India Incs Profitability Takes a Hit as Demand Slump,Interest Costs Hurt

A sharp jump in interest burden & depreciation reduces net margins to 6.7% in Dec quarter from a high of 11% 3 years ago 

A prolonged demand slump,and growing interest cost and depreciation have started denting the profitability of Indian corporates ,with the net margins of asample of BSE 500 companies sliding to a three-year low in the quarter to December 2012.In other words,a greater chunk of operating profit went towards interest payment,according to an analysis by the ET Intelligence Group.

The analysis shows net margins shrank to 6.7% in the quarter to December 2012,the lowest in 13 quarters,compared with a high of 11% three years ago,for the sample companies,excluding banking and finance,and oil and gas companies.A sharp spike in interest costs and depreciation has pulled down these companies profits.

Interest outgo as a percentage of profit before interest and tax,or PBIT,rose to 29% during the December 2012 quarter from 14% during the December 2009 quarter.The ratio has stayed above 20% for the last six quarters.Given the weak equity markets,companies used leverage to expand capacities over the past few years.Also,interest costs went up during the period, says Bharat Iyer,head of equities research,JP Morgan.

According to Iyer,now that capacities are online,sales are not picking up due to lower demand.Consequently,capital costs are higher and have adversely impacted profit margins. Saurabh Mukherjea ,head of institutional equities,Ambit Capital,said operating margins have been under pressure for the past few quarters because companies are finding it difficult to pass on the input costs effectively to consumers.

This,he says,has led to a higher proportion of interest to service borrowings.Higher interest costs will translate into lower profits for shareholders,as is bound to happen during a slowdown.Compounding the problem is the fact that the proportion of depreciation in profit before depreciation,interest and tax,or PBDIT,of Indian companies is gradually inching up as recent capacity expansions are unable to generate higher revenue.

The ratio touched a three-year high of 25 in the December 2012 quarter from a low of 19% in the March 2010 quarter.When companies spend more on covering the cost of depreciation,it has a negative impact on the net profit. Sanjeev Prasad, senior executive director,Kotak Institutional Equities,reckons new projects that have been commissioned were financed through aggressive borrowings,but they are yet to contribute to revenue and profits.Companies are facing operational issues,which are hindering profitability,he says. 

Prasad says the uncertainty over coal and gas availability has impacted power and metal companies.According to the analysis,net margin of power companies dropped to 8.7% in the December quarter from over 18% three years ago.For steel makers,it fell to 0.7% from 7.8% by the same comparison.Other sectors that reported a fall in net profitability were capital goods and cement.Sectors such as FMCG,IT,and entertainment & media showed resilience as companies were largely able to retain margins.Analysts expect the pressure of interest and depreciation to continue in the near term.

Volumes are not growing,which has impacted sales and profits as fixed costs such as interest and depreciation continue to weigh, says Dhananjay Sinha,chief economist and institutional research head,Emkay Global.According to Sinha,the asset turnover ratio for India Inc has fallen below one,reflecting the deteriorating ability of assets to generate sales.We need meaningful topline growth for asset turnover to increase,which looks doubtful in the immediate future, he says.

Efforts by the Reserve Bank of India,or RBI,to make borrowings cheaper may ease pressure on interest costs,but this again will be with a lag effect.The RBI has taken measured steps to reduce interest rates and improve liquidity.But monetary transmission could take time since the savings rate in the economy has fallen, says JP Morgans Iyer.Ambits Mukherjea thinks it will take two-three quarters of demand growth for revenues to pick up.We may see easing in interest cost from the March quarter,but it may take another six months for margins to improve, he says.

Weekly Stocks Outlook

 Bank Stocks Outlook:

Bank stocks are likely to trade rangebound with a positive bias next week tracking upbeat cues from the broader markets, analysts said. An analyst with a large domestic brokerage said that the preference for private bank stocks is likely to rise among investors ahead of the announcement of Jan-Mar earnings.

On HDFC Bank, ICICI Bank, and YES Bank, while it is neutral on Axis Bank shares. The price target on HDFC Bank is 721 rupees while for ICICI Bank and Axis Bank it is 1,175.00 rupees and 1,387.45 rupees,

respectively.

 IT Stocks Outlook: 

Shares of information technology companies are seen rangebound next week, with analysts expecting most stocks to witness some consolidation following their rise over the last one month.

Analysts said IT stocks will move sideways until companies announce their Jan-Mar and 2012-13 (Apr-Mar) results in a couple of weeks.

Capital Goods Stocks Outlook: 

Shares of most capital goods and engineering companies are seen underperforming next week as most companies are likely to have had lower-than -expected order inflows in Jan-Mar, dealers said.

Despite attractive valuations, shares of the companies such as Larsen & Toubro and Bharat Heavy Electrical are seen trading with a negative bias, a dealer said.

   

 Pharma Stocks Outlook:

Shares of major pharmaceutical companies are seen trading with an upward bias next week following disappointing current account deficit for Oct-Dec coupled with global and political uncertainties,

market players said.

India's current account deficit widened to touch a record high of 6.7% of gross domestic product in Oct-Dec from 4.4% a year ago and 5.4% in Jul-Sep.

  

 Oil Stocks Outlook:

Shares of state-owned oil marketing companies are likely to trade in a narrow range with a slight uptick next week, as the companies are expected to receive disbursement of around 250 bln rupees from the finance ministry, dealers said.

Telecom Stocks Outlook: 

Stocks of telecom providers are expected to trade sideways with a positive bias next week, with select telecom stocks having undergone major correction and now poised for consolidation.

FMCG Stocks Outlook:

Shares of major fast-moving consumer goods companies, apart from ITC, are seen trading with a negative bias next week as the market awaits indicators that will quantify the perceived moderation in demand, analysts said.

 

Steel Stocks Outlook:

Shares of major steel companies are seen down next week due to weak fundamentals and expectations of bearish Jan-Mar earnings, analysts said.

