The Recognition of Good Governance by PM - VRK100 - 15Sep2012

Rama Krishna Vadlamudi, HYDERABAD   15 September 2012
www.ramakrishnavadlamudi.blogspot.com

            When the quick-tempered sage Durvasa entered sage Kanva’s hermitage; Shankuntala, the beautiful young lady, is in deep thoughts pining and day dreaming about her beloved husband, Dushyanta, the king of Hastinapura. Slighted by her absent-mindedness, sage Durvasa curses Shakuntala that her lover would forget her. At the end of this well-known story, Abhijnanashakuntalam*, written by renowned Sankrit poet Kalidasa, Durvasa’s curse is lifted as Dushyanta recognizes and embraces his wife Shakuntala upon seeing the ring he gifted her.

            India’s prime minister, Mr Manmohan Singh, seemed to have caught up in Durvasa’s curse for a considerable time, if not as long as King Dushyanta.

            At long last, Manmohan Singh seems to have woken up from a self-imposed curse and has come back to the centre-stage of governing the country once again by pushing through various reforms amidst raucous opposition from other political parties. In his earlier avatar as finance minister in the early 1990s, he loved economic reforms and brought in path-breaking decisions which have now put India on a pedestal in the international arena. He has earned good reputation for his personal honesty; and as an economist and RBI governor also.  

            But in his new avatar as India’s prime minister since 2004, he has given the impression that his government was a lame-duck government hemmed in from all sides by various controversies over misallocation of 2G spectrum and coal blocks; and various policy indecisions. Another impression was that he was protecting some powerful and dishonest ministers and not taking any collective responsibility for the actions and misdeeds of his government.

            Owing to his stony silence and inability to communicate with common people, the general perception is that he is at the helm only to serve the needs of the ruling Congress (I) party headed by Sonia Gandhi and ultimately it is expected that he would pass on the baton to Rahul Gandhi, son of Sonia and Rajiv (late) Gandhi. However, this is only in the realm of speculation.

(*Abhijnanashakuntalam is loosely translated as Recognition of Shakuntala)

Pushing for Economic Reforms

            India was racing like a gazelle posting record economic growth rates of 8 to 9 per cent between 2003-04 and 2007-08, but the gazelle was caught by a large Indian python of indecision, misallocation of natural resources, dithering and prevarication – constricting India’s economic growth rate, which has fallen to as low as 5.3 to 5.5 per cent in the recent two quarters.

            After a gap of almost two years, the self-imposed curse is lifted for the good of the country. And Manmohan Singh’s government has now recognized the importance of providing good governance to Indians. In the last few days, his government has taken a number of measures aimed at boosting India’s economic growth, controlling fiscal deficit and providing more jobs to the unemployed.

            On Thursday, the 13^th of September 2012, diesel price was increased by Rs 5 per liter (including taxes) aimed at slashing the fiscal deficit and reducing the burden on public sector oil marketing/upstream oil companies.

            The next day the government has decided to allow foreign direct investment (FDI) in multi-brand retail and civil aviation sector and enhanced the ceiling for foreign investment in broadcasting sector (see details below).

            The Manmohan Singh government received scathing criticism for almost two years for lack of economic reforms. Now, his government seems to be serious in reversing the perception. The PM himself described the latest decisions as:

“The Cabinet has taken many decisions today to bolster economic growth and make India a more attractive destination for foreign investment. I believe that these steps will help strengthen our growth process and generate employment in these difficult times. I urge all segments of public opinion to support the steps we have taken in national interest.”

A gist of cabinet’s decisions on 14 September 2012:

1. FDI In Multi-Brand Retail:

ü      Foreign Direct Investment of up to 51 per cent is now allowed in multi-brand retail (This decision was kept in abeyance since November 2011 in the face of opposition from various quarters)

ü      State Governments can allow setting up these retail outlets subject to state laws

ü      Such retail outlets can be set up only in cities with population of more than 10 lakh as per 2011 Census

ü      At least 50 per cent of the total FDI brought in must be spent in ‘backend infrastructure’ – within three years of the induction of FDI

