1. business and industrial

June, 2013
Five reasons why auto world is shifting to emerging markets and what it means for India
Source: http://economictimes.indiatimes.com/news/news-by-industry/auto/automobiles/five-reasons-why-auto-world-is-shifting-to-emerging-markets-and-what-it-means-for-india/articleshow/20127224.cms
The dichotomy at times is hard to
About a decade back, in 2002, Asia's contribution to global production
fathom. The India auto industry closed
capacity in the automobile industry was 15-20%. Today it accounts for
2012-13 with a sales dip of 6.7%, the
over half. China has become the top country in car sales, beating the
first drop in 12 years. The outlook for
US. Auto MNCs, lured by this huge growth potential, are shifting
2013-14 isn't much brighter, with
production bases to Asia to be closer to their customers. India with a
industry
capacity to produce 3 million cars is the third largest.
experts
and
analysts
predicting a growth of 3-5%.
With vehicle penetration in India at a low 13 per 1,000 people
Yet talk to top honchos of auto MNCs and you get a different picture.
(compared to 45 per 1,000 for China) and a growing young
Honda sees India as an important leg on which global growth rests.
population, it should soon overtake Korea as the second-largest car
Ford Motors CEO Joginder Singh says the Detroit carmaker remains
producer in Asia, after China.
buoyant about the country's long-term potential. Ditto for Nissan and
Toyota.
2) Global Platforms, Global Lifecycle
The apparent disconnect between the sales slowdown in India today
Almost all auto companies are looking to reduce the manufacturing
and auto MNCs' long-term ambitions has a good explanation. Over
complexity in their product portfolio. They are laying thrust on global
the past decade, the demand and hence the manufacturing landscape
platforms using the same base globally to churn out a range of
in the auto world has begun shifting from the developed to the
vehicles. For example, Volkswagen's Polo (a compact) and Vento (a
emerging world.
sedan) are based on the same platform. It is now also developing a
Here are five reasons why this shift is happening and what it means
for India:
sub-four metre Vento on the same platform specifically for India. It is
reportedly considering an MPV and a compact SUV on the same
platform.
1) The Rise of Asia
Increasingly the auto world is seeing a global convergence of the
According to estimates of Brooking Institution, a US public policy
research organisation, the US' and Europe's share of the world's
middle class today at around 50% will dip to 22% by 2030. In Asia, it
will more than double from 30% to 64% by then. This shift is already
product lifecycle. More and more auto firms are now doing global
launches of their products in different markets and also phasing them
out simultaneously. For example, Ford EcoSport will soon debut in
India as part of its global launch.
reflected in the automobile industry.
"As platforms become globalised, there is less pressure to locate
production close to any one market. We're seeing surprisingly strong
manufacturing centres developing in North America, particularly the
US and Mexico. Of course China, Korea, parts of Southeast Asia and
Europe will continue to be strong production hubs," says US-based
Jeremy Anwly, vicechairman of Edmunds.com, an auto advisory
portal.
3) From High Cost to Low Cost
It helps that production costs in most developed countries like the US,
Japan and most western European countries are sharply higher than
the emerging markets. Perhaps the only exception is Germany which
has maintained its manufacturing edge due to its relentless focus on
technology, its thriving manufacturing ecosystem and its focus on
high-end cars.
1
June, 2013
4) FTAs Shift Balance
Many countries are signing regional or bilateral free-trade agreements
(FTAs). The US has signed one with Mexico, India has signed with the
Southeast Asian countries. India's FTA with EU though has run into a
controversy. The US has signed FTAs with a range of countries,
including Mexico which is fast emerging as a car export hub in North
America. Turkey is also emerging as production hub, partly due to its
FTA with countries like Korea.
5) Convergence of Demand & Norms
At a macro level, there is some convergence of the kind of vehicles
that consumers in different markets need. Europebased Mark
Fulthorpe, senior manager, IHS Global, says environmental and
efficiency norms in different countries today are much closer than they
As a result, auto MNCs are shifting their production bases from high-
ever were in the past. This means companies have to align their cars
cost economies like the US and western Europe to low-cost countries
with policy norms that are in a much narrower band.
like China and India. Analysts estimate that producing cars in India
today may be 15-20% cheaper than in the US. In fact, there are many
Also, globally, there is a clear shift in consumers' preference for
countries like the Czech Republic and Argentina with no primary
smaller, compact and fuel-efficient vehicles, says Haig Stoddard, a
domestic demand which are emerging as low-cost export hubs for the
veteran auto analyst with US-based Ward's Auto. All this means that
regions.
auto MNCs have to deal with a far less heterogeneous policy
environment and consumer demand allowing them more room to pick
"Rather than setting up duplicate production bases, OEMs are
their production location.
increasingly seeking to gain efficiencies and scale by establishing a
production base in the most efficient place where they can minimise
cost and maximise revenue," says Beijing-based Bill Russo, senior
adviser, Booz & Company, a consultancy firm.
2
June, 2013
Why there may not be too many takers for new banks
Source: http://www.livemint.com/Opinion/bAMjyY32Rd8Murrz5BNszK/Why-there-may-not-be-too-many-takers-for-new-banks.html
Given the constraints and complex licensing norms, firms are
The list of aspirants at this point includes large conglomerates such as
wondering if they should enter the banking business
the Tatas, Birlas, Mahindras, Bajajs, the Videocon group and the
Reliance Group; non-banking financial companies such as Religare
Enterprises Ltd, L&T Financial Holdings Ltd, LIC Housing Finance
Ltd, Magma Fincorp Ltd, Shriram Transport Finance Co. Ltd, SREI
Infrastructure Finance Ltd; brokerages such as India Infoline Ltd and
Edelweiss Financial Services Ltd; microfinance institutions such as
Bandhan Financial Services Pvt. Ltd and Janalakshmi Financial
Services; and state-run India Post, Power Finance Corp. Ltd and
Rural Electrification Corp. Ltd.
All of them have existing assets and want to convert themselves into a
bank. And there lies the catch. The licensing norms say that the new
RBI norms do not allow a bank to have secured liability on its books. So, those banking aspirants who
banks must have 40% of the loan portfolio in the so-called priority
want to start business by transferring their assets and liabilities of existing business will need to seek a
sector, or small loans, as soon as they start operations. Besides, they
relaxation of the norm. Photo: Pradeep Gaur/Mint
need to maintain the statutory government bond holding—currently
Ousted Citigroup Inc. chief executive officer Vikram Pandit ’s return to
23% of deposits—and cash reserve ratio (CRR), currently 4%. CRR
banking is creating excitement in the Rs. 75 trillion Indian banking
refers to the portion of deposits that commercial banks need to keep
industry, but there may not be too many takers for permits because of
with the central bank. This means, if an entity has an asset book of,
regulatory reasons and some licensing norms that many companies
say, Rs.10,000 crore, it must have Rs.4,000 crore worth of small
say will come in the way of creating value. The Indian central bank is
loans. Besides, it needs to keep Rs.400 crore with RBI in the form of
set to open up the sector for a bunch of private entities as well as
CRR and invest Rs.2,300 crore in government bonds to fulfil the target
state undertakings a decade after it allowed two new banks to start
of statutory liquidity ratio or SLR.
business.
In the past, when the development financial institution, the erstwhile
Famed investment banker Nimesh Kampani’s financial services firm,
Industrial Development Bank of India, became a bank through a
JM Financial Ltd, is nominating Indian-born Pandit, 56, as non-
reverse merger with its banking subsidiary, RBI gave it seven years to
executive chairman of its proposed banking company. Pandit and his
achieve these targets, but it did not relax the norms when another
business partner Hari Aiyar, who had worked with him at Morgan
such institution, ICICI Bank Ltd, became a bank.
Stanley and Old Lane, the hedge fund that was sold to Citi when
Pandit joined the Citigroup, are making a strategic investment by
This time around, RBI is not willing to relax the norms as the objective
taking a 3% equity stake in JM Financial. Both will have the right to
behind opening up the sector is the so-called financial inclusion, or
purchase shares up to the amount prescribed by the Reserve Bank of
expansion of banking services. It is also insisting that one-fourth of the
India (RBI) in the proposed bank. Under the licensing norms, an entity
branch network of a new bank must be in unbanked pockets where
or an individual can buy less than 5% in a bank. On Thursday, at a
the population is less than 9,999.
stock exchange filing after market hours, JM Financial said it would
apply for a banking licence. On Friday, its stock rose 13.38%.
So, there is a clear disincentive to a group that has an existing loan
portfolio and wants to start banking. Even if RBI gives a few years to
Till recently, every man and his dog wanted to set up a bank as it
achieve the targets for priority sector loans and investment in
gives one status and access to cheap money, but many large
government bonds, for such banks the sole business in the first few
conglomerates are now holding brainstorming sessions on whether
years will be only giving small loans and buying government bonds.
it’s worth entering the banking business in Asia’s third largest
Or they will have to pay the penalty for not meeting the targets. So, it
economy where around 40% of the adult population still does not
will be difficult to make profits in initial years.
have access to banking. Indeed, the opportunity is enormous as the
expanding middle class in India has ambitions to buy houses and
And, by the time a bank starts making a profit, its promoters would
cars, and corporations see huge consumer demand in many pockets
have to pare their stakes. Going by the licensing norms, the proposed
of the economy, but regulatory requirements are making many
new bank will have to be listed within three years and the promoters’
aspirants rethink their strategy. And, at least some of them have
shareholding must come down to 40%. Within 10 years, it must be
started feeling that it’s just not worth entering the segment. Those who
pared to 20%, and by the 12th year 15%.
want to float a bank need to put in their applications by 1 July.
3
June, 2013
Within these stipulations, how would a promoter create value? Even
Similarly, what will they do with their bad loans? If they transfer such
though the initial capital requirement is Rs.500 crore, the serious
loans along with good loans—however small the bad loans may be—
aspirants will have to pump in more capital as the capital adequacy
the bank’s asset book will have a blot from Day 1, but if they do not
ratio for the new banks has been kept at 13%. For the existing banks,
transfer these, they will find it difficult to recover money, as unlike
it is 9%. This means, for every Rs.100 worth of loans, a new bank
banks, non-banking financial companies cannot move on the fast-
needs Rs.13 capital. In other words, their capability to leverage will be
track recovery lane under the Sarfaesi Act, or the Securitization and
less than the existing banks and they would need more capital if they
Reconsutruction of Financial Assets and Enforcement of Securities
want to expand their asset base. Besides, they would need to spend
Act, 2002.
money on technology, branches and employees.
All these complexities may prompt the aspirants, particularly the big
So, those who have an existing asset book would need to spend
business conglomerates, to explore new models while applying for
heavily to achieve the targets for priority sector loans and mandatory
bank licences. One could be an alliance with a microfinance firm as
government bond holding, and others who want start with a clean
that will help them achieve the priority loan and rural branch network
slate would need to make heavy investments but cannot reap the
targets.
harvest as they would need to divest and bring down their stakes. In
big conglomerates, I am told, other business divisions have been
Despite all issues, many of the non-banking financial companies need
making pitches to the senior management against getting into
to become banks as otherwise they may not survive. The first set of
banking, saying they can generate better returns if the money is
new banks that got licences in 1994 had taken away business from
invested in their businesses.
then staid public sector banks and foreign banks in urban areas in
India. The banks that will set shop now will attack the non-banking
On top of these, any corporation that enters banking also runs a big
financial companies to generate business.
reputation risk if anything goes wrong in the business of money. This
is not the case with other businesses. For instance, the Tata Finance
scandal has affected the group much more than, say, its investment in
Corus Group Plc turning sour or Ratan Tata’s battle with the four
satraps in the Tata empire—Russi Mody, Darbari Seth, Ajit Kerkar
and Nani Palkhivala—after he took over the mantle in the 1990s.
