Indian Firms on the Scramble for Africa

Mumbai/Johannesburg - Indian consumer goods makers are scrambling to buy assets in Africa, applying their knowledge of challenging, lower-income markets to a continent where spending power is on the rise.

Tapping Africa opens up new growth avenues for cash rich Indian makers of personal care products such as soaps, shampoos and hair and skin care products, with rising costs and fierce competition squeezing profits at home.

"We are a homegrown multinational from a developing economy," said Jimmy Anklesaria, executive vice-president for international operations at Godrej Consumer. "Our ability to understand consumers in developing economies is sharp."

Godrej bought Nigerian personal care products maker Tura last year for about $33m, according to analysts. It has also bought haircare brands Rapidol and Kinky in South Africa over the past two years, and is on the hunt for more acquisitions.

Companies and countries looking to buy up its natural resources has long dominated foreign investment in Africa.

Two blockbuster deals last year - India's Bharti Airtel paid $9bn for the African cellular assets of Kuwait's Zain and Walmart's deal to buy South African retail chain Massmart Holdings [JSE:MSM] for $4bn - show the allure of the continent's rising spending power.

That potential market has intrigued Indian makers of consumer goods such as Godrej, Dabur India, Marico and Emami, which have been among those buying up assets.

"There will be many more acquisitions made by Indian companies in the consumer space in the coming months," said a senior banker with Indian investment bank, which recently advised an Indian firm on a M&A deal in Africa.

"We can expect some mid-sized acquisitions in early 2011."

Rising spending power

African consumer spending will nearly double to $1.4 trillion by 2020, while the number of households in Africa with discretionary income will rise by 50% to 128 million over the same period, a recent McKinsey report predicted.

Indian companies hope to use their experience developing and selling products in markets where affordability is crucial to compete with global players such as Anglo-Dutch giant Unilever, which recently struck a deal to buy Sara Lee Corp's operation in Kenya.

"Africa is currently witnessing growth rates that India witnessed about 10 to 15 years back," said Anand Raghuraman, partner and director at the Boston Consulting Group.

A sizeable population of Africans of Indian origin in eastern to southern Africa give Indian companies an advantage over global competitors, including China.

Whereas global players sometimes sell one-size-fits-all products, Indian manufacturers often adjust their offerings to suit local tastes and spending habits.

"The product portfolios of Indian companies are tweaked to suit local needs," said Debashish Mukherjee, principal with consultancy AT Kearney.

India was the most acquisitive company in sub-Saharan Africa in 2010, accounting for a third of the total value of deals done in the region, according to Thomson Reuters data. That was due mainly to Bharti Airtel's purchase of Zain's African assets.

Risks and growth

Risks to Indian firms making acquisitions in Africa include overpaying in the competition for scarce attractive targets. Both the Bharti and Walmart deals were widely seen to be expensive.

Africa also remains price sensitive, so a spike in commodity prices would squeeze margins.

"In low-income countries, consumers spend a high proportion of their income on food and if prices shoot up as they did in 2007/08, they will immediately stop buying anything that's not essential," said Boris Planer, research director at Planet Retail.

Still, Indian consumer goods firms active in Africa expect growth of between 25% to 30% from their operations there, and expect opportunities to move beyond personal care to household care and over-the-counter healthcare products in coming years.

"Among all the Indian companies who are moving into Africa, Godrej and Dabur are best positioned to benefit maximum from the Africa story," given the early-mover advantage, said Shirish Pardeshi, a senior sector analyst with brokerage Anand Rathi.

There is plenty of Indian competition for African assets.

Emami, which won board approval in October to invest $1bn to buy assets overseas and in India, is looking for more deals in markets including South Africa, Kenya and Nigeria, Group Director Harsh Agarwal told Reuters.

Marico, with cash of $480m, said it is looking to buy assets in North Africa and South Africa, while Godrej, with cash of $537m as of end September, continues to hunt for buys across Africa.

Dabur, one of the most active Indian players in Africa, is sitting on cash reserves of $873m and recently brought out US-based personal care products maker Namaste Labs and its two African units for $100m.

It is looking for assets in the $10m to $50m range in South Africa, Nigeria, Kenya, Ghana, Mozambique and Tanzania, said its CEO Sunil Duggal.

