L&T earnings down, says road remains challenging

This story first appeared in DNA Money edition on Tuesday, July 23, 2013.

Engineering and construction major Larsen & Toubro’s (L&T’s) first quarter (Q1, April-June) net profit declined 12% on-year to Rs 756 crore but revenue grew 5% to Rs 12,555 crore while operating profit margin declined 0.6% to 8.5%.

But the firm’s MD and CEO K Venkataramanan struck a note of optimism that L&T retains its ability to undertake and deliver projects in a way that adds to shareholder value.

Yet, he conceded that “on the ground scenario” in the country is not rosy but full of challenges.

“We are going through the most challenging times...  The government is trying to push some big ticket items primarily in the areas of freight corridor, transmission and roadways.”

R Shankar Raman, CFO, said that opportunities are limited and there is competitive pressure on pricing. “I don’t think you’ll find (now) margin levels reported earlier in 2007-2009...”

L&T management expects to maintain its guidance on Ebitda margins of 11-11.5% for the year. During Q1, order inflow improved 28% to Rs 25,159 crore, increasing the order book size by 8% to Rs 1,65,393 crore.

Analysts tracking L&T said Q1 numbers were lower than expected, hence the stock’s 7.5% dive to Rs 901.95 on BSE on Monday, the biggest drop in nearly four years.

Sanjeev Zarbade, vice-president of the private client group research at Kotak Securities, said the Q1 numbers were disappointing in the short term; however, on a long-term basis, they remain positive.

Viral Shah, senior research analyst - infrastructure, Angel Broking, concurred. But he pointed out that L&T’s numbers were below expectations on both the revenue and profitability fronts. He attributed this to “lower-than-expected execution and poor operating performance”.

However, L&T may benefit from the gradual recovery in the capital expenditure cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, said Shah.

So, Angel Broking is likely to revise its target price and rating on L&T, said Shah.

L&T officials said the country’s infrastructure industry has not been faring well for a while now due to economic slowdown. Hence, the company has been aggressively pursuing international markets, which helped increase its international order book size by 16% during Q1.

“While international markets have their own challenges, we are making inroads there and the results should be visible in the near future. There is a business opportunity overseas and we will secure our share, thereby insulating ourselves from the India story, which is likely to be a little slow in the next two years,” said Venkataramanan.

Pvt placements in agri biz up 75% in Jan-Jun 2013

This story first appeared in DNA Money edition on Monday, Jul 22, 2013.

A substantially large Indian agricultural market, coupled with increasing activity in the sector, has led to a significant increase in private equity (PE) and venture capital (VC) placements.

Going by data compiled by research service Venture Intelligence, the sector witnessed a 75% year-on-year increase in PE/VC investments during the first six months of this calendar year.

A total of nine agri-business companies raised around $126 million in the first half compared with $72 million raised by six companies in the same period last year.

Agriculture and related businesses comprise the entire value chain, encompassing foods, agriculture produce, seeds, fertilisers, agri-technology and agri-infrastructure.

Industry experts feel businesses addressing the bottom of the pyramid offer a great opportunity for focused investment firms.

“Investing in agriculture and related businesses fit perfectly into their investment theme,” said a top official with an international transaction advisory.

The largest PE investment in the industry during 2013 was Multiples Private Equity’s Rs 250 crore ($43.24 million) investment in Bangalore-based Milltec Group, which develops technology and machinery for rice milling, roller flour milling, maize (corn) milling and agro-processing plants.

Another buyout focused PE firm, India Value Fund, has committed $40 million to pick up a majority stake in Kochi-based spices firm VKL Seasoning. VKL, a spin-off from the Vallabhdas Kanji Group, provides seasonings and flavours to customers, typically quick service restaurants, in India, the Middle East and Africa.

Interestingly, this time around, the agri-business sector also witnessed participation from investment firms based out of the Middle East region.

For instance, in February, Qatar-based Hassad Food acquired 69% stake in PE-backed rice exporter Bush Foods Overseas for around Rs 800 crore ($135 million), giving existing investor StanChart PE a 2.5 times return on its investment.

