Friday, February 28, 2014

Market share becomes the game changer in battery wars

Shares of Amara Raja Batteries Ltd hit a record Rs.407.30 in intra-day on Wednesday. At this price, valuation of this second largest battery maker in the organized segment has shot past that of market leader Exide Industries Ltd.
The key reason is Amara Raja’s sustained growth in automotive battery market share, the core business accounting for over half the revenue of both companies. Over the last year, its gain has been Exide’s loss. Dealer reports say the former’s market share in the auto replacement market has inched up steadily to around 38% from about 25%, whereas the latter has lost equal ground from its earlier strong 55% share.
Will the outperformance continue? Can Amara Raja sustain its growth rate? Its strength in telecom batteries augurs well in the coming quarters as replacement activity has been noticed. Meanwhile, in the automotive original equipment segment, the firm cashed in on Exide’s capacity constraint at a crucial time two years ago, when the auto sector posted scorching growth rates. This will reinforce its sales in the replacement market in the coming years. Also, Amara Raja’s timely entry into the two-wheeler market will aid future revenue as the segment is expected to clock a 25% replacement market growth in the coming 12-18 months, even though the passenger and commercial vehicle segments may post tepid growth.
For now, there is no telling why the market leader whose brand was generic in auto batteries is unable to lift itself from the trough. Indeed, some point out that Amara Raja’s auto batteries in the replacement market are priced lower than that of Exide. But from an investor standpoint, profitability powers the stock price. For the December quarter, Amara Raja’s operating margin rose by 130 basis points to 17.4% while that of Exide’s dipped by 30 basis points to 10.9% from the year-ago period. A basis point is 0.01%. Growth in sales volumes will boost operating leverage for Amara Raja, which could sustain profitability. What’s favourable for both is that lead prices are stable, so far.
The Street forecast is that Amara Raja will clock 22-25% growth in fiscal year 2014 net profit, while that of Exide could decline by 10-11% from a year back. That said, Exide’s market price of Rs.110 discounts fiscal year 2014 earnings by around 14 times, while Amara Raja’s price of Rs.394 factors in most of the positives at the price-to-earnings multiple of 16.
“The prevailing market prices of both shares discount the recent developments and near-term outlook fairly,” said Surjit Arora, analyst at Prabhudas Lilladher Pvt. Ltd.
The only factor that might pull down Amara Raja’s stock price is the slowdown in net profit growth rate due to capital expenditure, which will lead to higher depreciation and lower net profit. Or, Exide’s improvement in market share in the coming quarters may see its shares moving up.
(Source: LiveMInt)

Truck makers invest in new models while driving cost cuts

Truck makers in India continue to invest in new models despite the slump in demand as they do not want to lose out on opportunities when the tide turns. Most of them are going ahead with plans to introduce new models even as rigorous cost-saving strategies are underway.
“We have probably hit the worst in the history of trucking in past 20 years,” said A. Ramasubramanian, president at Asia Motor Works Ltd (AMW), India’s fourth largest maker of heavy-duty trucks. Like its peers, the unlisted company has been hit hard.
The slowdown has not restrained AMW from investing in new models. “Instead of buying market share through heavy discounts, we decided to invest in new models and prepare ourselves for an upturn and expand the product portfolio,” Ramasubramanian said.
Over the last two years, AMW has introduced 15 new models for haulage and other applications, and is targeting 90% of the market in the 16-49 tonne (gross vehicle weight) segment against the earlier 20%. It has, however, adopted a calibrated distribution strategy and is launching them in select trucking hubs.
Others, too, have not capped investments on technology and new products. For instance, VE Commercial Vehicles Ltd (VECV)—a joint venture (JV) between Volvo and Eicher Motors Ltd—unveiled new range of trucks in Pithampur in December. Christened the Pro series, it will include four categories of trucks, covering 5-49 tonnes. The venture has outlined an additional investment of Rs.700 crore till 2014-end. This would fund the ongoing projects such as engine and bus body plants and expand capacity beyond 5,500 units to ensure it is ready to meet requirements for 2015. “We have utilized this period by introducing new series of products and strengthening our processes and systems,” said Vinod Aggarwal, chief executive officer at VECV.
Ashok Leyland Ltd, India’s second largest truck and bus maker, plans to develop 18 new models, based on a vehicle platform it showcased at the auto expo in Greater Noida in early February, according to Vinod Dasari, managing director of the Chennai-based firm. The company is also eyeing new countries for exports, he said.
Tata Motors Ltd, the market leader for trucks and buses, too, is preparing for a revival in demand. It showcased six new high-powered vehicles for construction, mining and haulage applications in November and plans to launch the new Prima and Ultra range of trucks before the end of fiscal 2014.
AMW’s range of heavy-duty trucks are mainly deployed in construction and mining—a segment that has its fate linked to the government’s planned expenditure and the state of the economy. This made the blow harder for the Bhuj, Gujarat-based truck maker. In the 10 months till January, AMW’s sales dropped 28.6% to 3,856 units.
The commercial vehicle market has seen the sale of medium- and heavy-duty trucks decline 28.4% till January, according to the Society of Indian Automobile Manufacturers (Siam), an industry lobby. The contraction in volume, the lowest since 2007, has been triggered by a slowing economy.
Both Tata Motors and Ashok Leyland, which have traditionally addressed South Asian countries, are looking at newer geographies for exports with the new range they claim is world class. The Boss platform that has been developed for export markets can address most of the markets, said Dasari of Ashok Leyland.
Tata Motors, which currently draws 10% of its total commercial vehicle sales from exports, is also planning to tap into other regions. “Now that we have global quality products, we can reach out to countries other than Saarc (South Asian Association for Regional Cooperation),” said R. Ramakrishnan, senior vice-president of the commercial vehicle business unit at Tata Motors.
Meanwhile, hit by a contraction in demand on the one hand and discounts as high as 20% for some of the heavy-duty trucks on the other, margins at truck firms have been singed. Companies are using the protracted slowdown as an opportunity to cut excess flab and tighten their processes and systems. India’s economic growth fell to a decade’s low of 4.5% in the fiscal year 2012-13, which is estimated to improve only marginally, official data shows.
AMW, for instance, got debts in excess of Rs.1,000 crore restructured in October. It also pared its manpower by 30% to 900, according to Ramasubramanian. It has shelved long-gestation projects.
Ashok Leyland and Tata Motors have announced voluntary retirement schemes to get rid of excess workforce.
“The industry has hit the nadir in terms of discounting and pricing,” said AMW’s Ramasubramanian.
Tata Motors’s Ramakrishnan agrees that sustaining the business at current prices is difficult, but with capacity at factories being grossly under-utilized and unsold stock piling at dealerships, discounts are inevitable. Following a 4% cut in excise duty announced by the government on 17 February, most companies are reducing prices. Ramasubramanian hopes this should reinstate some order and reduce discounts.
In a 18 February note on the impact of excise cut, India Ratings, a Fitch Group firm, said that even as it may benefit small truck operators, demand would be guided by the level of industrial activity, which remains weak. Factory output contracted for three consecutive months till December. Freight rates have hence remained depressed and a significant rise in demand is unlikely in the near term.
(Source: LiveMint)

