December 8, 2010

Highlights

Indian Cos Join Hands With Foreign Players

Move Will Raise Realisations, Margins

Steel: Value Added Is The Way Ahead

December 1, 2010

Steel: Giants Re-Discover Value Added Products

W ith better demand prospects and mega expansion plans in the pipeline, steel makers are sharpening their focus on value-added

products.

Value-added products are mainly finished steel and are termed so depending on their treatment or their end use. The products vary from

plates to galvanised colour-coated flat or long-steel bars to alloy steel. The end users are primarily the automobile and consumer dur-

ables sectors. Consumers are shifting to premium steel as it guarantees better products. Steel makers too enjoy a premium on them.

Recently, when steel-makers were hit by softening global prices due to weak Chinese demand, value-added products helped them im-

prove realisations as well as margins. It helps companies earn more from a smaller quantum of output.

Indian steel-makers have joined hands with foreign players for technical and strategic collaboration for this purpose.

Investment

Specalised steel products have been the focus of expansion for all major producers. Steel Authority of Indian (SAIL) plans to

invest around `4,000 crore to set up a 0.5 million tonne alloy steel plant in West Bengal. Another JV with Posco will cost the

company `12,000 crore.

JFE invested about `5,000 crore to buy a 14% stake in JSW Steel, primarily to fund JSW’s value-added products business.

Tata Steel will raise `7,000 crore for a JV with Nippon Steel for a separate plant at Jamshedpur, Jharkhand, which will manu-

facture high-end value-added products.

Demand Driver

For the past couple of years, demand for special steel, or value-added steel, with superior quality to meet stringent application norms of

various market segments, has been growing.

Plans Drawn Up By Major Companies

SAIL: India’s largest steelmaker, SAIL, currently has 37% of value-added products in its total output.

The company plans to enhance the share of value-added products in its product portfolio from the current 37% to 55% by 2012-13,

when its manufacturing capacity will rise to 23.8 million tonnes from the current 14 million tonnes. The effort is to switch from long

products -- primarily used in construction -- to value-added products which have better realisations.

SAIL is diversifying into manufacture of cold rolled grain-oriented steel used in manufacturing equipment for power plants and 70 mm

pipes to carry natural gas across the country. With huge power capacity addition targets, there is a huge opportunity to supply steel

products to power equipment makers. Similarly, with more pipelines expected to be laid with the finding of gas in the KG basin, SAIL

is drawing up plans to manufacture high quality steel pipes of above 70 mm thickness.

It recently joined hands with Japan’s Kobe Steel for ―strategic collaboration‖ in technologies for producing high-value products – for

nuclear plants to automobiles. This will include special alloy steel, bars and stainless steel tube.

Value Added Products As Percent Of Production

Capacity

Current (%) After Expansion (%)

SAIL 37 55

Tata Steel 45 58

JSW Steel 64 70

Essar Steel 80 80

December 8, 2010

JSW Steel: JSW Steel also has been slowly ramping up its value-added steel production. Currently, 70% of its flat and 40% of its long

products fall in the finished steel, hence value-added, category.

JSW Steel entered into a strategic alliance with JFE Steel Corporation in 2009, focused on production of high-end steel used in automo-

biles. JFE is well known for its technological prowess in value-added products. With India set to emerge as a global hub for small car

manufacturing, demand for auto-grade steel is set to boom. The move is in tandem with JSW’s expansion of capacity from the current

7.8 million tonnes per annum to 11 million tonnes per annum over the next two years.

Tata Steel: Tata Steel has about 40% market share in the auto steel sector. It plans a JV with Nippon Steel for automotive cold-rolled

flat products. The JV aims to capture the growing demand for high-grade automotive, cold rolled, flat products in India by setting up a

6-lakh-tonne facility in Jamshedpur by end FY12.

