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Sales boost only way to push profit

Ravi Krishnan and Ashwin Ramarathinam — Sun, 22 Nov 2009 17:32:00 GMT

Mumbai: The September quarter earnings of Indian manufacturing firms showed the best growth in at least the past 12 quarters, but with raw material prices rising and the Reserve Bank of India, or RBI, indicating that the days of easy money are over, companies will need to do more to make the numbers look good—they really need to drive up sales.

For 317 manufacturing firms that form part of the Bombay Stock Exchange’s BSE 500 index, the growth in net profit in the September quarter stood at 54.45%. Had there been no change in raw material prices and interest costs from the year earlier—when the credit crunch took hold, giving rise to stimulus measures—this would have been just 8.3%.

“From financial year 2011, topline (revenue) growth is necessary” to sustain earnings growth, said Rajat Rajgarhia, head of research at Motilal Oswal Financial Services Ltd.

Banks, oil marketing firms and service sector companies are not included in this analysis.

Oil and gas firms’ earnings depend on volatile international crude prices and a subsidy sharing mechanism by the government. Banks and financial institutions have a different earnings model as money is such firms’ raw material.

Here’s how we arrived at the figure: Raw material costs as a percentage of net sales fell to 42.52% for the three months ended September, compared with 45.13% in the year-ago quarter.

Similarly, interest costs as a portion of net sales fell to 1.79% versus 1.96% a year ago.

If these costs had remained in the same proportion to sales, the collective net profit of these firms would have been Rs31,406 crore instead of the reported Rs44,793 crore. In other words, the profit growth would have been reduced drastically to 8.3%.

“Margin expansion”, or the impact of cost cuts, was one of the main reasons for the good profit growth in the second quarter, said Rajgarhia of Motilal Oswal.

Prices of raw materials such as steel, aluminium and rubber declined sharply earlier this year due to the slump in global demand following the credit market seizure as markets crashed and US investment bank Lehman Brothers Holdings Inc. collapsed in September 2008. Most companies in the manufacturing sector benefited from the worldwide price reductions.

Indeed, on an absolute basis, raw material costs fell 16.54% in the three months ended September, the second sharpest decline in at least 15 quarters. The steepest fall of 22.79% was reported for the three months ended June 2009.

Second-quarter earnings “surpassed our expectations on operating profits and margins because of lesser- than-expected operating costs,” wrote Dhananjay Sinha and Komal Taparia of Centrum Broking Pvt. Ltd in an 18 November note.

On the interest rate front, too, companies benefited from the easy money policy of RBI, which cut rates and banks’ cash reserve requirement, or the portion of deposits kept with the central bank, several times to ease the credit crisis. Even though loan growth hasn’t really picked up in the economy, the liquidity infusion and rate cuts along with debt restructuring by companies have led to a smaller interest outgo for many firms. Interest costs in the September quarter fell 19.35%, the first time in 10 quarters when this metric recorded a decline.

Growth on track, but...

While analysts and economists are convinced that growth remains on track, they say that these factors can’t be relied on to sustain the earnings momentum.

For one, the central bank will reverse its easy money stance as inflation is rising. In its October review of monetary policy, RBI withdrew some of the special liquidity measures introduced last year and imposed tighter norms for realty sector lending. Most economists expect RBI to raise rates as early as January as wholesale price inflation may rise to as much as 8% by March from the current level of 1.5%. Higher interest rates and the draining of liquidity are the two conventional tools to fight rising inflation.

Secondly, commodity prices have risen from their lows this January. For instance, aluminium prices have increased 31% to $2,060 per tonne (Rs95,996). Prices of steel have also gained 5% while crude prices have risen by 65% to $76.72 a barrel.

“The effect of these factors will level off from Q4 (the fourth quarter),” said Apurva Shah, head of research at domestic brokerage Prabhudas Lilladher Pvt. Ltd.

Even if raw material prices increase, they won’t immediately reflect on costs for listed companies, most of which are big finished goods manufacturers.

“Intermediate pricing (such as for auto parts) remains low,” said Shah. “These companies are not in a position now to pass on raw material cost increases since everyone is sitting on spare capacity.”

Once demand revives, intermediate pricing, too, will improve and then companies will have to depend on revenue growth.

ravi.k@livemint.com

Firms wooing banks for foreign currency loans

Anup Roy — Sun, 22 Nov 2009 17:39:00 GMT

Mumbai: An increasing number of Indian corporations are raising foreign currency loans from local banks and converting them into rupees even as the overall loan growth in the banking system continues to be at a 12-year low.

Firms are finding foreign currency loans cheaper than raising loans in local currency directly because the London interbank offered rate, or Libor, an international reference rate for financial transactions, is attractively low.

Domestic banks raise foreign currency deposits from non-resident Indians, or NRIs, in the form of foreign currency non-resident (FCNR) loans. Currently, banks are paying 2.2-2.5% on one-year deposits. Interest rates on such deposits have come down substantially following the rate cuts by banks. The rate of interest for a one-year FCNR deposit was 3.12% in March.

Banks are lending such resources at 350-650 basis points over Libor, keeping a margin depending on the credit history of the borrower. One basis point is one-hundredth of a percentage point.

The three- and six-month Libor crashed to less than 1% earlier this year. The six-month Libor is now 0.4925%, and three-month 0.266%.

This, however, does not mean that the top-rated corporate borrowers are getting three-month loans at 4%.

This is because banks insist that the borrower must book a forward dollar contract to hedge the position. Since the three-month forward dollar now costs 2.3%, the cost of a three-month foreign currency loan for a top-rated customer works out to around 6.3%.

At current Libor, if a lower-rated firm takes a dollar loan, the cost comes to around 8.5%, which is much less than what a purely domestic loan would cost.

A senior banker with Union Bank of India told Mint that a firm which would get foreign currency loans at 600 basis points over Libor is eligible for a pure rupee loan at around 11%.

Forward cover is a sort of insurance against currency fluctuations. If the borrower does not take such cover and the rupee depreciates against the dollar, costs will go up substantially as it would need to buy dollars from the market for repaying the loan.

Under Reserve Bank of India norms, it is mandatory for borrowers to buy such forward contracts.

“We are seeing this trend for the last two months. As Libor has fallen to these levels, firms are increasingly asking us to give them such loans,” said a senior official with Bank of Baroda.

According to bankers, the not-so-well-rated firms are looking for such loans more than the top-rated ones, as they are the ones that will be faced with having to pay a higher price.

“Corporates are queuing up for these loans but banks are unable to meet the requirement of clients,” said N.S. Paramasivam, group treasurer of Essar Group. “They are giving the loans on a selective basis.”

