Wednesday, November 30, 2011

Customising e-commerce

An increasing number of e-commerce sites are turning to app markets to popularise their services.
An increase in smartphone penetration leading to a subsequent increase in mobile internet users have encouraged e-commerce sites in developing their own applications and payment gateways accessible across different operating systems (OS) like BlackBerry, iOS (Apple), Android and others.
The basic idea is to integrate the services – including payment options - available on the web into the handheld devices.
Trying to take the first mover advantage, some of the e-commerce sites like Naaptol, OLX or Snapdeal are moving away from the traditional WAP sites (mobile compatible sites) into the realm of developing their own applications.
Traditionally, e-commerce sites have preferred using the web and after popularity of the mobile web, developed WAP – Wireless Application Protocol – enabled sites for easy viewing on the mobile. However, with increasing popularity of applications, thanks mainly to smartphones, e-commerce sites are now exploring newer avenues for better reach.
Says Mr Amarjit Batra, country head, OLX.in, “The penetration of smartphones will boost hyper-localisation of products and help users. We found users more comfortable in having a mobile application than opting for mobile web search or using WAP sites.”
OLX.in with presence across 96 countries has nearly 15 crore users globally and its application is available across seven different mobile platforms that include Android, iOS (Apple), Ovistore (Nokia), Windows and Blackberry.
Snapdeal too is planning to widen their reach through applications. Snapdeal already has an application in the Android market and is planning to bring out similar applications on other OS.
While Naaptol's application is currently available on the Android platform only, it plans to introduce similar application across iOS and Blackberry platforms by January 2012.
Global telecom analyst Gartner, has pointed out that mobile device sales in India is expected to reach 231 million units in 2012, an increase of 8.5 percent over 2011 sales of 213 million units.
The mobile handset market is expected to show steady growth through 2015 when end user sales will surpass 322 million units.
Interestingly, companies like Tradusads.in which still has a WAP site confirmed that it was looking at possibilities of developing applications across different platforms (OS). However, Mr Saurabh Pandey, Vice President, Tradusads.in, maintains that with feature phones still dominating the Indian market, having a WAP site was had its benefits compared to an application.
“Many feature phones still do not have an option for application download. However, developing an application is the next step” he adds.

Payment options

According to industry sources, integrating web services into handheld devices would mean adding payment options to these applications. Currently, mobile applications contribute “not more than” one per cent of the total business of e-commerce sites. For the share to pick up, the availability of payment option or the integration of m-commerce is required in these applications.
Current mobile applications developed by these e-commerce sites generally have a search option for users and advertise options for merchants.
Admitting the importance of such integration, Mr Sachin Singhal, Head, e-commerce, Naaptol, adds: “A mobile app is more user-friendly than having a WAP site. However, integrating the payment window with it makes the application complete.”
According to Mr Sandeep Komarvelley, Head, Marketing and Alliances, Snapdeal, a payment gate option would make mobile apps “more meaningful” in providing end to end solution for users.
While Naaptol is developing a payment gateway that will allow users to use their credit cards to buy products, it also plans to set up a new server to cater to mobile app user requirements of faster browsing.
Snapdeal too is exploring options of integrating a payment gate along with its applications, Mr Komarvelley said.
(Source: Business Line)

Entry of large retailers will spur demand for tech services, says Dell

The furore over FDI in retail notwithstanding, the IT industry, for one, may have a reason to smile if foreign players are allowed into multi-brand retail.
Global retailers depend heavily on technology and software for their operations and supply chain, and their entry into India could spur demand for technology and outsourcing services.
The Dell India Chairman, Mr Suresh Vaswani, said the company is clearly “excited” about this new tech opportunity in the country.
“Retail will be a big area for IT (players), without question. In the US, the retail sector uses a lot of IT… computer systems…it is one of the largest segment in terms of market potential. Suddenly, all that is going to happen here and it will need a lot of IT. That is the exciting part,” Mr Vaswani said on Wednesday.
He pointed out that Dell has ongoing business relationships with many global retail majors but did not disclose the names of these customers. “We deal with them globally…now if they are coming to India, it is a great opportunity for us,” he added.

Software apps

Mr Vaswani further said that global retailers who come into India would focus on innovating in software applications space. “Indian retail is competitive, so you will have to get overall costs down and also lower the technology costs. Retail would require software, terminals, points of sales, handhelds, and the entire supply chain…It plays into our game completely,” he said.
In 2011, the total IT and BPO spending in the Indian retail vertical grew at an estimated 17.5 per cent to reach Rs 500 crore, according to Nasscom. Further, the Nasscom `Perspective 2020' report forecasts that the total addressable market for domestic technology and business outsourcing services in India will grow five-fold over the next decade to $90-100 billion driven mainly by India's economic growth. However, the 2020 report does not break up the contribution of the retail vertical in the outsourcing market.
Mr Vaswani had left Wipro earlier this year after India's third largest IT services company dismantled its joint CEO structure. He joined Dell in April this year. Besides leading Dell India, he is also the Executive VP and Global Head (Applications and BPO) for Dell Services.
(Source: Business Line)

Brokerages cut salary, second time in 6 months

It is a measure of how bad things are on Dalal Street – stockbrokers catering to the institutional segment have salaries by 20 per cent for the second time in the last six months.
“This is our second salary cut for 2011 as revenues are down and there is no other business to turn to,” confirmed an employee at a brokerage which is into institutional business and proprietary trading.
There is a danger of institutional business being shut down at several brokerages if this trend continues for another couple of quarters, leaving scores jobless.
In general, brokerages work on a basic revenue model in which a dealer earns Re 1 as salary only if he generates a minimum of Rs 4-5 as brokerage.
Trading volumes have dwindled since August as FIIs have been net sellers of equity. Domestic institutional investors do not have the wherewithal to act as a counterbalance. (There are restrictions on mutual funds and insurers on trading in derivatives.)
All this means lower income for institutional brokers.
“It's almost inevitable as costs have increased and revenue has vanished. Large FIIs are slowly shifting to direct market access (DMA) and this means brokerage would come down from 30 basis points to five basis points for delivery based transactions,” said Mr Anand Tandon Group CEO, JRG Securities.
The last bull run in the equity markets saw the number of institutional brokers rising two and a half times from around 30 in 2003 to approximately 75 where it remains. This was mainly due to a spurt in institutional business volumes led by hedge funds and other large FIIs.
With FII proprietary books and hedge funds vanishing, brokers are now left with long-term investors who do not generate trading volumes.
(Source: Business Line)

Auto cos put investments on hold

Slowing sales due to high interest rates and rising input costs force the move.

