16
August 10, 2011 August 10, 2011 Highlights Net Additions Shrinking Revenues Likely To Rise Telecom: On The Path To Recovery?
August 10, 2011
August 10, 2011
Highlights
Net Additions Shrinking Revenues Likely To Rise
Telecom: On The Path To Recovery?
August 10, 2011
Indian Telecom Sector: Contracting Profitability
The hyper growth phase in the Indian telecom subscriber base seems to be cooling off, with subscriber addition numbers declining since
the beginning of the current financial year. In fact the addition in new telecom subscribers started sliding since January 2011.
According to the data released by the Cellular Operators Association of India, the outstanding number of GSM subscribers in the country
stood at 598.7 million as on June 30, 2011. Bharti Airtel led the pack with the largest number of subscribers, followed by Vodafone Essar
and Idea Cellular.
The hunt for telecom subscribers entered its hyper growth phase in 2009 and 2010 with the entry of new GSM operators. These operators
slashed tariff in a bid to gain a share in one of world‘s fastest growing telecom markets. This resulted in the subscriber addition numbers
touching their peak.
Many subscribers — who were once loyal to existing brands like Airtel and Vodafone — fell prey to lower tariff rates. However, many
complained of poor service and inadequate network coverage. This, some analysts believe, led to a sharp decline in newer subscriber addi-
tions for the relatively smaller players and additions by the traditional players like Bharti, Vodafone and to some extent, Idea.
3G Off To A Shaky Start
Delhi-based newspaper Hindustan Times mentions in one of its articles that: ―While it‘s still too early to term it a flash in the pan, given
the high decibel advertising around its launch, the much hyped 3G services are yet to really take off.‖
According to the Cellular Operators' Association of India, there are nearly 600 million GSM subscribers in India. The industry estimates
that around nine million subscribers have opted for 3G services. This low number is quite surprising, given the amount of investment that
has been already sunk in to provide 3G services in India.
It must be noted that 3G includes internet TV, video-on-demand, audio-video calls and high-speed data exchange. However, consumers
have experienced frequent call drops and inconsistent internet speeds
which has resulted in slow growth in 3G subscribers.
Tariff War Seen Ending
In a major trend reversal, major telecom operators — such as Voda-
fone, Idea, Bharti Airtel and Tata Teleservices — hiked mobile tariffs
during June-July 2011. These companies have hiked cellular call and
messaging tariffs by around 20% across circles.
It is observed that mainly larger established players have taken the
plunge and raised tariffs primarily on account of two reasons. One, the
tariff rates had hit rock bottom and, given the large operating expenses,
raising rates was the only option to remain in black. Two, given the
experience of some of the newer companies that showed inconsistent
network and other service related issues, these operators expect higher
loyalty.
The tariff price war had led to a fall in the ARPUs (average revenue per
user) of the telecom service providers. The latest data (for March 2011
quarter) released by the Telecom Regulatory Authority of India (TRAI)
and companies is provided in Table 1.
Table 1: Performance Indicators
Mar-10 Dec-10 Mar-
11
Blended ARPU (Average Revenue Per User in `)
Bharti Airtel 220 198 194
Idea 185 168 161
Reliance 139 111 107
Tata Teleservices 125 170 179
Blended MOU (Monthly minutes of usage)
Bharti Airtel 468 449 449
Idea 398 401 397
Reliance 318 251 241
Tata Teleservices 250 401 407
ARPM (Average Revenue Per Minute in `/Minute)
Bharti Airtel 0.47 0.44 0.43
Idea 0.46 0.42 0.41
Reliance 0.44 0.44 0.44
Tata Teleservices 0.5 0.42 0.44
August 10, 2011
Performance Indicators—A Mixed Bag
In the March 2011 quarter, ARPU for GSM services declined by 4.52%, from `105 in December 2010 quarter, compared with `100 in
the March 2011 quarter. On a Y-O-Y basis, it decreased by 23.7%.
The ARPUs of Bharti Airtel, Reliance Communications and Idea Cellular were on par with the levels witnessed in the December 2010
quarter. Tata Teleservices reported a rise in its ARPU during this period.
Minutes of Usage (MOU) per subscriber for GSM service declined by 2.96%, to 349 in the March 2011 quarter compared with Decem-
ber 2010. The Outgoing MOUs (169) declined by 2.56% and Incoming MOUs (180) by 3.34%.
Financials Still Weak
While only the top three telecom companies listed on domestic bourses have declared their quarterly financial results, they account for a
large chunk of the telecom industry.
A look at the financial performance still reflects a dismal picture.
Net profit margins halved to 9.6% during the June 2011 quarter.
While the cellular subscriber base in India has been rising, lower
tariffs has led to a slower growth in revenues. High operating costs,
including access charges and spectrum fees together with a surge in
interest outgo, resulted in a sharp 45.6% decline in net profit.
