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The Satyam model

Vol. XXVIII/17

Oct 14 27, 2013
...................................................................................................................................... Owner : Capital Market Publishers India Pvt. Ltd. ...................................................................................................................................... Managing Director : S. Anantharaman ...................................................................................................................................... Jt Managing Director : Ruby Anand ...................................................................................................................................... Editor : Mohan Sule ...................................................................................................................................... Deputy Editor : Yagnesh Thakkar ...................................................................................................................................... Assistant Editor : Sameer Purohit ...................................................................................................................................... REGISTERED OFFICE 401, Swastik Chambers, Sion-Trombay Road, Chembur, Mumbai-400 071. Tel: 91-022-2522-9720 Fax: 91-022-2522-0954 / 2523-0011. email: CAPITALINE DATABASES Tel: 91-022-2522-1112 / 2522-9720 Fax: 91-022-2522-0954 / 2523-0011 email: ADVERTISING Tel: 91-022-2102-8388/ 2522-9720 Fax: 91-022-2102-4366 / 2522-0954 email: SUBSCRIPTION & DISTRIBUTION Tel: 91-022-2102 3869 / 5472 Fax: 91-022-2102-4366 email: AHMEDABAD 312, Sampada Complex, 3rd flr., Rashmi Society, Mithakhali, Six-Road Junction, Navrangpura, Ahmedabad-380 009. Tel: 079-2642 1534 / 35, 2656 4727 Fax: 079-2642 1535. email: BANGALORE No.37, 2nd Floor, Dickenson Road, Bangalore-560 042. Tel: 080-2557-2334 / 5 Fax: 080-4151-0674. email: CHENNAI No.41, 1 st Flr, Sundareshwarar Street, Mylapore Chennai-600004. Tel: 044-246-12690 / 38, 249-51900 / 01 / 02 Fax: 044-2461-2638 email: COCHIN Oriental Business Centre, 36/1262 A, Vaidyar Lane, Kaloor, Cochin-682 017. Tel: 0484-325 3420 email: DELHI 601, 6th Floor, Padma Tower - II, 22, Rajendra Place, New Delhi - 110 008. Tel: 011 - 2581-1255 / 56 / 57 email: HYDERABAD # 3-5-890, Room No-209, Paras Chambers, Himayatnagar, Hyderabad-500 029. Tel: 040-2326 4384, 32408398. Fax: 040-4007-7098. email: KOLKATA 3-B, 3rd flr, Satyam Bldg 46 D, Rafi Ahmed Kidwai Rd, Kolkata-700 016. Tel: 033-329 66683. Fax: 033-2227-3120 email: PUNE C-28, 1st Flr, Shrinath Plaza, Plot no. 559, Bhamburda, Shivaji Nagar, Fergusson College Road, Pune-411 005. Tel: 020-2551-1616 / 17. email: ...................................................................................................................................... Cover Price: Rs 50 Annual Subscription (26 issues): India Rs 1,300 Overseas (Airmail) US$ 140. (Cheque/D.D. drawn on Mumbai in favour of Capital Market Publishers India Pvt. Ltd.) 2013 Capital Market Publishers India Pvt. Ltd. All rights reserved. Reproduction in whole or in part without permission is prohibited. All possible efforts have been made to present factually correct data. However, the publication is not responsible, if, despite this, errors may have crept in inadvertently or through oversight. Though all care is taken in arriving at the recommendations given in this publication, readers are cautioned that prices of equity shares and debentures may rise or fall in a manner not foreseen. Readers are advised to take professional advice before investing. Subject only to Mumbai jurisdiction ...................................................................................................................................... Printed and published by S. Anantharaman on behalf of Capital Market Publishers India Pvt. Ltd. Printed at Magna Graphics (I) Ltd Kandivili (W), Mumbai - 400 067 and published from 401, Swastik Chambers, Umarshi Bappa Chowk, Sion-Trombay Road, Chembur, Mumbai 400 071.

To stem erosion in the shareholders wealth, the government should sell the FTIL group through the auction route
The explosion of the Rs 5600-crore NSEL scam is a vindication of Sebis former chief C B Bhaves tough stance against promoter Jignesh Shahs proposal to start an equity stock exchange after launching a commodity futures bourse. Besides insisting on separating distributors commission from investors subscription, his crackdown on mutual funds unit-linked insurance products had antagonised powerful asset management companies as well as irked the Insurance Regulatory and Development Authority and was the trigger for the setting up of a super regulator by finance minister Pranab Mukherjee, apparently to coordinate between different regulating agencies and avoid a turf war. Denial of extension to him was the collateral damage of the ambition of an aide of the finance minister to see her close relative as the boss of UTI. A vacancy was created at the countrys oldest AMC by shifting the incumbent to the capital market regulators office, riding on the campaign launched against Bhave for his inaction in weeding out fake subscribers at subsidiary NSDL, when he was the boss of NSE, instead of focusing on the faulty proportionate allotment mechanism applicable for distribution of IPO shares. The plan skidded, when the single largest shareholder of the government-sponsored mutual fund, T Rowe Price of the US, raised objection. The fourth largest mutual funds by assets remained headless for over two years till July this year. The moral of the story is that some of the outrages in the Indian financial world can be traced to political ties. Though MCX-SX got the green light after the promoter agreed to bring down his shareholding to 5% in a predetermined timeframe following a hard-fought legal battle, the truce was facilitated only after there was a change of guard at the finance ministry and Sebi. The promoter of Saradha chit fund could profit from the pyramid scheme either because of complicity or indifference of local policy makers. The Sahara group promoter has built a diverse empire by offering small savings schemes to the informal sector clueless about the risk and returns correlation and benefiting from a nascent regulatory environment with limited reach and power, confusion between regulators over supervision of overlapping products, and the complex landscape in the politically important home state of Uttar Pradesh. Similary, Ramalinga Raju, the promoter of Satyam Computer Services, had become the face of Andhra Pradeshs transformation from a agri- and marine-based economy to a hi-tech destination for domestic and foreign investors. His political reach cut across the aisle, enabling him to share a dais with former US president Bill Clinton during the latters visit to the state in 2000. While Raju was promptly arrested after his confessional statement to Sebi of having doctored his accounts for many years, Shah has blamed the professional management of the spot commodity exchange. Considering that flagship Financial Technologies India owned nearly the entire NSEL, the inference is that either he was sleeping at the wheel or did not know the difference between a spot and futures market. In fact, Shahs was a classic derivatives strategy of hedging against both a bull and bear run by running a regulated exchange as an entrepreneurial showpiece and at the same time generating a spurious enterprise for high return. This brings to the second realisation. The conflict between public interest and making profit is sharper in certain businesses. Stock exchanges, often cited in this context, cannot be run as non-profit organisations if they have to invest in offering seamless services and create a secure environment for trading. Yet, the for-profit objective is leading to consolidation among global exchanges, eliminating price competition. If they cannot be completely eradicated, it is essential to ensure that the damage due to scams is limited. Fast-tracking trial is one of the ways and so also freezing and liquidation of the assets of the manipulator. This may not be fair to the other stakeholders. Therefore, focus on consolidated results is an important lesson for investors. This will prompt closer scrunting of the symbiotic relations between group companies. For instance, flagship FTILs profit was being boosted by the illegal gains made by NSEL. To solve the problem of the troubled group, the Satyam rescue could be an ideal template. The government disbanded the board of directors and appointed a 10-member committee of eminent professionals to run the software services producer, hit by a Rs 7000-crore hole in the balance sheet. Later, the IT company was auctioned to the highest bidder. This is what should be done to the FTIL group to prevent further erosion in the wealth of the shareholders and also to discourage the formation of bubbles.

Oct 14 27, 2013


dividend in percentage remains the same, shareholders of companies issuing bonus shares receive higher quantum of dividend. Therefore, bonus issues could be real wealth creators for the shareholders.
Kaustubh Sahai, via e-mail

Wealth creator There are several similarities between a bonus issue and a stock-split (Stocks: The bonus benefits, Sep 16-29, 2013). When these companies go exbonus and ex-split, their market prices are adjusted. In both these cases, the stock price will be reduced by half. The basic principle is that the market value of a firm remains the same.
Kishor A M, via e-mail

Bonus issues could be traps. Many firms with dubious record of corporate governance and not-so-exciting financials opt for bonus shares to boost sentiments. In such cases, bonus shares could end up destroying shareholder wealth.
Esha Chaudhary , via e-mail

The phasing out of P notes, through which anonymous foreign investors can invest in Indian stocks, was rescinded after the market displayed withdrawal symptoms. Differentiating investment from tax havens between good and bad is in a limbo to pacify sulking investors.
Iyer Arun, via e-mail

term portfolio holdings.

Neraj Agnihotri, via e-mail

Companies with high FII holdings could witness wild swings depending on the FII activity. This could be a threat or even an opportunity as many of these companies are quality stocks, which investors can pick to be part of their long-term portfolio.
Maniraman S, via e-mail

Most of the companies likely to issue bonus shares are expensive based on ratios such as price to earning multiple or BV.
Krishnakant Sundaram, via e-mail

A preferential and differential treatment is being meted out to overseas investors in stocks and bonds as against those investing in green- and brown-field projects despite the flighty nature of the former. Expediency is scoring over permanency.
Bilaal T, via e-mail

As in a stock-split, the share price is adjusted or lowered after issue of bonus shares. The stock becomes affordable and, thus, attracts more investors. The liquidity profile of the stock improves. This is also a welcome development because the stock is tracked by more investors. This way the public scrutiny of a firm improves.
Venkateswar Chatamoni, via e-mail

FDI v FIIs If the 1991 depletion of foreign exchange reserves demonstrated the perils of being inward looking, the 1997 Asian currency turbulence showed the dangers of addiction to foreign money (Global audience, Sep 16-29, 2013). The 2013 current account deficit storm illustrates that reforms have to be ongoing and not selective.
Shubhrato Das, via e-mail

The current status of some sectors getting a torrent of foreign inflows while some others languish capture the unhealthy state of Corporate India due to uneven reforms.
Sethuraman Potti, via e-mail

Taking risks In India, equity is completely a risk capital (Compensating minority shareholders: Investors as warriors, Sep 16-29, 2013). Investors not only have to take the business risk but also bet on the promoters and their creditentials. It is a sorry state of affairs as even the authenticity of reported numbers is a risk investors have to take.
Annu Manjrekar, via e-mail

Compared with stock-splits, bonus issues can create shareholder wealth in the form of higher dividend.
Amithi Bunha, via e-mail

India is witnessing a strange paradox of foreign money gravitating to the equity and debt markets even as huge FDI projects get stuck due to lack of clarity on regulations.
Pratik Kanojiya , via e-mail

Level of interest Investors should be prepared for the worse if FIIs start offloading (Stocks: Perched at the edge, Sep 1629, 2013). Stocks with high FII investment could be subject to a brutal bear attack in case FIIs continue to push the exit button.
D H Zende, via e-mail

Class action could be a messy affair. One fear is that the shareholders could drag companies to the tribunal on minor or non-issues. In short, a bunch of influential shareholders could exert unnecessary pressure on the management. This could hurt decision making at companies.
Chintya Gourishetty, via e-mail

In a bonus issue, the face value remains the same. Now assuming the quantum of

The capital market is seeing an influx of foreign investment. The government has been treating overseas portfolio investors with a feather touch.

In many companies FII investment is stable though the level could be high. But this may not be a matter of concern as these could be part of long-

Burnout Company are burning cash because of slowdown in the domestic economy and no major pick-up in global market as well (Stocks: Squeezed dry, Sep 16-29, 2013). Besides, a few are in trouble due to company- as well as industy-specific adversities.
Sohail Lakdewala , via e-mail

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Oct 14 27, 2013 CAPITAL MARKET

07 | Cover Story
Stocks: Steady and ready to go
15 | In Focus
Managerial remuneration Fat cats Gujarat NRE Coke Crushed to bits Jain Irrigation Systems Setting price benchmarks Debt heavy, debt light Changing profile Some small- and mid-cap companies with a stable business model are creating capacity to maintain the growth tempo

69 | Sector Specific
Rate-hike shock

90 | Capitaline Corner
D B Corp Eyeing the non-urban audience

71 | Apna Money
Giving what is due No shock absorbers A spring in their steps Mutual Fund scoreboard NCDs:Choosing liquidity or higher return? Nipping the bubble Is separate return required for each service provided?