Auto part makers unsure about revival in demand

The cuts announced in the triggered a sigh of relief in the Indian automotive industry, which has been in the grip of a demand slump over the past two years that hurt not only (original equipment manufacturers) but component suppliers as well.

However, since the duty cuts are valid only until the regular budget is presented by the new finance minister after the forthcoming general elections, manufacturers of
are uncertain about future demand from OEMs.

OEMs are expected to clear their inventories on a priority basis if demand surges, but parts suppliers say they will benefit only when auto companies resume operating at optimum capacity.

Vikas Jain, president of the Gurgaon Chamber of Commerce and Industry, told Business Standard that the cascading effect of tepid demand for four-wheelers and commercial vehicles has been quite apparent on auto ancillaries in the Delhi NCR region: "The OEMs have not been able to consolidate their sub-vendors. Volumes have shrunk and margins of small and medium enterprises (
) have been squeezed. Many small units in the NCR cluster have become unviable and those who have multi-location units (operating simultaneously from the NCR and hill states offering tax incentives) have discontinued operations in the NCR."

It is imperative for OEMs to maintain their vendor base, since it takes time to develop it, and once demand starts reviving it will be difficult to immediately create one, he added. Dependence on a new vendor may involve a risk, as a slight defect in a component may trigger a recall of an entire batch of vehicles, leading to a big loss for OEMs.
Jashwant Purohit, executive vice president of Electromags, Chennai, said that the 2008 slowdown was due to global conditions. But the current slowdown has affected the entire value chain. The tractor industry has been insulated from this but the proportion of business from that vertical is small.

Purohit pointed out that auto ancillaries work on thin margins and high volumes. With volumes dwindling by up to 40 per cent, SMEs are left with no scope to tighten their belts, he said. They have not yet resorted to lay-offs, hoping for a revival in demand in the near future.

According to Vinnie Mehta, president of the
(), the Indian is facing challenges such as high rates of interest, inflation, volatility in costs of raw materials, high fuel prices and shaky customer confidence.

The auto parts industry went through turmoil in 2008-09, growing a mere 1.2 per cent, but recovered impressively in 2009-10, soaring by 25.3 per cent. Growth climbed further in 2010-11, to 35.9 per cent, but nosedived to 8.7 per cent in 2011-12 and fell further to 5.6 per cent in 2012-13 (see graph).

The commercial vehicle industry has registered negative growth for over a year. The passenger car segment has for the first time recorded negative growth in 2013-14. The sales of two-wheelers have been flat, and only tractor sales have been robust owing to a good monsoon in 2013.

An auto component manufacturer in Ludhiana who did not wish to be named said that the higher demand projections by OEMs in the last few years had pushed SMEs to expand, and the tapering off in demand had led to inventory piling up.

