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FEB 26, 2006
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 BT Special
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Oil On Boil
A surge in oil prices to almost $70 a barrel on concerns about the restart of Iran's nuclear programme only hints at what may lie ahead? Experts believe prices could soar past $100 a barrel if the UN Security Council authorises trade sanctions against the Middle Eastern nation and Iran curbs oil exports in retaliation. A look at the unfolding energy scenario.

Scrolling E-Tourism
As consumers increasingly look for tailor-made vacations, e-tourism is taking a new shape. Now, search engines are allowing customers to find the best value or lowest price for air tickets and hotels. Here is a look at global trends.
More Net Specials
Business Today,  February 12, 2006
Party On Dalal Street
The Sensex breaching the 10,000 level for the first time may be a good reason for celebration, but don't lose your head.

When the sensex kissed the 10,000 mark for the first time ever on the Bombay Stock Exchange (BSE) last fortnight, it was yet another sign that India as a market for global liquidity had arrived. That the benchmark index dipped below 10k by closing isn't important (and whether it falls further or goes on to newer highs by the time you read this isn't the point, either). What's significant is that a major psychological barrier-and that may be all it is-had been breached. After all, with the Sensex entering five-digit territory, it's now rubbing shoulders with the 110-year-old Dow Jones Industrial Average Index (DJIA)-which was at 10,793.62 on February 3, 2006 at the time of writing. Says Jaideep Goswami, Head of Institutional Equities, HDFC Securities: "It reflects that there is a huge level of interest in our markets and that sentiments are still very strong. (On the day the Sensex hit 10k), the Japanese were strong buyers, which certainly augurs well."

However, the narrowing of the gap between the Sensex and DJIA shouldn't by any yardstick be taken as a sign that the Indian markets are in the same league as their American and Japanese counterparts. For one, DJIA had a market cap of $3,770 billion (Rs 1,69,65,000 crore) as of late last year. The Sensex's market cap, on the other hand, at the near-10,000 levels is just $582 billion (Rs 26,19,000 crore). As Andrew Holland, Executive Vice President, DSP Merrill Lynch, points out: "It wouldn't be fair comparing the Sensex to the Dow or the Nikkei, as the depth and breadth of those markets are much superior."

Just What's So Hot About Ganesh Bank?
Not Just A Fund, But Fund Of Funds
A Crude Mess
Paper Balm To The Pain

The Numbers Don't Tell The Whole Story

Another First For Dr Reddy's
KKR Turns To Asia And India
Filling The Gap In India
Seeds Of Discontent

What's more, if India's markets have entered the 10k zone, it isn't the only one in the emerging market space. Turkey, for instance, is over four times that level, in the 45,000 range, Poland's benchmark index is close to 40k, Egypt is on fire, hovering near the 65k mark, and Brazil is in the 37,000-38,000 range. Even Pakistan has crossed the 10k mark (before India, we dare say). As per data from The Economist, there are at least 12 other emerging markets that have crossed the 10k mark, many of them comfortably, and a long time ago.

But it's when you start co-relating the gross domestic product (GDP) growth of emerging markets with their respective indices-markets are supposed to reflect the health of the economy, right?-that India emerges as a key player. With a stock market that's perched at 10k and a GDP growth that stood at 8 per cent for the third quarter, India is arguably the best placed amongst the entire emerging market lot. China's GDP did grow at 9.9 per cent for the fourth quarter, but its stock markets languish in the 1,300 range. Then you have a country like Brazil, where the benchmark index is in 37,000 territory, but its GDP grew at just 1 per cent in the third quarter. In a similar vein you have Mexico with an index in the 18k range, but with GDP growth of just 3.3 per cent (for the third quarter).

