India’s 100 Fastest Growing Small Companies: Small Wonders

ETIG is back with the 2008 edition of India’s 100 Fastest Growing Small Companies...

"THE MARKETS are in turmoil” — the drama unfolding in the stock market makes this a gross understatement. Bloodbath is the only word that can aptly describe the mad rush to sell off shares faster than the clock ticks. The reasons are many and varied, and the fall has turned into a self-propelling snowball, which just keeps on gaining mass and speed on its way down the hill.

When the large-cap giants have been beaten out of shape and their valuations have turned cheap beyond imagination, it surely is not a good idea to talk about small companies. And one also has to be extremely careful while talking about ‘growth’, else retail investors will discard it as an extinct word. But growth is the only way listed companies generate wealth and value for their shareholders and other stakeholders, including employees. The younger and smaller the company, easier it is to grow. And the earlier you are able to pick future leaders, the better it is for you. In fact, during the last bear run, which ended in early 2003, many small companies gave double-digit annual returns on a consistent basis, even as frontline companies remained grounded.

It was for the above reasons that we decided to come out with our first list of India’s 100 fastest growing small companies in 2007. The list was highly appreciated by our readers. With the annual reports of most companies out now, we need to update this list. Here, we present the 2008 Edition Of ETIG’s 100 Fastest Growing Small Companies. Last year’s list was dominated by companies from the then hot sectors such as real estate, capital goods and construction, with a sprinkling of IT companies. In the past one year, there has been a dramatic shift in the Indian growth story and this is clearly visible in this year’s rankings. While investment-demand driven sectors such as capital goods, real estate and construction continue to be in the list, the toppers are now from less cyclical and asset-light sectors, especially infotech. This may surprise many readers as the IT sector has borne the brunt of the recent bloodbath in the stock market. Most IT companies are currently trading at less than half their market value a year ago due to market concerns over the slowdown in the industry’s growth. Many IT companies figure in the top quartile of this year’s list. A close study reveals that only a few of the companies in the list are typical IT companies. Most of the companies, including top-ranked ICSA, are new-age IT services providers which operate in their own niche with little competition. And unlike their frontline peers, these companies operate in the domestic market, which makes them immune to currency fluctuations. It won’t be an understatement to say that this is the new face of the Indian IT industry — companies offering niche product and services with a clear differentiating factor. ICSA, for instance, offers supervisory control and data acquisition (SCADA)-based IT solutions to power companies, while Allied Digital provides remote infrastructure management and systems integration in the domestic market. Info Edge (India), on the other hand, owns niche portals such as naukri.com and shaadi.com, while Tanla Solutions develops value-added solutions for mobile phones.

This just goes to prove that it is possible to grow in the toughest of economic environment. What is needed is a financially viable and scalable business model. The next challenge for these companies will be to further scale up their businesses in an environment which is getting excruciatingly difficult by the day.

HOW WE DID IT
It was only two weeks ago that we came out with the list of India Inc’s elite club — ET500 — representing India’s largest listed companies. In view of this, it was only logical that in order to find the fastest growing small companies, we exclude all companies that figured in ET500.
So, the largest company in our sample had net sales of around Rs 720 crore, while the minimum net sales figure was fixed at Rs 100 crore. The next filter was market capitalisation. We considered only those companies which figured in the bottom 20% of the cumulative market cap of all companies listed on the BSE. So, the most valuable companies in our sample had a market cap of Rs 2,500 crore (the average for September ’08) and we excluded companies with a market cap of less than Rs 100 crore. To weed out the weaker constituents, we added criteria such as return on capital employed (RoCE), debt-equity ratio (DER) and interest coverage ratio (ICR). As a result, the final list comprised financially sound companies, which had an average RoCE of over 15%, average DER below 1.5 and ICR of above 5, for the preceding three years. We could find only 106 companies which met all our criteria, or less than 5% of our initial sample of around 2,000 companies.
We calculated the compound average growth rate (CAGR) in sales and net profit for all these companies for the preceding three years. The final ranking was done by assigning a 30% weightage each to RoCE and ICR, while a 20% weightage was given to the three-year CAGR in sales and net profits. Basically, this means that while growth is key, the quality or the ways of achieving it are of greater importance. You are now free to take your pick. But keep in mind that the ranking is not an endorsement of these companies. Make your own assessment before investing in any of these stocks.

