Posted by: John Elliott | March 13, 2008

Is India’s economy losing its shine?

The business mood is gloomy in India this week as fears about the economy slowing gather pace. An announcement Wednesday that year-on-year industrial growth dropped by more than half in January – 11.6% recorded a year ago to 5.3% – pushed the stock market into the sharpest of today’s Asia falls. The key Mumbai Sensex finished 4.85% down at 15,346, almost the lowest for six months and far below the dreamy 21,000 levels of just two months ago.

Finance Minister Palaniappan Chidambaram said – inevitably – that one month’s figures should not be seen as too depressing. That is the sort of comment that politicians make when things are going badly, but rarely say when they are going well. And he would not want to say anything else just 12 days after announcing his budget, which did not seem to acknowledge serious declines.

Of course Chidambaram is right, up to a point. But the figures continue a trend that has built up over many months, with tight monetary policy and high interest rates pushing average industrial growth down to 8.7% between last April and January, compared with 11.2% a year earlier.

Especially worrying is a decline in capital goods production trends with growth down to 2.1% in January compared with 16.3% in January 2007. Consumer durables growth has gone into a negative figure of minus 3.1%, pushed by a decline in sales of motor scooters that weigh heavy in the statistical model.

This is not good news for a government that is looking for an opportunity later this year to call a general election ahead of the possibly final date of May next year. November is being talked about as a possible date – after the fortunes of the Congress Party, which leads the current coalition government, have been tested in state assembly elections in Karnataka and perhaps elsewhere.

With highly experienced officials such as Chidambaram and Prime Minister Manmohan Singh in key top positions, the government is expected to produce a buoyant economy that benefits the poor and boosts business. That image might be hard to sustain as the year progresses, especially with inflation at around 5%, which is close to the politically uncomfortable figure of about 6%. Slowing growth might help to curb some prices, but inflation has a momentum of its own, driven by sharp increases in the cost to consumers of basic foods such as rice, wheat and edible oils – all items that touch the pockets of the poor.

The government is well aware that, like its predecessor, it will be judged in the election by how the poor, and especially the 75% of the population in rural areas, have fared. That is why Chidambaram’s budget contained loan wavers and concessions costing an estimated $15 billion over three years for 40 million farmers who have defaulted or are having serious problems with repayments.

The overall effect of this idea is now being questioned, partly because it could encourage others to default and also encourage state government to introduce similar costly concessions.

But the key criticism is how the tens of millions of farmers who have struggled to keep up with payments, and so do not qualify for Chidambaram’s largesse, will feel when they see defaulters being baled out. That could generate a bigger anti-Congress vote than the one that might be generated by the loan write-offs.

It’s never easy to help the poor in India. More than half the aid that is pumped down to rural areas is lost and never reaches its intended destinations. And now this new initiative could misfire – just as the pace of inflation increases and growth slows.

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Posted by: John Elliott | February 29, 2008

India waives $15B in loans to rural poor

India’s Finance Minister Palaniappan Chidambaram produced a populist annual budget this morning, aimed primarily at helping the rural poor, whose plight contributed in 2004 to the defeat of the country’s last Bharatiya Janata Party-led government.

In a dramatic gesture that almost eclipsed the rest of his 30-page speech, he waived overdue loans totaling an estimated $12.5 billion that are owed by 30 million farmers who have less than two hectares (five acres) of land. He pledged another $2.5 billion to help 10 million more settle loans.

Chidambaram also boosted the government’s spending on education by 20% and on health by 15% – both initiatives that will help the poor if they improve frequently dilapidated and under-performing social services.

With an eye on other income groups, he raised income tax thresholds and provided stimulus for cars, motor bikes and other consumer durables that would help sustain India’s current growth rate of around 8.7%. Growth last year was 9.6% and there is a fear that it will slip further.

Chidambaram did not shy away from accusations that this was a pre-election budget. Speaking to journalists this afternoon, he produced a characteristically laconic reply to a questioner who asked whether he was trying to win votes and said: “If you have nothing else to say about the budget, then I suppose you could call it an election budget.”