Nitin Peshawaria, a Chandigarh-based supplier of components to tractor manufacturers, said that despite steady sales of tractors the payment cycles for SMEs had stretched, for reasons best known to OEMs.
(Source: Business Standard)

HUL losing share in mass market brands: Survey

The country’s largest maker of home and personal care products, Hindustan Unilever Ltd (HUL), has lost market share at the lower end of the market, across key categories like detergents, soaps and toothpastes, as consumers turned more value conscious in a tough economic environment.
“Contrary to popular perception, over the last 12 months HUL has been struggling in some mass market products—Wheel, Rin, Breeze and Pepsodent have been losing share,” said a 4 February report by Morgan Stanley Research based on its AlphaWise survey.
Rival Procter and Gamble Home Products, a 100% subsidiary of Cincinnati-based Procter and Gamble Co. (P&G), and domestic peers like Rohit Surfactants Pvt. Ltd, manufacturer of Ghari detergents, have gained share in the past year, said the report.
On the other hand, P&G’s so-called tiering down strategy, with the launch of cheaper variants like Tide Naturals, helped it gain market share, said the report. P&G, maker of Head and Shoulders and Pantene shampoos, may look at a similar positioning for its skin care and shampoo portfolios, further increasing competitive intensity in these segments. “Over the last 12 months, P&G has performed well across its categories in India,” said the report.
In the soap segment too, HUL’s mass market brands Lifebuoy and Breeze have lost favour in small towns and villages, compared with Godrej No. 1 and Wipro Ltd’s consumer arm Wipro Consumer Care and Lighting division’s Santoor soap, said the report.
The AlphaWise survey is a house-to-house pan-India consumer survey of primary grocery shoppers in a household. It was conducted during June-August 2013 across 18 states covering metros, small towns and villages among 4,492 shoppers.
The survey covered six product categories—detergent, toothpaste, toilet soap, shampoo, hair oil and skin cream. Each respondent answered questions in four categories regarding changes in their use of brands in the last 12 months, intended change in the next 12 months, reasons for the change and perception of brands.
HUL’s volume growth has dipped to 5-6% from an average of 11.6% for fiscal year 2011-12. “The growth in 2012 was in double digits and in 2013 it is in single digits. Clearly there is a very significant slowdown in volume and value,” said R. Sridhar, chief financial officer of HUL, at a press conference in Mumbai on 27 January while explaining that the slowdown was across rural and urban markets and across categories.
HUL has underperformed the Sensex by over 14% in the last six months: this is largely on account of a moderation in valuation multiples after an open offer by Unilever Plc and continuing sluggish volume growth, said the report.
To be sure, a large part of the slowdown is a fallout of the slowdown in the rural market, which accounts for nearly 50% of HUL’s sales.
According to data from research firm IMRB International, which tracks sales in 30 core consumer categories such as soaps, shampoos, detergents and packaged staples, growth across rural markets between January and September slowed to 4% from 7% in the year-ago period.
Moreover, in the short term, the slowdown is likely to persist as the country goes to elections, which will limit policy actions to reverse the economic slowdown or to curb inflation. “From our perspective, at least in the short term, the market growth for the next few quarters will remain slow and it might be two or it might be three,” Sridhar said at the same press conference.
With urban growth (across categories) seeing an even steeper decline from 8% to 2% over the same period, according to the IMRB report, competition in rural markets may intensify further.
Even though rural growth has tapered off, it is still buoyant when compared with the urban market, said Zubair Ahmed, managing director of GlaxoSmithKline Consumer Healthcare Ltd, which is looking at putting more products in the rural market and improving the company’s reach by increasing the number of sales staff and pushing awareness of its products in the interiors.
With growth remaining weak and competitive intensity increasing, HUL’s revenue in fiscal year 2015 is expected to be lower by 4%, specially on account of continuing sluggishness in the personal product category, said the report.
Moreover, HUL will see an increase in competition in detergents, with Ghari in rural areas, and Tide in urban areas. Competitive intensity in soaps like Lifebuoy and the skin care segments is also expected to rise, said the report.
“Competitor mass-market brands may still continue to gain share over HUL,” said the survey. Additionally, the Indian subsidiary of Anglo-Dutch consumer products maker Unilever may not be able hike prices sufficiently to offset a cost push, driving margins lower than estimates, said the Morgan Stanley report.
For instance, over the next 12 months, P&G’s Tide will likely gain share over HUL’s Rin, said the report.
HUL will maintain market share in shampoos; P&G’s skin cream brand Olay may lose market share to HUL’s Dove and L’Oreal’s Garnier. “P&G is performing well across categories and with growth trends likely to accelerate (its performance) in rural India,” said the report.
The report added that over the next 12 months, HUL is expected to fare better than it did in the last 12 months in the mass segments on account of increased advertising and promotional spending.
In the past year, multinationals like Unilever and GlaxoSmithKline Plc have increased their stakes in their Indian subsidiaries. Additionally companies like PepsiCo India have pledged Rs.33,000 crore of investments in the country by 2020.
As companies invest in the Indian market and look at establishing their positions, especially in the mass segment, “they may take look to acquire regional/emerging brands that are performing well”, said the report.
“In a difficult environment, leaders get more aggressive and this hurts smaller companies,” said S. Raghunandan, chief executive officer and whole-time director of Jyothy Laboratories Ltd, who believes that large companies will look at grabbing growth by bringing down prices and increasing promotions to squeeze out smaller rivals, who are already under pressure as input costs are increasing.
Pricing has been on the downtrend since June 2012, and even though input costs have increased in the past six months, companies continue to reduce prices, said the report.
Even advertising expenses as a percentage of sales for Indian consumer packaged goods companies HUL, Marico Ltd, Dabur India Ltd, Tata Global Beverages Ltd and Godrej Consumer Products Ltd have increased by nearly 50 basis points over the past year to 13.5% compared with the preceding five-year average of 13%, said the report.
A basis point is one-hundredth of a percentage point.
The increased advertising spending is being used to strengthen existing positions in categories.
“We will look at strengthening our position in the categories that we are already present in by getting into adjacencies and not launch new products until the market improves,” said Sunil Duggal , chief executive officer of Dabur .
(Source: LiveMint)

