Wednesday, November 30, 2016

Consumer durable retailers go slow on fresh inventory

Nilesh Gupta, Managing Partner at Vijay Sales in Mumbai has stopped giving orders to consumer durable companies for the past few weeks and is unsure about when he will resume filling up his inventory. Demonetisation has taken a toll on the sales of the Mumbai headquartered retailer along with others like Croma, eZone and Next Retail, all of whom are now tightening their budgets when it comes to buying fresh inventory from companies such as LG, Samsung, Godrej and Voltas.
“We have stopped giving orders to durable brands since the time demonetisation was announced and suspect that even durable companies have reduced their production in the current scenario. It is a million-dollar question as to when we will start giving orders again to these companies since sales are down by 50 per cent at our stores,’’ says Gupta.
Videocon Group-owned Next Retail is also adopting a similar approach to controlling inventory in times of slow offtake in the durable category.
“We have stopped buying all the categories of consumer durables except mobile phones and the annual budgets of buying the durable brands are being reworked since we do not want to take risks.
“Sales have derailed despite us trying to push EMI schemes and it will become a serious issue for the high-end durable brands who might also have to shut down production,’’ observes Sanjay Karwa, CEO, Techno Kart, a Videocon Group company, which owns the 120 stores of Next Retail.
In fact, mobile phones is the only category which seems to be selling faster than the rest of the consumer durable categories today.
As Rajan Malhotra, President- Retail Strategy, Future Group, CEO, eZone, said: “Mobile phones is the only category which has momentum. We are tightening our budgets by nearly 40 per cent when it comes to buying other durable categories till the year end as we need to have a cautious approach.’’
Tatas-owned Infiniti Retail, which owns Croma retail stores, is witnessing healthier growth rates for the mobile phone category compared to the rest. “Smartphones is growing the fastest at more than 30 per cent even post demonetisation at our stores,’’ said Avijit Mitra, CEO, Infinity Retail.
As for consumer durable companies, it may be a matter of time some of them are forced to scale down production targets.
According to industry sources, MNC players like Samsung are believed to have halted production in certain categories and have prolonged their maintenance period at their factories when they are supposed to refurbish and repair their machinery by exceeding a week, as they do not want to undertake any production at this stage.
Others like LG are being cautious and would try and practice ‘just in time’ inventory control. “While we are not taking up our growth targets, at the same time, we are taking some precautionary measures. For instance, in the case of imports, we will try to keep a month’s balance and not stretch it beyond 30 days,’’ said Niladri Dutta, Head of Corporate Marketing, LG. Domestic players like Godrej and Voltas are also mulling cutting down on production in some of their categories.
Kamal Nandi, Business Head & Executive Vice-President, Godrej Appliances, said: “Since demand has dropped by nearly 40 per cent, we have decided to cut down production across all our categories like air-conditioners, washing machines and refrigerators by almost 20 per cent.’’
Market leader in air-conditioners, Voltas is waiting to see how demand pans out for the category. Pradeep Bakshi, President &COO, Voltas, said, “In the last 15-20 days , sales have dropped by 50 per cent. If this trend continues in the long run, we may have to cut down on production.’’
An analyst at brokerage firm MK Global said, “Most durable companies would be forced to scale back on production as they do not want to be stuck with unsold inventories since most retailers have stopped buying from them. Durable sales were not that great during Diwali and it should be a matter of time before durable manufacturers take a call on production.’’

