Beyond Market - Issue 63_2 - Nirmal Bang

For Pr ivate Circulation

Volume 1 Issue 63

02nd M ar ’12

OPTING OUT The tumultuous stock market is forcing several companies to delist themselves from the bourses

DB Corner – Page 5 Bailout Amid Uncertainty Despite receiving the second bailout package, Greece’s problems are far from over and it could take years for the country to recover from the huge debt pileup – Page 6 Fast-Tracking Disinvestment SEBI has come up with new measures to help companies comply with minimum public shareholding norms, which even the government is likely to use to meet its disinvestment targets – Page 9 Opting Out The tumultuous stock market is forcing several companies to delist themselves from the bourses – Page 12 On An Oriental Odyssey Indian pharma companies are lapping up the opportunities offered by Japan – Page 15

Volume 1

Issue: 63, 02nd Mar ’12

Editor-in-Chief & Publisher: Rakesh Bhandari Editor: Tushita Nigam Senior Sub-Editor: Kiran V Uchil Art Director: Sachin Kamble Junior Designer: Sagar Padwal

Noble Intensions, Doubtful Outcome While things look good on paper, only the execution of the National Water Policy, 2012 will reveal how successful it will be – Page 18 Smooth Drive To Road Finance Despite tough market conditions, companies from the road sector are doing remarkably well and have found newer ways of raising funds for their projects – Page 22

Marketing & Operations: Savio Pashana, Afsana Tamboli

Shockproof Ready: Munjal Showa Munjal Showa is expected to demonstrate healthy performance on the back of low gearing ratio, stable margins and support from the promoter group – Page 25

Research Team: Sunil Jain, Silky Jain, Dipesh Mehta, Amrita Burde, Anand Shendge, Manav Chopra, Vikas Salunkhe

Thrice The Gain Investors can choose from a host of mutual fund schemes that invest in debt, equity and gold – Page 30

HEAD OFFICE Nirmal Bang Financial Services Pvt Ltd Sonawala Building, 25 Bank Street, Fort, Mumbai - 400001 Tel. 022-3926 7500/7501 CORPORATE OFFICE B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013 Tel: 022 - 3926 8000/8001 We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons... Web: www.nirmalbang.com [email protected] Tel No: 022 - 3926 8047

Beyond Market 02nd Mar ’12

Choice Of Plenty Fund of funds have done remarkably well in present times and can therefore be considered for the purpose of investment – Page 32 Winner All The Way “A portfolio manager’s job is not just to select a stock but to identify its merit well ahead of time”, says Vijai Mantri, MD and CEO, Pramerica Asset Management Pvt Ltd – Page 36 Important Statistics For The Fortnight Gone By – Page 40 Style Quotient Unlike commonly used strategies like value, growth, top-down and bottomup investing, there are other effective methods of investing too that merit a mention – Page 41

It’s simplified...

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A company which is listed on a stock exchange may not stay that way for eternity. For, a time comes when being delisted is a better option than having the public as stakeholders in the company. While a number of Indian as well as multinational companies have gone public in the last decade or so, some others have delisted themselves from the exchanges. This means that the listed companies got their shares permanently removed from the bourses. However, the rationale for delisting could differ from company to company. But broadly speaking, a company chooses to delist for reasons like depressed market conditions and undervaluation of the company, to name a few. The cover story tries to decipher why companies are taking the delisting route and getting off the bandwagon of listed companies. There is an interesting article on debt-laden Greece and its problems, which are far from over despite the second bailout package. Also, in the magazine are articles on the new measures introduced by the markets regulator – Securities and Exchange Board of India (SEBI) aimed at helping companies to comply with the minimum public shareholding norms, which could also help the government in meeting its disinvestment targets, and details on the draft National Water Policy 2012. Among sectors, there are articles on the pharma sector which states that the Japanese market has caught the fancy of Indian pharma companies as they see opportunities in the land of the rising sun. There is another piece on road financing that details ways by which road infrastructure companies are raising money to fund projects awarded to them by the National Highway Authority of India (NHAI). The Beyond Basics section carries an interesting article on mutual funds that are a combination of equity, debt and gold, thus giving the investor the advantage of a equity and debt composition as well as capital appreciation of gold in the portfolio. Another article on fund of funds (FoF), a mutual fund category, shows how this investment tool gives investors the option of investing in a portfolio of mutual fund schemes. Finally, the Beyond Work section in this issue features Mr Vijai Mantri, MD and CEO at Pramerica Asset Management Pvt Ltd, wherein he shares his journey from being a marketing and sales person to becoming the MD and CEO of a financial services firM.

Tushita Nigam Editor 4

Beyond Market 02 Mar ’12


Fresh positions can be taken on declines.

T

he global markets have been moving up in recent times. And the US economy continues to show signs of improvement. Even the European sovereign debt crisis has been addressed at the moment, which is reflecting on their equity indices. The Indian markets too have performed very well since the beginning of the year 2012 due to sustained buying by Foreign Institutional Investors (FIIs). However, the last few days have seen a sharp correction mainly due to rising crude oil prices. The markets are weak at the moment. The Nifty is expected to trade between the levels of 5,150 and 5,420. Traders and investors are advised to avoid buying at upper levels. Fresh positions can be taken on declines and the maximum downside is around the 5,150 level. The markets look good on declines. Stocks like Reliance Power Ltd (LTP: `110.05), Wockhardt Ltd (LTP: Beyond Market 02nd Mar ’12

`458.88), Reliance Infrastructure Ltd (LTP: `540.80), Sun Pharmaceutical Industries Ltd (LTP: `547.55), Tata Global Beverages Ltd (LTP: `113.30), Tata Motors Ltd (LTP: `260.05) as well as Tata Motors -DVR-A-Ordy (LTP: `134.95) look good on declines from both trading and investment perspectives.

rates is expected by the streets. However, high crude oil prices and a probable increase in duties in the budget could lead to higher inflation, which may, therefore, see the RBI keeping rates unchangeD.

The coming fortnight is likely to see much activity as the results of the State assembly elections are going to be declared. So are announcements on the monetary policy review by the Reserve Bank of India and the Union Budget by the Finance Ministry. All these events are likely to give direction to the bourses in India. In the Union Budget, the Finance Minister is quite likely to reduce the fiscal deficit by increasing excise duty and service tax. Further, he could also come up with measures to boost infrastructure and power sectors, say experts. As far as the monetary policy is concerned, a reduction in interest

Sensex: 17,445.75 Nifty: 5,281.20 (As on 27th Feb ’12) Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.


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BAILO U

INTY TA R

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ID UNC E AM

Despite receiving the second

EC GRE E

bailout package, Greece’s problems are far from over and it could take years for the country to recover from the huge debt pileup

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he ongoing economic crisis in the Western world, particularly in Europe and the US has steered talks of a sovereign default. Importantly, Greece, which has been making news of possible default, has only increased the doubts in the minds of investors and policy makers. It is almost impossible to believe that a nation could default on its sovereign debts, which are considered to be risk-free, globally. Bonds issued by national governments in foreign currencies are referred to as sovereign bonds. Investing in government debts is considered to be the safest investment given the ability and the credibility of any government. 6


But historically, that is not true. Even reputed nations and governments of some big countries have defaulted on their debt in the event of a crisis. In fact, many of them have defaulted in the past, eroding investor confidence. With this background it is obvious that an increasing number of investors are taking the crisis in certain Euro nations with a pinch of salt. WHY WORLDS FEAR Almost all European nations, except UK and France, have in the past either declined to pay or defaulted or have restructured their sovereign debt. The situation has been chronic in Latin American nations that have defaulted or restructured debts several times.

