Poised to reap the benefits of expansion
In its latest annual report, Grindwell Norton (Grindwell) had admitted, “Domestic demand continues to be weak and there are no signs of an industrial recovery in the short term.” That is the past. The fact is that Indian manufacturing is at one of its lowest points and is poised to rise. As a company making abrasives, ceramics and plastics, Grindwell will be a big gainer from a manufacturing boom.
Grindwell is India’s second largest manufacturer of abrasives and ceramics (after Carborandum Universal) with a market share of around 25%; both companies have held ground against Chinese imports. The other player in the market is Wendt with 4% market share.
Grindwell’s parent, Saint-Gobain, is a global leader in abrasives and electro-minerals. The parent company is targeting to triple group sales by 2019. For this, Grindwell has implemented gross block expansion of 70% over FY10-14. It has unused capacity of 35% and is well placed to ride the manufacturing cycle based on its leadership position in India (with Carborandum) and innovative products.
For the quarter ended June 2014, Grindwell’s sales were Rs260.89 crore (Rs224.74 crore) and its net profit was Rs23.84 crore (Rs21.71 crore). For the year ended March 2014, Grindwell’s revenues were Rs941.61 crore (Rs945.09 crore). Its net profit for FY13-14 was Rs82.32 crore (Rs97.67 crore). Exports were at Rs102.78 crore in FY13-14 against Rs123.72 crore in FY-12-13.
In FY13-14, the new plant at Bengaluru was fully commissioned and the bonded abrasives expansion project at Nagpur, which had slowed down in
FY12-13, was also completed and commissioned. Capex is through internal accruals and the company’s share capital has not been increased since FY05-06.
Grindwell’s performance remained steady through high inflation, low GDP growth and depreciation of the rupee. Over the past five quarters, the average growth in sales of Grindwell was 3% and operating profit was down 4%. The average operating margin is 14%. The market-capitalisation is 2.67 times sales and 17.80 times operating profit.
Return on net worth is 15% and return on capital employed is 19%. It has no debt.
Promoters hold 59.03% of equity while 2.85% is with foreign institutional investors, 7.90% with domestic institutional investors and 30.22% with the general public.
Grindwell distributed dividends of 130% in each of the past three financial years. The face value of shares is Rs5 and book value is Rs100.45. Its share price rose from a 52-week low of Rs229.60 on 4 February 2014 to a 52-week high of Rs541.05 on 16 September 2014. The share is expensive at the current levels of around Rs524.15. A decline to around Rs400 would make it an attractive buy.
Never pro-consumer, IRDA now wants to give insurers a license to mis-sell even more
IRDA is expected to suggest removal of 40% cap on agency commission. It is an anti-consumer move which can bring back mass mis-selling like before September 2010 which saw insurers laughing their way to the bank and consumers crying foul for getting duped.
Insurance Regulatory and Development Authority (IRDA) Chairman TS Vijayan seems to be making a U-turn on the product caps put by previous chairman J Hari Narayan.
Media reports suggest that IRDA is expected to suggest to the Parliamentary Panel on Insurance Law (Amendment) Bill, that the new Insurance Bill remove the existing 40% cap on agency commission and leave agent licensing process to insurers themselves. TS Vijayan was slated to meet the panel members of on 27th October.
Removal of agency commission cap seems to be a desperate move to accede to Life Insurance Council’s demand to sell more insurance. Removing caps on agent commission will surely improve sales as history shows that a motivated and highly paid agent will surely sell more. Unfortunately, the victims of such selling will be consumers who will end up with a flawed product which gives meagre returns. Senior citizens will be made to buy products in the name of their children or grandchildren as making a sale would be more important to help the agents earn more.
This is not just conjecture. History has shown this to be the case. The disaster of pre-September 2010 ULIPs is still unfolding. Moneylife Foundation’s Insurance Helpline gets numerous cases of wealth destruction through flawed products, sold by aggressive salespeople only for their own benefit – high commissions. History will repeat itself if insurers are allowed to make their own decisions on intermediary commission. Higher agent commission will mean even lower returns from the product, which is already pathetic in case of traditional products like endowment, money-back and whole-life.
In September 2010, after IRDA was inundated with complaints about mis-selling, especially ULIPs, IRDA capped overall charges at 3% of net yield in case of ULIPs with a tenure of 10 years or below. Net yield is the return that a customer gets on maturity minus charges.
In case of insurance policies of above 10 years, IRDA had capped total charges at 2.25%.
