Shailesh J. Mehta School of Management Indian Institute of Technology,
Finsight The Fortnightly Newsletter
Inside this Issue
Source:
IIP Decline: The Bleeding of
Mint
Issue: Aug 19, 2012
2-4
The Economic Times
News of last 2 weeks
5-6
The Economist
Markets
7-9
Campus Buzz
10
Knowledge section
11
Check your Fin Quotient
11
already anemic economy
MoneyControl.com Business Standard Deccan Herald Hindustan Times Investopedia.com
F I N S I G H T
IIP Decline: The Bleeding of already anemic economy continues The dismal performance of the Indian industry took everyone by surprise when the IIP (Index of Industrial Production) figures reduced by 1.8% in comparison to the figures achieved last year. Though a poor show on the production front was expected, a negative growth definitely proved to be a shocker. Excerpts and valuable comments from the experts crowded the media space and quite naturally we found their opinions are in unison. Looking at the facts and figures would help us get hold of the nerve of the whole issue. IIP: WHAT IT MEANS IIP or Index of Industrial Production is an indicator of the short term performance of the production in the industry when compared to a reference or earlier time period. It serves as a metric to gauze the vibrancy of the economy operating on large scale industries. It is basically a short term reference (as was stated earlier) of industrial growth and it serves this purpose till the detailed industrial survey data becomes available ASI (Annual Survey of Industries). As with all the metrics, it also follows the weighted average method, assigning weights to sectors according to their contribution. Naturally, this index is being closely watched by the market followers.
IIP: THE UNDERLYING IMPLICATION That was the uninteresting definition part. Decryption of the message lies in another level. The earlier cover story of Finsight on “Rising Inflation in India & its ramifications� very well captured the mutual interactions of several macroeconomic factors in our country. The author apprised us of the fact, evidently, that the regulatory norms by RBI are biting into the expected supply of production by the manufacturing sector as the money to mobilise the whole manufacturing process is held ransom to the higher interest rates. Eventually, the mood of investing in India prevailing is quite negative. We need to remember that India is not at all an export-driven country; on the contrary the internal consumption boosts the growth. Hence, if the factory outputs are not quite meeting the market demands, the price will only increase, moreover exports would increase and again the trade deficit would be impacted heavily. What we see in the news headings in not far from this truth either. If we look at the agricultural sector, the implication of this equation is quite evident. Though the overall inflation has reduced to 6.87% in July, the food inflation remains raging at 10.06%. Adding salt to the injury, the agricultural production is hit and will go on showing even worse results in the face of a weak monsoon.
IIP Decline: The Bleeding of already anemic economy continues...2(cont’d) Though it will be clichÊd to state that this deadlocked scenario calls for an overhaul in the economic policies, this is a fact that is doing the rounds in the industry and the north block. The growing fiscal deficit after all is hammering down the GDP growth for long. A report in the Economic Times a few days back showed that 8 states and a couple of UTs have given their nod to welcome FDI in multi brand retail as the fund trapped country badly needs an injection of fresh inflows of investment for overall growth. But the blood-sucking coalition politics does not seem to wither away so easily. Only way to find out where this whole episode ends seems like watching the popular soap-operas that hallucinates the minds of our households!! W H AT N U M B E R S R E V E A L : A PA L E T T E F U L L O F D I S A P P O I N T I N G COLOURS Factory outputs grew at 9.5% in June last year (FY 2011-2012). Not quite the same this year, as the main culprit behind this seems to be the manufacturing sector which constitutes more than three fourth share of the index. The slowdown in this segment has paralysed the whole production juggernaut at play. After all, a decline of 3.2% is a big blow. The capital goods sector followed the mood registering a decline of 27.9%. Some consolation (if that is the right word to use) came in the form of meagre or rather non-negative growth in mining sector (0.6%), energy sector (8.8%) fared relatively well. CAPITAL GOODS SECTOR: A DIFFERENT STORY!CompanyQuarterly net sales (Rs cr) Amidst the news of the nosedive of IIP, one school of thought came out with their proposition that this decline does not reflect the scenario in the capital goods and consumer non-durables. Now when we talk about capital goods, essentially what it constitutes is boilers, engines, commercial vehicles, transformers etc. Notable is the fact that big players like BHEL or L&T have scored really well in terms of net sales (17% & 26% respectively). Even collectively the 17 companies in Bombay Stock exchange's capital Goods Index showed an increase of 16% net sales. Now, does this mean the IIP data is entirely confusing? Not really. The commonly accepted notion is that the index shows the movement of products from the factory level. But an engine or turbine or a boiler for that matter can take several months to finish and the manufacturers in the power sectors' production chiefly consists of these equipments only (more than 50%).
