The Ibs Times 37th Edition News Digest

THE IBS TIMES - News Digest Issue— 37

24th November 2008 [Monday] The Car Industry

If Detroit’s Carmakers are Bailed Out, Europe’s Will Be Next In Line

INDEX (Just Click to go directly)

Cover Story: Car Industry

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Bulls Eye View - 2 Money & Banking Industry and 4 Economy Commodities

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Corporate Diary

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Jargonomics

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NOT only in Washington, DC, is there a fierce debate over state aid to the beleaguered car industry. On November 18th, just as the bosses of General Motors (GM), Ford and Chrysler were lining up before the Senate banking committee to ask for help, the directors of the European Investment Bank, the European Union‘s lending arm, were considering whether to give Europe‘s carmakers €40 billion ($51 billion) in soft loans. The previous day the German chancellor, Angela Merkel, had met executives of GM‘s European subsidiary, Opel, to discuss guaranteeing a €1 billion liquidity line in the ―worst case‖ of its American parent going bankrupt. Despite the appearance of similarity on both sides of the Atlantic, however, there are big differences. For one thing, the plight of the Detroit Three is much more urgent. GM‘s boss, Rick Wagoner, told the senators that the economy faced ―catastrophic collapse‖ if bridging loans were not quickly made available. He gave warning that by the year‘s end GM might not have enough money to pay its bills. Ford‘s cash position is stronger—company insiders reckon that it might be able to scrape through on its own resources— but its chief executive, Alan Mulally, was not on Capitol Hill just for the ride. He fears that if either Chrysler or GM (particularly GM, since it is so much bigger) were to fail, the impact on the parts suppliers on which all three firms depend could bring down Ford as well. The Detroit Three can be reasonably confident of getting some help—eventually. Next year a sympathetic President Obama, and big Democratic majorities in both houses of the new Congress, should ensure that. But will that be too late? There seemed little chance that the Senate would pass a bill to allow the carmakers to get $25 billion of bridging finance from the $700 billion package set up to bail out the financial system. Many Republicans strongly opposed the idea of diverting funds to carmakers. The condition of Europe‘s carmakers is hardly healthy, but unlike their Detroit counterparts they are still some way from the critical list. J.D. Power, a market-research firm, forecasts that the western European market will shrink by 7.9% this year, compared with a 16% drop in America. But things are getting grimmer by the day. J.D. Power expects a further 10.5% contraction in Europe in 2009. Renault, which is cutting 6,000 jobs in Europe, thinks the market could shrink by 20%. As in America, there is disagreement both within the industry and among politicians about whether special aid is needed and, if so, what form it should take. Already, there has been a chorus of dissent over the prospect of Opel being singled out for help. And if aid is provided, what strings should be attached? The European Commission, which has been battling the carmakers over the introduction of tough CO 2emission rules in 2012, will want to make any aid dependent on assurances that the industry will build more fuel-efficient cars (an echo of a $25 billion package approved by Congress in September, from which nothing has yet been disbursed). The German makers, who build the biggest, fastest cars, and are therefore having to spend most to reduce their emissions, are in favour of such a subsidy. Contd...

TH E IBS TI ME S The Car Industry (Contd…) But the French and Italians, who specialize in producing economical cars, say they are quite capable of complying with the new rules without any help from the taxpayer—and do not see why the Germans should benefit from their own profligacy. They would prefer Europe-wide ―scrapping‖ incentives to encourage sales of new cars. Even within the commission, there are differences. ―I‘d welcome it if everything was done to prevent an important and traditional car producer in Europe from dropping out of the competition for reasons it is not responsible for,‖ says the industry commissioner, Günter Verheugen. But Neelie Kroes, the competition commissioner, rejects any comparison between the car industry and the financial sector, and has warned member countries against offering their carmakers unfair subsidies. Much depends on what the Americans decide to do. One option for Europe, assuming the Detroit Three get their money, would be to complain to the World Trade Organization. But Ford and GM are too important to Europe‘s car industry to make that probable. The betting is that Europe‘s carmakers will get a helping hand too—even if they do not really need it. - Uzma Rizvi and Gautam Lunawat