Power equipment manufacturers reduce prices to attract deals

Power equipment makers have reduced prices and are making aggressive bids to grab projects in a desperate attempt to cap their losses on under-utilised capacity at a time when very few new projects are coming up in the sector.
Sector players believe that companies have slashed rates by 10-25 per cent for core equipment supply and even for ancillary equipment and engineering work in a bid to keep their manufacturing units working. "Nobody in the industry is bidding to make profits now. We are all bidding to reduce losses," said MS Unnikrishnan, managing director and chief executive officer of Thermax.
There are very few projects that are coming up for bidding. So, people are bidding aggressively so that they can at least recover their fixed costs to run the manufacturing capacity," he said.
Engineering heavyweight Larsen & Toubro, which has always enjoyed premium pricing due to its leadership position, too, has lowered prices for its power equipment and engineering business as a response to the intense competition in order to grab a share of the shrinking pie.
The company told ET that last year it abandoned its "good pricing" strategy, where the price quoted to customers is arrived at after factoring all costs and profit expectation, in favour of a "fine pricing" strategy, where the company first sets a competitive price in view of the competition and then works on reducing costs to improve profits.
Companies like Larsen & Toubro, JSW Energy, Bharat Forge, Thermax, BGR Energy, among others, formed joint ventures with foreign partners and made huge investments to set up units to manufacture boilers and turbine generators in India. But, in the last two years, orders for core equipment have dried up as projects have been stalled or even cancelled due to issues relating to fuel availability, financing or approvals, or land acquisition.
Experts peg their combined loss at Rs 1,000 crore a year due to lack of orders. "Recent bid openings suggest that the pricing for power generation equipment continues to moderate with the steepest price declines observed for turbine bids," Barclays said in a report last week.
"With supercritical sets still requiring high import content, and with the rupee depreciating, the new prices suggest a steep decline in margins for the sector. Hence, we remain cautious on power equipment vendors and retain our 'underweight' rating on BHEL, BGR Energy and Thermax," Barclays said.
In the last two months, NTPC opened bids for two turbine generator packages for its Darlipalli (1,600 MW) and Tanda (1,320 MW) projects. The projects saw aggressive bidding, particularly from new entrants in the sector, as there have been very few orders in the past and the pipeline looks pretty weak, going ahead.
In fact, according to sector players, the lowest bid for the Darlipalli project, which was re-bid after the earlier winner BGR Energy pulled out, is believed to be made by Toshiba-JSW JV at a price of only Rs 70 per megawatt, which is 25 per cent lower than the price at which BGR Energy had bagged it in September 2011.
The best bid for the Tanda project, too, is believed to be less than Rs 90 lakh per megawatt, as against the price of Rs 1-1.5 crore being quoted for a similar project in late 2010. The government has made local sourcing of equipment mandatory, and also reduced the excise duty on capital goods, but sector players believe these efforts are unlikely to boost the power equipment industry which is reeling under a slowdown in investment.
India has boiler manufacturing capacity of 36,000 MW and turbine-making capacity of 35,000 MW, of which private sector accounts for over 40 per cent. The units are running much below their optimal capacity and incurring losses.
(Source: The Economic Times)

Thursday, February 27, 2014

India Inc’s restructured loans turning toxic at a faster pace

Slippages from restructured assets are set to rise as promoters are unable to turn around their businesses in a weak economy and to repay loans even after bankers have given them easier terms. RK Bansal, chairman of the corporate debt restructuring (CDR) cell, told FE the rate of slippages could go up to 15% from the current levels of 10%. “The slower-than-expected economic recovery and delayed clearances for projects will result in a higher share of failed restructuring cases,” Bansal said.
“One reason for the rising slippages is that many of the proposals approved by the CDR cell in 2011-12 were done in the belief that the economy would recover quickly, thereby reviving demand,” he explained. However, with the economy slowing, not only are more promoters approaching the CDR cell for more lenient repayment terms, more restructured loans are going bad.
Bansal believes the delay in government approvals and the difficult macroeconomic environment are likely to have a particularly severe impact on companies in the infrastructure space, including steel and construction companies. “These cases will probably need a second round of restructuring,” Bansal said. “Once the second restructuring is done, we call it a failure because it makes it a non-performing asset (NPA).”
At the end of December 2013, approximately 10% of nearly R2.9 lakh crore of assets approved by the cell had failed with promoters not keeping up their end of the bargain. The working group headed by B Mahapatra, executive director, Reserve Bank of India (RBI), which reviewed the guidelines on restructuring of advances, estimated that 25-30% of restructured loans may slip into the NPA category.
“This assumption was based on the fact that restructurings have taken place only in the recent past with long moratorium and repayment holidays and the repayment behaviour of such borrowers is still not known,” the committee said.
The majority of slippages over the past year are the result of companies failing to meet interest and principal repayments. In the October-December quarter, two companies with outstandings of Rs 1,500 crore exited the CDR cell successfully while the accounts of 12 firms with borrowings of Rs 4,100 crore.
(Source: Financial Express)