Similarly, last week, publicly listed rice exporter Kohinoor Foods agreed to sell a 20% stake for almost Rs 113 crore ($18.8 million) to Al Dahra Holdings, an Abu Dhabi-based agriculture focused investment firm.

Arun Natarajan, CEO, Venture Intelligence, said the rising appetite for such companies among overseas investors and also the higher prices being enjoyed by agri commodities in recent years could continue to sustain PE interest in the industry.

Apart from PE buyouts, the latest quarter (ending June) also witnessed VC funds and specialist agri-business focused funds stepping up their investment activity.

Omnivore Partners, an agri-business focused investment fund, announced two new investments in the latest quarter – in pork products firm Arohan Foods and fly trap maker Barrix Agro Sciences.

Additionally, Khyati Foods and Lawrencedale Agroprocessing attracted VC funding during the quarter from SEAF and Sarona Asset Management and Aspada Investments, respectively.

Lupin targets 30% topline from US branded biz

This story first appeared in DNA Money edition on Wednesday, July 10, 2013.

As part of its long-term growth strategy, Lupin, India’s third largest pharma company, is looking to increase contribution of branded business to its overall US revenues to 30% from 21% last fiscal, mostly through the inorganic route.

Lupin group president and CEO-designate Vinita Gupta has been maintaining since the last few quarters that acquisitions would be part of the company’s overall business approach.

While scouting for brands in some geographies, the company is simultaneously looking to buy companies that can provide new technology and market access.

Balaji Prasad and Rohit Goel, analysts at Barclays Equity Research, said Lupin has identified key growth drivers for the next 7-10 years.

“Apart from increasing contribution from branded business, the management will be leveraging focus on speciality segments like derma and oral contraceptives in other geographies and sustaining its strong traction in the US,” they said in a report on Monday.

Among other key growth-drivers would be a strong balance sheet with the flexibility to raise up to $1.7-2 billion if required; a strong distribution network; alliances with doctors to drive growth in Japan; and strategic partnerships to strengthen domestic business.

“Lupin plans to enter the dermatology segment and could potentially acquire derma assets too in the business,” the Barclays analysts said.

The coming years will see Lupin management focus strongly on the oral contraceptive (OC) and dermatology segments. Industry experts think OCs in the US could also be leveraged to venture into other big markets such as the $1.5 billion OC market in Brazil.

With the resumption of OC approvals in the past six months (which saw eight approvals and one launch), OCs are being viewed as a major growth-driver for Lupin.

DB Realty to de-focus from hotel projects

This story first appeared in DNA Money edition on Monday, July 8, 2013.

With its real estate business getting back on track, Mumbai-based DB Realty has decided to not take up any new hospitality projects and shelve earlier plans.

Properties that have already been developed and are running will be retained by the company, while those in the pipeline will either undergo change of use or get divested.

Vipul Bansal, chief executive officer, DB Realty, said, “Hospitality is not the focus area and there is no plan really to expand the hospitality asset portfolio anymore. Projects where work has not started will either get converted into residential developments or we will get rid of them. The focus will purely be on the realty business.”

Without divulging details, Bansal said a development in Pune will get converted to residential project while the company will sell up to 49% in the land parcel (7.7 acre site) at Delhi International Airport’s (DIAL) new hospitality district.

The plot at DIAL is under DB Hospitality Pvt Ltd, a group company in which DB Realty hold 49% stake. Earlier plans were to house four hotels and a large convention centre. However, plans were restructured later to develop 1.3 million square feet of the plot featuring a hotel, a convention centre, serviced apartments along with 300,000 sq ft of high-end retail space.

“It’s a very ideally located land with roads on three sides. We are not developing it anymore so whosoever comes in as a strategic partner will decide its configuration,” said Bansal.

On reports about the company looking to sell operational hotel projects in Mumbai and Goa, Bansal said there were talks earlier with an investor to sell a minority stake.

“These are big landmark hotels, something that we’d like to retain,” said Bansal.
The Park Hyatt hotel development that was to come up at the company’s Charni Road, Mumbai, site has also been put on hold.

The company owns a small hospitality asset in Mundra (Gujarat) and another 50-odd guestroom property in Rajasthan, which are on the block for a while.

