Two UBS bankers tried to create an offshore vehicle through which one of India's most powerful businessmen could illegally invest in securities at home, according to evidence heard in a London tribunal.
Anil Ambani, whom bank executives described as a "mega-client", was the ultimate owner behind a Mauritius-based vehicle called Pleuri, the tribunal heard.
Pleuri was established with the specific objective of investing in Indian stocks, according to evidence presented by the UK's financial regulator in a case against the former head of UBS' London-based India desk. Indian nationals and companies are not permitted to invest in Indian securities through foreign institutional investors.
Details of the controversial structure have emerged in the case of Sachin Karpe, former head of the desk that managed Indian client portfolios at UBS's wealth management division in London. Mr Karpe is challenging a £1.25m fine from the Financial Services Authority.
Mr Karpe and the other UBS banker, who cannot be named for legal reasons, have since left the Swiss bank. They allegedly misled UBS's compliance team by maintaining that Pleuri was owned by a wealthy French couple. UBS ultimately refused to sanction the structure.
"The source of funds [...] was plainly the Ambani family," Jonathan Crow QC for the FSA told the tribunal on Tuesday.
"[Mr Ambani] asked for a transaction and Sachin Karpe enabled it," said Michael Blair QC, Mr Karpe's barrister. "There was no suggestion that the client himself was damaged. The most that can be thrown at [Mr Karpe's] door was that he probably ought to have told the client that the bank would not deal with him because the transaction was not legal in India." Mr Blair described the FSA's case as "fat and splurgy".
Mr Ambani, who is not represented at Mr Karpe's tribunal hearing, has not been accused by the FSA of any wrongdoing. After the hearing, phone calls and emails to his spokesmen were not immediately returned.
The FSA alleges that in addition to trying to establish the offshore structure for Mr Ambani, Mr Karpe made unauthorised trades on other clients' accounts. To hide losses, Mr Karpe allegedly arranged loans from other clients, falsely promising them that the loans would be guaranteed by UBS at an above-market rate.
Mr Karpe is not appearing at the tribunal and not contesting an FSA ban. He claims he did not know that the Pleuri structure would be illegal. Mr Karpe is arguing against the size of the fine, and maintains the FSA overreached its powers.
After an investigation by the FSA, UBS paid a £8m fine in 2009 for not preventing the unauthorised trades. It also paid $42m in compensation to clients. UBS is supporting the FSA's case against Mr Karpe and two other ex-employees. Indian authorities have also launched their own investigations.
Mr Ambani entered into a settlement with the Securities and Exchange Board of India in January over allegations that his group misrepresented its end-of-year financial statements and violated overseas borrowing rules, without admitting any liability. As part of the Rs500m (£6.1m) settlement, the billionaire and his Reliance Infrastructure and Reliance Natural Resources companies cannot trade stocks on Indian exchanges through December 2012.
Smaller players of Tata Group: Which companies are investors' picks
Tata Group companies have always drawn the attention of investors for their transparent business practices and investor friendliness. And, with the recent appointment of Cyrus Mistry as the successor of Ratan Tata, these companies are again in the limelight.
While media reports have pondered over what this appointment means to the country's oldest business house, much attention has been also paid to the top breadwinners in the conglomerate.
We at the ET Intelligence Group decided to analyse the smaller players in the group to understand what lies ahead for them and to help investors pick and choose the right bets.
The House That Tatas Built
There are over 30 publicly-listed companies in the Tata empire, with market capitalisation ranging from Rs 56 crore (casting and forging company Tayo Rolls) to Rs 2 lakh crore (IT giant TCS). These belong to a slew of sectors including technology, retail, metals, hospitality, chemicals, and engineering.
Together, these companies have a market cap of over Rs 4 lakh crore with the top five players based on their market capitalisation constituting nearly 90% of this. They include TCS, Tata Motors, Tata Steel, Tata Power, and Titan Industries.
