Saturday, June 09, 2007

India's Sterlite offers ADS

Sterlite Industries India Limited, a leading producer of copper in India is planning to raise about $2 billion by selling American Depository Shares (ADS) to fund expansions. The ADS will trade in NYSE under the symbol SLT. Sterlite is a subsidiary of Vedanta Resources Plc, a group with interests in metals and mining with annual sales of $1.9 billion. The main metals involved in Vedanta's operations are aluminium, copper, zinc and lead in India, Australia and Zambia.

Vedanta currently holds 79.25% of Sterlite. According to the Economic Times of India, the offering will be for 125 million shares with an option to offer 18.75 million shares based on demand. The price would be determined by the share price of Sterlite's Bombay Stock Exchange, India listed share price. It would not be more than five per cent or less than 10 per cent of its India price. The sale represents about 18.3% of Sterlite. Currently, Vedanta holds about 78% of Sterlite and after the sale will own 62.8%. According to the SEC filings, the sale will be managed by Citigroup, Morgan Stanley, Merrill Lynch and Nomura Holdings.

Sterlite is a leading producer of non-ferrous metals in India. Sterlite has a strong presence in the Indian copper market and is also present in the aluminium and zinc sectors. Sterlite's involved in manufacturing and marketing cast copper rods, copper cathodes, aluminium cold rolled products and conductors. Sterlite has more than 40% share of the India's copper market. It is one of the two leading domestic copper producers in India. Sterlite's copper operations include a smelter, refinery, phosphoric acid plant and copper rod plant at Tuticorin in Tamil Nadu, India; a refinery and copper rod plant at Silvassa in Dadar & Nagar Haveli, India and a copper mine in Australia. Last month, Sterlite beat rivals including Arcelor Mittal (MT) and India's Aditya Birla Group to buy 71 percent stake in India's biggest iron ore exporter Sesa Goa for $1.7 billion.

(This article was published as "Sterlite Industries India Offering American Depository Shares" on SeekingAlpha on June 11, 2007 and as "Sterlite Industries (India) to offer ADS" on GuruFocus on June 10, 2007.)

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Saturday, September 30, 2006

Starbucks to Brew in India

Starbucks Corp. (SBUX) plans to debut its stores in India by mid-2007 through a joint venture with an Indian partner, RPG Enterprises. Though the negotiations are still going on, unconfirmed reports say that Starbucks will have a 51% stake in the joint venture while RPG will have the remaining 49% stake. RPG will also be the new venture's master franchisee. RPG is one of India's largest conglomerates with significant interests in power, retail, entertainment and technology among others. RPG has beaten other large Indian groups like Reliance Industries and Bharti Enterprises to convince Starbucks. With retail operations in major cities in India, RPG will be able to provide Starbucks with local cultural, economic, operating and franchising expertise, and may also lend its retail network.

New Delhi and Mumbai, the national and financial capitals will see the first stores by mid-2007. Starbucks will also be looking to add 100 stores every year for the next five years. Even though this strategy looks aggressive, it makes sense. Though India is traditionally a tea drinking nation there is a lot of coffee consumption and other malt-based drinks. Coffee culture in India has been getting bigger in India. Reports indicate that customers at existing retail coffee shops are students and professionals between 18 and 35 years old. Big coffee retail players in India like Barista (with Tata and an Italian partner), Costa Coffee (based in UK), Cafe Coffee Day (funded by Sequoia) and Barnie's (based in US) have aggressive expansion plans and are adding new drinks apart from Coffee. These players are also using a variety of different approaches to attract new mass and premium clientele. So Starbucks faces very fierce competitors in India.

This is where RPG's assets and expertise will be helpful to Starbuck's India strategy. With RPG's strength in entertainment and other upscale retail space, it can hope to direct some consumers to the new Stabucks' stores. They will also have to customize its drinks for the Indian market. Pricing will also be a factor to consider as Starbucks cannot translate its US prices in India. Starbucks experience with its Chinese operations will offer some ideas in this regard. With a burgeoning middle-class in India, Starbucks needs to attract only a small percentage of them along with students and professionals with high disposable incomes to easily entrench itself in the Indian market.

Though Starbucks does not have a first mover advantage, it is entering an already tried, tested and proven market along with a local player with strong retail expertise giving Starbucks an advantage along with its strong brand. This move will provide strong long-term growth opportunities for Starbucks.

(This article was published as "Starbucks' India Strategy Looks Promising" on SeekingAlpha on October 2, 2006.)

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Friday, September 29, 2006

Same Price. But will Zune's Features win against iPod's Experience?