IIP Decline: The Bleeding of already anemic economy continues...3(cont’d) More importantly, these companies may be involved in other functions such as design or project executions. These factors are not included in the index. METHODOLGY OF IIP CALCULATION: A HISTORY OF GOOF-UP In the recent past (March'12), the IIP data for January was calculated to be 6.8% after a poor show in Dec'11. The upbeat figures drew the attention of the industry and the sceptics frowned.
The hue and cry was followed by the Government revising the data to 1.1%. The Chief Statistician of India reported that the sugar output had been wrongly reported at 13.41 million tonnes whereas the actual figure was 5.81 million tonnes. Even the then Finance Minister Pranab Mukherjee stated this incident to be “totally baffling”. Such a history and the departures of the figures from the actual scenario, discussed above, has again made way for the questions asking the way IIP is calculated. CONCLUSION There may be some anomalies in the calculation of IIP but the slowdown is something we cannot ignore. It is true that the capital goods sector fared well, but problems are plenty in this sector too. The power segment is facing a great predicament in supply of fuels and land acquisitions. Experts have started talking about sub 5% growth for FY 2013 after looking at the figures at hand. Our only hope is a change of guard in the north block. PC, are you listening? By- Abhishek Banerjee , SJMSOM, M.Mgt, 1st Year
News of last 2 weeks Indian Rupee Climbs to Three-Week High, Bonds Gain The Indian rupee surged to a near threeweek high against the U.S. dollar Tuesday, tracking positive local stocks and as global risk appetite remained firm on hopes of strong action from the European Central Bank to tackle the region's debt crisis.
The rupee has gained 2% against the U.S. dollar since July 26, after ECB President Mario Draghi pledged to defend the common currency and sparked a rally in risk-sensitive assets worldwide. India's current account deficit, which swelled to an all-time high of 4.2% of gross domestic product in the last fiscal year to March 31, is seen as the biggest weight on the rupee. The rupee's 19% fall against the dollar over the past 12 months is expected to narrow the current account deficit by discouraging imports and making Indian exports more competitive. PMEAC projects 6.7% growth in GDP for FY 2012-13 The Prime Minister's Economic Advisory Council (PMEAC) headed by Dr. C. Rangarajan, on Friday, 17 August 2012, projected 6.7% growth in GDP in 2012/13. The GDP is projected to grow at 6.7% in 2012/13 due to the impact of weak monsoon on agriculture and the current reservoir storage position in 2012/13, PMEAC said in a statement.
PMEAC said deficient monsoon will likely have an adverse impact on the prices of primary food items, especially on those where the ability of government stocks to play a moderating role is not there. PMEAC has forecast inflation rate to be within the range of 6.5% to 7% at the end of 2012-13. RBI to tighten intra-group banking exposure norms The Reserve Bank of India (RBI) has decided to tighten banks' intra-group exposure norms to check “unacceptable risks� taken by banks while dealing within a banking group. The RBI said it becomes a concern when intra-group transactions and exposures disadvantage a regulated entity that is part of a financial group. India to go with IFRS from April 1 next year, says Moily India will implement internationally accepted reporting rules, IFRS, from April 1 next year, Minister for Corporate Affairs and Power Veerappa Moily has said.
With the Government looking to enact a new direct taxes code from April 1, 2013, there is expectation that thorny taxation issues under 'fair value' concept would be resolved by that date.
News of last 2 weeks Inflation eased to 6.87% for month of July 2012 The annual rate of inflation based on the Wholesale Price Index (WPI) eased to 6.87% (Provisional) for the month of July 2012 (over July 2011) from 7.25% (Provisional) in June 2012. Build up inflation in the financial year so far was 2.36% compared to a build up of 3.14% in the corresponding period of the previous year. The WPI inflation fell below the 7% level for the first time since November 2009, building hopes that the central bank will find more space to ease monetary policy and revive industrial growth that has slumped largely due to high interest rates over the past couple of years. IIP Declined to 1.8% in June 2012 Industrial production declined 1.8% in June 2012 compared to the level in the month of June 2011, as per the latest data released by the Ministry of Statistics & Programme Implementation. Manufacturing output, which has a 75.5% weight in the index of industrial production, fell 3.2% in June 2012 compared to the level in the month of June 2011. Capital-goods production shrank 27.9% in June 2012 compared to the level in the month of June 2011.
Union Finance Minister P. Chidambaram recently said that a path
of financial consolidation will be unveiled shortly. Government finances are under pressure as expenses exceed r e ve n u e , m a i n l y b e c a u s e o f subsidies doled out for cheaper supplies of food, fuel and fertilizer. Finance ministry wants RBI to pay seven percent interest on C R R deposits The finance ministry has suggested that the Reserve Bank of India pay seven percent interest on the mandatory deposits parked with it by banks, one among several measures proposed to lower rates even if the central bank does not ease the monetary policy. Finance minister P Chidambaram will take a call on the proposal, which would eventually go to the RBI. "This is one among the many measures we have suggested to bring interest costs down," a senior finance ministry official said. Indian banks need over Rs 1.5 lakh cr to meet Basel III norms Reducing its stake in public sector banks to below 50 percent is an option before the government to enable them meet capital requirement norms under Basel III, Reserve Bank of India Governor D Subbarao has said. He said Indian banks need to raise Rs 1.5 lakh crore to Rs 1.75 lakh crore as capital to meet the BASEL-III norms which are to be implemented by March 31, 2018.
