November 18, 2010

Highlights

Global Markets Spell Gloom For Indian Cos

Domestic Situation Buoyant

Steel: The Mixed Bag Syndrome

November 18, 2010

Steel: Second Quarter Result Analysis

S oftening steel prices and high raw material cost marked the second quarter of FY11 for all major Indian steel-makers. In spite of

domestic demand remaining intact, steel prices remained soft. Besides, low realisations was another cause for concern.

Although domestic demand from user industries like consumer durables, construction and auto is usually expected to surge during fes-

tive season steel, companies were probably unable to raise prices because global prices have been soft due to weak Chinese demand.

A sharp rise in cheap imports hit domestic production

in April-July 2010. However, imports have declined

since then. In August, finished steel imports halved to

0.46 million tonnes. The reasons for this drop are not

known, but the probable reason is the overall consoli-

dation in industrial growth, as reflected by the drop in

the Index for Industrial Production.

Prices of raw materials have declined in line with pro-

duction cuts in China. Contract price of coking coal

for Q3 has been fixed at $209 per tonne compared to

$225 per tonne in the previous quarter.

Iron ore prices were no exception, with contract prices

for October-December fixed at 10% less at $120 com-

pared with the preceding quarter.

Steel Authority of India (SAIL), India’s largest steel

-maker, saw its performance being hit in the second

quarter FY11 mainly due to low realisations and sharp

increase in cost. While topline grew by around 7%, profit after tax was down 35% YoY.

On an average, realisation per tonne for this quarter was around `31,000, up about 5% (YoY). It was down about 13% compared to Q1

FY11. Inventory clearance could be one of the reasons for low realisations in this quarter. Cost of production increased 19% (YoY),

mainly on account of high coking coal cost. SAIL paid $225/tonne for coking coal in Q2 FY11. Sales volume for the quarter was 3.01

million tones -- a sharp rise of 35% compared to Q1.

According to the management guidance, staff cost will remain high (`7,900 crore) throughout FY11. With global prices already soften-

ing, SAIL won’t be able to raise prices from the current levels. In future, capacity additions and value added product mixes might im-

prove performance. A lot will depend on Chinese demand.

Tata Steel’s Q2F11 performance was due mainly to better realisations in European operations and higher volume in Indian operations.

Quarterly Performance (In `Cr)

Tata Steel SAIL JSW Steel

Q2 2010 Q2 2011 YoY (%) Q2

2010

Q2

2011 YoY (%)

Q2

2010

Q2

2011

YoY

(%)

Net Sales 25,276 28,091 11 9,943 10,602 6.6 4,729 5,908 24.9

Raw material

cost 8,486 9,409 10.9 3,880 4,879 25.7 2,769 3,497 26.3

Operating

Profit -1644 3377 305 2,592 1,702 -51.4 753 810 7.5

Profit before

Tax -2361 2713 214 2,519 1,593 -36.8 453 548 21

PAT -2707 1978 173 1,663 1,090 -34.5 312 364 16.5

Source: Company

November 18, 2010

Consolidated net sales for the quarter stood at `28,091 crore -- up 11% (YoY). But on a QoQ basis it was flattish. Tata Steel’s India

turnover grew 25% YoY to `7,038 crore. Its European turnover grew only 7.1% to `21,053 crore (YoY).

Average realisation for the quarter was `49,390/tonne, an increase of 23% (YoY), mainly due to increased realisation in Europe to

$1133/tonne. Average realisation for Q1 was $1000 per tonne.

Other income was up 343% (YoY) due to stake sale in Tata Motors and Tata Power. Tata Steel got approval to raise `7,000 crore for

capacity expansion and raw material procurement . These measures will leverage the balance-sheet and reduce the debt-to-equity ratio.

However, the company’s future performance will depend more on demand sustainability in Europe. Two-thirds of Tata Steel’s revenue

is generated from this region. Softening raw material prices will help it bring down cost of production. However, cost of production

was down in Q2 also due to old contract prices.

During Q2, JSW Steel’s consolidated net sales stood at `5,098 crore, up 25% (YoY) and 23% (QoQ). Growth in sales was mainly

driven by better sales volume at 1.58 million tonnes for the quarter -- 32.9% higher (QoQ). This was mainly due to liquidation of the

previous quarter’s inventory. In spite of the improved product mix, realisation for Q2 was down to `36,487/tonne, down 7% compared

to Q1. Net profit stood at `364 crore, up 17% (YoY), mainly due to decline of interest cost. Interest cost fell 13% (YoY) as JSW Steel

prepaid its interest for this quarter.