Automobile companies, faced with slowing sales and a high cost of finance, are shying away from making new investments. Many have put expansion plans on hold.
Bajaj Auto Ltd, the country’s second-largest motorcycle maker, has deferred a final decision on its fourth manufacturing facility in Mundra, Gujarat. Bajaj’s biggest rival, India’s No 1 two-wheeler maker, Hero MotoCorp, has also put off work on starting another manufacturing facility in one of the southern states. Hero had set aside an investment of Rs 500 crore to set up the new plant. Hyundai Motor India Ltd, India’s No. 2 car maker after Maruti, has put off plans to set up a diesel engine factory in Chennai.
BUMPY RIDE
* Bajaj Auto has deferred a final decision on its fourth manufacturing facility in Mundra, Gujarat
* Hero MotoCorp has also put off work on starting another manufacturing facility in one of the southern states
* Hyundai Motor India Limited has put off plans for setting up a diesel engine factory in Chennai
Automobile makers are regularly wooed by state governments to set up factories, since they create jobs and give more work to vendors. For instance, two-wheeler companies source almost their entire components from within India, boosting small businesses. A deferment of investment by these companies hits growth all around.
“We are operating at more than 90 per cent of our capacity. We should set up a new plant; Gujarat is a likely alternative. But the economic conditions are so uncertain, we want to be prudent and see how the market develops,” said Rajiv Bajaj, managing director, Bajaj. “If there is a meltdown, we don’t want to be caught on the wrong foot.”
Bajaj’s motorcycle sales grew by a modest 1.9 per cent to 244,503 units in the domestic market in October, tumbling from a 14 per cent sales growth in June. After posting strong double-digit growth rates in the first half of the financial year, two-wheeler sales (which include motorcycles) for the entire industry slowed to a two per cent growth to 1,147,621 units last month. Though the two-wheeler segment is projected to end the financial year with sales growth of 13-15 per cent, manufacturers are exercising caution in investing in fresh capacity, which they fear, may remain unutilised.
CUSTOMERS’ GO-SLOW
“With interest rates going up, customers are showing a tendency to postpone purchases for which they have to avail of financing options. For companies, the cost of manufacturing has gone up,” said Ravi Sud, chief financial officer, Hero MotoCorp. “As interest rates continue to rise, firms are getting defensive and holding back investments. Even banks are depicting reluctance to loan to small and medium enterprises.”
Hero MotoCorp had set aside Rs 500 crore in this financial year for its new plant in the south. Sud said the investment would now be carried forward in the next financial year.
Bajaj had considered an investment of Rs 1,000 crore to set up its fourth and largest plant scheduled to have an annual capacity to roll out five million vehicles, almost doubling the company’s capacity. Bajaj makes 375,000 motorcycles and 50,000 commercial vehicles every month in its three manufacturing facilities in Aurangabad and Chakan in Maharashtra and Pantnagar in Uttarakhand. Hero has a combined capacity to make 6.15 million vehicles in its three plants in Dharuhera and Gurgaon (Haryana) and Hardwar (Uttarakhand),
The impact of the slowdown is not limited to the two-wheeler segment alone. The country’s second-largest car maker Hyundai has stalled an investment of roughly Rs 400 crore for a diesel engine manufacturing facility in Chennai. “We are not taking any decision on the diesel plant yet. But our investments here are so high, we can only go forward and not back,” said Arvind Saxena, director (marketing and sales).
The company has not decided on a timeline to revive the project given the sluggish demand in the domestic market. Passenger car sales have been on a slide since July. Car sales witnessed their sharpest drop in over a decade, slumping by 24 per cent to 138,521 units in October. Hyundai currently imports diesel engines for its premium hatchback i20 and mid-size sedan Verna. The proposed diesel engine factory was designed to have a capacity of 150,000 units per annum.
(Source: Business Standard)

Suzuki may launch electric vehicles in India

Japanese small car major Suzuki Motor Corporation is considering to launch electric vehicles in India, although it sees infrastructure as a big challenge.
With the demand of diesel cars very high in India, the company said it is also lining up more diesel engine cars for the country.
"It is under consideration to launch electric vehicles in India," Suzuki Motor Corporation Representative Director and Executive Vice President, Executive General Manager (Corporate Planning Office) Toshihiro Suzuki told PTI on the sidelines of Tokyo Motor Show here.
When asked for details, he said: "We cannot tell you what are the specifications. There is possibility, but the only problem is infrastructure in terms of electric plugs."
Suzuki also declined to comment on the possible timeline for introducing the electric vehicle saying, "When the time comes, we will introduce."
He said after considering the infrastructure problems faced with CNG and LPG models, introducing the electric vehicle poses even a bigger challenge.

"Even in CNG models, there is limitation in the number of gas stations. So it is more difficult to introduce electric vehicles in India, but we will introduce at the right time and it is under consideration," he added.

When asked about the possibility of introducing more diesel cars in India as the demand is much higher due to price difference with petrol he said: "We are trying to line up more diesel engine cars...When we are introducing more models in India, we will put more diesel engines."

The company today showcased Swift electric vehicle hybrid, new version of Alto -- Alto Eco, which the company claims to have a fuel efficiency of 30.2 km per litre.

SMC also showcased its new Swift Sport and a concept electric scooter.
(Source: Business Standard)

Indian groups risk default on dollar debt


Dozens of Indian companies are coming under financial stress after the sharp fall of the rupee against the dollar during the past few months made once-cheap loans in the US currency much more expensive, analysts have warned.
Indian companies face an overall short-term foreign debt maturity of $16bn for the year ending in March 2012 – according to Crisil, the Indian subsidiary of the US credit rating agency Standard & Poor’s – the majority of which is US dollar-denominated. 
The most common forms of the debt are foreign currency convertible bonds, which can either be converted into a lucrative stake in the issuer on maturity, which is attractive if the issuer’s shares rise, or simply repaid in full.
Many Indian companies resorted to the FCCBs as a convenient way to raise cheap debt when the country’s stock markets were gripped by exuberance between 2005 and 2008, with the main Sensex index peaking in November last year at more than 21,000 points.
However, since then it has plunged 20 per cent, which will mean buyers are expected to demand repayments rather than conversion into shares. The plunging value of the rupee against the dollar – down 17 per cent since its 2011 high in late July – is set to make this hugely costly for the companies involved.
Jagannadham Thunuguntla, strategist at SMC Global Securities, a New Delhi broker, said companies that had made cheap foreign loans and had failed to hedge their dollar exposure were sitting on a “time bomb”.
Reliance Communications, Suzlon Energy and Tata Motors are among those that analysts said had significant amounts of such dollar-denominated debt maturing over the next 12 months.
RCom’s shares have fallen nearly 50 per cent since the beginning of the year, while Suzlon’s have dropped 57 per cent and Tata Motors has plunged 86 per cent.
All have said there is no risk of default but they did not specify how they would deal with the rising cost of their debt. It is unclear to what level they have hedged their exposure to the dollar.
However, analysts fear that some companies that had banked on their share prices continuing to climb might be unable to afford to repay their convertible bonds when they come due.
A report by Edelweiss, a Mumbai-based financial services group, said that 60 per cent of FCCBs outstanding had been raised at a time when the Indian rupee was trading at 42 or less against the dollar in May 2008.
However, the currency has been the worst performer in Asia currency this year and on Tuesday was trading at about Rs52 against the dollar, after touching an all-time low at 52.73 on November 22.
RCom, the mobile telecoms operator controlled by Indian billionaire Anil Ambani, said it plans to redeem FCCBs worth $1.1bn due in March 2012.
Tata Motors, India’s largest automotive group by revenues, said it was not planning to restructure its FCCBs, worth $490m, but said it was concerned about the foreign currency debt exposure. The group reported a 16 per cent fall in net profit for the second quarter ending September 30 compared to the same period a year ago, partly due to foreign exchange losses.
Meanwhile, Suzlon, the world’s third-largest manufacturer of wind turbine generators, said that, in spite of its shares trading at about Rs25 – much lower than the conversion prices band of Rs76-Rs97 it offered investors – it was confident it would be able to manage its FCCBs repayments worth $500m due in two tranches next year.
(Source: Financial Times)

Businesses plan for possible end of euro


International companies are preparing contingency plans for a possible break-up of the eurozone, according to interviews with dozens of multinational executives.
Concerned that Europe’s political leaders are failing to control the spreading sovereign debt crisis, business executives say they feel compelled to protect their companies against a crash that can no longer be wished away. When German chancellor Angela Merkel and French president Nicolas Sarkozy raised the prospect of a Greek exit from the eurozone earlier this month, it marked the first time that senior European officials had dared to question the permanence of their 13-year-old experiment with monetary union.
“We’ve started thinking what [a break-up] might look like,” Andrew Morgan, president of Diageo Europe, said on Tuesday. “If you get some much bigger kind of ... change around the euro, then we are into a different situation altogether. With countries coming out of the euro, you’ve got massive devaluation that makes imported brands very, very expensive.”

