AI must cut staff, perks for bailout

The government wants Air India (AI) to scrap its performance-linked incentive (PLI) scheme and cut the number of staff per aircraft as pre-conditions for bailing out the national carrier reeling under a mounting debt burden, according to a senior official.

AI should downsize or increase the number of planes in operation, said the official who didn’t want either himself or his department to be named given the sensitivity of the issue.

“When we ask them to freeze the PLI, they say there is an agreement with employee unions which stops them from doing so. These agreements cannot be honoured if the company turns sick,” he said citing the example of Singapore Airlines staff, which took a voluntary salary cut during the recent SARS outbreak.

AI has also been advised to take a relook at its aircraft delivery schedule for Boeing and Airbus planes, given the market scenario. Further expansion of capacity at this stage will only lead to more losses, the government feels.

PLI is a major component of the compensation package of 31,000 AI employees. AI pays around Rs 1,400 crore as PLI annually out of its total wage bill of Rs 3,000 crore. AI employs 230 people per aircraft as against 130 employees in the case of IndiGo.

“We have been sending Air India’s bailout plan to the finance ministry, but so far, they have not been convinced,” the official said.

The civil aviation secretary M Madhavan Nambiar is expected to take up the AI issue with Prime Minister Manmohan Singh’s principal secretary TKA Nair soon.

AI is reported to have sought Rs 14,000 crore from the government in terms of equity, soft loans and grants. The newly-appointed AI CMD, Arvind Jadhav, however, denied the figure.

An official in the ministry of civil aviation said the airline is yet to give a formal proposal for financial help to the government. Asked about the quantum of financial assistance the official said: “Air India has a cumulative loss of about Rs 5,300 crore.”

A senior AI official blamed the merger of erstwhile Indian Airlines and AI, the creation of special business units (SBUs) and high fuel prices for the current state of the airline.

Meanwhile, doubts are being raised on the possibility of any financial help for the national carrier in the forthcoming Budget.

“We are still discussing the cash requirement of Air India. It looks certain now that the proposal will not find its way in the Budget. The gross budgetary support (GBS) figure for 2009-10 has already been worked out,” said another official who also did not wish to be identified.

Faced with a severe liquidity crunch, AI recently issued a circular to its employees deferring June salary and PLI by 15 days. It also asked its officers at the general-manager level and above to voluntarily forego their July salaries. Various employee unions of the airline have protested against the move and demanded salaries on time.

The domestic airline industry is estimated to have lost Rs 10,000 crore in 2008-09, mainly on account of high fuel prices, excess capacity, poor load factor and irrational pricing.

Sundaram Select Midcap: A good investment bet

The hardest hit has been the fastest on the road to recovery. Midcap stocks, that were battered post the global market meltdown, have now

silenced all critics. The worst performers of 2008 are among the best this year. When stocks are doing well, mutual funds ought to be the direct beneficiaries. So has been the case with Sundaram BNP Paribas Select Midcap. One of the finest midcap performers in the mutual fund space, this fund is also the largest with assets of over Rs 1,100 crore.

PERFORMANCE:

A quick glance at the performance chart and it is evident that this fund has not only moved in sync with its Benchmark Index – BSE Midcap for most of its tenure, but has clearly outperformed it on a number of occasions - the latest being the current market rally. Having performed better than BSE Midcap during the downturn, Select Midcap has infact outperformed it in the past three months. The fund has generated whopping 73% returns since April ‘09, against the BSE Midcaps’ 67%. These returns are also way ahead of the Sensex and the Nifty, which returned about 47% and 42% respectively during this period.

Select Midcap has had an edge over its benchmark index on a year-on-year basis since its inception. Even during last year’s global financial crisis, it gave returns of - 59% against BSE Midcaps’ -67 %. However, being a hard core midcap, the fund failed to beat the large cap indices – the Sensex and the Nifty were down by about -52 % during the period. The fund thus justifies its high portfolio beta of 1.18, which implies returns that are 18% higher vis-à-vis the market in an upturn and 18% lower in a downturn.

While restricting the fall in the downturn is commendable, the fund’s finest performance till date dates back to calendar year ‘06 when it returned a whopping 58% while the BSE Midcap, the Sensex and the Nifty trailed far behind at 29%, 47% and 40% respectively. The equity diversified category gave meagre average returns of about 35% then. While the fund has had decent performances thereafter, a repeat of the feat of ‘06 is keenly awaited.

PORTFOLIO:

A midcap fund is meant for investors with a high-risk appetite, especially those who would remain unperturbed by severest market volatilities. The rewards would be immense during booming times. Select Midcap’s portfolio has a bias towards risk, with more than 60% of its equity portfolio invested in midcap stocks. However, the fund is immensely diversified. It has nearly 56 stocks in its kitty and the exposure to a single scrip is limited to less than 5%. The top 10 stocks thus account for a mere 33% of portfolio’s equity composition. While such diversity is desirable to mitigate the stock specific risk, it becomes difficult for fund manager to manage and keep track of such a huge basket.

The fund’s aggressive strategy compels it to be fully invested in equities. But it drastically reduced its exposure amid the market turmoil. The fund has had about 20% - 30% cash in its portfolio since the beginning of 2008, albeit fluctuating widely between months. This also suggests that the fund has been aggressive in churning its portfolio.

A look at the sectoral composition and it is easy to decipher the fund’s play on the market momentum. With the entire Indian economy singing the infrastructure song, Select Midcap is not far behind. The fund has drastically increased its exposure to the construction and energy sectors in the past two months, allocating about 34% of its portfolio to these two sectors alone. While earlier these sectors commanded a portfolio share of about 10%-15 % ,the same has been increasing gradually since the beginning of this financial year. This increase , however, has been at the cost of industrial manufacturing sector which has been drastically cut from the portfolio over the past year and a half. However, one sector where the fund has maintained a clear bias is the financial services space.

OUR VIEW :

A pure equity diversified fund, with a clear emphasis on the midcap space, Select Midcap is meant for bravehearts . While the fund’s performance till date has not raised any alarms, risk-averse investors would do well to stay away and rather be invested in large-cap or multi-cap funds. However, for those who are clued to market trading and not anxious of the pitfalls, Sundaram BNP Paribas Select Midcap is probably the place to be in.

Bull's Eye: Punjab National Bank, Marico, ICICI Bank, Indian Hotels, Triveni Engineering

Punjab National Bank

Research: Goldman Sachs

Rating: Buy

CMP: Rs 642 Goldman Sachs upgrades PNB to `Buy’ from `Sell’ with a target price of Rs. 730 due to earnings upgrade and higher long-term growth expectations. The key argument for the change in rating is pro-cyclical environment contributing to strong rebound in earnings from 2010E. Barring unforeseen factors such as setbacks in non-performing loan/credit costs, PNB has compelling growth at reasonable price ideas. Goldman Sachs upgrades the earnings forecast for PNB by 57%-71% during 2009E-2011 E mainly due to lower credit cost assumptions, well below mid-cycle levels. PNB is currently trading at 1.0x 2010E P/B, much lower than its historical median of 1.3x. PNB’s share price rose 22% since we added it to our `Sell’ list on September 9, ‘08 versus the BSE Sensex which was flat as our concerns over a significant deterioration in credit costs did not materialise.

Marico

Research: BNP PARIBAS

Rating: Buy

CMP: Rs 72 BNP Paribas raises the 12-month price target of Marico to Rs 89, based on 20x FY11 EPS. The meeting with Marico’s management confirmed that the core Parachute coconut oil has remained immune in the current slowdown, and the company has not had to cut prices, despite fall in copra prices. Growth in Saffola is back on track following price cuts to partially pass on the input cost benefit. BNP Paribas expects a 20.3% y-o-y growth in FY10 driven by a 10% domestic volume growth and margin expansion on lower input costs. Kaya clinics, which have now attained critical mass, will add zing to earnings growth. The fall in input costs combined with relatively stable endproduct pricing gives us confidence that Marico will gain back at least 200 bps (basis points) out of the 300 bps it lost in FY09 (excluding Kaya) on the raw materials line. Even if the company increases its advertising spend to 12% of revenue to support new products, we are confident of a 70-bp EBITDA margin expansion in FY10. An additional 100-bp margin expansion can provide a 10.6% upside to the FY10 EPS estimate.

ICICI Bank

Research: Credit Suisse

Rating: Neutral

CMP: Rs 714 Credit Suisse maintains `Neutral’ rating on ICICI Bank with a target price of Rs. 661. The bank management reiterated that the bank is still not pursuing asset growth, as it is keen to first consolidate its balance sheet. While the bank is now more active in some segments like mortgages and infrastructure lending, with continued shrinkage in other retail segments and international loans, overall asset growth will be muted this year. Credit Suisse expects stronger loan growth from FY11 and forecast a 40% growth in total assets over FY09-12.

The management, presumably looking to manage expectations, is guiding only to modest net interest margin improvements for now. The bank had pulled back from this segment five quarters ago and with a 360-day write-off policy on these non performing loans. Provisions on account of these will not have large P&L (profit and loss) impact from FY11. Credit Suisse forecasts core bank RoEs recovering only to about 10-13 % in the next three years despite the more aggressive margin outlook on account of lower share of fees and elevated credit costs. It expects credit cost at 1.4% of loans even in FY12 as the bank is carrying little provisions on its restructured assets.

INDIAN HOTELS

RESEARCH:

CITIGROUP

RATING:

SELL

CMP: Rs 65 Citigroup has downgraded Indian Hotels to `Sell’ with a target price of Rs 62 on a higher multiple of 14x (vs.10x) at five-year trough valuations and 20% discount to Sensex on higher flows and a preference for asset plays. With continued fall in occupancy and average room rents in Q1, Citigroup sees growing risks for the domestic business; with little visibility on recovery of overseas losses, very weak 4Q and the stock’s 23% outperformance over the last 3 months. Consolidated PAT was down 84% y-o-y due to mounting losses from international properties and higher staff/overhead costs (largely one-offs ) even as it recognized a Rs 85.5 crore insurance claim and forex translation losses of Rs 46.5 crore.

However, Citigroup expects some occupancy pick-up in 2H and the reopening of ‘The Pierre’ in August ‘09 to lower losses; but expects muted ARR (average room rent) and high debt to increase pressures. We revise our estimates slightly for FY10-11. While Indian Hotels is Citigroup’s best hotel play, with revenue per available room across 10 key cities down an average. 42% in April ‘09 (vs a 35% fall in March ‘09), it expects dismal earnings over the next two quarters to weigh on stock performance.

Triveni Engineering

Research: HSBC

RATING: Overnight

CMP: Rs 93 HSBC initiates coverage on Triveni Engineering with an `Overweight’ rating and target price of Rs. 120. India’s third-largest sugar company is likely to see 69% y-o-y earnings growth in the next four quarters based on: 1) sugar prices rising 67% in the last year; 2) sale of low-cost inventory - about 48% of total sales volume - in FY09E. High-margin and low-capital engineering business gave Triveni stable cash flows and better return ratios than peers in the last sugar cycle downturn. HSBC expects its average return ratios (FY09E-10 E RoE of 20%, RoIC (return on invested capital of 17%) to be better than Bajaj Hindusthan (5% and 6%) and Balrampur Chini Mills (17% and 13%). Triveni (PE of 13x, PB (price to book value) of 2.1x and EV/EBITDA of 6.4x) is trading cheaper than its peers, Bajaj Hindusthan (PE of 57x; PB of 3.3x; EV/EBITDA of 10.8x) and Balrampur Chini (PE of 14.8x; PB of 2x; EV/EBITDA of 7.3x) on FY10E multiples. The risk on the downside is lower than forecast sugar prices.

Gujarat NRE Coke

Research: Macquarie

Rating: Outperform

CMP: Rs 45 Macquarie maintains `Outperform’ rating on Gujarat NRE Coke (GNC) and increases the target price to Rs 87. Macquarie global team has raised its coking coal price forecast by 17% for FY11, buoyed by China turning a net importer of coking coal and a possible restart of steel capacity globally. The recent settlement of coking coal at $129/t was surprisingly strong, as the expectation was for around $100-110. More so, the remainder of coking coal quantities left from last year’s contract at $300 has not been waived off. GNC owns two coking coal mines in Australia, with 580-million tonne reserves and a current mine coal production of 1 million tonnes. GNC has augmented its coke capacity by 25% to 1.25 million tonnes. GNC remains the best stock in which to invest to take advantage of the upturn in the coking coal cycle. GNC has good quality reserves, an excellent location and is well on its way to become one of the world’s top-ten producers of prime hard coking coal in the next three years.

