Oil companies and foreign sugar

Three state-owned oil marketing companies (BPCL, HPCL, IndianOIL) will jointly pump in $600 million, or Rs 2,400 crore, in Brazil to buy/lease plantations and related units for producing ethanol, a byproduct of the sugarcane industry blended with petrol to make "gasohol”.

TOI

Oil fields and coal mines are passe. India is now poised to make its first overseas acquisition of sugarcane acreage in search of altenate fuel energy security.

Ethanol is considered less-polluting than petrol and its progressive use is seen as reducing dependence on oil imports.


Brazil is the world’s biggest sugarcane grower and leads in gasohol usage with upto 25 per cent blending. India, with its inadequate ethanol supplies, has been doddering with efforts to introduce 5 per cent blending as opposition from sugarcane lobby and alcohol industry have blocked efforts to raise supply.

A team of executives from Bharat Petroleum, Hindustan Petroleum and IndianOil has initialled documents for working out deals to acquire 15-35 per cent stake in two of the largest ethanol players in the Brazilian sugarcane industry— Louis Dreyfus Commodities Bioenergia and Infinity — and 50 per cent equity in new plantations/projects of smaller firm Rezek.

Indian oil firms will form a joint venture company for ethanol investments and share half of the equity in it. The remaining half ownership will be offered to the Brazilian partners. Most of the investment will be equity contribution from the Indian oil companies as local debt is not available for financing acquisitions in Brazil. The joint venture will be based in Brazil for tax benefits.

Brazil allows foreign ownership of sugarcane acreages which are rain-fed and require little irrigation. The plantations are mechanised with integrated sugar mills.

Several European firms have acquired acreages and taken up ethanol manufacturing for captive use in their home country.

One way of making sugar useful...even if it is foreign sugar!

Safe budget

Businessworld
Omkar Goswami

Thanks to a compounded annual growth rate upward of 8.6 per cent over the last four years, Mr Chidambaram has had an enviable situation of an overflowing exchequer. Net direct tax revenues to the centre grew by 42 per cent to Rs 217,149 crore, which was over four-fifth of the budget estimate for 2007-08.

The government is in its final lap, and this budget will be structured with an eye on impending elections. That implies an expansionist budget targeted at rural India, the social sector, employment generation and micro and small enterprises. I, therefore, expect significant percentage increases in outlay on the various planks of the Bharat Nirman programme, such as drinking water and sanitation, rural roads, rural electrification and rural housing. I also expect more on Sarva Shikhsya Abhiyan, the mid-day meal scheme and the National Rural Health Mission. Most likely, the largest absolute increase will be on the National Rural Employment Guarantee Scheme.


The second factor is the distinct possibility of an economic slowdown. Mr Chidambaram is a realist who understands numbers, especially early warning signs. Given the present state of electricity, roads, highways and ports, it is very unlikely that industry can expect to continue growing at double-digits. Growth of the Index of Industrial Production has fallen from 11.2 per cent in April-December 2006 to 9 per cent for April-December 2007, and is trending down. My estimate is that India will be looking at a GDP growth of between 7.5 per cent and 8 per cent in 2008-09. Lower growth may require some expansionary sops. And I believe that the FM will offer a few, without too much pressure on the fisc.

The third factor is a guillotine called the Seventh Pay Commission. Mr Chidambaram had the misfortune of being at North Block when the Sixth Pay Commission was implemented. It seriously hurt the exchequer and scarred him as well. He knows of the pressures for substantial increases in civil service pay; and he knows how it can rock the exchequer. The FM will need to stash away a sizeable chunk of revenues to make these payments. And to go easy on major expenditure outlays, knowing that a big splurge is around the bend.

The fourth factor is fiscal rectitude, and the Fiscal Responsibility and Budget Management Act. Will Mr Chidambaram meet the Act targets for 2007-08 and 2008-09, and leave a much stronger exchequer? I believe he would want to; but he may not be able to, given the possibility of a slowdown, bigger pays and election-year sops.

On balance, what should we see? Lots of stuff on social sector expenditure; some sops to industry; a hold on reducing customs duties; talk on additional resources to meet pay commission recommendations; some talk too on the need for a strong exchequer; and, of course, couplets from Thiruvalluvar and other poets. High on politics; but basically safe. Or so, I hope.

