Budget 2009 : Expectations

Expectations are high after the formation of the new government at the centre. The Finance Minister, Pranab Mukherjee, announced that the government will present the full budget on July 6. The signals are the government will take quick and strong measures to address structural problems and provide a stimulus to enable an 8-9 per cent GDP growth.

Analysts are expecting the new government to continue to favour a low interest rate regime. Since the Reserve Bank of India (RBI) has already reduced the policy rates many times in the last few quarters, drastic rate cuts from the current levels are not expected.

However, there is definitely some room for smaller rate cuts and to take steps to ensure that the benefits of lower policy rates are passed to all borrowers.

Low Interest Rate Regime

Indications from senior government officials confirm that the new government will take the necessary steps to keep the interest rates under control. The government is putting pressure on banks to reduce home loan interest rates for current borrowers, to bring them on par with the new loan accounts.

Currently, the public sector banks are offering lower interest rates, lower processing fee, lower pre-closure terms etc on new home loans. Since the inflation rate is at a historic low, many analysts expect a further rate cut in the RBI's policy interest rates.

However, since the liquidity situation is good and business/consumer sentiments are looking positive, a drastic cut in the key policy interest rates seems unlikely. The government is more likely to push banks to cut their lending rates, and pass on the entire benefits of the earlier rate cuts to the borrowers.

Focus on infrastructure development

It is a well-known fact that infrastructure has been a bottleneck in the economic progress of the country.

Analysts expect concrete steps from the government on the infrastructure development front.

It will be interesting to watch the initial steps taken by the government in terms of attracting foreign and private players' participation in infrastructure projects.

Fiscal Deficit

The fiscal deficit situation has reached a much higher level due to the stimulus packages announced towards the end of last year. The government has to find ways to fund this fiscal deficit and the infrastructure projects. Analysts believe that disinvestment in some public sector undertakings is certainly one way to generate the required funds.

However, another opinion is that the fiscal deficit will be dealt with in a phased manner spanning the next five years. It would be interesting to see how the government uses the funds towards the infrastructure projects.

Foreign Investments

A stable government at the centre will help in attracting further investments from foreign funds - both foreign institutional investors (FII) and foreign direct investments (FDI). This will help in maintaining the liquidity situation in the market and also provide a cushion to various infrastructure development projects. It will indirectly reduce the demand for funds from banks and hence put an indirect pressure on the borrowing interest rates.

It is safe to infer that the interest rates on home loans are going to remain stable with a slightly negative bias in the medium term.

The interest rates on new loan accounts have already come down quite significantly. The rates on existing home loan accounts are expected to drop further due to a push from the government.

Those planning to take a new loan to buy a house should go for it after evaluating the terms and conditions of the lending bank.

BSNL looking at strategic foreign partner to reverse fortunes

As it battles falling revenues and profits, state-run telecom major BSNL is contemplating inducting a foreign strategic partner, a move that will enable the company get a better valuation than from an IPO or disinvestment.

"A strategic partner will be a better option...provided the government is favourable to that idea," a source, working closely on the listing of the PSU and involved in negotiations with the employees' unions, said.

BSNL's valuation has been pegged at about 100 billion dollars and the PSU has a paid up capital of about Rs 5,000 crore (1.04 billion dollars), but any investor will be willing to pay top-money to be BSNL's strategic partner given its countrywide strong network.

BSNL had reported a revenue of Rs 38,000 crore and a net profit of Rs 3,000 crore in the last fiscal and this year the company has projected a dip in both, mainly due to lower average revenue per user (ARPU) and if the trend continues for few years the company's long term plans may suffer.

Asked why a foreign strategic partner should be favoured over listing and disinvestment, sources said "...because when they come they can have a say in the management and change the face and culture of the company."

There are many big foreign telecom operators, like AT&T, France Telecom and others, who are looking at entering the Indian market and these companies are in talks with some of the private service providers.

Nano to rule cities as green norms push M800 off road

The world’s cheapest car, Nano, is likely to wrest the leadership position in the small car segment within a year as the ruling market leaders — Maruti 800 and Omni — will no longer be sold in 11 of India’s biggest cities from January 2010 because of failure to meet current emission norms. These cities account for one out of two cars sold in the country.

“This (absence of Maruti 800 and Omni) would mean no direct competition to Nano. The important question is whether Tata Motors would be able to manufacture enough units of Nano that would meet the demand.” said Kapil Arora, Partner (Automobile), Ernst & Young.

Although Nano could become the highest selling car in its segment, it would take some time to contribute to Tata Motors’ sagging bottomline. Mr Arora said Tata Motors, which suffered a Rs 2,500-crore loss last year largely due the tribulations of its UK subsidiary Jaguar and Land Rover, needs to sell at least 2.5 lakh units of the Nano to make money from the world’s cheapest car. The company may be in a position to produce the Nano in these numbers only by the end of 2010 once its plant at Sanand, Gujarat becomes operational.

The entry-level Maruti 800, the flagship product of Maruti Suzuki India, is priced at Rs 2.15 lakh. The basic version of the Nano is pegged at Rs 1.35 lakh though other version with more more features cost more.

“The pricing strategy of the product is not decided yet. The price of the Nano could go up. The margin at the moment is wafer thin, “ he added. The company spokesperson said: “The first one lakh allotments (of the Nano) are price-protected as prices were declared at the launch. For others, should circumstances require any pricing decision, it will be intimated to them (customers who have booked the car) at the time of delivery.” The company is also planning to launch the diesel version of the Nano. There has been speculation that the diesel Nano could cost around Rs 2 lakh, making it the cheapest car in the category.

Budget 2009: tax rates may be kept steady

India is likely to keep tax rates broadly unchanged in its budget next Monday and explore other avenues such as 3G wireless spectrum auction and stake sales in state firms to raise cash.

The government can ill afford tax cuts as they could dent revenue receipts and widen an already bloated fiscal deficit, while an increase in the tax burden could reverse the stimulus needed to accelerate growth.

The budget may outline tax reforms such as introduction of a new Goods and Services Tax from April next year, aimed at reducing the burden on companies.

Following are some of the likely tax proposals, according to industry groups, tax consultants and media reports.

DIRECT TAXES

* Likely to keep corporate tax rate unchanged at 30 percent.

* May consider tweaking Fringe Benefit Tax, levied on perks given to employees by a company, and Minimum Alternate Tax paid by firms who have book profits but report net loss. Both are at 10 percent now.

* Tax breaks likely for infrastructure and exporting firms. * Tax exemption on the portion of profits set aside by companies for investment, and an increase in the depreciation rates to 25 percent from 15 percent for plant and machinery to speed up capacity expansion.

* Relief to individuals by raising tax-exempt savings limit beyond 100,000 rupees ($2,079).

* Raising exemption limit on interest paid for home loans beyond 150,000 rupees to boost housing sector, and raise demand for cement and steel.

* Slowdown in economy led to a 43.6 billion rupee shortfall in corporate tax receipts in 2008/09 (April/March) compared with the initial budget target, while the shortfall was 157 billion rupees for income tax.

INDIRECT TAXES

* Unlikely to change excise or factory-gate duties after they were cut by 2 percentage points each in December and February to stimulate a slowing economy. Most of the manufactured goods attract 8 percent duty now.

* Customs duty levied on imports might be retained at present levels of around 10 percent. Industry lobbies have demanded cuts in the duty rates on some industrial inputs.

* Excise duty cuts and decline in factory output in the latter half of 2008/09 led to a revenue loss of 300 billion rupees, while a fall in imports and lower crude prices dented customs duty receipts by 109.3 billion rupees in 2008/09.

* There was some talk of raising tax rates on services beyond 10 percent, but the finance ministry may not tweak them. Only 100 major services are taxed and there is scope to extend the levy on more services.

* Service tax receipts grew marginally to 650 billion rupees in 2008/09, compared with an earlier target of 644.6 billion rupees, despite a cut in the rate in February.

