Showing posts with label FDI. Show all posts
Showing posts with label FDI. Show all posts

Saturday, April 27, 2013

Meeting the sub-7 degree challenge

An economic slowdown is bad enough, and prevailing sentiment on India's prospects due to the oft cited 'policy paralysis' makes it worse. However, considering the long term demand potential, the profit leaders of India Inc. should take the lead in bringing investments, growth and faith back.

India’s growth engine slowed to a rate of 6.5% in the previous financial year, which presents India Inc. with what we call the sub-7o challenge (GDP growth falling below 7%). Perceptions of the country’s potential, though, went down by several notches. To be fair, optimism on India will continue to ebb and flow in future as well, but what remains unchanged is the paradox that characterises India. In the month of June, we became, most unwillingly, the flavour of global economic debate, when Standard & Poor’s revealed that we risked being the first among BRIC nations to lose our investment grade rating. Interestingly we receive this warning despite outgrowing Brazil ( GDP growth of 2.7%) and Russia (GDP growth of 4.3% in 2011)! In the same month, India, along with fellow BRIC nations pledged $75 billion to the IMF fund for the Eurozone, where the likes of S&P should be giving ‘rescue’ ratings and developing an altogether new scale. Some experts even project this as a fitting reply to the S&P rating! You do not need to look at the report to ascertain the rationale for this bearish sentiment. A government that predicted GDP growth of around 8.2% for the last fiscal initially, seems to be either too laid back or too constrained to make amends for the reduced figure, and the central bank isn’t helping either. But for the 50 basis points cut in April, RBI has kept interest rates high. The industry laments the RBI’s lack of concern for growth and fails to understand why interest rates are being kept high despite manufacturing inflation having come down. Unfortunately, if one looks at the HSBC Manufacturing Purchase Manager’s Index for June 2012, rate cuts could be delayed even further. The index read 55 in June compared to 54.8 in May, and

the report claims that input and output prices have risen significantly in June. Furthermore, a weak monsoon threatens an upward push to an already high WPI of 7.55% in May. However, delaying rate cuts has a detrimental effect from another perspective. High interest rates are leading to heightened incidence of debt defaults among SMEs, due to which toxic assets are entering our banking system at an alarming rate. Furthermore, investor uncertainty has reached new heights following the announcement of GAAR. Though it has been rolled back, no one is sure when it will return. There’s no timeline for the implementation of GST. Economists insist that FDI in retail could be a major step towards improving supply chain deficiencies in agriculture and bringing down inflation, but the government remains locked in a political logjam. Considering that there isn’t much fiscal room, urgent policy measures are needed to improve investor sentiment. India has received an impressive $36.5 billion in FDI equity inflows in FY 2011-12, a growth by 88% yoy (Department of Industrial Policy & Promotion). It’s important that this momentum is not lost.

Mention the word strategy to India Inc. and they would, with reasonable certainty, point an accusing finger towards monetary & fiscal policy. But then, even in this environment, there are businesses that continue to outperform. A look at our B&E Power 100 list this year as compared to the list five years ago provides some interesting insights. There are 32 new entrants, & some of the prominent ones include DLF, Jaypee Infratech, Adani Ports, Yes Bank, Axis Bank, Sun TV Network and Cadila Healthcare. Notable exits include Suzlon Energy, Reliance Communications, HCL Technologies, Unitech, MTNL, VSNL, Tata Tea, Tata Chemicals, Videocon & United Spirits. The reasons vary greatly, but the crux is that 68 members in the list have stayed the course and continue to be part of the list. And six of them remain in the top 10. Credit it to their world class practices, or their overwhelming hold on the market, they have managed to excel in the best & the worst of times.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
For More IIPM Info, Visit below mentioned IIPM articles
 
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Tuesday, January 08, 2013

Wholesale retail: For those with staying power

Of the four or five big players known for their prowess in wholesale retail, only Wal-Mart and Metro appear to be serious contenders for the game in India. The rest are yet nowhere near getting their strategies and plans sewn up. Why?

