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FEB. 25, 2007
 Cover Story
 BT Special
 Back of the Book

Trading with ASEAN
In the recent Indo-ASEAN summit, ASEAN was, for the first time, on the defensive. India has agreed to bring down its negative list of imports to 490 items in the free trade agreement with the 10 ASEAN nations. But India’s step towards free trade was not matched by the ASEAN nations, as more than 1,000 items still figure in the negative list of the ASEAN. In 2005-06, India’s total trade with ASEAN was at $22 billion (Rs 99,000 crore), against just $7 billion (Rs 31,500 crore) in 2000-01.

Exchange Deal
Indian markets are on a roll. Global stock exchanges and financial institutions’ interest in the Indian stock exchanges goes to show the long-term growth potential of India Inc. The year has started on a positive note. The NYSE and three global financial institutions have each picked up a 5 per cent stake in the NSE. The deal will open exciting vistas in global co-operation for the NSE, and at the same time could improve the fortune of smaller exchanges in the country.
More Net Specials
Business Today,  February 11, 2007
Back From The Brink
Tier-II IT services player Polaris is on the mend.
Polaris’ Arun Jain:
Profitable times
In an industry where 30 per cent net profit margins are pretty much the norm-at least amongst the first tier of Indian it services firms-a margin of 2.6 per cent at the net level is difficult to reconcile with. That explains to a large extent why the stock of Polaris Software Labs has been treated with disdain for the past three-four years, during which the stock price hit an all-time low of Rs 51.8 in June 2006. But just when industry pundits and analysts were poised to give up on Polaris, the company has begun showing signs of a revival. After a miserable 2005-06, when the company posted revenues of Rs 825 crore and a profit after tax (pat) of Rs 21.3 crore-as against a pat of Rs 58 crore in the previous year-the Chennai-headquartered company has bounced back in the current fiscal with revenues for the nine-month period ended December 2006 of Rs 761.59 crore and net profits of Rs 79.6 crore. That's a net margin of 10.5 per cent-still not up there with the best, but a huge improvement nevertheless. By the close of the year, the company is confident of crossing Rs 1,000 crore in turnover and Rs 100 crore in net profit. The stock markets have been quick to sense a turnaround, with the scrip galloping a little over four-fold since last June.

Polaris' problem has always been profitability, right from when the Citigroup company OrbiTech was merged into it in 2002-03. Revenues got a huge leg-up no doubt (from Rs 293 crore to Rs 431 crore post-merger), but pat margins were confined to single digits. Arun Jain, Chairman & CEO, Polaris, has an explanation for the bottom line woes. "Our investments peaked in 2005-06. Companies in the growth phase do have one bad year when they invest for growth. I have always believed in the product and services combination model for a mid-cap company like Polaris-it takes time but that is the only way we can hold our own against the biggies," he says.

The Polaris top brass feels that strategy is getting validated. "At best there has been a delay of a couple of years when we made mistakes, which have only made us wiser,'' says Ashok Korwar, a long time management consultant and advisor to Polaris. Prior to the acquisition of OrbiTech, Polaris was having difficulty selling its banking expertise overseas; its credentials of having developed robust products for Citibank were clearly inadequate. Clients raised issues of intellectual property rights (IPR). The Polaris management thought that by acquiring IPRs through OrbiTech it could fix that problem.

But that wasn't the only issue clients had. Many of them did not want the 'monolithic product platform' that Polaris offered-which may be modern and even futuristic but entailed shutting down banking operations during implementation. By 2003-04, Polaris had learnt its lessons and changes were made in the product to make it flexible enough to sit on any existing platform. This way banks could implement modules they desired without any major hiccup in operations. But the reorientation, the branding of the new product from Orbisuite to Intellect and, finally the selling, took time.

"We had to make massive investments, of at least Rs 100 crore just for products post merger, but for 2005-06 we did not capitalise product expenses. If we did not follow conservative accounting practices, we would have shown a better bottom line," says Jain. Currently, the core team that works on product development consists of 150-the remaining 650 have been shifted to product implementation, maintenance and support onsite.

By 2005-06 Polaris, as one company official puts it, had a lot of things to sell but not enough feet to do the selling. Enter Arup Gupta from TCS as Chief Operating Officer. His immediate priority was to streamline operations. Marketing, sales, delivery were integrated. "We are doing top-end work with 11 of the top 25 banks globally and 11 more are talking to us," says Jain. Adds Gupta: "The average size of a deal has now grown from $1 million (Rs 4.5 crore) to $5 million (Rs 22.5 crore) and we will be taking this to $10 million (Rs 45 crore) in 12-18 months.''

A recent J.P. Morgan report says: "Polaris is our top pick in the mid-cap India it space." However, as the gap between the Tier-I and Tier-II of Indian it services keeps widening every quarter, Polaris has to scale up fast-and profitably.

Cross-Border Dosage
Merck Generics keeps Indian pharma-and PE-interested.