PRU believes that income generated by providing 3G services will
take some more time to contribute to overall revenues. However,
an increase in tariffs for calls and messages are likely to have a
direct positive impact on the revenues from the September 2011
quarter. This will also have a bearing on the profitability of the
industry, which has deteriorated significantly as a consequence of
the tariff war. High operating and interest expenses are likely to
erode profitability at the net level. But, on a sequential basis — that
is, quarter ending September 2011 compared with quarter ending
June 2011 — these companies are expected to witness an improve-
ment.
——————————————————
Financial Performance Indicator (` crore)
Jun-10 Jun-11 % chg Y-o-Y
Total income 14,401 15,274 6.1
Net sales 13,513 15,254 12.9
Salaries and wages 549 622 13.3
Network cost 3,278 3,827 16.8
Access charges 1,928 2,189 13.6
Regulatory charges like license, spectrum etc. 1,538 1,739 13.1
Interest expenses 236 521 121.1
Depreciation 1,619 1,894 16.9
Net profit 2,690 1,463 -45.6
Net Profit Margin (%) 18.7% 9.6%
August 10, 2011
Tea Output Update
India's tea production up by 10% in June 2011: India's tea production rose by 10% to 114.70 million kg during June 2011, on the
back of higher output in Assam and West Bengal. (www.moneycontrol.com, August 8, 2011)
PRU Analysis
Tea output in India has witnessed a healthy growth of 5.7% for H1CY11 primarily because of a higher output from Northern India.
Total tea output from North India increased by 11.3% Y-o-Y to 236.2 million kg while South India witnessed a decline of 3.6% over
the same period.
Assam accounts for two-thirds output from North India, around 45% of the nation‘s total production in the first half of a year and
around 55% in the second half. Output from Assam jumped 14.8% Y-o-Y in H1CY11 from 137.7 million kg to 158 million kg.
Tamil Nadu accounts for 70% of total production from South India, 25% of the nation‘s total production in the first half of a year and
around 15% in the second half. Output from Tamil Nadu declined by 4.7% Y-o-Y in H1CY11 from 89.8 million kg to 85.6 million kg.
Tea production in North India is a seasonal activity with the bulk of production being done from May to November. When we look at
the production data in the first half of a calendar year, the North Indian region accounts for around 65% of the total tea production
while in the second half it accounts for 80%.
The monthly tea production is more or less the same in South India throughout the year. Tea output from South in the first half of a
calendar year accounts for 35% of the total tea production while in the second half it declines to 20% due to the seasonality in output
from North India.
PRU View
Stagnant crop plantation area, lower yields and adverse weather conditions may limit the growth of tea production in India for CY11. In
CY10, after a 1.5% rise in production Y-o-Y in the first half of the calendar year, the output in the second half declined by 2.7%. This
resulted in an overall decline in tea production of about 12.6 million kg or 1.3%. This year too, a similar scenario is expected and tea
production may not improve substantially.
Domestic consumption has also been rising at a faster rate than the growth in production. In the past two years, tea production has wit-
0
50
100
150
200
250
300
350
H1CY07 H1CY08 H1CY09 H1CY10 H1CY11
Tea Output (million kg)
Total North India South India
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
H1CY08 H1CY09 H1CY10 H1CY11
Tea Output Growth Rate Y-o-Y
Total North India Assam South India Tamil Nadu
August 10, 2011
nessed a CAGR of 0.7% while the consumption has grown by 3.6%. Similar trend is expected to continue in future also.
This has resulted in tea prices rising the past one year. The prices in South India have risen more than in North India as the production
decline has made tea dearer. Prices will continue to rise in future due to seasonality factors and may remain well above the historical
average due to a possible domestic shortfall and increase in consumption rate of tea.
Compulsory Licence In — Patent Products Out
Natco Pharma Applies for India's First Compulsory License Plea: Natco Pharma has applied for the country's first compulsory
licence to sell a generic version of Bayer's patented medicine. (The Economic Times, August 3, 2011)
PRU Analysis
The objective of a patent grant to an innovator company is to ensure that the inventions are worked in India on a commercial scale and
to the fullest extent without any undue delay. However, according to one of the flexibilities mentioned in the WTO‘s agreement on
intellectual property — the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement — a compulsory licence may be
granted by the government to a company for producing the patented product without the consent of the patent owner mainly for domes-
tic use. The government is allowed to establish its own justification on the basis of which such a compulsory licence may be issued.
Some of the justifications may include a state of emergency in the country, patented drug not available freely or unaffordable price of
patented drug in the country.
