Airline Debt Restructuring Plan

The Indian airlines industry exhibited explosive growth in the period from 2003 to 2007. Thousands of passengers started flying for the first time, drawn by new airlines offering bargain flights around the country. However, the industry was hard hit by the economic crisis in 2007-08. Passenger growth, which was touching 40% at the onset of 2007, went into reverse. Soaring fuel prices in 2008 pushed up ticket prices, which further reduced demand.

The three major players in the aviation sector in India - Jet Airways (India) Ltd, Kingfisher Airlines Ltd and National Aviation Co. of India Ltd (NACIL)—which collectively control 65% of domestic passenger traffic, were the worst affected. The three airlines currently have a combined debt of $13.5 billion (Rs63,315 crore). State-owned NACIL runs Air India. Other than the exogenous factors, poor managerial decisions including predatory pricing by the larger players and underutilization of capacity were prime contributors to the huge debt.

Factors Leading to the Debt

Kingfisher Airlines is labouring under a debt burden of Rs 7,413-crore (as on December 2009). Out of this, Rs 2,099 crore is short-term debt; the remaining amount being long-term debt. Subsequent to its launch in 2005, the first year and a half went quite smoothly for the airline. A lot of Jet passengers shifted allegiance and joined Kingfisher and the company registered rising profits. However, it spent money like water on onboard service and brand building; neglecting costs altogether. Things began to go downhill soon after the airlines a stake in Air Deccan in June, 2007. Not having a CEO further exacerbated the airline’s problems.

2008 proved to be the final straw in its operations, and as oil prices hit new highs, so did the merged entity’s problems. By end March 2009, the airline’s debts had touched over a billion dollars. Senior executives were also at loggerheads with oil companies, vendors and the Airports Authority of India.

Jet Airways is slightly better off than its rival. Although it has a debt of Rs. 14000 crore; short term debts constitute only a small portion of that amount. In 2009, Jet’s domestic revenues were 37% higher and profitability was superior to Kingfisher due to a higher share of full-service carrier operations, while the higher proportion of low-cost operations in Kingfisher’s operations dragged it down.

Furthermore, aircraft ownership is a key difference between the two airline companies. Jet owns 39 aircraft against 21 owned by Kingfisher Airlines. Difference in fleet ownership is reflected in Jet’s higher debt levels. As per Jet’s management, 85-90% of the debt is towards purchase of aircraft at long term interest rates of 5-7%.

In an effort to minimize losses, Jet entered into sale-and-lease-back of its aircraft, or the ability to sell off the aircraft it purchased and continued using them for a rental fee.

State-run Air India, which enjoyed a monopoly in the country till the deregulation of the aviation sector in 1991, is besieged by a debt of Rs. 40000 crore. One of the major factors for this colossal figure is over employment of labour. The airline has a workforce of 31,000; which translates into 230 employees per aircraft. According to international standards, the number should be 100-150 employees for every aircraft.

Another major reason for the spiralling debt are the massive aircraft orders placed by the beleaguered firm with aircraft makers — 68 with Boeing and 43 with Airbus. The orders were placed when the country was beginning to witness an aviation boom, but the figures were overestimated even according to the heydays. The orders cannot be cancelled now; since cancellation entails a hefty penalty, which the airline is ill situated to bear. Poor capacity utilization is another major issue for the national carrier, with over 40% of seats going unoccupied in 2009.

Braving the Storm

In June this year, SBI had approached RBI with a proposal to restructure more than Rs2000 crore of Kingfisher’s debt. RBI declined to clear that proposal as it was not comfortable with the idea of giving any special concessions to any particular aviation company. In an 18 June meeting with bank executives, the central bank noted it would be a moral hazard for RBI to give any regulatory forbearance for any specific company. It was made clear that any regulatory consideration of banks’ requests regarding restructuring guidelines could only be for the aviation sector—and not for any airlines in isolation—in view of the difficulties faced; and provided the banks came together in a consortium arrangement and took a long-term and holistic view on the restructuring.

This prompted the bank to put forward the case of the entire airline industry rather than that of a particular firm, which was approved by the RBI in September. The proposal asks for conversion of the short-term loans into long-term ones and then extending the repayment schedule to nine years, with a one to two-year moratorium. SBI’s investment banking arm, SBI Capital Markets Ltd (SBICaps) is working on the debt recast plan, leading a consortium of 13 banks.