American Technology Research Analyst, Shaw Wu has commented that Zune, the new media player from Microsoft (MSFT) will hurt Microsoft and it's partners more than it will hurt Apple (AAPL) or it's iPod. Though the price tag for Zune, $249.99 is similar to a comparable iPod's price, Wu thinks that it will be difficult to convert iPod users to Zune. Wu also estimates that Microsoft will lose $50 for every Zune it sells. Wu's sources indicate that Microsoft did not expect Apple to lower prices of its iPods. This move had surprised Microsoft and had forced it to reduce pricing to match Apple's. Wu also commented on the superior supply chain and operating efficiency of Apple which is highly invisible. This probably has given Apple the edge over the new Zune threat by allowing Apple to lower the iPod prices. In this price range, Apple still makes profits while Microsoft loses money.

While many people cite Microsoft's success with Xbox, it is a completely different game than media players. Media players have small form factors and a lot of content to navigate. I repeat NAVIGATE. This is the key to iPod's success. The click wheel makes combing through a vast library of media easy. Whereas in Zune, one has to scroll through the library individually, making it difficult to move around. Zune's user interface, based on Windows will not provide a good experience. In the initial comparisons, Zune seems to have a lesser battery life than iPod, which is again a let down. The wireless or WiFi feature that allows networking and sharing is a novel concept. But you should enough Zune users around you to share with. Connecting to a wireless network and allowing other people to communicate with your device is a cumbersome process, a drain on the battery and not to mention issues associated with hacking or viruses. While you are waiting at a traffic signal or traveling in a train, you dont want anyone to hack into your player and erase all your music. Security is a key feature that not many people are talking about and we probably will wait for more information to be revealed. Zune has a bigger screen than the iPod. Well is this really an advantage or a disadvantage? If you want to watch videos it is good but if you just want to listen to music, then you probably will not need this big a screen. So the overall user experience of Zune may not stand up to iPod's user experience. There is also the question of how Zune's Marketplace with stack up with the iTunes Store. There is one area where Microsoft has the edge, gaming. If Microsoft is capable of somehow incorporating games into Zune and allowing a network of users to play games, it has a chance to get into a territory that Apple is weak in. This is understandable with Zune's screen size and wireless capability. But the current design of Zune is not game-friendly.

There are many products which have been successful in the past because of their user experience even though they had lesser features than their competitors. Zune with more features is simply not enough to challenge the iPod. It needs to be seen how long Microsoft can lose money, churn out new 'Zunes' and market its features and brand to gain an edge over Apple.

Wu also estimates that, Apple has 18-22% gross margin and 8-11% operating margin. So Microsoft will not only have to overcome Apple's prolific innovations and designs but has to atleast match Apple's operating efficiency to kill the iPod.

On a sidenote, another effect of Microsoft's foray into the media player business is antagonizing some of its partners. Since Microsoft has the upper hand on its partners now, it is not an issue. But Microsoft may feel the heat later on when it may need their help.

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Wednesday, September 20, 2006

Disney sells 125,000 movies through iTunes

Yesterday, Walt Disney Co. (DIS) CEO Robert Iger told a Goldman Sachs (GS) investor conference, Communacopia that the company has sold 125,000 movies through Apple (AAPL) iTunes store, generating a revenue of $1 million. Considering that with just 75 movies and in a single week, this is a smashing result. Iger also expects iTunes movie downloads to generate revenues of $50 million in the first year. This is a significant number and is worth noting as other Hollywood studios may find this kind of revenue hard to resist. Iger also expects to increase the number of digital content offerings as licensing issues are sorted out.

Amazon (AMZN) has not revealed how its service, Unbox has fared. Compared with Unbox, Movielink and other services, Apple may have the best digital distribution network of all. So we can expect relations between movie studios and Apple to warm up and start discussions. It is not clear how revenue is shared between Apple and Disney now. But from past behavior, Apple may not lose too much money on bandwidth costs, which is a major cost in digital distribution.

All this is happening without Apples's iTV or any clear solution to transfer content from a computer to TV. If iTV provides a simple and effective solution to this problem and convince consumers to use it, then Apple will get more leverage over other movie studios.

Iger made another comment about overhauling and relaunching it. Although he did not elaborate on this idea, Disney may be creating various channels of entertainment, in the style of YouTube in a move to use to deliver digital content or redirect visitors to iTunes.

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Tuesday, September 19, 2006

Internet Bellweathers Tank

Google (GOOG) is down $17.49 or 4.22% to $397.20, Yahoo (YHOO) is down $3.60 or 12.41% to $25.40, Amazon (AMZN) is down $0.87 or 2.71% to $31.21, eBay (EBAY) is down $1.18 or 4.4% to $25.66, CNET (CNET) is down $0.74 or 7.66% to $8.92 and IAC Interactive (IACI) is down $0.53 or 1.86% to $27.89.
Yahoo's CFO, Susan Decker has warned of lower sales for Q3, because of weakness in the Auto and Financial sector ads. IACI Chairman, Barry Diller had mentioned that IACI is seeing weakness in Financial sector. This may not be isolated to these two companies but a reflection of the entire sector. Although both the executives did not quantify how bad the slowdown is, expectations are worse and there is a big sell-off. This is probably a knee-jerk reaction and I expect the stocks to move up cautiously this week.

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