“If some body wants to buy we are more than willing to sell. However, there is no stress in the system anymore. Our banking lines are already open to meet day-to-day requirements. It is business as usual and any stake sale in our hotel projects will be purely opportunistic,” said Bansal.

On the residential front, the company has concluded sales worth about `800 crore in second half of the last fiscal.

The realtor is in advanced stage of getting key approvals for its 4-5 projects in Mumbai and expects to launch them in 6-8 months. The company will hit the market with 5-6 million sq ft in Mumbai at prices exceeding Rs 30,000 psf.

“We are talking about Rs 15,000 crore of fresh inventory in the market, which is very huge for us. We are very comfortable with Rs 500 crore debt as we have cash flow of Rs 70 crore every month. All our inventory is paid for so we don’t need to do any of the things done by other players in the market,” he said.

RCom to spin off land assets

My colleague Beryl Menezes co-authored this story first appeared in DNA Money edition on Monday, July 8, 2013.

Reliance Communications (RCom) on Sunday announced demerger of its real estate business into a separate entity to be called Reliance Properties, subject to “approvals from shareholders, lenders, courts”.

The real estate firm will likely be listed within four months. RCom shareholders will be given one share in Reliance Properties free for every one share of RCom they possess.

Analysts pegged the indicative value of one share of Reliance Properties at Rs 60, while the market price of an RCom share is Rs 130. This translates to almost 50% enhancement in the RCom shareholder’s value.

Analysts said the spin-off decision looks like a ‘desperate attempt’ by the highly leveraged RCom to pare its Rs 38,864 crore debt as of March this year.
Assets of Reliance Properties will include RCom’s prime property in Dhirubhai Ambani Knowlegde Centre (DAKC, pictured) in Navi Mumbai and a prime property near Connaught Place in Delhi.

RCom also has land in the new business district in Hyderabad and in Kolkata, which may also be considered for possible sale at a later stage.

The collective monetised value of 135 acres in Mumbai with a saleable area of 15 million square feet and four acres in Delhi is estimated to be about Rs 12,000 crore.

RCom said in a statement that it will now focus on its core wireless telecom and enterprise business.

An RCom spokesperson said the demerger will a transparent process and would not impact RCom’s profitability.

Analysts said the demerger seems to be aimed at creating large shareholder value, similar to the value created from the initial demerger of the Anil Ambani-led Reliance Group from Reliance Industries in 2005.

Sources said that RCom may be in discussions with one or more suitable investors already. RCom’s management on Sunday admitted that Reliance Properties would be also working with foreign investors to sell / lease its real estate assets.

Further details about the new company – management, headquarters, so on – will be revealed once the mandatory approvals are obtained.

In December 2012, RCom had entered into an agreement with Wanda, China’s leading real estate group, to lease out assets in DAKC and Hyderabad. RCom confirmed that the property up for grabs as part of Reliance Properties would be separate from that currently under development by the Wanda group.

Harit Shah of Nirmal Bang said, “The (spin-off) move is positive for (RCom) shareholders, as the land was not being used. Now, it will generate some value.

While the benefit to RCom will accrue only after the process of acquiring a stake in Reliance Properties is complete, the fact that the company had to hive off its real estate assets due to the debt burden, even when it has better assets like FLAG, which it is unable to sell, speaks volumes about the current state of the company. Even after floating Reliance Properties, what is key for RCom is to get the actual valuation of the land from investors, as estimated by the company.”

Sanjay Dutt, executive MD-South Asia, Cushman and Wakefield, a real estate firm, said, “Large corporates that are under financial pressure tend to use their non-performing assets to raise funds for the core business. While this is not a bad strategy – it was earlier used by Siemens, Tatas and HUL – ideally, RCom should have sold the land assets, as they are not a real estate company.

Further, one would have liked to know what is the vision of the company and whether the alternate route (if somebody wants to unlock the value of the unutilised assets) is to auction, sell land, put the money in the bank or give it to the shareholders and be happy.”