The most significant beneficiary of the recast would be Kingfisher Airlines, and will get a much needed respite from the payment demands of various lenders including oil companies and airports. With the restructuring, more time would become available for repayment of loans and its operations would not be encumbered by the cash crunch. Other options like raising money overseas or diluting equity to raise cash could also be explored. In the fiscal ended March, the airline also reduced its losses to almost half of those posted in the previous fiscal. This improved performance was achieved through better seat occupancy and cost reductions.

While the airlines are talking about cost-cuts and route rationalizations to turn things around, Jet Airways posted a profit in the current fiscal year through a number of innovative strategies. These include improving aircraft utilization efficiency, increasing flights on existing and new routes without adding new aircraft, reducing the weight of flights to scale back fuel expenses, and launching a second low-cost carrier; by converting some of its full-scale flights into a no-frills all-economy service under the brand name of Jet Konnect. Jet Airways has also sought approval from the Foreign Investment Promotion Board (FIPB to raise $400 million via qualified institutional placement (QIP) to repay debt and augment capacity.

Air India’s debt of Rs. 40000 crore is a different story altogether. More than any proposed debt restructuring, measures taken by the government in terms of equity infusion and guaranteed loans would have a larger impact on the public sector carrier. However, the government has hinted that the airline should generate more funds through better passenger yields and cost-cutting, instead of expecting further bailouts.

Is the Restructuring Justified?

In the past, the government has extended support to crisis hit sectors such as real estate and steel on previous occasions, and there is no reason not to provide the same to the domestic airlines. However, the debt recast should come with certain riders. A major cause for the heavy losses was the overcapacity inducted by the airlines and the undercutting that followed.
They should commit to keeping costs under leash and run their operations with maximum efficiency. The debt restructuring also makes sense from the banks’ point of view. Big players like SBI have an exposure of over Rs. 3500 crore to the industry. RBI’s move would help provide relief to banks as they would not have to classify airline-sector loans as non-performing assets (NPAs), giving them an opportunity to contain the growth of NPAs, while airlines would get some breathing space to repay their loans and would not be compelled to raise costly debt to continue operations.

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Strategy Digest Vol 5 (Oct)

Conglomerates now look for brand-holding firms

Several business conglomerates in the country are looking for ways to take care of their generations-old brand names and manage their different brands for different industries. Juggling a wide portfolio of brands and retaining the core identity of the parent calls for more than sound brand management capabilities and a simple brand identity manual. This means a strategic shift in thinking about the brand as a core intangible asset that has to be safeguarded and monetised through a robust mechanism like a brand holding firm. These firms would earn royalty from each of the operating companies using the brand as a shared resource. It is like a licensing agreement within a company. The contract in this case spells out how and where the corporate brand can be used in existing and new business areas. It could also be useful option for family-owned companies where frequent spats can lead to dilution of the corporate brand as members deploy it indiscriminately into new businesses and markets.

As new India strategy, ArcelorMittal to build smaller plants

As part of a new strategy for India, ArcelorMittal plans to begin with, smaller steel plants in states of Jharkhand, Orissa and Karnataka, that could be expanded later, instead of mega units as proposed earlier. This would help them have larger number of footprints and allow for faster execution of plans. Going ahead with the new strategy, the company may also look at acquiring small units in India and was reportedly in talks with at least a dozen firms for the purpose.

Dr Reddy's to enhance OTC presence by marketing drugs for Cipla, Vitabiotics

Dr Reddy's Laboratories (DRL) has entered into an agreement with drug major Cipla and UK-based Vitabiotics to market over-the-counter (OTC) and prescription drugs, besides nutraceutical products, in Russia and CIS countries, adding immediately to its revenues from the Russian and CIS market. There are long-term synergies, as Dr Reddy's has a strong sales and marketing network and our partners have a basket of products already registered and distributed in these markets. The agreement with Cipla will enhance Dr Reddy's presence in the OTC space and in therapy areas of gastroenterology, dermatology and oncology in both Russia and Ukraine.

Corporates look to cash in on growing football craze, Venky's close to a club buy

Venkateshwara Hatcheries, better known as Venky’s, is close to becoming the first Indian company to own an English Premier League (EPL) football club, the 135-year-old Blackburn Rovers. Both foreign football clubs and Indian firms have sought to promote football in India, given the sport’s rising popularity and growing business opportunities. Chelsea FC has been in talks with several companies to promote the game in the hope that India can seek to host the World Cup by 2030. Venky’s move comes after several attempts by domestic companies to own EPL teams. Sahara India Group earlier this year placed a bid, of which they later pulled out, to buy a 51 per cent stake in cash-strapped Liverpool. Ambani brothers Mukesh and Anil have also been keen on owning Liverpool and Newcastle United, respectively, but denied making any bids.

