Tag: retail in India

Have we oversold the India story ?


Indian Economy From Aviation, Retail , Healthcare & SEZ Perspective

A lot of experts spoke about the robustness of the Indian economy when the global recession of 2008 did not entirely slow down India’s growth. Experts spoke at length about the pragmatism of India’s central bank leadership and its policies to have evaded the crisis. They even spoke about the sturdiness of the capital market and the role of the regulatory authority.  Today the global crisis is over in most of the nations. United States is back on track with the unemployment figures at a controllable rate and the retail spending picking up. Similarly Japan is expecting the return on investments it made after the Tsunami crisis last year. The amount spent on reconstruction has boosted the economy and it is expected to grow at respectable 2 percent this year. Only Europe seems to be lagging behind, however it must be taken into account that integrating economies of over 30 nations is a daunting task and credit has to be given to EU’s leadership for having dealt with the crisis in a respectable manner.

When compared to the growth rates of these developed nations India’s 7.6 percent growth rate seems to be enviable. So is everything great with the Indian economy? Is it really faring the way it is being projected? Every year fiscal consolidation is the buzzword yet the budget keeps running into deficit. The finance minister keeps promising to bring it under control yet deficit has increased from 4.6 percent last fiscal to 5.9 percent this fiscal year. Most of the deficit is on the account of food, fuel and fertilizer subsidies. The government keeps making provisions for the underprivileged but it is equally true that they are not getting the desired benefits. Most of the provisions are limited to mike & paper.

Let us evaluate the top most (so-called Sunrise )  sectors in India that are consumer driven and how they are faring – Retail , Healthcare , Aviation and also the ‘Oversold & over hyped SEZ story’.

We will have a moment of truth !

Aviation Industry

The India Aviation industry is in a tailspin. Every other day Air India, Kingfisher, Jet Airways etc are making the headlines for all the wrong reason.

Air India the state-owned company has been relying on frequent government bailouts for its existence. Air India alone was responsible for the 10 percent of the global aviation industry losses in the year 2008 while it handled dismal 0.35 percent of the global passenger traffic.  It is also over staffed with over 500 employees per aircraft whereas the industry average is around 120.

Kingfisher airlines owned by the flamboyant liquor baron Vijay Mallya is in troubles. Banks have finally decided to withdraw support in terms of providing further debt.  The only hope which the country’s third largest carrier can have right now is a government bailout. However there is a vehement opposition to such an action by the government. Experts and other industrial groups have strongly advised against such an action as it is a free market economy and it would amount to sheer wastage of taxpayers’ money.

Jet Airways has recently been in news when the tax authorities decided to freeze its account as it was about to default on its service tax payments. The Jet Airways spokesperson attributed the problem to rising crude oil prices and the high airport duties and lack of support from government in terms of policies. According to them the delay in service tax payment was a minor operational issue. However the mounting losses over past few years tell an entirely different story.  They were in news few years back for having laid off over 1200 employees and later taking them back next day after intervention from a local politician.

Other airlines in India like Spice jet, Go Air etc. have been on the fringe and have been moving back and forth from black to red.  An only Indigo airline is making profits. Several other have bowed down under pressure. They were either forced to shut down operations like Paramount Airlines or they managed to exit at the right time like Air Deccan and Sahara Airlines.

So what exactly is ailing the airlines in India?  Rising crude oil prices are often quoted as the culprit. In India fuel cost is almost 40 percent of the operational cost of running an airline whereas in other countries it remains around 15 percent. High fuels cost give little margin to maneuver in terms of other aspects like offering attractive tickets rates and other offers. However this is not the entire picture. Even though the crude prices reduced from $ 156 barrel to $70 barrel in 2008 to 2009, the Indian carriers continued to bleed and posted losses.

The real problem is of excess capacity due to overselling of India’s growth story . India’s daily domestic passenger traffic is approximately 1.51 lakh passengers whereas the capacity is around 2.16 lakh passengers. Imagine the revenue loss everyday on account of unused capacity. This has happened only due to the mindless unplanned expansion by the airlines hoping to cash on the Indian Incorporation growth story sold by the gang of politicians right from Sonia , Manmohan & inefficient Pranab and highly promoted Montek !  The airlines promoters were chasing numbers which was arrived on mere speculation & playing a ‘Valuation game to make quick buck’. They went on buying spree and expanded their fleet. Today the aircrafts remain underutilized.  India has the aircraft flying hours of 12 per day compared to 16 per day internationally.