Executives’ concerns are emerging as eurozone finance ministers weigh ever more radical options to tackle the sovereign debt crisis, including the possibility of funnelling European Central Bank loans to struggling countries via the International Monetary Fund.
Car manufacturers, energy groups, consumer goods firms and other multinationals are taking care to minimise risks by placing cash reserves in safe investments and controlling non-essential expenditure. Siemens, the engineering group, has even established its own bank in order to deposit funds with the European Central Bank.
Some are examining expert advice on the legal consequences of a eurozone split for cross-border commercial contracts and loan agreements. By contrast, most small and medium-sized firms have made few, if any financial and legal preparations.
“Market participants and, increasingly, real businesses are pricing in a break-up scenario,” said Jean Pisani-Ferry, director of the Brussels-based Bruegel think-tank. “It is still hard to think the unthinkable, let alone to work out the details of it, but any rational player has to consider the possibility of it.”
Some businesses with global reach say a euro break-up would be grim but manageable. “We have made a first rough analysis about the consequences of the discontinuation of the euro as the Portuguese currency,” said J├╝rgen Dieter Hoffmann, finance director at Volkswagen Autoeuropa, the German carmaker’s Portuguese arm. “The conclusion is that overall the impact would not be so negative to our company, as we are mainly an exporter and belong to a worldwide group.”
Some French, Italian and Spanish executives say they have plans in place for severe financial and economic turbulence, but not specifically for a euro break-up. The risk, in their eyes, is that the region’s stability might come under even greater threat if it became known that companies were contemplating the worst.
(Source: Financial Times)

Boom times for US farming

What makes North Dakota, Nebraska and South Dakota different from the rest of the US? The first difference is that they have the lowest unemployment rate: 3.5, 4.2 and 4.5 per cent, respectively, compared with a national average of 9 per cent in October. 
The second big difference is farming. Agriculture has the largest share of gross domestic product in the three states. While the national average is less than 1.5 per cent, it is 10.9 per cent in North Dakota, 9.4 per cent in South Dakota and 6.8 per cent in Nebraska.
A large agricultural sector was a curse in the 1980s and 1990s, but today, it is a blessing.
The US Department of Agriculture said on Tuesday that the net value added of agriculture to the US economy – adjusted by inflation – will be the highest this year since at least 1974. And the boom is likely to continue. Official figures, also released on Tuesday, show that in 2011, US farmers will take home for the first time more than $100bn in a single year. As Tom Vilsack, the agriculture secretary puts it, “agriculture continues to be a bright spot” in the US economy. Indeed, farming, together with natural resources production, particularly oil, is one of the few bright spots.
The agricultural boom has been a windfall to the US agribusiness sector, moving it for the first time in years into the mainstream consciousness of investors. Companies from Deere & Co, the world’s leading manufacturer of tractors and combine harvesters, to Monsanto, the seed and pesticides producer, to Cargill, the world’s top agricultural commodities trader, have benefited. At the same time, the price of farmland in agricultural states – now another popular investment – has surged, with year-on-year gains topping 25 per cent.
The USDA suggests that the country’s farm sector is heading to another good year in 2012, extending the boom for a fifth consecutive year. Over the past decade, net farm income has almost doubled as the US has expanded its production of food commodities – particularly corn – and prices have surged to historic highs. In 2001, the country’s farmers took home more than $50bn; this year, the USDA estimates they will earn $100.9bn, up 28 per cent from 2010. At the same time, government handouts paid directly to producers are set to drop to $10.6bn this year, down 1.4 per cent from 2010.
The surge in farm income is the result of a rare boom in agricultural commodities. Over the past 30 years, food prices have increased only briefly in a few occasions. Most of the time the spikes were isolated to single commodities – wheat, corn or soyabean. The current boom, however, is lifting the price of almost every agricultural commodity at the same time, a phenomenon last seen in 1973-74.
The boom has its roots in strong demand for agricultural commodities in developing countries, particularly China and India, the voracious appetite of the US biofuel industry, and supply and trade disruptions in key producers, from Russia to Australia.
There are some clouds on the horizon, however.
There has been a sharp increase in costs, with fertilisers up 28 per cent year-on-year and fuel up 27 per cent year-on-year. All in all, production expenses will rise 12 per cent to a record $320bn. The 2011 jump resembles the worrying increase in expenses witnessed in 2007 and 2008.
Also, the boom could be coming to a natural end. The multi-year run of high prices is an oddity. Historically, production of food commodities eventually outruns demand triggering a protracted period of low prices. Whether the continuing strong demand will curb the natural tendency of farmers to overproduce themselves out of prosperity remains to be seen. But in the meantime, North Dakota, Nebraska and South Dakota will continue to remain different.
(Source: Financial Times)

Pfizer After Lipitor to Push Mini-Blockbusters

Pfizer Inc.'s long dependence on the cholesterol pill Lipitor to produce almost one-fifth of the company’s revenue begins eroding today when the drug’s patent protection ends in the U.S.
The next step will be rebuilding the world’s biggest drugmaker into a smaller, faster-moving company that focuses on development of biologic drugs and specialty medicines while expanding sales of existing products, such as Lipitor and the erection drug Viagra, in emerging counties such as China, executives said in interviews.
“We’re not going to be a one-product company,” said Geno Germano, Pfizer’s president of specialty care and oncology, interviewed at the company’s New York headquarters. “We’re poised to deliver significant new pipeline assets in the coming year, and in coming years.”
Pfizer rose 2.5 percent to $19.88 at 9:51 a.m. New York time, and has gained 14 percent this year.
The drugmaker is depending on four products to generate $4 billion in new revenue by 2014, said Timothy Anderson, a Sanford C. Bernstein analyst in New York, in a note to clients.
The drugs are Prevnar, a bacterial infection vaccine gained in Pfizer’s 2009 Wyeth purchase; the blood-thinner Eliquis, co-developed with Bristol-Myers Squibb Co. (BMY); the rheumatoid arthritis drug tofacitinib; and the cancer drug Xalkori for non-small-cell lung tumors. Pfizer is awaiting U.S. regulatory approval on Eliquis and tofacitinib.

‘Positive Data Points’

While it’s too early to tell whether those products will reach their potential, they offer “positive data points that should enhance confidence that this company might, just might, be turning a corner,” said Jami Rubin, an analyst with Goldman Sachs in New York, in a telephone interview.
It’s a significant corner. Lipitor, the world’s top-selling medicine, last year had $10.7 billion in sales, a figure analysts have said may drop as much as 70 percent by 2012.
At the same time, Chief Executive Officer Ian Read is planning to sell or spin off Pfizer’s animal health and nutritional businesses. Those units generated $5.44 billion in 2010 sales, or about 8 percent of revenue, all of which will vanish when they’re divested.
“Most CEOs want to build empires,” Rubin said. “Pfizer was a poster child for why bigger isn’t better. I think Ian Read understands that.”