“We look at the spread more than anything. If the bank is giving us loans at a lesser spread, this kind of loan always leads to cost savings,” said Paramasivam.

At the end of March, total outstanding deposits under the FCNR scheme stood at $13.21 billion, with another $975 million coming in over the first six months of the fiscal year ending March, according to an RBI publication.

Banks typically use these deposits to give loans to firms for their overseas needs. A portion of these deposits, however, is used for extending domestic loans as well.

Normally these are long-term loans with a reset clause every three to six months, linked to Libor. Firms have the choice of converting such borrowings into rupee loans after each reset.

Because RBI guidelines advise banks to avoid any asset-liability mismatch, they only extend such loans for less than a year because the foreign currency has to be returned to depositors at the end of that period.

Bankers said they deploy only 50-60% of foreign currency deposits for domestic loans. In the past, this limit was rarely reached as Libor was high and there was no cost saving to the borrower after banks added their margin and forward cover as a hedge.

A banker with another large Mumbai-based bank said that given the demand for such loans, lenders are exercising greater caution.

“We are generally giving these loans to our most-preferred customers, who have a good banking relationship with us,” said the banker who did not want to be identified because he is not authorized to speak to the media.

Despite the new-found popularity of such loans, they remain a cause of concern for borrowers because of the volatility of the foreign currencies involved, said Prabal Banerji, chief financial officer of Hinduja Group.

“For bridge loans or working capital needs, these loans are a very effective and cheap way of raising funds,” Banerji said. “But if you are betting on long-term loans based on this strategy, this is very risky. Since it is dependent on external factors such as Libor and foreign currency rates, any volatility in these makes the loan risky for long-term strategy making.”

NRIs can park their rupee deposits with domestic banks through non-resident external (NRE) accounts or non-resident ordinary accounts. They bank their foreign currency funds through FCNR deposits.

RBI has allowed banks to offer Libor plus 1% for FCNR deposits and Libor plus 1.75% for NRE funds.

Banks receive FCNR deposits in US dollars, pounds, euros, yen, Australian dollars and Canadian dollars.

The currency fluctuation risk is taken on by the banks in the case of FCNR; but in the case of other non-resident deposits, the risk is borne by the depositors.

anup.r@livemint.com

Their story is the story of Bhopal

Akshai Jain — Sun, 22 Nov 2009 19:29:00 GMT

Bhopal: The intervening night of 2-3 December 1984 changed life for everyone in Bhopal. But not even in her wildest imagination had Rashida Bee thought that looking back 25 years later, she would find it difficult to recognize herself.

“If it hadn’t been for that night,” she says, “the world could have come and gone, and I’d still be sitting at home in purdah, rolling beedis by night and doing housework by day.” Her colleague Champa Devi Shukla nods in silent agreement. She, too, would have been just another housewife in a basti in Bhopal.

Leadership qualities: Champa Devi Shukla (left) and Rashida Bee are managing trustees of the Chingari Trust that works with children with congenital defects born to survivors of the Bhopal gas tragedy. Madhu Kapparath / Mint

Instead, they now represent the victims of the Bhopal gas tragedy at conferences and demonstrations across the world. In 2004, they received the Goldman Environmental Prize, given to grass roots activists, for the work they have done with Bhopal’s poor. And they’re managing trustees of the Chingari Trust that works with children with congenital defects born to survivors of the disaster.

Rashida Bee hadn’t heard of Union Carbide Corp. till the night she woke up with a burning sensation in her eyes. For a while she thought someone in the neighbourhood was burning chillies, but then she heard the sounds of people running. “That night,” says Champa Devi, completing Rashida Bee’s sentence, “we all prayed for death.”

Also Read 25 yrs on, a walk through the Carbide plant

She doesn’t remember much of what happened next, but when she finally managed to open her eyes, she found most members of her family missing. After a frantic search, a few were tracked down at a hospital 150km from Bhopal. Seven were found in the morgue.

Champa Devi was luckier; none of her family died that night. She fled with her husband, three sons and one daughter, clambering over bodies of the dead to escape the spreading gas leak from the Union Carbide pesticides plant.

In the middle of that month, Rashida Bee’s family went away to Hoshangabad for six months, and Champa Devi’s stayed with relatives in different parts of the country.

Both remember the months after they came back to Bhopal as being the worst. Every member of their families was suffering from effects of exposure to the gas leak. Some found it difficult to breathe while others couldn’t summon the energy to stand for more than a few minutes at a time. There was no money and no work to be had.

Only chance

Then, on 15 November 1985, a few government inspectors came to their neighbourhoods. They were offering women training at a stationery centre that the government was starting as part of its rehabilitation programme for victims of the disaster.

Neither woman had ever worked outside her house. They had no idea what to expect, but they knew that this was their only chance.

Fifty Muslim women and 50 Hindu women were selected for three months of training. They were to be paid a stipend of all of Rs5 per day.

That is where Rashida Bee met Champa Devi. They sat in adjoining lines. “When I first saw her, I noticed the bindi, and assumed she was Bengali,” says Rashida Bee laughing at the memory. “And judging by her salwar kameez, I assumed she was Punjabi,” giggles Champa Devi.

Over the next few months, they became the voices of the women working there. Three months after they had joined the centre, the women were told that their training period was over and that they should now try to find employment.

“We were working at a stationery centre, but in those three months we hadn’t touched a sheet of paper,” says Rashida Bee, the anger still evident in her voice. That’s when they decided they would have to fight.

They were chosen by the women to speak to the collector—a top civil servant—when he visited the centre on the last day of training. The collector brushed them off, saying he could only give them work if the chief minister said so.

“I didn’t even know who the chief minister was,” sighs Rashida Bee. But the next morning they set out at 6.30am towards the chief minister’s residence. They didn’t have money for the bus fare, so they walked for 2 hours to get there.

After waiting for the better part of the morning, they managed to meet the chief minister, Motilal Vora. The best he could do for them, he said, was to get them jobs on a “piece rate” basis with Raj Udyog Nigam—a government-sponsored small-scale industry that said it would pay them for every piece of stationery they produced.

Collective action

For the next month, the 100 women went to work every day, but were only given work on one. “On 1 April 1986, a month after we’d started, all of us were paid Rs6 for that single day of work,” says Champa Devi, recollecting the date without a moment’s pause. “The price of a kilo of potatoes was Rs8.”

The women decided they would rather work for free. For the next three months, they refused any money. And for the first time their voices were heard. At the end of that period, they were promised a minimum of Rs150 of work every month.

Their first victory also made them realize the importance of collective action. On 17 March 1987, the Bhopal Gas Peedit Mahila Stationery Karamchari Sangh, an organization set up to help victims of the gas tragedy, was born.

