About us Strategies defines the organizational development, it is the strategy which shows the insight of what a company’s focus is on. We FINSTREET’ians too stratified or ‘streetified’ the broad learning of finance through channels like KSS, Finnomics, Finurosity, Finance Events etc. the skin may change but the DNA is remains the same KNOWLEDGE. We bind by the saying which say “ We know the price of everything but value of nothing”, We FINSTREET speaks about the vitality of VALUE and its flavor on Price. The awaited edition of September is no less in its ‘strategy’. Thanks to our brethren of FINSTREET who actually come up with the priceless insights of various happenings in Finance world. We have this magazine let quench the thirst of knowledge you have it in you all. When you want to know what our pharmaceutical industry, we promise you that this issue gives all the needed and have total analysis of our industry is at. The anatomy of Inflation- a common evil of modern times is detailed for your convenience. Fear of investing? We are here to guide you about what a hygiene investment is by investing in MUTUAL FUNDS and Commodity futures. Want to know what ONGC FPO is about? We have your answer. Put on your seat belt this magazine is taking you on a little journey from Basel I to Basel III. What is Africa? A laymen question but we have an expert answer waiting for you in this magazine, which uplifts your imagination about Africa as Dark Continent to ‘Africa shining too’. We have also come up with the inputs about the capital infusion into PSU Banks too. And after this heavy meal of knowledge keep in mind that you have a dessert of FUNNOMICS waiting for you at the end. In the last edition of Finnomics, we spoke of our evolution as Finstreet. This time we are happy to say that we actually crossed the evolutionary phase and entered into revolutionary phase. We FINSTREET promise you that we would be no less in reaching the expectations of our Finance Brethren and will be crossing and reaching our own expectations too. Because knowledge is ‘ the more you share the more you get’ we are happy for the Finstreet happening and our part in SIMSR happening too. - The Finstreet Team Team Finnnomics
Creative Team
Erica Fernandes, Ketan Shah, Pradyumna Swain.
Janeesha, Manoj, Ramakrishna
2
Contents Sector Talk Indian Pharmaceutical Sector………………………….………….…….....4
Demystifying inflation An Anatomy of Inflation……………………………………………………....10
Magic of commodities Commodities are the next refuge for investors………………...………..12
Race to Basel III Journey from Basel I to Basel III : India vs. USA ……………….…..……..15
Investing in mutual funds SAFE INVESTMENT A HABIT………………………………………...…………..18
Disinvestment delays ONGC FPO Deferred Yet Again!!! …………………….…………..……..….20
Capital Infusion Decoding the Capital Infusion programme for PSU Banks……….…….22
Emerging economy watch Is Africa the new market for the future?..................................................24 Fun ‘o’ Mics………………………………………………….……………………..…….27
3
Indian Pharmaceutical Sector KAUSHAL - MMS
The ongoing global economic turmoil, riding on the back of uncertainty in the Euro-zone and ratings downgrade of the seeming economic super-power, the United States, capital markets all over the world have witnessed a blood bath. The ongoing uncertainty in the global markets, have scared off some investors who conservatively prefer to have cash in hand or invest in precious metals to stay away from the risks on investing in the stock market. A few others see this as a tempting opportunity to invest in fundamentally strong industries at below par valuations with a view to cash in as the currently derailed market regains its position. In such a scenario, the Indian pharmaceutical sector is a good pick for investors with the latter philosophy. It is also a favourable sector for investment for those investors who feel that the crash in the capital market creates an artificial bubble by creating false demand for precious metals and thus are looking for strong sectors for investment.
India Shining
India is one of the fastest growing Pharmaceutical markets in the world, and its market size has nearly doubled since 2005. The Indian pharmaceutical market is expected to reach US$ 20 billion by 2015, growing at a compound annual growth rate (CAGR) of 11.7 per cent during 2005–2015 and establish its presence among the world’s leading 10 markets. Presently, it is the third largest market in terms of volume and fourteenth largest in terms of value.
v
Plethora of Opportunities
Revenues of large cap Indian generic drug manufacturers look set to grow due to the following reasons:-
ü
Domestic volume growth is benefitting due to expanding doctor coverage. Increase in doctor coverage results in increased distribution network which taps in the remote rural market increasing the target audience. Non urban markets are expected to continue growing with a double digit growth rate driving domestic growth. On the other hand, the urban market growth is forecasted to remain sustainable in single digit. Key trends include pharmaceutical players expanding to Tier-II and Tier-III cities along with urban markets.
Regulated markets will be a major revenue driver in the export driven Indian pharmaceutical sector as large drug patents expire over the next five years. Significant opportunities open up in developed markets as branded drugs with sales of US $80 billion are about to lose patent protection over 2010 to 2015.
ü
Sales in emerging markets are growing strongly thus offering growth opportunities, especially in countries like China, Russia, Brazil and Mexico.
ü
CRAMS (Contract Research and Manufacturing Services) sector on gradual recovery based on low cost of manufacturing operations in India and favourable macro trends.
Indian Pharmaceuticals:-Sector Overview
v
ü
v
ü
Biosimilars, the generic equivalents of biologic drugs made from organic materials rather than chemicals, are expected to be long term growth drivers based on industry forecast. It is said to offer opportunities of USD 10bn by 2015 up from less than USD 1bn in 2010.
ü
Opportunities also include building health infrastructure, developing tertiary care units and medical tourism. There is a growing demand for increased public health and infrastructure due to increasingly varying disease profile. Also, India‘s changing demographics and the increasing incidence of non-communicable and lifestyle-related diseases is expected to trigger the need for more tertiary care hospitals to cater to this demand.