NON-TAX REVENUES, REFORMS

* The government aims to raise at least 200 billion rupees from sale of 3G spectrum. The auction was originally planned for January but has been delayed pending a review of the floor price.

* Stake sales in state-run firms could be actively taken up to help raise cash needed to fund infrastructure and welfare schemes.

Bandra-Worli Sea Link to open on Tuesday

The Rs 1,600 crore (Rs 16 billion), 5.6-km Bandra-Worli Sea Link (BWSL), India's first open 8-lane, cable-supported sea bridge that will reduce traffic congestion in this metro, will be inaugurated by Congress chief Sonia Gandhi Tuesday, an official said.

The BWSL inauguration will be held at the northern end of the sea bridge which joins Worli in south Mumbai with Bandra in north Mumbai, the official told media here on Sunday.

A galaxy of leaders, including Maharashtra Chief Minister Ashok Chavan, Deputy Chief Minister Chhagan Bhujbal, central ministers Sharad Pawar, Vilasrao Deshmukh, Sushilkumar Shinde, Praful Patel, state ministers, legislators and parliamentarians shall attend the inaugural.

In construction for over 10 years, the new link between the southern island city and the northwest suburbs will be an alternative to the existing Mahim Causeway.

Currently, a daily traffic volume of over 1.4 million vehicles causes massive traffic snarls, especially during the morning-evening peak hours. The distance of 8 km between Bandra and Worli currently takes 60-90 minutes to cover during the morning-evening peak hours.

"After BWSL becomes operational Tuesday, this travel time will reduce to barely six-eight minutes. It will also entail savings in vehicular operating costs (VOC) of over Rs 1 billion a year," an official of the Maharashtra State Roads Development Corporation (MSRDC) said.

The chief attraction of the magnificent structure would be the two cable-stayed bridges, one 500 metres long (northern side) and another 350 metres long (southern side), for the passage of fishing boats.

The bridge rests on two towers, each 126 metres tall or equivalent to a 43-storeyed building. MSRDC has plans to provide a viewers' gallery at the top of the towers which would offer a bird's eye glimpse of the entire city.

There is a modern, automated, 16-lane toll plaza at the southern end, and the bridge has been equipped with sophisticated security and monitoring systems. Executed by Hindustan Construction Company over a period of more than 10 years, the MSRDC's project suffered a long delay of five years owing to various hiccups. The company will also maintain the bridge for the next five years.

The public sector giant, Steel Authority of India Ltd (SAIL), has provided almost two-thirds of the steel used in building the link. The BWSL has gobbled up a total of nearly 22,235 tonnes of steel of which SAIL's share is pegged at over 13,780 tonnes, according to a senior SAIL official.

"The steel is of the best quality and has come from our integrated plants. All the steel rods, if laid in a straight row, would measure almost 3,000 kilometres or the breadth of India," the SAIL official said.

Although the bridge is designed for speeding at 100 km per hour, initially the MSRDC plans to impose a 50 km per hour speed limit to enable motorists to get used to the bridge and prevent accidents. Two lanes are proposed to be reserved exclusively for buses and heavy vehicles.

TCS, Infosys see signs of recovery on order flow

India’s top two software exporters TCS and Infosys are seeing the first signs of an economic recovery as their top customers start discussing outsourcing contracts in order to further reduce their operational expenses. For instance, customers of Infosys, which signed over $100 million contract with Australian phone firm Telstra earlier this month, are now saying that the worst may be behind them.

“There is a lot more confidence among our clients; they feel that the worst is behind them. Especially in the US, many customers are saying that they were aggressive in reacting (to the recession)-they cut costs and renegotiated contracts,” S Gopalakrishnan, chief executive of Infosys told ET NOW. In a year when both Infosys and TCS have cautioned their investors on lower to negative growth in revenues, India’s $40-billion software exports industry is going through one of the toughest recessions in over two decades.

TCS, which counts Citigroup and GE among its top customers, is also seeing the first signs of recovery when it comes to the IT spending.

“We are seeing a recovery, but at a slow pace. The overall decline is slowly getting arrested. The recovery is showing but can’t predict the slope of this recovery,” N Chandrasekaran, chief operating officer, TCS told ET NOW.
Despite, financial problems and tightened IT budgets customers continue to work with offshore outsourcing companies in order to lower their operational costs anywhere between 20-30%.

As reported by ET earlier, tech biggies such as TCS, Infosys, Wipro and HCL are all set to get new outsourcing contracts worth $4 billion from top customers including British Telecom, Citi, GE and Bank of America this year. In a bid to cope with their tightened budgets, these companies plan to send their information technology works to offshore locations such as India.

Meanwhile, the ongoing slump is forcing many customers to evaluate different models of outsourcing, beyond traditional mode of structuring a contract based on number of hours and number of professionals on different projects.

“In the BSFI Segment itself I think that the downturn will drive some changes in terms of how clients engage with their partners. One major shift is shifting from capital expense to operational expense-it may be an interesting model to watch for in the future,” Mr Gopalakrishnan said. While top customers in the US are gradually beginning to discuss new outsourcing contracts, companies in Europe have been more active on the outsourcing front. According to research firm Gartner, almost 60 per cent of organisations in Western Europe will outsource more IT and business process functions in 2009, while renegotiation of existing contracts will rise to more than 60%.

“The focus on cost reduction is driving a high usage of outsourcing and global delivery in Europe in 2009 and 2010. However, under the current economic and technological conditions prices are going to decrease, creating a market full of opportunities and challenges for both end-users and external service providers,” said Claudio Da Rold, vice president and distinguished analyst at Gartner. Gartner anticipates prices of IT services outsourcing to decline by 5% to 20% through 2010.

Air India to become a low-fare carrier

The Maharaja will have to give up his full-service carrier status and transform into a commoner - low-fare airline - on most domestic routes to survive.

On Wednesday, PM Manmohan Singh spent 90 minutes with aviation ministry honchos on the cash-strapped airline's woes and its demands for a bailout from the government. While he is learnt to have promised support to the national carrier, it was made abundantly clear that any bailout will come if - and only if - Air India is able to shed its flab, become competitive and completely transform itself. Otherwise, it's curtains for the airline.

After meeting the PM, aviation minister Praful Patel said the government has formed a four-member committee of secretaries - headed by the cabinet secretary and comprising of the finance, aviation secretaries and principal secretary to the PM.

"AI's restructuring plan along with the request for equity infusion-cum-loan has to be submitted to them within a month. Unless a series of measures are taken to improve the airline, it will not be possible for the government to keep supporting in unconditionally. This is one last chance Air India has got," Patel said.

This "radical restructuring" could mean Air India transforming into a low fare airline on almost all domestic routes except a few niche metro sectors where full service airlines get some business. In this downturn, only LCCs (low-cost carriers) have seen good load factors and both Jet and Kingfisher are increasingly using their domestic fleet for their budget arms.

"Indian carriers will have to redefine their business models. If someone has a capacity that can't be supported by a full service model, what choice does he have?" Patel said. While AI's efficiency has touched a very low level, the aviation ministry has not been able to turn it around despite placing orders for new planes worth Rs 45,000 crore and merging Air India and Indian Airlines, the committee of secretaries will review airline's performance every month. More importantly, it will see if Air India is meeting the promises it made to get the bailout money.

"The management will be restructured within a month. Eminent people will be brought on the airline's board, including functional directors. Induction of new aircraft into the fleet will not be slowed down as Air India will phase out its old aircraft," Patel said.

The airline has lost about Rs 5,000 crore in 2008-09 and seen its working capital requirement increasing from Rs 2,369 crore in March this year to Rs 16,300 crore in May.

With an equity base of Rs 145 crore and accumulated losses of Rs 7,200 crore till May 2009, the airline is supposed to fund 111 aircraft purchase whose cost is now closer to Rs 50,000 crore.

