Wednesday, April 16, 2014

Expect higher sales growth for SUVs vs passenger cars: Dr Pawan Goenka, Mahindra & Mahindra

In an interview with ET Now, Dr Pawan Goenka, Executive Director & President-Automotive & Farm Equipment Sectors, Mahindra & Mahindra Ltd, shares his business outlook. Excerpts:
ET Now: Do you see any improvement in the SUV demand in the coming months?
Dr Pawan Goenka: First of all for FY15, we are expecting the overall passenger vehicle industry to turn around and get to a moderate growth level. I do have reasons to believe that SUVs will grow faster and if I look at the products that have been launched in FY15, you would see more concentration on SUV from almost everyone. I cannot put a number to it, but I would certainly hope that SUVs will be close to 10 per cent in terms of demand growth.
ET Now: In terms of a product demand, customer inquiry, customer footfalls, what is the update? Are things progressing well?
Dr Pawan Goenka: I was expecting a little bit more demand pickup to happen as a result of fairly substantial excise duty reduction and all the OEMs passing that on almost fully to the consumer, but we have not seen that kind of demand growth. Yes, there is more activity happening at the dealership, but not much of the demand growth. March was slightly better than February or January, but nothing like a turnaround. Our conclusion is that everybody is in a pause mode right now waiting to see what happens in elections and things would open up post election because I do not see any reason why there should not be a demand growth with the excise reduction.
ET Now: Updates on the tractor business and your growth expectations for the same in FY15?
Dr Pawan Goenka: Last year has been one of the best years for the tractor industry, with industry growth at 20 per cent. When we had started, we were looking at growth in single digit and as the year turned, we kept increasing our growth forecast. Mahindra & Mahindra has preformed slightly better than the industry and has marginal increased its market share as a result of that.
We do expect that FY15 will see growth, but not as much as in FY14. We have been saying 8 per cent to 10 per cent growth for the industry in FY15. There is a little bit of a shadow coming because of this so-called El Nino effect. We still do not know how significant and how serious it will be, but if it does become significant, then it could dampen the 8 to 10 per cent growth projections to somewhat lower level.

ET Now: The unseasonal rains have impacted agri segment sales. Do you think due to this agri phenomenon, sales could slow down further in the next coming quarters?
Dr Pawan Goenka: The unseasonal rains have been quite devastating as far as the harvesting of the crops is concerned and the estimates for lost crop are quite a bit going as high as 5000 crores. We have seen an affect of that somewhat in the month of March and it might have some affect going into the first quarter, but it will wear off and the bigger thing will be the El Nino affect.
ET Now: So how do you see the performance of the export markets right now?
Dr Pawan Goenka: For the automotive and tractor side, we are not planning on adding any major markets. We have presence in several markets around the globe and our effort right now is to develop products specific to these markets, grow our volumes in these markets. On the two wheeler side, we are absolutely new. We are looking at nine markets where we would be launching during the year and start getting our presence.
ET Now: How are the pricing trends currently? Any plans to hike prices?
Dr Pawan Goenka: We are very seriously looking at it. The input prices have gone up. The commodity prices affect we have to pass on. There is a fairly significant impact because of inflation also on our factory cost, our personnel cost and we are compelled to pass that on to the consumer. We would be taking a look to see what the environment is and the chances are that in the month of April, we will increase some prices.
(Source: Economic Times)

