Fuel Price Hike

The first expert committee for the de-regulation of diesel was set up by the government over 15 years ago. It is now after a decade and half that the government has taken the steps towards the deregulation of the fuel. It is quite understood that the government is bound to control the price of the fuel, as majority of the population of the country is not privileged enough to afford fuel price hike. Given that a substantial part of India’s population is still struggling to actually stay afloat, price hike in case of the most widely used fuel in the country would have made life impossible for these people.

On the other hand, if we talk about the rising fiscal deficit and the subsidy provided by the government, every nook and corner of the country is being eaten up; and the country is being deprived of the growth, the economy is expected to achieve. These huge subsidies are threat to cripple some of the oil companies which provides diesel, petrol and cooking gas across every part of the country.

Diesel Price

If we talk of Diesel, it accounts for over 66% of the annual fuel loss which is over Rs 1.6 Lakh Crore. Companies such as IOC, HPCL and BPCL are hard pressed to invest in improving retail infrastructure, so that the amount of subsidy which is being given by these companies could be managed well with the help of revenue generated from these facilities. It is needless to say that the government decision to deregulate diesel prices would marginally increase the monthly inflation in the short-run, but talking of the long run it will help the country control its ever rising fiscal deficit which is a sign of danger for the economy. There will a spike seen in inflation to the tune of 6-7 basis points but the effect will be observed for a shorter duration and would be a short-run phenomenon. This negative effect of rising inflation will eventually translate into lower fiscal deficit so as to attain the revised target of 5.3% of the GDP. The deregulation of diesel would definitely open the opportunities towards other utility fuels like LPG and kerosene, where a reduction in subsidy could be possible.

Read more about Advantages and Disadvantages of Oil.

It is expected that the Indian economy will be successful in restructuring its fiscal deficit at 5.3% of the GDP in the current fiscal year. This will be achieved with the help of proceeds generated from the divestment and spectrum sale to the telecom companies.

Industry voice, FICCI recently said that the decision to authorize oil marketing companies to hike diesel prices by a marginal amount, varying from 50 paise per liter per month is a much needed step as this will help in reducing the annual loss due to the retailing of fuel.

Effects of Diesel Price Control

With the controlling of price of diesel going in the hands of oil companies, the diesel price hike will result in the increase in the freight rate. Use of diesel in running electricity generators will be reduced significantly, which will result in increased electricity bills for factories and residential communities.

Read more about Oil & Gas companies in India.

Regarding the hike of diesel price, the Vijay Kelkar Committee had suggested a clear roadmap of hiking prices by Re 1 a liter every month till the entire under-recovery on diesel, currently Rs 9.6, is eliminated. Where as on the other hand government has “authorized” the OMCs to decide how much and when to increase. Such a step of authorizing the OMCs to increase the price of diesel every month for small consumers and collectively for bulk consumers like Railways and State Transport will only add to the financial woes of the companies. The dual pricing system will only worsen uncertainties for consumers.

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In this article, we focus on Nokia’s large patent portfolio providing a solid floor price to the stock. The company has spent almost $40 billion in R&B over the last decade in accumulating a huge war chest of patents related to the to the telecommunication industry. The company won a large settlement from Apple last year and has won another big settlement from Research in Motion (RIMM). The settlement details are not available to the general public so we can’t quantitatively value the benefits. However, Nokia has revealed that it will get a large upfront payment with recurring payments from RIMM. In return RIMM will get to license Nokia’s patent portfolio without fear of litigation. The deal is similar to that with Apple with Nokia getting a license fee for every phone that RIMM sells.

Why Nokia is going to war over patents

Nokia was the leader in the mobile market for a long time and complacency had set it. However things have changed dramatically as Nokia was forced to sell its HQ to generate cash. In the past, the company management never really used patents to extract fees from its competitors. But the company is being forced to look at all potential revenue streams as FCF turns negative. Nokia has belatedly realized it can extract hefty fees from its competitors after its win against Apple.

