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Term of the Week
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Company In Focus : Amazon
December 23, 2012
Cover Story Central banks : How they are ruling the financial world
INSTITUTE OF MANAGEMENT TECHNOLOGY, GHAZIABAD
Dear Readers, Greetings from FinNiche! In this edition of FinXpress, we have Amazon as the ‘Company in Focus’. In the ‘Term of theWeek’ section, we explore ‘DuPont Model’. Moving to the ‘Markets This Week’, the Indian markets ended in red for the second consecutive week with the Sensex falling 0.35 percent and Nifty falling 0.29 percent from last week. The special page gives some insight into Central Banks and how they are ruling the Financial World. We sincerely hope that the readers will find the content engaging. We would appreciate feedback and suggestions for improvement. We look forward to keeping you updated and adding to your knowledge base. Till then, “Enjoy Reading”!
Yours Sincerely, The Editorial Board FinXpress
December 23, 2012
COMPANY IN FOCUS Amazon Amazon.com, Inc. is an American multinational electronic commerce company with headquarters in Seattle, Washington, United States. It is the world's largest online retailer. The company also produces consumer electronics. The company was founded in 1994, spurred by what Bezos called his "regret minimization framework", which he described as his effort to fend off regret for not staking a claim in the Internet gold rush. The empire started off with a vision that one can build a store online that simply could not exist in any other way. Jeff Bezos, the owner understood and assessed the internet to push his vision beyond the boundaries. Amazon has the first mover advantage in online bookselling industry. Its objective then was not strictly based on competitive action and responses rather were based on implementing its mainstream strategic plot of expansion through customer innovation. BUSINESS STRATERGY: 1. Digital enables limitless inventory 2. Digital boosts customer care 3. Digital allows high margin, lowest prices PRODUCT AND SERVICES: Retails Goods: Amazon product lines include books, music CDs, videotapes and DVDs, software, consumer electronics, kitchen items, tools, lawn and garden items, toys & games, baby products, apparel, sporting goods, gourmet food, jewelry, watches, health and personal-care items, beauty products, musical instruments, clothing, industrial & scientific supplies, and groceries Consumer electronics: Amazon launched Amazon Kindle, an e-book reader. In September 2011, Amazon announced its entry into the tablet computer market by introducing the Kindle Fire, which runs a customized version of the operating system Android. WEBSITE: The domain amazon.com attracted at least 615 million visitors annually by 2008, twice the number of walmart.com. Amazon attracts approximately 65 million customers to its U.S. website per month. The company has also invested heavily on a massive amount of server capacity for its website, especially to handle the excessive traffic. In addition to amazon.com, there are different versions of Amazon for several different countries; as of 2012 these are: amazon.co.uk, amazon.fr, amazon.de, amazon.it, amazon.cn, amazon.co.jp, amazon.ca, amazon.com.br and amazon.es. These sites vary in assortment and prices.
December 23, 2012
BUSINESS MODEL: Amazon employs a multi level e-commerce strategy. Amazon started off by focusing on Business-to-Consumer relationships between itself and its customers, and Business-to-Business relationships between itself and its suppliers but it then moved to incorporate Customer-to-Business transactions as it realized the value of customer reviews as part of the product descriptions. It now also facilitates customer to customer with the provision of the Amazon marketplace which act as an intermediary to facilitate consumer to consumer transactions. The company lets almost anyone sell almost anything using its platform. In addition to affiliate program that lets anybody post Amazon links earn a commission on click through sales, there is now a program which let those affiliates build entire websites based on Amazonâ€™s platform. Some other large e-commerce sellers use Amazon to sell their products in addition to selling them through their own websites. The sales are processed through Amazon.com and end up at individual sellers for processing and order fulfillment and Amazon leases space for these retailers. REVENUE MODEL: Over the last decade Amazon has developed a customer base of around 30 million people. Amazon.com is primarily a retail site with a sales revenue model. Amazon makes its money by taking a small percentage of the sale price of each item that is sold through its website. Amazon also allows companies to advertise their products by paying to be listed as featured products. FUTURE INNOVATIONS: Amazon has 4 more new innovative devices planned to launch by 2020. They are 1.
The Amazon publishing platform,
The Amazon entrepreneur store,
The Amazon tablet and
The Amazon Universal Media Centre.
Focusing on its competency of digitization and innovating has helped Amazon expand its horizons largely. The process of innovation has to continue in new fields and new strategies have to be developed if Amazon wishes to continue on its path of success because the competition will increase rapidly as e-commerce and m-commerce develops even further.
