Monday, September 30, 2013

Car dealers now in reverse gear as inventory up 40%

The slowdown in the seems to be deeper than the Society of Automobile Manufacturers () figures indicate. Compared with last year, dealers' inventories have risen by about 40 per cent.

Gulshan Ahuja, secretary general, Federation of Automobile Dealers Associations (Fada) says: "The average
at the dealers' end is more than two months. Given that there are 2,800-3,000 passenger in the country, if one considers an average of Rs 1 crore worth of inventory per dealer, it means dealers are sitting on an inventory worth around Rs 3,000 crore."

The average per-dealer inventory had stood at around Rs 60 lakh last year (Rs 1,800 crore nationally), say dealer sources. The average inventory for dealers, then, was around three-four weeks. The number is significant because when car companies sell automobiles to dealers, these reflect as 'sold' on their books.
  • 67%: The average inventory with dealers has risen from Rs 60 lakh worth to Rs 1 crore
  • Build-up: Dealers are sitting on inventories of two months - up from three-four weeks. Inventories in Tier-I cities have seen a higher churn than the Tier-II ones
  • 10-20%: Decline in showroom footfalls on a year-on-year basis for most dealers
  • Festive demand: Dealers feel it will be tough to match last year's festive-season demand
  • Discounts & freebies: The biggest influencing factor for consumers; discounts are likely to be much higher during this festive season
  • 5-10%: Fall in profitability for dealers on a year-on-year basis

Siam data show that sales of declined 5.3 per cent during April-August 2013, compared with the same period last year. Within the passenger vehicles segment, sales of passenger cars, utility vehicles and vans dropped 5.80 per cent, 3.11 per cent and 6.24 per cent, respectively. Add the inventory at the dealers' end to that and things begin to look much grimmer.

From selling an average 400 cars per month last year, an Ahmedabad-based car dealer who operates showrooms of multiple passenger car brands, is down to selling an average 270 cars per month this year. "Since March this year, sales are down by around 35 per cent at the dealers' end. In good times, the inventory turnaround time is 24-30 days. A dealer always maintains a month's inventory. But, due to slow offtake, the inventory level has gone up to around two months," the dealer claims.

Siam, too, had recently said that compared with last financial year, the industry could be staring at lower sales this year. "If we have to match last year's 2.7 million units, we need to be selling over 200,000 units each month. But in the past three months, we have sold less than that," Siam Deputy Director-General Sugato Sen had said in September.

Broking house Indiainfoline recently conducted an auto dealer survey in Tier-I and -II cities (51 dealers across 23 cities covering eight original equipment manufacturers (OEMs), including Maruti, Tata Motors, Hyundai, Mahindra and Nissan).

It found that discounts, followed by freebies like insurance and exchange offers, had been the most influencing factors for consumers. Also, all respondents felt matching last year's festival-season demand would be tough and discount levels would be higher this time. "Profitability of dealers is down 5-10 per cent year-on-year," said the report.

Obviously, dealers now want better margins from OEMs to stay afloat in tough times. Ahuja says the average dealer margins in India ranged between 2.5 per cent and 3.5 per cent. For luxury cars, it was slightly higher, at 5 per cent.

Fada says, with rising overhead costs and a general sales slowdown, car dealers should be offered higher margins. Ahuja claims, in most developed countries, dealer margins are higher - in the range of 5-10 per cent.

A P Thakker, owner of a Mahindra & Mahindra dealership in the city claims: "Dealer margins should be at least around 5 per cent."

In its meetings with OEMs, the association has already started raising the issue. "Some OEMs have also come forward to help the dealers. But I cannot disclose their names yet," Ahuja says.

Dealers in other major cities like Mumbai, Kolkata and Delhi have also rooted for higher margins against the current backdrop of falling sales. A Delhi-based dealer claims, though the business is seeing tough times, not many dealerships are closing down. "While taking a dealership, one has already invested close to Rs 4-5 crore, besides infrastructure expenses.

He also holds inventory of cars. Closing down the dealership would mean a businessman would lose a lot of money. Therefore, people will continue with their dealerships, hoping the market will pick up, eventually," he says.
(Source: Business Standard)

Tech and telecoms trigger M&A rebound

A single deal has lifted the mood of investment bankers this year. Verizon’s $124bn buyout of Vodafone’s stake in their US wireless joint venture has helped to generate a year-on-year increase in global mergers and acquisitions and put dealmakers on track for their best year since 2008.
The value of announced M&A has reached $1.57tn, up 4.6 per cent in the first nine months, from $1.5tn for the same period last year, according to Mergermarket. It was only in early September that 2013’s deal haul overtook last year’s tally.
Some bankers describe a revival in telecom, media and technology (TMT) sector dealmaking as reminiscent of the 1999 dotcom boom.
Dealmaking in the sector has reached a six-year high, with seven of the top 10 deals this year emanating from the sector.
Until recently companies have not been penalised for delaying big M&A moves. However, without a strong economic recovery in the US and Europe, companies are expected to face pressure from investors to find sources of revenue growth.
“Companies are realising now they will have to start delivering on material growth for 2014,” said Chris Ventresca, global co-head of M&A at JPMorgan Chase.
However, without the Verizon deal, the value of M&A so far this year would have been down almost 4 per cent.
“While we’ve seen strong activity in the third quarter, when you look at the full year numbers, the run rate is still flat. The difference is that the tone is definitely better,” said Gregg Lemkau, global co-head of M&A at Goldman Sachs. “The equity market has reacted positively to the large strategic deals we’ve seen, resulting in a discernible increase in companies exploring more strategic activity.”
Growing boardroom confidence has been reflected in rising quarter-on-quarter M&A numbers in 2013 and average deal sizes hitting their highest levels since before the credit crisis.
“Many core consumer-facing companies have built strong balance sheets through the crisis and there is increasing confidence that now is the time to start looking at M&A as a potential driver of growth,” said William Vereker, head of corporate client solutions in Europe, the Middle East and Africa at UBS.
With a tapering of Federal Reserve monetary stimulus looming, companies have shifted their concerns to the long term availability of cheap money for dealmaking, away from direction of the macroeconomy.
“There is real momentum building. The obvious, long rumoured deals are going to happen as the threat of a rise in interest rates remains ever present,” said Philip Noblet, co-head of Emea M&A at Bank of America Merrill Lynch.
Boosted by Verizon’s record breaking $49bn bond issue to fund its deal with Vodafone, investment banks generated the most fees from debt sales since 2007.
Total investment banking fees across M&A, debt and equity capital markets have reached $52.5bn, a 3 per cent increase over the same period in 2012, according to Thomson Reuters, boosted by particularly strong rise of 22 per cent in fees from equity issuance.
While European banks’ share of the fee pool fell to their lowest levels since records began in 2000, some bankers highlight a new positivity in the region, where M&A rose 3.6 per cent, with $472bn of announced deals. The year should match 2012’s total but if it exceeds it, it would be the region’s best year for M&A since 2008.
“We expect to see a regular flow of deals being announced during the rest of the year,” said Henrik Aslaksen, co-head of global investment banking coverage and advisory at Deutsche Bank.