(To view the complete list of ETIG’s 100 fastest growing small companies, log on to www.etintelligence.com)

Lower subsidy lifts Gail’s bottomline

INDIA’S largest natural gas transporter posted a substantially better result for the quarter ended September 2008 helped by higher operating margins and flat subsidy burden. Gail net profit during the second quarter spurted 79% to Rs 1,023 crore while its net sales grew 36% to Rs 6,173 crore.

Gail’s operating margin in the quarter jumped 450 basis points to 23.9% mainly due to a sharp fall in its other expenditure. The company had booked Rs 257 crore in the corresponding quarter of the previous year as write-off on an exploration well going dry inflating the other expenditure. A fall in interest and depreciation costs and easing of effective rate of tax to 31.9% helped the company’s bottomline post a sharp growth. Liquid hydrocarbons proved to be the best performing segment for Gail as its subsidy burden inched up only marginally to Rs 401 crore. The profit of this segment jumped 157% to Rs 575 crore making it the largest contributor to Gail’s bottomline. Natural gas trading business as well reported a robust performance with 58% profit growth to Rs 111 crore. The profits from transmission of natural gas and LPG as well as the petrochemicals business remained flat.

Despite a weak market Gail shares ended 0.5% higher at Rs 224.65 on Thursday ahead of its results. The scrip has lost 19% against a 28% fall in Sensex over last one month.

Going forward, Gail is likely to emerge as the key beneficiary of improving natural gas availability in India. The company is laying up pipelines to double its transmission capacity in next three years. Additional natural gas from RIL’s KG basin and Petronet LNG’s expanded capacity is expected to start accruing from the first quarter of 2009 onwards.

RIL’s Q2 net may not lift sentiments

RELIANCE Industries — India’s largest company by market capitalisation and one of the most widely held stock — is unlikely to liven up the market when it announces its second-quarter result on Thursday. RIL’s profit for the quarter is expected to grow only marginally, or even dip, compared with the year-ago period.
“Reliance has come out with steady results in volatile markets. However, RIL will struggle to touch two-digit profit figure this quarter because of the slowdown in refining margins. On the other hand, improved margins in petrochemical business could result in flat growth in net profit,” said an analyst working with a leading international brokerage. The petroleum refining industry has entered a slowdown phase globally, with the gross refining margins (GRM) — the differential between prices of crude oil and refined products — coming down from the previous quarter. Motilal Oswal in its Q2 earnings preview report said, “During the quarter ended September 2008, Singapore GRM at $5.4/bbl was down 15% against $6.4/bbl in Q2FY08 and down 33% compared with $8.1/bbl in the immediately preceding quarter.”

As a result, RIL’s petroleum refining business, which contributes nearly twothird to its revenues, is likely to record a lacklustre performance in the latest quarter. Analyst estimates put RIL’s GRMs in the $11-$13 per barrel range, weaker from $15.7 posted in June 2008 quarter and $13.7 in September 2007 quarter. This means its refining profits will be lower on a year-on-year basis.

In contrast, RIL’s petrochemicals business is expected to post healthy revenues and improved margins due to stagnancy in feedstock naphtha prices. Petrochemicals represent around 30% of RIL’s revenues and profits. The smaller segment of oil and gas production is also likely to perform well due to higher petroleum prices in the September 2008 quarter compared with the previous year. Weakness in the rupee is another factor that will impact RIL’s performance. Despite being India’s largest exporter, RIL has always had more imports than exports. Particularly, a major chunk of its petrochemicals is sold domestically within India. However, since the domestic petrochemical prices are linked to their import parity prices, RIL is likely to benefit from the weak rupee. “We expect RIL’s petrochemical EBIT to rise 5% y-o-y to Rs 2,130 crore mainly driven by a weaker rupee,” mentioned a Merrill Lynch report.

Brokerage houses are divided on RIL’s profit growth this quarter. Among them, Angel Broking is the most bearish on RIL, projecting a 13% fall in its Q2 profits. As against this, Motilal Oswal and Sharekhan are the most bullish, estimating around 9% rise in RIL’s profit. The estimates of other brokerages like Prabhudas Leeladhar, Merrill Lynch, Citi Investment are somewhere in between. The company is expected to post good profits in the coming quarters because of sale of oil & gas from the KG basin.