In order to receive a compulsory licensc, a domestic company has to approach the innovator company to allow manufacturing of the
generic copies of medicines that enjoy patent protection after a minimum period of three years. If the innovator company fails to reach
an agreement, which primarily involves a royalty fee for each generic drug sold, the generic manufacturer can approach the patent of-
fice for a compulsory licence. A generic drug maker may also invoke the compulsory licensing provision after the patent holder is
given a 6-month notice to consider a voluntary licence offer after the expiry of 3 years.
In December 2010, Natco had approached Bayer for a voluntary licence for its liver and kidney cancer treatment drug, Nexavar, which
the company had rejected. Now, after the completion of the 3-year patent protection period in March 2011, Natco has applied for the
first ever compulsory licence for the drug.
PRU View
The price differential between the patented cancer drug Nexavar and its generic version is huge. While a month‘s dosage of Nexavar
costs a whopping `2.85 lakh in India, a similar dosage of the generic version will cost a mere `10,000.
August 10, 2011
Although the market size of such patented drugs is difficult to be assessed, as they are mostly sold through direct channels, the in-
dustry estimates the combined annual turnover of such medicines to be around `300 crore. However, the entry of generic products, if
and when it happens, can increase the affordability of these medicines immensely, thus benefiting lakhs of critically ill patients.
Since the grant of a compulsory licence to Natco will be the first of its kind in India, it is unclear how various events would unfold.
Depending upon the outcome, many more companies may soon join Natco Pharma in applying for a compulsory licence in order to
provide potential life saving drugs at very low prices and reduce the medical bill for the common man.
This also makes it interesting to see how the innovator companies would price their patented drugs in India which traditionally have
been priced at exorbitant rates.
Road To Development
Private sector takes a fancy to raod making: While the spectre of slowdown looms on most of the economy, the roads sector is
clearly cruising in the fast lane. Private companies have bid aggressively for projects auctioned recently, offering money to the gov-
ernment to build even those roads that were expected to need substantial financial support to become commercially viable. (The
Times of India, August 5, 2011)
PRU Analysis
In case of a road construction project on a build operate and transfer (BOT-toll) basis, if there is a gap between the investments re-
quired for a project and the gains arising out of it, then the Government steps in to increase the viability of the project by bridging
the gap. And, the assistance takes the form of capital grant. Up to a maximum of 40% of the project cost has been provided under
NHDP (National Highways Development Project) under capital grant.
While a `grant‘ is paid by the government to the concessionaire, a `negative grant‘ is where a road constructor pays the government
to get a contract. A company would offer to pay the government instead of receiving the grant is because the company estimates
that a large surplus will arise on account of high traffic usage. It is observed that a number of times, or quite often, the government‘s
assessment of traffic data likely on a road/highway is either underestimated or overestimated. Where the private developers find a
route lucrative, they offer to pay the government. The payment can be either in the form of an upfront premium or revenue share.
PRU View
This concept has been around for quite some time now, but substantial momentum can be observed on this front in recent times.
Media reports state that 15 road projects auctioned in calendar 2011 are expected to garner `16,000 crore for the government. The
latest one being GMR Infrastructure‘s `5,700-crore project running from Kishangarh in Rajasthan via Udaipur to Ahmedabad in the
first mega highway on the offer of negative grant of `636 crore.
It is observed that given the slow pace of reform development in other infrastructure sectors, huge attention and large amount of
funds are getting diverted to the roads sector, reflecting good investor appetite. Changes in bidding norms have also led to an in-
crease in investor interest.
Development of Port Infrastructure Lags Far Behind
Frequent Changes in Policy Regime Seem to Put Off Port Investors: Saudi The Indian story of port development though is at-
tracting global players, who all want to loop into the success, the frequently changing policy landscape of the sector and lack of a
centralised authority or organization that could provide them a clear pan-India picture and guidance seem to be dissuading at least
some of them. (The Economic India, August 7, 2011)
August 10, 2011
PRU Analysis
The development of port infrastructure in India is plagued with several structural problems. While the port industry looks attractive to
foreign and domestic private investors, the regulatory issues associated with its expansion deter them from investing in this sector.
A number of ports in India are associated with and indeed function like a trust which depend mainly on government grants for
their expansion. Also, projects at many of the major ports controlled by the central government while maritime states of the coun-
try have announced their individual port projects. This results in confusion from the investors perspective.
The port regulatory bill envisages a two-tier regulatory mechanism with regulatory authorities both at the national and state levels.
There are objections to the proposal from various states and operators as well as other stakeholders. The state governments be-
lieve that there would be duplication of efforts as their own maritime boards are capable of administering their ports.
Policies related to the ports sector are changing regularly with no single point of contact from whom the investors can gather in-
formation and understand the changing policies.
The strong lobby of trade unions is also adversely affecting opening up of the sector to foreign companies for development.
Under India's cabotage regulations, movement of coastal trade is reserved for Indian flag-bearing vessels. This again restricts the
investments from foreign players in the Indian port and shipping industry.
