Fundamentals June 3, 2013

Nik's Diary

The Indian markets opened in the red today tracking negative opening trades in the SGX Nifty and most of Asian markets. Asian markets are trading lower, after improving U.S. economic data added to concern the Federal Reserve will scale back its stimulus. US markets moved sharply lower in the latter part of the trading day on Friday. The sell-off seen in late-day trading came as a pair of economic reports added to recent concerns that the Federal Reserve could scale back its stimulus program within the next few meetings. Major European markets too ended in negative territory on Friday, due to some weaker than expected economic data from Europe. Eurozone unemployment rate climbed to a new record high, while German retail sales unexpectedly fell. Meanwhile, Indian markets fell sharply on Friday, as RBI Governor’s hawkish comments on inflation, current account deficit and commodity price movements dented hopes for an interest-rate cut at the RBI’s June 17 policy meeting. Weak GDP data also added to growth worries, dampening investor sentiments.

Real GDP growth at 4.8% in 4QFY2013, in line with expectations

GDP growth for the fourth quarter of 2012-13 (January-March) was a feeble 4.8 per cent, according to Central Statistical Organisation numbers released on Friday. The real GDP growth during 2012-13 is at 5 per cent, lowest in 10 years. This was broadly in line with expectations and analyst predictions. The January-March period was the second straight quarter of sub-5 per cent GDP growth– it was 4.7 per cent in the quarter ended December 2012, and 5.2 per cent in September last year. Key input sectors like mining and utilities failed to make the grade yet again. Mining GDP contracted by over 3 per cent from 5.2 per cent growth a year ago, the utilities sector fell to 2.8 per cent (3.5 per cent earlier), while agriculture growth was 1.4 per cent (2 per cent earlier). 

Slow growth

During the entire fiscal 2013, input sector growth slowed to just 2 per cent from 7.3 per cent in 2010-11. This was clearly reflected in the 5 per cent growth rate for 2012-13. Manufacturing grew 2.6 per cent during the January-March quarter compared to just 0.1 per cent a year ago, but with overall scarcity of inputs and high prices, a weak demand situation, and exports continuing to lag, the performance of manufacturing for the entire fiscal was a dismal output growth of just 1 per cent compared to 4.4 per cent growth in growth in 2011-12. Private consumption growth declined to 3.8 per cent from 9.7 per cent a year earlier, while the government spending was just 0.6 per cent from 7.6 per cent last year.  Weak exports too hurt the manufacturing sector. The services sector witnessed growth below the 7 per cent mark for the first time in the last 10 years. In keeping with the depressed mood on the economic and output front in fixed capital formation remained sluggish, growing 3.4 per cent year-on-year during January-March. Private consumption demand, which rose 3.8 per cent year-on-year during the quarter, remained considerably weaker than its longer-term trend of over 7 per cent. However, Finance Minister P Chidambaram said on Friday that growth numbers are “as per expectations”. Commenting on the data, Planning Commission Deputy Chairman Montek Singh Ahluwalia said, "There is evidence the economy has bottomed out. But we still don't have evidence of a strong recovery. It is challenging to get to 6 per cent (growth) where last quarter is 4.8 per cent." According to the finance ministry, the growth in the current fiscal is likely to improve to 6.1-6.7 per cent. Prime Minister's Economic Advisory Council Chairman C Rangarajan said, "GDP numbers has been on expected lines.... as far as manufacturing is concerned perhaps we have reached the bottom.”  Barclays Bank analysts Siddhartha Sanyal and Rahul Bajoria said in a note to clients late on Friday that the likelihood of continued fiscal austerity, along with weakness in typically resilient segments such as domestic services, suggests sluggish economic activity for a while yet. “The rainfall forecast for the coming monsoon season is ‘normal’, which should help the agriculture sector to fare better in the current fiscal year as well as possibly support an improvement in consumption spending to some extent,” they said, adding that inflation will remain broadly within the RBI’s comfort zone in the coming months, while the growth recovery will remain weak. Analysts are expecting a step-up in government spending closer to the upcoming state and national-level elections during the second half of 2013, to help revive consumption demand. Source: DeccanHerald

Infosys Board appoints Mr. N R Narayana Murthy as Executive Chairman of the Board 

