Saturday, August 04, 2012

A cosmopolitan hub away from the ‘City Lights’...

Unity in diversity is what nehru had envisaged when psu townships were set up. a case in point has been nalco, where people from different backgrounds have coexisted since years, says Dhrutikam Mohanty

It took around two and half hours to cover 158 kilometers on NH-5 & 42, the distance between Orissa’s capital city of Bhubaneswar and the industrial hub of Angul. We approached a traffic square some six kilometres ahead of the district headquarters, where the road led straight to touch Angul town and the left and right diversions hived off to reach Nalco’s smelter complex and residential complex – Nalco Nagar.

Angul district of Orissa, which is abundant with natural resources, has turned into a industrial hot spot after National Aluminium Company Limited (NALCO), came up in 1980s. Nalco has set up Asia’s largest integrated alumina-aluminium complexwith a 3,45,000 tpa smelter in Angul, which started commercial production in 1987. Close to it, a captive power plant of 960 MW capacity has been established for uninterrupted power supply to the smelter. Apart from exporting alumina & aluminium worldwide, Nalco has opened stockyards at various parts of the country to facilitate domestic marketing. With its consistent track record in capacity utilisation, technology absorption, quality assurance, export performance and profits, NALCO enjoys the status of a Navaratna company.

Presently, PSUs like National Themal Power Corporation, Mahanadi Coal Field Ltd. and Fertilizer Corporation of India also have mega industrial units in the Angul district. While Jindal Steel and Power Ltd. has come up with a steel complex and a 1500MW power generation unit, Bhushan Steel and Strips Ltd. also has a power plant and an advanced hot rolling plant here.

Nalco Nagar, the residential complex for employees of the company, was established in the year 1984 on an area of 619.88 acres. This well-planned, spacious, clean & green township has 3,583 quarters and it is ‘a home away from home’ for its 4,552 employees. The township will increase in population and size very soon, as construction of new quarters is at the final stages. In order to meet the housing requirement of the second phase of capacity expansion, NALCO has undertaken this project at a cost of Rs.40.91 billion.

NALCO runs two schools in the area: while in Saraswati Vidya Mandir, the medium of education is vernacular, the Delhi Public School imparts education via the CBSE pattern in English medium. “These schools provide education to both Nalconians and Non-Nalconians. The company does not discriminate on this line and the school fees are also very modest,” claims Anil Bhatt, Chief Manager, Public Relations & Periphery Development, NALCO, while elaborating on the company’s policy. As per the 2001census, the NALCO township has an average literacy rate of 73%, higher than the national average of 59.5%.

Nalconagar at Angul can also be called a mini India, as people from almost every state of the country live here. We found the secular texture of Indian society intact, as a temple, a mosque & a church are all built on the land provided by the company. People from all religions gather to celebrate each other’s festivals. Viswakarma Puja is regarded as the mass festival of the township; cutting across religion & regions, and employees congregate to celebrate this festival. Apart from this, Jagannath Rathyatra, Eid & Christmas are other important festivals of the township. “The company also provides funds to celebrate all these festivals,” says a senior executive of the company.

Though small in size, there is an all-in-one shopping complex in the township. A cooperative society of Nalco employees manages a departmental store also. Residents of this township depend upon this tiny shopping complex for their day-to-day needs. Recreational activities of the employees have been also taken care of. A mini stadium, a community centre and a sports complex signify this, as do many parks across the township. One can also find a symbolic recognition of the spirit of equality within the township as land & buildings have been allotted to three different worker unions and an officer’s association as well. In the recent past, these unions have vehemently opposed the central government’s proposal to privatise Nalco. However, the sight of old Fiat cars abandoned & dumped on streets in large numbers gives a startling, as well as discomfitting insight into the life of Nalco employees. We found 50-plus such cars and also noticed a number of Maruti 800s that have met the same fate as their Fiat predecessors! This reminded us of the allegations in a local daily, which stated that many company employees are grabbing monthly fuel allowance showing these vehicles as on road. The report alleged that employees buy such dilapidated vehicles for as low as Rs.10,000. If such misuse of government funds is true, it is a concern that most PSUs share.

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Friday, August 03, 2012

PROF. JAMES L. HESKETT, BAKER FOUNDATION PROFESSOR, EMERITUS, HARVARD BUSINESS SCHOOL

In State capitalism, does the operative word “capitalism” come in? State capitalism and State-run enterprises are neither to be applauded nor feared, writes prof. james l. Heskett of harvard business school

There seemed to be little concern among respondents that States will use their sovereign funds to foster their political interests. Russell Widener comments that ,“I would worry more if they began to use their scale of economy to shake and shift markets.” One advisor to two sovereign funds, Jack Cramer, points out that at least in his experience “the funds are... in no sense aggressive or eager to lead in a sector. As a rule, they want safe investments.”