Risks However it’s not plain and smooth sailing for the Indian pharmaceutical companies, especially those operating in the generic domain as ‘Big companies’ are becoming less innovative. This essentially means that the growth pipeline for generic drug makers is becoming narrow and their competition is increasing. Also, Europe and the US companies are in-
4
creasingly turning their attention to ‘tough to copy’ products and even entering the generic market to supplement their growth. The common sector risks include domestic drug policy and high compliance standards of the US FDA.
kets show a huge growth of over 200 percent from being a USD 6bn market in 2005 to a USD 20bn market by 2015e. Figure 1
India ranks fifth in terms of absolute growth Also, patent expiry will lead to intense competition over 2005-2015e.the period amongst generic players and challenging pricing Rank Country MarketinUSDbn environment as companies all around the world will be pouncing on to grab this opportunity and 2005 2015e make hay while the sun shines.
Sector Positives The domestic growth story The domestic Indian market is expected to grow rapidly over the next decade. The expansion is fuelled by the strong growth in the domestic market and the rising demand for exports. Sales force expansion has yielded positive results and industry growth has increased. The majority growth is coming from the nonurban markets, as metros are growing at single digit. Experts believe there is a first mover advantage in these markets which explains some companies increasing their doctor coverage ratios. The doctor coverage ratios for some companies have doubled to around 60-70 percent from the initial contribution of around 30 percent of the sales force.
1 2 3 4 5 6 7 8 9 10 11 12 13 14
US China Japan France India UK Canada Spain Brazil Mexico Turkey Germany SouthKorea Italy
248 13 68 32 6 19 13 14 9 10 7 31 8 20
444 38 82 46 20 32 25 25 20 19 15 38 15 25
Absolutegrowth %Growth
196 25 14 14 14 13 12 11 11 9 8 7 7 5
79% 192% 21% 44% 233% 68% 92% 79% 122% 90% 114% 23% 88% 25%
Source: IMS World Review, Mckinsey Pharma Model. Growth acceleration through exports Exports are set to rise as new opportunities open up in the United States, the European Union as well as the emerging markets, especially Russia, Brazil, Mexico and China. A slew of patents will expire in the US and EU over 2011-2015, including top selling brands Lipitor, Nexium and Plavix. Following the expiry of numerous patents in the United States of America, a major market for Indian pharmaceutical companies is open for grabs. A plethora of opportunities await the generic players. Even though the challenging price environment will be hard to deal with, due to intense competition from generic markets, the InHigh Absolute growth India is expected to be amongst the top five coun- dian pharmaceutical companies are expected to tries in the world with respect to the absolute growth do well due to experience in the generic field and in terms of revenue. The Indian pharmaceutical mar- comparatively low-cost of manufacturing in In-
5
dia.
growth.
Figure 2 A plethora of opportunities await generic play- Emerging markets gain importance ers as numerous branded products lose patents Emerging markets, which mainly consists Russia, Brazil, China and Mexico as well as countries like South Africa, Turkey and Indonesia, are growing at a faster rate as compared to developed markets. According to IMS, a well-known industry research firm, these emerging markets will increase their global share to 24 percent in 2014, from 16 percent in 2009. This 50 percent rise in market share makes it an attractive market for many pharmaceutical companies operating the global arena. Thus, emerging markets are the next big thing for the drug fraternity.
during the next decade.
Source: IMS World Review. India has a competitive advantage due to a variety of reasons. The following matrix describes in brief India pharmaceutical companies’ strong foundation to leverage the opportunities available. Figure 3
Advantage India: Indian pharmaceutical companies possess a strong foundation for sustained Wide r prod uct portfolio- A wid e mix of brand ed and gene ric products compriseing over 60,000 generics an d over 500 AP I's.
Stron g Infrastructure- A h ighly skilled workforce with start-of-art facilitie s.
In dia Shining
An attractive re gion f or C RA MS- Pref erred outsourcing de stin ation du e to low cost ope rations.
G overn ment Su pport- Setting up zero -d uty for tech up dates an d NIPER's for technical exce lle nce .
6
Figure 4
Niche Opportunities
Global pharmaceutical market split-Increasing Besides oral generics, many large cap Indian pharmaceutical companies are also expanding sales of pharma-emerging markets their capabilities in niche areas like parenterals and transdermal delivery systems which currently offer a good opportunity for growth. Though the volume in such market is lower, the higher margins and limited competition are drivers for sustained growth.
Sector Negatives Patent expiry could cannibalise generics. There is a risk that the patent expiry of branded generic drugs will lead to growth at the expense of lower sales of existing generic products. For example, Lipitor’s generic entry in November 2011 could impact growth in generic Simvastatin, an important product for many Indian generics. Also the influx of so many generic players to capitalise the market will lead to a challenging pricing environment.
Big Pharmaceutical companies moving to generics Source:IMS.
In order to sustain their growth, big pharmaceutical companies are moving into ‘tough to copy’ branded drugs as well as the generic markets. The advent of these big companies in the generic markets can strangle quite a number of comparatively smaller firms as they might not be able to match the competition. This might also affect mid-cap and small-cap companies listed on the exchange.
The United States has been one of the chief consumers for Indian pharmaceutical products’ exports. However, the growth in the emerging markets of Russia, Brazil, South Africa and Mexico will open a plethora of opportunities for Indian generic players. The sales in emerging markets are expected to grow nearly at 100% from a base figure of US $100bn in 2010 to a mammoth US $ 200 bn in 2015E. Awhopping 8% increase in the market share will have offer tremendous Narrowing product pipeline opportunities to companies with strong fundamentals in these regions. Innovation by pharmaceutical companies is on a A Potent opportunity for M&A decline with many companies reducing their R and D expenses over a period of time. Branded The initiative among several multinational branded products, which in turn provide a life to generic drug companies to expand their presence in generic products, are on a decrease and hence it might pharmaceuticals has elevated strategic interest in affect the generic players. Reduced R and D exgeneric companies with an established product port- penses and increased focus on niche products folio and distribution network. The acquisitions of Ran- and biosimilars are forcing generic players to look baxy, Piramal and Paras are apt examples of the into a new direction. same. Such levels of strategic interests are expected to continue for other Indian companies. Regulatory and compliance issues
7
The US Food and Drug Administration (FDA) approval timelines have lengthened from an average of 16 months during 2006-07 to 26 months in 2009-2010. This increase in time has a negative effect on the revenue cycle. Also, compliance issues have been concerns for certain Indian companies like Cipla Ltd., Ranbaxy etc.
