India Infoline Weekly Newsletter - May 17, 2013

Earlier in the week, markets declined sharply following higher-than expected trade deficit numbers. Trade deficit in April widened to $17.8bn. Exports increased 1.68% at $24.2bn while imports expanded 10.96% at $41.9bn. However, sentiments turned around after April WPI inflation fell to a 41-month low of 4.89%, it means that RBI has plenty of room to slash interest rates in its upcoming policy meet.

May 17, 2013 6:28 IST | India Infoline News Service

Top Stories

S&P says downgrade risk exists, leaves rating unchanged

The global rating agency Standard & Poor's (S&P) affirmed BBB- rating for India with a negative outlook. The government in it's meeting with the agency on April 25 this year presented its case for a ratings upgrade. In the meeting, the finance ministry officials cited the steps taken by it to control high fiscal deficit and revive investments.  S&P however ruled any possibility of a sovereign ratings upgrade for the country on May 4. India's long-term growth prospects, underpinned by its favorable demographic profile, and its high foreign exchange reserves support the ratings. The country's large fiscal deficits and debt, as well as its lower middle-income economy, constrain the ratings. We expect India's real GDP per capita growth will likely rebound to 4.6% in the current fiscal year ending March 31, 2014, from 3.6% a year ago. These are higher than those of most of its peers' but substantially lower than about 6% on average over the five years up to the fiscal year ended March 2012. Although part of this slower growth is cyclical, rigidities in the labor and product markets and inadequate infrastructure constrain the country's medium-term growth prospects. Despite the initiatives from the cabinet committee on investments to cut red tape on infrastructure and power projects, that committee's success in raising investment growth remains uncertain...Read More

Tata Steel announces $1.6 bn goodwill impairment charge

Tata Steel has announced a $1.6 bn goodwill impairment charge for the loss of value of Tata Steel Europe, media report said. Reports said that a formal announcement is likely on May 23. The company will announce its fourth quarter and annual results. The write off comes on the back of sustained slowdown in demand in Europe and other major markets, according to reports.

Earlier this month, Tata Steel's Thai subsidiary has taken a $120 million write-off. There were reports that a goodwill loss occurs when purchase price is higher than net asset value of the acquired entity.

Ranbaxy fails US drug safety test, to pay $500mn in settlement

Ranbaxy Laboratories Ltd announced that a previously disclosed investigation by the U.S. Department of Justice ("DOJ") of data integrity and manufacturing processes at certain Ranbaxy facilities in India has been concluded. The investigation related to conduct which occurred several years ago, and Ranbaxy’s current management team fully cooperated with the DOJ. On December 20, 2011, Ranbaxy announced that it had signed a consent decree with the U.S. Food and Drug Administration ("USFDA"), under which Ranbaxy committed to further strengthen procedures and policies to ensure data integrity and to comply with Current Good Manufacturing Practice ("cGMP"). In anticipation of the settlement agreement with the DOJ announced today, Ranbaxy announced at that time its intention to make a financial provision of $500 million related to expected costs associated with resolving the DOJ investigation. Under the terms of the final settlement agreement, Ranbaxy and its affiliates have agreed to settle alleged civil violations of the False Claims Act with the U.S., all 50 states and the District of Columbia. Separately, a U.S. subsidiary, Ranbaxy USA, Inc., has agreed to plead guilty to a criminal information charging violations of the Food, Drug and Cosmetic Act and other criminal statutes. Ranbaxy’s payments related to both the civil and criminal settlements total $500 million in aggregate. The financial provision Ranbaxy established in December 2011 will be sufficient to cover all material financial obligations under the agreement.