Bulls Eye View (Money, Banking & Markets) Nearly 90,000 financial jobs cut since Sept Banking giant HSBC is expected to lay off 500 staff in Asia the latest in a wave of cuts that has seen nearly 90,000 financial jobs axed since September. This will be HSBC's second round of layoffs in the region in less than two months, as the fallout from the global credit crisis continues to ripple through the financial sector. Here is a tally of major job cuts announced since September: COMPANY 1. Commerzbank 2. GMAC LLC 3. HSBC 4. UBS 5. Barclays PLC 6. National City Corp 7. Goldman Sachs Group Inc 8. American Express Co 9. DBS Group 10. Fidelity Investments 11. Citigroup Inc 12. HSBC TOTAL

No of Employees Date 9000 1-Sep 5000 3-Sep 1100 26-Sep 2000 3-Oct 3000 10-Oct 4000 21-Oct 3300 23-Oct 7000 30-Oct 900 7-Nov 1700 14-Nov 52000 17-Nov 500 18-Nov 89500

RBI not to cut rates immediately A top official in India's finance ministry said any move on interest rates by the Reserve Bank of India was unlikely to happen immediately. "Let's wait and watch on key rates. You should not expect anything in a day or two," Economic Affairs Secretary Ashok Chawla said after senior officials met the finance minister and the Reserve Bank of India governor. A sharp drop in the widely watched wholesale price inflation rate in early November has given the Reserve Bank of India (RBI) enough headroom to cut rates to shore up a faltering economy.

- Kavitha Koteeswaran

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Bulls Eye View (Money, Banking & Markets) No evidence of manipulative trading in ICICI shares: SEBI Market regulator SEBI said it did not find evidence of manipulative trading in shares of ICICI Bank, which had demanded a probe by the watchdog after its scrip came under heavy selling pressure in September. A spokesperson of ICICI Bank, which had approached the regulator seeking a probe into what they called ‗beating down‘ of their shares by vested elements, declined to comment. SEBI said by and large, the trading patterns are consistent with the shareholding pattern of ICICI with predominant holdings by FIIs, general buying and selling behavior by FIIs and the broad movements of the market during this period. The regulator analyzed the trading pattern of ICICI Bank shares from September 8 to October 10 this year following the complaint by the country's largest private sector bank. ICICI Bank MD and CEO K V Kamath had earlier demanded a probe by SEBI, alleging conspiracy by market manipulators to destabilize the bank's shares through rumors. SEBI said prices of ICICI Bank shares fell by 49.52 per cent from Rs 720.45 on September 8 to Rs 363.65 on October 10 this year. In its analysis, SEBI said none of the major sellers were observed to be placing orders successively at lower price.

Pressure builds on Bailout banks to cut bonuses Popular outrage over lavish banker pay that prompted Goldman Sachs and UBS to deny bonuses for top executives may force other banks getting government aid to eliminate year-end bonuses, compensation experts say. Goldman, expected to report a fourth-quarter loss, said on Sunday that Chief Executive Lloyd Blankfein and six others would get no 2008 bonus. On Monday, UBS unveiled a bonus plan that starting in 2009 will make top executives wait three years before receiving stock-based bonuses and payout cash bonuses over three years, plus impose "malus" penalties if performance diminishes. Bonuses have been strongly criticized as US taxpayers, suffering the worst financial crisis since the Great Depression, question the US Treasury Department's $700 billion bailout of the industry that played a large role in creating the crisis.

