Investing in Logistics

Businessworld
Piya Singh

India’s booming organised retail trade is now attracting big moolah and bigger players. Large corporate groups are seeing huge business potential in providing specialised warehousing facilities to the retail giants. Tata Realty & Infrastructure, the infrastructure development arm of the Tata group, is the latest big-ticket entrant. The company, which is setting up a $1-billion offshore real estate fund, is now ready to roll out a chain of business and logistics parks across India.

The other big players eyeing a part of the business include GE Equipment Services, an arm of GE and Reliance Logistics, part of Mukesh Ambani’s Reliance Industries. While GE hopes to build over a dozen parks for Indian Railways across the country, Reliance Logistics, with revenue of $400 million in 2006-07, now plans to cater to the logistics needs of other companies besides its own group firms.

Tata Realty & Infrastructure is likely to set up the logistics parks in Mumbai, Bangalore, Delhi and Chennai, Hyderabad and Nagpur in the first phase. “At present, land aggregation for putting up these parks is underway in Mumbai, Delhi, Bangalore and Chennai,” says a source. The company may also leverage land and warehouses owned by other companies in the group for this foray. These parks will house specialised warehousing facilities, cold storages and bulk storage with humidity control.

Earlier this year, Tata Realty and Infrastructure, a subsidiary of Tata Sons had signed a memorandum of understanding with Dubai-based Jafza International — a sister concern of DP World — to set up a joint venture company that would develop and operate these logistics parks. Jafza International manages seven such mega facilities in four countries while the group operates the Jebel Ali Free Zone, Dubai Auto Zone and Techno Park, amongst others.

Confirming the development, Tata Realty & Infrastructure’s CEO Dinesh Chandiok says,“We are seriously looking at several locations for setting up the logistics parks especially in major metros.” But he refuses to divulge if the company has signed up any particular project. “We hope to make some announcements in six weeks.”

The proposed joint venture company hopes to acquire land with basic infrastructure. The size and amount of investment of these businesses and logistics parks are not yet known.

And all this while the GOI is playing with India's infrastructure investments.

Infrastructure Funds
Road Infrastructure
Port Infrastructure

Return on your investment

TOI
Prabhakar Sinha

In a volatile market like this when the sensex lost over 1,000 points in two days, short-term investors, who check stock prices daily, should desist from investing. While speculators too are advised to stay away, stock markets are the best bet for those with a long-term outlook. And, the returns offered in the last five years, three years and 12 months only back the argument.




The 30-share sensitive index, has offered compounded annual returns of 43% in the last five years. For a three-year period the returns have been order of 47% and a little lower at 40% in the last one year.

Of course, return on investment is also a factor of when you enter the market. If you enter at a higher level, returns could be comparatively lower. But you can always stagger your investment over a period of time to reduce the risk of entering when the markets are already soaring. Investment advisors would tell you that staggering your investment enable investors to capture the boom and the bust of the stock market and balance out the risk.

Also, if you remain invested for a long period, the negative impact of entering at high levels would be reduced. So, if you are among those who think that the market is peaking, invest only if you can stay for long. While stock markets provide high returns, they come with high risk too. In other asset classes, if the risk is not high, the returns are also not as attractive.

For instance, bank fixed deposits for five years offer around 9% a year. And, that could be post-tax, if you invest the entire Rs 1 lakh under 80 C instruments like Employees Provident Fund and PPF in a year. If the investment is outside the tax benefit scheme, the return is even lower at 6.22%. PPF can offer you tax-free returns of 8%. But again there is a cap of maximum investment of Rs 70,000 including the deposits in EPF.

In the last couples of years, gold too has emerged as a good investment option, offering returns of 12% if you had invested a year ago and 15% if you bought the yellow metal five years ago. The returns were high due to the sharp depreciation of dollar. But, don't forget the income is taxable.

Real estate has emerged as a strong asset class offering 20% compounded returns over the last five years. Post-tax, this will be around 16%. But don't forget the large ticket size since you need to invest big.

