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APRIL 8, 2007
 Cover Story
 BT Special
 Back of the Book

Mobile Security
Today, it is all about information and how the right information is sent to the right people at the right time and right place. Uncertainty about how to secure mobile phones in the face of increasing threats is slowing individual adoption of mobile applications. There are many facets of mobile security, including network intrusion, mobile viruses, spam and mobile phishing. Analysts expect big telecom companies to develop security solutions on various security platforms.

Rough Ride
These are competitive times for the Indian aviation industry. As salaries zoom, players are scrambling to find profits. Even the state-owned Indian is now seeking young airhostesses to take on the competition. It is planning to introduce a voluntary retirement scheme for airhostesses above 40 years. On an average, they draw a salary of Rs 5 lakh a year. The salaries of pilots, too, are soaring. According to industry estimates, the country needs over 3,000 pilots over the next five years.
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Business Today,  March 25, 2007

Chemistry Of Geographies
Reliance is poised to pull off India's largest-ever overseas transaction.
RIL’s Ambani: Drawing a new gameplan
The Ambanis' penchant for size and scale is legendary, and is reflected in the capacities they've put up (refining and petrochemicals) and projects they've rolled out (telecom and the Rs 25,000 crore retailing blueprint that's being implemented). At a time when observers back home are still in awe of the mega-acquisitions pulled off by the Tatas and the Birlas (of Corus and Novelis, respectively), Mukesh Ambani, Chairman, Reliance Industries (RIL), at the time of BT going to press, appeared poised to conclude the mother of all mega-deals: With the $49 billion (Rs 2,15,600 crore) Dow Chemicals of the us, which could be either a joint venture or an outright acquisition. At the same time, he threatens to queer the pitch for India's organised retailers by not just partnering with a global giant in this business but by buying into its operations. For good measure, too, Ambani is said to be keen to acquire stakes in projects of Chevron, the US energy colossus that bought into Reliance Petroleum in 2006.

But it's the Dow transaction that promises to be the blockbuster. A recent report put out by Citigroup places the value of Dow's commodity portfolio at $21.56 billion (Rs 94,864 crore), without taking into consideration the control premium factor. Assuming a 15 per cent premium, Citi's analysts think Ambani would have to pay up $24.8 billion (Rs 1,09,120 crore) for Dow, lock, stock and barrel. That would easily make it the largest buyout by an Indian company-Tata Steel currently holds that honour with its $12.1-billion purchase of Corus. Even if Reliance opts for the joint venture route, the transaction could still well be the largest ever. According to Citi, a "60 per cent ownership in the JV by the acquirer would result in a pre-tax valuation of roughly $15 billion." At a value of $21.56 billion, Dow's chemical business has an enterprise/earnings before interest, taxes, depreciation & amortisation multiple of seven.

Apart from the attractive valuation, RIL will get instant access to global, developed markets, apart from technology. "The options for RIL domestically are fairly limited and, to that extent, going overseas is logical," points out V.K. Sharma, Director & Head of Research, Anagram Stockbroking. For the Michigan-headquartered Dow, the option of shifting its manufacturing from high-cost locations in the us and Europe to India cannot be discounted. Overall, Dow's product portfolio includes performance plastics, performance chemicals, agricultural sciences, basic plastics and basic chemicals. In 2006, Dow registered a top line of $49.1 billion and a net income of $3.7 billion. Dow is also the world's second-largest chemicals manufacturer, after BASF, with a presence in 150 countries. "RIL will benefit from Dow's global customer base, advanced technology and established bases in the world's developed markets," says Citigroup's report. RIL's spokesperson, when contacted, declined to comment.

The big move by the flagship comes at a time when Ambani is said to be considering a rather audacious purchase of ownership in a big global retailer, with the names of UK supermarket group J. Sainsbury and Carrefour of France doing the rounds. Media reports have suggested that Reliance would acquire a 13 per cent stake in Carrefour from the Halley family, its largest shareholder. As if all this weren't enough, it is also learnt that Reliance is looking to acquire stakes in Chevron's projects spread across the world. The route that Reliance will adopt will be through alliances, partnerships and acquisitions. Chevron has the option of increasing its stake in Reliance Petroleum to 29 per cent and the current development may be a way to strengthen the relationship between the two partners for other projects as well. Whilst you have to wonder whether an enthusiastic media should take the credit for the revelation of these various gargantuan global ambitions or whether it should be attributed to the proverbial and ever-permeable 'sources', fact is that just an acquisition of Dow Chemicals will be adequate to propel an already global giant (albeit not yet geographically) into an elite club of global corporations.

Power Play
North to bear the brunt for lower tariffs in Maharashtra.

It's been over two years since the government began its efforts to revive the beleaguered 2,184 mw Enron-promoted Dabhol power project (now rechristened Ratnagiri Gas & Power). The task continues. The latest move, on March 9: pooling the fuel cost of the Ratnagiri project with that sold to other consumers that purchase LNG sourced from Petronet LNG (PLL). The objective is to keep the tariff under Rs 3 per unit, else the key buyer, the Maharashtra state, would refuse to buy power from this plant. This, however, comes at a cost; existing consumers, over 150 of them, will pay a higher tariff for the gas they purchase from PLL. These include Maruti Udyog, fertiliser companies in the public sector (IFFCO) and the private sector (the K.K. Birla-owned Chambal Fertilisers) and small-scale units (glass industries, ceramic units) in North India.

