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Weekly Recap

NIFTY 50.2012-05-28.2012-06-01

The NIFTY ended on a bearish note, melting down -1.69% for the week.
Biggest losers were TATAMOTORS (-17.05%), RELINFRA (-7.61%) and RANBAXY (-6.58%).
And the biggest winners were TATAPOWER (+4.31%), AMBUJACEM (+4.26%) and HINDALCO (+4.16%).

Decliners eclipsed advancers 32 vs 17
Gold: +0.25%, Infrastructure: +0.99%, Banks: -0.72%.

Macro news is decidedly bearish: global growth, from US to China, is slowing down, domestic car sales are weakening, commodity prices are taking a hit. It’s only a matter of time before Central Banks will respond with a new round of monetary easing. Expect the ECB to do something.

Daily news summaries are here.

India finds itself on a slippery slope

Oil companies raised gasoline (petrol) prices by Rs 6.28 per liter or 11-12% at the retail level, sparking severe outrage from politicians and the so called ‘aam aadmi’. Apart from political rhetoric, it would help to look at the economic implications of fuel price hikes and the entire subsidy mechanism.

imageSince petrol prices are technically decontrolled, the hike will not bring down the fiscal subsidy bill. For that to happen, the paralytic government must get bold, meaning, it has to go out and raise the prices of diesel, LPG, kerosene as oil companies continue to bleed on selling these fuels at below-market prices. Although global crude prices have come off significantly from $125/ barrel mark, the benefits have been offset by the sharp depreciation in the rupee.

But the pressing issue is the entire subsidy sharing mechanism. Global prices of crude oil play a decisive role in the domestic pricing of petroleum products since more than 75 per cent of the country’s crude oil requirement is met through imports. The government subsidizes its refiners (downstream companies like IOC, HPCL and BPCL) to sell fuel below cost, and pushes drillers (upstream companies like ONGC, GAIL and IOC) to foot part of the bill while it bears the rest.

imageOil Marketing Companies (OMCs) had lost a record Rs 1,38,541 crore on selling fuel at government- controlled rates during the last fiscal. While the government will make up 60 per cent or Rs 83,500 crore of the total revenue loss, upstream PSUs will shell out 40% or Rs 55,000 crore as their share of the subsidy burden. Out of the Rs 55,000 crore, ONGC will bear Rs 45,188 crore (82%), Oil India will shell out Rs 5,978 crore (11%) while GAIL will contribute Rs 3,834 crore (7%).

imageThis time around, all OMCs will get full reimbursement which means they will not have to share the subsidy burden. As a result, both IOC and BPCL have reported solid numbers in Q4. Net profit of IOC trebled to Rs 12,670 crore from Rs 3, 905 crore a year ago while BPCL reported a four-fold hike in profits in Jan-Mar quarter at Rs 3,962 crore against Rs 935 crore a year ago.

imageThe ad-hoc subsidy mechanism and the financial jugglery with one oil PSU compensating the other has only worsened India’s fiscal position and the balance sheets of oil firms. It may be politically unfeasible but the sensible thing to do is to eliminate subsidies. While it may push costs and spike inflation, Pranab & co must get rid of price controls and allow oil companies to pass on higher global energy prices to curb wasteful consumption and rationalize energy usage. Cheap energy has discouraged energy saving which can be seen in the sharp spurt in sales of diesel-driven passenger cars.

Simultaneously, supporting measures for the needy—such as well-targeted cash support programme to compensate households for the price increase is easy to implement and understand.

Pussyfooting on this issue will only increase the subsidy burden further even as consumption rises while the rupee depreciates further. This is a potent mixture that can send the macro-economic picture into further tailspin.

[stockquote]IOC[/stockquote] [stockquote]BPCL[/stockquote] [stockquote]ONGC[/stockquote] [stockquote]HINDPETRO[/stockquote] [stockquote]GAIL[/stockquote]

FCCBs–Is Disaster Lurking?

Las Vegas bail bonds financing


Corporate India’s worry lines do not simply end with high input costs, slackening demand, rising credit costs, and low business sentiment. Lured by buoyant share prices, companies went overboard with their fascination for Foreign Currency Convertible Bonds (FCCBs) and raised foreign capital to fund their expansion plans from 2005-06 to 2007-08 when the bubble was just about to burst.

