The IBS Times- December 2014- Volume II

WISHING YOU A MERRY CRISIS MR. PUTIN

THE IBS TIMES December 2014, Volume II, Issue No. 176

2014, YOU WERE AWESOME SAY HELLO TO 2015 !

A LOOK BACK AT MOST HAPPENING EVENTS OF 2014 AND STOCK PICKS FOR 2015

FinStreet, IBS Hyderabad

ISSUE NO.

176

DECEMBER 2014 VOLUME II

What’s Inside 2

3

6

Behind the Scenes

Letter from the Editor

Economic Struggle Merry Crisis Mr. Putin

E-Commerce

9

11

15

Engineering Sector

Stocks to Watch Out in 2015

The New GST

18

23

25

What a Year it Was !

Spicy SpiceJet

28

31

33

Country of the Year: Tunisia

Maruti Suzuki India Limited

Industry Overview

Cover Story Continued

Economy 0% Inflation: Good or Bad?

Cover Story

Taxation

Airline

Market Watch

Country in Focus

3

Company in Focus

28

23 11

31

INTELLIGENCE BEYOND SUCCESS

“If Saudi does not help prevent the decrease in oil price „ this is a serious mistake that will have a negative result on all countries in the region”- Hossein Amir Abdollahian, Deputy Foreign Minister of Iran

Letter from the Editor

THE IBS TIMES Faculty Mentor

Dr. Ravi Kumar Jain

Dear Readers,

Greetings from Team FinStreet !

Cover Picture Source: http://www.tutor2u.net/

2014 was awesome for The IBS Times. With over 15,000 impressions, we are now amongst the most viewed online business school magazines.

Team IBS Times

We would like to express our sincere thanks to the readers and regular contributors from all over the nation for their keen interest and association with The IBS Times.

Chaahat Khattar (Editor-in-Chief) Akshay Gupta Atharva Solanki

Manisha Mohapatra Nikhil Acharya Nishtha Behl Shivam Tandon Vanika Sharma

Our in-house writers and researches are very much motivated to write even more in 2015 and we assure you of getting better with every issue.

The cover story for last issue of 2014 of The IBS Times puts light on the news that made headlines in 2014 and the stocks to watch out for in 2015.

Russia does not declare but the world knows that it is in recession and in this issue of The IBS Times we try to unravel why? The Economist declared Tunisia as The Country of the Year and we in this issue have analyzed the famous magazine‘s pick and have researched more on the Tunisian economy.

Alisha Singh Apoorva Anusha Avik Chakrabarty Kaushik Chandell

Kolisetty Sai Aishwarya

Recently Mr. Arun Jaitley tabled the revised plan for GST and the magazine highlights the changes and way forward for the same. SpiceJet is flying in turbulent and uncertain weather and our researcher writes on the ongoing crisis for our better understanding. Indian e-commerce sites are raining discounts every day and the magazine goes behind the scenes of their business model to discover how they do it?

Manjari Navjoth Sahu Priyanka Malik

The magazine also covers industry analysis on the Engineering Sector. The magazine includes an exhaustive report from investment point of view on Maruti Suzuki India Limited by Team Vriddhi Research.

Rahul Mishra Ripu Daman Tandon

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better.

Sachi Kheskani Sameena Usman

Team FinStreet wishes you a very Happy and Prosperous 2015 !

Srishti Karmakar

Chaahat Khattar

“Investors should purchase stocks like they purchase groceries—not like they purchase perfumes .”- Ben Graham

Economic Struggle

Wishing You a Merry Crisis Mr. Putin

- Kaushik Chandell

Fall in Oil Prices: From 100$ per barrel in June 2014 From crushing Chechnya‘s rebellion to pushing back

to 60$ per barrel in December 2014. With a drop in

the Russia‘s frontiers and restoring the pride of a

demand for oil across the world and increase in

nation, the man behind the storied success of Russia

production of oil in United States, Russia suffered a

Vladimir Putin in his reign of 15 glorious years is now

major hit on its major chunk of revenue which used to

down with just one thing, ―one of the biggest financial

come from the sale of oil and gas. Russia had

crisis of the era for an individual country‖. The former

maintained a very balanced budget in the first half of

KGB spy with his skills of outplaying rivals by

2014 with a price of 100$ per barrel and with this

always staying a step ahead of them encouraged Mr.

drop, Russia suffers from Dutch Disease, a term used

Putin to take major gambles, the most recent Russia‘s

by economist to describe a situation when a country is

annexation

military

very much focused on its natural resources for

intervention in Ukraine. As President Putin rejoiced

determining its other economic activities. Countries

the winter Olympics in Sochi, 10 months back, aides

like Kazakhstan, Venezuela and Nigeria are also

assured him that Russia was rich enough to withstand

feeling the ill effects of falling oil prices.

of

Crimea

and

Russian

a financial effect from an invasion in Ukraine. This conclusion

now

looks

nothing

but

a

grave

miscalculation by a drunkard sitting in a bar barely even able to sum up for his own drinks.