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Sectorama

This year, the flagship event of the Consult Club, Sectorama (a one of its kind sector analysis competition) is being conducted in a bigger and better avatar as part of Confluence 2010, IIMA's annual business summit, with prize money of Rs. 80,000 up for grabs! To check out the details and register, click here.
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Walt Disney of India

Suppandi, Shikari Shambhu, Ramu and Shamu, King Hooja, Amar Chitra Katha

All these kindle fond memories in most of us, a reminder of what we read in our childhood days. These old brands of Tinkle and Amar Chitra Katha which we fondly associated with the famous Uncle Pai, have now been acquired by a relatively new venture known as ACK Media or Amar Chitra Katha Pvt. Ltd.

ACK Media, a venture launched in 2007, was founded and is headed by Samir Patil, an ex-Mckinsey partner with 10 years of experience in media, hi-tech, and healthcare firms. ACK Media started with acquisition of Amar Chitra Katha and Tinkle brands from the India Book House in November 2007. Then, in April 2008 they acquired a controlling stake in Karadi Tales (series of popular audio books for children). Since then a number of steps have been taken to develop and revamp the old charm of the ACK characters and stories.

In addition to improving content in print, magazines, comics, home video space, ACK wanted to improve its distribution network and have a better relationship with the end customer. Hence, it acquired India Book House in May 2010, and gained control of a distribution network that includes 400 cities, 2500 stores and over 22000 vendors. Also, in order to cash in on the growing size of web users, websites of Tinkle Online, Amarchitrakatha.com etc. were launched which have been developing considerable traction ever since. Also, to capitalize on the telecommunication and mobile data access revolution, there are several mobile games and apps in the making.

There has been a lot of activity in TV & film production space as well. Apart from a deal it struck with Cartoon Network for an animated series, ACK has a content partnership with Turner Broadcasting System to produce two animated films and a series on Amar Chitra Katha stories. Other Indian comic book houses are also making similar attempts to revive the market For example, Raj Comics has tied up with a mobile services provider, and Diamond comics is slated to launch a TV channel this year.

In the near past, ACK had said that they were looking to raise Rs. 100 crore by selling stakes to private equity firms in order to increase their product portfolio, mostly in the digital space. The latest buzz is that Kishore Biyani is interested in acquiring 40% of ACK. Biyani’s reasons are still unclear, but it seems that Biyani wants ACK to venture more into animation and eventually theme parks, as part of his ambitions of creating the Disneyland of India.

The concept of making cartoons popular by involving social media, creating TV & Films animations and launching theme parks sounds fascinating, but there is a catch. Firstly, the world of children that grew up on Tinkle and Amar Chitra Katha has grown up into adults now. The current generation of children has too many options in terms of entertainment, and hence domestic comics figure forms a very small part of their leisure time, if at all . Secondly, the urban children population in Tier I and Tier II cities has undergone an anglicization of reading habits, which is steering them towards Noddy, Archies, Enid Blyton rather than Suppandi and Shikari Shambhu. Majority of the children who are still passionate about Tinkle and Amar Chitra Katha will probably belong to a class that might not be the target population for the web/mobile ventures, animations and especially theme parks that ACK is planning to launch.

In this background, how successful would web ventures, animation or an entertainment park based on Tinkle or Amar Chitra Katha be? It is all right for Samir Patil to aspire to be the Walt Disney of India, but is that a possibility with his current brand portfolio? To be fair to ACK, they have followed a very structured process - they have tried to revamp the brand by adding newer titles, by reaching out to the end consumer via a revamped and much improved distribution network, by generating online content to increase reach etc. All these are attempts to revive the comic books market and create a market demand for ACK/Tinkle characters and stories. ACK is assuming that by the time they launch animations and theme parks, this market would have undergone a complete revival, thus creating a pull for the brand.

But whether a successful revival is possible in this era of Archie’s, Noddy, Tin Tin, Nancy Drew etc., remains to be seen. Only time will tell!

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Strategy Digest Vol. 4 (October)

Kellogg enters hot breakfast market

With Indians striving for hot breakfasts in the mornings, Kellogg has decided to enter the hot breakfasts market with the launch of Heart to Heart Oats. Kellogg claims that these oats can be prepared in three minutes and should be consumed with hot milk.