Sovereign default could have a devastating impact on the economy and on those who hold such bonds. Companies, banks, fund houses and others who have been holding such bonds issued by the government could come under severe pressure. Even more threatening is the fear as to what would happen if the banks that hold such bonds are unable to repay the deposit to the general public. This would have come true if banks had parked funds in government debts that are no longer solvent. And it would have a ripple effect on the economy, causing serial defaults, bringing the banking system to a halt. There are instances where foreign It’s simplified...

capital is taken out from the country in the event of sovereign default, leading to pressure on currencies and balance of payment situations. In extreme cases, which are highly possible, there could be riots and a war-like situation erupting between the debtor and the creditor nation. WARS AND RIOTS Riots on streets are common today. It is more in Europe, especially Greece. Sovereign defaults have also stoked wars. Readings suggest that Britain had many a times invaded countries that failed to repay foreign debts like in the case of Egypt in 1882. There were instance of the US invading Venezuela in the 1890s and of Haiti (Republic of Haiti) around 1915. Germany is another classic case, which after its loss in World War I, suffered serious setbacks as a result of its new obligation or carried burdens in 1920 to pay war reparations to France and other victors as terms of surrender. The war was fought on borrowed money. It initially kept on reducing its obligations, but it was becoming a challenge with each passing day for Germany, which was devastated after the War especially in the light of the huge loan book. In 1921, Germany started paying its debt in kind by transferring coal, iron ore and woods. However, that too was not viable and later the government refused to pay, which led France and Belgium to capture Germany’s industrial land, Ruhr. Germany is not a case in isolation. Turkey, Bulgaria, and Austria too denied repaying debt to the enemy country creditors at the start of the First World War. A similar thing happened during the Second World War when Italy, Turkey and Japan refused to pay. Typically, during war times, nations borrow very heavily at Beyond Market 02nd Mar ’12

higher rates, which lead many nations to accumulate huge debts in the books, not viable in the post-war scenario causing default. TAKING THE CUT Rather than entirely defaulting, countries in the past have also sought a cut in the overall debt from creditors and have succeeded at it on most occasions, as creditors hoped of recovering something instead of nothing. Argentina did it during the 1998 economic crisis when its economy shrank due to the fall in exports and export competitiveness caused erosion of foreign investors’ confidence in the country. Between 1998 and 2002 its economy shrank more than 18% and there was wide unemployment and several institutions filed for bankruptcies. The country which attracted foreign money in the late 1990s was on the verge of bankruptcy as foreign investors started withdrawing their money. At one point, it was paying an interest of almost 75% to stop the flight of foreign capital. But to deal with the situation, the government asked creditors to take 70% to 75% cut in their debts, which means getting back `30 if someone had invested `100 in the sovereign bond. Presently, Greece is in the news for doing the same. Euro leaders had earlier agreed and went to the extent of writing off 50% of the debt it owed to private creditors, which was targeted to lower the debt and interest burden. Very high debt to GDP and interest cost to revenues could be the simple reason to say that the country in question might default. But that may not be true in all cases. There are many countries like Japan, UK and the US who have huge debt, which is equal to or higher than their respective economies. The countries

which have their own currencies could restructure their debts and print more money to finance the debts. Countries with large domestic debts could manage the situation without any pressure on currencies. CHANGE IN LEADERSHIP Generally a change in government does not change the responsibility of the new government in terms of debt obligations created by the earlier government. But that may not happen always as seen in revolutionary situations when the new government has defaulted on sovereign debts. Around the same time when the Argentinean financial crisis hit, Russia’s debt crisis was brewing largely due to the broad-based Asian Financial crisis in 1998. Russia was gravely impacted since its economy was driven by export of commodities. However as commodity prices, especially the price of crude oil fell, post the Asian crisis, the nation’s fiscal situation took a beating. This, coupled with the political crisis, where Russian President Boris Yeltsin dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet, caused a bigger crisis. In order to deal with the situation, it raised interest rates to almost 150%. Later, funds of about $22.6 billion were approved by the International Monetary Fund and World Bank. But that too did not help and investors started losing confidence and began selling Russian currency and assets, leading to a further downward spiral in prices and confidence. In the middle of August ’98, the Russian government devalued its currency and defaulted on domestic debts. GREECE UPDATE We have read about the history of nations defaulting on sovereign debt It’s simplified...

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and the consequences of the same. Off late the focus has shifted towards the European nations, especially PIIGS (Portugal, Italy, Ireland, Greece, Spain). Most of these countries have a huge national debt compared to the respective size of their economies. Their ability to service these high debts or even to repay them on time has raised questions. The problems have compounded especially in the light of shrinking government revenues as a result of the decline in domestic economies. Among these countries, Greece is considered to be the most vulnerable, given its high debt to GDP of about 100% and deteriorating economic fundamentals. Greece’s economy declined by 7% in the three months ending December ’11 as compared to the same period the year before. Even more shocking is the recent data which suggests that almost three out of 10 citizens are unemployed. If economic activities are shrinking and there is widespread unemployment, then it is obvious that the government’s tax collections and the overall revenues are also lower. In this scenario, servicing or repaying debt becomes questionable. In this light, many believed that the country was on the verge of bankruptcy. The markets were factoring in the default, which was also reflected in the interest rates, which headed to almost 25% in the month of September ’11. The interest rates were six times higher or almost 2,100 basis point higher from the levels they were about two years back. Further, the problems for Greece compounded when leading global ratings agency Standard & Poor’s downgraded the Greek government’s debt to junk bond status, alarming 8


financial markets. The rating agency estimates that in the event of default, investors would fail to get to the extent of 30% to 50% of their money back, sending a negative signal to the global financial markets. In this context, external support, particularly from members of the Euro zone was critical so that it could avert the risk of default. Positively, the Euro zone countries and the IMF agreed to extend help to Greece. However, that did not come easily. The aid from the European Commission and the IMF came with stringent conditions along with austerity measures aimed at cutting expenditures and increasing government revenues. Initially in 2010, the government ceased the government employees’ salaries, coupled with a cut in bonuses, overtime and travels. Further, in the second stage it initiated measures such as 30% cuts in Christmas, Easter and leave of absence bonuses, more cut in bonuses and increase in taxes. However, this too was not enough. The biggest of all came around mid-2010 when the government took drastic steps to garner higher revenues and save on expenses. But that also led to nationwide agitations and strikes. The situation still remains murky as protests continue and economic activities are plunging. The nation needs more funding support to deal with the situation. As Greece prepares to meet its debt repayment obligations due on 20th March, this time as well the ECB is considering of pressurizing Greece to agree to even tougher terms and conditions to qualify for a further payment of loans. Presently, the Greek government is working on finding a solution and seeking support from its leaders to