Hindalco faces difficulties in growing key copper business

Hindalco Industries Ltd’s copper division has acted as a lifeline in recent quarters, delivering stronger earnings growth compared with its flagship aluminium business, but its ability to grow the business remains limited due to lack of raw material supply and a stretched balance sheet.
For the quarter ended December, Hindalco’s copper division delivered an earnings before interest and tax (EBIT) growth of 33.16% compared with the same quarter a year ago, while the aluminium division saw its EBIT falling by 17.84%. Copper contributed 66% to sales and 64% to EBIT.
But ironically, the Aditya Birla group’s company expansion plans are still entirely focused on the aluminium and alumina business, where the company embarked on a $5.5 billion capital expansion plan in 2009. As part of this, it started work on new projects in Madhya Pradesh, Odisha and Jharkhand. None of the funds were earmarked for expansion of the copper business.
The company is looking at more than 1 million tonne capacity for aluminium in the next few years from 513,100 tonnes now, while its copper capacity, with only one plant, remains at 500,000 tonnes.
The company perhaps realized this anomaly as it announced in August that it is re-evaluating its investment strategy with respect to the proposed Aditya Refinery in Odisha and the Jharkhand aluminium project, citing delays in getting regulatory approvals and the uncertain economic environment.
The company has several bauxite mines for aluminium, but none for copper.
Hindalco is India’s largest copper producer with its integrated facility in Gujarat, comprising copper smelters, captive power plants, utilities and a captive jetty, and its only other competitors are Vedanta Resources Plc.’s Sesa Sterlite Ltd that has one copper plant in Tamil Nadu, and to some extent Hindustan Copper Ltd as in the recent years it has reduced its metal production.
The Aditya Birla group owns two copper mines in Australia, but wants to sell one of them.
Analysts and industry experts say the biggest difficulty for Hindalco in growing its copper business is the lack of explored copper mines in India.
“In India copper is underexplored and full mapping of copper as well as other (minor) ores has not been undertaken,” said Shakeel Ahmed, former chairman and managing director of Hindustan Copper Ltd. “As a result, no copper mine has been given out since 1982.”
The only few copper mines in India belong to the state-run Hindustan Copper, which supplies some of the ore required by Hindalco, even though there are indications of more copper reserves in Rajasthan, Madhya Pradesh and Jharkhand, according to Ahmed.
However, the unfavourable regulatory environment in India where many top metal, power and cement companies have faced scrutiny for the way their natural resources blocks were allocated, may also make it harder to apply for copper blocks in future.
When asked about the lack of raw material security in copper, the company’s managing director Debu Bhattacharya said its plant was built despite the non availability of copper mines in India.
“We put up the plant knowing all this. Even then it makes sense,” Bhattacharya said in a recent interview. “Highest EBIT has been delivered in this quarter so what is the big deal?”
The high level of debt is the other hindrance it faces in establishing backward linkages for the copper business, said analysts.
“The likes of Sesa Sterlite Ltd have cited interest in expanding copper smelting operations, however, Hindalco hasn’t guided for anything as yet,” said Ritesh Shah, metals and mining analyst at brokerage Espirito Santo Securities Ltd. “We think it is more a function of their balance sheet.”
As of 2012-13, net debt on a consolidated basis stood at Rs.46,342.44 crore, according to Bloomberg data, while the debt-to-equity ratio stood at 1.53.
Bhattacharya said at a recent media briefing that standalone net debt had fallen to Rs.14,000-Rs.15,000 crore after a refinancing exercise.
While most metal prices globally have been subdued due to sluggish economic growth in developed markets and fear of a slowdown in China, prices of aluminium on the London Mercantile Exchange (LME) have fallen more steeply than prices of copper. Over a one-year period, LME aluminium has fallen nearly 14%, while copper has fallen 7%. Over the past 6 months too, aluminium prices have fallen by a steeper 6% compared to a 1% price fall in copper.
In addition, the improvement in copper treatment and refining charge (TC/RC) as a result of reduction in copper capacity globally has resulted in strong earnings from copper, analysts said. In aluminium, the globe is oversupplied mainly as China is producing more which has dampened prices, the analysts added.
“In 2010-11 we all spoke about aluminium as the metal that would do well and at that time Hindalco had capacity constraints,” said Alok Agarwal, head of research, institutional equity, at Networth Stock Broking Ltd. “Now with the economic slowdown and the changes that have come with it, all of the aluminium production is not being absorbed.”
Yet, Hindalco is choosing to push aluminium sales, despite the lower realisations.
In the December quarter results, net sales of copper stood at Rs.4,817 crore, up 3.35% from the same period a year ago while aluminium net sales were at Rs.2,471 crore, up 12% on year.
Analysts said Hindalco’s strategy may now be to consolidate, including partly reducing its exposure to the aluminium segment, but it may not take away the fact that it needs copper mines to secure its raw material supply.
“We think management’s strategy to put Aditya refinery and Jharkhand smelter on hold—is a right step given concerns on coal security,” said Espirito Santo’s Shah, referring to Hindalco’s announcement to hold the Jharkhand project last year. “We don’t expect any major capex announcements from Hindalco in near future and expect management to focus on cashflows and balance sheet.”
Another analyst said Hindalco may not have given up on plans to look out for copper mines. “They have been looking for copper mines for five-six years but they haven’t been able to lay their hands on any one as they haven’t got the right price,” said Networth’s Agarwal. “Chances are they are still looking out.”

