The Nuts & Bolts of the ABB Hitachi Deal

Hitachi’s ABB Deal Isn’t Just an Escape Hatch

Whenever a Japanese company acquires an overseas asset, the rationale is typically that it’s finding a way to survive the country's aging demographics and shrinking returns.

But Hitachi Ltd.'s 800 billion yen ($7.06 billion) purchase of ABB Ltd.'s power-grid business is bigger than that. The deal, while on the expensive side, is high-margin for the Japanese industrial conglomerate, and could catapult it into the big leagues of power equipment globally. 

Hitachi is nearing an agreement to buy 80.1% of Swiss engineering giant ABB Ltd.’s power-grid unit, in a deal that values the entire business at $11 billion. ABB has an option to sell its 19.9% stake three years after the current deal — Hitachi's largest-ever purchase — is completed. ABB noted that Hitachi would help provide access to new markets as well as financing.

Combined with the Japanese conglomerate’s other industrial-equipment business, ABB’s power grids will allow Hitachi to compete neck-and-neck with General Electric Co. and Siemens AG. With ABB’s power grids under its belt, Hitachi also could avoid the fate of so many other global industrial companies, which have struggled to turn their businesses around. As Japanese conglomerates increasingly talk about reforming to extract more value and shed the Japan discount, Hitachi has been ahead of the pack — selling units that no longer fit its strategy and putting more cash to work.

Buying ABB brings Hitachi closer to its consolidated operating margin target of more than 10% by 2022, compared with 8% for the group and 6.5% for the power business currently. Other targets loom, too: The Japanese company is looking to almost double the sales in its power segment to more than 800 billion yen by March 2022 from around 450 billion yen.

Hitachi has almost 800 businesses spanning everything from construction machinery to nuclear power plants and healthcare. It’s now cutting its subsidiaries by 40% to 500 companies, as the Nikkei reported earlier this year, and aims to focus on four core areas, of which power and energy is one.

ABB Management Commentary - “Power Grids will strengthen Hitachi as global leader in energy infrastructure and Hitachi will strengthen Power Grids’ position as a global leader in power grids. With this transaction, we are realizing the value we have built through the transformation of Power Grids over the last four years. Our shareholders will directly benefit through the return of the proceeds of the divestment. Building on our existing partnership announced in 2014, the initial joint venture will provide continuity for customers and our global team’’

ABB investors have long been underwhelmed by the power-grid business, which is low-margin compared with the Zurich-based firm’s robotics and factory automation operations.

Announcing the deal, ABB spelt out a road map that would chart a new course in industrial automation, electrification, robotics and automation. Analysts said that in mature markets, the power transmission and distribution (T&D) business has limited incremental growth opportunities both in terms of orders and profits. From a technology-driven solutions business earlier, it is now a converter of raw material into finished goods, where there’s hardly any upside in margins.

ABB Management Commentary – ‘’Our four newly shaped businesses, each a global leader, will be well aligned to the way our customers operate and focus stronger on emerging technologies such as artificial intelligence. The continued simplification of our business model and structure will be a catalyst for growth and efficiency in our businesses. Our businesses will be further supported through the transfer of experienced resources from today’s country organizations’’

ABB: Shaping a leader focused in digital industries

Fundamental actions to focus, simplify and lead in digital industries for enhanced customer value and shareholder returns

Focus of portfolio on digital industries through divestment of Power Grids

• Divestment of Power Grids to Hitachi expands existing partnership and strengthens Power Grids as a global infrastructure leader with enhanced access to markets and financing.

• Enterprise Value of $11 billion for 100% of Power Grids, equivalent to an EV/op. EBITA multiple of 11.2x1.

• Crystallizing value from the transformation of Power Grids including doubling operational EBITA margin since 2014.

• ABB initially to retain 19.9% in the equity of carved-out Power Grids to ensure transition; pre-defined exit option on 19.9 percent equity at fair market value with floor price at 90% of agreed Enterprise Value, exercisable by ABB three years after closing.

•  Closing expected by first half of 20203.

•  ABB intends to return 100% of the estimated net cash proceeds of $7.6-7.8 billion from the 80.1% sale to shareholders in an expeditious and efficient manner through share buyback or similar mechanism.