Kick-Starting Growth in Brazil

As host of the 2014 FIFA World Cup in June and the 2016 Summer Olympic Games, Brazil has increasingly become a focus for the world’s spotlight. The image the world sees is not an unblemished one. Although Brazil barely experienced recession in 2009 and its economy rebounded strongly in 2010, there has been a marked deceleration since then. We believe the large investments needed to host the FIFA World Cup and Olympics could give a much-needed infrastructural boost to the economy, but doubts have been raised with regard to the ability to complete some of these projects on time, along with safety concerns. Large-scale protests against corruption, poor or nonexistent public services, and rising living costs are also issues to contend with. While we are indeed seeing some improvements in infrastructure development in large cities, overall, the Brazilian economy’s solid fundamentals have weakened in the last couple of years. Brazilian financial assets have proved particularly vulnerable in such an environment—especially as Brazil’s growth expectations have declined, the currency has fallen heavily and the country’s current-account deficit has widened. In addition, investor confidence has weakened because of uncertainty surrounding government policy, as well as creeping interventionism and protectionism. Investment sentiment toward Brazil has not been helped by government moves to claim huge back taxes from a mining company and other large corporations. And, a ruling is pending from the country’s Supreme Court on whether to force banks to reimburse clients for losses stemming from government policies dating back more than 20 years. In our view, a ruling could have a huge impact on Brazilian banks and hurt lending activity.
Looking forward, we think the slowdown of economic activity in Brazil is likely to persist, as indicated by the latest business surveys and tightening financial conditions. Despite slowing growth in Brazil, the country’s central bank has had to raise its policy interest rate from a record low of 7.25% in 2012 to 11.0% in April of this year to deal with persistent inflation. Investors also have remained concerned about the deterioration in the country’s fiscal outlook, which culminated in Standard and Poor’s (S&P) downgrade of Brazil’s long-term debt from BBB to BBB- in March, although this sovereign downgrade risk had been expected and already priced into the market. However, although the country’s current account position has been declining, Brazil continues to record primary surpluses sufficiently large enough to stabilize Brazil’s net debt-to-gross domestic product ratio. The ratio at the end of February was much lower than those of the United States and most western European countries, although debt servicing requirements are increasing.
Despite these negative headwinds, there are potential catalysts that could provide areas of investment opportunity going forward. In our view, Brazilian currency reserves remain high relative to the country’s foreign-currency debt, and we believe the decline in the value of the Brazilian real against the US dollar will continue, which could help the current-account deficit (although we believe it will likely also feed inflation). In addition, the lagging impact of slowing growth could favor select core Brazilian bonds, and valuations are increasingly attractive. We believe the local real interest-rate curve is still above its equilibrium level due to the combination of risks hanging over fiscal sustainability and domestic economic imbalances. We believe those risks (mainly a potential overheating of domestic demand and a current account deficit of 3.69% of GDP in the 12 months through February1) are likely to diminish over the next few years due to the tightening of liquidity in the economy and increases in the tax burden, providing a potentially appealing environment for Brazilian bonds.
We also believe there is significant upside potential in terms of market sentiment. In our view, Brazil’s government is certainly aware that the policy adjustments needed to curb inflation and repair public finances would likely hurt growth in the short term, but once the October presidential election is over, we may see a policy shift toward a more market-friendly and less interventionist government. As we see it, the government has already inconspicuously started to reverse some policy excesses—such as targeting a primary surplus of 1.9% of GDP and the gradual reduction in the credit growth of public banks—and even the re-election of the current president, Dilma Rousseff, could lead to adjustments that would help restore investor confidence. The tightening of fiscal policy that we expect over the next couple of years and a decline in fiscal policy uncertainty could, we believe, lead to additional bond investment opportunities due to attractive risk premiums in the local yield curve. Brazil’s five-year local currency bond yielded 12.35%, as of April 7th, which looks compelling when compared to other local emerging or developed debt markets around the world.2For example, a five-year note in the United States yielded 1.68%, 3.16% in South Korea, and 5.1% in Mexico, as of April 7th.3 Even though Brazil’s central bank increased its 2014 inflation forecast to 6.1% from an earlier estimate of 5.7%, which we believe may surprise to the downside, Brazil continues to offer some of the highest real rates in the world.
We are also aware that the pressure exercised by social movements to improve health, education and public transport services could prove a potential boon for domestic companies in these sectors. The market has already largely priced in a depressing economic scenario for the Brazilian economy, and any improvement over these bearish expectations could lead to upside surprises in many asset classes, including select sectors and equities. And when the fiscal and political uncertainties dissipate, we believe Brazil’s strengths as the world’s third-largest food exporter and an important oil exporter could come to the fore again. Brazil also has a world-class research base in biotechnology and deep-sea hydrocarbon exploration, as well as a number of innovative domestic companies that have benefited greatly from the huge expansion of the country’s middle class in the past 20 years.
While Brazil may no longer be the darling of the emerging markets world it once was, the pessimism may now be overdone relative to fundamentals, providing opportunity for investors that may be overlooked by others.
(Source: Franklin Templeton website)

Jaguar Land Rover: unleashed?

Knights Grand Cross of the Most Excellent Order of the British Empire are not made every day. Ratan Tata has just received the honour. It is another marker of the former Tata Group chairman’s role in Tata Motors’ success with the reborn Jaguar Land Rover.