The upshot? At the end of the day, index records in isolation are a great boost for sentiment, but fundamentally they may account for little, if not backed by solid economic (and corporate) performance. As Tridib Pathak, CIO, Cholamandalam AMC, points out: "I don't think we should give too much importance to the fact that the Sensex has hit 10,000. It is just a figure and has no consequential meaning. I would look for two things: market valuation and visibility of growth. If the valuations, for instance, reach historic highs, then there would be reason for euphoria." From the investors' point of view, Pathak adds, more than 10k, what should matter are figures for earnings growth, price-earning multiples and, of course, the performance of the economy.

The fortnight's burning question.

Q. Will Budget 2006 Spur Growth?

Yes. R. Gopalakrishnan, Executive Director, Tata Sons

We are on a good phase of economic growth. There are many constraints. And I think the atmosphere is built up to de-bottleneck those constraints and push the levers of growth. I don't see too many economic bubbles. But I am concerned whether India Inc. is prepared for a downturn. We are in a phase where we could expect a slowdown after a good four-year run. However, I don't see a disaster.

Yes and No. Subir Gokarn, Chief Economist, CRISIL

I don't expect the budget to act as a hindrance to India's growth. However, there are many issues like spend on infrastructure. It's not important as to how much money is allocated towards infrastructure development, but the critical issue is how the government implements and delivers its spending on infrastructure development.

Yes. Nilesh Shah, President, Kotak AMC

I think incremental policy in the Budget towards infrastructure development and manufacturing sector will help in capacity expansion and, hence, certainly spur growth in the economy.

Just What's So Hot About Ganesh Bank?

RBI's Reddy: Staying cool

It's not every day that any-forget a nondescript-bank screws up courage enough to take on the mighty Reserve Bank of India. So, the puny Ganesh Bank of Kurundwad's decision to successfully move the Supreme Court to block its RBI-blessed merger with Federal Bank comes as some surprise. But then perhaps not. The failed and loss-making Ganesh Bank (Rs 217 crore in deposits and Rs 106 crore in advances) has vastly bigger banks wooing it, including, reportedly, Citibank, the largest cooperative bank Saraswat and, of course, Federal Bank. What makes the 85-year-old Ganesh Bank hot property? For Saraswat, it's an opportunity to eliminate a competitor in Maharashtra, while for Citi and Federal Ganesh's network of 32 branches in Maharashtra and Karnataka is an ideal vehicle to reach the masses. How is the RBI taking the challenge to its authority? "The judiciary has its own role in the system," is all that an insider would say.

Not just a fund, but Fund of funds

TWP's Srini: A first for India

Yet another fund announcing plans of investing in India doesn't turn heads anymore. But when an investment banking firm says that it's stitching together a fund of funds for India, you know the lure is real. Thomas Weisel Partners (TWP), a US-based investment banking firm, is close to finalising a $300-million (Rs 1,350-crore) fund of funds for India. "We plan to distribute this amount between private equity and venture capital companies focussed on four high-growth sectors of technology, infrastructure, healthcare/life sciences and retail," says Vudayagiri "Srini" Sreenivasulu, 37, Director for TWP India. Currently based in San Francisco, Sreenivasulu, who previously was at Intel Capital in Bangalore, will relocate to Mumbai.

A Crude Mess
A sleight of hand won't help oilcos.

Rangarajan: Not an easy job to deliver

The high-powered C. Rangarajan committee, set up to evolve a fuel pricing policy for petro-products, is likely to recommend a trade parity pricing regime for the oil sector. That means prices of fuels like petrol, diesel, LPG and kerosene would be determined by a combination of export and import parity prices. Since it boasts excess refining capacity, India imports crude and exports some amount of petrol and diesel. These will now be retailed at export prices. Other products, such as cooking gas, will be sold at the imported price and not at the subsidised government-determined price. Secondly, the committee is expected to reduce import duties on crude to bring about some kind of parity between it and petroleum products. After all, Budget 2005 had reduced customs duty on petrol and diesel by 15 per cent to 10 per cent respectively, but that on crude only by 5 per cent. Oil companies don't think a mere tinkering with import tariffs is going to help their bleeding bottom lines. Instead of wasting time on cosmetic changes, the government should link prices of petrol and diesel either to international prices or work out a cost-plus formula on a certain price band, says an official at Indian Oil. As for the subsidy on kerosene and LPG, the best way to deal with it, say others, is to shift the burden from the oil companies to the Budget. With crude prices unlikely to return to the $40 (Rs 1,800)-a-barrel level of yore, it's clear that the government needs to take some tough decisions. Losses at oil companies are soaring, and for the first three quarters of 2005-06, they stand at Rs 25,000 crore.