Looking at the complete picture it is difficult fix the responsibility on the airline owners. They are capitalists who are driven by market forces. They anticipated growth in market based on market forecasts and other factors like projected rate of growth of GDP. They expected growth in industrial output and service industry output and subsequent increase in airline travel. However the reality was far removed from it. The India Incorporation failed to deliver and they were left in lurch. Today they are hoping for a miracle to save them from their predicament.

Losses Made by Major Domestic Carriers in India

Carrier Cumulative Loss 3 years (Cr)
Air India 13,000
Kingfisher Airlines 3900
Jet Airways 2400

Retail Industry

According to the experts the retail trade industry in India is having a bright future & is consumption driven due to the ‘reducing poverty due to social schemes and increasing middle class due to India’s growth story ‘. One of the studies by North bride capital expects it reach about USD 850 billion by 2012. Out of which organised retail will be having a share of over 20 percent. In numbers it over USD 175 billion. That is a huge market. According to others this figure will be achieved by 2015. Similarly other reports have painted rosy picture for the entire industry.  Currently it is increasing at a rate of 5% yearly.  A further increase of 7-8% is expected in the industry of retail in India by growth in consumerism in urban areas, rising incomes, and a steep rise in rural consumption.

As per consulting firm KPMG’s findings in a March 2009 report, the organised retail market in India has witnessed steady growth at 15 per cent in fiscal 2009. It will grow much faster, at the rate of 30-35 per cent annually, than the traditional one in the coming years. Fast moving consumer goods (FMCG) and apparel sectors are likely to drive this growth.

According to the 8th Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach 22% by 2010.

A India’s Retail Market Report by Boston Consulting Group

Year

Total Size ($ Billions)

Organised Retail ($ Billions)

Percentage

2005

244

8

3

2006

276

11

4

2007

316

15

5

2008

362

19

5

2009

368

22

6

2010

425

28

7

2011

471

35

7

2012*

528

44

8

2013*

590

55

9

*Forecast

 

The true story of the retail industry: It has become a ‘Valuation game’ due to over selling the India story of the growing middle class 

Subhiksha, Vishal Mega Mart, Koutons , Wadhawan group’s Spinach etc; do these names sound familiar and have something in common. Yes these are players in the organised retail industry who have succumbed and failed to deliver at their promoters expectations. These chain stores were at one time case studies of India’s organised retail success. So what actually forced them lower their shutters.   

According to Jagannadham Thunuguntla, head of SMC Global all these cases are classic examples of the retailers getting carried away by the India’s fascinating growth story and the phenomenal rise of the middle class.

The phenomenon is not limited with these cases mentioned above but also with the so-called successful ones in the industry. Country’s largest department store Shoppers Stop for instance posted an overall loss of Rs.4 crore in the last five years, while its debt soared to Rs.390 crore. The Tata group’s retail arm, Trent decided to close down its loss making chain, Fashion Yatra. It was launched in Oct 2008 and it was aiming at low-income shoppers in Tier 2 – 4 towns. Similarly Reliance Retail decided to close its Reliance Wellness format and not only that it scaled its hypermarket format down in some cities. Hypercity closed down its catalogue selling venture and also got rid of its Gourmet City format.

For the modern retailers penetrating further into urban markets has become a challenge. They have no option but to continue to create, preserve and then destroy the store formats they have come up with. Having closed down and revived several formats, most retailers have realised they need to constantly experiment with them to stay afloat.

So we can clearly see that India’s organised retail industry, which has the coveted potential of nearly a billion plus customers with enough cash to spare, has so far claimed a number of players, small and large. These players expanded too soon based on mere speculations.