Had their family members been supportive? “Yes,” both reply.

“For a while my uncles were a little upset that I was not wearing purdah, but then they saw how important my work was,” says Rashida Bee.

The formation of the union was the first step in a long struggle for fair wages. One of its first demands was that the women be paid “factory rates” that applied to manufacturing set-ups with more than 20 employees.

The next was that they be paid the same wages as other employees at the Central Government Press where they had been shifted to. The lower wages, Rs535 as opposed to Rs2,400, that were reserved for the “gas affected” because of their lower productivity were unfair and demeaning, they contended.

The fight took them on a one-month-and-three-day road journey from Bhopal to New Delhi in 1989, during which they camped out in the open, lived on the charity of villagers and wore sandals made of leaves when their slippers broke.

It was around this time that the women got involved with communities in the slums around the Union Carbide factory. Most of these people were drinking water contaminated by the chemicals dumped in the factory. As a result, the incidence of birth defects in children there was alarmingly high.

Health collapse

The compensation given to the slum-dwellers had been exhausted long ago on medical care, and a few of the other benefits that the government had supposedly doled out never reached them.

While she was busy with her work, the health of Champa Devi’s family members had started collapsing. Her husband was diagnosed with bladder cancer and died after three years of treatment. Her older son, who had suffered particularly badly from the effects of the disaster, committed suicide. Her youngest son had three children of which one was born with a cleft lip, the second died soon after being born and the third had stunted growth.

Despite the trauma, Champa Devi continued working with the stationery karamchari sangh. The sangh had finally taken the case for back wages to the courts. It made its arduous way from the labour court to the high court and then the Supreme Court, where it remains to this day.

In 2004, the world changed once again for Rashida Bee and Champa Devi Shukla when they were given the Goldman Environmental Prize for the work they had done with gas-affected communities.

The prize money was used to create Chingari, a rehabilitation centre for disabled children. Today, it has registered with it 300 children up to 12 years old. Space constraints, however, only allow them to accommodate 60 children a day. The centre has a speech therapist, physiotherapist, special educators and doctors. Its aim, according to Champa Devi, “is to try to give the children the tools to go to a regular school”.

Champa Devi and Rashida Bee still work at the Central Government Press, where they’re junior binders. The wages have increased over the years to Rs4,000. They spend the morning there and can be found at Chingari in the afternoon.

Of the three goals they set themselves when they got the award in 2004, they’ve achieved two. They’ve started a school for disabled children and they’ve instituted an award called the Chingari trophy for women who’re doing exemplary social work. A vocational training centre for women from the gas-affected neighbourhoods remains to be set up.

Getting this far

Even though things have changed for the women, the struggle has otherwise been painfully slow. The Chingari Trust is just off Berasia Road, one of the areas most affected by the gas tragedy. Rehabilitation and development still elude the area. The roads here are rutted with deep potholes, and there are swarms of mosquitoes everywhere.

But just getting this far has been an achievement. Sitting in their tiny office, Champa Devi and Rashida Bee look like happy sisters—giving interviews together, completing each other’s sentences, taking over when the other pauses and nodding together over shared memories.

Their greatest achievement, they feel, has been to prove they have it in them to fight and to lead other women in the struggle. “Once we felt like we were frogs in a well,” says Rashida Bee, “but now the whole world is with us.”

This year, they’ve decided to change the format of the Chingari trophy. Instead of giving it to one woman, they’re going to give it to 25 from across the country. One for each year of the past 25 years.

This is the second of a series. Tomorrow: The attractions and occupations of the tragedy.

akshai.j@livemint.com

The wrong place at the right time

Samanth Subramanian — Sun, 22 Nov 2009 19:30:00 GMT

Mumbai: Not everything in the photograph is, at first, immediately clear. The shop in the deserted background has been reduced to a yellow-and-green matrix formed by the hanging packets of potato chips. The advertisement for HDFC Standard Life is too awash with light to read easily. Even the gun is really just an elongated, metallic blur; we infer that it is a gun because we know who is holding it. Only its owner has been caught in sharp relief, his face composed but his stride reeking of the braggadocio of a young man who knows that a city, at least for the moment, is cowering before him.

Iconic image: Sebastian D’Souza’s photo of Ajmal Kasab at Mumbai’s Chhatrapati Shivaji Terminus got a special mention in the Spot News category at the World Press Photo award; and (right) D’Souza.

If every conflict produces one iconic image, 26/11’s is undoubtedly Sebastian D’Souza’s photo of Ajmal Kasab, frozen mid-rampage at the Chhatrapati Shivaji Terminus. It is the equivalent of the man in front of the tank at Tiananmen Square, the soldiers planting the flag at Iwo Jima, a tearful, pleading Qutubuddin Ansari during the 2002 Gujarat riots—the default image to accompany any story, published anywhere in the world, about the terror attacks. “And it isn’t even like I’m very proud of that photo, technically,” D’Souza says. “It’s just that nobody had ever photographed a terrorist in action before.”

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D’Souza, a spry 56-year-old, is the photo editor at the Mumbai Mirror, a newspaper housed in The Times of India building—so close to the terminus that last 26 November, he could hear a grenade go off even as he sat in his office. His team was already preparing to leave for the Taj Mahal Palace and Tower, from where rumours of a shootout had filtered into the newsroom. When he heard the explosion, D’Souza grabbed his backpack and sprinted towards the terminus, slipping in just before the police cordoned off the area. Another photographer, Rajnish Kakade of Associated Press, recalls that he wasn’t quite as lucky: “My office is a little further off. I was just 15 minutes too late.”

For the next 40 minutes, D’Souza played an intricate game of cat and mouse, hiding behind pillars and in shadows, sneaking through the carriages of stationary trains, chasing after the indistinct figures of Kasab and Abu Ismail. At times, he ran into knots of crouching policemen, all reluctant to open fire. He saw the owner of a bookshop gunned down mere metres away, one hand still clutching onto the stall as he fell. “Kasab heard the sound of my camera, but every time he looked my way, I ducked,” he says. “At some point, I realized I was wearing a light-coloured T-shirt, and that if I moved too much, they would see me. Something told me to run away.”

Cold-minded

In all, D’Souza took at least 100 photos, not once looking down at the viewfinder of his Nikon to see what he’d captured. “I’d been in the riots in Mumbai and Gujarat, but I don’t think this was as dangerous as a riot,” he says. “Here you knew there were two men. In a riot, you don’t know who will come after you to kill you.”

Only after the pair of terrorists left the station and the police crept back in to assess the damage did D’Souza look through his pictures. “The famous photo was the sharpest of the lot,” he says. “But there were other photographers, and I thought they would have gotten some photos too. Later I’d ask them: ‘Where were you guys? You shouldn’t have been afraid.’”