take additional cuts in spending of Euro 325 million so that it could satisfy the conditions laid down by the ECB for the next round of bailout, which is critical as a rescue package to avoid any default when Euro 14.5 billion falls due in March ’12. In fact what was considered to be critical, Greece has yet again very recently struck a deal after almost 13-14 hours of negotiations. With the support of Euro members, Greece struck a new bailout deal worth Euro 130 billion ($172 billion). The package is set to consider Euro 130 billion in new loans from the European Union and IMF. Importantly, the lenders have agreed for a reduction in interest rate by 0.5 percentage points over the next five years and further 1.5 percentage points in the later years. The measures will lead to a significant saving and bring down the overall debt marginally lower. The country is also said to be completing a debt swap with private investors, which will include a cut of 53.5% in the face value of Greek sovereign bonds. This is higher than the 50% cut that was proposed earlier. The effort will cut Greece’s national debt load by Euro 107 billion, equivalent to one-third of the total debt. This measure too will bring down debt levels significantly. It is estimated that the move will cut Greece’s debt to 120.5% of the GDP by 2020 as against the current levels of about 160%. The deal is considered to be having some positive impact from the nearterm perspective. But economists are keeping their fingers crossed about the new package and its long-term impact on the finances of Greece, especially in the light of deteriorating economic fundamentalS. It’s simplified...

SEBI has come up with new measures to help companies comply with minimum public shareholding norms, which even the government Beyond Market 24th Aug ’11 is likely to use to meet its disinvestment targets

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f government’s disinvestment target, compliance with the minimum public shareholding norms and company’s funding requirements are vague dots in the air, the Securities and Exchange Board of India (SEBI), through its recent policy measures, has tried to connect these dots. The policy measures we are talking about are the two alternate routes announced by the market regulator in January for companies to increase their public shareholding to 25% of the overall float. The two routes are institutional placement programme (IPP) and offer for sale of shares through the stock exchange. As per the ‘minimum public share holding’ guidelines set by the finance ministry in 2010, every listed company will have to take the public holding to 25% (10% in case of public sector undertakings), with a deadline of June ’13.


While the two measures mainly pertain to the mandatory public shareholding requirements, analysts have interpreted the moves differently. Some analysts feel that the move will facilitate the government in its disinvestment programme, others say that it will help companies raise funds in such difficult economic environment. Currently, as per the listing agreement, the Issuer Company or the promoter can adopt the following methods to achieve the minimum level of public shareholding. - Issuance of shares to public through prospectus - Offer for sale of shares held by promoters to public through prospectus - Sale of shares held by promoters through secondary market with prior approval from the stock exchanges It’s simplified...

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Now, in addition to the above methods, a company or promoter can use the two methods to comply with the minimum public shareholding norm. Following are some salient features of the processes. INSTITUTIONAL PLACEMENT PROGRAMME (IPP) - Only for companies which are currently not in compliance with the minimum public shareholding requirements - The IPP route can be availed of to increase the public shareholding up to a maximum of 10% of the paid up capital - Can be implemented either by way of fresh issue of capital by such companies or by dilution of promoter shareholding through an offer for sale - Only QIBs can participate - The issuer company needs to file the prospectus with SEBI, Registrar of Companies and stock exchanges - A minimum of 25% of the issue reserved for mutual funds and insurance companies - The issuer is required to announce an indicative price band a day prior to the opening of the offer and the aggregate demand to be displayed by the stock exchanges - A minimum of 10 allottees are required for issuance under this route and a single investor shall not be entitled to receive allotment of more than 25% of the offer size - Allotment of shares may be made on the basis of either price priority or proportionately or any other pre-specified criteria which need to be mentioned in the prospectus and cannot be changed subsequently 10


OFFER FOR SALE THROUGH STOCK EXCHANGE - Only for companies which are currently not in compliance with the minimum public shareholding requirements - Shares to be tendered on a separate window of the stock exchanges - Duration of this window would co-exist with normal trading hours - Promoters/members of the promoter group would not be allowed to bid for securities under this window - Subject to a minimum of `25 crores, the minimum offer size shall be 1% of paid up capital of issuer company - Every bid/buy order is to be supported by 100% upfront cash margin and allotment shall be done either on a price priority or clearing price basis proportionately - This route can also be used by promoters of top 100 companies (based on the average market capitalization) for sale of their shares ANALYSIS A genuine need to adhere to the ‘minimum public share holding’ guidelines, alternative to the traditional follow-on public offer of disinvestment for PSUs, suppressed primary market, which has taken a toll on fund-raising activities of corporates, sets the back drop of these new measures by SEBI. While the fine prints and corresponding changes in the listing agreements are awaited, it can be inferred that these methods would save time and at the same time be cost effective. And the most important thing is that it will not disrupt prices in the secondary markets.

However, there is nothing much to cheer about for retail investors in these two policy measures. Even as 25% of the issue size is reserved for mutual funds and insurance companies, participation of retail investors would be indirect through these QIBs. In case the government uses any of these routes for disinvestment, it will contradict the very disinvestment policy which says ‘Public Sector Undertakings are the wealth of the nation and this wealth should rest in the hands of the people.’ However, many experts are of the opinion that it might be a temporary arrangement by the government till the time some fiscal deficit is filled as mass mobilization of funds from retail investors would be impossible in such near-dead primary markets. (Remember how the government had to knock the doors of LIC to bail out the follow-on public issue of Rural Electrification Corporation). So retail investors can hope for some amendments as historically PSU disinvestment has been a huge wealth creator for the retail category. The OFS route through a separate window will help promoters offload their stakes without going through the complex procedure of “bulk and block deals”. Under the OFS route the very mention that the route is available for top 100 companies by market capitalization even when they have already complied with the minimum public shareholding norms, hints that the government is likely to use this route to dilute its stake. There are as many as 27 public sector undertakings such as ONGC, Coal India, NTPC, SBI, NMDC, IOC and BHEL in the top 100 companies in terms of market capitalizatioN. It’s simplified...

Listed below are companies - public and private – that are potential candidates for share sale as per the minimum shareholding norms laid down by SEBI. Few Private Companies With More Than 75% Promoters’ Shareholding

Company Name

Promoter Stake

Astrazeneca Pharma India Ltd Alfa Laval (India) Ltd Gillette India Ltd Mangalore Refinery & Petrochemicals Ltd Godrej Properties Ltd Jaypee Infratech Ltd L&T Finance Holdings Ltd Fortis Healthcare (India) Ltd Reliance Power Ltd Oracle Financial Services Software Ltd Muthoot Finance Ltd Wipro Ltd Godrej Industries Ltd DLF Ltd Oberoi Realty Ltd Adani Enterprises Ltd Adani Ports And Special Economic Zone Ltd Sun TV Network Ltd JSW Energy Ltd Jaiprakash Power Ventures Ltd Tata Communications Ltd 3M India Ltd

90.0 88.8 88.8 88.6 83.8 83.3 82.6 81.5 80.4 80.4 80.1 79.2 79.1 78.6 78.5 78.3 77.5 77.0 76.7 76.5 76.2 76.0

