Dalits will benefit the most from FDI in retail, says Dalit Indian Chamber

While chief minister of Uttar Pradesh Mayawati feels foreign direct investment (FDI) in retail will drastically impact livelihoods of the dalit section of the society, representatives from the community feel otherwise.

Speaking at a Confederation of Indian Industry (CII) discussion on FDI in retail, Milind Kamble, chairman, Dalit Indian Chamber of Commerce & Industry (DICCI), said, on the ground level, the schedule castes (SC) and schedule tribes (ST) will benefit the most with this move by the government.

“Approximately 8 million new job opportunities will get generated in the next 10 years and a significant percentage of the requirement will be for semi-skilled work force. This is a huge opportunity for the dalit youth who have not been able to pursue education beyond 10th and 12th standard. With short-term training programmes with assured placement being offered by most retail chains the dalit youth will be able to get gainful employment in these retail stores as well as other support areas including logistics firms,” said Kamble.

The dalit entrepreneurs are also set to benefit from the local sourcing clause which is one of the caveats for approving FDI in retail. “Of the overall sourcing by the retailers, 30% will have to be sourced locally of which around 4% will have to be from companies run by dalit entrepreneurs. This is again a very good move by the government and will work towards development and growth of the community,” said Kamble.

Rupa Mehta, chairperson, CII (WR) Family Business Task Force, said, previous experience has shown that good small and medium enterprises (SMEs) have survived and prospered well that too in face of competition. “I do not see any reason to change this optimism. Despite concerns about small kirana shops getting impacted leading to closure, not a single store had shut down in the past five years when modern retail grew to 7% from 2%. I firmly believe that Kirana stores today will innovate and change their complexion, but not go out of business. With this policy decision, Indian SMEs will get opportunities not only in Indian supply chain but also access perhaps to global markets,” she said.

Echoing the sentiments, Thomas Varghese, chairman, CII National Retail Committee and  CEO, Aditya Birla Retail, said, mom and pop kirana stores will shut down but not because of FDI in retail. “They shutting down because their new generation is not very keen on running kirana stores and wants to explore more lucrative job opportunities that go with the current market scenario,” said Varghese.

Satish Jamdar, vice-chairman, CII Maharashtra State Council and managing director, Blue Star Ltd, said the policy on FDI in retail is the right one and in the large interest of the country. “We recognise that there are some concerns, but it is time to cut through the hype and examine and address those concerns. On the whole, we feel FDI in retail will bring in choice, quality and price benefits to the consumer while providing growth opportunities especially to the farming and manufacturing sectors. Also today the service industry is a large generator of employment. Of the service industry, retail industry will potentially be the largest employer, if we factor in the back end infrastructure support. Consumers have benefited from the modern trade so far and FDI in retail will act as hedge against inflation,” he said.

Rating agency Crisil feels foreign retailers are unlikely to gain a dominant share over the next five years and that foreign direct investment (FDI) in multi-brand retail will stimulate investment in Indian retail sector. According to Crisil estimates FDI inflows of $2.5–3 billion over the next five years is modest in the context of overall FDI inflows of $160 billion in India over the past five years.

While food and grocery (F&G) vertical would attract a larger share of the likely FDI inflows, the clause specifying 50% investment in back-end infrastructure especially aligns with the commercial requirement in this segment. F&G accounts for two-thirds of Indian retail sales, but currently has organised retail sales of only around 2%, the lowest among retail verticals.

Ajay D’Souza, head, Crisil Research, said, “To improve profitability in the F&G segment, retailers need to control their supply chain costs and build scale. Every percentage point reduction in supply chain cost and resultant gain in earnings before interest, taxes, depreciation and amortisation (EBITDA) margin can improve equity internal rate of returns (IRR) of an F&G store by 250-300 basis points. Foreign retailers, with their access to capital and technology, are well placed to leverage this opportunity.”

French group Accor to open 12 hotels next year

This story first appeared in DNA Money edition on Thursday, November 17, 2011.

French hospitality major Accor is all set to more than double the number of its hotels and guestrooms in the Indian market by December 2012. It will open 12 hotels next year, adding 2,516 guest rooms to the existing 2,016 across 10 hotels in the country.

Accor will also debut three new brands— Sofitel, Pullman and Formule 1 — taking the number of operational brands in India to six from three (Novotel, Mercure and Ibis) earlier.

Michael Issenberg, chairman and chief operating officer, Accor Asia Pacific, told DNA, “Our first Sofitel branded hotel will open for guests next month in Mumbai. The 302-room hotel would be located at the Bandra Kurla Complex. Early 2012 will see another two brands — Pullman and Formule 1 — make their debut in Gurgaon and Greater Noida, respectively.”

The new openings include Formule 1 (3 hotels), Ibis (5), Novotel (2), and one each under Pullman and Sofitel brands. These would be a mix of owned and managed properties as well as pure management contracts with different asset owners.

Accor’s hotel pipeline till 2015 includes four Pullman, 14 Novotel, five Mercure and 12 Formule 1 hotels. “Our plan is to have 90 hotels across our brands in India by 2015. While we are emphasising on the mid and economy segments, efforts are being made to expand in the upscale segment as well,” said
Issenberg.

The Sofitel Mumbai hotel is being developed in partnership with city-based realtor Shree Naman Group wherein Accor has invested $16 million (Rs71 crore) for a 40% stake. Work on the hotel started in November 2006 and was scheduled to open in 2009.

The total cost of the project then envisaged was Rs473 crore. While the two year delay has shot up the project cost, Accor officials said their holding in the asset remained at 40%.

Two more Sofitel hotels in the pipeline though details have not been yet made public.

The Pullman Gurgaon Central Park project is a pure management contract with Delhi-based realtor Central Park, which is also developing a four-star hotel at the Delhi International Airport Aerocity Project.