Domestic steel prices have fallen below international prices due to sluggish demand for the alloy. Moreover, rise in cheaper imports from Japan and Korea are restricting local steel players from hiking their product prices, analysts said.

    

Cement Stocks Outlook:

Shares of major cement companies are seen under pressure in the coming sessions as sentiment for the sector remains poor due to unusually low demand, analysts said.

    

Interest Rates,Govt Bond Yields Stay High on Liquidity Shortage

The Reserve Bank of Indias interest rate cut is hardly helping investors or corporates as market is moving in the opposite direction due to liquidity shortage with the benchmark government bond yield touching 8%.Some hope for easing of liquidity pressure in the coming fiscal year,but the relief may not be much.The rates in the money markets,essentially short-term rates,have remained high due to tight liquidity conditions in March and redemption pressure as banks jostled to meet fund requirement.Long-term rates have remained high after RBI made it clear that the headroom for further cuts is limited,unless the consumer prices come off significantly.

On funding side,year-end pressure has kept the rates high due to the year-end premium embedded in the rates, said Mohan Shenoi,head (treasury),Kotak Mahindra Bank.These rates will come down in April.But for government bonds,the yield curve will become steeper because there is not much of a room for policy cuts,at best a 25-basis points cut may be.Knowing this,rates on longer end will remain high and shorter end will come down. RBI has cut the key repo rate by a quarter percent to 7.50% on March 19.Repo is the rate at which banks borrow funds on a daily basis from the central bank.But the cut in key rate has hardly translated into lower interest rates in the government or corporate bond market.Yields on ten-year government bonds touched 8% on March 26,from 7.83% in January.A lot of banks may also be staring at trading losses.

Banks may have given up on the possible gains they were looking for earlier, said a dealer from a private bank.But yields are still 15-basis points lower than what we saw in December, he added.One basis point is one hundredth of a percentage point.Call rates,at which banks borrow on an overnight basis from each other,have risen to 9% in the last two days,which was an indication of the stress on liquidity in the system.Banks borrowed on an average.1.25 lakh crore in the last one week.

Though it is a typical phenomenon at a fiscal end,the relief in the new fiscal could not be substantial given a structural problem in the system.Bank deposits are growing at a decade low rate,and the incremental credit-to-deposit ratio is at a near record high of more than 76%.This is a typical phenomenon in March,when rates in money markets tighten as many banks face fund shortage,and need to meet the balance sheet requirements for the year end.

In April,rates on shorter tenor bonds one,two or three years will come down,where we have seen some interest from companies, said Shashikant Raathi,head,debt capital markets,Axis Bank.April-June is generally a dull period for bond issuances,as there are fewer buyers.The yields on government bonds (to which yields on corporate bonds are linked to) largely depend on the nature of open market operations,if and how RBI provides liquidity,they should be in the range of 7.75-8.05%.

BRICS Plans $100-b Fund to Fight Currency Crises

Leaders also agree to set up a development bank first mooted by India,but are yet to finalise details 

Leaders from Brazil,Russia,India,China and South Africa approved a $100-billion fund to combat currency crises,while failing to reach an agreement on financing for a development bank.China may provide the bulk of the funding for the foreign-currency pool,Russian Finance Minister Anton Siluanov said in an interview in Durban,South Africa.Negotiators are considering proposals for China to contribute $41 billion,Brazil,Russia and India to provide $18 billion each and South Africa $5 billion,he said.

The establishment of a selfmanaged contingent reserve arrangement would have a positive precautionary effect,help BRICS countries forestall short-term liquidity pressures,provide mutual support and further strengthen financial stability, South African President Jacob Zuma said after leaders from the five nations met in Durban.

The BRICS countries,which have 43% of the worlds population and total foreign-currency reserves of $4.4 trillion,are seeking greater financial sway to match their rising economic power.Emerging markets from Brazil to Turkey have been hit by currency swings as interest rates near zero in the US,Japan and Europe fuelled foreign investors appetite for higher-yielding assets.Brazils real has gained 1.9% against the dollar this year,while South Africas rand has slumped 8.8%.

Officials didnt provide details on how the currency fund will operate.In October,Brazilian Finance Minister Guido Mantega said the pool will be modelled on the Chiang Mai Initiative,which gives Japan,China,South Korea and 10 southeast Asian nations access to $240 billion of emergency liquidity to shield the region from global financial shocks.

Firms' revenue growth to contract in Q4: CRISIL

Telecom services will grow at a steady 6-8% with improving average revenue per user

The pace of Indian companies’ revenue expansion could fall in the fourth quarter to a three-year low as growth moderation in consumption-led sectors adds to the woes in manufacturing, according to CRISIL. Revenue growth of companies, excluding banks and oil firms, could shrink to six-seven percent in the quarter ended March 31, from 17.5 percent in the year-ago period. 

Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins are projected to decline by 30-50 basis points during the quarter from last year.

While growth in investment-linked sectors is expected to continue to decelerate at a fast pace, consumption-led sectors, too, are experiencing moderation in growth, CRISIL said today in a note.

Manufacturing and investment-linked sectors are anticipated to grow at a tepid pace of four-five per cent in January-March, the slowest since April-June 2010, said Mukesh Agarwal, president of Crisil Research.

“Such sluggish growth was last witnessed over three years ago in Q1 FY10, driven by the dramatic slowdown in the global economy after the credit crisis in the US. But this time, domestic issues such as administrative delays, high cost of capital and persistent inflation are largely responsible for slowing demand growth,” said Agarwal in a note.

Private final consumption expenditure growth slowed down to 4.6 per cent in the October-December period of the current financial year from 9.2 per cent in the corresponding period last year. This has resulted in slower growth in sectors such as automobiles, hotels, retail and readymade garments, CRISIL said.

Prasad Koparkar, senior director of Crisil, said the service sectors were expected to witness relatively better revenue growth of 12-13 per cent in the fourth quarter unlike manufacturing.

“Corporate India’s revenue growth would have been even lower in the absence of support from these sectors,” said Koparkar. “IT (information technology) services is expected to continue to benefit from rupee depreciation, whereas the media and entertainment sector will see healthy growth driven by increasing digitisation,” Koparkar said.