Investing in the Indian Stock Market through Mutual Funds

Indian electric car

Businessworld
Sumati Nagrath

It has been called the ‘poster child for green transport’ by the UK’s The Daily Telegraph and features in the No. 1 slot of The Independent’s Best Cars list of 2007. Easily spotted while navigating London’s considerable human and vehicular traffic, India-made G-Wiz has, up till now, been the clear leader in the city’s fast growing electric vehicle (EV) market.

Manufactured by Bangalore-based Reva Electric Car Company (RECC), the G-Wiz was launched in the UK with an order of just 40 vehicles in 2004. “Today there are more than 900 units plying on London’s roads making it by far the company’s most successful market,” says Chetan Maini, deputy chairman and chief technical officer of RECC. One of the first players in the market, G-Wiz’s leadership position could be under threat because of the entry of competitors such as Nice Car Company’s Megacity and Future Vehicles’ Elettrica. London’s EV market is now a competitive one.

Maini is undeterred. Buoyed by the success of the G-Wiz in the UK, he is forecasting a 10-fold increase in worldwide sales from an estimated 3,000 in 2007 to an ambitious 30,000 units in 2008. Established in 1994 as a joint venture between the Maini Group India and AEV LLC, California, RECC has sold around 2,200 of these zero-emission city vehicles since they were first commercialised six years ago. According to Maini, exports account for about 70 per cent of Reva’s total sales.



Restricted only to London in the UK market, the tiny, almost dinky-car like G-Wiz has relied largely on word-of-mouth publicity to generate sales. The man behind the strategy and the near ubiquitous presence of this ‘quadracycle’ (the vehicle’s official categorisation under European norms) in central London is Keith Johnston, managing director of GoinGreen, the exclusive UK importer and retailer of G-Wiz.

“At a very early stage, we decided to adopt a purely online business model, which has allowed us to radically reduce costs,” says Johnston. These, he says, have been passed on to the consumers in the form of a lower retail price.

G-Wiz has played a vital role in popularising EVs in London. There is a city map on the wall of GoinGreen’s Southall office on which every customer is marked with a thumb tack. The pattern’s dense epicentre and gradual, but steady, outward spread is quite similar to that of the early stages of a viral outbreak.

This ‘viral’ spread of Reva is not restricted to London alone. Besides the UK, it is currently being sold in Italy, Malta, Cyprus, Norway, Spain, Ireland, Japan, Sri Lanka, and being test marketed in Australia, Switzerland, Germany, Austria, Nepal and Greece. But can this success be replicated in India where sales remain sluggish?




Green Is The New Black

While the innovative efforts of GoinGreen are commendable, there are other compelling reasons for the success of the G-Wiz in London. Even as concerns about climate change are paramount, an EV such as G-Wiz makes for an environmentally conscious buy. EVs can be charged from standard mains power supply anywhere. A study by a UK-based transport consultancy shows that even if we include the environmental costs of procuring the electricity that is used to charge the G-Wiz, it still only emits 63 gm CO2/km, compared to 170 gm CO2/km, the UK national average.

While motorists want to reduce their carbon footprints, they are also tempted by the various concessions offered by different local authorities within London. That’s what prompted Andy Hill, CEO of Broadchart, a music and technology company, to opt for a G-Wiz. “No parking hassles, no congestion charge, environmentally friendly, convenience,” is how he describes his reasons for buying the G-Wiz.

Without the special concessions this choice may not have been made. “My decision to buy the G-Wiz was influenced by these policies,” says Hill. “Without parking concessions, I would not have bought an electric vehicle.”

The Westminster City Council, in the late 1990s, introduced a raft of provisions for EVs. They are exempt from parking charges and also have access to free on-street electric car-charging points in Covent Garden, the cultural heart of the city. Other local councils have followed suit. All EVs are exempt from road tax and the daily London Congestion Charge of £8 (Rs 648), which is worth over £2,000 (Rs 1,62,000) per annum.

Policy Potholes

Environmental consciousness aside, economics, too, is a factor in the purchase decision. EVs lack government support in India. “Countries such as France, Japan, China and the US offer various subsidies, exemptions and parking privileges to EV owners,” says Maini. “In India, the excise duty for EVs remains fixed at 8 per cent, while it has been reduced from 40 per cent to 16 per cent for regular cars.”

