Niveshak August 2020

Dear Niveshaks,

We are delighted to present you with August 2020 Edition. This edition marks 12th anniversary of our magazine and we are extremely proud to be part of this journey.

MBA colleges across the country are gradually calling back their students on voluntary basis and we at IIM Shillong are waiting for our turn while continuing with our E-learning.

For this month, we took on “Q1 FY 2020-21 sector-wise analysis: On the road to recovery?” for our ANNIVERSARY ARTICLE. In this we performed sectorial analysis of Q1 on various sectors such as Hotel and tourism, Banking, Agriculture and allied activities etc.., In AOM, we presented the “Economy Down, Stock Market Up! Is this another bubble waiting to burst?” where we take on behavior of stock market in current market conditions and outlined the factors influencing it.

During this period, NIF grew at 7.98%, and the updated portfolio worth was Rs. 18,38,802. The portfolio's top gainers Paramount communications, PPAP automotive, and PVR, whereas Godrej Consumer, Dr Reddy’s, and Manappuram Fin were the major losers.

For FINVIEW, we interviewed Mr.Vishal Goel, Assistant Vice President at HSBC Global Research and our esteemed alumni. he gave his insights on recent changes in margin rules and how they impact India, surge in retail investors in recent times , ESG investing and many more.

For FINGYAN, we are presenting “MERGING TOWARDS VICTORY : Using Strategic M&A to emerge a winner from the current crisis”. This article presents various mergers and acquisitions happened recently and the role of covid-19 in these deals.

In the CLASSROOM section, we discussed the Operation twist as recently RBI conduct the simultaneous sale of short-term securities and the purchase of longterm securities under OMO. Here, we covered how it is implemented and the reasons for why it is implemented and its advantages.

We wish you, our readers, a happy reading experience.

Stay Invested, Team Niveshak All images, design and artwork are copyright of IIM Shillong Finance Club © Finance Club Indian Institute of Management, Shillong

Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.

THE TEAM Harichandana Hulash Goyal Ishan Pandey Megha Rekhani Mehak Shivangi Siddhant Saha Tushar Gera Vignaesh S

CONTENTS NIVESHAK: AUGUST 2020

6

The Month That Was

15

8

10

Niveshak Anniversary article: Investment Q1 FY 2020-21 sectorwise analysis: Fund On the road to recovery?

19

Economy Down, MERGING TOWARDS Stock Market Up! VICTORY : Using Is this another Strategic M&A to bubble waiting to emerge a winner from burst? the current crisis

24 25 27 DEALS IN BREWERY

finview

29

THE COMPANY SCANNER: Edelweiss Financial Services Limited

Classroom: OPERATION TWIST

NIVESHAK | AUGUST 2020

TMTW

TMTW: The Month That Was GoI planning 25% stake sale in LIC :Govt is planning to sell 25% stake in Life Insurance Corporation through public offering. GoI is seeking cabinet’s approval for the same. Sale is expected to boost finances and help govt meet the fiscal deficit target of 3.5%

Indian companies are looking at overseas acquisitions:Indian companies with strong balance sheets have shaken off the shock from the coronavirus pandemic to chase overseas acquisitions, hoping to pick up attractive assets whose valuations have been hammered by the virus.

Parliamentary nod for PSB capital infusion:In a recently concluded session parliament approved capital infusion of INR 20,000 cr for Public Sector Banks. Finance ministry is expected to provide this capital in the near future. State owned banks have shareholder’s approval for raising capital from the market. In FY21 budget. Capital infusion is expected to occur in October-December quarter.

Sectors such as software services, drugs have practically came out unscathed from the pandemic. In light of these developments many PE backed funds have ventured overseas looking to purchase companies at distress valuations.

Centre’s October 1 deadline on loan moratoriums:Supreme Court has set a deadline of 1st October, before which centre has to decide on a few things regarding loan moratorium.

First of these will be, amount of time to be given to borrowers who were not able to repay the loan. Also whether interest has to be charged for that period.

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Fortune turnaround for Auto?:PV sales in September is pegged to be at 2.8 lakh to 2.9 lakh units, YoY growth of 20%. The growth has come at the back of inventory build up along with sustained rural demand.

Automakers have witnessed higher capacity utilization.

Post lockdown, autos have seen a rise in retail as well as wholesale sales.

No signs of Economic recovery:After the Indian economy witnessed its worst contraction in the April-June quarter, of 23.9%, recovery is expected

NIVESHAK | AUGUST 2020

TMTW

to be gradual. Rising infections have posed a constraint for the economic growth. Quantum of V shaped recovery will depend on the GDP level. Credit offtake has not strengthened to the levels it was expected to reach. Thus it is expected that this financial year will end with a contraction for the economy BPCL stake sale:-

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GoI is planning stake sale of 53.29% in BPCl by Mar 21. Disinvestment is expected to unlock value for the firm through higher investments efficiencies, access to global markets as well as advanced technologies.

