Business News

FIRST

Commodity Czars

L.N. Mittal in steel, the Ambanis in polyester, K.M. Birla inviscose fibre. What makes the Indian entrepreneur global champ ofcommodities?

By Sahad P.V.

Nineteen ninety-five to now, it's been a stunning decade for theIndian entrepreneur. Few could have imagined back then that in acountry where restricting manufacturing capacities was a statedpolicy for decades, there would emerge entrepreneurs who lead thenotoriously difficult world of commodities. Yet, the unthinkable hashappened. In a range of industries, the Indian entrepreneur is thebiggest manufacturer or at least among the top manufacturersglobally. Lakshmi Niwas Mittal of Mittal Steel is the world's biggestmanufacturer of steel by far, with an annual capacity of 70 milliontonnes (mt); his nearest rival, Arcelor, has a capacity of just 40mt. Purnendu Chatterjee of the Chatterjee Group has just acquired theworld's largest manufacturer of plastic polypropylene, Basell, fromRoyal Dutch/Shell for a whopping $5.7 billion or Rs 25,080 crore (youfind a story on him elsewhere in the issue). The Ambanis of RelianceIndustries run the world's largest polyester plant in Patalganga,with a capacity of 1.8 mt per annum. Kumar Mangalam Birla of theAditya Birla Group is the world #1 when it comes to viscose staplefibre and white cement. His group also operates the world's largestsingle-location refiner of palm oil, and is the world's fifth-largest producer of carbon black. The list doesn't end there. TheMunjals have been in the Guinness book since 1986 as the world'slargest manufacturer of bicycles, rolling out 5.2 million of themlast year. And Subhash Chandra is the numero uno manufacturer oflaminated tubes, producing 4 billion tubes every year from 18manufacturing plants in 12 different countries. Even in chemicals andpharmaceuticals, India has global leaders (see Global Play).

Commodity industries aren't the easiest of businesses to operatein. Demand is cyclical, because of which prices are volatile andprofit margins thin. Economies of scale are a must, costs must besqueezed out of every single process every day, and poor productionplanning can easily tip the manufacturer into the red. So what makesthe Indian entrepreneur so adept at the commodities game? His processand finance skills. Those who manufacture in India also leverageother advantages like relatively cheap raw materials and labour. Forexample, even though Mittal operates all his steel mills outside ofIndia, his core team of turnaround managers comprises seasonedIndians, who walk into rust bucket factories that he typicallyacquires, but quickly turn them into some of the most efficientproducers of steel.

Similarly, Reliance has a track record of executing complex, multi-crore projects at the lowest costs and in record speed. A proof ofReliance's in-house project management capability is its $6-billion(Rs 26,400-crore) integrated Jamnagar complex, which it executed in arecord three years. It's believed to have been done at 30 per centlower capital cost than a comparable global plant. "This fundamentalstrength is at the heart of Reliance's low-cost positions in all itsbusinesses," Dhirubhai Ambani once said. Last year, Reliance acquireda high-cost polyester producer, Trevira GmbH of Germany. The idea isto get entry into the European markets and in the long term transferthose production capacities to India. The Noida-based Moser Baer,too, continues to tinker with production processes to shave somemilli-seconds off, say, the etching process. Says Rakesh Govil, Headof Corporate Strategy, Moser Baer: "We are 10-15 per cent cheaperthan our Taiwanese competitors because we have been able to do a fairamount of line integration ourselves, including design (thus reducingturnaround time), and been able to do a a lot of chip fabrication in-house, besides substituting imported raw material." Hero Cycles usesan Indian version of just-in-time production to drive costs down.

Perhaps, something more important that's driving the emergence ofthe Indian entrepreneur on the global commodities stage is thenewfound sense of confidence. "I see that Indians are showingoutstanding confidence based on their increased competitiveness andglobal outlook," says Tarun Das, Chief Mentor of CII and who'swatched Indian industrialists from close quarters for more than fourdecades. Agrees Rahul Bajaj, Chairman of Baja Auto: "The commonfactor here is that entrepreneurship is blossoming in a free marketenvironment post-1991."

What's also helping is that countries that traditionally werecentres of manufacturing are now finding their competitivenessgetting eroded by other low-cost countries and, therefore, are optingout of the game. In Europe, for example, a lot of small auto-component manufacturers are selling out and are being snapped up bythe likes of Bharat Forge. In other industries like textiles andapparel, factors such as low labour costs and access to raw materialsare forcing a shift in industries to low-cost countries.

Tomorrow, it could even be industries like automotive. Are theTatas and Mahindras listening?

DOGGED

Simputer Ver. 2.0

Okay, it's not an upgraded simputer, but encore software's newestlaptop offering, the Mobilis, comes with the same philosophy of low-cost computing. Priced between Rs 10,000 and Rs 20,000, the Mobilis(like its two other variants) doesn't have a hard drive (it usesFlash Memory), has a smaller seven-inch display and shorter batterylife compared to conventional laptops. Why does Encore feel it cansell 25,000 Mobilises in Year One? "It has its own market andapplications, but will be able to run Simputer applications too,"says Mark Mathias, the company's President. Its big hope, however, isa deal with itc for the tobacco giant's e-Choupal initiative.

SECOND

The Crisis In Cooperative Banks

Urban cooperative banks go belly up with a frightening regularity.There's only one way to prevent that: Make RBI their sole regulator.

