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					                                             June 8, 2011




                      June 8, 2011




BSE Top 100 Companies: Under A Margin Squeeze


         Highlights

            Revenue Growth Remains Robust
            Profitability Under Pressure
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                                        Result Analysis Of BSE 100 Companies

Revenues grow at a robust pace while profits witness erosion

Financial performance of a sample set of BSE 100 companies—which partially reflects Corporate India’s performance — has been ag-
gregated for the purpose of analysis. This set includes all the companies that have declared their interim financial performance for the
past 5 quarters.

Aggregate sales of the sample set of 97 companies reflects a strong 22.7% increase during the March 2011 quarter compared to the year-
ago level. This is an acceleration when compared to the December quarter, but slower when compared with the 29.8% growth recorded
in the March 2010 quarter.

          Crude oil and petroleum companies account for a lion’s share of 43.7% of the aggregate sales of the sample set. A 24% rise in
           sales of these seven companies, steered the growth in total sales. ONGC and Cairn India recorded a decline in revenues.
           Downstream petroleum companies registered a sharp growth due to deregulation in petrol prices, marginal increase in diesel
           and rise in other deregulated petroleum products.

          Income from operations of the financial services companies (taken as equivalent of net sales of manufacturing companies),
           reflects a 30% year-on-year growth.

          Metals and automobile companies registered over 20% growth in sales.

          Telecom, services (other than financial services) and pharma companies registered a single-digit growth

Aggregate profits of the sample set reflected a weak profit per-
formance. Net profits rose by 9.3% during the quarter. While this
growth is slower than the preceding September and December
quarters, it is higher compared to 3.1% rise registered in March
2010.
          Higher subsidy payout on sensitive petroleum prod-
           ucts eroded profits of upstream oil companies. Down-
           stream companies faced higher under-recoveries
           which resulted in 7.3% y-o-y drop in profits.
          Financial services companies recorded a 6.4% rise in
           profits. This slower growth is partially on account of
           a 98.9% fall in net profit of State Bank of India.
           Higher provisioning led to fall in profits of SBI .
          In line with our expectations, profits of telecom companies dipped by 3.5%.


                      Aggregate Financial Performance of BSE 100 Companies (% Y-o-Y Growth)
                                    Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
    Net sales                         -3.3    -12.3   -9.8     12.7   29.8     23.0   21.5  19.4 22.7
    Raw materials & purchase of
                                     -20.6 -23.3     -18.8     20.4   59.2     37.9   22.3  20.6 26.7
    finished goods
    Salaries & wages                 13.1      6.9    -0.8     0.1    17.6     16.2   28.3  21.4 28.2
    Interest                         33.0     22.5     5.3    -11.4  -12.5     -3.0    4.1  16.5 32.4
    Total tax provision                3.7    22.8   13.8      24.3   44.5     -3.4   21.0  29.2 2.0
    Net profit                       34.2     23.1   49.3      20.2    3.1    -18.2 31.6    24.0 9.3
    PAT / Total income               13.7     12.1   10.4      9.7    11.0      8.3   11.3  10.2 9.9
                                                                                                           Source: CMIE, DhanBank PRU
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                                                                                                      2011




A sharp growth in expenses vis-a-vis sales led to the slower growth in net profits.

Raw material cost, which accounts for a substantial portion of the manufacturing companies recorded a 26.7% growth. Rising com-
modity prices resulted in a higher raw material costs to sales ratio of 57.6% compared to 55.8% in the year-ago quarter.

The rise in total costs was accentuated by the 28.2% increase in salaries and wages. A number of industries, including Information
Technology companies, reported a higher headcount. Also, an improvement in corporate earnings together with high inflation has
taken its toll on the overall corporate wage bill.

Hardening of interest rates has had an adverse effects in two ways. One, it eroded profits of Corporate India. And second, it resulted
in slowing of investments.

Capacity addition in India rose at a slower pace than expected completion dates. The delays in commissioning of the projects were
not a result of hardening interest rates as a majority of these delays are because of operational reasons or environmental clearances.
What is worrisome is the fall in fresh investment announcements in the last three quarters. According to CMIE’s database on invest-
ments, new project announcements declined to `290,000 crore in the December 2010 quarter and `250,000 crore in the March 2011
quarter, compared with `360,000 crore in the September 2010 quarter.

Capital investments follow a cyclical movement. In the past, a capex cycle in India spanned over 4-5 years. However, due to a robust
growth in the Indian economy, this cycle has been far stretched. If the demand for goods and services does not remain strong and the
cost of capital increases, the companies may think of keeping their further investment plans on hold.

