Monday, July 30, 2012

Stratagem-INTERANATIONAL : PAKISTAN INC.: LOST HOPE?

Pakistan as an economy and political entity is in a mess. However, a handful of financially stable corporations do give some hope. But are they really up to it or is this just another political-business nexus?

But by 1972, Khan’s policies (on the political front) had backfired and thus came Zulfikar Ali Bhutto in power. The introduction of populist policies under his regime resulted in a kind of economic reversal. Sector wide nationalisation dragged back the GDP to 1950 levels. And the rest as they say is history. The unification of military along with Islamic bodies resulted in what we today know as Islamic fundamentalism. Bloodbath arising out of terrorism shows no signs of slowing down. In fact, as of 2011, Pakistan’s GDP growth rate has slipped down to 2.2% per annum. Moreover, as the surge in imports further outstrips exports, the economy is poised for yet another tough phase. With public debt amounting to $60 billion, S&P rates this economy B-.

The fact is, a couple of profit making power houses do not have the wherewithal to give a meaningful direction to Pakistan’s economy let alone save it. Economic growth is witnessed by nations which have a well planned political structure along with a mechanism to deliver social security. Pakistan lacks both of them. The issue lies in the fact that no one really knows who’s controlling power in Pakistan. Agrees Dr. Suvrokamal Dutta, a New Delhi based foreign and economic policy expert, as he tells B&E, “If someone thinks that a few corporate institutions with financial stability can safeguard the future of Pakistan’s economy, I would call it day-dreaming. Moreover, these corporations are financially strong because of their political links and derive huge synergies from foreign aids received by the treasury. If these aids were to stop, I guarantee that Pakistan as a political entity would disintegrate within 10 days.”

The only way this situation can change for the better is by pursuing political and economic reforms collaterally. The West will have to play an instrumental role in reinforcing amendments. A good start would be to ramp up investment and generate employment, which in turn would boost consumption. In the absence of these imperative measures, Pakistan would continue to be a failed state for generations to come supported by the US.



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Saturday, July 28, 2012

Consolidation in Zombieland! Serious or...?

Inorganic Activity is Inevitable in The Domestic Airline Business, given The Huge Overdues, debt load and losses. The Skies are open for Consolidation and pe activity. Sellouts or mergers – what will happen?

The big takeaway from mergers in the world’s largest airline market (US) is that this practice of buying and selling in this business does not fit into profitable categories in an unhealthy environment. Instead, the converse happens. US Airways tied the knot with AmericaWest in 2005. Then, both were making losses. And the sector had just lost $37.4 billion during the past four years globally. For five years post-merger, the two accumulated $12.1 billion in losses. Strangely, last year, the combine returned to profitability ($502 million; a time when globally, the industry recorded $18 billion in profits). Another big-ticket marriage was the Delta-Northwest merger of April 2008. Between 2001 & 2006, the two airlines had recorded a total loss of $33.1 billion, filed for bankruptcy and emerged a leaner machine. During the year that preceded the merger, the two had reported a combined positive bottomline of $3.93 billion. The sector too was happier, with global profits of $19.7 billion in FY2006 & 2007. Both imagined that the time was right – it was a merger of two profit-making airlines! What followed was unexpected. Between 2008 and 2009, the merged entity lost $10.2 billion (the sector lost $25.9 billion). As in the case of the newly merged US Airways, the new Delta made $593 million in profits in FY2010. You could draw up umpteen similarities between the cases mentioned above, but the two most important – which most ordinarily miss – are: first, the airlines were allowed to fail, file for Chapter 11 and then given a shot at another day; and second, both bled when the North American airline market bled. Both made merry when the sector made cash (in FY2010, US airlines made profits of $4.1 billion).

Guardians in the Indian airline space didn’t quite understand this. They still don’t. Be it the Jet-Sahara deal or the Kingfisher-Deccan acquisition or the merger of Air India and Indian, it all happened during a time when every party involved carried the “loss-maker” tag. More importantly, it occurred in a bleeding sector. M&As don’t work every time. That is known. They never work in a loss-making industry. This is what the Indian aviators forgot. Today, these three merged entities (which command 60.2% of the domestic market; DGCA data for June 2011) are in the middle of a bloodbath. They live in an environment, which domestically has been a kitchen sink for the past six years. Last year, Indian aviators lost a total of $400 million; ironically, the global aggregate was a positive $18 billion! While Jet lost Rs.858.4 million, Kingfisher lost Rs.10.27 billion and Air India more than Rs.57 billion. What is the cure?