1-year stock price performance(%) Piramal Healthcare Aurobindo Pharma Cipla Fortis Healthcare Divi's Laboratories Sensex DRL BSE-HC Biocon Ltd. GSK Glenmark Lupin Ranbaxy Apollo Hospitals IPCA Laboratories Sun Pharma Cadila Healthcare -20.00% -10.00%
0.00%
Figure 5
Pharmaceutical companies have given better returns on the Bombay Stock Exchange over the past 1 year and the trend is likely to continue.
Source : BSE Figure 6 Porter’s Five-force model for the pharmaceutical industry
10.00%
20.00%
30.00%
40.00%
50.00%
Currency Fluctuations Exports form a major portion of revenues for Indian companies and most of the exports are dollar denominated. Hence, minor fluctuations in the foreign exchange market have a huge impact on the companies’ profitability. Thus, currency fluctuations can be a major issue, at times, for the pharmaceutical market.
Financial Outlook The pharmaceutical and healthcare sector has historically outperformed the markets on a consistent basis. The following charts re-enforces the sector’s performance in the previous year i.e. 2010-2011 and the trend is expected to improve during the next five years.
Industry Rivalry: High as the first mover advantage plays a crucial role due to patent rights. Bargaining Power of Suppliers: Low as numerous suppliers available in local markets due to standardised inputs which facilitates switching of suppliers at low cost.
Bargaining Power of Buyers: Low as end consumers hardly possess any bargaining power. Brand identity exists but they are in the hands of the doctors who influence the consumers and not the consumers themselves.
Barriers to entry: High barriers to entry due to high capital investment and increased spending on Research and Development and existing patents. Challenging pricing atmosphere also increases such barriers. Threat of Substitutes: Low-In case of patented products which provides an incentive for better research and development. It is however medium
8
in case of generic products due to increased local manufacturers. Conclusion: Considering the latent and untapped domestic market, growing population, increase in the number of individuals affected by chronic diseases as well as the expiry of patents of branded drugs in the US markets and the rising share of the emerging markets, the pharmaceutical sector in general is expected to grow significantly. A wide portfolio of generic drugs and low cost manufacturing facility gives India, per se, a distinct advantage in the growth story. However, it is not going to be a smooth sailing for the generic players due to highly competitive environment and lack of innovation and adequate research and development. Considering all the factors, we are bullish on the pharmaceutical sector and have positive expectations from the sector, at least for the next five years.
9
An Anatomy of Inflation ERICA Fernandes– PGDM-IB
nflation has become the buzzword of modern economics. It has become Omni present; featuring in screaming headlines of newspapers, the speeches of central bank governors (it was the most
The standard practice is to measure inflation as growth in the price index over the previous year instead of comparing price growth
repeated word in the last RBI policy statement), not over the previous week or month. This is to avoid the to mention the latest IMF/World Bank report.
Economists define inflation as the measur-
seasonality of economic data e.g. food prices are always high during August-September during the monsoon months but come down in October after
able increase in prices of a defined bas-
the harvest comes to the market. So a measure of
ket of goods
October’s prices over September’s prices would
in a certain period. As most things in Economics, the definition is flexible enough to allow different types of consumers to measure inflation in their own fashion. For example, any consumer basket in India/ China will include rice while a Mexican basket would include tortillas. So the first step in measuring inflation is to
identify a basket of goods whose prices would be
compared
over time. The
show that prices have come down, but if this is a phenomenon that happens every year, we should ignore the short-term fall in prices. The year-on-year growth helps ignore the short-term fluctuations in prices and gives a more meaningful measure of inflation. come down, but if this is a phenomenon that happens every year, we should ignore the short-term fall in prices. The year-on-year growth helps ignore the short-term fluctuations in prices and gives a more meaningful measure of inflation.
common interprac-
In India however, attempts to have a single CPI
tice is to create
have not been very successful. India measures
a
inflation as growth in the Wholesale Price Index
national
Consumer I ndex
(WPI). As the name indicates the WPI measures
(CPI) which is a
prices in wholesale markets rather than the retail/
weighted average of all the prices in the economy.
consumer level. Also, a very large proportion of
The next step is to determine the weight of each
WPI consists of manufactured goods (65%) and
good in the index and to decide a base year when
the remaining is primary articles (raw materials)
the prices are being measured. Let us assume we
and fuel.
Pri ce
begin from January 2001 (our base year) and the CPI for January 2001 is taken to be 100. In January 2002, the CPI was measured as 107 which implies
There are multiple causes of inflation, but there are mostly two schools of thought re-
that prices grew by 7% (inflation is determined as 7%
garding inflation. The first is cost push, which
on a year-on-year basis).
states that inflation, is the result of supply side constraints. These constraints may be limited availability of labour or land or limited production capacity
10
which prevents firms from raising production levels. If This is why the RBI has been consistently hiking intersupply is unable to meet demand, firms respond by est rates since March 2010 with the intention of bringing down the borrowing in the economy and rising prices. The extreme case is a supply shock thus curbing investment demand. Also consumption when there is a sharp disruption of supply, example, which is financed by borrowing gets impacted, like the oil price spike in the 1970s and after the Gulf war purchase of cars, consumer durables, home loans. However, supply side inflation would require a comin 1991. pletely different panacea. Then interest rate hikes would only be bringing down growth but inflation would not come down, because the supply side constraints would remain. But in real life there is no universal rule of thumb to decide whether inflation is supply or demand driven, so policy-makers try a mix of everything. Managing inflation is a complex task which varies in accordance to the situation prevailing in an individual country’s economy. In today’s global environment, it has become imperative for policy makers look beyond the CPI & WPI so as to measure inflation.