By Roshni Jayakar

In the last five years, at least 10 cooperative banks have gonebust. In 2001, Ahmedabad-based Madhavpura Mercantile Cooperative Bankwent famously belly up following its involvement in the Ketan Parekhscam. An estimated Rs 600 crore of the total deposits of Rs 1,200crore belonged to small depositors, most of whom were farmers. Thefollowing year, urban cooperative banks (UCBs) fell like ninepins.Wardha District Central Cooperative Bank, Osmanabad District CentralCooperative Bank, Satguru Jangli Maharaj Cooperative Bank of Pune andNagpur District Central Cooperative Bank were forced to down shuttersafter the Home Trade scam. In 2004, it was the turn of South IndianCooperative Bank and Maratha Mandir Cooperative Bank to go under-simply because the banks had racked up huge non-performing assets(NPAs), eroding their capital base.

There are about 2,100 UCBs in the country with more than Rs1,00,000 crore in deposits and Rs 65,000 crore in advances (yes,their assets and liablities don't match). According to the RBI'sTrends and Progress in Banking Report of 2004, 1,926 UCBs had anaverage NPA of 17.60 per cent of their total advances. Needles tosay, depositors in these banks are at risk of losing their hard-earned money.

But why are the UCBs in such bad shape? The answer has to do withthe way such banks are run. To start with, the UCBs (because they arecooperatives) are owned by a limited number of members, belongingeither to a specific community or vocation. Because only shareholderscan borrow from such banks, the biggest borrowers often tend to bebigger shareholders, meaning that the banks have little incentive ingoing after them, should the loans turn bad. And since theadministration of such cooperatives is with the state-level Registrarof Cooperatives, and the Reserve Bank of India (RBI) only overseesbanking transactions in a limited way, there's rampant mismanagementof the UCBs. (One classic example: Madhavpura's Chairman RameshParikh even used the bank's money to settle his stockbroker son,Vinit's market dues.) Says Ashwin Parekh, Executive Director,Deloitte Touche, a global consulting firm: "The current ownershipmodel of the UCBs won't work in the long term."

Changing the nature of ownership of the UCBs is trickier thanensuring better management. The latter is easily achieved by givingthe RBI greater powers to regulate them, and bringing in bankingnorms that make them at least as well managed as other commercialbanks. That apart, the government may need to help the UCBsrestructure their balance sheets, by strengthening their capitalbase. Various expert committees in the past have also suggested thatthe central and the state governments should share the cost of such arestructuring. Indeed, following the release of its vision documentfor UCBs in March this year, the RBI has begun the process ofinvolving state governments in rehabilitating the weak banks.

The rationale of cooperative banks is infallible. It's just thatthey need to be run like they are supposed to.

UPA Vs NDA: The First Year

Which of the two coalition governments worked harder in its firstyear?

Governments, like CEOs, get their first year in power watchedclosely. Why? First impressions matter. Based on how much enthusiasmgovernments show to get cracking on key issues, stakeholders maketheir call on the course of the economy-and the longevity of theadministration. The Manmohan Singh-led United Progressive Alliance(UPA) finished its first year on May 21, 2005. Did the dream teamwork any harder than the Atal Bihari Vajpayee-led National DemocraticAlliance (NDA) government that it replaced?

To your right is a quick comparison of the key initiatives the twogovernments unleashed in their first 365 days in power. It's obviousthat the UPA regime, despite recidivist communist allies, has pushedthrough more important policies than the NDA did. A word of caution,though: When the NDA came to power (for the second time, after ashort-lived 13-month stint in 1998), the global economy was justrecovering from a slump. The East Asian countries like South Koreaand Hong Kong were still suffering from a hangover of their currencycrisis, Japan showed no signs of emerging out of its recession andBrazil had just devalued its currency, real. The UPA, in contrast,took over at a time when the Indian economy was galloping at 8.5 percent a year and the stock market had started on its bull run. Butthen, who says life is fair?

-Ashish Gupta

THE UPA SCORECARD

Implemented the Fiscal Responsibility and Budget Management Act

Introduced National Food for Work Programme

Introduced the products patents regime by pushing through thePatents (Amendment) Act, 2005

Scrapped the restrictive (to a foreign partner in a JV) Press Note18

Hiked FDI in telecom to 74 per cent and real estate to 100 percent

Signed an Air Transport Agreement with the US

Put in place strategies to enhance access to oil in India andabroad

Implemented the long-pending switchover to Value-Added Tax

THE NDA SCORECARD

Replaced the fixed licence fee regime in basic and cellularservices with a revenue-sharing system

Opened up long distance services in telecom to all players

Allowed derivatives trading in commodities

Raised the limit for foreign corporate acquisitions from $15million (then Rs 64.5 crore) to $50 million (Rs 215 crore)

Exempted tax on dividend income from equity mutual funds

Proposed divestment (via IPO) in national carriers Air-India andIndian Airlines

Divested 18 per cent in GAIL via Global Depository Receipts

Passed the Insurance Regulatory and Development Bill

CREDIT

Will Debt Get Dearer?