That is not surprising because there is widespread belief that Sonia Gandhi, the Italian-born leader of the Congress Party that leads the current coalition government, forced the loan scheme on him. She publicly called on him last week to deal with the loans, and this afternoon her party managers bussed farmers from the nearby state of Haryana to her Delhi house to thank her.

The timing of the election is uncertain. Polls have to take place by May next year, but could come this year if Leftist parties decided to withdraw support from Congress. They might do this if talks that are now being revived on India’s proposed nuclear deal with America, which they oppose, seem to be nearing agreement.

Alternatively, they might break away for some other reason in order to re-establish their independent identity before the polls. That could even happen with the tacit agreement of the Congress Party, which might also want to separate itself from the Left before the polls.

When the current government came to power in 2004, it promised to help the 70% of the population who live in rural areas and who are mostly involved in agriculture. Votes from these groups helped to bring down the BJP government that claimed India was “shining.”

But the government’s efforts to provide financial and other support have fallen short of targets because of corruption and leakage in delivery systems. Today’s $15 billion package is an attempt to break through that impasse and help farmers hit by bad loans – a problem that has led to tens of thousands of farmers with sub-standard cotton and other cash crops committing suicide in the past decade.

The government will announce how the scheme will work in the next few weeks. It will start in June and provide registered banks and cooperatives with funds over three years to support their liquidity and compensate them for writing off and settling the loans.

The plan has met with some criticism, partly because research shows that the most suicide-prone farmers are in debt to unauthorized money lenders and middle-men, who account for some 40% of rural lending and charge as much as 30% interest. Bankers are pleased because it will help them clean up their balance sheets, but there is concern about whether the scheme can be efficiently managed.

The stock market was unimpressed – the key Mumbai Sensex fell sharply during Chidambaram’s speech and then recovered to close about 1.2% down on the day. The question now is whether the $15 billion will not only help alleviate the misery of 40 million rural poor but will also buy their votes when India goes to the polls – and that is not certain.

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Posted by: John Elliott | February 25, 2008

Reliance issues bonus shares to save face

Anil Ambani, one of India’s richest businessmen, hit the world’s market headlines for the third time in just over a month yesterday when Reliance Power, which he controls, announced a bonus issue. Under the new offering, shareholders will receive three Reliance Power shares for every five bought last month in India’s largest-ever initial public offering.

That issue picked up $3 billion in just one minute when it was launched on the Mumbai stock market, even though the company has completed no projects and has no income stream. But, when the stock listed on the market on February 11, it was hit by world market conditions and, initially, by a lack of local liquidity. It fell 17.2% to Rs372.50 from the Rs450 issue price on the first day’s trading.

Ambani claimed that the price was being driven down by interests trying to undermine his business. The price recovered to Rs416 after the bonus plan was mooted and today it hit its original price of Rs450.

So has Anil Ambani, whose umbrella business is the Anil Dhirubhai Ambani Group (ADAG), done well or has he stepped into a legal and regulatory minefield, as bankers and analysts in Mumbai are saying privately?

He certainly seems to have succeeded – though maybe only temporarily – in rebuilding some shareholder confidence. This is important because he does not want to lose small shareholders’ faith in the Reliance brand that was built by his father, the late Dhirubhai Ambani.

He needs that confidence because of future IPOs – ADAG’s Reliance Communications is planning an issue for its Reliance Infratel telecommunications’ towers business.

He also doesn’t want to seem the loser when judged against the successes of his elder brother, Mukesh Ambani, who controls Reliance Industries (RIL) – the two brothers split their father’s empire in 2005. And he needed to counter suggestions that some investors might not complete payments for their shares.

But Anil Ambani has not created any new shareholder value even though the cost of the shares has nominally come down by around 40%, and he still has to gain approval from his shareholders, and from the regulatory authorities. Analysts are now saying that the share issue could run into problems because it is only being made to new shareholders, not the company’s promoters which include ADAG’s Reliance Energy (with a 45% stake) and other Ambani investment companies that have another 45%.

There are also potential profit tax issues linked with Ambani’s decision, announced yesterday, to transfer 2.6% of his personal stake in Reliance Power to Reliance Energy in order to prevent the bonus issue from diluting Energy’s stake.