2. FDI in Civil Aviation sector:

ü      Foreign airlines (existing policy allows only foreign investors other than airlines to invest in aviation sector) are now allowed to make FDI of up to 49 per cent in schedule and non-schedule airlines

ü      For example, British Airways can now invest in Kingfisher Airlines or Spicejet Airlines (not that the foreign airlines would find it attractive to invest in debt-ridden and loss-making Indian companies in the aviation sector)

ü      The 49 per cent limit would subsume FDI and FII investment

ü      Substantial ownership and effective control shall rest with Indian nationals

ü      The total FDI inflows into the air transport sector, during January, 2000 – April, 2012, were USD 434.75 million – which is just 0.25 percent of the total FDI inflows

3. FDI  in Power Trading Exchanges

ü      Foreign investment is now permitted up to 49 per cent (26% FDI & 23% FII limit)

ü      As per extant policy, FDI of up to 100 per cent in the power sector (except atomic energy) is already permitted

ü      As per extant policy, foreign investment of up to 49 per cent (26% FDI limit and 23% FII limit) is already permitted in stock exchanges and depositories

4. Review of FDI policy in Broadcasting sector:

ü      Foreign investment limit is now raised from the current 49 per cent to 74 per cent for companies operating in direct to home (DTH), teleports and cable networks

ü      Foreign investment of up to 74 per cent is now permitted in Mobile TV

5. Disinvestment of 9 to 12 per cent is permitted in four public sector companies, namely, Hindustan Copper, MMTC Ltd, Oil India, and National Aluminium Company.

Support for Reforms

            As described by the prime minister, these decisions are to be welcomed by all people, no doubt. For example, the diesel subsidy burden is taking a heavy toll on companies, like, BPCL, HPCL, IOC, ONGC, GAIL and Oil India. These companies are unable to invest, at the desired level, in new capacities or explorations. This has negatively impacted the nation’s energy security in the last nine years. Just consider the total loss suffered by BPCL, HPCL and IOC for the April-June 2012 quarter – it’s a staggering Rs 40,500 crore!

            The people need to ask who is providing for these subsidies and from whose pockets the subsidies are recovered. The truth is that the government is giving from one hand and taking away the benefit from another hand and the net result is zero benefit to common people. We need to understand this basic reality.

To know more about the oil subsidy burden, just click: http://ramakrishnavadlamudi.blogspot.in/2010/02/oil-subsidy-burden-why-kirit-parikh.html

The Case for FDI in multi-brand retail sector

            As per the latest FDI policy, respective state governments are vested with powers to give licenses to companies that want to bring in FDI in multi-brand retail outlets. The central government’s decision to allow FDI is enabling provision for state governments to act. If a specific state government is not comfortable with central government’s FDI policy, the state government is free to not allow such outlets.

            But one important point to note here is that in the last decade, most of the state governments have been competing with one another to attract capital investments to their own states by providing a number of incentives. Gujarat, Maharashtra, Karnataka and Tamil Nadu state governments are in the forefront to entice large companies of late. So, competition may force majority of states to allow FDI in multi-brand retail outlets.

            India is hungry for capital as it is deficient in it. Foreign investment, mainly foreign direct investment or FDI, helps the country in generating employment, providing innovation and ushering in new products for consumers.

            As part of the new policy, a lot of investments will be made in the back-end infrastructure, which includes, investment in processing, manufacturing, distribution, design improvement, quality control, packaging, transport, logistics, storage, ware-house, agriculture market produce infrastructure; excluding investments on front-end units.

            Without any doubt, the new FDI policy on multi-brand retail outlets will be beneficial to farmers as well as consumers.

Is there any flipside to FDI in retail?

            Yes, there will be some negatives. We need to prepare ourselves for some small sacrifices for the sake of greater good.  India is evolving and we need to welcome a lot of changes. Some opposition parties, especially the Bharatiya Janata Party, are giving the impression that this new policy will result in loss of livelihood for millions of people. This is a blatant lie on the part of BJP and other parties. It is very clear that BJP is opposing the government’s policy just for the sake of opposition. The party is resorting to a disinformation campaign.