Essar Steel: It currently has 80% of its products in the value-added category and has been increasing its thrust on producing special

steel for the automotive sector. Essar Steel is expanding its capacity from current 4.6 million tonnes to 10 million tonnes by March

2011. Even after expansion, it intends to maintain production of value-added products at the same levels.

In 2008, Essar Steel entered into a technical tie-up with Japan’s Kobe Steel to gain operational technology to make higher quality steel

products.

Outlook

Future growth of Indian steel makers will be driven by value-added products. Production of premium grade products will not only help

them improve realisations but will also add to their topline growth. Most imports into India from China happen in the flat steel segment,

which falls in the value-added category. Indian steel makers are now trying to capture it.

December 8, 2010

Cement: Not Again!

Cement Loses Grip Again: After a superlative performance in October, when overall dispatches of the cement industry grew over

18%, the sector has taken a beating in November. The November dispatches by most cement majors remained in negative territory,

except for ACC. (Business Standard, December 7, 2010)

PRU Analysis

Wholesale prices of cement recorded YoY growth all regions, except the north (6.3% decline), in November 2010. At `216.9 per 50 kg bag, price of wholesale cement was the lowest in Delhi compared to Mumbai, Kolkata and Chennai.

Prices in the eastern region have always remained higher than the others as there exists limited production capacity and cost of

transporting cement is quite high. With the end of monsoon, cement despatches recorded a month-on-month increase in October. Cumulative despatches during

April-October 2010 rose 6.9% YoY to 1,190 lakh tonne. The latest numbers released by the top five cement-makers reflect a 3.3% YoY fall in despatches in November 2010 compared

to the year-ago month. Reckoned month-on-month, all five registered a fall in despatches. PRU, in its earlier reports, had said that cement prices were expected to be high in the north because of the rapid pace of infra-

structure development on account of the Delhi Commonwealth Games 2010, post which they were expected to correct slightly.

We had also mentioned that commissioning of additional capacity may exert marginal pressure on prices. This indeed has hap-

pened.

Cement Despatches Slip In November

In lakh

tonnes

% Change

YoY

% Change

MoM

ACC 17 4.8 -9.4

Ambuja 14 -8.6 -18.9

JP Associates 11 13.2 -26

Shree Cement 7 -8 -24.7

UltraTech 27 -9.3 -22.2

December 8, 2010

However, falling despatches in November have become a cause of concern as cement is one of the key materials required for

infrastructure development. Overall demand for cement in December and January is expected to remain low because south India gets hit by the north-east

monsoon and is likely to impact consumption. Demand will take time to stabilise in the north as well. These factors may result in constant pressure on prices and on the indus-

try’s financial performance.

Core Sector: Taking On The World

Exports Up 21.3% To $18 Bn In Oct: India’s merchandise exports rose 21.3% to $18 billion in October over the year-ago period,

boosting hopes that the country may be able to reach the $200-billion target fixed for the current fiscal. Imports during the period grew

6.8% to $27.68 billion, leaving a trade deficit of $9.72 billion, according to a commerce ministry data release. (The Hindu, December 1,

2010) Oct Infra Output Up 7% YoY: India's infrastructure sector output grew 7% in October from a year earlier, faster than an upwardly

revised annual growth of 2.7% in September, government data showed. (Reuters, November 30, 2010)

Sectors Weight in

IIP (%)

October

2010

October

2009

April-October

2010-11

April-October

2009-10

Crude Oil 4.17 13.7 -2.1 10.7 -1.3

Petroleum Refinery 2.00 -4.8 7.2 1.4 -2.0

Coal 3.22 0.8 6.8 -0.1 11.4

Electricity 10.17 8.4 4.4 4.7 6.1

Cement 1.99 16.8 5.3 6.3 11.3

Finished Steel 5.13 6.2 2.5 4.2 1.8

Overall 26.68 7.0 3.9 4.5 4.5

Source: CSO

December 8, 2010

PRU Analysis

Core sector growth dropped to a 16-month low of 2.7% in September, dragging industrial growth down to 4.4% during that month.

