PUNJAB NATIONAL BANK NPAs a Worry, May Rise Further

Punjab National Bank reported a 2.4% growth in net profit in the June quarter. While this may appear decent in a difficult quarter, whats surprising was the significant deterioration in asset quality which was reflected in the 5% fall in the PNB stock. The state-run lenders net non-performing assets (NNPAs) rose to 2.98% from 1.68% a year ago and 2.35% a quarter ago. While this is one of the highest in the industry, this may go up due to lower provisions. The bank made a provision of . 1,698 crore, which is 1% lower than its provisions in the previous quarter. As a result, its provision coverage ratio fell to 54.7% from 58.8% in the previous quarter. Besides, restructured assets grew 6% QoQ in Q1. With a high exposure to stressed sectors such as infrastructure and power and given the slowdown and liquidity squeeze, this could rise further in the next few quarters. Restructured assets and NNPAs together account for 14% of the banks total assets. On the business growth front, there were hardly any surprises this quarter. PNBs loan book grew 3.6% against the industry average of 14%. Deposits grew just 3% in the quarter. A positive was the rise in deposits by 15% YoY during the quarter. The impact of recent measures by the RBI to curtail rupee depreciation will be less severe for the bank. The proportion of CASA to total deposits now stands at 40% against 36% a year ago. A lower percentage of bulk deposits will raise the cost of deposits marginally. PNBs income from treasury operations grew three-fold because of a fall in g-sec yields during the quarter. Although, this may not be sustainable in the coming quarters, its impact on overall operating profit may not be significant. Income from treasury operation accounted for 10% of operating profits of the bank during this quarter. At the current market price, the PNB stock is trading at a price-to-book value of 0.7, while its peers SBI and Bank of Baroda are trading at 1.3 and 0.8, respectively. The PNB stock is languishing due to higher slippages compared to other banks such as SBI and BoB. Considering that PNB has a better return on assets compared to SBI and BoB, its valuation may catch up in case of moderation in slippages.

HCL Tech Follows TCS & Infy, Beats Street with 11% QoQ Rise in Profit
HCL Technologies beat expectations with strong growth in sales and profit during the fourth quarter ended June and announced the induction of Roshni, the daughter of founder Shiv Nadar, 68, as a non-executive director. The 3.1% sequential growth in sales and an 11% boost to the bottom line reported by the Noida-based company bolstered the positive mood created by the betterthan-expected performance by larger peers Infosys and Tata Consultancy Services as well as the robust sales growth forecast by Wipro. We had a great quarter and fiscal year on pretty much all counts starting from revenue, margin, net income and cash flow, said Anant Gupta, who took over as chief executive from Vineet Nayar at the beginning of this year. Both Americas and Europe led the growth with most services line witnessing growth led by infrastructure. Indias fourth-largest IT services company reported revenue of $1.2 billion (. 6,944 crore) while net profit was $214 million (. 1,210 crore). HCL has won a significant number of contracts in the so-called rebid market as first-generation outsourcing contracts signed in early 2000s come up for renewal. About Roshni, 31, joining the board, Gupta described it as a very normal activity. The promoters own about 60% of HCL Technologies, whose market value is more than . 63,000 crore. Roshni is also an executive director and chief executive officer of HCL Corporation, the holding company of HCL Technologies and HCL Infosystems, which together have revenue in excess of $6 billion (. 36,000 crore). Expectedly, the growth driver for the company was IT infrastructure management services, which expanded by 8.6% from the previous quarter. HCL has traditionally had a strong presence the infrastructure management market, which contributes nearly one-third of the companys $4.7 billion revenue. The results are because of their performance in the infrastructure management space. They won some $1 billion of deals, with main contributions from infrastructure management, which will power growth in the near term. I do not expect any slowdown in the next year, said equity analyst Hardik Shah of Mumbaibased brokerage KRChoksey. The Indian IT sector, which has seen tepid growth since the global financial crisis, has