SLIPPING FORTUNES Slowdown in refining margins likely to hit RIL’s Q2 bottomline Broking houses divided over RIL’s financial performance Angel Broking is bearish, while Motilal Oswal, Sharekhan keep a bullish view

Gail: Lots In The Pipeline

Gail is a low-risk investment option with immediate growth triggers. Its current valuations are attractive for long-term investors

EVEN AMIDST the current market uncertainty and financial turmoil, Gas Authority of India (Gail) stands out as a low-risk investment option with immediate growth triggers. We had recommended this stock in our edition dated March 17, ’08. Although the scrip has not lost much in the recent meltdown — declining around 10% since our recommendation, against a 32.6% fall in the Bombay Stock Exchange (BSE) Sensex — its current valuations are attractive for longterm investors. Gail enjoys a monopoly status and an inherent pricing power in cross-country natural gas transmission, as it owns India’s largest gas pipeline network. The fact that it is a government-owned, diversified and cash-rich company improves its risk profile. Reliance Industries’ (RIL) natural gas, which is expected to start flowing from the fourth quarter of FY09, will benefit Gail to a great extent. Natural gas is a cheaper and better alternative to liquid fuels and there is a huge unmet demand in India. As a result, the company will enjoy the twin benefits of sustainable growth, while keeping risks low, even in times of a global financial turmoil and economic slowdown.

BUSINESS:
Gail’s business model is well-diversified as it operates in the entire natural gas value chain from processing, transporting and marketing, to producing liquid hydrocarbons and downstream petrochemicals. It is going in for the last step in backward integration of producing natural gas and has invested in 29 exploration blocks and three coal bed methane (CBM) blocks.
As part of its diversification in natural gas-related businesses, it has invested in liquefied natural gas (LNG), gas-based power plants and gas retailing through city gas distribution (CGD) projects. Its wholly owned subsidiary, Gail Gas, is setting up a compressed natural gas (CNG) corridor on the country’s national highways.
The company is already connected with all the natural gas supply points — Dahej and Hazira in Gujarat, Uran in Maharashtra and now Kakinada in Andhra Pradesh. This makes it a natural transport partner for any large producer or consumer of natural gas. Gail is now laying pipelines on the west coast, which will connect future LNG terminals at Dabhol and Kochi to the national gas grid. In a bid to diversify geographically, the company has gone to countries like China and Mongolia to implement CGD projects. Gail produces liquefied petroleum gas (LPG) — one of the heavily subsidised petroleum products in India — and has to suffer a portion of the under-recovery. However, over the past couple of quarters, Gail’s subsidy burden has remained flat, despite the spurt in global oil prices, which is directly helping its liquid hydrocarbons business. We expect that even in future, Gail’s subsidy burden will remain at present levels, which will allow the company to post decent profit growth.

GROWTH DRIVERS:
At present, the company transports over 82 million metric standard cubic metres per day (mmscmd) of natural gas, produces 1.3 million tonnes (mt) of liquid hydrocarbons, including LPG, and nearly 4 lakh tonnes of polyethylene. The company has recently expanded its polyethylene capacity by 25% to 5 lakh tonnes, which will be gradually scaled up to 8 lakh tonnes.
Gail has embarked on an ambitious plan to invest over Rs 28,800 crore by ’12 to expand capacities in areas such as pipelines, exploration & production (E&P), petrochemicals, city gas projects, LNG etc. This entails doubling the natural gas transmission capacity, covering over 200 cities under CGD, 60% expansion of petrochemicals capacity and expanding LNG terminals.

FINANCIALS:
Since FY05, Gail’s net profit has witnessed a compound annual growth rate (CAGR) of 11.2%, while its sales grew 10.7%. In the quarter ended June ’08, the company posted 31% profit growth to Rs 897 crore, on the back of a 35% jump in sales to Rs 5,731 crore. The company’s LPG and liquid hydrocarbons business, which was making losses in FY07, has witnessed substantially superior profit margins in FY08; in the first quarter of this year, its profit margin touched nearly 40%. Similarly, the natural gas transmission business is showing a steady increase in profit margins. The company recently issued bonus shares in the ratio of 1:2. If the company maintains a 100% dividend policy, as in the past three consecutive years, its dividend yield will be a decent 4% at the current market price (CMP).

