Where’s everything headed, then?

We as india writers have pushed out everything with insight in the last three four years, short of  the unworthy Indian infrastructure which could not attract even $100 bln in Gross investments yet with two debt funds of $3 bln each and some older established PEs like Macquarie and 3i and the Govt of India grants of INR 750 bln. Short because Indian Infrastructure sector with all the public enterprises involved is very short on the details and as it works without meaningful graft like the Telecoms, the Roads, Power, Aviation and Ports infrastructure continue to work with construction companies like our FMCG sector works with $500 mln brands from HUL, P&G and ITC and we are the wrong ones because we criticise something as if it was the end of the road for the sectors in each case and nothing else going to happen because it is not.

At least that is also what the Dy Governor of the RBI, Subir Gokarn seems to feel if we read into his new timetable to plan out Capital Convertibility for India. FDI in India has always been able to attract the bigger dollars irrespective of investors’ fascination with issues like the retroactive introduction of taxability of transactions and the impossibility of investing more than tokens of currency in our banking sector with restrictions of M&A or the recent failure of FDI in multi brand retail/ defence, healthcare and aviation.

The true problem comes in India’s cultural intractability compared to China or Signapore or others total rolling out of the Carpet for the bbigger dollar including the State sponsorship of the project, and not an immobilised set of half dozen land reform and Tax reform bills, and the Private state and comsumer acceptance of that way of life that the investment unwittingly imports itself with. Being open to cultural transfusion, this is a real anachronism always heaped on  the middling old politicians who could not run coalitions but it runs deeper as the next few generations will find out.

Probably what we need to bring in each sector is like the perfect storm, at least two representative investor in each such sector, like probably Yum with KFC and Pizza Hut and Tata Global – Starbucks and or Dominos with the Bhartiyas where there are unlikely to be any hiccups with all three biting the bullet and all government departments, consumers and politicians able to sell and compare. I would even aver that the 2g  experiment is still very much a success for the FDI story right now. A similar base exists in Banking where the world’s Top Banks are increasingly looking to Asia and India in particular to roll out bigger base staff or the magic wands that the local and global Harry Potters need to win the magical sorcerers over at state and center.

Whether it is International Quality standards for Highways or structured products in Banking, Indians more than other s are Comparison shoppers who like to think their Point-Of-View is appreciated and part and parcel of the product/standard unlike others who let FDI build a parallel Eco system, much like empty highways and cities outside Bejing while the Eastern corridor esp  around Beijing keeps cars stuck in Traffic queues that take three days to move from end to end, or even more

The simplification stated in that, is to be taken with the usual detailed quid pro quos and the details of a contract like bringing the capabilities to service rural consumers becoming a new reality for banks, auto and credit card and durables/discretionary sector plays from Pizza to That larger personal loan than the $500 on my Kissan Credit Card.

FDI momentum for India’s growth

India remains the #4 destination for FDI worldwide way behind China as less than one third the rate of FDI

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hitting China. China’s FDI changed characteristic at the start of the crisis to a Services led growth in the Central and Western regions , moving away form the Eastern seaboard and even as wages increased at the rate of 12% per year it stayed in new Services areas and current enterprises in McDonalds,, Starbucks and GM continue to either grow or as in GM’s case battle new 11-22% duties but remian the dominant player in China.

On the other hand, India has turned away many in retail from Ikea to Walmart, keeping those planning JVs in the play for more thna one reason. Yet, Till November the eight months of FY2012 managed a $22 bln inflow

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of FDI, $15 bln having come till July 2011 and data for December and January incl LVMH and Starbucks but excluding Carrefour and Ikea still expected from official sources.

FDI in aviation allowed to Foreign carriers is yet to bvecome a happy event without a ready pipeline of bidders and local sourcing restrictions helped a couple of 100% entry decisions get shelved

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FDI averaged $2.8 bln, $1.7 bln, $1.1 bln and $2.5 bln from August onwards and likely stayed below $30 bln for Calendar 2011. China in the meantime crossed $110 bln for 2011 as FDI alone even as new exchanges in Schenzen paralleled Hangseng in size and grew business on the last remianing Indian bastion, the Equities Capital Markets, India’s natural advantage in a well understood global ecosystem lost in China’s sheer opportunity and advanatges of quick execution and operationalisation we somehow never wanted, putting the blame on the democratic process.