Source: Capitaline

Few PSUs With More Than 90% Government Holding

Company Name

MMTC Ltd Hindustan Copper Ltd Neyveli Lignite Corporation Ltd National Fertilizers Ltd Fertilizers & Chemicals Travancore Ltd State Trading Corporation Of India Ltd Itd Cementation India Ltd ITI Ltd Scooters India Ltd Ircon International Ltd

Government Holding

99.33 99.59 93.56 97.64 98.56 91.02 92.11 92.98 95.38 99.73

Source: Capitaline



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OPTING OUT The tumultuous stock market is forcing several companies to delist themselves from the bourses 12



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ith the stock market on its unabated southward journey, the fortunes of a lot of Indian companies are being altered. Due to the depressed state of the markets, a host of companies have not come out with their initial public offerings. This situation has also forced other companies to delist themselves from the bourses. Delisting means the permanent removal of shares from a platform where stocks are being traded publically. Sometimes delisting is confused with the buyback of shares. But in reality, these are two completely different phenomenon. In a buyback programme, the company buys back its own shares and extinguishes them. This leads to the reduction of capital for the company. On the other hand, in delisting of shares, the shares are acquired by the promoter and do not result in any capital reduction for the company. In the last two years alone, more than 60 companies have delisted from the Indian stock markets. Some of this was law induced, while in other cases it was simply because the promoters felt that the market was undervaluing the stock, and, hence, decided to go private by delisting from the bourses. But before we go into the details about why companies are choosing to delist now, let us tell you about the process of delisting. HOW DELISTING WORKS Voluntary delisting begins when promoters of a company put a proposal to delist its board of directors. The board of directors meet over the proposal and then inform the stock exchanges, citing appropriate reasons for delisting of the company. The company must then obtain an approval for delisting from the Beyond Market 02nd Mar ’12

shareholders with two-third majority.

a

minimum

With the said approvals in place, the delisting process commences in a reverse book building format. The company sets a floor price in keeping with the rules set by the capital market regulator Securities and Exchange Board of India (SEBI). This is often at a premium over the current market value of the shares. This is an indicative offer price the company puts forth in order to attract more investors. The bidding process begins thereafter, with the company indicative price as the floor price. Once all the bids are submitted, merchant bankers find a price point at which the shares can be acquired. This is called the discovered price. The promoters have the prerogative of deciding whether or not to go ahead with the discovered price. If the answer is in the affirmative, this price becomes applicable to all shareholders tendering their shares back to the company, and the company is successfully delisted from the exchanges. It is, however, mandatory for companies to offer the same price to all shareholders holding the share up to one year from the delisting date. DELISTING VS REDUCTION IN PROMOTER HOLDING Most recent delisting action was triggered from the fag end of 2010 as a consequence of the new delisting norms. In an amendment to the existing delisting norms in mid-2010, SEBI stipulated that promoter holdings for all listed companies will be capped at 75%. This has to be achieved by June ’13. As soon as this announcement was made, many multinational firms were

quick to take action and decided to make their arms private rather than going through the hassle of decreasing their stake. Not that it worked out too badly for investors. Most of the companies that opted for voluntary delisting translated into big gains for shareholders who were holding the stock. Some of the recent stocks that delisted such as Alfa Laval, Carol Info, Patni Computers and Ineos ABS rewarded investors by offering hefty returns on the buyback of shares. On hopes of delisting, these stocks had a good run in 2011. These stocks bucked the overall bearish trend witnessed in 2011. Take for instance Alfa Laval. This stock was a star performer over the past year giving a 149% return to investors. Alfa Laval makes heat exchangers and separating equipment for solids, liquids and gasses. Although the company withstood the onslaught of the recession and managed to expand sales in 2009, the subsequent Euro zone crisis took its toll on the company. Besides, higher commodity prices in India and rupee depreciation hurt the company, leading to margin erosion. With the new delisting norms kicking in, the Swedish parent company has made a wise decision to delist. The stock which has much higher valuations over its peers over the past year or so, presents a good opportunity for investors. The delisting which is currently on, is receiving great response from investors. On day one itself, the company got 8.25% of the 20,40,202 shares on offer in delisting buyback, which is 1,68,334 shares being tendered. This incidentally is the largest first day response that has been seen by any company in the recent past. It’s simplified...

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While making an announcement about its impending delisting earlier this year, the Swedish parent company mentioned that delisting from the Indian bourses would give it increased operational flexibility. Alfa Laval Corporate AB Sweden currently holds 88.7% stake in the Indian arm. There are other companies like Micro Inks (that has a German promoter) and Atlas Copco which may soon follow suit. There is a case for MNCs being better candidates for delisting. Over the past decade, many Indian arms of multinational companies chose to delist from the bourses. The list includes bigwigs such as Philips, Cadbury, Otis, Reckitt Benckiser and Panasonic. The main reason they chose to delist was because of the maximum foreign ownership by a company in its Indian arm. Two decades back a foreign company could not have a wholly-owned subsidiary in the Indian state under the foreign direct investment route. But with the FDI policy having gone through a tremendous change over the past two decades, this is not required any longer. Foreign promoters, therefore, do not see the need to remain listed on the Indian exchanges. Besides, with the new norms of minimum public shareholding being enforced, the foreign promoters are finding abiding by the Indian set of laws and regulations too binding. Not only are the necessary approvals at each stage more cumbersome, it also increases the cost of operations for these companies. Instead, they prefer greater independence that gives them operational flexibility and keeps costs under check. Also, most parent companies of the Indian subsidiaries have deep pockets. Hence, funding 14


from the markets is not really a necessity for them. THE CASE COMPANIES

FOR

INDIAN

But this is not to say that Indian companies do not delist from the Indian bourses. These companies delist because they think that the stock markets have not valued their businesses properly and are simply being overlooked by investors. Take for instance the case of the one-time FMCG major Nirma. In late 2010 when the company decided to delist, the markets were taken aback. Nirma, the brainchild of Karsanbhai Patel, who started out by going door to door to sell homemade detergents in the 70s had become the proverbial David in Goliath’s land. In the 80s Nirma was a serious threat to bigwigs like Hindustan Unilever and Procter and Gamble (P&G) thanks to its prices which were at about one-third of the prices of its peers. However, over the years the company lost its grip over the consumer segment as the competition in the detergent market became too stiff to handle. The company then changed track and decided to diversify into chemicals, pharma and cement. This saw the market valuation of the stock fall drastically as compared to its peers. This vexed the promoters who then decided it was time to delist. While making its announcement to delist by the end of 2010, the company announced that it would further diversify into business modules that were capital intensive and thus carried a higher risk profile. Nirma therefore thought it was best to go private and not expose

shareholders to the risk of these businesses as that may not be well understood. Analysts, however, had a slightly different take on the same. They believed that being a private person by nature Karsanbhai was more than happy to keep to himself and did not fancy the participation of big institutional investors. Besides, the company also wanted to avoid compliance norms that a publicly listed company is forced to follow. There are other companies like Shakti Met Dor, which decided to delist from the bourses last year because it felt that the stock markets were completely overlooking it. Chemplast Samsar too recently announced its plans to delist due to the depressed state of the markets. For investors though, delisting companies is a golden opportunity because it provides opportunities for gains. Market experts recommend investors to look for potential delisting candidates. Some of the probable candidates for delisting are most MNC companies that have promoter holdings in excess of 80%. These are also companies that have good fundamentals and do not have any plans of raising capital just yet. An indication that these companies may delist can be gauged from the fact that they are trading at a lower valuation than their peers. These are also companies that are fundamentally strong and won’t go on a free fall. Based on the criterion mentioned in the article for delisting there are a number of companies that may follow suit. Delisting themselves from the bourses will not only offer good opportunities to companies but also investors, who could gain handsomely from this initiativE. It’s simplified...