Nano customers to get allotment letters soon

A lakh Tata Nano customers, most of them from small towns, will begin getting their allotment letters this week. Over 70% of the 2.03-lakh bookings have come from these towns.

Tata Motors, which closed bookings for the Nano on April 25, is expected to start delivering the car by early-July and complete the process by the last quarter of 2010.

“Tata Motors will announce the first 100,000 allotments for the Nano within 60 days of the closure of bookings on April 25, 2009,” said a company spokesperson.

The company announced earlier that one lakh customers would be selected through a computerised random selection procedure, with the remaining — numbering just over a lakh — being given the option of retaining the booking.

The company will also announce the allotment to these 1.03 lakh applicants, who will get the Nano at a higher price, and earn interest on their booking amount with effect from July.

At the time of the Nano launch in March, the company had said only one lakh customers will get the car “at the currently announced price”.


Among the three variants of the Nano car, the base version accounted for 20% of the bookings, followed by the CX variant at 30% and the remaining 50% for the top-end LX variant. “The Tata Nano is unlikely to contribute significantly to Tata Motors’ revenues in 2009-10 as the initial volumes are low. However, as the booking amount is higher for the top-end variant, the margins will be better. A lot will depend on product performance and how
fast the Sanand capacity comes up,” said an analyst from a Mumbai-based brokerage.

The company, which is currently manufacturing the Nano from its interim facility at Pantnagar, has a capacity to manufacture 50,000 cars per annum, which it plans to raise to 2.5 lakh units once its new plant at Sanand in Gujarat starts in December.

Tata Motors had a slew of car launches lined up this year. The company is also understood to be gearing up to launch its premium luxury cars — the Jaguar Land Rover on June 28 and the new Indigo in a few months’ time.

Tech Mahindra rename Satyam Computers as Mahindra Satyam

Scandal-hit Satyam Computers has been named Mahindra Satyam. The logo will be adopted from the Mahindra Group.

Speaking on the rebranding initiative, Mr. Anand Mahindra, Vice Chairman & Managing Director, Mahindra Group, said, “Customer centricity, high standards of corporate governance, unimpeachable ethics form the cornerstones of the Mahindra Group. This rebranding exercise symbolizes an amalgamation of the Mahindra Group’s values with Satyam’s fabled expertise, even as it retains that part of Satyam’s identity which signifies commitment, purpose and proficiency of the organization and its people.”

Vineet Nayyar, Executive Vice Chairman, Satyam Board, commenting on the new identity, “This is a significant milestone towards the recovery of the company. We are optimistic that this new brand will re-energize the organization and will be well received by all our stakeholders. With this initiative, we will witness steps by the Management to adopt and inculcate the values of ‘performance and customer first’, ‘good corporate governance and citizenship’, which are drawn from the Mahindra Group. With this synergistic approach, Mahindra Satyam will learn from the best management practices of the Mahindra Group while focusing on nurturing Satyam’s innate skills and capabilities.”

Tech Mahindra will finalise this weekend a new identity for Satyam Computer Services, the scam-tainted IT company it bought in an open auction last April.

The decision was taken at a closed-door meeting attended by top executives of Tech Mahindra Hyderabad this weekend. The new brand has drawn on the strengths of both Satyam and Tech Mahindra.

The meeting was attended by Mahindra & Mahindra vice-chairman Anand Mahindra, group HR head Rajeev Dubey, Tech Mahindra CEO Vineet Nayyar, international operations head CP Gurnani and strategic initiatives head Rajeev Kalra.

Senior executives at Satyam, TechM and M&M had been working on the re-branding exercise with select external advisors ever since TechM acquired the company.

Satyam Computers, one of the top IT companies of India, shocked corporate India last January when its founder and then CEO B Ramalinga Raju confessed to cooking its books over years. The government launched a massive probe, took control over its board, and after three months, put the company up for sale.

Tech Mahindra did not want to continue with the Satyam brand in its present form, though it wanted to leverage the strengths of the firm. The new brand will convey the synergies of Satyam, well-known for its expertise in areas such as enterprise resource planning, M&M group’s global brand and corporate governance and Tech Mahindra’s strength in telecom.

Apart from re-branding, Tech Mahindra and Satyam senior executives also discussed the joint go-to-market strategy of the two companies.

Remove FBT, surcharge

The key pre-budget hope is that the UPA will undertake tax amendments that will enable the following:

Increase the net take home pay of individuals such that their spending power increases in the present challenging times;

Increase the earnings and bottom line of corporates such that they have the ability to invest more in growth;

Generate avenues to increase the tax base such that there is an offset against the loss of tax revenues and fiscal discipline is maintained.

Given the stated objective of the government towards rationalisation of tax policies, simplification of tax laws and expansion of the tax base, there are some actions the government can undertake. Status quo in direct taxes is something that is not anticipated now. This could be the time to take formative steps towards further simplification and rationalisation of the complex tax code provisions.

A reduction in corporate and personal tax rates can be achieved by removing the surcharge. This will reduce the effective tax rates, increase the net take home of individuals and raise the post-tax income of corporates. This will also increase investment and spending. This investment and spending could then achieve other larger objectives of the government to give an economic boost and generate a multiplier effect in the economy. Moderate taxes increase the tax base through larger and better compliances.

Fringe benefits tax could either be abolished or become creditable against corporate tax liability. The cost of compliance that FBT generates for corporates does not seem to be in parity with the tax revenues that the government derives.

Further, the government could instantly provide a boost to core infrastructure projects by renewing expiring tax holidays (for example, in the power sector) and introducing clarificatory amendments that will benefit to genuine infrastructure and priority industries (for example, the natural gas sector).

The government may also consider special tax-holiday extensions for key projects in the public-private-partnership domain, for example, where concession periods have been extended either owing to structural delays or cyclical demand. In these times, exports are the platform of a stable global economy. Therefore, there is a case for extension of expiring tax holidays for IT/ITeS industry and other EoUs. To spur research and development, the government can re-introduce some old expired tax holidays like the 100% tax holiday for RandD companies. A re-introduction of the good old incentive like investment allowance will provide liquidity to the industry to increase spending in infrastructure and other projects. The revenue loss on this account could be more than offset through larger indirect tax collections and generation of additional employment.

To summarise, removal of surcharge, abolition of FBT, extension of expiring tax holidays and re-introduction of some old tax incentives are the platforms that the government can use to provide an impetus to the economy through greater employment, growth and spending.

This will increase its tax base and indirect tax collections, thereby, balancing the loss of tax revenues. Further, towards the roadmap to GST, the government could also rationalise the tax rates for excise duty and service tax.

FII and DII Activity on Friday, June 19, 2009

FII and DII activity that was seen on Friday, June 19, 2009 is shown below. The report shows that FII were net seller of Rs 29.08 crore where as DII saw buying of Rs 413.2 crore.

FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category	Date	Buy Value	Sell Value	Net Value
FII	19-Jun-2009	1848.44	1877.52	-29.08

DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category	Date	Buy Value	Sell Value	Net Value
DII	19-Jun-2009	1558.05	1144.85	413.2

MasterCard hires Citigroup Asia chief as COO

Citigroup's Asia head, Ajay Banga, will join MasterCard as its president and chief operating officer, the latest in a series of high-profile departures from Citigroup.

The appointment puts Banga in line to become the chief executive officer of the world's second-largest credit card network.

"While this was not the appointment of a CEO successor this was certainly the appointment of someone who fits in to a very thoughtful succession plan for the company," MasterCard spokesman Harvey Greisman told Reuters.

Banga, 49, can leave the company with his upfront compensation intact if he is not offered an opportunity by June 30, 2010 to become succeed Robert Selander as CEO of MasterCard.

Selander, who has led MasterCard since April 1997 and oversaw a high-profile public listing of the company in 2006, will relinquish the title of president to Banga when he joins the firm on Aug. 31.

MasterCard will pay Banga a $4.2 million sign-on bonus and $4.9 million in restricted stock grants, according to a regulatory filing.

Banga, 49, led a major reorganization of Citigroup's Asian operations last August that gave regional heads increased authority across the bank's sprawling product lines.

He received about $10 million in compensation in 2008 from Citigroup, making him one of the firm's highest paid executives.

He was appointed Asia chief in March 2008. Previously, Citigroup did not have a region-wide chief executive for its Asia-Pacific business.

Banga and other departures come in the wake of the appointment of Vikram Pandit as CEO and the billions of dollars the company has received in government bailout funds.

Government to consider stake sale in BHEL

India's minister for heavy industries, Vilasrao Deshmukh, said on Friday that Government would "positively" consider selling stake in state-run engineering firm Bharat Heavy Electrical Ltd. Deshmukh further informed that his department would support the disinvestment policy of the government to raise funds needed to expand operations at home and globally.

Mobile subscriber base to exceed 771mn in 4 years

With telecom operators focussing more on the rural market, the mobile subscriber base in the country is set to exceed 771 million by 2013, a study said. The mobile market penetration is projected to increase from 38.7 per cent in 2009 to 63.5 percent in 2013. With the subscriber base increasing by about 14 per cent, the total mobile services revenue in India is projected to grow at a compound annual growth rate of 12.5 per cent from 2009-2013 to exceed 30 billion dollars.

SBI officers against merger, seek 30% pay hike

The All India State Bank Officers Federation has said merger and consolidation of public sector banks would harm the expansion of banking activities in the country and nullify the financial inclusion concept of the Government itself.

The federation also pressed for a 30 per cent increase in salaries of bank officers, saying that a 15 per cent increase that is being offered is not enough.

The officers also want one more pension option and are prepared to contribute up to Rs 1,800 crore of the Rs 6,000- crore additional fund needed for the purpose, federation general secretary G D Nadaf said at a press conference in Agra on Friday.

TN Goel, President of the Federation, said the earlier salary agreement with the Indian Banks Association had expired on October 31, 2007, and a new one was due on November 1, 2007.

All the four bank officers' organisations had submitted a common charter of demands to the IBA and the Government on October 29, 2007, but nothing had been done in the matter of revision so far.

The officers organisations would not agree to anything less than 30 per cent increase in salary, he said.

Tata Steel hikes prices

In the wake of higher domestic demand for steel, India's largest steelmaker Tata Steel (TATASTL.BO : 411.75 +22.75) on Friday raised prices of flat steel by Rs 500-750 per tonne with effect from June 2009.

"Prices of hot-rolled (HR) coil and cold-rolled (CR) steel products have gone up in select regions for monthly contracts," a Tata Steel spokesperson told FE.

It is learnt that that hike in price of the commodity has been on the back of improved domestic demand from sectors, including construction and automobile, and the recent uptrend in global steel prices. The prices of HR coil in India are currently about Rs 24,000 per tonne and CR coil sells at about Rs 26,000 per tonne.

Tata Steel shares on Friday were up 5.85% to close at Rs 411.75 on the Bombay Stock Exchange (^BSESN : 14521.89 +256.36) (BSE).

JSW Steel, the third largest steel producer in India, may raise price of its galvanised steel by $25 to $30 per tonne. "Zinc prices have gone up from $1,000 to $1,500 per tonne. Taking that into consideration, we are exploring the possibility of increasing rates of galvanised steel. However, no decision has been taken yet," said Seshagiri Rao, joint managing director and group chief financial officer, JSW. JSW Steel would currently keep prices of its HR and CR coils stable for July. Galvanised steel sells for about Rs 32,000 to 34,000 per tonne in the country.

JSW Steel Ltd shares on Friday rose 5.52% to close at Rs 605.10 on the BSE.

When contacted, Steel Authority (SAIL.NS : 152.45 +0.9) of India Ltd (SAIL) said, "No, we have not increased our prices."

Ispat Industries Ltd (NIPPONDEN.NS : 0 0), on the other hand, is yet to consider price hike for its product. Declining to give any details, Anil Surekha, director-finance, Ispat Industries, said, "We will decide about any change in steel prices in the next week."

Similarly, an Essar Steel spokesperson said, "The company is currently reviewing the market."