Then there are other technical issues. For instance, banks’ liabilities—
deposits—are unsecured, while the bulk of a non-banking financial
company’s liabilities such as loans from banks and money raised from
corporations and wealthy individuals through bonds are secured. RBI
norms do not allow a bank to have a secured liability on its books. So,
those banking aspirants who want to start business by transferring
their assets and liabilities of the existing business will need to seek a
relaxation of the norm from the regulator.
4
June, 2013
Making A Splash
earmarked
Source: http://business.outlookindia.com/article.aspx?285140
for
capacity
addition. VA Tech, with a
presence across the water
spectrum, is in a position to
take advantage of this. At
home,
the
competes
company
with
domestic
players such as Thermax,
Ion
Exchange
and
Hindustan Dorr Oliver, as
well as international rivals
such as Veolia, Suez and
Degremont. But it does have
“There has been some slowdown but we have managed to get our share of the pie" —Rajiv Mittal,
Managing director, VA Tech Wabag
a couple of advantages.
A strong balance sheet and cheap valuation seem to work in favour of
First, the takeover of its
water treatment major, VA Tech Wabag
parent
gave
access
to
In 1996, Rajiv Mittal left London and came to Chennai to set up the
VA
Tech
cutting
edge
technology, with over 100
Indian office of the company he worked for. Eight years later, when
the Indian operation was put on the block, Mittal and three executive
patents. “This is one of the clear differentiators,” agrees Mittal, the
directors of the company decided to make a bid. Management
managing director. Also, the company is present across the water
buyouts are still a rare occurrence in India — and buyouts of Indian
spectrum unlike, say, Thermax, Ion Exchange and Driplex, which
arms of MNCs almost unheard-of. But, in September 2005, with some
compete only in the industrial water segment, while Degremont and
help from ICICI Ventures, the quartet bought 75% of the company
Enviro Control are present mainly in the waste water segment. That’s
they worked for, paying Rs 60 crore. A year after Mittal decided to try
helped the company increase the contribution to total revenue from
his hand at the unthinkable — he made a bid to acquire the parent
Indian business from 58% to 66%, between FY09 and FY12.
company in Austria. Again helped by the PE firm, he succeeded and
the deal was completed in 2007.
On the international platform, its pedigree has helped the company
win projects in over 20 countries across North Africa, Europe and Asia
Just what company are we talking about? It’s the Chennai-
where it can play the low-cost advantage card (see: World wide wet).
headquartered VA Tech Wabag, a Rs 1,400-crore tech firm that’s
VA Tech consciously follows an asset-light model, focusing on design
carving a niche for itself in the water treatment business, offering
and engineering in the projects it undertakes while outsourcing the
solutions for sewage treatment, industrial waste water treatment,
majority of its construction jobs. About 81% of its business comes
drinking water treatment, desalination and water reuse, to clients
from engineering-procurement-construction (EPC) services, while
across government and industry. It also has ambitions of establishing
operations and maintenance (O&M) accounts for the balance.
itself as one of the top three players globally in the water business
(currently, VA Tech is in the top eight). The company has given a
guidance of growing revenue to €1 billion (Rs 7,100 crore) by 2017 —
a four-fold increase in as many years. Of this, nearly half will come
from the Indian market, 25% from overseas business and the rest
through acquisitions. Can it achieve all that? That’s the billion-euro
question.
At home and abroad
According to EverythingAboutWater, the total Indian water market is
estimated at about $15 billion, while the water and wastewater
treatment market size is about $420 million; both are growing at 18%
a year. Another report, this one by the Water Resource Group,
A salt-free diet
estimates that about half the country’s water demand will go unmet by
2030 if existing conditions continue. Nearly 75% of India’s population
lives in water-stressed areas. So, it comes as no surprise that the
Indian government is focusing on improving water infrastructure
through its landmark schemes under the Jawaharlal Nehru National
Urban Renewal Mission (JNNURM), where 20% of the total spend is
Now, the biggest opportunity, believes the management, lies in
desalination. By 2018, VA Tech estimates, desalination capacity in
India will be around 5,350 million litres a day (mld) having grown at
30% a year from the current 900 mld. It recently completed its biggest
desalination project till date, the Rs 1,100-crore Nemmeli plant in
5
June, 2013
Chennai, which will supply 100 mld every day to Chennai residents,
taking care of 10-12% of the city’s requirement. While VA Tech has
earned Rs 530 crore for the design and construction of the project, it
parent
Delays are a concern but they are also
company gave VA Tech access
all too common in the project business.
to cutting edge technology, with
Where projects involving the government
The
takeover
of
more than 100 patents
also has an O&M contract for the plant, which will generate another
Rs 500 crore over a seven-year period.
its
may at times run into hurdles in getting
approvals or funds released, even natural phenomena such as a
heavy monsoon can stop work for up to a couple of months at a time.
Although there were some delays in the Nemmeli project, the
In some cases, VA Tech has itself funded the project to ensure timely
company has been able to use it to springboard its way to more
completion — the Nemmeli project is a case in point, although now
projects. In 2010, VA Tech entered into an alliance with Sumitomo
some 70% of the design and construction cost has been paid to the
Corporation to compete for large water infrastructure projects. The
company by the Tamil Nadu government. “Delays lead to cost
consortium won a $350 million project to build a 192 mld desalination
escalation, resulting in lower margins. Our customers have the
plant in Muscat, Oman. VA Tech’s share of the project, which is likely
willingness to pay but, at times, may not have the ability. So, we put in
to be completed in the next two years, will be around Rs 400 crore.
our cash to complete the projects,” explains Mittal.
Recently, the Tamil Nadu government also announced two more
This is where the company’s strong balance sheet and cash reserves
desalination plants. While a 150 mld plant will come up next to the
of about Rs 350 crore come to its aid. “Unlike many EPC companies
existing one at Nemmeli, another will be set up at Pattipulam near
that come with stressed balance sheets, VA Tech’s asset light
Chennai with a capacity of 200 mld that can be increased to 400 mld.
business model ensures that the company remains cash rich and that
Analysts believe VA Tech will be at an advantage when bidding opens
works to its advantage,” points out Nitin Bhasin, infrastructure analyst
on the projects, since it has already built the largest plant in the
at Ambit Capital.
country. In fact, the company is likely to be one of the major
beneficiaries of even the central government’s increasing investments
VA Tech is also becoming
in water supply and waste water treatment (see: The fourth wave).
careful in the kind of projects it
“The sector is so attractive and it is up to us and our ability to harness
chooses.
the growth opportunities,” says Mittal.
delay in execution as well as
Since
chances
of
payment are higher in municipal
and state government projects,
it prefers multi-laterally funded
and
central
government
initiatives. “The company works
in a space where most of the
payments
government
are
or
made
the
government
entities and dealing with them
can be very challenging. But it has done well on that front,” praises
Jerry Rao, founder of Mphasis and a director on the VA Tech board.
Indeed, as there has been some lag in government spending in India,
Order, order
the contribution of the domestic industrial business is now about 4550% of revenue, while the government business contributes 50-55%
At the end of December 2012, VA Tech had an impressive order book
compared with earlier when government business contributed about
of Rs 4,269 crore, but the slowdown has had an impact, with orders
75%.
taking longer to come by. “There has been some slowdown but we
have managed to get our share of the pie. We may have had to work
Meanwhile, when there has been a slowdown of orders in some of VA
harder for it but we will achieve the order book growth we had
Tech’s otherwise-strong markets, such as Libya and Algeria, due to
promised for FY13,” says Mittal confidently. At the beginning of FY13,
political unrest in 2011, the company has turned its focus to newer
the company has indicated an order book growth of 20% for FY13. It
markets such as Turkey, Sri Lanka and West Asia. “Having a diverse
is looking at a similar growth for FY14. The company is also confident
presence across countries works in its favour because when one
of achieving its full-year revenue guidance of Rs 1,650-1,700 crore
economy is a facing a downturn, you can focus on other markets to
with operating margins of 9-9.5%. That’s lower than the industry
generate growth,” says Sumit Chandwani, managing partner, Arth
average of 10-10.5% and in defence, the company points to high-cost
Capital. Chandwani was with ICICI Ventures when it invested in VA
overseas subsidiaries, which it says it has since turned around. Now,
Tech and played an instrumental role in both its takeovers. He
VA Tech is looking to build up volumes for margins to improve further.
continues as an independent director on the company’s board.
Besides, Mittal points out, margins on the standalone business are at
12.5-13%.
6
June, 2013
Over a five-year period (2007-2012), the company’s revenues have
grown by an average 34% and profits have grown by 61%. During the
nine months ended December 2012, revenues grew by 20% to Rs
925.5 crore and profits more than doubled to Rs 29.6 crore. Ambit’s
Bhasin feels that, given the growth trajectory of the company, its
current valuations are attractive. “The company’s revenue growth
trajectory from mid-teens is likely to shift higher to 20% during the next
two years. Given that the stock trades at 11-12x its FY14 earnings, we
think it is very attractive,” he adds. Over the past one year (as April
22, 2013), VA Tech’s stock has gained 16%, outperforming the
Sensex during that period. The company is also well-poised to gain
from the increased spending in water infrastructure, sewage and
waste water management in emerging markets. With Mittal eyeing €1
billion in revenues in the next four to five years, most analysts are
bullish on the stock on account of the strong management team,
increasing investments in the sector and execution track record of the
company. Bhasin has a price target of Rs 750 on the stock, which
currently trades at Rs 492. With the odds in its favour, it definitely
seems worth a bet.
7
June, 2013
The Milky Way
Source: http://business.outlookindia.com/article.aspx?285124
de la crème). And even as growth in Danone’s home region of Europe
is weakening, Euromonitor predicts that 95% of the global dairy
How Danone is differentiating itself in the Indian dairy market
market’s growth from 2011 to 2016 will come from emerging markets.
So, India is clearly important to the €21-billion foods major — in fact, it
has a presence in the country across all four of its business streams,
from water and fresh dairy products, to baby nutrition and medical
nutrition.
But, at the same time, Danone is clearly a latecomer to the Indian
dairy market. Amul, Mother Dairy, Nestlé and Britannia have had
decades to establish themselves — they have formidable distribution
muscle and their brands are deeply entrenched across the length and
breadth of the country. New Zealand’s Fonterra has just made its solo
entry in India after breaking off its joint venture with Danone’s
erstwhile Indian partner, Britannia. Then, ITC is planning a foray into
dairy, while Reliance Retail has Reliance Dairy Foods. There is also a
multitude of regional brands that are equally strong in their home
territories. What is Danone doing to stand out in this crowd?
“I don’t really care much about competition. After all, we are a much smaller player than Amul or Nestlé"
—Jochen Ebert, MD, Danone Foods & Beverages India
Devendra Shah was at his dairy plant in early 2007 when he was
informed that an executive from Danone India wanted to speak with
him. Intrigued at what a competitor could possibly want, Shah —
chairman of the Rs 880-crore Parag Milk Foods — answered the
phone and was taken aback when asked whether senior officials from
the world’s biggest yogurt maker could call on him. He said yes, and a
couple of days later, two top Danone executives made the trip to
Manchar, 60 km from Pune. They spent the better part of the day at
the facility that houses India’s largest cow farm and Asia’s biggest
cheese factory but their focus wasn’t on milk or cheese. “The
conversation was about what Danone could do with the yogurt market
in India,” recalls Shah.
If he was surprised at being asked for advice from a rival, Shah saw
A set market
that as no reason to hold back, especially since his brands (Go and
Gowardhan) were yet to launch flavoured yogurt. “I told them it was
Jochen Ebert first came to India from Saudi Arabia in 2006 and stayed
important to sell yogurt the way they would sell ice cream — the
on for three years. He returned in early 2012 as managing director of
consumer should have to use a spoon.” Unlike in Europe, where
Danone India but in two stints here, hasn’t really picked up the local
yogurt drinks are immensely popular, in India, points out Shah, “yogurt
language. There’s one four-letter word in Hindi that he knows really
needs to be scooped with a spoon”.
well, though: dahi. Indians may distinguish between dahi and yogurt
(the former being the plain variety we make at home, the latter bought
It’s not known whether the Danone executives took
Shah’s word to heart but when the French company
launched its yogurt in India, it was in a cup, to be
eaten with a spoon. The other, drinkable yogurtbased products — lassi and smoothies — followed
“The Kashmir to
only later.