Telecom services will grow at a steady six-eight per cent with improving average revenue per user (Arpu), he added.

The persisting weak demand scenario will put further pressure on the already low margins, the rating agency said. “Over the near term, revival in consumer and investor sentiment on the back of implementation of announced reforms, a normal monsoon and continued moderation in interest rates are critical for demand revival and improvement in corporate profitability,” it said.

Cyprus, lenders agree to aid deal; Laiki to close

Cyprus reached a deal with its European and international lenders, announced early Monday, which is expected to free up aid for the nation’s ailing finances but will also incur a deep restructuring for the country’s banking sector.

The cash-strapped island nation struck a bargain with the European Central Bank (ECB), the European Commission and the International Monetary Fund — collectively known as the Troika — clearing the main hurdle to securing 10 billion euros ($13 billion) in crucial financing.

A Eurogroup statement issued following the deal said “the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatization.”

Market reaction was generally upbeat, with the euro EURUSD +0.60% rallying to $1.3035, up from $1.298 late Friday in North American trade.

Shares in Asia also climbed after the reports of a deal, with Japan’s Nikkei AverageJP:NIK +1.69% trading 1.9% higher, while U.S. stock index futures showed gains, with those for the S&P 500 SPM3 +0.43% up 0.4% and Nasdaq 100 futures NDM3 +0.52% 0.5% higher.

Jeroen Dijsselbloem, head of the Eurogroup of the currency bloc’s finance ministers, said at a press conference after a marathon meeting in Brussels that Cyprus had agreed to a slate of reforms as part of the deal.

Specifically, he said there would now be deep restructuring measures for the two largest Cypriot banks — Popular Bank of Cyprus (also known as “Laiki Bank”) and Bank of Cyprus — as well as a downsizing of the nation’s overall banking sector.

However, the deal wouldn’t affect deposit holders with less than €100,0000 in their accounts, who will receive protection under European principles, he said.

Earlier this month, the Cypriot government had announced a one-time tax on all bank deposits, which sparked a sell-off on global markets and was eventually voted down by parliament in Cyprus.

Most of the policy focus fell on the outsized banking sector, which IMF Managing Director Christine Lagarde described as “the heart of the problem” and said needed to be reduced.

As part of that process, Eurogroup head Dijsselbloem said that Laiki Bank would be split up immediately, “with a full contribution from equity shareholders, bond holders and uninsured depositors.”

He acknowledged that it was the first time that senior bond holders had been hit in the euro zone but said “it’s a unique and exceptional situation” that concerned a bank that needed immediate help.

“Over the last week, the situation in Cyprus and its two banks deteriorated” he said.

Laiki Bank will be split into a “good” and “bad” bank, with the bad bank to be run down over time, he said.

The good bank will be folded into Bank of Cyprus, and all insured deposits will be moved to Bank of Cyprus, as well as the good assets, Dijsselbloem said.

Uninsured deposits at Laiki, comprised of those totaling more than €100,000, amount to €4.2 billion, all of which would be put in the bad bank, Dijsselbloem said.

Cyprus Course may Spell Trouble for the Markets

Markets could take cues from the success or failure of a European bailout package for Cyprus on Monday.The ECB has made a 10-billion rescue package for Cypriot banks on condition that Cyprus raise 5.8 billion by Monday.

Indian markets,which were pulled down to a four-month low last week,might experience a relief rally of 100-150 points during the truncated week if the bailout for Cyprus is passed,experts said.However,they added,an exit of Cyprus from the EU would not have a severe impact on the Eurozones finances as the amount involved is petty and Cypriot banks largest depositors are said to be Russian oligarchs and not residents.

The impact of an exit,if at all,will in no way be similar to that after Lehmans collapse, said Rashesh Shah,chairman and CEO,Edelweiss Group.In the unlikely event of an exit,there could be a knee-jerk reaction,but it wont persist. Agreed Saurabh Mukherjea,head of equities,Ambit Capital.I dont expect any incremental damage.The fear that peripheral nations like Spain,Italy,Greece and Portugal could also face a run on their banks has already been discounted by global markets.An exit,though,seems unlikely. 

However,RBI governor D Subbarao begs to differ.He said at a recent banking event that a meltdown of Cypriot banks would have implications for the banking sector everywhere.Cyprus is such a big issue as the island nation is interconnected with the world and what happens there has implications for the banking sector everywhere, news agencies quoted him as saying.No financial system is too small to be allowed to sink, he added.

Late on Sunday,Reuters reported that the Cyprus central bank imposed a 100 per day withdrawal limit at cash machines to avert a run on lenders.The measure would remain in place till Tuesday,or until confirmation of continued emergency funding from ECB. Apart from Cyprus,the near term tone for Indian markets,closed for Holi and Good Friday holidays on Wednesday and Friday,will be set by the expiry of the March series of derivatives contracts on Thursday.The possibility of a relief rally,enthusing bulls to roll over a greater number of long positions,has not been ruled out by experts like TS Harihar,co-head,derivatives,ICICI Securities.

Karun Mutha,senior VP & chief market strategist,HSBC InvestDirect,though less sanguine than Harihar about stronger rollover this month than in February,does not discount its possibility in the event of a relief rally.Sensex fell 3.77% last week while the Nifty closed down by 3.56%.Foreign portfolio investors,BSE data showed,sold shares worth.14 crore on Friday.

The Nifty currently trades close to its 200-day moving average a fall below which indicates markets have entered a bearish phase.Apart from the political storm after the DMKs withdrawal,there is a fear that foreign portfolio flows could be impacted by global events, said Sonam Udasi,head,research,IDBI Caps.

Debt Funds Gain as Equity MFs Lose Out

Domestic retail investors have gravitated away from equity funds and moved towards debt,exiting 4.49 million equity and equity-linked saving scheme accounts over the year to end-February,data provided by the mutual fund industry body shows.