‘Inflection Point’

Generic competition to Lipitor is “a major inflection point. They’re going from being the most successful primary-care company on the planet to focusing on biologics and specialty drugs,” she said.
Pfizer said in July it doesn’t anticipate making more announcements about the two units to be divested until 2012, and that any transaction may take as many as 24 months to complete. In the meantime, the company is moving to minimize its initial U.S. losses from Lipitor by making deals with insurers and pharmacy benefit managers to lower the price of the branded drug in return for agreements to block the use of generic copies.
CVS Caremark Corp. said this month it will offer Lipitor exclusively for patients in Medicare’s drug benefit, the U.S. medical plan for the elderly and disabled, blocking the use of generic copies. The move will affect about 3 million patients,Carolyn Castel, a spokeswoman for CVS, said by e-mail.
Health insurers, including Coventry Health Care Inc. and UnitedHealth Group Inc., have agreed to similar pacts.
The deals are meant to help Pfizer hold on to as much market share as possible until more generic makers are allowed to begin selling copies of the drug under normal patent procedures after 180 days.

Avoiding ‘Total Collapse’

“They’re trying to avoid just a total collapse, since the U.S. is such a big market,” said Christopher Bowe, an analyst with Informa-Scrip Intelligence in New York.
Watson Pharmaceuticals Inc. (WPI), which has an agreement with Pfizer to produce authorized copies of Lipitor, began shipping the pills to pharmacies today, the company said in a statement.
Ranbaxy Laboratories Ltd. (RBXY), based near New Delhi, is the other generic company entitled to sell generic Lipitor starting today. It is waiting for manufacturing approval by the U.S. Food and Drug Administration before it may do so.
At some point soon, Pfizer will shift resources out of Lipitor, said David Simmons, Pfizer’s president of emerging markets and established products.
The company plans to slowly start running fewer advertisements for the drug and will keep up its “Lipitor for You” program, a patient co-pay discount program, only as long as it generates positive results, Simmons said. “There is some point of diminishing returns,” he said.

Last Stand in China

The last stand for the branded drug may be in developing countries, Simmons said, noting that Lipitor “will continue to have a lifespan in China.”
Pfizer hasn’t yet begun marketing products in rural areas of China, he said, a country with 1.3 billion potential consumers. Simmons estimated that only 9 percent to 10 percent of patients who could benefit from Lipitor in China were aware of their condition and had been diagnosed, compared with 45 percent to 50 percent in the U.S. and Europe.
It remains an open question whether Pfizer will turn to a major acquisition, as it has three times since 1999, if its current plans don’t pan out. The key to changing the company’s pattern on mergers will be whether Pfizer can regularly produce new products, Rubin said.
“Pfizer has not been able to do that for the last decade,” she said.

$22 Billion Gain

Seamus Fernandez, an analyst with Leerink Swann in Boston, has estimated that divestiture of the two units could produce as much as $22 billion for the company.
While Read has said money gained from any deal will be spent on share buybacks, such a move would buck a company trend reaching back to 1999, when the drugmaker acquired Warner Lambert and gained Lipitor.
Since then, the company acquired Pharmacia in 2002 and Wyeth in 2009. In total, the three deals cost the company more than $200 billion.
The key to changing the company’s historic pattern will be whether Pfizer can regularly produce new products, Rubin said.
“Pfizer has not been able to do that for the last decade,” she said.
Read’s predecessor, Jeffrey Kindler, told investors he didn’t see an acquisition in the company’s future less than a year before the company announced plans to buy Wyeth for $68 billion. Major acquisitions like the Wyeth deal, though, aren’t viewed by investors as positively as in the past, Rubin said.

‘Fact of the Industry’

“Consolidation has been a fact of the industry for 40 years, and isn’t going to stop today,” she said. “But the deals that were done for the sake of synergy to accelerate near-term earnings growth, investors aren’t going to reward those.”
Still, even a succession of small new drugs may not be enough to keep investors happy, Bernstein’s Anderson said in anote to clients. “The ultimate measure of R&D productivity is not just the number of new regulatory approvals, but also the commercial worth of those new compounds,” he wrote.
As part of Pfizer’s effort to slim down prior to the loss of Lipitor revenue, the company has cut spending on research and development from $9.34 billion in 2010 to an estimated $6.46 billion in 2013, Anderson said.
By 2015, the company will spend just 10 percent of revenue on drug discovery, the least of the nine drugmakers Anderson covers, the analyst said.

R&D Cuts

“Nobody’s cut R&D on an absolute basis as much as Pfizer has,” Rubin said, calling the decision to make the cuts controversial but necessary.
One solution to the pipeline question may be the type of risk-sharing partnership Pfizer has secured with Bristol-Myers in developing Eliquis, tagged as a $2.5 billion product at its future peak by Barbara Ryan, an analyst with Deutsche Bank Securities in New York, in a note to clients.
The FDA yesterday agreed to review the drug with a goal of deciding on an approval by the end of March, the companies said in a statement.
(Source: Bloomberg)

India Could Be the New China: Goldman's O'Neill

Measures taken by the Indian government to open up the country to foreign investment could see it match Chinese growth rates, Goldman Sachs’ Chairman Jim O’Neill told CNBC Wednesday.

“I am particularly excited about the Indians. They are showing signs of really undertaking some initiative. In particular the approval by Congress of the FDI (foreign direct investment) restrictions being lifted on foreign ownership of retailers.
“It’s a huge development and highly controversial. It has had such an undeveloped commercial approach to retailing and agriculture that (it) could be a massive thing. India could get to Chinese style growth rates," O’Neill said.
He added that despite the phenomenal growth rates seen in the BRIC countries of Brazil, Russia, India and China over the past decade, future growth would be more muted.
“I start from the premise that nothing can stay as good as it is has been, forever, it can’t pan out as well as it has for the BRICs for the past decade.
But with that caveat it will be different within them still. China is deliberately trying to engineer slower growth, (at a ) healthier rate, so the average BRIC growth rate is going to be lower,” O’Neill added.

However, he said that the BRIC story would still be significant for investors.
“In terms of the collective growth of the world, the BRICs is the thing. That’s the core structural investment thesis and it’s very difficult for that to change unless the BRIC countries back off what they’ve been doing. But look at what India has announced. They’re trying to embrace it more,” he said.
He added that China's aim of slower growth over the next few years would ultimately be a good thing as a burgeoning middle class is given room to expand. But it would need some adjustments.
However, he said it was not just a case of opportunities lying only in the emerging economies. The current debt crisis engulfing Europe masked good news from the developed world.
“In view of the degree of pessimism and change in the developed world, there could be opportunities elsewhere. In the heart of the euro zone look at Germany, it’s not doing too badly. We seem to find it really convenient here in the UK to blame the euro zone for our own problems. If it’s that bad, how come Germany is doing well?
“Part of the answer is that Germany has become so well exposed to the BRIC story and that is what the UK, the U.S. and in particular some of the smaller European countries have to engineer,” O’Neill said.
(Source: CNBC)

Tuesday, November 29, 2011

Changes in the model portfolio

Looking at the deteriorating European situation and the political flux, locally, I am making the following changes in the portfolio:

Sales:

Axis Bank - 3% @ 1123/-
Kotak Bank - 2% @ 455/-
DLF - 2% @ 203/-
Ranbaxy - 4% @ 453/-
Titan - 3% @ 185/-

Buys:

HUL - 5% @ 390/-
Cipla - 3% @ 326/-
TCS - 3% @ 1090/-
Wipro - 3% @ 374/-

Paras

Shanghaied Home Buyers Take to Street

Danny Deng and his bride-to-be dreamed of their lives together as they walked through the showroom for a Shanghai housing project almost three months ago. Pooling his own and his parents’ savings, a loan from his boss and a 1.1 million yuan ($172,000) mortgage, he bought an apartment and secured his fiancee’s hand.
On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. (000002) slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
“If I’d paid for it all myself, the price cut wouldn’t bother me as much, but there’s a lifetime of my parent’s blood and sweat in it,” said Deng, a 30-year-old electrical systems salesman. “Developers’ profits are outrageous. The price they set when the housing market kept going up was far more than the real value.”
Deng’s anger underscores the dilemma facing China’s government as it tries to cool the property market. If policies such as increased down payment requirements don’t go far enough, it risks a housing bubble; if it pushes too hard, it may provoke the ire of a new generation of middle class “fang nu,” or housing slaves, in a reference to the lifetime’s work needed to pay off debts.