Citi profit crosses Rs 2,000 cr

Citibank has become the first foreign lender in the country to generate profits in excess of Rs 2,000 crore. The Indian operations of the troubled US bank clocked a 20% rise in net profit after tax to Rs 2,173 crore for FY09 (April-March), up from Rs 1,804 crore in the previous fiscal, on the back of a sharp rise in fee income and lower expenses.

Internationally, Citigroup reported five quarters of consecutive losses, totalling $28 billion from the fourth quarter of 2007 to the Q4 of 2008. In the first quarter of the current calendar year, it made a profit of $1.6 billion on trading gains. Emerging markets like Asia-Pacific have been the growth engine for the bank, even as its core US market is reeling from under the impact of the subprime crisis.

Citi has ploughed back profits into its Indian operations and grown its capital base to Rs 11,518 crore. With this profit, Citi's Indian operations rank at number seven among local banks in terms of net profit.

What makes Citi's profit exceptional is that the American bank has only 40 branches across the country. Some of Citi’s Indian rivals have more branches in metros like Mumbai alone.

The profit drivers for Citi have been treasury and corporate banking. For all the delinquency-related problems in personal loans and credit cards, Citi continues to have a profitable retail business. "Recognising the credit quality challenges we faced in our unsecured consumer loan portfolio, we were among the first in the industry to take corrective action and are pleased with our progress," said Citi South Asia CEO Mark T Robinson.

The bank’s branch banking business, Citi Gold — its offering for HNIs and mortgage business — has been profitable. Corporate banking revenue rose by 15% to Rs 3,029 crore, treasury 61% to Rs 3,293 crore while retail banking revenues rose 12% to Rs 4,005 crore. On a conglomerate basis, some of the NBFCs like Citigroup Global Market, Citicorp Finance, Citicorp Clearing Services and Citicorp Capital Markets have logged higher profits than last fiscal while Citi Financial, the group’s consumer finance arm, has reported a loss.

In the last fiscal, on a conglomerate basis, the net profit of the group was at Rs 2,596 crore. This year, however, the conglomerate profit would be lower. The group has not given the break-up in profit for any of the NBFCs.

In FY09, the bank's balance sheet grew 25% to Rs 105,264 crore. One of the profit drivers was the 46% rise in non-interest income to Rs 3,582 crore. Interest income grew 15% to Rs 6,840 crore. Advances of the bank grew by only 4% to Rs 39,920 crore while deposits grew 15% to Rs 51,677 crore.

Deloitte not to restate Mahindra Satyam’s books

Audit firm Deloitte, which along with KPMG, had been mandated to restate the accounts of Mahindra Satyam, the erstwhile Satyam Computer,is reliably learnt to have opted out of its restating role due to a possible conflict of interest. Deloitte is the statutory auditor for Tech Mahindra — a part of the Mahindra Group that had acquired Satyam Computer — and hence can’t undertake the twin roles, said people close to the development.

The problem arose because the Mahindra Group is said to be considering a merger between Tech Mahindra and Mahindra Satyam.

When contacted, a Deloitte spokesperson declined to comment on the issue citing client confidentiality. A Tech Mahindra spokesperson also didn’t want to comment. Deloitte and KPMG had been appointed to restate the accounts of Satyam after the former chairman of Satyam, B Ramalinga Raju, admitted to falsifying the accounts of the Hyderabad-based software company.

Deloitte and KPMG had been mandated to go through past accounts of Satyam to trace the methodology used by the Satyam’s disgraced chairman and his team to execute the fraud, estimated to about Rs 7,000-Rs 8,000 crore. The mandate was to dig up accounts over a seven-year period as investigators expect the fraud to have been initiated over that period. Deloitte’s move raises concerns about a possible delay in submission of the restated accounts of Satyam. KPMG declined to comment on the issue. It had earlier been reported in ET that the restated accounts of Satyam could be ready in four months.

Mining industry: On a growth trail

Highly endowed with vast mineral resources, the minerals and mining industry is a key segment of the Indian economy. The country’s accelerated growth rate warrants a rapid development of the mining sector, on which most of the basic industries in the manufacturing sector depend.

India, one of the leaders in coal and iron ore production, has seen significant growth in mining activity over the last few years. Moreover, on back of growing demand, even amidst global turmoil, India is surely moving ahead with its aggressive mining plans. There can be a deferral in capital investment, but India will continue to witness significant investment in the mining segment.

In 2008-09, the bulk of the value of mineral production, about 80.65 per cent, was confined to seven states, including offshore areas. Offshore areas continued to lead in terms of value and had a share of 17.72 per cent in the national output. Next in order was Orissa with a share of 14.80 per cent, followed by Chhattisgarh (11.36 per cent) and Jharkhand (8.22 per cent).

Coal India alone produced around 403 million tons (MT) in 2008-09. The company had planned to invest over Rs 18,000 crore to produce 520.5 MT of coal during the terminal year of the Eleventh Plan. One of the other most crucial and strategic raw materials for the country, iron ore has attracted major focus and attention. The country produced over 210 MT of iron ore in 2008-09. Considering the steel project expansion in the country, it has been estimated that production will continue to grow at a compounded annual growth rate of 2.1per cent.

There is tremendous activity in the non-ferrous metals segment as well. Major metal companies, including Nalco, Hindustan Zinc and Hindustan Copper, have massive expansion and exploration plans.

Getting mining leases are a pain point of the industry. But those who have got the mines are currently controlling the metal market, be it steel making or aluminum or copper. Steel makers with captive iron ore and coal resources have been able to make profit despite recession.

The Indian national steel policy, apart from steel production, also aims to remove the bottlenecks in the availability of inputs like iron and coal. It wants to enhance iron ore production from the current capacity of 172 MT to 290 MT in 2019-2020.

Well recognizing the importance of this sector, the country has already seen a tremendous growth in investment here. According to the Annual Report of RBI, deployment of gross bank credit to mining and quarrying (including coal) sector has already crossed Rs 10,616 crore as on March 2008 against Rs 2,800 crore as on March 2004.

However, the government must carefully evaluate export options and allot mining leases with great care. If national resources begin to go out of the country, it would affect our growth plans heavily.

Centre to set up regulatory body for the coal sector

The Centre has initiated work on setting up a regulatory body for the coal sector on fast-track basis. The proposed Coal Regulatory Authority, which finds a place in the ministry’s agenda for 100 days, could be a precursor to significant changes likely to be ushered into the coal sector through wider participation of private sector players leading to creation of a competitive coal market for user industries.

More significant, the regulatory body would be responsible for domestic coal pricing, a sticky and politically sensitive issue particularly for a mass use energy item like coal.

"We’ve already begun the process and this will be institutionalised within the next three months," Union coal minister Sriprakash Jaiswal said at a press meet during his maiden visit to the city on Wednesday.

The minister also deflated specific questions on any attempt to hike coal prices saying that the issue is not under consideration by the government at the moment. "The target is not to raise prices but to raise production. It is not necessary to raise prices," he said, while insisting "priority will be given to power sector."

Incidentally, the creation of a Coal Regulatory Authority was part of the T L Shankar Committee report on coal sector reforms and development in the country. The draft report, which had recommended recasting the present structure of CIL, had also recommended the setting up of an Office of Coal Governance and Regulatory Authority, which would act as regulatory and development agency. The body would be a key role even as the stage is being set for entry of pure play mining companies with optimum scale of operation and access to technology that would be a big advantage.

At present, private entry into coal mining is allowed for captive use only in steel and cement sector. However, out of the 190 allottees who were offered captive coal blocks with total reserves of 40 billion tonnes, barely 13 have managed to start production, with over 80% remaining unstarted. Most projects are mired in land acquisition problems with the rest tripping over environment and forest clearance.

