M. Gangadi: In mission mode

It's a business none other than Anil Ambani is reported to be eyeing, but down south in Hyderabad, a lesser known entrepreneur has been quietly going about the task of creating a chain of branded pharmacies. Dr Madhukar Gangadi, CEO and Founder, Optival Health Solutions, flagged off his first store in February 2006, aptly called 'Aushadhi' (a Sanskrit word which translates into drug/medicine in English). Today Gangadi has 53 such stores-47 of which were opened in February in Hyderabad. Now, the graduate from Wharton Business School is planning to add 22 more stores in Hyderabad and another 30 in Bangalore by October; after that Gangadi will hit Mumbai and Delhi. "Our goal is to reach 20 cities with 2,000 stores in two years," gushes Gangadi.

Gangadi's selling proposition is low-cost specialty stores. His cost of setting a store is just Rs 2 lakh, and he's raised Rs 9.3 crore from friends and family, of which he has invested Rs 7.5 crore. "The difference between the rate at which we buy and the MRP is 25 to 30 per cent on an average and we offer a 6.4 per cent discount at which we are able to break even at the store level." Once he is able to reach 350 to 400 stores (as per plans in six months) Gangadi feels an 8-10 per cent net margin is possible. Once the chain touches 100 stores (by October), turnover would have doubled to Rs 24 crore. The Veecees must be watching.

-E. Kumar Sharma

NPAs: A Fine Balancing Act
The bad debts of Indian banks are shrinking.

ICICI Bank's Kamath: Falling NPAs

If you are one of those concerned about the rather belligerent retail lending thrust of most Indian banks, the good news is that their bad debts are coming down. For the year ended June 2006, of 17 private and public sector banks studied, 15 have witnessed a fall in non-performing assets (NPAs). Amongst them, Dena Bank has been able to register a healthy improvement of 1.5 per cent over 2004-05, with ICICI Bank, Bank of India and Union Bank clocking a 1.2 per cent reduction in NPAs over the previous year (see Going Down). Says Sejal Doshi, CEO, Finquest Securities, a Mumbai-based stockbroking firm: "The rise in credit growth by 35-40 per cent has resulted in a fall in NPAs, even in absolute terms, of Indian banks. Higher provisioning, recovery of assets, transferring of bad assets to asset reconstruction companies and upgrading of bad debt into standard assets have been the key reasons for the fall in net NPAs." According to a study by rating agency CRISIL, write-offs, recoveries, restructuring and a healthier corporate sector have helped bring down gross NPAs to 3.5 per cent of advances in 2005-06, from 19.5 per cent 10 years ago. Adds Arun Panickar, Director (Rating), CRISIL: "Disbursement of more funds to the retail segment and the improving asset quality have helped the Indian banks to bring down their NPAs. Currently the weak assets (non-performing loans and capital coverage of bad loans) are at acceptable levels of 8.7 per cent of the total assets."

"Internationally, banks have a net NPA in the range of 1-1.5 per cent. Indian banks are far better," says K. Unnikrishnan, Senior Vice President, Indian Banks Association. "Till corporates don't default, NPAs for Indian banks are not a major problem as the impact of retail default will not have as huge an impact as defaults by corporates." That of course is because the size of a consumer loan is much smaller than a corporate loan, and a retail loan is also disbursed to a larger audience, bringing down the risk considerably.

Foreign banks, however, haven't been able to keep with the trend of falling NPAs. For the year ended March 2006, the three top foreign banks-Standard Chartered, HSBC and Citibank-have witnessed a surge in their NPAs; the net NPA to advances in percentage terms has surged to 1.57 per cent from 1.12 per cent in the previous year. HSBC's net NPEs also saw a marginal increase to 0.58 per cent from 0.5 per cent. Citibank witnessed a marginal decline to 0.95 per cent from 1 per cent. Experts like Doshi attribute the rise in foreign banks' NPAs to their low bases. "It's just in the last two to three years they have started lending to retail players," says Doshi.

The fear going forward is that as retail defaults begin to rise in a higher interest rate regime, NPAs will follow suit. "It will not be alarming but NPAs will surge," says Doshi. For the time being, Indian banks have enough reason to celebrate.

-Mahesh Nayak

CavinKare Cashes Out
Company sells packaging unit to pre-empt conflict of interest.

Ranganathan: Strategic exit

A possible conflict of interest prompted C.K. Ranganathan, Chairman and Managing Director of the Rs 420-crore CavinKare, to sell the Rs 100-crore Packaging India, a privately held packaging solutions company, to Essel Propack.

"We started this company as a backward integration project-to package our own products; but over the years, Packaging India's dependence on CavinKare has come down," says Ranganathan. CavinKare, too, now sources more than 30 per cent of its requirements from other packaging companies. And Packaging India's list of customers includes Kellogg's, Monsanto, Coke, Pepsi, Godrej Sara Lee, Procter & Gamble, Cadbury, Britannia and Dabur.