3 Major Banks increase non-resident deposit rates Banks and housing finance companies have started acting on the series of measures announced by the Reserve Bank on Saturday. While major banks have hiked their forex deposit rates, housing finance companies (HFCs) are readying plans to raise money from overseas to fund their operations at home. HFCs are, however, working on the modalities to borrow overseas before changing their lending rates. The country‘s largest lender, State Bank of India, the second largest lender, ICICI Bank, and the second largest stateowned lender, Punjab National Bank, have announced higher interest rates on the FCNR(B) and NRE (rupee) deposits on Monday. For SBI and PNB, post-revision, interest rates on foreign currency non-resident (banks) or FCNR(B) dollar deposits, of a maturity of more than one year but less than two years, will be 4.17%, instead of 3.42%. ICICI Bank revised its interest rates on NRE fixed deposits and FCNR(B) deposits with effect from November 18. The one-year NRE deposit rate has been increased by 75 bps to 4.92%.

MF inflows up in November: AMFI chief An improvement in the liquidity situation is visible as also an increased inflow into mutual funds this month, a top mutual funds industry official said. The recent measures taken by the Reserve Bank to ease the liquidity crunch in the system have helped the mutual funds industry, he said. The apex bank has cut its cash reserve ratio by 3.5 per cent and repo rate by 1.5 per cent since October, thereby considerably easing liquidity pressure in the system. The concerted efforts by the authorities have helped in bringing down interest rates from nine per cent to 7.5 per cent. Consequently, funds are now able to borrow at lower interest rates. Initially, funds were borrowing at 14-18 per cent but now due to intervention by the Government, RBI and the Indian Banks Association, most public sector banks are ready to lend money to mutual funds.

India can and will survive global crisis: PM India will sustain a growth rate of eight per cent despite the adverse impact of the global financial crisis, as per PM Manmohan Singh Exuding confidence that India had the "resources and the wisdom to grapple and deal" with the crisis, Singh said all instruments of public policy - monetary, fiscal, public investment and exchange rate - "will be deployed" to tackle it. Noting that the global economy was going through "choppy waters", the Prime Minister said "we can and we will survive this crisis". Replying to questions after delivering the inaugural address at the Leadership Summit, Singh said the government had "anticipated the global slowdown" and taken measures in the budget. Observing that the global economy was passing through a "deep crisis", the economist-turnedpolitician said "we cannot pretend that we are not affected by it."Due to the interdependency (of the world economies), we are in the same boat," the Prime Minister said. Noting that global problems required global solutions, he said there was a need for a global safety net.

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Bulls Eye View (Industry and Economy) Lenders likely to loosen grip, offer more credit Lenders are expected to loosen their purse strings to make available more credit in the coming days on the back of the likely reduction in interest rates, the Confederation of Indian Industry President, according to Mr. K.V. Kamath. This remark came in response to views expressed at the India Economic Summit 2008 on Sunday that bankers may have clamped up following the global financial crisis and that they needed to ‗unfreeze‘ to put back vigor in the credit markets. He noted that inflation had started to moderate on the back of fall in international crude oil prices and was poised to move down to 4-5 per cent levels in the coming months.

Reduce excise for industry to cut prices, says Bajaj The Government must reduce excise duty to enable industry to reduce prices and thereby help stoke demand in the economy, the Chairman of Bajaj Auto, as per the Mr. Rahul Bajaj. He also called for a pro-growth policy approach from the Government as against the current seemingly focused attention towards inflation control. Mr. Bajaj also called for more fiscal stimulus to give further boost to infrastructure in the country.

Slash of risk weights to have limited impact The Reserve Bank of India‘s move to reduce risk weights attached to commercial real estate lending and reduce the provisioning requirements for home loans signals the beginning of a reversal in the hawkish stand of the central bank, taken early on to curb inflationary trends and a possible real estate bubble. The move is clearly aimed at encouraging the banking sector to shed its ultracautious stance and increase lending to the sector. While this move is unlikely to provide any immediate growth trigger to the realty sector, large players or companies which are less leveraged may be able to receive funds at relatively lower costs, pursuant to this move.

New body proposed for assessing early warning in systemic instability An organization to assess systemic stability of major economies of the world composed of elite economists and with decisionmaking authority is the need of the hour to put the world economy, buffeted by the financial market meltdowns, back on the rails. On India‘s growth prospects, India should focus on providing more for agriculture and rural development and put public services delivery for employment, education, rural infrastructure, vaccination and mid-day meal scheme as a very high priority.