Riding on their heady valuations, the conversion price on such bonds was set at a steep premium, about 25-150 per cent higher than the prevailing stock price at the time of issuance and they carried zero or very low coupons.

But the crash in stock prices post the 2008-financial crisis has caught many companies that opted for the FCCB route on the wrong foot.

imageAlthough the benchmark indices have largely recovered and are about 20% below their 2008-highs, the share prices of companies with outstanding FCCBs are way below their peaks.

FCCBs worth more than US$ 7 billion is maturing by March 2013. With the first option of equity conversion knocked off, redemption pressure stares at issuers as they have to either buyback or repay the bond holders. Ratings agency CRISIL estimates that FCCBs worth Rs 220 – 240 billion may not get converted into equity shares as the current stock prices of issuing companies are significantly below their conversion price.

Take the case of Jaiprakash Associates [stockquote]JPASSOCIAT[/stockquote]. The Gaur-controlled entity issued FCCBs worth $400 million in Sept 2007, with the conversion price set at Rs 165 per share for bondholders. The stock is now quoting at Rs 64.00.

The same is the case with Tata Steel [stockquote]TATASTEEL[/stockquote], Suzlon [stockquote]SUZLON[/stockquote], RCom [stockquote]RCOM[/stockquote], Subex [stockquote]SUBEX[/stockquote], Educomp Solutions [stockquote]EDUCOMP[/stockquote], GTL Infra [stockquote]GTL[/stockquote] and others. RCom escaped the noose by tapping Chinese banks for refinancing its $1.18-bn FCCBs that were due on March 1, 2012. Suzlon, whose shares have lost about 60 percent in the last one year, is also in talks to raise $300 mn to refinance its FCCBs maturing on June 12.


Suzlon is currently trading at Rs 21.70 while the conversion price of its foreign currency bonds maturing this year are set at Rs 97, making them unattractive for bondholders to convert into shares.

If companies with low promoter holding opt for downward revision of the conversion price, it will only lead to further dilution of their equity stake and drag their share prices lower.


Moreover, the recent rupee fall has dealt a crude blow to companies. For example, a company would now need to pay an amount of about Rs 5,504 crore (based on current rupee value of Rs 55.04 per US dollar) towards the principal amount to a bondholder of $1 billion, while a similar loan amount would have been worth about Rs 4,400 crore at the start of 2010 when the rupee was quoted at Rs 44.

During these times of severe liquidity crunch, plummeting currency, highly leveraged balance sheets and tight cash flows, the upcoming redemptions can leave many companies paralyzed.

Unable to meet debt obligations or restructure terms of repayment with bondholders can lead to messy legal fights and winding up petitions as seen in the dispute between Wockhardt [stockquote]WOCKPHARMA[/stockquote] and its investors. The countdown has begun and the coming months will determine if India Inc can survive the redemption pressure or is another crisis looming?

Sino-India trade: Going strong but worries persist

When it comes to business, the Hindi Chini bhai-bhai comment has lived upto its billing. Despite the sharp downturn in global economy, bilateral trade between India and China has been growing, reflecting the vast potential for economic cooperation. Trade between India and China hit a record $ 73.9 billion last year, rising by almost 20%. China is the fastest growing market for India, ahead of US and Japan and two-way trade is expected to touch the $100 billion- mark by 2015.

clip_image001[8]While India’s exports to China grew by a mere $3 billion last year, China’s exports to India during the said period jumped by over $10 billion.

The huge trade imbalance in favour of our northern neighbour has been a cause of concern and India has been vocal about ‘seeking a more conducive business environment’. The trade deficit for India for 2011 stood at $ 27.08 billion.

Notwithstanding the huge trade gap, the economic relationship between the two top emerging market economies has gained much traction during the last decade.

