Current News

Gathering Momentum

Single brand foreign retailers are already making a splash.

The illicit romance has culminated in an arranged marriage. Upperclass Indians, long used to shopping for top-end fashion wear andpersonal and home accessories in London, New York, Paris, Singaporeand Dubai and at local shops that stocked smuggled goods, can nowjust walk (or drive) across to the nearest high-end store for many ofthese brands. It's still only a trickle, but the government'sdecision to allow single brand foreign retail chains to set up shopin India has proved to be a hit with both the retailers and theircustomers.

International designer house Versace has opened its first boutiquein India, called Jeans Couture, in Mumbai. On offer at the 2,200square feet outlet is the full Versace collection for men and women,the Versace Sport collection and the accessories range. Other bigname single brand foreign retailers like Louis Vuitton Moet Hennessyand Fendi (also owned by LVMH) are actively working towards enteringthe Indian market with controlling stakes in their ventures.

Many of the companies did not anticipate such massive demand fortheir products in India and seem to have been surprised by theresponse they received. The demonstration effect is beginning to ruboff on others as well. "We get regular calls from the owners ofseveral big brands that now want to come in," says Darshan Mehta,President (Brands), Arvind Mills, which owns licences in India forinternational brands such as Nautica and Tommy Hilfiger.

Estimates of market size vary, but most people say that the demandfor top-end foreign brands in India is in the region of Rs 3,000-4,000 crore per annum. "This segment is growing at 25-35 per cent,"says Mehta. "Given rising aspirations and increased incomes in thecountry, it will not be difficult for luxury brands to find a goodmarket here," he adds.

The progressive opening up of this sector alone can bring inbillions of dollars worth of FDI (foreign direct investment) everyyear. That, however, assumes that the government will get its acttogether. "The official policy is still very vague," says SubhinderSingh, Managing Director, Reebok India. Most players see the entry ofsingle brand retailers as the first step to the opening up of theentire sector. "We expect restrictions on foreign investment inretail to be eased within two years," says an executive at a topforeign retailer. "But we realise that a rainbow coalition governmentcan't move as fast as industry would like things to move," says asenior official in the Commerce Ministry.

Meanwhile, the Poonawalla Group has launched its first multi-brand high fashion store, Escape, at the Grand Hyatt Plaza,Santacruz, Mumbai. Backed by associates like BinHendi Enterprises,UAE, the store offers international luxury brands like Dolce &Gabbana, Just Cavalli, Versus, GF Ferre and Exte.

There are also reports that Giorgio Armani will enter India in atie-up with Reliance Industries' retail venture. Cartier, Chanel,Burberry, Hugo Boss, Swarovski, Tiffany, Moschino and Tommy Hilfigerare some of the others waiting in the wings. The trickle is beginningto gather momentum.

-Amit Mukherjee

SEBI Talks Tough

The regulator proposes to freeze demat accounts.

For M. Damodaran, chairman, Securities & Exchange Board of India(SEBI), it's time to plug the loopholes in securities regulations.Whilst SEBI's top brass was quick to issue lengthy orders banningstock market entities found to be neck-deep in a recent IPO scaminvolving fake demat accounts, the regulator is now working out waysto prevent off-market transactions in IPO shares before they'relisted and traded. SEBI has released a 15-page discussion paper inwhich it suggests that depositories should freeze the demat accountsof successful IPO allottees till trading begins in those shares.Roopalben and other key operators in the IPO scam used this very pre-listing period to make off-market transactions from thousands ofbenami accounts to few operative accounts of key operators andfinancers.

Damodaran is equally worried about the growing cases of companies'dematting' excess capital than the actually issued capital. As apreventive measure, SEBI has proposed a hefty penalty of Rs 25 crorefor any violation pertaining to excess issue of capital. According tothe discussion paper, SEBI will also track distinctive numbers ofshares in a depository system in order to ensure that sharecertificates, which have already been dematted, are not againtendered and dematerialised. Now all that's left is for thediscussion paper to translate into actual regulation.

-Anand Adhikari

Family Formula

Split over, it's back to business for Ajay Piramal.

Few know the real estate and pharmaceuticals businesses as well asAjay Piramal, Chairman, Nicholas Piramal India Ltd (NPIL), does. Sowhen Piramal and his sister-in-law Urvi decided to amicably split thefamily business, he suddenly found himself without a propertyportfolio. Urvi's three sons have taken charge of that now-PeninsulaLand, the real estate business, is managed by Rajeev Piramal, whilstPyramid Retail is run by Nandan. (Harshvardhan runs the textilesbusiness, Morarjee Textiles.)