IIP up but sustainability under cloud IIP rose by 4.8 per cent in September 2008, compared with 1.3 per cent in August, but was still lower than 7.4 per cent in September 2007. The sequential increase in IIP numbers has been supported by a better showing from capital goods, which grew by 18.8 per cent, rebounding from 2.3 per cent in August. This is healthy given the high base in September 2007 and needs to be watched for sustainability. Consumer durables too grew by an impressive 13 per cent, probably due to pre-festive demand. Recent reports suggest that exports declined by 15 per cent in October — the first contraction since 2003. Domestic car sales slumped by 6.6 per cent last month, as consumers put off their purchases, amid tighter access to finance. The decline in excise revenues by 8.7 per cent in October also is a pointer to slowing manufacturing growth..

Cut prices, not production, to tackle demand slowdown’ Imports of pig iron and certain specified iron and steel items such as semi-finished products, flat and long products would now become dearer. The Government on Tuesday slapped 5 per cent basic customs duty on these items. As an anti-inflationary measure, the Government had in April 2008 done away with import duty on various categories of steel products. Also, the Finance Ministry has now levied a 20 per cent basic customs duty on crude soyabean oil. There is, however, no change in the import duty on refined soyabean oil. Earlier in the day, Mr. Chidambaram had in his address at the India Economic Summit 2008 advised airlines, real estate companies, hotels, and car and two-wheeler manufacturers that a price cut rather than production cut or staff layoffs would be better option to tackle any demand slowdown in the economy.

- Nidhi Gupta

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Bulls Eye View (Commodities) Edible and non -edible oil prices take a further dip The prices of edible oil fell further at the end of this week as deepening global recession reduced the demand for commodities. Trading sentiments turned weak as palm and soyabean prices fell sharply in the Malaysian commodity markets on easing crude prices. However, bucking the general weak trend, groundnut oil gained moderate ground on heavy demand from vanaspati units due to the marriage season. With the palm oil futures declining in Malaysia-a hub for the oil export to global markets-after a decline in crude oil signaled lower demand for fuel substitutes amid a worsening global recession, gave a negative impact on the domestic front. In the non-edible section, linseed oil prices suffered a fall by Rs. 50 to Rs 4,650 on lack of support from paint industries and neem oil by Rs 50 at Rs 3,650-3,750 per quintal on reduced offtake by soap manufacturers. Other non-edible oils like mahuwa, castor, rice bran and palm fatty oils remained unaltered throughout the week in restricted trading activity. Interestingly, edible oil companies now want the ban imposed on exports by the government to be lifted. Till March 2008, there was no restriction on exporting edible oil from the country, and such exports were permitted both in consumer packs and in bulk. However, with the rise in edible oil prices in the international and national markets, the government imposed a ban on edible oil exports since March; 2008.The decision was taken to rein in the runaway prices of cooking oils which was one of the major factors in inflation. The industry now wants that ban to be lifted as oil prices have started climbing down in the international and domestic markets.

Coffee output pegged at 2.76L tonne The Coffee Board‘s latest post-monsoon survey estimates the country‘s new crop at 276,600 tonnes. This is both good as well as bad news for the commodities sector.The good news is that this is 5.6% higher than last year‘s crop of 262,000 tonnes. The bad news is that the latest estimate of the new crop is 5.6% less than the post-blossom estimate of 293,000 tonnes. The post blossom survey was conducted in May whereas the post –monsoon survey was conducted in the first few weeks of November and released this week.

Tea auction goes online On 19th November, 2008 the Tea Board kicked off e-auction paving the way for putting an end to the age-old ‗outcry system‘ in tea auction which started in India in 1861.The e-auction will be launched in all the seven tea auction centers in India by December in a phased manner. The country has seven such centers located at located at Guwahati, Siliguri, Jalpaiguri, Kolkata, Coimbatore, Coonoor and Kochi. The e-auction system is an outcome of the study conducted by AF Ferguson in 2002, which had suggested the electronic platform to bring in transparency in the auction system so that tea sellers get a fair price. The software system has been provided by NSE.IT which is the software arm of NSE.