Finding himself barred from the terminus, Kakade had made his way to the Taj, where he spent the night and most of the next two days. “I met Sebastian when he came to the hotel at 5 the next morning, but it was only around 8:30 or 9 that I saw his picture in the paper,” Kakade says. “It was so clear. It showed his presence of mind—it was shot cold-mindedly. Even then I thought it was a candidate for the World Press Photo award.” He was right; it would win a special mention in the Spot News category.

At the Taj, Kakade asked D’Souza if he would license the photo to Associated Press. “I told him that via a wire agency, everybody in the world would see the photo,” Kakade says. “He agreed. He didn’t even ask for any money.” D’Souza, with a wry smile, insists that he did it to take revenge upon a competing wire agency where he used to work. “But if I’d known I could have gotten a crore (of rupees) for it, I would have sold it and quit my job.”

This was live

D’Souza’s photo is particularly gripping as a capsule of incongruity. “We usually have images of a terrorist that conform to a stereotypical idea,” says Devika Daulet-Singh, director of Photoink, a New Delhi-based photo agency. “This guy looks like a college student—he could be anybody. It shakes up all your ideas. More importantly, you actually got an image of the attack. Usually, when something happens, say in Kashmir, you maybe get images of the bodies later, if that. This was live.”

Even before the terrorist assault on Mumbai ended, D’Souza’s photo had appeared in publications around the world, but it would be another seven months before he saw his subject again. In June, D’Souza appeared at the Arthur Road court house to testify against Kasab. “He had lost all his musculature,” he remembers. “Earlier he had looked firm and trim. Now he looked softer.”

Copies of D’Souza’s photos were handed around the courtroom, and as Kasab looked at them over his lawyer’s shoulder, D’Souza remembers, “something happened to him. He looked ill. He put his head down on the desk, and then he told the judge that he wanted to go back to his cell, that he wasn’t feeling well”. The judge disregarded that request. “So Kasab started crying. Seeing those photos, he must have felt something.”

The cross-examination of D’Souza was brief. “Kasab’s lawyer asked me if I knew what ‘morphing’ meant. He was trying to trap me,” he says. “I replied: ‘It’s the first time I’m hearing the word. You tell me what it means.’” But his cheekiest, most pithy response had come at the very beginning of that trial session. Asked, as a matter of formality, if he recognized the defendant, D’Souza looked directly at Kasab and said: “His photo made me famous. How could I forget?”

samanth.s@livemint.com

Quick Edit | On the prowl again

Sun, 22 Nov 2009 19:13:00 GMT

The announcement by Reliance Industries Ltd that it has bid for a controlling stake in LyondellBasell, the world’s third largest chemical company, is a sign that animal spirits are back in Indian boardrooms.

One effect of the financial panic that struck the world at the end of 2008 was that major Indian companies decided to steer clear of ambitious investment plans. The investment surge was stopped in its tracks and government spending had to be increased to prevent a collapse in growth.

Companies have been able to raise new equity and refinance old debts over the past six months, thanks to the easing of financial conditions. But much of that money has been used to repair balance sheet damage rather than fund new growth plans.

Reliance’s bid could make this the biggest overseas acquisition by an Indian company. As those companies that went in for ambitious leveraged buyouts realized, a lot will depend on how well the financial risks are managed by the acquirer.

Back to the bubble territory

Sun, 22 Nov 2009 16:14:00 GMT

The market capitalization to gross domestic product (GDP) ratio of a country can be interpreted as an indicator of how frothy markets have become. The accompanying chart shows this ratio for Bombay Stock Exchange (BSE) stocks over the past 12 years. Market capitalization at the end of March every year has been taken and computed as a percentage of nominal GDP at market prices. Notice the sharp rise in market capitalization from 2005 to 2008. Also, while the ratio dropped sharply in March 2009 because of the global crisis, it was still well above the level for March 2005. During the tech bust in 2001-02, the ratio had fallen to much lower levels.

Graphics: Yogesh Kumar / Mint

Now consider the current market cap to GDP ratio. If we compare the market cap of BSE stocks on 20 November with the nominal GDP at market prices for 2008-09, we get 109%. The objection to that would be that it would be wrong to compare the current market cap with last fiscal year’s GDP. We need to compare it with the GDP for 2009-10. The Prime Minister’s economic advisory council has given an estimate for GDP growth for this fiscal last year and they had said that GDP at market and current prices for the current year will be at Rs58.3 trillion. At current market cap, that gives a market cap to GDP ratio of 99%. Notice that the only year in which that ratio was higher was 2007-08. But if the ratio is already as high as it was during the final year of the last boom, that doesn’t look too good for returns from the stock markets in future. It is yet another indication that market valuations have become very stretched.

Incidentally, Barry Ritholz of the Big Picture blog has drawn attention to the fact that the market cap to GDP ratio of the New York Stock Exchange together with Nasdaq has crossed 100%. This had happened twice before: during the dotcom boom and during the housing bubble. What it indicates is that the US market is back to bubble territory.

It’s true that the very lax liquidity conditions could propel the market cap to GDP ratios to new heights. But as Citigroup Inc. ex-CEO Chuck Prince learnt to his cost, you cannot bank on a bubble.

Write to us at marktomarket@livemint.com

Shree Renuka’s unique strategy puts it in a sweet spot

Sun, 22 Nov 2009 16:14:00 GMT

The government’s decision to amend the fair and remunerative price (FRP) mechanism for sugar cane procurement means that state governments can now fix a higher price and not have to pay the difference between it and FRP to the farmers. In the current season, the issue is more political than driven by the market situation. Sugar cane is anyway being procured at around Rs200 a quintal, compared with FRP of Rs129, due to lower output and higher demand. Buyers are scrambling to buy cane, as sugar prices are ruling high, up by nearly 90% from a year ago.

It is in this backdrop that Shree Renuka Sugars Ltd announced its results for fiscal 2009 (year ended September). Its results reflect the combined effect of higher sugar production and higher realizations. The company’s strategy is unique, focusing on a higher share of refining capacity, compared with integrated sugar production. This reduces its investment, insulates it from seasonality as it can process raw sugar at any time, and reduces dependence on cane production.

In fiscal 2009, Shree Renuka’s sugar produced from cane declined by 28% to 377,750 tonnes but sugar processed from raw sugar jumped nine fold to 637,089 tonnes. Sugar output doubled as a result, and sugar sales rose by 50% during the year and by 48% during the September quarter. Realizations were higher by 66% and 84%, respectively.