All the Formule 1 hotels in the pipeline (12 hotels by 2015) would be owned and managed by Accor.

“The Formule 1 hotels are positioned at the economy segment carrying the sub-Rs2,000 price tag for a night’s stay. These hotels will largely compete with brands like Ginger and offer limited services. The food and beverage facility in these hotels will be outsourced to third-party firms,” said Issenberg. Accor formed a joint venture with InterGlobe Enterprises in 2004 to set up 15 Ibis hotels with 2,700 rooms at an investment of Rs805 crore by 2007.

Currently, there are four Ibis hotels operational in the country with another five to open in 2012.

Phoenix Mills cutting down frills, takes over arms

This story first appeared in DNA Money edition on Wednesday, November 16, 2011.

Multi-use integrated property developer, Phoenix Mills (PML), has set out to cut down the clutter. As part of its business restructuring exercise, the BSE-listed company is looking to acquire controlling stakes in its subsidiaries before merging them. The idea is simple: to keep the number of arms to a minimum and avoid complications in financial reporting.

On Monday, PML said it has acquired a controlling stake in Market City Management Pvt (MANCO) from Entertainment World Developers (EWDPL) and Big Apple Real Estate Development Pvt Pradumna Kanodia, director-finance, PML, said the company will be looking to merge some of the other wholly owned subsidiaries (WoS) with MANCO.

“It is a small company with a 40% holding and has been acquired at book value of Rs 6 lakh. The company was originally designed to take care of our property management contracts (PMCs) and other activities. We realised eventually that such an entity was not required anymore and hence, we have taken 100% ownership.

Going forward, we feel reporting in consolidation will be a Herculean task with too many subsidiaries. Reducing the number of companies that we need to manage will make accounting and reporting a lot simpler,” he said. Earlier in September this year, the company had acquired Mugwort Developers Pvt Ltd. The said acquisition, according to Kanodia, was also part of the broader restructuring initiative.

In another development, PML is targeting a March 2012 breakeven for its Phoenix Market City Pune property launched earlier in June this year. With around 22% occupancy at the time of launch, the property is currently enjoying occupancy of 60-65% with over 200 operational stores giving the developer rentals of over Rs 5 crore.

“The initial response for Pune property has been very encouraging. We are targeting a profit after tax (PAT) level breakeven by this fiscal end. The current rental realisation is almost covering my interest requirement for the month. We are hopeful the occupancies will reach 90% by March 2012 and averaging at close to Rs 65 per square foot (PSF) in terms of rental value. This rental realisation will not only cover our interest but will also take care of the repayments thereafter,” he said.

PML’s flagship luxury hotel Shangri-La with the High Street Phoenix development at Lower Parel in Mumbai which was to open by now has got further delayed owing to approval related issues. While the developer (PML) has completed most of the execution work, the management now envisages 3-4 month delay in the opening. “Given the current approval related issues faced by most developers in the city of Mumbai, we now feel a March-April opening of the hotel will be more realistic as against December which was communicated earlier. It will basically start with soft launch and the entire asset should be completely operational in a couple of months thereafter,” he said.

After numerous delays since 2009, the Shangri-La Hotel, Mumbai was envisaged to finally open by the year end. Its asset owning company, Phoenix Mills Ltd (PML), had earlier planned to soft-launch the property with 50% inventory sometime in Q2 FY2010-11. However, PML ran into problems with one of its contractors as a result of which work on the project suffered until new contractor was appointed. Work on the project finally resumed towards the end of 2010 and PML management was optimistic about handling over the hotel to the management company (Shangri-La Hotel and Resorts) for a soft-launch by December 2011. However, with the new set of delays, the property is now expected to start receiving guests by March-April 2012.

Featuring 410 guestrooms and 23 serviced apartments when fully operational, Shangri-La Hotel, Mumbai will soft launch with 250 guestrooms. The serviced apartment units will however be launched in the third and final phase which is likely to happen by the end of 2012-13. 

Most of the hotel projects being developed by PML sit under a separate special purpose vehicles (SPVs). The Shangri-La Hotel, Mumbai is under Pallazzio Hotel and Leisure Ltd (a subsidiary of Phoenix Mills Ltd). The overall cost of the hotel project is envisaged to be over Rs 700 crore, of which Pallazzio Hotels has already pumped in Rs 483 crore in equity while the balance is debt.

In an earlier interaction, Shishir Shrivastava, group CEO and joint managing director, PML, had said, “We have invested close to Rs 625 crore as of now and additional investment of Rs 175 to Rs 200 crore will be made to fully complete this property. The equity part has already gone in and we are now drawing down the debt component as and when required based on the extent of work completed.”

Cox & Kings to bring in two Holidaybreak models

This story first appeared in DNA Money edition on Wednesday, November 16, 2011.

Travel company Cox & Kings (C&K) sees significant revenues coming from Holidaybreak, its recent acquisition, from the next fiscal, even as it plans to bring the UK firm’s two successful business models to India.

Anil Khandelwal, chief financial officer, Cox and Kings Ltd, said, “The contributions will come largely from Holidaybreak’s adventure and education divisions. As C&K’s existing business has a direct co-relation with these segments, we expect to improve the performance of these divisions by at least 5-7% on an annual basis. We also expect to increase capacity utilisation of the education division by 2-3% in the next fiscal.”

While the numbers may appear small, Khandelwal said, they are very significant given the large volumes at these divisions.

“This apart, we expect the revenues and profitability of Holidaybreak to improve from the next financial year,” he said.
C&K acquired the London Stock Exchange-listed Holidaybreak in July for Rs2,400 crore and payments to the tune of 310 million pounds have been made to the registrar to be paid to the Holidaybreak shareholders.

In the recently concluded (October to September) fiscal, Holidaybreak had revenues of 436 million pounds with an operating profit of 44.8 million pounds. The education and camping divisions have contributed significantly to the rise in its profitability.