Wednesday, September 18, 2013

Emerging markets' foreign debt is no time bomb

Emerging markets are sitting on a $5.8 trillion pile of debt to foreign lenders. Yet they are far less vulnerable to sudden capital flight than they were two decades ago.
  At about 20 percent of these countries' combined GDP, the debt is large. Besides, it has grown by 48 percent in just four years, according to recently released data from the Bank for International Settlements. Some investors worry about a repeat of the balance-of-payment crises of the 1990s, when foreign lenders rushed headlong into Mexico and Southeast Asian countries, and then turned tail.
  But this time may be different, and not just because emerging markets now own $7.5 trillion in foreign-exchange reserves. While rising U.S. interest rates are once again pressuring emerging market currencies, international banks are unlikely to exacerbate the funding stress with the same viciousness as before. That's because 40 percent of their exposure to developing countries - equivalent to $3.45 trillion - consists of local-currency loans given out by their overseas units. Before the 1997 Asian crisis, this figure was less than 20 percent.
  Even among foreign lenders, local-currency loans are more stable than debt denominated in other currencies. In the two years to June 1999, foreign-currency loans by U.S., U.K., German, French, Swiss and Japanese banks to developing Asian economies fell 24 percent. The little local-currency business these lenders did in Asia back then grew by 1.4 percent. More recently, Eastern Europe saw foreign-currency borrowings from the same club of overseas lenders drop 30 percent in the two years following the 2008 crisis. The cutback in the lenders' domestic-currency exposure was less than half as severe.
  In the bond market - the other route through which emerging markets load up on foreign-currency debt - borrowers including governments have shown a growing preference to borrow in their home currencies.
  When it comes to contagion risk, the national identity of moneylenders is not as important as the colour of their money. As long as emerging markets owe debts to foreigners in currencies their central banks can freely print, they are less likely to experience a debilitating crisis.
(Source: Reuters)

Monday, September 16, 2013

Google’s Boss says College Is a Dinosaur

Colleges and universities are indecisive, slow-moving, and vulnerable to losing their best teachers to the Internet.
That’s the shared view of Google (GOOG) Executive Chairman Eric Schmidt and Anne-Marie Slaughter, a former Department of State official and until this month a tenured professor at Princeton University. They explored the problems of higher education on Friday in a one-on-one conversation sponsored by the New America Foundation, where Schmidt serves as chairman and Slaughter is the new president.
Colleges have the luxury of thorough, democratic deliberation of issues because “they never actually do anything,” Schmidt said during the event. He cited Princeton, where he graduated in 1976 and once served as trustee, which spent six years deliberating over whether to change its academic calendar—and in the end did nothing. “Don’t get me started on that,” Slaughter laughed.
Schmidt was more positive about the un-Princeton-like Khan Academy, on whose board he serves. He said the academy, which offers free online video tutorials on dozens of topics, has begun to analyze students’ answers to figure out which questions do the best job of assessing mastery of a topic.
The Google boss also had kind words for EdX, a nonprofit created by Harvard University and the Massachusetts Institute of Technology that lets students take “interesting, fun, and rigorous courses” for free. Google and EdX announced this week that the tech giant will host a platform called Open EdX in a bid to make it easier for anyone to create online courses. “The fun will start,” Schmidt said, as new ventures smash up against incumbents that resist change.
Slaughter agreed that traditional colleges and universities, with their high fixed costs, are at risk. “They’re going to lose their top talent,” she said. “We can become global teachers. The best people can become free agents.”
Speaking from the audience, BuzzFeed President Jon Steinberg said he doesn’t think his young children will need to attend college. “I don’t want my kids to go to college unless they desperately want to be scholars.”
That was a bridge too far for Schmidt. He said college “just produces a better adult.” While acknowledging that Google’s college recruits aren’t equipped to contribute immediately, he said, “They are phenomenal employees after the training program.”
Schmidt said entrepreneur Peter Thiel, who pays young people to launch startups instead of studying in college, “is just fundamentally wrong. We want more educated people.”
(Source: BusinessWeek)

Auto part makers buck trend

India's automobile industry may be going through one of its worst phases, including original equipment manufacturers, but auto-ancillary companies such as Amara Raja BatteriesBSE -0.17 %, Exide IndustriesBSE -0.78 %, Motherson Sumi, Balkrishna Industries, MRF, Bosch, Ceat, Goodyear IndiaBSE 0.93 % and JK Tyres appear to have bucked the trend on the back of strong demand from the replacement market for tyres and batteries.