In fact, the initial subsidy of Rs 1,05,000 for EVs was abruptly removed after just one year (1997-98). A reduced central subsidy scheme was reintroduced by Ministry of Non-conventional Energy Sources in 2002-03 but made applicable only to certain institutions and is not available to individuals.

Efforts made by London city councils have been one of the key driving forces behind the take up of EVs. “The concessions and the charging points are very helpful,” says Angela Campbell-Noe, CEO of Hat Pin Plc. “If there were no charging points in Central London, it would be impossible for me to get around in a G-Wiz.” Government support is indispensable if EVs are to be popularised in the country. “I have spoken to government officials and get lots of nodding heads, but none of that translates into policy decisions,” says Maini.




Buying an EV is not just about making an economically wise decision, it is also an environmentally sound choice that comes along with other lifestyle changes, which a majority of middle-class Indians are not yet ready to make.

If EVs in general and Reva in particular have to take off in India, three factors must come together — technological development from the manufacturers, favourable government policy, and environmental consciousness of the potential customers.

More infrastructure funds

TOI
Sherna D'Mello & Partha Sinha

As the India infrastructure story gets bigger and more attractive by the day, investors of all types - corporates to private equity players and venture funds, retail investors to fund houses, banks to government supported bodies - are vying for a share of the pie. Looks like it's a party for everyone out there in the market.

For mutual fund (MF) houses, it's the second wave of rush to launch infrastructure funds and at least three of them recently opened schemes primarily dedicated to this sector.




The first wave happened two to three years ago when, among others, Tata Mutual Funds, UTI Mutual Funds, ICICI Prudential MF and others rushed in with their infrastructure schemes.

While strong performance of existing infrastructure funds have given enough reasons for fund houses to launch schemes dedicated the sector, the government's keenness to develop India's infrastructure is another reason managers are bullish on these schemes.

"Increasingly, Indian companies are being stretched to meet infrastructure demand in the country. And already a huge amount of work is being done on this front,'' said Tata MF managing director Ved Prakash Chaturvedi.

Enthused by its nearly 150% return in the last two years, the fund house recently launched theIndo-Global Infrastructure Fund, which, in addition to investing in Indian infrastructure-related companies, will also look for international players, mainly Asia-dedicated companies.

Lotus India MF is the other player to launch its scheme for the sector while DBS Cholamandalam MF closed its scheme last month. Industry observers said there's more to come.

Apart from the schemes' growth potential, the other driver for investors is diversification of portfolio. Many financial planners advise investors not to allocate money to sector-specific funds as one could lose out if the sector fails to perform as expected.

"Infrastructure is a theme, it is not a sector. It is quite diversified and broad-based and covers small, medium and large companies - segments like capital goods and EPC firms among others.




This fund will invest in all companies that will benefit from infrastructure development,'' said R Rajagopal of DBS Cholamandalam MF. On its part, the government recently revised its estimate and predicted India will need $470 billion in this sector over the next five years. Experts say infrastructure development in India is still at a nascent stage and there is much more room for growth. Infrastructure cannot be imported and needs to be developed in the country, said a market analyst.

Growth in derivatives trading

Businessworld

Rajesh Gajra

Coincident with the upsurge in stock prices, and notwithstanding the occasional hiccups like the one in August 2007, activity in the derivatives market of futures and options (F&O) has also accelerated considerably. Professional speculators, arbitrageurs, institutional investors and retail investors have all upped the ante by trading in futures and options.

The pace is breathtaking. Going by the numbers, there has been a doubling of trading volume every two years. When the National Stock Exchange’s (NSE) index of 50 stocks, or Nifty as it is more commonly known, moved up by 66 per cent — from a level of 1500 points in October 2003 to 2500 points in October 2005 — the daily traded value in the F&O segment of the NSE increased by 116 per cent, from an average of Rs 10,016 crore to Rs 21,683 crore. Investor excitement, on the back of the global bull run, continued to run unchecked from October 2005 to September 2007, despite the steep correction in stockmarkets worldwide in August 2007.