“There is an increase of almost 2 million pounds in operating profit. The company has demonstrated good results, despite tough economic environment,” he said.

C&K is looking to bring Holidaybreak’s education and youth hostels divisions in India. “A lot of work in terms of evaluating and bringing these two concepts in India is being done,” he said.

Post the Holidaybreak buy, C&K has formed a committed of senior management personnel of both the companies to work on the integration plan.

While one of the big four consultancy firms has been appointed to look into the integration exercise, C&K has also brought on board a specialist who was involved with the travel company since it went public in 2009.

While C&K isn’t facing any problems due to economic slowdown in Europe and the US, its operations in Japan continue to be under pressure post the earthquake and tsunami situation there.

“We don’t see any visibility (revival of business) in the third and fourth quarters with respect to the Japanese operations,” he said.

Growing hunger for coal takes Tatas to Canada

My colleague Promit Mukherjee is the lead writer of this story, which first appeared in DNA Money edition on Tuesday, November 15, 2011.

The salt-to-software conglomerate, the Tata Group, is just not content with its substantial presence in Canada’s iron ore mines like Direct Shipping Ore and Taconite projects. Over and above the majority stake in those assets, it wants more and now has its eyes firmly set on the country’s metallurgical coal reserves, too.

The discussions are at a preliminary stage. Canadian ministry officials have let out that the group is looking at the British Columbia province of Canada for investment, which has huge reserves of metallurgical coal, also called coking coal and used for steel making.

“We are very much open to Indian companies picking up stakes in our mines and out of several companies we have spoken to, the Tata Group has shown a considerable interest to put in money here,” said Christy Clark, premier of the Province of British Columbia.

Clark is here in India for a business-cum-political visit and was in Mumbai to attend the Indian Economic Summit organised by the World Economic Forum and the Confederation of Indian Industries (CII).

Clark admitted that in this race for Canadian metallurgical coke, which is exported extensively, China seems to have the first-mover advantage and India has so much catch-up to do. In fact, citing a specific example, she said the China Investment Corporation recently picked up a 40% stake in a huge metallurgical coal mine in the province.

“China and Japan have huge interests in the region and we are also inviting Indian companies to the province as we have a gamut of opportunities for Indian companies here,” she said.

Currently, the bilateral trade between India and Canada is pegged at $2.1 billion of which a meagre $135 million comes from British Columbia.

Clark is out to change that and says she sees no reason why the figure can’t jump by a big margin over the next few years, given the promise the province holds.

Mining is just part of the bigger story. Clark has a string of meetings lined up with several business leaders in Mumbai and Bangalore over the next two days to push opportunities in various other fields like clean energy, LNG, shale gas, digital media and film, life sciences and mining. “Besides mining, British Columbia offers great opportunities in clean energy and LNG and we are keen on Indian participation in these sectors,” she said.

Clean energy - which includes hydro, bio fuel, solar and geothermal - accounts for as much as 93% of the power generation pie in British Columbia, but so far, Indian companies have been conspicuous by their absence from the scene.

Talking about what more is in store, Clark said the province has embarked on an ambitious $25 billion (Canadian) LNG project, the first part of which will come up in 2015 and the next will be ready by 2020. “Even in this project, Chinese companies have bid aggressively, but there has been no participation from Indian firms. We want companies here to come and invest in the project,” she said.

Canada is also keen to roll out a red carpet to Bollywood. “With a massive density of Indian population in our province, we want to make Vancouver the Bollywood of the West,” she added.

Currently, the bilateral trade between India and Canada is $2.1 billion out of which merely $135 million comes from British Columbia. Clark said with the number of opportunities present in the province, she wants to increase the number manifold in the next few years.

What ails infrastructure in India?

This story first appeared in DNA Money edition on Tuesday, November 15, 2011.

 - India gets about 100 hours of rainfall out of the 8,760 hours in a year, yet faces water shortage as the country has no facility to harvest rain water.
 - Despite having 500 billion tonne of coal reserves, India has tapped only 1%, even as fuel crunch pervades across power facilities.
 - Infrastructure in India is developed in such a haphazard manner that it ends up creating bottlenecks instead of facilitating smooth operations for stakeholders.

This was the theme that emerged at a seminar on infrastructure at a World Economic Forum summit, where industry participants felt that answer to the current woes lay in developing infrastructure holistically, or in totality, rather than in bits and parts.

“We waste $45 billion worth of efficiency because of our non-holistic view on the infrastructure development. This figure is expected to grow at least three times in the next 10 years,” Ravi Sharma, CEO, Adani Power, said.

Infrastructure development comprises growth in the healthcare, information technology, water, housing and real estate, education, energy and logistics industries.

James Stewart, chairman - global infrastructure, KPMG, UK, said, “While each and every sector contributes a certain level of growth, exceeding thresholds is only possible if the developments are looked at in entirety.”

Harpinder Singh Narula, chairman, DSC India, felt the government or the planners do not understand that the end user (public) has to be a participant in this. “The government can either take an inclusive or a top-down approach. However, adopting the latter leaves no possibility of taking a holistic view and that’s what we see happening in India,” he said.

Ankur Bhatia, executive director, Bird Group, said infrastructure development in India largely happens when ‘push comes to a shove’ kind of a situation.

“In most cases, we are developing infrastructure much behind of when it is required,” he said. “The aviation industry caters to 75 million people and a lot of them are repeat travellers, which mean only 30-35 million are taking to the skies in a market which is 300 million big. The primary reason is while people have the capacity to pay, a lot of destinations are not connected by flights.”

Participants also blamed government paralysis, bureaucratic stonewalling of projects and corruption for the infrastructure mess.

“The government has, by necessity, given lots of space to the private sector,” said Rajiv Lall, CEO of IDFC. “But having unleashed this genie, it has struggled to keep pace with it ... enthusiasm and skills of private developers far outpace the government’s ability to provide support.”