According to experts, Indian steel companies have seen an over 10% y-o-y growth in sales in May this year.

Niraj Shah of Centrum, said, "The price hikes show that demand is increasing and there is an appetite for consumption." Steel players have already shifted their focus on growing domestic sales as exports have taken a backseat owing to a 60% correction in global steel prices.

Meanwhile, economic think-tank Centre for Monitoring Indian Economy expects steel prices to fall by around 5% in the next three months.

"The expected dip in contract prices of iron ore and coal will put pressure on steel prices. We expect prices to decline by around 5% in the next three months," CMIE said in its monthly review of the Indian economy for June.

Domestic steel makers have urged the ministry to increase import duty on the alloy to 15-20% from 5% now or impose safeguard duty of about 25%. "Any restrictive measures to curb imports, if implemented, will narrow the gap between the domestic and international prices to a maximum of 7-8%. This indicates that prices have not bottomed out yet," CMIE said.

ICICI Home Fin to raise 1.5 bn rupees via bonds

ICICI Home Finance Company plans to raise at least 1.5 billion rupees through bonds next week, two sources, including a company executive, said on Friday.

"We have some commitments lined up. Intend to open an issue next week and target 1.5 billion rupees," the executive said, adding that the issue would have a greenshoe option to retain oversubscription.

The 18-month bonds offer a coupon of 7.5 per cent, and 24-months bonds offer 7.6 per cent, the executive added.

RBI to buy back bonds worth Rs 6,000 cr

Government bonds traded range bound ahead of RBI’s move to buy back securities worth Rs 6,000 crores from traders. On Friday, RBI will sold bonds worth Rs 15,000 crore. Dealers expect action to remain range bound in the coming days till the budget, when they expect some clarity to emerge on the government’s borrowing programme. The most commonly traded bond - the 5 year bond - however traded lower unaffected by the buy back news.

Its yield traded at 6.64% at 12 45pm, 3 basis points higher than its previous close. When yields rise, prices fall. The benchmark 6.05% paper only had trades worth Rs 20 crore. "The concern with OMO is that RBI has not been buying the whole amount that it says it will pick up from traders," saya RVS Shridhar, head of markets at Axis Bank.

"This is giving only mixed signal to the market. We will have to wait for the auction results. As for higher borrowings, market has been preparing for greater front loading of bond auctions," he added.

The rupee rose marginally on Thursday from one-month lows on Wednesday, although downswing in shares affected sentiment. At 12 45pm, the rupee was at 48.09 against the dollar, just above Wednesday's close of 48.13.

The dollar was steady against the euro on Thursday, trading lower after US inflation data further made in unlikely that Federal Reserve would raise interest rates by year end.

India's fiscal position suggests caution: Moody’s

Indian equities have rallied sharply in the last three months despite continuing risks to both the global economy and India's outlook. Investors took solace in India's relatively mild downturn and chances for faster recovery. However, Moody’s Economy.com warns that the country’s fiscal position suggests caution, as the government is not in a position to offer sustained support to a weak economy.

The surge in Indian equities over recent months has been met with jubilation from investors, but possibly also some caution. Despite some retrenchment in recent days, the Sensex is up 83.4 per cent since March 9; it has now returned to levels seen in September of last year.

Considering the dire scenarios that some were factoring into stock prices earlier this year, the rebound is not surprising. Yet there are several reasons to be skeptical about continued equity market improvement, believes Nikhilesh Bhattacharya, associate economist at Moody’s Economy.com.

According to Bhattacharya, “The major reason to question the strength of the recent rally is the state of the global economy. The developed world is still in recession, relying on fiscal and monetary stimulus on a scale unseen since World War II. Central banks and most independent analysts expect high unemployment, aversion to risk, and excess capacity to weigh on future growth. A recent discussion piece by International Monetary Fund economists showed that equity prices tend to bottom only at the end of a recession brought on by a credit crunch and asset price bust—not prior to the end.”

However, Bhattacharya sets a counterargument that India's downturn has bottomed and was mild compared with other countries. Based on first quarter GDP numbers, this appears to be the case. Yet Indian equities tend to take their lead broadly from US stock market movements, and it is hard to envisage a sustained divergence in direction, even though emerging markets can amplify US trends.

But India's economy faces its own challenges. “An already-stretched fiscal position has limited the government's ability to provide further stimulus, while weighing on government bond prices. Excess capacity, slowly recovering external demand, and relatively high long-term interest rates will drag on investment. Although the government has a strong majority in parliament, political will is required to cut popular subsidies and modernise labour laws. With global recovery prospects uncertain, these are further reasons to be cautious about Indian equity prices,” Bhattacharya concluded.

BSNL rolls out IPTV services in Kolkata

BSNL-Calcutta Telephones in partnership with Smart Digivision on Friday announced the roll out of IPTV services in Kolkata under the ‘MyWay’ brand.

BSNL customers in the city will be able to access IPTV using their broadband, fixed-line connection and a set-top box.

On offer are content (video, games, music and education) on demand and interactive style service.

Due to its unique two-way interactive system, MyWay IPTV is planning to offer a bouquet of future services like personalized stock ticker, interactive viewing which allows viewing a show from different camera angles and accessing email, chat and travel and weather information.

SBI to merge State Bank of Indore with itself

The State Bank of India (SBI) board on Friday approved the merger of its subsidiary, the State Bank of Indore, with itself. This would be the second acquisition by SBI of a subsidiary bank after the merger of State Bank of Saurashtra. The State Bank of Indore board, too, has approved the merger proposal. SBI holds 98.3% in the bank, and the balance 1.77% is owned by individuals, who held the shares prior to its takeover by the government.

The acquisition of State Bank of Indore will help SBI add 470 branches to its existing network of 11,448. Also, following the acquisition, SBI’s total assets will inch very close to the Rs 10-lakh crore mark. Total assets of SBI and the State Bank of Indore stood at Rs 998,119 crore as on March 2009.

The country’s largest lender had in early 2007 announced its intention to merge all its seven associate banks with itself. The market had estimated that SBI would first merge the small unlisted banks. SBI holds 100% stake in State Bank of Hyderabad and State Bank of Patiala, and in the range of 75-98% in State Bank of Bikaner and Jaipur, State Bank of Indore, State Bank of Travancore and State Bank of Mysore.

For SBI, the acquisition of State Bank of Indore will mainly be an HR exercise. This is primarily because SBI and all its six associate banks share a common IT platform and follow similar policies. Further, even as treasuries of all the associate banks operate separately, they are situated in the same building in south Mumbai. Moreover, the associate banks already sell insurance policies of SBI Life and issue SBI credit cards.

“The timing of the approval indicates there is some level of comfort for SBI to go ahead with the plan of merging its associate with itself, given that the Left is out of the picture,” said Hemindra Hazari, head of equity research at Karvy Securities.

It may be recalled that the SBI board had approved the merger of State Bank of Saurashtra with itself sometime in August 2007, but could only complete the process by August 2008, after the Left had walked out due to differences over the Indo-US nuclear deal. In his first meeting with the CEOs of PSU banks, finance minister Pranab Mukherjee said consolidation was important to improve competitiveness among Indian banks.

SBI in talks with Gulf investors for PE play

State Bank of India is talking to the governments of Qatar and sovereign entities in Oman to set up a private equity

fund.

“The government has designated SBI as the operationalising agency for setting up a sovereign wealth fund for the Qatar government,” said OP Bhatt, chairman, State Bank of India, at the bank’s 54th annual general meeting on Friday. “SBI is also in an advanced stage of setting up a general purpose private equity fund jointly with sovereign entities in Oman. Some other funds with Middle-East countries are also at various stages of being set up.”

Indeed, there have been very few instances of SWFs forming joint ventures with other funds. However, in recent times, funds belonging to the governments of China, Singapore and Dubai have invested in other private equity funds. Such funds came under the spotlight because of concerns of ownership of some assets. Also, these funds are also reported to have lost around $50 billion in the current financial turmoil.

SBI has already entered the private equity business. The Macquarie-SBI Infrastructure Fund, set up jointly with Macquarie, has raised over $1billion. It is expected to raise additional funds of $1 billion-$2 billion in the current year. As of today, SBI has a tie-up with Macquarie Capital group of Australia and IFC Washington for a $3-billion private equity fund to finance infrastructure projects.

Speaking at the AGM, Mr Bhatt also informed shareholders that the bank’s joint venture with Societe Generale Securities Services for custodial services business will start operations from the second quarter of this fiscal. The joint venture, Insurance Australia Group, for general insurance will start operations in the fourth-quarter of the current fiscal, he added.

With regards to other plans, Mr Bhatt said: “We aim to make SBI an international brand name, and foray into retail in Singapore by opening three new branches and seven ATMs.” SBI has 92 overseas offices in 32 countries and 11,448 domestic branches.

He further said SBI is planning new initiatives in mobile banking. The bank is also looking at consolidation of payment solutions business to achieve efficiency in operations, reduce costs and avoid duplication.

Berger Paints clocks net profit of Rs 88.7 crore

Berger Paints India has clocked a net profit of Rs 88.7 crore in FY09, which is a marginal drop of 3.58% from the Rs 92 crore net clocked in FY08. The company's sales for FY09 at Rs 1514 crore was higher by 12.5% than the previous corresponding period (Rs 1346 crore).

A Berger release issued on Friday said profits were impacted by high raw material prices in the first half and the slowdown in economy in the second-half, prompting the company to reduce prices. The price pressure and the reduction in volume, particularly in automotive sector, affected profits. "However, the company was able to hold on to its market and achieve growth in spite of extremely difficult conditions," the release added.

The board of directors of the company recommended a dividend of 30% per equity share with a face value of Rs 2 each. According to the company, the market is looking up and there are indications that the housing, automotive and industrial sectors are recovering. "The company therefore continues to be optimistic about the future of the paints industry," it added.

Foreign exchange reserves rise $2.4 bn

Foreign exchange reserves rose $2.4 billion during the week ended June 12, largely on account of inflows mopped up by the central bank.

While the government has reained its excesses and brought down the balances under the ways and means advances (WMA) within the agreed limit of Rs 20,000 crore between Reserve Bank and the government after improving its position for one week.

According to the latest data released by the Reserve Bank of India in its weekly statistical supplement (WSS), total foreign exchange reserves including gold and special drawing rights (SDR - currency with the International Monetary Fund) rose $ 2427 million to touch $263.6 billion during the week ended June 12. Almost the entire growth in reserves was on account of the rise in foreign currency assets, which went up $ 2,431 million, while the reserves with the IMF dipped $4 million.

Hike in house rentals by over 25%

Naresh Behl, a realtor active in IP Extension in East Delhi, works even on his weekly off days. Reason ? Those looking for rented accommodations keep on calling him to remind him about their requirement - this is something , Naresh says, he has not encountered in his decade-long career as a realtor.

“The demand for rented accommodation has really gone up in a big way as many people, who were looking for a house of their own, have shelved their plans due to the current insecurity in their jobs,” explains Naresh. The other reason is that many people are shifting from South Delhi to East and West Delhi for the simple reason that rentals in South Delhi are at least 20-25 % higher compared to other parts of the capital.

The economic slowdown has hit home sales and sent prices plummeting. The flip side - house rents have shot up. Rents went up by around 30% in major cities including Delhi and the National Capital Region (NCR) last year, as more and more consumers, hit by the slowdown, preferred living in rented houses to investing huge sums in properties, industry officials say.

“The slowdown has fuelled rental market. On an average, the residential rental has gone up 25% in the last one year in Delhi and NCR. In many areas, it went up by even 40%,” says Anu Gupta of Century 21 India.

Ashok Chauhan, a North Delhi-based broker adds: “The rental for a two-bedroom set in Delhi was about Rs 8,000 per month a year ago. However, today, it is very difficult to get a decent two-room set on the same rent even in remote localities.”

According to industry officials, the high cost of properties and slackening supply of houses have fuelled rentals in Delhi. “People need a house to live in, and not everyone can buy one. With prices still beyond the reach of a large section of the middle class, staying in a rented accommodation is the only option left,” Anu Gupta says.

CMD of ILD group Alimuddin Rafi Ahmad , on the contrary, is of the opinion that prices of flats are now well within the reach of working class. “There is enough correction in realty prices. However, prospective buyers are not going for kill as they are expected to do because there is an element of job insecurity. Nobody is sure whether his/her job is secure. And, it is these fence sitters who are fuelling rentals in Delhi and NCR.”