Chinese export to India relies strongly on manufactured items meeting the demand of fast expanding sectors like telecom and power in India. Chinese companies supply equipments at competitive prices. India’s exports are characterized by primary products, raw material and intermediate products.

clip_image001[10]Items like iron Ores, textile, copper, precious stones, organic chemicals, etc. continue to dominate India’s export basket. Among these, iron ores, slag and ash comprised of a hefty 45% share while cotton, yarn and fabrics made up 14% of the export basket. The fall in export of iron ore in 2011, which has traditionally been the top export item, has been attributed to the ban on mining in Karnataka and Goa and restriction on shipments from Orissa.

Imports from China rose by 24% with India emerging as the seventh largest export destination for China with a share of 2.66% of total Chinese exports to the world. Electrical machinery accounted for a huge chunk of imports to India. The composition of export/ import basket reveals that India ships raw material to China while China sends finished, value added goods back to India.

clip_image001[12]To ensure more balanced trade ties, India wants China to import more IT, ITeS and pharma products. New Delhi has also sought removal of restrictions on import of basmati rice, fruits and vegetables, ­­ landing rights for Indian TV channels in China and import of more Indian films.

With China emerging as our largest trading partner, it is high time India ups the tempo as far as the rate of its exports is concerned in relation to imports.

clip_image002India must diversify its trade basket and press for increased access to Chinese market whose annual imports stood at $1.4 trillion annually. Trade disputes between the two are not new with both initiating anti-dumping charges against each other. India has filed more anti-dumping investigations against China than any other country at the World Trade Organization (WTO) against a host of Chinese products, from toys and mobile phones to tyres and chemicals. China has slapped anti-dumping measures on Indian antibiotics.

Despite the political distrust between the two nations, bilateral trade has grown exponentially.

While India must cash in on the growing Chinese market by targeting different segments like jewellery, pharma and services, it also needs to plug the widening trade deficit for long-term benefits. Expanding economic engagement will also set the platform for overcoming political hostilities.

RBI pulls plug on gold loans


Loans (Photo credit: jferzoco)

As the saying goes, all good things must come to an end. Even in these difficult times, gold loan non-banking finance companies (NBFCs) saw roaring sales and record margins. According to ratings agency ICRA, “`Gold loan companies have reported an estimated compounded annual growth rate (CAGR) of over 100% during the last three years, with the portfolios of the top three companies cumulatively exceeding Rs. 410 billion as on Dec. 31, 2011.

Consider this- During the third quarter of the current fiscal, Manappuram Finance [stockquote]MANAPPURAM[/stockquote] more than doubled its net profit from a year ago to Rs. 161.37 crore, loan disbursements surged 86% while assets under management rose 90% to Rs. 12,358.21 crore. Industry leader Muthoot Finance [stockquote]MUTHOOTFIN[/stockquote] posted a 61% growth in net profit to Rs 251 crore, while total income galloped 91% to Rs 1,231crore and assets under management increased by Rs 1,944 crore to Rs 22,885crore.

clip_image001But the honeymoon is over. Fearing risks to banking system and retail investors due to the sharp surge in loan against gold, the Reserve Bank of India (RBI) tightened lending rules saying these companies can’t lend more than 60% of the value of gold jewelry. It also directed them to maintain a minimum tier-1 capital of 12% by April 2014 while depriving them of granting loans against bullion, primary gold and gold coins.

clip_image001[6]RBI’s moves are not without reason. The sharp surge in gold prices has resulted in an equally sharp increase in demand for gold loans, especially in rural areas. Since these NBFCs depend heavily on public funds like bank loans and non-convertible debentures, any reversal in gold prices will not only catch NBFCs off guard but may also pose a systemic threat, affecting banks and retail investors.

While the prudential norms has found favour with experts who believe it would improve the sector’s asset quality in the long-run and help them absorb any sharp volatility in gold prices, they maintain that the lower loan-to-value- (LTV) ratio will moderate disbursement volumes and result in business clip_image001[8]shifting to unorganized players like moneylenders who can still extend loans at higher LTV ratios.

Gold NBFCs, which are used to high profit margins, may have to reduce interest rates to prevent borrowers from shifting elsewhere, which will take the sheen out of their high flying business. Business growth is likely to fall from 80 per cent per annum to 20-25 per cent per annum and return on assets (RoA)may moderate from the current high level of 4.5 per cent to 2.5-3.0 per cent.