"Africa is a good hedge for what is happening in the Indian markets, and now asset valuations there are attractive compared to India," he said.

Reuters

Hello Africa, India is Calling

Millions of mobile phone subscribers in Africa saw the icon on their phone screens change from Kuwaiti company Zain to Indian company Bharti Airtel last year.

The change means little to the average customer, but for the continent, it's another sign that India is moving in.

The expansion by Bharti Airtel into 16 African countries underscores the rise of India in Africa, at a time when much of the focus on foreign investment here has been on China.

...

India and China are vying for Africa because of the bottom line: Africa represents new growth.

"This is the last growth continent in the world. Europe is a done industry. The US is a done industry. Southeast Asia is old," said Sunil Mittal, founder and chairperson of Bharti Airtel. "Our model is not suitable for a matured market. We need growth and Africa is the right place to grow."

Continue to full story...

Analysis: Engagement is vital for emerging markets to bear fruit

An excerpt of a great piece by Sanjeev Gupta of Sanlam Investment Management:

Evidence abounds of the growing influence of the new world. India obtained a nuclear treaty with the US that would have been laughed off by the US Congress a few years back. China and its currency is keeping the US Federal Reserve awake all night and threatening a new kind of war. Even Blackberry has had to suspend its “research in motion” and work with emerging market regulators who have demanded access to its guarded encrypted data – its selling point.

Yes, emerging markets are no longer a hobby horse and have instead reared themselves as a fountainhead of potent themes that are coming through thick and fast. In these times of extreme change only the nimble will survive, thus the need to unlearn and learn will be paramount to avoid the dangers of continued naivety.

To achieve a balance between development and sustenance, big business will soon have to work with a greater sense of responsibility and engage at a diverse level. The consumer-centric post-World War II legacy cannot meet the demands of the 3 billion people joining the fray. If this is ignored, the abuse and wastage of consumer extravagance will permanently damage the delicate ecosystems, straining limited global resources.

...

A myth is that all reforms are good and all economic liberalisation healthy. In fledgling economies, state intervention and control over key deliverables is key if development is to be all-inclusive and sustainable.

Continue to full article...

Corruption: South Africa not as bad as Brazil, Russia, China, India

With scores of 9.3 out of 10, Denmark, New Zealand and Singapore are the world's least corrupt countries, according to a new index from Transparency International, an anti-corruption watchdog. At the other end of the table, Somalia ranks bottom with a score of 1.1, ahead of Afghanistan and Myanmar. Worryingly, Brazil, Russia, India and China—the BRICs currently considered the global engine for economic growth—all score less than 4.

South Africa, with a score of 4.7, ranks in the top third globally, higher than Brazil (3.7), China (3.5), India (3.3) and Russia (3.1).

Source: The Economist, Transparency International

See also:
- Minister Fikile Mbalula talks about corruption

BRICs 'not complete' without SA

South Africa's foreign minister said on Thursday the informal grouping of fast-growing emerging economies known as BRIC -- Brazil, Russia, India and China -- should add South Africa to become BRICSA.

"We have doubled our efforts on BRIC and we remind them that it does not sound complete without SA at the end," Foreign Minister Maite Nkoana-Mashabane told a media briefing on her visit to China last week with President Jacob Zuma.

"The Chinese said they are hearing us and we should watch this space," she said.

The BRICs, a term coined by Goldman Sachs economist Jim O'Neill in 2001 to describe the growing influence of large emerging economies, accounted for about half of global economic growth between 2000 and 2008 and will account for 61% of global growth in 2014, according to the International Monetary Fund.

The countries are not formally linked but have held summits and taken steps to boost financial cooperation and investment opportunities between them.

South Africa, whose economy is about one-fourth the size of India's, has been lobbying heavily to be admitted to the group.

Zuma has made a point of visiting all four BRIC countries since taking office in May last year.

"In diplomacy one keeps knocking without annoying the occupants of the house," Nkoana-Mashabane said.

"We have done our best and made a positive impression with BRIC members."

Source

Trade ‘centre of gravity’ shifts - India Show

SA is intensifying its efforts to enter preferential trade agreements with major economic blocs in the developing world in a major shift in foreign policy.

