In October 2004, alarmed by trend lines that showed growth rates of revenues and earnings dipping, this magazine posited that the base effect, higher cost of inputs, fresh investments in capacity creation, and lower incremental returns from cost-reducing exercises could well indicate that India Inc. was catching a cold. Well, with the chill of winter behind us now, this magazine is happy to say that it was wrong, as the results of 1,800 companies for the quarter ended December 31, 2004 confirm. The worry now: the divergence between sectors is growing.

IT Services: Leading companies have been able to weather the problems created by a strong Rupee. And expected IT spends by Indian corporates (part of the new investment cycle) should help them grow.

Automotive and Auto-components: The auto industry is reaping the benefits of a surge in demand. And the components sector has been able to milk the export market for that incremental growth surge.

Cement: The sector has reported an aggregate net profit (total profit minus total loss of 26 companies) of more than Rs 100 crore, as against an aggregate loss of Rs 7 crore during the same period last year. But with the base effect kicking in, the rate of growth could slow down in the future.

Base Metals: Cyclical this industry may be, but companies in the sector have been the main beneficiaries of the China story. With demand from China refusing to die down, they will continue to thrive; the booming domestic market is just the icing on the cake.

Banking: With the interest rate firming up, treasury incomes have dried up for banks. The base effect (due to then higher treasury incomes) has forced them to show a fall in net profits for the three months ended December 31.

Petroleum (refining and marketing): Thanks to subsidies, oil marketing companies will continue to take a hit. A fall in global oil prices (which is unlikely anytime soon) is the only thing that can save them.

-Narendra Nathan

The Empire Strikes Back
GoI calculations: one ordinance = Rs 803 crore.

ITC'S Deveshwar: He's actually hurting

In interviews he gave soon after presenting last year's Budget, India's Finance Minister P. Chidambaram repeatedly stressed that he would look for ways to recover substantial tax revenues locked up in various court cases. Given the man's reformist credentials, this writer is loath to link that to the ordinance the government passed on January 25, directing ITC to cough up some Rs 450 crore in back-taxes (excise) in addition to the Rs 350 crore it had already paid. The case dates back to 1983-84 and involves the government's claims that the tobacco major had sold cigarettes at a price higher than that printed on the pack, and that the excise duty needed to be paid on this price.

ITC had deposited Rs 350 crore while it successfully fought a bruising 17-year battle in the Supreme Court. The court directed the government to return the money.

Now, the government has decided to adopt the retrospective legislation route, asking the company to pay the remaining Rs 450 crore within a 30-day deadline, or pay a penalty interest of 15 per cent a year. The ordinance cannot be challenged in any court, tribunal or authority. ITC officials are guarded in their response with CEO Y. C. Deveshwar saying, "We haven't formed a view on this and need to reflect on it."

However, the buzz in Delhi and Kolkata (where ITC is based) is that the company is considering approaching former solicitor-general Harish Salve (he had fought ITC's case in the Supreme Court) for advice.

By going back some 22 years in time to tweak tax laws, the government has introduced a new degree of uncertainty into corporate calculations. Companies will now have to be prepared not only for the uncertainties of the future but those of the past as well. Industry lobby Confederation of Indian Industry has described the event as unfortunate and says it will have a negative impact on the morale of industry. That's definitely worth more than Rs 803 crore.

-Ashish Gupta

SCARCE
Not Public Enough

India's stockmarket regulator, Securities and Exchange Board of India (SEBI), has drafted a regulation that says promoter holding in listed companies cannot go beyond 75 per cent. Strangely, however, it is silent on how it will deal with companies that have high promoter holding, especially those where it relaxed similar conditions (SEBI did so for a clutch of public sector companies and some it firms when they went public). For instance, the promoter holding in NTPC and TCS, both of which made initial public offerings in 2004, is 89.5 per cent and 84.8 per cent respectively. And there are several large firms where the promoter holding has already crossed 90 per cent. It isn't just Azim Premji.

-Narendra Nathan

The Oracle Of Acquisitions
Larry Ellison's once-flayed bid for PeopleSoft now looks visionary.

Oracle's Ellison: Like I told you...

A year ago when oracle CEO Lawrence Ellison announced his intention to bid for rival PeopleSoft, he stood alone. Many on Wall Street even began to doubt Ellison's ability to lead at Oracle, one of the world's largest enterprise software companies. But by the time the $10.3-billion (Rs 45,320-crore) acquisition was announced formally last December, the tide had turned. Not only had the CEO won over his shareholders, in hindsight, the move appeared visionary what with the us caught up in the throes of a merger mania-in some cases, leading to the creation of behemoths.

In the last six weeks, Procter & Gamble acquired Gillette (making it the world's largest manufacturer of cosmetics and other consumer goods) and SBC made out its intent to acquire AT&T-a trifle ironic considering that SBC had been spun out of Ma Bell, AT&T in another earlier avatar. This comes on the heels of a clutch of some big-ticket deals in the last quarter of 2004 that includes the merger of Sprint and Nextel ($36 billion or Rs 1,58,400 crore), the purchase of Guidant by Johnson & Johnson for $23.9 billion (Rs 1,05,160 crore), and the acquisition by Symantec of Veritas for $13.5 billion (Rs 59,400 crore). Then, of course, there's Oracle's PeopleSoft acquisition.

The explanation on Wall Street is simple. With the re-election of George Bush and partial recovery of the economy, the uncertainty that had dogged the US industry is now lifting. Having put the brakes on capacity expansion in these years, most American firms have also ended up cash rich. At such a turn, acquisition of capacity is a far more prudent proposition than actually investing in additional capacity.