Almost certainly, if not immediately. Interest rates on housingloans have already started moving up, and other retail loan segments-cars, durables and personal-could get dearer too. "The cost of funds(for banks) has gone up in the last quarter of 2004-05," says V.Vaidyanathan, Head of ICICI Bank's Retail Business. So why haven'trates hardened across the board yet? "While funding costs haveincreased, so has competition," explains Nicholas Winsor, Head ofPersonal Financial Services at HSBC India. In other words, there'smore money to lend than good borrowers. Still, if interest rates inthe US continue to climb, bankers in India may be emboldened tofollow suit.

-Swati Prasad

Dance Bar Economy

Spared the axe, Mumbai's dance bars heave a sigh of relief.

The art of imposing a ban" is certainly a title Maharashtra'sDeputy Chief Minister R.R. Patil should never attempt writing. Hisheroic attempt to restore Mumbai's morality by shutting down its1,250 or so dance bars appears to have come a cropper due to a smalltechnical snag. It apparently escaped Patil's attention that the"dance performance licence" issued to establishments is the sameacross five-star hotels, discos and pubs, exclusive membership clubsand just about every establishment where its members are likely toshake a leg. Fortuitously for Mumbai's bar owners, they are coveredunder the same licence. That discovery has, at least for the moment,put paid to Patil's attempts, meaning that this peculiarentertainment industry is back to business.

Just how big is it? Apparently, some 75,000 dance girls and300,000 male employees work in these bars. According to PravinAgarwal, owner of the Ellora Bar in suburban Borivali and VicePresident of the Fight for Rights of Bar Owners Association, a tradeassociation, the dance bars are divided into three categories. "Inthe uppermost class, each dance bar would make about Rs 50,000 pernight on liquor sales and about Rs 1 lakh per night on the dancers,while in the lower-most category, it would be about Rs 5,000 pernight on liquor and the dancers would collect about Rs 10,000,"Agarwal reckons. The Honorary President of the Bhartiya Bar GirlsUnion, Varsha Kale, estimates that each bar grosses anywhere betweenRs 25,000 and Rs 1 lakh per night (a lucky one, however, made Rs 93lakh when a gentleman called Telgi paid it a visit not too long ago).

So, assuming conservative takings of Rs 50,000 per night for the1,250 dance bars, the industry should be pulling in more than Rs2,281 crore per annum. The number of bars has been doubling everyyear since 1988 up until this year, according to Kale, but Agarwalfeels that things are beginning to slow. "We are not likely to seethe boom of 1996-99 again," he says. Maybe, but the show will go on.

-Priya Srinivasan

UCH!

Scalded

Oil companies in India continue to see their profits shrink as thegovernment baulks at another round of hike in fuel prices. IndianOil's net profits halved in Oct.-Dec. 2004 quarter compared to thesame quarter the previous year. IBP fared worse. Take a look.

-Swati Prasad

ODD

Subrata Roy's Curious Case

He was last seen in public on April 1, when he paid a visit toSahara Group's prestigious, but white elephant, Amby Valley project.Since then, though, bizarre stories have been emanating about thestate of health of Sahara Parivar supremo, Subrata Roy. One has itthat he's grievously unwell, while another attributes his suddendisappearance from public life to a debilitating heart ailment. Toadd to the confusion, somebody in Allahabad filed a habeas corpuswith the local court, claiming that Roy was being held captive by hiswife and colleagues, who were plotting to transfer Sahara's assetsout of the country. While a statement issued in the name of SubrataRoy called the allegations "extremely painful, false and highlydefamatory" and explained his public absence ("I am under thetreatment of doctors, who have advised me complete rest," it said)the buzz refuses to die down. Maybe its time Roy bought some airtimeon his own television channel.

-Kumarkaushalam

CAG On Overdrive

Is the state auditor being overzealous?

The past fortnight has seen the comptroller & auditor General(CAG), the government's auditor, kick up controversy over threedifferent issues: One, it has hauled up auto companies for notpassing on the excise duty cuts to consumers; two, it has accused aclutch of pharma companies, including Cipla and Nicholas Piramal, ofclaiming excessive deductions for R&D expenses; and three, morefamously, it has found fault with the valuations in disinvestment ofthe Centaur hotels at Juhu and the airport in Mumbai. Arun Shourie,the then disinvestment minister on whose watch the hotels were sold,has already made known what he thinks of the CAG's valuation skills:"idiotic". We'll refrain from going further into the Centaur issue,since it has been written about extensively in the recent days.Instead, we'll look at CAG and why controversy is its constantcompanion. One problem with CAG, most government ministries will tellyou straight off, is that it works in glorious isolation. There is nosystem of discussion with secretaries to the government, or with theheads of departments before the audit report is finalised. Thatleaves a yawning gap in the report, with the concerned departmentinvariably challenging the conclusions made. As a result, the mainpurpose of audit-improvement of administrative set-up and the systemsand procedure-takes a back seat. Instead, the CAG gets into slangingmatches with the departments it audits. The battles get worse whenthe department or the issue concerned is economic or scientific,because-CAG's critics say-it doesn't have the necessary skills toaudit them.

That's likely the case, but there's no denying the fact that CAGis stressed. While the quantum and complexity of government dealingshave increased manifold, CAG's headcount hasn't increased inproportion. Besides, and possibly the greater justification for CAG'sparanoia, given the corruption in Indian bureaucracy, the chiefauditor probably needs to be a muckraker.

-Ashish Gupta

Is TRAI Playing Favourites?

GSM operators cry foul over proposed allocation of additionalspectrum to CDMA rivals.