Recalcitrant Disturbance: With just $415 billion in reserves, $169 billion spread between two specialized funds, Russia‘s situation depleted faster than anyone had predicted. With further collapse in Ruble panic

However, Vladimir Putin has accused the Western

has started to take its toll among the ordinary citizens

nations for engineering the economic crisis in Russia.

of Russia. Central Bank has already raised the interest

Crisis has not only affected the Russian consumers

rates to 17% and the current situation can even drive it

and companies but has also created a negative impact

higher. Even the Policy makers are not able to give a

on the Global financial markets.

simplified answer to this situation. Adding up to the

SOURCES FOR THE BACKFIRE OF THE

problems, the statement made by KIRILL ROGOV, a

RESERVES

senior researcher at Gaidar Institute for Economic

Putin‘s Pride: Rising crude prices in the past fired the economy to such extent, that it

Policy to the government in Moscow, ―The reserves are not enough‖ has further jeopardized the situation.

became a symbol of

economic might and point of pride for Putin. This

Economic Sanctions: Despite the financial crisis, it

pride led him to blindly believe that Russia had

has been officially announced by the United States as

enough foreign currency reserves to annex Crimea

well as European Union that they will not ease the

and withstand any sanctions that might follow.

sanctions imposed on Russia because of annexation of Crimea. It‘s is being believed that the sanctions has led Russia‘s economy in a negative direction as well

3|DECEMBER 2014 | VOLUME II

Russian three months interbank loan rose to 28%.

Russians now in fear of rapidly declining Ruble started to purchase more durable goods like washing machines, televisions, furniture and change their pension plans and savings from being in Ruble to US Dollars or Euros. Even the currency exchangers are offering other currencies at much higher exchange rates than official exchange rates. For instance, 1 USD can be exchanged for 99.8 RUB whereas the official rate is 61.15 RUB and Euro can be traded for 120-140 as it has been a major reason behind the depletion of

RUB, official rate being 76.15 RUB. Major players

Ruble. Russian companies are being forced to

like VOLVO, Apple Inc. has halted their business

exchange Ruble with the foreign currencies in the

activities whereas IKEA suspended its sales in Russia

open market to meet the interest payment obligation

due to the volatility and lack of proper supply of the

on their existing debt.

Ruble. Goldman Sachs has cut its cash flow to the

Other Possible Causes: President Vladimir Putin has often been criticized of being a Kleptarchy.

Kleptarchy is a situation in a country which is being led by a corrupt government, and the government concentrates on maximizing the wealth and political

Russian companies and restricted long term ruble denominate repurchase agreements which is likely to add more pressure to the Russian Financial System.

Economists have predicted that the year 2015 will be a year of recession and high inflation.

power of the ruling class at the cost of the wider

Global Impact: Even though the Economic Sanctions

population of the country. Russia was even ranked

decreased the Russia‘s financial connections with the

second by THE ECONOMIST 2014 Crony Capital

financial world thus lowering the risk of affecting the

Index. Whereas Russia‘s overconfidence or in fact it

global economy, however, it was unable to stop the

should be said that Putin‘s overconfidence led to the

crisis from making a notable impact on the Global

downfall of economy and depletion of Ruble.

financial market. United States financial market

IMPACT

declined nearly 3% in just 3 business days. Financial Institutions holding a large amount of money on

Domestic Impact: The Russian Trading System Index (RTS), denominated in US Dollars depleted by 12% which was the lowest on any given day since the global financial crisis of 2008 whereas Moscow International Currency Exchange Index (Micex) declined 8.1%. In response to rising declining indices and rising interest rates and bank runs, the rates to 4|DECEMBER 2014 | VOLUME II

Russia have been affected whereas liquidity in the US Dollar-Russian Ruble has also declined. Almost every option of holding of Russian debts is now out of option, meaning even if they are sold in the market they won‘t be having any value to the buyer.