In addition, the economic growth of over 9% annually during the 2004-2008 period was powered primarily by investments. In the
aftermath of the Lehman Brothers crisis, the government boosted consumption to stop the economy from stalling. While this did
power economic growth for a while, it proved to be inflationary in nature and unsustainable over the long term without matching
growth in investments.
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                                    Global Aviation Industry Downgraded Further
Airline Industry 2011 profit outlook slashed to $4billion: This would be a 54% fall compared with the $8.6billion profit forecast in
March and a 78% drop compared with the $18billio net profit recorded in 2010. (IATA, June 6, 2011)

   Highlights of the forecast

The International Air Transport Association (IATA) further downgraded its 2011 airline industry profit forecast to $4 billion. Natural
disasters in Japan, unrest in the Middle East and North Africa, coupled with a sharp rise in crude oil prices, have slashed industry profit
expectations.

Fuel accounts for a large chunk of an airline’s costs. One of the main reasons for downgrade of the profit forecast has been higher fuel
costs. Compared with an estimated price of $96 per barrel (the Brent variety of crude oil), IATA expects crude to average at $110 per
barrel for the calendar year 2011. It has been estimated that for every dollar increase in the average annual oil prices, airlines have to
incur an additional $1.6 billion in costs.

While costs are expected to rise substantially, demand forecast is marginally downgraded. Improvement in global trade, higher corpo-
rate earnings and consequent expectation of global GDP growth of 3.2% is expected to result in 4.7% increase in demand for airline
services. Passenger demand is now expected to grow 4.4% and demand for cargo services is expected to increase 5.5%.

The combined capacity of passenger and cargo is expected to expand by 5.8%, which is above the 4.7% increase in demand expected.
Since the orders for the aircraft was placed anticipating a surge in demand, delivery of the some of the orders is due during the current
year which will result in 5.8% increase in capacity. However, lower demand will lead to lowering of the load factors (a term used to
measure capacity utilisation of the industry). Thus, aircraft utilisation is also expected to dip.

A look at the regional performance forecasts reveals that
            the Asia-Pacific carriers are expected to be the most profitable across regions. Asia-Pacific airlines carry 40% of global air
             freight volumes. While the Japanese earthquake and tsunami are expected to dent the region’s overall prospects, rising
             demand from India and China is expected to boost traffic volumes in this region. Also, demand increases (6.4%) are ex-
             pected to outpace capacity growth (5.9%) in this region.
            profit of the North American airlines is expected to contract to one-third compared to the 2010 levels. Higher fuel prices,
             older, a less fuel-efficient aircraft fleet together with a sharp trade link with Japan is expected to dent the region’s profits.
            The sovereign debt crisis is dampening demand from the European economies. Also, new and increased taxation of pas-
             sengers is damaging price-sensitive demand.
            Political unrest in parts of the region is hurting demand in the Middle East. Largest capacity expansion growth of 15.5% is
             planned in this region.
            African carriers are forecast to be the only regional operations to post a loss during the year.


                                                Another Jolt: CNG Prices Rise
Indraprastha Gas hikes prices to combat higher gas costs: After the price hike, the consumer price of compressed natural gas
(CNG) in Delhi would increase by 50 paise to `29.8 per kg and by 55 paise in Noida, Greater Noida and Ghaziabad to `33.40 per kg.
(Times of India, June 6, 2011)

CNG prices to rise further in Gujarat: Get ready to pay more for refuelling your vehicle as prices of compressed natural gas (CNG)
are expected to go up by 75 paise per kg very soon. In fact, a similar increase in CNG prices is projected every month over the next six
months. (DNA, June 5, 2011)
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   PRU Analysis

Indraprastha Gas Ltd (IGL) — a joint venture between GAIL (India), Bharat Petroleum Corporation and the Delhi government — has
increased prices of compressed natural gas (CNG) to pass on the higher cost of sourcing gas. IGL which operates primarily in the Delhi
and NCR region, last revised prices in April 2011. Delhi has world’s largest CNG-propelled public transport system with more than
four lakh CNG-run vehicles — both commercial and private plying in the region. There exists a difference in the price of gas as well as
other fuels in this region due to different tax rates prevalent.

Companies that sell gas in Gujarat include GSPC Gas, Adani Gas, Sabarmati Gas and Charotar Gas. Both GSPC and Adani had raised
CNG prices in May and currently sell gas at `37 per kg and `38 per kg, respectively in Ahmedabad. A further two per cent hike is
likely in CNG prices, state media reports.

According to a report by DNA, Petronet LNG has provided some projections about gas prices, which forecast a 75 paise increase in gas
prices soon. Also, a hike of around 2% is projected in gas prices every month for the next six months on account of higher fuel prices
across the globe.

   PRU View

Prices are expected to rise on account of two reasons. One, rising natural gas prices. And two, there exists a shortage of gas in India
compared with the expected receipts, due to which companies need to buy gas at spot rates. This further pushes up the price of gas.