The Telecom Regulatory Authority of India's (TRAI's) 142-pagerecommendations on spectrum issues (including a provision for morespectrum to CDMA operators in their 800-mhz band space within amonth) have, as anticipated, rival GSM operators crying foul. "TRAIis making CDMA operators (led by Reliance Infocomm) enter the 3gspace via the backdoor," fumes T.V. Ramachandran, Director General,Cellular Operators Association of India (COAI). TRAI's Chairman,Pradeep Baijal, however, is unfazed by the accusations. "An issue isbeing made out of something that is not there in therecommendations," he says.

The GSM lobby's fear boils down to two points: One, operators likeBharti have reached a point where they need additional spectrum togrow their subscriber base. Two, an early allocation of extraspectrum to CDMA operators will allow them to launch 3g serviceswithin a month via the Evolution Data Only (EVDO) technology andthus gain a headstart in the most anticipated revolution in thetelecom industry. The GSM players (who currently operate in 900 mhzand 1,800 mhz) would have to wait until the imt-2000 spectrum is madeavailable to them-and that could take until 2007.

TRAI has recommended that imt-2000 (3g) in the 2-ghz band(currently held by defence forces) should be made available to bothCDMA and GSM operators. As for CDMA operators' demand for 1,900 mhz(a frequency band that CDMA operators use internationally), TRAInotes that the armed forces would not be able to give it up. Thecurrent fight is happening because spectrum is a scarce resource, andwhoever corners the lion's share of it in effect ensures futuregrowth at the cost of competing technologies. Ratan Tata, Tata GroupChairman, has suggested that the spectrum be allotted to theoperators who agree to pay the highest revenue share, besides alicence fee (of around Rs 1,500 crore per operator on an all-Indiabasis). Tata's suggestion doesn't have too many supporters, simplybecause, the industry fears, such a system would jack up operatingcosts, making 3g unviable.

With TRAI recommending that efforts be made to move in thedirection of technology-neutral spectrum allocation (which basicallymeans allotting spectrum without regard to the unique needs of thetwo competing technologies), the fight over spectrum is far fromover.

-Kumarkaushalam

BUSINESS ON THE EDGE

Phones That Do More

Why Nokia's head of multimedia is bullish on his firm's newphones.

The photograph on this page is one reason. It was taken on one ofthe company's new N-series phones, you see, transferred to a computerusing Bluetooth, and then, on to the page. The thing about thisparticular phone, apart from a swivel-screen a la a digitalcamcorder, and still and video cameras is that it has a Carl Zeisslens, and a resolution of 2 Megapixel. That's the highest yet on acamera phone, and it involved a superior quality lens (that's whereZeiss comes in), a 2-Megapixel sensor, and some tweaking in theassociated software. There are prototypes of camera phones that boast5-Megapixel, even 7-Megapixel resolution, but as Nokia's head ofmultimedia explains, you can put a camera with 10-Megapixelresolution on the phone and still achieve nothing. Reason? The lensand sensor that would be required to translate this into a true 10-Megapixel resolution would make the phone big, as big as, say, adecent-sized Neal Stephenson book.

"This is truly high-quality," says Ansii Vanjoki, theaforementioned head of multimedia of Nokia (his designation readsExecutive Vice President & General Manager, Multimedia, and Member ofthe Nokia Group Executive Board). The man is in India, like othermembers, to attend a meeting of the executive board, the company'sway of doffing its hat to the Indian market (one of the mostattractive markets in the world for a handset and equipmentmanufacturer like Nokia). "It is almost professional quality; you canhardly make out the difference," he adds.

Vanjoki, a biker with two bikes, a Harley and a Triumph (picturesof both are on his phone) is convinced that this year, 2005, or thebeginning of 2006 will finally see telephony becoming just anotherfunction of a mobile phone. "It is still the primary function, butthat will soon change," he laughs. People have already started buyingphones on the basis of applications rather than telephony, claimsVanjoki. It could be calendar or e-mail applications for some, musicfor others, and photography for still others. He offers the exampleof the UK's Rock Entertainment, which recently announced that itwould forge relationships with major movie studios to offer movies ondisposable memory cards for phones, as one instance of the worldgoing the multimedia phone way.

After a not-so-hot 2004, Nokia seems to have recovered, with firstquarter profits (January-March 2005) up 18 per cent and sales, 17 percent. Much of the company's troubles revolved around its tardiness inlaunching clamshell phones at a time when the world was movingtowards them; it doesn't want to repeat the mistake with multimedia.Being at the vanguard of this revolution (as Vanjoki describes it)isn't just a function of technology and marketing; it requires anunderstanding of everything from psychology to biology. For instance,the Ngage, Nokia's gaming phone, revolves around the premise of"social computing". "It isn't a solo-player device like the new PSP,"he says, referring to Sony's PlayStationPortable.

Nokia's own research would seem to suggest that consumers aremoving rapidly towards function-rich phones; the success of thesephones, like Nokia's N-series ones, however, would also depend on theoperating environment. For instance, the n91 comes with a 4-gb harddisk and can serve as a music player (like the photography thing, thecompany has invested in improving the quality of sound). However, itssuccess depends on mobile telephony service providers offering musicdownloads as a value-added service. Indian telcos, says Vanjoki, areready to offer such services. Unlike the US, he adds, the Indianmobile telephony market had leapfrogged several stages to arrive atthe edge.