The minister met the state CM Buddhadeb Bhattacharjee on Wednesday to request him for assistance to get over land and environment problems for physical possession of some 2100 hectares that affect some 13 mining projects in West Bengal. Mr Jaiswal will have similar meetings with Jharkhand governor, alongwith environment minister Jairam Ramesh.

The coal minister also reiterated the government’s in-principle decision for disinvestement of upto 10% in Coal India Limited, with most of the shares likely to be alotted to emplyees and those whose land will be acquired. However, he said no timeframe has been fixed for it.

ONGC's profit hit by fall in output, lower realisations

Fall in output and lower realisations dragged ONGC’s profit in the final three months of 2008-09 to its lowest level in the fiscal despite a sharply reduced subsidy burden.

India’s largest oil explorer turned in results, which were below market expectations, hurt also by a drop in other income and a one-time provision of Rs 860 crore towards a legal dispute with the government over sharing of revenue. The ONGC stock gained 2.5% to Rs 1,051 on the BSE on Wednesday, while the benchmark Sensex rose by 0.7%.Net profit for the March quarter fell by 16% to Rs 2,207 crore on a 12% fall in net sales to Rs 13,834 crore.

ONGC’s production for the quarter, including the output from joint ventures, was 6.8% lower at 6.48 MT. Discounted fuel sales to petroleum retailing companies fell substantially to Rs 852 crore. However, for the full fiscal, the subsidy burden was 28% higher at Rs 28,225 crore. ONGC continued to be India’s top profit-making listed company in FY09, posting a consolidated net profit of Rs 20,117 crore. After adjusting for minority interest, it was Rs 19,752 crore, only marginally higher than last year.

The company’s consolidated performance for the year was aided by its wholly owned overseas arm ONGC Videsh. The subsidiary, which has 40 projects in 16 countries, benefited from higher crude oil prices in the first half of the year. OVL’s profit for FY09 grew 19% to Rs 2,853 crore on sales growth of 9% to Rs 18,503 crore. OVL’s production for the year, however, stagnated at 8.8 million tonne of oil equivalent.

Although the state-run oil marketing companies raised their dividends in FY09, ONGC has maintained its payout at last year’s level of Rs 32 per share. This will amount to an outgo of Rs 6,844 crore and including the dividend distribution tax, it will take away half of ONGC’s standalone annual profit.


At the current price of Rs 1,051, ONGC’s stock trades at 11.4 times its FY 09 earnings per share of Rs 92.4. The annual dividend yield works out to a little over 3%. The scrip gained substantially in May following expectations of an upward revision in natural gas prices and the possibility of divestment. ONGC’s weak results for the fourth quarter may not impact the stock price much as the company has managed to report better profit than last year despite higher subsidy and lower crude prices.

Tata Motors likely to report loss

Tata Motors is likely to report a consolidated loss for the financial year ended March 31, 2009 — the first time in eight years — mainly due to poor performance by its UK subsidiary, which owns the marque brands Jaguar and Land Rover.

According to analysts and broking houses tracking India’s largest commercial vehicle maker, the consolidated loss for Tata Motors could be in the region of about Rs 300 crore for the financial year owing to weak sales by the UK unit and high interest costs from a Singapore subsidiary.

In the fiscal year 2000-01, Tata Motors had reported a standalone loss of Rs 500 crore due to weak sales of commercial vehicles — its mainstay. Tata Motors refused to comment for this story saying it doesn’t give guidance on the financial results. The company is scheduled to announce its consolidated results on June 26.

According to four brokerages that ET spoke to, the loss of Tata Motors’ UK units could be about Rs 900 crore, interest costs from TML Holdings, the Singapore holding company, totalled Rs 400 crore in the previous fiscal year, while losses from Tata Motors Financial Services could be about Rs 100 crore.

Sales of Jaguar and Land Rover, the luxury brands, hit a rut after tight liquidity post the Lehman crisis affected car sales in Europe and the US. After seeing a 16% decline in the calendar year 2008, sales of Jaguar & Land Rover were down 17% in the January-March period in key US and European markets, says a recent Merrill Lynch report. However, demand from other markets, such as Russia and China, improved slightly.

Tata Motors bought Jaguar & Land Rover for $2.3 billion (about Rs 11,200 crore at the current exchange rates) in June 2008, surprising the global auto industry. The Tata Group already has a presence in the UK through tea firm Tetley and in steel after acquiring Corus. Shares of Tata Motors were up 4.2% at Rs 357 on BSE on Wednesday.

SBI cuts PLR by 50 bps; over 62% borrowers to gain

State Bank of India, which accounts for close to a fifth of all bank lending in the country, has reduced its prime lending rates (PLR) by half a percentage point. Following this reduction, the bank’s PLR will come down to 11.75% effective June 29.

The PLR is the reference rate to which banks link their floating rate loans. It reflects the prevailing cost of funds and interest on floating rate loan is expressed as a percentage spread above or below the PLR.

SBI’s rate cut will bring down the borrowing cost on 62% of loans extended by it. The cut will not apply to borrowing under special schemes. These include home loans, education loans, auto loans, produce market loans, and loans against warehouse receipts and loans to small and medium enterprises. Under certain special schemes, loans are available at discounted fixed rate for the initial year.

According to chief financial officer SS Ranjan, the bank has brought down its PLR to 11.75% from its peak level of 13.75% last year to improve credit offtake and stimulate economic growth. “There has been a general demand for lower interest rates and today we have been able to do it because we have been able to bring about certain efficiencies in operations which we would like to pass on to customers,” he said.

“About 68% of our loans are linked to prime lending rate. But various sectors that have already been granted concessions will not be affected because they are already below the PLR-determined rate. As a result, around 62% of our loans will be repriced” said Mr Ranjan.

The rate cut comes within weeks of finance minister, Pranab Mukherjee asking government-owned banks to reduce lending rates. SBI’s prime lending rate is now lower than that of several public sector banks, like Bank of Baroda, Bank of India and Canara Bank, which have retained their prime lending rate at 12%. But SBI’s PLR is higher than that of PNB, which has pegged its benchmark rate at 11%, the lowest in the industry. However, the Delhi-based bank has directed branches not to lend below PLR.

According to Mr Ranjan, Reserve Bank of India’s decision to review the way the PLR functions will not impact SBI’s return on loans. “The only change is that spread may turn positive over PLR”.

Budget 2009: Rs 3 lakh I-T relief on home loan?

In what can hold out hopes for lakhs of home owners, the urban development ministry is pushing a proposal to double the income tax relief on home loan interest payout to Rs 3 lakh, triple the exemption on payment of the principal amount and reduced interest rates for houses up to Rs 30 lakh.

Urban development minister S Jaipal Reddy raised the demand in a pre-budget meeting with finance minister Pranab Mukherjee on Tuesday arguing that I-T concessions would boost the recession-hit realty sector besides giving relief to households affected by the economic slowdown.

The ministry has also recommended that the income tax exemption limit om rental income be raised to 50% from the existing 30%.

The ministry, which is pushing a proposal to hike income-tax exemption available for interest payment on home loans to Rs 3 lakh a year, is also batting for raising the limit for exemption on repayment of principal amount to Rs 3 lakh.

Currently, taxpayers taking housing loans are eligible for I-T exemption on interest payment of up to Rs 1.5 lakh every year. Along with this, the repayment of principal amount up to Rs 1 lakh is part of investments eligible for benefit under Section 80(C) of the Income Tax Act.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom apartment in the metro cities costs anything between Rs 25 lakh and Rs 35 lakh. In a move to push demand in the housing sector, the UD minister also favoured cheaper loans for buying houses.

The ministry also demanded lowering of interest rate on small housing loans as part of the government's effort to stimulate the economy. "We should make arrangements for giving loans at 6.5% interest for houses in the below Rs 5 lakh category," Reddy said after his meeting with finance minister.