            When computerization was introduced in the banking sector, there was a huge opposition to it. Computerization has not resulted in job losses. The sons of trade union leaders who stridently opposed bank computerization have now been working in large multi-national IT companies! The trade union leaders just bluffed the nation at that time.

What are the political ramifications?

           

            The ruling Congress (I) party seems to have taken a calculated risk – they may have consulted some of their allies before pushing for economic reforms. Or, the ruling party may be thinking enough is enough. Mamata Banerji, chief minister of West Bengal, expects some economic revival package for West Bengal and so is Uttar Pradesh state government led by Samajwadi Party. May be, the central government will appease the allies through certain measures. It is hoped the present UPA government will last its full term till 2014. But watch out!

Conclusion

            Real foreign investment, however, will take some more time to come. It may take as long as six quarters to two years for actual setting up of multi-brand retail outlets in India. Because the companies have to get a lot of approvals and various conditions are attached to the policies. We need to be realistic about this.

            Diesel price increase of Rs 5 per liter is only symbolic as it would not bring down the fiscal deficit considerably. However, it needs to be grudgingly accepted that some times symbolism or tokenism helps to some extent.

            At long last, the central government seems to have woken up from the deep slumber by pushing for economic reforms. The government’s policies for allowing FDI in multi-brand retail and civil aviation sectors and raising diesel prices are to be welcomed wholeheartedly. Some of these are enabling provisions for attracting foreign investment to Indian shores. These measures will definitely enhance India’s attractiveness for foreign investors.

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Notes: FDI          – Foreign Direct Investment; FII               – Foreign Institutional Investors and RBI – Reserve Bank of India. Hastinapura of yesteryears is considered to be modern Delhi.

Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the stock market going up. The views of the author are personal and he changes his views on the market and economy very quickly depending on various factors. Readers or investors must consult their certified financial advisors before taking any decision on their investments.

India's New Normal GDP Growth of 5-6% - VRK100 - 12Sep2012

Rama Krishna Vadlamudi, HYDERABAD   12 September 2012
www.ramakrishnavadlamudi.blogspot.com

India’s GDP growth rate seems to have stabilized at 5.5 per cent or between 5 to 6 per cent. The gross domestic product or national income growth rate is below six per cent for the second time in a row, after reaching lowest multi-year growth rate of 5.3 per cent in the January-March 2012 quarter. The growth rate for April-June 2012 is at 5.5 per cent, according to latest official estimates announced on 31 August 2012. By all indications, it seems 5 to 6 per cent GDP growth rate for India is the ‘New Normal,’ as they say. What are the reasons for the slowdown and what is in store for India’s future growth? Find out.

First Quarter GDP

The first quarter for India is from April to June. During 2012-13, the first quarter GDP recorded a growth rate of 5.5 per cent. This is driven by construction sector, which clocked a growth rate of 10.9 per cent over the first quarter of 2011-12. Other sectors that contributed to the 5.5 per cent growth in the first quarter are: finance, insurance, real estate & business services (10.8 per cent); community, social & personal services (7.9 per cent); and electricity, gas & water supply (6.3 per cent).

As can be seen from the following graph, the growth rate in the first quarter of current year has fallen to 5.5 per cent from a high of 9.2 per cent in the fourth quarter of 2010-11, showing a rapid deceleration in the GDP growth rate.

 Note: GDP at factor cost at constant prices (2004-05). Data from CSO.

Investment Activity Hits Rock Bottom

The most worrying factor is the lack of any meaningful growth in investment activity in the country. Due to a virtual halt in government clearances for new projects, lack of environmental approvals, bottlenecks in coal supply linkages and other policy inactions, new projects are not coming up at the desired level in the economy. This is shown in the gross fixed capital formation (GFCF), which is a measure of total investments made in the economy. It is measured by the total value of all fixed assets acquired less disposals, plus certain additions.

At constant (2004-2005) prices, the GFCF is estimated at Rs 4,49,701 crore in the first quarter of 2012-13 as against Rs 4,46,754 crore in the first quarter of 2011-12, showing a dismal growth of less than one per cent. This dismal situation is corroborated by other indicators, like, IIP.