Analysts and the Indian media are rarely willing to comment adversely about the Ambanis’ business and they have yet to get their teeth into these issues publicly. The broad view tonight, however, seems to be that Ambani has applied some sticking plaster to Reliance Power, and the future is still to play for.

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Posted by: John Elliott | February 22, 2008

Tata joins forces with Boeing, EADS and others

At India’s DefExpo defense show this week, Tata announced a string of tie-ups with foreign manufacturers from the United States, Israel and Europe that set it apart from other emerging Indian defense manufacturers like Larsen & Toubro (L&T) and Mahindra & Mahindra.

The Tata group is becoming well known around the world for its low cost car, its bids for the Jaguar and Land-Rover brands, and for taking over Europe’s Corus steel company. Now it is emerging as the Indian market leader in a new area – defense equipment.

The company is transferring India’s proven ability to produce low-cost software and international-quality auto components and cars to the defense and aviation industries, persuading companies like Boeing (BA), European Aeronautic Defense & Space Company and Israel Aerospace Industries that they can benefit by buying from India.

The pairing with IAI is probably the most important announced in the past week. A joint-venture company is planned to develop and manufacture defense and aerospace products such as missiles, unmanned aerial vehicles, radars, and electronic warfare and security systems. With EADS, Tata will be bidding for a long-delayed $1 billion Army communications system, while it is to supply Boeing with aerospace components – including orders for the United States Air Force – totaling $500 million over five to eight years. There is also a helicopter cabin order from Sikorsky Aircraft Corporation.

The main prize that everyone wants is a $10 billion Indian Air Force order for 126 multi-role combat aircraft (MRCA) that is now out to tender. Robert Gates, America’s defense secretary, will push Boeing’s and Lockheed’s bids when he is in Delhi next week to try to revive slow-moving joint defense and security collaboration agreements.

India’s private sector has historically played a very minor role in the country’s $10 billion-plus annual capital expenditure on defense equipment. Up to 70% is spent abroad because the Indian public sector cannot deliver in terms of quality or speed on either research or production. Only about 30% of the orders placed in India (around 10% of the total) goes to firms like Tata, L&T, and Mahindra because the public sector-dominated defense establishment has never allowed the private sector to develop. That is beginning to change, but only slowly.

In June last year, I wrote a post saying India would soon announce names of a small number of Indian private-sector companies – Raksha Udyog Ratnas or, literally translated, “defense industry jewels” – that would be allowed to compete for big research, development and production projects on equal terms with the public sector.

I should have known better, as I wrote last October when it was becoming clear that the policy would be blocked. The names have still not been announced, and it doesn’t appear that they will be, at least until after the general election  next year, because of opposition from Leftist political parties, encouraged by trade unions and the defense establishment.

There is also a new offsets policy which requires foreign defense suppliers to spend 30%-50% of their orders in India. The government has forecast this could generate $12 billion in orders in the next four to five years – among the first will be business from Lockheed (LMT) for six Super Hercules C-130J military transport aircraft costing $1 billion that India ordered earlier this month.

It will be some time however before offsets produce orders that provide economies of scale, so Tata wants to build manufacturing capacity independent of how the Ratnas and offsets develop. Tata Advance Systems has been set up to manage the manufacture and integration of orders, and Tata Industrial Services will match Tata’s and other Indian companies’ capabilities with offset and other requirements from abroad. For large projects, various group companies such as TCS Aerospace (software), Tata Power, Tata Advanced Materials and Tata Motors will pool capital raising and risk management resources.

This will enable Tata, one of the country’s two largest business houses, to build up capacity and scale so that it is ready to manufacture in quantity for the Indian defense forces when it is allowed to do so. It also enables foreign defense companies to get used to working in India at a time when they are about to be forced to use Indian components through the new offsets policy. Other companies are also making similar moves, though none is so wide-ranging as Tata which, so far, is winning.

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Posted by: John Elliott | February 13, 2008

Demand from China kills India’s vanishing tigers

One of India’s greatest natural assets is wasting away. Or, to be more precise, it is being killed off because of political and bureaucratic corruption and inertia. That asset is the tiger, India’s national animal and the grandest of creatures living in the wild. Figures produced by the government yesterday estimate that there are only about 1,400 tigers left in India, down 60% from an official figure of 3,500 in 2002. If that rate of decimation continues, there will only be a couple hundred left in ten years time, so urgent action is needed.