English: Logo of Ikea.
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Fortunately, India’s infra sector does not suffer from those bottlemnecks that much, except that the Land acquisition itself has been an issue for many projects and the Power projects in play already beat by non availability of coal and sector specific finance deals

India FDI: India superpower in application development (E&Y)

China

Even as FDI growth in China continued to grow Services at 15% and manufacturing at less than 5% , its inland provinces will soon get to be the majority FDI destination with the Eastern seaboard share falling below 50% this year.

This year despite teh statistics from the E&Y report the erstwhile no. 4 sector with 33 infra FDI projects is likely to become a major recipient of FDI in value terms thru dedicated Infra Funds incl the ADB-HSBC – IIFCL one

India no. 4 FDI Destination : E&Y

In India however, 146 Tech projects outbid the no. 2 industry in Retail and consumer as the single biggest contributor to FDI. For some strange reason India’s middle class/ consumer for the E&Y team stays stuck at the 2001 figure of 250 million even as it discuesses the Top 5 FDI destinations as those favored by Indian IT

The top five FDI destinations in India are Bangalore, Mumbai, Chennai, New Delhi and Pune. They attract 43 per cent of the investment projects, 34 per cent of the jobs created and 26 per cent of the value of FDI in India.(BS report)

Auto and Healthcare were also pointed out as key destinations in the E&Y survey released by india head Rajeev Memani


The survey also points that private equity (PE) in India has significantly evolved over the last decade. It mentions that 2,000 Indian companies were funded by PE in the last five years and $50 billion was invested from 2007 to 2011. “Despite the ups and downs over the past decade, PE has emerged as a very important investor in India Inc and with the long term India growth story still intact, PE funds continue to look eagerly at investing in India, ” says the report.

100% FDI in Single Brand Retail, Aviation and Multi Brand FDI also on the anvil

As the drop in investment rate of more than 47% in both investment proposals (CMIe data in ET lead – ) and

English: Logo of Ikea.
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government infra project approvals shows up in negative cap goods and low GDP growth, the FDI saga is likely to be brought back to finish off positively for this government to keep the India growth agenda with itself.

An invitation to Louis Vitton, Cartier, Armani, Rolex and Ikea

The 100% single brand FSDI approval came through in the morning headlines, adding the usual 30% local sourcing rider allowing that sourcing to be from”Indian” providers” and necessitating the allowed limit of $1 mln( It could be $5 mln so easily if enough lobby pressure is applied) to be invested by the brands in developing such SME (Village industry/SMEs) supply chain themselves and there is hardly anyother option available for Ikea and others with the rider in place to develop such supply chain locally and/or limit participation to 51% and come in with a partner whence they can sell 100% imported units/itsems/SKUs for clothes/shoes accessories or furniture as the case may be.

Ikea for example would think of suppliers for joints, nuts and bolts where applicable/possible or some wood panels for specially introduced furniture lines ( highly unlikely!) or an apparel brand would set up finishing units as India is already a known exporter with a definite quality benchmark in fabrics/leathers/readymades or accessories

Multi brand FDI and Aviation FDI face state and coalition pressures from Mamta Banerjee and the

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designated DMK State Aviation minister, already facing tough corruption action in Telecom.

India’s economic contradictions show up, infra investment remains slow

Equities trading near lows, derivatives including the PCR has moved on to a low 1.05 showing that the down move in equities will be limited. However after Friday’s trading at 8.55% yields are already further down to 8.47% very encouraging to the RBI Governor to begin rate cuts in earnest  and there in lies another potential breakpoint for the market after policy announcement on Friday as rate cuts are unlikely to play into the Indian story for another 4-5 months., inflation drops well in progress otherwise.