On the other hand, SVP group CEO Sunil Jindal says the realty market is fast improving . Now, many serious buyers are apparently coming to their office. “The best thing is that there are many who are buying flats purely for investment purpose. Most want to give out their flats on rent.”

Subodh Mishra, a Web journalist, says he had to shift home from Pitampura to Rohini because of high rents. “I was paying Rs 8,000 for a two-room set in the Pitampura. However , this year my landlord asked for Rs 10,000. This was out of my budget, so I shifted to Rohini , where I got a similar house for Rs 8,500,” Mishra said.

The trend in commercial and official rental markets is just the obverse of the housing rental sector - here prices fell 30% last year, according to reports by global real estate consultant Cushman and Wakefield.

Anil Makhijani, head of Mak Realtors, said supply was more than the actual demand in the office rental sector. “Office rentals are going down because the supply is more than the actual demand. However, in the residential property sector, the demand is much higher. Naturally, the rents will go up,” Makhijani added.

US credit card defaults rise to record in May

US credit card defaults rose to record highs in May, with a steep deterioration of Bank of America Corp's lending portfolio, in another sign that consumers remain under severe stress.

Delinquency rates -- an indicator of future credit losses -- fell across the industry, but analysts said the decline was due to a seasonal trend, as consumers used tax refunds to pay back debts, and they expect delinquencies to go up again in coming months.

"I find it hard to believe that it is really a trend. You need to see stabilization in unemployment before you see anything else," said Chris Brendler, an analyst at Stifel Nicolaus. "It is too early to see some kind of improvement." Bank of America Corp -- the largest U.S. bank -- said its default rate, those loans the company does not expect to be paid back, soared to 12.50 percent in May from 10.47 percent in April.

The bank is paying the price of expanding rapidly in recent years and of holding one of the highest concentrations of subprime borrowers among the top card issuers, analysts said. In addition, American Express Co, which accounts for nearly a quarter of credit and charge card sales volume in the United States, said its default rate rose to 10.4 percent from 9.90, according to a regulatory filing based on the performance of credit card loans that were securitized. The credit card company also holds a large exposure in California and Florida, two of the states most affected by the housing crisis and unemployment.

Citigroup -- the largest issuer of MasterCard branded credit cards -- reported credit card chargeoffs rose to 10.50 percent in May from 10.21 percent in April. "Chargeoffs went up to record highs," said Walter Todd, a portfolio manager at Greenwood Capital Associates, referring to the entire US credit industry. Credit card losses usually follow the trend of unemployment, which rose in May to a 26-year high of 9.4 percent and is expected to peak over 10 percent by the end of 2009. If credit card losses across the industry surpass 10 percent this year, as analysts and bank executives expect, loan losses could top $70 billion.

"Until lenders show stabilization then trend-bucking improvement over a several-month period, we remain bearish on credit card lenders -- and the U.S. consumer," said John Williams, an analyst at Macquarie Research. "We continue to believe that macro challenges and credit quality concerns will pressure US card issuers over the next 12 months," he added. However, some smaller credit card companies such as Capital One Financial Corp and Discover Financial Services reported defaults rates grew less than expected.

Capital One said its credit card default rate rose to 9.41 percent from 8.56 percent, while Discover said its charge-off rate increased to 8.91 percent from 8.26 percent. JPMorgan Chase & Co -- the second-largest U.S. bank and the biggest issuer of Visa-branded credit cards -- said its default rate rose to 8.36 percent in May from 8.07 percent in April, but it still holds the best performance among the largest credit card companies.

LOWER DELINQUENCIES

Among credit card issuers, Citigroup and American Express showed a third straight month of a decline in delinquencies in May. While the data was encouraging, analysts said it was too early to claim victory. "Past May, seasonally it gets more challenging," said Sanjay Sakhrani, an analyst at KBW, as unemployment will keep rising and the tax refund effect will dissipate. Credit card lenders are trying to protect themselves by tightening credit limits, raising standards and closing accounts.

They have also been slashing rewards, increasing interest rates and boosting fees to cushion against further losses. But that could come to an end soon. The U.S. government approved a law last month limiting credit card fees and interest rates, which is expected to tighten lending further and ultimately boost defaults as consumers find it harder to refinance their debts.

Bank of America's shares closed 2.8 percent lower at $13.33 on the New York Stock Exchange. JPMorgan was down 3.22 percent at $33.99, and Citigroup retreated 2.9 percent to $3.37. American Express also surprised investors as it sold some loans that it had already written off, reflecting a partial recovery of such losses. Its stock ended 0.3 percent higher at $25.23 on the New York Stock Exchange.

Air France crash: GIC Re to pay $6 m in claims

General Insurance Corporation of India (GIC Re) will have to shell out around $6 million (approximately Rs 28 crore) towards its share of the claim arising out of the Air France crash in the Atlantic early this month. GIC Re had underwritten the cover of Air France’s fleet along with other international giants such as AIG and Allianz as part of its international business.

The hull and liability claim of the ill-fated aircraft is in the region of $600 million and GIC Re has participated in the reinsurance cover to the extent of 4%. The company’s net liability will be much lower as part of the risk has been passed on to other reinsurers.

Speaking to ET, GIC Re chairman Yogesh Lohiya confirmed that the maximum liability for GIC Re on account of the mishap would be in the region of $6 million.

The claim has not materialised yet but is expected to be lodged soon. GIC Re has increased its acceptance of reinsurance from abroad after the mandated reinsurance from local companies came down following liberalisation in 2001.

Although there were couple of aircraft claims under GIC Re’s aviation reinsurance programme, the corporation has decided not to change its strategy as rates are expected to harden in the aviation insurance business.

According to a Bloomberg report, the Air France claim may turn out to be the most expensive since 2001. The report said that families are entitled to compensation of at least $150,000 each. The most expensive claim to date has been that of an American Airlines crash in New York which happened days after the 9/11 attack.

In international flights, the payout towards passenger liability varies according to the earnings capacity of a passenger, among other things. Given that the aviation insurance is a niche market with a capacity of a couple of billion dollars, claims of this size will definitely put an upward pressure on rates.

Tech Mahindra to unveil the new Satyam brand soon

The long-awaited rebranding of Satyam Computer Services by its new owner Tech Mahindra is likely to be unveiled this weekend at a closed-door leadership meet at Satyam headquarters in Hyderabad.

The new brand, which is likely to be a hybrid brand drawing on both Satyam and Tech Mahindra, will be shown to a select audience initially. “The idea is to gauge the reaction of a small group to the rebranding before it’s publicly unveiled,” a person familiar with the plans said.

Mahindra & Mahindra vice-chairman Anand Mahindra, group HR head Rajeev Dubey, Tech Mahindra CEO Vineet Nayyar, international operations head CP Gurnani and strategic initiatives head Rajeev Kalra will be present for the unveiling. Senior executives at Satyam, TechM and M&M have been working on the rebranding exercise with select external advisors, ever since TechM emerged as the winner in an auction to acquire Satyam in April. “There is a meeting over the weekend. The participants will deliberate over various initiatives which will be beneficial to the future of Satyam,” the Satyam spokesman said.

The Tech Mahindra spokesman declined to comment.

The rebranding is expected to leverage both Satyam and Mahindra brands. While Tech Mahindra doesn’t want to continue with the Satyam brand in its present form, it wants to leverage the strengths of the tainted firm. The new brand will convey the synergies of Satyam, well-known for its expertise in areas such as enterprise resource planning, M&M group’s global brand and corporate governance and Tech Mahindra’s strength in telecom.

Analysts say rebranding could help Satyam, whose founder admitted in January to cooking its books to the tune of over Rs 7,000 crore. “Rebranding would leverage its business strengths and signal a rebirth as the scam has severely tainted the Satyam brand name,” an analyst said on the condition of anonymity.

Apart from rebranding, Tech Mahindra and Satyam senior executives would also discuss the joint go-to-market strategy of the two companies. A decision could be taken on whether Satyam should bid independently or as a subsidiary of Tech Mahindra for projects.

A decision could also be taken on the surplus bench strength, estimated to be about 8,000 employees, even after implementing the virtual pool programme. The programme covers about 8,000-10,000 employees who draw a fraction of their salary and don’t attend office.

Pune-based Tech Mahindra agreed to pay about Rs 2,889 crore for a 51% stake in Satyam in April. Satyam recently announced unaudited revenues of over Rs 2,000 crore and net profit of Rs 181 crore for the October - December 2008 quarter. Its revenues could thus touch about Rs 8,000 crore, or $ 1.6 billion, after extrapolating these numbers.

Air India seeks employees' help in 'fight for survival'

A day after Air India asked its top executives to forgo their salary for July, the chairman and managing director of the state-run carrier, Arvind Jadhav, Saturday appealed to all staff to "rise up to the challenge" and help the airline in its "fight for survival".

In a letter to each employee, Jadhav has said that in view of the global crisis, all airlines have been experiencing low fares, poor load factors, drop in premium travel, decline in cargo load and low yields.

Despite the hardships in the industry, Air india has not taken any harsh steps like pay cuts and job cuts so far, Jadhav pointed out.

"Employees have been receiving their wages, salaries every month even when people in the industry have lost jobs or seen emoluments take a dip. We should consider ourselves fortunate that we have been insulated from the adverse impact of the economic meltdown so far," Jadhav said.

His letter comes at a time when the employees of the carrier have called for an indefinite strike from July 1 if the management delays their salaries.

The company, struggling to cope with a cash crunch, had earlier announced that it will defer its employees' salaries of June by two weeks. It has also asked the top executives above general manager level to forego their compensation for July.

"As loans from financial institutions at high interest rates cannot be availed of endlessly to meet working capital expenditure, the time has come for us to face the moment of truth. This is an hour of crisis for us all and it is a fight for survival," Jadhav said.

The company has already requested the government to infuse funds by way of equity and soft loans and is hopeful that it would come soon, he added.

Jadhav also warned of the impact of suggestions for disinvestment or privatisation of Air India.

He urged each and every employee to "rise up to the challenge" and demonstrate their ability to overcome the crisis and emerge with flying colours.

Jadhav said the management was in dialogue with employees' unions to apprise them of the difficult financial situation confronting the aviation industry and the airline in particular.

Paramount Airways to buy 10 Airbus A321s

Aiming at launching international services, all-business-class carrier Paramount Airways today placed a $1.5 billion order for acquiring 10 Airbus A-321 aircraft with each of them costing over $900 million.

Paramount signed a memorandum of understanding (MoU) with the major European aircraft manufacturers on the sidelines of the ongoing Paris Airshow at Le Bourget in France.

Under the MoU the Chennai-based airline has an option to place orders for 10 more aircrafts in future.

"We signed an MoU with Paramount Airways for confirmed orders for ten A-321s and ten more on option," Airbus Vice President (Sales) Miranda Mills told PTI from France.

The airline has already made its intentions clear that it wants to launch international flights from southern India by the year-end.

IRB Infrastructure up on Punjab highway project win

Shares of IRB Infrastructure Developers climbed nearly 5 per cent after the company announced that it emerged the lowest bidder for a highway project in Punjab.

The project is on grant basis with concession period of 20 years and estimated cost of the Project is Rs 1200 crore, the company said in a statement to the exchanges.

The company has sought a grant of Rs 126.90 crore for the project, which is on build-operate-transfer basis, from the National Highways Authority of India.

At 1:20 pm, the company’s shares were trading at Rs 134.50, up 2.63 per cent after surging to a high of Rs 142.85.

Bank of Rajasthan ties up with Karvy for online trading

Bank of Rajasthan (BoR) has entered into a strategic agreement with Karvy Stock Broking Ltd (KSBL) to facilitate online trading for the bank's over two million customers, a company statement said here.

Following this tie-up, Bank of Rajasthan customers now have the additionnal option of making investment in equities, derivatives and initial public offering (IPOs) using the online trading platform of KSBL, it said.

BoR's customers would be able to make invesment through Karvy's i-zone, an online investment platform for investing in secondary market both on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

State Bank of Indore employees to go on strike on June 22

Soon after SBI announced its intention to acquire State Bank of Indore, the employees of smallest subsidiary of the group threatened to go on nation-wide strike on June 22 to stall the proposed merger move.