Reddy also argued for extending housing loans at the rate of 7.5% for houses costing above Rs 5 lakh and up to Rs 30 lakh. Presently, 7.5% rate is available for apartments priced up to Rs 20 lakh. The housing sector is on top of the UPA's agenda considering the huge demand-supply gap in cities and the sector's potential in generating employment.

The ministry also demanded that the real estate sector should be treated on a par with industry for all purposes, particularly lending norms like interest rate and risk perception for project construction finance.

The housing sector in the country has been hit hard by falling demand following a rise in interest rates. Besides lowering of home loan interest rates, the realty sector has been continuously pitching for greater tax benefit to stimulate the decline in demand.

EPFO to decide interest rate on PF deposits on July 4

Employment Provident Fund Organisation's advisory body Central Board of Trustees is likely to decide the interest rate on PF deposits for the fiscal 2009-10 at its meeting on July 4.

"The Central Board of Trustees (CBT) is expected to decide the interest rate for this fiscal on provident fund deposits during the meeting scheduled on July 4," an EPFO source said.

Once the CBT, which is headed by the Labour Minister, recommends the interest rate on provident fund deposits, it is sent to the Finance Ministry for final approval.

"The CBT is in a position to recommend 8.5 per cent interest rate for 2009-10, the same that depositors received in the previous fiscal," he said, adding that the final decision will be taken by the trustees.

At present, there are about 4.49 crore provident fund subscribers and they have been receiving 8.5 per cent interest on their deposits since 2005-06.

Even after paying an interest of 8.5 per cent, the source said, "the EPFO would have a surplus of Rs 6.4 crore during 2009-10." The organisation is expected to earn an income of Rs 12,994 crore in 2009-10.

Budget 2009: Investment in NPS will get tax exemption

The forthcoming Budget is set to make the New Pension System (NPS) tax exempt on contribution and accumulation, as the government looks to bring it closer to other such long-term schemes such as the public provident fund scheme and generate interest in the new system, which has so far elicited a lukewarm response.

With regard to tax exemptions during NPS withdrawal, finance minister Pranab Mukherjee is likely to make a statement on NPS enjoying equitable tax treatment with other long-term savings instruments in the new Direct Tax Code expected to be unveiled next year, said a government official who asked not to be named.

NPS is an ultra-low-cost funded pension system in which a common recordkeeping agency maintains individual pension funds of subscribers, who can choose from alternative pension fund managers and asset classes for investments.

It has been in operation for a year for civil servants recruited after January 1, 2004, and has now been opened up to all Indians. Contributions to NPS are expected to be clubbed in the cumulative savings up to Rs 1 lakh exempted from tax under Section 80 C of the Income Tax Act. Right now, 80C exemption is offered to various investments such as public provident fund (PPF) and National Savings Certificate (NSC).

Currently, the tax benefit is available on contributions under Section 80CCD only to salaried taxpayers and that too is conditional to the deposit not exceeding 10% of the salary.

During the period of accumulation, NPS is exempt from tax, just as other long-term saving schemes. However, as of now, withdrawals from NPS are taxable, unlike in the case of say PPF, creating a disincentive for savers. This anomaly can be fixed either by exempting NPS withdrawals also from tax or by bringing withdrawals from other long-term saving schemes also under taxation.

Experts have recommended that all long-term savings be brought under the tax regime dubbed E-E-T, exempt during contribution, exempt during accumulation and taxed during withdrawal.

Pension fund regulator PFRDA has made a strong pitch to the government for giving tax benefits to NPS. It wants a level playing field for all long-term savings in the tax laws.

NPS, which was hitherto applicable to all central and state government employees since 2004, is now available to all citizens from May 1. The government is also expected to reintroduce the PFRDA Bill, which will give legislative teeth to the regulator.

The Bill, which could not be passed owing to opposition from the Left parties, lapsed with the dissolution of the 14th Lok Sabha.

First 100,000 Nano buyers selected through lucky draw

Tata Motors, makers of the much delayed Nano small car, on Tuesday said it has completed random selection of the first 100,000 applicants who would buy the vehicle in the first phase and that delivery will begin next month.

"Tata Motors once again places on record its gratitude to the people of India for according such a warm welcome to the Tata Nano, as also to all its preferred financiers, dealers and partner companies for their stupendous effort in helping the company launch the Tata Nano," the company said in a statement.

The selection was made through a random computerised process after bookings closed April 25.

About two lakh bookings, which began April 9, were made across Tata Motors dealerships and State Bank of India (SBI) branches. This was, however, much lower than what was expected.

The selected applicants will be contacted individually, the statement said, adding that delivery will begin next month and continue till the last quarter of 2010.

India's third largest passenger car maker said 55,021 applicants out of the 106,703 not selected in the first phase had exercised the option to retain their booking.

They will be given preferential allotment in the second phase.

Additionally, they will be entitled to an interest of 8.5 percent on the booking amount if the car is delivered within two years (June 23, 2011), and 8.75 percent after that date. The booking amounts of the unsuccessful applicants shall be returned, the statement added.

The company will also be offering the unsuccessful applicants "an exciting offer on the Tata Indica range", the statement read.

Maruti to relaunch SUV Grand Vitara

Falling to make an impact in the sports utility vehicle (SUV) market, Maruti Suzuki is planning to re-launch its high-end Grand Vitara SUV with a more powerful 2400 cc engine

Likely to be priced higher than the existing Rs 14-lakh model, the new Grand Vitara, called GV 2.4 in India, will be pitted against General Motors’ Captiva, Hyundai Tucson, Ford Endeavour, Mitsubishi Pajero and Outlander, as well as the yet-to-be launched Skoda Yeti and Toyota’s Fortuner.

While the company spokesman refused to comment on the launch, a person familiar with developments at Maruti said the new SUV will be launched next month.

Sales of the third-generation 5-seater Grand Vitara fell to 270 vehicles in FY09 against 795 units in the previous year. More than 25,000 SUVs priced over Rs 10 lakh are sold in India every year.

Besides a bigger engine, the new Grand Vitara will carry minor changes in body design and interiors.

Maruti was once a major player in the domestic SUV segment with its Gypsy catering to the entry-level off-roader marke.

Pantaloon's May sales up 14 pc, to open nine malls by Dec-end

Kishore Biyani-led Pantaloon Retail India has clocked over 14 per cent year-on-year sales growth in May from its value, home and lifestyle retailing segments against the year-ago period.

The Future Group firm, which has chalked out ambitious expansion plans, also plans to open nine additional Central malls by December 2009, it said in an investor update.

The BSE-listed company's three segments put together generated sales worth Rs 619.27 crore last month, against Rs 540.66 crore in May 2008, up by 14.54 per cent.

India's largest listed retailer saw sales jump almost 30 per cent at Rs 6,719.29 crore from July-May 2009 in the three segments compared with the year-ago period.

Future Group founder and CEO Kishore Biyani said he plans to roll out 10 new malls, which will add 1.5 to 1.7 million sq ft to the company's existing retail space of 14 million sq ft.

Biyani will fuel the expansion using Rs 367.5 crore it raised last month through preferential allotment of shares and warrants.

Pantaloon Retail would inject close to Rs 250 crore within the next year-and-half for setting up 10 Central malls in the country, he said.

"We plan to expand Central in some of the country's other consumption centres such as Ahmedabad, Bangalore, Surat, Mumbai, Vizag, Jaipur, Thane, Raipur and Nashik," he said.

The retail major has also sought to raise additional long term funds of up to Rs 1,000 crore in one or more tranches through issuance of securities to various investors.

Besides, the supermarket operator will also roll out six Big Bazaar and eight Food Bazaar stores stores by July-end.

Biyani also plans to set up six eZone and two HomeTown stores by next month-end despite negative sales in its home retailing segment.