Global dividend payouts surpass $1tn mark

Dividends paid out by listed companies across the globe in 2013 totalled more than $1tn for the first time, according to research.
Analysis by Henderson Global Investors shows how emerging markets have grown as a source of investor income, even as continental Europe has somewhat faded.

It also points to the greater contributions from the financial sector, as banks continue to recover after the credit crunch; and from the technology sector as companies such as Apple respond to increasing pressure from investors to spend some of their cashpiles.
The $1.03trn payout represents an increase of more than 40 per cent on the $717bn in dividends paid in 2009.
Dividends from companies in emerging markets last year totalled more than twice their payments in 2009, while the contribution from Europe excluding the UK dropped from almost 30 per cent in 2009 to little more than 20 per cent last year.
The index is based on dividends paid out in full, rather than just those going to outside shareholders, and so includes payments to governments and families that own large corporate stakes.
This contributes to the prominence of emerging markets companies such as China Mobile and China Construction Bank Corporation, which paid $2.7bn in 2009 and $10.4bn last year.
Alex Crooke, head of global equity income at Henderson Global Investors, said the group structured the index like that because “we want to capture the income paid out by the world’s largest listed companies, regardless of the shareholder base”.
Companies in North America, including ExxonMobil and General Electric, still pay the most in dividends – about one-third of the total – but those in Japan and continental Europe have slipped back in terms of their relative contributions.
Mr Crooke said the differing regional performances partly reflect different corporate priorities. “There is a sharp division in markets between those where there is a strong pension culture and so pension funds looking for income – such as Australia, Singapore and the UK – and those where there is a greater emphasis on capital growth, such as continental Europe.”
The strong performance from companies in emerging markets comes even though some of their currencies such as the Brazilian real and the South African rand fell sharply against the dollar last year.
Financial companies contributed 17 per cent of the 2009 total, but 21 per cent of the larger total last year.
“We expect dividends from financial groups to grow further as the banking sector continues to recover,” Mr Crooke said. “We also expect growth in dividends from technology stocks, as more of these become mature and come under heavier investor pressure to pay out like regular companies.”
By contrast, utilities contributed more than 8 per cent in 2009, but just 5 per cent last time.
“We see utilities still facing challenges in maintaining and increasing dividends. Many of them are under regulatory pressure to keep prices low, and over the next two to three years they are likely to lose some of the benefit that they gained from the low cost of debt,” Mr Crooke said.

Wednesday, February 26, 2014

Dealing with 500m tonnes of global steel overcapacity: Novolipetsk

In the first few weeks of 2014 it has become clear that the global economy is entering a new phase of uncertainty. Emerging markets have come under renewed scrutiny, leading to volatile movements in currencies and stock markets, reflecting concerns among investors about the impact of the Federal Reserve’s “taper” programme and financial stability in China.
These issues come at a time when the underlying trends suggest that China has passed the point of its fastest growth. Those metals and mining companies who budgeted for years of accelerating consumption to come have already been caught out by the new realities and the pressures on them can only intensify in 2014 driven by the increased funding costs.
As such, global steelmaking is fast approaching its moment of truth, when the strategies of many producers especially in Europe will be found wanting. Business models that have emphasised capacity expansion above all other considerations are now very exposed to changing patterns of demand. Only growth programmes that targeted high value added steel products (HVA), while at the same time addressing the cost base, have been vindicated by today’s conditions.
In the past the effectiveness of these different growth strategies has not always been clear to the market. Investors often have not fully differentiated between companies and have judged the sector as a whole, but in the future the gap in performance between steelmakers will widen visibly.
Some of our competitors seem genuinely to have believed that our industry was set for permanently higher global demand, leading to significant excess capacity, which we estimate to represent 500m tonnes globally. Within the EU, for example, total steelmaking capacity in 2008 was around 250m tonnes, while post crisis it has experienced a limited decline to around 210m tonnes.
In this situation, hindered by a high cost base resulting from expensive energy and lack of access to key raw materials, European steelmakers should focus on premium and specialty products. Producers of commodity steel will continue to face serious challenges and regrettably these conditions look likely to be prolonged by misguided state support for inefficient European steelmakers. This is only delaying the inevitable closure of the least viable plants, which is necessary to bring European capacity back into line with regional and global reality.
Some steelmakers have responded to this situation by calling for a comprehensive agreement between producers and Governments to coordinate capacity cuts. However attractive this idea may sound in principle, I do not believe this will be practical or realistic. The market itself is the best allocator of resources and only producers that meet the market’s needs will prosper in the long term.
A number of European companies have recognised this reality and have made impressive efforts to improve cost effectiveness. We have also seen companies ready to tackle these issues through consolidation as it happens in Northern Europe. These are the actions that are required to strengthen the competitiveness of European companies in the global market.
Although the European steel market is weak, the continent’s leading manufacturers have a strong need for quality steel products. I believe that our business model for NLMK Group meets the needs of the market. We are one of the world’s most effective producers, combining distinct qualities in our Russian as well as our international operations.
The way to preserve employment in the European industry in the long term is to be highly cost-effective in terms of both raw materials and crude steel production while also possessing technologically advanced rolling facilities.
The model which we have adopted for NLMK is a combination of low-cost steel and key raw materials production in emerging markets and HVA production in developed countries such as Belgium, Denmark, France, Italy and the US (which are closer to end customers). This is the way for steel producers to attain the strategic flexibility to succeed in an environment of slower growth and tense competition. It enables us to supply both the Russian construction industry and many major international customers (such as ABB, Caterpillar, Renault, Schneider Electric, Siemens, Volvo, VW and many more) who view NLMK as the supplier of high-quality steel products. In addition, we have gained new markets for new products, for example supplying steel plates for off-shore wind generation mills inDenmark, one of the world leaders in wind power.
So, what’s next for the industry? My belief is that though challenges remain, they create opportunities for those companies that know how to exploit them.
NLMK, or Novolipetsk, is Russia’s largest steelmaker. Mr Lisin is chairman and the majority shareholder.