Markets The market edged higher for the third consecutive week as the rate of growth in inflation based on the wholesale price index (WPI) fell to the slowest pace in nearly three years in July 2012, building hopes that the central bank will find more space to ease monetary policy and revive industrial growth that has slumped largely due to high interest rates over the past couple of years. The barometer index, BSE Sensex, jumped 133.34 points or 0.76% to settle at 17,691.08. The 50-unit S&P CNX Nifty gained 45.90 points or 0.86% to 5,366.30. Previous week ended 10th Aug saw BSE Sensex rose 359.81 points to 17,557.74 and S&P CNX Nifty 104.70 points to settle at 5,320.40.Comments from Union Finance Minister P Chidambaram that he intends to shortly unveil a path of fiscal consolidation aided gains on the domestic bourses.
Key benchmark indices snapped two-day winning streak on Thursday, 16 August 2012, as investors pared expectations of further quantitative easing by the US Federal Reserve following encouraging US economic data but closed with small gains in choppy trade on Friday, 17 August 2012, as euro zone debt worries eased after German Chancellor Angela Merkel said Germany will do whatever it can to keep the euro. Key Highlights: Bharti Airtel Q1 net falls 24% to Rs 762 cr QoQ India's largest telecom operator Bharti Airtel disappointed the street by reporting lower-than-expected numbers in the quarter ended June 2011.
Consolidated net profit fell by 24.23% quarter-on-quarter to Rs 762.2 crore. However, net sales rose just 3.3% to Rs 19,350.1 crore from Rs 18,729.4 crore
during the same period.The stock hit a 52-week low of Rs 252.95 in intraday on 10 August 2012. State Bank of India net profit rises 136.91% in the June 2012 quarter SBI’s net profit surged 136.91% to Rs 3751.56 crore on 16.89% increase in total income to Rs 32415.49 crore in Q1 June 2012 over Q1 June 2011.The surge in net profit was mainly due to a sharp fall in provisions and contingencies in Q1 June 2012. The bank's ratio of net nonperforming assets to net
Markets assets rose to 2.22% as on 30 June 2012, from 1.82% as on 31 March 2012, and 1.61% as on 30 June 2011. Australian ruling on cigarette packages burns ITC, FMCG stocks Index heavyweight and cigarette maker ITC declined 2.2%to Rs 261.85 after an adverse court ruling in Australia for cigarette makers.
Tobacco giants failed in their bid to overturn an Australian law forcing them to remove virtually all branding from cigarettes packets, giving a boost to other countries planning similar steps. S E B I unleashes new rules to boost MF, IPO markets Capital market regulator unleashes a slew of measures aimed at reviving investors' interest in mutual funds as well as the primary market. S E B I announced extensive changes in its rules for mutual funds and IPOs.
As per the new SEBI rules, investing in mutual funds could become more expensive, but retail investors will be assured a minimum number of shares in IPOs. SEBI also recommended to the G o ve r n m e n t t h a t e q u i t y m u t u a l investors should be given tax benefits under the proposed Rajiv Gandhi Equity
Savings Scheme. Maruti Suzuki to lift the lockout at Manesar plant Maruti after market hours on T h u r s d a y , 1 6 Au g u s t 2 0 1 2 , announced that the lock-out at its Manesar facility in Haryana will be lifted on 21 August 2012.
The company had declared a lock-out at the Manesar plant on 21 July 2012 following large scale violence by workmen on 18 July 2012. In the violence a General Manager, Mr. Awanish Kumar Dev, was burnt to death inside the plant facilities and 96 supervisors and managers were injured/hospitalized. Lupin, UltraTech to replace S A I L , Sterlite in Nifty UltraTech Cements Ltd shares surged over 1% to hit its 52-week high of Rs. 1,733.40 after stock was included in the 50-share Nifty along with Lupin Ltd, according to reports. Reports stated the National Stock Exchange replaced S A I L and Sterlite Industries with Lupin and UltraTech Cement in the benchmark 50-share. The M S C I changes will take effect from September 3 while Nifty changes will apply from September 28, report says.m September 28, report says.