Struggling IT major Infosys on Saturday recalled its founder N.R. Narayana Murthy and returned control of the company that has disappointed investors with poor earnings in the last nine quarters and losing ground to smaller rivals. Murthy, who had shed executive role seven years ago and finally retired as head of Infosysin August 2011, has been appointed Executive Chairman, replacing K.V. Kamath during whose tenure the company shares slumped 15 per cent. The current executive co-chairman S. Gopalakrishnan will be re-designated executive vice-chairman while S.D. Shibulal, who was one of the seven engineers to launch the company in 1981 by pooling together USD 250, will continue as Chief Executive Officer (CEO). Billionaire Murthy accepted a five-year term, over which period he will earn a salary of one-rupee per year and will have his son, Rohan, as his executive assistant. Both Gopalakrishnan and Shibulal have requested that they too draw an annual compensation of Re 1 and the Board has accepted their requests, subject to necessary shareholder and government approvals. Describing his return as 'very unusual', Murthy, who will turn 67 in August, said the company was facing challenging times and his job would be to add value to Shibulal's job with ideas. "The board has taken this step keeping in mind the challenges that the technology industry and the company faces," Kamath said acknowledging calls from shareholders to strengthen executive leadership of the company. Under Murthy's 19-year tenure as CEO until 2002, Infosys became the first Indian company to list on Nasdaq and grew to become an over Rs 40,000 crore (USD 7.3 billion) enterprise. He is returning at a time when Infosys has performed below market expectations and has struggled to retain clients in North America and Europe. The firm has over past two years losts its IT bellwether status to Tata Consultancy Services, the country's largest software services exporter. In FY13, revenues lagged its own forecast and projected lower growth in earnings than industry during the current year.

Infy raises retirement age of executive chairman

Murthy, the poster boy of Indian IT success, said his son Rohan will not have any leadership role and he was there only to make Murthy more 'effective'. "Standing here today is very unusual to me. When I walked out of Infosys on August 20, 2011, I did not in my wildest dreams imagined that I will be back here in my executive capacity," he told a hurriedly called press conference. For Murthy's re-entry into India's second largest software services firm, the Board raised the retirement age of executive chairman from 60 years to 75 years, effective from June 1, Saturday. "When Chairman Kamath requested me, I was in a dilemma. I had to think very carefully. Then I realised that I was fortunate enough to add value in whatever way I could to previous CEOs too. And after discussions with my family, I decided that as long as I have an opportunity to add value to Shibulal in any manner that is most enjoyable to me in the company of those that I enjoy I said I would have no objection," he said. Murthy defended Shibulal saying he had 'distinguished himself as a very fine leader' and corporate history bears witness that impact of tough and timely decisions taken by CEOs have come much later. "First of all let me remind you, it is 11 years since I gave up my CEO position we had.... when Kris Gopalakrishan left his position the company grew at 25 per in dollar terms much above the industry average. So it is not fair to say founder CEOs have not performed well," he said. He said he would 'add value' to Shibulal's role and that the company should focus on large application development, maintenance and independent validation services. Kamath, who from Saturday took up the position of Lead Independent Director, said, "the Board has taken this step keeping in mind the challenges that the technology industry and the company faces and in the interest of all stakeholders, particularly shareholders large and small, who have asked for strengthening of the executive leadership during this challenging time."

My son has to make me more effective: Murthy

Murthy said: "This calling was sudden, unexpected, and most unusual. But, then, Infosys is my middle child. Therefore, I have put aside my plans-in-progress and accepted this responsibility." "As I pointed out Rohan is my executive assistant, he has no leadership role. Shibulal is the CEO. There are executive directors in the company and the Board members, they are all competent people. Only role that Rohan has is to make me more effective. That's it," Murthy said. Interestingly, while Murthy backed the firm's Infosys 3.0 strategy, he did not comment on the challenges being faced by India's second-biggest software-services provider. "Only this morning at 9-O'Clock that the board invited me. Therefore, I'm not in a position to give any answer. It is not possible for me to comment on any issues or parameters of Infosys at this stage," he said. The current challenging business environment coupled with stake-holders' nudge seem to have pushed the hand of the Board to make him Executive Chairman again after a gap of seven years. Murthy was Non-Executive Chairman of the Bengaluru-headquartered firm from 2006 to 2011 and thereafter was made Chairman Emeritus, and the decision to recall comes at a time when the company grapples with a string of disappointing results and loss of marketshare. "This in some sense is like a second innings because it's seven years since I completed my executive responsibilities... When I come back here in executive position, it's in some sense an exciting yet somewhat new challenge", he said. "This is a unique opportunity for me".

Who is Rohan Murthy?