THE centre of gravity in the world of trade has changed, Trade and Industry Minister Rob Davies said yesterday.

SA is intensifying its efforts to enter preferential trade agreements with major economic blocs in the developing world in a major shift in foreign policy, which previously gave priority to the country’s traditional trading partners such as the US and European Union.

As an influential member of the Southern African Customs Union (Sacu), SA will, together with India, begin preliminary negotiations this year with South America’s biggest regional trading bloc, Mercosur.

Brazil, Argentina, Paraguay and Uruguay make up the full membership of Mercosur. Other South American countries, such as Bolivia, Chile, Colombia, Ecuador and Peru, have been granted associate membership. Oil-rich Venezuela has signaled its intention to become a full member.

Speaking at the opening of the India Show yesterday, Mr Davies said the balance of economic forces favours developing countries and this development is the major factor that has influenced Sacu’s decision to pursue this agreement.

He said this preferential trade agreement with India and Mercosur will strengthen trade and investment opportunities between the regions.

Indian Commerce and Trade Minister Anand Sharma said a preferential trade agreement between the regions will “greatly enhance the (economic) relationship between the (three) regions”.

Mr Sharma is in SA to finalise details of a preferential trade agreement between India and Sacu.

He reiterated that the target of reaching a trade agreement worth 10bn by 2012 is on track.

SA enjoys a favourable trade surplus with India. The latest figures from the Department of Trade and Industry indicate that total exports to India were in the region of R5bn, while SA’s imports from India totaled R3bn.

Both ministers were speaking at the official opening of the week-long India Show at the Nasrec Exposition Centre yesterday.

The show will showcase about 54 of India’s major companies in sectors such as manufacturing, pharmaceuticals, engineering and the automotive industries.

Since President Jacob Zuma ’s inauguration last year, SA has targeted emerging markets to strengthen its economic relations.

Mr Zuma began courting these powerful emerging markets last year with a state visit to Brazil.

This was followed by state visits to India, Russia and China this year.

Analysts have lauded Mr Zuma’s decision to focus his diplomatic initiatives on gaining favourable trade agreements from emerging markets.

Mr Zuma, who also spoke at the India Show, confirmed SA’s intentions to work with India to pursue the transformation of multilateral institutions.

“We also have a common approach on a number of global issues including reform of the United Nations, the future of multilateralism, climate change, South- South co-operation and multilateral trade negotiations,” he said.

From Business Day

Setting Up Increased Trade between Africa and India - the Next Big Trade Route

South African President Jacob Zuma is currently on an official state visit to India accompanied by a trade delegation of leading South African business people. Nimesh Kampani, Chairman of JM Financial Group, and Sizwe Nxasana, CEO of FirstRand, signed this landmark MoU during the conference organised in Mumbai as part of this state visit.

Trade and investment between Africa and India is significantly on the rise, with India set to become one of Africa's major trading and investment partners over the next decade.

The bilateral trade between India and Africa is likely to grow by an estimated 22 percent in the next two years from the current levels of close to $45 billion to $55 billion in 2012.

Both economies offer tremendous growth potential given their large consumer base. The MoU signed between RMB and JM Financial will enable corporates at both destinations to explore and leverage opportunities in the economies of India and Africa.

According to the MoU, JM Financial and RMB will jointly provide M&A advisory services to:

- Indian clients seeking to make investments into entities or transactions in Africa; and
- South African and African clients seeking to make investments in entities or transactions in India.

Nxasana commented: "A partnership between RMB and JM Financial will unlock significant value for both parties by leveraging their individual expertise and sharing distinctive local market knowledge for the benefit of clients and shareholders."

In addition RMB's parent, FirstRand, is one of the largest financial services groups in Africa, and will provide JM Financial with opportunities to enhance its service to its domestic customers seeking to do business in Africa.

FirstRand also brings significant balance sheet capability to support future investment flows in the Indo-African corridor.

"This co-operation represents a significant step in furthering both RMB's and the Group's strategy to grow in the Indo-Africa corridor."

Kampani said: "In recent years, several Indian companies have shown interest in Africa. Both, Africa and India, are vibrant emerging economies, each with a rich resource base, a vast talent pool and low cost business models, offering immense business opportunities to investors, and thereby being a favourite investment destination world over."

