Wednesday, August 08, 2012

THE PHOENIX PERFORMERS

With low penetration levels coupled with climbing growth rates, the Indian mutual Fund industry is all set to unleash its true potential. by Manish K. Pandey

But then one should not forget the MF industry is poised to face tough competition from the insurance sector in the near future. Raison d’etre: Insurance companies in India have developed innovative products which link mutual funds and insurance, like unit linked insurance plans. Thus, innovation in terms of product offerings customised for these new target segments will be essential if MFs want to compete with these innovative insurance offerings. For instance, UTI’s plan to sell products through the postal channel targeting the retired population is a move in that direction. No doubt, the recent turmoil in stock markets has shaken investor confidence, and investors are apprehensive about investing in equity or instruments linked to equity but then niche products linked to infrastructure and real estate funds providing superior returns are likely to appeal to urban investors. Similarly, new products like daily savings plans are likely to become popular among the rural micro-saving segment.

As per Waqar Naqvi, CEO, Taurus Mutual Fund, “Owing to the change in regulations, we may soon see slight changes in the way [AMC] business happens today.” It will actually be distribution that will continue to hold a lot of value for the AMCs in 2010. Most importantly, with banks, independent financial advisors and national distributors all playing their roles, AMCs have to be very careful in choosing their distribution partners. Because those partners will actually be the vehicles riding whom the AMCs can penetrate deeper into the retail segment.



IT’S A TEAM!

While aggregate global MF proceeds are still below normal levels, inflows accelerated through 2009, creating a solid foundation for 2010. As per ICI, MF assets worldwide increased 12% to $20.34 trillion as of June 2009. Net cash flow to all funds was $81 billion in Q2 ‘09, up from $47 billion in Q1. Even net inflows to long-term funds were $293 billion in Q2, after experiencing a cumulative outflow of $607 billion over the prior three quarters. “After a strong market revival last year, fund managers are optimistic about the prospects of 2010,” says Annabel Brodie-Smith, Communications Director, Association of Investment Companies. Now that’s what you call a smart recovery! 

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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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