The current boom in State capitalism stems, in part, from investment opportunities in developed countries. Nari Kannan suggests that it is a product of “thoughtless consumerism (the thirst for cheap Chinese goods) and dependence on foreign oil,” particularly in the United States. But the phenomenon isn’t limited to US. As Kamal Gupta comments, “Countries like India... need investments in infrastructure. Where does it get the money it needs? From the money owners. How does it matter who they are?”

Could global financial markets accommodating state (and private) capitalism be improved? Yes, according to several respondents. Shann Turnbull points out that “National governments can deal with globalisation as they can determine the rules of ownership and control applicable in their jurisdictions.” Nevertheless, he proposes the creation of a “Community Investment Code” to be administered by the World Trade Organisation. C. J. Cullinane comments, “We need global guidelines and regulations as well as transparency.” Jacoline Loewen, concurs, saying that “There may not be global rules for State Capitalism yet, but these will come because the market is demanding transparency.”

The question remains as to whether States make very good capitalists. As investors, they are “systematically inefficient – from a profit maximisation standpoint.” As Paulo Wilson Rodrigues puts it, “State-owned enterprises are less profitable... for one reason: State administrators are less motivated.” Mixed motives may get in the way of long-term financial performance. If this is the case, do we view the success or failure of State capitalism, even if the emphasis is on capitalism, through too narrow a prism? Are State capitalists a different breed of investors? Do their behaviours pose any kind of long-term challenge that needs to be addressed now? What do you think?


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Tuesday, July 31, 2012

$197 billion in lawsuits. Serious.

So far, the July 2008 acquisition of Countrywide Financial has brought to Bank of America’s table, $197 billion in lawsuits. The bank is in a mess and there appears no relief to the state that the beleaguered entity is in at present. There is one quick-fix solution though – a spin-off!

Back in 2006, Bank of America (BofA) was a different company – profitable and growing endlessly. On July 20, 2006, this growing feeling of conceitedness encouraged Kenneth Lewis (the-then CEO of BofA) to declare before a group of coffee-sipping, cookie-munching senior executives gathered in the auditorium of the bank’s headquarters in Charlotte, that everyone in the auditorium was now an employee of the “most profitable financial outfit in the world”. The verbal jubilation was an outcome of the company’s second quarter earnings (Q2, FY2006), which stood at $5.5 billion – the highest ever quarterly bottomline in the 102 year-old history of the financial outfit. In terms of market capitalisation too, then, BofA was just $4 billion away from taking over Citigroup as the world’s largest wealth manager. [It finally managed that on November 28, 2006, when its m-cap of $243.71 billion surpassed Citi’s $243.52 billion.] All was going well, until two years later, in July of 2008, BofA made a “relatively low-priced” acquisition worth $4.1 billion. That was to change its future, perhaps forever. It was the second-lowest amount spent by BofA in its endeavour to grow inorganically during the past decade – lowest being the $3.3 billion spent on acquiring The US Trust Company from the Charles Schwab Corporation on July 1, 2007 – an exercise which it had managed well till then. But in its effort to outrun and outspend competition, BofA hardly realised that this one deal was synonymous to a blindfolded banker running into a pit of “bad loans”. Countrywide Financial was that pit.

At $4.1 billion, the deal came across as a good bargain, given that the mortgage major had delivered a return of 23,000% to shareholders between 1982 and 2003 (more than what Washington Mutual, Walmart and Berkshire Hathaway managed in the same period). Moreover, the acquisition promised to consolidate BofA’s position as the leading mortgage originator in US. What BofA ignored was the fact that Countrywide had achieved all this by touring on the subprime mortgage bus.

In FY2008, BofA’s revenues stood at $124.13 billion, with net profits of $4.01 billion. Even as the subprime mortgage scandal unfolded, claiming victims in the third and fourth quarter of 2008, the bank’s operational structure withstood all punches. Revenues and profits rose to $120.95 billion and $6.27 billion respectively in FY2009. But behind the curtains, the bank’s financial DNA had changed fast and dangerously so.

In 2007, the contribution of the highly volatile package of home loan & insurance businesses to its topline was just 5.4%. This changed to 12.5% in 2008, 14% in 2009 and then (understandably fell) to 9.5% in 2010. During FY2009 and FY2010, as more foreclosures surfaced and customers defaulted on their home loans (coupled with troubles with credit card defaults, which contributed to 23.1% of its topline during the two years), BofA suffered losses amounting to $5.79 billion (losses arising out of the credit card, home loan & insurance businesses during the two years totalled $24.9 billion).

Till date, BofA has been paying the price of loans issued by Countrywide. In fact, just after BofA settled a $8.5 billion lawsuit filed by a consortium of 22 investors in June this year (related to bad mortgages), the American Insurance Group (AIG) sued BofA on August 10, 2011, for $10.5 billion, alleging that the bank and its subsidiaries issued defective mortgages to borrowers who were not in a position to repay and then repackaged them into securities worth $28 billion which were then sold to AIG.