Paper Balm To The Pain

Oil woes: Will the flow stem?

Oil companies are bleeding and all that the government wants to do is apply Band-Aid. It has offered to allow oil companies to issue bonds worth Rs 5,763 crore with a coupon rate of 7 per cent, redeemable in 2012. It's not the first set of oil bonds, but it's the first one meant to bridge oil marketing companies' yawning losses; most of them reported losses for the first time ever last year. But how much will these bonds, which can be transferred in favour of any other person including banks and corporations, help when the total losses are at Rs 25,000 crore? Not much. "Oil bonds will help companies overcome their liquidity crunch in the short term, but they are not a long-term solution," notes Ravi Mahajan, energy expert at Ernst & Young. There is only long-term solution: Removing government controls on oil prices.

The Numbers Don't Tell The Whole Story
India Inc. delivered as expected in Q3. But oil and steel ruined the report card.

Q3 results: Here red isn't a good sign

India Inc. will be disappointed. a total of 1,984 companies recorded a net profit of Rs 30,540 crore for the quarter ended December 31, 2005, compared to Rs 29,590 crore during the previous corresponding period, an increase of a mere 3.2 per cent. The metals and oil & gas sectors were mainly responsible for the poor show. The net sales of the companies during the quarter under review jumped 15.3 per cent to Rs 3,87,674 crore from Rs 3,36,207 crore during the previous corresponding quarter. The logical inference: margins were under pressure.

However, if we consider the overall results minus these two sectors, the picture changes quite dramatically. A total of 1,901 companies recorded a 36 per cent growth in net profit to Rs 24,716 crore (Rs 18,129 crore) on the back of an 18 per cent rise in net sales to Rs 2,33,848 crore (Rs 1,98,498 crore). This impressive report card is primarily due to the performance of the software, banking, pharmaceuticals, automobiles, cement and capital goods sectors. During the quarter under review, the collective operating profit margins of these companies improved by 191 basis points to 26.72 per cent from 24.82 per cent, despite a 19.3 per cent rise in interest costs to Rs 29,721 crore.

Says Gagan Banga, Executive Director, Indiabulls Financial Services: "India Inc. has delivered as per expectations if you set aside the results of oil and steel companies. But the non-performance of these two sectors is a cause for concern, as they generate substantial employment. It can also have an impact on the market, as companies from these sectors have a huge market capitalisation and account for substantial weightage on major indices."

The steel sector suffered because of the slowdown in China and a flood of cheap imports. But there's a silver lining, too. Says Banga: "Steel is a major input for most companies. If prices remain subdued, the operating margins of India Inc. will shoot up further." The oil sector suffered, as it was not allowed to charge market prices for its products and also made to share the government's subsidy burden. The sector recorded a 51 per cent fall in net profit to Rs 4,261.5 crore (Rs 8,746 crore) for the quarter ended December 31, 2005. Its net sales, however, jumped 15.6 per cent to Rs 1,35,240 crore (Rs 1,17,001 crore).

Overall, it's been a good show. However rising interest rates could have an impact on margins in the coming quarters.