Vikram Pandit to invest $100mn in JM Fin’s NBFC arm

JM Financial announced that Vikram Pandit will make a strategic investment in JM Financial with potential additional investments in its NBFC, proposed bank and a joint distressed asset fund. The JM Financial Group Chairman Nimesh Kampani said "JM Financial and Vikram Pandit have known and worked with each other extensively for many years since the early days of the growth of financial services in India. We share similar values and are confident that the proposed association will create strong domestic financial services businesses with global best practices and reach. We are very excited to have Vikram as a strategic investor." The Board of Directors of JM Financial Limited at its meeting held in Mumbai approved the following:

Making an application for Banking License by JM Financial group in accordance with the terms of the Regulations and Guidelines issued by the Reserve Bank of India.  JM Financial will nominate Vikram Pandit as the non-executive chairman of the proposed bank. Vikram and Hari Aiyar will have the right to purchase shares upto the amount prescribed by the RBI in this entity. Expansion of the lending and financing businesses of JM Financial by issuance of US $100 million of capital to Global Funds raised and managed by a firm led by Vikram Pandit. JM Financial will nominate Vikram as the non-executive chairman of the NBFC.  Formation of a distressed asset fund to be set up jointly by JM Financial and Vikram Pandit’s firm with an initial target capitalization of US$100 mn, and Strategic Investment of 3% equity stake by Vikram Pandit and Hari Aiyar in JM Financial Limited through issue of warrants.

See FY14 GDP growth in 6.1-6.7% range: Raghuram Rajan

In a wide-raning interview, Dr. Rajan expressed optimism for the future, "Just building out the infrastructure will create an enormous amount of growth. Add to that the manufacturing that sits on top of that infrastructure and benefits from it; you will get additional growth. Add to that our young population, which is entering the labour force; you get yet more growth. And add to that the capacity to do things more cleverly than we have been doing it, to move up the skill chain or the value-added chain, I think that all those will add to growth."

With respect to the current growth constraints and projections for FY 2013-14, Dr. Rajan said "India would grow somewhere in the 6.1-6.7 per cent band in the current fiscal. On the expected scenario with India’s Industrial Production (IIP) numbers in the coming quarters, he said, "I think that by getting some of the large projects restarted and completed, you will, in a sense, re-energise growth in a number of ways; including the fact that when these projects are completed, their promoters have more cash flow coming in. They can then also sell off some of the debt on these projects to other entities and sometimes even sell off these projects; and thereby liberate or create the financial capacity that they need to undertake new projects."

Dr Rajan is confident that India’s manufacturing industry is expected to grow significantly in the coming years. India has inherent capabilities, and work is underway to improve in three major areas: infrastructure, regulation and skills. According to Dr Rajan, all the three areas would see dramatic changes in the coming ten years. On infrastructure, he said "Initiatives like the Delhi-Mumbai Industrial Corridor will be great enablers for manufacturing companies. On the need for enabling regulation, he pointed to the steps that the government was taking to improve efficiency and bring down regulatory hurdles. With respect to education, Dr Rajan lauded the expansion in higher education and said that the government was simultaneously pushing to improve the quality of vocational education. According to him, this double-barrelled approach would provide the knowhow and skills to boost the manufacturing sector. The interview with Dr Rajan was scheduled as a part of IBEF’s ongoing series titled "Perspectives on Indian Economy", wherein the Foundation engages with acclaimed thought leaders and experts for their views on India’s economic growth story.

IPL Spotfixgate: How it happened, who pulled the strings

In April 2013, secret information was received by Special Cell, Lodhi Colony, Delhi that some members of the Mumbai underworld are involved in match fixing in the ongoing Indian Premier League matches with the conspiring to indulge in active participation of some unidentified conduits / bookies/ players some of who are based in Delhi/NCR. The suspects were kept under watch, during which it was revealed that match fixers and bookies from Delhi, Gujarat, Maharashtra, Punjab etc and some players participating in IPL were spot fixing. Accordingly, case FIR No. 20/2013 dated 09.05.2013 U/s 420/120B IPC PS Special Cell, Delhi was registered on 09.05.2013 and investigation taken up. During investigation it was found that a group of bookies was in touch with various groups of match fixers who were involved in spot fixing in connivance with some team members of Rajasthan Royals namely Sreesanth, Ajit Chandila and Ankit Chavan. The modus operandi adopted to spot-fix during the progress of matches included asking the bowlers to give pre-decided signals with the help of their accessories like wrist watches, wrist bands, neck chains, towels etc. at the time of starting the over. The bowlers were asked to concede at least a given number of runs in a pre-determined and mutually decided over. After receipt of the signal from the bowler, the bookies would bet heavily and make huge profits...Read More