The Nifty has shot up by 80 per cent to 4500 points. The frenzy in derivatives trading has grown as dramatically, to an average daily traded amount of Rs 53,644 crore in September 2007, a 147 per cent increase from October 2005. “The liquidity in F&O has gone up substantially,” says Sanjiv Shah, executive director of Benchmark Asset Management, which has an arbitrage fund — that trades on differences between futures and spot prices. “You can do size, that is, put in higher order quantities, and yet expect to get a fair price.”

Changing Market Dynamics

Empirical study of the world derivatives market indicates that price discovery first happens in futures — a contract under which investors agree to pay a predetermined price for a stock at a specified future date — and is then reflected in the cash market, rather than the other way round. As a result, trading volumes also tend to rise in the latter. “The FIIs would take, say, Rs 100 crore exposure on a single stock and then would go short on Nifty to knock out the market risk from the stock exposure,” says Shah.

Second, the FDA — like the DCGI — does not keep a record of the institutional review boards (IRBs) overseeing trials. IRBs are either ethics committees attached to hospitals conducting trials, or independent ones that approve trials for a fee; their primary focus is to guarantee human subject safety and protection.

With no database to verify, it is just not possible to find out if an IRB is doing its job.

The cash market’s daily average traded value figure of Rs 15,330 crore in September this year is a 116 per cent increase from October 2005. But the levels reached by derivatives has surpassed the cash market in leaps — since index futures went live in June 2000. The NSE is clearly the frontrunner. BSE’s Sensex futures and other stock derivatives on BSE attract only about 2 per cent of the combined derivatives turnover.

There are other important characteristics in the trading of derivatives in India — for instance, there is a preponderance of stock futures, which contribute a little over half of all derivatives trading volume. No other large equity derivatives exchange compares on this front — in most cases it is usually index futures or index options that dominate trading volumes.

The same speculative and arbitrageur ethos that was displayed in the erstwhile badla mechanism is now manifested in stock futures. It seems traders cannot get enough, dabbling in the all-time favourites, Reliance Industries, other Reliance companies, State Bank of India, Tata Steel, etc., with new flavours such as GMR Infrastructure occasionally creating a ripple. “It’s the leverage that has always attracted the individual risk-taker,” says Gurudatta Dhanokar, head strategist in derivatives at Almondz Global Securities, a broker on the NSE. “He could have an investment of, say, Rs 2 lakh in a fixed-income asset, but would then rather take a Rs 2 lakh exposure in derivatives by paying only 10-30 per cent as margin.”

Coming Of Age — Almost

Stock futures dominate trading on a collective basis. The highest trading, however, continued to be in Nifty futures. More important, once not as liquid, stock and index
options — where the writer of the contract has the right, but not the obligation to buy or sell a specified stock — are now beginning to generate interest. Index options, particularly Nifty options, have seen their share rise steadily from 7 per cent in 2005-06 to 11 per cent in 2006-07. “Liquidity in Nifty options is consistent, irrespective of the direction of the market,” says Dhanokar. “But in American-style stock options (where they can be exercised daily), the liquidity goes for a toss when the market turns bearish and the premiums turn expensive.”

Another significant dynamic that has fuelled the growth of the derivatives market is the participation of FIIs, whose share in F&O trading has gone up from 7.5 per cent to 14.4 per cent in the past two years. Within pre-specified limits, the FIIs are permitted to hedge or even take unhedged exposure through F&O in stocks or indices. But retail interest accounts for 60 per cent of the entire market. Proprietary trading by brokers is the second-largest contributor to F&O trading volumes — 26 per cent in August 2007. But that is down sharply from 41 per cent in August 2004, implying a diversification of participants in the derivatives market.




Liquidity, depth and maturity are visible in the growing proportion of open interest or unhedged positions — as also the bigger risk appetite. A review of the NSE’s monthly statistics shows that the percentage of open interest to daily average traded value was about 109 per cent in June 2006. In other words, the majority of trades were getting squared off every day; not much getting carried forward to the next day. “That meant traders did not want to take overnight risk,” says Dhanokar. But the latest NSE statistics for August 2007 says the open interest proportion was 172 per cent, implying that F&O traders are taking longer calls on the market.