This will give Kellogg access to more Indian families where hot breakfast is a tradition. This product will potentially not only increase the sales of Kellogg in India but also reinforce their positioning of a healthy product since oats is considered to be good for the heart.

Maggi becomes healthier

In a move to strengthen its brand image and market leadership position, Nestle has launched another variant of Maggi. The variant is called Maggi Multigrainz, which has healthy ingredients like corn, wheat and millets.

This comes on the back of Maggi Atta noodles which was launched a few years back. Research has showed that consumers today are more aware of health food and this move by Maggi is an effort to attract such customers. Maggi currently has an 85 % market share in the instant noodles market and this should fortify their market position. Also, with competitors like HUL, Knorr and ITC trying to enter the market, Maggi is trying to innovate to fend off competition.

Pfizer acquires King Pharma

In yet another deal in the pharmaceutical industry, the world's largest drugmaker has decided to acquire Kind Pharmaceuticals, a pharma company focusing on pain medications.

Pfizer would be paying $3.6 billion for the deal. The deal is an all-cash deal. After acquiring Wyeth for a massive $68 billion last year, this will be Pfizer's biggest deal.

The deal will help Pfizer expand its product portfolio. Currently, its two primary products for pain remedy are Celebrex for arthritis and Lyrica for nerve pain. Moreover, this acquisition should increase its profits since many of its existing products now have generic counterparts.

Price war likely in small car segment

With the festive season kicking in, companies are aggressively cutting prices to promote their product. Skoda recently reduced the prices of its Fabia hatchback by Rs. 67,000 for the petrol variant and Rs. 1.1 lakh for the diesel variant. This comes on the back of Hyundai reducing prices of i20 by Rs. 40,000 earlier this year and recently launching a new version of i10 with minimal price increase.

Fabia, which was launched in 2008, has not managed to make an impact in India with other competing cars such as Ritz, WagonR, Hyundai i20 etc. having a higher market-share. Even Volkswagen, the parent company of Skoda, priced Polo below Fabia. This decision to reduce prices is expected to increase the market-share of Fabia in the small car segment, which has the highest volumes.

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Article of the month contest

This is to remind you all of the Article of the month contest that we had posted about a few days back. Only 2 days are remaining for your chance to win prizes and seeing your article on the blog.

Oct 20th is the last day to submit entries to consultclub@iimahd.ernet.in.

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The Curious Case of Microfinance - a Boon or a Bane

The recent series of suicides by committed by the poor borrowers from Microfinance Institution (MFI) in Andhra Pradesh, the state where it all began in India, brings the fundamental question of whether the MFIs are really a boon to the poor that are underserviced by the banking system or merely vultures that are replacing the moneylenders that were already charging usurious interest rates.

Let us begin by looking at the cost structure of the industry. There are three main cost components: cost of capital (11-12% for the top ones, 1-2% more for others), loan loss provisions (2%) and transaction costs (SKS reported 12.66% for fiscal 2009 in its prospectus). The transaction costs are high because of the mode of collection of repayments which is usually done on a weekly basis and the personnel costs. The sum total of these works out to be roughly around 26-30%.

In the wake of the spate of suicides, there is a call for the interest rates to be capped. But, the MFIs defend by saying that the interest rates they charge are probably what the credit card or a personal loan from a bank would cost, may be even a little lesser than them. (Average interest rate charged on credit cards in India-hold your breath, is a whopping 34%). They argue that though the proposed cap of 24% offers client protection, the needy might find excluded from this institutional credit system altogether! The logic is that the start-up MFIs and other smaller ones in remote areas will make losses for many years before breaking even. This also would mean that MFIs would avoid remote areas where process of delivering loans and collecting repayments is people intensive and quite expensive. Also, small ticket loans might not be issued because of the huge transaction costs involved. Hence, needy people cannot be brought into the ambit of Microfinance. Thus, it appears as if there is a trade-off between the availability of institutional finance and the reduction in interest rates.

Further, the argument is that as MFIs establish their business model in each market and start competing for customers, capital, employees and banking relationships, the economies of scale kick in and as they adopt new technologies, they would innovate in products and means of delivery/repayment to reduce the transaction costs and hence, the interest rates. Another thing that is used to oppose interest rate cap is the Raghuram Rajan Committee on financial sector reforms which says that liberalizing interest rates would allow the formal sector to lend to the poor and not the interest rate ceilings.