"As per the advice of AIBEA and AIBOA, the entire employees and officers of State Bank of Indore will observe an strike on June 22," said All India Bank Employees' Association General Secretary C H Venkatachalam.

Earlier this month, the union had already announced nation-wide strike by associate banks on July 3.

Vekatachalam in the statement said despite the protest by the the workman Director, Atul Pradhan, the board of State Bank of Indore approved the resolution by majority vote.

Meanwhile, banking behemoth SBI today announced its plans to merge another associate State Bank of Indore, a development that will reduce the number of SBI associate banks to five.

SBI, which has informed the Bombay Stock Exchange about its proposal to acquire Indore-based associate bank, had earlier in August 2008 had merged State Bank of Saurashtra with itself.

State Bank initially had seven associates and with the merger of State Bank of Indore, the number would come down to five.

SBI, State Bank of Indore boards OK merger

The boards of State Bank of India and its associate State Bank of Indore have approved an acquisition of the latter by the country's biggest lender, both banks told the stock exchange on Friday.

SBI's central board approved acquisition of the associate bank, subject to approval by Reserve Bank of India and the federal government, it said.

Earlier in the day, State Bank of Indore had informed the stock exchange of a resolution to merge with or be acquired by State Bank of India.

State Bank along with its associate banks controls nearly a fourth of India's bank loans and deposits.

It has already absorbed State Bank of Saurashtra and has said it is progressively looking to merge its other associate banks.

Retail may lose Rs 400cr FDI

Indian retail may lose foreign direct investment of up to Rs 400 crore this fiscal because of last week's recommendations by the Parliamentary Panel on Commerce, which has opposed further leeway to the entry of international retail brands in the country.

According to global consultancy KPMG, many major Indian retail players are also likely to be affected if the report's recommendations are implemented, while some foreign players might cut down their investment plans. "After the IKEA debacle, India Inc could lose as much as another Rs 400 crore in 2009-10 due to the stand in the parliamentary report," KPMG Advisory Service manager Anand Ramanathan said.

IKEA, the Swedish home furnishing major, had last week announced its decision to shelve plans for venturing into single format retailing in India following the panel report. Following IKEA's decision, other foreign retailers are also likely to re-visit their plans.

"Carrefour, Cartier, Armani, Tesco and UK-based Curry's and Sports Direct International could be some of the foreign retail players to cut down their investment in India following the government's FDI policy on retail," Ramanathan said.

ITC Foods may post maiden profit on strong sales

ITC Foods, the foods division of tobacco and hotels major ITC, is likely to report a maiden profit this year, thanks to strong growth in sales of biscuits and staples, a senior company official said.

The business, which sells brands, such as Sunfeast and Aashirwad, could report a revenue of over Rs 2,200 crore, up 25-26% over the previous year, the official added. “We could be turning profitable this year, if we see a growth of around 26% in FY10. Growth is the oxygen, even as we work on driving cost efficiencies,” the source said.

The foods business is newest and smallest business of the conglomerate, which last year reported a revenue of about Rs 23,000 crore. It faced a tough road when it began operations in 2001. Foods was a completely new diversification for ITC and it had to compete with established players, such as Hindustan Unilever and Parle and Britannia. There were also a number of small and regional brands, who dominated local markets and were considered impregnable.

To add to all that, the foods business had not proved to be a happy hunting ground for other large players. Unilever, which boasts of a strong foods business globally, had to scale back its plans in India and change its business model after its initial foray flopped. Modern Foods, India’s first privatisation in 2000, was sold by Unilever in 2007, while plans for its spices and atta brands were cut back sharply.

But ITC, to its credit, managed to make an impact. Sunfeast, the biscuit brand, has managed to chalk up a market share of 11-12%, while Aashirwad, has mopped up 45% of the branded atta market. Biscuits have been the biggest driver of the foods division, contributing over 35% of the top line, followed by staples.

Snacks, confectionery and basic spices are the other categories in which ITC is present. ITC Foods did not comment on the possibility of turning profitable this year, but, when contacted, its chief operating officer Chittaranjan Dhar confirmed that the division was working on several factors to increase profitability. He declined to specify numbers or talk about profitability.

The division, for instance, has prepared a plan to set up more production units closer to the market and increase the number of contract manufacturing units from the current 40. “At present, each of our plants service markets at a distance of 550-600 km.

We want to bring it down to about 250-300 km by adding contract-run units, with ITC investing in machinery and control processes. We will bring more plants on stream for segments, such as biscuits and staples (like atta), which are not freight-friendly in carrying out operations,” Mr Dhar told ET. Investors in the ITC stock could heave a sigh of relief, if the foods business becomes profitable.

“If foods can ensure a top line growth and report profits, the valuation multiples would definitely improve. In fact, the ITC stock was re-rated by the market, once it forayed into this category. Currently, snack-food Bingo and the biscuits segment are generating losses, while only Aashirwad is profitable,” said Aashish Upganlawar, FMCG analyst with Sharekhan.

ITC shares ended marginally lower at Rs 192.95 on Thursday. Last year, the foods business’ turnover grew 20% to over Rs 1,800 crore, a sharp deceleration from the 40% plus growth rates of a few years ago. The increasing losses had then prompted speculation that the firm’s board of directors had asked asked the foods division to work on profitability rather than numbers.

The FMCG major will continue to support growth in business segments where they are already leaders, or where they are in contention with existing leaders. Staples and biscuits are two such verticals. ITC claims to be performing exceptionally well in the mid-priced cookies and cream categories, with a focused strategy, as it trails established leaders like Britannia and Parle in the overall biscuit segment.

Also, ITC Foods will not aggressively go after businesses that are relatively small or do not offer signifciant ramp-up opportunities. This includes the read-to-eat operations under its Kitchens of India brand— its inaugural play in the FMCG business—where the Indian market is relatively small for ITC to invest in developing it. The spices business too is heavily fragmented and is without any major upside.

State-run banks may resist bigger rate cuts

Indian banks are likely to resist mounting government pressure to sharply cut rates as they grapple with expensive deposits raised at the height of the credit crisis and rising bond yields.

Government wants banks to lend more and cheaply to boost economic growth, following other Asian economies such as China, which lifted limits on bank lending to grease the wheels of its economy.

The pressure is adding to the risks for shares of state-run banks, which have underperformed the bank index and privately held banks this year.

"Profitability and margins could be under pressure particularly if specific Indian banks pursue a very aggressive growth strategy and decrease the spread earned on banking products," said Brayan Lai, a credit analyst at Calyon in Hong Kong.

"From a top down perspective, I prefer Indian state-run banks due to their quasi-sovereign backing and recapitalisation plans but, from a bottom-up approach, I'd be worried as some dubious lending may take place," he said.

Shares of the country's biggest lender State Bank of India have gained 32 per cent so far this year, lagging a 46 per cent gain in the bank index and a 57 per cent jump in shares of privately held ICICI Bank.

SBI and its associates control a quarter of all loans, and state-run banks as a sector corner 55 per cent of all assets.

SBI cut its deposit rate by 25 basis points, its fourth cut in 2009, but has yet to reduce its lending rate. Chairman O.P. Bhatt said the economic recovery was yet to reflect on banks' asset growth and passing on rate cuts to customers will take time.

With bank loan growth slowing sharply, policymakers worry that by not passing on to customers the deep cuts in official rates these banks may threaten an economic revival.

While the central bank has cut its main lending rate by 425 basis points since October, state-run banks have cut their lending rates by 150-200 bps.

Loan growth has slowed from around 27 per cent in November to around 15 per cent in early June and halved from rates of around 30 per cent seen in the financial year to March 2008.

At a meeting with the heads of state-run banks last week, Finance Minister Pranab Mukherjee urged them to follow the central bank and reduce interest rates.

Bankers say more deposit rate cuts would lead to a flight of money from bank deposits to federal schemes that yield an attractive 8 per cent tax-free rate.

"Banks are at a crossroads: if they keep cutting their deposit rates, they won't get the funds and if they don't get the resources what will they lend," said K. Ramakrishnan, chief executive of the Indian Banks Association, an industry body.

CARE research data showed these schemes have lost heavily to bank deposits which accounted for 55 per cent of household schemes at March 2008. In 2004, these schemes garnered 20 per cent of savings and their pool shrank by nearly 4 per cent last year.

"To me, current interest rates are fair and are conducive enough for healthy loan growth when the economy turns," Ashish Parthasarthy, deputy treasurer at HDFC Bank, said.

Private sector lenders such as HDFC Bank and ICICI, while free from government pressure to cut rates, will still need to follow state-run banks or lose customers.

Angel Broking analyst Vaibhav Agrawal estimates a 10-20 bps drop in margins in the next two quarters after a 40 bps fall in the March quarter.

Privately held banks such as ICICI, Yes Bank, Kotak Mahindra Bank and mid- to smaller state-run banks such as Dena Bank, Corporation Bank and Oriental Bank of Commerce will gain as they rely more on bulk deposits, he said.

Goldman Sachs said banks' return on equity will fall to 14.3 per cent in 2009 from 16.6 per cent a year ago as net interest margin shrinks to 3.45 per cent from 3.65 per cent in 2008, with state-run banks being affected the most.

Another factor worrying banks are rising bond yields.

Banks have to park roughly a quarter of their deposits in bonds, and benchmark yields are up 156 bps this year, squeezing their margins.

"You can't have a situation where banks' deposit rates are falling and benchmark yields are going up," said J. M Garg, chairman of state-run Corporation Bank.

'India, other emerging markets will grow well'

Abby Joseph Cohen, senior investment strategist at Goldman Sachs and president of the Global Markets Institute, had predicted the bull run in the 1990s, earning her the sobriquet ‘perpetual bull.’ But even the bulls pause for breath once in a while, and Ms Cohen failed to forecast the sharp decline in the markets during the dotcom bust of 2000-01 and the 2008 crash.

Her career, which began with the Washington Federal Reserve Board in 1973 where she worked as an economist, is the subject of a Harvard Business School case study. She is also one of Wall Street’s most prominent analysts. In an exclusive interview she shares her view of which way the global and specifically the Indian market is heading.

What is your outlook for emerging markets including India?

There are growth opportunities in the emerging markets. We think India will be growing well; we have enthusiasm as well for opportunities in the economies of Brazil and China.

Has the global rally in equity markets run its course?

Our belief is that many markets have enjoyed a sigh-of-relief rally since the beginning of this year, (and) much of this is actually warranted. Now obviously, there is wide variation by market. In the US, we thought the market was 40% underpriced as of February and March. We have seen a recovery of that degree here and any future increase will depend on what happens in the fundamentals, for example, will GDP improve, will corporate profits recover? We do think there will be some additional improvement from here.


What is your view on the dollar and the strength it has shown of late?

The dollar should not be viewed in a vacuum. Obviously any currency has a relative price and we’ve seen that if the dollar in general has been rising over the past few quarters in relation to other currencies.

The US economy for all of its troubles is likely to emerge from recession before some of the other major economies, including Western Europe and Japan, so that’s been one reason for the improvement in the dollar. The other thing to keep in mind is that the dollar may not have been at the equilibrium price when this all began. We do believe that the dollar was priced too low, relative to some of the other currencies in the world.

Could the US Federal Reserve increase rates by the year-end?

Our expectation is that the Federal Reserve would like to do as little as possible for as long as possible. Basically, wait to see if the economy can take on some traction and some momentum of its own, and that being the case, we think the Fed would like to sit back and watch the data. They are also aware of the fact that here are some technical factors that could make the economy look somewhat stronger than it actually is.

Inventories in the US are now at reasonably low levels, so even if demand stabilises, inventory might pick up more quickly, production may pick up more quickly just as companies try to get back to more relationship between inventory and sales. And I think the Fed would like to make sure before raising rates or do anything else to remove liquidity from the system, that in fact the economy has got its sea-legs back.

Unitech raised $209 mn from asset sales: MD

Unitech Ltd, India's second-largest listed property firm, has raised more than 10 bn rupees ($209 mn) from asset sales this year and is not under pressure to raise further capital, its managing director said on Tuesday.

"Market has definitely bottomed out. The volume of sales, which are happening right now, we have never seen before, though prices are down 25-30 percent from (2007) peaks," Sanjay Chandra told reporters.