Ajit Gulabchand, the CMD of Hindustan Construction Cosaid there is a “huge slowdown” in infrastructure-building. “Scams have created a lull in decision-making, people are afraid to take decisions,” he said. With Reuters, adding “India has hurt itself by stalling projects.”

Infrastructure developers complain that the government has not kept its side of its bargain by failing to create a policy framework to allow the sector to grow.

“There is no sector where the policies are consistent, where policies are long term, where policies are really thought out,” said Sharma of Adani Power.

With Reuters

Companies sitting on Rs3.5 trillion cash. Albatross?

My colleague Nitin Shrivastava is the lead writer of this story which appeared in DNA Money edition on Monday, November 14, 2011.

Coal India, with cash and equivalents of Rs55,000 crore on balance sheet, is symptomatic of the story of corporates today: they are simply unable to deploy funds meaningfully, be it through investments, mergers & acquisitions or treasury operations.

So much so, cash held by companies surged by a third in the last one year to an all-time high of Rs356,452 crore as of September 30, according to an analysis by DNA.

That’s a 9.8% increase in six months and a staggering 33.71% year on year. In all, 283 companies (excluding banks and financials), which represent two-thirds of the market capitalisation of the Bombay Stock Exchange, were looked at.

“Companies have deferred investments over the last few quarters which is obviously reflecting in higher cash balances. The macro environment has been challenging with the sharp spike in interest rates and policy paralysis affecting business sentiment. Also, in these uncertain times, you need to keep a warchest ready,” said Anand Shah, chief investment officer at BNP Paribas Asset Management.

Reliance Industries, Coal India, ONGC, NMDC, Infosys and NTPC are among the biggest hoarders.

Coal India has the highest cash balance among all at Rs54,980 crore, according to the company’s results released on Saturday. The top 10 cash-rich companies contribute Rs221,168 crore to the hoard.

“The increase in cash balances reflects improvement in operating performance which has led to higher cash flows. Indian companies had undertaken huge capex some 2-3 years back, which is showing in cash flows now for some of the companies,” said the head of equities at domestic brokerage house, who did not wish to be named.

But, even as cash levels have risen, the total debt of companies continues to surge.Total loans of these 283 corporates stood at Rs11,23,244 crore as of September 30, up 16.6% over the last six months and 28.44% in the last 12. Experts believe this is not necessarily because of fresh investments.

“The rise would have been due to companies taking loans to meet higher working capital requirements and on account of higher inflation,” said Nischal Maheshwari, head of research at Edelweiss Securities.

Few capital-intensive sector companies such as Adani Power, Reliance Power, SAIL, NTPC and oil marketers are the ones which have seen substantial rise in debt.

“My sense is that a part of this money is actually debt cash. Barring IT, the cash position with a lot of other companies is on account of borrowed funds. And taking risk by deploying debt-based cash is not really what companies would want to do,” said Vivek Gupta, partner, M&A practice, BMR Advisors.

There’s a case that companies are not making full use of cash as returns on fixed deposits yield at best 5-6% post tax, compared with their net profit growth, which is multiple that at around 12-15%.

There are 68 companies sitting on net cash surplus after accounting for debt — the major ones being Coal India, Infosys, ONGC, Cairn India and TCS.

“Overall, corporates are not confident on the growth front. Demand is not improving in many sectors and margins are under pressure. The saving grace till now has been that revenue growth has been healthy, which may slowdown in the coming quarters on account of lag effect of interest rate hikes on demand and the higher base of last year. Also, higher capital investment tends to have an impact on immediate return on equity and the returns get better only after a few years, once capacity utilisation goes up,”said Shah.The capex cycle has come to a standstill and is at a trough, according to some.

“As for mergers & acquisitions (M&A), opportunities are being looked at more fundamentally. It’s not being done with the same euphoria as during the 2008 downturn. People are taking a more calibrated and deliberate call now,” said Gupta.

The Street believes the cash conservation mode will continue till the headwinds show signs of easing.

Cummins halves guidance second time this fiscal

This story first appeared in DNA Money edition on Saturday, November 12, 2011.

Cummins India, manufacturer of engines for power generation, industrial and automotive segments, has halved its growth guidance for the second time this fiscal to 5-10% as a slowdown in economy reduced orders and affected business.

Anant J Talaulicar, chairman and managing director, Cummins India, said, “We had estimated 20% growth at the beginning of the year. The guidance was later brought down to 10-15%. I’d say now that we are probably looking at a 5-10% growth across the board (domestic and exports) on a year-on-year basis. As far as profitability (PBIT margin) is concerned, we see a further deterioration of 1% sequentially.”

“The cost of money has gone up significantly and is causing some projects to get deferred. Secondly, some of the projects in the infrastructure sector are slowing down and the demand picture is not as bright as it was earlier. However, if the demand picture improves and inflation stabilises at today’s levels, the profitability will start improving,” he said.

Cummins said the most affected was its power generation business, followed by mining and construction, and added that the share of power generation in its total sales had come down to 30% from 40% earlier. The industrials business stayed flat at 12%, while auto’s share doubled to close to 10% levels. The distribution business, the company said, is about 18-20%.

The raw material costs have also increased affecting profits. The company said it has passed on increased costs from time to time in the recent past, but doesn’t see any scope for cut in prices now. Cummins plans to spend Rs200-250 crore in capex this fiscal and Rs300-350 crore in the next.

Havells to double retail outlets

This story first appeared in DNA Money edition on Thursday November 03, 2011.

Havells India, electrical and power distribution equipment manufacturer, plans to double its branded retail outlets in a bid to grow household appliance business four-fold.

The company currently has 103 branded outlets — Havells Galaxy Stores — which it plans to ramp up to over 200 in the next 12 months.