While these companies are more often on investors' radar, there are at least 18 companies that have a market cap of less than Rs 3,000 crore and, barring a few exceptions like Voltas and Rallis, are not tracked too often by analysts and investors. Our focus is on these small cap and midcap companies in the group.
Some of them are in the pink of health and look attractive at current valuations. These include Benaras Hotels, Rallis, and Tata Coffee.
On the other hand, some companies like Nelco, Voltas, Tata Teleservices (Maharashtra), and Tinplate are finding it difficult to maintain growth due to various factors such as intense competition, slowing demand from users, and higher raw material costs. Read on to know which to pick and what to skip.
VOLTAS
A household name for air-conditioners and refrigerators, Voltas has reported a significant drop in volumes and margins in the cooling business due to unfavourable weather conditions. Even as competition is stiff, the company is reluctant to compromise on the pricing front in this business segment so as not to damage its brand image. However, if the volumes fail to pick up in coming months, the segment margin may drop further.
Voltas derives the major share of its revenue from the electrical & mechanical projects (EMP) business where it has a strong international presence in the Middle East. The current global turmoil has put pressure on its margins and new orders are hard to come by. Moreover, the company is currently under pressure to complete a couple of projects in Qatar despite concerns of cost overruns. The challenge here is to maintain its reputation as it bids to win some of the major upcoming projects in Qatar in the run-up to the FIFA World Cup in 2022 to be hosted in the country.
TATA TELESERVICES (MAHA)
The telecom arm of the Tata Group has been struggling to report a net profit over the last several years and the task has become even more difficult with falling per user revenue and rising competition.
Together with its sister concern Tata Teleservices, the company had 8.8 crore subscribers at the end of October compared with 9 crore in June. In the last few months, the company has lost customers to competition. In addition, only half of its users are active according to data from the Telecom Regulatory Authority of India.
This is much lower than 80-90% active customers for its bigger peers including Bharti Airtel and Idea Cellular. With stiff competition from larger players, future prospects look gloomy for Tata Teleservices (Maharashtra).
TATA COFFEE
Tata Coffee, a subsidiary of Tata Global Beverages, is an integrated coffee plantation company. The company earns its revenue from production and sale of coffee (cured and instant), tea and pepper and from tourism on plantation estates. It is engaged in the production of specialty and certified coffees for developed, premium-paying markets.
Rallying coffee prices since last year have punctured the operating margins of the company's overseas subsidiaries. However, Tata Coffee as a standalone entity has registered record turnover and earnings during the first half of this fiscal aided by improved performance of the instant coffee division and continued growth logged by its plantations.
The outlook for coffee prices remains bullish with consumption exceeding supply and global inventories at an all-time low. A concrete business association with Starbucks Coffee can trigger further growth for the company.
TATA METALIKS
Tata Metaliks manufactures and sells pig iron. It also provides customers with critical support across their entire business cycle thereby emerging as a one-stop shop for raw materials and end products.
Though its sales have been growing at a moderate pace of 10-12% on average, the company has been reporting losses since the past six quarters on account of a spike in raw material prices. Unlike in the past, pig iron prices have lagged behind coke prices for the last four quarters. This has impacted the company's bottom line.
The company is facing difficulties in sourcing iron ore on account of mining restrictions in the places where it operates. Until the company gains pricing power and overcomes its raw material sourcing hurdles, its profitability will remain under pressure.
CMC
With a strong presence in the country's IT systems and integration sector for decades, CMC in a way complements the Tata Group's other technology companies. CMC earns half of its revenue by providing systems integration services to the government and private sector clients. It is also a high-margin business for the company with over 30% operating margin before depreciation.
Though the company reported impressive double-digit growth in its profits in the last six years, it was mainly on account of better cost management. Revenue remained more or less stagnant during the period.