28 | Off Focus
The interventionist government Back to the old days

30 | Economy Pulse 68 | Stock Watch

Exide Industries Charged well

32 | Corporate Scoreboard 61 | Consolidated Scoreboard 62 | Company Index 66 | Bulletin 67 | Watch List

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Oct 14 27, 2013 CAPITAL MARKET

CoverStory CoverStory



Steady and ready to go

Some small- and mid-cap companies with a stable business model are creating capacity to maintain the growth tempo
The health of the economy is the prime factor while exploring the equity market for investment. At present neither the domestic nor the international economic scenario is encouraging. On the international front, the US economy remains fragile. Move south-wards, the apparent stability in the European market is widely termed as calm before the storm. China is the only hope. However, its manufacturing sector is moving at a snails space to recovery. The local market continues to struggle with high inflation and interest rates. The decline in the rupee against the US dollar has emerged as the top priority for policy makers. Though policy paralysis seems to have eased a bit of late, policies are tilted towards populism as general elections are fast approaching. Crucial bills such as land acquisition and food security have been cleared by parliament with an eye on votes. Indias gross domestic product (GDP) grew by 5% a decade low in the fiscal ended March 2013 (FY 2013). Going forward, the scenario continues to be bleak. Indeed, growth crawled 4.4% in the first quarter ended 30 June 2013. This is the lowest in any quarter over the last four years. UK-headquartered Unilever, the second largest fast moving consumer goods (FMCG) company in the world, issued a profit warning
Oct 14 27, 2013 CAPITAL MARKET

in September 2013. It expects lower sales growth of around 3-3.5% in the third quarter ended September 2013 from 5% in the first half of calendar year (CY) 2013. The lower growth will be mainly on account of weakening demand in several emerging markets in which Unilever operates. Unilever says slowdown in the emerging markets has accelerated as a result of significant currency weakening, while the developed markets remain flat to down. This profit warning is ample evidence of the grim global outlook. Back home, Hindustan Unilever, the Indian subsidiary of Unilever, is also likely to report lower growth. The FMCG business is considered immune to economic slowdown. With even this segment facing demand tapering, the situation is certainly hostile for businesses. Domestic and global equities cannot sustain the present higher level on liquidity alone. Grassroots-level growth will certainly need to catch up. In this grim scenario, there are companies that are talking big, sounding positive and confident about the future. Their body language is optimistic and unaffected by the current gloom. Supreme Industries, the countrys largest plastics processors, is one such company, bubbling with confidence. The firm incurred capital

expenditure of Rs 375 crore in the year ended 30 June 2013. It is almost through with one cycle of capex and expects benefits to start flowing in the current financial year. Further, it has envisaged capex of about Rs 250 crore in the current fiscal. This is significant investment considering the net worth of Rs 878 crore at the close of the fiscal ending June 2013. The proposed investment by Supreme includes many projects. Money will be spent on a greenfield plastic piping system at Kharagpur in West Bengal and a protective packaging system unit at the Kharagpur complex in Maharashtra. Besides, several activities will be undertaken like replacement of some moulding machines with energy-efficient machines including additional new products in the furniture business, increasing pipe production capacity at Gadegaon in Maharashtra and introducing several new varieties of fittings at the facilities in the Jalgaon district in Maharashtra and Malanpur in the Bhind district of Madhya Pradesh. It will be also funding automation of several existing units. Last, the company will be buying office premises in Delhi, Hyderabad, Kolkata and Chennai and at Ernakulam and Indore to consolidate administration at one location in these cities.



Supreme is showing confidence in its business model and capabilities. Over the last five years, turnover increased 2.6 times and profit 5.4 times. The mid-cap stock is commanding a high price to book value (BV) (P/BV) ratio of five. The beta of the stock is 0.27. This means the stock is not going to be extremely volatile in the future. It has decent track record of dividends. Greenply Industries is another company that is enthusiastic about the future. The leading manufacturer of decorative laminates is on an expansion spree. It completed acquisition of land in the Chittoor district of Andhra Pradesh for setting up a new medium density fibreboard (MDF) manufacturing unit and is in the process of obtaining the requisite statutory approvals. Further, Greenply is expanding its existing MDF unit at Pantnagar, Uttarakhand, to manufacture new value-added products. It will be increasing the lamination capacity and introducing laminated flooring and UVcoated panels. The civil construction work is completed and orders for machinery have been placed and equipment has started arriving at the site. Acquisition of land adjacent to the existing manufacturing unit at Behror, Rajasthan, to manufacture new value-added products has been completed. Purchase orders for major imported capital goods have been placed. Additionally, a veneer-cumplywood plant in Myanmar is poised to be commissioned. In 2010, Greenply made the biggest investment of its existence, of Rs 254 crore, accounting for 40% of its consolidated gross block. This expansion was mainly financed through debt. Today, it is reaping the benefits of this investment, becoming the countrys number one plywood, decorative veneer and MDF brand. Also, it is the largest laminate company in Asia and the third largest in the world by production volumes. Over the last five years, the turnover and bottom line of Greenply jumped over three times. Projected revenue is Rs 2350 crore in FY 2014, entitling growth of around 15%. A high debt-to-equity ratio of 1.6 (consolidated) is one of the concerns. But steps are been taking to reduce it. Indeed, the ratio is already down from 2 in FY 2012. The target is to lower it to 1.1 (standalone) end FY 2014. Mutual fund holding in the stock increased to 5.81% from a mere 0.06% over the last four quarters. Apart from the business confidence shown by Supreme and Greenply about their

crore were ignored. Further, companies trading at a premium to BV were picked. As additional filters, emphasis was on the dividend payment record and past financial performance. Vesuvius India is a subsidiary of UKbased Vesuvius, a leader in refractory products, which holds 55.57% equity stake in the Indian outfit. A fifth manufacturing facility and also a research and development (R&D) center will come up on 15 acres of land purchased at Visakhapatnam in Andhra Pradesh (AP) in March 2012. The capacity of the refractory at the Kolkata plant was doubled in April 2012. Starting operations in 1994 with active technology support of parent, Vesuvius has four factories, one in Kolkata in West Bengal, one at Mehsana in Gujarat, and two at Visakhapatnam in AP. Being present in the single business segment of refractories, the operations could be viewed as too narrow or positively as focused on a niche segment. The steel industry is a key customer. Debt-free, there was cash balance of Rs 72.1 crore on 31 December 2012. This is little over one-fifth of the net worth. Thus, funding for growth will not be a problem. Bajaj Electricals expects to clock 25% growth in turnover to Rs 4200 crore in the current financial year from Rs 3388 crore in FY 2013. Acquisition opportunities are being explored to achieve the target. Apart from introducing new products in different segments and price points, investment is being ploughed into brand building. Expansion of overseas business, which contributes only 1% of total turnover, is expected to boost the level to 3% in FY 2017. An R&D center is also contemplated. Established in 1938, the electrical goods and home appliance makers business is divided into three segments. First, the lighting segment includes lamps, tubes and luminaries. The consumer durables segment consists of appliances and fans. The third segment is engineering and projects and includes transmission line towers, telecommunications towers, high masts, poles and special projects. All the three segments are expected to report double-digit growth, going ahead. Havells India is setting up a homeappliances manufacturing unit at Neemrana in Rajasthan, with a capital outlay of Rs 50 crore. This plant will have manufacturing capacity of four lakh water heaters and is
Oct 14 27, 2013 CAPITAL MARKET

Greenply Industries is on an expansion spree

prospects, another striking similarity between these companies is the low risk. Supremes beta is 0.27 and Greenplys 0.45. Hence, they are not volatile compared with the overall market. Beta is determined considering the period of last one year. The S&P BSE Sensex, the stock market barometer, is the for proxy for the stock market. A beta of less than one indicates lower volatility compared with the benchmark, the Sensex in this case. A beta of one indicates perfect co-relation between the stock and the benchmark. If the benchmark moves up 10% in a particular period, the stock should ideally appreciate by 10%. Both these stocks have created wealth for their shareholders in the last five years. Supreme belongs to the mid-cap category, with market cap of Rs 4334 crore, while Greenply is in the small-cap category, with market value of Rs 907 crore. Invariably, this also means these stocks can reach greater heights aided by robust performance going forward. Capital Market spotted 10 companies that are dreaming big and also have low beta like Supreme and Greenply. They can be termed as growth-oriented stocks with low risk. The 10 companies have beta of less than one. This means these counters are less volatile compared with the overall market. The focus is only on small- and mid-cap stocks. This is considering the fact that these two categories of companies can generate far superior gains. But small- and mid-cap companies are generally risky for investment compared with large-cap companies and, thus, only low beta stocks were explored. Small-caps are defined as companies with market cap below Rs 1000 crore and mid caps as those with market value between Rs 1000 crore and Rs 10000 crore. Companies with market value below Rs 400

likely to be operational in February 2014. Another Rs 100 crore will go to increase manufacturing capacity across various units. There are 14 manufacturing units in India and six across Europe, Latin America and Africa. The 94 touch points include branches and representative offices across 50 countries. The aim is to achieve a growth of 1011% in the current fiscal. Over Rs 400 crore has been spent on advertising over the last two years. Against market perception that it is largely betting on Royal Enfield, the premium two-wheeler selling like hot cakes, Eicher Motors is also putting serious money into its equal joint venture (JV) with AB Volvo, VE Commercial Vehicles, to make commercial vehicles and buses. Since inception of the JV in 2008, Rs 1300 crore was invested. In CYs 2013 and 2014, with another Rs 1200 crore is earmarked. Royal Enfield continuous to report robust growth and is likely to sustain the growth momentum. In 2012, a lakh units were sold. Volume grew by over 50% in CY 2012. In the same year, 63 new dealers were added to take the dedicated dealership network to 249. No surprise that manufacturing capacity is to be expanded. In April 2013, a second dedicated plant at Oragadum, Chennai, commenced commercial production. Capacity will be further enhanced to 2.5 lakh units from the present 1.75 lakh in a phased manner by next year. The good part is the incremental investment will not be much compared with the initial investment. This plant can achieve capacity of five lakh units. Amara Raja Batteries is in the midst of a major expansion drive, investing Rs 745 crore to augment capacity through green- and brownfield expansion. The capital outlay for various projects include Rs 190 crore for medium valve-regulated lead acid batteries, Rs 50 crore for large valve-regulated lead acid batteries, Rs 405 crore for four-wheeler batteries, and Rs 100 crore for two-wheeler batteries. The company estimates this investment will provide incremental revenue of Rs 1675 crore at full capacity. The Galla family and Johnson Controls Inc, USA, hold equity stake of 26% each in the company. Founded in 1885, Johnson Controls is a leading global player in power solutions, with turnover of US$ 42 billion. Amara is a major supplier to telecom services providers, telecom equipment makers, UPS (original equipment manufacturers and replacement) producers,

in the poultry and poultry products segment, set up a new plant for processing oil seeds, and expand the network of its XPRS outlets. Funding will be through internal accruals and long-term loans. The benefits are expected to kick in from FY 2015. The debt-to-equity ratio of 0.78 times is a worry in the short to medium term. This is also because of the volatile nature of the poultry industry, where cost of feeds could unsettle profit equations. By FY 2020, Petronet LNG aims to have an overall storage and re-gassification capacity of 30 million tonnes per annum (mtpa). Capacity of the liquefied natural gas (LNG) terminal at Dahej, Bharuch, Gujarat, is being expanded to 15 mtpa from 10 mtpa. This project, expected to cost around US$ 590 million and to be completed in FY 2016, involves construction of two additional storage tanks, additional re-gas facilities of five mtpa, and four LNG truck-loading bays. The expansion is progressing as per schedule. Pre-qualification of prospective bidders for selection of contractors for engineering, procrurement and construction contracts is over. The contracts are likely to be finalised by the third quarter of this financial year. Acquisition of land on the south side of the existing plant is at an advanced stage. Clearance has been received for diversion of 22.62 hectares of forest land. Further, a five-mtpa LNG terminal is coming up at Gangavaram, AP, to meet the increasing demand and supply gap in the eastern and southern parts of the country. A binding term sheet has been signed with Gangavaram Port Ltd. Petronet is the result of a JV formed by the government to import LNG and set up LNG terminals in 1998. Promoters are Gail (India), Oil & Natural Gas Corporation, Indian Oil Corporation, and Bharat Petroleum Corporation. Godrej Industries is in the process of establishing a new chemicals manufacturing facility at Ambernath, near Mumbai, at a cost of Rs 300 crore. This plant is expected to start commercial production in the third quarter of FY 2014. This facility will manufacture surfactants, fatty acids including specialty grades and refined glycerin. This modern plant will allow the company to lower cost of operations. On a standalone basis, Godrej Industries makes chemicals that go into producing personal and homecare and specialised consumer products. Godrej Agrovet, the subsidiary in which it holds 63.7%,
Oct 14 27, 2013 CAPITAL MARKET