Given the high prices of petrol in India, a number of automobile companies have introduced a CNG-based engine which are perceived
to have low running costs and a comparatively lower maintenance requirement. It is estimated that CNG offers 66% savings towards the
running cost when compared to petrol-driven vehicles and 21% when compared to diesel-driven vehicles. Hence, people prefer either
purchasing a CNG-based vehicle or are installing CNG kits in their existing vehicles which enables use of both petrol and CNG.

IGL has taken hiked CNG prices by about 55% in the past 18 months to negate the impact of high acquisition cost Sales realisations
on CNG rose by 38% year-on-year for the company in the March 2011 quarter. While the company has the pricing power due to poor
availability of CNG, the extent to which the company will be able to save its profit margins is a cause for worry.



                                   Consolidation In The Indian Fertiliser Industry
Fertiliser firms fancy for farmer's mindshare: Companies look for consolidation; PE investors see opportunity in the sector. The
Indian farmer is once again causing a stir across corporate boardrooms. For fertiliser and agrochemical companies, the question is as
basic as a seed. If the end consumer of their product is the same, doesn’t it logically make sense to blur the turfs between the two?
(Business Standard, June 3, 2011)

   PRU Analysis

Consolidation is not a new word for the Indian fertiliser industry. Tata Chemicals, the market leader in urea and phosphatic fertilisers,
had acquired 35.8% stake of Rallies India Ltd in August 2009 for `364 crore. Later on it hiked the stake to 50%. Rallies India is a
leader in agrochemical industry and produces fertiliser as well.

In a recent development, Coromandel International acquired a 42.2% stake of Sabero Organics for `250 crore in an all-cash deal. Later
on it will make an open offer for a 31% stake.

Following could be the reasons for consolidation in the fertiliser industry:

   Clearer and better subsidy calculation policies of the Government are enabling serious players to map out their acquisition strategy.
   Given the complexities of manufacturing fertilisers and economies of scale involved in their production and distribution it’s diffi-
    cult for new players to enter the industry.
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   Since freight is a crucial determinant of operating profitability for fertiliser companies. Therefore players are keen to acquire com-
    panies that are closer to high consuming areas that are adjacent to their existing operations.

 It can be mentioned here that, fertiliser is a regulated sector hence has limited growth potential. So, acquisition of an agrochemical
company is a natural diversification for these companies. The fertiliser players can use their existing distribution system to deliver agro-
chemical products as well since the end-consumer for
both is the same — the Indian farmer. It helps in re-
                                                             Strategic
ducing the operating cost.
                                                                                                                              Value (Rs
Coromandel International Ltd manufactures and mar-           Buyer                         Target Company                       Crore)
kets crop protection products including insecticides,        Coromandel International     Sabero Organics                        450
fungicides and herbicides. The product range includes
                                                             Arysta Lifesciences          Devidayal Sales                        N/A
27 insecticides and 8 other crop protection products.
                                                             Financial
Sabero Organic Gujarat Ltd is a producer of speciality
and crop protection chemicals (Insecticide, fungicide        PE Funds                    Company                            Value ($ mn)
and herbicide). Sabero has wide product portfolio of         Henderson Equity            Sharda Worldwide                        25
240 products (which are registered in 50 countries),         Standard Chartered PE       PI Industries                           10
including some key products namely Mancozeb, Gly-
phosate and Monocrotophos across the categories like         Blackstone                  Gharda Chemicals (aborted)         130(reported)
fungicides, herbicides and insecticides.

 However, it has a weak presence in formulations and branded products sales which accounts for only 10% of company’s top line. On
the other hand, CIL has several popular brands which enjoy leadership status and has significant presence in formulation. This acquisi-
tion will help Sabero products to get a foothold in the formulations and branded products business.

Sabero has a strong presence in the export market with 240 product registrations in 50 countries. This will help Coromandel to mark its
presence in these markets. It is worth mentioning here that Sabero has product registration in key markets like US, Europe, Brazil and
Argentina.

This acquisition will pitchfork CIL into the Top Five league of the the country’s pesticides market and will help it to grow its profitable
non-subsidy business.

The pesticide industry in India is growing at an average rate of 10-12% a year. This strategy will mitigate CIL’s risks by building a
portfolio of subsidy (fertiliser) and non subsidy (agrochemical) businesses.

However, limited synergies exist at manufacturing level for both the companies. Both the sectors — fertiliser and agrochemicals —
have considerably different capital expenditure structures. Capex requirement for fertilisers is higher than that of agrochemicals.

Global PE investors are also increasingly showing interest in this sector. In October 2007, global PE player Permira bought out Arysta
for $2.2 billion.