The company's stock has lost 26% in the last year. It currently trades at a trailing twelvemonths P/E of 9. The domestic market for systems integration is rapidly developing, but CMC is yet to report any major improvement in its top line. Investors are advised to wait for a few quarters for cues on future growth.
TRF
Material-handling company TRF is but a small fish in the group with market capitalisation of less than Rs 300 crore. As the company's business is directly associated with the growth in the industrial sector, TRF too has been hit by slowing economic growth.
Though the current order backlog of Rs 1,275 crore gives TRF revenue visibility for more than a year, the order book size has been eroding consistently over the past few quarters as new orders have been hard to come by. The company is expected to bag a few orders from clients such as NTPC and Tata Steel in the near term.
Another concern for TRF in the near term is its deteriorating operating margin and return on capital employed (ROCE). The company's consolidated operating margins have dipped from over 10% until a year ago to less than 5% in FY11 while a consolidated ROCE of 6.4%, for FY11 is the lowest in the past four years.
RALLIS INDIA
Rallis India has come a long way from reporting losses in FY03 to becoming the most highly-valued agrochemicals company in India today. The company commands a P/E of above 23, higher than its bigger peers such as Bayer Cropscience and United Phosphorous. In last few years, the company posted a steady improvement in profits regardless of market volatilities. Recently, it acquired Metahelix to expand its presence in the seeds industry.
After growing its net profit at a cumulative annualised growth rate of 36% between FY08 and FY11, the company seems to be facing some headwinds. During the first three quarters of calendar year 2011 its profits grew in single-digit figures.
The company has a bright future with growing demand for crop protection products and better seeds across the world. It is setting up an additional unit in Dahej and is focusing on new products, R&D, registrations and exports to lead future growth.
TRENT
Trent is the retail arm of the group. Unlike many of it peers, Trent has very high operating efficiency. In the retail business, growth generally comes by increasing sales in the same stores and also by increasing the number of stores. This requires large capital expenditure and high working capital for increasing the inventory. To earn good returns on the capital invested, inventory turnover has to be high and debt needs to be in control.
Trent has one of the best inventory turnovers or the least inventory days in the industry, which reflects its efficiency. On average, it takes 60 days to sell inventory compared to 125 days for Pantaloon Retail (India). Trent's balance sheet is also comparatively stronger with a debt to equity of just 0.3. This means, the company has enough room to take loans for further growth.
At a price of Rs 963, the company is trading at a P/E of 46, which appears to be high on a trailing twelve-months basis, but is not as steep when discounted for its future earnings as stores take a couple of years to break even. Given its current expansion phase, investors can consider buying this stock at the current level.
TINPLATE
Tinplate Company of India (TCIL) is the country's largest producer and supplier of tin mill products, which are used in the metal packaging industry. TCIL corners about 35-40% of the domestic market.
Growth in the packaging sector is closely linked to the processed foods and beverage industry, which is expected to grow at 18-20% in 2012. Over the past five years, its sales and profits have grown at a compounded rate of 13% and 14%, respectively.
Though the long-term prospects are promising, the company's profitability has been under pressure on account of high input and borrowing costs. Since the March 2011 quarter, its sales and profits have been falling. In fact, in the September 2011 quarter its net loss almost doubled as it was not able to pass on the rise in raw material prices to consumers. Till this happens, the company's profitability will remain under pressure.
While these companies are more often on investors' radar, there are at least 18 companies that have a market cap of less than Rs 3,000 crore and, barring a few exceptions like Voltas and Rallis, are not tracked too often by analysts and investors. Our focus is on these small cap and midcap companies in the group.
Some of them are in the pink of health and look attractive at current valuations. These include Benaras Hotels, Rallis, and Tata Coffee.
On the other hand, some companies like Nelco, Voltas, Tata Teleservices (Maharashtra), and Tinplate are finding it difficult to maintain growth due to various factors such as intense competition, slowing demand from users, and higher raw material costs. Read on to know which to pick and what to skip.