Unitech shareholders approved on Tuesday issue of up to 1 bn shares to investors and 227.5 mn convertible warrants to one of its founder group firms.

The company last month sold shares for $325 mn to institutional investors to tide over tight liquidity. Indian real estate firms have been hit by a severe cash crunch after high prices kept away buyers of homes, offices and shops.

Allotment of low-cost flats under JNNURM on the anvil

With the elections over, the much-awaited allotment of low-cost flats constructed here under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) for the poor is likely to kick off within the next two months.

"The allottment of flats will start within the next two months. We are finalising a fool-proof data base of the beneficiaries on merit basis," a senior official from Urban Department told PTI.

To avoid a repeat of a DDA-like scam, the officials are taking all measures to fill the loopholes, if any, and are minutely checking the antecedents and income of the applicants.

And the task is not easy given that the department has received 2.78 lakhs applications seeking ownership for the flats.

At least 8,000 flats are ready for allotment in city's Bawana, Narela, Bhorgarh, Ghoga and Baprola area while another 6-7000 flats will be readied by next two months.

"We have target to construct 4 lakhs flats for economically weaker sections by 2012. Currently, we have received Rs 1,800 crore under JNNURM to construct 65,000 such flats," the official added.

DLF won't sell core assets as credit begins to flow

India’s largest real estate company DLF has decided against selling core assets — residential, industrial and commercial plots — which it had put on the block.

The company will now sell only the hotel plots, which are non-core to its business. DLF executive director YK Tyagi told ET that the company has pulled back these assets from the market over the past 2-3 weeks, considering that banks lending to the real estate sector has started to ease.

A few prime properties in Gurgaon’s Cybercity and Udyog Vihar areas, which have been on the block for sometime now, have been pulled back. DLF had recently told ET that it planned to raise Rs 10,000 crore by selling land parcels, treasury investments and real estate projects in the next 2-3 years.

There has been a change of heart for DLF. “The decision to pull back these core assets from the market was taken considering the fact that banks have become more liberal in lending to real estate companies,” said Mr Tyagi. He also pointed out that after the recent stake sale by the promoters of the company, the company was in a comfortable position.

DLF promoters had sold a 9.9% stake in the past month to raise Rs 3,980 crore, which has put the company in a comfortable position. Capital Group picked up close to 5% in DLF, while HSBC, GIC and Fidelity bought smaller stakes. Following the open market transaction, the promoter group now holds a 78.6% stake in DLF.

Mr Tyagi pointed out that the company will continue to sell its non-core assets, including hotel plots and its wind power business, which would help them reduce their debt by half. DLF’s debt stands at around Rs 14,000 crore.

“We expect to sell all of the hotel plots by the end of the year,” he said. The company had said earlier that they do not want to exit the entire hotel business. “We expect to sell all of the hotel plots by the end of the year,” he said.

The company had said earlier that they do not want to exit the entire hotel business. While looking at hotel properties and plots just as an investment, DLF would like to retain the Aman brand. DLF has a number of hotel plots located in Mumbai, Kolkata, Bangalore, Gurgaon, Baroda, Lucknow, Kasauli (Himachal Pradesh) and Sikkim among others. According to sources, DLF has managed to sell hotel plots in Sikkim and Baroda.

A number of core assets—commercial, residential, industrial plots—were on sale by the developer, some of which it managed to sell over the last few months. The company recently sold its 66% stake in Hindoostan Spinning and Weaving Mill in central Mumbai for Rs 310 crore.

TCS eyes e-governance projects to cope with downturn

IT bellwether Tata Consultancy Services (TCS) is eyeing e-governance projects to cope with the downturn, according to a senior "Post-elections, we believe conditions are ripe for e-governance projects to take off at the central and state levels," TCS chief financial officer S. Mahalingam told IANS here.

"We believe the momentum will pick up now for more e-governance to improve government services to the people. We are already working on an e-passport scheme for the ministry of external affairs with two pilot projects in Bangalore and Chandigarh," he added.

In this context, Mahalingam said basic infrastructure spanning roads, power, water, transportation and housing were critical for the efficient functioning of the information technology (IT) industry in both tier-one and tier-two cities.

"Sound infrastructure will enhance our ability to work from any city. Similarly, IT-enabled infrastructure will enable governments and organisations to improve their delivery mechanism. There is a phenomenal need for IT in public services and utilities," he asserted.

Though the $6-billion TCS lost to rivals Infosys and Wipro in winning some e-governance projects, it has bagged a multi-million-rupee contract from the corporate affairs ministry for total re-engineering of corporate governance across the country.

TCS opens new outsourcing center in Mexico

Tata Consultancy Services, India's largest outsourcing firm, has opened a new center in Queretaro, Mexico, the company said on Thursday, a reflection of the growing move to diversify offshore locations.

TCS said it would hire 500 people to work at the new center, its third in Mexico since entering the country in 2003.

The company has seven centers across Latin America, in Brazil, Argentina, Uruguay, and Chile, as well as Mexico, and employs information technology consultants in 42 countries around the world.

The industry and its clients alike have been seeking to expand the number of countries they use for offshore outsourcing, and some U.S. clients are more comfortable sending work closer to home than to faraway Asia, analysts say.

India still dominates the industry, accounting for 85 percent of the $45 billion information technology services offshore market in 2008, according to Forrester Research.

``There are some clients out there, particularly the large ones, that are looking to diversify risk,'' said John McCarthy, principal analyst at Forrester.

He said some companies, like General Electric, have tried to lessen their dependence on Indian outsourcers, but have struggled to find adequate alternatives.

``They can't find the skills in some of these other locations,'' he said.

The push out of India began several years ago, as wages skyrocketed and attrition soared, McCarthy said. The recent downturn has curtailed both those trends, but last year's terror attacks on Mumbai and continuing political instability in neighboring Pakistan have renewed the push to alternate locations, he said.

``India clearly is going to be the dominant location for the foreseeable future, barring some major geopolitical issue,'' he said. Argentina, Brazil, Mexico, Eastern Europe, Russia, Egypt, China, Malaysia, Vietnam, and the Philippines have all been developing as India alternatives, but none, save China, has the potential to be a real competitor, McCarthy said.

``I think potentially the big wild card is China. The rest of the locations will continue to play a niche role. They just can't scale,'' he said.

But for now China is ``not cheaper than India and the skills aren't nearly as developed,'' he said. ``Until that changes not much is going to happen.''

UBS in talks with Infy, Wipro for BPO, KPO units sale

Switzerland-based bank UBS is believed to have put its business process outsourcing (BPO) and knowledge process outsourcing (KPO) units up for sale. The bank, which has centres in Poland and Hyderabad, is in talks with Indian IT companies such as Infosys and Wipro, said a person familiar with the possible transaction.

The UBS India Service Centre (ISC), along with its Krakow (Poland) centre, is valued at around $200 million, according to another source. The story was first reported by ET NOW.

When contacted, Infosys CFO V Balakrishnan denied that they were in talks with UBS, while Wipro chief strategy officer and head of M&A KR Lakshminarayana declined to comment on the deal. A UBS spokesman in an e-mail response to ET said: “UBS continually seeks to explore commercial opportunities in all jurisdictions in which it operates that have the potential to be of benefit to the the company and its component businesses. However, UBS remains committed to all its activities in India.”

Wipro, which had bought Citi’s captive technology arm in December 2008, is learnt to have started a preliminary due diligence of the UBS unit. Both Infosys and Wipro are IT vendors for the bank and provide software development services along with application and maintenance services.

Incidentally, Wipro had also helped the Swiss bank set up its captive operations in Hyderabad. UBS had invested over $70 million to set up its unit, which employs 2,100 people. The bank also has a 250-seater unit in Poland, which became operational in 2008.

This enables UBS to leverage specific competencies not available in India, such as non-English language skills. Since its inception in June 2006, the ISC has built up capabilities to provide high-value, complex BPO and IT services with specialisation in research, analytics, securities operations, legal process outsourcing (LPO), infrastructure management, presentations & design and finance.

After Citigroup sold two of its captives in 2008, this is the second time a global bank would be hiving off its captive BPO arm, if this transaction materialises. Citi had sold its BPO captive, Citigroup Global Services (CGSL), to TCS in October last year for $505 million and Citi Technology Services (CTS) to Wipro in 2008.

TCS had acquired domain expertise and a large platform BPO in the banking and financial services (BFS) space. If the deal with UBS goes through, Wipro could leverage itself in the BFS space with the domain skill that it would get.

A part of UBS’ analytics KPO unit has recently seen a management buyout, which is unrelated to the possible transaction described in this story. Two months before, the management bought out a 50% in the analytics KPO servicing the investment banking arm of UBS, while the other 50% stake will be owned by UBS. This unit, which has been carved out from the existing ISC in Hyderabad, will be called Verity Knowledge Solutions (VKS).

“As part of the ongoing development of its offshoring strategy, UBS is migrating a part of the analytics service, currently working at the UBS India Service Centre to Verity Knowledge Solutions (VKS). UBS will take an equity stake in VKS. The operation employs around 150 people and is expected to be completed by the end of the third quarter this year. UBS will take an equity stake in VKS,” confirmed the UBS spokesperson Mark Panday.

Core inflation rate is still marginally positive

Inflation rate in India has gone into negative territory for the first time in over three decades. The rate of change in prices was minus 1.61 per cent for the week ended June 6. However, this is partly a statistical illusion because in the same week ending June 6 last year the inflation rate had suddenly jumped to over 11 per cent on the back of rising global commodity prices. So on a high base of June 2008, a negative growth in prices this year is not surprising.

Besides, if you disaggregate the wholesale price data, manufacturing inflation accounting for nearly 64% of the total basket is still in a marginally positive territory. It is food and fuel items, with 36 percent weight in the basket, which have gone negative. So the core inflation rate is still marginally positive.

So too much need not be read into the inflation rate going negative. This is definitely not a sign that the economy is still in a risk of deflation. The consensus view is the GDP growth for the economy in 2009-10 will certainly be higher than the 6.7% growth registered in 2008-09.

The inflation rate appears to be actually rising on a sequential basis i.e if you compare prices of food, fuel and manufacturing items today with what existed a month ago, the prices are actually rising. The point to point comparison can create some statistical illusion. Of course, there are myriad other problems with the way the inflation rate is calculated.

For instance India still follows three sets of inflation data. We have the Wholesale Price Index in which manufacturing has the maximum weightage and is used for official purpose. Then we have the consumer price indices for industrial workers and agriculture labourers, in which maximum weightage is given to food and fuel items. Both these indices are still showing an inflation rate of a little over 8.6% as of end April. Data on these come with a greater lag.

Consumer price indices for industrial workers and agriculture labourers have been much higher than the wholesale price index these past few months. It is most unlikely that even the wholesale price index will stay negative going forward. The rate of inflation will return to the normal 3 to 5% in due course.

Mutual fund AUM likely to grow 15-25 pc over next 5 years

Assets under the management (AUM) of Indian mutual fund industry is expected to grow by 15-25 per cent over the next five years even as there may be challenges of declining profitability, a CII--KPMG study said on Wednesday.

The study released at a mutual fund summit organised by CII has projected the AUM to grow to Rs 15-18 lakh crore by the year 2015.

The growth could be in the range of 22 to 25 per cet in case of quick economic revival while it may slip to 15 to 18 per cent in the event of a slow pick up, the report said.

Increased retail and institutional participation and innovation in distribution would be among the factors that would spur growth, the study said.

The study has, however, warned that the growth in AUMs may not be music to the ears of the AMCs which may find their profitability declining.

"Revenues of asset management companies (AMCs) are expected to reduce due to focus on low margin products to attract risk averse investors and also as operating costs escalate due to focus on reaching out to retail investors beyond Tier-II cities", the study said.

SEBI removes entry load on MF schemes

Market watchdog SEBI today asked mutual fund companies not to deduct marketing and distribution charges from investment made by subscribers, a move which analysts termed "revolutinary for investors".

SEBI's new guidelines stipulates that investors directly make payments to distributors instead of MF companies deducting it from the investment made in any scheme.

"There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly," SEBI said in a statement after its board meeting.

MF tracking firm Value Research online CEO Dhirendra Kumar said, "It is revolutionary move for investors which will bring greater transparency into the system. But, mutual fund distributors would be significantly hit and it may be unviable for the advisors.