Turbulent markets

Businessworld
Rajesh Gajra

Over the past two weeks, a surfeit of tea and coffee has been consumed, all thanks to the turbulence in the initial public offering (IPO) market, otherwise known as the primary market. Investment bankers and promoters of companies have been spending their days holding long meetings in the midst of their IPO offer periods to decide whether to abort planned IPOs, due to the sudden withdrawal by investors of all stripes: retail, high net worth individuals and even institutional investors.

Blame the meltdown in global equity markets in January - in the middle of a colder than normal month. But how much of a link is there between the secondary markets that saw huge losses, and the primary markets, where capiutal is being raised for ostensibly good projects? “Sentiment is a common thread between primary and secondary markets,” says Pankaj Vaish, MD and head of equities and fixed income liquid markets at Lehman Brothers in Mumbai. “Aggressively priced IPOs and those with massive oversubscriptions, without full financing, can signal that perhaps the market is getting too hot, as they did most recently.”

While the weather has gotten warmer, the once red-hot IPO market has been reduced to cold ashes. In what under normal conditions would have been a breeze, three high-profile IPOs — Wockhardt Hospitals, Emaar MGF Land and SVEC Constructions — had to withdraw their IPOs due to complete lack of investor interest.


Where Have All The Investors Gone?

“Realisation is dawning on many investors that IPO valuations may be on the high side,” says Stuart Smythe, executive director and head of equities, Macquarie Securities India. “They are becoming rational now and their risk appetite has been moved by recent global market weakness.”

For retail investors, the Reliance Power IPO was a rude wake-up call about the vagaries of the market. The stock was expected to list at close to Rs 1,000, going by the trade in the grey market. While it did open higher than the offer price of Rs 450 on 11 February, by the end of the trading day it closed down much lower. Secondary market behaviour since then has been erratic; the Bombay Stock Exchange Sensitive Index (Sensex) has been behaving like a yo-yo.

One segment that has been severely affected are the leveraged HNIs (high net worth investors) who took severe losses on IPO bets gone wrong, particularly Reliance Power IPO. Even as BW goes to print, there are settlement problems in the grey market, with investors unable or unwilling to pony up on the wrong bets they placed. For HNIs, the IPO market is going to be off-limits, at least for a while.

The Ripple Effect

The withdrawal of three high profile IPOs has severe implications for the equity market. “The IPO market is important from the economic perspective; it gives opportunity for companies to raise resources and acts a channel for investors to invest in such companies,” says Devendra Nevgi, CIO of Quantum Asset Management, managers of Quantum Mutual Fund. “When companies withdraw their IPOs you have to ask whether they really required the money in the first place.”

The second question that looms large is one of valuation. The fact that majority of IPOs in the last year have listed at a 10-100 per cent premium over the offer price raising questions about whether the fundamentals of the business and the markets justified the price. "If an IPO is priced at a premium to regional and local peers, global money managers struggle to justify assessing a new offering at a premium, when their existing holdings are at discount, or comparables are trading at fairer values than a new offering," says Macquarie's Smythe. For instance, the price to earnings ratio of Emaar, a realty company, was much higher than the listed realty stocks like Unitech and DLF that had fallen steeply in the secondary market slide.

Will Sanity Return

The secondary market prices of newly listed IPOs have also seen a correction in their prices. The most dramatic case was the Rs 10,123 crore IPO issue of Reliance Power. Issued at Rs 450, with a discount of Rs 20 for just the retail investors, it got listed on 11 February. It was the first big IPO in recent history that traded at a discount to the issue price on the day of listing. Its average traded price on the National Stock Exchange was Rs 416.80.

Though not completely unexpected, the dramatic withdrawals of IPOs have bought the investment bankers to some senses. So will things change?

In fact Reliance Power, trying to brave the turbulence in the markets, has announced that each investor with shares of the company will be compensated for his/her capital loss by being issued free bonus shares. The decision will be taken on Feb 24 at a board meeting.


As the news became public Reliance Power stocks soared nearly 12 per cent on the National Stock Exchange and touched a high of Rs 430, price at which shares were allotted to retail investors. The stock rose 11.67% in the BSE and even pulled up the rest of the market to the 18,000 level.