VALUATIONS:
At the CMP of Rs 243.65, the scrip is trading at a P/E multiple of 11. We expect the company to close FY09 with an earning per share (EPS) of Rs 26.1 and FY10 with an EPS of Rs 32.3. The CMP is 9.3 times the expected FY09 EPS and 7.5 times the expected FY10 earnings. At the same time, nearly 30% of Gail’s market capitalisation is represented by the value of its investments and cash. Hence, its core business is available at even cheaper valuations. Existing investors are advised to stay invested in the stock.

INDIA INC GOES GLOBAL

Indian economy has gone through a dramatic transformation in the last five years or so. And nowhere is this more visible than the boardrooms of India Inc. The high brow discussions on economic and business issues in board meetings has given way workshops on abstract topics such as integration, cultural fit and diversity management. What's more these discussions are often moderated by exexpat CEOs who are most likely to be affected by its outcome. Blame it on the new wave of globalisation that is sweeping through India Inc.
Though globalisation is now a cliché, this new wave is unlike any other. While in the past Indian companies participated in it as low-cost exporters, or say technology seekers or at best a local partner to MNCs, the same companies now found these strategies stifling. They are now breaking free to seek a place at the global high table. This is the new face of India Inc and we have captured in its full glory in the latest edition of ET500, which will hit the stands two days from now.
And we don't bring you just heaps of data and analyses. India's Inc top minds will be there to tell you the story of their globalisation drive, its strategic rational and the ways to make it successful. When talking about globalisation the first name that comes to mind is Tata Group. Their recent acquisitions -be it Corus or Jaguar Land Rover or General Chemicals-has put India on the global map.
So it was but natural for us to begin the journey the with an hour-long interview with Mr Alan Rosling, Tata Son's executive director and the brain behind the Group's globalisation drive. And we start from the ground zero, the genesis of the group's recent moves in the international market. If he is to be believed, Indian companies are better placed to make their overseas acquisitions successful. "Thanks to their unique history and culture, Indians find it easy to assimilate with new people and cultures. They don't usually force their way of life on others and this makes integration easier," says Mr Rosling. The softer issues play a key role in the success of an acquisition. And no one is better placed to flag the subject than Tata Group's HR head Mr Satish Pradhan, who is tackling this issue on everyday basis. Next we turn our attention to individual companies -Tata Chemicals and Tata Communications, to get their side of the story.
However globalisation fever is not limited to Bombay House only. One of the most talked about globalisation stories have been that of Avantha Group (formerly L M Thapar Group). Under the leadership of Mr Gautam Thapar, the group has transformed itself from a laggard to one of fastest growing and the most globalised of its peers. We caught up with Mr Thapar to get a first hand account of this journey. We followed it up by chatting with Mr Sudhir M Trehan, managing director of Crompton Greaves, the group's flagship company.
Globalisation is not only about having production facilities abroad, it also involves tapping global sources of finances and most importantly creating a global talent pool. We tackle the issues in two separate features.
Last year, we changed the ranking parameters to make its simpler and brought it in line with the globally accepted definition of size i.e revenues in last financial year. We have stuck to it and its amazing to see the resulting dynamism in ET500. Many companies made it the list this year thanks to IPOs. And as we found out some of most prominent of them are public sector undertakings, just another indicator of the rising presence of PSUs in India Inc. A long-term investor should keep a close watch on them.

Crude oil prices: On Slippery Terrain

The recent fall in crude oil prices will ease pressure on the government’s treasury, but refining companies are likely to take a hit. The future course of prices will depend on the global financial market turmoil to a large extent

THE RECENT unexpected fall in crude oil prices has followed the unprecedented financial sector crisis that the world is currently facing. As global liquidity dries up, there has been a blanket sell-off in various asset classes — crude being one of them. Although economic growth concerns have been weighing on demand for petroleum products, they surely do not seem sufficient enough to cause a nearly 45% fall in crude prices to below $80 per barrel, after hitting a peak in July.
Crude oil is the world’s most widely consumed commodity and any move in its prices has a global impact. One would assume that the sudden, steep fall in crude prices will bring cheer to the domestic petroleum industry, which has been reeling under heavy under-recoveries. However, the impact of this crash will vary for different participants, and will also differ in the short- and long term. A basic understanding of these forces and their inter-relationships is necessary for investors, so that they are able to make the right choice when the tide turns.