                                  Result Analysis Of Non Ferrous Metal Companies

Q4FY11

We analysed the Q4 FY11 result of the major industry players in the non-ferrous metal space, especially aluminium.

Our analysis includes three companies — Hindalco, National Aluminium Company Ltd (Nalco), Bharat Aluminium Company Ltd
(Balco) and Vedanata Aluminium Ltd (VAL)

Q4 results were mostly marked by increased realizations, driven by higher aluminium prices on LME. Average aluminium prices on
LME for Q4 was around $2,503, 16% up Y-o-Y basis.

Hindalco Industries Ltd

Hindalco Industries Ltd is a flagship company of the Aditya Birla Group. For Q4, the stand alone net sales posted a growth of 26% to
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`6,760 crore and profit after tax grew by 7% to `708 crore.

Realisation per tonne for this quarter increased 5% Y-o-Y and 3% Q-o-Q driven by increase in the metal prices.

Aluminium production during the quarter was 0.13 million tonnes , a marginal increase both on Y-o-Y as well as Q-o-Q basis.

Novelis: Novelis, Hindalco’s fully owned subsidiary reported strong set of numbers. The top line grew by 22.3% Y-o-Y and 15.6% Q-
o-Q to $2,960 million. Total shipment grew by 12.7% Y-o-Y and 3% Q-o-Q to 800,000 tonnes driven by strong demand across all
product segments.

Average realisation increased 15.6% Y-o-Y and 8.5% Q-o-Q to $3,700 per tonne.

Asia, South America and Europe reported volume growth of 16.9%, 13.8% and 3.2% respectively. Net profit for Q4 was $50 million
compared to loss of $1 million during Q4FY10.

Note: Hindalco’s quarterly results are declared on stand-alone basis. Only the annual results are include Novelis results .


                                     Quarterly Financial Results ( In `Crore)
                                                  NALCO                           Hindalco (Standalone)
                                                                 Y-o-Y                                     Y-o-Y
                                      Q4FY10       Q4FY11         %          Q4FY10         Q4FY11          %
             Net Sales               1603         1787            11.5         5350           6760          26.4
             Raw Material            190          222             17.3         3131           4793          53.1
             Operating Profit        459          415             9.48         789             828           5
             PBT                     479          419            12.65         674             787         16.79
             PAT                     373          305            18.18         663             708          6.7


                                                     BALCO and VAL

                                                              Q4FY10            Q4FY11        Y-o-Y %
                     Aluminium Segment Revenue                   846              838            0.9
                      EBITDA                                     237              230             3
                     Cost of Production($/tonne)                1,667            1,781            7
                     Realization ($/tonne)                      2163              2503           16



National Aluminium Company Ltd (Nalco)

Nalco’s net sales for Q4 increased by 11.5% to `1,788 crore aided by higher realisation (up 15% Y-o-Y). During Q4 aluminium seg-
ment’s sales grew by 13.7% Y-o-Y to `1,428 crore due to higher prices on LME.

Aluminium sales were flat at 118,000 tonnes, while alumina sales volumes fell to 196,000 tonnes (15% down Y-o-Y basis) due to in-
creased captive consumption.

Alumina and aluminium production both remained flat.

EBITDA declined by 8.8% Y-o-Y to `454 crore and margin contracted by 563 bps Y-o-Y to 25.4%. This was led by (a) higher staff
cost due to wage revision, and, (b) `40 crore increase in coal cost due to increased imported coal.

Net profit fell by 18.2% y-o-y to `305 crore despite increase in other income by 36.9% to `97 crore.
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Bharat Aluminium Company Ltd (Balco) and Vedanta Aluminium Ltd (VAL)

BALCO and VAL, both are the subsidiaries of Sterlite Industries Ltd. Sterlite Industries holds 51% and 29.5 % stake, respectively, in
these companies.

Since both the companies are not listed, their results are not announced separately. However, in its segment-wise data as part of the
overall results, Sterlite Industries has to report its aluminium segment revenues separately, which includes Balco and VAL revenues
only.


                                            Annual Financial Result (In ` Crore)
                                                       NALCO                        Hindalco ( Consolidated)
                                                                     Y-o-Y                                  Y-o-Y
                                             FY10         FY11        %           FY10          FY11         %
                    Nat sales                 5054        5958        17.9       60658          71800        18.6
                    Raw Material              785          766         2.4       38100          47416        24.5
                    Operating Profit          1042        1487       42.67        9584          7667          25
                    PBT                       1194        1524       27.68        6178          3813          53
                    PAT                       832         1069       28.43        4349          2822         35.1

                                                         BALCO and VAL

                                                                    FY10              FY11        Y-o-Y %


                           Aluminium Segment Revenue                 2836             3024           6.6

                           EBITDA                                    599              616            2.9

                           Cost of Production($/tonne)               1534             1784           16

                           Realization ($/tonne)                     1868             2257           21


Revenue generated during Q4FY11 was flat at `838 crore mainly driven by higher realisation. Realisation for Q4 stood at $2,503 per
tonnes, 16% up Y-o-Y basis.
 Balco’s aluminium production declined by 8.5% Y-o-Y to 62,000 tonnes for Q4FY11. Cost of production increased to $1,781/tonne
compared to $1,667/tonne in the corresponding period last year due to increased cost of coal and carbon.