American companies like Ford and Volkswagen experienced a 40% and 20% decline in sales

of the country to their pockets before the door shuts. Only option Russia is left with is to somehow end the Sanctions to restore

normalcy

to

the

financial system, which would require giving up to

the

demands of West regarding Ukraine, which seems to be unlikely as for now because it‘s hard for a leader like Vladimir Putin to lay down his weapons. respectively. ExxonMobil is not able to continue its project ―Oil discovery at the Arctic‖ due to the sanctions over the crisis of Ukraine. Adidas closed the stores in Russia and withhold any development plan for the country whereas Siemens lost 14% of its revenue coming from the Russian economy. Even McDonald‘s closed its 12 outlets due to Sanitary Violations. In Kazakhstan the Tenge was devalued whereas in Tajikistan, remittance rates were dropped to 49% and Somini was devalued 5.5% and in Uzbekistan, the Som was devalued 9% CAN RUSSIA BE SAVED? Russia‘s radioactive economy can‘t be cured by just increasing the interest rates. So is there anything that can save the economy. Malaysia did use the Capital Control sorcery to save its economy from the meltdown and kept the money from fleeing the country. But this can be a bit tricky because the moment investors realize that they might have to deal with a control system, they‘ll try to get the money out

5|DECEMBER 2014 | VOLUME II

Behind the Scenes

Demystifying E-Commerce Business Model

- Manjari Sharma

E-Commerce or Electronics Commerce is a way of

A new threat to traditional models of organization has

modern business which addresses the need of

arrived and companies are caught off guard on how to

organizations, suppliers and customers to bring cost

defend and win the war to retain existing market share

effectiveness and improve the quality of goods and

while expanding to new markets. How come the

services while increasing the delivery speed. E-

emerging ecommerce caused such a problem to

commerce is a paperless exchange of business

established enterprises? The reason being that most

information using following ways- Electronic Data

brick and mortar companies are still sticking to old

Exchange (EDI), Electronic Mail (e-mail), Electronic

rules that do not apply in today‘s market. Today‘s

Bulletin Boards, Electronic Fund Transfer (EFT),

successful companies must embrace IT and use it in

Other Network-based technologies.

order to achieve results. Traditional Economic views

Business models of E-Commerce can generally be categorized as- Business to Business (B2B); Business to Consumer (B2C); Consumer to Consumer (C2C); Consumer

to

Business

(C2B);

Business

are no longer applicable in the virtual world and Ebusiness, as accepted principles in Physics are not applicable with the inversed world of a black hole.

to

The following features of E-Commerce are attracting

Government (B2G) and Government to Business

youngsters and bringing the changes in the whole

(G2B); Government to Citizen (G2C).

scenario of commerce.

Virtual companies are changing traditionally accepted

Non-Cash Payment: It enables use of debit cards,

practices and making competition even tougher than it

smart cards, credit cards and other modes of

has ever been in the past. As the internet is

electronics payment.

diversifying markets to take advantage of flexible competitors

and

offering

better

priced

value

propositions in order to steal market share.

Today, being an industry leader is in no way a security blanket to confirm tomorrow‘s success. In order to maintain competitive advantage and develop as an industry leader tomorrow, established old school companies should be ready to take on the challenge of

24x7 Service availability and advertising/marketing of e-commerce increases the reach of products and services to masses. It helps in better marketing management and appeals to care.

Improved Sales: Through this, orders for the products can be generated anytime, anywhere. By this way, dependency to buy a product reduces at large and sales increases.

some difficult changes. They need to not only leverage IT to its limit but also to change the way employees and administration work to a whole new level.

6|DECEMBER 2014 | VOLUME II

Inventory Management: Using this, inventory management of products becomes automated and Reports can be generated instantly when required

offline store. They can introduce themselves through various modes of communications like Facebook, Twitter, LinkedIn and others. Suppliers: Online stores have the suppliers to hold and ship the products to the consumers directly. All these advantages enable them to make profits even though they offer huge discounts.

Starting an Online Business is Easy: The last reason to give large discounts on online shopping can be that Along with the above mentioned facts there are few more reasons that the online companies give so much discount coupons:

an online store can be started very easily. The companies need not look for a place to start, no need for warehouses as the suppliers do the arrangements

Middle-Men Cost not Required: The most important

themselves and many other things. There is very less

reason that e-tailing companies give huge discounts is

trouble for an online company than an offline store.

that they don't require paying any cost to middlemen like any other offline store. They get the products directly from manufacturer and sell.

E-tailing has grown tremendously over the past decade. E-commerce adoption within the franchising sector suggests strategy by franchisors, namely the

To get more orders: Companies provide discount

percentage of company-owned stores in the network,

coupons to get more orders. Consumers enjoy getting

franchisor resources and the allocation of exclusive

big discounts on purchases, and buyers buy the

territories to franchisees. Findings also suggest that

products where they can get lots of discounts than

the percentage of business-owned stores and the brand

others. Thus, the more discounts they give, the more

image, as represented by network size, exert a

customers they get.

significant and positive impact on the adoption of an

Competition: Every new day, we see a new shopping website. The competition is increasing for everything whether it is vegetable or fruit site, jewellery, electronics, apparels, accessories or any other site No need to pay rent for physical store: The online business doesn‘t require paying money for the physical store. They can operate their website from anywhere.

Larger Geographical Reach than Offline Store: The online stores have a larger coverage area than an

7|DECEMBER 2014 | VOLUME II

E-commerce

strategy

whereas

network

and

franchising royalties exert a significant and negative impact on the adoption of such a strategy.