Fully owned by the Indian group since it was acquired from Ford in 2008, the UK carmaker is now run by Germans, earns most of its money selling Range Rovers to China, and in many analyst models, makes up about nine-tenths of the value of each Tata Motors share. JLR is a different beast to 2008. But it will also be an expensive one to expand further. There may be one more marker to go, then. It is time Tata Motors seriously considered raising the funds required through listing part of its stake in JLR.
Consider the challenge. JLR plans effectively to double in size by the end of the decade – producing at least 700,000 lighter, more efficient, cars. Capital spending will be more than £3bn a year for the next few years, more than 10 per cent of revenue. The industry average is 8 per cent. Tata could allow this to continue, true. Margins on the flagship Range Rovers are very high. But they may not get much higher, and rival German premium carmakers have plenty of cash – and much more volume – to innovate with.
This might not convince Tata to sell a stake to the market straight away. JLR’s first Chinese plant begins production later this year: another marker to get through. However, in the long term, UK investors might prefer direct JLR exposure to running complicated sum-of-the-parts valuations on Tata Motors shares. They may even value JLR at a greater multiple than well-established BMW, if JLR’s best growth is ahead of it. If so, that would be a turnround from the last time any UK carmaker was publicly traded: Jaguar – in 1990.

India to expand irrigation to cut reliance on monsoon

 India plans to expand its farmland under irrigation by at least a tenth in the next three years, potentially boosting grains output by an equal proportion in the world’s second-biggest rice and wheat producer, a top government official told Reuters.
The extra irrigated area would cut India’s dependence on annual monsoon rains that water crops grown on nearly half of the country’s farmlands. Rice, cane, corn, cotton and soybean are the main monsoon crops.
Crop yields on irrigated farms are usually 2-2.5 times those in rain-fed areas. Better yields would boost exports after India shipped large quantities of rice and wheat in recent years.
“We have around 97 million hectares under irrigation and it’s slated to go up by 10% by 2017. Eventually, the potential is to take this forward by almost half to 149 million hectares,” A.B. Pandya, chairman of the state-run Central Water Commission, said in an interview on Monday.
Higher output and productivity will also raise rural income, stoking demand for an array for consumer goods ranging from lipsticks to refrigerators.
Although agriculture’s share in India’s nearly $2 trillion dollar economy has steadily fallen to 14%, the sector continues to employ more than half of its 1.2 billion people.
If India manages to realise its irrigation potential, almost three-quarters of its 199 million hectares of arable land would be irrigated, leaving just a quarter dependent on monsoon rains.
Reservoirs needed
A wide range of geographies, climatic conditions and crop patterns will prohibit India from raising irrigation facilities beyond its optimum potential of 149 million hectares.
“I don’t have an answer when are we going to realise our full irrigation potential. To realise that potential, we need new reservoirs to raise storage capacity to 450 billion cubic metres from the current 250,” Pandya said.
It would cost around Rs10,40,000 crore ($173 billion) to boost reservoir capacity, he said.
While there is no dearth of resources, issues such as land acquisition, resettlement and environmental clearances remain a prickly problem in building new reservoirs, said Pandya and his colleagues at the ministry of water resources.
A number of mining and industrial projects, including POSCO’s $12 billion Indian steel plant have been stuck in a quagmire of legal and environmental procedures.
Also, there has been stiff opposition to big dams in India that Pandya believes is a major constraint in realising the country’s true irrigation potential.
“The voluntary groups that are opposed to dams try to couch their argument in a way that looks scientific but their basic assumption is wrong,” he said.
A major project to construct dams in the upper Yamuna has been stuck for the past 20-30 years, Pandya said, referring to the river that flows through the capital New Delhi.
Agriculture may become more resilient because of the extra area under irrigation but the monsoon will continue to play a major role in supporting farmers’ income and replenishing reservoirs.
Heavy rains at the tail end of the last monsoon season have ensured water levels at 42% of total capacity in India’s main reservoirs, a fifth higher than a year earlier and a third more than the 10-year average.
“More than satisfactory water levels at our reservoirs are very reassuring, especially when the new monsoon season is just round the corner,” Pandya said.
(Source: Reuters)