Development of inland waterways also faces a roadblock with the political lobby favouring development of roads in the country.
PRU View
During 2010-11, only two ports in India exceeded the one million TEU mark for the first time ever. These ports include Chennai and
Mundra (which belongs to the private sector). India‘s container traffic grew by about 15% annually and can be considered impressive.
However, the infrastructure development in India has been poor. Land acquisition has been the major bottleneck in its development.
Government policies also need to be more supportive and regulatory framework needs to improve in order to be able to achieve the
Maritime Agenda 2010-20, set by the government.
Credit Enhancement For Infrastructure Projects
Infrastructure projects to get credit push: The government is expected to clear a new financing tool on Friday, which would help
infrastructure project developers access funds at a cheaper rate based on a guarantee and also free funds for banks to lend to industry
and retail borrowers. To begin with, this product — called credit enhancement — would provide funding support of around `15,000
crore. (The Economic Times, August 5, 2011)
PRU Analysis
India Infrastructure Finance Company (IIFCL) was promoted by the government to render long term financial assistance to infrastruc-
ture projects including roads, railways, seaports, airports, inland waterways, power, urban infrastructure, gas pipelines, SEZs and tour-
ism.
The finance ministry has proposed a plan whereby IIFCL will subscribe to 25-50 % of the bonds being issued by the infrastructure
company. This will be backed by an insurance cover by the Asian Development Bank (ADB) to the tune of 50% of IIFCL's exposure.
The remaining will enjoy a government guarantee by virtue of sovereign guarantee of IIFCL.
August 10, 2011
As a result, the bonds will garner a higher credit rating and will have to pay a lower interest cost to fund the project. Improvement in
rating from BBB to AA, will make it investment grade for long-term players such as pension and infrastructure companies.
Banks will also benefit. If IIFCL subscribes to the bonds, banks then do not have commit their funds to these bonds. It will then free
up bank funds for redeployment in industry and retail borrowers. It will also reduce the banks‘ asset-liability mismatch. The ALM
arises in many cases because nearly 80% of banks deposits have tenure of up to two years, while infrastructure loans typically have a
15-20 year term.
Kharif Crop Update
Sowing of kharif rice, oilseeds improve: Kharif rice, sugarcane & oilseeds has improved over the last week, but that of pulses and
coarse cereals is lagging due to deficient rain in parts of Andhra Pradesh, Karnataka and Maharashtra. (The Hindu, August 8, 2011)
PRU Analysis
Sowing area during the current kharif season has been disappointing for the main crops with the sowing of rice and oilseeds higher
than last year, while sowing of coarse grains (jowar, bajra and maize) and pulses is significantly lower. This has impacted the area
sowed for main crops by 1% as on August 3, 2011. On the other hand, kharif crop sowing for cotton, sugarcane and jute has been im-
pressive resulting in a 0.2% increase in total area sown.
In July, 71.7% of usual area was sown compared to 71.5% sown
last year. July monsoon shows a greater influence on the kharif
foodgrains production and is a very significant factor considering
that most of the crop sowing happens during this month. The
crop area sown was similar to last year despite rainfall in July
2011 was 14% lower than the long period average (LPA). The
farmers were able to do so as a result of higher rainfall received
during June (11% higher than LPA) which ensured adequate
moisture content in the soil. Also, the rains were geographically
well distributed.
PRU View
The overall weak July monsoon is likely to have an impact on kharif output unless August rainfall makes up for the lower sowing till
Kharif sowing area (lakh hec-tares)
WPI Index Weight
As on July 29 As on August 3
Normal 2011 2010 Y-o-Y 2011 2010 Y-o-Y
Rice 1.8 394 210 200 5.1% 260 245 6.4%
Coarse Grains 0.4 220 152 167 -9.0% 163 181 -10.0%
Pulses 0.7 107 74 82 -9.7% 81 90 -10.3%
Oilseeds 1.8 174 150 142 5.3% 158 153 3.2%
Main Crops 4.7 895 585 591 -0.9% 663 670 -1.0%
Sowing As % Of Normal Area 65.4% 66.0% 74.0% 74.8%
Cotton 0.7 97 106 101 4.1% 110 104 5.3%
Sugarcane 0.6 47 52 49 5.7% 51 48 6.1%
Jute & Mesta 0.7 9 9 8 7.3% 9 8 6.3%
All Crops 6.8 1048 752 750 0.3% 833 831 0.2%
Sowing As % Of Normal Area 71.8% 71.6% 79.5% 79.3%
-25%-20%-15%-10%
-5%0%5%
10%15%20%25%
8-Ju
n
15-J
un
22-J
un
29-J
un
Jun
e
6-J
ul
13-J
ul
20-J
ul
27-J
ul
July
3-A
ug
Average Rainfall departure from LPA for 2011
June - August 2011
August 10, 2011
July. However, IMD has forecasted a ‗below normal‘ (86- 94% of LPA) monsoon for August and September 2011. As a result, down-
side risks to crop output this year have increased after a bumper crop in the 2010-11 season and may lead to higher food inflation.