The BT 50 Index

The market is gaining in strength.

The market appears finally convinced of the sustainability ofcorporate earnings, and as confirmation, the BT 50 moved up by 12.44points (5.27 per cent) in the last fortnight. A rally by the beaten-down pharma (BT Pharma index moved up by 5.37 per cent) and banking(BT BFI has moved up by 6.24 per cent) firms also helped. And withinternational oil prices on the descent (it has gone below the $48 orRs 2,112 per barrel mark), this trend is expected to continue forsome more time.

Our flagship free float methodology-based index-BT 50-hascompleted two years now. The free float methodology has severaladvantages: first, it considers only the value of stocks freelyavailable in the market (after excluding the part held by promotersand other strategic investors) and the weightage assigned toindividual shares is more representative than the marketcapitalisation-based methodology; second, it takes care of theperpetual selection dilemma regarding closely-held companies. Forinstance, the inclusion of these companies may distort the indexbased on total market capitalisation methodology, but dropping themaltogether may reduce its representative character. The free floatmethodology facilitates inclusion of large closely-held companies butassigns them a lesser weightage. After the success of our broadmarket free float index (that the Sensex subsequently decided toadopt this is testimony to the efficacy of the free float method), wedecided to launch sector indices using the same method. While thegeneral index captures the overall movements (covering severalsectors), sector indices capture the movements in individual sectors.All these indices have a common base period (January 1, 2002). Theweightages are reassigned every quarter after companies declare theirownership details. The base value of all BT indices is 100.

-Narendra Nathan

CORPORATE

Who'll Snag Mphasis?

For Barings, putting Mphasis on the block was the easy part;getting the asking price will be much tougher.

By Rahul Sachitanand

Going by the buzz in Bangalore, just about everybody is in therace to snag Baring Private Equity Partners (India)'s 36 per centstake in the Jerry Rao-managed it and ITEs company, Mphasis. Thatincludes other private equity and venture capital funds, and severallarge domestic and overseas it services companies. According tosources in the know, Barings is asking for about Rs 420 per share,which is 57 per cent more than Mphasis BFL's closing price of Rs 267on May 16, when BT went to press. Will Barings get what it's askingfor? Given that a few early wooers-which are said to have includedWipro and CapGemini, among others-have already dropped out, itappears that at least some buyers think the overall valuation of Rs3,300 crore is too high.

It's hard to brush aside the concerns of such investors. Onceconsidered, including by this magazine, a candidate for the IT topleague, Mphasis has been hard-pressed to grow its it servicesbusiness, despite a spate of acquisitions. Although 62 per cent ofits revenues come from it services, its BPO business is growingfaster. Even that may now get hit because of a recent employee-related fraud at Msource, the BPO division. While the managementdealt with the situation promptly, some analysts feel it'll put thedivision on the backfoot when it pitches for new customers. (Mphasis,however, has projected an overall 25 per cent growth in revenues and30 per cent growth in net profit for this year.)

Given those issues, who'll be brave enough to buy Mphasis? At thisstage, it's easier to say who's unlikely to buy Mphasis. According tomarket watchers, both EDs and IBM can be ruled out. Why? In EDs'case, it is busy shutting over 20 of its global delivery centres, sobuying Mphasis would go against the strategy. As for IBM, it hasalready achieved significant scale in BPO with its purchase of DaksheServices, and it clearly doesn't need Mphasis to bolsters its ITservices business. What's likely is that another private equity firm,like Temasek or Blackstone, buys Mphasis and clubs it with another itservices company in its portfolio to create critical mass. Watch thisspace.

MUNCH

False Alarm

When finance minister P. Chidambaram announced his fringe benefittax proposal in Budget 2005, he sent India's budding meal voucherindustry into a tizzy. Would companies stop doling out meal couponsto employees and thus kill the Rs 250-crore industry? was thequestion. The answer is finally out: it won't. The Finance Bill asfinally passed exempts meal vouchers from the tax. Says Ravi Saxena,Managing Director of the Rs 170-crore Sodexho Pass India: "Withadequate support from the government and corporates, the industry islikely to grow." Thanks to Chidambaram, there'll still be freelunches going around in corporate India.

-Priyanka Sangani

The Music Never Stops

But Indian music retailers are just beginning to see the colour ofmoney.

The international music industry had a bad 2004, and, contrary toexpectations, it wasn't the popularity of iTunes (it sold its 150millionth song late in the year) that caused this. According to DaveKusak and Gerd Leonhard, authors of The Future of Music: Manifestofor the Digital Music Revolution, of the 30,000 music titles releasedin 2004, 25,000 sold fewer than 1,000 copies. According to a reportcarried in The Economist in October 2004, the main reason for this,on the basis of a study done by a music major, was the quality ofmusic itself.

India, fortunately, is on a different page. "The revenues of musiccompanies did not fall for the first time (in four years) in 2004,"says Savio D'Souza, Secretary General of the Indian Music Industry,an industry lobby. And with organised retail making its presence feltin almost all product categories, analysts such as Fitch Ratings'Priyamvada Balaji predict "an annual growth in the short-to-medium-term of 25-30 per cent", for music retail chains.

Piracy still remains an issue (for every legitimate copy of apopular piece of music sold in India, there are between three andfive illegitimate ones sold, assuming the price of a pirated versionto be between a third and a fifth of the original; however, last year708 people were convicted for music-piracy related crimes), but everycompany in the business is in investment mode. The RPG-owned MusicWorld will add 58 stores by end-2005, the Bennett, Coleman & CompanyLimited-owned Planet M, 95 in the next 18 to 24 months.