Graphics: Yogesh Kumar / Mint

During fiscal 2009, sugar sales rose by 144% from the previous year to Rs1,861 crore. The company has a sugar inventory of 390,344 tonnes, including raw sugar. This inventory will get offloaded in the coming months. Higher revenue from by-products such as ethanol and from power generation were offset by a decline in trading income. Overall revenues thus rose by a relatively modest 27% to Rs2,499 crore. But its expenditure rose by only 17% and operating profit margins as a result improved over 4 percentage points to 16.3%.

Shree Renuka’s stand-alone net profit doubled to Rs143.5 crore and its consolidated net profit increased by 91% to Rs225 crore. At Rs230, its share is trading close to its 52-week high, due to the favourable operating environment and its recent acquisition of a Brazilian sugar producer. It trades at about 12 times its projected fiscal 2010 earnings, which is reasonable given the positive factors.

A rising debt burden is a concern, as it is expanding capacity, and the Brazilian acquisition itself may add to consolidated debt. Any uncertainty caused by policy changes and the sugar shortfall turning into a surplus will be the key triggers to watch out for.

Write to us at marktomarket@livemint.com

Spate of bad news expected to continue in the telecom sector

Sun, 22 Nov 2009 16:15:00 GMT

The decision by Bharti Airtel Ltd to cut roaming charges by around 60% got significant press and its shares weakened further. But analysts tracking the company had already factored in a drop in roaming tariffs. After all, Reliance Communications Ltd’s “Simply Reliance” plan offered roaming at the rate of 50 paise per minute. Even after the sharp cut in its roaming rates, Airtel’s tariff is still higher at 60 paise per minute.

So it was more a question of when rather than if various tariffs will be cut. Thus far, much of the price cuts have centred on call rates for prepaid customers. Prices in non-voice segments such as SMS are also expected to be lowered. Besides, price cuts are happening gradually even for the postpaid segment, with per-second billing plans extended to this segment as well.

Postpaid users form the cream of the subscriber base for telecom companies, and generate much higher Arpu (average revenue per user) compared with prepaid users. Lower tariffs for this segment will lead to a further drop in revenue and profit.

Graphics: Naveen Kumar Saini / Mint

What will speed up this process is the government’s decision to introduce number portability by the end of this year. With competition set to get even more intense with the entry of new players such as Emirates Telecommunications Corp., or Etisalat, and Telenor SA, telecom companies will aggressively go after customers of rival networks. The fact that customers would be able to retain their phone numbers will only encourage this.

Coming back to the drop in Bharti’s roaming rates, it must be noted that national roaming accounts for 5% of the company’s mobile revenues, according to an analyst. In other words, in itself it won’t cause a huge drop in profit. But the development has led to negative sentiment among investors, since the trend of falling tariffs has been confirmed.

Bharti’s share price of Rs289 is close to its yearly lows, but isn’t likely to find many takers considering that the spate of bad news is expected to continue. As and when new operators start services, there may be a fresh bout of tariff cuts, and there could be a similar result when number portability gets operational. In the interim, markets may provide decent opportunities to pick up good telecom stocks such as Bharti at attractive valuations as long-term investments.

Write to us at marktomarket@livemint.com

GVK Power: raising stake in Bial is a well-timed move

Sun, 22 Nov 2009 16:16:00 GMT

The intent behind GVK Power and Infrastructure Ltd’s (GVKPIL) plan to buy out Larsen and Toubro Ltd’s (L&T) 17% stake in the Bengaluru International Airport Ltd (Bial) is to gain a controlling stake in the airport management.

GVKPIL is just completing the formalities on the 12% stake in Bial that it recently bought from Zurich Airport at Rs485 crore. For this, it paid a premium of Rs95 per share. This is not without reason. Bial holds great potential for future growth, given that it already handles more cargo and passengers than its southern counterpart in Hyderabad. According to Isaac George, chief financial officer, GVKPIL, “the quality of passengers is good, with a high average spend per passenger, due to the IT/BPO (information technology/ business process outsourcing) crowd.” This would only improve as the economic recovery gains momentum.

Also, stakeholders in Bial have a revenue sharing agreement of only 4% with the government (Airports Authority of India), unlike Mumbai where it is around 39%. The buzz in industry circles is that GVKPIL is also interested in increasing its stake from the present 37% in Mumbai International Airport Ltd, or Mial. South African company Bidvest Group Ltd holds 27% of Mial.

Flying high: A file photo of the Bengaluru International Airport. The airport holds great potential for growth and it already handles more cargo and passengers than its southern counterpart in Hyderabad. Hemant Mishra / Mint

GVKPIL’s intent to increase stakes in both Mumbai and Bangalore is well timed as air traffic in the second quarter of fiscal 2010 rose 3% over the year-ago period, with passenger traffic rising by 10%. In fact, this was after a contraction during the last four quarters.

Another positive in the airport business is the monetization of real estate in the airport entity. For example, Bial has 515 acres of land out of the total 4,000 acres available for commercial development, which can generate a strong revenue stream. Ditto for Mumbai. Monetization involves setting up of support services such as restaurants, hotels, duty free services and so on which can create a strong revenue stream.

Even before this monetization, fiscal 2010 will see stronger revenue growth and profit before tax as airports ride the economic recovery and benefit from higher tourist traffic. Bial’s revenue for fiscal 2009 was around Rs300 crore. In fiscal 2010, it is expected to earn around Rs400 crore. Similarly, revenue is expected to touch Rs1,000 crore at Mial compared with Rs800 crore in the previous year.

For GVKPIL, profit that accrues from these two airports is added to the pre-tax profit of the company, in which revenue streams mainly comprise of power and roads. Vehicular traffic and revenue on the Jaipur-Kishangarh Expressway project and higher operating rates and higher generation in power projects will improve earnings in the next two-three years.

A leading institutional broker has projected an 80-90% expansion in earnings with earnings per share of around Rs2 by fiscal 2011. At the current market price of the share of Rs52, the future earnings are discounted nearly 26 times, which denotes high investor confidence. That’s probably because the company is at the inflexion point, where the payback on its capital expenditure is just unfolding.

Write to us at marktomarket@livemint.com

What if a recovery is all in your head?

Recession Theory | Robert J. Shiller — Sun, 22 Nov 2009 16:33:00 GMT

Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.

Consider this possibility: After all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again—in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behaviour late in a recession, but economic theorists have long been fascinated by such a possibility.

The notion isn’t as farfetched as it may appear. As we all know, recessions generally last no more than a couple of years. The current recession began in December 2007, according to the National Bureau of Economic Research, so it is almost two years old. According to the standard schedule, we’re due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it.

Certainly, people did not always believe that there is a regular “business cycle” that starts and stops in a definite pattern. The idea began to spread in the popular consciousness in the 1920s and reached full bloom in the 1930s—with one major complication, the Great Depression, which received its name in midcourse, from a 1934 book with that title by Lionel Robbins.