December 23, 2012
TERM OF THE WEEK : DuPont Model
DuPont analysis (also known as the DuPont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (Return On Equity) into three parts.The name comes from the DuPont Corporation that started using this formula in the 1920s. Return on equity (ROE) is a closely watched number among knowledgeable investors. It is a strong measure of how well the management of a company creates value for its shareholders. The number can be misleading, however, as it is vulnerable to measures that increase its value while also making the stock more risky. Without a way of breaking down the components of ROE investors could be duped into believing a company is a good investment when it's not. ROE = net income / shareholder's equity If this number goes up, it is generally a great sign for the company as it is showing that the rate of return on the shareholders equity is going up. The problem is that this number can also rise simply when the company takes on more debt, thereby decreasing shareholder equity. This would increase the leverage of the company, which could be a good thing, but it will also make the stock more risky. There are two variants of DuPont analysis, the original three-step equation, and an extended five-step equation. Three-Step DuPont To avoid mistaken assumptions, a more in-depth knowledge of ROE is needed. In the 1920s the DuPont Corporation created a method of analysis that fills this need by breaking down ROE into a more complex equation. DuPont analysis shows the causes of shifts in the number. The three-step equation breaks up ROE into three very important components: ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier) These components include: Operating efficiency - as measured by profit margin. Asset use efficiency - as measured by total asset turnover. Financial leverage - as measured by the equity multiplier.
December 23, 2012
The Three-Step DuPont Calculation ROE = (net income / sales) * (sales / assets) * (assets / shareholder's equity) If a company's ROE goes up due to an increase in the net profit margin or asset turnover, this is a very positive sign for the company. However, if the equity multiplier is the source of the rise, and the company was already appropriately leveraged, this is simply making things more risky. If the company is getting over leveraged, the stock might deserve more of a discount, despite the rise in ROE . The company could be under-leveraged as well. In this case it could be positive, and show that the company is managing itself better. Even if a company's ROE has remained unchanged, examination in this way can be very helpful. Suppose a company releases numbers and ROE is unchanged. Examination with DuPont analysis could show that both net profit margin and asset turnover decreased, two negative signs for the company, and the only reason ROE stayed the same was a large increase in leverage. No matter what the initial situation of the company, this would be a bad sign.
December 23, 2012
MARKET THIS WEEK SENSEX SENSEX fell by 0.35% from last week and ended at 19242.00 this week.
Simple Moving Averages 30 Days
NIFTY The Nifty fell by 0.29% from last week and ended at 5847.70 this week. Simple Moving Averages
December 23, 2012
Overview Exchange Rates vs. INR Currency Symbol Rates % Change 55.086 1.14% US Dollar $ 72.77 1.9% Euro € 14.99 1.01% Dirham AED 0.655 0.76% Japanese ¥ Yen 8.83 1.8% Chinese CNY Yuan LENDING DEPOSIT RATE Base Rate Savings Deposit Rate Term Deposit Rate
9.75%-10.50% 4.00% 8.50%-9.00%
Rs. / Unit
10gms. 1 Kg.
0.97 % 5.2%
RESERVE RATIOS CRR 4.25% LRR 23.0% POLICY RATIOS Bank Rate Repo Rate Reverse Repo rate Marginal Standing
9.00% 8.00% 7.00% 9.00%
The Indian market ended in red for the second consecutive week with the Sensex falling 0.35 percent and Nifty falling 0.29 percent from last week.Sectoral wise, all the BSE sectoral indices ended with losses, the BSE Realty index was the top loser, down 3.8% followed by BSE Metal index down 2%, BSE Capital Goods index down 2% and BSE Healthcare index down 2%. The high beta Mid-Cap and the Small-Cap indices fell even more than the benchmark indices. Both the index lost 1.5% each.RIL, Infosys,, Wipro, SBI, ICICI Bank, Tata Steel, Bajaj Auto, Sun Pharma, Cipla, Hero MotoCorp, ONGC, Dr Reddys Lab, Tata Motors, Hindalco Inds, Mahindra & Mahindra NTPC, Bharti Airtel, BHEL, HDFC were among the losers in Sensex and Nifty. The markets fell as lenders were hit by profit-taking. Bharti Airtel fell more than 3 percent after Central Bureau of Investigation (CBI) filed charges due to alleged corruption in allocation of mobile airwaves. India has raised the ceiling for foreign direct investment (FDI) in asset reconstruction companies (ARCs) to 74 percent from 49 percent. The increase in the ceiling is subject to the condition that no sponsor can hold more than 50 percent of shareholding in an ARC through the FDI or foreign institutional investment route. Foreign investment in ARCs would also need to comply with India's FDI policy in terms of entry route and sectoral caps. The global markets also tracked weakness after a Republican proposal to deal with a US fiscal failed to get enough support, deepening uncertainty over the US fiscal cliff.The U.S. stock futures plunged sharply after House Republican leaders canceled their Plan B vote, which corroded hopes that politicians will reach a deal to avert the fiscal cliff before the end of the year.Even the European stock indices were trading lower tracking overnight losses in the US and weakness in the Asian markets Also Standard and Poor's expects India to grow by 6.5% during 2013.There might be disinvestment of Government’s shares in Steel Authority of India Ltd (SAIL) in February. The Bosnian unit of world steel major Arcelor Mittal, wants to lay off more than half its 2,600-strong workforce.