USDA predicts decline in Sugar production in India The latest sugar report from the US Department of agriculture may not be sweet for India.According to this report shrinking acreage under sugarcane cultivation will result in lower sugar production in India during 2008-09 which will impact the exports by a record 4.6 million tonnes. Brazil with a production of 32.4 million tones accounts for 20% of the global sugar output whereas Asia (comprising mainly of China, Thailand and India) contribute 40% of the global production. Consequent to the decline in acreage and fall in production, India is expected to be a net importer with imports of a million tonnes of sugar, while exports would fall dramatically to about 3 lakh tonnes or down a whopping 4.6 million tonnes from last year .

Metals may probe further lows Commodity markets continue to plunge to lower and lower levels. Central to the market performance is demand-side concerns that have continued to receive focused attention. Producers are responding to price declines by cutting output. Also, many new projects have been put on hold or even cancelled because of the current uncertain conditions that pervade the global economy. The financial turmoil continues to take its toll. There is little sign of it stabilizing. Meanwhile global growth prospects have been downgraded; and the world is said to be in recession already with the prospect of it continuing into 2009. Investors - be they institutions, retail or funds – have increasingly become risk averse and are liquidating their long positions.

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Bulls Eye View (Corporate Diary) Dabur buys 72% in Fem Care Pharma Dabur India has acquired 72.15% stake in women‘s skin care company Fem Pharma for Rs. 203.7 Cr in an all cash deal. The transaction ascribes a price per share of Rs. 800, which translates into an equity valuation of Rs. 282.4 crore. Dabur will make an open offer for an additional 20% shares in the company as required under Indian takeover regulations. The acquisition of Fem Pharma will allow Dabur to foray into the high-growth skin care market with an established brand. Further, Dabur also has the potential to extend the brand into newer and related skin categories .Fem Pharma had a profit of 9.75 Cr in the first half of 2009-09 fiscal on a turnover of Rs 54.45 crores. It has a sizeable presence in the international markets such as Yemen, Maldives, Mauritius, Malaysia, UAE and Oman.

Kirby India to Build Nano’s core production unit Kirby Building Systems India, a subsidiary of Kuwait based Alghanim Industries group has bagged a 70 crore project from Tata Motors to build the core production facility for the Nano car at Sanand in Gujrat. This fast track project is scheduled to be completed within a time period of 120 days beginning November 19th.

Philips acquires Meditronics The Dutch firm Philips has acquired the medical equipment maker Meditronics which is its second buyout in three months. This is Philips‘ fifth healthcare acquisition in emerging markets in two years. Besides Alpha and Meditronics in India, Philips has acquired two firms in Brazil and one in China. Maruti to Roll out MADE IN INDIA car by FY11

Maruti Suzuki India, the country‘s largest passenger car maker, will unveil its first ‗made in India‘ compact car in 2010-11.A battery of engineers and technocrats are working at its R& D centre at Gurgaon on the design and associated specifics of the fully indigenized passenger car. The company also plans to hire 1,000 additional engineers to hasten the design process of the vehicle. Earlier this week, Maruti launched its new Car called the A star at an introductory price of Rs. 3.47L to 4.12 L

Mark Robinson named as CEO of Citi group: South Asia Mr. Sanjay Nayar who was heading Citigroup‘s South Asia operations till now will be replaced by Mr. Mark Robinson. This is the first time in almost a decade that the Citi group had appointed an expat to head its India operations .Mr.Nayar had quit the job to take over as the CEO and country head of private equity giant Kohlberg Kravis Roberts in India.KKR is looking to invest in India in private equity, infrastructure, distressed funds and a host of other areas.