Retailers try in order to grab online sales without undercutting stores. All retailers are working to acquire more shares of online sales, but franchised operations have an added challenge.

The in-store and online experiences are becoming increasingly intertwined.

Retailers need to have an online presence and sales platform to compete for those online shopping dollars and franchisors are no exception. Yet franchisors do have the added challenge of figuring out how to structure the online platform in a way that will benefit individual franchisees and not negatively affect sales from the physical stores.

Corporate retail brands ranging from Penny to Walmart have integrated brick and- mortar stores and e-commerce to take advantage of sales in both avenues. The franchise model is more challenging.

The big issue is that franchisees are worried that online sales will cannibalize their own store sales and diminish revenue.

―The customer doesn‘t care who the franchisor or franchisee is. If a franchise system is going to compete in the growing online sales arena, they have to blur the lines between the two entities,‖ says Cindy McLaughlin, head of the Restaurant and Franchise Practice Group for BDO Consulting and managing partner of the audit practice and in Long Island, New York.

The online stores have changed the way people shop for goods and services. Consumers are using computers, Smartphone‘s and tablets to locate stores, research products, find coupons and place orders.

Across many brands, online sales growth is outpacing in-store sales growth.

8|DECEMBER 2014 | VOLUME II

Industry Overview

Engineering Sector

- Rahul Mishra

One man‘s magic is another man‘s engineering and

This shows that whole of transport provides a huge

that it is what required by a developing nation.

scope for development in the construction sector,

Infrastructure acts as the backbone and a sign of

there are roads and highways to be build for better

development and in India construction is the second

connectivity throughout the nation, then its repair and

largest sector, contributing 11 percent of the GDP. It

maintenance provides another area to look upon. As

employs 35 million of the nation‘s population and is

we have seen that there is a much needed

responsible for highest FDI inflows after service.

development in the aviation sector with new airports

Engineering is a diverse industry with companies

and corridors coming into picture along with

from equipment manufacturer to procurement and

deepening of channels for ports are also required.

construction and even into electrical, non electrical or

There is continuous growth in the population residing

static equipment manufacturer.

in urban areas therefore development in urban

Infrastructure needs in India depends majorly on public investment or the government and caters urban infrastructure, rural primary support in the form of solid waste management and transport. Developing a proper transport is a key component of national development. Building road networks, highways, railway connectivity, building of ports and harbors and much more requires constant investment, up gradation and maintenance. In India 80 percent passenger and 65 percent cargo carrying uses roads while there is a massive increase in Indian opting for air travel over the years yet there are only 454 airports which mean there is a huge demand for new air corridors covering more cities.

If we look at our

railways though being the fourth largest in the world has a lot of scope. It has a spread of 65,436 kilometers and covers 8000 stations and to match the demand railways requires an estimated $85 million for modernization and connectivity to ports and metro

infrastructure is very important to match this rate along with this we may witness a chain effect for managing waste and water along with electrification with such increase in demand. This was the infrastructure part of the industry let us now look into the industrial and real estate sector. Post independence over the years we have seen growth in agriculture and services but not in industry, this was because regulatory and licensing obstructions that hampered the growth but recently over couple of decades the scenario has changed with privatisation and foreign investment. There is not much work right now in real estate as the developers are waiting for hike or for approvals but the picture might change with large contractors coming in the sector as developers.

The industry can be divided into two categories: Light Engineering: Medium to low technology like medical and surgical equipments, casting components, raw material for heavy engineering, etc.

networks as there are several ports which provide major percentage of trade but are not connected by rail so this provides a huge scope for railways.

9|DECEMBER 2014 | VOLUME II

Heavy Engineering: Heavy electrical products, machine parts, innovation and services and so on.

In India large scale production is organized but it is also a home of unorganized mid sized and small operations that provide raw material for the large scale. Now days a lot of engineering services outsourcing is taking place due to lack of skilled workforce, low cost and lack of talent & innovation which will definitely give India a chance to showcase

Financial Year 2014 It was another disappointing year for the industry as the delayed projects resulted in weak order inflows, other

reasons

being

environmental

and

land

acquisition, commodity price inflation was another factor which affected the operating margins for the companies.

its potential and grab the market opportunity.

Due to lack of funds and higher interest rates the Let us now look at the Industry under Porters Five Forces Model:

capital expenditure for the industry failed to rise and because of the impact may continue to do the same for

Threat of Substitute: Supply in this segment is good

next few quarters but with a more stable Modi

but the problem it faces is in the technological

government it might get the momentum it requires.

executions so this creates a scope for better substitutes

Another reason that affected the balance sheet of the

another area is the speedy execution of projects.

companies was high level of inflation which induced

Threat of Mobility: Entry barrier is higher at upper level as project execution and skilled workforce are the essentials of engineering sector while in non technical areas it requires more of differentiation like in construction.

high interest rates thereby impacting investments and increasing the financial pressure.