The second theory is demand pull which assumes inflation is only a demand side phenomenon. Higher demand in the economy could be the result of large government spending or large consumer spending which may be propelled by low interest
rates
and
favourable
incomes.
Many
economists attribute the current inflation in China and India to high demand, as it has been noticed that the prices of items like fruits, vegetables, dairy products, eggs, meat etc. has been going up sharply. As income levels rise because of rapid economic growth, the purchasing power of people improves and their consumption of protein-related items increases.
Understanding what drives inflation is critical to help decide the best way to counter inflation Demand side inflation may be best curbed by reducing demand in the economy.
11
Commodities are the next refuge for investors Aatri Nagpal & Harish Trivedi
C
o
m
m
o
d
i
t
y
:
A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market.]It is a fungible entity, that is, the market treats it as equivalent irrespective of who produces it. For example: Copper or Crude
the recent US debt crisis has further added to volatility, resulting in large capital flows from equity, bond and currency markets to commodities.
Intrinsic value associated with commodities:
There is an intrinsic value associated
with a commodity. All major currencies in the world
Oil.
are fiat currencies without any real value. In times of
Why do investors turn to commodities
economic uncertainty, an increasing number investors flock to commodities for safety. This increases their demand even further. Growing demand fuels inflation, thereby reducing purchasing power and consequently, the value of a currency. The phenomenon is clearly evident from the inverse relation between the Dollar and Commodities Index, shown in the next page.
in turbulent times‌? Inverse relationship with the stock markets: Figure
1 (above) shows a steep rise in
the commodities index in 2008 and again in 2011 which is in clear contrast to the NSE movement across the same period. This confirms the negative correlation of stock and commodity markets. Whenever investors expect heavy volatility in the stock market, they look at safer avenues of
vestments such as
in-
commodities. Moreover,
12
performance over the years (Figure 1). Similarly, commodities offer a hedge against inflation and exchange rate fluctuations and are one of the favored investment avenues during times of high inflation.
Some additional factors which favor commodity
markets
in
India
are:
India’s commodities market has developed greatly in recent years and traders have learnt to not only use the information at hand but also anticipate events and their impact on the bottom line, thus
Growing Demand in Developing Na-
improving average returns in the commodity market.
tions:
As commodities can now be bought and sold Rising demand from emerging economies like China and India has pushed commodity price, especially for non-renewable commodities such as metals. The figure below shows the rising demand for copper and aluminum in China and India over a period of 15 years.
Risk Management:
online, a number of traditional risks associated with trading commodities such as quality, shelf life, storage, transportation, warehousing and labor etc have vanished. Online commodity trading is touted to be the ‘new sunrise
industry.’ Cur-
rently, international commodity and debt markets The golden rule for any
investor is to diversify the non-systemic or market risk
are much larger and have more investors than their corresponding equity markets; the same trend is expected to follow in India as well.
Has the horse bolted or has the ride just begun. It is said that when the commodities market is volatile, a huge economic downturn is on its way. Besides fuelling inflation, high prices of commodities create cost pressures for companies and reduce the purchasing power of consumers. Rising energy prices not only lower the purchasing power of consumers, by investing in diverse markets. With a falling Sharpe
ratio (return per unit
risk) on the equity mar-
kets, more and more investors are adding commodities to their portfolios boosted by their stellar
13
but can also lead to higher running costs and rising wages affecting the profitability of businesses. After
commodities.
For example, they should
avoid commodities such as food grains whose
seeing an unprecedented rise since December 2010, global commodity markets for agricultural
prices are directly regulated by the govern-
commodities, energy and metals suffered an
ment. Similarly, they should try to invest
abrupt correction in May 2011. Uncertainties in the
more in commodities which are non renew-
global economic recovery, a stronger US dollar
able and are backed by steady demand such as
and speculative commodity sell-off were factors which contributed to a monthly decline in prices
metals while avoiding commodities with cy-
across commodities. The prospect of increasing
clic
volatility in commodity prices in 2011 is a negative
price bubbles
demand which are prone to the formation of
sign for the global economic recovery. Thus, although most analysts and industry experts agree that a slight pullback or consolidation in commodity markets is possible on account of profit booking in the short term, the long term outlook remains extremely bullish as prevailing macroeconomic conditions show no signs of improving significantly in the near future.
Ending Note:
“All that glitters, is not
gold� Although commodities offer an excellent avenue
for investment in the near future, investors should be wary of some hidden traps while investing in
14
Journey from Basel I to Basel III : India Sunmeet PGDM-IB
Ever since the introduction of Basel norms in 1988,
ter of 2011, but there was never a schedule for
capital adequacy ratio has become an important
smaller banks to comply with Basel II. The inequity
benchmark to assess the financial strength and
between smaller and larger banks remains unre-
soundness of banks. It has been successful in en-
solved.
hancing competitive equality by ensuring level playing field for banks of different nationality.
Now Basel III capital proposals have been introduces. These are the new re-
Basel I framework for capital
quirements which will funda-
adequacy was introduced in
mentally change the interna-
1988. The Basel I framework
tional banking system. Devel-
was designed to establish mini-
oped by the Bank for Interna-
mum levels of capital for inter-
tional Settlement, they target a
nationally active banks. How-
series of key ratios and other
ever, its simplicity encouraged
key measurements. Basel III
over 100 countries across the
broadly asks banks to hold
world to not only adopt the
more and better quality capi-
Basel I framework but also ap-
tal as well as more liquid as-
ply it across the entire banking
sets. It also proposes to limit
segment without restricting it to
bank’s leverage while man-
the
active
dating building up of capital
voluntary
buffers in good times for use
adoption of Basel I framework
during periods of high stress.
by several countries had made
The driving force for these
it, de facto, a globally ac-
changes is to make the global
cepted standard.
financial system safer, more
internationally
banks.