EFFECT ON INDIAN ECONOMY:
The fall in crude oil prices has come as a boon for the Indian economy, which is witnessing a very high level of inflation triggered by sky-high crude prices. Although crude price was one of the reasons for the sharp rise in India’s inflation, the recent steep fall is not likely to reflect immediately on the inflation numbers. Since the government and oil companies absorb a major portion of the burden, rather than passing it on to consumers, the fall in crude prices will first ease the country’s fiscal deficit and provide some relief to oil companies. The total under-recoveries, which were predicted to reach Rs 240,000 crore for FY09, may now be restricted to Rs 160,000 crore.

FOR PRODUCERS:
Normally, a fall in crude prices is bad news for oil producers, but this is not the case for India’s largest oil producer, ONGC. Since the company is a beneficiary of nominated oil blocks, it has to sell crude at a discounted price to public sector refining companies. Its net realisation stood at only $70 in the quarter ended June ’08, although global prices averaged around $126. The recent fall in crude price will only reduce ONGC’s discounts, while keeping its net realisations unchanged. Hence, the company, which had received $55.9 per barrel in the quarter ended September ’07, is likely to earn better returns in the second quarter of FY09, despite the fall in crude prices. And till crude price stays above the $70 level, its fluctuations will have little impact on ONGC’s earnings. However, for other relatively smaller players in the private sector, the normal rule will be applicable. Companies like Cairn India, Selan Exploration Technology, Hindustan Oil Exploration and Reliance Industries (RIL) will see a drop in their future realisations from production of crude oil.

FOR REFINERS:
Although crude oil is the raw material for petroleum refiners, movement in the price of crude alone does not affect them. What really matters is the differential in the price of crude oil and refined products. Refiners benefit if the fall in prices of petrol and diesel is less than the fall in crude oil prices. However, this logic holds in an ideal situation. In reality, there is a 30-day gap between the purchase of crude oil and selling of output. So, if the price at which crude oil was bought is higher than the price at which its refined products are sold, then refiners book inventory losses and vice-versa. Hence, the one-way fall in crude oil prices results in heavy losses for refiners in the particular quarter. The fall in crude prices has been so steep during the past three months that the entire refining margins for several refiners may be wiped off. Standalone refiners such as Mangalore Refinery & Petrochemicals (MRPL) and Chennai Petroleum (CPCL), as well as private sector players like RIL and Essar Oil, are all expected to witness a substantial fall in their refining margins. However, this scenario will rectify itself in the next quarter, once crude prices stabilise.

FOR MARKETERS:
For oil marketing companies (OMCs) — which sell refined products in the retail market — the fall in crude prices does not mean much. Firstly, since their purchases are dollar-denominated and sales are rupee-denominated, the rupee’s depreciation takes away a chunk of the benefits they would otherwise have enjoyed from a fall in crude prices. The rupee has lost nearly 14% in the past three months and is hovering around 48.4 versus the dollar, making imports costlier.
Secondly, OMCs’ refining operations, which would otherwise absorb a part of their marketing losses, will witness heavy erosion in profits. As a result, their profitability will continue to depend on the amount of oil bonds issued by the government. Going forward, even if these companies are able to trim their losses, the same will be reflected in a fall in oil bonds issued to them by the government.

FOR EXPLORATION SUPPORT INDUSTRY:
There are a host of companies which offer various services to oil majors in exploration and production. With crude prices rising steadily, exploration activity across the world has increased substantially, boosting demand for the services and assets offered by such companies. These include exploration support companies such as Aban Offshore, Great Offshore, Jindal Drilling, Shiv-Vani Oil & Gas and Dolphin Offshore. However, this industry mainly operates on long-term contracts, which range from six months to five years. At the same time, petroleum exploration is a lengthy activity — it usually takes several months, if not years, to determine the presence of hydrocarbon reserves, as well as their commerciality. Hence, the sudden slump in crude prices is unlikely to have any immediate impact on the players in this field. Going forward, if crude prices continue to stay around the present levels for a prolonged period — say, more than a year — then these companies may witness some impact on their order flow.

