MUMBAI MASALA: CORPORATE BONDS, SOLAR ENERGY, AND RETAIL

UNCLAS SECTION 01 OF 03 MUMBAI 000170 SENSITIVE SIPDIS DEPT PASS TO USTR USDA FOR FAS E.O. 12958: N/A TAGS: EAGR ECON EFIN EIND EINV ENRG IN SUBJECT: MUMBAI MASALA: CORPORATE BONDS, SOLAR ENERGY, AND RETAIL REF: 08 MUMBAI 489 MUMBAI 00000170 001.2 OF 003 ¶1. (U) Table of Contents: - Capital Market Regulator talks about the Corporate Bond Market and the Financial Crisis - Ispat Energy Plans 500 MW Concentrating Solar Thermal Energy Project in Gujarat - Wal-Mart Expands its Indian Footprint while Other Big Retailers Pause to Regroup Capital Market Regulator talks about the Corporate Bond Market and the Financial Crisis -------------- ¶2. (SBU) In a meeting with Acting Charge d'Affairs Peter Burleigh, the Chairman of the Securities and Exchange Board of India, C.B Bhave, explained that Reserve Bank of India's (RBI) announcement that it would serve as a clearing house for corporate bond trading was a significant step forward in developing India's corporate bond market. (Note: On April 21, in its Annual Policy Statement for 2009-10, the RBI announced that it will allow capital markets' clearing houses to use RBI accounts to facilitate the settlement of over the counter (OTC) corporate bond transactions. End Note.) Once the clearing corporations set up accounts with the RBI, Bhave said, India will have a secure clearing and settlement mechanism that will also provide a more transparent price recording system. A steady stream of price data will help build the market and attract a wider range of market participants, he said. While the cap on foreign investment in the corporate bond market has been raised to $15 billion, it has gone unsubscribed, he believed, due to low demand. He admitted, however, that the development of exchange traded platform for corporate bonds in India is still a "far goal." ¶3. (SBU) In discussing the Indian economy, Bhave acknowledged that regulators are still trying to determine the impact of the global economic slowdown on India. He explained that the Lehman bankruptcy on September 15 coincided with advance tax payments by corporations, which naturally produces a short-term liquidity shortage (see reftel A). It wasn't until the end of September that India's regulators realized that there were more serious liquidity problems in the Indian banking system, after which the RBI took action. He said the first shocks came through trade channels, as trade finance was hit severely. Bhave said that India learned that domestic demand is still too small to replace global demand for India's exports. Although leveraged hedge funds had begun to pull out of Indian markets before September, this trend accelerated in October and November, compounded by withdrawals from non-leveraged domestic and foreign investors. ¶4. (SBU) While India is fortunate that its banking system has not been seriously hit by the crisis, Bhave believed that the banks' "non-integration" into global markets and a policy of isolation, rather than specific prudent measures taken by banks, was the main reason for its relative safety. Another benefit, in retrospect, is that Indian banks had few OTC derivatives on their books; here again, that development was a "factor of tradition, rather than any insight into the dangers of these products." In addition, Indian households still have relatively small amounts of leverage, and while credit card usage has increased in the past few years, it is not yet as pervasive as other countries. He said that credit cards are a "recently employed" phenomenon and that an older generation would still shy away from using them, preferring debit cards where the MUMBAI 00000170 002.2 OF 003 balance is known. Ispat Energy Plans 500 MW Concentrating Solar Thermal Energy Project in Gujarat -------------- ¶5. (SBU) Shishir Tamotia, the CEO of the Indian energy company Ispat Energy, said that the company plans to set up a 500 MW solar thermal project in Gujarat. Ispat will use "concentrating solar technology," which uses mirrors or lenses to concentrate sunlight into a beam which is then used as a heat source to raise steam to drive turbines for electricity generation in a power plant. The state's good radiation and the Gujarat government's pro-business policy made the company choose Gujarat as the project site, he said. (Note: To promote solar energy development, the Gujarat government announced 12-year tariff lock-ins at high, subsidizes rates to make it competitive with thermal energy rates and a commercially viable alternative for power producers. End Note.) ¶6. (SBU) The project cost is estimated at USD 500-700 million. Tamotia hopes to obtain funding at lower interest rates and earn carbon credits as the project is based on a non-polluting carbon