MUMBAI MASALA: CORPORATE BONDS, SOLAR ENERGY, AND RETAIL

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SUBJECT: MUMBAI MASALA: CORPORATE BONDS, SOLAR ENERGY, AND RETAIL

REF: 08 MUMBAI 489

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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

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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

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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

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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