayed regulatory approvals that made it difficult for many corporate borrowers to repay debt.
Listed banks added nearly Rs.1 trillion in bad loans in the December quarter, amounting to a 29% increase in the stock of gross NPAs from the September quarter.
Gross NPAs of 39 listed banks surged to Rs.4.38 trillion for the quarter ended 31 December 2015 from Rs.3.4 trillion at the end of September, according to data collated by Capitaline.
Jaitley mentioned that bad loans with public sector banks are largely attributable to a handful of sectors such as steel, power, infrastructure, textile and sugar industries. He said the government intends to tackle the problems on a sectoral basis.
“Moreover, the functioning of the PSU banks has improved, with top-level selection being more transparent. Bank reforms include professional board and management, and arm’s length dealing with the government,” Jaitley said.
Separately, at an event jointly organized by the Confederation of Indian Industry and Asia Society Policy Institute in New York, Jaitley said structural changes underway in India would place the economy on a stronger footing. “India has moved from being in a state of policy paralysis to the economic bright spot of the world,” a finance ministry statement cited the minister as saying.

Tuesday 19 April 2016

Janalakshmi Financial Services raises $150 million in primary funding

Janalakshmi says it will use the funds to acquire customers and build on current products



Small finance bank licensee Janalakshmi Financial Services Ltd said on Monday it has raised $150 million (Rs.1,000 crore) in a round of primary funding led by global private equity firm TPG.
Apart from the primary fund raising, existing investors also sold some of their stakes worth $60 million (Rs.400 crore), the firm said.
TPG’s investment adds to the 2014 investment it made in Janalakshmi. Existing investors, including an investment fund managed by Morgan Stanley Private Equity Asia, Havells India, and Vallabh Bhansali also participated in the round alongside new investors.
Janalakshmi will use the funds to acquire customers and build on current product offerings, a company statement said.
“This latest round of capital will fuel further expansion of the products and services we offer and bring them to more families, businesses, and individuals,” said Ramesh Ramanathan, promoter and chairman of Janalakshmi.
Earlier in January, CDC Group Plc, the UK government’s development finance institution, invested $50 million as tier II capital in Janalakshmi.
Last September, Janalakshmi received in-principle approval from the Reserve Bank of India (RBI) to convert to a small finance bank. The current round of equity will help Janalakshmi transition to a bank structure and comply with RBI’s rules for conversion to a small finance bank.
Starting in 2006 as a for-profit institution focused on improving the lives of the urban poor, Janalakshmi is now represented in more than 184 cities across 19 states and has assets under management of approximately $1.65 billion (Rs.10,500 crore).
“In India, there is a tremendous opportunity to fill the gap between what is being offered by traditional banks and what the nation’s growing population needs. Janalakshmi is a pioneer of microfinance and is at the forefront of addressing this opportunity in a meaningful way,” said Puneet Bhatia, partner and country head of India for TPG.
In India, TPG has partnered with financial services companies, including Shriram Capital, Shriram City Union Finance, Shriram Transport Finance.
In September, RBI issued small finance bank licences to Ujjivan Financial Services Ltd, Equitas Holding Ltd, Janalakshmi, Au Financiers (India) Ltd, Capital Local Area Bank Ltd, Disha Microfin Pvt. Ltd, ESAF Microfinance and Investments Pvt. Ltd, RGVN (North East) Microfinance Ltd, Suryoday Micro Finance Pvt. Ltd and Utkarsh Micro Finance Pvt. Ltd. Eight of the 10 are microlenders. Many have significant foreign holdings because of early investments from private equity funds and multilateral institutions and will have to comply with RBI’s rules to convert into small finance banks.
Firms such as Equitas and Ujjivan have gone the initial public offering (IPO) way to raise primary capital to fund business growth and to reduce foreign ownership.
On Monday, Mint reported that Ujjivan is looking to launch its IPO in the week of 25 April.
Earlier this month, Equitas’s Rs.2,176 crore IPO drew demand for more than 17 times the number of shares on sale because of strong interest from local financial institutions.
However, unlike Equitas Holdings Ltd and Ujjivan Financial Services Ltd, Janalakshmi has decided to remain a private company for the time being.
Mint reported in December that the company will be restructuring itself to create a three-tier structure so that it can adhere to RBI’s guidelines, instead of immediately going in for an IPO.
“We will have a Prompco, which will be the promoter entity, below it would be the non-operating finance company and under it we will have operating firm which will be the bank. Between these three entities, the foreign shareholding would be split in a way that we can conform to the regulatory requirements,” V.S. Radhakrishnan, managing director and chief executive said in an interview.
According to industry experts, small finance bank licensees need capital not just to resolve the ownership question, but also to invest heavily in building the new banking business model, which is expected to add pressure on their financials in the near to mid term. “There will be some pressure on the financial performance as right now they will be investing heavily on the technology, human capital and all those investments will not necessarily start giving rewards immediately,” said Kalpesh Mehta, partner at Deloitte Haskins and Sells, India.
Also, there is expected to be more competition in the space, given the government’s larger agenda of financial inclusion, he added.