neutral energy source. Assuming that these conditions are met, Tamotia expects to earn a 24 percent return on equity. The project will be connected to the grid by Gujarat Electricity Transmission Company (GETCO) which may take a minority stake in the project. Tamotia points out that inducting a government partner would enable the company to apply to the World Bank for funding and also lend added credibility to the project. ¶7. (SBU) The company is looking at importing solar technology from the Israel-based Solel group as well as some U.S. suppliers. The project is expected to be completed by June 2011; two 50 MW units will be commissioned by December 2010, followed by two 200 MW units. The project will be a peak-load power station and feed power to the grid during peak hours when electricity demand is at its highest, due to industrial usage. It will also be able to store up to 5 hours of power and will shut down only by 11 pm at night, which is non-peak hours. Tamotia pointed out that in contrast, wind power generation peaks at night and during the rains when demand for power is lowest. India has a peak power deficit of around 16 percent and peak power is more expensive than the average cost of power. As a result, Tamotia explained, solar power can give higher returns than wind power. In addition, peaking solar power stations do not face uncertainty about future commodity prices like coal and natural gas and is sustainable for 40 years, he argued. Tamotia noted that the cost of solar technology is decreasing, making solar energy more economically viable; the cost of photovoltaic cells has decreased from $100 per Watt in 1969-70 to $3 per Watt today. Ispat Energy plans to build similar facilities in the Vidarbha region of Maharashtra, Madhya Pradesh and Rajasthan if its Gujarat project is successful. Wal-Mart Expands its Indian Footprint while Other Big Retailers Pause to Regroup -------------- ¶8. (SBU) Arvind Chaudhary, the former CEO of the Godrej group's Aadhar Retailing, has joined Wal-Mart and will serve as the International Sourcing Head for the Asia-Pacific. In a meeting with ConGenoff, Chaudhary said that Wal-Mart is serving as a "technical consultant" to the Indian-owned Bharati group, which MUMBAI 00000170 003.2 OF 003 has opened retail outlets in Ludhiana and Jalandhar, Punjab, and in Haryana under the Bharati Group's brand name, Easy Day. Bharti Retail is planning to open stores in Pune next. (Note: The Bharti group and Wal-Mart formed a Joint Venture company, Bharti Wal-Mart Pvt. Ltd. for wholesale cash and carry and back-end supply chain operations in India. Foreign Direct Investment (FDI) in multi-brand retail is not permitted in India. End Note). According to Chaudhary, Bharti Wal-Mart does not plan to operate retail outlets in any metro cities until ¶2012. There is a glut of retail outlets in these cities and it does not make sense to open shops there at present, Chaudhary explained. Bharti Wal-Mart is also planning to open cash and carry wholesale stores, which will be one-stop shops that meet the daily needs of retailers, traders, restaurant and hotel owners and other businessmen. In late May 2009, the first store will be opened near Amritsar in Punjab, and the company also plans to open a similar store in Mumbai. These cash and carry stores will be 200,000 square feet large-format shops. ¶9. (SBU) Chaudhary claimed that the big organized retailers are struggling to stay profitable. The current economic crisis has caused Indian consumers to become cost-conscious and to defer buying decisions, he opined. Faced with shrinking demand, high operating costs and low margins, these big retailers are "hurting." It takes around six years, in good times, to make a profit, Chaudhary explained. The location of the outlet and the product mix are two critical keys to success. The margin on apparel is the highest and fresh produce has the lowest margin, so the right mix of these two items determines the profitability of the business. Most big retailers have yet to find the ideal mix, he claimed. ¶10. (SBU) Comment: As a knowledgeable retail industry insider, Chaudhary's comments reflect the larger sentiment that the ambitious plans of large-scale organize Indian retailers continue to be tempered by the realities of the Indian business environment. It is not easy to woo the Indian consumer who demands low prices, personal attention, and a one-stop shopping experience. Wal-Mart is still confident about its ability to succeed in India and is proceeding with its expansion plans even while other organized retailers are taking a step back to re-group. Whether the global retail giant can win over the complex Indian consumer and compete against the small neighborhood retailer is yet to be determined. FOLMSBEE