The proponents of a need for regulatory system for MFIs including a cap on the interest rate spread argue that the MFIs are making hyper profits at the expense of the poor robbing them of the meager surplus. Also, they point out various irregularities in the current MFI system, which include usurious interest rates, lack of transparency, cheating and using coercive mechanisms to recover loans like moneylenders.

They allege MFIs of indulging in multiple lending without due diligence exercise on the capacity to repay, purpose for the loan and its end use which is in direct violation of prudential norms. This raises the possibility of large scale defaults leading to a large chunk of Non Performing Assets (NPAs) which could have cascading effects on the balance sheets of the banks. They are also worried about the lack of transparency on effective interest rates and explain that because of weekly recoveries, poor unable to understand the usurious rates and that they are being taken for a ride by the MFIs.

The high transaction costs could also be because of the exorbitant sums of compensation the CEOs pay themselves in the large MFIs as pointed in the literature (Sriram, 2010). There is a total lack of transparency in this regard.

In the case of AP, critics point out that the state has had a community based SHGs existing more than 10 million women organized and federated at the village, mandal (an equivalent of Taluka) and the district levels. Further, Society for elimination of rural poverty (SERP) has achieved financial inclusion by linking SHGs with the banks. It holds more than 20,000 crores of outstanding loans on its books. MFIs are merely piggybacking on this system by showing them as Joint liability groups (JLG) formed by them. They are resorting to inducing SHG members to join the JLG by wooing the group leaders through freebies. Unlike SHGs MFIs getting hyper profits In case of non-payment or default, coercion and unethical means of recovery ranging from confiscating household articles using goondas, to forcing defaulters to take further loans for repayment and so on, which leads to distress and an increasing number of suicides.

They argue that currently there is a regulatory vacuum and the RBI needs to step in with a framework. The AP government itself is in the process of issuing an ordinance to regulate the activities of the MFIs.

The regulators must focus on improving MFIs’ lending practices, make them more transparent, ensure the clients understand the terms of loans and make sure that measures are in place to reduce multiple lending to segments like agricultural labourers for personal purposes rather than merely putting a cap on the interest rate spread.

In all, it is pretty clear that all is not well with the way MFIs are conducting themselves in the guise of NBFCs. It is definitely not working the way one leading MFI put its purpose as- Our purpose is to eradicate poverty. We do that by providing financial services to the poor and by using our channel to provide goods and services that the poor need. However, one positive to emerge out of this discussion is that these excesses by MFIs are being debated in the public domain is because of them being in organized space. The faceless moneylender who might’ve caused much more grief to the poor was never in such a spotlight.

Reference: "Commercialisation of Microfinance in India: A Discussion on the Emperor’s Apparel" by M S Sriram, March 2010

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Strategy Digest Vol. 3 (Oct)

Indian Hotels Company does a Tata Motors

The Indian Hotels Company recently announced the launch of Vivanta by Taj, hotels in the upper upscale segment.

Taj has thus positioned itself in the hospitality space similar to what Tata Motors has done in the automotive space. Taj is positioned in the luxury space, Vivanta by Taj in the upper upscale segment, Gateway in upscale and Ginger in the economy segment. Tata Motors, on the other hand, has positioned The Nano at the entry level, Indigo at the upscale segment, Safari and Jaguar or Land Rover at the upper upscale and luxury segments.

The reason for this segmentation is not to dilute the Taj brand by operating every kind of hotel under the same brand. Also, it is an effort towards retaining their market share in the face of many new hotel brands entering India.

Homegrown mobile phone companies sign big stars

While we may not realize, homegrown mobile phone companies have captured more than 20 percent of the market share. And they are definitely hungry for more!

Companies like Zen, Micromax, Spice etc. are displaying their ambitions by signing big stars to promote their products, especially in the tier-II and tier-III towns of India. Micromax has Akshay Kumar as its brand ambassador while Spice Mobile has signed on Sonam Kapoor.

The latest to join the bandwagon is Zen Mobile which has signed on the biggest superstar Amitabh Bacchan as its brand ambassador. It is to be seen whether these companies will be successful in penetrating the urban markets as well.

Fortis to buy key subsidiaries of Quality Healthcare Asia

Fortis Healthcare will buy key subsidiaries of quality Healthcare Asia (QHA) for about Rs. 882 crore. The firms to be acquired by Fortis Healthcare include Quality Healthcare Medical Services, Quality Healthcare Services, Quality HealthCare, Quality HealthCare Medical Holdings, and Portex.

QHA is the largest private healthcare provider in Hong Kong and this acquisition would provide Fortis with a footprint in Hong Kong.