Realty firms likely to see muted sales, profits in March quarter

 Property market in Delhi NCR remains under pressure; Mumbai continues to see sales volumes only in select residential projects

Top real estate companies are expected to post muted sales and profits in the January-March quarter compared to a year ago due to limited project launches, tepid cash flows and weak consumer sentiment.
The property market in the national capital region (NCR) remains under pressure, while Mumbai continues to see sales volumes only in select residential projects. Demand for Rs.1 crore-plus houses is weak in Bengaluru and Pune, while mid-income housing continues to see reasonable offtake.
However, even as residential sales remain lacklustre, a key positive that has emerged over the past four quarters is a pickup in leasing activity for office space, especially in Bengaluru.
“New project launches remained subdued during the quarter, with developers focusing on clearing existing inventory rather than launching new projects at a time when demand is sluggish,” said Sandipan Pal, an analyst with Motilal Oswal Securities Ltd.
Some of the launches in the quarter were Godrej Properties Ltd’s second phase of The Trees in Mumbai, Mahindra Lifespace Developers Ltd’s Vivante in Mumbai and Sobha Ltd’s International City in Gurgaon.
“While a general slowdown prevails in real estate markets across the country, NCR remains the worst-affected,” Pal said.
So far this year, the BSE Realty Index has fallen 0.51%. On Monday, it closed at 1,337.41 on BSE, up 4.4% from the previous close. India’s top two developers, DLF Ltd and Oberoi Realty Ltd, are expected to post lower sales and profits for the three months ended March, due to the lack of new launches and limited revenue recognition from projects.
DLF, the largest developer by market value, may see its March quarter net profit fall by 16.5% to Rs.143.25 crore compared to the corresponding quarter a year ago, according to a Mint poll of six brokerages. Its revenue is likely to marginally rise by 3.61% to Rs.2,023.5 crore.
“While DLF’s revenue is expected to be driven by older projects, operationally, we expect a weak quarter in terms of pre-sales with no new launches. Net debt is likely to increase on account of weak operating cash flow. The key monitorable will be update on progress of promoters’ stake sale in the annuity business,” said a report by IDFC Securities Ltd.
DLF recently sought expressions of interest from top global investors to sell a 40% stake in its rental assets arm as it seeks to pare debt. The rental assets arm holds about 20 million sq. ft of leased-out office space and is valued at about $2 billion. Multiple investors are likely to buy stakes in the office rental unit.
Sequentially, DLF is expected to post a drop of 17.1% and 24.4%, respectively, in net profit and revenue, according to the Mint poll.
On Monday, shares of DLF rose 2.4% to Rs.124.95 on BSE.
Mumbai-based Oberoi Realty is expected to post a 14.1% drop in net profit to Rs.88.48 crore from a year ago, while its revenue may see a sharp drop by 31.3% to Rs.235.80 crore.
“Oberoi didn’t have any launch in the fourth quarter, and will see a decline in sales booking on a year-on-year and quarterly basis. The third quarter was an eventful one for Oberoi, which launched its big Borivali project then and witnessed revenue recognition from its Esquire project,” said Adhidev Chattopadhyay, an analyst at Elara Securities Ltd. Quarter-on-quarter, Oberoi Realty may see a 53.1% and 67.9% fall in net profit and revenue, respectively.
Oberoi Realty rose 17.7% to close at Rs.279.85 on BSE after The Economic Times reported that Swedish furniture retailing giant Ikea is in talks with the developer to buy a built-to-suit retail space for more than Rs.900 crore in suburban Borivali. Oberoi Realty told BSE said that no transaction has taken place yet.
Slowdown woes apart, developers also struggled to meet their annual sales guidance owing to delays in approvals, making it tough to launch projects on schedule.
“FY16 is the third consecutive year where Sobha Ltd has missed its annual sales guidance with 3.4 million sq. ft of sales worth Rs.2,010 crore versus guidance for 4 million sq. ft of sales worth Rs.2,600 crore,” said an Elara Securities report. Even Prestige Estates, which had set an annual sales target of Rs.5,500- 5,800 crore for 2015-16, revised it in the course of the year.
While Godrej Properties continued to sell well in projects such as the second phase of Trees, a key monitorable will be if its debt levels remain in check, said analysts. Developers such as Oberoi Realty and Kolte-Patil Developers Ltd, among residential players, have low debt even as sales remain tepid.
Bengaluru-based Prestige Estates and Brigade Enterprises Ltd have robust annuity portfolios mainly due to their office projects, coupled with a strong residential launch pipeline.