These auto-ancillary companies jointly reported an average sales growth of over 6% in the quarter to June over the past year and clocked earnings before interest depreciation and tax (EBITDA) margins of close to 12% over the past couple of quarters. In fact, except for the March 2013 quarter, when revenue growth for these companies was flat over the previous year, the average revenue growth of these companies has been consistently healthy — at over 20% over a year ago since the September 2011 quarter.

In contrast, India's carmakers reported an average sales growth of 4.2% in the quarter to June over the past year which is lower than the year-on-year sales growth of 8.3% reported by these companies in the March 2013 quarter and the YoY sales growth of close to 8.1% in the December 2012 quarter.

While the strong and ongoing demand from the replacement market for tyres and batteries is positive for companies such as Amara Raja, Exide, MRF,
CeatBSE -0.09 % and JK Tyres, others such as Motherson SumiBSE 0.56 % and Balkrishna IndustriesBSE 0.02 % have reported healthy financials, given their strong presence in the global markets. The replacement demand for vehicle tyres and batteries is expected to remain strong, given a large base of vehicles sold in the past couple of years.

The passenger vehicle segment alone, for instance, has seen sales of about 47 lakh cars, 2.85 crore twowheelers and about 13 lakh utility vehicles during FY09 to FY11, which is likely to generate significant replacement demand in the next couple of years assuming an average tyre and battery life of 3 to 3.5 years.

There is a huge business and growth opportunity for tyre and battery manufacturing companies such as Amara Raja, Exide, MRF, JK Tyres, Goodyear India and Ceat despite the ongoing slowdown in the automotive industry.

For companies such as Motherson Sumi and Balkrishna Industries, their strong presence in international markets gives them an edge over competition in terms of geographic diversification and new business opportunities.

Motherson Sumi, for instance, is one of the key suppliers of various automotive parts to many global carmakers such as Volkswagen,
Audi and Hyundai and also supplies various automotive parts to other auto makers such as BMW, Renault Nissan, Ford, Mercedes-Benz, Tata MotorsBSE -0.72 %, Volvo, Toyota and Porsche.

Similarly, Balkrishna Industries, which specialises in off-road tyres and caters largely to the replacement market, derives almost 88% of its total sales from international markets, largely from Europe. The company is poised to gain not only because of global exposure, but also because of a weak
rupee which boosts its realisations.

With clear earnings visibility for these select auto-parts makers, there is a visible institutional investment interest in these companies.

Data on investment by local mutual funds show a rise in the exposure of equity funds to the auto ancillary sector from 2.34% of total funds in stocks in April '13 to 2.55% in July '13. However, mutual funds cut back on their exposure to the automobile sector during this period — from 4.64% to 4.20%.

With international auto-makers expected to continue to do well in the near term, following the rebound in the US and with replacement demand in the local market likely to hold strong with the overall base of vehicles-on-road rising progressively, investing in select stocks of auto ancillary companies may well be rewarding for investors from a medium to long term perspective.

FMCG companies raise prices to absorb rupee shock

With companies such as Hindustan Unilever (HUL), and Consumer raising prices two-12 per cent to offset the pressure of a volatile , products such as toothpastes, , moisturisers and creams are set to cost more.

For market leader HUL, the current round of price rises would be the second in two months. In July, the company had effected a seven per cent rise in the prices of select products such as Dove and Lakme. While analysts said both rounds were aimed at protecting margins, the pressure to increase prices across the board was mounting, as the rupee fluctuated widely.

“Just as there are ramifications for companies when the rupee depreciates against the dollar, there are implications when the rupee appreciates against the dollar,” says Nitin Mathur, analyst (consumer & retail), Espirito Santo Securities. “Both ways, it puts pressure on companies because hedging becomes a little difficult.”

After depreciating about 20 per cent between August and early September to 68/dollar-levels, the rupee has strengthened to 63/dollar in the last few days.

Prices of key inputs such as palm oil (used to make soaps) and caustic soda & soda ash (used to manufacture detergents) continue to remain flat this year. In the quarter ended June, companies passed on the gains made on account of lower commodity costs to consumers through promotional offers in the soaps & detergents categories. But this might not be so in the coming quarters, owing to the rupee’s volatility. “Palm oil is imported. So, gains made due to lower prices are nullified because of the rupee movement. I expect more companies to follow HUL and increase product prices,” says Abneesh Roy, associate director (research), Edelweiss.

Godrej Consumer, Wipro and Reckitt Benckiser were expected to increase product prices soon, said those in the know. When contacted, the companies neither confirmed nor denied this. Emami declined to specify whether it was increasing prices. The marketplace buzz is the maker of Zandu Balm and Boroplus has effected a three-five per cent increase in its portfolio. Naresh Bhansali, chief executive officer (finance, strategy & business development), Emami, said he was not in a position to comment on price rises.

Colgate and GSK’s move to increase the prices of brands such as Colgate Active Salt, Colgate Max Fresh and Sensodyne Rapid Relief is expected to nudge companies such as Procter & Gamble to consider a price rise for its Oral-B
. The rise in the prices of essential goods follows a 10.3 per cent price rise announced by cigarette major ITC last week. The Kolkata-based company had increased the maximum retail price of brands such as Gold Flake Kings, Gold Flake Lights and Classic to offset duty increases. This was the second price increase by the company in a month.
(Source: Business Standard)