New Era for Oil Reverberates Through Asia’s Shipyards to Runways

While the first OPEC production cuts since 2008 were inked as Asia slept, the winners and losers from the surprise deal are already becoming clear in the world’s biggest oil-consuming region.
U.S. crude is hugging $50 a barrel following Wednesday’s 9.3 percent surge, the biggest since February, and Goldman Sachs Group Inc. is projecting further gains of more than 10 percent by the end of the first half as the current oil surplus withers into a deficit. A revival in prices could prove challenging to countries like India and China, which import most of the crude they consume. Yet the region is also home to some of the largest players when it comes to shipping and oil-market infrastructure.
“It’s extremely hopeful and optimistic for those traditional manufacturing companies in Asia,” Hong Sung Ki, a commodities analyst at Samsung Futures Inc., said by phone from Seoul. “Oil explorers as well as steel companies that supply pipeline makers will start boosting investment and production as oil prices are on the rise in the long term.”
Asian energy stocks are surging the most in almost 10 months, with exploration companies such as Australia’s Santos Ltd. and Tokyo-based Inpex Corp., Japan’s biggest oil and gas explorer, leading gains.
Rig builders are also rallying, amid speculation higher oil prices will encourage further exploration, fueling demand for drilling equipment. Keppel Corp., the world’s biggest oil-rig manufacturer, jumped as much as 5.5 percent to S$5.75 in Singapore, the most since June. Sembcorp Marine Ltd., the second-biggest, also surged.
For them, the OPEC deal is coming at a key moment. Oil-rig makers have fired thousands of workers in the past two years and have been planning more cuts amid weak demand for equipment to explore and transport oil. Energy companies have cut more than 350,000 jobs since crude prices started to fall in 2014 and explorers reduced hundreds of billions of dollars in investment to weather the rout. 
Shipbuilders in South Korea, home to the world’s top three shipyards, also benefited from the deal, with Hyundai Heavy Industries Co., the biggest, gaining more than 5 percent in Seoul. Rival Samsung Heavy Industries Co. rose the most since June on a closing basis. Both companies have also had to shed employees this year as low oil prices crimped demand for new vessels and deep-sea drilling platforms.
While the oil-price increase may prove a boon for crude-industry support companies, it’s a negative for air carriers, with jet fuel prices jumping to a one-month high in New York. Japan Airlines Co. sank the most in nine weeks, as Australia’s Qantas Airways Ltd. slipped more than 2 percent. Singapore Airlines Ltd. lost the most since Nov. 11.
Moving beyond equities, the impact of the OPEC deal is being most keenly felt in the government bond market in Asia, with benchmark yields from China to New Zealand tracking Wednesday’s surge in 10-year Treasury rates.
The Bloomberg Barclays Global Aggregate Total Return Index, a measure of investment-grade debt from 24 markets around the world, capped a 4 percent slide for November last session, the gauge’s worst monthly slump since its inception in 1990. High oil prices buoy inflation expectations, which were already elevated on bets Donald Trump’s U.S presidency will usher in a wave of government spending.
Yields on Australian sovereign notes due in a decade jumped by seven basis points Thursday to 2.79 percent, their highest level since January. Rates on similar maturity bonds from South Korea to Hong Kong rose by at least two basis points as the slump in Treasuries worsened. Ten-year U.S. yields extended Wednesday’s nine basis-point climb, rising another basis point to 2.39 percent, their highest level since July 2015.
“A lot of people are beginning to think that it is the end of the bull rally,” said Roger Bridges, chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management’s Australia unit, which oversees $14 billion.

The World Is Feeling the Might of China’s Commodity Traders

The Chinese speculators shaking up global commodity markets are switched-on, flush with cash and probably not getting enough sleep.
For the second time this year, trading has exploded on the nation’s exchanges, pushing prices of everything from zinc to coal to multi-year highs and sending authorities scrambling to deflate the bubble before it bursts. Metals brokers described panic earlier this month as the frenzy spread to markets in London and New York, prompting wild swings in prices that show no signs of abating.
While billions of yuan have poured in from herd-like Chinese retail investors who show little regard for market fundamentals, brokers and traders say even more is coming from an expanding army of deep-pocketed hedge funds. They’re chasing better returns in commodities as stocks and real estate fade, often using algorithms and trading late into the night, when markets in London and New York are most active.
“There is no doubt that the price moves and the bigger volumes worldwide are being driven by the Chinese, and by professional speculators and financial players,” said Tiger Shi, managing partner at brokerage BANDS Financial Ltd., which counts several of those funds as clients. “The western hedge funds and institutional investors don’t really know what’s going on. Often they were used to trading macro factors or Fed policy, but now they find they have fewer advantages.”
Shi, previously head of metals in Asia at Jefferies Group LLC and Newedge Financial Inc., estimates that China may have more than 5,000 hedge funds active in commodities. At least 10 manage assets of more than 10 billion yuan ($1.4 billion).
The use of algorithmic trading, in which computers execute multiple orders in milliseconds, is turbo-charging volume and volatility, according to Fu Peng, a portfolio manager at Lianzhan Global Macro Fund Management Co. About a third of activity on Chinese exchanges is executed by automated commands, which generates more volume and greater momentum on global markets, Shi estimates.
A recent example was on Nov. 11. Copper in Shanghai jumped by the most since trading began in 2004 amid a surge in volume. On the London Metal Exchange, it gained as much as 7.6 percent, before sinking 1.7 percent in the Asian evening. The gap between the day’s high and low was more than $500, the widest in five years, and the intensity of the swing was just as big in New York futures.
“I can recall only two other occasions in my career where there was such panic and devastating price action in copper but this market today is far less transparent,” Matthew France, head of institutional sales for metals in Asia at Marex Spectron Group, said in an e-mailed report on Nov. 14. “The machine component in the market is now so much bigger as is the onshore retail and fund involvement on the Shanghai Futures Exchange and OTC options.”
The country’s biggest hedge funds include DH Fund Management Co., Shanghai Discovering Investment Co. and Shanghai Chaos Investment Group. Officials for all three declined to comment for this story.
Over less than two weeks this month, the value of daily transactions on China’s three commodity exchanges more than doubled to peak at $226 billion on Nov. 14. Sparked by speculation that government reforms are helping reduce oversupply of raw materials amid signs of improving demand, Chinese money is pouring into commodities as investors look for better returns than other assets including stocks or real estate, according to Fu at Lianzhan Global Macro Fund Management. 
“The nation’s supply-side reforms had a big impact on the market balance, and that’s the fundamentals behind the trading,” Fu said by mobile phone from Hong Kong. “But at the same time, we’ve got too much money there. There have been no returns from investment in industries. The stock market is neither dead nor alive. Investment in real estate also got curbed. So all the money is rushing into commodities.”
The Bloomberg Commodity Index has returned 7.4 percent this year compared with an 8.3 percent drop in the Shanghai Composite Index of equities, and the government has imposed measures to cool the country’s real estate market.
“Commodities market volatility is liquidity driven, as money from commercial bank wealth management products and private banking accounts flow into the market seeking higher return,” said Li Yulong, chief investment officer at Jyah Asset Management, a mutual fund which overseas more than 9 billion yuan.
Chinese traders are often most active during the night session, when trading also typically peaks on the LME and on Comex in New York. On almost two-thirds of the past 30 trading days, copper trading was heaviest between 9 p.m. and 11 p.m. in Shanghai, bourse data show. Analysis of volume and open interest suggests they typically hold contracts for only a few hours.
Similar to the last frenzy in April, the government-owned exchanges have stepped in to cool trading by raising fees and margins, or cutting the number of new positions allowed daily. Volume and turnover have since come off their highs but prices are still swinging. Copper is poised for its biggest monthly advance since 2009 in London and has briefly jumped above $6,000 a metric ton. But broadly, metals prices are retreating, with lead recording its biggest two-day tumble in five years.
“The massive and unprecedented surge in Chinese trading volume in base metals over the past month -- but especially since the election -- has put LME metals traders on red alert,” Tai Wong, director of commodity products trading at BMO Capital Markets in New York, said in an e-mail. The price moves caused by Chinese traders make “a strong argument that the Middle Kingdom is once again the center of the world, at least for metals,” he said.