Future Prospects: The proposed increase in infrastructure investment from INR 20 trillion to 40 trillion in the twelfth five

Bargaining Power of Suppliers: It is low because of

year plan will help construction companies add to the

high competition but they enjoy and have upper hand

growth of the nation as world class infrastructure is

when it is technology driven.

the need of time and this would act as the long term

Bargaining Power of Customers: It is high in power generation and T&D (transmission and distribution) equipments while low in technology driven sector.

driver for the industry. There is growing consensus on private and public partnership to remove the difficulties in the infrastructure sector of the nation.

The government is working in increasing the pace of

Competition: Major competition is on the basis of expertise, pricing, quality of equipment, size of the project and execution time but it is becoming tougher due to advancement in technology and increase in capacity. Even low cost foreign manufacturers like China and Korea are a tough competition for domestic manufacturers.

10 | D E C E M B E R 2 0 1 4 | V O L U M E I I

large projects by providing clearances and funding for the same. One of the major hindrances in the pace is the macro environment factor which is leading to lower margins, competition, rising costs and over capacity in few areas and causing the momentum to slow down.

Cover Story

Stocks to Watch Out for in 2015

- Kolisetty Aishwarya and Ripu Tandon

The holiday season is back here which reminds us that

Motors seems to be one of the stocks to pick up for

yet another year has passed away or rather we

2015.

managed to survive a twelve month long journey. The stock markets signing off on a positive note for the year 2014, we have here the top ten stock picks for the year 2015.

Tata Motors: Reporting fiscal year 2015, first quarter sales of Rs. 646 billion, this was 38% higher against the prior corresponding period.

The largest commercial

Wipro:

vehicle manufacturer has greatly benefited from the

For the December quarter, Wipro said net profit rose

substantial amount of profits generated by its

around 27% to Rs.2014 crores from Rs.1589 crores a

premium brand Jaguar Land Rover. The company has

year earlier. Revenue rose 18% to Rs.11327 crores.

been fighting to come back from in gaining its market

Analysts on average had expected a profit of Rs.2005

share as its ranking in FY15 slipped to number 6 in

crores on revenue of Rs.11315 crores. Wipro Ltd

the Indian market and the market share below 5%.

chief executive officer (CEO) T.K. Kurien said he

The company has received positive responses with the

expected the company to perform better in the next

introduction of ―Tata Zest‖ this year which marked its

fiscal year, after India‘s third largest software services

order pipeline of 10,000 plus units within 20 days of

exporter posted third quarter (Q3) earnings that beat

its launch and started online booking for ―Bolt‖.

analysts‘ estimates and forecast healthy revenue

Being volatile over the past one month where the

growth for the next three months, signaling that its top

share prices have fallen from Rs.535.05 on December

clients are now willing to spend more on technology

01, 2014 to Rs.485.40 as on December 26, 2014, this

services.

stock seems to be undervalued especially considering the plans of introducing various different models and products over the next fiscal year. Another factor to be considered is that car sales in India, which is expected to be the world‘s third-largest car market by 2018. Also, the strong sales of its luxury unit Jaguar Land Rover adding to the profits of the company accompanied by sales on its trucks and buses, Tata

11 | D E C E M B E R 2 0 1 4 | V O L U M E I I

ICICI Bank:

VOLT booked revenue of INR17.5b, up 10% YoY,

Largest privately owned financial institution, and with possible cut in the interest rates in future by RBI due to inflation being at a lower rate. These rate cuts can trigger credit growth for ICICI Bank. One of the other aspects that would play a key role for ICICI Bank would be its increase in CASA (Current and

against an estimate of INR16.3b.Improvement in revenue was aided by 27% YoY increase in unitary cooling business revenue. EBITDA for 1QFY15 increased 2.2x YoY at INR1.6b v/s an estimate of INR1.1b. Hence, PAT increased 2.7 x on a YoY basis at INR1.1b.

Savings account ratio) and retail deposits over the few years. The savings and currents accounts for ICICI has increased from 29% in March 2009 to 44% as of September 2014. These number are pretty important for ICICI Bank as improvement in savings and current accounts would increase the net interest margin.

Also,

understanding

from

the

asset

quality

perspectives, the NPA (Non-performing assets) ratio of 1.96% in March 2009 has declined to 0.96% in September 2014. Currently trading around Rs. 340 to Rs. 360 over the past one month, considering these important factors and positive results, ICICI becomes a favorable buy for 2015.

Tata Consultancy Services (TCS): As per Barclay‘s the company is likely to outpace the industry growth which would be led by the strength in large deals successes and continued efforts in account mining.