Why am I writing about tigers on a Fortune magazine blog that focuses on business and, occasionally, politics? Mainly because their future is one of many ecological and environmental problems that are being ignored in a greedy rush for wealth and growth, and partly because it demonstrates how ineffective the Indian government can be when faced with vested interested at home and abroad. If the government cannot get to grips with this issue, then it seems unlikely to protect other parts of India’s heritage, and much of the country’s magic and culture will gradually vanish.

There is money to be made by poaching tigers and transporting them out of India, usually to China, where their bones and other body parts are used for traditional medicine, and their skins for trophies and (until recently) to adorn coats worn by officials and herdsmen on the Tibetan plateau. The Indian poacher makes relatively little (though their price is going up), but on the international market an animal can account for tens of thousands of dollars. Meanwhile politicians and bureaucrats grow rich on the kickbacks that are paid for them to facilitate, or at least ignore, the poachers and traders.

Conservationists have been warning for at least three years that India’s tiger population was down to 1,400-1,800, but this was not accepted by the government. But yesterday’s report, based on a new census, puts the figure at 1,411 (plus maybe another 80 in two states not included). It admits that the margin of error means the real total could be anywhere between 1,165 and 1,657. The government is trying to reduce the shock of the 60% loss by saying its 2002 figure was over-estimated. It is also trying to soften the blow by claiming that tigers living in protected areas are doing well and only those elsewhere are being killed, which conservationists say is wrong.

The government has, however, made some important statements. For the first time the report accepts that tigers are being lost because of encroachment into forest areas for wood-cutting, animal grazing and even mining, which means both loss of habitat and prey. It recognizes that “it is essential to set aside inviolate areas devoid of human presence” for tigers and other wild animals and adds: “Tigers are a conservation dependent species requiring large contiguous forests with fair interspersion of undisturbed breeding areas.”

The report also accepts the wider picture, explaining why the tiger is more than just a tourist attraction. “[The] tiger is not only a flag bearer of conservation but also an umbrella species for majority of eco-regions in the Indian subcontinent. Its role as a top predator is vital in regulating and perpetuating ecological processes and systems.” Put more simply, if India makes a real effort to save the tiger, it will at the same time be saving areas where other animals can live and where rivers can flow naturally. If such areas are deforested , they are lost to nature – forests are cut down, animals vanish, rivers are diverted, and the ecological balance is upset with consequential siltation and floods.

Sadly few people see that link, and the tiger does not grab the sort of widespread public admiration in India that it has abroad, even though it has a place in the Hindu religion with the goddess Durga being worshipped riding a tigress. So it is easy for the government to issue reports and then do little. What it should be doing is revamping its grossly under-staffed and unmotivated forest guard service, and strengthening enforcement and prosecution of poachers and traders.

But the problem will never be solved by tackling the supply side. This is a demand-driven trade and the only really effective way to protect tigers is to persuade China fully to implement – and continue – a ban on the use of their skins and body parts. “If India wants wild tigers, it not only has to improve enforcement but stem the demand by talking forcefully to China,” says Belinda Wright, one of India’s leading tiger conservationists.

India however seems scared of tackling China on this issue, probably because it has sensitive border differences with its large neighbor that defeated it in a war in 1962.

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Posted by: John Elliott | February 11, 2008

Market realism hits Reliance and Emaar

India’s stock market is coming down to earth and, along with it, the dreams of companies that planned big market flotations to raise funds for projects that are yet to happen. Emaar MGF Land, a real estate joint venture 42% owned by Emaar of Dubai, decided on February 8 to pull its float, which had originally been expected to raise nearly $2 billion, because of “adverse” market conditions. A day earlier, Wockhardt Hospitals, a leading healthcare company, pulled a smaller float.

The trend was underlined this morning when Reliance Power, which raised $3 billion last month in the country’s biggest ever initial public offering (IPO), listed on the markets. During the day, it dropped as low as 21% below the Rs450 issue price and closed 17.2% down at Rs372.50. That was a marked reversal of analysts’ talk a short time ago of it hitting Rs900 or at least Rs550-600.