Kanyakumari
is
In the three years since its launch, Danone India
important only if
has expanded its portfolio pretty rapidly, in keeping
footprint
you have a mass
the
with the way most multinationals in India do
dairy segment"—
business. The company now has five products (with
Devendra
multiple flavours) in the milk and yogurt space, and
product
in
Shah,
Chairman, Parag
Milk Foods
from stores in small plastic tubs, in flavours such as banana,
strawberry and vanilla), but for Ebert, the dahi universe includes all
forms of fermented milk — curd, yogurt, lassi, chaas and smoothies.
“We are a yogurt company and we want to increase the per capita
consumption of dahi,” he declares. Right now, per capita consumption
in India is a meagre 2.3 kg per year, of which just 300 gm is of the
packaged, store-purchased variety. Back in Danone’s home, the
French spoon up 25 kg of yogurt every year. The numbers across the
rest of Europe are equally high: 23 kg in Holland and 24 kg in
Germany. “If per capita consumption increases to even 8 kg here, you
are talking of a lot of business to a lot of people,” Ebert grins.
operates in a Rs 2,513.5-crore segment of the Rs
33,200 crore organised dairy market (see: Crème
8
June, 2013
Certainly, as urban lifestyles change rapidly, there’s
a growing acceptance of store-bought curd. Indeed,
Danone estimates that although the average per
capita of packaged yogurt is 300 gm, it is skewed
heavily toward urban India, where the figure is likely
to be closer to 1 kg (and near zero in rural India).
“If Danone localises
The number of working women, singletons and
everything, it won’t
students staying away from home is rising in big
cities, most of whom, points out Ebert, have
reasonably high disposable incomes and are short
have
any
advantage
over
competitors
such
as
Amul"—Pankaj
Ghemawat,
on time. For them, the convenience of prepared
Professor of global
yogurt available on demand is an unbeatable
strategy,
proposition. “The 300 million urban population,
IESE
business school
which includes working women and university
students is my market,” says Ebert. The biggest plus — consumption
Premium and proud of it
of dahi is a habit ingrained from childhood in most Indians, so it
becomes a necessary part of the daily diet.
A fan of “indovation” — a portmanteau word for innovation for the
Indian market — Danone has introduced products developed
According to market estimates, some 100 tonnes of packaged,
especially to cater to local tastes. These include lassi and chaas.
branded curd is sold across India every day. Danone’s share of that is
“Dairy is an extremely local business. The problem of spoilage aside,
still minuscule — about 5% — although packaged curd is believed to
tastes vary widely across countries and sometimes within countries,
account for 70% of the company’s Rs 100-crore turnover. Established
as well,” points out Pankaj Ghemawat, professor of global strategy at
players such as Mother Dairy, Amul and Nestlé take away the lion’s
IESE Business School, Barcelona. He adds a caveat: “The challenge
share of the market (see: A small serving). These brands are also
is coming up with smart combinations of global and local since, if
present across the spectrum of dairy products in India, which makes it
Danone localises everything, it won’t have any advantage over
even tougher for Danone to carve out a niche for itself. “I don’t really
competitors such as Amul.”
care much about competition,” says Ebert. “After all, we are a much
But even though it’s launched popular desi products
smaller player than Amul or Nestlé.” He cites a recent instance when
just like its rivals, the company is clearly not even
a colleague told him that Nestlé had dropped the price of its 400 gm
trying to take on the big players at their own game,
dahi offering, from Rs 45 to Rs 40. “I heard him out and asked what
which would involve a big basket of products and
the next topic of discussion was,” Ebert adds. “Honestly, we are here
to launch better products and need to focus on that.”
Right now, though, new products aren’t on the agenda — no butter,
“The moment you
Danone is playing the premium card, differentiating
India approach, you
itself on the quality platform. Its products are also
cannot
control
cheese or paneer, the staples of any dairy company in India (although
everything
in
the company does sell ultrahigh temperature, or UHT, milk in Tetrapak
regions"—RS
cartons). Ebert states quite firmly that Danone is a company that
presence at nearly every kirana store. Instead,
want to have a pan-
Sodhi,
all
Managing
director, GCMMF
priced higher than the rest of the market: Danone’s
lassi, for instance, sells at Rs 20 for 150 gm, where
Ebert estimates local dairies would sell the same
to be as quick in launching new products as we have since we
quantity at Rs 15. “We are convinced quality
products will find takers,” he says emphatically. That’s another reason
entered the market in 2010,” he says. Danone is also being
the company is in no hurry to extend its presence nation-wide — in
conservative in extending its presence across the country. So far, the
fact, even in the cities where it operates, it sticks mainly to modern
company has established itself in only five big cities — Delhi, Mumbai,
retailers where more affluent, quality-seeking consumers are likely to
Bengaluru, Hyderabad and Pune — and doesn’t plan on adding a
shop.
sixth in the near future. “This is a complex market,” defends Ebert.
Parag Milk Foods’ Shah says a pan-India presence isn’t necessary
primarily makes fermented products. “In any case, we did not expect
given Danone’s positioning. “The Kashmir to Kanyakumari footprint is
important only if you have a mass product in the dairy segment,” he
points out. At the same time, mass is certainly easier to handle than
premium, as Shah knows first-hand. Two years ago, Parag launched
a premium milk brand, Pride of Cows, priced at Rs 75 a litre (regular
milk sells for around Rs 30 a litre, while UHT milk costs about Rs 50
per 1 litre carton). Not only is the milk sourced from a different herd
(3,500 Holstein Freisian cows), the brand is also not handled by the
9
June, 2013
company’s regular distribution network — it moves directly from the
Parag’s Shah uses two distribution models: the
farm to depots in Mumbai and Pune before being delivered to the
conventional
consumer’s doorstep. “It is not an easy model to execute, though it is
and producer-own distribution system (comprising
now obvious to us that the consumer is willing to pay a premium for
trucks, tempos, vans and motorcycles)-end consumer.
quality. In fact, we think it is far tougher to satisfy the rich consumer in
India today,” Shah adds.
Raising the bar
“State cooperatives
The latter is used for the premium Pride of Cows
have
done
brand, where Shah says he cannot take the risk of the
much in the value-
product getting spoiled or not reaching on time to the
not
added
product
segment.
This
homes of his limited but important clients. “To have its
big
own distribution network, a brand needs premium
For its part, Danone is going the extra mile to ensure it meets
gives
customers’ — and its own — quality standards. The company has
opportunity to new
created its own distributor model, which is quite different from the
usual producer-distributor-retailer network that most dairy companies
producer-wholesaler-distributor-retailer
a
entrants"—Girish
pricing as well as adequate volumes. We can’t do that
Nadkarni, Partner,
for our mass brands because it is too expensive,” he
IDFC Private Equity
says. “The USP of having your own distribution is
use. Here’s how it works. Most of Danone’s production is outsourced.
Milk — all versions, including slim and UHT — and packaged curd are
manufactured at the Schreiber Dynamix Dairy facility at Baramati,
Maharashtra; fresh products such as lassi and flavoured yogurt are
made at a company-owned factory at Rai, Haryana.
clean and fresh products and consumers will willingly pay a premium
for that.”
Still, when consumers aren’t even aware of the extra effort and
expenditure in ensuring freshness, does it translate into market
The cold chain, though, is entirely owned and
Danone’s milk
share? Danone insists that the company’s promise is of quality and
operated by the company. “Irrespective of where
moves directly from
that’s what is providing. Retailers, meanwhile, say that the branded
the products are made, we use our own cold
depots before
chillers do help sway consumers towards the brand since it makes the
chain
being delivered to
brand top of mind when they’re in the store — the jo dikhta hai, woh
and
distribution,”
points
out
Ebert.
Danone’s fresh products leave the factory in
the factory to its
the consumer
bikta hai principle of retail. It helps that Danone also offers higher
trucks owned by the company to be stored at its own warehouses
margins than its rivals. According to a supermarket owner in a
(one in each city where the company sells). “The trucks maintain
Mumbai suburb, the margins on Danone dahi are Rs 9-10 on an MRP
temperature of 4-8 degrees Celsius to ensure quality. From the
of Rs 45. Nestlé offers Rs 7-8 on a retail price of Rs 40, while Amul
warehouse, our trucks move the products to retail outlets where we
provides just Rs 2-3 margins on an MRP of Rs 35. “Our move has
have our coolers,” he adds. The fleet of 70-100 trucks makes up to
paid off,” reiterates Ebert. “We are the largest sellers of dahi in Pune
four trips a week to retailers in the five cities. “Our logistics costs must
and the second or third-largest in Mumbai.”
be twice as high as competition,” Ebert guesses.
Interestingly, where Danone is spending hand over fist on its
Certainly, the costs seem prohibitive. Ebert declines to share numbers
distribution network, it’s following a need-based approach to shelling
but market sources say each chiller costs Danone Rs 10,000-12,000
out cash. Which means the company is perfectly happy to do away
— and the company is said to have distributed at least 3,500 across
with some things other companies in the FMCG space may consider
India. In addition, the company pays dealers up to Rs 500 every
hygiene if it doesn’t see the need. Earlier this month, the company
month to house the refrigerator. Then, the running cost of each truck
spent some serious money on advertising, signing on Karisma Kapoor
is a staggering Rs 80,000 per month.
as brand ambassador for a campaign with a new tagline, “Only Good
That’s not how other companies operate. Their products are delivered
in simple, distributors’ tempos. Amul uses only third-party distributors,
says RS Sodhi, managing director of the Gujarat Cooperative Milk
Marketing Federation (GCMMF), which owns the Amul brand. “We
work on wafer-thin margins of 3-5% net in fresh products. If we had
our own distribution network, costs will go out of control,” Sodhi points
Gets In”. But here’s the shocker — Danone didn’t hire an agency for
the creatives — its in-house marketing team and a production house,
Illuminations Productions, produced the film by themselves. “We knew
what we wanted to show in the ad and just shot it,” says Ebert.
Upbeat about value-adds
out. The second and more important reason is that an owned
Will
distribution will work if a product is available only in a few cities. “The
strategy and focus on high-end
moment you want to have a pan-India approach, you cannot control
products rather than just milk
everything in all regions. In that context, it makes sense for us to
(which makes up 77% of the
outsource distribution.”
Danone’s
premium-only
market) work? “Even today, 70%
of milk is sold loose and we see
a huge, untapped opportunity to
convert loose milk into packaged
milk,” says Kandarp Singh, managing director, South Asia, Tetra Pak.
Still, dairy companies point out that it’s better to be an “anything
10
June, 2013
except milk” rather than an “only milk” player, given the low net
operations there, and that project was meant to be the foundation for
margins in the business. “At best, polypack milk will offer you 2-3% net
what was planned in India.
margins and it will be difficult for any player to remain in only that
segment,” says Sodhi. The other challenge in the business is ensuring
In October 2011, Danone announced the creation of a
a good backward integration model. “Issues such as milk procurement
separate business unit (Danone BoP India) that would
are tricky. It is easier for a cooperative like us since profit is not the
create products aimed at that section and launched its
objective unlike the case of the private players,” he points out.
first product, Fundooz, at the time. A food brand for
offers
If that’s not a worry for Danone, given that it
higher margins on
outsources production, the company’s product
Danone
its
products
Modern retail has
school children, the product was priced at Rs 5 for 70
allowed
large
gm.
players
to
successfully sell
compared
with
portfolio too may be an inspired choice. Parag’s
what
and
Shah concedes that being in the yogurt business
flavoured yogurt
executing a BoP model well, as Ebert points out, lies
(he has products like packaged curd and fruit
and
in bringing in volumes quickly. To do that, though, you
Amul
Nestlé offer
products such as
packaged
curd" —Kishore
yogurt) is a good idea. “Margins are a healthy 12% and it is certainly a
lucrative market to be in,” he adds.