Tuesday, November 29, 2016

Demonetization Dos and Don’ts

On November 8, at 8:15 in the evening, Indian Prime Minister Narendra Modi’s government nnounced that, at the stroke of midnight, all 500- and 1,000-rupee notes in circulation would no longer be considered legal tender, and would need to be exchanged for new 500- and 2,000-rupee notes. Modi’s “demonetization” intervention affected 85% of the money in circulation in India. It was an unprecedented move, whether in India or almost anywhere else, and it is by far Modi’s boldest policy intervention to date.
The Modi government is targeting the “black money” associated with tax evasion, corruption, and counterfeiting, and thus the drug traffickers, smugglers, and terrorists who engage in those activities. India’s tax-paying salaried classes and even the poor initially welcomed the policy enthusiastically, viewing it as sweet revenge against tax evaders who had stowed away their ill-gotten gains; they reveled in anecdotes of corrupt officials burning bags of cash or throwing money into India’s rivers. Given these large upfront costs, it is reasonable to ask how effective demonetization is in fighting tax evasion and corruption, and if there is a less costly approach to demonetization.The near-term impact will be the equivalent of an “anti-stimulus” policy intervention, and the consequent drag on demand will be significant. Moreover, as real-estate prices decline, so, too, will household wealth. Although lower house prices will make new homes more affordable, the stock of occupied homes will far exceed new purchases in the near term, so the negative-wealth effect will overwhelm the gains.
Back in 1976, in an article entitled “How to Make the Mob Miserable,” the American economist James S. Henry addressed the question of effectiveness, prescribing demonetization as a measure to undermine mafia operations. But policymakers did not take his proposal seriously. Henry’s proposal was, in his own words, “dismissed as either administratively impractical or as a one-shot action that would have no long-run impact on criminal behavior.”
In a new book, The Curse of CashKenneth Rogoff champions the elimination of high-denomination notes in order to fight tax evasion and criminal activity. Rogoff furnishes extensive evidence that making it costly to hoard cash would deter illegal activities. While tax evaders also store their wealth in non-monetary forms, such as land, art, and jewelry, cash remains a leading vehicle for ill-gotten gains, owing to its inherent liquidity. In other words, questions posed by Modi’s critics about the role of cash in feeding stockpiles of black money are misplaced.
That said, Rogoff proposes a different strategy to address the menace of black money – one that would be minimally disruptive and arguably more effective, at least in the long run. That strategy would depart from the Modi government’s intervention in two fundamental ways. First, it would be gradualist, implemented over several years. Second, it would permanently eliminate high-denomination notes.
While this gradualist strategy would not punish existing hoarders, who would find creative ways to recycle their cash in the interim, it is more likely to improve tax compliance and reduce corruption over time, as large-denomination notes are permanently taken out of circulation. India’s current policy of replacing 1,000-rupee notes with 2,000-rupee notes undermines the long-term effectiveness of its policy. 
Moreover, the gradualist approach is administratively practical, minimizes the collateral damage to the real economy and ensures that there is enough time to extend financial services and financial literacy to larger parts of India. Over the last two years, the Modi government has made an impressive push for financial inclusion with its Jan Dhanprogram, which has facilitated the creation of 220 million new bank accounts. But many people who create accounts do not necessarily use them. A 2015 World Bank study of bank-account usage and dormancy rates across different regions found that only 15% of Indian adults reported using an account to make or receive payments. In this environment, a cash scarcity is economically crippling.
Modi’s policy intervention is bold, and the economic principles motivating it are beyond reproach. But a gradualist approach that includes the permanent withdrawal of large notes would have served the cause better, even if it did not generate the same “shock and awe” as the current policy. This will become more apparent as the large costs to the economy emerge over the next several months.