December 23, 2012
NEWS OF THE WEEK Investment protection clause: India can't do a Maldives without paying a price Recent disputes, including the GMR-Maldives government row and the clash between foreign telecom firms Telenor, Sistema, Etisalat and Vodafone and the Indian government, have exposed India's vulnerable position in investment agreements. While the foreign telecom companies can use a potent weapon - the 'investment protection' clause in bilateral treaties - against India, GMR cannot do the same with Maldives. This clause is absent in the India-Maldives trade pact. Conversely, it is present - that too in an open-ended form - in many of the other 70-odd bilateral treaties operationalized by India that have been invoked in the telecom disputes. The 'investment protection' clause gives a foreign company an additional, and stronger, legal option in a dispute with a country: international arbitration based on a bilateral treaty.India could end up facing large claims as most of the treaties signed by it have blanket investment-protection provisions, which can be exploited by foreign companies in international arbitration panels.
India Inc's top guns set to attend NarendraModi's Vibrant Gujarat 2013 summit Hundreds of diplomats and businessmen, including the who's who of Indian industry such asRatan Tata, MukeshAmbani, Anil Ambani, Sahara India Chairman Subrata Roy, Essar Group's Shashi Ruia, Gautam Adani of Adani Group and Vedanta boss AnilAgarwal, are expected to gather at the showpiece investment meeting of newly re-elected Gujarat Chief Minister NarendraModi in January. No effort is being spared to make Vibrant Gujarat 2013, marketed by American lobbying giant Apco Worldwide, the "most high-powered and effective" investment summit "ever held", an official closely associated with organising the event said on condition of anonymity. Vibrant Gujarat 2013 will be Modi's first major public event post-elections, and will inevitably be assessed in the context of his ambitions and chances of leading BJP nationally. Senior government officials and marketers associated with the meeting said "the event has been accorded the highest priority by the chief minister".
Forex reserves jump by $1.64 bn to $296.63 bn The foreign exchange reserves rose by a robust USD 1.637 billion to touch USD 296.63 billion during the week ended December 14 on the back of healthy addition of core currency assets, the Reserve Bank said today. The total reserves stood at USD 294.99 billion in the previous reporting week. Foreign currency assets, a major component of the forex reserves, were up by USD 1.614 billion to USD 262.119 billion for the week ended December 14, according to the Reserve Bank's weekly statistical supplement. Foreign currency assets expressed in US dollar terms include the effect of appreciation or depreciation of the non-US currencies, such as the euro, pound and yen, held in the reserves, the apex bank said. The gold reserves remained unchanged at USD 27.803 billion during the week, RBI said. For the week under review, the special drawing rights (SDRs) were up by USD 15.4 million to USD 4.43 billion, while the country's reserve position with the IMF was also up by USD 7.8 million to USD 2.27 billion.
December 23, 2012
Etihad keeps Kingfisher, Jet Airways guessing; deal may be sealed soon The middle-east carrier Etihad kept Jet Airways and Kingfisher Airlines guessing even as it picked up a 70 per cent stake in Air Berlin's flier miles programme for over Rs 1,000 crore on Wednesday. According to a source in Kingfisher Airlines, the Etihad management, under CEO James Hogan, had indicated that the management will decide on a possible investment in Indian aviation sector very soon. Kingfisher top brass is still waiting, giving credence to the buzz that Etihad may lean towards Jet Airways as its Indian partner. "We have not heard anything. We are waiting. If the decision goes in favour of Jet Airways, then we would think that Kingfisher was used as a ploy to beat down Jet Airways' valuation," said a senior Kingfisher official. At the stock bourses, the investors were disappointed in the absence of news for the second consecutive day. The shares of Kingfisher and Jet fell. Jet Airways saw its share price plunge 7.03 per cent, or Rs 42.85, to Rs 566.50 a share. KFA fell 1.43 per cent to Rs 15.21 a share. Etihad warmed towards Kingfisher after a deal between United Spirits with spirits maker Diageo was announced, a source at Kingfisher Airline said.