Starbucks goes plush for India, gives its stores a local flavour

If Starbucks to you means the ubiquitous chain that sells coffee on the go through hundreds of small stores all over the US, its Indian avatar might come as a bit of a shock.
The world's largest coffee chain is positioning itself as an aspirational brand in this tea-drinking nation, and is going over the top with its stores, some of the plushest it's opened anywhere in the world. "We believe a coffee house should be a welcoming, inviting and familiar place for people to connect, so we design our stores to reflect the unique character of the neighborhoods they serve," a Tata Starbucks spokesperson said in an emailed reply.
Starbucks entered India in October 2012 through an equal joint venture between the Seattle-based retailer and Tata Global Beverages. The alliance has opened 22 stores in India so far — in premium locations like Horniman Circle, Colaba and Bandra in Mumbai, Connaught Place in Delhi and Koregaon Park in Pune. Experts say it's following the same strategy it adopted in China, where it opened in prominent locations to increase visibility to consumers. A person familiar with Starbucks' India strategy, who asked not to be named explained, "Right now, the idea is to familiarise Indians with Starbucks."
Research on the coffee chain showed that for Indian consumers, coffee is not the primary reason to visit a cafe — and very few order a beverage to take away with them. Most consumers spend about 45 minutes in a cafe, using it as a spot to meet friends and relatives.
So, Starbucks wanted its stores to be as appealing as possible while giving consumers a unique "Starbucks experience", the person familiar with Starbucks plans said. That meant stores in India don't fit the global design template — each store has been designed differently, with "local" touches incorporated. For example, the store in New Delhi's Connaught Place has ropes and chatai on the walls and henna patterns on the floor, with pictures of Indian spices on its walls. The store in Select Citywalk mall has locally-crafted wood paneling, while the Pune store incorporates localised railings and a rich display of antiques and copper.
"The idea was to bring about the traditional elements of this country and present them in modern settings," said the person quoted above. This is an experimentation phase, and Starbucks will eventually reach a standard format and design for its Indian outlets. Darshan Mehta, the chief executive of Reliance Brands, says he has so far visited four Starbucks outlets in Delhi and Mumbai. "They are beautiful in terms of shape, size and coziness.
The Horniman Circle store is truly the high-end of Starbucks spectrum," he says. Along with its locallysourced coffee, the outlets offer an Indianised food menu — with items like murg kathi wrap, wasabi kotumbwadi and chicken makhani pies next to the English muffins on offer.
  "Our stores are designed in-house and the mission of each designer is to create a spectacular third place that is steeped in the local culture and designed to reflect the unique characteristics of each neighborhood," the Tata Starbucks spokesperson said.
However, rival coffee chains don't think this strategy is sustainable. "They would definitely like to make a statement through the first fifty stores. It's very likely that later they will look at kiosks and routine stores," says the marketing head of a rival coffee chain. "As far as their store ambience goes, they are overdoing it," he added.
The chief executive of another rival coffee chain agreed. "The focus and investments on ambience and store location is obvious. Many of us don't have the bandwidth to invest so much on ambience," he said, asking not to be named.
Prices at Starbucks are in line with the premium store strategy: the chief executive of the rival coffee chain quoted has noted that Starbucks has increased prices for its food and beverages by as much as 20% in three months. "It's an unprecedented move; most of us (coffee and quick service restaurants chains) are focusing on value and giving combo deals to consumers. Starbucks has done the opposite.
Maybe, they can pull it off because of their deep pockets, but we can't afford to take up prices and alienate consumers who are anyway looking a value deals," he said, asking not to be named.
(Source: Economic Times)

Telcos’ volume down as instant messaging platforms get voice

Yuvraj (22) is hooked to his smartphone, especially instant messaging (IM) platforms such as WhatsApp and Nimbuzz. Not just because he wants to send that quick text to his friends. But because he can make a “free” voice call.
Yuvraj is not alone.
Rising smartphone penetration is bringing out the frown linen on telcos as IM platforms (synonymous with Over-The-Top content providers) woo people with “free voice call” apps. Messaging apps are now passé. Some players such as BlackBerry Messenger (BBM), Line and Nimbuzz are more popular for voice than messaging.
“Earlier telcos lost out on SMS revenues because of these free messaging apps. Now, with the introduction of Voice-over-Internet-Protocol (voice calls over the Internet), the competition is intensifying,” an official from a leading telco told Business Line, on conditions of anonymity.
Voice calls and text messages (SMS) put together represent nearly 75 per cent of a telecom company’s revenues. Telcos such as Vodafone, Airtel and Tata DoCoMo refused to comment on the issue. “It’s not that voice calls or SMS has completely stopped. Just that there are disruptions to this system with IM players coming up as a low-cost alternative. Many telcos (in India) will feel the pinch in another one year or so,” said Sameer Agarwal, CMO, RockeTalk. According to him, as data penetration goes up, competition will increase.

Free Call concept

Market sources say that it is inevitable that voice calls over the Internet create disruptions. The prime reason: Virtually free calls. While a three-minute call may be charged Rs 1.50 (or 50 paise a minute) by a telecom operator, it would cost no more than 30 paise if made via the Internet (or, say, an IM like Nimbuzz).
“The call is converted into data, which is charged at very low rates. It takes a fraction of the bandwidth. For the end user, it’s a near-free call. His call charge is included in the data pack he uses,” explains Vikas Saxena, CEO, Nimbuzz. Nimbuzz offers such voice-over-Internet services in India. According to him, telcos need to re-work their sustainability model in the long-run.
Some telecom companies (such as Telenor, Orange, Telefonica, T-Mobile, Vodafone) did try to create a global alternative standardisation through an initiative called Rich Communication Suite . But that is yet to see the light of day.