Oil majors Rosneft and Saudi Aramco are unlikely to bid for the stake

NIF PERFORMANCE EVALUATION As on August 31st, 2020

August Month's Performance of NIF 110 108 106 104 102 100 98 96 94

Performance of Niveshak Investment Fund since Inception 300

250

200

150

100

Scaled Sensex

Scaled Portfolio

0

30-Jan -1 4 20-M ar-14 13-M ay-1 4 01-Ju l-14 20-Aug-14 09-Oct-14 28-No v-14 15-Jan -1 5 04-M ar-15 24-Apr-15 11-Ju n-15 28-Ju l-15 11-Sep -1 5 03-No v-15 22-Dec-15 09-Feb -1 6 30-M ar-16 19-M ay-1 6 05-Ju l-16 23-Aug-16 13-Oct-16 30-No v-16 11-Jan -1 7 16-Feb -1 7 07-Apr-17 26-M ay-1 7 13-Ju l-17 31-Aug-17 18-Oct-17 07-Dec-17 24-Jan -1 8 19-M ar-18 06-Aug-18 26-Sep -1 8 15-No v-18 03-Jan -1 9 20/ 02/ 19 10-Apr-19 31-M ay-1 9 18/ 07/ 19 07/ 10/ 19 26/ 11/ 19

27-08-2020

25-08-2020

23-08-2020

21-08-2020

19-08-2020

17-08-2020

15-08-2020

13-08-2020

11-08-2020

09-08-2020

07-08-2020

05-08-2020

03-08-2020

50

Sensex Scaled values

Portfolio Scaled Values

Value Scaled to 100

Total Investment Value: 10,00,000 Current Portfolio Value: 18,38,802 Change in Portfolio Value: 7.98% Change in Sensex: 6.84%

Risk Measures: Standard Deviation NIF: 35.12 Standard Deviation Sensex: 25.15 Sharpe Ratio: 2.80 (Sensex: 3.52) Cash Remaining: 1,46,352

Comments on the Equity market and NIF’s Performance The Indian markets’ performance in July, 2020 was stronger in comparison to that in June, 2020 which can be in part associated to the global cues and fiscal and monetary measures.The surge in retail investors trading in stocks continued and is consistent with the global trend post the COVID-19 pandemic.

Zero interest rates and liquidity lured FIIs to pump $2 Bn in Indian equities. DIIs were the net sellers this month and ended up selling $1.5 Bn during the month.

Indian rupee gained 3% against USD which depreciated against all currencies in August 2020. Eight out of the ten S&P BSE sectors ended in the positive territory in July, 2020. Of course, the extent of returns differs. Sectors like IT, healthcare and metals were the top gainers. Power, Capital goods and Real estate were the sectors which turned out to be the laggards in the month of July.

NIF displayed a strong performance with the NIF growing at a steady rate of 8% against a market return of 6.84 % reaching the level of Rs.18,38,802.

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NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE Monthly Performance Portfolio Weight

Top Gainers for the month 38.10%

Paramount Comm

35.25%

PPAP Automotive

32.80% Top Losers for the month

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PVR

-4.02%

GodrejConsumer

-3.38%

Dr Reddy's

-1.60%

Manappuram Fin

ANNIVERSARY ARTICLE Q1 FY 2020-21 sector-wise analysis: On the road to recovery?

ANNIVERSARY ARTICLE

NIVESHAK | AUGUST 2020 The GDP of India for Q1 of Financial Year 2020-21, i.e., the April-June quarter (Q1) declined by a sharp 23.9%, as per the estimates released by the Ministry of Statistics and Programme Implementation. The GDP had expanded by 5.2% in the corresponding quarter of 2019-20.

The June quarter GDP data is considered to be the worst contraction in the history of the Indian economy. It is mainly because the central government on March 25 had ordered a complete lockdown of most of the manufacturing and service sectors due to the spread of COVID-19. Only the essential services such as food items and medicines were permitted during this period of lockdown as the country tried to curb the spread of corona virus across the country.

The GDP for the fourth quarter of Financial year 2019-20 had expanded by 3.1%.

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The gross value added (GVA) at basic price at constant terms during the quarter ending June 30th shrunk 22.8%. The GVA at Basic Price at Current Prices declined 20.6% in Quarter 1 of FY 2020-21.

According to National Statistical Office (NSO), all the key sectors except agriculture witnessed substantial contractions, with construction witnessing a decline of a whopping 50.3% while the manufacturing industry saw a 39.3% fall. Apart from these industries, electricity, gas, water supply and other utility services declined by 7%. Trade, hotels, communication, transport and the services related to broadcasting contracted 47%.

Only the agriculture, forestry and fishing industry demonstrated a growth of 3.4% in the June quarter, the data showed.