VOLTAS
A household name for air-conditioners and refrigerators, Voltas has reported a significant drop in volumes and margins in the cooling business due to unfavourable weather conditions. Even as competition is stiff, the company is reluctant to compromise on the pricing front in this business segment so as not to damage its brand image. However, if the volumes fail to pick up in coming months, the segment margin may drop further.
Voltas derives the major share of its revenue from the electrical & mechanical projects (EMP) business where it has a strong international presence in the Middle East. The current global turmoil has put pressure on its margins and new orders are hard to come by. Moreover, the company is currently under pressure to complete a couple of projects in Qatar despite concerns of cost overruns. The challenge here is to maintain its reputation as it bids to win some of the major upcoming projects in Qatar in the run-up to the FIFA World Cup in 2022 to be hosted in the country.
TATA TELESERVICES (MAHA)
The telecom arm of the Tata Group has been struggling to report a net profit over the last several years and the task has become even more difficult with falling per user revenue and rising competition.
Together with its sister concern Tata Teleservices, the company had 8.8 crore subscribers at the end of October compared with 9 crore in June. In the last few months, the company has lost customers to competition. In addition, only half of its users are active according to data from the Telecom Regulatory Authority of India.
This is much lower than 80-90% active customers for its bigger peers including Bharti Airtel and Idea Cellular. With stiff competition from larger players, future prospects look gloomy for Tata Teleservices (Maharashtra).
TATA COFFEE
Tata Coffee, a subsidiary of Tata Global Beverages, is an integrated coffee plantation company. The company earns its revenue from production and sale of coffee (cured and instant), tea and pepper and from tourism on plantation estates. It is engaged in the production of specialty and certified coffees for developed, premium-paying markets.
Rallying coffee prices since last year have punctured the operating margins of the company's overseas subsidiaries. However, Tata Coffee as a standalone entity has registered record turnover and earnings during the first half of this fiscal aided by improved performance of the instant coffee division and continued growth logged by its plantations.
The outlook for coffee prices remains bullish with consumption exceeding supply and global inventories at an all-time low. A concrete business association with Starbucks Coffee can trigger further growth for the company.
TATA METALIKS
Tata Metaliks manufactures and sells pig iron. It also provides customers with critical support across their entire business cycle thereby emerging as a one-stop shop for raw materials and end products.
Though its sales have been growing at a moderate pace of 10-12% on average, the company has been reporting losses since the past six quarters on account of a spike in raw material prices. Unlike in the past, pig iron prices have lagged behind coke prices for the last four quarters. This has impacted the company's bottom line.
The company is facing difficulties in sourcing iron ore on account of mining restrictions in the places where it operates. Until the company gains pricing power and overcomes its raw material sourcing hurdles, its profitability will remain under pressure.
CMC
With a strong presence in the country's IT systems and integration sector for decades, CMC in a way complements the Tata Group's other technology companies. CMC earns half of its revenue by providing systems integration services to the government and private sector clients. It is also a high-margin business for the company with over 30% operating margin before depreciation.
Though the company reported impressive double-digit growth in its profits in the last six years, it was mainly on account of better cost management. Revenue remained more or less stagnant during the period.
The company's stock has lost 26% in the last year. It currently trades at a trailing twelvemonths P/E of 9. The domestic market for systems integration is rapidly developing, but CMC is yet to report any major improvement in its top line. Investors are advised to wait for a few quarters for cues on future growth.
TRF
Material-handling company TRF is but a small fish in the group with market capitalisation of less than Rs 300 crore. As the company's business is directly associated with the growth in the industrial sector, TRF too has been hit by slowing economic growth.
Though the current order backlog of Rs 1,275 crore gives TRF revenue visibility for more than a year, the order book size has been eroding consistently over the past few quarters as new orders have been hard to come by. The company is expected to bag a few orders from clients such as NTPC and Tata Steel in the near term.