First Half FY11

On a half-yearly basis -- H1 FY11 (taking Q1 and Q2 together) – SAIL’s net sales grew by a mere 3.9% and PAT was down 24.5%.

The company’s performance was hit by high raw material prices and surge in staff cost.

On an average, coking coal price for H1 FY11 for SAIL was $262.5, compared to $129 last year. There was a huge surge of employee

expenditure -- by 68% -- compared to the previous corresponding period. Sales volume was slightly down to 5.4 milllion tonnes for the

first half FY11, compared to 5.8 million tonnes for H1 FY10. However, realizations were up by 10% for H1 FY11 to an average of

`33,000/tonne.

In case of JSW Steel, net sales and PAT both grew by 23% for H1 FY11 compared to H1 FY10. The increase was mainly driven by

higher realisations. Average realisations for H1 FY11 was `37,768 compared to `29,149 for H1 FY10. In spite of the raw material price

increase (being a non integrated player) JSW Steel still managed to record high profits.

Tata Steel’s consolidated net sales for H1 FY11 grew 13.7% compared to H1 FY10. Raw material cost rose 10.7%. The company’s

consolidated PAT grew 177% due to increased capacity utilisation and improved realisation from its Corus unit. The capacity utilisa-

tion increased from 67% on an average for H1 FY10 to 87.5% for H1 FY11. In the near future steel prices are expected to remain soft

due to weakening Chinese demand. This will hit the topline of players. However, demand will remain intact in the domestic market.

The only sign of relief is declining raw material prices. However, to what extent this will help companies improve bottomlines remains

to be seen.

Half Yearly Performance (In `Cr)

Tata Steel SAIL JSW Steel

H1 2010 H1 2011 YoY (%) H1

2010

H1

2011 YoY (%) H1 2010

H2

2011

YoY

(%)

Sales 48,463 55,100 13.7 18,899 19,632 3.9 8,719 10,726 23

Raw material

cost 15,548 17,214 10.7 7,938 9,581 20.7 5,357 7,022 31

Operating

Profit -1,900 5,982 345 3,967 3,230 -18.6 1,366 1,531 12

Profit before

Tax -3,277 5,595 227 4,525 3,341 -26.2 768 999 30

PAT -4,919 3,800 177 2,993 2,266 -24.3 534 659 23.4

Source: Company

November 18, 2010

IIP: Another Hiccup

IIP Growth Slows To 4.4%: Industrial output growth almost halved to 4.4% in September — lowest in 16 months — against 8.2%

a year ago — as most sectors clocked sluggish growth. (Hindustan Times, November 12, 2010)

PRU Analysis

A sharp decline in industrial output recorded during August and September 2010 can be partly attributed to the high base of the

corresponding year-ago period. It must also be noted that 33 items in-

cluded in the IIP (accounted for in rupee

terms) have undergone revision with the

base year for inflation being revised.

Manufacturing, which comprises about

80% of the IIP, grew at slower 4.5% in

September against 13.8% a year ago. Elec-

tricity output expanded 1.7% against 7.5%

in the same month last year. Mining output

rose 5.3% against 7.4%.

Use-based classification reflects that

growth in capital goods has been the main

drag in growth. Capital goods output

declined by 4.2% (YoY).

However, it must be remembered that the

capital goods segment has of late been a

victim of sharp revisions. Hence, it will

be too early to ascertain whether there is

a downturn in the investment cycle. But

yes, infrastructure development has been

slow during the current year, given the

good monsoon and continued bottlenecks

in our system. Rising interest rates may have also

dampened growth to some extent.

Use Based Index of Industrial Production (Base 1993-94=100)

Sep

2010

% YoY

Growth

Apr-Sep

2010

% YoY

Growth

Index of Industrial Production 325.6 4.4 328.1 10.2

Index of Basic Goods 245.0 3.5 252.0 5.5

Index of Capital Goods 566.8 -4.2 563.7 24.3

Index of Intermediate Goods 329.0 10.3 332.2 10.4

Index of Consumer Goods 344.5 5.2 342.6 8.1

Index of Consumer Durables 624.4 10.9 593.2 23.2

Index of Consumer Non-durables 280.0 2.5 284.8 2.1

Source: CSO, DhanBank PRU

Note: Growth figures calculated on IIP index numbers

Note: Growth figures calculated on IIP index numbers

November 18, 2010

Growth in production of consumer durables too receded in September 2010 compared to August. On a cumulative basis, the seg-

ment has recorded a robust growth of 23.2% till September 2010.