Result Analysis Of Capital Goods and Engineering Companies
Quarterly
We have analyzed the Q1FY12 results of the major players in the capital goods and engineering space. Our analysis includes five com-
panies — Bharat Heavy Electricals Ltd (BHEL), Larsen & Toubro (L&T), Crompton Greaves, ABB India and Siemens India.
It can be mentioned here that ABB India follows the calendar year for reporting its results. Siemens India follows a October-September
financial year. Hence we have taken Q3 (April-June) for Siemens India and Q2 for ABB India into consideration for this quarterly re-
sult analysis.
Bottomline: This quarter was marked by muted growth in order inflow. Margins were under pressure due to increased competition and
high raw material prices.
BHEL
BHEL reported a subdued performance for Q1FY12. The company registered a moderate growth of 10.2% (Y-o-Y basis) in topline to
`7,125 crore on account of lower execution. The power segment performance was disappointing with a mere 7.6% growth (Y-o-Y ba-
sis), while the industrial segment posted a growth of 19.1% for the first quarter.
However, operating cost was efficiently managed with only 16.4% (Y-o-Y basis) rise in the raw material costs. Raw material and em-
ployee cost as percentage of the revenue remained at 57.1% and 17.9%, respectively, which resulted in a healthy growth of the bot-
tomline. PAT grew by 22.1 %( Y-o-Y basis) for Q1FY12.
Order inflow has been dismal during the quarter totaling to `2,471 crore, down 77% Y-o-Y and 89% decline Q-o-Q basis.
The perceived shortage of coal supply casts a grim outlook for the power sector in India. Hence, demand weakened for power genera-
tion equipment. Going forward, the company will face intense completion in the super critical space with many players marking their
entry by signing joint ventures with foreign players. The boiler-turbine-generator (BTG) capacity is estimated to hit 36GW by the end
of 2013.
-15%
0%
15%
30%
45%
Jan
-10
Feb
-10
Mar
-10
Ap
r-1
0
May
-10
Jun
-10
Jul-
10
Aug
-10
Sep
-10
Oct
-10
No
v-1
0
De
c-1
0
Jan
-11
Feb
-11
Mar
-11
Ap
r-1
1
May
-11
Jun
-11
Y-o-Y Inflation
Rice Jowar Bajra Maize Pulses Oilseeds
August 10, 2011
L&T
L &T witnessed a healthy 21.1% growth (Y-o-Y basis) in topline to `9,482 crore during the quarter. The topline growth was led by
growth of two segments — engineering and construction (E&C) and machinery and industrial products (M&IP).
The E&C segment recorded strong revenue growth, backed by execution and contribution from the power segment. This grew by 23%
(Y-o-Y basis) to `8,100 crore. M&IP segment grew by 26% (Y-o-Y basis) to `690 crore led by industrial machinery, valves and rubber
processing machinery exports.
Order book position at the end of Q1FY12 stands at `136,200 crore, which reflects a growth of 26% and 5% on Y-o-Y and Q-o-Q ba-
sis respectively. However, the order book inflow for the quarter was `16,190 crore which witnessed only a marginal 3.6% growth (Y-o-
Y basis) and a decline of 46.8% (Q-o-Q basis).
The company registered a 12% growth (Y-o-Y basis) in PAT despite the 46.5% jump in the raw material costs.
ABB India
ABB is a global leader in power transmission and distribution and process automation space. ABB India is a 52% subsidiary of ABB. It
focuses mainly on automation products and process automation.
The company registered a topline growth of 17% (Y-o-Y basis) to `1,693 crore for this quarter led by power systems segment which
grew by healthy 21.7% ( Y-o-Y basis). It can be mentioned here that transmission and distribution contributes to about 60% of the reve-
nue. Other segments — process automation and low voltage products — grew by 5.6% and 15.4% respectively.
Q2CY11 witnessed robust growth of 45% (Y-o-Y basis) in the order inflow. The order book position at the end of Q2CY11 stands at
`8,410 crore.
Operating profit jumped by 31.89% for this quarter. However, the bottomline for this quarter registered a marginal growth of 1% (Y-o-
Y) basis. This is attributable to the increase in interest costs.