Homebuyers Stung

Demanding Vanke, China’s largest publicly traded property developer by market value, compensate them or cancel their contracts, Deng and his fellow picketers on that rainy day are among homebuyers stung as prices reverse. Urban residential values have risen 155 percent nationwide since reforms 13 years ago created a private residential market in the communist nation. Prices in Shanghai almost quadrupled over the past decade.
In October, hundreds of homeowners demonstrated outside the offices of China Overseas Property Group Co. over cuts (SHPROP) at another project in Shanghai, according to the Chinese-language New Century Weekly. There have also been Chinese newspaper reports of similar protests in Beijing and the industrial city of Shenzhen near Hong Kong.
“This is certainly sending a very alarming signal,” said Cheng Li, a senior fellow at the Brookings Institution inWashington. “If property prices really go down, there will be a serious political crisis led by the middle class.”

Customer Anxiety

China Vanke, in an e-mailed response to questions, said that while it understood customers’ anxiety, prices were set by supply and demand.
“In a market correction, it’s hard to avoid that both sides, developers and homebuyers, will be affected,” the company said.
Residential property prices fell from the previous month in 33 cities of the 70 measured in October, the worst performance this year, after the government imposed restrictions on mortgages and loans to developers.
Analysts at Credit Suisse Group AG say prices may fall 10 percent this year and another 10 percent in 2012. Huang Yiping, a Hong Kong-based economist at Barclays Plc, said the drop would be between 10 to 30 percent in the next 12 months.
In an indication of how seriously the government is taking the matter, a Nov. 21 commentary by the official Xinhua News Agency said that such protests are “a social phenomenon that cannot be ignored,” before adding that their appeals aren’t supported by law.

Middle Class Power

China’s emerging middle class represents a potent new force that may number as much as 243 million, said Li of the Brookings Institution. On a growing number of issues from housing to the environment they are voicing their opposition online and on the streets.
Another Xinhua article argued that some price declines could be beneficial, enabling more people to afford a home.
Also at stake is the pace of economic expansion in one of the world’s few growth engines. Property directly accounts for 12 percent of China’s gross domestic product even before taking into account building materials, furnishings and appliances, according to a July report by the International Monetary Fund.
A drop in real estate prices could undermine the value of the collateral for about 40 percent of the loans issued by China’s biggest banks, the IMF said after a November survey of the lenders.

Price Move ‘Danger’

Falling land values may also impact local governments which depend on them for one-third of their revenue, said Wang Yi, a Beijing-based real estate analyst at Goldman Sachs Group Inc.
“The government thinks they have everything under control and can set the bottom,” said Du Jinsong, head of property research for Credit Suisse. “The danger is they may do more than enough, and it may be too late to stop a bigger fall.”
Questions over China’s housing policy are “overshadowing”China’s economic outlook, the Paris-based Organization for Economic Cooperation and Development said Nov. 28. A day earlier, Xinhua reported Chinese Vice Premier Li Keqiang as saying the government should continue tightening after some observers, including scholars at Renmin University of China in Beijing, suggested the government would start lifting restrictions next year.
Residential property-related companies are already suffering on the stock market. China Vanke, based in Shenzhen, is down 25 percent this year in Shanghai trading, while Soufun Holdings Ltd. (SFUN), owner of China’s biggest real-estate website, has dropped 36 percent.
For Deng, the pain is more than financial. Tears swell in his eyes as he recounts the moment his father handed him access to his life savings of 360,000 yuan to help make the down payment.

Gnawing the Elderly

The gift made Deng consider himself a member of the “ken lao” generation, meaning to gnaw on the elderly.
“I was depressed, uncertain, touched and a bit ashamed,”he said, asking not to be identified by his full Chinese name because of the personal nature of his story. “I had been proud and didn’t think it was their business. But when the moment really came, I knew it was impossible to manage only by myself.”
Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy anapartment first, he said.
“At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.

Raise a Child

Deng saw an ad on Soufun.com for pre-sales of a project called Qinglinjing, meaning “Clear Forest Path,” that was being constructed near a soon-to-be built subway station next to the future home of the Shanghai Disney Resort. Deng and his girlfriend visited a showroom to walk the wooden floors of the replica 96-square-meter (1,033-square-foot) apartment, planning how they would fill its two bedrooms, living room and study.
“We loved it,” Deng said. “It suits us for the next three to five years because we plan to raise a child soon.”
The snag was its 1.7 million yuan price tag. Chinese policy requires a minimum 30 percent deposit. Deng had saved 70,000 --not enough. That’s when he called his parents, then borrowed another 50,000 yuan from his boss, and secured a loan of 1.1 million yuan paying as much as 7.8 percent interest fromAgricultural Bank of China, he said.
On Sept. 28, Deng and his girlfriend signed a contract with the developer, happy after winning discounts including 40,000 yuan off for being a member for the Soufun.com website and a 20,000 yuan markdown by collecting 20 stamps on a red “home-passport” issued by Vanke. The end price: 1.58 million, or about 13 times Deng’s annual wage.
The next month, they got married. Paying the mortgage will take up 40 percent of the new couple’s combined salary.

Housing Boom

The new norm for Deng’s generation stems from housing reforms begun in 1998, when then Premier Zhu Rongji privatized state-owned housing provided at low rents to urbanites, transferring home ownership from the government to the families occupying the dwellings. The housing market has boomed ever since, with a brief reversal in 2008 overcome by government stimulus.
Some 290 million city dwellers own their own homes, according to consultants Gavekal Dragonomics in Beijing.
China’s official home-ownership rate of 87.8 percent, which excludes migrant workers, exceeds the U.S. level of 66.3 percent in the first quarter of 2011, according to U.S. census data.
While the property privatization has helped fuel one of the fastest episodes of wealth creation in world history, new buyers like Deng must mortgage their futures to afford a home in China’s swelling cities. The home-buying boom has contributed to a doubling of household debt in China since 2008, though the amount is still far below U.S. levels, according to Dragonomics.
Concerned a bubble was forming, the government this year stepped up measures to curb the market, including limiting home purchases in some cities, raising down payments and warning banks and other lenders to cut back loans to builders. That’s left some developers facing a liquidity crunch, necessitating price cuts to ensure enough sales are made to pay off upcoming debts and payrolls.
“It’s a game between developers and the state,” said Li Yun, an engineer who borrowed 280,000 yuan from his friends and relatives to buy an apartment at the Qinglinjing complex and who joined the protest. “Now that they cut prices so much it pushed homeowners to the frontline.”