Cipla’s Lulla: Deal time
For a business that's conser vatively valued at $5 billion (Rs 22,500 crore), it's inviting its share of suitors. Predictably, a host of names from the private equity universe, including Carlyle, Blackstone, Apex, Texas Pacific Group, KKR and Warburg Pincus (the last two are said to have joined hands), are believed to have thrown their hats into the ring for Merck's global generics business. That's in addition to the two domestic pharma majors, Ranbaxy and Cipla, who are in the race. At the time of writing, Dr Reddy's Labs, too, had reportedly joined the fray. Iceland's Actavis is also keen on Merck Generics. The PE firms may partner one of the Indian companies in a deal. It is learnt that discussions between Carlyle and Blackstone with both Cipla and Ranbaxy have made significant progress. Says Amar Lulla, Joint Managing Director, Cipla: "A consortium of private equity investors wants us to join them." Lulla declined to name the investors. Ranbaxy's CEO and MD Malvinder Singh told BT that Merck's generic business was a quality asset. "It offers a strategic fit to our global business and we would certainly be interested if it is available at the right price and enhances shareholder value." Industry observers point out that the interest of private equity players is the result of the size of the deal. "It may be difficult for a company in India to make a deal of this size on its own," says a Mumbai-based investment banker.

STAR's New Formation
The broadcaster's acting CEO has his task cut out.

STAR’s Nair: Ready for a new role
With two of its India CEOs-Peter Mukerjea and Sameer Nair-on their way out, star India's new acting Chief, Paul Aiello, has his task cut out. Not only does he have to ensure that Mukerjea and Nair don't play pied-piper, taking along the cream of star TV's talent along with them, he's got to find some magic to make KBC iii as popular as it was in its first avatar. Even as rumours last fortnight suggested that 17 star India employees will cling on to Nair's coat-tails, according to company insiders, Aiello met up with the senior employees on a one-on-one basis. Aiello is also understood to have sent out a mail to all employees across the India office, assuring them of a smooth transition. He is understood to have said in his mail that India is an important market with huge opportunities.

One of those is mobile entertainment, where star is keen to tap the current Rs 2,000 crore mobile value-added services sector. The company last year set up a mobile and interactive division 'star Mobile Entertainment' to grow the business. By end-February, it will launch a new platform called Plus, a solution for consumers to catch up on television, sports, movies, shopping and banking on the go. star expects 30 per cent of its revenue to accrue from mobile entertainment in the near future, say company sources.

The bulk of income will, of course, still come from broadcasting, with blockbuster programmes like KBC iii. However, not just are ratings lower this time around when compared with KBC I, they've initially shown a declining trend, in contrast to the first avatar, when ratings soared in the first week of the show. Should star be worried? Outgoing CEO Nair maintains that "we have conclusively met all our objectives for KBC with Shah Rukh Khan." One of those objectives was to wrestle back the 9-10 pm band. It appears to have succeeded there, what with star Plus racking up 2.5 times more viewership than competitor Zee in that slot. With or without Nair, the fight-back has begun at star.

Is Teledata a Bubble?
The company's big growth doesn't convince The Street.

It's difficult to find an equity analyst tracking his company, but that doesn't faze K. Padmanabhan, whose dream for his group led by flagship Teledata Informatics is to be as big as TCS some day soon. He's got some way to go. For the first nine months of the year ending March 2007, Teledata had revenues of Rs 2,229 crore and profits of Rs 282.6 crore-TCS' corresponding numbers were Rs 11,034 crore and Rs 2,678.5 crore, respectively. What's impressive though is Teledata's growth rate during that period, against the previous year's corresponding nine months: 273 per cent in revenues, and 159 per cent at the net level. Over three years, its compounded annual growth is 200 per cent in profits and 112 per cent in sales.

Why then are brokerage houses not researching the stock-despite which the price has shot up 424 per cent over five months (until recently the stock was trading even below its earnings per share)? Teledata Informatics is debt-free, and has 27 software solution companies, which provide ERP and CRM solutions. It derives 95 per cent of its revenue from exports and, for good measure, is also the fourth largest ship-owner in India with 14 ships, and a global leader in providing ship management solutions. Says K. Padmanabhan, Managing Director, Teledata Informatics: "We haven't been able to generate confidence among investors. Therefore, we are increasing our stake in the company." As on December 31, 2006, the promoters' holding in the company was 14.34 per cent (till June it was below 5 per cent). Plans are to increase it to 25 per cent.

In the first week of December, Teledata made a demerger announcement, after which the stock with a Rs 10 face value took off-from under par to around Rs 50 at the time of writing. For every 100 shares of Teledata Informatics, shareholders will get 100 more shares plus 50 shares each of Teledata Marine Solutions and Teledata Technology Solutions. However, the face value of all the three companies will come down to Rs 2 per share. That may not be the most attractive demerger scheme in recent times. Says Amit Rathi, Director, Anand Rathi Securities: "Worldwide entities with multiple businesses suffer from conglomerate discount, as investors like to give premium to standalone business. However, companies with lower credentials demerge their businesses just to come in spotlight." Padmanabhan, meantime, is aiming for $7.5 billion (Rs 33,750 crore) in revenues by 2010. Should TCS watch out?