China iron ore mountain a risk as financing crackdown bites

A crackdown in China on financing backed by commodities risks unleashing a flood of iron ore sales from tens of millions of tonnes of the raw material sitting at Chinese ports, raising the prospect of a renewed price slump.
Investors who have raised funds against mostly unhedged iron ore could be at risk in the event of a price fall due to sluggish steel demand, leading to forced sales as banks wind back loans against the raw material, analysts and traders warned.
Beijing's moves to tighten access to credit have led to buyers defaulting on about $300 million of soybean imports in recent weeks, while fears of an unravelling of copper financing deals helped push the metal to a three-and-a-half year low in March.
Iron ore prices have recovered after slumping 8 percent in a single day to a 17-month trough last month as steel prices plunged, but a fragile outlook for steel consumption in China and towering port stocks mean the steelmaking raw material remains vulnerable to another rout.
Iron ore port stocks stood at a near record above 108 million tonnes <SH-TOT-IRONINV> last week, enough to build almost 1,200 New York Empire State buildings.
"A big crisis has passed, but with the high inventory, the risk is still there for iron ore prices," said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.
"It's all subject to how fast steel demand will recover going forward, and what I see is a mild recovery."
Commodities such as copper and rubber have been commonly used for financing, where traders or investors borrow against the commodity with the aim of investing the money in high-return areas such as real estate.
But Beijing's credit tightening has spurred investors desperate for cash to turn to iron ore. Industry sources familiar with the practice estimate some 30 million tonnes or $3.5 billion of stocks are now tied up by financing.
A surge in China's iron ore imports from late last year has been largely driven by these financing deals, traders and analysts say, but caution the raw material is an unlikely candidate for financing.
Unlike copper, most of the iron ore at the ports is not hedged, meaning those raising money against it are unable to lock in a price and remain exposed to any price fall, increasing the risk of a forced sale.
Hedging is little used by Chinese steel mills and iron ore traders, with the industry only shifting to spot pricing in recent years after 40 years of fixing iron ore prices annually.
The Dalian Commodity Exchange launched China's only futures market for iron ore just six months ago and foreign bourses have found it hard to convince the Chinese market to hedge via the more established iron ore swaps.
"I have not heard of too many Chinese traders hedging," said a foreign iron ore trader, one of a few who does hedge and did so recently on a 300,000-tonne cargo.
Chinese mills and traders also operate on narrow margins and are unused to paying to fully hedge their positions, added a Shanghai-based trader whose company has never hedged its port stocks.
"Since cash is tight, we don't have extra funds to hedge our position in the futures market," he said.
At the same time, the price of iron ore is particularly volatile.
Iron ore has recovered nearly 12 percent since its rout in March but remains down 13 percent for the year, compared with a more muted fall and recovery for copper.
"The person who ends up holding the cargo is making an all-in bet that the person on the other end is going to be able to pay for it and unload it," said Graeme Train, analyst at Macquarie Securities in Shanghai.
"With iron ore it is difficult to hedge and it can be very volatile, so that is the big risk."
Unlike copper, which has varied applications, iron ore is also solely used for steelmaking, and presents storage problems.
"You cannot stockpile iron ore too long, otherwise the iron will be oxidised and the quality will go down," said UOB-Kay Hian's Lau.
Iron ore also takes up a lot of space at ports, which can increase charges if they want to move the cargo or to free up space, said a trader who had a cargo stored at a port for up to a year.
Iron ore at around $116.90 a tonne <.IO62-CN=SOI> is worth much less than copper at around $6,700 a tonne, so storage and logistics costs make up a bigger percentage of the overall price.
"It's not exactly a very profitable thing to be doing," said a source at a foreign lender with a presence in China.
China has up to $160 billion of outstanding loans using commodities as collateral, about 31 percent of the country's short-term foreign exchange loans, according to Goldman Sachs.
The steel sector is now taking a hit from China's crackdown on high-risk shadow banking activity as well as curbs on lending to shape up sectors plagued by excess capacity.
Many Chinese banks have slashed lending to these sectors by up to 20 percent, part of Beijing's efforts to reform an economy that in three decades relied on cheap debt to expand at a double-digit pace.
Some traders say credit conditions are tightening even further, with some banks refusing to open letters of credit (LCs) to industries such as iron ore and coal.
A Shanghai-based trader who sells Asian cargoes to Chinese mills said a buyer was recently refused a letter of credit by a major Chinese state lender, but was able to get credit at another bank.
"Our bank in Hong Kong has been warning us that the future might come when Chinese banks will refuse to open a letter of credit," he said. 
(Source: Reuters)