“There have been many depressions in modern economic history, but it is safe to say that there has never been anything to compare with this,” Robbins wrote. In his narrative, the Great Depression was an extreme event, compared with ordinary depressions.

“Recession”, a kinder, gentler term, began to be used around the time of the 1937-38 contraction to refer to a normal downturn in the business cycle. In January 1938, The Chicago Daily Tribune offered a wry definition of a recession, calling it “a new word for depression, coined by those who don’t like to admit that we’re still in one”.

People joked so much about the euphemism that in 1938 US president Franklin D. Roosevelt said, “It makes no difference to me whether you call it a recession or a depression.”

The proliferation of the idea of a more or less predictable business cycle intersected with a rapidly growing public interest in psychology. Choice of words can matter greatly for the psychologically aware, and the new word “recession” had a much softer sound than its predecessor. Recessions, as the term came to be used, implied timetables that mark their expected end. Uttering the word does not risk damaging confidence, at least not fundamentally. A diagnosis of a recession can be shrugged off as something from which you will recover, as though your doctor had just diagnosed an illness as a common cold. A depression came to be another matter entirely.

Back in 1931, for example, The New York Times attributed the emerging economic cataclysm to a “mood of pessimism which had been carried to grotesque extremes”. In 1932, it compared reckless talk about “depression” to shouting “fire” in a crowded theatre.

Roosevelt is widely remembered for saying, in 1933, that “the only thing we have to fear is fear itself”. But he was only repeating an oft-told message.

It wasn’t until 1948 that sociologist Robert K. Merton wrote an article titled The Self-Fulfilling Prophecy, using the Great Depression as his first example. He is often credited with having invented the “self-fulfilling prophecy” phrase, but by the 1930s the idea was already as commonplace as the breakfast toast made with modern electric toasters.

In important ways, we are still using that 1930s pattern of thinking. We are instinctively fearful of reckless talk about depressions, and we try to support one another’s confidence. But the economy has still not recovered, by any means.

Coueism has been discredited generally, as has much of the old business-cycle theory, but they live on in our popular notions about recessions. We may hope that our resorting to euphemism and belief in timetables of business-cycle recoveries work better to restore confidence than they did in the 1930s.

The problem might be put this way: There is still a nagging doubt afloat that the current event is really just another example in that long sequence of recessions. In which mental category does the current contraction belong: recession or depression? We may still be at a tipping point. To the extent that the theory of the self-fulfilling prophecy is correct, there is a case for continued vigilance, to ensure that adverse events don’t encourage widespread talk of the second category.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets Llc.

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LyondellBasell may lift RIL revenue, add heft

Bhuma Shrivastava — Sun, 22 Nov 2009 15:45:00 GMT

Mumbai: The attempt by India’s most valuable company Reliance Industries Ltd (RIL) to acquire bankrupt chemicals maker LyondellBasell Industries AF, if successful, will help boost revenue and reinforce its bargaining power with suppliers and customers, analysts said on Sunday.

But such an acquisition would bring limited value to RIL’s business in India, which has sufficient domestic capacity to meet demand, one analyst said.

RIL said on Saturday evening that it had submitted “a preliminary non-binding offer to acquire, for cash, a controlling interest” in Rotterdam, Netherlands-based LyondellBasell, without disclosing financial terms. Conditions include LyondellBasell’s emergence from bankruptcy proceedings, “conduct of due diligence, documentation and receipt of sufficient creditor support”.

If it materializes, the acquisition would be the first marquee overseas asset purchase by the oil-to-yarn conglomerate, owned by India’s richest man Mukesh Ambani. The offer is in the vicinity of about $10-12 billion (Rs46,600- 55,920 crore), Reuters cited a person with direct knowledge of the offer as saying. A second person said the offer was around the upper end of the band, the wire service reported, without naming the two persons.

RIL is aiming to attain global scale for its conventional energy platform—petrochemicals, refining and oil and gas exploration—and invest in its new businesses such as retailing and alternative energy, chairman Ambani said last week at the company’s annual meeting of shareholders. “RIL has no new projects lined up after commissioning its new (Jamnagar) refinery and KG (Krishna-Godavari) D6 (gas block) and this acquisition will at least prop up the top line,” said Maulik Patel, head of research at Mumbai-based brokerage KR Choksey Shares and Securities Pvt. Ltd. “Besides making it a global player in petrochemicals, it will also substantially add to the distribution network of RIL.”

An industry executive close to the deal said that the acquisition, if it materializes, will give the energy firm “much larger negotiating power with suppliers and customers” as well as add about half a dozen new petrochemical products to RIL’s product line-up.

Patel calculates that RIL can raise up to $11 billion keeping its debt to equity ratio one-to-one. It has $4.2 billion in cash and cash equivalent, and about $8.6 billion of unsold treasury stock, giving it a total and “ample elbow room” of $23.8 billion, he said. This would be far in excess of the $10-12 billion offer mentioned in the Reuters report, which said Bank of America Merrill Lynch was among the advisers to RIL.

LyondellBasell, a maker of plastics such as polypropylene and polyethylene, was formed in December 2007 when Basell AF paid $12.7 billion for Lyondell Chemical Co., which declared bankruptcy 13 months later. The firm, which has a crude oil refinery and other operations in Houston, is a unit of New York-based Access Industries Holdings Llc, founded by billionaire Len Blavatnik.

Lyondell Chemical and other US affiliates of LyondellBasell Industries filed for bankruptcy in January. Lyondell Chemical had assets of $27.1 billion, debt of more than $19.4 billion and more than 25,000 creditors, according to the petition filed in US Bankruptcy Court in Manhattan.

“I’m not very excited about RIL acquiring a chemical company. You can’t sell LyondellBasell’s products in the country as domestic capacities are sufficient; as for global markets, you will be selling the same products to the same customers and buying the same feedstock that they (LyondellBasell) were anyway buying...so where’s the value addition?” said a Mumbai-based analyst with a foreign brokerage, who did not want to be named. “It is just an asset on the cheap. Another question is how much debt RIL is going to take on its books and how much of a haircut LyondellBasell’s lenders will be willing to take.”

The attempt to acquire LyondellBasell, if successful, could “bump up RIL’s ranking” a few notches in Asia’s energy rankings, according to Vandana Hari, Asia news director for oil and gas at global energy statistics tracking firm Platts. RIL currently ranks fourth in Asia behind three Chinese firms based on assets, return on capital employed and profits, among other financial parameters.