Havells India aims for 10-11% growth this fiscal

power generating companies, the oil and gas sector, and Indian Railways. Automotive and industrial batteries are exported to Asia Pacific, Africa and Middle East. Shilpa Medicare s capital work-inprogress was Rs 129.1 crore end March 2013. This amount is significant in relation to the net worth of Rs 320 crore and market value of Rs 636 crore. The drive to invest in manufacturing continues, with Rs 70.8 crore incurred towards capital expenditure in FY 2013. Testing of machinery and other equipment is in progress and other expansion-related work is moving as per schedule. Commercial operations of the formulations plant are expected to commence in the current fiscal. Other expansion projects including a R&D centre are progressing well. Indeed, the Mahaboobnagar, AP, plant became partially operational in June 2013. The facility to manufacture formulations will commence commercial production in stages. The active pharmaceutical ingredients and formulations makers key focus is on oncology, with eight manufacturing plants. Of these, seven are located in India. A bonus issue in the ratio of one share for every two existing shares was declared in May 2013. In FY 2013, Venkys (India) completed its expansion-cum-modernisation program started in August 2011. This has led to increase in the capacity of poultry and poultry products and the animal health products segments, modernisation in the oilseed segment, and setting up of Venkys XPRS, a retail chain serving chicken delicacies. Considering the growing demand, another expansion program, with an estimated capital outlay of Rs 125 crore, was initiated in March 2013 to augment capacity


Growth without volatility
Low beta stocks undertaking capital expenditure




CMP (Rs)
312.3 162.1 3656.1 263.7 375.7 650.9 214 118.6 173 341.1 443.5 345.6

M-CAP (Rs cr)

5333.2 1617 9875.1 8842.8 906.9 8124.5 1899.5 8895 636.6 4333.7 416.4 701.6


328.7 233.4 3980.0 332.0 524.0 817.0 358.0 175.2 218.8 379.5 621.5 387.7 207.8 149.9 2205.0 218.5 196.0 556.8 206.0 106.1 136.2 270.0 390.0 311.3

201303 201303 201212 201303 201303 201303 201303 201303 201303 201306 201303 201212

ROCE (%)
40.1 12.4 22.9 5.9 19.7 22.6 8.6 25.7 14.5 37.8 10.6 25.5

RONW (%)
30.5 5.0 18.9 5.2 28.6 33.5 15.4 28.8 15.6 34.1 7.6 17.4

DIVI. TOTAL DEBT (%) (Rs cr)

252 100 200 175 60 150 42 25 65 375 50 45 88.1 165.9 38.9 2829 685.8 981.5 8.9 3034 131.6 469.8 315.1 0


0.09 0.27 0.02 0.83 1.66 0.84 0.02 0.79 0.32 0.52 0.78 0 22.3 -66.4 -4.6 54.0 103.3 20.3 2.2 3.0 27.0 20.0 -77.4 28.8

BV (Rs)
62.1 72.2 649.7 92.4 196.4 115.5 81.0 59.3 87.1 69.1 359.3 169.1

5.03 2.25 5.63 2.85 1.91 5.63 2.64 2.00 1.99 4.94 1.23 2.04

17.3 40.5 30.0 21.9 7.6 21.0 17.4 8.1 11.9 14.9 36.2 10.5

Amara Raja Batteries 0.64 Bajaj Electricals Eicher Motors Godrej Industries Greenply Industries Havells India Mahindra Holidays Petronet LNG Shilpa Medicare Supreme Industries Venkys (India) Vesuvius India 0.5 0.63 0.89 0.45 0.68 0.27 0.73 0.51 0.27 0.5 0.35

BV: Book value. Consolidated financials considered wherever available. CMP (current market price) is closing as on 1 October 2013. TTM PAT: Trailing 12-month profit after tax is for the period ended 30 June 2013. Change in TTM PAT (%): TTM PAT is for period ended 30 June 2013 over the period ended 30 June 2012. P/BV: Price to book value. Source: Capitaline Databases

manufactures animal feeds, oil palm plantations, genetic seeds, agro-chemicals, and poultry and processed meat. Another subsidiary Godrej Properties (61.5% stake) develops residential and commercial real estate projects. In FY 2013, an additional equity stake was acquired in Godrej Consumer Products (GCPL) for Rs 110 crore. The 21.64% equity stake in GCPL is valued at over Rs 6000 crore. Godrej Industries is currently valued at Rs 8843 crore. Lately, Godrej Agrovet established a palm oil mill at Chintampalli in AP. Another oil mill will be commissioned in Mizoram in the third quarter of FY 2014. Mahindra Holidays & Resorts India added 560 units to its room inventory, taking the total to 2,480 units end FY 2013. The addition includes two international properties in Bangkok and Dubai. FY 2013 is the second consecutive year of reporting a significant jump in inventory. Despite economic slowdown, the plan to create capacity is not being abandoned. Work is going on five projects: Assanora in Goa, Kanha in Madhya Pradesh, Naldhera in Shimla, the second phase at Virajpet at Coorg in Karnataka, and Tungi at Lonavala in Maharashtra. In the next few years, these projects will add over 500 units to the inventory. Besides, there are land banks at 10 destinations to develop properties in future. Apart from this, existing resorts have additional land that can be utilised for expansion. The vacation ownership and holiday facilities provider, of late, has reported

slowdown in membership addition. However, the expansion plans reveals the belief in strong growth in the medium to long term. In FY 2013, 17,489 members was added compared with FY 2012s 18,089. Conclusion Value of beta changes over time. Indeed, beta calculated on the basis of historical data could vary for different periods. Therefore, beta for one year could be different from beta for one month. Moreover, as beta of the featured stocks is below one, these companies may not able to catch the overall trend if the market reports sharp gains. Investment, expansion or acquisitions are the key words for equity investors. Companies could deliver above-average return if their growth plans are successful. However, capital expenditure could turn out to be a firms undoing if it is not able to deliver profitable growth. At the same time, nil or marginal investment in businesses could mean stagnation. Such companies could even report de-growth in revenue and the bottom line could come under pressure. Financial standing, recent operating performance, level of leverage, past track record in executing expansion projects or handling acquisitions, ways and means of raising resources to finance capital expenditure, industry expertise, and market understanding are important factors. Financing arrangement can reveal how much is through debt, equity and internal accruals. Too much debt could result in

financial stress. Opting for equity issuance would mean equity dilution, which could lower return for existing shareholders. Amara Raja Batteries will be funding its capacity expansion plans through surplus cash, internal accruals and moderate debt. Its debt-to-equity ratio stood at 0.09 times. Actually, it is zero-debt company considering cash of Rs 411 crore on its balance sheet close of FY 2013. The quantum of risk that firms are taking could be way too significant. Eicher Motors will be investing Rs 1200 crore in a JV that is 68% of its net worth. Companies in this league include Amara Raja (70% of net worth) and Shilpa Medicare (40% of net worth). Essentially, investors should invest in such companies based on their risk profile as failure could translate into significant capital loss. Certain projects have long gestation period. In turn, this could mean risk of execution of projects. Even the industry scenario and the government policies could change in the meantime, adversely impacting the expansion plans. Expanded capacities of companies going on stream at the bottom of the economic cycle, after which the growth rate should start looking up, is the ideal time to enter the featured stocks. The countrys economic growth hit a decade low in FY 2013 and the current fiscal could be no different or even worse. May be the stock market is moving close to the bottom or has already hit the bottom. In the present scenario, these low beta stocks could be worth exploring. S Khedekar
Oct 14 27, 2013 CAPITAL MARKET

InFocus InFocus

Managerial remuneration

Fat cats
Many companies reporting poor financials are rewarding their top brass with hefty compensation
Equity is a risk capital. However, this definition seems to be restricted only to the minority shareholders in case of a few companies. The market is abuzz about companies reporting poor financials on one hand but rewarding their top brass with hefty remuneration on the other. Worse, there are companies paying excess remuneration compared with what is prescribed in the Companies Act, 1956. Remuneration payable to top managers is structured in a way to encourage performance. This is one way to create a win-win situation for the management and the shareholders as well. Higher the profit, higher would be the payout to the top management as remuneration is linked with profit. However, there is an issue in this arrangement. This could result in the management pursuing aggressive accounting policies to prop up profit and, in turn, earn higher remuneration. Indeed, this was one of the key reasons that resulted in debacle of US investment bank Lehman Brothers. Anyway skyhigh bonuses have always made headlines and remained an issue on Wall Street. Even US president Barack Obama has lost the battle against Wall Street veterans on this issue.
Oct 14 27, 2013 CAPITAL MARKET

Hefty remuneration to top managers when a company is struggling to survive is ridiculous. Why should companies incurring massive losses, not paying dividends, accumulating heavy debt, and whose shareholders are unable to even recover book value (BV) if the firm goes for liquidation pay very high remuneration to their top managers when the stock is underperforming? There has to be a link between performance and remuneration. The responsibility of underperformance primarily lies with the top management and the controlling shareholders. Broadly, two sections of the Companies Act, 1956, are applicable to managerial remuneration. These include Section 198 (overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits) and Section 309 (remuneration of directors). According to Section 198, the total managerial remuneration payable by a public or a private company thats a subsidiary of a public company to its directors and its manager in any financial year should not exceed 11% of the net profit for that financial year. The net profit should be

computed in the manner laid down in the Section 349. Within the limits of the maximum remuneration, a company can pay a monthly remuneration to its managing or wholetime director. If a company has no profit or its profit is inadequate, it is not supposed to pay to its directors, including any managing or wholetime director or manager, by way of remuneration. However, in case of losses or inadequate profit, a firm can pay remuneration in excess of limit specified with the approval of the Central government. The new Companies Act 2013, retains this provision. There are a few safeguards against excessive remuneration. Approval of the shareholders is required in certain instances. However, this is a mere formality as only a handful of companies are professionally managed and most are driven by controlling shareholders or promoters. The second safeguard is that of approval of the Central government. But this is also ineffective as companies generally manage to get the government to stamp on excess remuneration. Indeed, if the Central government rejects certain cases of excess remuneration, companies are known to have re-approached the government for reconsideration. The executive chairman and vice chairman and managing director (MD) of real estate company Housing Development & Infrastructure (HDIL) did not take any remuneration in the quarter ended 30 June