Thus,
the
Then Basel II norms were introduced
which
incorporated
stricter norms to be followed by the banks internationally. Many developed countries achieved Basel II accreditation and model validation from Jan 1, 2008 except United States. Although U.S. regulators agreed to rules to implement Basel II with modifications to address the Basel II disadvantages to smaller banks, those modifications were never implemented due to the onset of the 20072009 financial crisis.21 Large banks were scheduled to complete their implementation by the first quar-
liquid, and better capitalized and to avoid the type of systemic
crises
plagued
the
which
have
international
banking system since the collapse of Lehman Brothers and the ensuing subprime crisis. The Basel III proposals were first put forward by the Basel Committee on Banking Supervision at a meeting in December 2009 as a way of updating the existing Basel II Framework and strengthening the resilience of the global banking sector in the wake of the financial crisis. Since then, banks and other financial institu-
15
tions have had the chance to respond to the pro-
ferred stock, leaving Citigroup with massive quanti-
posals, which include new rules on capital ade-
ties of common equity. Citigroup's Tier 1 common
quacy, leverage ratios and liquidity standards.
ratio at the end of 2010 was 10.7% as measured
Although most of the U.S. banks are considered to be in fairly good position to meet the Basel III capital requirements but since U.S. has a long track of taking high risks especially in the financial sector & pushing the world into downturn various banks are
under Basel I. The bank has not given estimates based on Basel III but stated it is confident, based on what is known today, that they will be well above the Basel III capital requirements and above 8%-9% on a Tier 1 common basis in 2012. Citibank has got a strong bal-
likely to face certain issues
ance sheet with Tier 1 Common
while complying with the new
ratio of 10.3%. It is targeting to
norms. In light of the above
operate in a Tier 1 Common ratio
statement certain banks in U.S.
range of 8%-9% under Basel III,
can be looked to get a better
expected to be above those
view about the same.
levels by 2012. In a nutshell, CitiBank of America is in a fairly good position to meet Basel III's capital requirements notwithstanding its recent rejection for an
bank is expected to be well above Basel III capital requirements without issuing equity.
increase in its dividend payments in the second half of 2011. The company's current Tier 1 common ratio (measured under Basel I) was 8.6% at the end of 2010. A very rough estimate of that same number under Basel III requirements would be closer to 6.1%, putting it slightly under the 7% minimum ratio. However, the bank has a plan to reduce risk-weighted assets by about $400 million through mitigation efforts by the time Basel III begins to be phased in. It is also estimated that the bank's earnings power over the next two years would allow it to reach the 7% level fairly easily but would limit the amount of dividends the bank could return to shareholders. The
For J.P. Morgan, the bank's year-end 2010 Tier 1 common ratio would measure out to be 7% as required by 2019 under Basel III standards. The bank is unlikely to increase it above the minimum--and with an announcement of a $0.25 quarterly dividend and a large share repurchase program, J.P. Morgan has moved beyond just building its capital base. In fact Jamie Dimons, the Chief Executive of J.P Morgan has recently accused the Basel III norms to be ‘Anti-American’ & even suggested considering to pull out U.S. out of the regulatory system.
bank has not gone into any detail surrounding the
Wells Fargo remained profitable during the recent
liquidity requirements or the net stable funding ratio
recession, but also more than doubled in size
at this time.
through the purchase of Wachovia. Through its
Citigroup was--outside of AIG--the largest recipient of U.S. bailout funds during the crisis. At one point, the U.S. government owned more than 30% of the worldwide giant. The government has sold all of its common stock and redeemed most of its trust pre-
tremendous earnings power, and some capital raises, the bank's Tier 1 common equity ratio increased to 8.4% at Dec. 31, up from just 3.1% in the first quarter of 2009. Primarily a retail bank within the U.S., it is hard to see how the bank will become
16
systemically important to the global banking indus- Indian banking sector. Further, a higher level of core try, but if the rules are applied country by country, capital could dilute the return on equity for banks. Nevertheless, Indian banks may still find it easier to Wells Fargo could get entangled. make the transition to a stricter capital requirement regime than some of their international counterparts On the contrary looking at the Indian economy the since the regulatory norms on capital adequacy in process has been much faster. Our banking system India are already more stringent, and also because is much more resilient & stronger than the U.S. In Inmost Indian banks have historically maintained their dia, Reserve Bank of India had implemented the core and overall capital well in excess of the regulaBasel II standardized norms on 31 March 2009. Retory minimum. serve Bank of India does not see higher capital re-
quirements under the proposed Basel III norms hitting Indian banks significantly. Indian banks are not likely to be significantly impacted by the proposed new capital rules. As on June 30, 2010, the aggregate capital to risk weighted assets ratio of the Indian banking system stood at 13.4%, of which Tier I capital constituted 9.3%. As such, it is not expected that Indian banking system has to stretch significantly in meeting the proposed new capital rules both in terms of the overall capital requirement and the quality of capital. Indian banks already claim to have made most of the deductions from capital now being proposed under Basel III. However, there may be some negative impact arising from shifting some deductions from Tier I and Tier II capital to common equity. Tier-I capital (equity capital and disclosed reserves) can absorb losses without a bank being required to cease trading and Tier-II capital (undisclosed reserves, general loss reserves and subordinate term debts) can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. The capital requirement as suggested by the proposed Basel III guidelines would necessitate Indian banks raising Rs. 600000 crore in external capital over next nine years, besides lowering their leveraging capacity. It is the public sector banks that would require most of this capital, given that they dominate the
17
SAFE INVESTMENT A HABIT Kshitij Registrar - PGDM-B Savings
are important for a country’s High Risk, High Return! ,Average investors are generally clueless about the stock market operations and
growth. Investments through domestic in the process put their hard-earned money at risk. savings acts as a driver for economy CHOICE BETWEEN EQUITY and DEBT:
growth. Indian financial markets present a AGE FACTOR should decide what is best suited for an individual, as explained by the graph below –
• •
Younger the person – higher the Equity allocation Older the person – higher the Debt allocation
THAT’S WHY MUTUAL FUNDS! For an average investor, task of asset allocation and optimizing returns is difficult. That’s where Mutual Funds offer superior option. They allow the individual plethora of investment avenues. to decide between Debt & Equity schemes, based Let’s look at some of the basic investment options on their age. Indian investor has been using–
•
Bank Deposits
•
Post Office Savings
•
Company Deposit
•
Equity Shares
Amount invested is represented by units as allotted, based on the Net Asset value (NAV) of the scheme declared daily. Various business houses/ financial institutions/ banks / foreign institutions have sponsored Asset Management Companies (AMC), either alone or as a joint-venture.