ANNIVERSARY ARTICLE

NIVESHAK | AUGUST 2020 Sector wise Analysis

Banking Sector

Hotel and Tourism Industry

Hospitality sector has been one of the hardest hit sectors due to the pandemic.

Hotel sector has shrunk by 47%, and from what it looks like, it’s a long journey to recovery ahead. WTTC had estimated the revenue loss of up to $ 2.7 trillion along with 100 million jobs at risk globally. In the context of India, the next one year is going to be the most arduous for the travel and tourism industry, with an estimated revenue and job losses standing at $17 billion and 40 million (both direct and indirect) respectively.

The reduced operational capacity and increased operating costs due to increased safety and hygiene standards are some of the many challenges hotels face when they reopen.

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Almost 25-40% of total loans are under moratorium for most of the major banks, and most of them believe that only a small proportion of these loans may turn into NPAs. The benefits arising out of reduction in deposit rate would be tested due to the cut in the lending rate along with the changing scenario of lending and the banks may not have adequate profit cushion to support slippages unless they decide to raise fresh capital — which is a challenging task.

Loans under moratorium have declined from 31% of total outstanding loans in Phase-1 of the moratorium to about 18% as of Phase-2.

This is mainly because more borrowers starting to repay loans with the gradual opening of the economy.

Also, banks are being stricter in offering this moratorium as they worry about its impact on the credit culture.

ANNIVERSARY ARTICLE

NIVESHAK | AUGUST 2020 Manufacturing, Trade Sectors

Construction

and

Manufacturing, construction and trade sectors reported massive slump of 39.3 per cent, 50.3 per cent, and 47 per cent, respectively. These sectors were impacted by tight liquidity conditions and an overall slowdown in government spending on infrastructure development activities. Source: data released by the National Statistical Office (NSO) Production side was pulled down by deep contraction in manufacturing, construction, and trade, hotel, transport sectors while the expenditure side was clearly pushed lower by heavy contraction both in consumption and investment.

Although prices of the core crops remained largely steady during the strict lockdown months of April to June, mainly due to the strong government procurement, prices of horticulture produce, namely vegetables, and the livestock items such as eggs, meat, and milk dropped sharply at the producers’ level due to the disruption in supplies from mandis to the consumers and unfounded rumors about the virus spreading to protein food. India’s rabi production in the Financial Year 2019-20 crop year is estimated to be around 149.60 million tonnes, 4.10% more than the previous year. Of that, wheat output is estimated at a record 106.21 million tonnes.

Agriculture and allied activities Agriculture and allied activities were the only bright spot amidst the dismal GDP performance of the other sectors, registering a growth rate of 3.4% at constant prices in the first quarter of 2020-21.

However, the growth, which was driven largely by a bumper rabi harvest and facilitated by the relaxation in the lockdown, may not have resulted in a big rise in the income for a section of farmers. The evidence for this is the gross value added (GVA) at current prices for agriculture and allied sectors rising 5.7% in Q1 of 2020-21 against 8.6% in the same quarter last year.

This translated into an agricultural inflation rate of 2.3% in Q1 of FY 202021, down from 5.6% in the first quarter of the last financial year.

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ANNIVERSARY ARTICLE

NIVESHAK | AUGUST 2020 Demand Side: Why did the demand by each of the GDP constituents fall?

Individual demand: consumers were locked at home due to the pandemic.

And only essentials that made it to their shopping list, along with a substantial decrease in discretionary spending.

Private businesses: They had to shut shop for over a month due to the

nation-wide lockdown.

Even after the curbs were lifted, massive damage had been caused to the supply chain and labor availability, which didn’t help much Net Exports is positive because our imports suffered more than exports The government expenditure shot 16% due to the pandemic and the efforts to mitigate the financial crisis induced by the pandemic, but it failed to compensate for the loss in demand in other sectors

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AOM

NIVESHAK | AUGUST 2020

Economy Down, Stock Market Up! Is this another bubble waiting to burst?

only expected to go up. All of this is only going to add to the misery of the common man.

On the other hand, the Sensex fell from the all-time high of 42,272 in Jan ‘20 to 25,981 in Mar’20 and -Divya Singhvi surprisingly is now trading at 38,700.

Keshav Tawari This is despite there being no IIM Bangalore economic or healthcare wise improvements in the prospects of the An interesting analogy compares the nation. This quick recovery has left economy and stock markets to a man many economists and financial walking his dog in the park. The man analysts puzzled! (economy) moves in a straightforward stride with few deviations. His dog (stock market) on the other hand, is on a leash and runs in the same direction but at times chases a squirrel to the left or a butterfly to the right and goes completely berserk.