According to the Association of Mutual Funds in India (Amfi),the number of debt and gilt mutual fund accounts opened between March 2012 and February 2013 was about 890,000 higher than that in the year-ago period.

Experts say customers fled equity funds mainly because of losses due to miss-selling by distributors,and moved to debt on expectations that an interest rate cut by the Reserve Bank would fuel a rally in bond prices.

This is a very healthy sign for the mutual fund industry,as retail investors have become aware of the markets, said Akshay Gupta,managing director and chief executive at Peerless Funds Management Company.

There was a lot of mis-selling in the industry by mutual fund distributors during the period of 2002 to 2008;in fact,those accounts are getting rectified. Investors are anticipating a rally in bond markets,as interest rates are likely to ease over the next 12 months.Fund managers expect a 50 to 75-bps rate cut by the RBI over the same period.

We have seen retail investors coming into debt schemes on expectations of an interest rate cut by the RBI in the range of 50 to 75 basis points over the next 12 months, said Nandkumar Surti,MD and CEO at JP Morgan AMC.

The equity mutual fund folios of retail investors have decreased in the month of February,as investors who had entered into equity markets about three to five years ago have got flattish returns, he added.

Retail investors want to be assured about their investment thats the main reason why we are seeing inflows into debt mutual fund schemes, said Gopal Agarwal,chief investment officer at Mirae Asset.

Gold imports likely to be high this year

This year, WGC expects India's gold demand to stand at 865-965 tonnes. Last year, it was 864.2 tonnes

The government’s move to raise the import duty on gold to reduce imports of the commodity might not yield the desired results. Early indications from the World Gold Council (WGC) showed imports in the quarter ending March were high. Also, imports this year are likely to be high, as auspicious gold-buying occasions this year would be 20 per cent more than last year, WCG has said.

This year, WGC expects India’s gold demand to stand at 865-965 tonnes. Last year, it was 864.2 tonnes.

Last year, “gold-buying occasions were less; this would be corrected this year and, therefore, demand would be higher,” David Lamb, global managing director (lifestyle and jewellery), WGC, told Business Standard.

Since India doesn’t produce gold, the demand is met through imports. Only a small portion of the demand is met through recycled gold. Last year, gold imports stood at 864 tonnes, while recycled gold stood at 117 tonnes.

“While the range of imports is kept wide, as we live in a world with volatile influences such as exchange rate, inflation and consumer confidence. But, on the positive side, 2013 has more auspicious days,” said Lamb.

Last year, auspicious dates to buy gold were lower by 20 days, which led to jewellery demand falling 11 per cent to 552 tonnes, according to WGC data. This month, jewellers have seen good demand; they expect this trend to continue till June. Demand would re-emerge in August and in the October-December period.

“We are seeing good sales this year, compared to last year. In value terms, I expect sales to be up 20-25 per cent,” said Mehul Choksi, managing director of Gitanjali Gems.

Last year, demand for gold was also hit by the shorter wedding season. However, this year, there are more muhurats, which would lead to a rise in gold sales.

According to a Bloomberg report, Somasundaram P R, managing director of WCG India, said this year, imports would be higher, adding the rise in imports would match the increase in demand. If imports are high and gold prices (in rupees) are in line with last year’s, the government’s efforts to control the current deficit might not see much success.

“While the current account deficit is a serious issue, increasing the duty and trying to stop gold demand is not a positive way. It is not going to yield results,” Somasundaram told Bloomberg. The US economy was showing signs of improvement and this would lead to a boost in exports from India, helping cut the current account deficit, he said.

Realty Stocks Take a Hit on Hubtown,HDIL Downgrades

The cuts follow reports of defaults by Mumbai cos;HDIL asks agency to review and restore its rating 

Reality has come back to hit more and more builders.Two leading Mumbai developers Hubtown (formerly Ackruti) and Housing Development and Infrastructure,or HDIL,have been downgraded by credit rating agencies following reports of defaults on borrowings.

Hubtown,which is active in slum rehabilitation projects,has defaulted on repayment of interest and principal on.100 crore non-convertible debentures (NCDs),according to credit rating agency Brickwork.The agency,which was informed about the default by the debenture trustee,has downgraded the security to BWR D (which stands for default grade rating ).Another rating agency,CARE downgraded HDIL NCDs,worth.2,095 crore,to default rating.HDIL,with total debt of.4,000 crore,however,has not accepted the downgrade.

The company has asked CARE to review and restore the rating while reiterating its strong financial and operational performance along with sound fundamentals.Hubtowns rating of BWR BBB (minus) assigned on July 25,2011 was suspended by Brickwork due to non-co-operation of the company to share information required for review.Well-heeled investors,foreign funds and portfolio management services of brokerages have invested in real estate papers which offer a comparatively higher yield.According to market sources,the PMS arm of Reliance Capital also has exposure to Hubtown papers.But when contacted,a Reliance Capital spokesman said that Reliance has faced no problems on any payments.In response to an ET query a fortnight before the downgrade,a Hubtown senior official had said,There is no default.

We are on track to make the payments as per schedule. Despite HDILs non-acceptance of the revised rating,shares of the company continued to slide through Wednesdays session and ended at.48.70 on the BSE,down 20% over Tuesdays close.Hubtown closed down 3.3% at.147.65 on the BSE.Although the downgrade was restricted to only a few developers,shares of most real estate companies continued to slide on Wednesday.

Unitech,Puravankara Projects,DB Realty,Peninsula Land,DLF and Indiabulls Real Estate slipped 4-7 %.For long now,analysts have been focusing on cash flow positions of realty developers and their ability to service debt.

The outlook for cash flows over the next 2-3 years for real estate developers is linked to their ability to achieve strong sales momentum,and execute construction of projects as per schedule and thereby collect cash from customers on an ongoing basis, said a report by Ambit Capital.Meanwhile,Credit Suisse (Singapore ) sold 57.32 lakh HDIL shares through a bulk deal on the NSE for.50.99 apiece.