Worst may be over for commercial vehicle sector: MRF

MRF, one of India's top tyre makers, said it believed the worst is over for the commercial vehicle industry and things should look up after the coming monsoon. Commercial vehicles account for half of the Chennai-based company's revenue.
"If you notice in the last few months the slide has stopped. Hopefully it should be better if you have a good monsoon," Koshy K Varghese, executive vice president of marketing atMRF told reporters at an event to roll out tyres made for the Sukhoi-30 MKI fighter aircraft of the Indian Air Force.
The Indian commercial vehicle industry has seen a continuous downward spiral since April 2012, hurt by weak demand, when volumes fell 11.6%. For fiscal year 2013, the industry shrank 26%.
Varghese's views mirror that of German truck maker Daimler, which last week said demand for commercial vehicles will improve in the second half of the year, after the elections, and that it is already seeing greenshoots of a recovery in terms of higher freight rates and lower discounts.
Varghese said what helped the company cope with the downturn in demand was the focus on aftermarket sales and the steps it took to lower raw material prices. "Our exposure to aftermarket is always substantial. OEM (original equipment manufacturer) just accounts for 20%. MRF has a market share of 27-28% in after market in commercial vehicles.
According to experts, margins for replacement tyres are up to 10 percentage points higher than those for originals.
MRF, which follows a September-October accounting year, said it will invest Rs 800-1,000 crore in this period to expand capacities at Hyderabad and Trichy facilities.
"The asset turnover ratio in the industry is 1:1- which is if we investRs 1,000 crore we get Rs 1000 crore revenue. That's why not many enter this industry," Varghese said.
He however declined to specific the capacity and the expansion plan in detail.
Kotak Institutional Equities Research's recent analysis of net debt/EBITDA levels for the top 4 Indian tyre companies (Apollo, CEAT, MRF and JK Tyres) showed the metric would be lower in fiscal year 2014 at 1.1 times, compared with 1.4 times in 2010, as lower rubber prices lead to higher profits.
"In our view, even as industry players will embark on capex, leverage ratios will remain much more comfortable versus past. Hence, given relatively comfortable balance sheets, we expect pricing discipline to be maintained going forward.
Concomitant lower industry risk profile also means that earning multiples have a scope to move higher versus past levels." analyst Jasdeep Walia wrote in the note last month.
Varghese also said the company is not worried about competition from global tyre major Michelin, whose Chennai plant will be on stream soon. "Fifteen years ago the same happened in the passenger car industry with the entry of Bridgestone.
We are still larger player with market share of 27-28% in the replacement market. So we don't see Michelin entry has a threat. But we are watchful," he said.
(Source: Economic Times)

Future Group to acquire Nilgiris

 Future Group is set to take over southern supermarket chain Nilgiris for Rs 150-175 crore, according to two people with direct knowledge of the deal. It has in principle agreed to acquire the stake of private equity firm Actis Capital along with the minority shareholding of the promoters in a transaction that could give Kishore Biyani led Future the extensive footprint in southern India he's been looking for.

The deal will be structured such that Future Group gains control of the 65% held by Actis and the holding of the Mudaliar family. In return, Actis will get a minority stake in Future Consumer Enterprise or FCEL, which runs the group's private brands business and grocery stores such as KB's Fair Price, Big Apple and Aadhaar, which will eventually put the total deal size at Rs 275-300 crore, according to the people cited.
FCEL includes brands such as Sach, associated with former cricketer Sachin Tendulkar, Tasty Treat, Clean Mate and others that are sold through the Big Bazaar and Food Bazaar outlets. FCEL is part of Biyani's ambition to expand the private brand business into a Rs 10,000-crore enterprise by 2018. Biyani, chief executive of Future Group, declined to comment.

Sarah Godfrey, a Londonbased spokesperson for Actis, declined to comment. Shomik Mukherjee, a partner at Actis who directly oversees the PE's investment in Nilgiris, said: "Nilgiris is a leading retailer and food brand in south India and we as shareholders are committed to supporting its growth and helping the management team achieve its full potential."
The UK-based PE firm has been seeking an exit for about two years from the 2006 investment that gave it a controlling stake of 65% for about $65 million in Bangalore-based Nilgiris, one of India's oldest retail chains.
Late last year, Future Consumer Enterprise sold its 44% stake in Capital Foods, that sells various food products under brands such as Ching's Secret and Smith & Jones, to private equity firm Artal Group for about Rs 180 crore. FCEL is currently debt-free.
Since India barred any foreign investment in multi-brand retailing at the time, Actis invested in Nilgiris Dairy, the back-end company that operates some of the stores, but more critically sources and supplies fresh milk, dairy products, bakery items and staples under the Nilgiris brand to franchisee stores. Nilgiris fits in with Biyani's model of expanding neighbourhood stores through franchisees.
"Nilgiris has an annual turnover of Rs 700 crore but 60-70% of the stores are run by franchisees and Nilgiris gets a fee for use of the brand and by selling bakery and dairy products to the franchisee stores. So, the revenue is not all on Nilgiris' books," a person aware of the initial talks between the two had told ET.
In 2012, Actis had mandated HSBC's investment banking unit to find a buyer at an enterprise value of $170 million for Nilgiris, which was established in 1905.
(Source: Economic Times)