Another concern for TRF in the near term is its deteriorating operating margin and return on capital employed (ROCE). The company's consolidated operating margins have dipped from over 10% until a year ago to less than 5% in FY11 while a consolidated ROCE of 6.4%, for FY11 is the lowest in the past four years.
RALLIS INDIA
Rallis India has come a long way from reporting losses in FY03 to becoming the most highly-valued agrochemicals company in India today. The company commands a P/E of above 23, higher than its bigger peers such as Bayer Cropscience and United Phosphorous. In last few years, the company posted a steady improvement in profits regardless of market volatilities. Recently, it acquired Metahelix to expand its presence in the seeds industry.
After growing its net profit at a cumulative annualised growth rate of 36% between FY08 and FY11, the company seems to be facing some headwinds. During the first three quarters of calendar year 2011 its profits grew in single-digit figures.
The company has a bright future with growing demand for crop protection products and better seeds across the world. It is setting up an additional unit in Dahej and is focusing on new products, R&D, registrations and exports to lead future growth.
TRENT
Trent is the retail arm of the group. Unlike many of it peers, Trent has very high operating efficiency. In the retail business, growth generally comes by increasing sales in the same stores and also by increasing the number of stores. This requires large capital expenditure and high working capital for increasing the inventory. To earn good returns on the capital invested, inventory turnover has to be high and debt needs to be in control.
Trent has one of the best inventory turnovers or the least inventory days in the industry, which reflects its efficiency. On average, it takes 60 days to sell inventory compared to 125 days for Pantaloon Retail (India). Trent's balance sheet is also comparatively stronger with a debt to equity of just 0.3. This means, the company has enough room to take loans for further growth.
At a price of Rs 963, the company is trading at a P/E of 46, which appears to be high on a trailing twelve-months basis, but is not as steep when discounted for its future earnings as stores take a couple of years to break even. Given its current expansion phase, investors can consider buying this stock at the current level.
TINPLATE
Tinplate Company of India (TCIL) is the country's largest producer and supplier of tin mill products, which are used in the metal packaging industry. TCIL corners about 35-40% of the domestic market.
Growth in the packaging sector is closely linked to the processed foods and beverage industry, which is expected to grow at 18-20% in 2012. Over the past five years, its sales and profits have grown at a compounded rate of 13% and 14%, respectively.
Though the long-term prospects are promising, the company's profitability has been under pressure on account of high input and borrowing costs. Since the March 2011 quarter, its sales and profits have been falling. In fact, in the September 2011 quarter its net loss almost doubled as it was not able to pass on the rise in raw material prices to consumers. Till this happens, the company's profitability will remain under pressure.
AUTOMOTIVE STAMPINGS
Formerly known as JBM Tools, ASAL is part of the Tata AutoComp (TACO) group, the country's leading automotive components conglomerate. The company is engaged into the production of a wide range of sheet metal components for passenger and commercial vehicles and tractors.
ASAL has posted a drop in sales and profit since last two quarters. It raised Rs 29.5 crore through a rights issue in July this year. The company's stock has depreciated since last year, underperforming the broader market indices.
TATA ELXSI
Bangalore-based Tata Elxsi is a niche player in the technical design segment. It offers embedded product design and industrial design solutions. It also provides animation and visual effects services and systems integration. Despite increasing opportunities across most of the business segments, Tata
Elxsi has not been able to register impressive growth over the last four years.
The company's revenue has not budged much from the Rs 400-crore level while profits at the operating and net level have declined during the period. The erratic change in its sales and profits reflects the lumpy nature of its business.
Tata Elxsi's stock has lost 26% in the last one year. Its trailing twelve months P/E works out to be 18.8, which is on the higher side when compared to the P/E range of 6-10 for IT companies of similar size. The premium valuation could be attributed to its exposure to the fast-growing animation industry. However, the company's performance so far does not instill confidence. Investors need to wait until there is some stability in its growth trajectory.