PSU paychecks set to rise. The Government has approved an average of 96% increase in the salaries of those working for Central Public Sector Enterprises (CPSE‘s).The increase has been highest at the top with the salaries of heads of profit making CPSE‘s increasing by as much as 300%.In addition, employees could also receive as much as 200% performance related pay as well. This should also help provide some consumption boost to the slowing economy. The revised salary will be applicable from January 1, 2007 which means that employees could receive fat arrears as well. According to a analysis by Economic Times, the CMD of a oil sector major will now be earning 5,76,000 per month, after factoring in the 200% performance related bonus. This is a huge leap from his monthly salary of 1, 02,500 per month at present and will put him ( at least in terms of pay) ahead of Infosys Chairman Narayan Murthy who earns Rs. 4,16,666 per month at present. However, the revised salary burden would put an extra pressure of Rs. 9000 crore every year on the CPSE‘s.

Pepsi told to remove mountain picture The Delhi high Court has directed the cola giant PepsiCo India to remove the picture of the ‗snow capped mountain‘ from its packaged water product Aquafina. It has also directed PepsiCo to add the phrase ‗as per BIS standards‘ to its label along with the phrase ‗purity guaranteed.‘ The court felt that pictorial device was creating a misleading impression in the minds of the public by suggesting that the water which is being marketed by the company has its origin in the mountains. - Siddhartha Arora

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Market Watch Indices

24th Nov

BSE SENSEX NSE Dow Jones

8903 2708

8386

NASDAQ DOW Nikkei S&P 500 CAC 40 DAX FTSE 100

1384 8312 7911 849.08 3291.47 4554 4153

24th Nov Re/US$

50.01

Re/Pound

73.97

Gold ( a gm) Rs

1182

Silver ( a kg) Rs

17020

Brent Crude(a bbl) Rs

2373

- Gautam Lunawat

Jargonomics Du Pont System The Du Pont analytical method helps us throw more light on the performance of a company. It is a method of financial analysis which dissects the important ratio ROI (Return on total investment or assets) into its constituents as shown below. This gives a deeper insight into a firm‘s working, by indicating how turnover and profitability have influenced the ROI. ROI= Profit after taxes/Total assets = Sales/ Total assets * Profit after taxes/Sales

Economic Value Added (EVA) A tool for evaluating and selecting stocks for investment, and also used as a measure of managerial performance. An American consultancy firm Stern Stewart is credited with the development of this tool in the late eighties. It is calculated by subtracting the total cost of capital from the after tax operating profits of a company. EVA= After-tax Operating Profits – Total cost of capital Operating profits simply mean earnings before interest and taxes. The cost of capital is the composite cost of total equity and debt, which together are deployed in various assets such as land, buildings, machines, inventories, receivables and cash. Total equity includes reserves and share premium for which an appropriate opportunity cost must be considered. A positive EVA is deemed to be a good sign and higher it is the better. EVA expressed on a per share basis facilitates comparison between companies.

EOQ It is the acronym for Economic Order Quantity, a term that relates to inventory management. It is the optimum size of order which minimizes the cost of purchasing and holding inventories. The formula to calculate EOQ is : EOQ = Square Root (2*Co*D / Ch ) Where , D - Demand per unit time , Co - Ordering Cost , Ch - Holding cost per unit time

Floating exchange rate The exchange rate of a currency that is allowed to float, either within a narrow specified band around a reference rate, or totally freely according to market forces, such as nation‘s economic health, trade performance and balance of payments position, interest rates and inflation.

- Uzma Rizvi

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TH E IBS TI ME S Editors : Abir Zara Khan, Deepika Pandey, Gautam Lunawat, Ishita Singh, Kavitha Koteeswaran, Nidhi Gupta, Rohit Sinha, Sanjana Bhuwalka, Uzma Rizvi, Varun C. Bhagath Mentors : Puneet Thakur

Disclaimer: This newsletter is just a compilation of news from various sources. Thus, readers are expected to cross-check the facts before relying upon them. Though much care has been taken to present the facts without error, still if errors creep in, necessary feed backs will be always welcomed. Editors will not be responsible for any undertakings. The newsletter is not meant for sale and hence, no part of the newsletter should be used without the prior permission of the editorial team.

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