Simplification of business model and structure

·         Discontinuation of legacy matrix structure

·         Businesses will run all customer-facing activities as well as business functions and territories, fostering ABB’s entrepreneurial business culture

·         Businesses to be strengthened by transfer of experienced country management resources

·         Existing country and regional structures including regional Executive Committee roles to be discontinued after closing of the transaction

·         Corporate activities to be focused on Group strategy, portfolio and performance management, capital allocation, core technologies and ABB Ability™ platform

Shape four leading businesses aligned with customer patterns

 • All businesses global #1 or #2 in attractive growth markets:

* Electrification 

* Industrial Automation

* Robotics & Discrete Automation

 
* Motion

•          ABB Ability™ tailored digital solutions will drive customer value in each business whilst capturing synergies through common platform.
•      Actions position ABB with a leadership role in digital solutions, and evolving technologies such as artificial intelligence.

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ICRA pegs India’s Q2 GDP Growth to ease to 7.2%

After registering a robust growth in the first quarter of this financial year, the pace of India’s economic growth is expected to have substantially slowed in the July-September quarter amid higher fuel prices and a weaker rupee.

According to a report by rating agency ICRA, the GDP growth of Indian economy is pegged at 7.2 per cent for the second quarter, dragged down by lacklustre agriculture and industry. The GDP had grown by a higher than expected 8.2 per cent in the first quarter of the fiscal as compared to the year-ago period. 

The report cited higher fuel prices and weakness in rupee as primary factors dragging the industrial growth. Further, the country has been affected by heavy rains in some states leading to massive flooding while the other states are dealing with significantly deficient and drought like situations resulting in to muted agricultural growth.

As per the report, overall, manufacturing GVA (gross value added) growth is expected to ease to 7 per cent in Q2 FY 2019 from the healthy 13.5 per cent expansion in Q1FY2019. The agency said higher commodity prices may support a shallow recovery in GVA growth in mining and quarrying from the marginal 0.1 per cent in Q1 FY 2019 to around 2.5 per cent in Q2 FY 2019, despite a slowdown in volume growth.  

However, services sector growth is expected to rebound to 7.8 per cent in the second quarter from 7.3 per cent in Q1 FY 2019, buoyed by a sharp pickup in the expansion in the Government of India’s non-interest revenue expenditure, a mild rise in growth of bank deposits, air and ports cargo traffic, as well as a moderation in the pace of FII outflows.

Going ahead, the Indian economy is expected to slow down in the second half of the fiscal, partly because of the base effect of higher growth last year. Tighter financial markets, a credit squeeze and the lagged impact of weak currency and high oil prices will continue to weigh on growth.

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Companies report strong prospects from Railways Business: Extracts from commentary about Railways Business.

KEC International

Considering strong order book the railway business of the company is expected to close current fiscal with a revenues of about Rs 1500-1600 crore having clocked a revenues of about Rs 734 crore in H1FY19. The company has linked up with various vendors in railway business. With ramp up in railway business the vendor financing have also gone up. But backward integration by the company in Railways has resulted in improved profitability as well as reduction in payable days. Focus on streamlining railway supply chain, vendor base and credit terms.

Cummins Ltd

Within industrial construction sales stood at Rs 100 crore, rail Rs 100 and others form remaining sales. Railways have grown significantly and strong traction exists. Government efforts on infra sector is also helping the overall growth

Kalpataru Power Transmission Ltd

For the Sep 18 quarter, T&D revenues stood around Rs 1100 crore, Oil and gas and Railway together around Rs 450 crore. Margins in railways around 9-10%. Strong orders coming from Pipeline and Railways for next 2-3 years. Strong order inflows from Railways and International T&D in Sep 18 quarter.

SKF Ltd

Within industrials, railways account for around 7% of total sales. Strong traction seen from passenger wagon side, while the demand from freight side bearings will pick up from now.

Escorts

New products launched in Railways. Order book is more than Rs 400 crore will be executed.25% growth in Railways for FY 19 with margins of 18-20%.

lrcon International - Expect revenue of about Rs 4600 crore in FY19

Stand-alone executable order book of the company as end of Sep 30, 2018 was more than Rs 27000 crore up from about Rs 22400 crore as end of March 31, 2018. The executable order book consists of only projects where work has already commenced and if the order waiting for clearance and approvals are included the order book will be approximately over Rs 35000 crore. Since infrastructure projects in sectors like railways take 1-1.5 years to complete investigation/surveys and clearances etc, the company includes only the orders for which work commenced in the order book.

Rites India Ltd

Performance of first half is not representative of full year as typically 60% of the revenue of the company will accrue in second half. For FY19 the company is confident of maintaining/improving the FY18 EBITDA margin levels. The EBITDA margin for FY18 was 9.86% and for H2FY18 was 14.51%.