Due to its long term dominance of the telecom market, Nokia has got a large number of valuable telecom patents along with Qualcomm (QCOM), Alcatel Lucent (ALU) and Ericsson (ERIC). Nokia makes almost $650 million each year by licensing its patents. The company is trying to claw back its lost market share from the likes of Apple and Samsung. Patents are going to be Nokia’s biggest weapons against its competitors. The lack of this weapon prompted Google to pay $12.5 billion for the struggling Motorola. Like Nokia, Motorola is one of the pioneers of the mobile phone market and had a large number of crucial patents to its name. Nokia has got a bigger patent portfolio than Motorola and is starting to use it to devastating effect against its rivals. We think that these patents not only provide a solid floor for the stock but can lead to additional upside. The upside could happen as Nokia receives potential settlements from telecom rivals like Samsung, LG and others.

Read more about Mobile Phone Companies in India.

Nokia’s Patent Fight with Apple

Nokia’s war with Apple was a long drawn and costly one starting on Oct 22, 2009 when Nokia sued Apple over 10 patents. Apple retaliated with a countersuit for Nokia infringing on 13 patents. The war then continued in multiple countries and cases. The war ended with a victory for Nokia as Apple agreed to pay a licensing fee for its phones. Nokia also got access to some of Apple’s path breaking touch screen and design patents. Nokia had probably started the case hoping to win access to some of Apple’s patents.  The win turned out to be better as Nokia not only won access to those patents, but also a huge sum of money from Apple.

Nokia’s Patent Fight with HTC

Nokia has lodged a number of patent infringement cases against HTC in US and German courts. HTC has become everyone’s favorite whipping boy due to its small size and lack of a sizable patent portfolio. The company has already been savaged by Apple and now Nokia is determined to extract its pound of flesh. HTC has almost no chance of avoiding a settlement with Nokia. Google has also joined the fight to protect its Android platform. Given the recent wins over Apple and RIMM, Nokia will be even more confident of winning over HTC. While this won’t provide Nokia with too much money, this will lay the foundation of a bigger settlement against the current mobile goliath – Samsung.

Nokia to target Samsung, LG Next?

The Korean giant Samsung is not an easy target like HTC, as the company has got almost 65,000 patents to its name. However, the defeat against Apple shows that Samsung is weak in its telecom and wireless patent portfolio. This gives an opening for Nokia to launch simultaneous attacks against Samsung in multiple geographies. The company lost a billion dollar patent case to Apple last year which hurt the company’s reputation more than its balance sheet. Nokia has already shown its patent prowess by winning against Apple and RIMM. We think Nokia has a great chance of winning against Samsung and LG as well. This will mean that Nokia will be getting royalties for almost every mobile device sold on the plant.

What is the worth of Nokia’s patent portfolio?

Nokia says that it has licensing arrangements with more than 40 companies for its 10,000 patent families. This provides Nokia with a diversified base of customers and derisks the patent royalty model. It is hard to come up with an accurate figure with regard to the worth of Nokia’s patent war chest. However the recent wins indicate that Nokia has every chance of increasing its patent royalties. We conservatively estimate the value of Nokia’s patent portfolio to be $12.46bb. We have used simplistic back of the envelope calculations and made the following assumptions

  • $1 billion in payments every year
  • 5% discount rate
  • Payments received over 20 years.

Summary

Nokia is strongly marketing its Lumia range of phones which seem to have excellent features at a reasonable price. While it is too early to tell how they will match up to Samsung and Nokia, we are getting increasingly positive. Nokia has got a great reputation for the longevity and durability of its mobile phones. In the last couple of years, Nokia has started to appear like a tired brand because of the sameness of its offerings. The company lacked the zing leading to an exodus of its loyal customers towards Samsung’s Android lineup. We think that Nokia’s Windows phones bring freshness to Nokia’s phone lineup and could recoup a large percentage of its market share. The company’s stock is not factoring a turnaround in its fortune. Nokia’s stock has rallied strongly from its all time low. But we think the stock might still be cheap as the management starts to really leverage its undervalued assets.

Quiz Time on GWI!!

“Safe” and “Technology” Stock do not go together. Again “Value” and “Technology” do not go together though this category is showing a growing number of companies. Cisco (CSCO) like Intel (INTC) and Microsoft (MSFT) belongs to the older technology generation compared to new kids on the block like Zynga (ZNGA), Facebook (FB) and LinkedIn (LNKD). Like older technology companies, Cisco also trades at a lower valuation multiple due to the lower expected growth rate. However unlike the other technology value plays, Cisco does not suffer from the same competition intensity. The company is also expanding rapidly into newer technology areas like mobile computing, cloud computing, video conferencing, web-based collaboration, data center servers. and network storage. Cisco’s large size implies that it will not show dramatic growth, but it will not show a big decline either (HP, Dell).