No Pushovers

Incidentally, telcos feeling the heat from IM players is now becoming a global issue.
According to international media reports, the Government in Vietnam is working out ways to regulate Over-The-Top content providers and IM players. Some operators are trying to make money by giving bandwidth to IM players. Data charges are included in monthly bills.
Others have gone ahead with partnership plans such as Reliance with WhatsApp and Airtel with Facebook.
The other alternative has been more direct — to join the bandwagon with own Over-The-Top content offerings. Orange’s “Libon” and T-Mobile’s “Bobsled” are some examples. In India, Airtel boss Sunil Bharti Mittal’s son, Kavin, has launched “Hike”. Market sources expect it to take on IM players.
(Source: Business Line)

Bank lending to emerging markets soars to record

Banks piled into emerging markets at a record pace earlier this year, highlighting the scale of the global search for yield that has partially reversed since the US Federal Reserve said it intended to slow its bond buying.
Cross-border lending to emerging markets surged by $267bn, to an estimated $3.4tn, in the first quarter of 2013, the Bank for International Settlements said on Sunday. 
The BIS said the 8.4 per cent increase was by far the highest recorded, with the amount of interbank lending rising by almost $200bn, or 12 per cent.
The so-called central bankers’ bank, which compiles what are widely regarded as the most comprehensive set of statistics on cross-border capital flows, said in its latest Quarterly Review that 85 per cent of the rise was accounted for by more lending to China, Brazil and Russia.
The publication of the figures comes as the US Federal Open Market Committee gears up for its policy meeting, ending on Wednesday, when it could decide the timing and pace at which it will slow its $85bn worth of monthly bond purchases.
With interest rates close to zero across advanced economies and liquidity abundant as a result of their central banks’ mass bond-buying sprees, credit has flowed into emerging markets in recent years as lenders and investors sought higher returns. According to the BIS data, interbank lending to emerging markets in the Asia-Pacific region alone has doubled since the investment bank Lehman Brothers collapsed five years ago.
Lending to emerging markets has shown signs of retrenchment since Ben Bernanke, chairman of the Fed, signalled in May that the US central bank had begun to consider unwinding its exceptional monetary stimulus.
The expectation of a return to higher interest rates in advanced economies in the years ahead has led to a retreat – particularly from emerging markets with large current account deficits such as India – although the pace of that retrenchment has slowed in recent weeks.
According to the BIS data, the record rise in cross-border lending to emerging markets in the first quarter mainly reflected buoyant interbank lending, while cross-border credit that was extended to borrowers in China rose by $160bn, or 31 per cent.
With international demand for Chinese assets growing, companies in the world’s second-largest economy can borrow at cheaper rates from lenders abroad and are reliant on banks headquartered off the mainland for foreign-currency loans to help fund their expansion overseas.
The BIS data showed emerging market companies were also increasingly turning to debt markets in offshore financial centres such as Hong Kong to secure funds. Chinese businesses’ borrowing through offshore financial centres has soared from less than $1bn between 2001 and 2002 to $51bn in the 12 months to June. Of these bonds, 16 per cent is denominated in renminbi, with most of the rest – 77 per cent – in dollars.
Though there are restrictions on bringing capital into China, businesses apply for permission to bring funds borrowed abroad into the domestic market.
Overseas lending to Brazil expanded by 14 per cent, or $34bn; for Russia, the figure was $29bn, an 18 per cent rise. Both were the largest quarterly increases on record.
Euro area banks increased their lending to emerging markets for the first time since the second quarter of 2011. Lenders in France, the Netherlands, Germany and Luxembourg accounted for most of the growth.
In contrast to the rapid rise in lending to emerging markets, cross-border claims on banks in the advanced economies slipped by $341bn, or 1.5 per cent.
Though bank lending to emerging markets could remain strong as long as growth remains so, the end of quantitative easing and an eventual rise in interest rates in advanced economies are likely to slow the pace of cross-border flows.