Reliance’s debut helped to pull shares overall down by 4.78% to the lowest level in nearly three weeks. The Bombay Stock Exchange’s key 30-share Sensex fell to 16,630.91, its lowest close since January 22, and 21.6% below its record 21,206.77 on January 10.
Reliance – which is part of Anil Dhirubhai Ambani Group (ADAG) and is controlled by Anil Ambani, one of India’s richest businessmen – mobilized bids totaling an astronomic $180 billion last month for its IPO, even though it has yet to produce a revenue stream. The future of the company – and the stock – depends on Ambani’s ability to turn plans for 13 power projects totalling 28,200MW into reality.

The company drained so much money out of the stock market last month that it helped to trigger the slide at a time when the market was being buffeted by downward trends internationally. So the irony is that Reliance’s own poor performance today was triggered by its almost unreal success last month.

The link between the Reliance and Emaar flotations is that both are built on dreams for the future. Just as Reliance had to admit in its prospectus that “we cannot assure you that our power projects will commence operations as expected”, so Emaar’s prospectus admitted that “most of our projects are in the preliminary stages of planning and require approvals or permits.” The prospectus added that 83% of the land required was still zoned as agricultural – a problem that will also hit Reliance’s projects.

Anyone who knows anything about industrial and infrastructure development in India knows that substantial resistance is building up against rezoning agricultural land, and the country has an appalling history on planned power projects. So it is scarcely surprising that both companies have been hit now in the current international market gloom.

India’s fundamentals are still strong, even though economic growth forecasts are down below 9%. Investors are looking for comfort to the Budget that Palaniappan Chidambaram, the finance minister, will deliver on February 28. When Reliance hit its high spot last month, he said that “investors are investing in the future of India.” He was right of course, though they are now more choosy than they were a month ago.

And, as I wrote in my last post on this subject, many market professionals seem almost relieved the Sensex has fallen from the “absurd overvaluations” of its peak and that dreams are now being questioned.

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Posted by: John Elliott | February 6, 2008

Lockheed leads American defense companies into India

The American government is rightly pleased about a $1 billion order that has just been agreed with India for six of Lockheed Martin’s Super Hercules C-130J military transport planes that will be used by the Indian army and air force. This is India’s first large order with an American defense company and it comes at a time when its traditional – and massive – defense ties with Russia are under increasing strain.

India has for decades been reluctant to buy defense equipment from America, fearing Congress’s power to block deliveries if it did not approve of Indian military activity or policy at some time in the future. This attitude has been changing in the past couple of years when ties between the two countries have improved dramatically – notably with talks on a nuclear deal, though that is now making little progress.

“With this sale, India is telling us it’s ready to buy top-quality U.S. equipment on its merits,” says James Clad, the Pentagon’s deputy assistant U.S. secretary for South and Southeast Asia. “It positions us to be in the Indian defense market for years to come”. But India’s worries remain, and they will affect how it behaves on other orders, and especially on a $10 billion fighter jet contract where Russian and European companies are bidding against America’s Boeing (BA) and Lockheed (LMT).

The significance of the C-130 order as a breakthrough in defense sales should not be over-stated because there was no rival aircraft on the market. India urgently needs the four-engine C-130 because it does not have a medium-sized transport aircraft that can land on short airstrips. Currently it relies on large and cumbersome Russian IL-76 transport planes and smaller AN32s, whose limitations were demonstrated during the mountainous border conflict with Pakistan in 1999 at Kargil. So it decided to negotiate a government-to-government deal without going out to international tender for the C-130s, which will be delivered from 2011, subject to final price negotiations.

For Lockheed, the deal is important, not only because it brings in $1 billion of business, but because the company will be able to demonstrate to the Indian government and air force how it handles orders. This will include meeting Indian government offset arrangements, which require a supplier to spend 30% of a contract’s value in India. There could also be further orders for two or more aircraft.