2013. These two did not take any remuneration in the fiscal ended March 2013 (FY 2013) as well and were paid remuneration of Rs 1.5 crore in FY 2012. A commission of Rs 50 lakh and sittings fees of Rs 8.6 lakh was paid to the executive chairman and vice chairman and MD in FY 2013. The stock is available at Rs 36.6 against its BV per share of Rs 247.8. HDIL is reeling under huge debt of Rs 4018.8 crore, with debt-to-equity ratio of 0.40 times. IVRCL is another firm that is available at fraction of its BV, with price to BV ratio of 0.13. Due to inadequate profit, the company paid managerial remuneration aggregating to Rs 57.3 lakh to executive directors in the June 2013 quarter. This was in excess of the prescribed limits and is subject to approval from the Central government. Pending approval from the government, the excess amount of Rs 3 crore, including Rs 2.6 crore relating to the previous periods, was accounted as Dues from directors. IVRCL reported losses in the last two financial years and has accumulated heavy debt. The debt-to-equity ratio stood at 2.2 end FY 2013. The remuneration paid by Mukta Arts to its MD for FY 2013 and from FY 2006 to FY 2012 was in excess of the limits prescribed under Schedule XIII to the Companies Act, 1956. The company made applications to the Central government seeking post-facto approval for earlier years, which is awaited. The company is going to seek the Central governments approval in FY 2013. Mukta Arts had received approval for part of the excess remuneration paid In FY 2012. The company had made applications requesting reconsideration and approval for the balance excess remuneration as well. Pending final communication from the government and application for FY 2013, no adjustment has been made in the financial results. The auditors continue to modify their report on this matter. The stock is trading close to its five-year low reported in July 2012. Ramkrishna Forgings paid managerial remuneration of Rs 3.4 crore in FY 2013. Of this, Rs 1.2 crore was in excess of the limits as laid down in Section 309 (3) read with the Schedule XIII of the Companies Act, 1956. The company has sought approval of the Central government for the excess remuneration. The approval is awaited. The stock is available at 40% discount to its BV. Aptech has approached the Central government seeking approval for remuneration

Executive Chairman and MD of HDIL did not take any remuneration in the June 2013 quarter

paid to the MD in excess of limits aggregating to Rs 25 lakh for FY 2011 and Rs 67.5 lakh for FY 2012. Government nod is awaited. For excess remuneration of Rs 54.9 lakh paid to the MD for FY 2013, the company will be applying to the Central governments approval in due course. It has reported wild swings in the bottom line over the last one decade. Managerial remuneration of Rs 1.3 crore in the earlier year and Rs 27 lakh in the quarter ended June 2013 paid by Kanoria Chemicals & Industries is subject to approval of the Central government. Aimco Pesticidess managerial remuneration of Rs 77.4 lakh paid in the earlier years to the directors including the ex-director is subject to approval of the Central government. Post shareholders approval, Seamec sought approval of the Central government for payment of excess remuneration of Rs 1

Tough job
IVRCL, available at P/BV ratio of 0.13, paid managerial remuneration of Rs 57.3 lakh to EDs in the June 2013 quarter due to inadequate profit
Relative performance of IVRCL v BSE Sensex
120 100 80 60 40

BSE Sensex

20 08 Oct 2012 Jan 2013 Apr 2013 Jul 2013 07 Oct 2013

Base=100 as on 08 Oct 2012 FV of IVRCL Rs 2.

crore to MD for FY 2011 due to absence of profit. The government had sanctioned Rs 76.2 lakh. It has made representation for review of partial sanction and a decision is awaited. From a five-year high of Rs 254.7, the stock has declined to Rs 42, a discount of 70% to its BV of Rs 139.7. Jyothy Laboratoriess employee benefit expenses for FY 2013 included Rs 11.1 crore paid or payable in the year towards remuneration to its wholetime directors. The maximum remuneration payable under the Companies Act, 1956, is Rs 1.9 crore. The company computed the maximum remuneration payable as Rs 10.2 crore based on the legal advice received by it. It has filed an application with the Union government and is in the process of obtaining shareholders approval for remuneration payable to wholetime directors. As the approval is pending, the excess remuneration paid to the directors is held in the trust by the directors. The amount of remuneration as computed by Jyothy is significant considering dividend of Rs 41.5 crore paid in FY 2013 and Rs 20.2 crore in FY 2012. Considering the absence of profit in FY 2013, Astrazeneca Pharma India sought approval of shareholders by a special resolution for remuneration aggregating to Rs 2.3 crore for former MD Anandh Balasundram, former wholetime director Ruby Lau, and wholetime director Robert Ian Haxton for FY 2013. The company reported loss of Rs 89.5 crore in FY 2013. Bombay Burmah Trading Corporation in FY 2013 paid remuneration to one of the MDs in excess of the limits prescribed under Companies Act, 1956. The excess remuneraOct 14 27, 2013 CAPITAL MARKET


tion has been approved by the board of directors and the remuneration committee. The application has been submitted to the Central government for approval of the excess remuneration of Rs 79 lakh. The approval is awaited. The auditors have drawn attention to this matter in their report for FY 2013. Bharat Gears employee benefits expense included provision made on the basis of shareholders approval for excess remuneration payable to the joint JMD. The company has applied to the Central government for requisite approval. Hathway Cable & Datacom received approval from the Central government for remuneration paid to ex-MD in the June 2013 quarter. As per the approval, the company is required to recover Rs 3.8 lakh towards sitting fees paid to him. This tokenism may or may not help. Arshiya International is in the process of making an application to the government for approval of the payment of minimum remuneration as approved by the shareholders at the annual general meeting held in September 2012 in the years of loss or inadequacy of profit to the chairman and MD (CMD). Provision for the June 2013 quarter was made at 50% of minimum remuneration approved by the shareholders. This was agreed upon by the CMD at the meeting of the board of directors held in January 2013. However, considering the financial position of Arshiya, the CMD has not drawn any remuneration since 1 April 2013. The company is struggling with high debt, with a debt-to-equity ratio of 2.8. The stock has plunged from a five-year high of Rs 363.4 to the present level of Rs 12. Andhra Pradesh Paper Mills accrued Rs 4.1 crore towards managerial remuneration paid to the erstwhile directors in the period ended 31 December 2011. This was in excess by Rs 1.9 crore of the maximum limits specified in Schedule XIII to the Companies Act, 1956. At the annual general meeting held in March 2012, the shareholders had approved the remuneration. The company approached the Central government in April 2012 and received approval for remuneration paid to certain directors. It is awaiting the approval for balance remuneration of Rs 70 lakh to a director. The auditors of New Delhi Television (NDTV) qualified the books of accounts for FY 2013 on remuneration of Rs 1.6 crore paid for FY 2013 and for the
Oct 14 27, 2013 CAPITAL MARKET

Jyothy Laboratoriess remuneration to its wholetime directors was Rs 11.1 crore in FY 2013

previous years to the directors of its subsidiaries. The situation of excess remuneration emerged due to inadequacy of profit. The respective subsidiaries have initiated the process of obtaining the necessary approvals from the Central government. Further, the standalone and consolidated financial results for FY 2013 included remuneration amounting to Rs 28.8 lakh and Rs 38.1 lakh, respectively, paid to the directors. These exceeded the limits due to inadequacy of profit. Remuneration paid by NDTV amounting to Rs 24.5 lakh accounted for in the consolidated accounts was in excess for the quarter ended 30 June 2013. The concerned subsidiaries are required to obtain approval from the Central government. The auditors have qualified this matter in their review report on the consolidated results of the quarter. Also, re-

muneration amounting to Rs 5.1 lakh and Rs 9.2 lakh accounted for in the standalone and consolidated accounts, respectively, in the June 2013 quarter is subject to the shareholders approval. The company reported a turnaround, with profit of Rs 1.9 crore in FY 2013 compared with loss of Rs 87.3 crore in FY 2012 and Rs 173.9 crore in FY 2011. The appointment and remuneration of Rs 2.8 crore by erstwhile Mafatlal Denim (MDL) to its managerial personnel is subject to the approval of the government. It was a promoter group company now amalgamated with Mafatlal Industries. MDL filed an application for reconsideration when the default to the secured lender no longer existed. The company in June 2013 received approval from the Central government for payment of remuneration and, thus, resolving the matter. Conclusion The capital market regulatory, Securities and Exchange Board of India (Sebi), is planning to come out with stringent norms to control the menace of fat pays to top managers. The market needs to wait and watch what its solution is for this issue. This problem can be tackled by the minority shareholders, provided institutional investors take interest. Even media attention can deter companies from writing out hefty cheques to its non-performing top brass. Sebi is also making efforts to push institutional investors like mutual funds to take an active part in the decision-making process. Are institutional shareholders listening and ready to stand up? S Khedekar

Chilled out
Due to no profit in FY 2013, Astrazeneca Pharma India sought shareholders nod for Rs 2.3-crore package to former MD and director and current director
Relative performance of Astrazeneca Pharma India v BSE Sensex

BSE Sensex
100 80 60 40

Astrazeneca Pharma
20 08 Oct 2012 Jan 2013 Apr 2013 Jul 2013 07 Oct 2013

Base=100 as on 08 Oct 2012 FV of Astrazeneca Pharma India Rs 2.


While auditing the consolidated accounts, the statutory auditors of Gujarat NRE have relied on the unaudited financial statements of all the Australian subsidiaries, whose financial statements reflected total assets of Rs 8532 crore and total revenue of Rs 1395 crore on 31 March 2013. To put it in simple words, the consolidated accounts of Gujarat NRE were prepared based on the available managementapproved financial statements of the Australian subsidiaries on 31 March 2013. According to the auditors of Gujarat NRE, the unaudited financial statements have been approved by the management committee of the respective subsidiaries. The auditors report on consolidated accounts of Gujarat NRE was signed on 30 May 2013. GNCCL is listed on the Australian Stock Exchange (ASX). The consolidated financials of GNCCL were filed with ASX on 30 May 2013. Subsequently, Grant Thornton Audit Pty Ltd, the statutory auditors of GNCCL, came out with its audit report, literally trashing the books of accounts. We have been unable to obtain sufficient appropriate audit evidence on the books and records and the basis of accounting of the consolidated entity, says the audit report, signed by Grant Thornton on 15 August 2013. The auditors have raised concerns over multiple issues including valuation and impairment of assets, going-concern assumption, deferred tax assets, recoverability of trade receivable, and completeness of contingent liabilities and subsequent events disclosures. We were not provided with sufficient appropriate audit evidence, or time, to finalise procedures pertaining to various disclosures and transactions contained within the financial report, say the auditors. On impairment of assets, the auditors have commented that GNCCL obtained an independent valuation of its mining assets and mining licences. However, this valuation is based on certain assumptions, which may no longer be valid. The directors have not obtained an updated independent valuation to determine the extent of the impairment to the carrying value of the mining assets and mining leases. The accounts of GNCCL are prepared on a going-concern basis. However, the auditors are doubtful whether the firm will able to pay debts on time. The consolidated entity reported a loss before tax of AU$ 11.21 crore including an impairment charge of AU$8.37 crore in the fiscal ended March
Oct 14 27, 2013 CAPITAL MARKET

Gujarat NRE Coke

Crushed to bits
After the trashing of accounts of the Australian subsidiary, only a white knight can be a saviour
Small- and mid-cap companies continue to struggle in the trading ring despite the S&P BSE Sensex remaining firm at around the 20,000 level. Company-specific reasons like debt or corporate governance issues are dragging these two categories of stocks. Many of them are available at way below their book values (BVs). Why would a stock trade at heavy discount to its BV unless there are issues of serious magnitude? Gujarat NRE Coke is one such small-cap stock, available at 50% discount to its BV of Rs 26.3 per share. The discounting is not without reasons. There are several uncertainties pertaining to its Australian operations, which is reflecting in the stock market performance. From a fiveyear high of Rs 91.5, the scrip has nosedived to present level of Rs 13, a massive wealth erosion of 86%. Gujarat NRE Coke is Indias largest independent manufacturer of metallurgical coke. It derives 87% of its standalone revenue from coking coal and coke segment. The remaining 13% is contributed by the steel segment. Also, it generates power through wind turbines. The statutory auditors report of the

Australia-based strategically-important subsidiary, Gujarat NRE Coking Coal (GNCCL), explains the bear attack on the counter. Apart from two Indian subsidiaries, Gujarat NRE has nine Australian subsidiaries including sub-subsidiaries. One of these is GNCCL, which owns and operates two hard coking coal mines in the Illawarra region of New South Wales, Australia.