SUMMING UP:
Just like any other sharp and secular movement, the recent fall in crude oil prices has brought its own set of problems. On the one hand, it is easing pressure on the government’s treasury, but on the other hand, refining companies are set to take a hit. Globally, the balance between demand and supply of crude oil will continue in the months to come. The future course of crude prices will depend on the global financial market turmoil to a large extent. In the medium term, crude prices are expected to stay range-bound near current levels.

From moving in a fairly stable range over the past three years, the rupee suddenly finds itself swerving around in a rather rocky terrain.

From moving in a fairly stable range over the past three years, the rupee suddenly finds itself swerving around in a rather rocky terrain. Ramkrishna Kashelkar takes a hard look at the grim scenario

WHEN THE rupee was appreciating last year, it was widely believed that the upturn was here to stay. Foreign investments came rushing to India, lured by its strong economic growth and low inflation. Even Indian corporates went overseas like never before, borrowing heavily to fund acquisitions, as well as various expansion projects. So, when the tide turned, it was a rude awakening for India Inc. Today, India is more integrated with the global economy compared to a decade ago and the rupeedollar exchange rate has a huge bearing on India Inc’s growth prospects.
India continues to be a net importer of goods, especially capital goods and key industrial inputs. A costlier rupee raises project costs and affects the rate of investment, which impacts economic growth. Besides, depreciation in the rupee reduces the financial returns of foreign investors, reducing the relative attractiveness of India as an investment destination. Given this, if we want to have a view on India’s growth story, it becomes necessary to understand the moves being made by the rupee. Why the rupee depreciated suddenly is an interesting question. The most obvious reason is the global financial crisis and the ensuing massive unwinding of foreign portfolio investors to fund their domestic liquidity requirements. However, there have been subtle changes in the economy over the past few months that have been hinting at a weak rupee.
India’s inflation spurted to double digits in June ’08 — higher than the rate of economic growth — on the back of high crude oil and commodity prices. At the same time, the government’s decisions to raise subsidies rather than pass on the high global prices of crude oil and fertilisers have dramatically increased the fiscal deficit. Besides, the government has to make provisions for waiving agricultural loans, handing out the Sixth Pay Commission awards and other welfare schemes launched in the recent past. According to various estimates, these measures are expected to push India’s fiscal deficit to nearly 8% of the gross domestic product (GDP) — the highest ever in nearly a decade. A bigger fiscal deficit translates into an equally huge trade deficit, which puts downward pressure on the rupee. Till such a time these worries are addressed extensively, the downward pressure on the rupee is likely to continue.

US AND THEM
It is not just the rupee, which has taken a thrashing from the sudden exit of foreign capital. Other emerging markets such as Brazil and Russia have also witnessed a depreciation in their currencies — sharper than India’s — over the past few weeks. While the rupee lost around 7.5% of its value from the beginning of July ’08, Brazilian real lost 20.6%, Russian rouble fell 10.3% and South Korean won depreciated by 16.9%. China is the only country whose currency has appreciated against the dollar over a period of time.

THE SLIPPERY ZONE
While the outflow of the so-called ‘hot money’ has hit the rupee hard, the continuing liquidity problems overseas are adding fuel to it. The foreign branches of Indian banks are suddenly finding it difficult to roll over short-term loans taken from local banks. In such cases, they are left with no other option, but to raise the necessary foreign exchange (forex) in the domestic market by selling rupees, which adds to depreciation in the rupee.

LIQUIDITY WOES
The Reserve Bank of India (RBI), which overseas the domestic money supply, also monitors the supply of forex in India, so as to smoothen out the erratic movements by keeping the markets wellsupplied and liquid.
However, RBI’s ability to intervene in the market is limited. The level of RBI’s forex reserves, which were on a secular uptrend till May ’08 to reach $315 billion, have been waning since then. Current forex reserves of $292 billion indicate a 7.3% drawdown from the peak, but they are still at very high levels, considering India’s history of having reserves equivalent to around 12 months of imports.
But forex reserves have to be used carefully because they play a key role in maintaining the general confidence in the currency. The structure of India’s foreign capital inflows has changed dramatically in the past few years. While India’s total capital inflows have increased at a compounded annual growth rate (CAGR) of 58.4% over the past five years, the hot money inflow — capital coming in through portfolio investments and short-term credit — has grown at 89%.