Boeing hopes to be in a similar position soon if it can clinch an order for its P-8 maritime reconnaissance aircraft. Other American companies such as Honeywell (HON), GE (GE), Raytheon (RTN), Northrop Grumman (NOC), Pratt & Whitney, United Technologies (UTX), Bell Helicopter Textron, and General Dynamics (GD) are actively chasing orders and tie-ups with Indian defense companies.

The C-130 order has upset Russia, which wanted to offer an upgraded – but not comparable – AN-32 if there had been an open tender. The complaint marks the current strained relationship between India and Russia, which have been traditional allies since India’s independence.

With over $14 billion orders currently in progress for military aircraft, ships, rockets launchers, helicopters and other equipment, Russia is India’s largest defense supplier (followed by Israel), and India is its biggest customer. But the easy days, when Russia saw India as an essential customer and was prepared to meet the county’s demands for specialized equipment and knock-down prices, are over. Late last year it infuriated India by saying that it was doubling the price of an old aircraft carrier, the Gorshkov, that it is refurbishing for the Indian navy.

Russia now has other significant defense customers and wants market prices. But it is not offering India competitive back-up services on quality, training, and spare parts, and this is seriously affecting the operational efficiency of the Indian armed forces. “The Russians now want to sell arms not at ‘friendship’ but commercial prices, without providing ‘commercial’ quality of after-sales service,” Kanwal Sibal, a former Indian foreign secretary and ambassador to Russia, wrote in the Indian Express newspaper yesterday.

This leaves the door open for American companies – led by Lockheed – to show what they can do. But they will have to overcome the problem that there is no history of trust between the two countries. As Sibal put it in his article: “Russia is a trusted partner and trust in defence matters has to pass the test of time and of difficult circumstances”.

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Posted by: John Elliott | January 23, 2008

India’s investors lack sophistication

India has unsophisticated investors. I’m talking about stock market investors of course following the stock market crash, with Mumbai’s key Sensex index plummeting 19% from an all time and over-priced high of above 21,000 on January 8 to under 17,000 by Tuesday. Such a remark, judging from past Riding the Elephant experience, will generate a furious tirade of comments, especially from readers based in the United States who are always anxious to protect India’s reputation.

But how else can you explain a market which swings from such extremes. Last week it mobilized bids totaling an astronomic $180 billion for the $2.9 billion initial public offering launched by Anil Ambani’s Reliance Power (which has yet to produce a revenue stream). On Monday and Tuesday, it crashed, seemingly ignoring the country’s strong economic fundamentals. As Palaniappan Chidambaram, India’s finance minister, pointed out when he tried to calm nerves during the slide, the fundamentals are strong. The economy, he pointed out, is growing at around 9%, and the prime minister’s economic advisory council is forecasting 8.5% for 2008-09.

It’s not just Indian retail investors, but foreign funds (many of them based in the United States) that have been rushing herd-like into Mumbai in recent months – and then rushed out on in the past days. This afternoon I spoke to a leading Mumbai banker who has close links with the United States. “If anyone thought that having strong foreign institutional involvement in the Indian market would bring stability, it is clear that that assumption was misplaced,” he said (anonymously because of his links). He complained about a “lack of conviction and analysis” by foreign funds which “on Tuesday told me they were ‘getting the hell out of India’ and today are saying ‘buy.’”

The same line came from Pradip Shah, chairman of IndAsia, a Mumbai private equity firm, who said there were “a lot of unsophisticated players” and added: “Many are naïve and felt left out of the growth so rushed in thinking India was the center of the universe and that nothing could go wrong.”

With earnings and economic growth scarce elsewhere on world markets, funds have been scrambling irrationally, with little analysis, to be part of the record 21,000-plus levels. But for some time there have been worries about when the bubble would burst and what would cause it. Now we know – a combination, as had been feared, of international market falls and a local factor.

The story of the slide in world wide markets is well known. The main local factor was the $180 billion bid for Reliance Power’s IPO – $120 billion from foreign and local funds and $60 billion from private investors. That took $27 billion “out of the system” in deposits and was not available to cushion the market’s fall, says Manish Chokhani, a director of Enam Securities, one of the IPO’s lead managers. As the market fell, it was consequentially difficult for investors to meet “margin calls” for them to top up advance-payments on share purchases. Investors then sold existing holdings to raise the money, which added to the downward trend. Chokhani expects some $20 billion of that money to be released within a few days, improving liquidity.