“This is and has been a good time to buy for companies that are forward looking, are not concerned with the immediate downcycle in the refining segment and have been making domestic investments for a while anyway. RIL fits the bill,” said Hari. “Those late now will again be chasing expensive assets a few years later.”

Another analyst with the Indian arm of a foreign brokerage said that most energy companies were strategically getting out of, or de-emphasizing, the petrochemicals business, and the sector would be under-invested in the West.

“If you are getting the distribution network for a song, then why not? If anybody can pick this (LyondellBasell) up, it is RIL,” said the analyst, who didn’t want to be named.

Reuters and Bloomberg contributed to this story.

Cadbury aims for a bigger bite of Indian market

Anupama Chandrasekaran — Sun, 22 Nov 2009 16:55:00 GMT

Chennai: Even as US-based Kraft Foods Inc. and other likely bidders emerge for the world’s second largest confectioner, Cadbury Plc is renewing its own bid for the Indian consumer with hopes to raise its market share in the subcontinent.

Over last three years, Cadbury’s Indian arm has logged higher profits by doubling sales growth through its presence in more retail outlets through a wholesale network that has grown as it increased reach into smaller towns.

Smaller packs and variants of existing brands starting at Rs2 boosted sales in the last few years, but the aim now is to energize the category by attracting new customers via a new avatar of Perk, the wafer chocolate introduced in the 1990s to counter Swiss multinational Nestle SA’s successful launch of KitKat.

The new Rs5 Perk, which is bigger than the version it replaces, boasts of having glucose energy and is aimed at bringing more on-the-go teenagers looking for a low-cost hunger buster.

Also See Growth recipe (Graphics)

“The increase in size is important for the new consumers,” said V. Chandramouli, director of human resources and strategy for Cadbury India Ltd. “At the same time, the product went through multiple rounds of evaluation to make sure we do not alienate existing buyers.”

Cadbury’s switch to the fast lane happened with the arrival of Anand Kripalu, whose mantra even at his former employer Unilever was to kick up not just market share but to lift the entire category.

“If you have super brands and star talent, then that combination has to make us bigger than what we are,” said Kripalu, Cadbury India’s managing director who interacts informally with his employees every quarter via an open house.

The London-headquarted company, which also sells bubble gum Bubbaloo and milk-food drink Bournvita, has dominated the Indian market for over six decades with around 80% share of the chocolate business in the 1980s.

With the entry of Nestle in the 1990s, its share slipped and now stands at 71% of the Rs2,000-crore chocolate market, according to research group AC Nielsen. Nestle, which is more popular for its dairy products, Nescafe coffee and Maggi noodles, has a close to 25% share of the chocolate pie, and Gujarat Cooperative Milk Marketing Federation, widely known for its Amul butter, milk and ghee, and imported chocolates take the remaining 4% share.

“While I would applaud Cadbury by saying that they have put up barriers to entry, I think that their position today is not so much of their own making as much as the fact that nobody has chosen to give them an iota of a fight in the market because competitors have other businesses that are far more profitable,” said Sharda Agarwal, a director at brand consultancy MarketGate.

Cadbury’s brand share in India may be the highest in the world but that ranking lacks sheen as annual consumption of chocolates by an Indian is just 54g, against 10.5kg in the UK and 5kg in the US.

So, three years ago, with a multifunctional team of sales people with distributor focus, marketeers intuitive of consumer needs and the scientists in the product and packaging research and development lab, the move to create a chocolate magnet for new customers that would push per capita consumption began.

Meanwhile, Sunil Sethi, Cadbury India’s director of sales, pedalled hard to improve supply chain efficiencies by chiselling away more than half of the distributors to remain with the most productive ones and connecting their computers to the corporate server, enabling electronic order placements and shrinking unreliable paper bills.

Next came offering-specific assortments, as against the entire brand basket, to retailers via distributors based on the customers they attracted, which reduced inventory at the distributors and also improved their cash flow.

The result: a 700% jump in the number of wholesalers that the distributors serviced and an average of at least 20% annual growth in sales along with a nearly 30% jump in profit.

“We’ve freed up money from blocked inventory, and as a result, you have made your distributor far more profitable,” Sethi said. “Today, most of my retailers are earning a 24% return on investment versus earlier when it would vary anywhere between 15-25%.”

With the launch of the new Perk, which has a more cost-effective recipe along with cheaper packaging, the firm expects to double its retail presence to two million outlets in another two-three years, inching closer to reaching all the 4.6 million outlets that stock confectionaries. It is also offering the new Perk in a more affordable Rs100 trade pack versus Rs145 earlier.

Graphics by Yogesh Kumar / Mint

Sustaining the level of growth is the challenge

Sun, 22 Nov 2009 17:09:00 GMT

Edited excerpts from an interview with Anand Kripalu, managing director, Cadbury India Ltd.

How have you led the charge in recent years?

Expanding reach: Kripalu says the firm aims at reaching more shops with the new Perk.

The last two years for me has been to raise the bar of ambition in the company. When I joined the company, the Cadbury brand was so much bigger in the mind than it was through the profit-and-loss statement. Historically, we have grown at about 10%. The ambition was to say if we are not growing at 20%-plus then we are not growing to potential.

Was involving the sales team in product development a key move?

Yes, even in the Perk mix, there have been wholesale packs, etc., that have been crafted based on retailer insights from the sales teams. Sometimes you create the whole marketing mix based on consumer insights and then the sales guy comes along and says, “Hey, this won’t work.” But that opinion comes in too late because we have to launch. We are trying to make sure that some of these things work if brought in much earlier.

What’s the agenda with the new Perk?

A key effort with the Glucose Perk is to get into shops where the old Perk never existed. In a market like India, you get a competitive advantage from being in traditional trade (grocery stores.)

How has distribution improved and what do you see as a challenge going ahead?

The number of wholesalers we reach has grown seven-eight times in the last three years. Chocolate is largely an urban thing, but we are going further. Each year, you get the lower hanging fruit but then you have to catch the higher hanging fruit to sustain the same level of growth. And that is the challenge.

Web firms try offline options to net customers

K. Raghu — Sun, 22 Nov 2009 16:30:00 GMT

Bangalore: Four Interactive Pvt. Ltd, which runs online local search portal Asklaila.com, now has an offline extension—agents assisting callers who seek information on restaurants, shopping malls and the like.

The phone-assisted service began a pilot programme on Thursday in Bangalore, where the local search firm is based, that will eventually expand to the 13 cities it covers now.

Accessible information: Four Interactive co-founder Kiran Konduri.

Three-year-old Four Interactive is not the only one attempting the so-called click and mortar model, a term for an online venture extending into the physical domain. Delhi-based Infocom Network Ltd, which has run online portal Tradeindia.com since 1996, connecting business users with suppliers of goods such as tyres and washing machines, set up a 15-member call centre to answer customer queries earlier this month.