The good news for such companies is that the ratio of CDs tocassettes sold in India is a healthy 1:1 as opposed to the 1:7 it wasa few years ago. However, it is still not clear whether the marketcan support (or needs) 10 outlets in a city. Hemu Ramaiah, ManagingPartner, Landmark, a book-and-music retailer, is betting that theywon't and is investing in large-format destination stores. "Music hasto be sold with flair," she insists. That won't be easy. Mostretailers complain that placing orders with the Big Five (Sony,Universal, BMG, Warner and Virgin) is followed by a frustrating waitfor titles. And dealing with small regional music companies comeswith its own set of challenges. "The smaller distributors need toevolve," says Ajay Mehra, CEO, Planet M.

Most organised retail players, however, are oblivious to the bigthreat. Digital music sales are already happening in India (some Rs50 crore worth in 2004), through mobile telephony companies (userssubscribe to a service that allows people who call them listen to aparticular song). With India set to have 200-250 million phones by2007, that, not piracy, is the big threat.

-Amanpreet Singh

Making News

Mumbai's new newspaper markets itself like none before.

Mumbai's newest marketing blitz is hard to miss. You see itstaring back at you from bright yellow hoardings all over the city,and you even find it sitting atop tables at tony restaurants andpubs. No, the high-decibel marketing isn't for a new car, a newmobile phone or a new show on television. Rather, it's for DNA-DailyNews & Analysis, the newspaper to be launched in August by thecombine of Zee and Dainik Bhaskar. "The scene is changing on a dailybasis and so has our advertising budget-we started out thinking Rs 10crore would be enough, but that's obviously not been the case," saysSuresh Balakrishnan, Head (Marketing), DNA. What explains DNA's bigad budget? Mumbai is a Times of India (TOI) city; it has the largestcirculation, and an overall print advertising share of 56 per cent(Tam Adex figures for April-March 2004-05). So DNA, headed by formerTOI honcho Pradeep Guha, will need all the help it can get. SaysKamini Banga, a marketing consultant: "By showing the sort of peoplewho TOI would want as its readers as saying that they want anothernewspaper, DNA is making sure it hits where it hurts most."

Apparently, Dainik Bhaskar had adopted a similar strategy duringits own launch in Surat to good effect. Will the publishing group doan encore with DNA in Mumbai? "The involvement bit may work well as agimmick, but sampling is only the beginning of the marketing effort,"says Meenakshi Madhvani, Managing Partner, Spatial Access, a mediaaudit firm. Indeed, as any marketer will tell you, the biggest riskany hi-profile campaign runs is falling short of the consumer's hyped-up expectations. In other words, Guha has crafted a successfuladvertising campaign. He now needs to craft a better newspaper.

-Priyanka Sangani

SPIN

Can GM India Stay On Track?

Just about the time general Motors (GM) in Detroit was desperatelytrying to renew its credit lines from banks to stave off bankruptcy,the auto major's new boss in India, Rajeev Chaba, was busy unveilinghis vision for the local market. A 10 per cent share by 2008, heannounced. Given that GM in India has an overall market share of 2.75per cent, Chaba will need a near-miracle to deliver those numbers. ByChaba's own admission, the company will need new cars to get its cashregisters ringing. So plans are afoot to launch, "as many as five newcars within the next 30-36 months", says a GM India (GMI)spokesperson. He isn't telling what these cars will be, but industrysources expect both the Chevrolet Spark (the old Daewoo Matiz) andthe Chevrolet Aveo (another Daewoo product to replace the old OpelCorsa) to be two of the cars. With the parent struggling, will GMI beable to execute on its plans? "The problems with our parent concerndo not affect us," says the spokesperson. Funnily enough, that'sexactly what Fiat said three years ago-before its sales plummetedfrom 32,111 units to 5,407 units last year.

-Kushan Mitra

Wal-Mart Checks Out India

The retail behemoth gets a feel of the country ahead of setting upshop.

It's a twin event that retailers in India have been dreading forlong: one, the opening up of retail to foreign investors and, two,the coming of the $288-billion (Rs 12,67,200-crore) Wal-Mart. Pastfortnight, both events seemed closer to happening. Union CommerceMinister Kamal Nath reiterated the government's plan to open up theretail industry in a phased manner, and Wal-Mart's President & CEO ofinternational business, John Menzer, came courting the Indiangovernment, meeting Prime Minister Manmohan Singh, among others.

While Wal-Mart's head of international corporate affairs ElizabethKeck told BT on the eve of the high-powered team's departure that thevisit was mainly meant for Wal-Mart's 80-person global sourcingoffice in Bangalore, it is unlikely she had anyone fooled. Wal-Marthas actually been meeting potential partners, including, it is said,the Mahindras (they deny it) and Anil Ambani of Reliance Industries.Ambani's elder brother Mukesh, too, is said to be interested insetting up hypermarkets with his close aide Hetal Meswani.

Wal-Mart's interest comes at a time when competitors like the $43-billion (Rs 1,89,200-crore) Target are more interested in growingtheir home market rather than venturing overseas. The chairman ofTarget Technology Services India, Paul Singer, told BT recently: "Weare only in 47 of the 50 states in the us. So our focus is likely toremain on expanding our presence at home." Meanwhile, anotherAmerican retail giant Sears Roebuck Kmart is set to join the party byopening an India liaison office soon.