Today the market has recovered on the back of the U.S. Federal Reserve’s 75-basis-point cut. The Sensex rose to a high during the day of 17,997 – up 1,267 points from last night’s close, its biggest-ever one day gain. It finished the day at 17,594 – up by over 5% from Tuesday, ending a seven-day losing streak.

Across India, small investors are feeling badly bruised, even wounded, by the crash. But some professionals seem almost relieved that what they have long expected and feared has at last happened – and are glad that what some call “absurd over valuations” have now been rationalized. “This is now a much safer place to be,” said one. They just hope that today’s bounce will neither be reversed, nor be followed by too fast a climb back to irrationality. Some people, they know, never learn.

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Posted by: John Elliott | January 15, 2008

India’s largest-ever IPO boasts investors, but no sales

An Indian power company that has no completed projects and no income stream this morning picked up $3 billion within just one minute of it launching India’s largest ever initial public offering (IPO) on the Mumbai stock market. Within half an hour Reliance Power, controlled by Anil Ambani, had offers for four times its debut price – and most bids were at the high Rs450 ($11.50) end of the issue’s price range.

“Investors are investing in the future of India,” said Palaniappan Chidambaram, India’s finance minister, when I asked him, at a lunch he gave to mark the south Indian Pongal Virundhu festival, to explain how such blind investment (in the sense that the company has no track record) could be justified.

Chidambaram wasn’t just doing his job by making a PR point. He meant it. India is the flavor of the year. Economic growth is expected to stay above 8% despite a slowdown in industrial growth and international worries. The stock market is beating expectations –the Bombay Stock Exchange Sensex index broke through 21,000 for the first time last week – that was 50% up on levels last August, though today it closed at 20,251. There is enormous optimism about India’s potential and there is a huge demand for power – capacity needs to double to over 250,000 MW by 2015.

Ambani, who runs Anil Dhirubhai Ambani Group (ADAG) which controls Reliance Power, intends to help meet that demand by becoming the country’s largest private sector power producer in a currently public sector-dominated industry. He has plans for 13 projects that would produce 28,200MW of power on sites that he has identified. He will back that up by organizing co-operation agreements with international manufacturers of turbines and generators.

That is the positive spin that has today attracted the $3 billion. But there are some downsides. As the company’s prospectus says, “We have no operating history so it is difficult to estimate our performance” and “we cannot assure you that our power projects will commence operations as expected.”

Reliance Power only has power purchase agreements in place for 4,560MW of the 28,200MW, and its first project will not start producing power until 2009-10. It has massive land acquisition needs, which are becoming more difficult to achieve at a time when conversion of agricultural land to industrial use is becoming more socially disruptive and political controversial. Then the company has to cope with all the bureaucratic and environmental hassles that usually delay large-scale projects, and it also has to fight off delaying tactics emanating from its opponents.

Life has never been easy for Anil Ambani since he split in 2005 from his elder brother, Mukesh Ambani, who is one of the world’s richest men and runs the similarly named Reliance Industries (RIL), one of India’s two largest groups. There is now bitter rivalry between the two men and their companies, and there is a constant flow of stories about how they try to trip each other up.

As recently as last Friday, India’s Supreme Court passed a blanket order that today’s IPO could go ahead despite any interim orders that might be passed by lower courts. The Ambani group had argued that there was a “malafide and illegal campaign by certain interested persons to stop or delay the IPO.” A few days earlier, another regional court in Uttar Pradesh dismissed a plea against land being allocated for one of the power projects.

The brothers’ split followed the death of their father, Dhirubhai Ambani, who founded the Reliance business and built up massive support among small shareholders as well as a reputation for excellence in executing large projects. That dual reputation still clings to the Reliance name, despite the brothers’ split, and helps to explain why today’s issue has been so successful.

I asked Anil Ambani, when he came to Delhi on his IPO road show a week ago, how he could expect to raise so much money when he had no current operations and no track record, and when there were serious reservations in the market about his ability to deliver. Replying, he talked about how Shell had almost mocked his father years ago about plans to build a massive oil refinery in India when Dhirubhai had no experience and no assured customers. Shell was proved dramatically wrong, and Anil Ambnani said he was confident of doing the same now.