However, the core sector grew well in October, driven by a 16.8% rise in cement and a 6.2% rise in finished steel output. Power

generation, which has 10% weight in IIP, rose a robust 10.2%. While refinery production is lower due to plant maintenance, lower

coal output is a cause of concern and can dampen power generation. Despite the coal and refinery sectors’ poor performance, the

core sector grew by a robust 7% in October.

Another positive is the surge in exports. Export growth during October has outpaced imports for the first time in the past 3-4 years.

Engineering goods, gems & jewellery, chemicals and petroleum products have registered healthy export growth. However, that of

tea, tobacco, cashew and handicraft declined. In fact, according to media reports on Wednesday, December 8, 2010, exports were

up 26.8% in November 2010 to $18.9 billion. Oil imports into India rose by a marginal 0.3% YoY to $8.41 billion in October while

non-oil imports rose 9.9% to $19.27 billion.

In rupee terms, the October exports were up 15.3% at `797.63 billion while imports rose by mere 1.5% to `1,229.7 billion.

Healthy export performance and high vehicle production, together with a strong core sector growth, may result in over 5% YoY

growth in IIP for October 2010. The average month-on-month IIP during April-September 2010 has been 10.4% (according to re-

vised figures). Another factor that may reflect a higher YoY growth will be the low base of October 2009. The only culprit here has

been the index of capital goods production, which has been highly volatile. This volatility may creep in to the October IIP numbers

as well. IIP numbers for October hold a special importance, given that RBI’s mid-quarter review for December 2010 is slated to be

announced soon.

Cotton: Another Cap On The feather

After Cotton, Yarn Exports Capped: The textile industry got a much-needed breather on Wednesday as the government banned

fresh export of cotton yarn till further orders. It capped yarn exports for 2010-11 crop season at 720 million kg. The cap is to allow yarn

exporters to meet their trade obligations they have already entered into, a senior official said. (Financial Express, December 2, 2010)

PRU Analysis

The Union textile ministry has put a 720-million-kg cap on exports for cotton year 2010-11. Last year the export quota was 650

million kg. Indian cotton year runs from October to September. Normally new crop starts arriving by the first week of October, but

this year the arrivals got delayed due to monsoon. Globally, there is a supply constraint as crops in China and Pakistan suffered and

December 8, 2010

hence prices have been high. Domestic prices, moving in tandem with international prices, have scaled new highs.

Both raw cotton and cotton yarn prices have shot up in the domestic market. According to the Cotton Association of India, average

prices of Shankar-6 kadi and J-34 scaled new high of `124 and `116 per kg on November 21. Cotton yarn prices have touched an

all time high of `240 (40s), a rise of over 80% over last year’s prices.

This move by the government could help soften the prices of cotton yarn, and hence raw cotton. But, so far this season there has

been no clarity on supply of raw cotton due to late arrivals. Supplies from major producing states — such as Gujarat — too have

been low compared to the last season. Hence, this move could be untimely and create more confusion. Besides, it can also hit the

domestic textile industry and push global yarn prices.

But, there are greater uncertainties in store:

As per a government authorisation, the entire quantity needs to be shipped within the next 45 days. This decision will push up

yarn exports considerably in the next 45 days. Mills will be forced to divert supplies from domestic markets for exports, reduc-

ing the availability for domestic consumers of yarn.

As far as the spinning industry is concerned, it may find it difficult to honour some of the commitment made to domestic cus-

tomers during this period.

Following restrictions on cotton yarn exports, international prices of cotton yarn will shoot up since India is currently the larg-

est supplier of cotton yarn in the global markets.

Post this 45-day compulsory shipment period, there will be a glut in the marker till March.

This will benefit other suppliers such as Pakistan, Turkey and Indonesia.

Capital Goods: BEML Aims High

BEML Hires IIM-B To Become `10,000-Cr Co: Heavy Industries PSU BEML has appointed Indian Institute of Management, Ban-

galore, as the consultant to draw up a five-year road map to become `10,000-crore company. (The Economic Times, December 7, 2010)

PRU Analysis

BEML is a mini ratna company under the defence ministry and has presence in mainly three verticals -- mining and earth moving,

railways and defence. It produces and sells earth-moving equipment, metro coaches and defence hardware.

