December 22, 2010

Highlights

Growth In The Segment negligible At 1-2%

Inflation Could Be Playing Spoilsport

Consumer Non-Durables: Chink In The IIP Armour

December 22, 2010

Consumer Non-Durables: IIP’s Weakest Link

Used-based classification of the index of industrial production (IIP) covers basic goods, capital goods, intermediate goods and con-

sumer goods. Consumer goods can be further broken down into consumer durables and non-durables.

The consumer non-durables segment consists of 63 items spanning food & beverages, textiles, paper, leather, drugs, soaps & deter-

gents, lighting products and other miscellaneous items. Over the past few months, consumer non-durables, with a 23% weightage in the

overall IIP, has been a dampener, registering weak growth.

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IIP YoY IIP MoM IIP 3 Months Moving Avg

IIP Movement

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Consumer non-durables YoY

Consumer non-durables MoM

Consumer Non-Durables 3 Months Moving Avg

Consumer Non-Durables Index Movement

December 22, 2010

Growth in the segment has been negligible at around 1-2% YoY since May 2010. On an MoM basis, the picture is even more gloomier

as the segment has shrunk in 12 of the last 19 months registering a negative growth in contrast to IIP which registered negative growth

only seven times. Following are the top 10 items with the highest weightages in the consumer non-durables index.

Analysing the top 10 items with the highest weightages, it is clear that only three -- milk powder, tea and vitamin A -- have declined in

October. Tea production declined due to excessive rains the northeast. The rest of the seven items registered positive growth. Hence, it

is the items with lower weightages that have not done well, thus pulling down the index. Some such items are country liquor, soft drink

& soda, leather footwear & garments, hair oil/ayurvedic oil, soaps of all kinds and rubber footwear.

PRU View

The consumer non-durables category is mostly dependent on the lower income cohort of the population -- both rural and urban. High

inflation could be a reason for households allocating large portions of their disposable incomes for food items and in the process reduc-

ing the amount available for other FMCG items. Also, rural households may have substituted branded products with cheaper non-

branded ones. In addition, there is an unproven hypothesis forwarded by some economists that the windfall incomes of the past two

years — the economic stimulus programme in the aftermath of the Lehman Brothers collapse, higher cereal procurement prices, guar-

anteed minimum wage payment through NREGA, payout of Six Pay Commission arrears — might have prompted higher consumption

of durables (such as TV sets, two-wheelers) and discouraged spending on branded food and FMCG products. Consumers may have

apportioned a larger proportion of the windfall to a one-time large purchase, rather than spend it on items of daily consumption.

Top 10 Items Of The Consumer Non-Durable Index

Product (% YoY Growth) Weight

in IIP Oct-09 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

Total IIP 100.00 13.85 13.85 16.64 12.19 7.17 15.09 6.92 4.39

Consumer Non-Durable 23.299 10.56 10.56 4.83 1.04 2.03 1.06 0.79 1.94

Cotton hosiery cloth 2.537 16.86 -0.03 1.32 2.27 1.52 5.8 11.3 10.34

Sugar 2.243 -16.31 295.79 144.15 20.3 88.26 -11.11 62.5 2.83

Wheat Flour/Maida 2.141 12.35 10.63 9.72 10.64 8.05 5.68 4.17 6.21

Paper & Paper board

(IPP) 1.380 8.10 2.42 4.41 4.36 2.85 2.66 5.75 10.94

100% non-cotton cloth 1.202 21.00 -9.41 -3.18 -5.34 -9.24 11.42 2.49 0.33

Vitamin A 1.072 70.37 -62.47 -74.77 -38.87 -50.98 -46.46 45.13 -100

Milk Powder 1.010 23.71 -8.61 8.5 3.57 41.26 4.29 5.52 -15.36

Cotton cloth

(excluding hosiery) 0.987 11.33 1.80 3.52 3.48 5.06 13.57 10.67 14.13

Cigarettes 0.833 14.66 21.01 8.64 60.45 34.08 29.39 17.63 20.07

Tea 0.763 6.22 9.03 1.76 -11.9 -2.98 -8.69 6.53 -9.68

December 22, 2010

Corporate: High Earnings Growth On The Anvil

Advance Tax Payments By India Inc’s Top 100 Swells By 18.7% To

`27,531Cr: Advance tax payments by India’s top 100 corporate taxpayers rose

18.7% in December from a year ago, indicating better corporate performance in

the third quarter. (The Economic Times, December 21, 2010)

Apr-Nov Indirect Tax Receipt Up 42.3% YoY, Says Govt: India’s indi-

rect tax receipts rose 42.3% on year to `2.08 trillion during April-November.