Moodys’ and goldman Sachs ( Jim O Neill) have already sounded dire Forex payments warnings  with retail FDI having counted as negative. India’s fixed income exposure outside continues to look healthy with recent outward and inward transactions of sizable value completed per expectations so we stil have time to repair our outlook.

Apart from revisiting retail FDI , whence the six months figure of $20 bln in FDI could move faster in the

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remaining fiscal, we also need to get our power sector investments going again. 2012 will be better for Fixed Capital formation as the new 5 year plan makes fresh proposed investments in its first year and briniging the growth imperative back could bring back the same additionally.

Fortunately, India’s banks are sitting on good capital reserves to accelerate credit where it is in the right stage whether for outward FDI or domestic projects thru domestic and International/PE equity. Infra structure projects’ longer gestation from the various Bombay Metro projects to the Harbor Sea link (Sewri) to be bid by Mukesh ambani and investors’ rejection of the same show the challenge ahead of us in investments in infrastructure as both fixed income markets and equities need to vcover short term returns to recover their higher costs for the scarce capital. 30 year capital can come to projects from private players only if longer debt is assured of better financial infrastructure apparently,else funding India’s $2.5 tln infrastructure gap and thus maintaining the growth imperative was well within our reach in 2011

Negative Gross Fixed capital formation after a dull 8% growth in the June quarter has skewed India’s relationship witht he credit agencies. It’s uneven relationship and the last minute slowdown when China is steadying ships is a confusing signal for the market watchers.

Unfortunately RBI cannot do much more right now except sing paeans to the success of inflation being in control

We are not alone in the slowdown nor we ever had any reason for our equity markets to be so optimistic in the last six months, but somehow we missed our growth imperative in 2010 and 2011 before being caught inthe slowdown, looking at the fall now negating our previous accomplishments rather than allowing us a wait and watch period.

Healthcare remains free – 100% FDI

India Gate

India’s Pharma market is a paltry INR 565 bln currently, Just cardiovasculars and diabetics constituting less than $ 2 bln each across a universe of global MNCs and Indian diaspora supplying generics globally. In a nation of 120 bln people or 25 bln households, 10 bln households of which are below the poverty line, it is a quandary not many can resolve. The pharma companies already see only one strategy to increase the per capita usage. increase prices so much that even if they bought half the medicine they bought last year they would end up with a higher per capita consumption. The CCI is apparently reviewing this unnecessary price increase in the system, A Food Security Act in place may further improve longevity ( at least for the common man / analyst leaning on logic to make an infererence)
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However any larger study will show that by back of envelope calculations if we looked at the 98% uncovered population of the country without medicare as spending a per household 15,000 on medicines for the year for children, OTC, prescription and the stereess related disorders for the husband and wife the 24.5 bln would end up spending INR 367.5 tln or $7 tln on medicines and I dare say hospital care would be an extra amount more than this consumption expense. Of course the 10 bln poor families would depend on state sponsored insurane and low cost care for these requirements.

100% FDI has been persevered with in this sector. Both for greenfield projects thru the automatic route and brownstone projects thru the approval route

However, Lupin and Cipla do not seem to have a buyer after being on the market. The global situation could well be to blame for that and the fact tat sales of $1 bln barely are hardly the scale someone is looking for to enter the market. Like in automobiles, the lack of scale just whets the appetite for global players to explore independednt plays from scratch and market realities stop them from taking the plunge as such a large market does not forgive mistakes easily

On the Hospitals side of the Heathcare sector, players such as Fortis are still trying to take advantage of the amorphous nature of an emergent industry , valuation and transfer pricing issues likely to continue to plague the industry as a whole as for other sectors with Vodafone again taking the fall in one of the first decisions by the Tax man

MNC players have hung back till now in poharma, but they do not have any more reason to do so, India by itself could be a bigger market than Africa as a whole and while GSK and others have moved on to growing NGO initiatives in Africa (GAVI) for the immediate scale possible, the India market is likelier the more profitable market with and without NGO participation and sponsorship.