Monday, November 28, 2016

Cementing recovery gradually

Not many cement mixing trucks are plying on the highways these days. The rotating drums that mix cement, sand, gravel and water to make concrete are lying idle — post the announcement of demonetisation by the Modi government. “Without sand and gravel, what’s the use of cement,” asks a Chennai-based cement dealer.
Demonetisation effect
The procurement of sand and gravel — where transactions are largely done on a cash basis — took a big hit last week on account of demonetisation. This, in turn, had repercussions for off-take of cement – which requires sand and gravel to produce concrete. Moreover, given the liquidity crunch faced by individual house builders — a large demand driver for cement — cement sales were down 40-80 per cent in the last 10 days.
While the fall in demand due to liquidity crunch is expected to recover from next January, there are concerns as to the long-term impact on cement demand from a crackdown on black money.
According to Ambit estimates, demonetisation could affect 15 per cent of the cement market — with volume growth reducing to 0-4 per cent between December 2016 and March 2017 and 5 per cent in FY ‘18. North and Central markets are expected to bear the maximum brunt, given the higher extent of cash-based transactions as compared to the South.
Market break-up
About 60-65 per cent of cement demand comes from individual housing — which is equally split between rural and urban markets. Rural demand, dependent on agriculture and allied activities, is expected to be unaffected by demonetisation (30 per cent). Another 25 per cent demand from infrastructure and industrial capex would also remain immune. So it is 30 per cent of urban and semi-urban housing demand as well as another 15 per cent demand from organised real estate — 45 per cent in all — which could be affected by the demonetisation move. While two-thirds of these transactions are currently in ‘white’, the remaining that accounts for 15 per cent of the overall demand is expected to be vulnerable to crackdown on black money.
With uncertainty looming large over the long-term impact of curbs on black money on the cement sector, investors have turned bearish. Cement stocks have fallen anywhere from 13 to 28 per cent in the last one month.
While the demonetisation could have a long-term impact on cement demand, its effect on the economic recovery is to delay it by 5-6 months, at worst, according to experts. So, those investing with expectation of a cyclical upturn in the sector still have reasons to stay put. Moreover, with some of the stocks shedding their flab, there are opportunities to buy stocks at reasonable valuations as compared to the past.
To zero-in on such companies, we analysed the cement businesses across five parameters — capacity utilisation, market lucrativeness, valuation, cost efficiencies and financial leveraging.
Companies with a cement production capacity of 10 million tonnes or more were considered for the analysis.
Capacity utilisation
Improvement in capacity utilisation is a good trigger for cement stocks since it contributes to profits at a rapid clip after recovery of fixed costs. Capacity utilisation of the cement industry is currently at 66 per cent — close to the lowest in the last decade. During the last boom witnessed in the cement industry, capacity utilisation had touched 94 per cent levels (2007).
Cement demand has a strong correlation to economic growth — with a 1 percentage growth in economy resulting in a 1.2 per cent growth in demand for cement. Since 2001, cement demand has grown at about 8 per cent annually.
However, the last four years have been an anomaly — when cement demand clocked average annual growth rates of only 4 per cent. With demonetisation playing spoilsport this year, both FY 17 and FY 18 could be bad.
However, over the years, industry players have added capacity at a rapid clip in anticipation of recovery in economic growth and upturn in the cement cycle. And the industry is now almost done with its capex. Over the next three financial years FY 17- FY 20, capacity addition would halve to about 33 million tonnes (mt) as against 70 mt added in the last three years.
At current capacity of 410 mt, about 138 mt are lying idle — half of which is in the southern market. While bigger players like UltraTech Cement, ACC and Ambuja Cement had capacity utilisation in the range of 73-77 per cent in 2015-16, it was lower (54-58 per cent) for some regional players like Ramco Cement and Dalmia Bharat.
In terms of potential improvement in capacity utilisation, ballpark estimates hint at Ambuja Cement and Shree Cement topping the charts among large players. UltraTech Cement, in contrast, was only 9 per cent away from its peak levels of 2007. Among regional players, Dalmia Bharat and JK Cement look attractive with further potential to improve capacity utilisation by 24 per cent and 19 per cent respectively. The JK group’s capacity utilisation had touched 90 per cent levels in 2007 as against 78 per cent for Dalmia Bharat. It needs to be noted that the regional footprint of players would have changed since 2007 and not strictly comparable.
In all, Ambuja Cement and Dalmia Bharat look to have greater potential to benefit from pick-up in capacity utilisation. Many regional players, including Dalmia Bharat, recently added capacities which, in turn, lowered their utilisation rates. They have further scope for improving capacity utilisation rates. On the other hand, JK Lakshmi Cement is already running at a higher capacity utilisation rate of 82 per cent — with relatively less headroom for further improvement.
Market lucrativeness
The market lucrativeness of a region is a function of various factors — size, demand, pricing and the extent of fragmentation. In terms of size (as measured by volume despatches), the North is the biggest market with a market share of 40 per cent, followed by the South (28 per cent), the East (19 per cent) and the West (13 per cent).
And thanks to strong growth in demand for cement in the North and the East, capacity utilisation has been higher at 80 per cent and 85 per cent respectively in these markets. Western and southern markets, in turn, have lower rates of 70 per cent and 55 per cent respectively.
Going forward, the NDA government’s focus on boosting rural income — by increasing allocation to IAY (Indira Awaas Yojana), PMGSY (Pradhan Mantri Gram Sadak Yojana) and MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) — is expected to boost cement demand for the country. Moreover, this year, after two years of successive drought, monsoons have been normal. If it is followed by a bumper winter crop, rural spends could increase — boosting cement demand. However, it needs to be seen to what extent rural spends would get into big-ticket housing — as against that of consumption items.