Revenue collection from customs increased an annual 67% to `868.4 billion,

while excise tax receipts grew 34.4% on an annualised basis to `819.84 billion.

(Reuters, December 15, 2010)

Direct Tax Kitty Up 18% In Apr-Nov: Direct tax collection in the first eight

months of this fiscal registered an 18% growth over the same period last year with

net receipts at `2,16,628 crore. The major boost came from the robust industry

performance with the corporate taxes showing an increase of more than 22%. (The

Times of India, December 8, 2010)

PRU View

Advance tax reflects the company’s projected earnings for the quarter. A

company is expected to pay advance tax by the 15th of the last month in each

quarter. This tax is calculated on the earnings that the company expects it will

earn in this quarter.

An outflow of Rs 45,000-50,000 crore towards advance tax payments is ex-

pected during the quarter. This indicates continued healthy growth in earnings

by Corporate India. However, it must be noted that growth in either earnings

or tax collections seems higher partially on account of a low base of the pre-

vious year.

Given the heavy tax outflow by corporates and the tight liquidity situation in

banking, RBI, in its mid-term policy review for December 2010, took two

major steps. One, it reduced SLR by 100 basis points to 24% and two, it has

scheduled Rs 48,000 crore of bond buy-backs through open market opera-

tions. These measures are expected to improve overall liquidity.

Hospitality: Sunshine Time

2010 — Bidding Adieu To Hard Times: India's hospitality sector checked into 2010 with hopes of revival after suffering heavily from

the 2008-09 economic downturn and the year did not disappoint. An over 10% increase in tourist arrivals and rising hotel occupancies

consigned the memories of the economic downturn and the 26/11 Mumbai terror attacks to the far corner of the industry’s mind. (The

Press Trust Of India, December 21, 2010) Knight Frank Puts Indian Hotel Rooms Market At `119,000Cr By 2013: Global property consultancy, Knight Frank India,

has announced the release of their research study on India’s hotel market. (Business Standard, December 21, 2010)

Highlights of the report:

During 2010-13, the Indian hotel room market for 10 cities is estimated to grow from ` 74,000 crore to `119,000 crore.

Up to 35,977 additional operational rooms expected across 10 cities by 2013.

Translating to 17% average annual growth rate for 10 cities.

Mumbai and Goa to be most attractive hospitality markets in next three years; the size of the Mumbai market will be greater at

`42,000 crore than the NCR market size of `28,000 crore.

Growth in supply is estimated to surpass growth in demand during 2010-13.

Advance Tax Payments (` Cr)

Dec-10 Dec-09

ONGC 2,742 NA

SBI 1,850 1,759

Reliance Industries 1,100 830

Tata Steel 1,000 650

LIC 980 1,070

Punjab National Bank 640 618

ICICI Bank 450 301

Bank of Baroda 435 330

HDFC 400 320

Bajaj Auto 370 310

Tata Consultancy 230 177

Hindustan Unilever 220 175

Tata Motors 220 100

Hindalco 200 148

Central Bank 179 138

UltraTech Cement 165 90

Bank of India 150 102

IndianOil Corp 100 NA

GSK Pharma 90 85

Dena Bank 75 65

Tata Power 58 81

Tata Chemicals 58 40

Zee Entertainment 30 37.5

Hindustan Petro 29 48

Marico 21 18

Alstom Projects 12 16

Total of the above 11,804 7,509

December 22, 2010

PRU Analysis

Tourism in India is witnessed a revival in 2010. The number of foreign tourist arrivals (FTAs) recorded an over 10% YoY growth

during the current year. This is in spite of a muted response to the Delhi CommonWealth Games 2010 in October.