Overcrowding is a concern. It implies suffocation for all. Currently, there are six groups in the Indian market. This as per market experts, is one too many. With a domestic passenger count of 52 million a year, a merger or a sell-out over the next two years is expected. While speaking to B&E from Manchester, Gordan Bevan, VP - Consultancy Services for Airport Strategy & Marketing, UBM Aviation Worldwide, opines, “An expanding economy such as India’s does not need four national carriers, all specialising on a hub and spoke legacy business model, with all four hubbing through either Delhi or Mumbai, both of which have capacity constraints. As an example, the growth of the airline industry in newly-liberalised Eastern Europe did not result in the creation of more large carriers.” There you have the exact count – we need four big FSC/LCC groups to have a healthy competitive environment given the footfalls.

And what in the case of a takeover? Which is the most-likely target? Let us look at the two biggest current issues ailing the Indian aviators besides the unhealthy fare war. First, ATF prices, which soared by 51% y-o-y during H2, FY2010-11. To understand how airlines suffer, Jet shelled out an additional Rs.4.43 billion on fuel during Q4, FY2010-11 resulting in a loss for the year. So who suffers due to fuel cost rising up to 39% of operating cost during the quarter ended June 30, 2011? Ketki Mahajan, Aerospace Analyst at Frost & Sullivan, shares her view with B&E. “Airlines can no longer work on the LCC model. This is because of high crude prices, and high ATF tax levied by various states, high airport charges and rising service tax on fares.” This brings us to the next problem: taxes. Sudheer Raghavan, COO, Jet Airways, tells B&E that at times, the tax issue makes him wonder “why Jet is in the airline business at all.” Therefore, under such a circumstance where airlines are paying 33.5% more than what they were doing 12 months back on fuel (due to rise in ATF tax), life for LCCs becomes difficult. Actually, impossible. All indicators therefore point to the smallest of the LCCs being up for grabs – GoAir, with a fleet of 10 A320s and a 6.1% market share (June 2011). In fact, CAPA has even forecasted that GoAir could exit the market through a sell-out, as Singapore-based Binit Somaia, CAPA’s APAC Regional Director tells B&E, “Given the size of the Indian market today, it has a large number of airlines operating, with limited differentiation in their networks and models. There does exist therefore the potential for some further consolidation.” But suitors would want to woo GoAir before 2015, as the year would see it add another 78 A320s to its fleet, thereby increasing the airline valuation multi-fold. If GoAir has to go, it will be best bought by another airline, any time after March 2012 (Indian carriers are forecasted to register their first profit in 7 years, of anywhere up to $400 million in FY2012, as per CAPA).



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Friday, July 27, 2012

The Devil, Deep Sea & The Debt

Troubled EU Economies have to Hastily rid themselves of their debt; but why hasn’t The EU fined Eurozone Members for their Financial Profligacy?

The great recession of this century exposed a fundamental truth of economics; huge imbalances in real economy and/or trade can never be covered up for long. In fact, the longer they are covered up, the harder they get back at you.

After nearly 18 months of struggle, major blocs of the world have been able to emerge from the effects of the crisis, but the situation with the 17-member strong Eurozone remains questionable, especially with Greece, Ireland, Portugal & Spain so perilously poised. Economists have stated that Greece’s mountain of debt of €325 billion is almost twice the sustainable level and the situation is graver than the 2001 Argentina crisis.

As per the Stability and Growth Pact in Eurozone, any member state exceeding the annual deficit limit of 3% of GDP will be fined. In 2005, Portugal, Germany and France crossed the limit, but no steps were taken. Most interestingly, 14 out of 17 members except Estonia, Luxemburg and Finland crossed the deficit limit in 2010 as per Eurostat. Ireland with a government deficit of 32.4% of GDP, Greece with 10.5%, Spain with 9.2%, Portugal with 9.1% and Slovakia with 7.9% are at the highest risk.