Well, the stock markets are a leading indicator of the economy and hence there is the expectation that they will show bullish trends when the Has this really happened for the first economy is booming and bearish time? The graph above paints a trends when the economy is under different picture. While it is often stress. Currently, due to the COVID-19 seen that the stock market is thriving pandemic, the Indian economy is despite the economy performing projected to shrink by 6.8% in FY21, sluggishly, this however is seen as a financial results of most corporates short-term mismatch. Historically, we declined with top and bottom line have seen that annual gains of more revenue performances being one of than 50% in the market have the worst in the last 12 quarters, generally coincided with turning leading to cost cutting and downsizing points in the economy and are by laying off employees and scaling accompanied by improvement in the back compensations. Unemployment GDP growth rate. This makes the in the country was at an all-time high current situation rare since the of 23.5% in April’20. Aviation, economy and stock markets are in Hospitality & Non-essential consumer such tangential directions. The most goods, NBFCs and real estates have surprising part being the speed of taken a major hit and once the recovery since even after the 2008 moratorium expires, banks’ NPAs are global financial crisis the SENSEX [15]

AOM

NIVESHAK | AUGUST 2020 took almost a year to recover to prior levels. So clearly it is the speed with which the Sensex fell and recovered, even before the pandemic is over, that is the matter of concern.

However, Indian stock markets aren’t the only ones showing such tendencies. During the 2008 financial crisis, the stock markets globally fell by 40-60% even though the economy didn’t really shrink by 50%. This was followed by S&P 500 tripling in the next 6 years which was of course not backed by such high growth in GDP. During COVID, the second quarter growth rates in US took its worst hit since the Great Depression of 1930s due to the coronavirus lockdown.

However, the major stock indexes have almost recovered back to precrisis levels making this one of the shortest bear trends in history.

So, what exactly is causing such a large dissonance between the markets and the economy this time around?

Firstly, the stock market is mostly forward looking and tries to discount the future while the economy shows the present state. Secondly, the economy includes all strata of society, but stock market is limited to those with sufficient disposable income and is primarily dominated by a much wealthier class.

When we look at the astonishing movement in the stock prices there are certain macroeconomic, behavioural and global factors which can explain this anomaly.

Central Banks and Governments have played an important role in increasing the liquidity in the market. As a chief

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economist says, “This Rally in equities is clearly not driven by fundamentals – its driven by the liquidity support from federal Reserve.”

Role of Central banks: RBI has continued to decreased repo rate from 5.15% in Feb ‘20 to 4% as of today. In US, the Fed is now targeting rates between 0% to 0.25% down from a previous target range of 1% to 1.25%.

Central banks all over the world are adopting quantitative easing to increase liquidity in the market.

Governments Boost: Markets are benefitting from massive monetary stimulus by the government - ₹10 trillion in India and $2 trillion in US worth of economic rescue packages.

Higher savings: Investment from retail investors in Q1FY21 shot up 78% Q-o-Q to ₹33,731 crore in the cash segment. The number of demat accounts have also jumped by 2.9 million from Jan to May ‘20. This indicates people with liquid funds are preferring to invest in stock markets in the absence of other lucrative options.

Given the higher liquidity in US (due to rate cuts & fiscal stimulus), we see a surge in investments from FIIs into India and other developing markets – it foreign touched a whopping $2.87bn in June ‘20 surpassing Mar ‘20 inflow of $1.14bn.

During the COVID scenario, markets saw an increase in the number of short sellers. One of the highest in the last 15 years. However, as the market kept rising (opposite direction to their expectations), the short sellers needed

AOM

NIVESHAK | AUGUST 2020 to cut their losses. In order to do so, they ended up by buying shares, which lead to increased demand and hence increased prices.

Investors are placing large bets on sectors such as tech and pharma.

During the pandemic, IT companies have managed major fixed cost reductions and have sustained their business through a ‘Work from home’ model. Pharma too has gained from increased medical expenses and lesser dependency on China for API. The expectation of bright future prospects for the companies in these sectors has led to a rally in their stocks.

Another phenomenon that we see occurring in stocks that entered the COVID scenario with large cash reserves and financial strength is their ability to weather through the crisis and end up gaining market share from the smaller competitors. In any case, most analysts and rating agencies have accepted FY21 as a washout year for earnings and growth. In such a scenario, managing to gain market share leads to higher valuation for such stocks. A prime example of this is Asian Paints. Additionally, stocks such as Reliance, Infosys, ICICI Bank and HDFC Bank which had a higher weightage in Nifty and SENSEX preCOVID as well, have rallied during COVID leading to an even higher weight in the index. Thus we can see that it is just a few stocks which have resulted in driving up the indices to a large extent.

Additionally, commodities such as gold always tends to gain when interest rates

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are low and political and economic uncertainties are high. Primarily due to its value as a safe investment alternative.

Our Opinion Given the lack of sustainability of the factors currently driving the bullish trend of the stock markets, this bubble is expected to burst sooner rather than later. This is primarily because the current prices in the market are not driven by the fundamentals but by excess liquidity.

India’s NPA crisis continues to plague the banking sector and the deteriorating financial health during the pandemic is only going to lead to further defaults post the moratorium period expires (Sept onwards). The government has attempted to induce demand through stimulus. However, the government has little fiscal space to provide a booster shot to the economy having already breached the fiscal deficit target.