The tourism ministry said the number of FTAs to New Delhi had increased by over 5% during the Games. However, this 5% figure

is lower than the national average increase in FTAs of 9.2% in October.

This reflects positivity for the tourism industry. Pick-up in business travel by domestic companies and higher external trade com-

pared to last year led to improved demand for hotels and tourism industry.

Higher demand for rooms results in higher occupancy rates – a measure of utilisation of available capacity. An improvement in

demand and occupancy leads to higher average room rates (ARRs). This results in better revenues.

While the low base effect is a reason behind growth numbers looking good, high food & beverage costs and rising employee costs

are adversely affecting profits.

However, hotel companies are expecting the scenario to improve. As a result they are announcing and completing hotel projects. In

November itself, three major projects with a capacity of 572 rooms were completed.

Indian Hotels completed its Taj Falaknuma Palace Hotel at Hyderabad at a cost of Rs 85 crore. Spread over 32 acres, it offers

60 rooms. Marriott Hotels India opened its Pune Marriott Hotel & Convention Center in November 2010. The hotel offers 416 rooms, four

meeting rooms and two restaurants. Kamat Hotels also commissioned its Sahibabad Vits Hotel in November 2010. It offers a total of 151 rooms, of which it com-

pleted 96 rooms in November.

PRU View

With the onset of the peak tourist season, occupancy rates and room rates are expected to improve in the remaining months of the

current financial year 2010-11. This will result in higher revenues. However, costs are also expected to remain high.

Auto: Exporting Its Way To Glory

Exports — The Road Ahead For Indian Auto: India’s car exports doubled in two years, riding on special incentives in Europe. (The

Economic Times, December 21, 2010)

PRU Analysis

India is the world’s seventh largest vehicle

maker. Its share in automobile exports globally

stood at a paltry 1% in 2009 or at $3 billion

while that of Japan, the largest exporter’s share

stood at 19%.

India’s export of passenger vehicles has, how-

ever, more than doubled over the past two

years.

The country looks poised to achieve its set tar-

get of $17.7 billion for all vehicles exports as

per the Automotive Mission Plan (AMP) much

before the target date of 2016.

December 22, 2010

India is the world’s small car sourcing hub and Europe

has emerged as the favorite destination for its exports.

Europe’s scrappage scheme put Indian exports in top

gear.

In the UK, a 10-year-old car could be scrapped for a

bonus of £2,000 and this increased the demand for cars

by four lakh units.

India now exports one for every four cars it sells lo-

cally. Most car makers, including MNCs, export huge

numbers every year.

Companies such as Hyundai, Maruti Suzuki, Nissan,

and Ford have established dedicated export facilities in

India.

Steel: The JSW-Steel-Ispat Deal

JSW Steel To Buy Ispat Stake For `2,157Cr: India’s third-largest steelmaker JSW Steel agreed to buy a controlling stake in smaller

rival Ispat Industries for $476 million, catapulting it to the No. 1 spot of the nation’s steel producers’ list. (Reuters, December 21, 2010)

PRU Analysis

JSW Steel, India’s third largest steel maker, is all set to acquire a controlling stake in debt-laden Ispat Industries. The new com-

bined company, to be named JSW Ispat Steel, will be catapulted to India’s largest private steel company by volume.

JSW Steel (Consolidated, ` Cr)

FY07 FY08 FY09 FY10

Net Sales 8,554 12,427 15,934 18,957

Raw material cost 3,961 6,678 9,985 11,213

Operating Profit 2,831 3,791 2,470 4,613

PBT 1,926 2,423 314 2,199

PAT 1,303 1,658 242 1,553

Ispat Industries (` Cr)

FY07 FY08 FY09 FY10

Net Sales 7,472 8,323 8,245 10,215

Raw material cost 3,770 4,546 4,650 5,895

Operating Profit 1,726 1,857 848 1,807

PBT 2.65 111.6 -1,025.5 -336.8

PAT -10.26 30.79 -689.81 -322.67

December 22, 2010

Rationale

JSW Steel

Ispat Industries currently has a capacity of 1.6 million tonnes of sponge iron, two million tonnes pig iron and 3.3 million ton-

nes hot rolled coil. This deal will make it India’s largest producer in the private sector, with a combined capacity of 14.3 mil-

lion tonnes per annum by March 2011.