The company had a turnover of `2,971 crore in 2009-10 and for H1 FY11, the turnover recorded was only `1,136 crore, a growth

of 14% compared to the previous corresponding period. The company looks to become a `5,000-crore company by 2013-14 and a

`10,000-crore by 2016-17. IIM (B) has been roped in with such a target in mind.

Cotton Yarn Production, Exports & Domestic Availability (million kg)

Production Imports Total Supply Exports Domestic

Availability

Exports

(% Of Production)

2005-06 2,521 5 2,594 552 2,041 21.9

2006-07 2,824 8 2,893 615 2,279 21.8

2007-08 2,948 7 3,046 664 2,382 22.5

2008-09 2,898 5 3,008 556 2,452 19.2

2009-10 3,074 5 3,168 589 2,579 19.2

2010-11 3,370 5 3,460 720 2,740 21.4

Source: Cotton Yarn Advisory Board

December 8, 2010

BEML’s current order book stands at `4,600 crore (cumulative),

of which railways contribute about 50% and the rest comes from

the defence and mining segments. The company has been making

losses in the current metro projects — Delhi Metro Phase 3 and

Bangalore Metro. The metro business’s profitability depends on

BEML’s cutting cost of existing products from `110 million per

coach to `60 million per coach. The company plans to bid for

Hyderabad and Jaipur Metro as well.

It has decided to diversify in order to achieve its revenue targets

and has decided to foray into manufacturing dredgers (a ship or boat equipped with a dredge, which is a device for scraping or

sucking the seabed/river-bed to improve navigability of the water channel) with the support of the shipping ministry.

The market size is about `6,000 crore and intends to gain at least 17% of the market share in the next three years, which will gener-

ate revenue of approximately `1,000 crore over the period. BEML is currently scouting for a technology partner for this new line

of business. India currently imports dredgers.

BEML is also exploring assembling of helicopters and small aircraft. Currently it supplies some body parts of fighter aircraft.

BEML has acquired a 25-acre plot in an SEZ on Bangalore’s outskirts to design, manufacture and roll out aero products.

The company’s earnings have been hit by the metro projects and the slow growth in revenues can be attributed to the slowdown in

earth moving and defence segments. BEML will have to turn around the current metro rail projects for better revenue generation in

future. Diversification of business will also help.

Auto: Price War Of Another Kind

Car-makers To Raise Prices From Next Year On Rising Input Costs: Rising input costs have forced car companies to hike prices

from January 1, which will help boost sales in December. Customers normally postpone purchases till the New Year to get better resale

value. (The Economic Times, December 7, 2010)

PRU Analysis

Carmakers have hiked prices of cars at

least four times since January 2010 due

to rising raw material costs, increase in

excise duty and adoption of Bharat Stage

(BS) IV in 13 cities and BS III in other

Indian cities.

This time again, carmakers have an-

nounced a hike in prices mainly due to

rising input costs of steel, rubber and

copper.

Sales will be higher in December 2010 as

the hike will be effective from January 1,

2011. Usually buyers wait for January to

buy cars as the resale value is directly

related to the year in which the car is

manufactured.

The latest the year, the higher is the re-

sale value. However, this latest bout of

price hike could influence customers buy cars in December 2010 itself, pushing up overall sales in the process.

Hyundai Motors has announced price hike in the range of 1.5-2%, while General Motors will increase prices by 3%. Tata Motors is

contemplating rising prices of its passenger vehicles soon while ruling out any such move in Nano and Aria.