“The initial response to the home appliances range has been very encouraging, both from the end-users as well as the distributor fraternity,” Anil Gupta, joint managing director, Havells India said on a second-quarter analyst call.

The company had forayed into the home appliance business in August this year.

“A lot of our channel partners operating multi-brand outlets have expressed interest in converting to Havells branded exclusive outlets. The process has been kick-started already and we should easily achieve the targeted numbers,” he said.

Havells’ current offerings in the domestic appliance segment include products for food preparation, garment care, home comfort, cooking and brewing.

The company has earmarked a capital expenditure of `150 crore for this fiscal, of which `70-80 crore will be spent towards marketing and research and development for its small appliances range in the next 24-36 months.

“The market response during the festive season has been very positive and we are envisaging sales of Rs50-60 crore from our domestic appliances line this fiscal. The target for next fiscal will be Rs200 crore, and Rs500 crore in the next four years,” he said.

Sanjaya Satapathy, research analyst with Bank of America-Merrill Lynch, said Havells’ product expansion including the recent foray into home appliance products will help the company sustain 15-20% growth despite the adverse macroeconomic environment.

“The company has also launched new products in industrial switchgears and lighting fixtures in the first half of the current fiscal. It currently has a 6% share in the Rs3,000 crore industrial switchgear market and an 11% share in the Rs2,500 crore lighting fixture segment. Havells’ market share in these segments is below potential and these segments are also more profitable,” Satapathy said in his recent report on the company.

To enhance its penetration in Tier III markets, the company will increase its dealer network to over 6,000 from 4,000 now in a year.
The company’s net profit for the second quarter grew 16% to `81 crore as compared to Rs69.5 crore in the corresponding quarter previous year.

Consolidated net revenues grew 19% to Rs1,585 crore in July-September as against to Rs1,335 crore in the corresponding quarter last year.

Private equity deals halve as investment firms sit on the fence

This story first appeared in DNA Money edition on Thursday November 03, 2011.

Private equity (PE) investments in India continue to fall.
PE firms invested around $186 million across 15 deals in October as compared to $347 million in 26 deals in the same month last year, according to data by brokerage J M Financial. The decline in the amount invested and number of deals closed was 46% and 42%, respectively.

In the third quarter of the calendar year 2011, PE firms invested about $2,249 million across 98 deals as against $2,357 million spread over 111 deals a year ago. The third-quarter deal value was also lower in comparison to April-June, the preceding quarter, wherein a total of $2,911 million was put in across 122 deals.

While the decline is very steep, industry experts feel that generalising investment momentum based on a month-on-month data would be unfair.

Avinash Gupta, national leader - financial advisory practice, Deloitte Touche Tohmatsu I (P) Ltd, said, “I think responding to numbers registered in a certain short span is not the right way to look at the overall investment approach by PE firms. This is because one lumpy deal can completely change all the equations and things can suddenly start looking very different.”

However, Gupta agreed that slowdown in investment activity is visible and overall macroeconomic scenario globally is depressing the investment sentiment.

Gupta said there is a high level of uncertainty in the market and hence things are slow. Valuations are being impacted, particularly because interest rates and inflation levels are soaring, he said, adding, the general economic activity and slowdown in demand has made promoters of businesses unsure about their growth plans.

“Companies are still contemplating whether or not to invest in building capacity and to raise funds for it. So while there is enough money with PE firms, which are at various stages of their investment terms, they are adopting a wait-and-watch approach at the moment. It’s a mixed bag in the private investment market where we are seeing decent activity, but deal closures are happening at their own pace,” Gupta said.

However, despite sluggish investment momentum, the average deal size in October 2011 increased to $17 million as compared to $14 million in the same month last year.

The key sectors that saw PE money flow in were consumer, IT/ITeS and financial services with deal values accounting for 21%, 21% and 17% of the total investment. The data also indicated that this year PE firms increased their focus on unlisted companies with 87% of the overall deals as compared to 81% in October 2010.

Top deals in October included $32 million investment in India Infoline by The Carlyle Group, Reliance Equity Advisors’ significant minority stake in VVF for $28 million, co-investment of $25 million by NEA, Canaan Partners and Silicon Valley Bank in Naaptol Online Shopping, investment of $22 million in Max Flex and Imaging Systems by Reliance Equity Advisors and CLSA Capital’s $22 million placement in Resonance Eduventures.

In all, October 2011 witnessed three exits, the largest being $73 million by Warburg Pincus in Kotak Mahindra Bank.

While fundraising environment remained challenging, three new funds were closed, including second close of $550 million by Tata Capital for Tata Opportunities Fund.

On the other hand, two new funds were announced by KKR and SBI Macquarie, wherein the former is raising $6 billion for its second Asian Buyout Fund and the latter is planning to raise $1-1.5 billion for its second infra fund.

A senior official from one of the leading advisory firms said, “It will remain challenging for a lot of PE firms as their limited partners, or investors in the funds, now would like to see returns for their investments made in the past. PE firms which have an interesting theme and investment strategy may still be able to attract some LPs, but others will have to demonstrate performance and focus on making exits with decent returns.”

L&T stuns St, says competition hot as orders vanish

This story first appeared in DNA Money edition on Saturday October 22, 2011.

Larsen & Toubro (L&T) on Friday cut its order growth guidance to 5% from the 15% it had envisaged at the beginning of this fiscal, citing a slowdown in investment momentum and cut-throat competition for orders.

R Shankar Raman, chief financial officer, L&T said the reassessment was necessitated as decisions related to new projects were being deferred. “At the moment, our best guess is that the conditions are going to remain as challenging as they are today and it is quite likely that the growth will be around 5% rather than the targeted 15% earlier,” he said.

The engineering and construction industry has seen considerable slowdown in investment momentum in the last 6-8 months.
Adding to the troubles is the competitive business environment wherein fewer projects are coming up and as such are being fiercely fought for.