Also, a significant part of the government projects — especially roads and railways — is happening in the north, central and eastern region.
In all, north, central and eastern region are expected to benefit from the expected boost in rural income with some of these markets, central, for instance, being primarily retail-driven. Western region, in contrast, which is driven by urban housing, is expected to witness a lull — thanks to higher residential property prices and lack of demand.
Demonetisation, however, could play spoilsport over the short term in the markets of north and central India due to high share of cash transactions while the south market remains resilient.
In terms of pricing, southern players top the charts followed by East, West, North and Central. As per latest data, cement prices are hovering at ₹310-330 for a 50-kg bag across the country. Since January of this year, cement prices were up in the North, Central and Western markets, while they remained flat in the South. In the East, cement prices were down as compared to the beginning of the year.
Also, there are signs of consolidation in the industry – which is bringing pricing power back to the hands of market leaders. For instance, with the merger of cement business of Jaiprakash Associates with that of UltraTech, there has been consolidation in the Central market – with the top six players commanding a market share of 87 per cent. In the last few months, Nirma acquired Lafarge and Orient – the Jaypee’s cement business in MP, while Shree Cement is now actively bidding for Shiva Cement.
Eastern market is the most consolidated with 90 per cent market share among six players, followed by the West, South and North at 80 plus, 67 and 70 per cent respectively.
At this juncture, the Central and the Eastern market look attractive– when all the four parameters are taken into consideration. Among the large-cap players, Ambuja Cement (45 per cent of sales) and ACC (38 per cent of sales) currently have higher exposure to both these markets. Among the regional stocks Dalmia Bharat has the highest exposure at 50 per cent of its sales.
Financial leveraging
Many of the regional cement players have ramped up capacity by taking additional debt to expand capacity, JK Lakshmi Cement, JK Cement and Prism Cement being among them. With cement demand not growing commensurately, interest costs have weighed heavy on the profitability of these players. For instance, interest to operating profit ratio for JK Lakshmi Cement rose from 17.9 per cent in 2012-13 to 60.4 per cent in 2015-16. During the same period, it rose from 23.1 per cent to 51 per cent for JK Cement.
Debt to equity ratio is currently at a decade-long peak — in the range of 1.4-1.9 for some of the regional players.
In contrast, for larger players like Shree Cement, the ramp-up in operations has been done from its own cash flows. Its debt to equity fell from 0.34 per cent in 2012-13 to 0.16 in 2015-16. It has further plans to ramp up capacity from 26 mt in 2015-16 to 40 mt by FY ’20. While Ambuja Cement has no debt on books, the debt equity ratio for UltraTech Cement is expected to increase post-merger with JP’s cement operations in MP to 1.0 from 0.50 in 2015-16.
From a financial leveraging perspective, JK group companies – JK Lakshmi Cement and JK Cement – appear riskier with debt-equity ratio in the range of 1.4-1.5 . While Ramco Cement had taken to higher debt in the past, its debt equity has now reduced to 0.9. We prefer Ambuja Cement, Shree Cement among the large players and Dalmia Cement among the regional players.
In the last one month, the stock prices of large players were down 16 per cent on an average, while some of the mid-cap stocks were down by 23 per cent. Among the large players, Ambuja Cement fell the most – 20 per cent – while among the regional players, it was JK Cement (28 per cent). Post correction, some of the counters are quoting close to the replacement value.
For instance, Ambuja Cement is currently quoting at an enterprise value per tonne of $158 – which is close to the replacement value of $150 per tonne. While ACC is currently quoting at an enterprise value per tonne of $98, it is getting lower valuation for its bad operational performance. While its volumes dipped 10 per cent in the September ’16 quarter, there was also an unexpected hike in its operation costs during the quarter. While the market leader UltraTech cement is a safe bet on the cement industry it is also quoting at a hefty premium of $200 per tonne – 33 per cent above the replacement values.
Among the mid-cap counters, JK Lakshmi Cement and Dalmia Bharat are reasonably priced – quoting at $76 per tonne and $111 per tonne respectively. Interestingly, while Ramco Cements was quoting at a slight premium to replacement values ($167 per tonne), it was also quoting below its five-year historical averages – be it price to earning multiple or enterprise value to operating profits ratio.
Ambuja Cement and JK Lakshmi Cement come out as favourites on the parameter of valuation.
Cost leadership
Cost efficiency is a function of the ability to control three type of costs — power and fuel, freight and raw materials. In the past, many cement companies were able to reduce their costs (and improve profits) by substituting coal with pet coke, whose prices had fallen by 40 per cent during the August ’14 – February ’16 period. However, since February ’16, petcoke prices have been up 80 per cent, with little headroom to cut costs further by changing the fuel mix.
During the year 2015-16, Ramco Cement benefited from lower diesel prices (that lowered its freight costs) as well as lower raw material costs.
Among the large players, Shree Cement is very efficient with cost per tonne of ₹2,982 as against ₹4,035 per tonne for Ultratech and ₹4,346 for ACC. Moreover, Shree Cement had a relatively higher EBITDA per tonne than its peers – Ambuja and ACC – making it our favourite among large-cap stocks. Among mid-cap players, Ramco Cement was operationally efficient with lowest cost per tonne (₹2,481) than its peers. Moreover, it enjoyed the highest EBITDA among its peers, making it our favourite among the mid-cap stocks.
Top scorers
If all the above mentioned parameters are taken into consideration, among the large-caps, Ambuja Cement stands out – scoring on four aspects of market lucrativeness, financial leverage, capacity utilisation and valuation. Among mid-cap players, Dalmia Bharat scores on the aspect of capacity utilisation, financial leveraging and market lucrativeness, while JK Lakshmi scores on valuation.
While demonetisation has put a temporary spanner into the economic wheel, it is also expected to fill government coffers over the long term. Moreover, any signs of slag in rural income or their spends would only mean greater fiscal measures to prop up the economy. This in turn could mean higher spends on infrastructure and rural welfare schemes.