Currently, there is a stark difference between the economic fundamentals of country and the stock market rally with India reporting a -23.9% GDP degrowth in Q1FY21 whereas the markets have rallied more than 15% in the same period. The degrowth numbers are infact expected to be worst when damages in the informal sector are taken into account. As mentioned by the RBI governor, the rally is fuelled by liquidity pumped in the market and is not expected to sustain at these levels for too long.

AOM

NIVESHAK | AUGUST 2020 China is India’s largest trade partner which can be seen through its trade deficit contribution of $ 53.6 billion.

Rising tensions between the countries and increased boycott of Chinese goods, especially raw materials has the potential to impact India’s manufacturing abilityand domestic businesses until they find alternative suppliers. So while the hopes for a vaccine are fuelling current investor

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sentiment, CO VID related fatalities and gri m economic conditions are the present reality.

T he vaccine and subsequent economic recovery remain a distant dream and a correction of the stock market is on the cards to converge with the economy.

Because after all, as Ritholts said, “The i ndex i sn’t the real worl d”.

NIVESHAK | AUGUST 2020

MERGING TOWARDS VICTORY : Using Strategic M&A to emerge a winner from the current crisis - Darpan Jain, IIM Ahmedabad

FINGYAN cutting off global supply chains, and well, postponing (or canceling) exams!

This deal was no exception. By late July, the deal had collapsed after the PIF withdrew its bid. The statement they released was as follows: “With a deep appreciation for the Newcastle community, we have come to the decision to withdraw our interest in acquiring Newcastle United Football Club. Unfortunately, the prolonged process under the current circumstances coupled with global uncertainty has rendered the potential investment no longer commercially viable”.

In early April, when most of the world was in lockdown and sports fans across the globe were distraught due to all games being postponed, a specific section of football supporters was brimming with joy. These supporters had seen their historic club lose its local dominance over the past couple of decades. But the time for Although there were other factors domination was back, they thought, as touted to have influenced this deal, it this famous club based out of North is fair to assume that the pandemic East England was subjected to a had a fair role to play. takeover bid. Newcastle United F.C. A more concrete example would be or ‘The Magpies’ as its commonly the breakdown of the Cineworld and called, was in for a bright future if this Cineplex deal. UK Based global takeover could be completed. The club cinema chain Cineworld Group PCL had received a £300 million ($375 had agreed to pay $34 per share in million) bid from a consortium of cash, amounting to a 42% premium buyers including the Saudi Public for Canada’s largest movie chain, Investment Fund (PIF), Amanda Cineplex Inc., in a friendly takeover Staveley’s PCP Capital Partners, and bid. The deal was valued at over $2.5 British businessmen, Reuben billion at the time and would have brothers, each vying for an 80%, resulted in North America’s largest 10%, and 10% stake respectively. cinema chain. On the next trading day By mid-April, talks were in an itself, Cineplex shares rose more than advanced stage and football fans 41% (by $9.87) to $33.88. around the world were getting ready But what was once a ‘friendly’ for another Manchester City and PSG. takeover soon turned into a court But M&A’s are complicated, and these battle. Cineworld backed out of the were no ordinary times. COVID-19 deal claiming “certain breaches” by had taken over the world, inflicting Cineplex, hence invoking the ‘Material infections and deaths in 200+ countries, adverse effect’ clause.

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FINGYAN

NIVESHAK | AUGUST 2020

A Material Adverse Event (MAE) clause enables a party to withdraw from a contract in circumstances where there is a material change after its signing. Such clauses are usually found in acquisition and financing agreements.

In acquisition agreements, the MAC clause gives the buyer the option of withdrawing from the transaction.

However, this piece is not about exploring the legal aspects, so we will stop at that. After Cineworld backed out, Cineplex filed for damages to which Cineworld filed a counterclaim, and now, both parties are fighting in court, with the deal off the table. So much for a friendly deal!

All in all, COVID-19 has triggered a downturn in global M&A deals. In the first half of 2020 itself, Deal volume dropped by 49%, while deal value was down 22%. In addition to the Newcastle and Cineworld deal, several others have fallen through.

Xerox stopped its pursuit of HP, while SoftBank backed away from its planned bailout of WeWork. There have been huge market capitalization losses as well, with Travel & Hospitality losing 49% and the Banking sector losing 31% market cap over the first 25 days of the pandemic itself.

(EXHIBIT) Unsurprisingly, some deals that were still being finalized were struck at considerably lower prices. Total price/EBITDA, a key ratio to measure price adequacy in M&A deals, had fallen below seven in March and April (median level usually between 10 and 14).

Largest cinema chains in North America (number of screens) (Jones, 2019)

Market Capitalization losses in the first 25 days of the pandemic (COVID-19: Rebalance for Resilience with M&A, n.d.)