Thursday, September 12, 2013

The Case for India: Raghuram Rajan

Indian cricket fans are manic-depressive in their treatment of their favorite teams. They elevate players to god-like status when their team performs well, ignoring obvious weaknesses; but when it loses, as any team must, the fall is equally steep and every weakness is dissected. In fact, the team is never as good as fans make it out to be when it wins, nor as bad as it is made out to be when it loses. Its weaknesses existed in victory, too, but were overlooked.
Such bipolar behavior seems to apply to assessments of India’s economy as well, with foreign analysts joining Indians in swings between over-exuberance and self-flagellation. A few years ago, India could do no wrong. Commentators talked of “Chindia,” elevating India’s performance to that of its northern neighbor. Today, India can do no right.
India does have serious problems. Annual GDP growth slowed significantly in the last quarter, to 4.4%, consumer price inflation is high, and the current-account and budget deficits last year were too large. Every commentator today highlights India’s poor infrastructure, excessive regulation, small manufacturing sector, and a workforce that lacks adequate education and skills.
These are indeed deficiencies, and they must be addressed if India is to grow strongly and stably. But the same deficiencies existed when India was growing rapidly. To appreciate what needs to be done in the short run, we must understand what dampened the Indian success story.
In part, India’s slowdown paradoxically reflects the substantial fiscal and monetary stimulus that its policymakers, like those in all major emerging markets, injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, especially because the world did not slide into a second Great Depression, as was originally feared. So monetary policy has since remained tight, with high interest rates contributing to slowing investment and consumption.
Moreover, India’s institutions for allocating natural resources, granting clearances, and acquiring land were overwhelmed during the period of strong growth. India’s investigative agencies, judiciary, and press began examining allegations of large-scale corruption. As bureaucratic decision-making became more risk-averse, many large projects ground to a halt.
Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed. Once restarted, it will take time for these projects to be completed, at which point output will increase significantly.
Finally, export growth slowed, not primarily because Indian goods suddenly became uncompetitive, but because growth in the country’s traditional export markets decelerated.
The consequences have been high internal and external deficits. The post-crisis fiscal-stimulus packages sent the government budget deficit soaring from what had been a very responsible level in 2007-2008. Similarly, as large mining projects stalled, India had to resort to higher imports of coal and scrap iron, while its exports of iron ore dwindled.
An increase in gold imports placed further pressure on the current-account balance. Newly rich consumers in rural areas increasingly put their savings into gold, a familiar store of value, while wealthy urban consumers, worried about inflation, also turned to buying gold. Ironically, had they bought Apple shares, rather than a commodity (no matter how fungible, liquid, and investible it is), their purchases would have been treated as a foreign investment rather than as imports that add to the external deficit.
For the most part, India’s current growth slowdown and its fiscal and current-account deficits are not structural problems. They can all be fixed by means of modest reforms. This is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. But India does not need to become a manufacturing giant overnight to fix its current problems.
The immediate tasks are more mundane, but they are also more feasible: clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current-account deficit and ease its financing. Over the last year, the government has been pursuing this agenda, which is already showing some early results. For example, the external deficit is narrowing sharply on the back of higher exports and lower imports.
Every small step helps, and the combination of small steps adds up to large strides. But, while the government certainly should have acted faster and earlier, the public mood is turning to depression amid a cacophony of criticism and self-doubt that has obscured the forward movement.
Indeed, despite its shortcomings, India’s GDP will probably grow by 5-5.5% this year – not great, but certainly not bad for what is likely to be a low point in economic performance. The monsoon has been good and will spur consumption, especially in rural areas, which are already growing strongly, owing to improvements in road transport and communications connectivity.
The banking sector has undoubtedly experienced an increase in bad loans; but this has often resulted from delays in investment projects that are otherwise viable. As these projects come onstream, they will generate the revenue needed to repay loans. In the meantime, India’s banks have enough capital to absorb losses.
Likewise, India’s public finances are stronger than they are in most emerging-market countries, let alone emerging-market countries in crisis. India’s overall public debt/GDP ratio has been on a declining trend, from 73.2% in 2006-07 to 66% in 2012-13 (and the central government’s debt/GDP ratio is only 46%). Moreover, the debt is denominated in rupees and has an average maturity of more than nine years.
India’s external debt burden is even more favorable, at only 21.2% of GDP (much of it owed by the private sector), while short-term external debt is only 5.2% of GDP. India’s foreign-exchange reserves stand at $278 billion (about 15% of GDP), enough to finance the entire current-account deficit for several years.
That said, India can do better – much better. The path to a more open, competitive, efficient, and humane economy will surely be bumpy in the years to come. But, in the short term, there is much low-hanging fruit to be plucked. Stripping out both the euphoria and the despair from what is said about India – and from what we Indians say about ourselves – will probably bring us closer to the truth.
The author became Governor of the Reserve Bank of India on September 4. This commentary was written before he took office.
(Source: Project Syndicate)

Wednesday, September 11, 2013

Bigger than auto-rickshaw but smaller than compact car, quadricycles to hit roads from October

The government has issued a draft notification that seeks to classify the quadricycle as a commercial vehicle under the Central Motor Vehicles Rules, taking the four-wheeled vehicle that is bigger than an auto-rickshaw but smaller than a compact car closer to Indian roads.
The draft notification allows use of quadricycles for transporting passengers as well as goods on non-highways. It says the vehicle must have a fully-enclosed body with a steering wheel, and that an empty quadricycle must not weigh more than 450 kg if used for transporting passengers and 550 kg if it's is made for carrying cargo.
The new category has been notified and we are inviting suggestions from the public on quadricycle," said a senior officer with the road transport ministry. "A period of 30 days has been kept for submitting suggestions or objections to the draft notification, which will be followed by the final order."
According to the notification, a passenger quadricycle will have the maximum seating capacity for three passengers and a driver, while the goods variant will be allowed to carry only one passenger along with the driver. The notification also has a negative list of materials such as rexin, cloth and plastic that cannot be used to cover the sides or the top of a quadricycle. It stipulates the maximum length of the passenger variant at 3 metre, effectively disqualifying all compact cars from being used as quadricycles. Tata Nano, the smallest car in India, is 3.2 metre in length.
For a goods quadricycle, the maximum length has been set at 3.7 metre. The overall width of these vehicles must not exceed 1.5 metre, according to the notification. The government has not notified any active or passive safety features for quadricycles that are applicable on other four-wheelers in the country. Quadricycles, however, will comply with the emission norms stipulated for auto rickshaws, which are less stringent than norms such as Bharat Stage III and IV that are mandatory for passenger cars.
Even though the government is moving ahead with plans to introduce quadricycles on the Indian roads, many automakers in the country openly oppose the idea, arguing that quadricycles will take the Indian automotive industry back by many years.
Automakers that have opposed the idea of quadricycles include Tata Motors, TVS Motors, Maruti Suzuki and Mahindra & Mahindra. Piaggio of Italy, which makes and sells quadricycles in Europe, has said that other companies should be given adequate time to develop products suitable for the Indian market.
"There has to a level-playing field to facilitate potential manufacturers to develop and offer products for the local market. We will wait and watch for any decision on quadricycles for the future," said Ravi Chopra, chairman at Piaggio India.
At present, Bajaj Motors is the only automobile maker in India that has developed a four-wheeled passenger carrier, the RE60, and plans to launch it by the end of this fiscal. The company has supported the move of introducing the new form of four-wheel vehicle that is more evolved than the traditional auto rickshaw and superior on passenger safety and fuel efficiency.
Officials in the transport ministry say the government policy on quadricycles will provide a natural upgrade to the dated three-wheeler auto rickshaws and will serve as an evolved form of transport with improved stability and modern features needed for intracity transport.
(Source: Economic Times)

Tata’s JLR to create a revolutionary aluminium vehicle architecture

Tata Motors-owned Jaguar Land Rover announced a massive GBP 1.5 billion investment plan which is expected to create 1,700 new jobs at its factory in Solihull, and create a revolutionary new aluminium vehicle architecture. The futuristic all aluminium chassis will be the base for all JLR's future models.