BofA’s Q2 results for this fiscal don’t look encouraging either. The bank posted a net loss of $8.8 billion (its worst ever!). Speaking to B&E from Chicago, Jim Sinegal, Associate Director of Morningstar, says, “Thanks primarily to its $4 billion acquisition of Countrywide in 2008, BofA now possesses tens of billions of dollars in potential legal liabilities. Earnings must improve substantially in order for the bank to achieve escape velocity from the weight of billions of dollars in legacy mortgage-related liabilities threatening to reduce capital to unacceptable levels.” Under the purview of limited liability laws, stakeholders of a publicly-listed entity are not liable for its defaults. In this case, the shareholder is BofA. This implies that the bank can treat its bleeding bottomlines, if it is to pull the shutters on Countrywide. So, the question is – why hasn’t BofA taken bankruptcy protection on Countrywide yet? Because it cannot.



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Monday, July 30, 2012

Wrong ends from The Barrel

Governments of Countries Facing mass killing Incidents must Immediately clamp down on legal Gun Possession 

Carnage merchant Anders Behring Breivik, in a ludicrous act of insanity propelled by extreme right wing emotions, gunned and bombed around 98 Norwegians to death on July 22, 2011. However, the blame for this terrible tragedy should also go to the ease with which the average Norwegian citizens can acquire guns today.

Although acquisition of firearms in Norway is regulated by the state, it is not very difficult to acquire one on the pretext of hunting or for the sport of shooting. The result – an estimated 500,000 guns are owned by private homes in this tiny country. Going by the Gun Ownership Rate (Small Arms Survey 2007) i.e. guns per 100 residents – Norway was at an (un)impressive 11th position with a score of 31.3. However, topping the list most convincingly is the United States with a score of 88.8 (2007 figures). There are few restrictions on possessing firearms in US, protected by the Second Amendment to the US Constitution. The culpable nation had seen 24 such incidents of mass murder since 1960, which is the highest in the world! After US, the next 6 countries with the highest gun possession rates (legal guns per 100 population) are Yemen (61 guns per 100 population), Finland (55), France (32), Canada (31.5), Germany (30) and South Africa (13), according to the c. These 6 countries also top the world in terms of mass murders after US, though the pecking order is different: Germany (7), South Africa (5), France (5), Yemen (3), Canada (3) and Finland (2).

Therefore, a direct inference can easily be drawn when it comes to the correlation between the ease of availability of legal arms in a particular country and the incidents of gruesome mass murders that happen there.


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Saturday, July 28, 2012

Great People, Greater Institutions

Latin American states are led by Iconic Leaders who last The Short term, while North America is led by Democratically elected leaders through strong Institutional structures, which last the long term. Time enough for South American nations to gain from institutionalising Governance Structures than depend on individuals

Only some news reports have the potential to spread like wildfire and transcend borders; and these are reports that have titanic ramifications for the world at large. A case in point was the press release from the office of Venuzuelan President Hugo Chavez, which said that he would be undergoing an operation on June 10, 2011 to remove an abscessed tumour with cancerous cells. The world was left stunned and speculations were being made on how long the 57-year-old Chavez would continue and who would be the possible successor!

This has led to a very relevant debate on Latin American leadership and its future. Interestingly, Latin American states have mostly been led by iconic leaders, statesmen and politicians. Hugo Chavez himself is one Venezuelan leader who attracted enough international attention with his Bolivarian ideology and bold leadership. From the ranks of an ordinary military officer, he went on to become the 56th President of the state and is ruling since 1999. Similarly, a press operator in an automobile parts factory, Luiz Inácio Lula da Silva became the 35th President of Brazil. He served Brazil for two terms from 2003 to 2010 with dignity and pride during which Brazil gained immense prosperity and prestige. He has been widely recognised as the most popular and influential Latin American political figure. He was often described as “a man with audacious ambitions to alter the balance of power among nations.” The third iconic figure who fortified Latin American politics is Cuban Revolutionary leader Fidel Castro. He not only served Cuba as Prime Minister during 1959 to 1976 and later as President during 1976 to 2008 but also saved Cuba from US imperialist aggression, and he is recognised as one of the world’s greatest leaders.