Sales Agents Clapped

Zuo Hongxia, mother of a 15-month old baby, said she became a home owner after losing patience waiting for years for prices to come down. She recalled the frenzied scene when she picked her apartment in the same development as agents crowded around urging her to buy and then clapped and congratulated when she nodded agreement.
Just weeks after Deng had signed his purchase contract, he found out about the price cut when he saw a leaflet advertizing apartments in the same development with a discount of 4,000 yuan per sqm. The previous asking price was about 17,000 yuan to 18,000 yuan per sqm, according to Soufun’s website.
Acknowledging he’s unlikely to get the difference refunded, Deng said he’s now pushing for a waiver to management fees or a free parking lot. With talk some people have been detained by police after protesting, he’s also taking precautions, standing on the sidelines with a cap pulled low and bandana masking his face at a separate rally on Nov. 23.
“I didn’t have a choice,” he said of the decision to buy.“I don’t want to be too different. Otherwise, maybe for a long time, I would be alone.”
(Source: Bloomberg)

American Airlines’ AMR Corp. Files Bankruptcy

American Airlines parent AMR Corp. (AMR)filed for bankruptcy after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S.
With the filing, American became the last of the so-called U.S. legacy airlines to seek court protection from creditors. The Fort Worth, Texas-based company, which traces its roots to 1920s air-mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan.
“It’s painful but probably necessary,” John Strickland, an aviation analyst at JLS Consulting in London, said today in a telephone interview. “They will have to go through the whole process that their peers have gone through.”
Job and flight reductions are likely in the future as AMR seeks to trim expenses, Chairman and Chief Executive Officer Tom Horton said today on a conference call. Normal flight schedules will continue on American and its American Eagle regional unit for now, along with the airline’s frequent-flier program, the company said. A spinoff of American Eagle, which already had been delayed from this year into 2012, is on hold, Horton said.
Horton, 50, most recently AMR’s president, replaced Gerard Arpey today as chairman and CEO. Arpey, 53, opted to retire after the board asked him to stay, Horton said. Arpey will join Emerald Creek Group LLC, a private-equity firm founded by formerContinental Airlines (UAL) Inc. CEO Larry Kellner, on Dec. 1, the firm said in a statement.

Unanimous Vote

The board voted unanimously last night to file for bankruptcy, Horton said. AMR was determined to avoid Chapter 11 as air travel fell and losses mounted after the 2001 terrorist attacks, even as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. Rival carriers later combined, giving them larger route networks that were more attractive to lucrative corporate travel customers.
“It became increasingly clear that the cost gap between us and our biggest competitors was untenable,” Horton said. “The economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success.”
AMR plunged $1.29, or 80 percent, to 33 cents in New YorkStock Exchange composite trading at 11:13 a.m. The shares earlier fell as much as 88 percent. Unlike secured creditors, shareholders typically get paid last in a bankruptcy and often receive nothing for their shares.

Cash Crisis

The stock had declined 79 percent this year before today as analysts including Philip Baggaley of Standard & Poor’s warned the company could face a cash crisis during the next 12 months without new labor agreements. AMR had $4.1 billion in unrestricted cash and short-term investments as of Nov. 25, Chief Financial Officer Isabella Goren said in an affidavit.
American was engaged in negotiations with unions for all of its major work groups as far back as 2006, seeking to boost employee productivity and erase part of what it said was an $800 million labor-cost disadvantage to other carriers.
AMR has the highest operating costs among the four surviving major U.S. network air carriers, Goren said in court papers. The company is set to post its fourth-straight annual loss this year and analysts had forecast a loss for next year as well.
“AMR cannot continue to progress towards a viable and stable future without further, significant remediation of its uncompetitive cost structure,” Goren said.

Talks Stall

American fell from its perch as the biggest airline by traffic after Delta Air Lines Inc. (DAL) bought Northwest Airlines Corp. in 2008, then slid to No. 3 last year when UAL Corp.’s United Airlines and Continental Airlines Inc. merged.
All operate traditional hub-and-spoke systems, with their own regional units or partner airlines ferrying passengers to be collected at larger airports. US Airways Group Inc. (LCC) is the other major carrier with that kind of route network. It ranks No. 5 in the U.S. by traffic, behind Southwest Airlines Co. (LUV), the largest discounter.
American and leaders of its pilots’ union were scheduled to meet with federal mediators on Dec. 6 to provide an update on contract talks that stalled two weeks ago. The two sides hadn’t set a date to resume negotiations since Allied Pilots Association leaders declined to send a Nov. 14 contract offer to union members for a vote, saying it “clearly” would be rejected.

‘Perfect Storm’

“You would expect a leaner, stronger company to emerge from bankruptcy,” Chris Logan, an analyst at Echelon Research & Advisory LLP in London, said today by telephone. “As they are in Chapter 11, it will be more easy to demand concessions from the labor force.”
American’s pilots, flight attendants, mechanics and baggage handlers wanted to use the contract talks to regain some of the $1.6 billion in annual concessions they gave in 2003 to help the company avoid bankruptcy.
“We agreed to sacrifice based on the expectation that our airline would regain its leadership position,” David Bates, president of the Allied Pilots Association, told members in an e-mail. “What has transpired since has been nothing short of a‘perfect storm.’”
Laura Glading, president of the Association of Professional Flight Attendants, said the filing “wasn’t a great surprise.”
“It’s a loss of jobs I worry most about,” she said in an interview. “That’s a horrible, horrible nightmare in this economy. We’ll do what we can to mitigate that as much as possible.”

AMR Employees

AMR had about 80,800 employees at the end of September, including 67,100 at American, with the rest at American Eagle, cargo operations and other units. American Airlines has 8,700 active pilots, with another 950 on furlough, and 17,000 flight attendants.
Among the company’s largest unsecured creditors listed in court papers was Wilmington Trust Corp., trustee for holders of $460 million in 6.25 percent convertible senior notes due in 2014. AMR on Sept. 27 sold $725.7 million of 10-year bonds backed by aircraft to refinance maturing debt. The company paid the highest interest rates since 2009 to raise the cash.
The 8.625 percent notes due in October 2021 fell 2.5 cents to 96 cents on the dollar as of 8:20 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Jet Order

American had blamed higher labor costs, as well as benefits that have increased more slowly than expected from business ventures with partners across the Atlantic and Pacific, partly for its failure to return to profit. The airline also has a fleet of older, less fuel-efficient planes that put it at a disadvantage when fuel prices rise.
“Airlines still face that fundamental issues of cost levels versus achievable revenues in the market place,”Strickland, the JLS analyst, said. “Higher fuel prices and the weaker U.S. economy would have given them the final push.”
American shuffled flight schedules in September 2009 to increase operations in Chicago, New York, Dallas-Fort Worth, Los Angeles and Miami to attract more high-fare business travelers.
AMR said in July it would buy 460 single-aisle jets -- 260 from Airbus SAS and 200 from Boeing Co. (BA) -- in the industry’s biggest-ever order. The orders remain “rock solid,” Horton said today.
“When we’re completed with this process, our company will be competitive and poised to grow and prosper and go out and capitalize on these aircraft orders,” he said.

‘Key Part’

Placing an order for aircraft “creates a contract,” and in bankruptcy accepting or rejecting the contract will be up to AMR, said Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Service in Chicago. Boeing and other suppliers will probably have representatives at the bankruptcy hearings who “will be looking at what their options are,” he said.
Boeing said it has “no reason to doubt” that the order for its 737s and Airbus A320s remains pivotal to AMR. The planemakers will provide $13 billion of financing on the first 230 jets, American said in July.
“We anticipate as part of American’s reorganization that new, fuel-efficient airplanes will be a key part of their ongoing success,” Mark Hooper, a spokesman for Chicago-based Boeing, said in an e-mailed statement.
International Consolidated Airlines Group SA, a U.K.-based joint venture partner with AMR that owns British Airways andSpain’s Iberia, said it has “every confidence in the future of American Airlines” and looks forward to working with Horton.
AMR’s lead bankruptcy counsel is Weil, Gotshal & Manges LLPand its financial adviser is Rothschild Inc.