CavinKare, which already has a presence in hair and skin care products and pickles, is diversifying into other segments of the packaged foods business. This is creating the potential of conflict. How? Because packaging orders tend to reveal the marketing strategies of the companies placing the orders. "Competitors in the industries we operate in or plan to enter will hesitate to buy packaging from us," says Ranganathan. Hence, the decision to cash out. The price: Rs 63.5 crore. "We had the option of keeping a limited stake in the company, but this wouldn't have resolved conflict of interest issue," he adds.

-Nitya Varadarajan

Beating The Best
Why then hasn't D-Street taken a shine to UTI Bank?

Over the past four years, whenever UTI Bank hit the headlines, it hasn't been for the most flattering of reasons. In 2002, the joint parliamentary committee probing the stock market scam of 2001 wanted the Mumbai-based private sector bank to conduct an inquiry into his failed merger with Global Trust Bank; the JPC apparently felt the Chairman of UTI Bank, P.J. Nayak, stood to gain from the merger. Just as that storm seemed to be dying out, UTI Bank was again in the news when HSBC controversially acquired a 14.7 per cent stake in it, and at one time appeared to be preparing to acquire it (HSBC was keen to acquire a little over 20 per cent in the company from CDC Capital Partners-now Actis-in late-2003). UTI Bank survived once again, with HSBC being compelled to dilute its holding. What's gone unnoticed in all this drama is the steady performance of India's third largest private sector bank-over the past six years it has been the most consistent performer in the banking sector. Compounded growth on the assets, deposits, net profits and net interest income fronts between 2000 and 2006 has been the highest for UTI Bank, according to data collated by it. Asset growth, for instance, has been higher than those of the biggest names in Indian banking (see The Dark Horse Runs the Fastest).

Yet, UTI Bank doesn't quite get its due on Dalal Street-if you discount ChrysCapital mopping up 4.9 per cent shares of the bank from recent secondary market purchases. Centurion Bank of Punjab, which of late has been on an acquisition spree, commands a price-earning multiple (p-e) of 38 while UTI Bank trades at just 20. Even the Hinduja-owned IndusInd Bank, whose portfolio is skewed towards auto and commercial loans, enjoys a P-E of 34. HDFC Bank and ICICI Bank have P-Es of 30 and 18, respectively. V.K. Sharma, Head (Research), Anagram Securities, points out that despite a strong 'UTI' brand and a robust performance, the bank is still not counted in the league of HDFC and ICICI. So, what's the problem investors have with a bank that's growing at a scorching 40 per cent year after year? The biggest drawback could be the public sector perception UTI Bank has inherited, along with the historical woes of the now-defunct Unit Trust of India.

UTI Bank isn't fazed by such assessments. Says Hemant Kaul, President (Retail Banking): "Whatever we have created is purely on an organic basis. That's why we are able to grow rapidly at 40 per cent plus year after year." UTI Bank has a portfolio that's 70 per cent corporate, with the rest being retail. Now it's trying to step up the retail thrust. The third largest debit card issuer has just entered a crowded credit card segment and is aggressively drawing up plans to penetrate the next big frontiers, one rural and the other international. But as Macquarie Research in a recent report puts it: "The bank's international and direct agriculture portfolios may take a while to start kicking in."

Back home, the bank continues to surprise, and delight. "We have the highest ATM to branch ratio in India. Today, 97 per cent of the bank's transactions take place in the ATMs. This is probably the highest in the world," says Kaul. Sharma says UTI Bank is an ideal takeover target, particularly once foreign banks are allowed to shop in the Indian banking space post-2008. Nayak and his team, of course, may have other plans.

-Anand Adhikari

Ascott Group Checks In
Singapore firm plans seven service apartments by 2010.

Ascott's Ong: Mission accomplished

The Ascott Group of Singapore, the largest service apartment company outside the US, is entering the Indian market with two of its mid-market brands, Somerset and Citadines. Its target: travellers who typically use 4-star and 3-star hotels; its hook: prices that are 25-30 per cent lower than those charged by hotels; its Indian partner: the Chennai-based Rattha Group, which is in the business of garment exports and construction.

"We want to capitalise on the high-growth Indian market," says Cameron Ong, MD and CEO, Ascott Group, which will manage and maintain the apartments and market them internationally through its global network for an initial period of 10 years. Adds H.S. Rattha, Chairman of the Rattha Group: "We roped in the Ascott Group for its experience and brand pull."

The first service apartment block of 210 units (built-up space: 210,000 sq. ft) comprising two- and three-room units, will come up in Chennai by 2008. Common facilities will include restaurants, gym and swimming pool. Land has already been acquired for the project. The Ascott-Rattha combine plans to build 1,000 units across seven properties in Tamil Nadu, Andhra Pradesh, Karnataka, Maharashtra by 2010. The planned outlay: Rs 1,000 crore. The business traveller will soon have more options to choose from.

-Nitya Varadarajan