On An Oriental Odyssey

Indian pharma companies are lapping up the opportunities offered by Japan Beyond Market 02nd Mar ’12

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stimated at around $75 billion, Japan is the second largest pharmaceutical market in the world and seems to have become a favourite of Indian pharma players, leaving the US and European Union far behind in terms of popularity. And why shouldn’t it be a hot favourite among Indian pharma

players? It is teeming with opportunities for Indian pharma ingredient companies in terms of supplies of active pharmaceutical ingredients (APIs) and intermediates to generic companies in Japan. Japan is an untapped, high-value market also because of its strict regulations, which is being eased now to support Indian pharmaceutical players to establish their presence. It’s simplified...

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The government of Japan is under tremendous pressure to meet the healthcare needs of its aging population and also address the issue of increasing healthcare costs, providing a big scope to Indian generic makers. Although the local regulatory requirements are rather tough, it is a very attractive market for Indian companies nonetheless. Supporting this development is global rating agency, Fitch Ratings which has predicted a stable outlook for the Indian pharma sector in 2012. The agency also stated that long-term profitability and growth would be driven by newer markets and Japan is one of the many lucrative places for Indian pharma players. THE SHIFT To say that the focus has now shifted from the developed markets like the US and Europe would be an overstatement. It is just that risks have spread across growing markets of CIS, Latin America and Japan. And this transition is the result of challenges in the developed markets such as the economic crisis, high R&D costs against low New Molecular Entity (NME) approvals, leading to lesser focus on innovation, which has led to focus on generic products and thus increased pricing pressure. There are also issues like saturated levels in developed markets owing to low unmet needs, patent expiry and acceptance of generic products as well as impetus on protection of the local industry through various non-tariff barriers. As far as global pharma markets for API is concerned, the top three markets for APIs are the US, Europe and Asia Pacific. The API market in 16


the Asia-Pacific region grew consistently at a CAGR of 6.7% from 2005 to 2010 and is expected to touch 9.6% between 2010 and 2016. In the Asia Pacific region, Japan and China enjoy the highest market share for API with 42.8% and 20%, respectively. To avoid price erosion, now seen in the US, Indian manufacturers have started exporting more APIs to Japan. GOVERNMENT ROLE India has been an important player in the pharmaceutical market in the world. Due to the advantage of technology and language, Indian players have gained entry into regulated markets, much ahead. As the presence of players kept increasing, earnings kept reducing, thus minimizing the margins. Today, most players literally operate with lower margins. The other major reason for the decrease in margins is the business model. These regulated markets are largely distributor-based, where price erosion has gone extremely bad. Generic launch is reduced to 5%, forcing manufacturers to work on cost plus basis and with increasing costs the markets are becoming unviable. To ensure better synergy between Indian and Japanese pharma companies, both the governments have signed bilateral agreements like CEPA (Comprehensive Economic Partnership Agreement), which will also act as a catalyst to boost pharma export growth to Japan. This agreement is aimed to ensure access to a highly developed Japanese market for the pharma sector. And for the first time ever, Japan too has committed to offer the same treatment to Indian generics as they do to their domestic industry.

With $58 billion, $48 billion, $39 billion going off patent globally in 2011, 2012 and 2013, respectively, India’s potential to become a leader in export of pharma products to countries like Japan is immense. However, the existing fear in the minds of Japanese patients on the propaganda of counterfeit medicines from India cannot be ruled-out. In the wake of this situation, unstinted support from the Japanese government in the form of policy, infrastructure and financial assistance through special incentive schemes, etc are inevitable. Valued at US $75 billion, Japan till now has been a much closed economy for Indian manufacturers. It is only in the past 4-5 years that Japanese companies have started accepting and acknowledging the strength of the Indian manufacturers. Indian pharma companies owe it to the bilateral agreement signed between the two countries, which has opened the flood gates to Japanese manufacturers for 100% FDI and, in turn, is getting access to India’s growing generic market. Especially since generics are increasingly becoming popular due to Japan’s large ageing population and high health care costs. Almost all Japanese citizens are covered through the National Health Insurance, funded by the government of Japan. To reduce the healthcare expenditure burden, the government has introduced a series of reforms that would expand generic penetration to 30% of the overall Japanese pharma market by 2012. The government is also offering financial incentives to hospitals, It’s simplified...

pharmacies, patients and other stakeholders to encourage the use and adoption of generics. TREND SETTER Organically North India-based Parabolic and Venus Remedies are two examples of pharma companies entering into Japan after receiving regulatory approval and patent from the Japanese regulator. Venus Remedies, a leading research-based global pharmaceutical company has received its first patent grant from Japan Patent Office (JPO) for its novel research product called ‘Vancoplus’, which has been designed with the intention to curb growing bacterial resistance, specially caused by the notorious MRSA strain, which is usually termed as one of the major superbugs.

Similarly, Parabolic Drugs Ltd, a vertically integrated API manufacturer and exporter in India has received an official accreditation from Japan’s ministry of Health, Labour and Welfare, enabling it to manufacture and supply Cephalosporin non sterile drugs to the Japanese market. Inorganically Mumbai-based pharma giant Lupin, through its Japanese subsidiary, Kyowa Pharmaceutical Industry Co Ltd (Kyowa), has entered into an agreement with I’rom Holdings Co Ltd (IH), an integrated Japanese healthcare provider, to acquire up to 100% of the outstanding shares of its subsidiary I’rom Pharmaceutical Co Ltd (IP). The acquisition will not only strengthen Lupin’s presence in the Japanese market but would also

provide for a stronger growth footprint in the priority market. On the other hand, the acquisition will allow Kyowa and IP to leverage their strengths and competencies to create meaningful synergies that would augment Lupin’s growth in the Japanese generics market. The industry today is moving towards the emerging markets due to less competition and fairly good margins compared to US or Europe. Only a handful of Indian companies are into research and innovation and most of them are more focused on generic products. The same amount of resources, used in regulated markets, if used in the growing markets, would lead to optimum utilization of resources yielding higher returns and Japan offers growth opportunities for generic players, in the years to comE.