Fall from grace

Gujarat NRE Coke is available at 50% discount to its BV of Rs 26.3 per share. From a five-year high of Rs 91.5, the scrip has nosedived 86%
Relative performance of Gujarat NRE Coke v BSE Sensex

Gujarat NRE Coke


BSE Sensex




08 Oct 2012

Jan 2013

Apr 2013

Jul 2013

08 Oct 2013

Base=100 as on 08 Oct 2012 FV of Gujarat NRE Coke Rs 10.

2013 (FY 2013). Further, there is working tions, Grant Thornton has actually thrown capital deficiency of AU$40.79 crore. the books of accounts of GNCCL in the GNCCL is in breach of loan covenants. dustbin. Considering its earlier report for It has significant creditors in arrears. As per FY 2012 was absolutely clean without a the auditors, the company has not able to single red flag, how come the auditors provide evidence to support the full amount tumbled upon so many issues that they have of the replacement loan facility, which is refused to provide an opinion? Grant required to pay existing facilities. Though it Thornton doubts whether the company can is looking at re-negotiating financing and raissurvive in the next 12 months or not. These ing money through additional equity fundcomments must be a rude shock to the shareing, the auditors have significant doubt about holders. Why were the auditors not able to its ability to continue as a going concern for spot a single problem with the books of acthe next one year. counts of GNCCL earlier? GNCCL has recognised deferred tax asFor investors, the pertinent question is sets of AU$ 8.73 crore, which is included in whether to refer to the auditors report while non-current assets. The company failed to evaluating companies for investment. The provide convincing evidence to the auditors whistleblowers job executed by Grant GNCCL is down 90% from five-year high that sufficient taxable profit will be availThornton is too late for the shareholders to able in future to recover these losses. As a The auditors of Gujarat NRE may have salvage their investment. GNCCL is a penny matter of prudence and conservative acconsidered the fact that Grant Thornton had stock trading at AU$ 0.08. counting principles, the firm should not have issued a clean audit report in FY 2012, indiThere is interesting comment in the anrecognised the deferred tax assets. cating all was well with the company earlier. nual report (AR) of Gujarat NRE for FY The trade receivables include AU$2.77 Last year, Grant Thornton had released its 2013. As per the notes in the AR, GNCCL crore due from GNCCLs ultimate parent report on 26 May 2012 for FY 2012. This has invested in mutual funds anticipating company, that is, Gujarat NRE. The audiyear, it was in mid August 2013. better return. However, the value of these tors are not sure whether the company will Gujarat NRE had cancelled dividend deinvestments have significantly declined due able to recover this amount. clared for FY 2012. Its shareholders apto economic and financial crisis and imGrant Thornton has questioned the proved the move through a special resolupaired accordingly. completeness of contingent liabilities and tion during its annual general meeting held In May 2012, Jindal Steel & Power subsequent events disclosures. We were on 30 September 2013. Apart from the fact (JSP) came on board as a strategic partunable to obtain sufficient appropriate authat dividend was announced out of reserves ner. It invested in GNCCL at AU$ 0.25 dit evidence to determine the completeness and challenging market conditions, its bankper share, representing premium of 48% of the contingent liabilities and subsequent ers were not pleased with the idea of paying to its then prevailing market price of events disclosures, reads the audit report. dividend. Is it not the duty of auditors to AUS$ 0.17. Simultaneously, JSR entered Not expressing opinion on the financial exercise extra caution in such circumstances into offtake agreement spanning over 10 statement is a very rare development. Bawhile auditing the books of accounts? years. It will source total of five million sically, investors are not supposed to rely With its harsh comments and observatonnes at a price linked to a benchmark. on the financial statements of The company held around GNCCL. 20.77% equity stake in GNCCL Heavy load to bear On ASX, GNCCL has lost over as on 12 August 2013. 90% to the present level of AU$ Gujarat NRE Coke has a debt-to-equity ratio of 1.7 times, In January 2013, there was talks 0.08 from its five-year high of AU$ with a marginal dip in net worth in the market that JSP could acquire 0.89 reported in January 2011. It is controlling stake in GNCCL. It could YEAR END 201303 201203 201103 201003 200903 emerge as white knight for Gujarat quite evident that the market is far 1639.2 1663.9 1710.2 1449.2 1257.8 from enthusiastic about the future Net Worth (Rs cr) NRE. Probably, this is one and only Sales (Rs cr) 2136.3 1398.3 1813.7 1439.9 1522.6 prospects of GNCCL. hope for the company and its share14.5 11.3 186.4 210.8 50.9 The auditors of both these com- Other Income (Rs cr) holders to emerge from doldrums. 62.4 -53.7 77.8 21.5 276.2 panies Gujarat NRE and GNCCL PAT (Rs cr) But will JSP be interested in 306.4 51.9 326.4 158.4 151.1 seemed to be lax in their fidu- Cash Profit (Rs cr) GNCCL as its turnaround could be 26.3 28.8 30.6 29.0 26.6 ciary duties. How can the auditors Book Value (Rs) painful exercise and even futile? of Gujarat NRE rely on management Dividend (%) GNCCL was hit with a workers 0 0 10 10 10 accounts considering the fact that Debt-Equity Ratio strike over non-payment of salaries. 1.7 1.18 1.05 1.0 0.79 the Australian subsidiaries are way Interest Cover If the Australian assets go out 0.97 1.19 1.5 1.2 3.4 too significant for the parent com- PBIDTM (%) of its hand, the business left with 31.2 32.8 30.8 24.3 32.4 pany? The Australian subsidiaries ROCE (%) Gujarat NRE will not be significant 0 0 7.3 6.2 16.9 account for 90% of Gujarat NREs RONW (%) enough. It will be like starting from 0 0 4.4 0.45 17.6 consolidated total assets and 65% Consolidated financials. scratch for the company. of consolidated total turnover. S Khedekar Source: Capitaline Databases
Oct 14 27, 2013 CAPITAL MARKET


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cost dearly. Funds raised through ECBs are with interest rate of 3.83%, while secured loans from International Finance Corporation (IFC), Washington, bears interest rate of 4.4%. The decline in the value of the rupee against the US dollar has turned foreign loans a costlier affair. Thus, the movement in the foreign currency market is of importance in future. The rupee declined a little over 5% as against the US dollar in the quarter ended 30 September 2013. It reported an all-time low of 68.36. The Indian currency plunged a huge 9.8% in the first quarter ended 30 June 2013. Over the short to medium term, it is likely to remain volatile, keeping the shareholders on the edge. Finance cost was Rs 516.5 crore in FY 2013 as against Rs 476.8 crore in FY 2012. This is a massive amount considering the fact operating profit was Rs 698.6 crore in FY 2013 and Rs 849.9 crore FY 2012. The interest burden is unlikely come down substantially in the immediate future, though efforts are on to lighten the balance sheet. The effective interest rate on domestic loans based on weighted cost was 11.26% in the fourth quarter ended 31 March 2013. The interest rate is unlikely to decline from this level as borrowing from banks for working capital requirements is at 13-14%. The rising interest rate scenario prevailing in the economy is going to adversely impact borrowing cost. Long-term funds were raised to deleverage the balance sheet, re-finance shortterm loans, to lower cost of funds, and explore opportunities in overseas markets in the food and micro irrigation businesses. In October 2012, Rs 397.8 crore were raised by allotting over 4.97 crore equity shares (face value Rs 2) at a premium of Rs 78 per share to Mount Kellett and IFC on preferential basis. Mount Kellett is a US-based investment firm focused on global distressed, special situations and opportunistic investing, with US$ 7 billion under management. Also, US$ 40 million were mopped up through the issue of FCCBs and US$ 75 million through ECBs. In FY 2013, Rs 16.1 crore were raised through the issue of convertible equity warrant. These funds have been collected to meet the long-term requirement, repayment of short-term loans, capital expenditure, and investment in overseas subsidiaries. In the current fiscal so far, US$ 10 million were gained through FCCBs and US$ 65 million ECBs. Impressed with the funding-raising efforts in FY 2013, Care upgraded the credit rating

Jain Irrigation Systems

Setting price benchmarks

Improvement in receivables, debt reduction and appreciation in the rupee are crucial factors for the stock to bounce back
Jain Irrigation Systems has reported a massive 76% plunge from the five-year high of Rs 256. At Rs 62, the stock is at a striking distance of its consolidated book value (BV) of Rs 47.3, which could be a crucial price benchmark going forward. Is the worst over for the counter? There is no straight answer to this question. There are a few ifs and buts. There have been delays in repayment of principal and interest on loans availed from banks and financial institutions in the fiscal ended March 2013 (FY 2013). There were no amounts overdue on 31 March 2013, reads the annexure to the auditors report for FY 2013. Is this a red flag for investors or a mere one-time and rare instance of delay? Consolidated debt increased three times to Rs 3825 crore over the last five years to FY 2013. Standalone debt rose 3.2 times to Rs 2862.7. Consolidated debt-to-equity ratio stood at 1.9 and standalone 1.3. The hefty debt is one part of the story. The other part is that a significant portion of the standalone debt is in foreign currency: 50% of total debt on 30 June 2013 and 46% of total debt on 31 March 2013. Exports were Rs 611.3 crore in FY 2013. These are expected to provide cushion against volatility in foreign currency market. Consolidated foreign exchange loss was Rs 131.5 crore in the quarter ended 30 June 2013 compared with Rs 114.2 crore in the June 2012 quarter. This loss was treated as Exceptional item as against the earlier policy of adjusting it to Finance cost. In FY 2013, foreign exchange loss was Rs 124.5 crore and pertained to foreign exchange loans. Foreign exchange debt is mainly in the form of foreign currency convertible bonds (FCCBs), external commercial borrowings (ECBs) and foreign currency term loans from institutions such as Export-Import Bank of India. The strategy of raising funds at lower rates from overseas markets seems to have

Weighed down
Over the last five years to FY 2013, Jain Irrigation Systemss standalone debt rose 3.2 times, with 50% portion in foreign currency on 30 June 2013

* 7 October 2013 Base = 100 as on 1 October 2012. FV: Rs 2.