As growth flattens in the developed countries of America and Europe, retail giants are looking to India as the market that could help put some life into their limp balance sheets. With a $500 billion retail market growing at roughly 15%, of which hardly 10% is organised retail, a roughly $2 trillion economy, and with 1.2 billion potential consumers, India is no doubt a mouth-watering proposition. But then, India with its derelict infrastructure, a vast but ropy supply-distribution network extending into the hinterlands, which in some places can be as old as 200 years, can test the nerves of even the most doughty marketers determined. And with government policies skewed in favour of the traditional ‘kirana’ stores, the country, despite its big potential, often proves frustrating for global retail players wanting to spread their business wings in India.

But as everywhere, where there is a will, a way is always found. So despite being a tough market to crack, global retail biggies like Wal-Mart, Carrefour, Metro and Tesco, are all agog and breaking sweat to make a go of the business to business retail model in the Indian retail sector. A small tailwind working in their favour is that the government allows 100% foreign FDI in the wholesale retail space. Also, most players hope that FDI in multi-brand retail is likley to come sooner than latter in spite of the faux populism preached by most political parties in India.

The wholesale cash-and-carry domain is dominated by the American retailer Wal-Mart (with 17 stores), which has a 50:50 JV with its Indian partner Bharti, and German biggie Metro (with 10 stores). The second-largest retailer, French Carrefour, has only two stores so far in north India, and plans to open two more this year, in the northern Indian cities of Agra and Meerut. The UK-based supermarket giant Tesco has no immediate plans of setting up shop here, and is happy partnering with Tata Trent Group’s Star Bazar chain of operations. The only Indian player who can take on these overseas giants is Reliance, but it has just one store to show for on its wholesale retail scorecard.

Over the long term horizon, only Bharti Wal-Mart and Metro seem to have significant expansion plans. Both retailers aim to open 50 cash and carry stores across the metros, and tier 2, 3 towns of India. With a typical Metro store costing anything between Rs.60 to Rs.70 crore, that would entail an investment of roughly around Rs.35 billion from Metro. The group has already invested about $150 million so far in this market, and plans to invest roughly Rs.6 billion in opening 8-10 stores this fiscal. Says Rajeev Bakshi, MD of Metro Cash & Carry, “Our USP is that we have a long-term understanding of the India market, being the first one to set up shop in 2003. We are going to only focus on cash and carry format. And that doesn’t mean we are passive retailers.” Bakshi joined Metro from PepsiCo India, and is actively focusing on pro-actively using marketing to reach out to prospective consumers, and entering into long-term relationship with kirana stores.
 

Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
For More IIPM Info, Visit below mentioned IIPM articles.
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Tuesday, July 24, 2012

The Indian Real Estate space

PE Investors are Amassing Unusual Stakes in Indian Real Estate companies. But given their Short Term Profit Interest, there is a Critically huge Potential threat for The Industry. A close look at these Unregulated Flip Artists in The Indian Real Estate space.

A cursory glance of the happenings in the real estate domain in the last three months of the calendar year 2011 brings to light interesting facets: Parsvnath Developers Ltd (a New Delhi based realty firm) has raised a billion rupees by selling 49.9% stake in a housing project (Parsvnath Exotica) to private equity firm Sun Apollo India Real Estate Fund LLC; Red Fort Capital Advisors Pvt. Ltd. is investing Rs.1.5 billion in Ansal Properties and Infrastructure; the real estate market is abuzz with the news that Pune-based Kumar Developers is negotiating with private equity players to raise up to $250 million; Lodha Developers is apparently in talks with Standard Chartered Private Equity to raise approximately Rs.4-5 billion; Shriram Properties is expected to raise over Rs.7 billion from private equity placements while global private equity giant Blackstone based out of US, with a corpus of Rs.49.5 billion is planning to make its India real estate foray by investing close to Rs.2 billion in Bengaluru-based Embassy Property Development. If these examples give you an impression that all that these PE firms have in their hearts is to contribute wholeheartedly towards India’s growth and towards providing housing for the less privileged sections of our society, relax. PE firms are worse than fair weather friends, as they singlehandedly have the potential to ensure the destruction of the ‘fairness’ in the weather. Take these case study examples.