Why We Like Cisco

Offers Good Value

Cisco has traded in a range of $14 to $28 over the last five years and is currently lying in the middle of that range at ~$20. The company is trading near its 52 week high of $21 which is somewhat in line with the general stock market. Cisco trades at a forward P/E of ~10x with a solid dividend yield of 2.8%. The company has produced an average FCF of $9 billion in the last five years giving it a FCF yield of 12x. The company has a massive war chest of $29 billion in cash which implies that the ~27% of the company’s stock price or $6 is accounted by cash alone. If you leave out the cash, then the P/E is only ~7.5x.

The company has managed to keep on growing slowly and steadily without making any big waves. Cisco has shown an 8.5% growth in revenues and a 12.5% growth in earnings over the last 3 years. The book value and OCF have also grown at the same steady rate. Cisco did not give a dividend till 2010, but now has started giving a handsome yield along with its massive billion dollar buybacks. The management has committed to use 60% of its FCF for buybacks and dividends.

Intel like dominance in Networking

Cisco is like the Intel of networking, with only one competitor that is much smaller in size. Juniper Networks (JNPR) has been competing with Cisco for a long time now but has never really been a serious threat to Cisco. While Cisco has not managed to decimate Juniper like Intel vanquished AMD, Juniper isn’t going to challenge Cisco dominance anytime soon.

$10 billion of FCF per year used to gobble up any potential competition

Cisco has built its reputation as the premier global supplier of enterprise-class networking equipment and software over a long period. The company keeps buying networking startups and companies to keep up with technology innovation. The company has used ~$68 billion in the past to buy a large number of companies. M&A integration is a separate function in Cisco, given the large number of acquisitions it makes.

Getting out of the Consumer Technology Space

Some companies are just not good with consumers and are best in B2B segment. Cisco is one such company that has repeatedly failed to achieve success in consumer technology markets. It bought the maker of the Flip camcorders, but failed to leverage this buy and had to ultimately shut down it down. Same thing with the Wi-Fi router maker Linksys. The company bought one of the leaders in the segment but is now trying to sell it as well. The company has belatedly realized its weakness and is remedying it. We consider this to be a good sign.

Growth in New Segments and Customer Diversification

One of strengths of Cisco is its ability to grow in newer product areas. The company in its most recent quarters showed strong growth in the Data Center (61% growth), Wireless (38% growth) and SP video revenue (30% growth). None of its competitors have such a strong and a wide product range. The company is also not dependent too much on one type of customer such as Telecom providers or Enterprises or Government.

Read about List of Cloud Computing Companies in India.

Summary

Cisco like other mega cap technology stocks such as Corning (GLW) will never be multi baggers. That is the curse of being a mega cap as the law of large numbers catches up with you. However, Cisco like Corning has a huge competitive moat and generates billions of dollars in FCF each year. These companies have started giving a decent dividend besides buybacks, making them ideal for patient value investors.

   Quiz Time on GWI!!

India recently joined the global solar trade wars with the Ministry of Commerce starting an investigation into dumping of solar cells on a complaint made by Indian solar manufacturers association. Note Indian domestic solar producers have been almost been completely wiped out by imports of Chinese solar panels and First Solar (US solar thin film producers). The prices of imported solar panels are much lower than that of the costs of the small Indian solar cell and module makers. While one of the objectives of India’s solar policy was to promote the use of indigenous solar production, that has not happened despite a rapidly growing market. The Indian market has been taken over by imports almost completely leaving almost nothing for the domestic guys.

Indian solar developers and power supplies like Welspun Energy, Reliance Power have benefited enormously from the currently overcapacity and crash in solar panel prices globally. Solar Panel price has crashed to 65-70c/watt in 2012 from $4/watt in 2008. This has not only reduced the solar electricity price to Rs 7-8/KwH from Rs 16/KwH but also generated handsome profits for the developers. The import duties on solar products will put a major setback as the pries of solar systems will rise if domestic panels are used. To ward off this danger, Indian solar developers who are a much more influential group than the small solar manufactures are planning to:

1) Revive their lobby Solar Independent Power Producers’ Association

2) Appoint a Consultancy to show how cheap imports are benefiting India

3) Hire a Legal Firm to fight the Case in Court.