While the existing consumers have little choice-the cost of alternative fuel (naphtha, fuel oil) is close to thrice the price that they currently pay-fact remains that they will pay for the sins of the Maharashtra government as well as those of the Centre in contracting power from the erstwhile Dabhol project in the first place.

Through the pooling mechanism, consumers in Maharashtra gain a considerable bit. Fuel accounts for close to 60 per cent of power tariff and while the market price of LNG is close to $9 per mmbtu, translating into a tariff of around Rs 3.60 per unit, the pooled cost of $5.83 per mmbtu will ensure that the tariff will be around Rs 2.70 per unit. But for private sector consumers like Maruti, whose current payout is in the region of $5 per mmbtu, the fuel bill will rise by over 10 per cent. For fertiliser units, the increase in the fuel bill will mean little given that the costs are reimbursed by the government under the retention pricing scheme, in effect increasing the fertiliser subsidy bill. The worst hit, however, will be small scale units like glass and ceramic units, where gas consumption accounts for as much as 80 per cent of the operating expenditure.

Conversion Gambit
A promoter has issued warrants to restore faith in IPOs.

Dabhol plant: High tariff
You need to be a brave promoter to consider an initial public offering (IPO) in a market that appears to have lost its appetite for new offerings. After all, since January, 18 of the 26 companies that tapped the primary markets are trading below their issue price. You need to be even braver if you're a promoter preparing to take your realty company public. Stocks like Akruti Nirman and C&C Construction, which got listed in February, are trading way below their offer price.

Another option for IPO-hungry promoters is to be innovative-like Orbit Corporation, a real estate developer, which is raising up to Rs 106.5 crore by issuing convertible warrants with equity shares, a first in the history of Indian primary markets. Merchant bankers point out that such a structure is a bid to restore confidence of investors in real estate IPOs. The warrants issued can be converted into shares 18-30 months after the stock is listed. If the six-month average stock price trades below the offer price, investors can convert the warrants at a 30 per cent discount to the stock price. If the six-month average price is above the offer price, investors can bag the shares at a 10 per cent discount after conversion.

At the time of writing, the Orbit issue was set to open in a price band of Rs 108-117 per share. Price-earnings multiples are not relevant because they're at an absurd level-of 4,320-4,680 for the year ended March 2006 (the company showed net profits of Rs 9.2 lakh for that year). However, what gives the pricing respectability is Prudential ICICI Mutual Fund's 3.45 per cent buyout of Orbit's equity at Rs 90 per share last year.

Free Market for FIIs
Are they deserting India for Vietnam? Not really.

These days Paritosh Thakore, Head of Asian Equities, ABN Amro Bank, is besieged by institutional investors urging him to flag off a Vietnam-dedicated fund. It isn't as if these investors are staking out the globe for socialist republics (although the Communist Party of Vietnam was progressive in launching free-market reforms way back in the mid-80s). If investors want a piece of the action in Vietnam equities, it's simply because it's so far the best performing market in 2007, with a 54 per cent gain till date. "Investors have become demanding. They want to invest in developing markets that will create value," says Thakore. Along with Vietnam, investor interest has also surged in markets like China, Malaysia, Sri Lanka and the Philippines-in the 75 days till mid-March, Pakistan has gained 14 per cent, China 11 per cent, Malaysia 9 per cent, and the Philippines and Turkey 7 per cent. India, in contrast, has been the worst performer amongst emerging markets, with the Sensex losing 6 per cent in this period. Brazil and Russia are other two emerging markets in the red, down 4 per cent and 5 per cent, respectively.

If Vietnam, which recently became a WTO member, has become the flavour of the season, it's because investors view it as a stable proxy to China-economic growth has been consistently high (averaging 7.8 per cent over six years) and political stability isn't an issue.

What's also attracting investors is the fact that markets like Vietnam have been neglected for long, and hence undervalued. Also, as K. Ramachandran, Senior Vice President & Head Advisory Desk, BNP Paribas, points out: "Barring China, all these other markets are relatively small; hence a not-too-large flow of funds can have a huge impact on these markets." Although Vietnam is an outperforming market (but still not an Asian top six, and hence not listed in the table above), market men estimate its FII inflows in 2007 at comfortably under a billion dollars. India, despite recent outflows, has attracted $1.13 billion so far. Says Ajay Bagga, CEO, Lotus AMC: "Vietnam is in the take-off stage which is why we are seeing interest from select institutional players. However, a few million dollars of inflows in countries like Vietnam will not impact flows into India. The third-largest market in Asia, which received 49 per cent of total FII inflows last year, will continue to attract investments as long as (earnings) performance continues to impress." However, what could impact all these markets-India included-is a us slowdown. Says Markus Rosgen, Managing Director-Equity Strategy Regional Head, Asia Pacific Equity Research, Citigroup: "A slowdown in the us will hit all the export-led economies in Asia, so India may not be adversely impacted. However, all markets in this region will suffer as investors will get risk-averse and pull out their investments from this part of the globe."