Industry may Grow at 7% This Fiscal

Maharashtra finance minister Ajit Pawar presented the states economic survey for 2012-13 in the assembly on Tuesday.The survey says the industrial sector in Maharashtra is expected to grow at 7% while the service sector is expected to grow by 8.5%.In 2011-12,the states gross state domestic product (GSDP) grew at 7.1%.However,agriculture has been a drag on the state economy as the sector saw a negative growth of 1.4% in FY12.

The finance minister told the assembly that negative growth in agriculture has affected the states economic performance this year.Agriculture and allied activities have done poorly,mainly because of bad monsoon in many parts of the state in 2011-12 as well as 2012-13,but industry and the services sector have done well during this period.in In 2011-12,the GSDP stood at.7,87,426 crore against.7,35,212 crore in 2010-11,showing a growth of 7.1% as per the first-revised estimates.For April-December 2012,The average consumer price index in the state for rural areas was at 9.7%.For urban areas,it was 9.6% over the corresponding period of the previous year.

The YoY rate of inflation based on all-India wholesale price index fell to 6.6% in January 2013 from 7.5% in April 2012.For food sub-group,it declined sharply to 6.7% in October against 0.9% in April.Subsequently,it increased to 11.9% in January 2013.

The survey says deficient rainfall in 136 talukas affected production of foodgrain and other agri produce in the state.Due to deficit in monsoon,sowing of Kharif crop was delayed and Rabi crop in October also got affected,owing to erratic rainfall in September. Foodgrain production is expected to be reduced by 18% in 2012-13 compared with the previous year.

However,production of oilseeds and some other produce is expected to rise by 15%.The state has barely managed to maintain small growth in the power sector as power generation from natural gas fell by 8.1%.

The thermal power output rose by 12.7%,but state-run distribution firm MAHADISCOMs transmission losses were at 16%.According to the survey,ever since the economic liberalisation policy was implemented in 1991,the state received 4,246 FDI proposals worth.97,799 crore till March 2012.Of these projects,nearly 45% have been commissioned and 10% are in the process of being executed.

RBI Policy: Mid-quarter review of FY13 Monetary Policy

MUMBAI - Below is the text of the Reserve Bank of India's Mid-Quarter Review of Monetary Policy for 2012-13 (Apr-Mar):

Monetary and Liquidity Measures

1. Based on an assessment of the current macroeconomic situation, it has been decided to:

* reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75 per cent to 7.5 per cent with immediate effect;

Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 percent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect.

Introduction

2. Since the Reserve Bank's Third Quarter Review (TQR) of January 2013,

global financial market conditions have improved, but global economic

activity has weakened. On the domestic front too, growth has decelerated

significantly, even as inflation remains at a level which is not conducive

for sustained economic growth. Although there has been notable softening of

non-food manufactured products inflation, food inflation remains high,

driving a wedge between wholesale price and consumer price inflation, and is

exacerbating the challenge for monetary management in anchoring inflationary

expectations.

Global Economy

3. Global economic developments over the last few months present a mixed

picture. US GDP estimates for Q4 of 2012 indicate a tentative upturn on the

back of improvement in housing and payroll employment. However, US

macroeconomic prospects are clouded by the uncertainty surrounding the

temporary appropriations and the debt ceiling. In the euro area, plagued by

contingent risks of political uncertainty and adjustment fatigue, GDP shrank

for the third successive quarter in Q4. Output in Japan too contracted in Q4,

and it is as yet unclear how effective the emerging package of stimulus

measures will be and how quickly they will turn around the economy. While

some emerging and developing economies (EDEs), including China, are gradually

returning to faster growth, activity is slowing in others, hobbled by weak

external demand and slack domestic investment. International non-fuel

commodity prices have softened in Q4, but fuel prices have remained firm,

despite the growth slowdown, portending persisting inflationary pressures,

particularly for net energy importers.

Domestic Economy

Growth

.

4. India's GDP growth in Q3 of 2012-13, at 4.5 per cent, was the weakest in

the last 15 quarters. What is worrisome is that the services sector growth,

hitherto the mainstay of overall growth, has also decelerated to its slowest

pace in a decade. While overall industrial production growth turned positive

in January, capital goods production and mining activity continued to

contract. The composite purchasing managers' index (PMI) declined in

February, largely reflecting slower expansion in services. In the agriculture

sector, the second advance estimates of kharif production indicate a decline

in relation to the level last year. However, that may be offset, at least

partly, by the rabi output for which sowing has been satisfactory.

Inflation

5. The year-on-year headline WPI inflation edged up to 6.8 per cent in

February 2013 from 6.6 per cent in January, essentially reflecting the upward

revisions effected to administered prices of petroleum products. On the other

hand, non-food manufactured products inflation, and its momentum, continued

to ebb along the trajectory that began in September 2012, enabled by

softening prices of metals, textiles and rubber products. Worryingly, retail

inflation continued on the upward path that set in from October 2012, with

the new combined (rural and urban) CPI (Base: 2010=100) inflation at a high

of 10.9 per cent in February 2013 on sustained price pressures from food

items, especially cereals and proteins. Consequently, the divergence between

wholesale and consumer price inflation continued to widen during the year.

Monetary and Liquidity Conditions

6. Money supply (M3) and bank credit growth have broadly moved in alignment

with their revised indicative trajectories. With government cash balances

with the Reserve Bank persisting at a higher than normal level, the liquidity

deficit, as reflected by the net drawals by banks under the liquidity

adjustment facility (LAF), has remained above the indicative comfort zone.

The reduction in the cash reserve ratio (CRR) of banks by 25 basis points,

effective from February 9 and open market purchases of Rs 200 billion since

February have enabled money market rates to remain anchored to the policy

repo rate. The Reserve Bank will continue to actively manage liquidity

through various instruments, including open market operations (OMO), so as to

ensure adequate flow of credit to productive sectors of the economy.