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NIVESHAK | AUGUST 2020 Why Managers sit tight during such crises In such a climate, it is tempting for managers to sit tight and reduce M&A activity. This can be attributed to the following five problems: The management might feel they have more important things to cater to. One of the top-most priorities is achieving maximum liquidity, especially at a time when sales and cash flow are rapidly decreasing.

Similarly, for sectors and companies that benefit from the crisis, managers have to deal with uptake in demand for their products/services (Telecom, Pharma, Video conferencing, etc. in the current case), which means dealing with supply chain expansion and other problems.

The ‘moving target’ problem in company valuations. Buyers want great deals, and sellers want to extract the maximum price. But in such a scenario, the former fear overpaying due to the huge uncertainty around the target’s future financial prospects and the latter feel they will be asked to accept an artificially depressed price.

There are enormous logistical problems created by the inability to travel and hold personal meetings.

Although video conferencing has risen over the years, it is still a poor substitute for in-person due diligence.

Sellers or target companies want quick cash. An M&A deal with a notoriously lengthy process is not really designed for this!

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FINGYAN It’s not all gloomy…

However, the situation also provides opportunities. M&A history suggests that in past downturns, the companies that pursued acquisitions and divestitures in a structured way outperformed their peers. Although the differential varied by sector, it could reach as high as six times over! And if we look at it, certain financial factors do make it possible for well-capitalized companies to revisit their past M&A strategies and make a strategic move.

In the Indian context, these include: Low debt yields: Ten-year government securities were at ~5.7 percent in June compared to 7.0 percent a year ago Dwindling valuations: Overall market cap-weighted valuations fell about 1/4th from December 2019 to March 2020 Rising liquidity stress: More than 60% of top-500 companies had less than 90 days’ cash on hand These are generally true in other countries too.

Strategic themes for M&A value addition So how can companies take advantage? They can do so by identifying and choosing one of the following themes.

These can determine the value attainable in particular moves that companies make and, in general, shape their inorganic strategies.

Intra sector consolidation: Although the pandemic has caused severe economic damage across the board, some sectors and some firms within the affected sectors have suffered more. Fissures are appearing within

NIVESHAK | AUGUST 2020

sectors as a wider gulf is created between companies with sufficient funds and those without it. As the effects get deeper, this gap will only grow, giving the former group a healthy competitive advantage. This imbalance can subsequently lead to consolidation, with weaker firms being brought off by stronger ones.

FINGYAN Alliances and partnerships: As companies move towards digital channels, nimble companies will want to extend their presence. Alliances for sharing customers, data, and crossselling will provide lifelines for these companies to stay relevant.

Companies have to act quickly. To structure the process, they can make appropriate timelines focusing on the short and medium-term. The following framework can help

Difference in cash positions between strong and weak firms (COVID-19 Recovery and M&A in India | McKinsey, n.d.)

Portfolio Divestitures: With scarce resources, companies could rush to save their stars and cash cows, hence, leaving non-core sectors unattended. This will necessitate carve-outs and divestitures of these sectors to relevant players.

Acquiring regional firms: As the pandemic dries up resources for smaller regional firms, established companies may move to acquire local brands that are strong in particular niches. The leaders can re-energize these brands by using their big production footprints while also gaining new customer segments that were catered to by these smaller firms.

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Strengthening Due Diligence amidst crises But what about Due diligence, you ask? As pointed earlier, one of the hurdles created by the pandemic includes a lack of personal meetings that adversely impacts due diligence procedures. This can be reduced using tools like Earn-outs: Tying the final purchase price to the future performance of the business Indemnities: Allows the buyer to keep a percentage of the purchase price in an escrow account, which would be released to the seller only when all its claims about thebusiness

FINGYAN

NIVESHAK | AUGUST 2020

Far from being out of action through 2020, companies that act strategically use M& A during this unprecedented economic earthquake will be the ones most able to prevail as economic activity rebounds.

(such as the state of its inventory), can be verified in a post-crisis environment Creative due diligence: Video tours and drones can be used to conduct inventory checks, paperwork can be studied in virtual break out rooms, employees can be evaluated overvideocalls.

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DEALS IN BREWERY

NIVESHAK | AUGUST 2020

DEALS IN BREWERY Reliance Retail and Future Group Reliance Retail Ventures (RRVL) acquired the retail & wholesale business and the logistics & warehousing business from the Kishor Biyani-promoted Future Group on the basis for a lumpsum amount of Rs 24,713 crore. Analysts have said that the deal marks the company’s transition from its energy business, towards becoming a futuristic consumer-focused retail and telecom company. The oil-to-telecom major, which is certain in boosting its presence in the retail segment through its Reliance Retail arm, has claimed the acquisition to being done as part of the scheme in which Future Group is merging certain companies carrying on the aforesaid businesses into Future Enterprises (FEL).The deal will also help the indebted Future Group pare its borrowings. Reliance Retail and Fashion Lifestyle (RRFLL) and RRVL took over certain borrowings and current liabilities related to the business and discharged the balance consideration by way of cash. Under the scheme, the retail & wholesale undertaking is transferred to RRFLL, a wholly-owned subsidiary of Reliance Retail Ventures, along with the logistics & warehousing undertaking.