While it made the product better, agents shifted to selling traditional products which earned up to 40% commission in first year (35% in case of LIC). This tilted the insurance company’s sales portfolio completely. LIC with 70% business in ULIP and 30% in traditional products went on to have 30% ULIP and 70% traditional. This again proved that agents can sell inferior products if there is enough commission.
Media reports quote Life Insurance Council secretary general V Manickam, saying, “Agents are responsible for bringing in over 90% of business to the life insurance industry. But they do not find their job attractive now with the 40% of first year premium as their commission.” The insurance company lobby has an agenda of penetration, but should also be answerable to the humungous complaints received by IRDA on product mis-selling. Is there any action plan to help improve the returns for the consumer or just selling a product is all that matters for Life Insurance Council? Will Life Insurance Council promote term plans if they really want Indian to be adequately insured? IRDA’s desire to develop online market for life insurance seems to be contradictory with its latest move to remove caps on agent commission.
Over the past few years, IRDA has caught several insurance companies paying more than the legally permissible commission to agents, especially corporate agents. Apart from the blatant violations of commission norms, life insurers also find ways to give additional compensation to agents with lucrative contests, paid foreign trips and so on.
Moneylife has highlighted that buying traditional products instead of new ULIPs was like jumping from frying pan into fire. It was also a candid opinion from IndiaFirst CEO Dr P Nandagopal. In an interview with Moneylife in 2011, he stated that “ULIPs certainly offer lot of advantages over traditional products in terms of transparency, lower charges and flexibility of investments.”
In a recent media interview, he stated, “If an insurer’s charges are steep, open markets will beat that insurer down. But, if the insurer is selling an opaque product (traditional), the charges and benefits are neither known nor comparable, and the insurer gets away with selling an inferior proposition with high pitch marketing. Unlike in a ULIP, there is no meaningful limit on the expenses in a traditional plan; the insurer can pass on all expenses to the policyholder in the initial years. An inefficient company with high operating and distribution costs can pass on its cost to the policyholders without their knowledge. Traditional participating plans for savings are long outdated in developed markets such as the UK. They are present only in Asia and West Asia due to underdeveloped regulations.”
IRDA’s life insurance guidelines, effective January 2014 fell short of bridging the gap between commissions on traditional and ULIP commission. In the case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year, 7.5% in the second and third year and 5% subsequently. Products with PPT of 12 years or more will have first year commissions up to 35%, in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years.
With ex-LIC CMD and now IRDA Chairman moving to help the life insurance companies get back to its heydays and also helping the 20 lakh agents earn better livelihood, it can only mean difficult times for consumers ahead. It is not just individual agents, but banks that will be happy to earn fat commissions from sales to gullible banking customers. The feeble steps taken by previous IRDA Chairman to safeguard consumers will be crushed by insurers with a new license to kill.
FDI in construction sector will help the cash-starved realty sector raise funds, says Nomura in a research note
The government on 29th October relaxed rules for allowing FDI (foreign direct investment) in the construction sector including housing by reducing the minimum built-up area and capital requirement for foreign investment in such projects — a move that will help the cash-starved realty sector raise funds, says Nomura in a research note.
The specific changes in regulations include:
(a) The government is now permitting 100% foreign ownership of projects in the construction sector through an automatic route.
(b) It has also eased the requirements on the amount of land, built-up areas and certain capital requirements for foreign investment in the construction sector.
(c) It will now also allow investors to exit on completion of the project or after three years from the date of final investment.
(d) Investors can now bring in minimum FDI of USD5mn within six months of the project’s commencement and the investor can provide the remaining amount of investment committed over 10 years.
(e) Further in the case of an investor committing 30% of the capital for low cost housing, the requirements on minimum built-up areas and on exiting the project have been relaxed further.
(f) Also, the government may in certain cases permit repatriation of the investment or transfer a stake from one non-resident investor to another before completion of the project.
The Department of Industrial Policy & Promotion (DIPP), under the Commerce and Industry Ministry, moved the proposal to attract more foreign investment in construction and real estate sector that is facing a slowdown and liquidity crunch since last 2-3 years. Although 100% foreign direct investment is allowed in townships, housing and built-up infrastructure and construction developments since 2005, the government has imposed certain conditions.
Between April 2000 and August 2014, the construction development including townships, housing and built-up infrastructure, received FDI worth USD 23.75 billion or 10% of the total FDI attracted by India during this period.
According to Nomura, the new measures are intended to lower the threshold for new investment and facilitate larger FDI inflows in the construction sector, which accounted for about 10% of total FDI inflows in India over the last decade. The measure will aid developers and boost the government’s longer-term reform on affordable housing and smart cities. Additionally, this should boost growth in the construction sector, which is critical for India's infrastructure development plans.