TCS reported a revenue growth 6.4%

sequentially which was helped by its Japanese acquisition.

However, the company marginally

missed on analyst estimates with an organic growth of 4.6% in constant currency terms.

The company‘s

management is also focusing on increasing its presence in digital technologies which is a key emerging area in the Information Technology Voltas:

Segment. Also, the company witnessed robust growth

With investor sentiment gradually reawakening in

across most industry verticals. However, insurance

many Middle-Eastern states, Voltas has reasserted its

remained soft for TCS as the company‘s insurance

long-established standing as a trusted EPC contractor

processing platform (Diligenta) showed signs of

for electro-mechanical projects. The first fruits have

weakness. One of the major factors to consider is that

been 3 substantial orders totaling Rs.1000 crores in

the company sees a strong demand in discretionary

value, raising expectations that more will follow.

which it expects to power the revenue growth in its

12 | D E C E M B E R 2 0 1 4 | V O L U M E I I

digital business.

Although the deal sizes may be

small, TCS can compete for the smaller deals to boost its revenue. With the performances over the years by TCS, stocks of the company look favorable for the coming year as well. The shares being traded around Rs.2500 to Rs.2691.90, with a weaker Q3 due to seasonality, buying the stock for a longer period of time looks even more favorable.

Cera Sanitaryware: India‘s fastest growing company in Sanitaryware, Cera‘s stocks have grown especially after the Clean India Campaign. However, it is not just the Clean India Campaign that can be looked upon for the increase in share price of the company. One of the greatest factors that can be noticed in the net profit of Cera Sanitaryware has been the increase in consumer spending at a scorching pace over the past 10 years.

The net profit of the company has been rising by 40% on an average over the past 10 years (there was a rise in the price from Rs. 9.1 on December 31, 2003 to Rs. 701.50 on December 31, 2013).

Bharti Airtel:

The operating

performance of the company has been stable with

American Tower Corporation and Bharti Airtel

margins above 17%, but the top line has been growing

Limited today announced that they have entered into a

above 40% in a year, on an average over the past 5

definitive agreement, through Bharti Airtel Limited‘s

years.

subsidiary company, Bharti Airtel International

noticed with the stock prices and that has been the

(Netherlands) BV (Airtel), for the sale of over 4,800

increase in the stock prices by 283% over the past two

of Airtel‘s communications towers in Nigeria. Airtel

years and having a PE ratio of 24.24.

will be the anchor tenant on the portfolio under a lease

company‘s stock price history along with the factors

with a ten-year initial term. Bharti Airtel, it said, is

such as Clean India Campaign, stocks of Cera

likely to be the biggest beneficiary of constructive,

Sanitaryware looks promising.

One of the interesting factors that can be

With the

competitive and regulatory dynamics in the Indian telecom sector.

HDFC Bank: HDFC‘s individual loans have grown by over 25% in the past couple of years, the company expects the growth to be slightly lower (+20%) in FY2015 due to 13 | D E C E M B E R 2 0 1 4 | V O L U M E I I

a high base of the previous year. Given its competitive

Ranbaxy comes as a positive factor for the company.

offering, specialization in mortgage lending and base

The only key approval to the related development is

rate constraints by banks, it is not overly worried

of U.S. Federal Trade commission which will be

about the rising competition. While growth in

received by the company in due course of time as per

developer loans has been muted, HDFC expects to

the analysts.

grow this book by ~15% in FY2015 as sentiments are improving and could lead to a pickup in demand for credit. Also the developer loans have the return on asset (ROA) accretive (due to higher yields and fee income), any pick-up in these loans will be able to contribute to an improved profitability.

Reliance Industries: Predicting nearly doubling of earnings per share (EPS) and return on capital employed (ROCE) for RIL by 2021, it said the catalysts for growth should fall into place in the next 6 to 12 months as the company completes its USD 16 billion refining and petrochemical projects and launches its USD 12 billion telecom project. RIL to launch its telecom Sun Pharmaceuticals: The

largest

drug

venture by early 2015, the first module of its pet-coke maker

by

revenue,

Sun

gasification project (one of its two key downstream

Pharmaceuticals reported a profit of 15% in the

projects) in September 2015 and the new refinery off-

second quarter which was roughly in line with the

gas based olefin cracker by March 2016. Hoping that

expectations and was strongly helped by the growth in

the suggestions turn out to be useful to our readers,

sales in the domestic market. But one of the factors

we wish you a happy new year and a happy investing

that makes this stock attractive is that the company

this year.

agreed to buy Ranbaxy for $3.2 billion. By this the company bets that it could help Ranbaxy fix its quality control issues which eventually led to the U.S. Food and Drug Administration (FDA) to ban its Indian-based plants. Even-though the company itself has been facing the regulatory scrutiny with FDA banning exports from its Karkhadi plant, the approval of India‘s antitrust regulator for the bid to buy