Ambar Maheshwari, MD-corporate finance, Jones Lang LaSalle, another property firm, said, “Real estate prices have gone up despite the tough economic environment in the last few years. Most corporates are looking at somehow monetising or optimising it.”

Cement prices sag, may fall further

This story first appeared in DNA Money edition on Saturday, July 6, 2013.

Cement prices declined across the country in the last fortnight except in South despite efforts by manufacturers to arrest price fall ahead of the lean monsoon season.

Prices fell Rs 10-20 per 50-kg bag in the last 10 days of June after rising Rs 5-25 per bag between May-end and early June in northern, eastern and some pockets of western India, according to a pricing trend report by Motilal Oswal Securities.

The demand too remains sluggish in most regions and may worsen in the next one month due to monsoon. Prices are likely to fall further due to weakness in demand.

Jinesh Gandhi, vice-president - research (cements), Motilal Oswal, said in the report that after rising till mid-June, prices on a month-on-month basis in north and east were down by Rs 8-15 per bag.

“However, central India posted relatively lesser volatility, albeit exit prices (June-end price) were down by Rs 10-15 per bag. Markets in west – Mumbai and Nagpur – remained mostly stable though Pune and Ahmedabad saw strong swing during June. Raipur (east) and Bhopal (central) showed stable to marginal increase in prices,” he said.

Cement firms generally raise prices ahead of monsoon as June to September is a lean period for sales.

In Pune, after rising by Rs 10 in May, prices went up by another Rs 20-25 in June. However, in the second fortnight of June, they fell by Rs 20.

Prices fell Rs 40 per bag to Rs 225 in Ahmedabad, before rising to Rs 260-265 per bag due to production discipline, which, some dealers said, was about 30% by Tier I players.

According to the report, mid-June prices of Tier II/ outside brands (like Wonder cement) went down to as low as Rs 197 per bag in Ahmedabad.

In Delhi, Jodhpur and Chandigarh, prices were down Rs 5-10 per bag. After Rs 15-20 per bag increase in May, Delhi and Jodhpur saw another increase of Rs 10 per bag in June before reversing by Rs 20 per bag in the last couple of weeks.

Contrary to the declining trend, markets in south India (the first to hike prices) saw cement prices either remain stable or increase.

“Prices in AP were up by Rs 90-100 per bag over past 45 days, led by production discipline. AP dynamics impacted the adjacent markets positively with Bangalore and Chennai seeing Rs 15-20 increase,” said Gandhi.

Some dealers from central and eastern parts see good harvesting season boosting rural demand, he said,

“Overall, while visibility remains weak for the near term, medium-term demand outlook has optimism with several infrastructure/power projects underway,” he said.

New DTH connections to cost more on rupee fall

This story first appeared in DNA Money edition on Friday, July 5, 2013.

Those looking to buy a new direct-to-home (DTH) connection, get ready to shell out more.

Given the rupee’s decline, DTH operators are left with no option but to pass on the incremental cost of importing set-top boxes (STBs) to new subscribers.
Leading the pack is DTH market leader Dish TV, which has a 28% share of India’s $1.5 billion, 32.4 million subscriber (2012 figures as per Media Partners Asia) DTH industry.

The company has increased the prices of its standard definition (SD) and Dish Plus recorder STBs by Rs 250 effective Thursday to Rs 2,249 and Rs 2,349, respectively. No hike has, however, been effected for high-definition (HD) set-top boxes, which continue to be sold at Rs 3,099.

The increase in STB prices more or less mirrors the rupee’s decline against the dollar. The local currency has lost almost 12% in the last two months and closed Thursday at 60.13.

Dish TV officials did not share further details citing silent period for their fiscal first quarter results, which are due soon.

Other DTH players, including Tata Sky, Reliance Digital and Airtel Digital are also hiking prices.

Harit Nagpal, CEO & MD, Tata Sky, the Tata Sons DTH joint venture with Star India, confirmed the price hike, saying changes in currency rates hurt the company since it imports all its STBs.

“New customers will now get a Tata Sky connection at a marginal (8-10%) increase owing to the falling exchange rate of the Indian rupee,” he said, adding that the new rates took effect on July 1.