The first new model to utilise this innovative architecture is new mid-sized sports sedan from Jaguar, to be launched in 2015. The idea is that the new design will be flexible enough to be the base for future model of either
Jaguar or Land Rover cars. JLR chief executive Ralf Speth, making the announcement at the Frankfurt auto show on Tuesday, said: "Today's announcement signals Jaguar Land Rover's ambitions to push the boundaries and redefine premium car ownership."

Jaguar also revealed its first ever sports crossover concept vehicle — the
C-X17 — which was created as a design study to introduce the all-new aluminium monocoque architecture. The C-X17 concept illustrates the diversity of vehicles that could be produced using the architecture such as the four-seater sports crossover. At the show, JLR also revealed its first-ever sports crossover concept vehicle — the C-X17, which was created as a design study for the aluminium monocoque chassis. The C-X17 is designed to illustrate the diversity of vehicles that could be produced using the architecture, such as the four-seater sports crossover.

The company announced that its future investment plan will include increased spends for its suppliers, and will bring the total number of UK manufacturing jobs announced by Jaguar Land Rover over the last three years to almost 11,000.

Meanwhile, JLR reported its best ever monthly sales performance for August. JLR sold 27,852 vehicles — an increase of 28 per cent versus the same period last year. During the first eight months of the year, Jaguar Land Rover sold 269,653 vehicles, up 16 per cent. For the first eight months of the year sales were up in all major regions with Asia Pacific up 29 per cent, the China Region up 21 per cent, North America up 18 per cent, the UK up 16 per cent, Europe up 5 per cent and other overseas markets up 19 per cent. JLR is a significant contributor to Tata Motors' total sales.
(Source: Economic Times)

IBM Grip Loosened in Dow Average With Visa, Goldman Sachs Added

International Business Machines Corp. (IBM), whose $186.60 share price and 2.6 percent loss in 2013 combined to restrain the Dow Jones Industrial Average more than any other stock, is about to have its influence diluted.
The world’s biggest seller of computer services will see its proportion in the gauge cut to 7.9 percent from 9.4 percent when Goldman Sachs Group Inc. (GS), Visa Inc. (V) and Nike Inc. (NKE) are added this month. Goldman and Visa, at $165.14 and $184.59, become the second- and third-most influential members of the Dow, which is weighted according to stock price rather than market value.
Reducing IBM’s influence was part of the rationale for picking Goldman, the fifth-biggest U.S. bank by assets, and Visa, the largest payment network, according to David Blitzer, chairman of the S&P Dow Jones index committee, which announced the actions yesterday. Had they been in the gauge all year, the Dow would be up 17.3 percent instead of 15.9 percent, data based on yesterday’s prices compiled by Bloomberg show.
IBM’s sway over the Dow has been “reason enough not to consider it a good reflection of the stock market,” according to Mark Luschini, the Philadelphia-based chief investment strategist at Janney Montgomery Scott LLC, which oversees $58 billion. “On certain days I’ll walk out, and I’ll know to the right of the decimal where the S&P 500 index closed. But I won’t know if the Dow Jones industrial average is above 15,000.”

Three Removals

Bank of America Corp. (BAC), Hewlett-Packard Co. (HPQ) and Alcoa Inc. (AA) will exit the Dow on Sept. 20, making it the biggest reshuffling in almost a decade, according to S&P Dow Jones Indices, which administers the average. The changes may tighten its correlation with the S&P 500 and make the gauge more relevant to professionals, Luschini said in a phone interview.
Moves announced yesterday by a committee that includes editors of the Wall Street Journal will also boost the influence of banking and computer companies in the 30-member gauge as Goldman and Visa join JPMorgan Chase & Co., Cisco Systems Inc. and five other financial and technology firms. Bank of America is being removed even after rising 109 percent in 2012 for the Dow’s largest gain.
In Bank of America, Alcoa and Hewlett-Packard, the Dow is losing its three lowest-price shares and replacing them with members that have as much as seven times the influence. The addition of higher-priced stocks to balance IBM means the Dow will be less susceptible to swings in the computer company, which was first added to the 117-year-old index in 1932 and has been a member continuously since 1979.

‘Major Weight’

“You have three stocks that are hardly weighted at all and you’re adding three that are coming in with major weight -- it’s a pretty big change,” Richard Moroney, editor of Dow Theory Forecasts newsletter who manages $180 million at Hammond, Indiana-based Horizon Investment Services, said in a phone interview. “Does it make it more representative? Yes.”
IBM has more than doubled since the bull market in U.S. equities began in March 2009, a period in which it has always been the highest-price stock in the Dow. Because of the weighting, IBM’s performance has sometimes meant the difference between a gain or loss for the whole average.
On April 19, when IBM shares tumbled 8.3 percent after profits fell short of analyst estimates, the Dow trailed the S&P 500 by 0.8 percentage point, the most since December 2008. IBM’s loss cut 132 points from the Dow that day, erasing almost all the gains from other members. When the S&P 500 ended 2011 virtually unchanged, IBM’s 25 percent rally contributed almost half of the Dow’s gain for the year, driving the 30-member gauge up 5.5 percent.

Apple, Google

While Visa and Goldman will help limit IBM’s influence, some of the most heavily traded technology stocks in the country are effectively ineligible for the Dow because of prices so high they would distort the gauge, Blitzer said.
Apple Inc. (AAPL), whose shares closed yesterday at $494.64, has the biggest weighting in the S&P 500 because its market value is $449.4 billion, the largest in the world. Google Inc. (GOOG), whose stock trades at $888.67, has a capitalization of $296.1 billion and is the sixth-biggest weighting in the S&P 500, according to data compiled by Bloomberg and S&P.
“Clearly, Google and Apple are huge companies, very big and very well known, and there’s no question that they’re very important to the U.S. and the global economy,” Blitzer said in a conference call with reporters. “The prices of their stocks are so high that putting Google in would completely distort the index and it wouldn’t work.”