Home Solutions Retail (India), an unlisted entity and a wholly-owned subsidiary of Pantaloon Retail India (PRIL) runs the home retailing (and home electronics) stores - Home Town, Furniture Bazaar, eZone, Electronics Bazaar, and Collection i.

The company's same store growth in home retailing fell 28.27 per cent in May at Rs 40 crore, continuing a six-month losing streak that began in November 2008.

Reliance Retail to break even by Sept

Reliance Retail is expecting to break even at the store level in all cities except Mumbai by September following six months of stepped up efforts at reducing cost and increasing footfalls at the stores, a senior company executive, who did not wish to be named, said. “We will be able to generate cash at our stores by September, except in Mumbai, where real estate cost for our stores is still high,” the executive said.

The retailer, which runs over 900 stores, including 50 in Mumbai, has already broken even at the store level in around one-third of the 80 cities it operates in. The executive said stores in Chennai, Bangalore, Hyderabad, Orissa and half the number in Delhi have broken even. Stores in the other metro, Kolkata, however, may fail to break even.
A Reliance Retail spokesperson declined to give details on the company’s finances, saying, “As a policy, we do not comment on our financials and do not make any forward looking statements.”

The company’s value formats, comprising convenience store Reliance Fresh, supermarket Reliance Super and hypermarket Reliance Mart, together have 750 stores. The speciality formats, including apparel, jewellery, wellness, footwear, consumer electronics and eyewear, account for the rest.

The downturn hit all modern trade players and their sales fell due to weak consumer sentiment and unavailability of funds precipitated by global credit crunch. Indian retailers, new to the game, were also saddled with high operational costs, mainly that of rental and manpower.

That is when Reliance Retail made a strategic shift: It renewed focus on presenting itself as a deep discounter, started a war on cost and moderated the pace of expansion.

As the cost cutting drive had started, another top company official, while speaking to ET early this year said, “We are making double digit savings in both capital and operational expenditure, with our new way of doing things.”

The retailer is far more cautious now, choosing the right location at far lower rentals, compared to the overheated days of 2007. Similarly, the company shut several unviable stores, relocated many and shrunk the size of many others to suit business requirements. The exact number of stores shut couldn’t be ascertained, but people close to the development said over a hundred stores must have been impacted by the whole exercise.

On the same line, these people say at least 3,000 staff were retrenched at the retail chain, but company denied this, saying only an insignificant number of staff have lost jobs. The company currently employs around 23,000.

A significant move was also made to underline its position as a value retailer. The company went ahead to present itself as the right destination for bargain hunters through different communication strategies.

It has even piloted a ‘Supervalue’ format in some smaller cities and towns, including Jaipur, Mysore and Dhanbad, where it has no-frills stores that offer products, up to 10% cheaper than other Reliance stores.

Oil prices could surge if Iran crisis worsens: Analysts

World oil prices have so far not been pushed up much by post-election violence in key crude producer Iran -- but they could spike higher if the situation deteriorates, analysts warn.

Iran has ruled out cancelling the disputed presidential June 12 vote as the international community voices increasing alarm at a violent crackdown on opposition demonstrators.

The Islamic republic produces about 3.8 million barrels of crude oil per day and is the third biggest global oil exporter after Russia and Saudi Arabia.

Analysts fear the biggest crisis since the 1979 revolution could force the Iranian government to cut off oil supplies or block the Strait of Hormuz -- a crucial passageway for oil tankers.

"There could be a rude awakening (for the oil market) if tensions in Iran escalate further," said VTB Capital analyst Andrey Kryuchenkov.

"Not only does the country pump a significant amount of OPEC crude, it also controls the Strait of Hormuz through which around 40 percent of global seaborne oil flows daily."

The opposition has been staging almost daily rallies to protest at alleged fraud and widespread irregularities in Iran's election which returned hardline President Mahmoud Ahmadinejad to power for another four years.

But oil prices have fallen heavily since the election, dampened by the dire global economic outlook and a stronger dollar.

New York's main futures contract, light sweet crude for delivery in August, traded at about 67 dollars per barrel on Tuesday. That compared with more than 72 dollars one week earlier.

"Although the markets are clearly not fazed by developments there thus far, we would not dismiss the likelihood that the (Iran) situation could come back to have a more forceful impact on oil prices -- particularly if the opposition manages to pull off a national strike that could potentially spread to the oil sector," said MF Global analyst Edward Meir.

"Needless to say, the odds arrayed against the opposition are daunting, as many of its leaders are jailed, while communications among the remaining are severely hampered and monitored.

"Nevertheless, the situation remains very fluid and anything is possible at this stage."

World leaders are calling for an immediate halt to state violence against the protesters, but the Iranian authorities have fired back, accusing Western governments particularly Britain and the United States of meddling.

Iran's state media said at least 17 people have been killed and many more wounded in the unrest that has convulsed the nation for 11 days.

After Saudi Arabia, Iran is the second largest member of the 12-nation Organization of Petroleum Exporting Countries (OPEC), which accounts for 40 percent of all world crude supplies.

"There is no indication that (Iranian) oil production will be affected," said Francis Perrin, director of the journal Arab Oil and Gas.

He added that traders expected other OPEC member nations would compensate for any potential loss in Iranian oil output.

Analyst Nimit Khamar, at Sucden Financial Research, noted that there had not yet been any disruption.

"Post-election protests continue, but there does not appear to be any disruptions to oil supply yet.

"However, there is market talk that Iranians are trying to organise a national strike including the oil industry in reaction to the reappointment of Ahmadinejad."

OPEC's member countries have spare capacity of around six million barrels per day, according to a recent estimate from the Paris-based International Energy Agency.

Hanson Westhouse analyst David Hart told AFP that the oil market would benefit from high stockpile levels as well.

"The external environment is in a better position to cope with any potential disruption due to a healthy production capacity buffer elsewhere and high existing stockpiles during a period of generally weak demand," Hart said.

But he added: "With a partial (oil output) disruption, I think we head back above 70 dollars per barrel. A full disruption, depending on the length and the time it takes spare capacity to come on-line, could run significantly higher.

"The problems for now appear to be contained within Iran which makes the threat of an actual disruption lower. A disruption is more likely to occur, in my view, if external parties were to become involved," he continued.

Maytas Infra seeks Rs 700-cr additional loan for revival

Maytas Infra, the construction company promoted by Ramalinga Raju’s family, has sought an additional loan of Rs 700 crore from bankers to revive the company. The company also wants the lending consortium to lower interest rates on loans and allow delayed repayment of debt.

Bankers, which are part of the consortium that lent to the Hyderabad-based company, will meet later this week to decide on a loan restructuring package. Although banks have asked promoters to bring in at least Rs 100 crore as capital, the promoters said they can at best infuse half of that amount over the next two years.

“Banks have a Rs 3,000-crore exposure to Maytas, of which around Rs 2,300 crore is non-fund exposure as a result of guarantees,” said a banker on condition of anonymity. The banker added that ICICI Bank has the largest exposure of around Rs 700 crore to Maytas.

State Bank of India has Rs 340 crore exposure, while IDBI has Rs 200 crore at stake. The balance is with over 10 banks, which are part of the consortium that lent to Maytas. After Satyam promoter Ramalinga Raju confessed to committing fraud at the IT company, the fallout hit other Raju-promoted companies, including Maytas Infra.

Many clients of Maytas Infra cancelled contracts midway, creating a liquidity crisis. Vedanta Alumina, KSK Energy, Hiranandani and Hyderabad Metro Rail are among clients, who removed Maytas from their projects. The cancellations have hit banks, as every contract is backed by a bank guarantee.

The newly-appointed board of Maytas has asked lenders to extend the tenure of its loan up to 2018. The company has also urged banks to lower the interest rate to 7%. “This will not be acceptable to us. We will not reschedule the loan at anything less than 11%,” pointed out one of the lenders. Currently, lenders are charging the company in the range of 9% to 11% for short and long-term loans.