The board would also consider other measures that could reduce the cost of Reliance Power Ltd shares below the IPO price of Rs 430 per share for retail investors, and Rs 450 per share for institutional and other categories of investors, the company had said.

Smart move to reduce the turbulence in the market. Also a way of maintaining its reputations since the ADAG (Anil Dhirubhai Ambani Group), which owns Reliance Power, has other IPOs to float: Reliance Infratel and Reliance Entertainment.

The real India growth story

Operators and investors continue to bleed at the Stock Market, partly due to greed and partly due to global uncertainties. After the withdrawal of the Wockhardt IPO, the real estate (realty) firm Emaar-MGF also withdrew its IPO——and while investors were licking their wounds came the real shocker.

Reliance Power, which had expected to net $3.5 billion from its IPO, had declared an issue price of Rs 450 per share. The company had expected the retail subscription to take the price close to Rs 900 per share——in the end it was a dampener, closing the day at Rs 372.30, following hefty selling by investors.


This debacle has forced other companies ot rethink their own IPOs. Globus Spirit, a liquor (IMFL: Indian Made Foreign Liquor) company, has withdrawn its IPO. Realty firm Uppal is postponing its Rs 2000 crore IPO, while BPTP another real estate company is re-thinking its IPO plans.

Despite the bearish trend, companies like Rural Electrification Corporation and GSS America Infotech are going ahead with their IPO plans. RECL is entering the markets on February 19 with a price band of Rs 90-Rs 105 per share while GSS America, whose issue opened on Monday, is coming with a price band of Rs 400-Rs 440 per share.

Even the government is worried. It has proposed to set up an "IPO pricing norms" committee to change the way that issue prices are determined——presently by the company and the merchant bank managing the issue.

Meanwhile the real India growth story continues on the ground——this time in Kutch. Rs 27,000 crore has been invested in the region's infrastructure, which has been devastated by the earthquake of 2001. Rs 75,000 crore more is expected in the next four years. The reason for this windfall of private equity in infrastructure is the state government. The first thing it has done is to build world-class roads in the region; and then encouraged the private development of power plants and ports. Secondly it walks the talk on fast track clearances of projects. Gujarat takes only three months to approve a project, which in most other states may take up to year.


Watch this story on video:
http://portfolio.moneycontrol.com/india/video/stockmarket/14/47/newsvideo/325678

Operators and investors

Businessworld
Rajesh Gajra

This month opened with a bit of drama. On 1 February, when the Sensex shot up by 3.3 per cent, both foreign institutional investors (FIIs) and domestic institutions were net sellers on the combined cash market of NSE and BSE. Their net sales — Rs 127 crore and 115 crore, respectively — were small but without a net purchase of Rs 500 crore by FIIs, it is difficult to raise the market.

During the January crash, retail and domestic institutional investors were net buyers, while the FIIs and brokers were sellers. But the trend seems to have reversed in February. Retail investors did net sales of Rs 370 crore on BSE in the first three days while brokers’ proprietary accounts took in net purchases of Rs 107 crore.

Are operators driving the market?

Well at least the operators of Wockhardt Hospitals are not driving the market. Their IPO, on the strength of which the Wockhardt expansion was to take place, failed to attract investors and has now been withdrawn :
Reuters
Rina Chandran

India's Wockhardt Hospitals Ltd has shelved its initial public offering, becoming the first Indian listing hopeful to pull its deal as market turbulence saps appetite for risk.

India's stock market soared 47 percent in 2007, its fifth year of a bull-run, and had $15.8 billion initially in the IPO pipeline for 2008 -- more than double the size of last year.

Concerns that the credit crisis would trigger even deeper write downs for banks and financial institutions and a looming U.S. recession have caused many companies in Asia to shelve IPOs.

Healthcare services provider Wockhardt said late on Thursday it was pulling its offer to raise up to $165 million after it got subscriptions for only a fifth of the offering of 25.1 million shares. The company had extended the period and cut the price after initially hoping to raise up to $197 million.

Emaar MGF Land, the Indian joint venture of Dubai's Emaar Properties EMAR.DU, which aims to raise up to $1.64 billion, had to cut its price band twice and extended its IPO by three days to Feb. 11.