"JM Financial's strong advisory and execution capabilities along with RMB's market knowledge and expertise will enable both parties to provide its clients with valuable advice and service. We are delighted to partner with RMB and FirstRand."

Also: South African President Sets Target of $10 billion trade between India and South Africa

- I-Net Bridge

India steps up coal search in South Africa

India's Tata Power, the country's largest private-sector utility, is looking for coal resources in Indonesia and South Africa, a senior official said on Tuesday.

Speaking at the Coaltrans conference in Bali, J.K Niyogi, head of project, said Tata Power forecasts coal imports to surge to 22 million tonnes per year by 2014, from 5 million tonnes per annum in 2009

Tata said in March its trading unit is looking to help arrange coal supplies from Australia, Indonesia and Africa for small power producers amid a growing shortage of the resource in India.

- Reuters

Jerome Booth on Emerging Markets (Forbes.com)

Forbes: How do you define emerging markets? You've got a unique definition of that.

Booth: I define it by risk perception. All countries are risky and the emerging markets are the ones where it's priced in.

And the opposite of course is a developed country where the domestic investor base doesn't even think of their own sovereign risk. So I don't think it's a surprise that Iceland is a developed country. It wasn't that people couldn't have worked out that there was a problem. A 13-year-old probably could have typed in IMF.ORG and worked it out in 2006. Likewise Greece, which today has a probably larger risk of default, sovereign default, in the next one year than any major emerging market. So it's really about risk perception. And that's the particular way I define it.

Forbes: Now political risk. How do you define political risk and why do you find that higher in so-called developed countries than your bailiwick of emerging markets?

Booth: Well political risk is everywhere, but I think it's on the increase in the developed world, whereas I think in the emerging world. For example, last year you had Indonesia and India, two examples of elections where the domestic the electorate returned the existing government's, prior reform governments because they understood that this was an external shock. They don't have credit crunch. And they didn't blame their politicians, but they also understand the importance of continuity. Whereas in certainly my country and a lot of the developed world I think you've got a massive increase in political risk. You've had several pieces of retroactive legislation. You've got measures really which are denying the scale of the credit crunch. Nobody should talk about the credit crunch in the past tense, you see. All the academic research on this is pretty clear. It will take many years to delever.

And political risk is everywhere. Political risk is when there is a risk that a road project as a private equity investor, say, the government or a local government will change the terms of the deal before it's completed. And that in some sense is often as high in a developed country as it is in the emerging world, frankly.

Watch the video here

India Snaps up Coal Assets

Indian conglomerate JSW appears to have outflanked rival bidders for control of suspended coal group SA Coal Mining Holdings (SACMH). An announcement released on Friday disclosed that JSW had struck a R85m agreement with various entities associated with the Royal Bafokeng Tribe and Strider Holdings, which are the major shareholders in SACMH.

SACMH is in essence a fully-fledged South African Coal producer delivering coal to Eskom and the export market through Richards Bay Coal Terminal.

Direct Link

Also:
Jet Airways first airline to fly direct between South Africa and India.

Growing Relations:
Indian makes biggest export to South Africa in 2009 - The Indian Premier League (link)

The new masters of management

Developing countries are competing on creativity as well as cost. That will change business everywhere:

"Just as Henry Ford and Toyota both helped change other industries, entrepreneurs in the developing world are applying the classic principles of division of labour and economies of scale to surprising areas such as heart operations and cataract surgery, reducing costs without sacrificing quality. They are using new technologies such as mobile phones to bring sophisticated services, in everything from health care to banking, to rural communities. And they are combining technological and business-model innovation to produce entirely new categories of services: Kenya leads the world in money-transfer by mobile phone, for example."

Read The Economist's Special Report

The Case for Emerging Markets

"Since 1999, Emerging Markets have been financing industrial economies (including the United States). In most Emerging Markets, such as China, Brazil, India, Russia and South Africa, the current account (exports – imports) provides income which is then invested mostly in US government debt. The United States is then able to fund this deficit with these borrowings. This situations means many emerging economies have stronger fiscal positions than their Western rivals; they are the creditors financing the American budget deficit."

Read my views here.