Reliance Retail will now have access to close to 1,800 stores across Future Group's Big Bazaar, FBB, Easyday, Central, Foodhall formats, which are spread in over 420 cities in India. The deal terms entail a merger of five listed units of Future Group across grocery, apparel, supply chain and the consumer business into Future Enterprises Ltd (FEL), which currently manages the group’s retail back-end infrastructure. Apart from the grouplevel debts, banks have an exposure of another ₹11,970 crore to the promoters entities of the Future Group. The deal with the Future Group will bolster Reliance Retail which already happens to be the nation’s largest retailer by the number of stores, in a sector that’s estimated to be worth $1.3 trillion by 2025 from $700 billion in 2019, as quoted in a study by Boston Consulting Group and Retailers’ Association India.

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NIVESHAK | AUGUST 2020

FINVIEW

Plus the upfront pledging means that all systems have to be in perfect sync. This will lead to lower liquidity in markets in short term.. Also since now investors can't use the profit before the settlement, those with lower liquidity might face missed opportunities. In the long run, when these teething issues are resolved, and investors gain confidence in this system, things will come back to normal with more healthy investing without fear of holding misuse by brokers.

Mr. Vishal Goel

2.

With the India's real GDP predicted to contract by 11.5% in FY21 as per Moody's report, what systemic changes do you think are necessary to cope with it?

Assistant Vice President of the Global Research division at one of the most reputed global Investment Bank. A MBA from IIM -Shillong and B.E.(Hons.) from BITS Pilani 1. In your opinion what bearing will the recent changes in margin rules have on the Indian market ?

Though the new set of margin rules are brought in to bring more transparency and safe guard investors, this will have short term negative and long term positive effect. At first, since Indian retail investors already have limited knowledge of trade, the new addition of rules will be a burden.

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The contraction is not a result of any recent policy change. Yes the government spending had increased in the Pandemic and income has reduced due to decreased consumption behavior. Still a V shaped recovery is inevitable. Question is how big the V is going to be. I think the geopolitical scenarios are going to play the major role in coming months. The global supply chain is currently under massive pressure. The most effective and long lasting solution for India at present is to leverage this opportunity by playing a bigger role in global supply chain.

Offering relaxed rules and more friendly terms to global complaints, who are suffering in current trade/sentiment war is the way ahead - generating more employment, more spending power, more consumption.

NIVESHAK | AUGUST 2020

FINVIEW

3. Do you think that the surge in retail investors in recent times owing to the pandemic a positive trend? What advise would you give someone looking to enter the market as a retail investor ?

No, it's not. Most of the people who entered the market in recent months are playing out more on speculation rather than understanding the fundamentals. This trend is inline with the definition of bandwagon effect.

People are entering because others are entering. And they are investing on stock A because others are investing in Stock A. These investors normally are the first to bail out at the first downtick in the stock price. I would say that entering a market is easy, but knowing when to exit is tough. For those who are looking to enter the market, go with the traditional approach of doing your homework first. Scan those company annual reports, read the outlook provided by experts, diversify your bets and then invest.

4.

What are your views on the alleged moratorium time bomb over which MSMEs are embarked ?

Its a tight rope on which government is trying to keep a balance. No doubt moratorium was required during lockdown phase as working capital vanished. But what's happening now is sign of lack of credit discipline.

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And it's not far when these demands of moratorium extension will start converting into demand for waiver. In my view, this is not healthy for banking sector as NPAs are bound to swell up.

So government has to come up with solution wherein both MSME and banks can swim across safely. "Vocal for Local" is one good push towards this.

5. ESG investing is still at a nascent stage in the Indian financial markets. But with the pandemic acting as a motivator, do you feel it will see a rapid adoption?

ESG investing has been there since quite some time. Earlier we used to hear that investors are hesitant in investing in say Tobacco stocks. May be social stigma, may be environmental consideration. But this was there. Now, it has evolved from the perspective that more filters are available as companies started to disclose more ESG data in their filings.

These extra filters have opened up a whole new area of stock selection.

Going ahead when we have more historical data points, whether on governance, or energy consumption, or social spending, the trends will start to appear which will lead to more informed decision making. Pandemic is again, a new filter in my view, wherein data points like how companies helped the employees in these trying times, will play a role.

Fund houses will use this to promote their stock picking ideas.

NIVESHAK | AUGUST 2020

THE COMPANY SCANNER

THE COMPANY SCANNER Edelweiss Financial Services Limited Edelweiss Financial Services Limited is a leading financial services conglomerate, focusing on understanding the needs of customers and offering them the right financial solutions accordingly. The organisation serves a client base of 1.2 million people through its network of 476 offices employing close to 11,000 employees.

