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NOVEMBER 5, 2006
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The Building Boom
Is an asset price bubble building up in the real estate market? Flats in posh Mumbai areas sell at the rate of Rs 50,000-70,000 a sq. ft. and housing plots in Gurgaon are going for Rs 1 lakh a sq. yard. This may sound like music to those who have been clinging on to their assets, it portends danger to buyers. The high real estate prices keep the majority out of the housing market and make the dream of owning a house more distant.

The Learning Curve
India's investment in education-as a percentage of GDP-is lower than not just of countries in the West but also some of the emerging economies, including China. The percentage of population in the relevant age group enrolled in higher education too is the lowest among countries with which it must compete. Clearly, there is a need to scale up substantially the physical infrastructure and attract better faculty by offering market wages.
More Net Specials
Business Today,  October 22, 2006
Molten Heat
Can Tata Steel polevault into the global steel makers' top 10?

Till last fortnight, Tata Steel was more accustomed to being viewed as a probable victim of consolidation rather than a predator on the prowl for global capacities. After all, with a total steel-making capacity of 5 million tonnes, the Tatas' metals flagship ranks a distant 55 on the global stage amongst steel manufacturers. The future for such small players, pointed out analysts, and one L.N. Mittal, President, Arcelor-Mittal, appeared bleak on a fragmented basis. Being acquired seemed inevitable. So much so, Ratan Tata, Chairman, Tata Sons, the holding company of the Tata group, acknowledged at the annual general meeting of the steel company that there was an urgent need to hike the promoters' stake to protect Tata Steel from marauders.

How the tables have turned. By evincing interest in the $18 billion (Rs 82,800 crore) Anglo-Dutch steel giant Corus for an estimated $9 billion (Rs 41,400 crore), the $4.84 billion (Rs 22,264 crore) Tata Steel has indicated that not only does it not want to be gobbled up by a bigger player, it also wants to be invited to the table of the Big Boys. And how. Consider: In terms of revenues, the Tata company is almost one-fourth the size of Corus; and the $9 billion it would take to buy out Corus is roughly 10.97 times the annual profits of Tata Steel.

Such odds don't faze the Tatas any more. In 2001, the group displayed its first streaks of audacious ambition when Tata Tea, with a market cap of under $400 million, paid $473 million to acquire Tetley. More recently, the same company bought a 30 per cent stake in an American packaged water firm for $677 million (Rs 3,114.2 crore), although its topline for 2006 stood at just Rs 971 crore. Just before that its Rs 190 crore subsidiary Tata Coffee acquired Eight O'Clock Coffee in the us for a little over Rs 1,000 crore-over five times its annual turnover. And, of course, there are the big-ticket (and successful) acquisitions of Daewoo CV by Tata Motors and NatSteel Asia-the last one by Tata Steel itself, along with Millennium Steel in the Far East-to name just two.

But this one's different-after all it's a play for one of the world's top 10 steel producers, with a turnover of £10 billion (Rs 85,000 crore), with profits of £580 million (Rs 2,668 crore). As far as the topline goes, Corus is only a bit smaller than the entire Tata group, which posted revenues of Rs 99,850 crore for the year ended March 2006. But look at what Corus could do to Tata Steel. At a stroke it would add a capacity of 18 million tonnes all over Europe (the UK, Germany and the Netherlands), at roughly $500 million (Rs 2,300 crore) for a million tonnes. Now this compares well with greenfield projects being considered elsewhere in the world-including India. L.N. Mittal, for instance, has plans to put up a 10 million tonne capacity in Jharkhand for $5.5 billion (Rs 25,300 crore), which works out to around $550 million per million tonnes. Corus, of course, offers plants catering to markets right from China to the us. Such multiple locations, however, make digesting the acquisition a challenge. "The steel industry will take time to reap the benefits of consolidation. The reason for this is that production capacities and raw material sources are typically scattered across the world," explains Deepak Jasani, Head of Research (Retail), HDFC Securities. However, the biggest question mark revolves around the funding of the huge acquisition. The investment banking fraternity points out that a leveraged buyout (LBO) route is the answer to that, with the Tatas raising debt for the acquisition on the Corus balance sheet itself. It is gathered that a host of banks-including ABN Amro, Deutsche Bank and Standard Chartered-have agreed to fund this mega-acquisition. Tata Steel, at the end of financial year 2006, according to its annual report, had reserves to the tune of Rs 9,201 crore. A Tata Steel report released by UBS in early September-before the Corus deal became public-outlined the fact that Tata Steel has raised in excess of Rs 7,000 crore over the last few months. This came through a preferential allotment of shares to Tata Sons which brought in Rs 1,500 crore in addition to two syndicated loans of $750 million and (Rs 3,450 crore) $500 million (Rs 2,300 crore) each. On the Corus issue, Tata Steel, in a note to the stock exchanges, has said: "Given recent industry consolidation, Tata Steel is reviewing various opportunities, including Corus. However, there can be no certainty that an approach will be made and if made that it will result in an offer." What stands between the Tatas as a regional bit player and a global steel powerhouse is some hard-nosed negotiation and $9 billion.

Kalyani Joins the C(h)orus
Bharat Forge may be eyeing some bits and pieces.