After release of IIP figures for September, chief economic advisor, Kaushik Basu, said that if data for October (to be released on

December 12) does not reflect reasonable growth, RBI may have to consider a policy change.

Exhibiting confidence in the domestic growth story, Planning Commission deputy chairman, Montek Singh Ahluwalia, said, “A

sharp fall in India’s industrial output in the last two months is an aberration and the government is confident of achieving 8.5%

economic growth during the current fiscal.” He also said growth might fluctuate in coming quarters but annual growth was likely

to hover around 8.5%.

Railways: Mirror Image

Railway Revenue Earning up 7.73% In Apr-Oct 2010: The total approximate earnings of Indian Railways on originating basis

during 1st April – 31st October 2010 were `52,060.64 crore compared to `48,323.41 crore during the same period last year, registering

an increase of 7.73%. (Press Information Bureau, November 11, 2010)

PRU Analysis

Revenue-earning freight traffic movement by Indian Railways is the only available economic indicator that represents movement

of goods within the country. There is no data on freight movement by roads -- another major mode of transportation.

Reflecting the slow growth in manufacturing, revenue earning freight traffic movement grew by a slow 2.3% during the current

financial year up to September 2010.

April-Oct ’10 April-Oct ’09 % Growth

YoY

Units: ` Cr

Total Earnings 52,060.6 48,323.4 7.7%

Total goods earnings 34629.13 32453.64 6.7%

Total passenger revenue earnings 14870.29 13626.67 9.1%

Units: Million Nos

Numbers of passengers booked 4570.57 4316.75 5.9%

Source: PIB, DhanBank PRU

Break-up of Revenue Earning Freight

Traffic (million tonnes)

Apr-Sep

'10

% YoY

growth

Coal traffic 199.4 6.11

For steel plants 20.95 10.15

For thermal power 136.55 5.12

Pig iron & finished steel traffic 15.19 -0.13

Iron ore (excluding for steel plants) 35.65 -18.35

Cement traffic 46.42 3.16

Foodgrains traffic 19.11 13.14

Fertiliser traffic 23.81 13.38

POL traffic 19.97 2.15

Container Service 17.9 1.76

Other goods traffic 33.68 0.66

Goods traffic on railways 438.2 2.34

November 18, 2010

As per reports, movement in October was 10% higher than in September 2010, mainly due to growth in loading of coal (9.88%),

foodgrains (14.96%), steel (9.91%) and cement (15.28%).

Coal, which accounts for over 45% of the goods transported by rail, registers lower movement during the monsoon months (June-

September) each year. A good monsoon also led to a sharp rise in foodgrain and fertiliser demand.

Decline in the loading of iron-ore continued, which has been affected by the sanctions imposed in Orissa and Karnataka, according

to PIB.

Roads: The Forgotten Path

Road Projects May Not Be Able To Use Allocated Funds: Out of the `23,602 crore budget allocation for the current financial

year, the road transport and highways ministry has been able to spend only `7,167 crore, or 30%, in the first half of this financial year,

according to ministry data. (Business Standard, November 12, 2010)

PRU Analysis

The pace of NHAI’s road construction activity remained sluggish during FY11. Awarding of road projects has also not been satis-

factory, with only around 40 projects were awarded during the period.

We had mentioned in our earlier articles too that minister Kamal Nath’s target of developing 20km of roads per day seems over-

ambitious. This is because several problems such as land acquisition, dispute resolution and funds continue to act as roadblocks

despite over 80 land acquisition units being set up in the states.

NHAI’s financing plans hit a roadblock, with the Planning Commission having disapproved its new long-term borrowing plan.

According to reports, NHAI sought to borrow `64,000 crore, in addition to a `1.92 lakh crore loan approved earlier for its national

highway development projects till 2030-31. This was on account of rising input costs and inflation.

However, the ministry had utilised only 30% of the allocated budget by end of September 2010. Hence, with such slow pace, along

with ambiguity over bidding norms, NHAI’s revised target of developing around 12-13 km per day for 2010-11 (from the earlier

20 km per day) too seems improbable.