Like the duties on imports of Chinese telecom and power equipment, the Indian consumers of these products will fight tooth and nail to prevent duties on imports of solar equipment.

Read our earlier article on how First Solar benefited from a Loophole:

How USA’s First Solar hit the Jackpot in India through a Loophole in Solar Subsidy Policy.

US based thin film solar panel manufacturer First Solar has captured the lead marketshare in India’s solar panel market. This is quite surprising since First Solar’s competitive position is being eroded globally by Chinese crystalline solar panels which are cheaper and of higher efficiency. In fact First Solar has mostly stopped selling solar panels because they are no longer competitive. The reason for First Solar’s spectacular success in India is due to India’s solar subsidy policy JNNSM. The policy which was meant to support India’s domestic solar panel companies though a “domestic content” provision has ironically helped First Solar become the undisputed leader in winning most of the JNNSM projects. The reason is that JNNSM excludes thin film solar panels from the domestic content provision which means that solar developers can buy thin film technology from foreign companies. Given that the cost structure and scale of Indian solar manufacturers is clearly no match to that of the global solar companies, First Solar has benefited hugely . The company recently won a 50 MW solar panel supply contract to Kiran and Mahindra Solar companies which won the bid under JNNSM.

Despite talks about making the conditions more stringent and imposition of duties on solar panel imports, nothing has been done till now. Note USA is strongly opposed to this as it knows First Solar will lose an important market where it is still being able to compete

USA opposed India’s domestic content requirements in Solar Energy (in vain)

USA has opposed India’s Local Content Requirements for the Federal Solar Energy JNNSM program. Note according to the JNNSM rules,solar panels will have to be produced in India for the first year and solar cells will also have to produced from the second year. There is also a proposal that the local content requirements may be extended beyond 2013 and will also include solar inverters. US administration is opposed to these rules as it will lead to export hurdles for its solar companies Sunpower and First Solar. India installers and developers have also opposed the move as it will lead to lesser choice amongst suppliers and probably higher costs.

Note India solar cell/module manufacturers are heavily in favor of the domestic content rules as it will be difficult for them to compete with much larger and lower cost Chinese companies. Note China has not protested against these moves as it promoted its Domestic Wind Energy Industry in 2006 through this policy. Ontario, Canada too is following the same policy and has been take to the WTO by Japan. Note USA has not been a party to the Japanese move, as its companies have won large contracts in the region. There are both pros and cons to the domestic content policy for solar energy but one thing is for sure if free imports are allowed, Indian companies are not in a position to compete with the foreign ones on cost.

Indian Solar Panel Manufacturers closing down

Solar Companies around the world are facing hard times with bankruptcies galore. Not only hundreds of small installers, erstwhile behemohts like Q-Cells have defaulted on debt and declared bankruptcy. So its not a great surprise that Indian solar companies which were never very competitive anyway are facing equally bad times. The biggest and oldest solar panel companies like Moser Baer and Tata BP Solar are facing survival questions. These companies have seen departure of top executives and are looking for CDR resolutions. Moser Baer which had invested hundreds of millions in investments into crystalline silicon and thin film solar is having difficulty in paying back its debt. The stock price has cratered to almost nothing as well. The company which had invested into exotic solar technologies as well as the mainstream has managed to fail everywhere. The company had even invested in a polysilicon startup as well as concentrated solar power technologies. It shut down its thin film equipment plant a year ago as Applied Materials the equipment supplier itself got out of the business. The company is now mainly into the EPC business. Other companies like Indosolar are also looking like a write-off. When the biggest solar panel companies like Suntech are themselves in such trouble, it is a surprise that these companies are managing to produce anything at all.

Indian Power and Infrastructure Companies like GMR, Lanco, GVK, Reliance Infrastructure have been making continued losses in the past couple of years and have been unable to reduce their massive debt burdens. These companies had expanded rapidly during the boom into power, construction, real estate, infrastructure like roads, ports and airports. However macroeconomic and governance problems coupled with their high leverage has put them into a tight spot right now. Lack of fuel for their power plants, delays in execution of projects, increasing receivables from financially distressed government companies, geopolitical risks have all combined such that some of the top companies like Lanco is being unable to pay salaries to its staff.