“As a result, win rates are dropping for all the participants in the sector and L&T is no exception. Considering this situation and the policy initiatives that are required to be taken to fast-track some of these investment programmes and the confidence that has to be re-found in the business community, we do think we will lose much of the remaining six months in this process of discovery,” said Raman.

As for the engineering and construction behemoth’s revenue growth outlook of 25% for this fiscal, the management said revenue visibility was better than accretion in the order pipeline since 82% of its revenues came from the order backlog.

“Our assessment tells that we should be able to maintain the guidance in so far as the revenue is concerned. The 15-18% of fresh orders that we were banking on to be able to get the revenues up to its full 100% level, despite the correction in the order inflow that we are accessing today, we think should survive. Hence, our assessment now is that the revenue guidance should stay,” said Raman.

For the quarter ended September, the management said new orders fell 21% to `16,096 crore while the total order book was at Rs142,185 crore. Net sales for the quarter were up 19.3% at Rs11,245 crore, while net profit rose 15% to Rs798 crore, including extraordinary gains of `70.8 crore from sale of shares in Mahindra Satyam.

Finally, tipping point for cable TV

This story first appeared in DNA Money edition on Friday October 14, 2011.

A paradigm shift is nigh for India’s television distribution industry, where for years unscrupulous local cable operators have under-declared subscriptions, causing huge revenue losses to broadcasters and platforms.

Over the last five years, while direct-to-home (DTH) has flourished in an environment of voluntary digitisation with around 35 million subscribers, digital cable has stayed laggard.

“The pain in digital cable has only further intensified in the last 9-12 months, when multi-system operators (MSOs) such as DEN and Hathway have added less than 0.5 million subscribers in spite of being adequately capitalised. The ‘hope’ of the regulatory support was a critical reason for this delay,” said Nikhil Vohra, managing director, IDFC Securities Ltd.
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Interestingly, of the 225 million-or-so households in the country, an estimated 20 million are in the metros covered in Phase-I of the digitisation ordinance issued on Thursday.

The rural skew also shows in the DTH pie, with only 9 million out of a total 35 million subscribers from urban areas.

Among other players, Dish TV is expected to extract a sizeable pie from the metros in a mandatory digital environment. Nationalised MSOs such as Wire and Wireless (WWIL), DEN and Hathway are also likely to see sharp increases in their delta gains.

Dish and WWIL are Zee Group companies, which also co-owns Diligent Media Corporation, which publishes the DNA.

“Against a backdrop of extremely poor execution and muted subscriber addition of less than 0.5 million subscribers annually, we now foresee a near three-times jump in digital subscriber addition in the next 12-18 months. This will ensure a sticky base for MSOs ready to monetise,” said Vohra.

“It’s not that companies were not investing into the business earlier,” said, Smita Jha, consulting head - entertainment and media, PwC. “They never had a say as the end-user was free to choose between analog and digital cable, which will not be the case now thanks to mandatory digitisation with defined timelines,” she said.

Locals forced to digitise; better Arpus
Local cable operators (LCOs), which had limited incentive to digitise or partner with MSOs earlier, will now be compelled to undertake digitisation.

“With limited access to capital as also ability to digitise their own network, LCOs are now bound to partner with MSOs. This, coupled with digitisation with addressability, will lead to addressal of the biggest bane in the cable distribution industry — under-declaration (of subscribers),” said Vohra.

Both DTH and digital cable operators will benefit as DTH companies were earlier competing with analog cable operators owing to lower average revenue per user (Arpu) on cable networks. “The Arpu was in the Rs 100-200 range. As a result, DTH companies could not increase their prices. Digitisation would lead to an increase in cable operator and DTH Arpus. It’s a win-win for everyone. While set-top box prices at Rs 1,000-1,200 may look on the higher side in case of digital cable, these prices are declining and will come down further in the coming years. This will be a key factor for digital cable operators looking to grab market share in non-metros, the deadline for which has been set for 2013 and 2014,” said Jha.

Consolidation ahead
Once the key metros get digitised, there will be some amount of transparency in the market in terms of revenue declaration, which will instill confidence in the investor community to participate in the fundraising plans of various players in the industry.

Keeping in mind the funding requirement, a proposal to increase foreign direct investment (FDI) limit in the C&S industry has been mooted already. Once the Cabinet approves a hike in FDI limit to 74% from the current 49%, experts feel it will lead to realignment of the cable and satellite business, spurring mergers & acquisitions.

From a consumer perspective, digitisation will make cable more competitive vis-a-vis DTH.

Now order a pizza on cable
For one, cable would have an interactive two-way communication system and hence a lot of value added services (VAS) which are not possible on DTH.

How about ordering a pizza over cable and receiving a confirmation from the pizza guy, for instance?

There would also be other VAS offerings like digital video recorder, pay per view, broadband internet and IPTV, bringing cable on par with DTH.

The monthly outgo, in addition to purchasing set top box, is likely to remain the same for a bulk of consumers, though it could be higher for those opting for expensive pay channels.
To a large degree, therefore, it will come down to quality of picture and programming, availability of channels, value-added services and of course pricing of the services which is key driver in a country like India.

More capital needed
On the flipside, for the cable operators, the mandatory digitisation will increase the capital requirements.

According to Jehil Thakkar, head media and entertainment practice, KPMG, all the cable companies will now have to think about where the funds are going to come from —- internal accruals, fund raising or take on debt, etc.

“We have estimated overall capex (entire infrastructure cost including set top box and optical fibre cable) for the industry to be around Rs 20,000 crore in the next 3-4 years. Given the state of the market, companies will have to raise money either through private equity or debt while some of the public ones can explore market-based options,” said Thakkar.