That said, derivatives have been the cause for the failure of venerable institutions such as Barings Bank in 1995, and losses from derivatives trading have blown big holes in balance sheets of global companies. But for hedgers, arbitrageurs, and other risk-takers, the new-found maturity of the Indian derivatives market is a welcome sign.

See: Commodities Trading

Playing with India's infrastructure

Businessworld

Ashok V Desai

The Prime Minister is keen on infrastructure. He has created a celestial committee on it to hasten matters. This committee created a daughter committee in June 2005. That committee was to meditate on the Delhi-Bombay and Delhi-Calcutta freight corridors. Why these two? A coastal corridor linking all the ports from Bhuj through Tuticorin to Paradeep would have made more sense; so would have a Bombay-Calcutta corridor, going through relatively undeveloped central India. The corridors were created for the aggrandizement of Delhi.

Corridor is a fancy name for a railway line dedicated to freight. Why not passengers? Because they have votes, so they cannot be made to pay an economic price. Lifeless goods are more paying. And if the same line carries passengers and freight, passengers get priority, and timely freight delivery cannot be ensured.

The decision to exclude passengers rules out upgrading of the present Western Railways line, and requires a new, parallel line. Will it serve the present stations? It may diverge here and there, but it cannot avoid major cities like Baroda and Ahmedabad. So really, there will be one straight, fast, streamlined line for freight and another winding, slow, crowded line for passengers.

Elsewhere, railways make money by transporting passengers at high speeds. Here, because the passenger has votes, he gets the bullock cart service while goods whiz past.

Who will own the new line? It will be a joint venture of Indian Railways and public enterprises such as the oil companies. Why the latter? Because they can be made to cough up the money and will ask no questions in case things go wrong. Above all, there will be no private financiers and shareholders, for they would want returns and ask questions.

The joint venture will own the track, but not the trains that run on it; they would belong to the Railways. But the separation of track and rolling stock has failed elsewhere, notably in England; there, Railtrack went bankrupt and had to be taken over by the government. Why try the failed model in India? Because the railways do not want to pay for the track, but will not allow others to carry the traffic, which earns money. The government does not have the guts to take on the million railway employees.

Who will build the line? The Japanese. Why them? Because the Prime Minister and the Japanese get on very well together; and the Japanese are flush with money and would be prepared to give long-term loans. Why are loans necessary if the public enterprises are going to put up the capital? Because they hate to have to invest in a railway on which they will have no control and which will make no money for them, and so they will put up as little capital as they can get away with.

The Japanese are great at building and running shinkansen, the rapid passenger trains. Their freight technology is not great. Why then were they asked to build a freight corridor? Because the Prime Minister loves them. The Germans, who are champion freight carriers, do not fancy working with the Indian government.

The Delhi-Bombay corridor may make sense at least part of the way; but why the Delhi-Calcutta corridor through the robber-infested badlands of UP and Bihar? Because Buddhadev Bhattacharjee (the Communist Chief Minister of West Bengal) has done the Prime Minister favours, and they have to be repaid. No matter if it costs an additional Rs 200 billion; no matter that it will definitely make losses.

It does not matter to the Government of India, which has easy access to the taxpayer’s pocket; but it does to the Japanese, for if the Delhi-Calcutta corridor does badly, they will lose face. So they are balking. No matter; the government will approach another government for building the Delhi-Calcutta corridor.

And will not the Delhi-Bombay corridor pass through Gujarat and Rajasthan, and do terrible injustice to Madhya Pradesh? That is precisely what Kamal Nath is saying; and he has clout. So the corridor may soon meander off into the Chambal ravines!

Terror Cost

TOI

Sanjay Dutta,TNN

Private oil companies on undersea oil hunt will have to share the government's cost of providing security to men and infrastructure such as floating platforms and specialised vessels they deploy off India's shores.

The government's decision comes in the wake of mounting terror threats, which have made guarding the country's offshore assets an expensive proposition as more and more firms set sail in search of hydrocarbons treasure.