Mail Pilot

American Airlines was formed from companies including Robertson Aircraft Corp. of Missouri, which employed Charles A. Lindbergh as a mail pilot, according to the carrier’s website. The companies began consolidating in 1929 and became American Airlines in 1934.
Company stock began trading in 1939, and during World War II, half of American’s planes flew for the Air Transport Command. American pioneered nonstop transcontinental service in 1953 and 20 years later was the first major airline to hire a woman pilot, according to its website.
(Source: Bloomberg)

Home loans grow despite rising interest rates, property prices

High residential property prices in some parts of the country and rising interest rates have not dampened the appetite for home loans in the first half of the current financial year (April-September 2011), going by data from the National Housing Bank and the Reserve Bank of India.
In the first six months of the current financial year, the collective disbursement of home loans by 54 HFCs (housing finance companies) was 10 per cent higher at Rs 49,458 crore against Rs 44,870 crore in the corresponding year-ago period.
Similarly, in the first six months of the current financial year, the collective disbursement of home loans by 47 scheduled commercial banks was up six per cent at Rs 20,779 crore against Rs 16,221 crore in the corresponding year-ago period.
“Due to availability of affordable houses on the periphery of metros and in Tier-II and Tier-III cities, demand for housing finance has been good,” said Mr R.V. Verma, Chairman and Managing Director, NHB.
First-time buyers seeking affordable houses are not deterred by high interest rates if they are able to get ready possession of flats, priced up to Rs 25 lakh, he added.
NHB is the regulator and supervisor of HFCs and provides refinance to banks against home loans.

Lending rates move up

With the RBI increasing the interest rate at which it lends overnight funds to banks (repo rate) six times since the beginning of the current fiscal to staunch the rising tide of inflation, the latter have steeply upped their lending rates.
In the financial year so far, the central bank has raised the repo rate from 6.75 per cent to 8.50 per cent. Banks responded to this monetary tightening by re-aligning their Base Rate upwards from the 8.25-9.50 per cent band as on April 1, 2011, to 10-10.75 per cent now.
Banks determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer-specific charges as considered appropriate.

HOUSING Prices RISE

Housing prices, according to the RBI's latest report on macroeconomic and monetary developments, have risen amidst falling transaction volumes in the April-June 2011-12 period.
The RBI's quarterly housing price index increased by about 8 per cent for the second successive quarter at an all-India level, while the transactions volume index that had fallen sharply in the July-September and October-December 2010-11 periods dipped by about 7 per cent in April-June 2011-12 period.

Residex movement

NHB's Residential Housing Price Index (Residex) shows that residential housing prices in six cities have risen in the July-September 2011 quarter over the previous quarter (April-June, 2011).
The city which has shown the maximum increase is Pune (13 per cent) followed by Chennai (9 per cent), Mumbai (7 per cent), Delhi (5 per cent), Jaipur (2 per cent) and Bengaluru (1 per cent).
There are 9 cities which have shown decline in prices over the previous quarter with maximum fall shown by Kochi (-9 per cent) followed by Hyderabad (-8 per cent), Bhopal (-7 per cent), Surat (-7 per cent), Faridabad (-6 per cent), Ahmedabad (-4 per cent), Lucknow (-4 per cent), Patna (-3 per cent) and Kolkata (-2 per cent).
The Residex tracks the housing prices in the select 15 cities.
The Residex takes into account the price trends for residential properties in different locations and zones in each city as per classification devised for the purpose.
“The continued rise in residential housing prices in cities such as Mumbai can be attributed to investor interest.
“In cities such as Chennai and Pune, the rise could be due to genuine consumer demand. In the case of the nine cities where the prices have fallen, it is a clear indicator that demand is softening on account of the prevailing high prices,” said Mr Verma.
(Source: Business Line)

Gas-based power projects in AP running out of steam

Gas-based independent power projects (IPPs) in Andhra Pradesh appear to be running out of steam, with gas supplies from Reliance Industries Ltd's (RIL) KG Basin shrinking in the last few months.
Their expansion plans hinge on fresh gas allocations, which seem tough going by the current demand-supply situation.
While RIL dashed off an arbitration notice to the Ministry of Petroleum and Natural Gas on Monday, most of the IPPs that depend on fuel from this basin are finding it difficult to run the existing plants at the desired capacity.
Officials of some IPPs say that at the present rate of gas availability, their PLF (plant load factor) has slumped to below 65 per cent.
“Due to the cash crunch, we are not being able to service our debt, take up regular maintenance of the plant and meet fuel payments,” an official of a leading IPP told Business Line.
The four IPPs which have suffered the most include the 220-MW GVK II unit, 445-MW Konaseema Gas Power Ltd (KGPL) of the VBC Group and the 464-MW Gautami plant. While together they require 7.21 MMSCMD to meet 90 per cent of fuel requirement, they were allotted 6 MMSCMD. But, availability as on date is hardly 4.54 MMSCMD, so they require additional supplies of 2.67 units to regain their viability.
Poor fuel supplies have not only cut their PLF, but resulted in higher heat rate and auxiliary power consumption. For instance, KGPL has suffered a loss of Rs 32 crore on account of higher heat rate alone last year. “The company's present net loss per month on these two accounts is Rs 5 crore,” a source close to KGPL said.
These IPPs have pointed out that if gas is made available beyond 80 per cent PLF threshold, the AP discoms could receive this additional power at a cost of seven paise per unit. The PPA is based on a two- part tariff — fixed cost of 0.94 paise per unit and variable (fuel) cost which at the present rate of $4.2 per MMBTU works out to Rs 1.75 per unit.
(Source: Business Line)

Will a weak rupee help exports?

China's exports have risen not just on the strength of a cheap yuan, but also through strong brands and diversification. By that token, a weak rupee alone may not boost Indian exports.
Popular wisdom based on an economic principle that has outlived its utility can often play rough with those who hold dear to it. With the rupee in free fall, most policymakers must be shaking their heads in relief; exporters, too, must be heaving contented sighs at the prospect of recovering lost ground in the wintry landscape of recession in the most prized markets of the West.
But a falling rupee may help exporters' margins more than lift their volumes. Recent interest subsidy concessions offered by the Commerce Ministry betrays this confusion — the government does not seem to know what it wants to lift margins or volumes. So, while exporters benefit from the falling rupee, whether it helps exports as a whole is another matter.
For years, policymaking with regard to exports has rested on the assumption that price was the most valuable ally of exports; lower export prices, it was held, helped China stamp its massive footprint in world markets. Cheap labour and a weak yuan did the trick more than quality or other features such as brand-building quality and emphasis on innovation and flexibility in markets with shifting tastes.