A Reliance Digital TV spokesperson, too, confirmed a Rs 260 hike in SD set-top boxes to Rs 2,250 from July 4.

Officials from Videocon d2h and Sun Direct could not be reached.

Though Airtel Digital has not formally announced its decision yet, a company official said a price hike is inevitable.

“DTH companies are already facing challenges by offering STBs at subsidised rates. The depreciating rupee is only making things tougher. I’m most certain that STB prices will be increased in more or less the same proportion to what competition undertaken,” the official said, requesting anonymity.

The DTH industry is on a growth trajectory thanks to compulsory digitisation prescribed by the Telecom Regulatory Authority of India. Industry experts feel DTH players will benefit the most in the third and fourth phases of digitisation, covering the entire nation by December 2014.

A report by Media Partners Asia, an independent provider of information services focusing on media, communications and entertainment industries, the Indian DTH industry will grow to $3.9 billion and  63.8 million subscribers by 2017 and $5 billion and 76.6 million subscribers by 2020.

Infra companies rope in foreign partners

This story first appeared in DNA Money edition on Monday, July 1, 2013

Last week, IL&FS Transportation Networks (ITNL) partnered with Japanese road construction firm East Nippon Expressway Co to tap public private partnership (PPP) projects in India. 

Tata Sons’ wholly owned subsidiary Tata Realty & Infrastructure Ltd (TRIL) is seeking foreign collaborations to bid for urban transportation projects, a space it believes will only get bigger in the coming years. 

For airports development, TRIL is understood to have got on board a foreign partner to bid for upcoming projects. 

A host of other infrastructure companies too are seeking foreign allies to grab a bigger share of Indian  infrastructure growth story. 

Overall infrastructure spend under the 12th Five Year Plan (2012-17) is estimated to be around $1 trillion (Rs 60 lakh crore). Half of the figure is expected to be invested by the private sector. 

“In terms of the overall capacity addition, it would be the largest infrastructure build-up in the country and more than what has been built in the last two Five Year Plans put together,” said Mukund Sapre, executive director, ITNL. 

He said the power sector will see the largest investment at Rs 15 lakh crore, followed by road and bridges (Rs 9.5 lakh crore), telecom (Rs 8.5 lakh crore), railways (Rs 4.5 lakh crore), irrigation (Rs 4.5 lakh crore) while ports, airports, water and sanitation, logistics, etc will make up the rest.

But why foreign collaborations?

Sanjay G Ubale, MD & CEO, TRIL, said “Foreign collaborations have become important as infrastructure projects are now getting bigger and complex requiring a lot of technology in terms of construction in addition to sound project management skills.” 

He said such tie-ups help in pre-qualifications in the government tenders.

“There are various terms and conditions required to be fulfilled to pre-qualify when the government puts out a tender. Some of these criteria can only be met by a foreign construction company,” Ubale said.

TRIL had partnered with French company Vinci for the Mumbai Trans Harbour Link – a Rs 9,360 crore, 22 km freeway grade road bridge connecting Mumbai and Navi Mumbai. The contract is likely to be awarded by August.

Also, the infrastructure projects tend to be very large, calling for significant investments, which a single company may not be able to garner. 

Most collaborations happening currently are for attracting foreign capital. 

“Since in any collaboration the partner has to bring in capital to the extent of his participation, financial health is an important criteria,” said Sapre.

Sensing opportunity, many financial institutions too have formed joint ventures to build up infrastructure portfolios such as infrastructure fund by Macquarie-SBI. 
Similarly, many other non-banking financial companies have set up infrastructure development funds to provide debt funding. 

Of the total infra spend Rs 40,000 crore is estimated to be expended on the EPC works for roads, ports, solar power, thermal power, railways, etc. giving ample opportunities for private investment. 

“The total investment envisaged during 2012-2017 is estimated to be $800 billion. The Indian infrastructure companies should see their order book growth by 20% annually over the next five years,” Sandeep Upadhyay, senior vice-president and head-infrastructure solutions group, Centrum Capital, said. 

While all the infrastructure sectors provide excellent opportunities for investments major attractions would be in categories such as roads, railways, ports, power and airports, he said.