14 | D E C E M B E R 2 0 1 4 | V O L U M E I I

Taxation

The ”New” GST

- Srishti Karmakar

Goods and Service Tax (GST) is been in news for a

have a dual structure – a Central component levied

long

Vijpayee

and collected by the Centre and a state component

Government back in the year 2000 and now it is back

administered by states levying it on a common base.

but yet to be implemented. GST is a pending indirect

Integrated GST (IGST) would be levied on inter-state

tax reform which is hoped to replace the existing tax

supply of goods or services. This tax will be levied by

system. It will make the tax system simpler, reduce

the Centre and the requisite payments will be made to

the tax outflow in the hands of consumer, make

the state in which the goods or services are consumed.

exports competitive and boost tax revenues. It is

Import of goods or services would be treated as inter-

hoped that the new Government will be successful in

state supplies and would be subject to IGST.

time.

First

proposed

by

the

incorporating it in the next upcoming Budget 20142015.

The GST to be levied by the Centre would be called Central GST (CGST) and that to be levied by the

The tax structure is expected to be much simpler and

States would be called State GST (SGST).CGST and

easier

the

SGST would be levied at rates to be mutually agreed

manufacturing sector more competitive and save

upon by the Centre and the States. GST would replace

money. The implementation of GST would push up

the following taxes currently levied and collected by

the GDP by around 2% and reduce corruption. This

the Centre:

to

understand.

This

will

make

tax structure will bring about greater compliance,

a. Central Excise duty

increasing the number of tax payers. This will increase the tax revenue and reduce in fiscal deficit.

At present, GST is the one of the best ways to

b.

Duties

of

Excise

(Medicinal

and

Toilet

Preparations)

improve the fiscal health of the country and a way to

c. Additional Duties of Excise (Goods of Special

restrain the fiscal deficit to the target level of 4.1%.

Importance)

This change in the tax structure is going to have a

d. Additional Duties of Excise (Textiles and Textile

huge impact in the current supply chain of India. GST

Products)

will make the cost of production falls in the domestic market as logistics cost by 7%-9%. Indian goods and services will be more price-competitive in foreign

e. Additional Duties of Customs (commonly known as CVD)

markets. This can bode well for exporters, who

f. Special Additional Duty of Customs (SAD)

compete with manufacturers abroad facing a lower

g. Service Tax

cost structure. h. Cesses and surcharges GST will convert the country into unified market, replacing most indirect taxes with one tax. It would

15 | D E C E M B E R 2 0 1 4 | V O L U M E I I

several taxes in the transit of goods within India from April 2016.

However, the proposed GST has several caveats that could be troublesome

for

both

the

industry and the government.

Among

the

key

proposed

amendments are: powers to states to make laws for levying GST;

a

dispute

resolution

mechanism; and compensation for States for loss of revenue due to GST up to five years. The compensation will State taxes that would be subsumed within the GST are: a. State VAT b. Central Sales Tax

be on a tapering basis, i.e., 100% for first three years, 75% in the fourth year and 50% in the fifth year, said the Finance Minister The government has also exempted liquor from GST and has kept petroleum and petroleum products out of the GST purview until

c. Luxury Tax

a consensus is arrived between the States and the

d. Entry Tax (other than those in lieu of octroi)

central government.

e. Entertainment Tax(not levied by the local bodies)

This Bill differs from the erstwhile bill introduced in

f. Taxes on advertisements

2011 in various ways which essentially indicates a level of progress having been made since then. This

g. Taxes on lotteries, betting and gambling

Bill has managed to cover petroleum products within

h. State cesses and surcharges insofar as they relate to

its ambit, albeit in a phased manner. Since petroleum

supply of goods or services

products are key industrial inputs, and therefore should be within the ambit of GST in the long term.

In a much needed boost to reforms, India‘s Finance Minister Arun Jaitley introduced the Constitution (122ndAmendment) Bill 2014 on Goods and Service Tax (GST) in the Parliament‘s Lok Sabha on Dec 22nd 2014. If everything goes well, GST will replace

16 | D E C E M B E R 2 0 1 4 | V O L U M E I I

There is a provision for imposing a temporary additional tax at 1 percent on the inter-state supply of goods and services which would directly accrue to the originating State (and therefore would not be shared).

The Bill provides that compensation to States on revenue loss on account of introduction of GST would

GST will help in speeding up the process of achieving a higher

level

of

GDP

and

increase the investment inflow due to higher returns.

Implementation of GST will spend positive signals to the businessmen and manufacturer, reduce

the

prices

of

commodities and tax burden on consumer. Now what is needed is a thumps up from both the Parliaments and we would not have

any

difficulty

understanding different levied on goods and services. be based on the recommendations of the GST Council. Therefore, the GST Council would be decision making authority on the computation of compensation to States for any revenue loss, and therefore seeks the general concerns of States towards revenue shortfalls by allowing for determination of compensation

by

a

body

with

―democratic‖

representation by all States.