BEYOND Pricing

But how much does pricing really affect competitive positions of producers/exporters in markets? In the Chinese case, price is increasingly giving way to other factors that are helping consolidate its hegemony in global markets.
Two years ago, the United States Department of Commerce gave out data that showed India slipping from the top five slots as apparel exporters, edged out not just by China, but by Bangladesh, and countries such as Indonesia and Thailand. China still remained the top exporter of apparels. It is possible that the yuan played no small part in retaining that edge. It would also have helped Chinese exports of mass volume goods such as latex gloves or chefs' caps — quotidian goods requiring little technological upgrade.
But China has been diversifying its export basket with manic speed and efficiency. By doing so, it is also dispelling the old wisdom about pricing as an essential ingredient of competitive advantage.
According to the US-based National Science Foundation's Science and Engineering Indicators 2010, China is “the largest single high-technology exporter and has changed the relative positions of the developed and developing countries”. The Chinese did not use the strategy of price to elbow its way into a market dominated by the US Japan and Germany. Two of the more familiar Chinese product names will show how they did storm the bastions of American and Japanese superiority in white goods.

Success of Haier, Lenovo

When the Qingdao Refrigerator Company catering to the domestic Chinese consumers entered into collaboration for technology and equipment with German major Liebherr in 1984, it began a journey towards a new identity for its product that would symbolise a new competitive thrust in traditionally Western-dominated markets.
Haier's development as a brand of Chinese white goods represents more than just collaboration with a renowned player in the business. It meant a restructuring of business practices, acquisitions of synergistic firms and the establishment of production bases in countries with relatively cheaper labour such as Indonesia and Philippines, and much later Pakistan, the Middle East and Africa. It took on competition headlong from American giants such as Whirlpool and GE by setting up bases in the US as well as aggressively marketing its fridges and other home appliances.
In the bargain, it proved that price need not be a driver of export growth as much as brand creation and positioning, of a continuous focus on quality, relocation of production bases closer to buyers. Haier is now the 4{+t}{+h} largest white goods manufacturer in the world with more than 50,000 employees, 240 subsidiaries and 30 design centres around the world.

Lenovo strategy

Consider Lenovo as another example of a global exporter that does not use price to leverage its position in competitive markets. Today the world's 4{+t}{+h} largest personal computer seller, Lenovo began its journey to global stardom as late as 2005 through a top drawer-acquisition; when IBM sold its personal computer business to the Chinese firm that catered till then to the domestic market, it gave Lenovo the handle to leverage its position in the business.
In 2007, Lenovo innovated radically by centralising its marketing and services activities from around the world in Bangalore.
That act lent muscle to a fledgling vendor dipping its feet in a growing market swarming with iconic global and domestic brands. It is now the third biggest name in India after HP and Dell. But equally it gave Lenovo a foretaste of global competition: India was the first market outside China; only two years later, in 2008, did it introduce its consumer products elsewhere.

Brand creation

The growth of multinationals carries with it several benefits for the Chinese entrepreneur/owners, none of which accrue from low prices. By turning transnational, the firm transcends the tensions of local currency fluctuations. An appreciating yuan may affect earnings or margins, but not market share in the short or medium term, since that share has been acquired through brand goodwill.
For Indian exporters and policymakers looking to exploit the benefits of a cheapening rupee, of seeking to diversify markets (Latin America, Africa), China offers valuable insights.
By simultaneously diversifying exports and markets, by carrying the battle to the ‘enemy camp' as it were (as Haier and Lenovo among others have done, on the basis of brands rather than price), Chinese exporters have done much more than become multinationals: they have shown that over the long haul, temporary dips in earnings or margins are more than offset by the creation of a brand.
(Source: Business Line)

Slump in freight market leads to surge in ship breaking

Ship owners are a worried lot today as a depressed freight market has been taking a toll on their earnings for the last almost two years now. But players at the other end of the business - ship breaking - are increasingly cashing in on the shipping industry downturn.
Generally, bouts of frail freight market make it expensive for shipping companies to deploy older vessels, prompting them to turn the ships over to the scrap yard.
And this makes it a boom time for ship breakers, especially when prices of steel scrap spiral, as it is happening at present.
“Increasing global shipping capacities against a backdrop of weakening in economy will lead to a surge in ship breaking activity in the next couple of years. India's ship breakers will acquire a larger market share globally, supported by favourable demand for steel scrap and limited competition from neighbouring markets,” a report by CRISIL says.
In 2009 and 2010, the volumes of global ship breaking aggregated about 44 million gross tonnage (GT), which is almost twice the volumes of the four proceeding years.
Mr Gurpreet Chhatwal, Director of Crisil Ratings, points out that new ships ordered in 2006-08 will be ready for delivery by 2012 and result in expansion of global capacities by over 25 per cent. “However, global trade is expected to slow down, driving reduction in freight rates in next two years. And this will improve economics of increased scrapping of older ships,” he said.
Crisil estimates that of the 180 million GT of global shipping capacities over 20 years old, about 55 million GT will come to the breaking yards in the next two years.
The global market share of India's ship breaking industry, located at Alang in Gujarat, is expected to grow to 40-45 per cent in the next two years, from 35 per cent in 2010.
Legal restrictions on ship breaking in Bangladesh and China's higher ship breaking costs are expected to help Indian players.
In the last three years, the revenues of 52 Crisil-rated ship breakers, which account for about 46 per cent of the Indian ship breaking industry, increased at a compound annual growth rate of 46 per cent, helping these players nearly double their net worth.
(Source: Business Line)

Reliance closes 4 wells in KG-D6 gas field

Reliance Industries (RIL) has shut four wells in its flagship KG-D6 gas fields off the east coast due to high water ingress leading to output dipping to 41 million standard cubic metres per day (mmscmd).
The Dhirubhai-1 and 3 (D1&D3) gas fields and the MA oilfield in the KG-DWN-98/3, or KG-D6, block in the Bay of Bengal produced 41.06 mmscmd of gas in the week ending November 13, according to a production report filed by the operator (RIL) with the Oil Ministry here.
Of the 18 wells drilled, completed and put on production on D1&D3, four wells -- A2, B1, B2 and B13 -- had to be shut or closed due to high water cut/sanding issues, the company told the ministry.

RIL had outperformed the targets when it crossed 54 mmscmd from D1&D3 gas fields in March, before fall in pressure, water ingress and thinner-than-expected reservoirs resulted in a drop in production. Together with 7-8 mmscmd of gas from MA oilfield in the same licence area, total KG-D6 output was 61.5 mmscmd in March 2010 as against the targeted 40 mmscmd in 2009-10 fiscal.

The production, as per the government-approved field development plan, was to rise to 61.88 mmscmd from D1& D3 this year but it has fallen to 34.11 mmscmd in the week ending November 13. MA oilfield is producing 6.92 mmscmd, the report said.

The MA oilfield currently produced 12,636 barrels of crude oil per day.

The report said 13.31 mmscmd of the gas output is being sold to fertiliser plants and 24.44 mmscmd to power plants. The remaining 3.31 mmscmd is consumed by other sectors, including by the East-West pipeline that transports gas from the east coast to consumption centres in the west.

RIL projected an output of 40.80 mmscmd of gas during the rest of November.

As per the status report, out of the 22 wells planned in in Phase-I of D-1 and D-field development, 18 wells have been drilled and completed so far. Of these, 14 wells were put on production, while four wells were kept closed due to high water cut and sanding issues.

Minister of State for Petroleum and Natural Gas RPN Singh had in August informed Parliament that output from KG-D6 was short of the 70.39 mmscmd (61.88 mmscmd from D1&D3 and 8.5 mmscmd from MA field) level envisaged by now as per the field development plan approved in 2006.

While RIL holds 60% interest in KG-D6, UK's BP holds 30% and Niko Resources of Canada the remaining 10%.

RIL started natural gas production from the KG-D6 fields in April 1, 2009.
(Source: Business Standard)