An entry load is a charge levied by a MF when an investor steps in, to meet their marketing costs and distribution commissions. And as the entry load is deducted from the investment made by the investor, his total invested amount reduced to that extent. Usually, if an investor enters any MF schemes via a broker it attracts entry load of around 2.25 per cent, while the broker gets from an asset management firm a commission between 2 and 2.25 per cent or depending on the performance of the distributor.

"The profitability of the AUM could be hit by the move," Taurus MF Director R K Gupta said.

Further, the upfront commission to distributors shall be paid by the investor to the distributor directly, the statement said.

"But I think it is a good development from the point of view of investors, mutual funds and even the distributors. Now the broker commission would be provided separately from the investment made by the investor," Gupta added.

Interestingly, the distributors shall have to disclose the commission, trail or otherwise, received by them for different schemes or MFs which they are distributing or advising the investors.

"The distributors' role may be modified into an adviser who provides value added services to investors after this decision. However, in the short term the move may impact the distributors and fund houses," SMC Capital equity head Jagannadham Thunuguntla said.

The equity schemes of MFs are likely to be hurt the most as they attract the most entry load among schemes.

"It would hurt mostly the equity funds, which are the most rewarding for fund houses, Kumar added.

Inflation drops to negative, at -1.61 for week ended June 6

Inflation for week ended June 6 was at -1.61% in the 12 months to June 6, compared with the previous week's annual rise of 0.13 percent. Inflation has dropped to negative for the first time since 1977-78.

It was worse than a median forecast of an annual fall of 1.52 percent in a Reuters poll of analysts.

The annual inflation rate was 11.66 percent during the corresponding week of the previous year.

The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is released weekly.

Are Money Back Policies productive?

‘Save a little money each month and at the end of the year, you will be surprised at how little you have’ – Ernest Haskins Confused??? Aren’t you..... Time and again, financial advisors have propagated the rewards one can reap by saving little by little. And here, we are contemplating otherwise!!! Well, you need not be Ernest Haskins to believe the truth behind this aphorism. Simply analyse the returns likely to accrue from the money back (insurance) policy you have invested in, and the above adage would flash like a golden truth, literally.

Money back policies are one of the most traditional insurance cum investment policies and have been widely promoted and distributed by the insurance companies. Unlike a regular endowment plan, where the policy amount (sum assured) is receivable either on death or at the end of the policy term, money back policies ensure that the survivor receives a certain percentage of sum assured regularly during the term of the policy. This ensures periodic cash inflows in the hands of the survivor to meet various financial needs that might crop up with time.

The unique selling point (USP) of this product however lies in the fact that in the event of the unfortunate death of the insured, the nominee shall be eligible to receive the entire sum assured irrespective of the payments already made as ‘moneyback’ . To simplify this USP, assume a 30-year old youth with a money-back policy of Rs 10 lakh for a period of 20 years. Now assuming a 20% pay-out (of the sum assured) every five years, this individual would have received Rs 6 lakh by the end of the fifteenth year, with the remaining Rs 4 lakh to be received on maturity. But if the individual dies before the end of the 20th year, the nominee shall be entitled to the entire sum assured of Rs 10 lakh, resulting in total pay-out of Rs 16 lakh by the insurance company.

Sounds interesting, really, but probably for those who wish or plan to die early in life leaving their wealth for their heirs to enjoy! And for those who are in no hurry to meet the ‘Yamraj’ , a little pondering and analysis of the premiums payable on money back plans would help to structure their prospective investments.

Money back policies are probably one of the costliest traditional insurance products available in the market. And this is obviously because the insurance companies are unable to milk the premiums received by them for the entire investment tenure. To have a gist of the cost structure of a money back policy - a simple 20 year money back policy from LIC calls for a premium of over Rs 6,300 per one lakh sum assured for a healthy individual aged 30 years as against Rs 4,900 charged by a pure endowment plan. A term plan, on the other hand, shall be available at 1/20th of this cost.

Thus, though money back plans are usually promoted as schemes taking care of both insurance and investment needs of the insured, a deeper look into these schemes is bound to unsettle the investors. An ETIG study of 10 popular money back policies reveals that the sum total of premiums paid during the entire policy tenure are either higher than or equal to the total receivables from these schemes. This is despite the fact that most of these schemes promise guaranteed additions upon maturity.

While we have not considered the proportion of variable pay-outs or bonuses which may be declared by the insurance companies from time to time - as the same are not guaranteed - even if the same are incorporated , they are not likely to make a significant difference to the probable pay-outs by insurance companies. Thus, while these money back schemes do justify their insurance features, they grossly fail to answer the thesis behind the investment structure of the policy. An investment, after all, implies growth of capital and not its diminution.

The insurance companies are likely to argue that since they periodically repay a part of the sum assured, the same can then be reinvested by the investors in other investment avenues. While the point is valid and well noted, it definitely calls for a counter argument.

If the investor ultimately has to seek other investment avenues in the middle of the policy tenure, why not do so in the beginning itself and invest the amount in instruments that yield returns rather than use it for paying premiums. And as far as the insurance needs are concerned, a pure term plan would do just the same at a premium, which is nearly 1/20th of that paid for money back.

(A term plan from LIC would charge Rs 3,227 per annum for Rs 10 lakh policy vis-àvis Rs 62,796 per annum levied by a money back policy.)

The hefty premiums demanded by the various insurance cum investment policies make one ponder over the productivity of such investments. While both insurance and investment are equally important and need to be provided for fairly early in life, it is advisable to split the two objectives. Let insurance companies take care of insurance needs and there are opportunities aplenty as far as investments are concerned.

Bull's Eye: Indian Oil Corp, Financial Tech, Biocon, ONGC, Bata India

Indian Oil Corporation

RESEARCH:

ABN AMRO BANK

RATING:

SELL

CMP:

Rs 556 ABN Amro Bank downgraded Indian Oil Corporation from ‘Hold’ to ‘Sell’ with a target price of Rs 490. IOC reported Q4FY09 net profit of Rs 6,620 crore, turning 9MFY09 losses of Rs 3,670 crore into full-year profit of Rs 2,950 crore. This was largely a result of the contribution from government bonds of Rs 40,370 crore and upstream sharing of Rs 18,200 crore in the full year.

ABN Amro estimates prices of kerosene, LPG, petrol and diesel will need to rise 140%, 42%, 11% and 3% respectively, or crude price will need to fall below $54/bbl, to ensure no gross under-recovery . It expects refining margins to remain low. To maintain adequate profitability, the government, like in FY09, will ensure IOC has no net under-recoveries by contributing in the form of oil bonds and upstream sharing.

As long as gross under-recoveries exist and earnings depend on government policy, IOC’s core business should trade at a discount to book value. At the target price, the core business would trade at 0.9x FY10 price to book value, while IOC’s holding in ONGC/Gail is worth Rs137/share.

FINANCIAL TECHNOLOGIES

RESEARCH:

IDFC

RATING:

OUTPERFORMER

CMP:

Rs1352 IDFC-SSKI initiates coverage on Financial Technologies (FTIL) with `Outperformer’ rating and target price of Rs 2,000. Vision, execution and ability to reinvest capital have prompted the evolution of Financial Technologies from India’s leading exchange solutions provider to Asia’s largest exchange conglomerate.

The ‘only’ gateway to the potential $10-trillion Indian exchanges space, FTIL has captured 87% of the commodity markets through MCX and given taut competition to equity incumbent NSE in currencies through MCX-SX . Besides pioneering niche models in power and spot, five international exchanges have been set up in potentially under-penetrated regions.

BIOCON

RESEARCH:

DEUTSCHE BANK

RATING:

SELL

CMP:

Rs 214 Deutsche Bank maintains Biocon’s estimates and target price of Rs 135, however, it downgrades the rating to `Sell’. Biocon has a poor track record - lacklustre revenue, falling margins and PAT (6%). This is aggravated by increasing working capital and large capex, resulting in higher gearing and low ROCEs. Thus, it has the lowest asset turn and ROCEs amongst peers.

Axicorp’s acquisition will add value only in the medium to long term. Biocon expects to supply mycophenolate and tacrolimus in US for generic launch. Generics are not able to snatch significant market share immediately on patent expiry in immunosuppressants. Moreover, there is a large number of API fillings for both. Also, the patent holder has been able to delay generic companies for tacrolimus for over a year. And there is a possibility of a rebound in licensing fees for Biocon.

ONGC

RESEARCH:

MERRILL LYNCH

RATING:

BUY

CMP:

Rs 1127 Merrill Lynch retains its `Buy’ rating on ONGC with a target price of Rs 1,261. Since the May 16 election results, there is expectation that auto fuel pricing may be freed up to oil price of $75/bbl. Current auto fuel prices reflect $55/bbl of Brent price. Auto fuel pricing freedom up to $75/bbl of Brent price implies a over 20% hike in diesel and gasoline prices. Merrill Lynch, therefore, assumes 8-10 % diesel and gasoline price hike, which has boosted the target price by Rs 111/share.

Earlier, auto fuel subsidy hit of Rs 1,400 crore in FY10E and Rs 5,700 crore in FY11E was assumed. Assuming a 8-10 % price hike in diesel and gasoline has meant no auto fuel subsidy for ONGC up to Brent price of $62/bbl. Thus, now no auto fuel subsidy is assumed in FY10-FY 11E, which has boosted FY10- FY11E EPS by 5-18 %. FY12E EPS is also boosted 15% due to lower auto fuel subsidy.

BATA INDIA

RESEARCH:

STANDARD CHARTERED BANK

RATING:

BUY

CMP:

Rs 161 Standard Chartered Bank initiates coverage on Bata India with `Buy’ rating and a target price at Rs 202. Bata is planning to aggressively expand its retail network of 1,200 stores by 60 stores annually for the next three years. With restructuring of its retail network over the past couple of years, Bata is on a strong wicket to successfully achieve its expansion plans.

During 2004-08, Bata’s revenue compounded 9% annually and EBITDA expanded by 1,600 bps to 9%. During the same period, its debt on balance sheet dropped to Rs 44.6 crore from Rs 122.1 crore . Bata is very well-placed to carry out its expansion plans with improved revenue and profitability growth rate and virtually a debt-free balance sheet.

At this target price of Rs. 202, Bata will quote at a PE of 25.9x and EV/EBITDA of 13.7x 2009E financials. Consistent growth in revenue and PAT of 12% and 15% respectively during 2008-12 may result in re-rating of the stock from the current level. Any disturbance in the cordial relations between the management and their employees and relaxation of retail FDI regulations that may increase competition are the key risks to the call.

CADILA HEALTHCARE

RESEARCH:

CITIGROUP

RATING:

SELL

CMP:

RS 340 Citigroup maintains `Sell’ rating on Cadila Healthcare with a higher target price of Rs 320. It remains concerned over a potential hole in earnings on expiry of Protonix patents and Cadila’s ability to effectively fill the hole. That apart, given the limited differentiation in the company’s biz model, the stock is to continue trading at a discount to its peers. Cadila’s FY09 results had sales and PAT of Rs 99.9 crore and Rs 68.2 crore from the JV with Nycomed. This is likely to be a finite opportunity given the imminent patent expiry of Protonix.

The company also has hedging positions worth about $70 million at an average rate of about Rs45.5/$ and forex debt of about $140 million on its books which provides some cushion against rupee appreciation in the short term. Things to watch out for: (1) Scale up of the Hospira JV: Cadila has guided to three product launches in FY10 and six launches in FY11, and indicated that this could make up for the patent expiry of Protonix; (2) Domestic formulations growth trend: FY09 growth was lacklustre at 9% y-oy . Given that this accounts for about 43% of Cadila’s sales, it would be difficult for Cadila to achieve its guidance of $1bn sales by FY11, without a dramatic pick up in growth.

MPHASIS

RESEARCH:

HSBC

RATING:

OVERWEIGHT

CMP:

Rs 354 HSBC initiates coverage on MphasiS with an `Overweight’ rating and a target price of Rs 430, valuing the stock at an about 25% discount to its largecap peers, in line with the historic range. A mid-tier Indian IT services company of which Hewlett-Packard owns 61%, MphasiS’ top-line growth has outperformed peers over the last few quarters due to strong traction in its HP/EDS accounts. HSBC finds further scope for inroads in the HP/EDS accounts, as HP’s cost-saving targets warrant further offshoring of about 10-12 K employees by end-FY 10.