Though debt to GDP ratio of the Eurozone is less than US or UK, the bigger challenge is ensuring an effective political mechanism to tackle the crisis. Renegotiation of debt has to be taken to a logical conclusion through consensus. This is not currently the state in Greece, for instance, where Greek PM George Papandreou has been struggling to get new austerity measures accepted so that a fresh bailout package may be approved. Moreover, EU should adopt a balanced trade policy as in the current context; Germany enjoys an enormous trade benefit while Greece and Slovakia suffer with a small product base.


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Thursday, July 26, 2012

Make Vit. D Fortification a Rule

The Government must Ensure Milk is Fortified with Vitamin D in India; An Easy Solution to Counter Rickets, Osteomalacia and other bone Diseases

Consider this: A 2008 National Rickets Survey found that 197 out of 20,000 children had rickets and further concluded that around 550,000 children are suffering from rickets. Rickets (in children) and Osteomalacia (in adults) are similar in nature. Both are bone-weakening diseases and lead to deformities. Incidence is high among children as their bones are weak in their growing age, and curing requires considerable calcium and vitamin D. Why Vitamin D is important is because calcium cannot be absorbed by the body unless there is sufficient Vitamin D in the body. While exposure to sunlight is the best method for the body to naturally create Vitamin D, the dark skins of Indians ensures that enough Vitamin D is never created within the body.

Milk is considered an important source of this vitamin. But the milk that Indians consume normally is so highly adulterated that the question of nutrients comes much later. Add to that the problem of milk incontinence, which many Indians suffer. Curd is a good substitute source – but not everybody takes that. Also, breast milk is extremely low in Vitamin D, resulting in new born children suffering the most.

A few developed countries have drafted laws that solved these problems. In US, it’s imperative for all milk producers to fortify their milk with Vitamin D. The Office of Dietary Supplements, US government, has asserted that children need 600 International Units (IUs) of Vitamin D to stay healthy. Vitamin D fortified milk alone can provide 115-124 IUs of the vitamin per cup, which will be around 20% or more of this requirement. Countries like US and Canada have made sale of raw milk illegal. Given that the number of people suffering from bone-related diseases is high in India, the Ministry of Consumer Affairs should immediately force packaged milk producers to add vitamin D during pasteurization.


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Tuesday, July 24, 2012

Who Should be The Next Captain?

In these Good Times, nothing seems Wrong with The Indian Cricket Team. But one thing that cannot be Ignored is selecting and preparing The Next Rung, Particularly The Captain of the team

For the first time in Indian cricket’s recent history, if the master blaster Sachin Tendulkar were to announce his retirement tomorrow, apart from the general calls for postponing the retirement, there’ll be no sleepless nights for any fan.

However, the team has played a lot of cricket continuously since the last ten months, which has become a major reason for some senior players asking for permission to be rested for the West Indies tour, including Dhoni. Who could, then, take up Dhoni’s mantle in the future? We present our extremely radical top choices in reverse priority; that is, the last one is our topmost choice (and all, assuming Dhoni has gone on a paid vacation to Honolulu):

Yuvraj Singh: Frankly, the changed Yuvraj Singh has the captaincy on a platter and can lose it only if he throws it away (or if Virender Sehwag refuses to play under him). Despite being the Man of the Series in the 2011 World Cup, Yuvraj’s performance in the current IPL tourney as a captain hasn’t been that impressive. Maybe one could attribute that more to the lack of quality within the team than on Yuvraj himself. Strengths; changed calmer attitude, supreme commitment to stay there and win the game, and seniority. Weaknesses; borderline case of self-belief; that is, it could all crash the day he has a string of bad scores. Yuvi is our third choice for captain.

Gautam Gambhir: The Delhi born lefty is undoubtedly our second choice. His biggest pluses are his relative youth, ‘in-it-to-win-it’ killer attitude (he said it first), individual passionate commitment, and of course, his ability to single-handedly win a match with his batting. His negative traits are his lack of patience (he’s gotten out quite inanely in the past), uncontrollable anger, ergo, lack of team handling skills in critical situations (shouts at fellow team members; no can do). One should remember that Gambhir led India to a successful New Zealand tour where India won by 5-0 last year.

Virat Kohli: If the BCCI wishes to radically do what South Africa did in 2003 (when it made Graeme Smith the captain when he was just 22), then it should make the 22 year old Virat Kohli the captain and go off to Honolulu and join up with Dhoni for a while – given the acrimonious debate that will arise post the appointment. Virat became famous when he played for Delhi against Karnataka in the Ranji Trophy on the day of his father’s death (shows his unquestionable resolve towards cricket).