“Our mindset will enable us to execute these big projects,” he said. He also pointed out that he has successfully developed the Reliance telecom business that he took from his brother during the split. One of his bankers added later that the main things to be tackled on power projects were getting permissions, assembling land, and arranging financing – all areas where Ambani has proved his skill in the past.

There is one other factor that could assure today’s investors. Anil Ambani is a workaholic driven by massive ambition and will not allow himself to be seen by his brother and the wider public to fail. At 48, he is also fit, jogging several kilometres in the mornings and sticking to a strict diet. He will not run away from the challenge of proving himself as good as Mukesh.  That may be an unusual sort of fundamental to quote on an IPO. But it’s one of Anil Ambani’s main strengths.

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Posted by: John Elliott | January 10, 2008

‘Nano’ achieves Ratan Tata’s dream

Ratan Tata has achieved his dream. This morning the chairman of Tata Sons, one of India’s two largest companies, unveiled his “Peoples’ Car” at a pop star-style media circus staged at the Delhi auto show. He fixed the price of a basic 623cc model at the much vaunted level of one lakh (a hundred thousand) rupees or about $2,500.

That makes it the world’s cheapest car, though it may not be very profitable.

And he named it Nano – to conjure up high tech and small size images.

“A promise is a promise” he said, announcing the price. When I asked him whether the figure would otherwise have been higher, he said the promise had been a response to what had appeared in the media.

This had become “a challenge” that he felt he had to meet. He’s proud that he has launched “a means of transport that does not exist”, enabling families to move up-market faster from motor cycles that frequently carry three young children as well as parents.

Ratan Tata in the Nano

Ratan Tata in the Nano

The basic model of this handsome elongated bubble of a car will have the dealer price of $2,500 but will cost the consumer about $3,000 with tax and delivery costs when it is launched toward the end of this year.

That is about three times the price of an average motorcycle and half that of the Maruti Suzuki 800cc saloon, currently India’s lowest priced car. More luxurious versions, with air conditioning and other features, will be priced higher.   

The car is unlikely to be exported for three years or more but, when it is, extras such as air conditioning and power brakes and steering would be added.

Rajiv Bajaj, managing director of Bajaj Auto, claimed this week when he launched a concept $3,000-plus car to be developed with Renault and Nissan (NSANY), that Tata (TTM) had never said his one-lakh car would be profitable. Today Tata dodged the question, saying the auto show was “not the platform to talk about breaking even.” Margins would be “spread over several models” and, with variants, the car would be “a profitable proposition for the company.”

Contrary to recent mocking jibes, Nano would meet all emission, pollution and safety norms, though its basic India version would not be sufficient for full European emission and side-crash requirements, nor have an air bag. Its maximum speed will be about 65 miles an hour with regular gas (diesel will follow later) consumption of 50 miles to the gallon.

Tata would not say much about how the low price has been achieved beyond that his Indian designers had “shrunk the package of the car” so that less steel and other materials are used, along with a smaller engine. But it is only 8% smaller than the Maruti 800, though it has, Tata claimed, 21% more inside space.

Some savings will come from locating suppliers on the same site as the main Tata Motors factory in West Bengal (which has been hit by rows over use of land). Further savings might be made later by using subcontractors to assemble cars nearer the point of sale.

Overall, Nano is undoubtedly a major achievement for Indian design and manufacturing. It is also a huge personal success for Tata, whose ideas have been met with widespread incredulity since he first broached the idea nearly ten years ago of moving families off dangerously overloaded motor bikes and into the relatively greater safety of a low cost car.

He has said recently that he would like to retire before too long and that it would be a good time to do so when the Nano is fully launched. He is now 70 and is due to go by the time he is 75. “I do not want to go out in a wheelchair,” he recently told Business World, an Indian business weekly.

But first he has to find a successor who can provide the widely diversified and growing Tata group (currently bidding for the Jaguar and Land-Rover car businesses) with the type of strong leadership that he has achieved – and that seems to be posing him with a more difficult challenge than designing and unveiling the Nano.

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