As far as VAL is concerned, aluminium production declined by 9.4% Y-o-Y basis to 184,296 tonnes, due to low availability of baux-
ite. However, alumina production increased by 19.6% Y-o-Y to 108,404 tonnes. The cost of production was $2,089 per tonne.

Annual Results
Nalco’s production of aluminium for FY11 was 0.44 million tonnes, a marginal increase of 2.8% Y-o-Y basis. Whereas VAL reported
a 40% Y-o-Y increase in production to 0.38 million tonnes. The company had commissioned a 0.25 million tonnes smelter in Orissa in
January 2010 which led to a rise in its production. However, the other subsidiary of Sterlite Industries, Balco, witnessed a 3.7% decline
in production.

Hindalco’s production declined by 3.2 % during FY11 to 0.53 million tonnes . Power outage at its Hirakud smelter on account of heavy
rains and lightning impacted the company’s production during July-December 2010.

Overall, primary aluminium production grew by 6.2% to 1.62 million tonnes for FY11.

Nalco witnessed a decline of 2.4% in the raw material cost for FY11 Y-o-Y due to stock adjustment. It is worth mentioning here that
the company relies on imported coal which is more expensive than domestic coal.
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Power accounts for a major portion of the cost of production for aluminium companies. In case of Nalco and Hindalo, the power cost
increased by 10.4% and 10.2 % respectively.

Aluminium segment contributed about 80.5% to Hindalco’s revenue for FY11. Novelis accounted for 66% of the total revenue. Going
forward, Hindalco’s top line will be driven by a capacity addition of 0.77 million tonnes in the next two years.

Hindalo witnessed a decline of 35.1% in PAT due to losses incurred in Novelis, its subsidiary. Novelis recorded a net loss of $46 mil-
lion during Q3 due to a one-time interest expenditure incurred on a loan repayment. Restructuring expenses for Q3 stood at $20 mil-
lion.

Nalco managed to a record 28% growth in net profit Y-o-Y basis due to a decline in raw material cost. It can be mentioned here that
even if the company has backward integration, the cost of production has been high.

Going forward, we expect the overall industry to witness a growth in revenues, backed by huge capacity additions by Hindalco and
Balco. Inventories at LME is currently hovering at an all-time high of 4.6 million tonnes which is expected to put a cap on prices.

                                                 Industry Update: Textiles
Manmade Fibre:

A sharp rise in cotton prices has boosted the demand for man-
made fibre as manufacturers have started increasing the pro-
portion of manmade fibre in yarn to protect their margins.

Domestic spinners are reported to be moving from cotton
fibres to a blend of cotton and man-made fibres or completely
man-made fibres in recent times.

The blended ratio earlier used to be 60% cotton and 40% syn-
thetic in yarn. Now the proportion is moving towards equal
use of both (50% each).

The strong demand has been driving up the prices for polyes-
ter staple fibre (PSF) as well as polyester filament yarn
(PFY). Prices of both PSF & PFY have surged sharply.

During May 2011, the prices of PSF hit a high of `126.38 per                                                           Source: CMIE
kg, showing a growth of 36% y-o-y basis . PFY prices grew by 52.1% Y-o-Y to hit `124 per kg. This is
the highest price since April, 2003.

 It is worth mentioning here that the prices of key inputs like purified teraphthalic acid (PTA) have been rising on the back of rising
crude oil prices. PTA is derived from naptha, which in turn is derived from crude.

However, companies most likely will be able to pass on the impact of the price increase of raw materials like PTA and MEG to the end
consumer backed by healthy demand. Hence, bottom line of the industry won’t be affected.

Cotton acreage may rise 5-10%

Area under cultivation of cotton is expected to increase by 5-10% in 2011-12 to 15-18 million hectares compared to 11.6 million hec-
tares in the previous year.

This can be attributed to the high cotton prices throughout last year which has encouraged farmers to opt for cotton crop. Cotton year
in India lasts from September to October. Cotton prices in international market have been high due to floods in main producing coun-
tries, like China and Pakistan, which lead to supply constraints.