In order to function more effectively, Murthy intends to create the Chairman's office to assist him during his tenure and has requested the Board to permit him to put together a team for this function. The team will include his son, Dr Rohan Murty, as his executive assistant. Rohan Murty is a Junior Fellow in the Society of Fellows at Harvard University. He has a Ph.D. in Computer Science from Harvard University and a Bachelor's degree in Computer Science from Cornell University and has held fellowships at MIT, Caltech, and Microsoft Research. Rohan has authored several papers and has patents as part of his research on wireless and mobile computing. Kamath indicated on Saturday that Infosys decided to bring Murthy back as stakeholders wanted it, in addition to the 'external and internal environment'. Asked for the circumstances under which invitation was extended to Murthy to come in as Executive Chairman, Kamath cited 'external and internal environment' without elaborating and what 'stakeholders are telling us, communicating to us'. Most importanly, he said, the company has to care to what stakeholders were telling it in a variety of ways. So, it was a response to stakeholders "as it were". "All these were considered in that invitation", Kamath said. "... the Board has kept in mind clearly the fact that this industry is going through challenges and the Board has also kept in mind that the company has certain challenges", he said. Murthy, along with six fellow software engineers, established Infosys with about USD 250 in 1981. In the last 30 years, they have made it one of the most respected names in the software outsourcing sector.  Meanwhile, reacting to Narayan Murthy's re-appointment, Biocon CMD Kiran Mazumdar-Shaw tweeted: "NRN, I am confident, will restore Infosys to its original glory but he must be given reasonable time to reboot the business." NASSCOM on Saturday welcomed re-appointment of N.R. Narayana Murthy as Infosys Executive Chairman, saying his insights into the company and the technology industry would be valuable. "Mr Murthy is an iconic leader who has played a key role to shape the Indian technology industry and we welcome him in his role as Executive Chairman, Infosys", NASSCOM said in a statement. "His guidance and strategic insights to Infosys as well as for the industry would be valuable as the industry focuses on its next phase of evolution and growth". Murthy recently chaired the NASSCOM 2020 Organisational and Governance Committee and his leadership, commitment, inclusive and collaborative approach helped to define the strategic approach for NASSCOM, the statement said. "We look forward to work more closely with him in his role as Executive Chairman, Infosysto address industry challenges and build new opportunities", it said. Source: DeccanChronicle

National Green Tribunal (NGT) allows Sterlite to restart copper smelter

The National Green Tribunal on 31 May 2013 gave approval to Sterlite Industries Ltd, the UK-based Vedanta Group company so that it can start operations of copper plant in Tuticorin district of Tamil Nadu. A bench of Justices headed by NGT Chairperson Justice Swatanter Kumar cleared it that the copper plant unit of Sterlite Industries Ltd will start its operation in presence of the committee which was established by the National Green Tribunal.  The panel of the committee will have four members which will be one member of engineer from Tamil Nadu Pollution Control Board (TNPCB), Member Secretary of Central Pollution Control Board (CPCB) as well as two members of IIT, Madras.  The CEO of Sterlite Industries Ltd, P. Ramnath explained that Sterlite Copper, which is a four-lakh-tonne-a-year smelter, will begin to operate with full capacity just after a week of its production. 
Background of the case 
The Sterlite Copper unit was shut down following an order of Tamil Nadu Pollution Control Board on 29 March 2013. There were complaints of throat irritation as well as eye irritation from public, due to which the unit was closed. Sterlite Industries Ltd, in turn appealed to Southern Bench of the Tribunal. The Southern Bench of the Tribunal in response, constituted the two-member expert committee in April 2013 in order to assess the emission safety systems of the factory.  The expert committee panel then submitted the report on 29 April 2013 after which the case was given to Principal Bench in New Delhi. Source: jagranjosh

India's Sun Pharmaceuticals reported to be in talks to be in a US $5bn deal for Sweden's Meda

Drug major Sun Pharmaceutical Industries is said to be in talks to buy Sweden’s pharma firm Meda AB in a deal worth up to $5 billion, according to media reports. Sun Pharma has been in talks with several banks to raise funds to buy out Meda for as much as $5 billion as part of its expansion plans, Wall Street Journal has reported. A spokesperson of Sun Pharma refused to comment on the reports, while e-mailed queries to Meda remained unanswered. The Mumbai-based firm had, however, last week termed the reports of a possible deal as “speculation”. “We have absolutely no comment on market speculation. Please further note since we have large cash and cash equivalents, we are constantly linked to rumours of international acquisitions,” the company had said in a filing to the BSE. Meda is an international speciality pharma company with product portfolio in three main segments - speciality products, over the counter drugs and branded generics. The Dilip Shanghvi-led pharma major has a history of acquisitions. In November 2012 Sun Pharma had inked a pact to acquire US-based DUSA Pharmaceuticals for around $230 million (around Rs 1,250 crore). In December same year, the company’s arm Caraco Pharma had entered into a definitive agreement with Japanese drug maker Takeda Pharmaceuticals’ to buy US-based generics subsidiary URL Pharma. In 2010, after nearly four years of legal wrangling, Sun Pharma had acquired a controlling stake in Israeli firm, Taro Pharmaceutical Industries Ltd. The Mumbai-based firm had signed a $454 million merger deal with Taro in 2007, which was terminated a year later by the Israeli firm unilaterally. After this, both companies had filed various legal suits against each other. In November last year Sun Pharma had said it was looking forward to larger acquisitions as a part of its expansion plans. “We continue to look for opportunities to expand our business in all the key geographies and markets we are focused on. We are looking at acquiring businesses hopefully larger then DUSA going forward,” Sun Pharma Managing Director Dilip Shanghvi had said during a conference call last year. Sun Pharma had posted a consolidated net profit stood at Rs 3,008.06 crore for the fiscal 2012-13, as against Rs 2,656.69 crore in the previous fiscal. Source: thehindubusinessline