Now, Commodity Trading Is No More A Puzzle. Commodity trading can be confusing especially if one is inexperienced and lacks the necessary skills to trade successfully. At Nirmal Bang, our team of seasoned analysts with years of experience and in-depth knowledge can help you spot the underlying clues and create the investment strategies that best suit your commodity trading requirements.

w w w. nirmal bang.com For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd. R E G D. O F F I C E : S o n awa l a B u i l d i n g, 2 5 B a n k St re e t, Fo r t, M u m b a i - 4 0 0 0 0 1 . Te l : 0 2 2 - 3 9 2 6 7 5 0 0 / 7 5 0 1 ; Fa x : 0 2 2 - 3 9 2 6 7 5 1 0 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981



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Noble Intentions, Doubtful Outcome While things look good on paper, only the execution of the National Water Policy, 2012 will reveal how successful it will be

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T

he Union government on 31st January this year released the draft National Water Policy, 2012 that attempts to bring a holistic and inter-disciplinary approach to water-related problems, which was missing in the National Water Policy of 2002. The draft policy, which has been posted on the website of the Ministry of Water Resources is open for comments till 29th February. It will be placed before the National Water Board and the National Water Resources Council for adoption after carrying out necessary modifications. The new draft policy, among other things, lays emphasis on the need for a national water framework law, comprehensive legislation for optimum development of inter-state rivers and river valleys, recycle and reuse of water, heavy fines for polluted effluents and reversal of under-pricing of electricity, which leads to wastage of both water as well as electricity. Water resources minister Pawan Kumar Bansal has been quoted as saying the policy under preparation since 2010 is being framed with a “participatory approach”. The first water policy was adopted by the National Water Resources Council in the year 1987. This was revised and updated in April ’02. In the National Water Policy of 2002, it was said that the policy “may be revised periodically as and when the need arises”. The preamble of the new policy draft says the policy had to be revised because large parts of India have become water-stressed. It says rapid growth in demand for water due to population growth, urbanization and changing lifestyles could lead to Beyond Market 02nd Mar ’12

water conflicts in the future. The new draft policy suggests that the government considers establishing a “permanent Water Disputes Tribunal” at the Centre in place of the existing mechanism of different tribunals for different inter-state water disputes. The policy also acknowledges that access to safe drinking water still continues to be a problem in certain parts of the country. The draft water policy has strongly recommended the reversal of “heavy” under-pricing of electricity to avoid “wasteful” use of both water and power. Emphasizing on the need to treat water as an “economic good”, the draft policy urges governments to put a price on its usage in order to promote efficiency. “Over and above the pre-emptive uses for sustaining life and eco-system, water needs to be treated as an economic good and, therefore, may be priced to promote efficient use and maximizing value from water,” the draft says. This proposal is expected to face opposition as many state governments have been providing almost free electricity to farmers, which has resulted in over withdrawal of groundwater in many regions. Recognizing the right of states to frame suitable policies, laws and regulations on water, the draft policy has laid emphasis on the need for a “national water framework law.” It has favoured the enactment of a “comprehensive” law for optimum development of inter-state rivers and river valleys, public trust doctrine, amendment of the Indian Easements Act, 1882. The draft policy has also recommended the setting up of a Water Regulatory Authority in each

state to fix and regulate the water tariff system and charges, in general. “While the practice of administered prices may have to be continued, economic principles need to increasingly guide the administered prices,” the draft says. The policy says water needs to be managed as a community resource held by the state under public trust doctrine. It also gives importance to irrigation over industry. In this aspect, the new draft varies from the old policy, which gave importance to water for drinking over irrigation, hydro-power, ecology, industrial use and other uses. Perhaps, the most controversial aspect of the policy is that it proposes privatization of water supply, ending the government’s role in the sector. The policy has also hinted at increasing water tariff, saying that water needs to be treated as an “economic good”. The new policy draft states, “Water has been recognized as an economic good, over and above pre-emptive need, for the first time, which would promote maximization of value of water and its conservation and efficient use.” The draft says the “service provider” role of the state should be gradually shifted to that of a regulator of services and facilitator for strengthening institutions responsible for planning, implementation and management of water resources. “The water-related services should be transferred to community and/or the private sector with an appropriate “Public Private Partnership” model. Private sector participation should be encouraged in planning, development and management of water resources projects for diverse uses, wherever feasible,” the draft says. It’s simplified...

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The policy gives importance to efficient use of water. It says a system to evolve benchmarks for water uses for different purposes, such as water footprints and water auditing should be developed to ensure efficient use of water. Project financing has been suggested as a tool to incentivize efficient and economic use of water. It has also specified the provision of setting up of Water Regulatory Authority and adequate water pricing to incentivize recycle and re-use of water. The silver lining in the draft is that it presents a holistic picture of the ecological need of rivers rather than restricting it to only minimum flow requirement, thus giving importance to ecological needs of a river. It states that the ecological needs of the river should be determined recognizing that river flows are characterized by low or no flows, small floods (freshets), large floods and flow variability and should accommodate development needs. “A portion of river flows should be kept aside to meet ecological needs, ensuring that the proportional low and high flow releases correspond in time

closely to the natural flow regime,” the draft policy says. Industry lobbying bodies have welcomed the new policy draft. “Improving water efficiency across all sectors is crucial for reducing dependence on freshwater sources,” Romit Sen, senior assistant director, Federation of Indian Chambers of Commerce and Industry (FICCI), said in a news report. The draft policy also recognizes encroachment and diversion of water bodies and emphasizes the need for their restoration with community participation. It has proposed setting aside a suitable percentage of the costs of infrastructure development, which along with collected water charges, may be utilized for repair and maintenance.

amongst party states. It says a similar mechanism should be established within each state to amicably resolve differences in competing demands for water amongst different users of water, as also between different parts of that particular state. The proposal has faced many criticisms. The draft policy calls for privatization of water delivery services and pricing of water to fully recover cost of operation and administration of water resource projects. It calls for the government’s withdrawal as a service provider in the water sector.

Contract for construction of projects should have in-built provisions for longer periods of proper maintenance and handing back the infrastructure in good condition.

According to critics, the suggestion that the state should exit the service provider’s role will lead to a sharp rise in the cost of water in both rural and urban areas. They also point out that private sector water services have failed in many countries across the world where local governments have taken over once again.

The new policy draft has proposed a forum at the national level to deliberate upon issues relating to water and evolve consensus, co-operation and reconciliation

The draft National Water Policy, 2012, is open for comments till 29th February and it remains to be seen if any more changes will be made to the policy, before it is finalizeD.

Micro analysis. Mega gains. Trading at Nirmal Bang is based on extensive research and in-depth analysis, where we focus on the smallest of details and turn them into an advantage for you. Over the years, the analytical approach coupled with decades of experience has helped us maximize returns for our investors and thereby inspire confidence in them.