So far, only state-owned explorer ONGC has been chipping in with expenses incurred by defence forces for securing the seas and airspace around offshore installations like those anchored around the Mumbai High cluster of fields.

Now, private companies which are pumping or hunting for oil/gas will have to share the costs in ratio of their area of operation.




"The number of companies operating in offshore areas has risen considerably after six rounds of the government's acreage auctions. This means a huge exposure as offshore operations take huge investments that need to be secured. Besides terror or military threats, security also includes steps taken to ensure safety and avoid accidents from, say drifting ships hitting platforms," an oil company executive said.

The oil ministry will notify the decision in a month, which will be effective from April 2007. To start with, ONGC will pay upfront the entire oil industry's burden of the security expenses every year.

The companies operating in offshore areas will then pay their share to the flagship explorer through the Directorate General of Hydrocarbons, the regulator for exploration firms. However, only those firms which have deployed men and machines for six months will have to share the security costs.

Though private companies agree with sharing security costs, they want this to be treated as part of expenses towards starting commercial production from oil/gas fields. If government accepts the suggestion, it will allow them to recover share of security costs from revenues earned from hydrocarbons. While the jury is still out on this aspect, the government will make changes in the oilfield contracts to enable DGH to collect share from private companies operating in offshore areas.

At present, security of coastal or high-sea oil operations is dealt with through the Offshore Defence Advisory Group. ONGC spent Rs 27.5 crore on installing a vessel and air tracking system and spends Rs 1.26 crore every year on establishment cost of the group. All these and future recurring costs will have to be shared by private firms.

Getting energy-efficient

Businessworld

PIERRE MARIO FITTER

Hydrogen-powered vehicles are the holy grail of automotive technology. Several scientists and companies believe that hydrogen holds the key to a cheap, renewable fuel for cars as well as cleaner skies. Although millions of dollars and several years have been spent on research, the technology is still too expensive for the common man.

Now, a project between the Ministry for New and Renewable Energy (MNRE), the Society Of Indian Automobile Manufacturers (SIAM) and Indian Oil Corporation (IOC) will attempt to bring hydrogen blend-powered vehicles to India.

According to a ministry source, the Rs 6-crore project will focus on producing a commercially-viable hydrogen-CNG blended fuel by October 2009. The goal is to eventually have all new and existing CNG vehicles running on the new blend.




The benefits are clear. A similar American experiment in 2002 using a Dodge Ram Van (Chrysler’s full size van) showed a considerable reduction in greenhouse gas emissions. This is because hydrogen burns nearly four times more efficiently than fossil fuels and only emits water vapour. Additionally, by combining hydrogen with CNG, lesser quantities of CNG will be needed, thus reducing India’s demand from volatile foreign sources of gas such as Iran.

Tata Motors, Mahindra & Mahindra, Eicher Motors, Ashok Leyland and Bajaj Auto will provide one vehicle each for the project — an Indica, a Scorpio, two light commercial vehicles and one three-wheeler, respectively.

The consortium will first attempt to find the right blend of hydrogen and CNG (between 0 and 30 per cent of hydrogen), which is compatible to all the engines. These tests will also determine whether minor adjustments need to be made to the fuel injectors, timing mechanisms and other parts of the existing CNG engines. All this will happen at an IOC facility in Faridabad, near Delhi.

The first year will go into laboratory testing, and in the second year, each vehicle will be test driven for 50,000 km. These road tests will establish whether the new fuel’s performance is acceptable under long-term, everyday driving conditions. There will also be emissions tests every 10,000 km to observe the eco-friendliness of the new fuel.

If the hydrogen-CNG blend proves successful, the government is expected to invest heavily to market the fuel. This is part of MNRE’s overarching goal to have 1 million vehicles running on hydrogen-based fuels by 2020 — about 20 per cent of all vehicles expected to be sold by then.

Currently, an experimental hydrogen-CNG fuel station is running in Delhi to test on-site blending of the two gases. This will show whether existing CNG pumps can be similarly modified. But the project will need hundreds of such fuel stations. How these come up is another story.