New steel plants cast doubt on China’s emission control plans

Steel plant closures central to the Chinese government’s plan for cutting pollution are likely to be outpaced by steel mills under construction, casting doubt on Beijing’s ability to make headway against air pollution enveloping northern China.
On Wednesday, Beijing was again gripped by the thick grey pall that has lingered over northern China for more than a week. Public anger over air pollution has spurred the government to speed up the release of air monitoring data, and could strengthen the hand of environmental regulators in shutting down powerful polluters.

About 30m tonnes of new steel capacity across the country is still under construction, double the 15m tonnes of cuts pledged for 2014 by Hebei province, the industrial heartland surrounding Beijing which accounts for about a quarter of Chinese steel capacity.
Hebei agreed to the cuts as part of a national plan to reduce polluting emissions in the North China plain, where pollution regularly exceeds national standards.
State media showed footage of steel mills and cement plants being destroyed to underline the government’s resolve. About 8m tonnes of capacity have been permanently closed down in Hebei since the plan was announced.
But so far, it is the least powerful polluters that have taken it on the chin. “Generally speaking, the mills that have closed are older and unprofitable,” Wang Jiguang, a sales director at Hebei Iron and Steel Group, one of China’s largest steel producers, said at an iron ore conference organised by Metal Bulletin in Beijing. “Most of them have actually been idle for six months to a year already due to economic reasons.”
Hebei pledged to cut its steel capacity by 60m tonnes by 2017, as part of a negotiated deal to reduce emissions in northern China, the Yangtze Delta and the Pearl River Delta while encouraging industrial investment in the arid west.
Meanwhile, the central government set up a $1.6bn fund to reward industry that complies with emission cuts, in recognition of the local jobs and taxes generated by polluting companies. It is expected to transfer about $330m to Hebei province, which is also the source of most of Beijing’s power supply.
Past attempts by central planning agencies to reduce industrial capacity by fiat have similarly ended in tears, as plant bosses and the banks that lend to them almost always chose to expand rather than face closure.
Allowing the market to cull the inefficient producers has proved even more difficult in China, as state-owned steel companies are generally the worst performers. Nearly every inland steel producer with more than 5m tonnes of capacity – in other words, at least a dozen of China’s biggest and most politically powerful mills – are losing money, according to industry expert Xu Zhongbo of Beijing Metal Consulting Ltd, with the exception of mills that have invested in automotive steel.
Policies directly tied to reducing pollution rather than cutting industrial capacity have generally been more effective. For instance, about a decade ago China ordered the phase-out of the heavily polluting Soderberg process at aluminium smelters, and smelters were duly upgraded.
Power plants across China have installed emissions scrubbers, and have become more willing to use them in recent years after power subsidies were tweaked to reward their operation.

Tesla’s sudden acceleration recalls dotcom rush

Seldom since the days of the dotcom bubble has a single investment analyst’s call so electrified the stock market.
Shares in Tesla Motors, the US electric car manufacturer that had already climbed a wall of investor euphoria, shot up as much as 19 per cent on Tuesday morning thanks to a single note from a Wall Street analyst.
Adam Jonas of Morgan Stanley predicted that, on the most optimistic assumptions, Tesla’s shares could more than double from their already lofty level. That would value the company at more than the almost $60bn market value of General Motors – even though its plans to deliver 35,000 luxury Model S electric sedans this year pale in comparison to GM’s near-10m vehicle sales in 2013.
If Mr Jonas’s forecasts come true, Tesla will outsell battery rival BollorĂ© of France by more than eight times by 2022, beat every major carmaker’s estimates of widespread autonomous car penetration, and sell more electric cars by the end of the decade than Renault and Nissan combined, the runaway market leaders today.
The bold call added around $5bn to Tesla’s market value on Tuesday morning and prompted warnings that record share prices on Wall Street were prompting some analysts to reach for expansive targets not seen since the tech boom of the late 1990s.
“Perhaps as a result Facebook’s WhatsApp acquisition last week, people are boldly going where no one has gone before,” said David Garrity, a former leading Wall Street autos analyst and now principal at GVA Research. “People are fervid in their imaginations about where things can go.”
Mr Jonas’s bull case for Tesla reminded some investors of the most infamous dotcom bubble call, when a then little-known analyst named Henry Blodget sent shares of up 19 per cent on a single day in 1998 after predicting the stock would jump to $400.
Mr Blodget later described his call, which coincided with the final leg of the tech boom, as “like throwing gasoline on a bonfire”. The shares topped his forecast weeks later before falling back with the dotcom rout.
Besides riding a boom in the electric car business, Tesla could be in line to dominate a second gigantic business, according to Morgan Stanley: sales of power storage equipment to electric utilities, which is set to be a $1.5tn market.
Elon Musk, Tesla’s chief executive, indicated last week that it was on the brink of announcing what he called a “gigafactory” to produce more lithium ion cells for batteries than the entire current world production.
To cap it off, Mr Jonas also predicted that Tesla was in line to become the leading maker of self-driving vehicles. Pointing to eventual full adoption of driverless cars two decades from now, he wrote: “100 per cent autonomous penetration, utopian society”.
Mr Garrity made a bold call of his own at the height of the internet boom in 1999, predicting that ecommerce company Commerce One, then trading at $420, would reach $1,000. The stock came within a whisker of his target only six days later, before eventually succumbing to the dotcom rout.
“I should have declared victory and gone home,” Mr Garrity said on Tuesday.