Interestingly, while DTH players like Dish TV and Reliance TV already have separate entities —- Wire and Wireless and Digicable, respectively —- to address the cable TV market, there is a possibility of other players also adding cable operations to their business. “This approach will broaden their offerings for the different geographies/ markets in addition to building on the competitive advantage. This could happen through both organic and inorganic routes,” said Thakkar.

Players cheer
Dish TV has hailed the move as a positive one. “This ordinance will certainly help the DTH industry much more than other forms of distribution,” said Salil Kapoor, COO, Dish TV India, adding that DTH has emerged as the platform of choice across all population and socio-economic strata.

According to Sudhir Agarwal, CEO, WWIL, the entire cable TV universe will be converted to digital homes, thus reducing under reporting, bringing in transparency and resulting into boost in subscription revenue.

“Digitisation of existing cable infrastructure will augment the channel carrying capacity, offer better quality and will provide further scope for delivering various value added services. A multi-fold increase in subscriber number is expected. Such exponential growth in subscriber numbers requires huge infrastructure to serve them as well, for which WWIL is well positioned.

M G Azhar, president - strategy and business development, DEN Networks Ltd, feels the initiative will create a paradigm shift in the pay distribution industry and alter the fundamentals of the media sector. “The transition will see the entry of more channels, the spread of broadband and triple play offerings and ultimately a transformation in how households consume content and entertainment in this country,” he said.

Harit Nagpal, CEO, Tata Sky, said it will help transform the sector into an organised industry. “It will aid the organisation of the Industry and result in clearer subscription figures for broadcasters,” he said.

Cabinet nod for full digitisation of cable services

This story first appeared in DNA Money edition on Friday October 14, 2011.

Cable television services in towns and cities across the country will go completely digital in the next three years, the government said on Thursday. The cabinet committee of economic affairs has cleared a proposal for digitisation of cable services in all metros by 2012 and other urban areas by 2014, information and broadcasting (I&B) minister Ambika Soni said.

At present, while there are several direct-to-home and multi-system operators in the urban areas, analog systems also abound, leading to issues of transparency and control.

The ordinance will allow the I&B ministry to insert a clause in section 4A of Cable Act, thereby making a digital addressable system mandatory in the cable sector. This will have to be done in four phases as recommended by the I&B ministry and the Telecom Regulatory Authority of India.

"Cable operators will have to abandon analog in the four metros by March 31, 2012. Cities with a population of one million will be covered by March 31, 2013. All urban areas would be covered by September 30, 2014. The entire country will be covered by December 31, 2014," said Soni.

The ordinance will now pass through the law ministry to the president for a final signature, post which it would be ratified by Parliament within six months.

The cable and satellite television industry has hailed the initiative as a game-changer.

Mandatory digitisation is expected to reduce revenue leakage in the system where the level of under-declaration of subscribers and revenues is said to be as high as 80%. With compulsory digitisation, errant operators can no longer fake the numbers.

Experts feel the initiative is a win-win across the value chain. Cable operators benefit as capacity constraints are removed and they are able to offer more channels by going digital, thereby boosting subscription revenues.

Additionally, they get to offer a host of value added services such as movie-on-demand, electronic programming guide, internet and high-definition channels as additional revenue streams.

For the broadcasters, on the other hand, the initiative means a reduction in the carriage fees they need to pay cable operators to ensure their channels are beamed in a certain locality.

As for the end-consumer, there is an assurance of greater variety and better quality of content. Indeed, it is likely there would be an explosion of channels as even niche plays become viable.

WNS lines up FPO, most likely to facilitate Warburg’s exit

This story first appeared in DNA Money edition on Thursday October 13, 2011.

WNS, the New York Stock Exchange-listed business process outsourcer, has filed a shelf registration statement with the Securities and Exchange Commission (SEC) to offer and sell up to $50 million of ordinary shares/ American depositary shares (ADS).

That could give private equity major Warburg Pincus a chance to exit its majority shareholding in the company.

The sale could be done in one or more offerings, WNS said in a statement.

Shelf registration is a regulation that a corporation can evoke to comply with SEC requirements for a new stock offering up to three years before doing the actual public offering.

Vishal Mahadevia and Niten Malhan, managing directors at Warburg Pincus India, were not available for a comment. “The firm is bound by internal operational policies, which does not allow discussion of its investment activities. Warburg Pincus is unable to share any views regarding your queries,” a spokesperson responded.

Parth Iyengar, head of research, Gartner India, said the move may not necessarily be indicative of the private equity firm’s exit from WNS. He said economic instability in western world may be forcing Warburg Pincus to look at monetising its stake in the BPO firm. “It must be concerned about the economic instability and so must be considering monetisation some of its shareholding in WNS before its value depreciates more.”

Generally, when an investor is looking to exit a venture the shelf registration is for offloading of major stakeholding and in a trickle like it was in the case of WNS, said Iyengar.

Once approved by the SEC, the shelf would allow Warburg Pincus, which is the largest shareholder in WNS holding 48% as of June 30, 2011, to offer and sell up to 2.14 crore ordinary shares or ADSs.

It will be up to the private equity firm to exit its entire holding in the company through one or more offerings.

WNS will not receive any proceeds from the sale by Warburg Pincus.

Keshav Murugesh, group chief executive officer, WNS, did not give away specifics related Warburg’s exit plans.

“The shelf will provide us the flexibility to sell shares as and when required to achieve our strategic objectives and fund our growth plans including capital expenditures, acquisitions and other investments in the business,” was all he conceded.

Interestingly, Warburg has been trying to exit its investment in WNS for a while now, but wasn’t able to, because of disagreement with the WNS management over the exit approach.

According to media reports, WNS was favouring Genpact, which was one of the largest bidders in a stake sale exercise conducted in the last quarter of 2009.

However, Genpact’s bid was in the form of stock and not cash while the PE firm (Warburg Pincus) was looking at the highest bidders offering cash in favour of their investment.