GVK another top infra conglomerate from AP has seen its profitable airport in Maldives being taken over by the government there. The coal mines that these companies bought in Indonesia and Australia for millions of dollars are facing increased taxes and duties. Burdened by high debt, these companies are looking at Chinese banks to help them survive. Chinese Government supports its companies through its massive state owned banks which lend money more on strategic merits than commercial ones. Vendor financing is the biggest selling advantage Chinese companies have, while selling to cash strapped customers. The big telecom firms like ZTE, Huawei have used Chinese loans to sell equipment to India’s telecom companies. Now power equipment firms in China are using the power of the Chinese banks to sell capital equipment to loss making Indian private electricity firms.

Lanco delays giving salaries

Lanco Infratech Ltd has been forced to delay salary payments to its employees after creditors refused to extend new loans to the debt-laden infrastructure builder battling cash-flow problems, two persons aware of the development said.Gurgaon-based Lanco Infratech has 16 operating group companies with a combined salary bill of around Rs.75 crore per month. The company, which has 6,800 employees, has been delaying salaries by nearly a month to around 3,000 employees at some of its group companies, the people said.

Looks to Chinese Bank for $2 billion Loan

India’s Lanco Infratech Ltd. Monday said it has signed a pact with China Development Bank to raise $2 billion in debt to fund power projects. China Development Bank will provide $600 million from its own funds and will help raise the rest from a syndicate of Chinese banks and financial institutions, Lanco said. It added that it will use the money to finance the construction of two power projects of 660 megawatt each being set up in India’s Uttar Pradesh state.

Meanwhile Reliance Power ties up with Chinese Ming Yang to build Wind Farms

China Ming Yang Wind Power Group Limited (Ming Yang) has announced that Guangdong Mingyang Wind Power Industry Group Limited (Guangdong Mingyang), a subsidiary of Ming Yang, has entered into a financing framework agreement with Reliance Power Limited and China Development Bank Corporation (CDB). Under the Framework Agreement, being the coordinating bank and lead potential lender, CDB will act as the lead arranger to coordinate the provision of financing facilities to Reliance Power to support future renewable energy projects. The amount, terms and conditions of the financing facilities will be subject to the potential lenders’ respective internal approval procedures and further assessment of the projects. On July 2, 2012, Ming Yang announced that it has signed a Memorandum of Understanding with Reliance Power to co-develop up to 2,500MW renewable energy projects in India within three years.

Its been a while since Technology Wars were written about in greenworldinvestor . However we could not stop ourselvers into writing about the biggest Technology War currently taking place publicly between Samsung and Apple.

Tablets become Ground Zero of Technology Wars as Smartphone becomes  Samsung and Apple Duopoly

Consolidation in the technology market is creating Technology Behemoths competing in large parts of the technology spectrum. Microsoft is entering the  tablet market with Surface  to counter its prime competitor  Google which recently launched the Nexus Table. It will also go head to head  with Apple another one of its competitors in the MP3 player and PC market. Its interesting that Microsoft is launching tablets to protect its turf in other technology area. The Technology War between these Behemoths is now being fought on multiple levels and segments. The tablet market is seeing the largest number of players fighting it out for consumer mind share. The list has every major technology company – HP, RIMM, Apple, HTC, Nokia, Motorola, Sony Ericsson, Google, Microsoft, Dell, Acer.

Earlier Smartphones were the Ground Zero of the Technology Wars but now the battleground has shifted into Tablets as Apple and Samsung have decisively moved ahead of the others in Smartphones.

Apple & Samsung over Tablets

Apple vs. Samsung has been one of the most debated topics in the minds of people for now. As technology and consumer products major Samsung airs TV ads poking fun at those who eagerly waited for the launch of iPhone5 by the world’s most innovative and successful company Apple Inc., the legal shots between the companies continue. It’s been almost over a month when the California jury recommended Samsung pay over $1 billion in damages to Apple for patent infringement whereas the judge lifted the ban on Samsung’s most innovative product Galaxy Tab 10.1. The titanic tussle between the two tech giants continues and has led to one of the biggest penalties for patent violations in legal history.