Biyani,
CEO,
Future Group
It was a Catch-22 situation. The challenge in
need to advertise, which will lead to increased costs
and, ultimately, higher prices. “We soon realised that
the category was not well-established like confectionery, which is what
Girish Nadkarni, partner, IDFC Private Equity, agrees that the big
opportunity lies in the value-added segment, which includes cheese,
flavoured yogurt, dairy-based drinks and so on. “A category like
cheese has been growing by 14% and is driven by high demand from
quick-service restaurants such as Pizza Hut,” he points out. IDFC
Private Equity, in September last year, invested Rs 155 crore in Parag
Milk Foods for an estimated 20% stake. The real opportunity for the
children really like,” points out Ebert. The Tetrapak version of Fundooz,
manufactured at the Rai plant and priced at Rs 25, is still around,
although the BoP version has been withdrawn. Ebert says he and
Danone have learnt a valuable lesson from the experience: first
establish the mother brand before launching subsidiary brands. “For
now, the BoP plan in India is on the backburner. The focus is very
much on dahi,” he says.
private sector, says Nadkarni, comes from the fact that the sector is
mostly unorganised with Amul being the largest player. “There is not
The other project that bombed was Creamix, a stirred yogurt positioned
very much that the state cooperatives have managed to do in the
as a dessert snack. Launched in September 2011, it was priced at Rs
value-added product segment and this is the big opportunity for new
20 for 100 gm. “We thought the Indian consumer would like it.
entrants,” he says.
Obviously, it was a mistake,” confesses Ebert. The potential in the
stirred yogurt market came from the fact that at least half the market
Large retailers, too, are upbeat about the market for value-added
products in the dairy space, especially yogurt. “The fact is that this
category did not exist five years ago simply because there were very
few chillers available. Modern retail has allowed large players to
successfully sell products such as flavoured yogurt and packaged
curd,” says Future Group CEO, Kishore Biyani, who owns the Big
Bazaar chain of supermarkets. Biyani is convinced that modern retail
will continue to open up new opportunities for companies in the
packaged foods space. “Companies that can sell hygienic products will
thrive and consumers will be willing to pay for it,” he says. More
worldwide was not set dahi but stirred. “It was not a product the
consumer was expecting and we were a little too early with it,” he says.
Creamix has retreated from the field, perhaps to return to battle some
other day.
For now Danone is focusing on the existing
Danone spends
product
only when needed.
portfolio,
which
Ebert
considers
a
Instead of hiring an
formidable arsenal. Indeed, even in its group
outside agency, it
companies in India, Danone doesn’t do too many
made its own ad
new launches, preferring to sweat the ones already
film
importantly, Biyani sees the move to packaged foods as a game
in the market. Yakult is perhaps an extreme example. Yakult Danone,
changer. “Once you [the customer] adopt this category, you will never
a 50:50 JV between Danone and Yakult Honsha of Japan, has just one
go back to the traditional way of preparing the food. This is true
product — probiotic health drink Yakult, which was launched in India in
whether you buy curd or garlic paste,” he declares.
2007. But in a very niche market (Amul has the only other product in
Set, not stirred
India), Yakult is the leader. Similarly, Nutricia Baby Nutrition will
continue working with the existing brands in its portfolio — Farex and
It is not as if Danone’s run in India has been a cakewalk. Far from it.
Protinex, among others —
And the troubles weren’t only about the company’s history of bad blood
phenomenon of fresh milk products takes off exponentially at one point
with the Wadias (see: Danone in India). For a company that’s just three
in time in any market. I don’t know how long that will take in India but
years old, Danone India has already had its misses. The big one is
we will do all we can to make that happen,” he says. Interestingly, he
related to its interest in the base of the pyramid. The experience in
speaks of how yogurt consumption has taken off in a big way in a large
Bangladesh with Grameen Bank was a trigger to try something similar
market like the US. “Per capita consumption was 5.6 kg five years ago
in India. There, the French major launched Grameen Danone, a
and is almost 10 kg now. There is no reason why something similar
community-based business model that would offer affordable nutrition
can’t happen in India,” thinks Ebert.
for
the foreseeable future. “The
to malnourished children. Incidentally, it was Ebert who oversaw the
11
June, 2013
Unilever's Bargain Offer: Should You Hold On or Tender Your Shares?
Source: http://forbesindia.com/article/boardroom/unilevers-bargain-offer-should-you-hold-on-or-tender-your-shares/35289/1
The consumer packaged goods giant has launched an open offer to
Yet, whether this decisive shift in the balance of power towards
buy back shares of HUL. Should investors rejoice?
emerging markets translates into rich pickings for Indian investors is
far from clear. For instance, would Damani be better off staying
On April 30, Ramesh Damani was in
invested in Hindustan Unilever? Or should he tender in his shares and
for a pleasant surprise. The value of
seek to earn higher returns from a clutch of other consumer stocks
a substantial holding in his portfolio,
that may not quite have the sheen or pedigree of a HUL stock but
Hindustan
have generated consistently higher returns? We’ll get to that in a bit.
Unilever
(HUL),
had
overnight zoomed 20 percent on the
But first, what made Polman craft his open offer in the first place?
back of the news that Unilever was
launching an open offer to buy back
The India Logic
HUL shares. “I was jubilant,” says
It’s not hard to see why he took this bold call. When he took over at
Damani, a successful stock market
Unilever in 2009, Polman had laid out an ambitious goal—to double
investor. “There’s no way I’ll be
revenues. While he’s not set a timeframe, Polman has emphasised
surrendering my shares at these
that it wasn’t the €80 billion number in itself that was important, but
prices,” he says.
inculcating a mindset of growth that was crucial to the company.
Unilever’s global boss Paul
Polman wants to be part of the
In the last three years, Unilever has made rapid strides in getting
next phase of India’s growth story
there. Polman has managed to add €10 billion to take the topline to
Damani had every reason to be happy. He’d long argued that the
world over, consumer businesses were among the best to own as
investors looked for stable growth, good cash flows and, in time, a
high price to earnings multiple (PE). Now, he’d received an
endorsement from the strongest possible source: Paul Polman, the
global boss of the €50 billion consumer packaged goods giant
Unilever, the world’s second biggest consumer packaged goods firm.
While both Damani and Polman may have different reasons for their
bullishness, the net result is the same—consumer businesses in India
are extremely valuable. In the last five years, the BSE FMCG index
has returned 242 percent, the highest among any index.
€50 billion in the last three years. And a bulk of that growth came from
emerging markets. While mature markets like the US and Europe
have slowed, Unilever’s subsidiaries in places like India, Indonesia
and Nigeria have been firing on all cylinders. Profits growth at HUL,
for instance, has increased to 11.4 percent a year in the last five
years, versus 5.2 a year in the last decade.
But there’s one big hole in Unilever’s portfolio: China. Here, Unilever
has some catching up to do. Analysts estimate that P&G is eight times
larger than Unilever (both companies do not break out individual
country sales). Polman realises that bridging the gap in China is not
going to be easy. Instead, according to a chief investment officer at a
leading local fund house who prefers to remain anonymous, the open
Polman, who sees emerging markets (they bring in 55 percent of
offer may be a signal that Polman may have decided to instead hitch
revenue) as the next big lever of Unilever’s growth story, is investing
a ride with the Indian growth story.
big in the India growth story. After HUL hit its stride in the last four
years, its parent company believes that this is an opportune time to
invest in the next phase of growth in India.
“From Unilever’s perspective, given their low cost of capital and long
time horizon, much longer than even for long-term investors, a 2.6
percent return on capital in euro terms that would grow further over
At $5.4 billion (Rs 29,220 crore), this ranks as the largest open offer
the years would make sense,” says Bharat Shah, executive director at
for an Indian company by its global parent. Simply put, HUL will pay
ASK Group.
shareholders Rs 600 a share for every share tendered—a 20.3
percent premium. In November, GSK Consumer had spent Rs 5,221
crore to buy back shares in its Indian subsidiary. With strong growth in
the Indian consumer market, analysts at IDFC expect subsidiaries of
Nestle, P&G Hygiene and Colgate Palmolive to follow suit.
That’s why Polman’s open offer holds an interesting mirror to the
Indian growth story. On the one hand, the fact that global firms like
Unilever see higher potential for growth and earnings in markets like
India, compared to their home markets in Europe and US, is beyond
doubt. This current surge in confidence comes at a time when
simmering doubts about the inherent strengths of developing and
As organised retail ups its pie in India over the next decade, the ensuing battle for margins between
emerging markets, particularly in the last two years, have cast a pall of
retailers and consumer companies will only increase
gloom over the broader investment climate.
12
June, 2013
More importantly, in buying into the Indian subsidiary, Polman is
Over the course of the last decade, HUL has also become much more
getting a higher return on capital than his cost of borrowing. With cash
closely aligned with its global parent. Most important functions like
reserves of €3 billion, Unilever would have to borrow very little to pay
research and development, human resources and so on are now
for the additional stake in HUL. Analysts say its borrowing rate is likely
shared. Company insiders say there is a far greater cross pollination
to be 1 percent at most. HUL’s earnings per share for FY13 was Rs
of ideas between India and other subsidiaries. In January, HUL’s
17.6. At a purchase price of Rs 600 a share, Unilever stands to make
board voted to up royalty payments to Unilever from the present 1.4
2.6 percent a year. And with profit likely to grow every year, the return
percent to 3.15 percent by 2017, signalling another important intention
is only likely to increase. “If one takes a long-term thirty-year view,
to align more closely. And lastly, the company is working on an
then it is a good deployment of their cash,” says Rajeev Thakkar,
ambitious plan to treble its rural direct distribution reach. With this,
chief executive at Parag Parikh Financial Advisory Services Ltd.
HUL has taken an important step to position itself for faster revenue
Not everyone is equally supportive of Polman’s decision. An analysis
growth in the years to come, say analysts. With a strong long-term
published by Reuters Breakingviews says Polman, who declined to
outlook, it’s no surprise that Polman has chosen to make this bet.
speak to Forbes India, could have spent $4.7 billion to buy back 110
The Next Decade
million of its own shares and boost its earnings more, at least in the
While there’s a strong argument for Unilever to up its stake, fund
short run, than the HUL buyback would.
managers argue that there is an equally strong logic for minority
But Polman is not one to take a
investors to surrender their stock. On the face of it, that might seem
short-term view. Soon after he
like a piquant situation. Surely what’s good for Unilever is good for the
took over in 2009, he refused to
minority investor? Apparently not, say analysts.
issue earnings guidance, saying
For starters, HUL is likely to see a margin squeeze in the years to
the
thinking
come. As organised retail ups its pie in India from 6 percent at present
distracted the company from
to 12-15 percent over the next decade, the ensuing battle for margins
focusing on long-term profitable
between retailers and consumer companies will only increase. Add to
growth. He’s also focussed not
that competition from private labels and the picture only gets worse. In
only on topline and bottom line
developed markets, both P&G and Unilever have had bruising battles
growth but also on volume
with the likes of Walmart and Tesco. There’s little to suggest that this
growth, which he argues is a
phenomenon will reduce the pricing power of consumer packaged
key metric of the health of a
goods firms.
short-term
business. In contrast to buying
Unilever
stock,
the
HUL
buyback is expected to add no
more than a few percentage
points to Unilever’s earnings.