Similar sentiments have guided the Oracle-PeopleSoft merger. The combined companies, as executives continually claim, are now positioned to deliver a more competitive offering in the enterprise applications market, and do more innovative things with a larger applications R&D budget. A bullish management has projected a 22-28 per cent jump in EPS (earning per share) in fiscal 2006. According to Boston-based AMR Research, the merged entity had an applications business of $5.5 billion (Rs 24,200 crore) for 2004, making it the second-largest applications vendor with an estimated 12 per cent of the business applications software market. In the enterprise resource planning (ERP) software segment, the share of the merged company will account for a fifth of the total market. "Oracle's acquisition of PeopleSoft," says Bruce Richardson, Senior Vice President of research for AMR Research, "makes the combined entity a much more formidable competitor to sap in the faster growing sub segments of the enterprise applications market, including customer relationship management, supply chain planning and human capital management."

Then, reality does not exactly replicate theory. The company suffered its first hiccup when Oracle initially announced that it would not be supporting the existing PeopleSoft platform, but then quickly reversed its position. Accordingly, it will support PeopleSoft's product line through 2013 and will begin to roll out products by 2007 that combine features from Oracle, PeopleSoft and J.D. Edwards & Co.-acquired by PeopleSoft in 2003.

One of the beneficiaries of Oracle's decision to stick with the existing PeopleSoft platform is Hexaware (former Aptech). "Our take is that existing clients will continue with the old platform or move to the new one. This is good news for Hexaware-which is among the top three support teams worldwide. They will also be involved in doing developmental work," says New York-based Nilesh Navlakha, Director, Deutsche Bank.

However, Indian companies (they do a lot of PeopleSoft work) should take heed. While this merger went their way, others may not. And that's all the more relevant as the us gears up for one of the biggest rounds of mergers since the dotcom boom.

-Anil Padmanabhan in New York

A Local Mega Merger
Dabur acquires Balsara in a deal that everyone says makes sense.

While the rest of the world was going gaga over the humongous P&G-Gillette merger, a homemade merger between two very Indian consumer goods companies is creating ripples here. Dabur India has acquired Balsara Hygiene & Home Products for Rs 143 crore. And almost everyone from competitors to analysts believes that this is a good buy for Dabur, a herbal-products company that has flattered only to deceive in its efforts to become a fast-moving consumer goods (FMCG) major.

Discounting what some unkind tongues are saying about Dabur's ability to leverage acquired assets-in 1996, the company acquired the Binaca brand from Reckitt & Coleman, but never really achieved anything much with it; today the brand is moribund; and Binaca was once a brand to be reckoned with in the toothpaste market although it had lost much of its sheen by the time it was acquired-the deal makes eminent sense.

Balsara has some strong brands in its stable such as Odonil (air freshener), Odomos (mosquito repellent), and Promise and Babool (toothpastes). However, the company is not in the best of health, with losses of Rs 8 crore last year. It also suffers from a distribution network that is effective only in parts. "This acquisition is part of our inorganic growth strategy, which we had planned earlier," says P.D. Narang, Group Director, Dabur India. A senior executive from a rival FMCG company believes that the deal makes a lot of sense: "Dabur's distribution network is not very strong in western India and this deal also brings them some successful brands," he says.

On the same day the deal was announced, Dabur released its results for the period ending December 31, 2004: revenues for nine months were up to Rs 955.9 crore (an 11 per cent increase) and net profits up 43 per cent to Rs 106 crore. The Balsara acquisition will add around Rs 200 crore to the company's topline; that, say some analysts, will make Dabur a Rs 1,500-crore company.

The acquisition comes at a time when Dabur, armed with a contemporary logo (an artistically done tree) and a high-intensity advertising blitz starring brand ambassador Amitabh Bachchan (his visage even adorns the exterior of the company's HQ near Delhi), has been trying to grow its market. However, it still isn't known whether the Balsara brand will be retained. "The acquisition will still take some time, but you must remember that while Babool, Odonil and Odomos are very popular, the 'Balsara' brand is not that well known", says an executive at the company. The stock market has reacted positively with Dabur's scrip up 5 per cent since the announcement. Like everyone else, analysts are questioning whether the new Dabur will be able to take on the might of HLL and, now, P&G Gillette, and whether this is the first of a new wave of acquisitions in the FMCG sector.

-Kushan Mitra

PC: Promise And Performance
The Finance Minister has stuck to what he said in Budget 2004. We think he deserves an A.

PROMISE

» Fund the National Common Minimum Programme to the extent of Rs 10,000 crore
» Provide universal access to basic education
» 100 days employment to one member of families living under the poverty line
» Accelerate fiscal consolidation and fiscal reform
» Double agriculture credit in the next three years
» Focus on infrastructure
» Ensure higher and more efficient fiscal devolution
» Ceiling on foreign direct investment in
» A Board for Reconstruction of Public Sector Enterprises will be created; government will divest some stake in NTPC
» Create an Investment Commision
» Introduce bill to regulate special economic zones

PERFORMANCE

» Has made Rs 12,000 crore available
» Well, his education cess has brought in some Rs 4,000-5,000 crore
» Food for Work programmes have begun in 150 of India's poorest districts/ the National Employment Guarantee Act has been passed
» Has notified the Fiscal Responsibility and Budget Management Act to ensure zero revenue deficit by 2009
» Agriculture credit has grown by 30 per cent last year
» Rs 1,72,000 crore has been sanctioned for development of National Highways
» The states' share of taxes has increased by a percentage point under the 12th Finance Commission. This will result in an additional inflow of Rs 15,000 crore to the states
» Ceiling on FDI in telecom has been raised to 74 per cent telecommunications and insurance will be raised
» Board has been created and stake (5 per cent) has been divested
» A three-member commission headed by Ratan Tata is in place
» Bill introduced, but with Group of Ministers for clarifications

-Ashish Gupta