The new management at Maytas Infra, has refused to convert a part its debt into equity. Restructuring has become difficult since the company is not in a position to give fresh assets to pledge with banks.

“Without government support, restructuring the loan would be difficult as cash flows of the company are very weak,” said a Mumbai-based lender. “Without cash flow, banks are unwilling to extend further loans,” he added.

Maytas Infra is involved in 62 projects, including roads, bridges, industrial structures, oil & gas exploration as well as power generation and transmission. Following the Satyam scandal, many contracts have been cancelled midway. This has not only affected the cash flow of the company but has also made it difficult to pitch for new contracts.

Poor response forces infra, realty cos to defer QIP plans

Fund-raising through the qualified institutional placement (QIP) route has taken a beating as investors are not willing to subscribe to issues at high prices.

Several infrastructure and real estate companies such as GMR Infra, Sobha Developers, HDIL and Hindustan Construction went for roadshows, but are now holding back on the formal launch of QIP issues.

“Many companies have gone for non-binding roadshows for QIPs, but responses from investors were not good because of pricing issues. Companies want prices to cool off before they go ahead with the issue,” according to an investment banker involved in a few QIP issues.

The Mumbai-based real estate developer HDIL, which had recently gone for road shows to mop up around Rs 2900 crore, has decided to keep the equity offering on hold. “Now, we are in no hurry; we will consider the QIP issue after the budget,” says HDIL, MD & CEO, Sarang Wadhawan.

Most of these stocks have run up quite sharply over the past few months, making it unattractive for investors to look at these offerings. Adding to the problem is the pricing formula prescribed by the market regulator Securities and Exchange Board of India (Sebi).

Under the Sebi rule, the floor price for QIP is based on the two-week average price of the stock. Shares prices have gone up sharply in recent weeks, leaving little room for companies to price the issue attractively. Bankers are seeking a change in pricing norms so as to ensure more flexibility in issue pricing.

Merchant bankers have already made representations to the market regulator to allow them to offer at least 10% discount to floor price to make the issues attractive for investors. Domestic corporates jumped onto QIP bandwagon after DLF, Unitech and Indiabulls successfully mopped up funds through QIP issues in the early part of May.

Not a single company has managed to close an issue since then, even though over a dozen companies have lined up QIPs to mop up close to Rs 25,000-30,000 crore.

Even investors have turned quite cautious as the valuation of companies has gone up in the recent rally. “Some of the early birds have managed to raise funds. But it will be difficult for many companies that have announced fund-raising through this route,” says Shankar Sharma of First Global Financial Services.

Markets returning to normal: JPMorgan Chase

Jamie Dimon, the chairman and CEO of JPMorgan Chase , is among the handful of leaders of the financial sector to emerge with his reputation enhanced. Mr Dimon told that financial markets have stabilised but recovery will still be a slow and a difficult process. Excerpts from the interview:

From your vantage point can you do a SWOT on the world economy?

If you look at recent history, the world has been through multiple crises — from the 2001 internet bubble, the 1997 emerging market crisis, the 1987 crash to the 1990 recession in the US. (If you go further back) 1982 and 1974 were the last global synchronised recessions.

This time we went into a crisis which looked like a normal crisis, which you expect (to happen) every five-to-six years, until Lehman went bankrupt. Then we had a cardiac arrest in the global capital markets. And that helped push the world into a global recession. The bond market, equity markets, equity issuances, inter-bank markets, spreads, Libor, trade finance globally are coming back (in the past few months).

(But) Behind that is a wall of support from governments. The financial affairs of the world are moving towards normalisation. Of course, the world is (going) through a deep recession — a lot more in the US and Europe than in India. No one really knows the outcome of that. It looks like in the US and Europe it could bounce back from these levels. That’s a very good thing. You can see that in consumer spends, business plans, confidence levels, purchasing indices, inventory levels. Even in parts of the market that were badly hurt like the housing market in the US, it’s still getting worse, but at a much slower pace. You actually see a bottoming out of the world economy. I don’t think anyone knows whether a recovery will be U, V or a W (shaped).

JP Morgan paid back the TARP money. But when you took the money you took it reluctantly too..

Governments all over the world, in totality, took some very dramatic, bold and aggressive responses. On October 13, Hank Paulson and Ben Bernanke called nine of us and said we want you to take these TARP funds. We want you all to take it because if some of you don’t take it, it could have the effect of causing a run on those banks that do. Over time, it morphed into something different. The American Congress started adding restrictions on it, like the H1 B visa. So we gave it back. The crisis had passed. The stress had made all the 19 banks stronger. So, the argument that you were hurting other banks by not taking it was no longer true.

I don’t think it helps the financial system of the US if people vilify banks all the time and act like even the healthy ones did something wrong, when they really didn’t.

Credit card defaults and other consumer defaults are increasing. There is a fear that this is not a genuine recovery?

There is no question that the US is in the middle of a very deep recession. The unemployment rate will continue to go up. Credit card losses and commercial loan losses are going up. Take that as an absolute given. I am telling you that it’s going to happen. None of us know for certain what the future holds. It’s possible that the recession will get worse. At JP Morgan we plan for that. We know it may be worse than what we think.



What’s your reaction to the Obama administration’s white paper on reforms?

A lot of things that they are talking about are accurate. We need to reform mortgage regulation, I do think we need to think a lot better about systemic risks, we should eliminate the (idea of) ‘too big too fail’. But I don’t think the solution is to make (banks) small. The solution is a mechanism that resolves the problem of a big company failing and doesn’t damage the world. Lehman wasn’t a bank and AIG wasn’t a bank. And, even if you take some of the big banks, only part of what they do is inside the bank. We need a separate mechanism wherein each major legal entity can be taken over and everyone who is engaged in that entity - the equity holders, the preferred holders - know exactly what is going to happen. So, if the US takes over a failed bank, the equity is wiped out (and) after it takes over all the assets and the government reimburses all the costs, then they would pay back debt holders. This is a perfectly reasonable thing to do. In this way the market would have a discipline of pricing debt.

If you are saying that you will solve the problem by capping size, you actually do a bad thing for the economy, as economics and competition drive those decisions. And, if you say you are ‘too big too fail’, you have this hazard, everyone will do business with them knowing that they would be paid off. There will not be any discipline in the market place.

Derivatives didn’t cause the problem. They helped amplify it. It’s a perfectly legitimate instrument and we are the largest derivative dealer in the world. To say let’s put most of these contracts in the clearing house, which will increase transparency, reduce counter-party credit risk and make easier to manage in a crisis. I completely support that.

You have told the shareholders that the TARP process was a painful experience.

I think they (the government) did the right thing and I don’t blame the regulator for what happened. But it became painful to have your company vilified like that. Four-five bills came out on compensation, some of which violated the US Constitution. It reminded me of school, how people act when bullies were around. How many people stood up to the bullies. Very few. It’s inappropriate to kick people when they are down. Other than regulations isn’t the problem systemic too. China parked its reserve money in US securities. Until systemic changes what can happen.

Isn't the problem that US customers are over leveraged?

I find it very peculiar when Americans point fingers at the Chinese and the Chinese point fingers ate the Americans. It was different sides of the same coin. So maybe America spend too much. But who benefited from them. China and India. But the imbalance was because of the policies of both the countries. People were hoping that these imbalances would resolve themselves over time.

That happens. Sometimes huge imbalances would resolve naturally. (But) It's a bad thing for policy makers to rely on that. The wiser thing should be for the policy makers to look at these imbalances and not allow them to become big. That would probably lead to low interest rates which most economists thing led to enormous speculation. I don’t think corporation in US are excessively leveraged. Financial institutions were, but they already reduced it dramatically. There is no question that consumers on average over-speculated. The American consumer will try and save more now. That will cause some deleveraging over time. That deleverage will probably slowd the growth of the American economy for several years.

To what level. Sub 2%?