A HAZY FUTURE
DURING FY08 alone, nearly $46.8 billion of hot money flowed into India, representing 43.3% of India’s net capital inflows of $108 billion. Since hot money can be easily pulled out at short notice, its large presence in the economy is a potential danger. The boom in the economy and the stock market in earlier years led to its rising influence. But with things not so smooth any more, it increases the risk of a sudden exodus of foreign capital. Similarly, at times, RBI’s ability to intervene in the forex market gets restricted due to liquidity problems. When the rupee is being sold off and losing value, RBI needs to sell dollars to support the rupee. This reduces liquidity in the banking system. So, it needs to be careful that its forex market operations do not leave the domestic financial system dry. Non-food credit growth has reached 25% despite high interest rates due to heavy borrowings by oil and fertiliser companies. RBI has taken steps to address liquidity problems. It started a second daily liquidity adjustment facility for banks and also allowed them to dip below the mandated 25% statutory liquidity ratio requirement by one percentage point. In a bid to attract more foreign currency, RBI has hiked interest rates on foreign currency deposits by 50 bps.

MACRO MIX-UPS:
The Indian economy is not in good shape. Growth in IIP has slowed, while inflation has soared. During the first five months of FY09, fiscal deficit has already crossed 87% of India’s full-year forecast. The spurt in global crude prices has single-handedly increased India’s trade deficit. Crude prices jumped to an average of $120 in the first half of FY09 from $70 in the corresponding period of previous year. So, India’s oil import bill swelled 77% in August ’08 to $11 billion and by 60% to $46 billion during April-August ’08. In view of this, India’s export growth is falling short of the growth in imports. The resultant trade deficit is likely to touch $125 billion for the whole of FY09. There appears some light at the end of the tunnel on this count. Crude prices have retraced nearly one-third from their peaks to fall below $100 per barrel and are expected to remain range-bound. In the medium term, domestic availability of natural gas and crude oil is expected to increase substantially as RIL’s oil fields in Krishna Godavari basin and Cairn’s Rajasthan fields begin production. Both these factors will ease India’s crude import bill and reduce the fiscal deficit. A simultaneous meltdown in the commodity market will also alleviate inflation.

NO CLEAR VIEW, YET:
The recent fall in the rupee, led by withdrawal of foreign portfolio investors from India, may not be rectified till stability returns. The global scenario is uncertain. India also needs to fight its own woes — high inflation, widening current account and fiscal deficits and slowing economic growth — besides absorbing repercussions of the global turmoil. The Indian economy’s ability to re-emerge as an attractive investment destination will determine the rupee’s upward movement. Till then, the rupee is likely to remain under pressure.

RIL warrant conversion ups promoter stake to 49%

THE scrip of Reliance Industries (RIL), India’s largest company by market capitalisation, shed over 7.6% on Friday, just before the promoters converted their 12 crore warrants into an equal number of shares. Posttransaction, the promoter group holds 49% stake in the company, with 52% voting rights. This involves an infusion of around Rs 15,142 crore into the company. The shares have a lock-in period of three years.
Despite the warrant conversion, the promoter group’s stake is below the 51.37% it held in the company on June 30, 2008. A close inspection of RIL’s shareholding pattern reveals considerable changes in the promoter group’s holding during the July-September quarter.
Promoters’ stake had gone down from 51.37% to 44.8% — representing a decline of 9.54 crore equity shares — between July 1 and September 30, 2008. After the warrant conversion, this has gone up to 49%.
During the September quarter, nearly 9.42 crore shares were transferred from the promoter group to various RIL subsidiaries and are now classified as public shareholding, but with non-voting shares.
Replying to questions on these transactions, an RIL spokesperson said: “Eight body corporates holding 9.42 crore treasury shares of RIL for the benefit of its shareholders, have since become subsidiaries of RIL.” RIL market cap dips
“AS A RESULT,these shares do not enjoy voting rights and cannot be classified under promoter group. The promoter group companies have not sold any RIL shares for subscribing to warrants,” the RIL spokesperson added.
The spokesperson also said that loans from RIL to these companies were converted to equity share capital. However, he said that he can’t elaborate on the events that triggered the transfer of ownership in these eight body corporates or the price at which they were transferred. The latest shareholding pattern shows eight subsidiary companies holding 9.42 crore shares of RIL. Among these three private limited companies — Reliance Chemicals, Reliance Polyolefins and Reliance Universal Enterprises — hold 9.02 crore shares or 6.2% stake and five other companies together account for the rest 40 lakh shares.
Since the promoter group’s shareholding has fallen by 9.54 crore in the July-September quarter, there still remains some confusion about 12.55 lakh shares, which is the difference between these two figures. Commenting on the change in RIL’s promoter group shareholding, SP Tulsian, an independent investment advisor, said: “Under the earlier conditions, the conversion of warrants would have taken the promoters’ holding in RIL beyond 55% triggering an open offer under the Sebi guidelines.” It seems the promoters wanted to avoid such a situation.
In the past 10 trading sessions, RIL has lost nearly 15% of its market capitalisation wiping out nearly Rs 44,000 crore of investor wealth. The price-to-earnings ratio (P/E) of the scrip has come down to 12.8, a level last witnessed in June 2006.