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REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981

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Contact - Daisee Boga: +91-22-39268244, 7738068289

Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610, Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010

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Despite tough market conditions, companies from the road sector are doing remarkably well and have found newer ways of raising funds for their projects

R

oads form an integral part of the growth of a nation. Besides connectivity, roads also even-out the growth trajectory of territories. This is the reason even in times of uncertainty in the economy, the National Highway Authority of India (NHAI) has awarded over 4,700 km of road projects to road infrastructure companies in the current fiscal. Furthermore, many a road company has bid and secured these projects. What has been unprecedented is the aggression in the bidding of these projects especially in the present situation of high interest rates and limited funding options. In some cases, the number of bidders for a project were in the range of 15 to 18, taking the bidding value of a road project to incomprehensible levels. So, what are the arrangements that help road companies bid so high and grab projects in a high interest situation? We give you a holistic picture of how road projects are financed as opposed to other projects in the infrastructure industry. NITTY-GRITTIES Due to their long gestation period, road projects are most capitalintensive and need huge long-term financing. Hence, the need for capital for a road project is very high. In countries with developed markets, domestic financing through debt, equity and mezzanine financing form primary sources of funding projects. Beyond Market 02nd Mar ’12

And in countries that are less developed, the role of the government as a facilitator of investments is paramount. Besides this, the role of the government extends to clearing of legal and policy hassles involved in road projects. Few cardinal problems faced by several road companies include lack of a single or comprehensive clearing window, hassle-free policy framework, transparency in the process of issuance or dealings in projects and also a lack of political will to create a congenial environment to work. NEW AVENUES In India, till the 1990s, investment in road projects was solely done by the government, its special agencies and certain public sector undertakings. The funds for these investments came from budgetary allocations, surpluses of government agencies and borrowings from the markets, including borrowing from multilateral agencies and bond issuances. Despite these avenues of raising funds, investments in road infrastructure were quite low. Hence, the government had to open the doors to infrastructure investment. An obvious recourse was private investment. Private investment rose in airports and its modernization, and then stretched to roads. However, a significant difference came in with the launch of the National Highway Development Programme in 1999, which announced a systematic capacity enhancement - creation of four-lanes (amounting to 13,000 kilometres) of national highways in two phases. Investment in road projects was also bolstered due to the formation of the Central Road Fund, which was specially created for the purpose of development of roads. The funds

collected through the levy of cess on sale of petrol and diesel were deposited in the Central Road Fund. Yet funding of road projects was not adequate and private investments were the need of the hour, more so since road projects were long-drawn and it was imperative that different sources of private investments evolve to address long-term financing. Also, these private investors, given their return on equity considerations, seek to maximize the quantum of debt financing for these projects, which can vary from levels as low as 40% to 50% (telecom and port projects), to more common levels of 60% to 70% (energy, toll roads, urban sector projects, airports) and may even go up to 80% to 90%. Then flourished the domestic financial institutions, insurance companies and commercial banks that saw strong and lucrative opportunities in road projects. As the private sector opened up and broke the shackles of the license raj, several new private sector banks commenced operations and the tendency of banks to provide long-term credit also increased. This was also aided by easy liquidity conditions that prevailed over much of last decade. Then came a chief institution that ushered new dynamics of business in road projects. It was the formation of Infrastructure Development Finance Company (IDFC) as an overarching institution to provide debt financing to road projects and pioneer norms for smooth sailing of road projects. It was formed with the sole intention of acting as a financial intermediary with the government of India having 40% equity and the remaining stake spread across representatives of shareholders, independent directors and a management team. It’s simplified...

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IDFC took minority equity stakes in companies as a strategic and financial investor and provided advisory services of private and governmental clients through a public-private partnership trust. IDFC thus emerged as a strong leader in identifying important needs of road projects. SITUATION AT PRESENT The concept of refinancing lenders emerged since 2006. The government formed India Infrastructure Finance Company Ltd (IIFCL) to provide long-term finance to road and infrastructure projects and re-finance lenders in these projects. India Infrastructure Finance Company Ltd began by limiting its exposure to these projects to 20% of the project cost and did not do appraisal of projects on its own; instead, it participated in projects with a bank. Such cautious approach in financing of road projects helped streamline the financing of road projects. At present, many road companies is putting in practice the concept of a holding company for road projects. As road projects are susceptible to various risks such as regulatory, payment, financing, availability of raw materials, revenue visibility and more importantly, execution risks, most road companies form a holding company for each road project. This helps companies in keeping their balance sheets clean and less leveraged. A special purpose vehicle (SPV) is formed exclusively for each project and financing is obtained on this SPV. The road company has to contribute 30% of the project cost in terms of equity and 70% is provided by the investors. This form of arrangement has attracted a lot of private equity (PE) investors. In the period between 2005 and 2007, a lot of private equity 24


funds’ investments have gone into road projects. These PE funds did selective investments in quality assets which took care of initial funding problems of road projects.

out with more initiatives on the lines of India Infrastructure Finance Company (IIFCL), which gives credit rating to projects to attract investments from institutions.

And this arrangement has lifted the confidence of road companies in terms of bidding of projects. And a large number of companies thus resorted to aggressive bidding in the race to secure projects. The aggression in the race came from the entry of many companies which did not have roads as their core business. These companies entered into road projects as investments in the Engineering Procurement and Construction (EPC) side of the business dried up.

Another measure from the government that would facilitate infrastructure companies’ growth is an efficient secondary bond market. It would help companies in raising capital in falling markets. For this, the government should put in place a kind of structure and legal framework for secondary bond market.

However, with interest rates reigning high there have been execution delays due to working capital issues. This has brought moderation in bidding of road projects. At present, the premium between two bidders has narrowed down significantly. It is estimated that the difference can be in the range of `5 crore to `10 crore. GOING AHEAD For sustained funding of road projects, refinancing from banks is a must. For lenders requiring liquidity support, an active refinance window through IIFCL on attractive terms could help increase the number of debt providers for infrastructure. Several industry experts feel that the government needs to speed up certain initiatives to facilitate funding for infrastructure companies. One of the often quoted arguments among analysts is enhancing credit worthiness of projects taking into account the viability. Credit rating enhances the capacity of raising debt at the SPV level of a project. The government should come

Foreign pension funds which have a long-term investment objective are shying away from the Indian bond market due to the lack of liquidity. The RBI should provide a proper mechanism for hedging investments in debt funds so that they can mitigate forex risks. There is a section in the infrastructure industry which believes that the role of insurance companies and pension funds in financing road projects should be increased. For these institutions, specialised agencies such as IDFC could be provided for the much-needed expertise in enabling these institutions in making investment decisions. It has been argued that the role of India Infrastructure Finance Company can also be enhanced in serving as the guarantor to investors such as pension funds or retail investors. This, many believe would be the most effective way of pacing up of investment in road projects. Lastly, a mechanism needs to be developed that would create avenues for selling of assets in case of paucity of funds. This can be done in consortium with large banks or high net worth individuals who can come on board in different stages of implementation of the projecT. It’s simplified...