Cement mixing trucks are definitely going to be back on the road with a big vroom.
(Business Line)

Zinc Explodes With Lead in Surge to Highest Level in Nine Years

Zinc in London headed for its highest close in more than nine years, while lead was set for its strongest finish since 2011 as bullish sentiment spurs a surge in metals. However, a momentum indicator eyed by traders signals that the markets are overbought.
Industrial metals have climbed almost 30 percent in 2016 after three years of losses as demand growth stabilized in China, President-elect Donald Trump pledged to invest in infrastructure and revitalize the U.S. economy, and mine closures curbed supply. Chinese investors have added to the speculative binge.
Zinc, the best performer on the London Metal Exchange this year, climbed as much as 5.4 percent to $2,970 a metric ton and traded at $2,954 by 3:23 p.m. in Shanghai. Lead advanced as much as 7.2 percent before trading 3.4 percent higher. Both metals closed up the limit on the Shanghai Futures Exchange.
“We’re bullish on zinc and lead given the tightness in ore supply and potential production cuts at smelters in coming months, but the speed of the rally exceeds our expectations,” Dina Yu, an analyst with CRU Group, said by phone from Beijing. “There have been no big changes in fundamentals that can explain such a surge. The market is driven by bullish sentiment in all metals.”
Metals extended gains after the LME Index of six contracts posted its biggest weekly advance since 2011. Copper in London rose 2.1 percent to above $6,000 a ton, and is poised for its best month in more than a decade. The speed of the moves has left the 14-day relative strength indexes for zinc, lead and copper all above 80. Levels over 70 are considered by some investors to be a sign that a rally has gone too far. 

Zinc has outperformed its peers, rising more than 80 percent this year, as mine supply dwindles. Lead is up almost 40 percent. The metals, which often come from the same mines, will be supported by “tightening fundamentals and widening deficits over the coming years,” BMI Research Ltd. said Monday. Global consumption of zinc exceeded supply for a seventh month in September, according to data from the International Lead & Zinc Study Group.