Quarterly Financial Results(` crore)
BHEL L&T ABB India
Q1FY11 Q1FY12
YoY
(%) Q1FY11 Q1FY12
YoY
(%) Q2CY10 Q2CY11
YoY
(%)
Net Sales 6,479 7,125 10 7,831 9,482 21.1 1,446 1,693 17
Raw Material
Cost 3,934 4,580 16.4 1,752 2,566 46.5 985 1,238 25.7
Operating Profit 834 976 14.67 1005 1,126 12.09 50.05 66.01 31.89
PBT 998 1183 18.5 977 1,093 11.89 55.52 58.92 6.1
PAT 667 815 22.1 666 746 12 38.32 38.72 1
Siemens India Crompton Greaves (consolidated)
Q3FY11 Q3FY12 YoY(%) Q1FY11 Q1FY12 YoY(%)
Net Sales 2,234 2,778 24.3 2,302 2,437 5.9
Raw Material Cost 1,173 1,677 43 1,196 1,610 34.5
Operating Profit 217 212 2 275 138 49
PBT 236 228 3 270 127 52.96
PAT 156 154 0.9 190 79 58.3
August 10, 2011
Among all the five companies, ABB India‘s raw material cost as % net sales
stands at the highest (73%) for this quarter.
Net profit margin stands at 2.3%.
Siemens India
Siemens is global player manufacturing a wide range of consumer and in-
dustrial products. It operates in energy, industry, real estate and healthcare
sectors.
Siemens Q3FY12 revenue registered a growth of 24 % (Y-o-
Y basis) mainly led by the energy segment, which grew 22%
(Y-o-Y basis). Within the energy segment, oil and gas seg-
ment jumped by 102% (Y-o-Y basis).
Profitability was impacted by high raw material costs during
this quarter. Raw material costs increased by 43% (Y-o-Y
basis).
The company‘s order book grew at slower pace this quarter.
The order book at end of Q3FY12 stood at `14,900 crore, a
10% rise (Y-o-Y basis). Order inflow grew by 16% (Y-o-Y
basis) to `2,300 crore.
PAT witnessed a marginal decline of 0.9 % for this quarter.
Crompton Greaves
The company reported a dismal performance for this quarter. On consolidated basis, the company registered a modest growth of 5.9%
(Y-o-Y basis) to `2,437 crore.
The domestic segment witnessed a topline growth of 9.38 %( Y-o-Y basis), whereas the overseas segment witnessed a decline of 10%
in euro terms . This is mainly attributable to weak business environment in Europe and North American markets. The company derives
47% revenue from overseas subsidiaries
On standalone basis, power systems segment posted a growth of 11.5% (Y-o-Y basis) to `569 crore. Industrial segment grew by 16.2%
Y-o-Y basis to `362 crore.
The consumer segment, which has been posting healthy growth for last several quarters, delivered a flat growth rate of 2.2% (Y-o-Y
basis). This is mainly on account of inflationary pressures which weakened the demand.
Consolidated order book by the end of the quarter stands at `7,088 crore . Order inflow (consolidated) stands at `2,250 crore, a decline
of 18% (Y-o-Y) and 29% (Q-o-Q).
PAT declined by whopping 58.3% (y-o-y basis) to `79 crore.
Outlook
During this quarter, profit margin was eroded due to increased raw material prices (strong commodity prices and crude oil price) and
higher financing cost.
Raw Material As % of Net sales
Q1FY11 Q1FY12
BHEL 61 64
L&T 22 27
Crompton Greaves 53 57
ABB India 68 73
Siemens India 53 60
Source: Cline
Source: Cline
August 10, 2011
Companies are currently sitting on a healthy order book position. However, growth in order book has slowed down during this quarter
and is expected to slow down further driven by muted ordering from key segments like power generation, transmission and distribution.
This is attributable to macro headwinds like shortage of coal, land acquisition and environmental clearance.
Going forward, capex led orders can moderate in the short run as the manufacturing industry might defer capacity addition plans due to
increased financing costs, given the rising interest rates.
Companies might get some relief from softening commodity prices in future.
Commodity Market Hit By Global Uncertainty But Yellow Metal Touches A New High
Bullion shines, other commodities subside: Domestic fundamentals unchanged, but US fright impels investors to pull back in all
other markets. Gold climbed to hit a new record on Monday, as investors booked the commodity as a safe-haven investment at a time of
global economic crisis. In contrast, base metals and agri commodities fell, as investors pulled back from these sectors to offset loss in
other avenues. (Business Standard, August 9 , 2011)
PRU Analysis
Spot gold price in the international market hit a record high of $1,715 per ounce on August 8, 2011 as deterioration in the sovereign
rating of US stimulated investor interest in gold as a safe heaven investment in times of global uncertainty. The other precious metal,
silver, didn‘t witness much of action and remained steady at $39. 80 per ounce on Monday.
Except for the precious metals (gold and silver), all other commodity categories – base metals, agricultural products and crude oil —
registered a fall. Base metals witnessed a sharp fall after S&P downgraded the sovereign credit rating of US to AA+ from ―AAA‖ on
concerns over the budget deficit and climbing debt burden.