Ispat Industries has 1,200 acres of land at Dolvi, Maharashtra, which will help JSW Steel operate in the western region.

The acquisition helps mitigate execution challenges faced while setting up greenfield steel plants, such as land acquisition and

permits.

Freight cost per tonne for finished steel of the combined entity will be almost 1/3 of that paid earlier by the individual compa-

nies. Ispat has steel-making units in Maharashtra (Dolvi, Kalmeshwar) which caters mainly to the western region. Hence, it

will reduce the freight cost and enable JSW Steel to supply to its customers in the western region at a lower freight cost.

Ispat Industries

Cut debt on books. It must be mentioned here that Ispat Industries has a debt of `7,185 crore on its book at the end of Q2

FY11 and another `877 crore as short-term payables (negative working capital).

The deal will allow Ispat to source its raw material from the JSW group, including coking coal and pellets, at relatively low

rates. Additionally, in the absence of captive power, the higher power costs have been adding on to its cost of production. With

JSW’s entry, Ispat will get power cheaper, leading to better profitability. Ispat will get captive power from JSW’s Ratnagiri

plant.

Ispat, until now, has been selling around 40% of its produce outside Maharashtra and was not able to get benefits on VAT.

However, the arrangement with JSW will ensure it sells its products in Maharashtra itself and enjoy VAT benefits too. (It must

be noted here that if a company has the steel plant in Maharashtra and sells its products in the same state it doesn’t need to pay

VAT)

Deal Structure

JSW Steel will subscribe to 1086 million shares of Ispat Industries at `19.85 a share. Ispat currently has 1,222 million shares

issued to shareholders. So, it’s a large equity infusion and a substantial dilution for existing shareholders .

Up to 1086 million shares subscribed at `19.85 means `21.57 billion or `2157 crore of cash infusion into Ispat Industries. This

will help in bringing down Ispat’s high debt levels (current debt/equity ratio is around 4.3).

JSW Steel will make a mandatory open offer of 20% for shares of Ispat Industries.

The deal will be funded through internal accruals of JSW Steel. There will be no additional debt taken for this purpose.

Ispat Industries shares fell 15%, the most since January 2008, to `21.2 at close on Tuesday in Mumbai. JSW rose 2.1 % to `1, 211.

December 22, 2010

Chemicals: The Tata Chem-British Salt Deal

Tata Chem To Buy British Salt For £93M: Tata Chemicals (TCL) today said its UK subsidiary, Brunner Mond, has inked an agree-

ment to acquire British Salt for £93 million (about `656.48 crore). (The Press Trust of India, December 20, 2010)

PRU Analysis

Tata Group conglomerate Tata Chemicals (TCL) has bought 100% stake in British Salt, a UK-based chemical company that pro-

duces pure white salt, for £93 million or `673 crore. The deal will be done through TCL’s UK-based wholly-owned subsidiary,

Brunner Mond Group Ltd. The deal will be entirely debt financed.

TCL is a global company focusing mainly on three segments -- essential products for daily use in households, industry and the farm

sector. It is a leading agri-business player apart from being the world’s second largest producer of soda ash. It is a market leader in

Indian branded iodised salt segment through its Tata Salt brand.

British Salt is one of UK’s largest manufacturers of pure dried vacuum salt and enjoys a market share of 50% in the country. It pro-

duces approximately 800,000 tonnes of pure white salt every year. Salt is a key raw material for production of soda ash.

Note: Brine, an unwanted byproduct of oil and gas drilling and production operations, is composed of groundwater, salt, and vola-

tile organic compounds. A brine-well or salt-well is used to mine salt through the use of water as a solution to dissolve the salt so

that they can be extracted by pipe through distillation.

This acquisition will provide TCL with an opportunity to secure long-term raw material i.e. brine (salt deposit) supplies for its UK

subsidiary Brunner Mond to manufacture soda ash. Brunner Mond contributed 9.21% to TCL’s revenue for 2009-10. This move

augurs well for TCL since it will add to the top line in future. It can be mentioned here that soda ash contributes 45% to the con-

solidated revenue of Tata Chemicals.