Markets Currencies: The rupee rose marginally on Friday, helped by the euro's gains and after a government panel forecast a lower current account deficit, but still posted a fall for the week as high global crude prices sparked demand for dollars.The partially convertible rupee closed at 55.73/74 per dollar as per the SBI closing rate. Commodities: Indian investment and jewellery demand declined to 181.3 tonnes compared to 294.5 tonnes in corresponding period previous year. Concerns over weak monsoon along with inflation and higher prices affected Gold consumption in India. COMEX Gold December futures on NYMEX registered weekly loss of 0.2% and settled at $ 1619.4 per troy ounce. Rising Syrian tensions and falling Crude supplies resulted in spiraling of light sweet Crude oil prices in world markets. Further supporting crude was the ongoing sanctions on Iran and its nuclear program.The Brent spot price was last recorded to be $ 115.77 per barrel. EIA has projected Brent Crude oil to average at $ 103 per barrel in second half of 2012 in its latest outlook. Expectations for week ahead The market may consolidate in a truncated week ahead amid lack of major triggers in the near term. The stock markets remains closed on Monday, 20 August 2012, on account of Ramzan Id. The progress of monsoon rains will be closely watched.The monsoon has been less than average during the current year. Rainfall across the country has been 15% below the long-term average so far this monsoon season, which started June 1. An India-Mauritius joint panel will discuss a series of proposals to review the double taxation avoidance treaty between the two nations on 22-24 August in Mauritius.On the global front, Greek Prime Minister Antonis Samaras is set to meet German Chancellor Angela Merkel in Berlin on 24 Aug 2012, and will visit French President Franรงois Hollande on 25 Aug 2012.
Campus Buzz: MIT AITI INDIA PROGRAM, July 02, 2012 to August 09, 2012 Massachusetts Institute of Technology (MIT), Boston launched the MIT Accelerated Information Technology Initiative (AITI) for the first time in India on July 2, 2012 at IIT Bombay. The program, hosted by IIT Bombay and Shailesh J. Mehta School of Management (SJMSOM), IIT Bombay is the India launch of MIT's mobile technology start-up incubator and was offered to 40 under-graduate and management students at IIT Bombay. AITI is a multidisciplinary group of the MIT that promotes development in emerging regions by cultivating young technology entrepreneurs.
In I I T, A I T I provided a six week course focusing on entrepreneurship and deployment of mobile phone services and applications like SMS, USSD, Android, and mobile web. The entrepreneurship component focused on idea generation, case studies, market analysis, marketing, pitches, presentations, funding and networking. Hence, forty students were selected out of a pool of several aspirants who finally got the coveted opportunity to explore novel ideas, start businesses, build teams, find customers, and manage cash flows for their mobile-based ventures with guidance from their MIT-affiliated instructors. During this program, external speakers like Gautam Shewakramani, Hiren Asudani, Ashok Karania and others had also come in from organizations such as GSMA, CoolAge, Mumbai Angels, Flurry India, InfoStretch, Loop Mobile, and there had also been several guest lectures by IIT faculty. Finally, the culminating Startup Showcase was held on August 9th at IRCC Auditorium, SJMSOM Building on the IIT campus from 6 to 9pm where the teams presented their work to the public. The program started with an encouraging speech by Prof. Karuna Jain and was anchored by Mr. Sriram Emani, Speaker Series and Startup Showcase Lead. Judges representing Mumbai Angels, Freemont Partners, TiE Mumbai, and Google were invited to give feedback to each of the student teams presenting, as well as determine who will receive an incubation opportunity and potential seed funding from Freemont Partners.The winning teams will be engaging with the Mumbai entrepreneurship community for mentorship, feedback, and eventually, funding for implementation of their business venture. -Aditya Das, M.Mgmt 2012-14, SJMSOM, IIT Bombay
Knowledge Section Hostile takeover - Allows a suitor to take over a target company whose management is unwilling to agree to a merger or takeover. The bidder continues to pursue it and makes the offer directly to the shareholder's after having announced its firm intention to make an offer. Sometimes a company's management will defend against unwanted hostile takeovers by using several strategies. Some of them are: Pac Man Defence: A defensive antitakeover tactic in which a company that is facing a hostile takeover from another company essentially turns the tables and attempts to purchase the would-be buyer. The target hopes that the acquiring firm will call off the takeover attempt and look for easier pickings. The White Knight: This is a common tactics in which the target company finds another company to enter the scene and purchase them out and away from the company making the hostile bid. A third company makes a friendly takeover offer to the company facing a hostile takeover. Other strategies include Poison Pill , Crown Jewel, Golden Parachute etc.
Check your fin quotient 1) In the world of trade and commerce what is special about the commissioning of Monte dei Paschi si Siena in Italy in 1742? 2) Name the term used for depreciating a company's intangible assets? 3) Royal & Sun Alliance recently re-entered, after 29 years, to Indian financial market and it is the first foreign insurance company started operations here through a joint venture with an Indian company. Name the company? 4) What is known as the cost of living index which represents the goods and services purchased by consumers?
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