Consultancy business has contributed about 67% of the operating turnover and income from the consultancy has increased by 83% to Rs 292 crore in Q2 FY19 against the corresponding last quarter revenue of Rs 160 crore. Company's standalone Order Book stands at Rs 6183 crore as of 30.09.2018 which is expected to be executed in the next 1 to 3 years. This order book also includes export order book of Rs 1284 crore as on 30.09.2018. The present export order book is likely to be executed in 2 to 2.5 years time. As per delivery schedule Company will start exporting in the second half of FY19.

India Tops Asia’s Most Investment-Driven Economy

Over the years, India has emerged as one of the fastest growing economies in the world and an attractive investment destination driven by economic reforms and a large consumption base. Factors including government’s policies on the liberalization of most sectors for foreign investment, growing opportunities across sectors, skilled human resource, cost-effective production facilities and strong domestic demand have played a major role.

According to a new Standard Chartered study, India has emerged as Asia’s most investment savvy economy and over two-thirds of the country’s affluent class prefer to use various investment products to achieve their financial goals and greater social mobility.

While the number of people climbing the social ladder in the west, when it comes to invest, save and spend, is slowing down, there is an increase in new group of people in Asia, Middle East and Africa who are accumulating wealth and improving their personal well being rapidly and this group of people have been named in the study as ’emerging affluent’. The study examined the views of emerging affluent consumers from 11 markets across Asia, Africa and the Middle East.

As per the report of 11,000 emerging affluent consumers across Asia, Africa and the Middle East, 68 per cent of Indian people belonging to this segment are using investment products to achieve their financial goals, as compared to an average figure of 57 per cent.

About 63 per cent of these people in India prefer investing in financial products as part of their long-term financial plan to meet financial goals and boost their personal wealth. On the other hand, another popular strategy adopted by these people was career progression and increment in salary (44 per cent), followed by starting a new business (25 per cent) to increase their wealth.

Saving for their children’s education, which is also the top savings priority across the markets, was the number one financial goal for India’s emerging affluents, the study showed.

Investment products, according to the company for this particular study, refers to fixed income investments, equities, stocks, unit trusts, mutual funds, self-invested pension funds, investment-linked insurance, real estate property funds and real estate investment trusts (REITs).

As per the study, new technology has made it easy to manage money effectively anywhere in the world. Online banking tools are playing a key role in effective money management today as the stock investments, transfers, payments and financial advice is just a touch of a button away today.

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India 58th Most Competitive Economy in WEF Index

In the midst of rapid technological change, political polarization and a fragile economic recovery around the world, the latest global competitiveness report signals a positive upswing for Indian economy.

According to the World Economic Forum’s (WEF) Global Competitiveness Index 2018, India has been positioned as the 58th most competitive economy globally with a marked jump of 5 places in just a year since 2017, marking the best jump among all the G20 nations.

The report said that India’s greatest competitive advantages include its market size, innovation, and business dynamism. However, India needs to improve in areas such as its labour market (particularly concerning workers’ rights), product market, and skills.

The index covers 140 nations and it measures national competitiveness. The United States ranked number one again with a score of 85.6 out of 100, with its strengths including business dynamism, labour market, and the financial system.

Singapore, in the second spot closely followed the US, maintained its competitiveness due to policies that promoted openness, which is a key driver for its economic success. Germany, in third place, scored highly on its macroeconomic stability but was held back due to slow adoption of IT.

Other countries in the top 10 include Switzerland (4th), Japan (5th), Netherlands (6th), Hong Kong (7th), United Kingdom (8th), Sweden (9th), and Denmark (10th).

According to the report, the top performers in the upper and lower middle-income brackets, such as China and India, are catching up with or even outperforming the average among high-income economies.

Among the BRICS economies, China topped the list at 28th place with a score of 72.6, ahead of the Russian Federation (65.6, 43rd), India (62.0, 58th), South Africa (60.8, 67th), and Brazil (59.5, 72nd).

India, however, remained the "South Asia's main driving force".

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ADB trims Asia’s growth forecast, retains India’s at 7.6% for 2019

Indian economy continues on a robust growth path as it recovers from temporary shocks resulting from the demonetization of large bank notes and the introduction of a national Goods and Services Tax in 2017. Improved domestic demand, steady revival in industrial growth and reduced drag from net exports are expected to help Indian economy maintain its growth numbers.