Fortis has been keen to have a presence in South-East Asia for some time now as was evident when it tried to acquire the Singapore-based hospital chain Parkway Holdings.

Microsoft launches smartphones

Smartphones are touted to be the next big thing in tomorrow's world. Microsoft clearly does not want to let go of this opportunity considering there are firms which have already this market.

The smartphone by Microsoft is supposed to look like the iPhone but with a more interactive interface and superior functionalities. It’s also got the Xbox which should appeal to the younger generation.

This is probably Microsoft's last and only attempt at gaining a hold in the smartphone industry since many players have launched their smartphones before Microsoft did.

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Africa: The land of business opportunities

Africa – the first few thoughts that used to come to mind were apartheid, poverty, dictatorships, savannah grasslands and of course, lions. This perception has seen a polar shift in recent times. With an increase of 4.9% in real GDP from 2000 to 2008, Africa has experienced immense economic progress. Though still the poorest continent, it is perceived as a promising land with opportunities galore.

Why Africa?

Africa has abundant and varied natural resources ranging from diamonds to tropical fruits, gold to black gold, and other minerals and ores (like iron, cobalt, uranium, copper, bauxite). A majority of Africa’s resources are untapped even today. Given the rising prices of commodities one would believe Africa’s natural resources to be the only reason behind its rapid economic growth. However, natural resources directly account for only 24% of the GDP growth from 2000 to 2008. Many other factors have fuelled growth in Africa apart from its geological blessings.

Governance has improved drastically in Africa over the last decade. Macro and micro economic reforms along with a move to end armed conflicts have helped businesses grow. Several countries like Angola and Mozambique ended hostilities recently, creating political stability in the continent. Furthermore, Africa was able to reduce its inflation from 22% (1990s) to 8% (post 2000). Governments have shrunk fiscal deficits, decreased corporate taxes, removed trade barriers and strengthened regulatory systems. Privatisation has also played a role in improving the macro-economic environment.

Social and demographic trends in Africa are another reason for the continent’s growth. On one hand, the middle-class African consumer has emerged as a major growth driver. On the other, rapid urbanization which has led to an urban population of 40% is also a big factor. Incomes have risen steadily, 85m households in Africa have an annual income above $5000 (believed to be the point where a family starts discretionary spending). Such households are expected to increase by 50% in the next 10 years. Africa’s labour force is also expanding at the highest pace in the world. This large workforce could become a significant engine for consumption in future.

Attracted by the high rates of return, investors have flocked Africa in the recent years, increasing total capital inflows from $15 billion in 2000 to $87 billion in 2008. Companies investing in Africa not only provide capital but also bring technological and managerial know-how. Although this might harm regional players in the short term, it bodes well for long-term growth.

Booming Sectors

Global demand is likely to remain high for oil, coal and gas which account for 85% of Africa’s current resource production. With growth in African economies, the continent will have a flourishing market within itself and might not even need to rely on importers outside Africa. Smaller mining companies (Katanga Mining Company) or large companies from developing countries (Vedanta from India) seem most prepared to enter unexplored and unstable African countries. Such companies have more experience in working in developing countries and understand the risks present in setting up business in Africa.

With 60% of the world’s uncultivated arable land and low crop yields, Africa is waiting for a “Green revolution”. The continent’s agricultural output could increase from $280 billion a year today to $500 billion by 2020 and as much as $880 billion by 2030 according to a report by McKinsey Global Institute. This sector promises enormous potential to any player in the industry, be it a fertiliser/pesticides manufacturer, seeds supplier, machinery manufacturer or food processor. Although the know-how for a transformation in the agricultural sector is easily available, bringing about a change is easier said than done. The entire agricultural value chain has barriers that cannot be overcome by a single player. A comprehensive policy change with regards to supply, technology, distribution, availability of finance, better tax and land laws is the way to go forward. African governments have increased investments in agriculture and are open to involving the private sector, making this one of the most lucrative and easy to enter industries in Africa.

Consumer sectors in Africa are growing two to three times as fast as those in the countries belonging to the Organization for Economic Co-operation and Development (OECD). Spending patterns tend to change as discretionary household spending increases. Hence, consumer facing industries like retail banking, telecom, education, health-care and other consumer goods and services are expected to experience higher growth. One of the major challenges faced by such industries is the lack of infrastructure. So, companies entering Africa need to come up with innovative strategies for sales and merchandizing. Also, just like in India, companies cannot afford to concentrate only on the high-income segment of customers.