Edelweiss manages its global operations form its headquarters located at Mumbai. It was incorporated on November 1995 by Mr. Venkat Ramaswamy and Mr. Rashesh Shah, who is also the present Chairman & CEO of the company. The company became a merchant bank in the year 2000 and in 2007 the company obtained clearing member license.

The subsidiaries of the organisation include Edelweiss Broking Limited, Edelweiss Tokio Life Insurance Company Limited and Edelweiss Asset Management Ltd. In 2017, Edelweiss had also acquired Rooshnil Securities.

The present share value of the organisation is at around â‚š68. The company is registered with the National Stock Exchange of India, the Bombay Stock Exchange and the MCX Stock Exchange. The major three lines of [27]

business undertaken by Edelweiss are credit, investment & advisory and insurance. Within these business lines the company offers financial services across varied domains ranging from life insurance, general insurance, equity brokerage services, mergers & acquisitions, portfolio management services, wholesale investing services, private equity and similar investment related services with the help of its network of sub-brokers and other registered people across India. As a drastic business overhaul measure, it was announced that Edelweiss would be completely exiting the wholesale credit business by 2022 and would be shifting the focus on retail credit business along with asset management and wealth management verticals.

The company has put forward 13 Guiding Principles which are a blend of their ideas, culture and business ethics.

These guiding principles govern the

NIVESHAK | AUGUST 2020

THE COMPANY SCANNER

business operations and ensure that the organisation follows the right path in creating value for all the stakeholders without compromising on the long-term vision of the company.

The guiding principles are: We are a Thinking Organization, We are Fair, We operate as a Partnership internally and externally, We focus on the Long-Term, We focus on Growth, Our Reputation and Image is more important than any financial reward, We Obey and Comply with the rules of the land, We take care of our People, We Respect Risk, Our Financial Capital is a critical resource for growth, Our Customer Experience defines us, We Listen and Fulfil the customer’s needs and We satisfy the needs of all stakeholders.

The company has been awarded with distinguished accolades such as the

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Best Broker India in the FinanceAsia Country Awards 2020, Iconic Brands of India 2020 - Edelweiss Mutual Fund by The Economic Times, Top 25 Financial Innovations of India in the Finnoviti Awards 2020 and the Most Innovative Investor Education Program Edelweiss Mutual Fund in the Outlook Money Conclave 2019.

The total income of Edelweiss Financial Services Limited for the FY20 was ₹9,603 crores, the corresponding PAT was ₹(2,045) crores and the net worth was ₹8,541 crores. The key focus areas of the organisation as per the board for FY21 are a) COVID-19 impact management on liquidity and asset quality, b) equity capital raising of ₹1,500 – ₹2,000 crores and c) enhancement of operational efficiencies through use of technology.

NIVESHAK | AUGUST 2020

CLASSROOM

CLASSROOM OPERATION TWIST What is it?

Introduced in 1961 by US Federal Reserves, operation twist refers to the open market operation wherein proceeds from the sale of short-term bonds are used to purchase long term bonds. The aim is to put downward pressure on long term yields whereas short term yields consequently are faced with an upward pressure. The result is a twisted yield curve and thus the name.

Why discuss this?

The Reserve Bank of India decided to conduct the simultaneous sale of short-term securities and the purchase of long-term securities under OMO. If we consider the two tranches of INR 10,000 crore on 27th August and 3rd September, the total amount stands at INR 20,000 crore.

How does it work?

Yield and price of a bond move in the opposite direction. When the central bank purchases long-term bonds, the price is driven up, and thereby a downward pressure is created on longterm yield. On the other hand, as the purchase is made using sale proceeds of short-term bonds, the sale causes a dip in price, consequently leading to an upward pressure on short term yield.

Another thing to note is that in open market operation, when the central bank sells, liquidity is reduced in the

market, whereas when it purchases bonds, liquidity is increased. Thus, open market operations are a part of monetary policy to control liquidity in the market. Operation twist is a tool that helps the central bank to control yield in the market.

Why do it?

Lower long-term yields boost the economy by reducing the cost of borrowing. The result is cheaper loans and disincentives for saving. At the same time, lower short-term rates (currently prevalent) can prove to be leakage for the economy as a difference in short term rates across countries can lead to cross country arbitrage. Therefore, an attempt to push down long-term yields and simultaneously push up the short-term yields with an aim to stimulate the economy and block leakages seems justified in the face of Operation Twist!

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Fin.

ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from participants from all B-Schools across India. We are looking for original articles related to finance and economics. Participants can also contribute puzzles and jokes related to finance and economics. References should be cited wherever necessary. The best article will be featured as ”Article Of The Month” and would be awarded cash prize of Rs. 2000/- along with a certificate.

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