“People in large corporations are comfortable looking online (for information), but our enquiries on the phone were from small and medium enterprises,” said Bikky Khosla, chief executive of Infocom Network. “By going through the phone, we also are trying to reach a bigger audience.”

In December, Internet firm Yahoo Inc., bought a 30% stake, for an undisclosed sum, in Chennai’s Info Network Management Co. Pvt. Ltd, which runs a phone-based directory enquiry service aimed at allowing the company to offer integrated phone and online local search services.

While some firms use agents, others such as Google Inc., offer voice-based search through an automated response system.

“It is very hard to build a virtual business in India,” said Kiran Konduri, co-founder of Four Interactive. “Mobile is the largest (opportunity) in the country, (but) it is not getting to the potential.” The firm will have 23 people round the clock answering about 2,500 calls from customers. Asklaila currently has search options via website, mobile Web, text message and digital satellite television and the phone-in service is an extension to expand the market, Konduri said.

Analysts say factors such as India’s low Internet penetration, cultural differences and the access that’s provided through knowing the local language, makes such firms to offer an off-line option.

“Not all online users are comfortable with all the online methods. Even now, there are a large number of cases when a call is made even when you are booking tickets,” said Diptarup Chakraborti, analyst at technology researcher Gartner Inc. “Cultural issues are still there, and the Internet in India is largely an English medium.”

India has between 34 million and 50 million Internet users, according to various estimates. On 16 November, Internet market research firm comScore Inc. said the country had 35.8 million Internet users as of September, but did not count the users who access the Internet from cyber cafes.

Just Dial Pvt. Ltd, which runs a phone-based service offering business information to consumers, has successfully travelled in the opposite direction, having seen its online service grow larger since putting the database on the Internet two years ago.

“Today, there is more traffic online with 250,000 visitors, while we get around 200,000 callers,” said V.S.S. Mani, founder and MD of Just Dial. “The future is definitely Web. But yes, there could be a hybrid, multi-platform text search.”

Google, which has a voice-activated search that can be used on mobile and fixed phones in India, says that it will continue to follow the automated route.

“For us, what we don’t want to do is be in the call centre business. That is not the Google model. (In that case) we can’t scale without adding people. If they (users) want to call and ask, let them make voice a modality as opposed to a call centre thing, where you need people on the other side,” said Vinay Goel, head of products at Google India.

Big realty companies picking up stakes in distressed developers

Madhurima Nandy — Sun, 22 Nov 2009 17:19:00 GMT

Bangalore: The partial revival of the residential property market following last year’s crash and money raised from qualified institutional placements (QIPs) is allowing bigger real estate companies to buy out builders who haven’t recovered from the slump.

Real estate companies such as Ackruti City Ltd, Sunteck Realty Ltd, Orbit Corp. Ltd, Oberoi Constructions Pvt. Ltd and Sunil Mantri Realty Ltd are picking up stakes in distressed assets or taking over completely from smaller developers stuck with land parcels without the money to build on them. Such assets carry the added advantage of having approvals in place and therefore being quicker to complete.

Graphics: Sandeep Bhatnagar / Mint

“These are good associations for both the smaller and bigger builders because while the latter would not have money to buy new land, it’s a good construction and sales strategy for the former,” said Ramnath S., director (research), IDFC-SSKI Securities Ltd, a brokerage firm. “Also, many small players, (who) would have concluded land payments and now don’t have money to build, can depend on a big brand name to sell the product.”

“For us, any land which we buy has to be available at a reasonable price,” said Vimal Shah, managing director of Mumbai-based Ackruti City. The company, which has a debt overhang of Rs900 crore, plans to build residential projects with land it has acquired from distressed sellers. “These properties came to us at good rates.” The projects will be renamed and sold under the Ackruti banner, he said.

There are several such opportunities in a market where there is still a credit crunch and smaller developers are looking for a rescue.

Over the past few months, Ackruti has concluded three deals, picking up stakes in projects in Mumbai from small firms that have been stuck after buying land during the boom. The deals cover a total 2 million sq. ft, according to Shah.

DLF Ltd, India’s biggest developer, has gone the other way however, exiting land deals that were signed in 2007-09 during the property boom.

Ackruti is co-developing the Hindoostan Spinning and Weaving Mills Ltd property at Prabhadevi in south Mumbai with Chennai-based entrepreneur C. Sivasankaran after DLF exited the special purpose vehicle earlier this year, selling its 66% stake to the latter.

A DLF spokesperson said the aim of the company was to reduce debt through the sale of non-core assets.

“This property Hindoostan Spinning Mill was best suited for a hotel and since we are not too keen on hotels, we decided to exit from this,” said the spokesperson, who can’t be named. “Also, it was a readily cashable deal which worked for us.”

Shah said premium serviced apartments and a hotel are planned on the sea-front plot.

Orbit Corp. has set aside Rs150 crore, part of which was raised from its QIP in August, to buy distressed assets, which was one of the state aims of the fund-raising programme.

“We are negotiating with three developers who are also landowners for properties in south and north Mumbai,” said Pujit Aggarwal, managing director, Orbit Corp. “These are good opportunities for us because it reduces at least two years of work for us and makes it easier to start the project.”

The developers declined to disclose the names of their partners, citing confidentiality terms in their agreements.

Developers said that the pile-up of assets is the consequence of a three-year boom, during which landowners without any track record or expertise in property development, turned overnight into builders to cash in on the bubble.

“In the current situation, these firms, which are sitting on big land parcels, are scared to execute the projects and don’t have the money,” said Sunil Mantri, founder of Sunil Mantri Realty. The opportunities aren’t limited to the bigger markets such as Mumbai, he said. Mantri has completed deals for distressed assets in Hyderabad and Pune.

Large firms believe that it is a better business model to form joint development agreements with smaller, local partners rather than buying out the land or forming a joint venture, analysts said. While buying out usually proves to be more expensive, joint ventures result in an equal sharing of cost and value, which is not suitable for such partnerships.

“Joint development agreements, in such cases, are suitable because we acquire the property and then give back a percentage of the built-up land to the partner,” said Kamal Khetan, managing director, Sunteck Realty. “In such cases, the larger developer, of course, provides and looks after aspects like construction finance, marketing and sales of the project.”

Sunteck has entered into a joint development deal for a large, 2.6 million sq. ft slum redevelopment project along the Eastern Express Highway in Mumbai and is also negotiating for four such projects across the city, he said.

“It’s a win-win situation for both and small developers are smart in tying up with a bigger developer, which has a good track record and brand value, to joint develop a project,” said Vikas Oberoi, managing director, Oberoi Constructions.