According to an update of flagship annual economic publication by the Asian Development Outlook (ADO), India is expected to grow at a healthy 7.3 per cent in the current fiscal and 7.6 per cent in FY 2019.

ADB expects growth to maintain its strength and pick up next year as the economy continues to adjust to the reforms and investor sentiment improves. India's economy grew by a strong 8.2 per cent in the first quarter of FY 2018.

Further, in its Asian Development Outlook report, the ADB maintained developing Asia's growth forecast at 6 per cent this year, but trimmed the projection for 2019 to 5.8 per cent from 5.9 per cent in July amid the growing trade dispute between the world's two largest economies and tighter global liquidity.

The United States and China has imposed fresh tariffs on each other's goods as the world's biggest economies showed no signs of backing down from an increasingly bitter trade dispute that is expected to hit global economic growth.

Meanwhile, China's growth projection for this year has been kept at 6.6 per cent, but next year's outlook has been slashed by 0.1 percentage point to 6.3 per cent amid sluggish demand growth and the grumpy relationship with the U.S. Beijing has set a growth target of around 6.5 per cent this year, the same as last year, which it handily beat with an expansion of 6.9 per cent.

South Asia is poised to remain as the fastest growing in the region as the ADB maintained its growth estimates of 7 per cent for this year and 7.2 per cent for next year.

However, moderating export growth, hastening inflation, net capital outflows and a deterioration balance of payments clouded the growth outlook for Southeast Asia, with growth this year projected to slow to 5.1 per cent from the July forecast of 5.2 per cent.

In addition to the trade war, signs of the U.S. economy overheating could prompt the Federal Reserve to raise interest rates at a faster-than-expected pace, which would pose a risk for countries in the region already contending with currency weakness and the threat of capital flight. Countries with elevated private debt like Malaysia, China, South Korea and Thailand could experience destabilizing effects on their financial sectors.

Latin Manharlal Group

India’s economic growth quickens to 8.2% in April-June

Despite the falling rupee and the growing concerns around a possible global trade war, India’s economic growth shows signs of a sustainable, V-shaped recovery, spurred by an upswing in manufacturing activity and recovery of private investment, buoyed by strong consumer demand.

According to the Central Statistics Office (CSO), India’s Gross domestic product (GDP) growth rose to a nine-quarter high of 8.2 per cent in the first quarter of 2018-19, compared with 5.6 per cent in the same quarter last year. In the fourth quarter of 2017-18, GDP growth was at 7.7 per cent.

This surge in economic growth ahead of national elections in 2019 would help augment the government amid a debate over its economic record versus that of its predecessor following the release of back-series data recently. The robust surge in GDP data will also be factored in by the Reserve Bank of India’s monetary policy committee at its next review scheduled for October 3-5. 

Further, India continues to remain the fastest-growing large economy in the world, with China's growth coming down to 6.7 per cent in April-June 2018 from 6.8 per cent in January-March of the year.

According to the government data released, manufacturing grew at a nine-quarter high of 13.5 per cent largely owing to a low base effect, while the services sector expanded at a slower pace. The services sector grew at a pace of 7.3 per cent in Q1FY19, down from 7.7 per cent in Q4FY18.

However, economists remained sceptical of sustaining the growth momentum in the coming quarters. There are some risks for the economy looming, which includes higher oil prices, tightening global financial conditions and a shortfall in taxes that could put budget targets out of reach. Further, the rupee’s slump to a record below 71 per dollar could deter foreign investors, fan imported inflation and prompt intervention from the central bank, all of which carry implications for growth.

However, the government expects that even its projections of up to 7.5 per cent of GDP growth in FY19 may be crossed. Reforms and fiscal prudence are serving the economy well and this growth in an environment of global turmoil represents the potential of New India.

In the interim, the International Monetary Fund pegs that Asia’s third-biggest economy will grow 7.3 per cent in the fiscal year through March 2019 and 7.5 per cent in the next. The Reserve Bank of India, which has increased interest rates twice since June to curb inflation, expects the economy to expand 7.4 per cent in fiscal 2019.

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India sees 23% surge in FDI Inflows

India is attracting record level of foreign investments supported by the market size, investment reforms, and economic growth rates. The Indian economy stands as the right mix of openness and opportunity for the foreign investors.

According to India’s Department of Industrial Policy and Promotion releases, India witnessed a 23 per cent growth in foreign direct investment (FDI) at $12.75 billion during the April-June quarter of 2018-19. The foreign fund inflows in April-June 2017-18 stood at $10.4 billion.