given out more positive signs in the June quarter. Infosys reported sequential revenue growth of 2.7%, beating analyst estimates of around 1.5% growth while TCS saw its sales expanding 4.1%. HCLs business process outsourcing arm, which has been making losses for several quarters, turned profitable during the June quarter, growing at a healthy 3.9%. The bottom line for the year on the whole was $10.1 million on a turnover of $53 million, compared to losses last year. HCL BPO has been intentionally moving away from lowmargin, voice-based contracts, said Rahul Singh, president of HCLs financial services vertical and business services division. Amid healthy growth and higher employee utilisation, the company saw its staff churn rates inching up from 14% a year ago to 14.9% now. HCL, which has about 85,500 employees, said it would give an 8% salary hike for offshore employees and 3% for the onsite employees. The utilisation rate is over 80%, but that rate may not be sustainable, said Shah of KRChoksey. And with the rebid market being so competitive I do not think their margin levels are sustainable.

MANAGEMENT PANEL TO DRIVE EFFORTS TO DERIVE SYNERGIES Top Team to Help Ambuja, ACC Integrate Key Functions

Swiss cement giant Holcim will create a new corporate structure to integrate key functions of Ambuja Cements and its subsidiary ACC close on the heels of restructuring the ownership composition of its two Indian arms. The new management panel, which will initially drive joint efforts to derive synergies in the areas of supply chain management and shared services such as human resources and finance, will come into force from next month. Ambuja Cements MD Onne van der Weijde will head the panel which will comprise managing director of ACC Kuldip Kaura and Ambuja Cements CEO Ajay Kapur. Senior executive Samuel Poletti will come on board as the integration manager, spearheading plans to bring operations of two companies closer. The members of the existing executive committees of the two companies including functioning directors, chief financial officers (CFOs), zonal heads, procurement, commercial, logistics and capex programme heads will also be key members. Interestingly, Weijde, also a former ACC CFO, will be in charge of all the key functions under this new corporate architecture. The respective board of directors will remain intact as they are. The mandate of the committee is to align both companies through the existing management to unlock synergy benefits and implement best practices. Committee will take up direct responsibilities for the area of supply chain optimisation and shared services which is expected to deliver . 900 crore benefits. It is not time-bound, an Ambuja Cements spokesperson told ET. The joint strategies will kick off with the swap of clinker and cement in different parts of the country. For starters, two ACC plants will supply clinker to two Ambuja units and two Ambuja plants will supply to four ACC units. Similarly, 13 Ambuja plants will supply cement to parts of 21 states for ACC while 10 ACC plants will supply to parts of 16 states for Ambuja. Freight and logistics costs are significant expenses for any cement player. So, by bringing the two together, Holcim can complement the geographical footprint and

reduce 25% of logistics costs, said a Mumbai-based cement sector analyst from a leading foreign brokerage. While Ambuja and ACC have been operating as independent entities, Holcim had earlier initiated efforts to consolidate the procurement of raw material under one roof, leading to cost savings to the tune of . 12,000 crore. But experts believe that joint operations are possible only through cultural integration. Coming together of two organisations is about the unison of cultures. It is only clinical and a folly to believe that merely because two organisations service a common client base or have a similar value chain, they can successfully integrate. The synergy for which organisations integrate can be realised only if the enabling environment and the cultures of different elements are integrated through planned migration initiatives, said Adil Malia, head, HR, Essar Group. Holcim, the worlds fourth-largest cement maker, recently announced a complex reorganisation of its ownership structure in its two Indian arms which will see Ambuja Cements becoming its flagship company. ACC, another large Indian cement company controlled by Holcim, will become majority-owned by Ambuja. Through a string of intra-group transactions involving both cash and stock swaps, Holcim will eventually hike its stake in Ambuja to 61.3% from the current 50.01% and Ambuja in turn will buy Holcims 50.1% stake in ACC. Currently, Holcim owns a little over 50% in both ACC and Ambuja. Together, they account for almost 20% of Holcims global EBIDTA. Company watchers feel this reorganisation also dovetails with an ongoing global programme initiated in May 2012 called Holcim Leadership Journey which aims to battle the slowdown in EU by achieving organic growth, reduce costs and improve top line across Holcims global empire. However, the exercise has been severely criticised by analysts and market watchers who believe this goes against Ambujas minority shareholder interests. The management insists that aligning management and ownership structures at both ACC and Ambuja is a win-win for all as it will streamline operations further and see significant cost-savings.