Sowing is already complete in three major cotton growing North Indian states. The acreage in Punjab, Haryana and Rajasthan has in-
creased by 200,000 hectares to 1.50-1.55 million hectares. In the previous year cotton acreage was 1.35 million hectares.
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North India accounts for 13% to India’s total cotton pro-
duction with annual contribution of 3.8-3.9 million bales (1
Bale = 170 kg).

 In Gujarat, the area under cotton cultivation is expected to
go up to 2.8 million hectares for the year 2011-12 com-
pared with 2.63 million hectares in 2010-11.

India’s cotton acreage had increased by around 8% from
10.31 million hectares in 2009-10 to 11.16 million hectares
in 2010-11.

Cotton Prices: Popular Shankar-6 kadi had hit `62,500 per
candy (a candy = 356 kg) during March this year and is
currently hovering around `42,000 per candy, a 30% de-
cline.
                                                                                                    Source: Cotton Corporation Of India
Government eases cotton export cap

Government has increased the export quota of cotton by 1 million bales in the current season . Earlier, the Government had capped the
exports for 2010-11 at 5.5 million bales. Hence this takes the total quota to 6.5 million bales for this crop year.

This limit of 5.5 million bales was already exhausted by the exporters.

Export ceiling was put mainly to curb the sharp price rise in domestic market in order to protect interest of textile industry. The apparel
units were badly hit by sharp rise in raw material (cotton prices).

The decision was taken for allowing further exports in order to exhaust the excess stocks.

According to Cotton Corporation of India, unsold stocks with traders currently is about 4.5 million bales. However, textile ministry had
opposed the additional export quota as the total production for 2010-11 is estimated to be 31.2 million bales, a decline from the earlier
33.9 million bales.

Prices have declined sharply (in the past two months) in anticipation of higher yield due to increased cotton acreage in India and China.

Cotton acreage is area under cotton cultivation.

But, the spinning units are averse to any such decision as further exports might create scarcity of cotton supplies in the domestic mar-
ket. An additional export quota may put the spinning mills in a tight spot.

Cotton prices have declined to about `42,000 a candy( Candy = 356 kg) from `62,500 a candy in March. If the exports are resumed, it
will benefit the traders rather than farmers as the excess stock is lying mainly with traders.

                                                         Strike At Maruti

Maruti Suzuki strike disrupts production: Maruti Suzuki India’s Manesar plant has stopped functioning, resulting in a production
loss of about 1,200 units so far as a workers' strike entered the third day. (Business Standard, Jun 6, 2011)

   PRU Analysis

India’s top car manufacturer, Maruti Suzuki, is facing severe workforce agitation which has led to a production shutdown at their
manufacturing facilities. Around 2000 workers went on strike on June 4 at the company’s Manesar plant (with an annual capacity of 3.5
lakh units), demanding recognition of a new union, Maruti Suzuki Employees Union (MSEU) and retention of contract labourers for
the two units coming up inside the complex. Maruti is expanding the capacity of its Manesar plant by setting up two facilities of 2.5
lakh units each. Maruti Suzuki currently has one recognized trade union, Maruti Udyog Kamgar Union.
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Recently, there have been reports of strikes at a couple of units owned by multi-national automakers, including Hyundai and Chevrolet.
Production at the GM plant in Gujarat was adversely affected by back-to-back strikes by workers who were demanding better working
condition, among other demands. Nearly 900 workers had gone on an indefinite strike from the second shift on March 16, 2011, that
lasted for six weeks.

The Manesar plant of Maruti roles out about 1200 units a day on a two shift basis. The ongoing strike since the second shift on June 4,
2011, is estimated to have cost Maruti around 3000 units till date. The popular models like Swift, DZire, SX4 and A-Star are manufac-
tured at the Manesar plant along with other models. This translates into a revenue loss of around `150-175 crore and this may be just
the beginning. The strike is believed to be backed by the All India Trade Union Congress (AITUC), affiliated to the Communist Party
of India, which is spreading into Gurgaon and nearby areas and has been increasingly targeting auto companies, including Hero Honda
and Honda Motorcycle and Scooters India (HMSI), and auto component companies. The last time Maruti faced a strike situation was in
FY01 and that time too, the strike was backed by AITUC that lasted for three months resulting in a production of around 60,000 units.

The auto hub near the Manesar-Gurgaon area contributes around 60% of India’s auto production and employs around 1 million
workers, most of whom are on contract basis. Trade Unions are easy to form in a place where majority of workers work on contract
basis who have the principle aim of negotiating wages and improving the working conditions of workers with the employers. To en-
hance their collective bargaining power, these unions go on strikes and try to gain employer recognition by forcing the employer to
agree to recognise it voluntarily.