TYPES OF FUNDS:
Different types of Mutual Funds – Debt, Equity and Balanced Funds. These different types cater to differThese options (except Equity) provide fixed return ent investor needs– those wanting higher returns can on investments, but investments are locked-in till invest in Equity Funds; and those who are risk averse will invest in Debt Funds, Balanced funds are mix of maturity. Returns on these remain stable through debt and equity funds. the life of investment, irrespective of the market movement, hence are considered safe invest-
DIVERSIFICATION:
ments. However, they are not tax efficient, as the Money collected from investors are invested across industries and asset classes, hence the risk is diluted. return on investment is taxable in the hands of the Diversification reduces the risk because all stocks investor. don’t move in the same direction at the same time. One can achieve this diversification through a MuEquity Shares, on the other hand, provide higher tual Fund even with small investment. They can returns as compared to the above fixed income choose a combination of Debt, Equity and Balanced schemes to diversify risk based on the age factor investments, but are highly volatile and risky . (explained earlier). “NOT ALL EGGS IN ONE BASKET”
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PROFESSIONAL MANAGEMENT: Mutual Funds employ the services of professional
Mutual Funds are regulated by Securities & Exchange Board of India (SEBI). Fund Managers follows the Investment Committee approvals and invest accordingly. If SEBI finds any discrepancies in the investment process, they impose strict fines on AMCs. It’s mandatory for Mutual Funds to declare detailed scheme-wise portfolio every month.
SYSTEMATIC INVESTMENTS: An investor, who chooses to invest in Equity Funds
Fund Managers. They use detailed research and their experience to analyze each investment opptunity, for the better returns with lower risk, medium and high risk, depending upon type of Mutual Fund.
LIQUIDITY: Fixed deposits with companies / banks / post offices attract penal interest, if withdrawn prematurely. However, investors can invest or withdraw from
for higher returns, can
open-end Mutual Funds, on
daily basis. Units of
regular interval. This is to average out holding cost
close-end schemes are traded on stock exchanges.
of each investment, over time. As entry / exit timing
invest small amounts at
is difficult for an average investor, they are better off averaging out their holding cost by investing at
WELL REGULATED:
regular intervals. This is a good saving habit and creates a healthy portfolio over time.
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ONGC FPO Deferred Yet Again!!! DHAVAL SANGHAVI - MMS
The FPO (Follow on Public Offer) of ONGC (Oil &
a level of $100 a barrel on a few occasions as well.
Natural Gas Corporation) has been deferred yet
The dependence of India on imported crude oil is
again. The FPO of ONGC was supposed to open
also a known fact. Oil imports are the single largest
on 20th September but the government which is
item in our import bill. Any increase in the prices of
the majority shareholder in ONGC has decided to
crude oil is bound to affect the finances of the oil
call off the FPO on 16th September. The lacklustre
refining and oil marketing companies. In normal
response received from the international road
circumstances, the increase in the price of crude
shows by a team of ONGC executives and bu-
oil should not adversely affect ONGC because it
reaucrats is said to be a major reason leading to
sells the oil that is imported to the oil marketing
the deferral of the public offer this time. This issue
companies after some refining processes. So,
has been a part of finance minister Pranab Muk-
ONGC can very well charge higher prices from the
herjee’s plan to raise Rs.40000 crores from the sale
upstream oil marketing companies like IOC, HPCL
of shares in state run companies. This follow on
and BPCL keeping in mind the increased cost of
public offer (FPO) has been deferred several
production for ONGC. However, in India, petrol,
times. It was originally planned to be
diesel, kerosene and other products
launched in 2010-11 but was de-
derived from crude oil are heavily sub-
ferred as the company did not have
sidised by the government to ensure
adequate independent directors on
that the end consumer does not have
its board to meet market regulator
to bear the high price of petro prod-
SEBI’s listing norms. It was later re-
ucts due to volatility in the crude oil
scheduled for 5th April and then
market. One of the ways that the gov-
again on 5th July but was postpones
ernment provide this subsidy is to con-
both the times due to adverse mar-
trol the retail prices of fuel or the end
ket conditions. The market seemed to cheer the
price which the customer pays. The oil marketing
fact that the share sale was again postponed as
companies have to sell the fuel at the retail prices
the shares of the company rose more than 5% on
set by the government. These companies have to
the Bombay Stock Exchange after the announce-
almost always sell such fuel at a loss. In order to
ment on 16th September. The market seems to
compensate these companies for their loss, the
realise that the company needs to first address
government resorts to issuing oil bills to such com-
certain issues affecting the company as opposed
panies so that the losses of these upstream oil mar-
to launching a follow on share sale. Some of the
keting companies is absorbed by the government.
issues affecting ONGC are as explained below.
An alternative method is to ask ONGC to bear a
1) Suffering losses due to providing subsidies for the upstream oil companies:-
part of the burden that the government provides for and hence help the government in bridging the gap in the finances of such oil marketing compa-
The volatility in the prices of crude oil is an accepted fact today. The commodity bull run of the last few years has seen the price of crude oil cross
nies. One of the ways to do this is by asking ONGC to sell the imported oil at a price lower than the cost to ONGC to such oil marketing companies.