Major IPOs in waiting include a $1.5 billion offer from the tower unit of mobile firm Reliance Communications, a $500 million issue from mutual fund firm UTI Asset Management, and a $635 million offer from Bharat Oman Refineries, a venture of Bharat Petroleum Corp and Oman Oil Co.

Foreign funds, buyers of a record $17.4 billion in Indian equity in 2007, have sold about $2.5 billion net in shares so far this year.

Private equity in Infrastructure

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....for this sector India will need $470 billion over the next five years.

Businessworld
Piya Singh

In march 2003, IDFC private equity closed its first infrastructure-dedicated fund of about $200 million. "At the time, it was quite a coup considering very few people believed in infrastructure," recalls IDFC Private Equity’s President and CEO Luis Miranda. Soon, Miranda had promoters lining up with proposals at his office. Some offers were dubious while others were full of execution risks. It took IDFC a year to make its first commitment. The fund also had little experience in the sector. "We invested Rs 100 crore in GMR Energy’s power businesses as I was very impressed with the promoter’s execution skills," says Miranda. "But we didn’t have experts in the power sector and getting approvals and NoCs from banks was difficult. Even though we signed the term sheet with GMR Energy in August 2003, the deal was closed only in March of the next year."


Five years later, Miranda is amazed that significantly larger deals are closed in just a few weeks and investors are even compromising on basics like the due diligence process. "There are entrepreneurs telling me to make up my mind quickly as they have three other potential investors waiting in queue," he adds. Miranda has a point. Last year, according to data collated by global accounting firm Grant Thornton, six PE deals of more than $500 million were struck out of which four were in the infrastructure sector including telecom infrastructure and real estate (Tata Realty & Infrastructure investing in logistics and GTL Infrastructure shared telecom towers).

This year, deals only promise to get bigger led by the infrastructure sector. For instance, Essar Power that plans to set up three power plants with a combined capacity of 3,600 MW is in talks with several large funds to raise $600 million out of a total capital outlay of $4 billion. Sterlite Power is reportedly looking at raising $1 billion from PE players and financial investors in a pre-IPO placement. The company plans to put up 10,000 MW of capacity across India at a total investment of Rs 40,000 crore. GMR Energy is also learnt to be in talks with funds for some proposed ventures even as the holding company GMR Infrastructure recently raised a billion dollars from a clutch of PE players. Telecom infrastructure also witnessed several large deals last year and this momentum is expected to continue this year.

Temasek, Goldman Sachs, Macquarie along with some other PE funds invested a billion dollars in the tower business of telecom provider Bharti last year while the infrastructure unit of Reliance Communications raised $337 million. This year, Tata Teleservices, which also plans to hive off its tower business into a separate entity like Reliance and Bharti, is also expected to raise funds from PE players for its telecom infrastructure business.

This ‘power and tower story’ may also be responsible for inflating valuations, say bankers. "There is a lot of hype around infrastructure and there’s too much money chasing deals. People seem to have forgotten that PE investments in infrastructure can be risky with delays in execution, court case, accidents — all of these have financial implications," says Miranda. Ernst & Young’s National Director for Transaction Services Jayesh Desai agrees. "While valuations need to be looked at on a case-to-case basis, in some infrastructure deals, the valuations are unbelievably high".


However, despite high valuations, PE’s interest in Indian infrastructure is unlikely to wane. A lot of the momentum is supply-led. PE funds under pressure in home markets such as the US have been focusing on the sub-continent where deals are smaller and so is the amount of debt raised in most transactions. "I expect PE funds to invest much more in India’s infrastructure. Out of a total $50 billion of PE funds that I expect to flow into India in the next five years, a substantial portion may be invested in the sector," says JM Financial’s Executive Director for Investment Banking, Bhavesh Shah.

However, the momentum in PE is part of that in the entire financial system. According to a recent report by Morgan Stanley’s Managing Director, Ridham Desai, called India Strategy — The future of our business continues to be sparkling, the country’s structural liquidity story is intact and gets reinforced with the passage of time. The report states that it expects savings into equities over the next 10 years to accumulate ten fold over the previous decade’s total to $350 billion at the current exchange rate. "The structural liquidity story is also likely to support capital market businesses of investment banking, broking, fund management and investments as we roll into 2008," the report adds. "By 2017, equity mutual funds could be managing $500 billion in assets, the market may be trading over $14 billion in securities, brokerage firms may be generating revenues of $9 billion and investment banks may have $500 billion in cumulative equity issuances."