Q1 CY13 gold demand up 32% at Rs. 72,899.4cr: WGC

The latest World Gold Council Gold Demand Trends report for the period January-March 2013, shows a market driven by diverse global demand, and an appetite for owning gold jewellery that continues to grow. Total jewellery demand was up 12% year-on-year in Q1 2013, driven in the main by Asian markets. Jewellery demand in China was up 19% on the same period last year and stood at a record 185 tonnes(t). Demand in both India and the Middle East was up 15% respectively and in the US, demand showed a significant increase, 6%, for the first time since 2005. Demand for gold in China and India was also driven by an increase in bar and coin sales - up 22% year-on-year in China and 52% in India. In the US demand for bars and coins was up 43% compared with the same quarter in 2012. Globally, bar investment was up 8% while official coins (such as American Eagles and Canadian Maple Leafs) were up 18%. Gold held by gold-backed ETFs, which in 2012 accounted for 6% of the world’s gold demand, fell by 177t. Central Banks remained significant acquirers of gold, making purchases in excess of 100t (109t) for the seventh consecutive quarter. Overall total global demand for gold in Q1 2013 was 963t, down 19% from Q4 2012...Read More

Special Stories

Are Nestle, Colgate eyeing Unilever-HUL type buyback deals?

Unilever Plc’s $5.4bn open offer to its Indian subsidiary, Hindustan Unilever, among other such deals has set rumours abuzz of more such deals in the FMCG space in the near future. Bolstered by growth seen in the Indian consumer spending and projection of massive growth projections in the sector, foreign arms of Indian FMCG companies are in for a scramble for an increased share of the Indian FMCG pie. Consumer spending in India increased to Rs. 9.2 trillion in the fourth quarter of 2012 from Rs. 8.2 trillion in the third quarter, according to data from Central Statistical Organisation. And these numbers are bound to go up. In the past five years, the consumer sector has outperformed the market by a whopping 169%. Consumer sector stocks now quote at an 89% premium to Nifty. In November last year, UK-based GlaxoSmithline Plc offered to buy 31.8% stake in its Indian arm to raise the stake to 72.5%. According to FMCG sector analysts foreign parent companies want a bigger pie of the ever increasing Indian consumer pie. Foreign parent companies want a bigger share of the profits by way of higher dividends. Most FMCG companies have posted better than expected numbers for the quarter ended March 31, 2013.   Owing to an excellent state of affairs in the consumer space, there is increased speculation of more Unilever type deals where foreign parent companies would look for increased action. Nestle India and Colgate-Palmolive are likely to pursue Unilever type deals in future, said reports. According to experts, smaller players in the market could be potential takeover targets in the near future.

Is HCL Tech, Infosys in fray for Polaris?

Several companies, including HCL Technologies, Mahindra Satyam and Infosys and L&T, have bid for the services business of Chennai-based software firm Polaris Financial Technologies, according to reports. According to reports, bidders are offering a price that is lower than $400 mn (Rs 2,190 crore) that Polaris was expecting for it. Early this month, Polaris announced a split of its business into two divisions, services and products, with a separate CEO for the services business and individual CEOs for different product lines. Axis Bank is advising Polaris on the transaction, says report.

Securitisation volume of retail loans dips 14% in FY13: ICRA

Issuance volume of rated transactions in the Indian securitisation market (including rated bilateral assignments)1 fell by 20% in FY20132 over the previous fiscal to Rs. 30,250 crore. This decline was mainly because of single corporate loan securitisations [also known as Single Loan Collateralised Loan Obligations (CLOs) or Loan Sell-Offs (LSOs)] completely stopped while some bilateral loan pool assignments were done on an unrated basis. The volume of securitisation of retail loans (both Asset-Backed Securitisation or ABS, and Residential Mortgage-Backed Securitisation or RMBS, cumulatively) declined by 14% in FY2013. During FY2013, banks were the key investors in securitisation transactions. With bank finance to NBFCs no longer qualifying as "priority sector lending (PSL)", investing in securitisation transactions—with the underlying comprising eligible loan receivables—continued to be the key route left for banks to meet their shortfall in priority sector lending targets. Going forward, ICRA expects the market dynamics to alter again following the clarity in the taxation regime for securitisation, brought in by the Union Budget 2013-14. The new tax treatment should open the path for mutual funds to invest in securitization transactions. Nevertheless, the same is feared to be a negative for banks, since there could be a proportionate disallowance of expenses incurred in respect of such investment—thus having a significant impact on the post-tax yield on the transactions.