While these retail stores were expanding and accumulating debts they hoped that the middle class with disposable income would be ready in short time to support them.  Things did not turn out the way they had planned. India Incorporation failed to deliver and along with that came the global economic crisis. These firms ultimately paid the price by closing down their shutters. For instance Subhiksha had expanded to over 1600 stores country-wide entirely on debt. This was a blunder that it committed as it was counting on the rising customer demand which was only on papers.

Not only the growth stories are misleading, at the same time the country’s back-end is not developed and huge investments go into developing it.  The vital supply chain required for the retail networks are entirely missing. This leads to a huge inventory cost which the small retailers are unable to cope up with. Take for example, it is estimated that in the food retail business in India, the wastage due to lack of proper storage facility is staggering 40%. This entire situation is largely the result of the lack of proper policy framework from the government.

The Indian retailers like Future group , Reliance and others are backing FDI so that they can get investment and save themselves from the fate of Subhiksha , Koutons , Gini & Jony , Spkykar , Vishal Mega mart , Foodland super markets, Surya Group etc . We have more companies going into CDR – Corporate debt re-structuring post the closure of the financial year 2011 ( March 2012 ). Banks do not wish to announce the failures or NPA’s in this year.

Ideally , retail businesses should have been making money due to consumer demand but the fact remains that India’s income and growth story is limited only to 6-10 towns and impacts less than 10 % of India’s population

 SEZ’s in India

India adopted the concept of zones from as early as 1965. Kandla in Gujarat was the first Asian export processing zone till the advent of the modern SEZ’s as such zones are now known as. With the passing of the SEZ Act in 2005, it was hoped that the Chinese success story would be replicated in India. It was expected that investor’s confidence would be established in the Government’s commitment to a stable policy regime. The real aim was to generate greater economic activity and employment with the establishment of SEZ’s following the Chinese model of economic growth !

There were numerous applications from multiple sources with individuals, indigenous companies, foreign MNC’s all rushing to have a share in the pie. Sadly it was a short phenomenon. The initial excitement was over as the problems started cropping up. Today in the last two years, as many as 60 applications for SEZs have been withdrawn, while 35 developers have applied for de-notification, according to data by CB Richard Ellis (CBRE), the real estate consultants.

Till date, the government has approved 584 SEZs. There are 381 notified SEZs, of which 148 are operational. Of these 148, only 17 are multiproduct SEZs. The remaining ones are SEZs dealing in engineering, electronics, IT/ITeS, hardware, textiles, bio-technology and gems & jewellery.

So what exactly is wrong with the SEZ idea in India which paid its dividends in China, Poland and Philippines?

On the whole the SEZ idea in India seems to be very much the product of the irrational expectation which has been fueled by imagination.

Healthcare Companies :  Most of the healthcare companies are ‘managing profits’ and as i write , a major healthcare ( hospital ) chain and a pharmaceutical conglomerate is about to wind up in the next 3 months . Imagine a healthcare & hospital company winding up ?

So the Congress party has sold the India story purely on ‘Imaginative basis and on speculative data’ numbers , have no idea of what is fueling inflation and what will deliver growth ? With all sunrise sectors on a downslide , it is better to replace these ‘ignorant intellectuals’ and bring in people who can understand the economy and run it efficiently .

Based on the governments high-octane pitches for the India’s growth story , consulting companies have brought out reports supporting government announcements , and  business houses have approached investors or moved to stock market and raised money and have put up expansion plans . But the reality is that, India does not have a growth story with the current fundamentals being very weak and ‘Leaky’ social schemes are making the party rich and not the population !

Also,  that the current stand of the government to raise the tax issue with Vodafone is a clear proof of what i am writing . India is desperate for funds and behaving like a dictator reversing a five decade legislation for just 10,000 crore ( USD 2 billion ). Does it not show the lack of morality and desperation for funds ? Rest will become apparent in April – May-June Quarter !

Lastly , the financial deficit of the government proves the rest ; all is not well with the India ‘bubble’ story ! Tough times are ahead , if we don’t take immediate action !