The patent-related lawsuits have been turning into tsunami issues for the entire tech industry. The patents which are actually meant to safeguard and cover the look and feel of devices are increasingly being “weaponised” by their holders. Such tussle over the patent infringement issues has compelled the juries to award huge damages in intellectual-property dispute and penalize companies for that matter in order to safeguard and implement a law against violation of such issues in future. The legal battle between Samsung and Apple is also intriguing because the archenemies work closely together.

Apple & Samsung over Smartphones

Samsung happens to be one of the biggest suppliers of components such as memory chips for Apple’s gadgets but the company manufactured phones and tablets have always used the free android based operating system provided by tech giant Google which compete head-on with Apple’s iPhones and iPad tablets. Apart from tablets, smartphone arena is also not left behind by the two rivals. The tension between the firms has grown manifold with the increased penetration of smartphone in the world. Statistics show that Android based Samsung phones are capturing the market at a higher pace than the Apple products. This not only leads apple into an endangered area but also threatens about its OS being completely washed off the market. Around 40% of the people globally use Android based phones and the android user base has increased manifold as compared to Apple’s iOS.

The fight between the two companies had been brewing for some time and was supposedly a litmus test for Apple’s determination to thwart the progress of Android, an operating system marketed by search engine giant Google Inc. As a matter of fact Apple Inc. has not sued Google for the fact that the company distributes its Android operating system free of cost and doesn’t earn profit directly from sharing the OS while sharing the same with the phone manufacturers. Samsung which chose Android as its Operating system is now making huge revenues upon which the counter party Apple calculate damages as Samsung is known to be the world leader for the Android based products.

Different Court Rulings regarding Apple & Samsung Battle

Apple bombarded a list of lawsuits against its rival around the world, claiming that Samsung’s devices breach various patents held by the company. Across many cases being heard over many a places across the worlds between the two companies, a court in South Korea said both firms were guilty of patent violations against the other and banned some of their devices from sale in the country. On the contrary owing to the fact that America is known to be the world’s largest market for consumer electronics, such ruling by the Californian court would have resulted in a greater impact for the company, tech industry, US economy and the global economy at large thus leading the jury in San Jose to conclude Samsung’s violation of Apple’s several utility patents. Some of the things covered under the patents breaching by Samsung included:

  • Bounce-back scrolling (which makes on-screen icons and web pages rebound if swiped too far
  • Tap-to-zoom functionality (Makes it easy to zero in on).

Apart from the utility the court also ruled that the South Korean company has copied the look and design of iPhone which includes the rounded corners of icons, thus breaching Apple’s design patents as well. Adding fuel to the fire the jurors also tossed out the South Korean firm’s claims which stated Apple ripping off some of the company’s own innovations.

Does Samsung Win?

It is said that the mobile phone company Samsung is willing to change the design of their phones to sell in America whereas the same design shall continue for the rest of the world. Analysts also declared tech giant Samsung as the winner of the patent case as for a minimal amount which is to be paid by Samsung as penalty to Apple, it is successful in capturing the market share making itself the market mover in the industry. Thus small price paid for copying stuff has helped the company reap huge benefits for coming many years and helped become a powerhouse in mobile devices segment. On the contrary for many the result of the case could also spark a new round of innovation in the long run, as firms would definitely try to protect themselves and their offerings from the rival Apple Inc. The patents war between the two tech giants is not yet over and is expected to get fiercer in days to come.

Patrick Moorhead, the world famous Tech industry analyst, said “Samsung views Apple as a threat to their long-term survival and will do what it takes weaken them. Samsung will spend billions to do this as their company is under attack.”

Despite being the fact that public does not follow the legal dispute, Samsung has taken up the entire advertising medium to push its Galaxy S III over Apple’s new iPhone 5. One cannot just escape ads be it print media or the video ad space all over, Samsung has made it felt everywhere and its rightly said “Ultimately there’s no avoiding the war”.

Also Read on GWI:

Apple facing threats from Chinese domestic Technology Companies

Read Step by Step How Apple is killing Personal Computers and Win Intel Duopoly along with HP, Dell

Mobile Phone Companies in India