While we had the likes of Morgan Stanley (which invested $68 million in Mantri Developers through its real estate arm), Siachen Investments (invested $100 million investment in Nitesh group), the Chatterjee Group (proposed $450 million investment in commercial properties), Trinity Capital, et al during the mid 2000s who invested, we also had the opposite club led by examples like Symphony Capital (exited its investment in DLF Assets Ltd; DLF bought the stakes from Symphony Capital in a deal valued at $695 million), Siva Ventures (exited Amby Valley Ltd’s in a buyback deal valued at $323 million). Numerically speaking, data from Venture Intelligence reveals that in 2010, there was about $1.5 billion worth of investment across 46 deals in the real estate sector compared with $749 million across 23 deals in 2009. A simple back of the book analysis makes it amply clear that the Indian real estate sector accounted for approximately 20% of all PE investment in 2010 and about 15% of all deals. Now comes the real hitter. In 2010 itself, there were eight exits in the real estate space worth $1.24 billion (statistics from VCCEdge indicate that in the current year, there have already been six recorded exits worth a combined $124 million). It doesn’t require a high profile stock analyst to deduce that PE firms, overall, have been simply playing the Indian real estate market, using opportune moments to buy in or sell out, behaving more like hot money stalwarts in the FII market than as the quasi FDI investors they were supposedly expected to be. PE investments overall have been growing; no doubt about it (PE investment in India rose 57% reaching $3.3 billion in Jan-March 2011).

But as data shows, so have PE exits. For an industry to grow over the years, what in general is critically important is a continuous supply of money, where the overall money supply within the industry keeps growing. The case, especially in the real estate industry, and more specifically due to the PE behaviour, is that there only remains an illusion of money moving; with the reality being a constant fight by real estate developers for stable sources of funds. The illusion of PE money flowing into a domestic real estate firm creates the subsequent move towards higher valuations – a self fulfilling and deprecating move. An IIT Madras study that studied VC and PE investments over a period of 2004-9 mentions how surprised the researchers were when they found that the average duration of such investments is only 17 months. 17 months? Are we supposed to believe that real estate projects in our country are being planned, implemented and sold within 17 months on an average?

Even industry players like Suresh Swamy, Executive Director, PwC, Vikram Hosangady, Executive Director, Transaction Services KPMG India, accept this phenomenon of PE involvement and the effects beyond. But the blame in this case perhaps rest completely with the government, and specifically with the RBI and SEBI. Till date, after so many years of brandishing the liberalisation and globalisation flag, and after so many years of allowing foreign capital to enter Indian markets, there is still no regulatory act or guideline or body that controls PE investment into India. While statements there have been many, all that would remain plain filibustering until the bodies that were supposed to be responsible for controlling foreign fund inflow put their words into action. What is required is for RBI and SEBI to set up a set of guidelines that defines the exact procedure under which a PE would be allowed to function, the minimum price at which it would be allowed to buy into a domestic company, a lock in period that would ensure that PE firms do not hold the domestic firm to ransom, a preferred or proposed exit strategy (for example, IPOs are the most transparent of all exit strategies) and most importantly, a body that would register not only each and every entry or exit of any PE firm, but also their financial transactions to the tee. Of all these requirements, there is no gainsaying the fact that the most important one is the lock in period. Currently, such lock-in periods are engineered solely on the negotiating power of the domestic firm, and on how desperate it is for funds – for example, just as recently as in March 2011, six PE firms were lined up to invest in Hero Investments, for providing the money to the Hero group to buy out Honda’s investment in Hero Honda; with the clause being that the PE firms would have an eight year lock in period. That, for all practical purposes, resolves the issue there and then. But now every company in India has the negotiating power of the Hero Group, and least so in the Indian real estate sector.

India requires approximately 7.5 million housing units to take care of its surging demographics. Being part of an approximately $12 billion sector, which is growing at a CAGR of 30% and accounts for about 5% of the country’s GDP, it is ironical that outside players are taking undue advantage of the supply side constraints. While on one hand, the RBI has not even been able to handle the issue of inflation properly, on the other hand, we have SEBI which is more intent on moving proposals that would now allow it to tap phones of market traders (and for that matter anybody and everybody they wish). We guess they have a lot of staff and time at their disposal for doing that... Some moments invested in this issue won’t harm them either.



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