Second, consumer goods companies in India will have to brace
themselves for market share battles. In 2009, HUL and P&G sparred
on detergents and Thakkar (of Parag Parikh Financial Advisory
Services) says there is no reason why such skirmishes couldn’t
happen again. Colgate Palmolive has shown itself to be a worthy
For HUL, the global CEO’s
competitor
confidence might be a shot in
conglomerates have also upped their game in the past few years and
the arm
a period of
are now formidable competitors. “The barriers to entry in this space
painfully slow growth in the last
are very low,” says a prominent fund manager who requested
decade, when both revenue
anonymity.
after
in
the
toothpaste
space.
Home-grown
Indian
growth and profit growth slowed
between 2001 and 2007. Its
stock price stagnated at the
early Rs 200 levels. It’s only
after April 2008, when Nitin
Paranjpe took over as CEO,
that the company has resumed
Third, as the competitive intensity in the Indian market increases,
companies are being made to work harder to make their products
noticed by Indian consumers. Advertising and promotion expenses
are rising, further crimping margins. Since 2007, advertising spends
for HUL as a percentage of sales have gone up from 10.6 percent to
12.5 percent in 2012.
its growth trajectory. So, longterm holders of the stock have seen their shares appreciate by 9.4
percent annually, while those who entered five years ago have seen
them rise by 13.5 percent annually.
13
June, 2013
Fourth, there’s the spectre of
If an investor’s time horizon is under five years, they’d advise their
high commodity prices. The
clients to sell. They declined to be named as they are not authorised
last decade has seen a
to discuss specific stocks.
commodity super cycle with
What if you hold out?
crude and palm oil staying at
peaks for the last four years.
Still,
High
prices
investors who plan to hold
drove down gross margins at
out. LIC, which has a 3.13
HUL from 51 percent in 2010
percent stake in HUL, does
to
not plan to surrender its
47
commodity
percent
according
to
in
2012,
there
shares.
Morningstar.
are
According
some
to
an
Palm oil prices have eased
article in Business Standard,
in the last six months, but it’s
an
anybody’s guess which way
company felt the HUL stock
they’ll go in the next decade.
would rise from its current
LIC
official
levels, and
said
the
the premium
While there is nothing to suggest that these same competitive
offered by Unilever wasn’t
pressures won’t apply to other consumer goods companies, HUL
attractive enough. Domestic
being the largest could suffer greater damage. At some point, its sheer
size could start to weigh it down and make it harder for it to grow. Also,
smaller competitors would begin to nibble away at the margins.
Regional brands have in the past given the company a run for its
institutions and mutual funds are expecting about Rs 1,000 a share.
They say that as they are long-term investors, they would not disinvest
their shares in the open offer.
money—Wheel two decades ago and more lately Ghadi and
However, even for the Glaxo open offer, financial institutions like LIC
Cavinkare.
initially said they would not sell their shares, but later changed their
So what does the minority shareholder do?
The answer would depend on whether you believe the Indian market
offers relatively better opportunities for wealth creation. According to
Sanjoy Bhattacharyya, managing partner at Fortuna Capital and a
Forbes India columnist, there are indeed other stocks that an investor
can put money in to generate a higher return.
First, let’s see how much investors can make, if they stick with HUL for
the next decade, a reasonable time horizon for a long-term investor. At
present, HUL has earnings per share of Rs 17.5. Over the last five
years, the company has grown profits by 11.4 percent. Now, let’s
mind. So whether such posturing gives way to pragmatism in this case
remains to be seen.
It’s also unlikely that enough individual shareholders will surrender
their stock for the company to get to the 75 percent mark. HUL has so
far maintained that it does not plan to delist.
Some of this behaviour may be partly linked to emotion, rather than
rational logic. After all, for many long-term investors, HUL was indeed
the gold standard. The stock gave them consistent returns for
decades. Despite the setbacks in the better part of the last decade,
investors still attach a sense of security to the stock.
assume a best case scenario—the company grows faster, margins
Meanwhile, Damani says he has no plans to surrender his shares.
improve and more people up trade to its higher value products. With a
The Unilever offer is a vindication of the fact that HUL still has a lot of
profit growth of 18 percent and a price to earnings multiple of 30, the
growth to come. According to him, the business is growing, has
stock would trade at Rs 2,730 a decade from now, or an annual gain of
consistent cash flows and has a good return on capital.
12 percent.
“In a market where there are such few quality stocks, why surrender
This, according to analysts, is not enough. As our table shows, HUL’s
one of the few quality stocks you have?” he asks. He scoffs at the
competitors—ITC, Nestle, Colgate Palmolive, Dabur and GSK
notion that consumer stocks are expensive. What’s to suggest the
Consumer—have all grown faster than HUL in the last five years. Also,
price earnings multiple won’t reach 50 tomorrow, he asks.
one has to remember that the parent will take away royalty income,
Damani may well be proven right. For the moment though, most
which made up 2 percent of profit last year.
experts aren’t ready to take a long-term call on the stock that was
Shah of ASK says the justification for a Rs 600 price per share would
once the darling of the Indian markets.
imply a compounded profit growth of 18 percent for the next decade
fetching investors a 12 percent return. According to Shah, given HUL’s
history and the size of the opportunity, that sounds like an ambitious
target. He points to stocks like Asian Paints, Nestle, ITC, Marico, Page
Industries, TTK Prestige that are likely to give a much better return. His
view is consistent with the analysts Forbes India spoke to.
14
June, 2013
Karl Slym has a Fix for the ailing Tata Motors
Slym’s promise of 90 days ended in December 2012. It is now actually
Source: http://forbesindia.com/article/boardroom/karl-slym-has-a-fix-for-the-ailing-tata-motors/35221/1
more than 180 days but Wasan hasn’t heard from him. Ghosh has
Karl Slym wants to change the way Tata Motors makes and sells its
since quit to join Hyundai. According to sources, in the last financial
cars. But the cars he has don’t sell; and his idea of those that will
year Wasan’s Tata dealership made a loss of about Rs 6 crore. This
should take at least two years to hit the market
March, he sold only 70 units. Now he is seriously contemplating
pulling the plug. He won’t be the only one to have done that. In the
last two years, Tata Motors has lost three large dealers in Mumbai,
one in Pune, one in Chandigarh, two in Hyderabad and two in Delhi.
Today Tata Motors’ domestic car business
is on a sticky wicket. Sales for FY2013
dropped
by
almost
29.2
percent
to
2,22,112 units from 3,13,710 units in
FY2012. In the December quarter, the
standalone business posted a loss of Rs
458 crore. Analysts are expecting another loss in the current quarter.
On the products front, in 2012-13 the Nano has utilised only 20
Karl Slym
Age: 50
Career: Started at Toyota as senior manager; spent more than 25
years in GM across roles and geographies, including seven years as
percent of its production capacity of 2,50,000 units at Sanand,
Gujarat. Almost all of Tata’s other vehicles (Indica Vista, Manza,
Safari, Sumo Grande, Aria) have been beaten in their respective
segments by local and global competitors.
head of GM’s India operations. Joined Tata Motors in October 2012.
A former Tata Motors senior official, who spent more than a decade at
Education: MSc in business administration, Stanford University
the company and spoke on condition of anonymity, says this is the
Interests: Music, Bollywood, cricket and travelling
result of lack of focus, poor allocation of resources and narrow vision
It was October 2012. Karl Slym, the new managing director of Tata
for the car business. “In the last five years, there were just too many
Motors, had just joined office. And he was keen to get a pulse of the
things vying for attention. First, there was making the Nano itself.
organisation quickly. Slym asked Tapan Ghosh, regional manager
Then Singur and taking the plant to Sanand. Then fires in the Nano.
(west) in the passenger vehicles division, to fix up a meeting with
Then Jaguar Land Rover. All of this meant that everything that had
Kasturi Wasan, owner of Wasan Motors, one of the oldest and largest
been planned for the car business was getting postponed. And we
dealers of Tata cars in the country. The meeting was fixed at Wasan’s
never had enough money to invest in building a pipeline for our
Tata-Fiat dealership in Chembur, Mumbai, at 5 pm. Slym walked into
existing brands,” he says.
Wasan’s sprawling fourth floor office, overlooking the Sion-Trombay
road, with two of his colleagues—Prashant Fadnavis, head of
marketing services, and Ghosh. After exchanging pleasantries, Slym
got down to business, “So Mr Wasan, how is it going?”
Of course, Cyrus P Mistry, the chairman of Tata Sons, has taken
notice. He asked the organisation to buckle up in his Lake House
address to employees on April 1. “The last four years witnessed fierce
competition in the passenger car market, with the entry of seven new
Wasan had been waiting for this opportunity for a long time and he
global manufacturers and the introduction of 150 new models. The
didn’t hold back. Sales had plummeted to 225 units per month
commercial vehicle segment too faced challenges with the entry of
compared to an average of 900 units in 2008-09. Despite all kinds of
new players like Bharat Benz,” he said. “It is time to meet them and
marketing pushes—buy a Nano with a credit card, exchange your old
beat them in their backyard.” In his meetings with the top
motorcycle for a Nano—the car had remained a non-starter. It was the
management, Mistry has been pushing towards making the car
same story with the Manza, the Indica, the Safari and the Aria. There
business profitable, developing “futuristic products that are truly world
were hardly any footfalls in his showroom and his sales staff was
class” and to draw lessons from the turnaround of Jaguar Land Rover.
demoralised.
Lord Kumar Bhattacharyya, founder and chairman of the Warwick
“With these issues, I will not have enough money to even pay salaries
Manufacturing group, who was part of the five-member search
to my staff. In fact, I have been thinking of closing this dealership
committee that selected Mistry as Ratan Tata's successor believe
because I have been making losses for the last two years,” he told
Mistry will do he can to make the company a success. “Let me tell
Slym.
you, Cyrus is a very forensic man. He has got a tremendous mind.
The new MD heard him out patiently. At the end of the meeting, which
And he will not go on a whim or fashion, he will do whatever is right for
lasted about 90 minutes, Slym said, “No, Mr Wasan, don’t give up.
the company as a business. And it has to make money. Cyrus is not
Give me 90 days and I will do something. If you still think your
going
to
tolerate
any
weaknesses
in
the
organisation.
dealership is not viable, then you are free to go.”
15
June, 2013
Car companies cost a lot of money, they should not only be designed
cash from operating activities has dropped from Rs 6,154 crore in
well but also made well and sold well.”
March 2008 to Rs 3,653 crore in March 2012.
Lord Bhattacharyya should know. He has seen the company’s steep
Jinesh Gandhi, equity research analyst at Motilal Oswal Securities,
decline from close quarters and believes that Ratan Tata’s vision for
says, “Right now, the private vehicle [car] business is being funded by
the car business was let down by the senior management at the
the
company. “Ratan, as far as cars are concerned, it is in his blood. But
contributions from JLR. There are no restrictions in terms of
he is not going to go and sell cars. It is up to Tata Motors to sell.
movement of cash across divisions. But going forward it is not going
Somehow, Tata Motors lost touch with the market. They had an iconic
to be that easy. The commercial vehicles business is going through a
car like Nano, which Ratan had produced but it never got the due
cyclical downturn which we hope will make some recovery next year.
respect in marketing. If it was in any other country, it would have been
And JLR has its own investment commitments of about £2.5 billion
a great success,” he says.
next year and the year after that. So free cash flow will be curtailed.”
The Problem
This is where Karl Slym’s million-dollar assignment comes in. Can he
The story of Tata Motors is also the story of two companies: Tata
Motors India and Jaguar Land Rover (JLR). Its current state of affairs
reflects in its financial performance.
commercial
vehicles
[trucks
and
buses]
business
and
change the fortunes of this division of Tata Motors? He’s confident he
can.