See double-digit RoEs for NBFCs in medium-term: ICRA

NBFCs have not been insulated from the operating environment and have seen a slowdown in growth and an increase in delinquencies. However, rise in delinquencies and credit costs for NBFCs have been on expected lines, says ICRA in its quarterly update note on Retail Non Banking Finance Corporations and Industry Outlook for the period ended December 31, 2012. In light of diversity of the loan book and close monitoring of the portfolio by NBFCs, ICRA expects most NBFCs (barring mono-line Gold loan companies) to report double digit Return on equity and maintain prudent capitalization levels in the short to medium term. NBFC retail credit grew at a moderate rate of 15% during the nine months of FY 2012-13 to Rs. 3.3 trillion as on December 31, 2012. The growth has been significantly lower than 32% and 34% witnessed during FY 2011-12 and FY 2010-11 respectively. Asset quality indicators of the retail focused NBFCs after witnessing an improving trend over the period 2009-2012, started deteriorating in FY2012-13 on account of the weak operating environment, with Gross NPA% increasing from 1.6% in March 2012 to 2.2% in December 2012. As per ICRA estimates, 90+ delinquencies for NBFCs have deteriorated more sharply in the corresponding period. Segments which were more affected include the gold loans, commercial vehicle, construction equipment segment and Loan against property. The average 90 day+ delinquencies for gold loan companies increased from around 2.8% in March 2012 to ~8% in March 2013.

A change in NPA recognition norm as proposed in the draft guidelines for the NBFC sector, if implemented, could lead to a spike in the gross NPA level for NBFCs (from 2.2% as on December 31, 2012) in the short term; as depending on the asset class, 90+ days’ delinquencies are typically 1.5-3.5 times (average 2 times) the 180+ days’ delinquencies. However, the percentage, in ICRA’s view, would settle at a lower level over the medium term as NBFCs realign their monitoring and recovery systems to the 90-day format and also due to higher recoveries. In the case of housing finance companies (HFCs), which migrated to the 90-day NPA recognition norm from March 31, 2005, the gross NPA percentage rose from 3.6% in March 2004 to 6.2% in March 2005 and subsequently declined to 4.5% March 2006.

Diesel price hike is credit positive for Indian Oil cos: Moody's

Last Friday, the Indian government allowed the country’s three oil marketing companies to raise the retail price of diesel fuel by INR0.90 per liter. The increase came against the backdrop of declining global diesel prices over the past several months, which, when combined with the price hike, has reduced the loss, or "under-recovery level," at which diesel is sold in India. Lower under-recovery levels are credit positive for the three state-owned oil marketing companies – Bharat Petroleum Corporation Limited (Baa3 stable), Indian Oil Corporation Ltd. (Baa3 stable) and Hindustan Petroleum Corporation Ltd. (unrated) – and for state-owned upstream company Oil and Natural Gas Corporation Ltd. (ONGC, Baa2 stable). With the price hike, diesel prices have risen a cumulative Rs2.25 per liter since January, which translates into an approximately Rs180 bn ($3.2 billion) decline in under-recoveries. In addition, international diesel prices have fallen by about INR3.50 per liter, or 9% since January. As a result, the under-recovery on diesel has now dropped to INR3.00 per liter versus INR9.00 in January. In India, the country’s three fuel retailers sell diesel, kerosene and domestic liquefied petroleum gas (LPG) at government-set discounted prices. The government and the country’s upstream companies share the under-recoveries, or the gap between the reference price, which is based on price of the products in the international markets, and the lower selling prices. The diesel price hike will reduce the oil marketing companies’ borrowings, which they typically use to fund the under-recoveries until the government reimburses them six to nine months later. The higher diesel price will also help lower the companies’ interest expenses, for which the government does not compensate the companies...Read More

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