Shockproof Ready Munjal Showa is expected to demonstrate healthy performance on the back of low gearing ratio, stable margins and support from the promoter group

M

unjal Showa, a member of the Hero Group was established in 1987 in technical and financial collaboration with Showa Corporation of Japan. Munjal Group holds a 39% stake, followed by Showa Corporation, which has a 26% stake in Munjal Showa Ltd. The company is a pioneering global leader in the manufacture of shock absorbers. Munjal Showa Ltd operates as an ancillary and manufactures automobile components mainly for the use of two-wheeler and four-wheeler industries. The company designs and manufactures front forks, shock absorbers, struts, gas springs and window balancers for sale in the domestic market. The company has three plants situated at Manesar, Gurgaon and Haridwar. The company manufactures struts and window balancers for four-wheelers only in Gurgaon, whereas shock absorbers for two-wheelers are produced at all the three plants. INVESTMENT RATIONALE Strong Patronage From Promoter Group Munjal Showa enjoys a strong goodwill in the market on the back of its association with a well-known promoter group Munjal family (Hero Group) and Showa Corporation of Japan, which hold 39% and 26% stakes, respectively. Munjal Showa has an edge over its peers in the industries because the company has strong support from its parent companies in terms of financial muscle as well as technology. Beyond Market 02nd Mar ’12


25

Positive Correlation With Hero MotoCorp We have seen a strong correlation in volume growth between Munjal Showa and Hero MotoCorp. The volume growth of MJS has outperformed the volume growth of HMCL four times in the last five years, by an average of 1.5%-2.5%. MJS’s volume growth was approximately above 20% over the last couple of years.

Break-up Of Revenues 2.0%

1.5%

13%

8.0%

Going forward, we expect this trend to continue and MJS’s volume growth to remain above HMCL’s volume growth. Though the management has guided for at least 10% volume, we expect MJS’s volume growth to be 17.2% and 12.5% in FY12E and FY13E, respectively. The volume growth of MJS is expected to be driven by expansion of capacity from the Haridwar plant.

Source: Company Data, Nirmal Bang Research

Volume Correlation

Expansion Plans Of Various Clients

25.0

23.6 21.7

20.0 15.0 10.0

0.0 FY07

20.1 17.4

12.1

13.2 11.2

5.0

17.2 14.9

12.5 10.0

11.5 3.2

0.0 FY08 FY09 FY10 HMCL Volume Growth (%)

FY11

FY12E

FY13E

MJS Volume Growth (%)


Based on volume correlation, MJS’s top line is also in tandem with the top line growth of HMCL. Only in FY10, MJS reported a growth of ~19% in revenues, which was much below HMCL’s top-line growth of 28%. This decline was mainly on account of the decline in realization rates. MJS blended realization rate declined 7% in FY10, while volume growth remained robust at about 22% in FY10. Esteemed Clientele Munjal Showa has established a strong base in auto ancillary manufacturing market and caters to the demand of Original Equipment Manufacturers (OEMs) such as Maruti Suzuki, Hero MotoCorp and many other companies. The company offers a wide range of auto ancillary products and meets the demand of Maruti Suzuki (upper end cars and export models), Honda (Honda City car), Hero MotoCorp (complete range of Motorcycles) and Hero range of mini-motorcycles and mopeds and Honda Motorcycles and Scooters India (Pvt) Ltd. However, the company is highly dependent on Hero MotoCorp, which contribute about 76% of its total revenues, while Maruti contributes 7%-8%, Honda Sial contributes 1.5%, Yamaha 1%-2% and balance by HMSI 26

(Honda Motorcycles and Scooters India Ltd) in H1FY12. The company’s attachment with such large OEMs provides a strong revenue visibility over the long term.


76.0%

Hero

Honda Sial

MaruƟ

Yamaha

HMSI

Hero MotoCorp’s current capacity stands at 6.15 million, which is expected to go to 6.5 million by FY12 and further to 7.5 million by FY13E. Honda Motors and Scooters India (HMSI) operate with two plants in India with a total capacity of 2.8 million units. It plans to set up 2 new plants in the country, which would increase capacity by about 2.5 million units. Of the 2 new plants stated, one is already under progress and will add 1.2 million to take the total capacity to 4 million by the end of 2013. Yamaha is expected to raise motorcycle and scooter capacity to 1 million units from 360,000 i.e by 640,000 units by FY13E. Capacity Expansion Current Capacity* Expansion (FY13)*

Hero Moto HMSI Yamaha

6.15 2.8 0.36

7.5 4 1

Source: Company Data, Nirmal Bang Research (* In Millions)

We believe, with expansion plans of various clients of the company, Munjal Showa is set to benefit and witness higher growth in top line, going forward. Expansion To Drive Growth The company’s Haridwar plant became operational in April ’09, which was mainly commissioned to cater to HMCL’s demands. The Haridwar facility has a capacity to produce shock absorbers up to 1 crore units per year. The company has already increased its production from 24,000 units per day (equivalent to 6,000 units of Hero and 1 unit requires 4 shock absorbers) to 30,000 units per day as on September ’11 and plans to further increase it to 36,000 It’s simplified...

units per day by FY13E. The company has strengthened its position in the industry with a variety of products and has also reduced the time cycle for the development of new models. The management expects to grow its capacity by 6%-7% every year. Moreover, the Haridwar facility enjoys 100% tax exemption for the first five years and 50% tax exemption, thereafter, for the following five years, leading to significant tax savings. Low Gearing Ratio The company had always enjoyed a lower debt to equity ratio till FY08. However, to find the planned expansion in capacity, the company had resorted to debt, which increased the debt equity ratio to a high of 0.65x in FY10. Now the ratio has started moderating and currently stands at 0.55x in FY11. Superior Return Ratios The company’s return ratios have improved from FY08 onwards. The company’s RoE stood at 17.74% in FY11 as against 12.97% in FY08, whereas its RoCE stood at 19.33% in FY11 as against 17.95% in FY08. Return On Equity Dupont Analysis

RoE (%) Net Profit Margin Asset T/O Leverage

FY08

FY09

FY10

FY11

FY12E

FY13E

13.0% 2.7% 3.8 1.3

13.0% 2.5% 3.5 1.5

14.2% 2.5% 3.3 1.7

17.7% 2.7% 4.1 1.6

25.1% 3.7% 4.9 1.4

23.9% 3.7% 5.2 1.3


The company has already seen a sharp improvement in net margins in 9M FY 12 driven by higher utilization rate, better pricing and lower taxes. Higher utilization and pricing has led to improvement in EBITDA margins and net margins. Effective tax rate is low in FY12 due to tax benefits at its Haridwar plant, which helped the net margin to improve by 40bps-50bps in 9M FY 12. This, coupled with better asset turnover, is expected to boost the RoE in FY12E. Going forward, we expect the stable net profit margin and turnover ratios to keep the RoE in the range of 23%-25% in the near-to-medium term. We believe that with superior return ratios, the stock will definitely command a premium multiple from current levels. Return On Equity 30.0% 25.0%

25.1%

20.0% 15.0% 10.0%

23.9%

17.7% 13.0%

14.2%

13.0%

5.0% 0.0% FY08

FY09

FY10

FY11

FY12E

FY13E


RISKS AND CONCERNS Any slowdown in the auto industry will impact the performance of the company. Beyond Market 02nd Mar ’12


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&KHDSHUTXDOLW\LPSRUWVSRVHDPDMRUFKDOOHQJHWRWKHFRPSDQ\ $VLJQLILFDQWLQFUHDVHLQWKHFRVWRIUDZPDWHULDOVZLOODGYHUVHO\DIIHFWPDUJLQV +LJKHUGHSHQGHQFHRQ+HUR0RWR&RUSSRVHVDVLJQLILFDQWULVN FUTURE OUTLOOK AND VALUATION 0XQMDO6KRZDUHSRUWHGDQ5R(RILQ)