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Friday, July 27, 2012

Goa talks to Virat Bahri on The Company’s outlook

P. K. Mukherjee, MD, sesa Goa talks to Virat Bahri on The Company’s outlook post The Lifting of The Export ban and The Sfio Report

B&E: Indian steel companies often complain that we should be looking at value adding our iron ore within the country rather than exporting it. What is your stand on this issue?
PKM: Theoretically, yes. (But) where is the capacity to consume? How much capacity have we added since independence? Value addition, as stated above, is a big subject and we can discuss over it for hours. I can only say that nowhere in the world does steel producers depend only on captive ore. Instead, players buy ore from merchant miners at international prices, be it Australian Blue Scope or even US Steel mills, leave aside the Japanese and Europeans who have largely depended on imported ore for decades and still compete year after year in the international market with competitive technology – they invest in sinter plants and consume all grades of ore instead of high grade lumpy ore as a major portion. There are so many sponge iron plants in this country that only consume high grade lumpy ore of specific size, leading to crushing of limited natural resources and generating more fines; leave aside the question of their environmental footprints.

B&E: What is your outlook for the current fiscal? How do you see the break up of your Indian and global businesses altering?
PKM: Domestic sale as a percentage of total sales is going up. But a significant quantity coming out of Goa mines, which is having low grade reserves and is not touched by domestic steel producers will necessarily have to be exported continuously. The Karnataka scenario and transport bottlenecks in Goa would determine our outlook this fiscal. We’ll continue to maximize the volume within all regulatory parameters. Subject to the above, we look forward to volume growth of about 20% from our Goa and Karnataka mines put together.

B&E: What is your stand on raising of export duties by the government? How is the new manufacturing policy expected to affect your business?
PKM: We believe in free market economy and more regulations have various fall outs, which, in the long run, may not be helpful for the country as a whole.

B&E: What is the status of the SFIO investigation that questions your overinvoicing of imports and what is your stand on the same? How important is transparency to you as an company?
PKM: We’ve received the SFIO report and are in the process of compiling our comments & are confident that the ministry will consider the report objectively after evaluating our comments.


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Thursday, July 26, 2012

Stratagem-HONDA INDIA: SAGGING SALES

Failure to Refresh its Offerings has Cost Honda dear, which has Lost Sales and its Leadership Position in The Executive and Premium Cars. 

Above all, it’s the rising demand for diesel cars and the new product offerings in the mid-size sedan segment that has caught Honda unawares. Even the Johnnie-come-lately Volkswagen’s Vento has outsold Honda City, selling 3,994 units as against City’s 2,773 units at the end of March 2011. What’s worse, the beleagured Japanese automaker has no back-up plan to make up for the loss of volumes on account of the tremblor disaster. In a scenario where 65% of the total cars sold in the mid-size sedan segment are powered by a diesel engine, Honda paid the price of completely ignoring the diesel engine car market and then waking up too late by when competitors had already charged ahead. As such Honda is still two years away from developing a diesel engine for its cars in the Indian market. “Keeping in mind the price differential between petrol & diesel, it is expected that the demand for diesel cars will go up even further,” says Kapil Arora, Partner (Automotive), Ernst & Young. Going by market estimates, close to 40-50% of the total sales of products like Vento and SX4 come from the diesel variants. The sudden dieselisation of the Indian sedan market has only added to the woes of the Japanese auto major. “The rise in demand for diesel cars is because of the gap in the price of petrol & diesel. As diesel is comparatively cheaper and gives better mileage, consumers are preferring diesel cars in the light of the rising petrol prices,” says Jnaneswar Sen, VP – Marketing, Honda SIEL. He adds that Honda will take another two years to come up with a diesel engine for the Indian market. The question is: Will Honda be too late to in waking up to the call by 2013?

Going by the market standing at the end of FY 2010-11, Honda SIEL has a 2.36% share in the Indian passenger car market, as compared to the 14.26% share of Hyundai Motor India. The latter entered India in 1996 (almost a year after Honda’s entry into India). Even players like Ford, General Motors and Toyota have inched ahead of Honda even though they started their Indian journey around the same time. For the record, GM today has a market share of 4.25% while Ford is the sixth-largest player with a 3.91% market share. Taking into account the success of products like Figo, Beat and Spark, Honda seems to have ceded the space in the hatchback segment to its rivals. But for the earthquake, the launch of Honda’s Brio, which is expected to debut in the high-volume fetching sub Rs.5 lakh segment, has just got a little longer. The product was expected to be running on Indian roads by August 2011, but now it will be launched during the last quarter of this year. “Apart from the metros, we see huge growth potential in Tier-II & Tier-III cities for this car and therefore we have been expanding our sales network to reach out to newer cities and markets in the last 2 years. The potential to increase sales from the rest of the country is huge,” says Sen.

In the meantime, Honda will have to ramp up its marketing efforts to make up for the lost volumes due to the production cuts. As the Brio will make its debut during the festive season, Honda will be pinning a lot of hopes to pull off high volumes. Considering that Honda will not make its presence felt in the diesel segment until 2013, Brio will be the only hope for the company to make it count in the highly-competitive Indian market. One hopes that Honda’s extensive research on the Indian hatchback market and the lessons it learnt from the Jazz episode will help the Japanese carmaker to get it right this time around with the Brio.

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