He was eulogized when the Indian team won the 2008 U/19 Cricket World Cup held in Malaysia, where he led the team. Strengths; super energetic 24x7, never-say-die attitude, personal commitment and involvement in trying to win, better composure than Gauti by miles, better self-belief than Yuvi, no past controversies. astounding team management skills (he’s supremely loved by the team). Weaknesses; lack of overall experience in managing a team full of seniors. But if Graeme could, then so could Kohli. He is our top choice for captain.


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Friday, July 20, 2012

Ten years? You are Fired!

In Terms of both Content & Intent, Yunus’ ouster Elicits Controversy

The latest joke in Bangladesh after the dismissal of Dr.Muhammad Yunus, founder, Grameen Bank, from the post of MD, reads thus – In hell, every other nationality is kept in guarded cells but the one housing Bangladeshis remains unguarded. Because if anyone tries to leave, jealousy ensures that the others pull them back!

After a documentary (aired on Norwegian TV) that tried to prove how Dr.Yunus is embezzling funds (later proved wrong), Yunus seems to have become a prime scapegoat of the media and the ruling Sheikh Hasina Wajed-led Awami League. He has been accused of “making a sweeping statement against politicos”, promoting adulterated yoghurt. Above all, Sheik Hasina has called him as the one who is “sucking blood from the poor in the name of poverty alleviation.”


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Wednesday, July 18, 2012

Can he upset The Japanese?

Volkswagen has Renewed the term of its CEO, and all Eyes are on The Company as it Seeks to do to Toyota what Toyota did to GM by 2018. Can Winterkorn Indeed win his Most Coveted Prize?

2010 was surely one of the most relieving years for many companies who were browbeaten by recessionary winds over the past few years; and the largest German auto major Volkswagen is no exception. In fact, the company made all sorts of noises as the calendar year touched the end. For the less informed, even after the company had sold more than seven million vehicles for the first time in its history in a calendar year, the spotlight was on the term renewal of its CEO Martin Winterkorn. The board wholeheartedly voted in favour of extending Winterkorn’s term for another five years for its own set of reasons. Needless to mention, completing the merger with sports carmaker Porsche will be the second most important agenda of his renewed term. Second, because the first one is to displace Toyota as the world’s #1 auto major by 2018 in profitability and unit sales. Notably, the CEO now has the benefit of job security through 2016 for a term that would have expired by the end of 2011. As he is the architect of Volkswagen’s so-called Strategy 2018, the board feels that it makes a lot of logical sense if he captains the ship to that harbour. But is he indeed good enough to run the course?

Before taking control of the reins at Volkswagen AG in 2007, Winterkorn was the Chairman of the Board of Management of Audi and Porsche Automobile Holding SE. The last few years have been nothing but dynamic for this German engineer. Still, even critics accept that the appointment of the new global design chief (Walter de’Silva) is one of the most important decisions he has taken so far. For the uninitiated, de’Silva had previously overseen design at Audi, where he conceptualised the current R8 sports car and A6 sedan. And considering that Toyota has been dealing with an ageing product line-up, Volkswagen’s bet on design may prove to be a gold mine in the years to come. Even the CEO of Toyota Motor Corporation, Akio Toyoda, recently admitted at the North American International Auto Show in Detroit that the company will now be looking at making its cars look better.

Moving towards its goal to become the world’s largest auto major, Volkswagen will be doubling its capacity in China to three million units a year with two new plants. Moreover, the company will also be opening another plant in Tennessee to increase both sales and margins in North America. Even if Volkswagen is able to overtake Toyota in unit sales, profitability still remains one of the biggest challenges. While Volkswagen has been operating with an average net profit margin of 2.42% over the past five years, against the industry average of 3.46%, Toyota, on the other hand, has a net profit margin of 3.61% that beats the industry average. “Volkswagen is now trying to reduce costs and increase profit by removing many of its premium traits and also by building a US plant. They are doing this to increase volume but it could backfire because many US buyers won’t want to buy a Volkswagen if it doesn’t feel like a more up-scale option compared to Honda or Toyota,” said Karl Brauer, senior analyst, Edmunds. He also adds that it was in fact the drop in perceived quality for the Japanese automakers that has opened up opportunities for Volkswagen. A compromise on that front would not be a very good idea.


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