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MNCs become value buyers

Mar 26, 2009

Novartis' delisting designs?
At a time when domestic investors are shying away from seeking attractive bargains, foreign investors seem to making the most of the opportunity. No, we are not talking about the Foreign Institutional Investor(FIIs) here. We are referring here to the multinational companies (MNCs) that are looking to increase their stake in the Indian subsidiaries at very attractive valuations. So much so, that they are even willing to make the open offer at a substantial premium to the current market price. The latest example being Swiss drug maker Novartis AG, which yesterday made an open offer to acquire an additional 39% stake in its Indian subsidiary at a price of Rs 351 per share. While the offer was at a premium of nearly 26% to the market price, it must also be noted that its successful completion would raise the stake of Novartis in its Indian subsidiary to nearly 90% from the current 51%. It therefore goes without saying that the company would then also have the option of delisting its Indian subsidiary. This is not the first case of its kind as several MNCs in the past have chosen to delist their Indian subsidiaries. The same, however, is detrimental to the interests of Indian investors. Considering the growth potential of the Indian market and the company's extremely strong fundamentals, we believe the offer that values the company at about 10 times its trailing twelve month earnings is way too underpriced. We won't be surprised if there are very few takers for the offer. Furthermore, it also raises concerns over the intentions of the parent, which is looking to transfer wealth from minority shareholders to itself. If at all the company had best intentions in mind, a share buyback would have been a more prudent option.

Airline industry fails to take off in 2009
International passenger demand fell by 6% YoY in January 2009, and cargo volumes fell by 23% YoY making it the eighth consecutive month of contraction for cross-border freight. Nearly 40 airlines worldwide have suspended their operations in the last 15 months because they could not pay their dues. As per the aviation industry body International Air Transport Association (IATA), airlines the world over are set to lose as much as US$ 4.7 bn in 2009 as a result of the global recession that has shrunk passenger and cargo demand. This is nearly double the association's earlier estimate of US$ 2.5 bn. As per IATA, the relief of lower fuel prices has been overshadowed by falling demand and plummeting revenues. Leading airlines have slashed fares to encourage continued travel and undertaken several cost-cutting measures to stay afloat through the economic slump. Nonetheless, their woes do not seem to have ceased. In fact, as per the body, Asia-Pacific carriers will continue to be hardest hit by the economic turmoil and are expected to post losses of US$ 1.7 bn, thus accounting for nearly 40% of the overall losses in 2009.

Around a decade back, Warren Buffett had written in the Fortune magazine how the money that had been made since the dawn of aviation by all of America's airline companies was absolutely zero. Nothing seems to have changed since then.

Cautious capex plans
India Inc.'s ambitious capex plans seem to be reined in line with the tempered demand and low capacity utilisation in the wake of the economic turmoil. As per a business daily, one of the largest and most successful retailing companies in the country, Titan Industries has utilised only half of its planned capex for FY09 as a slowdown in consumer spending have hurt the demand for its products. The company plans to go ahead with its capex in the next fiscal in a calibrated manner once it can sign in additional manpower and real estate at relatively reasonable costs.

The company's revenues in the high-margin watch segment were hit in FY09 by lower consumer spending, while volumes in the jewellery business have suffered due to higher gold prices. Titan currently derives a majority of its revenues from the low-margin gold business. However, going forward, the company plans to increase prices of its watch and eyewear products to hedge margins in FY10.

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