   PRU View

Labour unrest has been a long and persistent problem for the Indian auto manufacturers and the auto component players. The compa-
nies are trying to come out of their own backyards and are looking to expand capacity at locations where they have no presence. As per
media reports, Maruti has been in talks with the Gujarat government to set up new manufacturing units. Even Ford India, which has
their existing facilities in Chennai may set up their next plant either in Gujarat or Maharashtra. Tamil Nadu is another state where large
auto manufacturers like Ford and Hyundai have their facilities and they have also been a victim of frequent strikes in the past.

Trade unions in the Employee Cost As % Of Sales FY11               FY10       FY09       FY08       FY07    FY06      FY05       FY01
past have strived Hyundai Motors                          N/A      1.7%       2.1%       2.4%       2.2%    2.2%      2.1%       N/A
hard to increase the Maruti Suzuki                       1.9%      1.8%       2.3%       1.9%       1.8%    1.8%      1.8%       3.0%
wages and working
conditions of its members albeit with limited success. If we have a look at the published data by the car manufacturers, the employee
cost as a percentage of net sales has actually declined over the years despite frequent strikes and lockdowns at manufacturing facilities.
However, since the contracted workers do not receive all benefits accruing to an employee on the rolls of the company, the total em-
ployee cost remains depressed. It does not reflect the actual picture that may have prevailed had the contracted workers been a part of
the permanent staff. Many of these companies are likely to witness a rise in employee costs if they accede to the demands for confirm-
ing the contract labour.

The Q1FY12 results would also be impacted by the ongoing strike and the extent of production, revenue and profit lost during the quar-
ter will ultimately depend upon the time taken to resolve the issues between the management and workers.


                                     Japan Generics Play To Benefit Indian Firms
Indian pharma ingredient firms in Japanese generics race: Indian firms in the pharmaceuticals ingredients space are thronging the
Japanese market — an outcome of the Japanese government’s decision to entertain the use of copycat drugs in the country. (Business
Standard, June 2, 2011)
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                                                                                                        , 2011




    PRU Analysis
With a view to bring down the medical cost for the government, Japan has been trying to open their pharma market for generic players
for almost a decade. Japan, which has a government-funded National Health Insurance scheme covering every citizen, wanted to shift
from costly patented products to cheaper generic versions and has been working towards this since 2002. However, the generic compa-
nies could not make much inroads in the world’s second largest pharma market as the generic market accounts for a mere 5% of an esti-
mated total market size of $85 billion.

The recent positive steps taken have led to a good growth in the generics in the last year or two. The generics markets grew at an im-
pressive pace of 25% in 2010 mainly due to huge incentives offered to the doctors and pharmacists for substituting prescription drugs
with generics. Another step in the right direction has been the signing of a two-way Comprehensive Economic Partnership Agreement
(CEPA) with India in February 2011 which has given India access to a highly developed Japanese pharma market. With this agreement,
Japan will be receiving low cost generic drugs from Indian companies which have built their business models around exports of generic
drugs and Active Pharmaceutical Ingredients (API) to the world.

   PRU View

Currently, the generics penetration in the Japanese market is limited to         World Pharmaceutical Market Statistics ($ billion)
18% in volume terms and 5% in value terms. The governments intends to                      Prescription    Generic               % of
increase the penetration level from the current 18% to around 30% in 3          CY10                                   Total
                                                                                              Drugs        Drugs               Generics
years. This would translate to a total generics market size of around $9
                                                                                World          724           126       850        15%
billion by CY13 from around $4 billion in CY10.
                                                                                Japan           81            4         85        5%
Indian drug makers export to 220 countries in all, with formulations and        CY13e
bulk drugs accounting for 98% of the total exports, totalling around $10
billion in CY10. India's biggest customer is USA which accounts for 22%         World          814           186       1000       19%
of the sector's exports. Indian companies also enjoy a dominant position in     Japan           91            9        100        9%
other developed as well as emerging markets.

With Japan committing to treat Indian generics on par with their domestic generics, as committed under CEPA, Indian companies can
be expected to effect a higher number of product registrations. India, at present, exports only a miniscule percentage of its total exports
to Japan, totaling around $100 million. The Japanese generics market is expected to more than double in the next three years or so and
presents a potential of $5 billion worth of revenues to the generic manufacturing companies around the world. Considering India’s total
exports of around $10 billion, the Japanese market presents a huge opportunity. With Indian manufacturers being leaders in the global
generic pharma space, especially their experience in the world’s largest and most developed market of the world (USA), it might be fair
to expect Indian generic companies to gains leadership position in the Japanese generics space in the future.