Priced Out

More U.S. companies may be priced out of the Dow as stock splits have become less common and the number of shares trading above $100 reached a record. Eleven companies in the S&P 500 have split their stock this year, compared with 42 annually since 1996, data from S&P show. That helped send the average share price to $65.96 last quarter, the highest on record.
Goldman Sachs climbed 3.5 percent to $165.14 yesterday. Beaverton, Oregon-based Nike jumped 2.2 percent to $66.82 and Visa in Foster City, California, increased 3.4 percent to $184.59.
Palo Alto, California-based Hewlett-Packard lost 0.4 percent to $22.27 and Alcoa in New York slipped 0.3 percent to $8.06. Bank of America in Charlotte, North Carolina, added 0.9 percent to $14.61.
The Dow average was devised in 1896 by Charles H. Dow, co-founder of Wall Street Journal publisher Dow Jones & Co. It originally included General Electric Co., American Tobacco and 10 other companies before expanding to 20 companies in 1916 and 30 in 1928.

UnitedHealth, Kraft

The average was last reshuffled in September 2012, when UnitedHealth Group Inc. replaced Kraft Foods Inc., which spun off its North American grocery business.
Goldman Sachs shares have more than tripled since their 2008 low though they remain down more than 30 percent since hitting $247.92 in October 2007. Second-quarter earnings doubled as overall revenue rose 30 percent, helped by record fees for debt underwriting. It held the top spot among arrangers of global equity, equity-linked and rights offerings in the first half, according to data compiled by Bloomberg.
“We are pleased to join this historic and significant market benchmark, and remain dedicated to delivering value for our shareholders as a member of the Dow 30,” Michael DuVally, a spokesman, wrote in an e-mail.
Visa, which is categorized as an information technology company by S&P and financial services by Russell Investments and Bloomberg, sets interchange fees and collects money for credit card-issuing banks. The stock is up 22 percent in 2013 after rising three of the last four years and at more than $180 would vie with IBM for the Dow’s biggest weighting.

Nike, Alcoa

Shares of Nike have climbed every year since 2008. The world’s largest maker of sporting goods reported net income in the quarter ended May 31 of $668 million, up 22 percent from a year ago, as demand surged for running and basketball gear in its largest market, North America.
Alcoa, the largest American aluminum producer, is being removed after plunging more than 80 percent since its 2007 high and seeing its debt-rating cut to speculative grade this year -- making it the second junk-rated Dow Jones Industrial Average (INDU) company in at least three decades. Trading around $8, it has the smallest influence on the average.
The company said in a statement that the move has no effect on Alcoa’s business strategy.

Autonomy Writedown

Hewlett-Packard, which took an $8.8 billion writedown related to its acquisition of Autonomy Corp. in November 2012, has declined for three straight years, and at about $22 is the average’s third-smallest stock. Its trailing 12-month revenue plummeted the most in more than a decade last fiscal quarter, according to data compiled by Bloomberg.
“HP remains confident that we are making progress in our turnaround,” Michael Thacker, a spokesman, said in an e-mail. “We have delivered financial performance in line with or better than our expectations throughout this fiscal year, and remain focused on delivering shareholder value.”
Even with its 2012 gain and a 25 percent advance this year, Bank of America, the second-largest U.S. lender, remains more than 70 percent below its high of $54.90 in November 2006. Two people with direct knowledge of its plans said yesterday the company will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand.
The index change “has no impact on our business or our strategy for providing solid returns to shareholders,” Jerry Dubrowski, a Bank of America spokesman, said in a statement.
(Source: Bloomberg)

Rise in India car sales considered unsustainable

India’s struggling carmakers staged a temporary comeback in August, boosted by higher sales from Maruti Suzuki following a factory closure last year, although industry figures warned that low demand and a weak rupee would cause the sector to shrink for a second consecutive year.
Sales of passenger cars rose 15 per cent year-on-year during the month, the first increase in 2013, as Maruti, India’s largest carmaker by sales, enjoyed an upturn even as the rest of the industry continued to suffer from weak consumer confidence and rising fuel costs.
A month-long shutdown at a big Maruti plant close to New Delhi cut the company’s production during August 2012, following industrial unrest and rioting in which a senior manager was killed.
But while Tuesday’s data from the Society of Indian Automobile Manufacturers trade group showed car sales up at 133,486, SIAM described the figures as a blip and said the industry’s run of bad figures was likely resume in the coming months.
“Maruti’s figures have created the illusion of a turnround, but actually this is not so, things are still worrisome,” said Sugato Sen, senior director at SIAM. “Nothing has changed for the better . . . We are still saddled with high inflation and now we have this new dimension of foreign exchange rates, so the cost of manufacturing has gone up.”
India’s rupee has declined by about 20 per cent against the US dollar over the past six months, helping some car exporters but adding costs more generally to an industry that imports much of its raw materials, and particularly affecting global auto groups that bring in components from abroad.
The currency’s fall is likely to add further downward pressure to a once-vibrant sector that shrank for the first time in a decade the last financial year. SIAM suggests that earlier forecasts of a modest expansion this year are unlikely to be met.
“At the end of the year we will not be anywhere near what we had originally projected,” Mr Sen said. “To recover from here . . . will require huge growth in the subsequent months, which we don’t expect.”
Manufacturers hope that consumers may be tempted back into showrooms over the next couple of months, which are seen as an auspicious time to buy cars on account of a number of Hindu religious festivals. However, analysts cautioned that sustained sales increases were unlikely.
“Even the festival season is not going to be all that festive this year,” said Ammar Master, senior analyst for India at research group LMC automotive.
“Sentiment is getting worse and worse . . . You will see more incentives and discounts, but India’s middle class just isn’t buying cars at the moment because people are worried about growth and jobs.”