Despite the big numbers, PE funds may be forced to keep a close watch on returns. It may serve them well to keep their expectations in check even though early movers like Miranda claim to have made seven times their investment in companies like GMR Energy.

More Infrastructure Funds

Brazilian Sugarcane Industry

The Brazilian Sugarcane Industry Association (UNICA), represents the top producers of sugar and ethanol in the country's South-Central region, especially the state of Sao Paulo, which accounts for 60% of the country's total production. Along with its 101 member companies, UNICA develops position papers, statistics and specific research in support of Brazil's sugar, ethanol and bioelectricity sectors. Its membership accounts for about 50% of Brazil's sugarcane harvest. In 2007, Brazil produced 425 million metric tons of sugarcane, which yielded 29.8 million tons of sugar and 17.7 billion liters of ethanol.

Yahoo Finance

A report called "Deadly Brew," aired on Thursday, Jan. 24 by Bloomberg Television, is a dangerously misleading and out-of-context representation of Brazil's sugar and ethanol industry, according to the Brazilian Sugarcane Industry Association (UNICA).

"The report relies on isolated incidents, flawed data and unsubstantiated allegations. Not surprisingly, it arrives at unbalanced and inappropriate conclusions that bear no resemblance to the industry as it is today," says UNICA President and CEO Marcos Jank.

The report is seriously out-of-date according to Jank, as it not only omits wide-ranging advances in labor conditions and relations between workers and employers, but also chooses to portray industry efforts to introduce mechanization and end the manual harvest in a gradual and orderly manner as a problem and not a solution. At the same time, the report strives to criticize the manual harvest itself.

"Bloomberg appears more interested in showing impressive footage of a fire burning in the night than explaining that this is how straw is cleared virtually wherever sugarcane is harvested in the world," says Jank. The fact that close to 40% of the Brazilian harvest is already mechanized is not even mentioned, while signed agreements between the industry and labor unions that have brought significant improvements to worker transportation, transparency in payment methods and protective equipment standards were equally ignored.

And while nobody in the industry will argue that problems still exist, they must be put in the right context, something the Bloomberg report fails to do as it focuses on examples far removed from the accepted norm in the Brazilian sugar and ethanol industry, in a clear attempt to imply that exceptions reflect the entire industry.

A partial list of misrepresentations in the report includes:

-- The completely unsubstantiated statement that conditions have
deteriorated while ethanol has expanded. For example, close to 95% of
all field workers involved with UNICA member companies are documented
workers, with labor and social security benefits, which puts the
sector ahead of nearly all others in the Brazilian economy in that
respect. On average, workers are paid about double the current
Brazilian minimum wage, which places them among the best paid in
Brazilian agriculture;

-- The report portrays all cane cutters as migrant workers from lower
income regions in the country, which is not the case anywhere in
Brazil. Most cane cutters are from the area where they work;

-- There are close to one million workers in the industry throughout
Brazil, not 500,000 as the report says. About 400,000 are cane
cutters. In the state of Sao Paulo, the heart of the industry and
base of UNICA's membership, there are 189,000 cane cutters,
of whom 40% are migrant workers from other states;

-- There is no minimum amount a cane cutter must produce per day.
Cutters are guaranteed a minimum daily fee regardless of how much
they cut, and the final amount paid to each cutter is based on a
pre-negotiated amount per ton;

-- Numbers without context may sound impressive in political campaigns
but don't amount to credible journalism, and are often used to
distort viewers' impressions. The report mentions accident numbers
that appear high but are outdated, and doesn't refer to the latest
Labour Ministry statistics showing accidents in the sugar and ethanol
industry falling from 11,000 in 1999 to 8,000 in 2005,
even as the number of workers has grown;

-- The report also mentions an outdated death total, ignoring the latest
available Labour Ministry figures, which show that in 2005,
17 workers died on the job or while being transported to their work
locations. That represents 0.004% of 414,000 cane cutters
throughout Brazil;

-- It should be noted that contrary to what the Bloomberg report implies
on several occasions, there is not a single case where the death of a
field worker from the sugar and ethanol sector in Brazil has been
officially linked to the type of work done;