Bharat Forge's Kalyani: On the prowl

The Tatas may be in the race for Corus lock, stock and barrel, but there's another Indian metals conglomerate that's eyeing bits and pieces of the Anglo-Dutch giant. Bharat Forge from the Pune-based Kalyani group has reportedly thrown its hat into the ring for acquiring Corus' strip products and long products divisions. Bharat Forge has been among the most active players in the automotive components space and over the past one year has acquired Federal Forge in the US, Sweden's Imatra Kista AB and CDP Aluminiumtechnik in Germany. Company officials-Chairman and Managing Director, Baba Kalyani and Executive Director, Amit Kalyani-were travelling and unavailable for comment. What would be an attraction for the Kalyanis are the host of value-added products in the Corus stable, namely hot rolled steel strips, light gauge coated steel and semi-finished steel. These are spread across Corus' divisions-some of them being Corus Packaging Plus, Corus Tubes and Corus Rail-and are a significant contributor to total turnover. In 2005, the strip products and long products divisions together had a total turnover of just over six billion pounds. It remains unclear what parts of these Bharat Forge will eventually acquire. For the moment, the Kalyanis' interest in the Corus divisions would end up as only that if the Tatas go ahead with an offer for the world's ninth largest steel maker.

Smooth Landing?
Airbus' woes may not impact deliveries to Indian carriers.

Last fortnight when aircraft giant Airbus announced that deliveries of its $250 million-a-piece (Rs 1,150 crore) superjumbo A380 would be delayed yet again-for the third time since 2005-customers all over the world let out a collective groan. A few from that anxious lot are in India too. Together, Kingfisher, Air Deccan, GoAir, and a number of new low-cost players have placed orders for 344 aircraft (including ATRs) slated to be delivered over the next six years. The resignation of Airbus Chief Executive Christian Streiff after a mere three-month stint wouldn't have soothed nerves (Louis Gallois has since taken over).

As Airbus' clients around the world said that they were evaluating other options, there was increasing pressure on Airbus to compensate its clients for delays. Airbus has committed to sell 159 A380s jets to 16 airlines across the world. Australian airlines Qantas has been paid an initial compensation of $77 million (Rs 354.2 crore) while China Southern Airlines may get paid $250 million (Rs 1,150 crore) as compensation for the A380 delays, according to reports. Back home, Kingfisher Airlines has been reportedly paid $22 million (Rs 101.2 crore) as compensation. Kingfisher had ordered five A380 aircraft for a 2010 delivery, which will now only happen a year later. But if most other Indian airlines aren't worried, it's because A380s are hardly what the country needs today (Kingfisher plans to fly international routes with the A380). G.R. Gopinath, Managing Director, Air Deccan, says India is not ready for an A380. "The market in India has not yet reached the inflection point in terms of size for such a large seater."

Airbus officials remain mum about the ongoing crisis. "I don't think that the Indian market will be affected in any significant way because the deliveries of A380s are still far away," says Kiran Rao, Executive Vice President with Airbus, even as he refuses to comment about the compensation given to Kingfisher. But will Airbus' woes-industry experts expect it to lose $6 billion (Rs 27,600 crore) over the next four years-impact delivery of other aircraft too? "The top management of Airbus is going through a churn and Airbus itself has had a tough time recently. It's an issue that will affect the operations of the company globally. Having said that, the fleet in India, right now, is predominantly narrow bodied aircraft, so there won't be any major adverse impact," adds Kapil Kaul, CEO of CAPA (Centre for Asia Pacific Aviation) Indian subcontinent and Middle-East.

Competitor Boeing refuses to comment specifically on Airbus delays. Says Dinesh Keskar, Senior Vice President of Sales for Boeing Commercial Airplanes: "Our market forecast shows very little demand for A380 sized airplane for India. The travelling public, and the global economy, all do better when the industry contains healthy, competitive companies creating value for its airline customers and the flying public day in and day out." Boeing for its part has its hands full with over 100 Indian orders: 68 planes from Air India, 20 737ngs (next generation) from Spice Jet, 10 737-800s and 10 777-300ers from Jet Airways, and 10 737-800s from Air Sahara.

The Fireworks Begin
This bull frenzy is driven more by fundamentals than liquidity.

It's difficult to remember the last time-if ever there was such an occasion-when the Dow Jones Index in the us and the BSE's benchmark index hit their all-time highs within days of each other. But that's exactly what happened last fortnight when the Dow crossed the 12,000 mark for the first time ever, as did the Sensex which, at the time of writing, was hurtling towards the 13,000 mark. And along with the Dow, a number of other indices, including The Straits Times Index of Singapore and Jakarta Composite of Indonesia, were also perched at highs they've never scaled before (see A Global Bull Run). Says Nilesh Shah, CIO, Prudential ICICI AMC: "Sheer liquidity is driving the us markets. Apart from the receding fears of another us interest rate hike, huge money pumped in by us corporates has also been responsible for driving the us equity markets." Adds U.R. Bhat, Managing Director, Dalton Capital Advisors: "Expectation of a rate cut in the us has also seen money flowing out of debt to equity." Falling oil prices, from a peak of $78 per barrel to under $58 last fortnight, contributed to the bullish mood.

Back home, expectations of robust earnings growth propelled the 30-share Sensex to its all time-high-above the previous high of 12,671 set in May. It's taken the benchmark index 87 trading sessions to surpass the previous peak. Between the two highs, the Sensex had slipped 30 per cent to 8,800 in June. Says Rajesh Boghani, Dealer, Parag Parikh Financial Advisory Services: "It's more of realignment in the market. Better-than-expected Infosys Technologies quarterly performance as well as its improved guidance triggered the rise in the Sensex on expectations that others too will follow." Between 11 and 13 October 2006, the Infosys stock jumped nearly 10 per cent, as against a 3 per cent rise in the Sensex. Says Bhat: "The previous bull run (up to May) was liquidity driven. This time round it is mainly fundamentals."




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