Oilcos may slip on softening crude

Standalone & Private Sector Refiners Likely To Perform Better Than Oil Marketing Cos

CRUDE oil, which had of late become an asset, registered a major meltdown as the turmoil in the global financial markets hit a new peak. Within weeks, NYMEX crude oil futures fell below $93 on September 16, 2008. Although it recovered to $110 level after that, by Septemberend the prices are again back at $96. Considering the $147 peak in July 2008, crude prices have lost nearly 35% through the quarter ended September 2008.
While low petroleum prices in general are welcome for the Indian petroleum industry, which is reeling under huge under-recoveries, the sudden crash in oil prices actually means more losses. This happens because petroleum refiners purchase crude at a higher price and by the time they process and ready it, the refined products for sale command a substantially lower price in the market. There is usually a gap of 30 days between purchase of crude and sale of refined products. When Indian petroleum refiners publish their performances in September 2008 quarter later this month, the phenomenon is likely to lead to a heavy erosion in their gross refining margins (GRMs). This will be in sharp contrast to the preceding quarter, when the sustained rise in crude oil prices had enabled them post super-normal GRMs and a spurt in profits.
“The refinery margins, which are otherwise healthy at $6-7 per barrel, will get hit by the inventory losses in September quarter,” told Indian Oil finance director SV Narasimhan. The company had posted historically highest GRMs of $16.8 per barrel in the June 2008 quarter on hefty inventory gains.
MRPL finance director LK Gupta agreed, “The inventory losses could be so big this time that the entire GRMs might get wiped out. However, it will just average out the booster we got in the preceding quarter.” Like most other domestic refiners, MRPL too had posted its record high GRM of $18.1 in the June 2008 quarter.
An analysis of a similar oil price crash in August 2006 to January 2007 period — when crude oil prices tumbled one way from $77 to $50 — shows the huge pressure that domestic refiners faced on their GRMs. (See table). The only exception was RIL, which posted healthy GRMs — although lower than the year’s average — during September 2006 and December 2006 quarters.
RIL was an exception even in the June 2008 quarter, when it did not book inventory gains, allowing the public sector refineries to post GRMs higher than its own, perhaps for the first time in its history. It is, therefore, expected that even this time round, RIL would escape with a healthy doubledigit GRM as against the other domestic refiners, who will post low single digit or possibly even negative GRMs.
The general business environment has also deteriorated for petroleum refiners with a weakening in the buoyant GRMs witnessed in earlier months. “In July, we saw diesel cracks abnormally high above $40 per barrel, which have now come down to around $20 levels,” informed Narasimhan.
At the same time, marketing operations of the state-owned oil marketing companies — IOC, BPCL and HPCL — continue to lose money. “Our daily loss on marketing is still over Rs 200 crore. Weakening of rupee is adding to our woes. And considering the weak global investment outlook, there is little possibility that rupee will strengthen in the immediate future,” informed SV Narasimhan.
With a number of factors going wrong, domestic petroleum refiners are expected to come out with dismal results for the upcoming quarter. Standalone and private sector refiners including MRPL, Chennai Petroleum, RIL and Essar Oil will be somewhat better off compared to the marketing players like IOC, BPCL and HPCL. While RIL is likely to battle the odds to post a double-digit GRM, some of the others could even dip in the red.