Rajendra Pratap Gupta

Healthcare I Retail I Rural Economy I Public Policy

www.commonmansblog.com

Indian Government is clueless about the Economic Crisis – Rajendra Pratap Gupta


India is clueless about how to resolve the current economic crisis?
For over a year, the world has been sliding into the grip of recession. First it was America, then Europe and now Japan. It was naive of our Harvard and Oxford educated FM & PM to keep denying that India would not be affected from the crisis. They kept shouting that India was fundamentally strong and that the crisis would not impact the Indian economy. Even after issuing a ‘Token Bailout’ package the Congress government believed India was better compared to the rest of the crisis affected economies. But of late, congress has accepted the fact that 2009 would be worse.
The height of irresponsibility and lack of knowledge is evident from the fact that Indian Government also did what America was doing i.e. issue a bailout package. India should have acted differently. But why apply brains? Just copy what USA is doing – copying others is the biggest folly of our selfish and mindless politicians !! Way back in August 2008, i wrote for Financial Express supplement – SME World about the impending crisis. This article got published in November 08 issue of the magazine (download the original article from http://www.rajendra.collectivex.com ). But the contents were very much available on my blogs much earlier. I had clearly mentioned that the crisis in India started much earlier and the government was a silent spectator. It did nothing to correct it. Now it is acting posthumously. The moment banks started hiring recovery agents , the crisis has started. After all , banks don’t hire recovery agent for small NPA’s.
I see quite a few reasons for this illogical and irresponsible bailout step. Why should bailout be avoided and what did the current government to the economy. Listing a few view points
• Indian government and our foreign educated PM & FM are totally clueless about the crisis , so leave alone management of the crisis
• They quickly hired foreign experts in their advisory council. Irony is that these foreign experts have rarely stayed in India and know little about the realities on the ground. Adding to this , they had the so called Knowledge commission , P.M’s advisory council, Economic advisory council and many such sinecure posts to keep the sycophants and power hungry corrupt people on benches on our tax payers money
• Political compulsions & uncertainty keep the government & the public guessing for the future moves and the markets will never gather momentum
• Real issues have not been addressed so far, and i don’t see any signs of revival in the economy with such an irrelevant approach to this crisis which will worsen with time passing
Now let’s examine what the government is doing:
• Pumping more liquidity in the banking system
• Decreasing interest rates
• Announcing sops for exporters
• Announcing increase in NREGA scheme
• Making tall statements of strong fundamentals etc…..
Now let’s see what each of the above mentioned steps would lead to:
• Putting more liquidity in the system. But Indian financial system was never cash strapped, Banks were growing very well. We have enough of money available! Now, the bank and financial institutions are becoming risk averse. Who trusts these crooked politicians? If the banks dole out loans and they turn out to be NPA’s. Manmohan and PC Would be gone by then , and the poor branch manager or the M.D. of the bank will become the scapegoat. So in as much as these measures are announced with much fanfare, the implementation is poor. No one is trusting each other. It is a ‘crisis of lack of trust and transparency in our System’. PM can increase liquidity by repo rate cut, but he cannot force the local branch manager of State Bank of India to start lending tomorrow from 9.30 AM till 5.30 P.M. Imagine, even if this was a reality. Would