Oct 14 27, 2013 CAPITAL MARKET

inched up 2.3%, while profit crashed 98% in FY 2013. Of late, however, receivables have shown favorable movement. Jain Irrigation Systemss NBFC could be the role model to create However, the receivable position is financial liquidity in the farming sector improving. Consolidated trade receivables tenure up to three years. It had sanctioned To tackle the issue of high receivables declined Rs 316.5 crore in FY 2013 over FY loans of Rs 36.5 crore and disbursed Rs resulting in severe pressure on the 2012. Receivables are expected to come down 27.5 crore to 3,250 farmers till the close of balance sheet, the Jain Irrigation Systems further in FY 2014. Various ways are being the fiscal ended March 2013 (FY 2013). group has formed non-bank financial explored to lower receivables (see box: InOverall disbursement is expected to company, Sustainable Agro Commercial house solution). be around Rs 100-Rs 150 crore in FY Finance (SAFL), which has raised Rs 60 The MIS business is back on growth 2014. Further, SAFL is likely to cover crore in equity. Moreover, it is expecting track, growing 13% in the first quarter ended 25,000-30,000 farmers till the end of the contribution from IFC, part of World 30 June 2013 over a year ago. Exports of current fiscal. Bank, which intends to hold 10% equity MIS rose 238% in the first quarter. Orders SAFL could be the role model to create stake for Rs 6.9 crore in the company. on hand were Rs 1200 crore end June 2013 financial liquidity in the farming sector. Jain SAFL has started operations in across all the divisions. According to the held 48.99% equity stake in SAFL on 31 Maharashtra, with 22 branches divided annual report for FY 2013, the irrigation March 2013. Going forward, it could spin into four zones. This entity will finance business will be moving to the positive a surprise for its investors. micro irrigation and other products for revenue growth territory in FY 2014. assigned to bank facilities and instruments due focus shifting from on MIS to other There is clear understanding of the to easing of liquidity pressure. For instance, businesses. Thats the reason the revenue strategy going forward. There will be no bank credit lines have been fully utilised, share of MIS witnessed a sharp reduction compromise on receivables and cash flows observes the rating agencys report. of 870 basis points in FY 2013. Revenue even if it comes at the cost of growth. Besides, According to Care, dependence on the from MIS declined 14.5% in FY 2013. reducing inventory level is another priority. agriculture sector and government policies, Cash-flow management has emerged as The working-capital cycle measured by volatility in raw material prices, long a major challenge. This also reflects the delay number of days sales outstanding (DSO) working capital cycles and high interest cost in repayment of principal and interest. One stood at 170 days in FY 2013 compared are among the several negatives. However, of the key reasons is the high receivables. with 176 days in FY 2012, reflecting a the rating agency have taken into account MIS is subsidy-driven business and delay marginal improvement. However, this is still the strong business profile and experience in subsidy on irrigation products is a normal high compared with 157 days in FY 2009 of the promoters. scenario. No surprise, consolidated net sales and 145 days in FY 2010. DSO is defined Established in 1986, Jain Irrigation is a as inventory plus receivables less pioneer in micro irrigation systems (MIS) Financial profile accounts payable. in the country. The second largest MIS Jain Irrigations MIS is the largest revenue contributor, There will be strict vigil on capital player in the world is also the largest maker followed by piping, food, and solar products expenditure. As matter of fact, the capex of polyethylene pipes and one of three YEAR END target has been reduced to Rs 130 crore 201303 201203 201103 201003 200903 largest manufacturers of polyvinyl chloride from Rs 180 crore in the current financial 2151.7 1718.9 1521.0 1216.7 861.2 pipes in the domestic market. Other agri- Net Worth (Rs cr) year. The plan is to pare debt by Rs 500 businesses include plastic sheets, Capital Employed (Rs cr) 5976.9 5567.2 4557.7 3718.6 2748.7 crore end of FY 2014. Likewise, wind 3773.8 3352.8 2846.7 2326.6 1917.0 dehydrated onions and vegetables, Gross Block (Rs cr) assets worth Rs 64.5 crore are to be processed fruits, tissue culture and solar Sales (Rs cr) 5362.5 5241.2 4479.8 3652.7 3057.6 divested. The sale proceeds will be systems solar systems, comprise water Other Income (Rs cr) utilised to repay debt. 66.8 34.5 110.6 54.8 54.4 heating systems, panels, and water pumps. PBIDT (Rs cr) 698.7 849.9 858.5 690.4 452.0 Apart from 30 manufacturing plants, Outlook PAT (Rs cr) 8.0 222.3 281.0 250.9 130.2 the wide distribution network consists The sharp correction in the stock could 172.6 367.6 402.9 349.6 197.8 of 5,485 distributors and 116 offices and Cash Profit (Rs cr) be tempting for investors. Anyways, 47.3 42.4 39.4 159.7 112.8 warehouses. Since 2006, 19 acquisitions Book Value (Rs) Jain is one of the best plays on the rural 25.0 50.0 50.0 45.0 25.0 including plants were made. Of these, Dividend (%) market. However, the company has a nine were overseas. This also explains Debt-Equity Ratio (times) long way to recovery. There are two 1.92 1.99 1.88 1.90 1.62 utilisation of funds raised by the Debtors Turnover price benchmarks that are available over 2.59 2.69 3.38 3.96 4.13 company over the last few years. the short to medium term. First, the two Interest Cover 1.00 1.48 2.25 2.68 2.08 MIS is the largest revenue tranches of FCCBs one issued in FY PBIDTM (%) 12.50 15.94 18.78 18.56 14.38 contributor, with share of 45.5% in FY 2013 and another in FY 2014 have a 0.17 4.29 6.30 6.69 4.23 2013 (54.2% in FY 2012), followed by PAT Margin (%) conversion price of Rs 115. Second, the 8.86 13.81 17.68 18.10 15.35 piping products 22.2% (20%), food ROCE (%) preferential equity shares were allotted 0.47 13.40 20.01 22.55 14.67 products 20.4% (16.9%), and solar RONW (%) at Rs 80 per share including premium products 4.4% (3.4%). The business Consolidated financials. of Rs 78 per share. model is in the process of changing, with Source: Capitaline Databases S Khedekar

In-house solution

Oct 14 27, 2013 CAPITAL MARKET



Debt heavy, debt light

Changing profile
Companies with zero debt or near-zero debt balance sheets stand out during periods of business slowdown
External factors such as domestic and global economic slowdown, policy uncertainty, and high inflation and interest rates are crucial reasons behind the disappointing performance of companies struggling on the trading floor. However, there are also companyspecific issues that have resulted in erosion in the shareholders wealth. These are heavy debt and poor corporate governance. The number of companies referred to the corporate debt restructuring (CDR) cell has increased manifold during the last few years. As per media reports, the CDR referrals rose 40% to touch Rs 26386 crore in the quarter ended 30 September 2013 compared with Rs 18907 crore in the corresponding period of the previous year. This reflects the fact that debt remains the key concern for several companies. Moreover, with the gross domestic product hitting a decade low in the fiscal ended March 2013 (FY 2013) and no revival in economic fortunes in sight in immediate future, financial stress is likely to increase in future. On the other hand, banks are staring at deterioration in the asset quality and increase in non-performing assets (NPAs). The net NPA ratio of commercial banks in24

creased to 1.68% in FY 2013 from 1.28% in FY 2012. Public sector banks net NPA ratio rose to 2.02% from 1.53. Private sector banks are relatively better with lower net NPA of 0.52% in FY 2013 compared with 0.46% in FY 2012. This is one of reasons public sector banks such as State Bank of India have reported correction over the last four months. Certainly, this problem is acute for PSU banks. As there are companies saddled with high debt, there are companies that have kept away from debt with a zero debt or near-zero debt balance sheets. This prudent strategy stands out during periods of business slowdown, when debt-laden firms are dumped by investors. However, this prudence could be termed conservative in the heydays. In short, leverage has emerged an important parameter that the market focuses on while exploring stocks. In this context, it is essential to understand companies policies and strategies on debt. Shree Renuka Sugars s debt-to-equity ratio increased to 5.5 times end of March 2013 from 0.91 times end September 2009. The significant jump in debt was primarily

owing to the leveraged buyout of assets in Brazil in 2010. Due to these acquisitions, the company has significant presence in centre-south Brazil through Renuka Vale do Ivai (100% owned), and Renuka do Brasil (59.4% owned), with combined crushing capacity of 13.6 million tones per annum (mtpa). Shree Renukas profile improved with this acquisitions. Globally, it is one of the largest sugar producers, with total crushing capacity of 22 mtpa. However, heavy debt and swings in operating performance has emerged as key concerns. Due to worries over high leverage, the Shree Renuka stock has collapsed 81% to Rs 20 from a three-year high of Rs 106 in November 2010. Presently, the stock is available below its book value (BV) of Rs 22. This is rare considering the fact that the company has generally commanded premium to its BV. Shree Renuka is conscious about reducing its debt level. The company managed to pare down its debt by Rs 1681 crore to Rs 8477 crore in FY 2013. It aims for significant deleveraging in the next two years on higher capacity utilisation across the group and select strategic initiatives. However, the company has not elaborated on strategic initiatives in the annual report for FY 2013. Mint in September 2013 reported that Shree Renuka is in talks with firms based in the UK and Germany to offload its cogeneration asset in Brazil. The value of these assets is estimated to be around Rs 2000 crore. The company has not issued
Oct 14 27, 2013 CAPITAL MARKET

any clarification on this report. In May 2013, the company denied a report about its Brazilian subsidiary, Renuka do Brasil, raising around US$ 250 to US$ 350 million through bond sale. As against Shree Renuka, Glenmark Pharmaceuticals has managed to reduce its debt over the last three years. The company had debt of Rs 367.8 crore end FY 2013. This is significantly lower compared with Rs 1869.4 crore on 31 March 2010. The debt-to-equity ratio declined from one to 0.20 in the same time. This debt level is insignificant as Glenmark had cash and bank balance of Rs 607 crore on 31 March 2013. Despite reduction in the debt level, Glenmarks interest cost remained elevated at Rs 160 crore in FY 2013 as against Rs 165.5 crore in FY 2010. This was primarily because of high component of foreign debt and decline in the value of the Indian rupee against the US dollar. Indian companies have accumulated substantial foreign debt over the last one decade. The low interest rates prevailing in the western markets attracted a slew of companies to raise debt in foreign denomination. However, volatility in the foreign exchange markets has added to the worries of Corporate India. The recent and unprecedented devaluation of the rupee, with the Indian currency plunging to a historic low of 68 per US dollar, has virtually wiped out the low interest rate advantage. Even hedging comes with its own cost. Tata Motors, the countrys largest commercial vehicle maker, reported an impressive decline in the debt-to-equity ratio, which dropped to 1.4 times in FY 2013 from 4.8 times in FY 2010. The decline was purely on account of the sharp rise in net worth in the last three years. Otherwise debt had increased in absolute terms to Rs 53591 crore at the close of FY 2013 from Rs 35108 crore end FY 2010. The healthy jump in profitability added to Tata Motorss net worth, which increased to Rs 37598 crore from Rs 8021 crore in these three years. Profit jumped by almost four times. No surprise, the interest outgo increased 44% to Rs 3553 crore. Anyway reduction in the debt-to-equity ratio is a positive development as it reflects the strengthening of the balance sheet. The lesson from Tata Motors is that investors should not only focus on debt but also on change in the net worth level as well.
Oct 14 27, 2013 CAPITAL MARKET

Glenmark Pharmaceuticals has managed to reduce its debt over the last three years

This is because interest cost may remain static or even increase despite decline in the debt-to-equity ratio. In terms of deleveraging of balance sheet, Mumbai-headquartered pharmaceutical company Wockhardt would be an appropriate example. Its debt-to-equity ratio declined to the present level of 1.3 from 4.9 times end FY 2010. Outstanding debt declined to Rs 2070.5 crore in FY 2013 from Rs 4017.5 crore in FY 2010. At the same time, net worth improved from Rs 671.7 crore to Rs 2704 crore. Interest cost fell 20% in FY 2013 compared with FY 2012 due to reduction in debt in the year. As per the annual report for FY 2013, Wockhardt repaid loans of Rs 1521 crore including settlement of the foreign currency convertible bond (FCCB) loans. Also, a substantial portion of the Indian debt was repaid in FY 2013. The net debt-to-equity ratio was around just 0.4 times at the close of FY 2013, as per the company. The cash and bank balance was at Rs 1096 crore on 31 March 2013. As matter of fact, Wockhardt is a case study. The stock has emerged unhurt after plunging into red over hefty losses it reported primarily on derivatives bets that went wrong. After reporting losses for two financial years, the company bounced back to profit in FY 2011. Tata Global Beverages is another example. What is special about the beverage company with global ambition is the almost consistent decline in the debt-to-equity ratio over the last seven years. The ratio improved to 0.21 in FY 2013 from a

seven-year high of 1.44 in FY 2007. Total debt declined to Rs 1389 crore from Rs 4578 crore. The company is reaping rich benefits of the reduction in debt, with its interest cost falling by 70% to Rs 84.5 crore. It had cash and bank balance of Rs 697.7 crore on 31 March 2013. Taking Shree Renuka, Glenmark, Tata Motors, Wockhardt and Tata Global Beverages as lead examples, Capital Market spotted two sets of companies. First, companies that have reported deterioration in the debt profile. Second, companies that have managed to strengthen their balance sheets with improvement in the debt-to-equity ratio. The high debt-to-equity ratio could put severe constraints on future growth plans. Companies with high debt-to-equity ratio may find it difficult to raise finance from banks and other financial institutions. Worse, it could be difficult to raise equity as the controlling shareholders may not get the desired valuation. To spot companies with drastic change in their debt profiles, companies that are fairly liquid and whose latest financial results are available were selected. Consolidated financials were considered, wherever available. Companies with market capitalisation of over Rs 100 crore were taken into account. Companies were picked primarily looking at the change in the debtto-equity ratio, net worth and absolute level of debt. For this exercise, the last seven years were taken into consideration. The debt-toequity ratio is based on the average of debt and net worth considering figures for the latest and previous financial years.