-Rahul Sachitanand

Volkswagen In India

It could be plonking down $1 billion on a plant in Vizag.

On May 2 this year, officials from the government of AndhraPradesh went to Volkswagen's headquarters in Wolfsburg, Germany, andthey've returned with some good news: The German carmaker, best knownfor its iconic small car, the Beetle, is coming. It plans to set up amanufacturing facility in the port city of Visakhapatnam at a cost ofabout Rs 5,000 crore. Two of VW's divisions, Skoda and Audi, alreadysell their cars in India. According to D.A. Somayajulu, Advisor tothe state government and who was part of the team that went toGermany, the carmaker has proposed 90 per cent indigenisation at themanufacturing plant. It obviously means that VW plans to introducemore mass market (read: small or compact) cars in India. It's almosta decade late to India's automotive party. Let's see if it can stillmake heads turn.

-E. Kumar Sharma

POLICY WATCH

Lots Of Gas

Wanted: an independent regulator for the gas sector.

On February 23, 2005, the seven-member Gas Industry Group (GIG),comprising leading gas companies in the country-BG India, ExxonMobil, Shell Gas & Power, Gujarat Paguthan Energy, Gujarat PetroleumCompany Limited, Gujarat Gas Company and Reliance Industries-finallyhad to turn to the press for help. They had been trying for months,without success, to get the Union Power Ministry to address theirconcerns.

The provocation: a recent addition to the Draft Pipeline Policy,which made it mandatory for all players using the pipeline network ofGAIL (India) Ltd. to make available a certain percentage of theevacuated gas to it. GIG wants to pay GAIL in cash for using itsgrid. The reason: paying a part of the access and transit fees in gasmakes it virtually impossible for GIG members to commit definite gassupplies to their buyers. "It will be virtually impossible to marketgas under the new circumstances," contends Nigel Shaw, CEO, BritishGas, India.

There seems to be some logic in the GIG argument. Since gasproduction varies from year to year, meeting commitments is adifficult proposition even in the best of times. Parting with aportion of gas to GAIL will only compound the problem. But thegovernment is unwilling to give in: it needs the additional gas tomeet its social obligations, which the private players are unwillingto do.

But this is not the only problem dogging the still-to-be-announced pipeline policy. Another sticking point: should GAIL alonedevelop the proposed nationwide gas pipeline grid or should other(private) players also be allowed to participate? This has forced GIGmembers to adopt a wait-and-watch policy, thus, slowing down thedevelopment of this sector. Shell, which has already invested around$750 million (Rs 3,300 crore) in its Indian LNG business, now findsthat it cannot reach, or find, new customers because of governmentregulations.

Gas pricing is another contentious issue. The government hascapped gas prices at around $2 (Rs 88) per million metric Britishthermal units (MMBTU) to subsidise fertiliser plants. "Any price lessthan $5 (Rs 220) per MMBTU is uneconomical and, therefore,unsustainable," says a senior Shell official. Even Exxon-Mobil andGujarat Gas feel that there is a need to set market-related pricesfor gas. Further, with local gas distribution being thrown open inmany cities, new regulations are needed for the award of licenses andfor issues relating to the delineation of exclusive distributionareas and period of contract. Nothing seems to have been done on thisfront.

An independent regulator is clearly the need of the hour, but withthe Petroleum and Natural Gas Regulatory Bill still pending inParliament, no solution seems in sight. The industry demand isreasonable: clear demarcation of responsibilities between theMinistry of Petroleum & Natural Gas and the regulator. GIG membersalso want a separate regulatory authority for the gas sector-as inthe US and UK-and not one that is clubbed with the oil sector"because of the different needs of this sector".

There is a crying need for speeding up the development of thissector: gas isn't just more environment-friendly, its use can alsosubstantially bring down the cost of fertiliser and power in thiscountry. Replacing the more expensive naphtha (cost: $9-12 or Rs 396-528 per MMBTU) with gas as feedstock for power and fertiliser plantswill also save the government huge amounts as subsidies. Is thegovernment alive to these possibilities? The time to act is now.

-Ashish Gupta

Mittal Turns To India

Steel czar L.N. Mittal finally unveils his plans for India.

Lakshmi Niwas Mittal is looking homeward. In the first week ofMay, Mittal, Chairman and CEO of the $31-billion (Rs 1,36,400-crore)Mittal Steel Company NV, sent a three-member team to Jharkhand. Itsbrief: initiate talks on setting up a greenfield steel plant in thestate. The team, which included Mittal Steel's Head of Finance &Corporate Treasury, Sudhir Maheshwari, and its Director, Mining, M.P.Singh, conducted an aerial view of Chaibasa in Manoharpur district ofJharkhand, and then met state Chief Minister Arjun Munda, andMinister for Mines Madhu Koda. The company will now conduct afeasibility study on the project and submit a proposal to the stategovernment.

Mittal, who built his empire buying and turning around ailingsteel companies in Europe, Asia, Africa and the US, has not yetfrozen the size of his Jharkhand venture. There have been reportsthat he is planning to invest $5.5 billion (Rs 24,200 crore) on a 10million-tonne greenfield plant-his first such project. But thecompany is being tight-lipped about its plans. "Mittal Steel is aglobal company and we are very interested in the Indian market, andwould look at appropriate opportunities as they present themselves,"a spokesperson at the company's London headquarters told BT.