FDI in India is expected to grow notably following the implementation of initiatives, such as Goods and Services Tax (GST) related reforms, enactment and implementation of the Insolvency and Bankruptcy Code (IBC), demonetisation, and other ease of doing business reforms rolled out recently by the central government. These reforms have boosted India’s image as a preferred destination for foreign investment, with many sectors being fully available to foreign investors for making investments without any restrictions.

The sectors which witnessed the maximum inflow of FDI included services, trading, telecommunications, computer software and hardware and power, that comprise around 33 per cent of all inflows.

Among the countries, Singapore emerged as the largest source of foreign investment during April-June 2018-19 with $6.52 billion. Mauritius, Japan, the Netherlands, United Kingdom and United States made up the other sources of investment.

A growth in FDI inflows augurs well for the Indian economy especially in light of the widening Current Account Deficit (CAD) caused due to a surge in crude oil prices. According to a report by SBI Research, the CAD could touch 2.8 per cent of the Gross Domestic Product (GDP) for the fiscal year 2018-19.

An uptick in FDI inflows helps the country bridge the growing CAD deficit and the growth seen in the last quarter is especially heartening considering the 3 per cent growth in inflows witnessed last fiscal year. A decreased inflow of foreign investment has negative implications for Balance of Payments (BOP) and the value of rupee, therefore, the figures for the last quarter should bring cheer to the economic policymakers.

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On India’s 71st Independence Day, Let Us Salute the Real Heroes of India

INDIA’S UNIQUE ACHIEVEMENTS IN AGRICULTURE

Needar Jawan, Surakshit Bharat

Saksham Kisan, Samriddh Bharat 

§  Agriculture plays a vital role in India’s economy.

§  54.6% of the population is engaged in agriculture and allied activities (census 2011) and it contributes 17.4% to the country’s Gross Value Added for the year 2016-17 (at current prices).

§  Steps have been taken to improve soil fertility on a sustainable basis through the soil health card scheme, to provide improved access to irrigation and enhanced water efficiency through Pradhan Mantri Krishi Sinchai Yojana (PMKSY), to support organic farming through Paramparagat Krishi Vikas Yojana (PKVY) and to support for creation of a unified national agriculture market to boost the income of farmers.

Milestones in Indian Agriculture

§  Green Revolution (1968)

A large increase in crop production in developing countries achieved by the use of artificial fertilizers, pesticides, and high-yield crop varieties.

§  Ever- Green Revolution (1996)

Swaminathan is an advocate of moving India to sustainable development, especially using environmentally sustainable agriculture, sustainable food security and the preservation of biodiversity, which he calls an "evergreen revolution."

§  Blue Revolution (Water, Fish)

Blue Revolution, the Neel Kranti Mission has the vision to achieve economic prosperity of the country and the fishers and fish farmers as well as contribute towards food and nutritional security through full potential utilization of water resources for fisheries development in a sustainable manner, keeping in view the bio-security and environmental concerns.

§   White Revolution (Milk)

White Revolution was one of the biggest dairy development movements, by the Indian Government, in India in 1970. It was a step taken by the Indian Government to develop and help the dairy industry sustain itself economically by developing a co-operative, while providing employment to the poor farmers.

§  Yellow Revolution (Flower, Edible)

Yellow revolution defines increase in the oil production. The growth, development and adoption of new varieties of oilseeds and complementary technologies nearly doubled oilseeds production from 12.6 mt in 1987-88 to 24.4 mt in 1996-97, catalyzed by the Technology Mission on Oilseeds, brought about the Yellow Revolution

§  Bio Technology Revolution

Biotechnology is the application of scientific and engineering principles to the processing of materials by biological agents to provide goods and services. From its inception, biotechnology has maintained a close relationship with society.

§  ICT Revolution

ICT is short for information and communications technology. It refers to a broad field encompassing computers, communications equipment and the services associated with them. It includes the telephone, cellular networks, satellite communication, broadcasting media and other forms of communication.

§ Indian Army

India has the second largest army in the world with about 1.2 million soldiers. It has the complete spectrum of weaponry required to fight any type of war from nuclear to low intensity/sub-conventional. For reasons that will be discussed later (when India’s military industrial complex is examined), most of the equipment, especially combat equipment, is imported and is largely of Soviet origin due to historic political conditions. Only in the last decade or so has the Indian Army diversified its import sourcing. 

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