Agri- Inputs Phosphoric Acid

Tata Chemicals Business

Structure

BMGL GCIP Standalone Rallis India IMACID

Soda Ash Soda Ash

Soda Ash Urea

Fertiliser trading DARP/NKP

December 22, 2010

British Salt is also active in the gas storage business that has a potential to generate additional cash flows for TCL.

It must be noted here that TCL had acquired UK’s Brunner Mond in 2006 for $113 million. Brunner Mond has operations in Kenya

and the Netherlands too.

Other Major Acquisitions:

TCL acquired Brunner Mond Group, an UK-based which makes soda ash and associated alkaline products in 2006 for $113

million.

TCL acquired General Chemical Industries Products, a US-based soda ash maker for nearly Rs 40,000 million in 2008.

TCL increased its stake in pesticide maker Rallis India to 50.06% in 2009. So Rallis India is now a subsidiary of TCL.

Joint Ventures:

Indo Maroc Phosphore South Africa (IMACID) - TCL holds 1/3rd shareholding in Morocco-based IMACID, to secure the

supply of phosphoric acid.

TCL bought 35% stake in Joil, a Singapore-based jatropha seedling company, in 2008. This helped TCL gain exclusive mar-

keting rights for technology to develop the best seed varieties of jatropha, which yields bio-diesel.

Khet-Se Agriproduce, a 50/50 JV of TCL and Total Produce, was launched to create distribution facilities for fresh fruit and

vegetables across India.

Coal: The Lanco-Griffin Deal

Lanco Infratech Buys Aus Coal Mine: Lanco Infratech today said it has inked a pact with Australia’s Griffin Coal to acquire coal

mines for an undisclosed amount to secure fuel for its projects to take power generation capacity to 15,000mw by 2015 from existing

2,100mw. (The Economic Times, December 15, 2010)

PRU Analysis

Lanco Infratech is an infrastructure development company operating mainly in power generation, power trading and EPC

(engineering, procurement and construction). It got listed in 2006. Lanco has subsidiaries and divisions across all verticals like con-

struction, power, EPC, infrastructure and property development.

The company has an in-house engineering, procurement and construction division. It has an innovative business model where part

of the power generated is sold in the open market. This helps it utilise the mismatch in demand-supply during peak period, when

prices are nearly twice the firm contract price or sometimes even more than that, adding significantly to the profitability.

Lanco’s total capacity grew from 511mw in FY09 to 2,100mw currently due to on track and systematic capacity additions. Its

power generation capacity is all set to increase to 15,000mw by 2015. Power generation has become the main revenue generator for

the group, accounting for a major chunk of its turnover.

In a recent development, Lanco entered an agreement through its subsidiary Lanco Resources Australia to acquire 100% of Griffin

Coal mines. The deal is valued at A$850 million and will be funded through a mix of internal accruals and debt. Lanco Infratech

had `2,555 crore in cash on its books by the end of Q2 FY11. This could be used to fund acquisitions. The debt equity ratio stands

at a comfortable 0.3 right now.

Griffin Coal in western Australia, owns the largest operational thermal coal mines there. It owns thermal coal mines with a produc-

tion of over four million tonnes per annum (MTPA), which will be ramped up to over 15 MTPA in the near term.

Coal remains a dominant fuel for the sector given the magnitude of coal-based capacity additions being planned. The total thermal

power plant capacity addition during the 11th plan was 58,644mw, which is about 75% of the total capacity addition (the others

being hydro-electricity and nuclear power) during the 11th plan.

This deal will ensure raw material security for the current as well as future power projects. Lanco's 1,000-mw plant in Udupi, near

Mangalore, is based on imported coal.

December 22, 2010

These mines will potentially help it consider its expansion. This acquisition will be used in the company’s other power plants, such

as the 1,200-mw thermal plant at Anpara in Uttar Pradesh and the Amarkantak plant with a capacity of 600mw in Chhattisgarh.

Hence, the company’s performance in the medium term will primarily depend on the ability to commission projects. The order

book stands at `25,400 crore by the end of Q2 FY11.