But you can't keep Ajay Piramal away from real estate for toolong. Recently he raised a domestic fund, India Reit Fund, with acorpus of Rs 250 crore. "Along with the domestic fund, we will alsohave one where we will get foreign direct investment," says Piramal,adding, "We are looking to partner with developers-typically emergingand budding entrepreneurs-at an early stage, when they acquire land,so that we can go along with them."

In the meanwhile, just as his sister-in-law has inducted her sons,Piramal will soon be roping in his daughter Nandini Piramal into thefamily business. Nandini, 26, who has just completed her MBA fromStanford Graduate School of Business, is expected to take up herappointment as General Manager (Strategic Marketing) with effect fromJuly 1, in NPIL's overseas pharma subsidiary, NPIL Pharma Inc., oncethe company gets the shareholders' nod to do so. Piramal's wife,Swati, is Director of Strategic Alliances and Communications at NPIL.

Real estate may be a passion for Piramal, but it's clearlypharmaceuticals that's the growth engine for his group and Piramalhas ambitious plans for this. NPIL is ranked fourth amongst pharmacompanies in India (including the multinationals). In 2005-06, thePiramal flagship's market share inched up from 4.3 per cent to 4.6per cent, and it posted consolidated revenues of $352 million (Rs1,619.2 crore), a growth of 23.9 per cent over the previous year. "Wehave a clear vision in the domestic market and will go for aleadership position," says Piramal.

The three growth planks he has identified are domesticformulations, which account for 70 per cent of revenues, custommanufacturing, and research & development. "In three years, we shouldbe able to launch our own molecule in the market," he adds. NPIL hasalready begun clinical trials in the therapeutic areas of Oncology,Diabetes and Inflammation. The anti-cancer molecule, cdk-4, hasalready reached phase I of its clinical trial and Piramal has hishopes set on this. He's aware that drug discovery is a riskybusiness. "But with stable cash flows from the domestic business aswell as custom manufacturing (last year, the group's consolidatedprofits stood at Rs 126.05 crore) we can afford to take this risk."

Another Piramal trademark is mergers & acquisitions (M&A) andthere is unlikely to be any letting up in the pace of acquisitions.Last fortnight, NPIL pulled off yet another transaction, by acquiringa manufacturing facility of Pfizer in the UK for an undisclosedamount. Piramal hopes to generate revenues in excess of $200 million(Rs 920 crore) from custom manufacturing because of this deal. Amongother significant acquisitions made last year were those of AveciaPharmaceuticals in the UK and Torcan Chemical in Canada, with anannual turnover of roughly $70 million (Rs 322 crore) each. Aveciawas in the red when acquired, and Piramal expects it to break even inthe current year. Piramal is particular about not paying too much forwhat he buys. "Most companies are paying several multiples ofturnover but our acquisition multiple is 0.3 times of sales onaverage." He explains that the capital employed for companies he'sbought is limited and therefore in the long-term the returns will beattractive. Also, these have opened doors to NPIL in terms ofestablishing close associations with the top pharma companies in theworld. "We have very close relationships with eight of the top 10pharmaceutical firms in the world," he adds. Those associations willcome handy in bolstering his presence in the domestic market.

-Ahona Ghosh

Red Sun Rising

Emerging sectors take a beating on the bourses.

Few will dispute that prospects for stock price appreciation arerosier in sunrise sectors like media, entertainment, aviation andretail, than in traditional industries such as cement andautomobiles. But then what happens when markets begin to fall? Thenew-age stocks fall harder than good old commodities and cyclicals.Consider this: Stocks of multiplex companies are down 46 per centfrom their 52-week peaks. Aviation stocks have been hammered 47 percent, media, 45 per cent and retail, 36 per cent (see The Faster TheyRise The Harder They Fall). In contrast, the Sensex had shed 18 percent from its all-time high of 12,671 as on June 23. Old economycompanies too have not been bruised as much. Automobile stocks on anaverage have declined 20-25 per cent (although TVS Motor plunged by44 per cent), cement stocks are down roughly 25 per cent from theirpeak, and bank shares are lower by 25-30 per cent. Says P. PhaniSekhar, a research analyst who tracks the it, telecom and mediasectors at Mumbai is Angel Broking: "Sectors that enjoy highvaluations in a buoyant market take the biggest hit during adownturn. The airlines sector, for example, has been punished clearlybecause of stretched valuations. Multiplexes too have beenexpensively priced." QED.

-Shivani Lath

Saving ITI

An infusion of Rs 1,024 crore may just help the PSU survive.