I don’t think growth will be sub 2%. The American economy is amazingly resilient, it moves quickly, people adjust quickly. Most economists think that the economy will still grow at 3% as it slowly deleverages. In banking there were two models. In Eastern Europe, Mexico and other countries the banks were privatised and sold to foreign buyers. China and India have largely state controlled banks.

Do you think that the Indian or Chinese models proved right.

No. You are looking for too simplistic an answer. Canada had five public banks. They did fine. A lot of banks in America, Mexico did fine. Some banks in Europe did okay. China and India also did a good job. It does not mean that there should be public banks. If I was running India I would want a very strong domestic banking system. I would not want all Indian banks to be owned by foreign banks. Nor should all banks be state owned. Just as a matter of policy. That I completely agree with. I wouldn't want the big foreign banks to come and buy our banks for cheap. I don't think ultimately state owned banks is the answer. Nor do I think if you are a large country all banks should be foreign owned.

Where do you see the opportunities for JP Morgan in India?

When we go into a country, we go in permanently. If we look at what's going to happen in India over the next 30-40 years, its going to be exceptional. Therefore the goal is to build all the time. We have to do in a way that Indian people and the Indian government say that we are better off with JP Morgan beeing here. They helped us build a better country. They helped our country overseas. I think there are outstanding growth prospects in areas like private banking, asset management, custodial services. We are trying to open some more branches here to serve wholesale clients in cash management and we think all those things will have big growth opportunities....But even if the Indian government said to us today okay, go ahead and start how many branches you want. We can't go into India and compete with ICICI.



I would love to do retail in India. The retail, consumer business would be outstanding markets and growth markets for many years.

Our (US) stock exchanges are worth a $10 trillion. In India it is at around $700 million. My guess is in 30-40 years it would be $10-20 trillion. Therefore, the growth in investment banking services which would be required by Indian companies is enormous.

Do you think that India and China can carry the world's economy?

No. If you were an American it’s a great sense of comfort that India and China are doing well. Imagine what would happen if US was in a recession and so was India and China. If you were an Indian and Chinese you would want the US to recover quickly as America creates a lot of demand for the world. But it is certainly better that parts of the world is healthy while other parts are going through a recession.

Do you see more speed breakers in terms of higher capital requirements etc?

I think it will be across the spectrum change in regulation. It's not going to change the client who needs advise on equity capital market or debt capital market. Some of the products will be gone. On capital, one of the reasons JP Morgan has survived and done well was that we always believed in having a lot of capital and conservative accounting. But if you say everything requires more capital what would happen is that the cost of capital to the client will go up. The bankers will just have to pass it on and the client will pay more. So spreads would be higher.

Will it drag down economic growth?

It could. It depends on how ultimately it is done. We do want some leverage in the system as it drives growth and we all want growth. Now central banks, treasuries know that. I think they would want to have adequate capital and not excess capital.

In the last few years was there an under pricing of risk?

Risk was definitely under priced. People weren't pricing for risk at all. If you run a business you are going to have cycles. We really need to have a pricing plan for cycles. I don't think today there is a right pricing. There is still a lot of fear in that pricing. So, it’s going to come down. You have to be prepared for the good and the bad. You cant expect to be in the investment banking and expect a 20% return on equity. It’s not possible. I always said if you are good you would do an average 20% — you could do 10% in bad times and 30% in good times.

You were the heir apparent in Citi and then you had to leave. I wasn’t asked to leave. I was fired. I had to leave I guess.

You joined Bank One. How did you adjust? There must have been lot of people who went from being a superstar and starting life almost new and then you came back. What's been the journey? Where were you ever down and out?

I sat in a room like this and Sandy Weil and John Reid said that they were going to make some changes and Sandy said I want you to resign. I said okay. So they asked is that it. (I said) Obviously you have decided. The management team was just showing up. So I stood there and they all gave me a standing ovation. I shook their hands. I wished them the best and said it's a great company. I called my wife. I always make jokes. I said Judy I am going to say something, but it’s not a joke. She must have heard it in my voice and I said I just resigned and I drive home. It’s Shakespearean - the plotting, the politics.

Was the fourth quarter of 2008 most challenging period of your life?

It was the scariest. It was when Lehman collapsed. We knew we would survive. I called the board on the weekend and Lehman was still talking about doing some deals and I didn't think that it would happen. People were hoping that there would be some kind of deal. I told them that Lehman is going to declare bankruptcy on Sunday night. AIG was on its last legs. I didn't know the outcome as I didn't know whether the government would bail them out. In a quick order the attack could go to Merrill and we may see three or four bankruptcies next week. It was unprecedented. It was not even seen in the Great Depression.

Did the crisis get triggered off because Lehman was allowed to collapse?

No. I may be wrong. People are going to write books on this for ever. No one is ever going to know. There is no way of knowing what would have happened under different circumstances. I believe that the system was already on its last legs. There was too much leverage, too many hedge funds, bad Basel II, mortgage business without a control. I think the system was waiting for one bad thing. I also think there was no way an American administration would bail out an investment bank. They were paid a lot of money, the arrogance. It’s one thing for the parliament to bail out a company, it’s another thing to bail out an investment bank.

Stocks to watch: SBI, Wockhardt, RNRL, RIL, Tech Mahindra, Firstsource Solutions, Idea Cellular, ONGC

Oil preices were a little lower in Asia Wednesday. In morning trade, New York's main futures contract, light sweet crude for delivery in August, fell to $68.37 per barrel. London's Brent North Sea crude for August dipped to $67.89.

Indian rupee moved higher taking cues from other Asian currencies. At 9:30 am, partially convertible rupee was at 48.40 against the dollar over its previous close of 48.56.

The country’s largest bank, State Bank of India (SBI), is looking at expanding its international footprint. SBI is looking at buying a mid-sized overseas bank, and the deal size could be between $1.5-2 billion. The deal will be in line with the bank’s strategy to expand its global operations.

The troubled pharma firm Wockhardt will issue preference shares to banks against a slice of their derivative losses and may get nearly a decade to repay its local borrowings under what’s turning out to be the country’s biggest and, possibly, the most complex corporate debt restructuring (CDR) programme.

Anil Ambani group firm Reliance Natural Resources has invited Reliance Industries for talks to reach an agreement after the Bombay High Court gave its verdict on gas distribution case. But RIL is yet to agree for a discussion, say reports.

The Mahindra Group, the new owner of Satyam Computer Services and the largest shareholder in Tech Mahindra, intends to merge the two companies, giving shape to its ambitions in the IT business.

BPO service provider Firstsource Solutions has bagged a five-year outsourcing deal worth Rs 145 crore from Idea Cellular. This will be for providing customer management and billing services in Idea’s Kerala and Tamil Nadu circles.

Aditya Birla Group company Idea Cellular is raising Rs 6,000 crore ($1.2 billion) through a mix of foreign currency and rupee debt at a time when most corporates are finding it difficult to raise funds on the back of a global credit crunch.

ONGC is expected to post a substantial rise in profits for the fourth quarter of FY09 helped by a sharp fall in its subsidy burden and a weak rupee. The analysts expect the fourth quarter standalone profits to jump 45% to Rs 3,800 crore.

TCS and Infosys are seeing the first signs of an economic recovery as their top customers start discussing outsourcing contracts in order to further reduce their operational expenses. For instance, customers of Infosys, which signed over $100 million contract with Australian phone firm Telstra earlier this month, are now saying that the worst may be behind them.

State-owned utility National Thermal Power Corporation (NTPC) and the largest coal producer Coal India are in advanced stages of acquiring mining assets in Mozambique, Indonesia and Australia, as the new government firms up plans to meet the growing energy demand.

Bil power’s Q4 net profit was down at Rs 2.98 crore versus Rs 5.66 crore in the same quarter a year ago. Net sales stood at Rs 115.6 crore against Rs 102.1 crore.

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.