-Swati Prasad

The Real Estate Boom

There's a correction around the corner, but it may not last toolong.

If you're already counting the capital appreciation on the dreamhouse you bought two years ago, we suggest you hold the bubbly. Therise in real-estate prices seems set to slow down. "A correction willhappen over the next six months to a year," feels ChanakyaChakravarti, Joint Managing Director, Cushman & Wakefield. The goodnews is that it could be limited to overheated markets like Gurgaonand Noida in the National Capital Region, and parts of suburbanMumbai such as Goregaon, Malad and Powai.

Even though demand for housing remains buoyant, there is evidencethat some buyers are postponing their purchases. The reasons:interest rates on housing loans have inched up and discounts are nolonger on offer. And, with property prices soaring, the differencebetween the rent of a housing unit and its equated monthly instalmentis widening. "Rental income will not justify investment in propertycompared to other investment opportunities, unless the investor isbetting on capital appreciation," says Kashyap. But buildersdisagree. "I expect to see a 15 per cent increase in demand thisyear," says Niranjan Hiranandani, Managing Director, HiranandaniConstructions. That's heartening. And if the economy continues togrow at the current clip, the correction, when it comes, won't lastfor too long.

-Swati Prasad

AUTO

On A Slow Charge

The Reva electric car has three crucial defects: it is extremelyslow (maximum speed: 60-65 kmph), has limited range (80 km in"economy" mode) and is unattractive to behold. So Chetan Maini,Managing Director of Reva Electric Car Company, hired car designerDilip Chhabria to correct these flaws. The result: Reva NXG, aroadster that has better range-200 km-snazzier looks, bettersuspension, an on-board tablet pc with Global Positioning Systemsoftware and GPRS Internet connectivity, and a top speed of 120 kmph."This car can just rocket off the start-line," Maini boasts. He hasno plans of productionising the NXG just yet; it is just a technologydemonstrator. Meanwhile, Indians still haven't got used to the ideaof charging cars. That's why, despite a running cost of only 40-50paise per km, Maini is targeting sales of only 1,200 cars this year,one-third of them from exports.

-Kushan Mitra

SELF WORTH: ASHOK K. PARMAR

Try, Try And Try Again

Ashok Kumar Parmar has struck a blow for small investors.

He is not your typical corporate raider. Yet, for the last fewmonths, Pune-based Ashok Kumar Parmar, 54, has been making headlinesfor demanding berths on the boards of companies in which he'sacquired up to14 per cent stakes. His latest target: the Aurangabad-based, Dhoot-controlled Videocon Communications, in which he holds14.6 per cent.

Parmar started picking up Videocon Communications shares from themarket in December 2004, when they were trading at Rs 42, a price-earnings (PE) multiple of only two. "In a market where almosteverything is trading at PEs of 10-plus, Videocon Group shares areruling at abysmal levels," he says. His earlier attempts at gettingon to the board of Videocon Appliances failed; and Parmar booked a Rs3-crore profit in November last year by selling a 12 per cent stakein the company, where he continues to hold about 2 per cent. "Ihaven't met the Dhoots yet," he says, describing how a meeting withVideocon Chairman Venugopal Dhoot, scheduled for March 30, 2005, wascancelled at the last minute. But Parmar is undaunted by the failureof his attempts at getting board berths in listed companies likeVideocon Appliances, Sai Service, Elecon Engineering and Indian HumePipes. He has diluted his holdings in all of them. Interestingly, theman still can't operate a computer, and prefers to call ICICI Directfour-to-six times every day to put his deals through. Parmar's otherfavourite stocks: IDBI, GE Shipping, IOC and Vijaya Bank.

A commerce graduate from Belgaum, (Karnataka), Parmar came to Punein 1972. After a six-year stint with Maharashtra Synthetics at apaltry salary of Rs 150 per month, he set up a grocery store in 1979and forayed into construction in 1983. For the last 22 years, ParmarBuilders, his real-estate company, has taken up one project at atime. In 2002, Parmar entered the stock market, which, he says, "ismuch cleaner" than the construction sector, "to secure the future ofhis three sons", two of whom are MBAs from the Indian Institute ofManagement, Bangalore, and the third a mechanical engineer from SSPM,Pune University.

Says Parmar, who enjoys gardening: "I will keep trying to getberths on the boards of companies I invest in. Maybe I'll get luckyafter 10 tries." Whether he does or not is immaterial to the biggerpicture; his efforts have already helped unlock huge value for thesmall investor.

-Roshni Jayakar

Business News

FIRST

Commodity Czars

L.N. Mittal in steel, the Ambanis in polyester, K.M. Birla inviscose fibre. What makes the Indian entrepreneur global champ ofcommodities?

By Sahad P.V.

Nineteen ninety-five to now, it's been a stunning decade for theIndian entrepreneur. Few could have imagined back then that in acountry where restricting manufacturing capacities was a statedpolicy for decades, there would emerge entrepreneurs who lead thenotoriously difficult world of commodities. Yet, the unthinkable hashappened. In a range of industries, the Indian entrepreneur is thebiggest manufacturer or at least among the top manufacturersglobally. Lakshmi Niwas Mittal of …