Cong Births A New State to Reduce Election Pangs Telangana to have 10 districts, including capital Hyderabad that it will share with Andhra Pradesh for 10 years

Congress has conceded the long-pending demand for carving a separate state of Telangana out of Andhra Pradesh despite sharp dissensions among its local leaders, a move seemingly calculated to reap electoral dividends for the party in the next general elections. The Congress Working Committee on Tuesday endorsed the demand, granting statehood to Telangana, which will have 10 districts, including capital Hyderabad that it will share with Andhra Pradesh for the first decade and get to claim as its own thereafter. Congress, however, gave up under pressure from local leaders the proposal of cleanly bifurcating Andhra and merging two districts of Rayalaseema region, Anantapur and Kurnool with the new state. It is resolved to request the central government to take steps in accordance with the Constitution to form a separate state of Telangana-within a definite timeframe, CWC said. Electoral Considerations This was stated in a resolution after the partys allies approved the decision at a coordination committee of the Congress-led ruling coalition. While the decision evoked cheers in Telangana, the United Andhra Pradesh Joint Action Committee called for a bandh in the Rayalaseema and Andhra regions on Wednesday. Although Congress leaders insisted that the decision had little to do with political considerations, electoral compulsions appeared to be clearly weighing on their minds, especially since the party has lost considerable ground in the state that made a handsome contribution to propelling it to power at the Centre in both the 2004 and 2009 Lok Sabha polls. Political expediency cannot be a reason for such a far-reaching decision, Digvijaya Singh, the partys general secretary in charge of Andhra Pradesh, said. At the same time, he expressed hope that K Chandrasekhara Raos Telangana Rashtra Samithi (TRS) would merge with Congress. As far as TRS is concerned, KCR has repeatedly

given statements that his party would merge with Congress after Telangana is granted statehood. We shall await a reaction from TRS. We will be favourably inclined to discuss this issue with them, Singh said. The actual formation of the proposed state, Indias 29th, will take about four-five months, Singh said. The main opposition, BJP, which had promised formation of Telangana if it came to power at the Centre, demanded that the government bring the bill in Parliaments monsoon session, which will begin on August 5. We dont want Congress to only make an announcement. It should also bring a bill in Parliament in the monsoon session, Javadekar said, adding the bill will be passed by both Houses.

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Have to Find Solutions for CAD: Subbarao

In what could be his last monetary policy, RBI governor D Subbarao has maintained status quo on rates after tightening liquidity a fortnight before the policy. Defending his policy action, Subbarao says that his measures will be rolled back once the rupee stabilises which will create room for more monetary easing. What is the rationale for liquidity tightening to defend rupee? We determined that the vulnerability of the rupee is hurtful for the economy for a number of reasons. First, if the exchange rate overshoots it may not come back to the original level. Second, rapid volatility in the exchange rate could affect the balance sheet of banks, corporates and even households. Forex intervention is a standard tool for defending against volatility. As much as we resorted to this instrument, we were conscious that whatever we did should not fuel speculation or help speculators.

When will you roll back? The roll-back of the measures would be data-dependent. Some of the indicators we would look at are the bid-ask spread, the intra-day volatility in exchange rate, forward contracts, importers assessment of volatility in the exchange rate, open interest positions in the currency futures market and a number of indicators to determine if volatility in exchange rate is contained. We would also make an assessment of the global markets and see how vulnerable they remain to announcements. We are as anxious as everybody to roll it back but to be locked into a timeframe is both infeasible and not advisable.

Are you in favour of the government issuing sovereign bonds? We have reservations about that. There are costs. It will compromise our financial stability. There is a lot of value to be attached to governments borrowing in the domestic market. We have learnt that lesson. Emerging economies are not as unsafe as they would have been because the borrowing has been domestic. Will we really get a lower rate because it is a sovereign issue? It is not clear.