Tesla Battery Jolts Shares Higher While Disrupting Power

Tesla Motors (TSLA) Inc.’s plan to boost battery production by building what Chief Executive Officer Elon Musk calls a “gigafactory” may do more to transform the power industry than it does to advance the electric car.
Utility customers throughout the U.S. have already begun turning to battery storage and solar panels as a way of reducing electricity bills and their dependency on local power companies. The trend threatens the more than 100-year-old monopoly utility business model that books about $360 billion in annual power sales.
By lowering the cost of energy-storage with its lithium-ion batteries, Tesla could accelerate the disruption of the electric utility business as it doubles its share of the global car market to about 1 percent, Adam Jonas, a Morgan Stanley analyst, wrote in a note yesterday. Morgan Stanley’s note helped push Tesla’s market value above $30 billion for the first time yesterday, as the company’s Model S sedan also became the first U.S. car to receive Consumer Reports’ “best overall pick” in the magazine’s annual ranking.
If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again,” said Jonas, who rates the shares the equivalent of a buy. “If Tesla can become the world’s low-cost producer in energy storage, we see significant optionality for Tesla to disrupt adjacent industries.”

Utility Obsolescence

Tesla gained 5.8 percent to $262.32 at 9:38 a.m. in New York. The shares have climbed more than sevenfold in the past year. The company has said it may partner on the new battery plant with Panasonic Corp., which rose 5.3 percent to close at 1,259 yen in Tokyo trading, the highest in about three weeks.
NRG Energy Inc. Chief Executive Officer David Crane, who says the U.S. utility industry is doomed to obsolescence unless it changes, drives himself to work every day in his Tesla Model S.
Tesla’s Musk told Bloomberg Television last week that the company plans to provide details on a proposed “gigafactory” to produce the batteries needed to make more affordable vehicles. With each Tesla capable of storing enough energy to power the average house for 3.5 days, a growing population of Tesla cars represents a significant increase in how much electricity can be held in a country’s infrastructure.

‘Holy Grail’

Worldwide, the market for energy storage is expected to grow from about $500 million to about $12 billion in 2023, according to Navigant Consulting Inc.
Homeowners might use battery storage, combined with solar power, to further reduce their dependence on utilities and potentially sell electricity back to the grid, a new business model known as distributed generation. Batteries allow customers with solar panels to store energy during the day and then tap the excess overnight when the sun goes down.
“Battery storage is the holy grail of the distributed generation movement,” said Travis Miller, an analyst at Morningstar Inc. “If developers can create a high-capacity battery technology, it opens the door to a significant increase in options for customers to supply their own power.”
While still considered too expensive for wide-scale adoption, a drastic reduction in the cost of home energy storage systems would be a “game changer,” American Electric Power Co. Chairman and Chief Executive Officer Nick Akins said during an interview last year.
“If you can get batteries cheap enough and combine them with solar panels, you no longer need the utility,” said Sam Jaffe, an analyst with Navigant. “Then the question is how cheap does it have to be? And it has to be really, really, really cheap.”

New Partnerships

Tesla would have to reduce the costs of its batteries by more then 70 percent for it to make sense for most homeowners to producer their own electricity, Jaffe said.
Companies already are tapping into grid storage. NRG Energy (NRG) said a year ago it started selling power from electric cars to the nation’s largest power grid in a partnership with the University of Delaware. SolarCity Corp. is now offering Tesla batteries as part of a power-storage system for commercial customers in parts of California and New England that will reduce utility bills and provide electricity during blackouts.
SunPower Corp., the second-largest U.S. solar-panel maker, said in December that it was testing use of power-storage systems to couple with its rooftop solar units.
California has opened up the market for the technology by requiring the state’s utilities to use 1.3 gigawatts of storage by the end of this decade.

California Innovation

Musk and SolarCity CEO Lyndon Rive are scheduled to speak on innovation before state regulators on Feb. 27, according to an e-mailed statement today from the California Public Utilities Commission.
“The scale of Tesla’s battery production, even for its own use as an auto manufacturer, thrusts the company into ‘key player’ status for grid storage,” Morgan Stanley’s Jonas said in his note.
The battery plant would be built with partners, and “there’s a likelihood Panasonic would be part of it,” Musk told Bloomberg last week. Panasonic Corp. is both a Tesla investor and its main supplier of lithium-ion cells. Panasonic’s participation is “not 100 percent confirmed,” he said.
“Nothing has been decided at this stage, however Panasonic has a cooperative relationship with Tesla, and the company will look into a variety of options,” Chieko Gyobu, a spokeswoman for Panasonic, said by e-mail.
(Source: Bloomberg)