Losing Touch with the Market
Ralf Speth is the man leading the
charge at JLR. During his tenure,
the
company
has
But first, Tata Motors must get back in touch with the market. Let’s
understand how it lost touch in the first place.
grown
There’s the story of Safari18. In early 2006, the Safari18 project was
dramatically. In the 12 months to
initiated at the Engineering and Research Centre at the Tata Motors
March 31, 2012, JLR generated
plant in Pune. The old Safari had been Tata’s workhorse in the sports
profit after tax of £1.4 billion
utility vehicle (SUV) segment for over seven years and it urgently
compared to £1 billion in the year
needed a refresh—the ‘18’ stood for 18 months. By industry
ending March 31, 2011. The
standards, that’s a healthy target. Except that it was never achieved.
company’s
increased
Instead, it took Tata Motors six years to finally get the vehicle out and
from £9.8 billion in March 2011 to
the new Safari Storme was launched only in October 2012. Total
£13.5 billion in March 2012. In
money spent: About Rs 400 crore.
revenue
2012, the company sold 3,57,773
vehicles, up 30 percent over
2011. Today, almost 90 percent
of Tata Motors’ profits and more
than 70 percent of its turnover
comes from JLR.
In the automotive business and especially in a cut-throat market like
India, a mistake like this can prove to be quite costly. In the last six
years, sales of utility vehicles in India have skyrocketed. The market
has grown by almost four times to more than 5,53,000 units per year.
In this same period, utility vehicles manufacturer Mahindra &
Mahindra launched three completely new vehicles (Xylo, XUV 500
Now contrast JLR’s performance
and Quanto) while refreshing its existing portfolio (Bolero and Thar).
with
Indian
Even India’s largest car maker Maruti Suzuki, which was primarily a
operations. While the company
small car manufacturer, launched a hugely successful UV from
does
scratch called Ertiga. There’s also Renault’s big bang entry into the
Tata
not
Motors’
release
separate
and
SUV space with Duster, which has captured the fancy of Indian
commercial vehicles business,
customers. Who was caught napping? Tata Motors. In a segment in
Tata Motors’ net profit from its
which it enjoyed pole position just a few years back.
Indian operations has dropped by
Then there is another way to lose ground—a dramatic flux in the top
almost 40 percent in the last five
management team. Come to think of it, Karl Slym, who joined office in
years. The company reported a
October 2012, is the only CEO (for its car business) that Tata Motors
net profit (standalone) of Rs
has had in a long time.
numbers
1,242
for
crore
its
in
car
March
2012
compared to Rs 2,029 crore in
March 2008. Its return on capital
employed (ROCE) from its India
(standalone) operations has dropped from 18.96 percent in March
2008 to 10.36 percent in March 2012. The company’s standalone net
It all started with the Nano debacle and the exit of Rajiv Dube as head
of the passenger car business in May 2010. This was soon after Carl
Peter Forster came in as the global CEO of the company. Forster
brought in Ralf Speth to head JLR. Prakash Telang was elevated from
head of commercial vehicles business to MD, India operations. R
Ramakrishnan, the champion of Tata’s successful takeover of South
16
June, 2013
Korea’s Daewoo Motors in the commercial vehicles business, was
A car is an aspirational purchase. A Tata vehicle is far from that. The
air-lifted to take over Dube’s role and began reporting to Telang.
connotations associated with it are ‘value for money’ and ‘taxi’. Almost
Soon, it was head of car product group Nitin Seth’s turn to leave and
join Ashok Leyland. Till date, Seth has poached about 34 people from
his former employer. Seth was soon replaced by Niraj Srivastava,
regional manager (west) of the commercial vehicles business. Around
the time of Seth’s exit, SG Saxena, head of Tata’s utility vehicles
business, also quit to join JCB. In May 2011, Forster quit Tata Motors
citing personal reasons. Telang retired in 2012. Srivastava quit last
year to join Audi India.
So, for about three years, Tata’s car business was run by people who
had made their career in the commercial vehicles business. It is not a
surprise then that consultants believe that Tata’s passenger vehicle
business has been run just like its commercial vehicles business.
all of Tata’s vehicles—Indica, Indigo, Sumo—are predominantly
bought by fleet taxi owners. “Which is a good endorsement,” says
Slym, “Because fleet buyers buy stuff that is good value for money
and endurance. However, an overemphasis on fleet turns away the
personal buyer. So this is the balance between what do you want as
fleet and what do you want from a customer as aspiration, does he
aspire to buy that car which he thinks as a taxi? So I think it is
important for us to now have differentiation in our products.”
This problem manifests itself at the point of sale. Harsh Vardhan, a
former JWT executive, is an independent brand consultant who has
worked closely with Tata Motors’ dealer subsidiary Concorde Motors.
He spent months speaking to prospective customers and studying
their buying experiences. What did he find? “There are serious image
“Look at their product refresh cycles. While competition has added
confrontations at the point of sale. Everybody is on the same floor—
products one after the other, Tata Motors must have used all the
the fleet taxi owner, the driver of a Sumo and this executive with his
alphabets in the English language to launch one version after another
wife looking at the Indica. It is a bit of a let-down of the executive’s
of their old cars. That’s how you sell trucks not cars,” says a senior
image which makes him think this car is not for me but for taxis,” he
automotive consultant who did not want to be quoted.
says.
Slym found another vexing issue. What does a Tata car stand for? “If
Maruti launched something that’s got excellent fuel economy, the
emphasis is on the fuel economy. So, therefore, you have to focus on
your strengths. The emphasis has got to be on the car. And I think we
have had a little bit of disconnect between the company and the
customer,” he says.
Tata’s brand positioning has been at best confusing—‘more car per
car’, ‘club class’, ‘reclaim your life’, ‘the real SUV’ and ‘a class apart’
are just a few examples. Scratch a bit more and one can find a more
serious problem. Traditionally, there were three planks on which Tata
Motors sold its vehicles: 1. Operating economics, aka diesel. 2. Cheap
acquisition price. 3. Space.
“Today we have lost all three. Our dominance as the only diesel
player is long gone. Across all our segments, both multinationals and
Indian companies have vehicles which are competitively priced. And
the market has moved from driving around large families to self-drive
vehicles. There as a brand we have lost relevance,” says a Tata
Motors official who did not want to be quoted.
A jolly man with an unmistakable sense of humour, Slym gets a bit
Add to the above issues, the far larger problem where Tata’s product
serious when discussing what really went wrong at Tata Motors. Slym
development machinery has failed to regularly churn out new
spent the first three months of his tenure meeting dealers, suppliers,
products. Which leaves them today with a portfolio that could well
customers and employees of the company. What he came back with
have been from the early half of last decade. When was the last time
in the shape of a SWOT analysis wasn’t very encouraging. “The worst
Tata Motors launched a completely new vehicle? Slym adds, “This
thing was our perception in the market as a passenger car maker. Our
year, how many cars have seen growth? Only new cars, none of the
market, brand, quality—whatever you want to say—as perception in
old cars. When was my last new car launch? The Aria. Which was two
the marketplace is not as good as we would like it to be. I think the
years ago, so it has been a while. So that’s not in line with keeping
label was earned, it didn’t come from anywhere,” he says.
your name in line with the minds of people. It has been a problem for
us in identifying where and when we want our products.”
17
June, 2013
While Tata Motors does not release standalone results for its car
to wherever it is supposed to go. So I think there is a lot of
business, experts estimate the company has invested more than Rs
containment things that we are doing at the moment to be able to
5,000 crore in the Nano project. “Nano is not the whole and soul of
protect while we put the countermeasure in place,” Slym adds.
your strategy. But for political motivations within the company, there
was never a vision that we should have a portfolio of cars. Some of
that will be value for money. Others which will be cool, young and
yuppie. In that same space Maruti has seven brands, Hyundai has
three while Tata has just one—the Indica. How do you expect the
His containment strategies can be summed up thus: Building an
organisational structure that has accountability, fixing product
planning, emphasis on quality and a strategy function that can plan for
the future.
company to compete?” adds the former Tata Motors official quoted
He’s begun with tweaking the supply chain first. “We didn’t have a
earlier.
single purchasing organisation which I think was a huge shortcoming
for us because we miss out on the benefits of our scale, we confuse a
Analysts are also sceptical. Motilal Oswal Securities’ Jinesh Gandhi
lot of things that way, so we have now got M Venkatraman as head of
says, “The new management has enough understanding and
purchasing.
experience of the passenger vehicles business. But it will take at least
three years to arrest the current situation. Given that the car business
is a cash guzzler, it will require investments in new products and
marketing. Most of that contribution will come from Jaguar Land Rover
and the commercial vehicles business.”
Instead of having eight purchasing centres and buying things for
specific plants, we have centralised it,” he adds. Venkatraman is an
old GM hand and his appointment is in line with the top-level changes
that have accompanied Slym’s arrival at Tata Motors. In October
2012, Ranjit Yadav, country head of Samsung India’s mobile & IT
business, was brought in to replace R Ramakrishnan as president of
the car business. Neeraj Garg, former director of sales and marketing
at Volkswagen India, was appointed as vice president.
To fix issues in product planning and product management, Slym has
changed their mandate and also ensured that the team reports
directly to him. “We didn’t have a programme planning organisation,
we had a programme monitoring or managing unit, as a result of
which some of our vehicles have not been necessarily on time as we
would like them,” he says.
It is a big learning from the Aria debacle. “People in the beginning
have to identify what’s happening in the world today and the future.
And then the customers’ expectations three years ahead is designed
and engineered into the car and we don’t lose anything along the way
and we don’t let three years become six years either,” Slym says.
If that were the case, the Aria should have been pitted right against
The Containment Strategy
Toyota Innova. He adds, “It looks quite similar and it sells quite some
volumes in that area. There you go. But the Innova is Rs 9.95 lakh
On December 18, 2012, Slym got together the top 82 leaders of Tata
Motors to roll out what he calls his ‘One Team, One Vision’ plan. It has
a fairly obvious message: Let’s focus on the customer. Quite often
large companies take this route of identifying a common vision
and the Aria was launched at Rs 14.5 lakh. So why do I pay Rs 5 lakh
more than the Innova if we are looking at the same customer? You
don’t. So that’s where we get back to the disconnect with the
customer, not just at the point of sale.”
document which everybody can relate to. Slym has done the same
and he is pretty kicked about the result. “I was at Dharwad the other
Poor quality has been a perennial issue with Tata’s passenger
day and I asked the team at our all-employee meeting and they know
vehicles. Slym is attempting to fix that and has created a team under
the mission, they know the vision, they know the values, they are
SB Bowankar (who will also report directly to him), whose sole job is
motivated, so that to me is a good sign that the people can articulate it
to focus on improving quality. “You can’t expect the manufacturing
and we have done a good job of rolling it out,” says Slym.
guy to take care of quality. You have got to have the supplier
delivering the right thing which is from our design and engineering etc,
The man is a firm believer in the principal that an organisation should
so we now have a quality function standalone reporting to me but
be able to maintain a healthy balance between short- and long-term
looking at the full piece of quality from the very early design,” he adds.
objectives. Something that he found amiss at Tata Motors. “I think
there are two words that sometimes don’t translate well together—
there’s containment and countermeasure. Countermeasure stops the
problem occurring at the root and containment stops it from getting out
18
June, 2013
Last but not the least is strategy. “I have been internally critical of the
Most of these measures look fantastic on paper. But the question is
fact that in some places we haven’t got products where if we want to
how long before they can translate into something real on the ground?
be a volume manufacturer we have got to have products. So we now
Slym knows this bit of the story thanks to the promises he has made
have a strategy group that not only looks at products but also looks at
to dealers. But how long will it take?
our overall business strategy as well to make sure we have got
binoculars on, as I call it, to see not tomorrow, 2013 or 2014 but what
will happen in 2016, 17, 18 and how we are preparing for that.
Whether that be a product opportunity, a country opportunity even
legislation or fuel type and all those kind of things,” he says.
Slym says, “It is not just that piece on quality. It is also everything
else. Some things have happened already but you know how long a
vehicle development cycle takes, so therefore, a new vehicle coming
to market will be a number of years. So those kind of things coming
into the market which is new, new, new vehicles with platforms and
things like that will be a number of years.” Is this going to be a case of
too little, too late?