ORIENTAL HOTELS
Oriental Hotels is an associate company of Indian Hotels Company - one of the largest hotel chains in the country. Indian Hotels Company offers technical assistance to Oriental Hotels, which has the Reddy group of Chennai as its chief owners. One of the flagship brands of the company is Taj Coramandel.
Besides this, the company also runs other hotel units such as Fisherman's Cove, Vivanta by Taj and Gateway Hotels. Over the years the company has demonstrated impressive financial performance. Its operating margin is the best in the small-sized hotels segment.
Even in the present situation of weak business, the company has an operating margin of around 28%. With the completion of rebranding and expansion of Indian Hotels Company in coming quarters, the company would see an increased flow of revenues.
At present, the company is fairly valued. Its stock is commanding a P/E of 16. Its current stock price is at a 34% discount to its price a year ago. Investors are advised to buy into the stock with a horizon of one year.
TAYO ROLLS
Jamshedpur-based Tayo Rolls (formerly Tata Yodogawa) is a subsidiary of Tata Steel involved in the manufacture of cast rolls, forged rolls, special castings & pig iron. Tayo is a company with mounting losses each quarter. Continued delay in commissioning and ramp up of a new project coupled with the temporary suspension of pig iron operations had affected the profitability of the company causing severe cashflow problems.
The revenue of the company has also stagnated at Rs 128 crore since the last two fiscals. The company's stock has fallen since March this year, underperforming the broader market indices.
The roll industry is largely dependent on the steel industry. The current downtrend in the steel industry has compelled steel plants to have better inventory control management, due to which orders have been deferred resulting in poor offtake for companies like Tayo. The business of the company is likely to pick up once prospects for the steel industry improve.
NELCO
Once a flagship technology company of the Tata group engaged in high-end telecommunications, Nelco's operations today are limited to remote telemetry and managed network solutions. The company's stock performance has been poor over the last year following lacklustre business outlook.
Though the company's revenue grew at a moderate pace in the last five years, profits have dwindled. Revenue grew at a five-year compounded annual growth rate (CAGR) of 8.2% till September 2010, but the company failed to report consistent profits during the period. It reported an operating loss in each of the two years ended September 2011.
The company's core business of remote telemetry solutions has been facing competition from smaller vendors. The division's revenue shrank by nearly one-third in FY11. The other division that delivers network solutions also failed to grow during the year.
Nelco's stock fell by 58% over the last year. Given the bleak future prospects, it looks difficult for the stock to provide meaningful returns in the long run.
BENARES HOTELS
Robust financial performance, near zero debt, good dividend-paying record and advantage of location are major investment triggers for the stock of Benares Hotels.
The company trades at a P/E of 11 times, which is relatively low. The company's presence in Varanasi, one of the main pilgrimage destinations in India, ensures a continuous flow of travellers.
For years, the company has been recording a net profit margin in the range of 15-20%. This is far better than larger players like Royal Orchid Hotel and Kamat Hotels, which have a net profit margin of 10% and 1%, respectively. Given these factors, the stock looks promising for long-term investors.
MOUNT EVEREST MINERAL
The company sells bottled natural mineral water under the brand named 'Himalayan'. Tata Global Beverages owns 40% stake in Mount Everest Mineral Water (MEMW).
MEMW is a loss-making company logging annual sales of Rs 20-22 crore since the last five fiscals. The company has entered into a joint venture with Nourishco Beverages, a company promoted by Tata Global Beverages and PepsiCo India Holdings for branding and manufacturing Himalayan Natural Mineral Water. Since February 2011, MEMW has been in the process of transferring sales and distribution of its product. This arrangement is expected to drive market reach and volumes of brand Himalayan, aided by wider market access of the premium network of Pepsico India Holdings.
The company's stock has depreciated during the last nine months following poor financial performance. The company's business prospects hinge on the success of its joint venture with Pepsi and Tata Global Beverages.