Fiscal Situation

7. The Union Budget for 2013-14 has made a firm commitment to fiscal

consolidation. According to the revised budget estimates for 2012-13, the

gross fiscal deficit (GFD)-GDP ratio, at 5.2 per cent, was contained around

its budgeted level, mainly by scaling down plan and capital expenditures. The

GFD-GDP ratio is programmed to decline to 4.8 per cent in 2013-14 and further

down to 3.0 per cent by 2016-17, in line with the revised road map for fiscal

consolidation.

External Sector

8. With merchandise exports recording positive growth for the second

successive month in February and non-oil imports contracting, the trade

deficit narrowed significantly. For April-February 2012-13, however, the

trade deficit was higher than its level a year ago with adverse implications

for the current account deficit (CAD), already at a record high. Although

capital inflows, mainly in the form of portfolio investment and debt flows,

provided adequate financing, the growing vulnerability of the external sector

to abrupt shifts in sentiment remains a key concern.

Outlook

9. There are several risks to the global outlook. The impact of sequestration

in the US on the global economy is likely to be muted in view of legislation

initiated to avert the debt ceiling. Nevertheless, lead indicators point to

sluggish global growth. Political economy risks that block or delay credible

and determined policy actions in advanced economies (AEs) are inhibiting

recovery. For EDEs, risks of spillovers from AEs remain significant. While

global inflationary pressures are likely to be subdued, given still large

output gaps, several EDEs could potentially face the threat of elevated

energy prices.

10. On the domestic front, the key macroeconomic priorities are to raise the

growth rate, restrain inflation pressures and mitigate the vulnerability of

the external sector. These are briefly addressed in the following paragraphs.

11. The Central Statistics Office (CSO) has projected GDP growth for 2012-13

of 5.0 per cent, lower than the Reserve Bank's baseline projection of 5.5 per

cent set out in the TQR, reflecting slower than expected growth in both

industry and services. Key to reinvigorating growth is accelerating

investment. The government has a critical role to play in this regard by

remaining committed to fiscal consolidation, easing the supply bottlenecks

and improving governance surrounding project implementation.

12. On the inflation front, some softening of global commodity prices and

lower pricing power of corporates domestically is moderating non-food

manufactured products inflation. However, the unrelenting rise in food

inflation is keeping headline wholesale price inflation above the threshold

level and consumer price inflation in double digits. Also, there is still

some suppressed inflation related to administered prices which carries latent

inflationary pressures. All this complicates the task of inflation management

and underscores the imperative of addressing supply constraints. From an

inflation perspective, upward revisions in the minimum support prices (MSP)

should warrant caution in view of their implications for overall inflation.

13. On the external sector front, the key challenge is to reduce the CAD,

which is well above the sustainable threshold. This adjustment, requiring as

it does, measures to improve the competitiveness of exports and wean away

demand for unproductive imports, will inevitably take time. Meanwhile,

financing of the CAD with stable flows remains a challenge.

14. The foremost challenge for returning the economy to a high growth

trajectory is to revive investment. A competitive interest rate is necessary

for this, but not sufficient. Sufficiency conditions include bridging the

supply constraints, staying the course on fiscal consolidation, both in terms

of quantity and quality, and improving governance.

Guidance

15. Notwithstanding moderation in non-food manufactured products inflation,

headline inflation is expected to be range-bound around current levels over

2013-14 in view of sectoral demand-supply imbalances, the ongoing corrections

in administered prices and their second-round effects. In addition, elevated

food prices, including pressures stemming from MSP increases, and the wedge

between wholesale and retail inflation have adverse implications for

inflation expectations. Risks on account of the CAD remain significant

notwithstanding likely improvement in Q4 over an expected sharp deterioration

in Q3 of 2012-13. Accordingly, even as the policy stance emphasises

addressing the growth risks, the headroom for further monetary easing remains

quite limited. End

Cyprus deposit-levy shakes up markets

A bailout of Cyprus announced over the weekend — which includes a controversial levy on bank deposits — is set to prompt considerable uncertainty in global asset markets, analysts say.

Under Saturday’s rescue deal, international creditors agreed to provide 10 billion euros ($12.9 billion) to the country. In return, Cyprus plans to sell government assets, raise corporate-tax rates and impose a tax on interest earned in Cypriot banks. But most controversially, the aid package also requires a one-off levy on deposits in all Cypriot banks.

Under the plan, those with more than €100,000 in one of Cyprus’s banks will be hit with a 9.9% charge, while depositors with smaller amounts will see a 6.75% one-off tax. In return, the depositors will receive shares in the country’s lenders.

The move marks the first time in the euro-zone debt crisis that depositors in any member country have been required to take a haircut on their bank holdings, and investors are unsure about the fallout.

Brown Brothers Harriman head of global currency strategy Marc Chandler said that the tax on small depositors in particular was “shocking.”

“To soften the blow of the confiscation of savings, depositors will be given shares in the lenders — a type of forced debt-for-equity swap,” he said. 

A report Monday suggested that the amounts required to be paid and the thresholds for payment may be adjusted in favor of small depositors. 

Chandler said the inclusion of small depositors in the bailout levies may be linked to the prevalence of Russian money held in Cyprus banks. “It is thought that the tax on small savers was required so [that] Russia did not think that its citizens were being singled out,” he said. 

Russia is very important to Cyprus, having lent the island nation €2.5 billion two years ago, and reportedly considering easing the terms of the loan.

According to strategists at Barclays Capital, non-residents hold around 40% of deposits in Cyprus, and of that amount, 30% is from Russian and other non-euro-area countries.

Also a factor is suspicion that the Cypriot banking system is often used by money launderers. “With a lax anti-money-laundering framework, many policy makers in Europe were not keen to provide a bailout of depositors,” the Barclays analysts said. 

The strategists noted that the agreement to prop up Cyprus financially also contained steps to tighten up controls to prevent money laundering.

Still, Cyprus makes up less than 0.25% of the euro area’s gross domestic product, Chandler at BBH said.

“Cyprus asset markets are too small for large pools of capital, such as mutual and hedge funds, as well as insurance companies,” he said.