Africa has the distinction of being the first continent in the world where cellular telephony outnumbered the fixed line network. In recent years, Africa has witnessed massive reforms and development in the ICT (Information and Communication Technologies) sector. Mobile penetration is 42% while internet penetration stands at 8%. It comes as no surprise that Bharti would look attentively towards South Africa and make an all-out attempt to participate in the budding market.

A comparison of Africa with BRIC countries in terms of infrastructure reveals that the former lags far behind. The BRIC’s power consumption is twice that of Africa’s and road density is five times that of Africa. According to World Bank estimates, Africa needs an investment of $118 billion a year to cover its backlog. This need for infrastructure has implications for African governments as well as private players all over the world. Currently, 65% of infrastructure funding comes from the continent’s governments. In order to increase growth, governments would have to encourage the entry of private players in this sector. Although private investment has been growing at 13% since 2000, minimal support from the government and prevalence of unhealthy trade practices have discouraged private companies from entering the market.

Should I ...

Companies which wish to enter Africa should plan to build their consumer base in a range of African countries. Since nations vary widely in terms of stability, profitability and risk characteristics this strategy will help in hedging a company’s risks. The company could benefit from good infrastructure in a relatively developed country like South Africa and provide services across the continent, cashing in on the high growth in undeveloped countries.

Companies that engage in socio-economic development in Africa seem to perform better. Investing in communities by building plants, creating job opportunities or encouraging entrepreneurs help a company in establishing a stronghold by building a good rapport with consumers and governments.

.. or should I not?

Most companies take the rosy pictures of growth and potential opportunities with a pinch of salt. African countries differ greatly in their individual circumstances but the problems plaguing them are very basic and similar. Poverty, high mortality rates, unstable governments leading to frequent breaches in peace, highly unstable economies are few of the plethora of problems faced. Regulatory challenges also form major barriers to entry for companies. Most government processes are inefficient and involve extensive paperwork. Also, rules and processes are unclear and implemented badly, leading to corruption.

A few countries like Mozambique have started marketing themselves proactively. The president of Mozambique was in India recently, promoting his country as an economically and politically stable nation in order to encourage investments. International institutions have played an important role in bringing about peace and reducing mortality in the continent but most countries still have a long way to go.

References: Lions on the move: The progress and potential of African economies – McKinsey Global Insitute

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Strategy Digest Vol. 2 (Oct)

M&M enters bike market

The competitive and high-volume bike industry recently saw another new entrant in the form of the conglomerate Mahindra & Mahindra. Mahindra & Mahindra has vehicles in the MUV, LCV, tractor and the two-wheeler car segments. The market currently is dominated primarily by Hero Honda and Bajaj Auto. They have been market leaders for some time now and it will be difficult to penetrate the motorcycle market.

However, Mahindra & Mahindra is relying on its branding and distribution networks to make it big in the bike segment. They intend to appeal to the cost-sensitive customers by launching the 110cc Stallio and to the more affluent customers by launching the 300cc Mojo.

Marlboro enters regular cigarette market

Marlboro, which entered the Indian markets with the king-size cigarette, has finally decided to enter the regular cigarette market. The regular cigarette market has high volumes and the company, Godfrey Philips, wants to get pie of this share. It will soon launch a campaign regarding this new foray.

The market leader in this segment is ITC. The Marlboro Gold Advance Impact, as the new brand launched by Marlboro will be known, will be priced at rs. 3.50 per stick. In response, ITC is launching a new product in the regular market segment called the Players Gold Leaf which will cost Rs. per stick. This reaction clearly suggests that it recognizes the dangers posed by this move by Marlboro.

Back to its roots

We observe that most commodity companies desire to move up the value chain and build itself a brand name. In this context, the decision of Tata Coffee to transfer its brands to Tata Global Beverages and focus instead on excelling in the coffee commodity business comes as a surprise.

This move has been undertaken by the management of Tata Coffee to focus on B2B business by consolidating their commodity business ranging from plantation to packaging. This is in stark contrast to what most coffee-making companies are doing. They are looking at taking advantage of the fact that a lot of unbranded coffee is sold to consumers.

Tata Coffee is expanding its coffee plantations not only in India but also in African countries. Along with this, Tata Coffee will need to strengthen its distribution network and enter into agreements with coffee brands and retailers.