Sunday, November 27, 2016

The Unexpected Management Genius of Facebook’s Mark Zuckerberg

The first time I interviewed Mark Zuckerberg, back in 2005, he was all of 21 years old and could have passed for 16. He had recently dropped out of Harvard to move his startup to Silicon Valley and was obviously enjoying the novelty of being called CEO. Facebook’s website—there was no mobile version yet—had 6 million users and was open exclusively to high school and college students. It had only just added a feature allowing users to upload multiple photos to their profiles. But the company was already a hot commodity, valued at $100 million and coveted by buyers who were willing to pay far more. And despite his callowness, it was obvious that Zuckerberg was an entrepreneur who was, as I wrote at the time, “preternaturally levelheaded.”
If there was one point Zuckerberg was most forceful about that day, it was this: He wasn’t the least bit interested in selling his year-old company. “I’m in this to build something cool, not to get bought,” he said with a bloodless sincerity that was altogether convincing.
Eleven years later Zuckerberg (No. 1, Businessperson of the Year) has built something beyond cool: He has willed into being a global phenomenon. Facebook  FB -0.38%  is a nearly 16,000-employee media powerhouse worth $350 billion—and also an advertising-technology juggernaut on track to annual revenues of more than $27 billion in 2016 and gaudy profits of $7 billion. Its core product now has 1.8 billion users, and Zuckerberg has shrewdly assembled a portfolio of properties to buttress Facebook. The complete “family of apps” includes the photo-sharing tool Instagram and the communications service WhatsApp, plus two homegrown apps, Facebook Messenger and Facebook Groups. In addition, Zuckerberg believes the company’s Oculus virtual-reality headset represents the next way people will communicate with one another.
Facebook’s immense accomplishments already have conferred superstar status on Zuckerberg, inviting comparisons to the likes of Bill Gates, Steve Jobs, and Jeff Bezos. At 32, he is as fresh-faced and casually dressed as a decade ago, yet today the Facebook CEO is a celebrity wherever he goes. He huddles with Presidents, Prime Ministers, and the pope. He is photographed jogging in Beijing and Barcelona. (This year he ran his first half-marathon.) Together with his physician wife, Priscilla Chan, he has become one of the world’s most ambitious philanthropists, most recently pledging $3 billion to an initiative with an audacious goal: to cure, prevent, or make manageable all diseases in their children’s lifetime. 
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Zuckerberg is rightly recognized for his outsize success. Nevertheless, he is surprisingly underappreciated for his business acumen. Yes, he has delegated the commercial aspects of Facebook to Sheryl Sandberg, Facebook’s polished chief operating officer, a Harvard MBA who is 15 years Zuckerberg’s senior. Sandberg’s presence has fostered an “adult supervision” narrative familiar to the Valley. But unlike, say, the Google  GOOGL 0.16%  founders, who turned over the CEO job to Eric Schmidt for a decade, Zuckerberg has remained chief executive throughout Facebook’s 12-year sprint to greatness. Despite repeated doubts—when Facebook missed the shift to smartphones, when it was thought to have botched its IPO, when it was seen as losing its luster with young people—Zuckerberg has remained the company’s chief product visionary and business strategist. Through bold acquisitions and the articulation of a remarkably constant mission, Zuckerberg has kept Facebook on track in the face of full-frontal assaults from the likes of Google, Twitter  TWTR -0.88% , Snapchat, and others.
Admirers attribute Zuckerberg’s business success to his inquisitive nature as well as to his relatively grounded approach to technology. “He’s always been a learn-it-all person, to a level that is sometimes maddening, considering how much more I have to learn from him than he does from me,” says Matt Cohler, a venture capitalist at Benchmark and an early Facebook employee who has remained close to Zuckerberg. “He maintains a relentless focus on innovation, but at the same time he’s an applied-science and engineering guy.”
What Zuckerberg has engineered at Facebook is growth that is astounding considering the size of the company. For four years running, it has grown revenues at a 50% clip, while profits have jumped fivefold. Unsurprisingly, Facebook’s stock has followed suit, doubling in two years. In its most recent quarter, Facebook increased its revenues 56% over the year before and its net income 166%. (And yet the stock dipped on the news, as some investors expressed fears the company won’t be able to keep up the scorching pace.)
Growing at scale is the holy grail of business leadership—and this feat alone makes Zuckerberg an easy choice for Fortune’Businessperson of the Year for 2016. Facebook’s products are frequently dissected, as are its missteps as a reluctant media titan. (Facebook seems to enjoy the financial fruits of advertising dominance far more than the editorial responsibilities that go with it.) 
Yet for all the celebration of Facebook’s success and the adulation of Zuckerberg as a visionary, what’s less well understood is how he goes about his day job as an executive. What makes him so effective as a businessperson? An examination of Zuckerberg’s management approach reveals that his success rests on three pillars: his unique ability to look into the future, his otherworldly consistency, and the business discipline he has nurtured in an industry quite often enamored of bright, shiny objects. A closer look reveals just how levelheaded he has remained over the years.

Being a visionary is harder than it looks.

Mike Vernal graduated from Harvard in 2002, a few months before Zuckerberg arrived on campus, and took a job at Microsoft  MSFT 0.22% Five years later he joined Facebook as an engineer, and later rose to head the company’s search, local, and marketplace product groups, reporting to Zuckerberg. Earlier this year he left Facebook to become a venture capitalist—meaning his new job is to find the next Mark Zuckerberg.
Having watched Facebook’s CEO up close, Vernal believes the key to Zuckerberg’s success is his ability to think for the ages while knowing when to go deep. “One of the things that defines Mark is that he takes a very, very long view of things, almost a geological view,” says Vernal. “Most people think day to day or week to week. Mark thinks century to century.” (Indeed, Zuckerberg’s favorite video game is Civilization, which allows players to consider the vast sweep of history while plotting their next move.) 
Somewhat less grandiosely, Vernal cites Zuckerberg’s audacious 10-year-and-beyond quest to connect the half of the planet that doesn’t yet use the Internet. Facebook’s plan to do this involves fixed-wing drones that will deliver connectivity from high above the earth. Vernal says Zuckerberg typically has a pile of books on his desk, visible to all through the glass walls that surround it. “For a while there was a book on free-space optical communications,” says Vernal, referring to a technology Facebook is pursuing that will beam signals from the atmosphere. “It is telling about Mark’s personality that he reads a college textbook on free-space optics.”
An introvert given to long stares and awkward silences, Zuckerberg does more than think deeply. Where CEOs with more emotional intelligence rely on their gifts for gab, Facebook’s CEO attributes his management technique to his training as an engineer. “For me engineering comes down to two real principles,” he told a group of Nigerian software developers this summer. The “engineering mind-set,” he said, dictates thinking “of every problem as a system” and breaking down problems “from the biggest stage down to smaller pieces.” Over time, Zuckerberg told his rapt audience in Lagos, “you get to the point where you’re running a company,” itself a complicated system segmented into groups of high-functioning people. “Instead of managing individuals, you’re managing teams. And if you’ve built it well, then it’s not so different from writing code.”