Govt plans to introduce ‘sin tax’ to curb use of alcohol, tobacco India has mooted the introduction of a designated "sin tax" to finance a part of the health budget during the 12th five year plan (2012-2017)to be submitted to the National Development Council (NDC). The document for NDC says a package of policy interventions would be taken up which includes raising taxes on tobacco, enforcing ban on tobacco advertising in electronic media, counseling for quitting tobacco, early detection and effective control of high blood pressure and diabetes, screening for common and treatable cancers and salt reduction in processed foods. According to the Planning Commission, general tax revenues would be the principle source of finance for publicly delivered health services supplemented by partnerships with the private sector and, contribution by corporates as a part of their corporate social responsibility. The commission has pitched for earmarking a part of the proposed 2% CSR allocation by companies for funding public healthcare facilities. The companies’ bill, passed by Lok Sabha this week, proposes that companies with a turnover of Rs 1,000 crore, net profit of Rs 5 crore or net worth of Rs 500 crore mandatorily spend 2% of their profits on CSR, while leaving it to companies to decide where they intend to spend the funds.
Walt Disney completes Lucasfilm acquisition for $4.06 billion Disney says it has completed its acquisition of Lucasfilm Ltd. for $4.06 billion in cash and stock. The company said Friday that it issued 37.1 million shares and made cash payment of $2.21 billion to buy the maker of "Star Wars" from its sole owner, George Lucas.The total transaction value was based on Friday's closing price of $50 for Disney shares. The deal includes special effects giant Industrial Light & Magic, video game maker Lucas Arts and sound studio Skywalker Sound.
December 23, 2012
COVER STORY Central Banks: How They Are Ruling the Financial World It's a central bankers' world, and we're all just living in it. Entities such as the Federal Reserve and the European Central Bank in 2012 took control of global economies like never before. Based on current market and economic behaviour it's likely to be years before anything changes.After all, how can central banks take their foot off the stimulus pedal when there's so much at stake? In all, 13 other central banks in the world have followed the Fed's lead and set interest rates at or near zero in an effort to keep the liquidity spigots open and prop up their ailing economies. Those 14 economies represent a staggering $65 trillion in combined equity and bond market capitalizations, according to Bank of America Merrill Lynch. As for the bond-buying programs - aka quantitative easing - that dovetail with the low interest rates, the U.S. central bank alone shortly will eclipse $3 trillion on its balance sheet and is expected to end 2013 north of $4 trillion in electronically created money. When you add up all the central banks in the world, that figure is going to be over $9 trillion. That's like creating the second-largest economy in the world out of thin air.
The central banking has become an economy unto itself, a multi-trillion-dollar empire that manipulates markets, which responds to the slightest news out of the respective entities' policy making committees.And if you're looking for a point at which the central banks let the free market to its own devices, don't hold your breath.Fed Chairman Ben Bernanke and the central bank's Open Markets Committee has said that rates will remain near zero at least until unemployment drops to 6.5 percent and inflation rises to 2.5 percent. If current trends are any gauge, either occurrence is likely to take years. In fact, the otherwise bullish Bank of America strategists say the main risk to stocks next year is the economy improving significantly, as that might spur the Fed to dial down the extraordinary measures it is taking to keep the American growth engine purring.
December 23, 2012
The most obvious reason for the ongoing rally in risk assets is the largess of major central banks. Policy continues to be a major driver of risk appetite. With so much investment flow predicated on QE-infinity, and the maintenance of zero interest rates, anything that disturbs the liquidity outlook is likely to increase volatility. The strong performance of banks and bonds and the underperformance of cash may make bond and equity markets vulnerable to any upside growth surprises in the first half of 2013, as this would likely lower liquidity expectations. The result of such widely shared sentiment is an upside-down world for investors. Whereas those looking to put money to work in the equity markets could simply look at a company's fundamentals and price action and then act accordingly, a world where aggressive central bank policy will be at play indefinitely and immeasurably changes the entire landscape.Yes, monetary policy always has been important to the markets, but not like this. Never have investors been so nervous after such a strong market. Greater enthusiasm would have been expected. If the Fed were to leave policy alone and let markets decide, then equity markets would probably fall. But, as it is, if real investors can't predict which way markets will go, then they will stay on the sidelines.
None of the major Wall Street houses is betting against the stock market in 2013, reasoning that equities will be pushed forward by a modestly strengthening economy and continued Fed accommodation. This change in communications should further cement the view that the first rate hike won't occur until late 2015. The continued gentle posture of monetary policy should keep financial conditions supportive, helping to offset some of the drag imposed by fiscal policy. We're in open-ended QE across the globe. Nobody knows what the end game is.
December 23, 2012
CAN YOU SOLVE IT? FinQuiz
LAST WEEKâ€™S ANSWERS:
Match the following : Shikha Sharma
Dr. Omar Ashur
1. 2. 3. 4. 5.
CITIBANK Black Tuesday Tarini Vaidya (KBC Bank India and South Asia) Warren Buffett Security paper mill (Hoshanagabad, MP)
Winner: Ajay Maheska
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December 23, 2012