Reliance Retail banks on toys

After Hamly's, Reliance Retail is now poised to enter into a joint venture with the US-based toy retailer Toys "R" Us. Toys "R" Us has over a 1000 stores across the world and owns brands such as Babies "R" Us and KB Toys. Hamly's and Toys "R" Us, however, operate in different operate in different price segments, with Hamly's catering to the upper class segments while Toys "R" Us caters to the middle and upper-middle class segments.

Reliance Retail wants to be in a position to take advantage of increasing consumer demand and clearly believes that there is huge potential in the Rs. 6,000 crore Indian toy market where over 60% of the market still belongs to the unorganized players.

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Article of the month contest

We take immense pleasure in announcing a competition for all our readers - the “Article of the month” contest. Now you will be involved with the blog not just by reading it, but by using it as a forum to express your views. Also you will have the chance to grab some moolah while doing this!

The topic for this month is “Diversification”.

Diversification to an extent, is considered a necessity in order for an enterprise to grow and expand; but isn't too much diversification a dilution of the enterprise's strategy? At one time, the world of business spoke of the merits of synergised diversification, but now there are numerous examples of companies opting for unrelated diversification as well. Thus arises the question, how much diversification is really good for a firm?

Please express your views on the topic with specific examples from industry and make yourself heard. The best article will win a Rs. 1000 book voucher from Flipkart and the best few articles will be posted on our blog. Send in your entries by the 20th of October.

Rules

1. The article should be between 500-800 words and should be an original piece of work.

2. All sources should be duly acknowledged.

3. All articles that get posted on the blog will become the property of the Consult Club, and should not be used anywhere else.

4. Send in your entries to consultclub@iimahd.ernet.in.

5. The decision of Consult Club will be final and binding.

We hope to see an enthusiastic response from all our readers!

In case of any doubts, you can mail us at consultclub@iimahd.ernet.in.

Also, we just launched our new website that can be accessed at http://stdwww.iimahd.ernet.in/consultclub/. The website contains a lot of information about Consult Club’s initiatives, including the events that we organize over the year, our various publications and newsletters etc. Feel free to drop in comments and suggestions at consultclub@iimahd.ernet.in.

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Professional Consulting and Political Campaigns

Cash guzzling political campaigns are the talk of the town whenever the election season arrives. With the world zooming into the 21^st century, these campaigns have evolved into a serious business of complex strategic planning and mass marketing with a single aim of getting the candidate into power. The advent of technology and a high degree of professionalism into this field has led to a ripened business of niche consulting catering to politicians and political parties.

Consultants and political advisors have been around forever, but the modern political consultants differ from their traditional counterparts in two major aspects:

• Traditional political consultants tend to have personal interests in the candidate, the office and the issues. Election work is not their primary source of income nor is it their full time profession. On the other hand professional political consultants completely redefine this image. They often possess a certain level of emotional detachment from the candidate and the campaign. They possess expertise in specialized aspects and treat politicians like clients rather than partners in victory.
• In the era prior to the 1990s, political advisors were experienced people with a strong insight into the strategy game and were considered political gurus. They have been relied upon for many years but are almost always limited in their reach and resources, but with the rapid progress in technology, rising campaign budgets and focus on results in the past two decades, the professional consultants have revolutionized campaigning for political parties. They rely upon solid business fundamentals and research to develop efficient and effective strategies for their clients.

Professional political consultants undertake projects under three major aspects of political campaigning.

1. Generating financial resources

The Obama-McCain presidential race in 2008 alone cost a staggering $2.4 billion. This showcases the need for massive funding and thus the expertise that is required to raise the money. This has been a major area where political parties turn to experienced professional political consultants.

2. Designing strategies

Voter base profiling, ground research and hours of analysis go into collecting data to build a strong foundation for a successful political campaign. Consultants specialize in these activities and can be the difference between success and failure.

3. Promotion and advertising

Developing promotional and advertising programmes has been the most dominant work for the political consulting firms. This area of work has evolved hugely with technology, web based campaigning and a constant need for breakthrough promotion strategies.

Political Consulting in India

The developed form of political consulting as described above is an evident characteristic of political campaigns in the United States but it is yet to find its feet in young democracies such as India. The political scenario in India is hugely different and more volatile than those in countries like the United States. As a result, dependence on new age professional consulting firms is limited to advertising, promotional activities and analytics. However, the Indian political picture is changing rapidly and professionalism seems to be the way to go. With young leaders bursting onto the scene and a spark of development politics, there is huge scope for such consulting expertise in India. Although it would still take some time before we see all this in mainstream action, budding firms (eg. Leadtech) are slowly gaining acceptance in India.

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