Coming soon: The Bellagio and MGM Grand at Bandra-Kurla Complex

This story first appeared in DNA Money edition on Wednesday October 12, 2011.

Mukesh Ambani continues to make inroads into India’s hospitality sector — after taking a stake in East India Hotels of the Oberois. A special purpose company promoted by Ambani and South Mumbai realtor Maker Builders is setting up two hotels — a Bellagio and an MGM Grand — at Maker Maxity in Bandra-Kurla Complex.

The company has signed an agreement with MGM Hospitality to manage and run the hotels. The Las Vegas Bellagio is known for its dancing fountains and high-end luxury suites. Its promoters say they are keen to merge Mumbai’s personality in the Bandra Bellagio’s architecture.

MGM will also bring in Skylofts, which are serviced apartments. DNA Money had first reported Maker Maxity’s plans to bring in the Bellagio hotel in June last year. The hotels are expected to be operational in 3-4 years from the time work starts.

Gamal Aziz, CEO of MGM Hospitality, said the location’s proximity to the central business district, the entertainment industry and affluent residents provides a perfect setting for the confluence of energy, indulgence and luxury that the hotels will bring to the destination. “It is a huge milestone in our strategy to extend our brand reach in the Indian hospitality market,” he said.

Officials of the joint venture did not respond to DNA’s mail. Calls made to Rishi Kapoor, vice-president — India development, for MGM, remained unanswered.

Google India to bring 500,000 Indian Small Medium Businesses online for free

Google India launched a nationwide initiative to assist small medium businesses in India to get online with a free website, personalised domain and hosting. Called ‘India Get Your Business Online,’ this initiative aims to break down the barriers that stop small businesses from getting online -- by offering a quick, easy and free tool to set up and host a website.

With this initiative, Google intends to help 500,000 small medium businesses in India to get online in next three years, working with web hosting provider HostGator.

Small business owners in India can logon to www.indiagetonline.in and use the tool to get a get a free, easy-to-build website and web hosting for one year powered by HostGator. Businesses also get a customised domain .in name and free tools, training and resources to succeed online.

According to union rural development minister Jairam Ramesh, "SMEs are the future business leaders of India and their growth is a priority for the UPA government and its policies. We want to see India's SMEs grow to become recognized Indian brands, and a presence on the Internet is absolutely essential for this. I therefore welcome Google's initiative in launching India Get Your Business Online for SMEs. This will help SMEs modernize their operations and reach out to more customers in India and abroad. Indian SMEs should make the most of such opportunities to establish their presence on the Internet. I wish this initiative all success."

Highlighting Google’s commitment to India, Nikesh Arora SVP & Chief Business Officer of Google Inc. said, “Google has always believed in the power of the Internet to help small businesses thrive and to make people's lives easier by making information more accessible and useful. We recognise India as a high growth and high potential Internet market in the world and we’re committed to play the role of a catalyst to bring the benefits of the internet economy to small and medium businesses in India. We have received tremendous response to this initiative in other countries and we’re very excited to bring this initiative to India and empower local businesses as more and more Indian users get online.”

While India is home to an estimated 8 million small and medium businesses, only about 400,000 have a website. The initiative is designed to bridge the information gap that exists online due to the lack of presence of local Indian businesses on the Internet. Businesses often believe that getting online is too complex, costly and time-consuming; this perception prevents many SMBs from taking the first step towards building an online presence. Google India and HostGator plan to change that through this initiative. In addition, HostGator will also offer free support in creating, hosting and managing the website for a period of one year without any cost through its toll free call centers 1800-266-3000.

“Small and medium businesses have been an important focus area for us and we have launched a number of initiatives in India to support SMB’s who are already online. By partnering with HostGator we’re changing the game - our consumers will benefit from having access to better information of local businesses, business owners will benefit as their customers will be able to find them easily - so it’s a win-win proposition for both. We’re investing major resources in this campaign to help as many businesses as possible to get online. We aim to get at least 500,000 businesses online in the next three years,” said Rajan Anandan, managing director and VP sales and operations for Google India.

“SMBs form a very substantial part of our global customer base and we are committed to offer world class service to Indian SMBs. With Google, we have the perfect partner and we are very excited about the opportunity this represents for small and medium businesses in India. We will do our best to help out business in India build their online presence and also offer 24/7 support through our call center,” said Taylor Hawes, Marketing head of HostGator.com.

India get your business online program is also supported by Federation of Micro, Small and Medium Enterprises (MSMEs), popularly known as FISME. FISME, the non-profit organization will work with Google India to help SMBs get online through direct customer outreach and events.

V K Agarwal, president, FISME said, “With Google search being the most preferred search service on both the desktop and mobiles in India, this initiative of offering free domain, dynamic website and promotional tools, brings unparalleled advantage for small businesses in India. FISME with its network of 730 MSME associations will help the Indian Small businesses to make the most of this opportunity and benefit from this program. It is going to be a game changer.”

Details of www.Indiagetonline.in website creation tool:

● Free: It’s free to set up your website. The domain is free for 1 year, and it’s free to maintain your website for 12 months.

● Quick: The website tool takes 15 minutes from sitting down to being found online

● Easy: You don’t need to be a tech whiz to get started. All you need to start is your address, phone number, TAN/CIN or PAN to verify you as a business

● The website is simple because customers are looking for simple information online

● If you want to make your website work harder, you’ll have access to steady stream of free tips and tools from the Getting Indian Business Online team and a free coupon of worth Rs. 2500 INR advertising trial from Google AdWords to help promote your site.

● Gives you your own .in domain

● You get a Google Apps account - free personalized email ids

● Other features include photos/logos, integration with social media platforms

● After the first year, SMBs can choose to pay a monthly pay-as-you-go to maintain their website using HostGator.

● At the end of the first year, they’ll have to pay a nominal charge if they wish to renew their domain name. They can cancel their website at any time.