The downgrading in credit rating is likely to push up borrowing costs, can hurt growth even further and push the U.S economy into
another recession.
It can be mentioned here that better than expected non-farm payrolls data and lower unemployment data, released last week, failed to
convince investors. According to statistics released by US Labor Department, non-farm payrolls gained 117,000 jobs in July compared
with a forecast for an increase of 85,000, while the country's unemployment rate dipped to 9.1% in July from 9.2 % in June.
Note: Nonfarm Payroll is a statistic researched, recorded and reported by the US Bureau of Labor Statistics. It represent the total num-
ber of paid US workers of any business, excluding the general government employees, private household employees, employees of
nonprofit organizations and farm employees. The total nonfarm payroll accounts for approximately 80% of the workers who produce
the entire gross domestic product of the United States. Hence it‘s an indication of current state of the economy.
On Friday, August 6, commodity markets were hit by renewed concerns over the global economic uncertainty due to fears of US econ-
omy slipping into another recession and worries of sovereign debt contagion in Europe.
Metals slumped down on worries of demand weakening in US and Europe. It is worth mentioning here that US is the second biggest
consumer of these base metals after China. Copper prices on London Metal Exchange (LME) hit $9,041 on August 8, 2011, a 10% de-
cline compared to the price prevailing six months ago. Aluminium fell to $2,402 a tonne , a 6% decline in the same period. Zinc also
fell by almost 12% to hit two-month low at $2,200 a tonne.
August 10, 2011
It can be highlighted here that the margin required for com-
modity trading might have gone up in the current circumstances
(since cost of credit goes up) bringing down the speculative
activity in the market. Hence, base metals are likely to be driven
more by fundamentals henceforth, rather than speculation.
This fall in commodity prices is expected to help domestic com-
panies to bring down their spiraling raw material prices.
China is the biggest consumer of all the base metals. Hence,
demand from the China has become crucial for commodities.
Since the debt problems are mostly in the western world, com-
modity prices might find support in the long run by Chinese
demand.
Spot gold prices breached $1,700 levels to touch $1,705 a troy
ounce on August 8, 2011, in the International market, a 25%
growth in the past six months. Silver prices grew by almost
30% in the same time period.
Gold prices have been rising steadily in recent times amidst rising global uncertainty driven by EU debt crisis and a continuing slow-
down in the US. However, the Friday downgrading of the US debt rating has created fresh concerns clouding the outlook for the
world‘s biggest economy.
With markets speculating about the demise of the dollar as a safe haven, the appeal of gold has increased. According to CMP group, a
leading commodities market research group, the central banks of Thailand, Mexico, South Korea and Russia have been the most sig-
nificant buyers of gold recently.
Goldman Sachs, the leading investment bank has revised the three month gold price forecast to $1,645 per ounce from $1,565 earlier.
19000
22000
25000
28000Domestic Gold Price(`/10g)
0
30
60
1200
1400
1600
1800 Precious Metals Price Movement
Gold($/ounce) Silver($/ounce)(RHS)
Source: Bloomberg
August 10, 2011
Fertiliser Sector Buzzing Ministerial panel approves conditional deregulation of urea pricing: A ministerial panel has approved a conditional deregulation of
urea pricing, setting the stage for a price increase of the most widely used fertiliser. (The Economic Times, August 6, 2011)
PRU Analysis
In a recent development, the government has moved one step closer towards the much awaited urea price decontrol. A group of Minis-
ters (GoM) headed by finance minister Pranab Mukherjee has approved of bringing urea under Nutrient Based Subsidy scheme (NBS)
from April 2012.
Some of the important approvals include:
Raising the price of urea by 10% immediately. The 10% hike in per tonne over the current maximum retail price (MRP) of `5,310
a tonne would translate to around `530 in additional cost for farmers.
The subsidy calculation will be based on a pre-approved and fixed cost per tonne basis, against the earlier practice of cost of pro-
duction.
Prices will be partially decontrolled; hence the government will still give some subsidy to protect the interests of farmers from a
sudden and sharp price increase.
Bringing the most widely used fertliser under NBS is an important move, since it could bring down the subsidy burden. Under the new
system, subsidy for urea per tonne will be fixed. Earlier the subsidy was calculated based on the cost of production of the manufacturer
and was not fixed. In case of an inefficient manufacturer, the government had to pay more subsidy earlier, since the cost of production
was invariably higher than other manufacturers.
Under the new regime, subsidy payment will be uniform for all manufacturers. Hence, the government might be able to reduce the sub-
sidy outgo. The efficient players tend to gain in such a scenario because if they are able to control costs, then they stand a good chance
of bringing their production cost below the fixed per tonne subsidy given by the government. This improves bottomlines immediately.