Would interest rates be slashed to support growth? Rates will come down in future but not until such time as volatility in the exchange rate is contained.

Is RBI more in favour of using exchange rate management tools to manage economy than increase interest rates? No. I dont think that inference would be appropriate. We would use all economic variables both interest rate and exchange rate for macroeconomic stability, growth, macroeconomic management and external sector management. We have to find structural solutions for current account deficit. RBI is interested in long-term plans of financing the current account deficit.

Sen v Bhagwati / Cong v BJP

Both economists and both political parties agree on development and disagree only in degree

The Indian media specialises in infotainment. An entertaining spin converts boring information into heated discussion. Some journalists have equated the Amartya Senvs-Jagdish Bhagwati debate with the Congress-versus-BJP debate in the coming general election.

Rubbish! Sen does not embody the Congress, nor Bhagwati the BJP. Both the Congress and BJP borrow ideas from both. The boring truth is that differences between Sen and Bhagwati are much exaggerated, as also between the Congress and BJP.

Four-Way Crossroad Narendra Modi and Bhagwati focus more on growth than distribution. Sonia and Sen focus more on distribution than growth. Yet, all four clearly favour both growth and distribution. The differences are on how to optimise the mix. These differences are debated with great heat. But the big picture remains that Sen, Bhagwati, Congress and the BJP all believe in both growth and distribution. More to the point, the differences between Sen and Bhagwati are not the differences between the Congress and BJP.

Frenemies for Coopetition Both favour schemes and projects while in office, and then oppose the same when in Opposition. The BJP favoured FDI in insurance and pension funds when in power, but opposed these when in Opposition. The BJP initiated the move for a goods and services tax, but now has many reservations being in the Opposition. The BJP is supposed to be more relaxed on labour laws (notably in Gujarat), yet contract labour use has risen hugely under the UPA, including in Congress-ruled states like Haryana. Even on secularism, lets not exaggerate Congress-BJP differences. The Congress lambasts Modi for the 2002 Gujarat riots. Yet, in the 2012 Gujarat elections,

Congress chose Shankersinh Vaghela, a defector from the BJP, to head its campaign. Vaghela had led the Ram Janmabhoomi movement in Gujarat, and left the BJP only because it did not make him chief minister. By choosing Vaghela as its Gujarat leader, the Congress adopted soft Hindutva. What does this imply? It means that being for the Congress or for the BJP does not mean much in terms of economics and means only a little more in terms of secularism. Sens objection to Modi has nothing to do with economic policy. True, Sen is critical of some aspects of Gujarats development, such as relatively slow progress in social development. But Sens overwhelming objection to Modi is that he is a divisive figure in a nation needing harmony. Columnist Mihir Sharma has succinctly summed up Modis limitations as a reformer. Like the rest of his party, Modi has objected to FDI in retail. He has decried the increase in diesel prices that is essential for fiscal stability. He has opposed the cap on cooking gas cylinders, and announced a partial write-off of rural electricity bills. He has objected to the proposed GST. He talks of minimal government, but says this does not mean small government. Modi has not attacked the provisions of the Food Security Bill or MNREGA, as Bhagwati has done. So, while Modi is a good manager and reformer, he is also a calculating populist, which Bhagwati is not. Some say the Congress has taken the idea of entitlements on food and employment from Sen. Maybe, but Congress has also taken the idea of Aadhaar and cash transfers from Bhagwati. Some BJP governments have experimented with cash transfers, others boast of success in distribution of cheap grain. Sen praises BJP chief minister Raman Singh of Chhattisgarh in this respect. The rather boring conclusion: there is much ado about rather little. There are differences between Sen and Bhagwati, and between Congress and BJP. Both are exaggerated. Sen is not Congress, and Bhagwati is not BJP. And the differences between Sen and Bhagwati are not the differences between Congress and the BJP.

New Companies Bill to make doing business easier: Sachin Pilot