Auto: The Rural Gold Rush Begins

Carmakers Turn To Rural Mkts To Speed Up Sales: With automobile sales zooming high, automakers are sprucing up their

presence in rural markets that have emerged as one of the major revenue drivers for them. (The Economic Times, November 15, 2010)

PRU Analysis

The automobile sector, which has seen sterling performances MoM, is constantly looking for fresh avenues of growth to maintain

the momentum. Under such a scenario, what appears to be holding the key is the rural market. Some carmakers have already begun

tapping its potential.

Of India’s 206 million households, about 70% resides in rural areas. And, a mere 2.3% of the rural households have cars, against

10% of urban households.

For Hyundai, which drew 31% of its total sales from rural areas in 2009, Santro has already emerged as its bestseller in this seg-

ment. Hyundai dealers are opening more sales points in Tier III cities to better penetrate the rural markets.

General Motors is close to drawing 30% of its total annual sales from rural markets, against 20% in 2009.

Maruti Suzuki plans to increase its share of sales from rural areas to 20% from the current 17%. For this, it is tying up with ITC’s e

-Choupal and Hariyali Kisaan Bazaar of the DCM Shriram Group.

November 18, 2010

Through e-Choupal, Maruti will engage prospective customers at village levels. DCM Shriram’s Hariyali Bazaars empower farm-

ers by setting up centres in rural regions where each centre operates in an area of 20 km and serves 15,000 farmers of that area.

Maruti will be able to enhance its presence in rural areas through these tie-ups.

Hindustan Motors is also set to launch a rural focus programme in Q4 FY11. It wants to have a 15% share coming from rural areas,

up from the existing 12%.

It may be possible that soon not only two-wheelers but cars too will find a growing market in rural India. What remains to be seen

is the methods various companies adopt to grab a piece of this huge pie.

Cotton: In A Bind

Cotton Exporters Run Into Trouble: Procurement is too low, prices too high, for time-bound commitments. Cotton exporters,

who were expecting bumper profits, with a good crop and high prices abroad, are finding themselves unable to procure the quantity

they need at the price they were supposed to get. A serious issue since they have scheduled export commitments. (Business Standard,

November 16, 2010)

PRU Analysis

As mentioned in our edition dated October 28, 2010, following

global trends, domestic cotton prices have been high despite a

supply surplus. International prices are high due to a demand-

supply mismatch.

Since mid-October when cotton started arriving in the market,

prices have risen sharply. They are up over 50% in the past

three months. According to the Cotton Association of India,

prices of popular Shankar 6 and J-34 have scaled new high of

`116 and `106 respectively for November.

Exporters have already signed forward contracts with ginner.

Ginners, who separate seeds from raw cotton fibre before con-

verting the raw cotton into consumable bales, are not able to

procure cotton at such high prices. So they have been defaulting

on commitments. Hence, exporters have run into trouble.

There could be other reasons as well besides high procurement

prices:

Exporters have already signed deals to ship 52 lakh bales

by December 15. But enough cotton wouldn’t have arrived

by then.

So far 37.5 lakh bales have arrived in various mandis.

Cotton Corporation of India estimates that with the

daily arrivals of 200,000-225,000 bales, total arrivals

could be 7.5-8 million bales by November-end.

Ports can handle only 25 lakh bales per month.

Textile mills also procure cotton every month, which

makes the situation worse.

The government has the tough task of protecting the interests of

textile mills as well as exporters. Indian mills are labour intensive, employing about 35 million people, making it contingent upon

the government to ensure minimum job loss in the sector. High cotton prices put pressure on margins of textile makers (cotton be-

ing a raw material). The government has to ensure that domestic cotton prices never surge too high.

November 18, 2010

The textile industry has been demanding a minimum prohibitive duty of `10,000 per tonne on exports, to ensure adequate domestic

cotton availability. The only option is to suspend exports till the demand-supply situation gets clearer.

GE: ‘Glocalisation’

GE India To Localise Bulk Of Its Domestic Products: The company is targeting 30% growth per annum. GE India is embark-

ing on a major localisation drive under which 60-70% of the products that it sells will be manufactured in the country in the next five

years. At present, the localisation is 10-20%. (Business Standard, November 16, 2010)

PRU Analysis

GE is a diversified technology, media and financial services company. Currently, all of GE's global businesses have a presence in

India, with participation in a wide range of manufacturing, services and technology fields. Its India business constitutes technology

infrastructure, energy infrastructure, commercial and consumer financial businesses. Technology infrastructure comprises health-

care, transportation, aviation and enterprise solutions. Energy infrastructure comprises energy, oil & gas and water & process tech-

nologies.