The corporate headquarters of Indian Telephone Industries (ITI)has moved from the upmarket Magrath Road in Bangalore toDoorvaninagar on the outskirts of the city where its manufacturingfacility is based. The move is just another indication of the belt-tightening measures at this once dominant public sector behemoth.Y.K. Pandey, the current Chairman & Managing Director, is atechnocrat (he holds a Masters degree in engineering from RoorkeeUniversity and was part of the start-up team at government hotshop c-dot, the Centre for Development of Telematics) and likes to point outthat it was ITI's telecom networks that largely enabled the itrevolution in the early 1990s. However, towards the end of thatdecade, ITI was reduced to just a trading company. The telecomtechnology evolution from mechanical to electro-mechanical toelectronic and now digital caught the company by surprise. Thecompany was, and continues to be over-manned. The Department ofTelecommunications (dot), once its monopoly buyer, lost market sharewith the opening up of the sector (the operating arm of DOT has sincebeen hived off and rechristened BSNL).

Along with the DOT, ITI also took a huge hit. Sales were down byalmost half in just two years-from Rs 2,317 crore five years back toRs 1,257 crore two years later. With accumulated losses of Rs 1,800crore in 2005, ITI was stretchered to the Board for Industrial &Financial Reconstruction. Mercifully the Centre infused funds to theextent of Rs 1,024 crore over the last two years (it has happened intranches). Admits Pandey: "When I took over in May 2003, thingslooked bleak. Since then we have tried to turn things around."

In addition to the cash infusion, the company has taken a numberof measures to reverse its fortunes. Employee strength has been cutfrom a peak of 32,000 to 14,257 through a voluntary retirement scheme(VRS). The company, which had seven manufacturing facilities, hasmerged the two Bangalore plants, bringing down the total number tosix. It has even rented out its upmarket corporate headquarters to ahospital. When Lucent and Motorola expressed their reluctance totransfer technology, ITI parted ways with them. Instead, itstrengthened its relationship with French company Alcatel (whichrecently brought Lucent and awaits clearance from the EU'sCompetition Commission) which was much more responsive to its needs.ITI is even contemplating sale of excess land. Pandey declares:"Technology is no more an issue. We have technology right from IPtelephony to optical fibre to 3g telecom products. In spite ofcompetition, not many are aware that we are the largest turnkeytelecom player in the country even today."

The infusion of Rs 1,024 crore helped the company repay Rs 388crore worth of bank loans, as well as settle provident fund dues ofRs 93 crore and VRS payments of around Rs 220 crore. It also allowedITI to splurge Rs 150 crore on capital expenditure and enhance itsequity base by Rs 200 crore. The company has on hand an order book ofaround Rs 2,000 crore mainly from MTNL and BSNL. An additional orderfor 15.5 million lines from BSNL valued at around $1.6 billion (Rs7,360 crore) is in the pipeline. Government policy mandates that athird of the 45.5 million lines, $4.8 billion (Rs 22,080 crore) orderfrom the state-owned firm has to be given to ITI and its partnerAlcatel.

That order, when it materialises, will go a long way in turningaround ITI. There's still a lot of work left to be done. The averageage of the workforce is close to 50. Even after the recent VRS, thewage bill is a staggering Rs 377 crore and interest on debt, Rs 200crore. Additional funds are clearly required to not only offer a newvrs but also for working capital. The accumulated losses still standat Rs 1,800 crore as of March 2006. Pandey, though, is sanguine. "Wewill even offer contract manufacturing facilities for some of theMNCs. We will also raise working capital with the help of thegovernment. Our order book position is healthy." Now, it all boilsdown to execution.

-Venkatesha Babu

Bharti-Tesco?

Or will Wal-Mart or Carrefour partner Bharti in its retail foray?

Is Bharti Enterprises going with Tesco of the UK for its retailjoint venture? The news has been in the air for a couple of monthsnow and discussions between the two parties are said to be in thefinal stages. Even as Tesco is being spoken of as the most likelypartner, a spokesperson for Bharti told BT that the group was stillin dialogue with a few foreign players and that an announcement wouldbe made in a couple of months. There are three players that Bhartihas been in talks with: Tesco, Wal-Mart and Carrefour. Rajan Mittal,who is spearheading the group's retail foray, had recently told btthat the company was seriously looking at all possible retail models.Bharti already has a joint venture with the el Rothschild Group-controlled, ELRO Holdings India, FieldFresh Foods Pvt Ltd thatexports fresh produce under the same brand name.

-Krishna Gopalan

Instruments Of Instability?

Are P-notes responsible for stock market volatility?