A consistent message helps rally the troops.

Zuckerberg has proved adept at selecting talent, relying on a core of top executives who have been at Facebook for much of its existence. He claims to draw more inspiration from his coterie of senior managers than from any mentor or adviser. While he retains his reputation as a boy-genius coder, in reality Zuckerberg is something of a grinder—a 99% perspiration guy who has surrounded himself with a group of people he respects and with whom he is constantly stress-testing his hypotheses. “Ideas typically do not just come to you,” he said in a 2014 public Q&A session at Facebook. “They happen because you’ve been talking about something or thinking about something and talking to a lot of people about it for a long period of time.”
At Facebook’s F8 developers conference in April, Zuckerberg laid out the company’s 10-year road map, which includes continued development of artificial intelligence and virtual reality.Photo: Courtesy of Facebook
From such thinking came Zuckerberg’s realization that three broad themes matter most to Facebook: connectivity (his goal of bringing the Internet—and the wonders of Facebook, of course—to those who don’t have it), artificial intelligence, and virtual reality.
What’s more, because he is always pushing, Zuckerberg has shown an ability to recognize big ideas from others early—including when Facebook has been late—and has been able to act with bold conviction to buy what others have created, if necessary. Examples include spending $1 billion to buy photo-sharing site Instagram in 2012; $2 billion for Oculus VR two years later; and $19 billion for WhatsApp, also in 2014. Instagram, with estimated revenues of $2.5 billion this year, already is a runaway success, while at a minimum Oculus and WhatsApp have positioned Facebook to succeed in important areas adjacent to its core product.
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Photos, Bosworth: Paul Sakuma—AP; Cox: Christophe Morin—IP3/Getty Images; Iribe: Harriet Taylor—CNBC/NBCU Photo Bank via Getty Images; Koum: Manuel Blondeau—AOP.Press/Corbis/Getty Images; Olivan: Jim Wilson—The New York Times/Redux; Sandberg: Allison Shelley—Getty Images; Schroepfer: Denis Allard—REA/Redux; Systrom: Matt Edge—The New York Times/Redux
One of Facebook’s key business innovations is a “growth team”—today made up of hundreds of people—that designs tactics for various parts of the company, relying on a rigorous set of metrics to gauge success. The unit has broad latitude to weigh in on any aspect of Facebook’s business. “The growth team’s discipline has had as big an impact on Facebook as anything else,” says Vernal, the former top product executive. “The team owns no single product. Instead, it owns any issue that is preventing people from signing up for or using Facebook.”
Silicon Valley companies are now widely replicating the concept of the growth team invented at Facebook.

Patience pays, even for a young company in a hurry.

Facebook has a simple, if grandiose mission: “To give people the power to share and make the world more open and connected.” Zuckerberg, whose wooden public speaking style has improved with practice, is mind-numbingly efficient about slipping the statement into everyday conversation, as well as his speeches and interviews.
The repetition makes for effective external and internal messaging. If something at Facebook can’t be explained by the oft-repeated catchphrase, then it doesn’t fit. Virtual reality has a place because Zuckerberg thinks it’s the next “platform” for communicating, just as the web was when he started Facebook. Spending an outrageous amount of money for WhatsApp—which has challenged Skype as the trendiest free international calling service—was acceptable because it fit into the “open and connected” mantra.
A corollary to staying on message is being patient and disciplined in pursuit of the mission. Zuckerberg was ultra-patient with Instagram, which had no revenues when Facebook bought it but is now booming. He appears to be playing a similarly long game with WhatsApp.
Indeed, Zuckerberg’s achievement in guiding Facebook to where it is today owes as much to what he hasn’t done as to what he has. Unlike Alphabet, Google’s parent, Facebook harbors no separate unit for “moon shots.” It isn’t attempting to reinvent contact lenses or autonomous vehicles. Zuckerberg may have pledged part of his immense wealth to fighting disease—his Facebook stake is worth nearly $50 billion—but his company has no subsidiary attempting to reverse the effects of aging.
So he’s disciplined, collaborative, consistent, generous, and at least outwardly humble. He’s even a progressive role model. When his daughter, Maxima, was born just after Thanksgiving last year, Zuckerberg took a two-month paternity leave.
Zuckerberg is also big on personal goals, having committed in the past to learning Mandarin and this year to designing his own AI-fueled personal assistant, named Jarvis, for his home. He recently told an audience in Rome that through Jarvis he can control the house’s temperature but that “much to the chagrin of my wife,” she cannot, “because it is programmed to only listen to my voice, which is one of the perks of being an engineer.” He added, “I’ll give her access once I’m done.”