-- There is no provision in the Brazil-U.S. Ethanol agreement signed in
2007 that "ensures Brazil will be a major beneficiary" of ethanol
exports to the United States. Not only is there no such clause or
guarantee in that document, as stated in the Bloomberg report, but
current import tariffs in the U.S. strongly discourage importing
ethanol from Brazil;

-- There is no such thing as a "razor-sharp stalk" as mentioned in the
report -- what's razor-sharp is the straw that's burned so cutters
can begin the harvest. In fact, burning the straw is called for in
collective agreements between workers and employers. If the straw
isn't cleared, the cutter cannot do the job.

The Brazilian Sugarcane Industry finds it unacceptable that a global organization like Bloomberg, established in Brazil for several years with a large team of journalists, chose to produce such a distorted view of a highly successful sector of the Brazilian economy, which Bloomberg professionals cover and do business with on a daily basis.

"There is no reasonable explanation for phrases like 'cars run on human blood' or 'Brazil entering its industrial revolution' finding their way into a report produced by Bloomberg, leaving the impression that its professionals are not aware of what goes on in Brazil, including its current stage of industrialization. In fact, Bloomberg professionals cover Brazil every day, and routinely file stories that clash directly and quite blatantly with much of what's in the 'Deadly Brew' report," Jank concludes.

US Ethanol policy
Adam Dean

Brazilian President Luiz Inácio Lula da Silva and U.S. President Bush met last week at Camp David to discuss the future of ethanol. As the world's largest producer of sugar and a pioneer in the production of ethanol, Brazil is a key ally in Bush's plan to reduce America's foreign oil dependence and environmental footprint.

Imports of Brazilian ethanol could be a major step toward achieving Bush's goal of reducing American gasoline consumption by 20 percent over the next ten years. As ethanol can be produced from sugar, increased consumption of the fuel in the United States could also lead to a higher commodity price for sugar producers in Brazil, with the potential to lift thousands out of poverty.

Despite these potential benefits, there is disagreement on whether producing fuel from food crops such as sugar or corn is truly a panacea. Breaking nearly a year of silence due to ill health, Cuban leader Fidel Castro recently lambasted the U.S. plan. According to Castro, the diversion of food crops to fuel production devastates the poor of Latin America, who can no longer afford basic food staples. For instance, due to its use in the production of ethanol, corn prices have risen more than 80 percent since last summer, from $2.17 to nearly $4 a bushel. This increase has caused tortilla prices in Mexico to rise by nearly 50 percent over the same period.

But the effects of rising corn and sugar prices are not all bad. The use of sugar in ethanol production has the potential to benefit thousands of rural farmers in Latin America who depend on the commodity's price. If the United States were to increase imports of Brazilian ethanol, the additional demand could lift the price paid to Brazilian sugar producers from a recent low of only nine cents per pound. In this way, Castro's complaints over the rising prices of food commodities fail to consider the benefits for producers in developing countries.

Despite the above criticisms of biofuel consumption and free trade, the key to higher living standards for the poor of Latin America does not lie in protectionist trade measures or abandoning ethanol production. Rather, an American commitment to free trade would allow all to benefit from the advances in biofuel technology.


At the heart of the issue is U.S. ethanol policy. Despite the Bush Administration's explicit support for increased U.S. ethanol consumption, the United States maintains a tariff of 54 cents per gallon for imported ethanol. This tariff limits U.S. ethanol imports and creates a higher domestic price than would otherwise result from a more open market.

By limiting market access for Brazilian ethanol producers, who would benefit from increased exports, the U.S. tariff also limits the subsequent benefits that would accrue to Brazilian sugar producers. Furthermore, since ethanol production in the United States is based on corn, the tariff also leads to a higher price of corn in the United States. This artificially inflated price is then passed on to Mexican consumers in the form of higher food prices.

The ramifications of the U.S. ethanol tariff display the ethical consequences of American trade policy. In order for Brazilian ethanol and sugar producers to benefit from global trade, they must be granted tariff-free market access to the United States.

If the United States is to share the benefits of globalization with developing countries, it must maintain a commitment to open markets for foreign imports and carefully consider the global impact of its trade policy.