Airlines: A Low Cost Affair

IndiGo Pips Air India To Become Third Biggest Carrier: Four-year-old budget-carrier IndiGo has gone ahead of Air India to be-

come the country’s third largest airline by passengers carried, according to market share data for November. IndiGo, with a fleet of 32

Airbus A320 aircraft, had its flights 91% full in November. Air India, which has 69 narrow body aircraft in its fleet, flew its domestic

flights 77% full. (Mint, December 21, 2010)

PRU Analysis

We have carried several articles in the past giving the marketshares of airlines in India. However, this time there is a slight change

in the ranking. IndiGo, which was on 4th place in terms of market share has replaced Air India in November 2010. “Air India may

have suffered in November because of a badly

managed transition to its new hub at Delhi's Ter-

minal 3. The move led to several flight cancella-

tions,” media reports said. We had also mentioned that running low-cost

airlines was the ideal solution during times of

global economic slowdown.

In fact, some of the full-service airlines also used

their aircraft to provide low-cost air travel, de-

mand for which was high. However, with the re-

vival they chose to move back to full-service

flights as revenues and profits are higher on run-

ning full-service flights.

PRU View

Even though revenues of Indian airlines are grow-

ing slowly, high expenses are taking a toll on

profitability. Jet fuel (aviation turbine fuel), which

accounts for a large part of costs, is also rising

with crude oil prices crossing $90 per barrel in the

international market.

Hence, airlines are either adopting low-cost opera-

tions or developing a more competitive cost struc-

ture.

Since November 2009, low-cost airlines have been offering freight services on passenger flights at a low cost. Consequently, busi-

nesses are open to air transport as an option for domestic freight, not merely for high-value items but even for perishable items like

flowers and shrimps. The development of dedicated cargo hubs and complexes at airports at various locations like Mumbai, Cochin

and Nagpur are also likely to aid the growth in air cargo traffic.

With DGCA planning to cap domestic airfares, we expect revenues to get hit.

December 22, 2010

Agriculture: Onions Make Us Cry

Pak Onions To India’s Rescue: Delhi and other northern states are getting help from Pakistan to bring the zing back to their curries

with about 350 tonnes of onions landing at the Attari border on Tuesday. Pakistani onions are priced at Rs 19 per kg but there is no

predicting their retail prices. (The Press Trust of India, December 21, 2010)

PRU Analysis

Onion is an unavoidable ingredient for a large section of Indian cuisine. Onions,

therefore, have the power to not only tingle taste buds but unsettle governments .

Onion prices have shot up to `70-80 per kg in most Indian retail markets from just

`35-40 some days ago, bringing pressure on the current UPA government.

Maharashtra accounts for the major chunk of onion production in India, distantly

followed by Uttar Pradesh and Gujarat. If anything goes wrong with production in

Maharashtra, it hits the whole of India. This time around, the same has happened

again after untimely November rains spoiled the standing crop. The government has

attributed soaring prices to hoarding and black-marketing by wholesalers and dealers

too.

It has taken three primary steps till now to control the situation:

On December 20, 2010, government imposed a ban on export of onions till January 15, 2011.

Doubled the minimum support price from $525/ tonne to $1,200/tonne for the already approved contracts by NAFED, the

regulating agency.

In Delhi, the National Consumer Cooperative Foundation (NCCF) and NAFED will sell onions through retail outlets at

cheaper rates

Meanwhile a concern is emerging over imports from Pakistan at the current level of $400/tonne (`18,000 per tonne), as the crop in

Pakistan is not huge. Rising demand from India has pushed up prices in Pakistan by 25-30%, which will lead to increase in cost of

new import orders by India.

Agriculture minister Sharad Pawar has said that onion prices will remain high over the next 2-3 weeks. However, the National

Horticultural Research and Development Foundation (NHRDF) has said the export ban has already started impacting prices. It said

the average prices have fallen to `2,500 per tonne in the largest onion trading hub in India -- Lasalgaon, Maharashtra.

——————————————————————————————

Onion Exports (in Lakh MT)

Year Qty Value (in `Cr)

2004-05 9.44 817.49

2005-06 7.7 620.27

2006-07 11.61 1135.42

2007-08 11.01 1285.82

2008-09 16.71 1816.14

Source: Maharashtra State Agriculture

Board

December 8, 2010

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