19
June, 2013
Legal methods US MNCs like Apple, Google deploy to cut taxes on non-US profits
Source: http://articles.economictimes.indiatimes.com/2013-05-30/news/39629043_1_tax-practices-tax-rules-tax-gimmicks
Some
of
the
largest
US
multinationals resort to ingenious
”though
legal
”practices
to
pay
virtually no tax on their non-US
profits, much
to
the
growing
governments
and
chagrin
civil
of
society.
ET outlines the five methods they deploy to avoid taxes
One of them has a subsidiary in Ireland that does not pay income tax
to any government in the world. Another has negotiated with the
government of Puerto Rico to pay tax of just 2% on its profits. A third
sells 4 billion pounds of goods in the UK, but pays just 2.4 million
pounds in tax or an effective rate of 0.06% in that country because,
thanks to a nifty corporate structure, another arm in Luxembourg, a
tax haven, earns those profits.
All three practices abide by the rules of whichever land they operate
in. The companies behind these practices are Apple, Microsoft and
Amazon, respectively. In another form, in another country, it could be
just about any large US corporation with a global footprint pursuing
and profiting from tax practices that are legal, but push the boundaries
of good form.
According to Rohan Phatarphekar and Himanshu Parekh, partners in
audit firm KPMG, the law hasn't kept pace with how business has
These are among the world's largest, most profitable and most
evolved, and companies are exploiting that gap. "To some extent, it
respected companies. Yet, when it comes to the taxes they pay as a
must be acknowledged that the legislative as well as the treaty
portion of their profits, they bring the rear in giving to a pool to which
framework has not kept pace with rapid changes in the nature of
every citizen is expected to contribute to enable governments to work
international trade and commerce," they told ET, in an email
and build nations. So, while US citizens pay 39.6% in the highest slab
response. "Taxpayers will try and structure their operations in a
and companies registered there 35%, Apple pays 13.8%, Google
manner which is within the parameters of law as well as tax effective.
15.2% and Microsoft 15.7%.
Having said that, the substance over form issue is relevant and needs
to be satisfied in any structuring."
Increasingly, governments are becoming more discerning, civil society
more strident and the media more inquisitive of such tax numbers and
In the days to come, if the world continues to grow less tolerant of tax
practices. In the past year, the UK has seen the gradual release of tax
havens and corporate tax practices, the 'substance over form' filter will
figures and practices relating to Amazon, Starbucks and Google.
be applied more often, especially to these five ways that US
multinationals actively deploy, with devastating effect, to reduce their
More recently, the spotlight has turned to the US, where investigations
done by a committee of its legislators have been critical of the tax
practices of Apple, Microsoft and Hewlett Packard. "What has become
tax liability outside.
Use transfer pricing to reduce non-US profits...
totally clear now is the global rules on taxing corporations do not
work," says John Christensen, director, Tax Justice Network, London,
The US taxes corporate profits at 35%. But multinationals need not
which works in the area of tax advocacy.
pay tax in the US on profits they keep outside the country. Which is
what most of them do. According to the US senate panel's report, 17
The US report has outlined how Apple, for example, exploited gaps in
companies had $294 billion cash parked outside, or 52-92% of the
the tax rules of different countries, set up entities in low-tax
total cash held by them. Some of this is in tax havens, which have low
jurisdictions, and routed transactions through and within those entities.
tax rates. For example, Ireland, which is integral to the practices of
Even as US legislators slammed Apple's practices as "convoluted"
Apple and Microsoft, has a tax rate of 12.5%. Companies try to reduce
and "pernicious", the company's CEO Tim Cook, in a Congressional
this further by using transfer pricing the rules that govern inter-
hearing last week, said the company did not "depend on tax
company transactions within the same ownership.
gimmicks".
20
June, 2013
Take Microsoft, whose operating systems reside in computers across
"Second, it has no controlled foreign company rules to challenge tax
the world. In 2011, according to the US senate investigations
haven abuse."
subcommittee, the company incurred 85% of its $9.1 billion research
and development (R&D) expenditure in the US. Yet, for tax purposes,
Microsoft showed only 35% of this as contributed by Microsoft US.
Even better, form two Irish companies
By setting up more than one subsidiary in Ireland, and structuring
Instead, Microsoft apportioned it to subsidiaries around the world in
transactions between them, companies can lower even the 12.5%
proportion to the revenues earned by them termed a 'cost-sharing
rate. The first Irish subsidiary, say A, will buy the intellectual property
arrangement'. Thus, if its Irish arm accounted for 30% of its global
rights (IPR) from its US parent by participating in a cost-sharing
revenues, 30% of Microsoft's R&D spend was expensed by this entity,
agreement. This company would be controlled and managed outside
enabling it to reduce its net profit further. Apple has a similar structure,
Ireland, usually in the US, as in the case of Apple, or in a tax haven
where economic rights of intellectual property for non-US sales are
like Bermuda.
transferred to an Irish subsidiary. This Irish arm earned pre-tax profits
of $22 billion in 2011, but Apple paid tax of just $10 million on that
income an effective tax rate of 0.05%.
Since, it's controlled outside Ireland, it need not pay tax in Ireland. In
the second step, A sub-licences the IPR to B, the second Irish
subsidiary. Usually, B would be selling the company's product and
The senate panel report says: "Several aspects of the cost-share
services in non-US locations. So, for B, income would be in the form
agreement, and Apple's research and development and sales
of sales and the expense would be payment of licensing fee to A,
practices, suggest that the agreement functions primarily as a conduit
enabling it to lower its tax outgo further. This method is referred to as
to shift profits offshore to avoid US taxes...The transfer of intellectual
'double Irish'.
property rights to Ireland via the cost-sharing agreement appears to
play no role in the way Apple conducts its commercial operations."
...as well as US profits
Microsoft has transferred some IPRs to Microsoft Ireland Research
(MIR), which does sales in Europe, Middle East and Africa. In 2011,
MIR paid its US parent $2.8 billion for these IPRs. MIR, in turn,
Companies have also been transferring and reducing their US profits
licensed this IPR to another Irish entity, earning $9 billion. And it made
and tax liability. For example, Microsoft has a Puerto Rican subsidiary,
a profit of $4.3 billion by just buying (economic rights of IP) and re-
Microsoft Operations Puerto Rico (MOPR), which holds the rights to
selling (license of IP). A US senate panel report says Microsoft saved
sell to US customers. MOPR makes copies of Microsoft software and
$4.5 billion in taxes between 2009 and 2011 by offshoring profits.
ships it to the US. "The US entities retain 53% of the gross profits and
Similarly, Apple has three Irish entities.
send the remaining 47% to MOPR in Puerto Rico, where it is taxed at
a pre-negotiated rate of around 2%", says an earlier US Senate's
The first is Apple Operations International (AOI), which is owned
investigation subcommittee. By this method, the report adds, Microsoft
100% by Apple Inc. This entity owns most of Apple's offshore entities.
saved $4.5 billion in taxes during three years.
In Ireland, AOI owns Apple Operations Europe and Apple Sales
Form an Irish company, but control it from the US
International. AOI is a non-tax resident of Ireland and has not paid any
tax for the last three years. It is managed by three directors, two of
The tax laws of most countries, including the US, apply to companies
whom are US-based Apple employees. Between 2006 and 2012, AOI
on the basis of where they are registered. Thus, if a company is
held 33 board meetings, 32 of them in Apple's US headquarters in
registered in the US, it is taxed in the US. Ireland is different, in that it
Cupertino, California. The lone Irish director participated in just seven
uses 'control' as the basis of taxation. Thus, a company that is
meetings, of which six were over the phone. Apple told the
registered in Ireland but controlled from, say, the US will not be liable
investigation panel that AOI's assets were managed, and its
to be taxed. Multinationals exploit this loophole extensively. For
accounting record (general ledger) was maintained, in the US.
example, an Apple subsidiary, Apple Operations International, earned
$30 billion in net profit between 2009 and 2012.
"Apple indicated that no AOI bank accounts or management
personnel are in Ireland," the report states. Another Irish subsidiary
But the firm never declared tax residence and paid no tax. Ireland's
that is owned by AOI indirectly is Apple Sales, which held the
low corporate income tax rate of 12.5% is its main attraction. Apple,
economic rights to Apple's IPR. It booked huge profits by procuring
says the US senate panel report, negotiated a special tax rate of 2.5%
from Chinese suppliers and selling to Apple distributors in various
with the government there. Google, too, routes 88% of its non-US
countries. Apple Sales in Ireland distributed its profits as dividend to
sales via its Irish subsidiary. According to Richard Murphy, director of
its parent. Thus, AOI received $ 29.9 billion in dividends between
UKbased Tax Research LLP, which does tax research and advocacy,
2009 and 2012, and it did not even file a tax return or pay any tax on
companies can whittle down effective tax rates in Ireland to virtually
it.
zero. "First, it (Ireland) does not have any effective transferpricing
rules. So, goods, services, assets, royalties, management fees and
other 'costs' that reduce Irish profits to next to nothing can all move
out of Ireland to tax havens without questions being asked," he says.
21
June, 2013
Go Dutch To Save Withholding Tax
The Dutch company will be placed between the two Irish firms, A Ltd
and B Ltd. So, if B Ltd was paying royalties to A Ltd, then it would be
Through the Irish subsidiaries, multinationals are able to reduce their
liable for Irish withholding tax. But now the payment from B Ltd would
liability significantly. But even the Irish subsidiaries alone are unable
be routed first to the Dutch entity, which in turn would transfer almost
to take care of the tax their subsidiaries might have paid in other
the entire money received to A Ltd. This is because Irish tax laws
countries. For example, if Apple sells a product in India, and the
exempt withholding taxes on royalties on payments made to
Indian entity pays fees to Apple Ireland for the use of IPR, the
companies in other European Union countries. Since the Dutch
payment is usually subject to a tax called withholding tax.
company is placed in between two Irish firms, this method is called the
This is paid to the Indian government. Having another layer in
'Dutch sandwich'.
Netherlands addresses this problem. The Dutch tax system does not
The Dutch central bank calls these entities 'special financial
tax dividends and capital gains received from foreign subsidiaries. At
institutions'. In 2009, it estimated, 90 billion euros in income was
the same time, it has zero withholding taxes on outgoing interest and
channelled through these 1,300-odd firms, mainly as dividends (from
royalties. So, both the inward and outward flow of money is not taxed.
equity interest) and interest income (intra-group loans); about 87% of
In addition, the Netherlands has a multitude of tax treaties that
the outward flows went to foreign group companies, with offshore
reduces withholding taxes. So, effectively, if the payment goes from
centres being the largest source of money as well as recipient.
India to Netherlands, it will be subject to a lower withholding tax.
Christensen of Tax Justice Network says companies are being
Likewise from all countries with whom the Netherlands has a tax
"duplicitous" when they claim that they are acting within the law. "For
treaty.
decades, they have been lobbying to set the laws in their favour, and
they strenuously lobby against measures to improve on tax
transparency," he adds.
22
June, 2013
How companies are using social media to take entry in new markets
Source: http://economictimes.indiatimes.com/news/news-by-company/corporate-trends/How-companies-are-using-social-media-to-take-entry-in-newmarkets/articleshow/20098220.cms
Companies are using conversations on
social media platforms to shape entry
strategies in new markets, address
consumer grievances and communicate
directly with target groups.
Merely being present on social media is
no longer sufficient for some of the
world's largest corporations, who are turning to young technology
ventures in India for help in decoding social chatter for business gain.
These companies are using insights gained from conversations on
Facebook, Twitter and other social media platforms to shape entry
strategies in new markets, address consumer grievances and
communicate directly with target groups.