The lowest debt-to-equity ratio in any of the last seven years was compared with the debt-to-equity ratio reported in the latest financial year. With this, companies with a sharp rise in the debt-to-equity ratio were shortlisted. As a next step, companies reporting increase in absolute level of debt were picked. Thus, there were 25 companies (See table: Rise in financial stress). Similarly, the highest debt-to-equity ratio in the last seven years was compared with the latest debt-to-equity ratio to determine companies that have managed to significantly reduce their financial leverage. Last, companies to have reported decline in absolute level of debt were picked. At the end, there were 25 firms (See table: Decline in financial stress). Conclusion While looking at the debt profile of companies, investors should glance at another set of figures and ratios over five to 10 years to get a holistic view. The crucial numbers to look out for are debt, operating profit (OP), the operating profit margin, and interest outgo. Among ratios, debt-to-equity and interest coverage are two important ones. The ratios and figures could reveal half the story. Cheap foreign debt has become
Tata Motors reported an impressive decline in the debt-to-equity ratio in FY 2013

popular over the past one decade. However, this inexpensive foreign debt comes with its own perils. A fluctuating rupee can make this source of debt expensive and endanger the balance sheet. The debt profile well reveal how much debt is foreign and how much is local. Also, proportion of short-term debt to the overall outstanding debt is important. Short-term debt is expensive as against long-term debt.

Last, and important, robust OP is an equally critical attribute. OP largely depends on the industry outlook and the position of a company within the industry. High debt and weakening operating performance could be a deadly cocktail that could destroy shareholders wealth. Moreover, debt could be low but the scanty operating cash out flows could make it mammoth. S Khedekar

Rise in financial stress

Companies reporting increase in the debt-to-equity ratio



MCAP (Rs cr)

3723 7216.2 4556.1 22844.8 5167.9 3846.7 15545.7


40.2 75 119.5 137 17.9 33.8 84 83.1 201203 201303 201303 201303 201303 201203 201303 201303 201303 201303 201303 201303 201303 201303 201303

22291 10376.6 6471.2 56906.1 13364.5 3010.1 69457.5 72960.8 65947.7 11585.8 33156.9 27510.7 37882.3 4903.9 41102.7 4.6 1.7 1.6 35.7 37.8 91.9 1955.6 962.8 486.4 2079.1 1722.1 257.7 3492.9

OP (Rs cr)
2982.7 2810 1473 8809.8 1524.6 444.6 7796


7.29 3.18 2.63 1.69 4.15 1.6 3.05 1.32 1.74 2.54 1.88 1.18 2.5 1.88 7.32 0 0.52 0.58 0.63 1.33 0.52 1.73 0.33 0.79 0.89 0.91 0 0.79 0.65 0.5



IFCI JSW Energy Fortis Healthcare Hindalco Industries Religare Enterprises Pipavav Defence & Offshore Adani Enterprises Bharti Airtel Larsen & Toubro Adani Ports & SEZ Bharat Petroleum Corporation Reliance Power Tata Power Company Motherson Sumi Systems Adani Power

22.4 44 98.5 110.7 345.5 52.3 141.4

9 6.5 13.4 13.1 -7.7 113.2 16.7 58.4 15.4 16.3 2 18.7 -53.5 26.4 -3.5

0.81 1.16 1.04 0.65 1.66 1.93 0.72 2.56 2.19 4.49 1.41 1.02 1.5 5.91 2.14

1.4 168.6 3.9 208.9 1.4 31.8

366 250.4 98.4 40.7

296.9 126.1 370.4 256.7 1146.3 678.1 175 117.8 449 106.7 113.2 241.1 70 256 58.6 68.3 145 29.5

2.9 195.1 1.3 142.9 1.7 365.7 2.5 1.9 1.2 2.5 1.9 7.3 35.7 232 66.2 52 38.8 23.8

322 128696.3 800 138.6 326.4 67.6 78 229 32.1 74020 28690.9 23601.3 18948.7 18510.2 13462.9 9204.5

4947.7 25426.1 4610.3 13885.3 541.8 2518.3 585.3 2635.5 249.5 1646.4 2690.9 8201.3 2070.1 5963.9 1798.2 1117.8


Oct 14 27, 2013 CAPITAL MARKET

GMR Infrastructure Jaiprakash Associates Essar Oil Hindustan Petroleum Corporation Tata Communications Videocon Industries Jaiprakash Power Ventures CESC Ashok Leyland Jyothy Laboratories 22.4 35.1 52.9 190.5 202.5 177.6 15.5 339.6 15.1 169.7

MCAP (Rs cr)

8699.5 7777.8 7544.8 6449.2 5771.3 5661.4 4539.2 4243 4004.4 2737.3


27 106.8 96.2 10.7 28.4 46.1 201303 201303 201303 201303 201303 201112 201303 201303 201303 201303

42349.3 63111 24741.9 45736.7 12362.4 27283.4 23014.9 9530.8 4355.4 625.9 3.8 3.8 12.9 18.7 55.7 8.1 2099 4661.9 3423.6 2379.8 794.1 1624.2 1212.6 501.2 376.9 68.2

OP (Rs cr)
3531.6 7023.3


3.81 3.82 1.2 2.33 2.22 1.01 0.43 1.05 0.86 1.03 0.38 0



-60.6 11.2 -14.3 0.7 -15 -32.9 19 6.8 17.8 33.4

1.2 0.63 6.82 0.47 4.05 0.73 0.7 1.04 1.27 4.69

3539.2 12.92 5626.2 2390.5 1372.4 1996.8 1522.4 1228.4 91.9 3.2 6.29 2.49 3.32 1.8 1.23 0.94

381.4 158.5 257.8 136.9 246.3 163.8 46.9 8.6

3.2 394.5 6.3 2.5 3.3 50 236 22

368 252.7 28.7 211 11.8 140

1.8 326.9 1.2 0.9 11.9 36.2

Decline in financial stress

Companies recording fall in the debt-to-equity ratio
Glenmark Pharmaceuticals Shree Cement Britannia Industries Tata Global Beverages Havells India Wockhardt Strides Arcolab Max India MMTC D B Corp Unitech EIH Gujarat Mineral Development Omaxe Gujarat Pipavav Port Fresenius Kabi Whirlpool of India DCM Shriram Consolidated Hindustan Media Ventures Som Distilleries & Breweries Fairfield Atlas New Delhi Television Gammon Infrastructure Projects Force Motors Sayaji Hotels 537.2 4158.6 831.8 149.6 650.9 496.3 860.8 188.3 48.3 242 15.8 53.7 88.9 136.1 45.2 128 156.8 58.1 113.9 279.6 241.2 85 6.7 291.8 130 14556.8 14488.4 9969.1 9251.3 8124.5 5447.4 5092.2 5007.8 4825 4438.3 4133.8 3066.4 2827 2361.4 2182.7 2025 1988.7 963.1 835.6 769.5 658.8 547.7 494.8 384.5 227.8 612 386.5 5210 3412.7 864 181.7 400 122 201303 201206 201303 201303 201303 201303 201212 201303 201303 201303 201303 201303 201303 201303 201212 201303 201303 201303 201303 201203 201303 201303 201303 201303 201203 367.8 1704.2 380 1388.7 981.5 2070.5 1594.5 676.3 1679.4 163 5116.9 744 0 1082.2 320.7 140.2 0 1556.8 3.2 11 36.2 222 533.5 68.9 155.4 0.2 102 160 235.4 41.3 84.4 123.2 215.4 193.4 84.5 250.8 9.2 34.4 71.7 0 126.4 68.4 -2.6 3 154.8 5.3 0.1 2.9 22.9 42.5 8.3 25.2 1020.7 1796.2 472.9 826.3 896.7 2197.7 1252.4 1212.6 151.5 398.6 416.2 286.8 1021.1 258.6 197.3 138 242.5 520.5 141 29.2 1.55 2.01 2.08 1.44 2.26 4.88 2.97 2.41 3.66 2.7 2.98 1.08 1.26 2.5 4.5 2.45 1.23 2.36 1.57 4.23 0.2 0.76 0.31 0.18 0.38 1.28 1.21 0.19 0.86 0.19 0.4 0.27 0 0.6 0.5 0.23 0 1.2 0 0.21 0.38 0.04 0.56 0.06 1.39 21.9 14.4 36 22.7 21 3.5 37 39.7 -62.9 17.7 18.2 58.9 5.1 22.2 19 28 17.6 3.4 8.8 37.4 19.7 138.3 358.5 21.1 35.6 5.3 5.3 17.9 1.9 5.6 2.3 2.5 1.7 3.2 4.3 0.3 1.3 1.1 1.3 1.8 3 3.3 0.6 1.6 9.8 5.7 2.8 0.8 0.3 1.9

0.8 1103.2 1 0.2 46.4 77.1

817 556.8 2166.1 344.2 1224.9 552.7 266.7 150.5 776.8 37.2

0.8 115.5 1.3 219.2 1.2 342.6 0.2 109.2 1.6 0.2 0.4 0.3 0 14.9 56.1 46.2 41.5 79.7

280 196.3 40.9 83.3 221.7 14.7 43.3 76

171.2 134.9 54 154.2 289.5 86.4 41 78.5 141 49.1

0.6 107.1 0.5 0.2 0 1.2 0 0.2 0.4 0.6 0.6 25.1 42.6 47.6 90.1 69.3 34.1 42.1 30.3 9.7

156.9 102.4 304 156.5 242.9 100.9 16.7 525 139 95.4 51 6.1 225 107

55.2 19.32 59.3 97.3 97.9 52.5 3.18 3.89 4.1 3.64

0.1 875.9 1.4 68.6

Consolidated financials taken into consideration wherever available. CMP: Current market price is closing as on 1 October 2013. BVPS: Book value per share.OP: Operating profit. P/E based on latest TTM (trailing twelve months). Max D/E Ratio& Min D/E Ratio: Maximum and minimum debt-to-equity ratio considering the period of last seven financial years. Source: Capitaline Databases

Oct 14 27, 2013 CAPITAL MARKET


OffFocus OffFocus
ity plan was shot down. Then making the rounds of headlines was the Reserve Bank of India (RBI) shooting off a letter to various temples asking them to account for their gold. That led to protests, especially in south India. Many temples have now actually refused to even provide an account stating that the gold they hold is given as a donation by their devotees and they are not obliged to reveal anything. The government now has a certain opinion about consumer activities. It perceives some of them to be healthy and the others not so much. It is trying to constrain spending, particularly by the urban middle class. For the man on the street, however, efforts to usher in an era of austerity is not going to be very palatable. Take the instance of something as simple as eating out, which is not only a luxury but also a necessity for the time-starved working professional. Not only is food inflation making it more expensive to order a takeout meal, the government also has its heart set on adding to the costs. To add to its kitty an additional Rs 4700 crore in the form of indirect taxes, the government brought air-conditioned restaurants under the service tax net. Service tax is 4.95% and value-added tax ranges between 12.15-15% on restaurant bills. This effectively means shelling out 17-20% on taxes each time meals are consumed in restaurants. Compare this with how developed countries impose tax on restaurants. In the USA, Minneapolis, Minnesota charges the highest tax on meals. But that is 10.775%. In the Netherlands, this is only 6% in restaurants and bars. In Japan, there is 5% fixed consumption tax. The idea behind this sort of taxation by the Indian government is that it is a luxury tax targeting highincome individuals. The truth is that it is more a tax on people who cannot cook or who have no time to cook, whether they are well off or poor. The falling economy of India is a sort of tragedy for middle-income India. All the things that they covet, expensive phones and cars, foreign vacations and colleges, not to mention even needs like groceries and homes, are again slipping through their fingers when they had just started getting used to being affluent. Cutting down unnecessary consumption now seems to be the cornerstone of governmental policy considering Indias feeble manufacturing sector does not produce enough to actually make the country an export-driven economic power. So
Oct 14 27, 2013 CAPITAL MARKET