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Since, ONGC is a company majority owned by the government, it has to follow the government diktat which can seriously affect the financials of the company. So far there has not been any impact on ONGC’s financial position but the earlier the government frees ONGC from such subsidy bearing responsibility the better it will be for the company. This would also help in generating interest among investors for the share sale of ONGC. 2) The Cairn India royalty issue:ONGC is a partner with a 30% economic interest in the Barmer oil block in Rajasthan developed by Cairn India. However, the royalty for the technology used for drilling for the oil was completely being paid by ONGC. This was not a problem until Cairn India accepted a proposal from Vedanta Resources, Plc in UK where Vedanta would acquire the assets of Cairn India including the Barmer oil block through Sesa Goa which is a subsidiary of Vedanta. The government withheld approval for this deal between Vedanta and Cairn India for almost a year when ONGC raised objections and demanded that Cairn should pay a part of the royalty so far paid by ONGC. The matter has gone to court and will take time to resolve. Mean-
to successfully produce oil and gas from other new blocks in India but has also not been able to search for areas which can be prospects for future oil and gas discoveries. Private companies like Cairn
India (Barmer oil block in Rajast-
han) and Reliance (Krishna Godavari basin off the coast of Andhra Pradesh) are the more recent oil & gas discoveries in India. The fact that ONGC which is entrusted with the task to search and operationalize new and viable oil and gas fields has not been able to do so, will certainly have investors concerned about the lack of initiative for new finds on the part of the company.
while, the government recently gave approval for the Cairn – Vedanta deal after a period of almost ten months from the time of an application filed by Vedanta to clear the deal. Investors would like to receive some clarity over this royalty sharing issue before considering investing in an upcoming share sale of ONGC.
Due to all these factors, investors would be cautious about investing in the follow on share sale of ONGC. Investors would like some clarity to emerge on these issues before they consider investing in future share sales by ONGC.
3) Lack of new oil and gas discoveries:ONGC has failed to find and develop new oil and gas blocks within the India in the past two – three decades. The last big oil and gas block discovery for the company was Bombay High, off the coast of Mumbai. However, the company has not only been unable
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Decoding the Capital Infusion programme for PSU Banks Dipesh Nebhnani - MMS
.The equity or its own capital component is a very critical part of a bank for its growth & expansion. The international Basel-II norm stipulates that the Capital
been scrapped off as the Government will have
Bank
Capital Required (in Rs. crores) in the coming 3 years
State Bank of India
45000
Punjab National Bank
15000
Canara Bank
6000
Indian Overseas Bank
3500-4000
Corporation Bank
9000-10000
Allahabad Bank
3000
adequacy ratio (CAR) should be maintained at 8%. In India, Banks are regulated by RBI guidelines which require them to maintain the CAR at 9%. All the major banks of the country which includes banks like SBI, Bank of Baroda, Canara Bank etc. are public sector banks (PSU’s) in which it is mandatory for the Government of India to have a minimum holding of 51%. For a developing country like India, where a whopping $1 trillion would be required for infrastructure projects in the next 5 years, the role of banks becomes very critical. Banks would be required to provide credit facilities to these projects which could only happen if they have sufficient capital in their hands. The
banking sector in the country is mainly dominated by to subscribe for 60% of the issue if approved. On the PSU Banks, which means that the capital infusion is the contrary, the government is likely to provide a to be provided by the government for expansion pur- capital infusion of Rs.3000 crore for its immediate poses. Banks can take the public offering route but requirements. There are other six-seven banks too the stake of the government cannot be diluted be- which require capital infusion this year. The govlow 51%. The current stake of government in the top ernment has set aside Rs.6500 crore for banks, but 10 PSU banks, including India’s largest bank SBI, is it seems the government will exceed this limit & slightly less than 60% which means there is not enough would go for headroom for further equity dilution. In fact, when it months.
another supplement in the coming
comes to SBI, the tier-I capital of CAR stands at 7.6% instead of the stipulated 8% which means the government is already facing problems in providing capital to the banks. Also, the government
The capital requirements of a few major PSU banks required for their expansion purposes in the coming 3 years -
commitment of holding 58% instead
According to the report sub-
of the minimum
prescribed re-
mitted by the PSU banks to the
quirement of 51% is a matter of con-
government, it is estimated
cern. The rights issue of 20,000crores
that banks would
for SBI has been
a capital support of Rs.1 Lakh
pending for a very
long time at the government’s disposal for its approval. According to the new plan, the rights issue has
require
crore in the next 3 years. What does this mean to our country? India already has a higher fiscal deficit
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of around 5% of its GDP. The finance minister in its budget announced that they would reduce the fiscal deficit to 4.5% in this fiscal. But, achieving this figure of 4.5% is already unlikely as no major disinvestments have taken place due to subdued capital market conditions. Also, oil-subsides provided by the government are already putting strain on the expenditure of the country. What this means is that
This could be a stop-gap arrangement for the govt. which could save capital in the near-term & could be resourcefully used for other economic development schemes. A more remote but a probable solution could be selling-off the small PSU banks to the private sector which would help in freeing up of capital from these banks. Selling the banks to private sector would help in growing these banks & would assist in capital generation & mobilization in the country. But, this solution can have serious political issues & moreover govt. would not be inclined towards selling their profit making units.
the government would find it extremely difficult to fund the capital requirements of these PSU banks & it would put un-due pressure on the balance sheet of the govt. What can be the solution to this issue? The best solution could be that the govt. can relax the prescribed norms of holding 51% of their stake in these banks. If the govt. decides to reduce their stake to 33% or 40%, then the banks can go to the market with the FPO or rights issue without any govt. subscription to these issues. In fact, many PSU banks & the former RBI Governor, Mr Bimal Jalan had suggested the same remedy to this solution. This would also lead to better public accountability & might help the banks in improving their profits & operating margins. Another short-term solution to this issue could be that the govt. could dilute their stake up to 51% instead of being adamant on holding 58% stake .