In terms of GDP at market prices, the rates of GFCF at current and constant (2004-2005) prices during Q1 of 2012-13 are estimated at 29.9 per cent and 32.8 per cent, respectively, as against the corresponding rates of 31.2 per cent and 33.9 per cent, respectively in Q1 of 2011-12.

What of the Future?

The future for new investment activity is dicey. The Government of India seems to be in no mood to revive the slowing economy despite hopes of some policy initiatives from the government. India’s prime minister, blames the opposition parties for lack of political support to policy reforms; while the opposition parties are pointing their fingers at the prime minister; while the truth lies in between.

Various estimates put out by different agencies put India’s GDP growth for the current financial year 2012-13 at between 5 and 6.5 per cent. The most pessimistic estimate is from Morgan Stanley at 5.1 per cent. Other estimates are:

Ø      Reserve Bank of India                                6.5%

Ø      Crisil Ltd, Moody’s & CLSA                        5.5%

Ø      Citigroup                                                        5.4%

The reasons attributed by the private agencies for their pessimism are:

Ø      Government’s lack of control on fiscal deficit and growing public debt

Ø      Sticky inflation which remains at elevated levels of 7 per cent or more

Ø      Policy inaction from the Government on various reforms or measures

Ø      The continued dissonance between India’s ruling and opposition parties

Ø      The debt problems in eurozone and the US

My Take on the GDP Estimate

A wise man has once said that the best estimate for the next value is the same as the current value. The latest quarter growth rate is 5.5 per cent and so the best estimate for the next quarter could be 5.5 per cent, which gives an average of 5.5 per cent for the first half-year 2012-13 of 5.5 per cent.

What about the next half-year? Let us see some past data as given below:

        Note: GDP at constant prices (1999-2000) for years from 2006-07 to 2008-09 and at constant

                  prices (2004-05) for years from 2009-10 to 2011-12. Data source: CSO.

The above graph shows in the last two years, only two years (2009-10 and 2010-11) have seen GDP growth rates higher in second half-year than that of first half. So my presumption is that second half growth could be much lesser than that of first half, though absolute GDP in second half is higher than that of first half.

Even if we assume that the Government takes some policy initiatives to revive the economy, it will take another three to four quarters to reflect in the GDP figures. Considering the fact that the economy recorded a growth of 5.7 per cent in the second half of 2011-12, my guesstimate is that the economy may not be able to do any better in the second half of 2012-13.

Overall, it is safe to predict that India’s real GDP for the financial year 2012-13 is likely to grow by 5.5 per cent. As we have seen repeatedly in the past, the Government and its cheerleaders will try to talk up the growth rate without any concrete measure on the ground level. As a nation we muddle on with our dithering, the country’s poor and lower middle classes will continue to suffer with higher food prices, malnutrition, poor healthcare and skills deficit.

The 2012-13 GDP estimate of 5.5 per cent is the ‘New Normal’ for India.

My assumptions in arriving at the above GDP estimate are:

1). The Government will continue with its ‘dithering’ over policy reforms despite all talks to the contrary as it is bogged down in corruption scandals

2).  India’s ruling party seems to have lost its credibility with the common people and the prime minister has given the impression of being directionless and politically incompetent to take any policy reforms

3). The fiscal room available to revive the economy is limited at this point of time as the fiscal deficit is going to be very high in future

4). The Government will be unable to reduce its subsidy burden from fuel (diesel and LPG especially), food and fertilizers

5). Any downgrade of country rating by Standard & Poor’s will further weaken the sentiment about India in the short term

6). No doubt this is a crude attempt at estimating the GDP figures

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Sorry friends, if I sound very gloomy about the economy,

but this is the reality and let us face it squarely!

CSO – Central Statistics Office of the Government of India

IIP – Index of Industrial Production

Graphs: Author

Data source: CSO

Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the general stock market going up. The views of the author are personal and he changes his views on the market and economy very quickly depending on various factors. Readers or investors must consult their certified financial advisors before taking any decision on their investments and the investment should be in line with their risk profile & risk appetite and their general market perception.