                      Mergers & Acquisitions - New Growth Mantra For Indian FMCG

Marico, Dabur & Godrej Consumer beat MNCs in African haircare market: In the past four years, Marico, Dabur and Godrej
Consumer have spent about Rs 2,000 crore in acquiring over half-a-dozen global companies selling hair care products to African and
Afro-American consumers. (The Economic Times, June 2, 2011)

   PRU Analysis

In the past few years, we have witnessed some of the FMCG biggies aggressively acquiring companies overseas in the name of diversi-
fication, de-risking the business model, targeting high growth markets and achieving the multinational status. This leaves us wandering
about the legitimacy of the ‘great domestic driven demand’ and ‘rural market penetration’ theories which are, perhaps believed to be
                                                                                                    June 8 June 8, 2011
                                                                                                           , 2011




driving the GDP for India.

To present a case in point is FMCG giant, Hindustan Unilever (HUL). HUL
                                                                                      HUL                   FY08 * FY09 * FY10 FY11
has not been able to grow beyond 10-12% in the past few years. The growth in
                                                                                      Sales (` crore)       14833 16642 17738 19691
revenues barely covers inflation and it is evident that the giant is finding it
                                                                                      Sales growth                  12%    7%  11%
difficult to grow in a country where urban demand is quite robust and rural
areas - including Tier II and Tier III cities - remain relatively under penetrated.   * Numbers are restated to re-align with financial year


Godrej Consumer (GCPL) is an example where we have seen               Godrej Consumer              FY07      FY08      FY09      FY10      FY11
the company on an acquisition spree to give a major boost to its
                                                                      Sales (` crore)               951      1104      1397      2041      3643
revenues. GCPL has more than trebled its sales in the past three
                                                                      International (` crore)                 271       313       378      1207
years, mainly on account of two things — overseas acquisitions
                                                                      Domestic (` crore)                      833      1084      1663      2436
and merging of domestic businesses. This is the reason why we
see a consistent growth in the domestic sales of the company.
                                                                      Sales growth                 36%       16%       27%       46%        78%
GCPL has been acquiring and merging businesses with itself
                                                                      International                                    15%       21%       219%
since 2005. Now, the company may find it difficult to deliver
                                                                      Domestic                                         30%       53%        46%
high growth in revenues.

                                                  Timeline - GCPL Acquisition & Mergers
          Date                         Acquisition                          Date                               Merger
         Jun-11 Darling Group Holdings                                     Dec-10     Essence Consumer Care Products Pvt. Ltd.
 FY11 Jun-10 Argencos Sa                                                   Dec-10     Naturesse Consumer Care Products Pvt. Ltd.
         Apr-10 Megasari Makmur (Indonesia)                                Apr-10     Godrej Household Products Ltd. [Merged]
         Mar-10 Tura (Nigeria)                                            May-09 Godrej Hygiene Care Pvt. Ltd. [Merged]
         Feb-10 Godrej Household Products Ltd. [Merged]                   May-09 Godrej Consumerbiz Pvt. Ltd. [Merged]]
 FY10
         Dec-09 Sara Lee Corpn.
        May-09 Godrej Household Products Ltd. [Merged]
 FY09 Dec-08 Godrej Hygiene Products Ltd.
         Jan-08 Kinky Group (Proprietary) Ltd.
 FY08
         Oct-07 Godrej Global Mid East F Z E
 FY07 Sep-06 Rapidol Pty. Ltd.
 FY06             Godrej Netherlands BV (Keyline)


Another company, Jyothy Laboratories, have recently acquired a          Jyothy Lab               FY07       FY08      FY09      FY10      FY11
major stake in Henkel India to grow revenues inorganically after
the company posted a meagre 4% growth in its top line for                Sales (` crore)           422       398       385       605           628
FY11. Sales in FY10 jumped as it merged its subsidiary, Sri Sai         Sales growth (%)            18        -6        -3        57           4
Home Care Products for the year.

 PRU View
The above instances add the statistics provided below are just an indication of how FMCG players have supported revenue growth over
the past few years. The lacklustre growth registered by FMCG growth has baffled many experts, especially when economic growth is
being powered by consumption. For example, while consumer durables sales have been growing at a rapid clip, production and sales of
consumer non-durables has been quite low. There are a multiplicity of issues at play here, The larger players are probably finding it
                                                                                                 June 8,June 8, 2011
                                                                                                         2011




difficult to extend their reach to the rural markets. The lack of infrastructure could be adding to distribution costs and eating into mar-
gins, making rural marketing a non-viable proposition.

In addition, most regions are characterized by the presence of local players, which have a much better brand recall and customer loyalty
that is difficult to cut through. It may also be that consumption in domestic market is not so strong after all. A look at the IIP numbers
for consumer non-durables may give a broad picture that the growth is declining.

While the recent acquisitions by the Indian players have been mostly in the emerging markets of Africa, West Asia and CIS nations that
offer high growth, it still remains to be seen how long these companies can sustain high growth rates with such acquisitions.




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                                                                                                                    2011




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