According to reports, Greek operations of the Bank of Cyprus and Laiki Bank will be ring-fenced, which the Barclays strategists said would likely limit the prospect of a bank run in other countries.

“We expect officials to be able to successfully reassure depositors, especially in the periphery of Europe, there are no hidden intentions to repeat the Cypriot exercise,” said Chandler at BBH.

Morgan Stanley’s strategy team in turn said that the European Central bank “seems to be better equipped to contain contagion, the peripheral [euro-zone] countries are in a stronger position, and the global funding conditions are more accomodative.”

The strategists said “this is more likely to make markets more resilient in the long run. However, investors should expect material market weakness in the near term.”

In particular, according to Nomura Securities strategist Jens Nordvig, there’s considerable near-term uncertainty over whether the country’s parliament will ratify the plan. ”If parliament rejects the deal … a form of euro exit is once again a risk to consider,” Nordvig said.

Focusing on profitable growth

Fall in customer acquisition costs, rising subscription rates and digitisation benefits should result in strong financial gains for Dish TV, say analysts

India’s largest direct-to-home (DTH) television service provider lost about two per cent on news that Apollo Global Management, which holds 11 per cent, is likely to exit the stock. The Dish TV scrip has lost 20 per cent since October last year, underperforming the broader markets due to lacklustre operational performance, with profit growth and margins falling sequentially in the past two quarters.

While increased investments took a toll on the December quarter performance, things should look up in the coming quarters due to the recent price increases in set-top boxes (STBs), higher subscription rates and lower customer churn. Analysts say the fall in the stock price is a good entry point, given the industry discipline and focus on profitability, which will reflect on the market leader, warranting a re-rating of its stock. At the current price of Rs 65.75, the stock is trading at 10 times its estimated FY14 ratio of enterprise value to operating earnings (EV/Ebitda). Morgan Stanley analysts say this is cheaper than for most of its global DTH peers. Most analysts are bullish on the stock and have a target price of Rs 80-100.

Price rises

DTH entities have been making losses thus far. They were looking to outdo each other in acquiring customers, thereby pushing subscriber acquisition costs (through subsidised STBs, free rental packs, etc) to unsustainable levels. However, with the focus turning to cash flows and steering customers to the high-value packs, these moves should help create a sustainable business model. Surendra Goyal and Aditya Mathur of Citi Research say, “Funding challenges and issues around monetisation/churn should result in industry participants starting to behave more rationally. This is already visible across DTH, where most players increased box prices.”

Over the past two quarters, STB prices have been increased by DTH companies. The latest one from Dish TV saw two price rises last month alone, increasing it from Rs 1,690 to about Rs 2,000 apiece. The increases are likely to stay, say Deutsche Bank analysts. “Though the price hike might affect new subscriber addition in the short term, it should be easier to implement because all competitors except Sun Direct have increased prices of their STBs,” they add. Given the higher prices of the boxes, it will also be difficult to switch to competitors, as the cost of doing so is now substantially higher. This would help bring down customer churn.

Customer additions, rentals

Digitisation is having a twin impact on DTH entities, helping them increase their subscriber base and the rentals. Jatin Chawla and Akshay Saxena of Credit Suisse say, “Phase-I implementation has been moderately successful, with DTH gaining about 25 per cent share, and progress on Phase-II will be the next trigger for the (Dish TV) stock.” Further, given the higher investments required by cable TV operators due to digitisation, monthly rentals are likely to increase.

What will push up average revenue per user (ARPUs), according to the analysts, would be digitisation. This would force cable operators to raise prices, allowing room for DTH entities to do so, too. In addition to lowering STB prices, the earlier practice of free subscription packs is also on the decline. Vivekanand Subbaraman and Naveen Kulkarni of PhillipCapital (India) say, “DTH players, including Dish TV, used to offer a free one-month subscription of the platinum (premium) pack with the STB. This has been withdrawn, and customers are forced to pay a minimum of Rs 250 initial recharge as subscription top-up.”

Analysts estimate Dish TV’s monthly ARPUs, Rs 160 at the end of the December quarter, to move to Rs 162 at the end of FY13. Given the improving industry scenario, most analysts have upgraded their FY14 ARPU estimates for Dish TV from sub-Rs 160 to Rs 164-169.

Every rupee increase in ARPU should have a larger impact on profitability. In a report dated March 5, Deutsche Bank analysts note that Dish TV’s Ebitda is highly sensitive to ARPU increases – every five per cent increase in the ARPUs will result in a 12.5 per cent increase in Ebitda.

On the whole, the focus on cash flows should also improve profitability, resulting in higher Ebitda margins for Dish TV. These margins had tanked 450 basis points to 24.7 per cent on a sequential basis in the December quarter as the company raised its selling and distribution expenses to capitalise on the digitisation opportunity. These are expected to stabilise around 30 per cent in FY14.

Feb WPI inflation rises to 6.84%

The January WPI inflation was 6.62%; fuel inflation rises to 10.47%

• Ahead of the RBI monetary policy review on the 19th of March, the Wholesale Price Index (WPI) inflation rose to 6.84% in February from its level of 6.62% in January.

• The food articles inflation dropped to 11.38% as against 11.88% in January.

• Non-food manufactured products inflation too dropped slightly to 3.8% as against 4.1% in the previous month.

• However, the fuel and power group inflation increased to 10.47% from 7.06% in January.

• December inflation has been revised to 7.31% from 7.18%.

Indonesias Plan to Restrict Coal Exports Shocks Power Producers

Envoy from the Indonesian embassy is reported to have said some grades of coal would not be exported 

Indias thermal power plants that import coal are concerned that more restrictions from Indonesia,a key supplier,will put more pressure on electricity generation,which is already suffering from many problems including fuel scarcity.Power producers are concerned as the economic counsellor at the Indonesian embassy in India Otto Riadi was quoted in an agency report as saying that exports of some grades of coal would not be allowed and the fuel would be used to generate power in Indonesia.