GE so far hasn’t been very successful in India. Growth in past five years has been flat. It is now targeting 30% growth per annum

from FY12 onwards. The company will mainly target energy and healthcare segments. There is huge opportunity in healthcare

given the consumer dynamics and demographics. The chronic energy shortfall in India provides tremendous potential in power

generation as well.

So, GE India plans to set up a shared manufacturing facility over 500,000 square feet. The location is yet to be finalised. Setting up

a manufacturing capacity not only helps the company reduce cost but also increases accessibility by reducing the waiting period for

products. Products get more specialised, suiting the unique needs of the Indian market.

GE plans to design the bulk of its products at its Bangalore R&D centre. According to the company’s target, 50% of the work at

Bangalore will be for technology or products meant for India. At present, only 10 % is India-specific.

The company had developed low-cost healthcare products for India, such as India-centric ECG machines, a baby warmer incubator

and ultrasound machines. In the energy space, it is developing smaller machines that will run on different fuels such as biogas and

biomass.

This strategy will not only help GE increase its market share, but will also create an altogether new market.

FMCG: Going Global

Dabur Buys Us Hair-Care Co For $100M: Dabur India has bought US-based hair-care company Namaste Laboratories and its

three subsidiaries for $100 million (`446 crore) in an all-cash deal as Indian consumer product companies continue their global acquisi-

tion spree. (The Economic Times, November 16, 2010)

PRU Analysis

Indian consumer goods majors are on a global acquisition mode. Companies such as Godrej Consumer Products, Marico, Wipro

Consumer Care and Dabur are creating a presence in high-growth markets of west Asia, south Asia, south-east Asia and Africa.

In September 2010, Dabur joined the race to turn into a multinational company with its first ever such acquisition -- of a Turkish

personal care company called Hobi Kozmetics -- for `324 crore ($69 million). This company sells skin-care and hair-care products

in 34 countries across west Asia and north Africa.

Now Dabur has made its second overseas acquisition that will help it enter the $1.5-billion ethnic hair-care market of Africa. It will

also serve as a gateway to the US market. Namaste Laboratories specifically caters to the special hair-care needs of women of Afri-

can descent.

November 18, 2010

Its portfolio operates under the brand Organic Root Stimulator and comprises products for damaged hair, hair loss, hair thinning,

dry and itchy scalp. The products are available in the mass, retail, beauty stores and salons.

Namaste has significant market shares in west Asia, Africa, Europe and the Caribbean region of North America.

The acquisition will improve profitability, enhance shareholder value and provide a complimentary product mix to Dabur’s India

product portfolio. Dabur expects the two acquisitions along with the existing international businesses to contribute nearly 25% of

Dabur’s revenues in FY11.

Edible Oil: A New Grind

Emami To Invest `950Cr Into Edible Oils: Looking to emerge as a leading manufacturer and garner substantial market share in

the branded edible oil segment, the Emami Group has earmarked `950 crore over the next two years for the purpose. (The Economic

Times, November 14, 2010)

PRU Analysis

Recently Emami, the FMCG major with a focus on personal healthcare and beauty, forayed into the food and beverages arena. It

launched its edible oil brand Healthy & Tasty across West Bengal, the northeast, and Karnataka. It plans to go national soon.

Emami wants to project Healthy & Tasty as a health-smart product and has launched its six variants – soyabean, sunflower, mus-

tard, soyabean blend, palmolein, and palmolein blend.

To gain substantial market-share in the branded edible oil market, Emami has set aside `950 crore. The investment will be routed

through Emami Biotech, which looks after the edible oil business, Emami’s wholly-owned subsidiary.

Up to 30% of the funds will be raised through equity, and the rest will be through internal accruals and debt. The investments will

be used to set up greenfield projects and expanding existing units.

Emami Biotech was established in 2006 to manufacture bio-diesel from jatropha. It currently faces regulatory hurdles in bio-fuels

and hence is focusing on edible oils. It produces 1,600 tonnes per day of edible oils. Over the next two years, it expects to enhance

its capacity to 3,000 tonnes a day.

—————————————————————

November 18, 2010

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