With EDS’ focus on large deals and a high proportion of ‘offshorable’ services, there is potential to offshore 60% of commercial outsourcing work. HSBC estimates 2% top-line growth here, which could expand MphasiS’ top line by about 16% in FY10E. HSBC forecasts growth in cost of goods sold to be in line with headcount growth and factors in only a modest decline in pricing, as a large proportion of revenue is offshore, where pricing is already at a 15-20 % discount to sector leaders.

Top 10 challenges for India to achieve 2050 potential

Various studies have shown that India could be 40 times bigger by 2050. To achieve this potential, however, the nation needs to implement many changes.

In one of its latest papers, Goldman Sachs outlines ten crucial steps that India must take in order to achieve its full potential.

“In our latest annual update to our Growth Environment Scores (GES), India scores below the other three BRIC nations, and is currently ranked 110 out of a set of 181 countries assigned GES scores. If India were able to undertake the necessary reforms, it could raise its growth potential by as much as 2.8% per annum, placing it in a very strong position to deliver the impressive growth we outlined,” it says.

Here are the 10 things for India, as outlined by Goldman Sachs, to achieve its 2050 potential:

India’s governance problems overarch all its other problems. Without better governance, delivery systems and effective implementation, however, India will find it difficult to educate its citizens, build infrastructure, increase agricultural productivity, and ensure that the fruits of economic growth are well-distributed.

Governance problems stem from the increasing inability of the government and public institutions to deliver public services in the face of rising expectations. A large gap between physical access to services and the quality of services provided is leading to a citizen satisfaction gap.

Some observers attribute India’s governance problems to its democracy. Goldman Sachs thinks it is the malpractice of democracy—or the ‘democracy deficit’—that is the cause of the problem.

A well-functioning democracy should allow citizens to have more voice in evaluating the quality of services they receive, for governments and service providers to be accountable, and for citizens to pay directly for services received.

Many international observers tend to see education as one of India’s biggest advantages. This is primarily because they tend to meet only the best and the brightest.

It is the case that India has a large number of highly educated people. But it has a population of 1.1bn and probably the highest absolute numbers anywhere globally receiving hardly any education.

There is evidence that the amount of time spent receiving secondary education is important for economic growth and productivity. India scores poorly relative to the other BRICs, and even below the average of all emerging market countries.

The actual amount spent on education is low, and its efficiency is weak. It is important that India improves the amount and quantity of money spent, and that the quality is improved.

There is also significant need for better higher education. The likely numbers seeking higher education can be expected to grow by three of four times by 2020 from the current number of around 10mn.

The National Knowledge Commission has proposed an increase in the number of universities from 350 today to 1,500 by 2016. It has also proposed an increase in the 18-24 age group — to be educated to university level from 7% to 15%.

India plans to quadruple the number of its universities in the next ten years—an admirable goal and a huge challenge. Its goal should also probably be that at least 20 of these are the world’s best. Shanghai University has become recognised as the authoritative voice on leading universities.

Its latest ranking does not show a single Indian university in the top 300. China itself has six. In order to achieve this kind of ambition, just as in other spheres of life, India’s leadership needs to have strong and imaginative goals. Perhaps India can share ‘best practices’ with leading universities from elsewhere around the world.

Although India has not suffered particularly from dramatic inflation, it is currently experiencing a rise in inflation similar to that seen in a number of emerging economies.

Goldman Sachs thinks a formal adoption of Inflation Targeting (IT) would be a very sensible move to help India persuade its huge population of the (permanent) benefits of price stability. It also recommends greater independence for the Reserve Bank of India and the abolishment of all FX controls.

“We are well aware of some of the difficulties, both real and perceived, for India to adopt these choices, but we think it is in India’s best long-term interests to undertake these steps. IT has given major benefits to a broad variety of countries, ranging from ‘developed’ countries (such as New Zealand, Sweden and the UK) to ‘developing’ ones (such as Brazil, Korea and South Africa). For India, there are probably broader powerful benefits,” it says.

India’s gross fiscal deficit remains one of the highest in the world and, recently, government liabilities have been increasing at an alarming rate.

Goldman Sachs estimates that the overall government deficit stood at just under 6% in FY2008. In FY2009, this may accelerate to above 7%, due to a large debt-waiver for farmers, a big wage hike for civil servants, increasing fertiliser and oil subsidies, and higher exemptions on income tax.

At such high levels, government borrowing crowds out private-sector credit, keeps interest rates high, adds to already high government debt, and becomes a key source of macro vulnerability.

Therefore, a medium-term strategy for fiscal policy, which reduces the overall deficit to a sustainable level, is critical for India.

India’s financial sector remains small and underdeveloped. The state still dominates the sector, holding 70% of banking assets, a majority of insurance funds and the entire pension sector.

Additionally, markets are lacking in corporate debt, currency and derivatives. This leads to a lack of credit and low financial savings. Total credit, at 50% of GDP (although increasing rapidly in recent years), remains well below that of its Asian neighbours (an average of over 100% of GDP) and especially compared with China (111% of GDP).

Within this, consumer credit remains abysmally low (at 11% of GDP) compared with an Asian average of over 40% of GDP. Household savings tend to be in physical assets and gold, and risk diversification channels are not available.

To meet its growth potential, India needs to pursue financial reforms to channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability.

Savers need to have access to a broad range of financial instruments, while borrowers should be able to access local debt and equity.

In the past decade or so, Indian trade with the rest of the world has ballooned. Lower tariff barriers encouraged by Indian authorities have been key, as has booming world trade. This impressive development needs to be kept in perspective, however, as it has come from an exceptionally low base. India currently accounts for no more than 1.5% of global trade.

On Goldman Sachs’ GES scoring system, India still ranks below the average of all developing countries. India’s trade with China is rising sharply, and China now ties with the US as India’s biggest trading partner.

Again, however, it is important to recognise that trade with China remains very low. India takes just 1.93% of China’s exports and provides just 1.46% of its imports. Total trade with the US in 2007 was just $42bn. For comparison, total US trade with China in 2007 was $405bn. Similarly, total Indian trade with China was just $37bn.

Thus, in terms of international trade, India continues to be much less ‘open’ than many of its other large emerging nation colleagues, especially China. Given the significant number of nations with large populations on its borders, Goldman Sachs recommends that India target a major increase in trade with China, Pakistan and Bangladesh.

Increasing agricultural growth is critical not only for India to sustain high growth rates, but also to move millions out of poverty. Currently, 60% of the labour force is employed in agriculture, which contributes less than 1% of overall growth.

India’s agricultural yields are a fraction of those of its more dynamic Asian neighbours. For instance, rice yields are a third of China’s and half of Vietnam’s.

Agriculture will have to contend with two other problems. First, the loss of arable land for non-agricultural uses as India industrialises and urbanises.

Second, soil erosion due to intensive farming and environmental degradation. Since there are limits to enhancing area under cultivation, as forest cover is already dwindling, raising agricultural productivity will be key.

India’s constraints in infrastructure are obvious to first-time visitors or long-term residents. The problems of clogged airports, poor roads, inadequate power, delays in ports have been well-recognised as impeding growth. Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7% of the value of their sales due to power outages.

Incremental demand for infrastructure will continue to increase due to economic growth and urbanisation. Thus, there is both a stock and a flow problem. If India’s economic growth were to continue, it will fuel demand for energy, transport, logistics and communication.

The success stories in the past few years need to be replicated. India has built more than 3,600 miles of highways for the Golden Quadrilateral Highway project, whereas in the previous 50 years it had built 300 miles; the New Delhi metro was completed earlier than envisaged; and the privatisation of the telecom sector, and its rapid growth and penetration, are all success stories that demonstrate that India can build infrastructure.

The ability to continue to do so will be critical for the growth of the economy.

India’s high population density, extreme climate and economic dependence on its natural resource base make environmental sustainability critical in maintaining its development path.

History is replete with instances of societies that have depleted their natural resources in the course of their development, thereby leading to severe loss of growth, and in some spectacular cases (e.g., Easter Island) a complete collapse of the civilization. Although such dire prognostications are premature, urbanisation, industrialisation and ongoing global climate change will take a heavy toll on India’s environment, if not managed better.

India is well-placed to deal with environmental issues. It has a strong policy and institutional framework—including a separate ministry for environment and forests; state and local pollution control boards; a vocal media; and of late a very active judiciary.

The political commitment to a sustainable environment is, however, still lukewarm, and significant segments of the population may profess to have other, more pressing priorities. If not given the right priority, environmental sustainability has the potential to become India’s greatest challenge.

TCS: demand decline halts

A slowdown in global demand for outsourcing has been halted but customers are still demanding lower prices, the chief financial officer of Tata Consultancy Services, India's biggest software exporter, said.

"Now we have to really see whether this arresting of decline just leads to a plateau where there will be a flat demand for a period of time," S. Mahalingam told a news conference on Wednesday.

An army of low-cost English-speaking engineers had driven an outsourcing boom in India, but turmoil in global markets and a recession in the United States, which accounts for more than half the sector's revenue, have slowed the scorching pace of growth.

"Companies are definitely cautious in terms of their spends," Mahalingam said.

Gartner Inc, the world's biggest technology research company, this month sharply curtailed its forecast for information technology spending this year reacting to larger-than-expected budget cuts by companies during the first quarter.

It now expects IT budgets to fall 4.7 percent this year, compared with forecast three months ago that called for budgets to rise 0.16 percent from 2008.

Mahalingam said Tata Consultancy was focused on reining in costs related to areas such as staff salaries and sales and marketing expenses to offset the impact of pricing pressure on margins.

"Pricing requests definitely keep coming even now," he said. "As we have said earlier, request comes for anything from 5-15 percent."

Tata Consultancy posted a 4.6 percent rise in Jan-March net profit and said its overseas clients were demanding fee cuts in a tough environment.

This was the fifth consecutive quarter of single-digit year-on-year quarterly profit growth for the Tata Group firm, after seeing a rise of more than 20 percent in the previous quarters.

Tata Consultancy and close rival Infosys Technologies are expanding in Europe and elsewhere to cut their dependence on the U.S. market and Mahalingam said the company was expected to see good growth from newer markets such as western Europe, Brazil and India in the years ahead.

Shares in Tata Consultancy, which has a market value of about $16 billion, closed 2.8 percent lower at 379 rupees, in line with a 2.9 percent drop in the broader market.

The stock has risen 58.5 percent this year, outperforming the broader market and the sector index, after falling about 56 percent in 2008.

Tata Elxsi sees R&D scope amidst auto sector downturn

The automobile sector may have screeched to a slower pace over the past year, but that sentiment does not seem to pervade tech companies operating in the automobile solutions development space.

Design solutions major Tata Elxsi is expecting a strong performance in the R&D solutions space in its automobile vertical as the amount of software going into automobiles continues its upward swing, triggered by a spurt in demand for increased efficiency and features.

According to Tata Elxsi vice president R Natarajan, the bullish sentiment of the company is based on the increasing push across the world for development of greener vehicles, and the fact that R&D related to car models of the future are not clouded by the present downturn in the industry.

"There are stricter emission norms for the automobile industry that is coming into play globally, more government funding for such projects, and an emphasis on increased safety norms. All of these mean increased work and revenues for tech solutions companies", Mr Natarajan said.

According to him, the government funding for the push for greener cars in the West would trickle down to India, considering that many of the auto majors now have their R&D work being done in Asian countries including India.

He said Tata Elxsi was working on several cutting edge tech developments like a smart wiper for cars that will self-adjust its speed based on rain sensors, for a Korean auto major, and a range of solutions for the aviation sector that deal with cockpit display, cabin lighting and door management among others.

Two of the company's key verticals - the automobile and aviation sectors - are feeling the brunt of the slowdown, but Mr Natarajan said the company's revenues "will not dip significantly", considering that R&D work was likely to increase given the demand for better safety and efficiency standards. Tata Elxsi had a net profit of Rs 58.16 crore for 2008-09, up from Rs 52.85 crore in the previous year.

Mr Natarajan said roughly 700 of the company's 3,500-odd technologists and engineers were based here, and that the company had ensured that it honoured its commitment to all those who were offered job positions.