Financials (` Crore)

FY07 FY08 FY09 FY10

Net sales 2427 2526 2797 2834

Operating Profit 279 285 344 263

PBT 316 348 387 319

PAT 205 217 269 222

Source: CMIE, DhanBank-PRU

December 8, 2010

Soon, Maruti Suzuki, Toyota Kirlos-

kar, Mahindra & Mahindra and Ford

India will announce the quantum of

price increase. All of them had unani-

mously echoed the view that their op-

erational efficiencies had helped them

absorb higher input prices till now. But

this looks unsustainable in the face of

rising prices. Hence, they will have to

pass on the cost to customers.

Some of them — such as Honda Siel

and Toyota Kirloskar — use many

imported inputs for their cars. The

sharp appreciation in the Japanese yen

against the dollar has also made the

price revision inevitable.

The hike is not expected to hit sales,

particularly in the backdrop of rising

incomes and a growing economy.

How Tata Nano Hit A Big Bump: The Tata Nano was a small car that was expected to deliver big numbers — the new plant at San-

and in Gujarat was built to produce 2.5 lakh units a year, eventually ramping up to five lakh units. However, the car saw sales of a mere

509 units in November 2010. (The Economic Times, November 3, 2010)

PRU Analysis

Nano was launched by Tata Motors to

cater to the lower strata of the society

and was marketed as the world’s

cheapest car. However, after its first

dispatch in July 2009 at 2,475 units, it

has hit the bottom at 509 units in No-

vember 2010, much to everyone’s

surprise, since it was touted as an

alternative to two-wheelers.

Nano has faced several issues – car

going up in flames on three occasions

and some cases of smoke emitting

from it, poor distribution reach, fi-

nancing issues, unexpected group of

wealthy buyers and ambiguous posi-

tioning.

Production has reportedly come to a

standstill at Sanand, Gujarat, and the

number of workers has come down by

80% in November 2010. Dealers have not picked up new stock in the past two months as their inventory is still unsold.

The industry is calling it a marketing failure as it is the negative publicity which seems to have done the maximum damage. The company has identified the following three problems:

In the beginning Nano failed to reach its targeted customers who were supposed to be without any car. Close to 70-80% of the

initial bookings came from the affluent class who already had 1-2 cars

Failure in understanding the psychology of target customers – they were hesitant to visit traditional big showrooms to check

Source: CMIE, DhanBank-PRU

December 8, 2010

out the vehicle. To make them comfortable, Tata Motors opened 110 small-sized showrooms and is now opening another 100.

Dearth of financing options as the intended Nano-buyers’ profile matched the typical two-wheeler customer who was aspiring

to buy a four-wheeler. Now Tata Motors is working out solutions by tying up with various banks to secure attractive financing

options for Nano buyers.

Besides, the very fact that one could spend just a few thousand rupees more and buy a better quality low-cost yet tried-&-tested car

such as Maruti Alto, created a psychological barrier for Nano.

But, the incidents of Nano catching fire or emitting smoke are most immediate factor impacting sales. Tata Motors has taken up a retro-

fitting exercise, under which it is introducing a fuse in the wiring circuits to avoid a short circuit and putting a non-inflammable cover

for the exhaust system. It also plans to introduce more safety solutions.

Overall, however, it seems Tata Motors will have to re-launch Nano, free from all existing troubles.

Telecom: Grain & Chaff

Bharti, Idea Have Highest Share Of Active users, Says Trai: GSM mobile operators like Bharti Airtel and Idea Cellular have

the largest number of active subscribers according to a first-time segregation of customers by usage, done by the Telecom Regulatory

Authority of India (Trai). (Indian Express, December 7, 2010)

PRU Analysis

India’s telecom subscriber base has been rising at a rapid pace,

showed statistics released by the telecom companies.

Lower tariffs, easy availability of SIM cards at a low or zero cost

and various lucrative offers by telcos prompted some to own more

than one connection. However, how many of these connections are

active was not known.

As per classification by the Telecom Regulatory Authority of India

(Trai), those who use their mobile connections at least once a month

are termed active, while those who use less are inactive.

Trai segregates active and inactive users by visitor location register

(VLR) and home location register (HLR). There are two sets of fig-

ures operators submit – active customers, known as VLR, and HLR

or the inactive customers, arising from multiple SIM card usage.