English: Wordmark of Cipla. Trademarked by Cipla.
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State funds however are unlikely to come this way till Food, infra and defence are paid, both healthcare and education eternally waiting for the state and the planning commission to realise their importance with higher more tangible contributions. India’s state owned low cost health infrastructure is one of the most well spread across the 3 lac odd villages with many still outside the ambit of affordable healthcare comparible only to banks without India’s ‘large unbanked population’ still ominpresent in towns throughout the country, not even accessible for weeks at a time in certain cases

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FDI failures

Ikea ContestThe government has lost the advantage it created for itself in retail , but with the market trading at value levels,

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it might get one more opportunity with foreign investors in the near term, a minor window of opportunity in which it has to push the home field advantage with DTC, GST, Companyies Bill, and many more waiting to be fully executed weither federally or in law.

FDI in aviation, in retail and in Cable as identified are now critical to be cleared in quick time and the political pressures will anyway cost the ruling team some franchise share nationally. 100% single brand FDI by itself has Ikea and other takers esp with Reebok’s village plans and high end retailers cutting India out in favor of China sooner as China snows on luxury retailAs with the “golden chidiya” proposition of India a couple of centuries earlier, just that instead of plunder wwe can parcel the rights and sell toi the highest bidders now to get crucial capital flowing.

We have missed significant opportunities inInsurance FDI, new banks ( that need to watch for regulation changes till 2015) and infrastructure and retail where China has out smarted us and now runs a bigger and faster balance sheet

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MID CAP PHARMA Coverage: Orchid Chem

Though we have tried to cover all companies yet on Sales and Potential in the Healthcare segment, we are really short-staffed to push out first in class updates on the same. Suffice it to say that with Orchid Chem FCCB redemption coming up, bonds will be called and the fear has driven the scrip down from 186 levels.

Current TV18 interviews with promoter K Raghavendra Rao confirming that fears are misplaced as a further ECB has been tied up to return the earlier FCCB debt as also domestic arrangements have been made. The company also ‘guides’ lower interest costs in 2012

The company is profitable with a 10% NPM and good Q_O_Q and yearly growth in the September quarter, running to $500mln + run rate. Definitely not worth dropping and something you should buy and keep with Glenmark, Opto circuit (devices) and hold Biocon if you have any

If you do the calculations, from the USD 500 million of our sales, around USD 420-430 million is exports, and against that the import component, it is less than USD 200 million.

The delta of USD 200 million on profit and loss statement (P&L) is in terms of dollar inflow and my dollar outflow including FCCBs is less than USD 200 million. My dollar balance sheet is mildly positive hence rupee volatility is just a paper entry and it doesn�t affect Orchid on six months or one year basis.

Lupin and Cipla are the bigger ones in the area who were actively looking to sell out ahead of changing FDI regulation in the sector where earlier M&A has already scooped out much local infrastructure and biggie Sun Pharma is adding inorganic marketing and research strengths. Dr Reddy is a stable business with sales intact a a $2 bln run rate

In most cases the domestic market is relatively small,  but that is more of a limitation for MNC pharma stocks still listed

The retail consumption level off – Hero reports lower Q4

Hero Honda Passion
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Profits year on year are down 16% and the auto number s for March have definitely scared observers as well. The profit deceleration is hihger than expected ( misses Bloomberg poll estimates by 2% ) Sales growth numbers are respectable yoy like for others as Bajaj Auto and Maurti, Hyundai ( even yoy pretty bad)

India just does not have the profile to switch to SME players in this age and till the dollar gets to levels of below Rs 40 to a Dollar, the Trillion Ruipee EV companies are likely to be good enough for PE or individual global portfoliso. Index ETFs are anyway 75% of the FDI with $1 bln per month likely to continue. disposable incomes allowed food and fuel inflation without concerns yet, but going forward the larger imported inflation and the transmission to manufacturing and the retail demand curves ( durables, autos, services) have been the immediate market concerns that need facts to displace the pessimism

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