You can access my articles on financial markets at:

www.ramakrishnavadlamudi.blogspot.in

Know Your Company-Amara Raja Batteries-VRK100-12Sep2012

Rama Krishna Vadlamudi, HYDERABAD   12 September 2012
www.ramakrishnavadlamudi.blogspot.com

When I first analyzed the stock of Amara Raja Batteries three years back (18 September 2009), the stock price of the company was quoting at Rs 140 and the Sensex was around 16,700. In the last three years, the Sensex barely moved with a return of less than eight per cent, while the company’s price has given a phenomenal return of 175 per cent – that is, a compounded annual growth rate of 40 per cent.

After such a tremendous gain, is the company’s valuation gone too far ahead of its fundamentals or is the current valuation right for accumulating the stock? Find out:.

Promoters and Shareholding Pattern:

The total promoter shareholding in Amara Raja Batteries Limited is 52 per cent as at the end of 30 June 2012. Indian promoters, Galla family, hold 20.5 per cent and another 31.5 per cent is held by a foreign promoter company, Johnson Controls. Johnson Controls is a leading US player in the world with superior technology in batteries. Foreign Institutional Investors (FIIs) hold around six per cent and Indian mutual funds hold 19 per cent stake as on 30 June 2012.

               

Pledge of Shares by Promoters:

Out of Indian promoters’ share of 20.5 per cent of the total paid-up equity, the Indian promoters have pledged 16.3 per cent of their holding or 3.34 per cent of the total paid-up equity capital.

Business Model:

The company gets its revenues from two segments, namely, industrial and automotive battery divisions. In the industrial segment, the company is the largest supplier of batteries to Telecom and UPS sectors and to Indian Railways. Its brands are ‘Powerstack’ and ‘Quanta.’

The company is the second largest player in the automotive battery business in India. The major OEM (original equipment manufacturer) customers include Ford, Maruti Suzuki, Hyundia, Honda, Tata Motors, and TAFE Tractors. Its powerful brand in this category is ‘Amaron.’ The unorganised sector  accounts  for a large proportion of the automotive battery segment.

Capacity Addition:

The company proposes to invest an amount of Rs 190 crore during the next 12 months for augmenting its capacity. The funding, the company hopes, will be through internal accruals.

Retail Network and Plant:

The company has got a network of 274 Amaron franchisees and 18,000 Amaron retailers and 900+ PowerZone retail network for rural and semi-urban areas.

The company’s manufacturing facility is located near Tirupati, Andhra Pradesh, India.

Growth Drivers for the Company:

ü  The company’s ever-increasing distribution network across the country

ü  Reserve Bank of India is promoting white-label ATMs, which may increase demand for batteries. Banks too are fast expanding their ATM network.

ü  Government of India’s initiatives to increase e-governance and broadband connectivity in the country

ü  3G and 4G rollout by Indian telecom operators is likely to increase the demand for batteries

ü  Replacement demand for telecom operators

ü  Improving market share in the automotive battery business by expanding Amaron franchisee networks and after-sales service

ü  Growing IT and ITeS sectors and rural tele-density

ü  Mounting  power  deficit, enhancing the need for  back-up  batteries  in critical equipment and processes

ü  Household sector’s usage of batteries is also going up due to severe power outages

Risks associated with the company:

Slowdown in India’s GDP: India’s national income or gross domestic product is showing increasing signs of a serious slowdown. After recording lowest multi-quarter growth rate of 5.3 per cent in January-March 2012 quarter, the real economy expanded by 5.5 per cent during April-June 2012 confirming the fears of a structural decline in GDP in the backdrop of rising fiscal deficit, ballooning current account deficit, elevated inflation, steep depreciation of the rupee, policy inaction from the Government and sovereign debt and economic crisis in the eurozone. India’s falling GDP is likely to adversely impact sales and profit margin of the company.

Raw  material procurement: The key input and major cost element – more than 60 per cent – in battery manufacture  is  lead  and lead alloys. Any rise in lead prices will adversely impact the company’s profitability. Commodity prices are vulnerable to global demand and supply.

Forex losses on account of net forex outgo: The foreign exchange gain during 2011-12 is Rs 12.4 crore on account of cost of raw materials, revenues and others. This may turn adverse in the next few quarters depending on rupee movement and company’s hedges. Net foreign exchange outgo during 2011-12 was Rs 610 crore due mainly due to procurement of raw materials from abroad.