Trai has published, for the month ending September 30, 2010, VLR

numbers provided to it by telecom operators. VLR numbers are an

indicator of the active connections at the time. Their highlights are:

Of the total user base of 687.7 million, only 483 million are

active.

On counting only active users, India's teledensity dips to 38%

against 60% including both active and inactive connections.

According to Trai, 89% of Airtel users and 88% of Idea Cellu-

lar users are in the active category.

All three new entrants — that is, Uninor, Etisalat DB and S-Tel

— have around 60% subscribers in the inactive category.

Tata Teleservices has the lowest percentage of active subscribers at 44% for its CDMA mobile services and 46% for GSM.

Active Wireless Connections (in millions)

September

2010

% Active

Connections

Bharti Airtel 143.3 89.3

RCom 117.4 66.9

Vodafone 115.6 75

BSNL* 78.3 62.2

Tata Teleservices 79.1 45.1

Idea+Spice 74.2 88.1

Aircel 46.5 59.1

MTNL 5.3 35.9

Loop Telecom 2.98 48.2

MTS 6.6 46.3

Uninor 11.3 30.9

HFCL 1 48.7

S Tel 1.6 24.3

Videocon 4.5 38.9

Etilisalat+Allianz 0.1 43.6

Total 687.7 69.4

*BSNL has not provided VLR data for its CDMA connections

December 8, 2010

PRU View

We at PRU have mentioned in our earlier reports that although the number of subscribers is rising at a stupendous pace, revenues

are not increasing at the same rate. Average revenue per user (ARPU) and lower minutes of usage. Reason for the same has got

clearer with the release on active user connections data.

Either people own more than one connection or then those who own a single connection (may be in the rural or semi-urban areas)

are not using their cellphones. This not only results in lower revenue growth but also increases cost of maintaining connections for

the telecom service provider.

We at PRU believe that with the given 14 players in the industry, consolidation of companies is long due. This will help stabilise

tariffs which, in a bid to attract higher subscribers, are declining.

Retail: A New Beginning

Tatas’ Trent Set To Launch Operation Westside: Westside, the flagship retail chain of Tata Group’s Trent, will add a gourmet

food section and launch premium labels through designer collaborations and international licensing deals to take on peers such as Shop-

pers Stop and Lifestyle that are pulling away increasingly affluent consumers. (The Economic Times, December 1, 2010)

PRU Analysis

In response to its sliding market position vis a vis Shopper’s Stop and Lifestyle, Trent has decided to give a makeover to its flag-

ship retail chain Westside, which has till now focused more on private labels.

Over time they have become more of a lower middle class destination for shopping while the upper middle class and affluent class

are getting cornered by Shoppers’ Stop and Lifestyle. Also, in the value category, it is lagging behind Reliance’s Trends and Land-

mark Group’s Max and Pantaloon’s in the mid-market segment.

Keen on holding on to its planned current positioning, it has identified the need to upgrade.

As per industry sources, Westside has been a conservative company that has observed lower footfalls and lower sales productivity

due to lower ticket value. It started with a good model of private brands which yield better returns but with intensifying competi-

tion, they entered into third party managed categories, such as cosmetics and watches. Due to this, an inconsistency developed with

the original format.

Now Trent is taking the following major steps:

It has selected UK-based retail design consultant Fitch to improve its store appeal

It is changing its merchandise mix as per micro locations by providing more space to premium brands such as Vero Moda, Ed

Hardy, US Polo, and Chicco in comparison to private labels depending on location.

Trent will open 11 large-format stores in FY 2011 and another 15 stores in FY12. It already has 49 stores in India.

It is entering exclusive licensing agreements with international brands (such as, Aerology in footwear) to cater to high price

points.

Also it has tied up with famous fashion designers such as Priyadarshani Rao and Wendell Rodrigues to introduce premium in-

house brands.

December 8, 2010

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