The sensex, in June alone, swung by more than 300 points in a dayas many as six times (and there were still five trading days to go atthe time of writing). It's become fashionable to attribute thevolatility to hot money from hedge funds pouring out of the country.At such times, participatory notes (PNs) inevitably become thesubject of debate as the feeling is that much of this hot money comesinto the country-and flows out even faster-via these instruments. PNsare offshore derivative instruments that allow parties not registeredwith the regulator to invest in Indian markets via registered FIIs ortheir sub-accounts. Newspaper reports suggest that PNs are back onthe radar of the Finance Ministry and the Securities & Exchange Boardof India (SEBI), who are apparently considering norms to persuade PNholders to register and invest directly in Indian markets rather thantake the FII route. This, it is felt, will help curb huge FII sell-offs, such as those seen in the recent past. SEBI's problem is alsothat it is not able to identify the investor who is taking the PNroute.

SEBI refuses to comment on the media reports, but there is a viewin the market that such a move may not be such a bad idea after all.Says Narayan S.A., Managing Director, Kotak Securities: "If thecustomer comes directly to the market, it makes things easier for theregulator and the investor. It ensures transparency and is good forthe markets in the long run. The move is beneficial and necessaryfrom the regulator's point of view." A more liberal view comes fromShankar Sharma, Director, First Global: "It should be left to themarket participants to decide whether they want to be registered orinvest as PN holders." To be sure, this isn't the first time the PNbogey has been raised. It may also not be the last time.

-Shivani Lath

Diamonds And Rust

Did the crash in equities claim a big-time Mumbai jeweller?

Equities have been the best friend of many a Mumbai jeweller. So,last fortnight when virtually the entire city was in the grip of arumour that one of the biggest names in the gold and jewellerybusiness, Tribhovandas Bhimji Zaveri (TBZ), had lost big time in therecent market fall and was hence forced to sell out, the tale didn'tsound too outlandish. Media reports indicated that TBZ's loss in thestock markets is estimated in the Rs 1,000-1,400 crore range, whichhad forced the jeweller to sell out to a European diamondmanufacturer. TBZ's CEO R.K. Nagarkar, however, maintains there's nocause for concern and that the operation is in very good health. "Weare in the process of opening our second showroom in Hyderabad andare looking very closely at Western India." he says. TBZ has mandatedreal estate consultant, Trammell Crow Meghraj to identify newlocations. Terming the buzz in the air on TBZ selling out as"rubbish", Nagarkar clarifies that the company was in fact one of thehighest taxpayers in the country. "We are in the process ofcorporatising ourselves and there is no truth about us selling out."

-Krishna Gopalan

Pay Up, Tune In

Two-thirds of Worldspace's subscribers are in India.

In an era of innumerable 'free' fm channels, can a paid radiomodel service work? Noah Samarra, 49, an Ethiopan lawyer-turned-entrepreneur who runs the Washington-based Worldspace, the globalsatellite radio service provider, believes it can. If Samarra is afrequent flier into India, it's not just to meet his guru, Sri SriRavishankar, in Bangalore. He needs to keep visiting India because1.1 lakh of Worldspace's 1.53 lakh customers are based in India.

Samarra talks about a potential global audience base of 5.2billion for Worldspace, but fact is, 16 years after its launch-andfive years after operations were flagged off in Asia-Worldspace hasyet to find its feet. The problem is Worldspace is not a uniquemodel; there are other satellite radio service providers across theglobe like XM Radio and Sirius (who aren't dong too well themselvesalthough they have built differentiators with unique, somtimes edgyprogramming; Howard Stern, anyone?). Samarra says Worldspace haswhittled down its debt burden, which stood at nearly $2 billion (Rs9,600 crore) a year ago, to $155 million (Rs 713 crore). However,with revenues of a mere $3.5 million (Rs 16.1 crore) in the Januaryto March quarter (which are the latest numbers available), it willtake some time for the company to start making money. Also the factthat a Worldspace receiver (your ordinary radio cannot receive itsservice) has to be bought might also hinder its growth. Samarra ishowever gung-ho about the eventual success and viability of hisventure. "In India, we have seen a 35 per cent growth compared to theprevious year."

Worldspace is betting that its model of ad-free niche channels(for instance you can receive an old Hindi songs-only channel called'Farishta' or a Kannada channel), specialised programming, and CDquality music will convince consumers to pay up to Rs 1,800 a yearfor the service (also varies if it is bundled with the hardware). Thecompany, which has 300 employees in India, is also working withmanufacturers like BPL, Flextronics, Epigon and Nippon Audiotronicsto reduce the cost of the receivers and offer more choice tocustomers.

-Venkatesha Babu