Cash Flow:

Net cash inflow from operating activities for the year 2011-12 is Rs 296 crore, net cash outflow from investing activities is Rs 70 crore and net cash outflow from financing activities is Rs 43 crore. The cash and cash equivalents as at the close of 31 March 2012 are Rs 229 crore.

The company has been reducing its debt using the comfortable cash flows. The total debt of the company is Rs 86 crore (31 March 2012) and its debt-equity ratio is at a very comfortable 0.10.  

Competition:

Exide Industries is the leading player in batteries market in India. The second largest player is Amara Raja Batteries. Exide is a fully integrated player with some backward integration into smelters. Exide enjoys better market share and brand power compared to Amara Raja Batteries.

Share Price Information:

Amara Raja Batteries Limited is proposing to undertake a stock split, by sub-dividing the company’s equity share of face of Rs 2/- into two equity shares of Re 1/- each. The record date is 26 September 2012 and the Ex-date is 25 September 2012. The 52-week high of the stock price is Rs 403.80 (16 August 2012) and the 52-week low is Rs 190 (19 December 2011).

Latest Quarterly Results:

The company recorded a net profit of Rs 76 crores, showing a growth of 95 per cent compared to the previous quarter of last year; while the revenues are at Rs 694 crore, indicating a growth of 32 per cent. The company has been showing good and consistent growth in sales and net profit during the last four quarters.

Valuation and Prospects:

The current market price is Rs 383 per share at the close of 12Sep2012. In the last three months, the company’s stock has given a return of around 25 per cent. Its current market cap is Rs 3,270 crore. The earning per share (trailing twelve months) is Rs 29.5 and the price-earnings ratio works out to 13; whereas at the book value of Rs 96.4 per share, the price-book value ratio works out 3.97. The company paid a dividend of Rs 3.78 per share in August 2012, which works out to a dividend yield of around one per cent.

The comparable data for its main competitor, Exide Industries, are as follows: P/E ratio of 25.8, and a P/B ratio of 4.47. Prima facie, the data indicates the valuation of Amara Raja Batteries is cheaper compared to Exide Industries. However, Exide Industries’ premium valuation stems from the fact that its market share and brand value are much bigger compared to that of Amara Raja Batteries. That way the higher premium for Exide Industries is justified.

What should investors do in such circumstances? The financial position of Amara Raja Industries as evidenced by its balance sheet, profit and loss account and cash flow statement is very strong. The company’s business model is sound and its track record in sales and net profit for the last four years indicates that the company has been gaining market share through introduction of new products and wider reach to new and untapped customer segments. The booming automotive industry in India also has helped the company.

While the past has been good, the future appears to be tricky considering the fact that Indian economy has decelerated substantially in the past two quarters. The slowing economy will have negative impact on the automotive industry as well as the company. In addition, rating agencies like, Standard and Poor’s, have put the outlook on India as negative and they further cautioned that they may downgrade India’s country owing to ballooning fiscal deficit, steep rupee depreciation and inflation higher than the comfort zone of the Reserve Bank of India and the Government of India. If and when the threatened downgrade happens, it will have negative repercussions on Indian stock market.

The company’s stock price will continue to do well in future provided the company is able to increase its market share and if and when the economy starts to expand at higher growth rates of 6.5 per cent or 7.5 per cent. Considering the fact the Indian economy’s growth path is not showing any signs of sudden acceleration, investors are better off if they wait for some price correction in Amara Raja Batteries’ equity shares. My sense is that investors can pick up the stock in the range of Rs 310 and Rs 340 provided the company continues to maintain its present position in the battery industry.

My previous article on Amara Raja Batteries can be reached at:

http://ramakrishnavadlamudi.blogspot.in/2009/12/amara-raja-batteries-snapshot-vrk100.html

Disclosure: The author does not hold any shares in the company, nor in Exide Industries.

Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the general stock market going up. The views of the author are personal and he changes his views on the market very quickly depending on the then current situation. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception.

Sources: NSE, BSE, company’s annual report, etc.