you and i take this loan? For what & Why? We are concerned about the uncertainty of income and job. Liquidity in the system is not the remedy, right? So clearly, government is not taking the right step as it does not know or acknowledge the problem in reality. Today, even corporates like TATA are finding it difficult to raise money. Let’s see why? TATA’s went overboard, and brought big businesses abroad for billions of dollars, and mostly, in all cash deals!! Wrong strategy? When they brought these companies, the stock markets were racing around 20000. Their stocks were really valuable. Had they done a cash and stock deal for all its acquisitions, they would have been better off even when the markets tanked. Now for the price they brought Land Rover and Jaguar, they could have bargained to buy the entire company!!! Any ways, the companies that owned these brands are fast becoming history or getting bailouts and kind of getting nationalised or filing for bankruptcy. Same is the case with Arcelor Mittal. What a deal it was. Now the question is, was it structured in the right manner?? Wait for another quarter, Iconic Ambani’s are likely to tell a similar story. Indian systemic corruption has created mammoth business houses, and the future of this natural imbalance is a foregone conclusion. It was just a coincidence that Satyam got caught. No big corporate can exist without political patronage, and this political patronage comes at a price in cash and with moral flexibility . Satyam is just the tip of the Iceberg. Each and every corporate has shady spots somewhere or the other. Difference is that they have not been caught like Satyam.
• Lowering interest rates: Still the loan port folio of financial institutions is not increasing. Reason , people believe that companies due to drop in sales going forward, and increasing inventory pile up, will dole out better discounts and so are deferring the buying decisions, till the prices drop further. The recession has taught people that, cash in hand is better than ‘Notional money’ in real estate etc…. People are pretty sure that times ahead will not be easy. Assume for a while that, even if the corporates go for taking a loan and increasing the production. Who will bring the buyers? People are in no mood for discretionary spending. All in all, lowering interest rates is also not working in isolation. The problem is totally different and not getting addressed here at all. In today’s tour economy is akin to cycling, either we are peddling or we will fall!
• Announcing Sops for exporters: Suppose, i am an exporter and i am exporting to USA, Europe and Russia. My order books have dried up as the economy is headed for trouble in these countries. Will Sops help me bring orders? Is this not an eye wash for the public? Sops will only work when orders start pouring in. This is again a misfired weapon.
• Announcing increase of funds for NREGA (National rural employment guarantee Scheme) Schemes: This scheme was already in place. We have never been able to quantify the positive impact of this scheme on poverty alleviation. Albeit , our politicians have become richer ! We all know the fake musters made and the amount eaten by the babu’s and ministers. What poor need is not money, but training to earn money consistently. It is like if you feed fish to poor; you can feed him fish a few times, better teaching him how to fish and he can earn for himself every day. How long will NREGA spend our hard earned money on feeding people? This is a misguided and misplaced scheme. What we need is a NYVTS – National Youth Vocational Training Scheme & NRSS – National Re-Skilling scheme – to re-skill and retrain people in better earning vocations and not NREGA. We must create – SEZ’s – Skilled Entrepreneur Zone in every tehsil / district to empower the rural –real India. Still 68 % of the population lives outside urban India. Mind you, urban poor are worse off than rural poor. What schemes are meant for them?