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Is Africa the new market for the future? Rajesh Dharmarajan -PGDM B
With three of the four large economies (in terms of zation era. Lack of political will for continuous and nominal GDP) suffering in deep financial turmoil, it is wise to look for economies beyond the regular horizon which offers substantial growth opportunities for business.Moreover, China, the third largest economy, has
sustainable economic environment, thereafter, should not be discounted as it acted as a bottleneck for the continent’s growth. The problem of unemployment is also leading to countless crimes.
firmly established itself as a manufacturing hub of vir- Despite all these issues that the Africa is confronttually every consumer product ranging from ICs to ing, it has umpteen reasons to be called as an automobiles. By 2015, IMF reckons, China would con- investor friendly region. It would be unfair to call tribute to three fourth of the world’s GDP, most of Africa an under-developed region as it is only an which would come through manufacturing. Hence, it under-exploited continent.But, South Africa as a automatically makes sense to focus on emerging nation in the entire African region possesses the economies that offers vast business opportunities. The highest ability to grow at a substantially competibiggest growing economies China and
tive rate.
India have reached the position where
A look at the economy
they are now have primarily been because of the advantages that it had inherent in itself through cheap labor which helped in industries bringing down the operational costs drastically. A region which has similar qualities coupled with a modest growth rate show-up is the second largest and populous continent, Africa.
Latest census data pegs the section of population involved in service industry at 65%. Couple it with the unemployment rate of 25.7%. Services could be an immediately available option in an economy suffering from very high unemployment rate primarily because of the
Natural Advantage Africa, on the whole, is naturally blessed
lack of proper education and hence insufficient awareness. With
with an abundance of natural resources. Moreover, the Government taking up substantial measures whole of the continent has been surrounded oceans. to improve the educational system, there lies a As Adam Smith puts it in his masterpiece “The wealth huge potential of converting a significant portion of nations”, the regions which have the largest access of this 25.7% as employable population if the serto natural resources and wealthy access to variety of vices industry is exploited still further. transportation modes stand the biggest chance of development and economic prosperity. Africa as a continent has exactly the same. Apprehensions about why it hasn’t still emerged as one of the biggest economies despite having umpteen resources could be answered by attributing issues such as Apartheid
GDP growth rate of 4.6% and the CPI inflation around the same order might not ring a bell, on the first look. But, as a nation which had its first democratic elections in 1994, it has done fairly well. In a nation where economic consistency overpowers competency the Government by
which took away its most part in the world’s industriali-
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Being receptive toward foreign investors, has al-
to a variety of industries. Communication is the
ways been trying to find a match between consis-
backbone of any economy that wants to establish itself as an industrial one. Since,
tency and competency.
in general, across the world,
Cultural Distance
telecom industry being oligopAfrica
is
primarily
a
nation
where the cultural distance is so huge from that of the developed nations like US, Canada, Germany etc. And hence, it will take time for the companies in these countries to understand the nuances and intricacies of doing business in this market. But, this factor of cultural distance will turn out to be a massive plus for Asian companies especially that of India and China. Hence, it will take far lesser time for these companies to establish themselves firmly. However, those American and European firms that already have found a firm base in Asia would also not find it difficult to do business here in Africa. Generally, an ideal way to penetrate into the market for the foreign companies is through mergers and acquisitions of the do-
oly in nature, it is apparent that intense and close competition will
only
foster
innovation
thereby driving growth by delivering services at an affordable cost to not only the public but also the corporates thereby improving the efficiency of the region as a whole. This strong telecom base would naturally tend to attract business process outsourcing companies. But, what stands as a hindrance for the companies to step in is the lack of proper educational system in place and hence the companies would have to invest heavily on training. Moreover, as Wipro has recently developed a business model of creating rural BPOs through proper and focused training on required areas stand as a testament about the potential this area holds for this particular sector.
mestic companies. That is both acceptable and understandable for similar industries that already exist with a substantial foothold. For example, Airtel India ventured into the South African telecommunication market by acquiring Zain. It was possible because telecom was already an established industry there. However, it is not possible for all the industries, say, electronic appliances, which is yet to be substantially established.
As history stands as proof, BPOs have the inordinate ability to improve the standards of living conditions of a region. Also, BPOs, apparently, tend to generate a Domino’s effect on any economy’s prosperity as they create jobs which increase the purchasing power of the common citizens thereby paving wider way for the FMCG and consumer durable market, resulting in an overall development of the economy as other distantly associated
Telecommunication and BPO sector Telecom sector has so far been the most exploited
industries could bank on this development. Countries like India, Philippines substantiate this claim.
industry in the region especially South Africa. Every major telecom company has its operations here. Telecom is much more than an industry that generates profits for its own self. It indirectly contributes
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Infrastructure and FIFA ‘10 The country has already proved its mettle in infrastructure investment by organizing FIFA ’10 in the most possible successful way. Infamous speculations on its crime rate and HIV were strictly dealt with, proving the countries organizational capa-
Easier said than done, for the country to be more investor friendly, it entirely lies in the hands of bilities. This should only positively influence the companies to invest. Advanced development is
the Government to let the business optimism and
significantly localized around cities such as Cape
economic cum strategic intelligence dine to-
Town, Port Elizabeth, Durban and Johannesburg
gether at the same table of industrial develop-
where most part of the event was held. FIFA ’10
ment by offering attractive foreign investment
was more than a sports event as it stood as a testament for the country’s determination towards making it a better place to invest. The hospitality
policies. And, the Government is credible enough to make these changes happen.
industry has shown significant growth and so is the tourist industry though the latter was already something the country was known for. Conclusion The recent developments on the part of the Government suggests, it is more willing to invest on areas other than diamond manufacturing and adventure tourism, and it simultaneously is working toward bringing the corruption and crime rates down as they have been plaguing the country for so long. Hence, the country has more than enough reasons to suggest that it is an ideal destination for the investors to look, if
the weeds are
plucked out.
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FUN ‘O’ MICS
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