DYK: How a good monsoon can impact you

Since inflation and interest rates are linked, the effects of a good monsoon season will have an impact on agricultural incomes, the overall market sentiment, and even policy action.


The three days that the equity market was open for trading in the previous week, S&P BSE Sensex went up 837 points. This cheer was on account of, among other things, a favourable monsoon forecast for the year. On 11 April, the government said that the El Nino condition is declining, and that La Nina effect is likely to takeover leading to a good monsoon. On 13 April, Sensex closed at its highest levels in nearly three-and-a-half months at the same time the India Meteorological Department (IMD) forecasted an above-normal monsoon. Stocks of agri-input and agri-equipment companies and those that depend on the rural economy for revenues (such as two-wheelers), saw an increase in share prices.
MONSOON AND THE AGRICULTURE SECTOR
El Nino is usually associated with scarce rainfall or even a shift in the monsoon season, i.e., late rains or a withdrawal. La Nina, on the other hand, usually has the opposite impact, and brings more rainfall.
The progress of monsoons is a key driver for the agriculture industry. A recent Kotak Institutional Equities report stated that the monsoons have been playing a bigger role, especially since financial year 2013, in the absence of high growth in the minimum support price (MSP) of key crops.
As per the Economic Survey 2015-16, 25 crops are covered by MSP. This is the minimum price that the government assures farmers for their produce in case of a steep fall in market prices. The government announces prices at the beginning of the sowing season. Due to failed rains in the past two years, MSPs have only risen marginally.
According to the Economic Survey, the agriculture sector employs 48.9% of the workforce, and its share in gross domestic product (GDP) was 17.4% in 2014-15. However, the growth in agriculture GDP and its allied sectors saw a fall of 0.2% during 2014-15. So, a good monsoon this year could translate into increased agricultural productivity and possibly an increase in MSPs.
IMPACT ON YOU
MSPs play a key role in driving cereal inflation, and also affects prices of other agricultural products (read more herehttp://bit.ly/1myXflv). Since inflation and interest rates are linked, the effects of a good monsoon season will have an impact on agricultural incomes, the overall market sentiment, and even policy action.
Do keep in mind that these are early days, and the monsoons are about two months away. IMD will release its final forecast in June-July. But if the rains are indeed good, agricultural GDP can see an increase, as will rural income and consumption. This will benefit stocks of companies in sectors such as fast-moving consumer goods (FMCG), agri-inputs, and even rate sensitives sectors such as auto and banking.
Good rains also bode well for borrowers. Reserve Bank of India (RBI) governor, Raghuram Rajan, has said that there will be room for cut in policy rates if inflation continues to ease and the monsoon is in line with the forecast. In 2015, RBI had cut rates by a total of 125 basis points, and on 5 April this year, it cut the repo rate by 25 basis points. One basis point is one-hundredth of a percentage point.

Narrowing gap between WPI, CPI inflations

Commodity prices, with a large weight in WPI, have recovered a bit while food prices, which have a large weight in CPI, are coming down


Arvind Subramanian, the government’s chief economic adviser, should be pleased. Almost a year ago, he had made the point that the real rate of interest faced by Indian producers, based on the Wholesale Price Index (WPI), was much higher than that faced by consumers, based on the Consumer Price Index (CPI). At that time, the divergence between wholesale and retail price inflations was very high.
But that is changing rapidly. The chart shows the trajectories of CPI-based and WPI-based inflations. Note that, for September 2015, the difference between the two measures of inflation was 9 percentage points. For March 2016, the difference has narrowed to 5.68 percentage points. The chart shows how the two inflation measures are converging.
The reason, of course, is that commodity prices, with a large weight in WPI, have recovered a bit while food prices, which have a large weight in CPI, are coming down.
While CPI-based inflation is expected to remain around 5%, it’s likely that WPI inflation will edge up, narrowing the gap further. The real rates of interest faced by producers and consumers will converge.

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