The interventionist government

Back to the old days

After opening up in the 1990s to save the economy, demand is sought to be controlled once again to save the economy
Imagine a retailer who wants to give a discount to a customer but is restricted from doing so. A bit unfair? Now imagine a chain of cinemas that slashes ticket prices but faces a ban on screening and the full force of law because reducing ticket prices is illegal. It can no longer operate until it apologises. So the cinema owner has no choice but to do so. That just happened last week in Chandigarh because the local government objected to cinemas offering discounts to customers. Intervention of the government in such matters is bewildering. The reason given for the closure of cinemas was that lowering ticket prices deprives the government of tax revenue! When the government intervenes in demand and supply, the casualty is free economy. Overtly or covertly, the government is always a player in the market. By imposition of taxes, it can influence demand and supply. When the government appears to have shifted from managing the broader picture to getting involved in the nitty-gritty is when alarm bells start ringing, as they should. In 2011, the prime minister himself was worried about excessive regulation and expressed apprehensions of returning back to the license raj. It is necessary to ensure that these regulatory standards do not bring

back the license permit raj, which we sought to get rid of in the wake of economic reforms of the early nineties, he said. Anyone who lived in the preliberalisation India would be familiar with the stifling economic environment, which permeated every aspect of life in the country. People would wait years for a twowheeler, months for a telephone connection, and, sometimes, even weeks for a cooking gas cylinder. Queues for kerosene, sugar and food grains were the norm. For those lucky enough to be born in the 1990s, they can just watch a couple of Hindi movies to familiarise themselves. It was all the result of an interventionist government that wanted to control production, not only through state industry but also by curbing private enterprise. Fast-forward to today and the license raj may have been dismantled but the governments hold on what is kosher and what is not seems to be getting stronger. Last month, when the rupee seemed to be in a free fall, the government was in a full damage-control mode. Ideas that flew on television screens ranged from truly creative to half-baked. Shutting down petrol pumps during the night to conserve oil to help balance the balance of payments was just one such idea. Thankfully, that chaotic auster-

the consumer and his interests or aspirations must face the axe. The actions of affecting consumer choices are no just limited to adding taxes. It seems there are other means available as well. Consider the recent direction of the RBI to banks to stop all 0% equated monthly instalment (EMI)-based schemes on white goods such as LCD TVs, mobile phones and other such gadgets. The reason given for such a ban has been the fact that banks have been fleecing customers by hitting them with a processing fee and, essentially, these 0% loans were never 0%. That this directive comes just before the holiday season is interesting. So customers waiting for Diwali for many such great deals from lenders or retailers will now just have to shell out hard cash or pay interest on EMIs. It could be seen in a way also to dampen demand for these goods, which are essentially imported and cost the country significant foreign exchange. Similarly, there was a trend in the past when Indian travellers coming from abroad could bring in a TV worth Rs 35000 without having to pay any customs duty. Travellers coming from Dubai, Thailand, Singapore and Malaysia often used this break due to the price differential between Gulf and South East Asia. In August, 36% import duty was slapped on such imported TVs. Now, the difference has been essentially wiped out. This is just another example of how the government is beginning to influence choices that the customers make at the micro level. Indian consumers have always had a healthy appetite for gold. Gold is the traditional means by which the average Indian offsets inflation. The precious metal is also significant to the average citizen because it is a gift that is given on weddings and passed on from one generation to another. The goldcrazy country is the biggest buyer of bullion in the world. In July, imports of gold were worth US$ 2.9 billion. To counter these imports, the government has hiked duty on gold three times this year. It stands at a record 10%. The duty on gold jewellery has been increased to 15%. While it is true that gold is not an essential commodity and its import is not good for the health of the economy in perilous times, it is also true that trying to restrict gold imports is also a problem. According to one estimate, smuggled gold shipments into India reached 200 tonnes in 2013 by midOct 14 27, 2013 CAPITAL MARKET

Ban on 0% EMI is a festive-shopping spoiler

August. With the festive season looming, demand for gold will only pick up. Bollywood might as well discover the good old gold smuggling villain of the 1980s again. It is not only gold but also foreign currency that the aspiring middle class uses increasingly. Resident individuals in the past could remit up to US$ 200,000 a year. Now they are curtailed to only US$ 75,000. The government also banned purchasing real estate abroad, effectively restricting Indian citizens from investing overseas. Resident individuals are now more locked into the rupee than ever before. These steps of the central bank indicate a return back to the days of capital controls. The government needs to protect the countrys economy and also take care of the wider interest of the people. Some of the measures that have been taking recently appear to give it a scrooge-like image. It has been able to justify each of the actions reasonably. But the spirit behind those actions is questionable. Take, for example, the restrictions on gold. The problem is perhaps more social than economic and should have been addressed a long ago. Over the course of time, the government should have provided effective and simple means of investments to common people so that they could benefit from the capital market. Curbing social ills like dowry and forced marriages or providing opportunities like less bureaucratic court marriages would reduce expenditure on arranged marriages. If there had been better public transport infrastructure, the demand for fuel could have reduced to a great degree in cities. Similarly, building better infrastructure could have encouraged in-

dustry and improved the countrys balance of trade position. We have returned back to the era of stopgap measures to try to avoid rack and ruin. It is strange that the country seems to have come a full circle. It was a controlled economy that led us to open up and liberalise in the 1990s. Today, we are resorting to controlling the market, the consumer and demand to save the economy. It would not be unfair to say that the common man is being punished for the failings of the government over the years to provide effective governance. It would be equally fair to say that there needs to be a change in our own behaviour as well. Not all consumption is necessarily healthy but this needs to be addressed through social change. The government might begrudge the common man a couple of LCD TVs or mobile phones but needs to practice what it preaches as well. It is common knowledge in India that government workers are gas-guzzlers. Unfortunately, there are no figures for how much fuel they use but since the government thinks of fuel as an office expense, for which the Central government spent Rs 5200 crore in the fiscal ended March 2012. An average minister of the Central government uses over 46,000 litres of petrol a month. In states, the situation is similar or worse. It is routine to see convoys of scores of cars on highways and state roads. Government in India is synonymous with sloth and privilege. The facilities that it has extended to itself need to be cut first before it can point fingers to anyone else and ask them to get ready for austerity. After all it is the governments job to lead by example. In the last few days it has done a whitewash of austerity by making lowly bureaucrats travel economy class and banning functions in five-star hotels. So are we back to the 90s? Not yet. We are heading there is a more a likely analysis. The economic situation still remains grim. The market is now dependent on what the Federal Reserve does and how the Americans manage their budget. If the country is truly to become a financial power we must put more substance back into the economy. That means not focusing on these petty restrictions but building the nation. This in the case of India needs to be done literally, brick by brick, road by road. The only problem now is who is going to bell the cat? Shivdeep Singh

Inflation rebounds
Higher prices of food articles and passthrough of rupee depreciation are boosting inflation. However, core inflation has sharply dipped, indicating weakening of demand. Thus, improving supply of food articles can moderate inflation


Wholesale Price Index All Commodities Primary Articles Fuel and Power Manufatcured Products Core Inflation * Agriculture * Capital Goods * Consumer Durable Goods * Consumer Price Index CPI-General CPI-Rural CPI-Urban CPI-Industrial Workers Real Estate Index CPI-Housing Mumbai Delhi Chennai Kolkata Bengaluru Commodity Watch Gold Silver Aluminium Steel Crude Oil Basket Diesel Petrol Cement Sugar Cotton Currency Watch Real Effective Exchange Rate (REER) Nominal Effective Exchange Rate (NEER) USD Index Financial Markets 10-year G-sec Yield $ 5-year AAA Corporate bond yield $ BSE Sensex Market Capitalisation-BSE Monetary Policy Repo rate $ Cash Reserve Ratio $ Global indices IMF Price Index IMF Energy Index FAO Food Price Index CPB World Industrial Production CPB World Merchendise Trade
* indices are developed out of WPI data.


177.5 247.8 202.3 150.0 146.8 237.4 138.3 123.4 134.6 135.4 133.6 237.0 132.1 221.0 199.0 303.0 189.0 108.0 30473.0 52250.9 151.9 46790.0 7001.6 52.0 75.1 166.0 3300.8 13620.3 83.5 68.8 101.9 8.77 9.78 19379.77 3263346 7.50 4.00 185.7 196.9 199.1 121.3 131.9

1.20 3.77 1.25 -0.13 0.02 4.44 -0.55 0.16 1.13 1.20 1.14 1.73 0.92 0.17 5.67 0.88 0.65 2.44 1.11 5.33 -2.30 -1.47 3.13 -5.14 -5.13 -0.23 0.17 -0.30 4.08 5.70 0.25 0.00 1.11 2.34 -1.13 0.48 2.15

3.56 9.02 5.42 0.47 0.53 12.48 0.13 0.81 4.18 4.31 4.05 3.98 2.72 -0.45 -1.49 -2.26 -4.06 -0.92 12.17 19.56 6.75 0.21 18.51 3.42 13.21 -2.64 -0.56 18.90 -11.63 -11.84 0.29 1.33 1.22 -0.08 2.27 0.25 0.00 3.57 6.70 -5.08 0.54 0.76


3.86 10.43 3.48 0.94 0.99 17.42 1.41 0.89 5.90 5.70 6.20 6.33 5.26 1.84 2.05 -3.50 -9.57 1.89 3.26 -5.05 8.32 0.21 20.93 6.78 7.97 -2.30 -3.10 23.85 -13.10 -12.85 1.20 0.82 0.92 2.89 4.91 0.00 0.00 -2.62 -0.91 -6.60 1.37 1.16 5.15 12.08 7.21 1.35 1.49 17.31 1.80 1.74 7.34 6.70 8.27 8.29 7.92 11.62 11.80 -2.88 -1.05 10.20 -1.23 -13.99 2.98 0.06 19.42 10.46 11.66 -1.31 -7.94 42.16 -11.50 -11.43 2.91 0.72 0.86 -0.24 2.46 -0.50 -0.25 2.78 4.83 -5.60 2.10 2.63

6.10 11.72 11.34 1.90 1.97 16.58 2.16 3.10 9.52 8.93 10.32 10.85 10.54 12.18 15.70 -1.94 -3.57 8.00 -3.74 -15.97 4.58 -0.21 14.81 17.74 9.67 -3.26 -12.72 25.98 -10.75 -10.85 2.72 0.62 0.83 3.29 4.97 -0.50 -0.50 0.09 1.07 -7.74 1.80 3.59

25.80 39.76 36.69 16.91 16.25 42.25 9.06 9.81 34.60 35.40 33.60 33.15 32.10 38.13 80.91 65.57 7.39 58.82 59.55 59.62 28.61 6.34 99.77 33.50 45.48 9.64 19.81 27.40 -17.53 -25.20 0.40 0.92 1.28 -3.43 7.46 1.50 -2.00 25.09 39.28 2.55 8.97 10.89

2004-05 2004-05 2004-05 2004-05 2004-05 2004-05 2004-05 2004-05 2010 2010 2010 2001 2010 2007 2007 2007 2007 2007 Rs Per 10 Gram Rs Per kg Rs Per kg Rs Per tonne Rs Per barrel Rs Per liter Rs Per liter 2004-05 Rs Per quintal Rs Per quintal 2004-05 2004-05 Index Per cent Per cent Index Rs lakh crore Per cent Per cent 2005 2005 2002-04 2005 2005

Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Aug-13 Apr-Jun 2013 Apr-Jun 2013 Apr-Jun 2013 Apr-Jun 2013 Apr-Jun 2013 Sep-13 Sep-13 Sep-13 Sep-13 Sep-13 Sep-13 Sep-13 Aug-13 Sep-13 Sep-13 Aug-13 Aug-13 Sep-13 Sep-13 Sep-13 Sep-13 Sep-13 Sep-13 Sep-13 Aug-13 Aug-13 Sep-13 Jul-13 Jul-13


Oct 14 27, 2013 CAPITAL MARKET