Private FM operators favour higher FDI cap

This story first appeared in DNA Money edition on Saturday, June 29, 2013.

The Association of Radio Operators for India (Aroi) is understood to be in favour of an  increase in the foreign direct investment (FDI) limit to 49% from the current 26%, as proposed by the panel led by Arvind Mayaram, secretary, Department of Economic Affairs.

The Aroi governing body, in a meeting on Friday deliberated on the panel’s suggestions ahead of the inter-ministerial group’s meeting next week.

An industry source said the deliberations were not yet over and the matter has been opened to voting. “There is overwhelming support for increased FDI. The ministers will be consulting with leading industry layers on Saturday, post which, the matter will get discussed by the inter-ministerial group early next week,” said the source.

Officials of My FM, Radio City and BIG FM could not be reached for comments.
“It is a bit early to make a concrete statement considering the matter is still being discussed. Aroi has not gone official with its views. We’ll have to study Aroi’s stance and take a call on our approach accordingly,” said a top official of one of the big five private radio companies.

In May, the Union Cabinet had approved the EGoM’s decision to auction 839 channels in 294 cities as part of the third phase of private FM radio. The new FM radio frequencies will be opened for cities with a population above one lakh.

Currently, 86 cities are covered by FM radio services.

Unlisted Tata infra firms aim for 4x orders

This story first appeared in DNA Money edition on Thursday, June 27, 2013.

Tata Housing, Tata Projects and Tata Realty & Infrastructure, the Tata Group’s unlisted infrastructure entities, are on course for a four-fold increase in order book over the next five years.

The current order book (fiscal 2014) stands at Rs 15,000-20,000 crore and the goal is to ratchet this beyond Rs 70,000 crore in the next five years.

The Tata Group, operating in the Indian infrastructure space since 1910, has eight companies across sectors like energy, telecom, realty, transportation, infrastructure, project execution, project consultancy.

They contributed $12.5 billion, or 12.4%, to the group’s overall revenues in 2011-12.

Siddhartha Roy, economic advisor to the group, said the ratio of private and public sector in the country’s infrastructure spend used to be 25:75 in the 10th Five Year Plan, which increased to 36:64 in the 11th and is almost 50:50 in the 12th.

“What this basically means is that a very large part of the investment or the funding for this investment has to come from the private sector. The group has already made significant investments in the area of power, telecom, housing, infrastructure (roads, airports, urban transportation) etc and will be aggressively building the pipeline across infrastructure projects in the coming years,” said Roy.

Of the envisaged Rs 70,000 crore orderbook, the share of Tata Projects Ltd will be about Rs 25,000 crore, while it will be Rs 24,000 crore and Rs 22,700 crore from Tata Housing Development Company and Tata Realty & Infrastructure, respectively.

Sanjay G Ubale, managing director and CEO, Tata Realty, said investments will be in areas like road projects (Rs 7,500 crore), airport (Rs 5,000 crore), urban transportation (Rs 3,000 crore), industrial park (Rs 3,000 crore), real estate (Rs 4,000 crore) and hospitality (Rs 200 crore).

“We are looking at three airport projects of which work on the Jamshedpur site has already started. We will also bid for the Goa and Navi Mumbai airport projects as and when they are invited. On the roads front, there are 10 projects for which bidding is likely to happen and we should get at least two projects if not more,” Ubale said.

The commercial real estate space currently offers huge potential for inorganic growth and the company should be concluding a few deals in the coming few quarters in addition to taking the organic approach to building up portfolio, he said.

As for Tata Housing, the company has been growing at almost 100% compounded annual growth rate (CAGR) over the last 4-5 years and currently has 26 signed projects at various stages of planning and execution.

With approximately 704 acres of landbank, the company currently has 55 million sq ft under development across 10 states across including eight major cities and 11 locations.

Brotin Banerjee, managing director and CEO, Tata Housing, said growth this year might be relatively slow mainly because of delayed approvals and general slowdown in the market.

“Having said that we have over 90 million sq ft in the pipeline under various stages of approvals. We are hoping to sign a very big private-public partnership project in Sri Lanka which should happen in the next couple of months.”