This would be applicable to traders,not companies that have mines,the diplomat clarified.A power sector executive said Indian companies have not received any such indication from the Indonesian government about the restrictions,but the Association of Power Producers is worried.Earlier,Indonesia imposed a minimum export price regime to create indices below which one cannot export coal.Now,it is yet another attempt to nationalise natural resources.If the country finds exploitation of its natural resources,it will curb exports the way Australia introduced carbon tax on coal.

The development affects the Indian power sector as a sizeable power generation requires Indonesian coal, the associations director general Ashok Khurana said.India has close to 18,000-20,000 MW of power generation capacity,including plants being built,that count on fuel supply from Indonesia,the worlds biggest exporter.Power project developers such as Adani Power,Essar Power and Shapoorji Pallonji are banking on Indonesian coal supplies to fire their plants.Further,Coal India is importing coal from Indonesia and Australia to honour its fuel supply agreements as the government venture is unable to increase production from its own mines.According to industry estimates,Coal India will also import another 30,000 MW of coal from various countries for supply to power firms.

The government expects coal demand to grow at 11% during the 12th Five-year Plan,while local production would rise 7%.India already has a demand-supply gap of 163 million tonnes of coal.Reliance Power,which plans to use Indonesian coal for the proposed 4,000 MW plant in Andhra Pradesh,declined comment.The Adani group,which operates 4,620 MW of capacity with Indonesian coal,also declined comment.Both Reliance Power and the Adani group have mines in Indonesia.Other coal importers,particularly those who do not own mines in Indonesia,are also worried.It is not likely to happen in the nearterm.We are surprised with this kind of development since the Indonesian economy is largely dependent on coal exports.However,India must develop domestic mines to prevent any uncertainty of fuel supplies, said Alok Sanghi,director,Sanghi Industries.He added that it is difficult to estimate but Indonesian coal dominates the fuel basket of cement producers which also imports from Africa,Australia,Columbia and even USA.With limited domestic supplies,coal import is on the rise in India.National Spot Exchange (NSPL) has witnessed coal trading increasing to 60,000-70,000 tonnes a month within three months of launch of contract.

Emerging market will see robust inflow in 2013

1. Comparatively better macro-economics situation in EM's & loose monetary policy in advanced economics.
   
   
2. Fastest growing ecnomics & account for 70% of world population.
   
   
3. EM's passing through mass Industrialization & Urbanisation.
   
   
4. A good Govt & Fiscal Reforms has provided stability to the asset class as whole.
   
   
5. Also, EM asset have attracted more flows as investors have been rationalizing funds from peripheral economies of Europe.
   
   
6. According to survey, AAA rated advanced economies contributed only 20% to World GDP in 2012 as compared to 50% in 2007.
   
   
7. EM's corporate bonds have emerged as a focal point for investors globally primarily because of attractive yield premiums & high liquidity.
   
   
8. Also yield arbrtitage between EM curency soverign bonds & developed market bonds narrowing along with stronger balance sheet of EM companies.
   
   
9. Improved economic outlook to boost investors towards equity side.

Rate hikes, lower costs to boost Bharti's cash flows

Analysts say the company's net debt-to-Ebitda ratio would fall from about 2.8 for FY13 to 0.8 in FY16

Through the past week, Bharti Airtel rose three per cent. This followed a series of upgrades by analysts, owing to the improving mobile rates environment. The company’s plans to raise low-cost debt and sell a part of its direct-to-home (DTH) business are considered positives. The poor response to the recent spectrum auction, the management’s comment on a fall in capital expenditure this financial year and improving realisations indicate flows would improve.

In a report released today, Rohit Chordia and Shyam M of Kotak Institutional Equities say recent moves to bridge the gap between headline and realised rates by eliminating discounted minutes is a move towards pricing minutes at levels that can sustain the business. The analysts believe incumbents would be able to raise rates to absorb the impact of regulatory pay-outs, which could be lower than anticipated earlier. Most analysts are positive about Bharti and Idea and have a 'buy' call on these stocks. At the current price, Bharti Airtel is trading at 24 times its FY14 earnings estimates of Rs 13.4, with a target price of Rs 380-400.

Rising rates, realisations

Across circles, rates have been rising through the past six months. Vinay Jaising and Vanessa A D'Souza of Morgan Stanley believe incumbents such as Bharti and Idea have raised promotional rates 20-30 per cent in a staggered manner across the country. Analysts say rates have increased from 1-1.2 paise a second to 1.2-1.5 paise a second. Unlike the rate increases a couple of years ago (when only large players had raised rates), this time, smaller companies, too, are raising rates to focus on profitability. Rahul Singh and Saurav Anand of Standard Chartered Research say, "The key difference from the mid-2011 hikes is those were primarily led by incumbents."

For the leading companies in this segment, the rise in rates would lead to a rise in revenues, as well as higher realisations per minute. Analysts believe in the next five quarters, this would also lead to an overall increase of seven per cent in average revenue per minute (ARPM). With the share of data usage/non-voice in revenue pie increasing, expect blended ARPMs to pick up, too.

Lowering costs

Bharti is also taking steps to lower its cost of funds and bring down its Rs 61,000-crore debt accumulated due to the Zain acquisition and 3G-related investments. Recently, the company raised debt of $1 billion to cut its cost of funds and refinance existing debt. The company is also considering selling stake in the DTH business. If 25 per cent stake is sold, the company would garner Rs 1,400-1,500 crore, given the $1 billion valuation for a 7.9 million subscriber base.

The Tanzanian government is in talks with Bharti Airtel to buy out the latter's 35 per cent stake in state-run Tanzania Telecommuni-cations Corp (TTC), which owns and operates a fixed line network. Bharti Airtel's core telecom operations in that country are under Bharti Airtel Tanzania. It acquired the TTC stake as part of its Zain acquisition. Lower costs, both on the operational and regulatory fronts, are likely to help the company tackle the large debt. Morgan Stanley analysts estimate the ratio of the company's net debt to earnings before interest, tax, depreciation and amortisation to fall from an estimated 2.8 in 2012-13 to 0.8 in 2015-16.