Solution to the Crisis:
Essence of this is that printing & pushing ‘Notional money’ in the system is not the solution. It is an illusionary step. Creation of money by the hands of people is the right solution. How will that happen? I believe that government (Even the US Govt.) should not have resorted to bailouts. If Lehrman Brothers collapsed, it collapsed. So what? Let all the financial institutions and auto majors be left to meet within themselves and come out with a solution. They could have formed a practical consortium to deal with the problem, shared resources and planned a better crisis management. Now each of these corporates will get a bailout package, they will go out on the rampage with cut throat Competition and crisis will aggravate, a few of the bailed out companies will eventually cease to exit. We are just giving a palliative care through bailouts. Competition and collaboration are two ways to save the economy. We need collaboration now. Today the government is patronizing inefficiency and paying the price for poor regulation as bailouts and it will cost it dearly.
Even after the bailout, i fail to understand, how 16 or 25 billion dollars will save General Motors? About a year back , GM had about 30 billion dollar as cash and it was burning billions of dollars every month and finally they fell on the knees.People are not going to buy a Chevy due to the fact that the GM motors has a government bailout plan and package! History was a witness to Enron collapse, World Comm collapse, and IT Sector bust after the boom. Well that’s in a business cycle. All that goes up comes down. If the government wanted to do well. It could definitely take some practical steps like.
• Put a moratorium on corporate , housing and other loan EMI’s for the next 3 years or part payment instead of full EMI’s for the next 2-3 years a nominal interest be added, so that even banks do not suffer loss. But public should be relieved of the burden of payments substantially and immediately
• Automobile industry should be happy as the crude oil is cheaper. What the government could do is to step in and make the cab drivers replace taxi’s older than 10 years by a bank loan for 10 years duration at reduced interest rates like 7.5 % for any duration i.e. fixed rate of interest for the entire term of the loan . The duties and other taxes should be cut by 50 % for all the taxi’s that are older than 10 years, by 75 % for vehicles that are more than 5 years to less than 10 year old. Would this not boost both the auto industry and the banks? Also, this would increase collection of the government as road tax. Which could be reduced by a good 50 % for all purchases made in the next three years? It would boost a whole lot of industries associated with Auto , fuel, Iron and steel , rubber , etc …….Make the small car ‘Nano’ and the ‘electric car & scooters’ totally duty free . Any ways, the government collections are down. At least, here it will not lose anything, but only gain as whatever taxes it can collect directly. But indirect collection of taxes will get a boost as a host of activities will increase with this push. It will lead to substantial increase in employment
• Business and Real estate : Service tax on rental be abolished , Increase the tax slab for interest payments to Rs.2 lacs, issue home loans at fixed rate of interest from 7 % till 8.5 % for any amount of time . Appoint immediately a Housing regulator to check inflated real estate cost and check the cartelization to keep the prices low. One thing that government can do is that, all buildings under construction and not sold, in those buildings, 70% of the units can be sold and remaining 30 % have to be rented only. Government must construct flats & shops for poor and low income groups for rental occupancy only. This will not only boost the demand but also keep the real estate prices low. The stamp duty and other government charges should be reduced by about 50 %. Any ways, government is not making any money due to poor or nil demand in real estate sector. 50 % taxes would be good enough at this point in time. Even the biggest real estate company by market cap, DLF has reduced the prices of their projects due to poor sales and their prices have dropped by a good 32 % in one of the Bangalore projects. Most of the real estate co’s are abandoning the projects.
• Alternative Energy: Wind power and solar power is to be immediately pursued in every house hold, town & district. This can be financed by banks and will lead to a cleaner and greener countryside and improve the economy and generation of power for households and communities
• SME: this sector is contributing to just 39 % of the manufacturing output. In developed economies, this sector contributes about 90 % of the manufacturing output. Government needs to push this sector into growth mode by setting up nodal growth centres for SME’s manned by professionals from the corporate world. Setting up incubation centres in major national & regional institutes for providing technical support and professional guidance. For detail steps , read the article that i have recently written for The Financial Times supplement – SME World
• Transport & Logistics: Approx 90 % of all the commercial vehicles sold in India is via loans. According to Deepak Sachdeva , President of the Delhi Goods Transport association , between April and December alone, close to 158000 commercial vehicles were repossessed or either surrendered due to loan defaults. This impacts the employment of drivers, helpers and host of other people who run the road side businesses dependent on the truck movements. We need to incentivise these set of people and relieve them from the loan burden with moratorium on EMI payments. Reduce tax on road permits , remove penalty for late payments of EMI for up to 2 years . Octoroi tax must be abolished immediately.
• Agriculture: The government needs to push this sector with more reforms and technical innovations considering that more than 80 % of the farms are of small size holdings less than five acres. We need to bring a sigh of relief to these farmers by host of measures
These are just a few of the steps that government can start with. Rest later

Rajendra Pratap Gupta
President
Country First
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Aditya Birla Retail – Dead end ????


Aditya Birla retail seems to be nearing a dead end. With arround 640 stores and losing close to Rs.30 crore a month. It might be the most difficult business for the Birla Group so far. What is interesting to note is , that there are 640 stores, and out of them 100 stores are having a sales of Rs. 5 to 6 per sq.feet. Whereas , the expenses are above Rs.200 per sq.feet. Knowing well, that any expenses including rental , if exceeds Rs.110 per sq.ft. It is a loss making proposition.

All this started with Kumar Managalam pushing for numbers in the initial days. Due to intense pressure, Sumanta Sinha did what the master expected. So the pressure filtered downwards , leading to the number game and the quality of the locations and the rentals were compromised heavily.

Now more than 100 stores need to be closed in my view, and earlier the better, or the business gets on the block. The grapevine is, that Mckinsey is doing a valuation excercise.

Adding to this mistake of chasing number game is the expat seniors who take crores of package , and learn the Indian retail business at the expense of the biggies like Reliance or Birla’s. Time will tell us, those who don’t know what is being sold and where, are teaching India how to sell ???

Hiring expats is another stupidity from the Indian retailers. Who will learn the lesson the hard way.