Another first for Dr Reddy's

DRL's Prasad: Tapping opportunities

Dr Reddy's Laboratories (DRL) has entered into an agreement with pharma major Merck & Co. to sell and distribute generic versions of two of its patented drugs, Zocor and Proscar, once they go off patent in the US in June this year. It is the first Indian pharma company to enter into such a deal with a multinational. "We will continue to look at such opportunities going forward," says G.V. Prasad, Executive Vice chairman and CEO, DRL. "The deal, per se, is not innovative, as other companies have done it in the past," he adds. Prasad, however, is quick to emphasise that this does not signal a shift in DRL's long-term strategy of becoming a discovery-led global pharmaceutical company. "It's more in the nature of a sensible opportunity that the company is tapping in the marketplace," he explains. The markets have welcomed the news. DRL's stock touched a 52-week high of Rs 1,215 on February 2, 2006. It closed at Rs 1,190.40 on February 6.

KKR Turns to Asia and India

KKR's Marks: Sold on Indian IT

As the CEO of Flextronics, Michael Marks in June 2004 led the purchase of Hughes Software Systems from Rupert Murdoch's DirecTV. Now as a Member of the legendary buyout firm, Kohlberg Kravis & Roberts, responsible for advising on Asia and technology, Marks may be helping KKR, a late entrant to the Asian market that he joined end last year, strike its first Indian deal. When BT went to press, HSS' (now called Flextronics Software Systems) President & Managing Director, Arun Kumar, was in the US as part of the ongoing due diligence exercise, and a Flextronics International spokesperson said "we have no comment". But sources told BT that the deal, which might see KKR buy a significant stake in FSS, could be announced by February-end. Flextronics had bought HSS for $226 million, or Rs 1,017 crore.

Filling the Gap in India?

The government's decision to allow 51 per cent FDI (foreign direct investment) in single-brand retail outfits has got some of the biggest players interested. Gap, the $16.3-billion (Rs 73,350-crore) apparel retailer with brands like Banana Republic and Old Navy, besides the flagship label, is making aggressive moves in Asia. It recently announced its first franchise in South-East Asia with retailer FJ Benjamin, which will sell the Gap and Banana Republic Brands in Singapore and Malaysia. Although Pantaloon's Kishore Biyani denies it, he is expected to land a multi-franchise agreement with Gap in India. When contacted by BT, a Gap representative, Kris Marubio, said that Gap "will consider a foray into India at the appropriate time". Given that in the US, Gap is fighting sluggish sales, it may not be too long before it builds a presence in virgin markets like India. Currently, Gap's international operations fetch $1.5 billion (Rs 6,750 crore) a year.

Seeds Of Discontent
Is Monsanto stiffing cotton farmers?

Bt cotton: Good, but pricey

On January 23, as the congress plenary session was winding up at Gachibowli in Hyderabad, Andhra Pradesh Chief Minister Y.S. Rajasekhara Reddy handed a letter to Prime Minister Manmohan Singh. It had nothing to do with party politics. Instead, Reddy was trying to enlist the pm in a fight against us-based Monsanto, which markets Bt cotton seeds in India. Why? Reddy argues that Monsanto and its Indian JV, Mahyco Monsanto Biotech don't have patent over Bt technology in India, but have collected Rs 50 lakh from other Indian seed companies to which they sell Bt cotton seeds. That apart, Monsanto and Mahyco are said to be charging a high "trait value" (sort of a royalty), which, in the case of a 450-gm seed packet, works out to Rs 1,250 of the retail price of Rs 1,850. The trait value, the argument continues, is not just 12 times the cost of seed production, but higher than those prevailing in the us (Rs 108) and China (Rs 34). Says Poonam Malakondaiah, Commissioner and Director of Agriculture, AP: "We have nothing against the company and the technology, but we have been getting large representations from the farmers (about the) exorbitant price." About 80 per cent of the farmers in the state have small holdings and, therefore, find the seed price too high. Pricing, Mahyco counters, is based on the value that products and technology deliver to farmers. And technology fees help fund research, and are shared with the retail technology channel, seed partners, shareholders and to cover business costs. No doubt Bt seeds have revolutioned cotton farming in AP, but Monsanto finds itself in a drug innovator company-like situation. Except in this case, farmers are a far more powerful vote bank than mere pill-poppers.




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