"It (social media analytics) helps us converse in the proper context
with the right audience and close business with customers," says Arun
Balakrishnan, chief executive of the Indian arm of Warren Buffett's
Berkshire Hathaway. As a late entrant to India, Berkshire was up
against established players like Axa Bharati and ICICI Lombard and
needed unconventional digital marketing to get an edge.
Last December the insurance provider turned to social media
Many of these companies started out with basic services such as
creating social media accounts and pages, and have now graduated
to playing the role of social media consultants. Unmetric, founded by
IITMadras graduates Lakshmanan Narayan, Joseph Varghese and
Kumar Krishnasami, started out by helping local businesses such as
restaurants and spas understand and use social media.
analytics venture Salorix for help. The Bangalore-based firm used its
analytics platform to mine millions of real-time social media
conversations to identify top influencers in this segment. The volume
of direct conversations around topics like health and travel insurance
was minimal but people would talk about topics that are related - a
loss of health plans when moving jobs or travel insurance for a
summer holiday. The challenge for Salorix was to link the insurer with
such customers. "After all, rarely does anyone get up in the morning
and express the need to buy insurance on Twitter," says Anup
Ghoshal, Salorix India's head for business development.
The four-year-old venture, founded by IITBombay alumnus Santanu
Bhattacharya, ran a six-week campaign that helped Berkshire
increase its follower base on social media by 80% and engagement
ninefold. By 2016, large corporations are expected to spend around
$9.8 billion (Rs 55,000 crore) on social-media advertising, from $3.8
billion in 2011, according to research firm BIA/Kelsey.
Ensuring this money is well-spent is high on the agenda of most
companies, say experts. "Brands are using analytics to understand
who they are interacting with, what users like and how to create
communication to reach out to the right audience," says Ashesh Jani,
a partner at Deloitte Haskins & Sells. This is throwing up huge
opportunities for startups such as Salorix, Chennai & New York-based
Unmetric, Simplify360 and Drizzlin, that are sifting through social data
to deliver actionable insights.
The Chennai-based venture was launched in 2010 as EyesAndFeet.
But in a year, the founders realised there was value in analysing the
data being generated by large enterprises. They developed a
software platform that can sift through billions of bits of data on social
media and analyse it through selflearning algorithms. Within a month
they raised a first round funding of $3 million (about Rs 16 crore) from
Nexus Venture Partners. Today with customers like Subway, Toyota,
Airtel and Australian bank Suncorp, the two-year-old company is
targeting revenue of $15 million (Rs 82 crore) in fiscal year 2015.
"Markets are truly all about conversations. Brands need a new suite
of analytics solutions to keep them on top of competitive campaign
activity and to mine actionable insights," says Narayan. Large
companies are also looking to create targeted communication on
social media, a service offered by Bangalore-based social media
analytics venture Simplify360.
"Reputation management and sentiment analysis has become very
important on social media and analytics can help us there," says
Vasudev Murthy, a senior practice partner at Wipro Consulting
Services, which has partnered with the Simplify360 to provide social
media solutions for its clients. One of Wipro's clients, a large Indian
bank, now has a technology dashboard that highlights in real time any
negative talk on social media. Deep Sherchan, the 28-year-old
cofounder of Simplify360, says his company charges between Rs
10,000 and Rs 1 lakh per month for the cloud-based platform. It
counts Cafe Coffee Day, Mahindra Retail and ITC Foods among its
35 clients.
23
June, 2013
By fiscal 2014 the company expects to clock revenue of Rs 17 crore.
Such ventures are also finding a ready clientele among advertising
and digital agencies. "Every month, the marketers and social media
teams at companies and agencies need to report the impact of the
money being spent on these sites. Our analytics helps to measure the
impact," Sherchan says. Entrepreneurs admit that it is still early days
for social media analytics.
Deepak Goel, cofounder of Drizzlin Media India, says brands have so
far mainly focused on changing communication according to the
analytics. Drizzlin works like a social media consultant for clients like
Lenovo and quick service restaurant KFC. "Few have reached the
stage of creating products and services based on analytics. That
would be the ultimate use," says Goel.
24
June, 2013
Crash of the rupee and how it impacts you
Source: http://articles.economictimes.indiatimes.com/2013-05-27/news/39557333_1_rupee-petrol-and-diesel-dollar
The rupee has continuously fallen against the dollar this month. Last
week it fell below the key psychological level of 56 to the dollar, its
lowest level since September 2012, as the dollar rallied on worries
about a potentially early end to the US monetary stimulus. The rupee
has also been impacted by a weak China manufacturing survey,
which increased concerns over the world's second largest economy.
Here's how a falling rupee impacts your investments
Where you gain
> NRIs remitting money back home are effectively putting more
money into their family's wallets as they will get more rupees for every
dollar remitted.
> Export oriented companies and those with significant foreign
currency revenues will benefit from the rupee decline. This is because
they will earn more rupees for every dollar worth of goods sold or
Where it hurts
assets held.
> Companies with foreign currency borrowings or those importing raw
> Domestic gold prices are likely to receive a boost on account of the
materials from abroad take a hit.
declining rupee. Individuals in global funds gain as the performance of
> A weaker rupee may dampen FII sentiment as the value of their
investments (in dollar terms) erodes.
these funds in rupee terms gets multiplied to the extent of the fall in
the rupee.
> Foreign travel and overseas education become more expensive.
> Weakening rupee will raise the cost of petrol and diesel.
25
June, 2013
11 Timeless Tips from Buffett and Munger
Source: http://www.morningstar.in/posts/18037/11-timeless-tips-from-buffett-and-munger.aspx
Investing is about much more than just numbers.
Berkshire Hathaway probably enjoys more shareholder loyalty and
One shareholder asked what quantitative metrics Buffett looks at
dedication than any company in history.
before buying a stock. The reality is that investing involves a large
degree of subjective judgement. Buffett gave the example of a
Year after year, shareholders return to Omaha to hear Warren Buffett
basketball recruiter trying to pick a player for his team. He might be
and Charlie Munger expound on topics large and small. And Buffett
biased against a player who is 5 feet 4 inches tall, and he might get
and Munger are nothing if not consistent. They have been following
excited about a player who is 7 feet tall. But that information alone is
the same common-sense investment philosophy for decades, and
nowhere near sufficient to know who will be the better addition to the
generously sharing the "secrets" to their success with anyone who
team. Buffett and Munger can't buy stocks just based on financial
cares to listen. As one shareholder put it in this year's introductory
ratios; they need to understand how the business actually works. Both
video, going to the Berkshire annual meeting is a bit like going to
claimed not to know how to use a computer to screen for stocks.
church. Shareholders know what they're going to hear, they already
believe in Buffett and Munger's approach, but they keep coming back
to have the message reinforced.
Think like an owner.
One of the most important lessons Buffett tries to convey at every
opportunity is that investors should think like business owners.
To be sure, it's one thing to understand Berkshire's investment
Berkshire's managers evaluate stocks exactly the same way they
philosophy and quite another to carry it out. With the goal of
would if someone offered to sell them the entire companies. Far too
reinforcing the message, here are some of the enduring lessons that
many people treat stocks as pieces of paper, and investing as a form
came up in this year's Berkshire Hathaway annual meeting:
of gambling. Thinking like an owner changes your whole perspective
It's OK to pay a fair price for a company with very strong and growing
on stock investing. If a company has a bad quarter or two because it
competitive advantages.
is making investments for the future, that's a good thing. If there's no
change in a company's fundamental outlook, then a decline in the
Early in his career, Buffett was the most strongly influenced by
Benjamin Graham. His focus was primarily on finding deeply
stock price can be a good thing too: it allows you to increase your
ownership stake at a better price.
undervalued stocks; Graham preferred companies trading for less
than their net working capital balance. However, Buffett credits Charlie
Management quality and culture are essential.
Munger with teaching him that "it is far better to buy a wonderful
The quality of management can be one of the hardest things for an
business at a fair price than to buy a fair business at a wonderful
outside shareholder to judge. Personally, I've found that the only way
price." In my opinion, investors are far more likely to lose money by
to really get a sense for management is to follow a company over a
compromising on quality to buy an apparently "cheap" stock, than by
period of years, observing how management reacts to different market
purchasing a fairly valued company with a very strong competitive
conditions and competitive challenges, how strategic priorities are set
position (what Morningstar calls a wide moat), especially if the
and whether management carries them out effectively, and so on.
competitive advantage is also strengthening over time (a positive
moat trend). HJ Heinz is a recent example of a company Berkshire
was willing to acquire for a seemingly rich price because Buffett
believes in the quality of the business and management.
Ideally, you want to find a company where outstanding stewardship is
part of a deeply ingrained culture that will live on through future
management transitions. At Morningstar, we do our best to capture
our view of management through our stewardship ratings—with our
Stay sane while others go crazy.
exemplary stewardship rating reserved for companies with the most
When asked what Berkshire's competitive advantage is, Munger's
competent strategic execution and disciplined capital allocation.
response was that "we like to stay sane while others go crazy." Buffett
Managements should set a straightforward performance yardstick,
has often expressed the same sentiment as: "be fearful when others
and then stick to it.
are greedy, and greedy when others are fearful." It's as simple as that.
Buffett stated that the average investor can expect to see at least four
or five serious market dislocations in their lifetime, along the lines of
the late 1990s tech bubble or the 2008-09 financial crisis. The
challenge is to have the "mental fortitude" to take advantage of them.
Buffett's preferred way to measure performance for Berkshire
Hathaway is growth in book value per share. Buffett compares this
growth with the returns of the S&P 500: if Berkshire's book value
appreciates faster than the S&P 500, Buffett and Munger are earning
their keep. If book value doesn't keep up with the S&P 500, in Buffett's
words "our management will bring no value to our investors." You
would be hard-pressed to find such a straightforward and easily
verified performance yardstick at most companies—even those that
have much simpler businesses than Berkshire.
26
June, 2013
In general, book value is a terrible proxy for intrinsic value.
Stay within your circle of competence.
While growth in book value is a decent enough substitute for
For the vast majority of investors who don’t have the time or
improvements in Berkshire's intrinsic value from year to year, Buffett
inclination to extensively research individual securities, Buffett and
emphasises that in general book value is not a good measure of
Munger recommend low-cost index funds. For their part, Berkshire's
intrinsic value. This is because book value is based on historical cost
managers concentrate on companies in the US (although they have
and occasionally arbitrary accounting rules. Companies that make
made occasional international investments, such as Iscar in Israel and
wise investments over time (such as Berkshire) will end up with assets
PetroChina in China) and have no problem passing on stocks whose
worth significantly more than their historical cost, but the opposite
future outlook they deem too hard to understand (they mentioned the
could just as easily be true of companies that make poor investments.
specific examples of Apple (AAPL) and airlines).
Don't do dumb things, especially in insurance.
Macroeconomic forecasts are of little use to investors.
Berkshire's primary advantage in the insurance segment is its
Berkshire doesn't pay much attention to the outlook for the overall
unwillingness to do "dumb things," in the words of Buffett. It can be
economy. There's just too much uncertainty surrounding economic
very tempting for insurers to chase market share through aggressive
forecasts for them to be of any use. As Buffett said, "to ignore what
underwriting. In an unfavourable pricing environment, the rational
you know because of predictions about something nobody knows is
thing to do may be just to sit on the sidelines. However, that would
silly."
create an awkward situation for most normal insurance companies,
which face shareholder pressure to show growth in premiums and
would end up with 80% of their employees having nothing to do.
The United States' past and future is a story of ever-increasing
prosperity.
Munger stated that while most of Berkshire's businesses would do
Buffett is a perpetual optimist. At this year's meeting, he said that he
pretty well under different owners, reinsurance is an exception.
envies a baby being born today in the United States because, "on a
Reinsurance just isn't a good business without truly exceptional
probability basis, that is the luckiest person ever born." According to
management.
Buffett, "We live far better than John D. Rockefeller did in his day, and
the same will be true of today's babies compared to us."
27