In order to create a level playing field for all players and bring uniformity in the cost of production, the government is planning to in-
troduce the gas pooling model. Government will be providing gas to manufacturers on the weighted average of the gas price. It can be
mentioned here that under the administered pricing mechanism, fertliser players are provided gas at a uniform price. However, compa-
nies are paying different prices for gas as transportation tariff and taxes etc are not uniform.
Decontrol of urea prices will help fertiliser companies increase their realisation per tonne. Hence, it is a win-win situation for both
manufacturers and the government.
In order to encourage the balanced use of fertlisers and reduce the subsidy burden, the government had implemented Nutrient Based
Subsidy (NBS) policy with effect from April 1, 2010. Under NBS, subsidy is given on the basis of the nutrient in the fertilizer — nitro-
gen, phosphorus, potash and sulphur — and is fixed for each ingredient, regardless of its price of production.
This did away with the maximum retail prices at which manufacturers earlier sold fertilisers. Earlier, subsidy was on the product. How-
ever, subsidy is now calculated on the basis of the composition of the fertilizer. The subsidy for each nutrient is calculated mainly on
Import Parity Price (IPP). The IPP is calculated by adding international fertiliser prices with freight cost.
After the implementation of the NBS, MRP of complex fertilisers have moved in line with global prices. Farm gate prices (or MRP)
have increased by almost 20-25%, widening the price gap between urea and complex fertilisers. This might lead to over-use of urea and
degradation of the soil. It can be mentioned here that urea is still the cheapest fertiliser and continues to be controlled. The current MRP
of urea is `5,310 per tonne, whereas companies are selling di-ammonium phosphate (DAP) at around `11,350 per tonne and muriate of
potash (MOP) at `5, 900.
August 10, 2011
The maximum retail price of urea was frozen for eight years and was hiked by only 10 % in April 2010.
In a recent development, the government has decided to buy back outstanding fertiliser bonds worth `6,954 crore with a discount and
compensate for 50% of the losses incurred.
Note: As per the buyback/compensation proposal, companies would be provided a compensation of either the actual loss they will in-
cur if they sell the bonds now or 10% of the face value of the bonds to be sold, whichever is lower.
The government had issued bonds worth `27,500 crore to fertiliser companies during 2007-08 and 2008-09 in lieu of paying cash to-
wards subsidy payment. Bonds worth `20,555 crore have already been repurchased from the fertiliser companies earlier.
The buyback of bonds will improve the working capital of the fertiliser companies, which have to import inputs and raw materials —
such as naphtha, rock phosphate, and phosphoric acid — at very high prices from the global market. The proposal of compensating for
loss incurred on sale of these bonds will have positive impact on the bottomline of fertilizer companies.he
Partial price decontrol of urea is very vital for making the sector attractive to investors and reduce the government‘s subsidy bill. This is
especially so because urea accounts for 50% of the total fertiliser consumed in the country.
During 2010-11, the country is expected to consume 26 million tonnes of urea, 11 million tonnes of of DAP, five million tonnes of
MOP and 10 million tonnes of other complex fertilisers.
Potash supply to improve as deadlock over import-price ends: The domestic availability of Muriate of Potash (MoP) is expected to
improve in the coming days as Indian companies and global suppliers have struck a deal to end a four-month deadlock over import
price. (Press Trust Of India, August 4, 2011).
PRU Analysis
The ongoing negotiations between Indian fertiliser firms and global suppliers of Muriate Of Potash (MOP) have recently ended with a
two-step deal.
Canpotex, the world‘s leading supplier of potash, has agreed to sell MoP at $470 a tonne to Indian companies — namely Tata Chemi-
cals and Coromandel Fertilisers — for Q2 and Q3 of FY12, and at $530 a tonne for the last quarter of FY12.
It can be mentioned here that Canpotex together with Russia‘s Uralkali and Beluraskali‘s export arm account for around 57% of global
supply of MOP. The Indian fertiliser industry has stopped importing potash since April due to high import prices as the benchmark im-
port parity price (IPP) for MOP is set at $420 per tonne by the Government. An international cartel comprising different suppliers like
Canpotex had urged Indian firms to procure MOP at $500 a tonne.
The subsidy given to the fertiliser companies is computed based on these benchmark prices. Companies cannot import at $500 a tonne
when the IPP is set at $420 as it works out to be a loss-making proposition for them.
It can be highlighted here that India is a leading importer of potash with imports touching 6.4 million tonnes during FY11. Import
prices of MOP for this fiscal are about 32% higher compared to last fiscal which, in turn, is likely to result in a steep rise in the MRP.
Under the current circumstances, higher costs of fertliser and pesticides will add to input costs and the government might have to raise
the minimum support price for foodgrains in order to protect the interest of the farmers.
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August 10, 2011
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