Profit warning PDF Print E-mail
Friday, 31 October 2014 04:57
AddThis Social Bookmark Button

Amazon and BP represent worrying trends

When two big foreign investors into India issue what is tantamount to profit warnings on their India business in quick succession—in BP’s case, it wrote off more than 10% of its India investment—it is time to sit up and take stock. Given that the government’s gas price hike was much lower than that recommended by the Rangarajan committee—$5.6 versus $8.4 per mmBtu—it was expected that BP’s investment in RIL’s gas fields would get hit. But since the government had announced it would offer a premium for fields in the deepwater, it was expected BP would wait to see what was on offer. While it is true the BP filing was a pre-scheduled one and necessitated by SEC rules, it is also true that the path ahead remains unclear. If the government is to decide on the premium for each gas field depending upon its individual characteristic, it goes back to what view the government—the ministry, the directorate general of hydrocarbons and the comptroller and auditor general—takes on the cost estimates in each field development plan. Apart from making future clearances very subjective, it defeats the purpose of what the government is planning for the next round of NELP auctions, of moving towards a revenue-share arrangement in place of the existing profit-shares. Another option can be to give a generic premium of a dollar or two for deepwater fields, but this means several fields will simply be put out of the reckoning since RIL-BP have been saying many fields are not economic below $9-10.

The Amazon profit warning, albeit for its China investments as well, is even more curious. The company has been having all manner of run-ins with the tax authorities and there have been many who have been arguing that e-tail in India is breaking many rules, from indulging in predatory pricing to breaking the spirit of the e-tailing law in India. The first charge is easily dealt with since, by virtue of not having even a marginal market share in India’s retail market, predatory pricing is ruled out. The FDI law is more complex since there is a grey area as far as the marketplace model that companies like Amazon follow is concerned. The law doesn’t specifically allow it, but it doesn’t ban FDI here either. But it does remain true that FDI is to be allowed in the marketplace model; there is no reason to stop FDI in multi-brand retail either. What complicates things is that while commerce and industry minister Nirmala Sitharaman appears to be blowing hot and cold on this aspect of things—while she was first reported as saying FDI rules for retail and e-tail would be the same, she was later quoted as saying there was no investigation into a Flipkart, but she is back to saying the rules cannot be different for the two retail formats. Given the speed at which e-tail investments are being ramped up, surely the government needs to come up with a studied response once and for all? Perhaps when the prime minister met Masayoshi Son of Softbank earlier this week, he could have warned him not to invest in Snapdeal since the government policy was still fluid.



You are here  : Home Economy Profit warning