As next steps, this Bill needs to be debated and voted on by the Lower House of Parliament. Thereafter, it would need to be voted on by the Upper House of Parliament, before being ratified by at least half of the States. This change would impact almost all business divisions

of

industries

from

procurement,

to

manufacturing, to sales and distribution. Service providers are also likely to be substantially impacted.

India is likely to clock a growth rate of 5.5 per cent in the current year, bettering 4.7 per cent of 2013-14.

17 | D E C E M B E R 2 0 1 4 | V O L U M E I I

in taxes

Cover Story Continued

What a Year it Was !

- Avik Chakrabarty & Navjoth Sahu

2014 was a landmark year for both the global and the

Israel showed good response when many foreign

Indian economies. In a striking role reversal between

investments flowed into the nation.

the world‘s two largest economies, the US appeared to be rapidly gaining back its mojo and played a key role in boosting the global economic machine, while the Chinese juggernaut appeared to be screeching to a halt.

The War corresponded the same time to that of United States of America and the ISIS troops in Iraq that is America started passing on air strike on Syria, as the ISIS planned to annex the Iraq Government and capture its capital Baghdad. Followed to it the US

In India, the year started off with low growth and high

Government declared air campaign in Syria, calling

inflation. By the time it ends, inflation is low while

on 22 air strikes against the ISIS. Which in turn had

growth appears to be picking up.

large impact on the Oil Supply as ISIS were

At the end of the year 2014, looking back at the year we find it was quite eventful year globally.

controlling around 60% of the Syria and if the bombardment hit the oil convoys on the smuggling road, then it shall significantly disrupt the supply and

January

production of the oil. Especially these routes were

Latvia Joins EU

majorly in Turkey, which were then produced at

To begin with the year, after countries like Romania

around 50000 barrels of oil per day which went to the

joining the Euro Currency Union in the previous year,

black markets of Turkey.

Latvia reformed its currency to Euro at the starting of

February

the year, though there was a multiple opinion about

Ebola Outburst

the transformation, many protested, but many had good hope about their future prospective. The adoption, although dangled the situation but averted itself from the deepest recession. People were happy about the price rise and inflation in the country.

In the following month the year saw some of the great mishaps in human history, The Ebola virus epidemic burst in West Africa, infecting around 20,000 people and killing around 7000 people. The analysis estimated the short-term impact on output to be 2.1 %

But, despite all this we should not forget the Euro Crisis which turned to be the biggest evil in the history of the world economics, which had significant adverse economic effects, with countries like Greece and Spain the hardest hit, with an unemployment rate

points of GDP in Guinea; 3.4 % points in Liberia; and 3.3 % points in Sierra Leone. Initially Inflation and food prices engulfed majority of the infected countries, but later found family most hit were the vulnerable to food price shocks.

of 27% thereafter killing more than 5000 people in the strike. Due to these Strikes there was heavy damage to the Industries and the private sector firms, but later 18 | D E C E M B E R 2 0 1 4 | V O L U M E I I

The analysis further revealed that the largest economic effects of the crisis are not as a result of the

nation; this also costed Russia the total cost of Annexation at $82 billion. On the other hand Ukraine has a loss on few aspects as Crimea contributed only 3.6% to the GDP of Ukraine, although the loss of local energy and mining assets will be particularly expensive, direct costs (mortality, morbidity, care-giving, and the

above all the company Chornomornaftohaz. But

associated losses to working days) but rather those

losses of Choromornaftohaz production does not have

resulting from aversion behavior driven by fear of

fundamentally change the gas balance in Ukraine.

contagion.

But this Annexation did not go really well for Russia,

This in turn leads to a fear of association with others

In a Emergency meet by other G8 nations, Russian

and reduces labor force participation, closes places of

Federation was temporarily suspended from the G8

employment, disrupts transportation, and motivates

nations, Further the United Nations called up the

some government and private decision-makers to

Nations regarding the Crimean Referendum in which

close sea ports and airports.

local Crimean people were asked to vote for which country they would like to join, majority voted for

March

Russia. But, the same did not happen in the United Ukrainian Outcry

Nations, 13 countries voted against the Annexation

In the same month the year saw a major political

China Abstained, while Russia Vetoed. Later the

Outcry in Ukraine, when people voted against the

United

Ukrainian

and

resolution in which 100 favored while 11 were

replacing him with Oleksandr Turchynov, after days

against, which affirmed that the annexation was not

of civil unrest leading to death of more than 200

valid and declaring Crimea to be integral part of

people in Kiev. This ultimately led to one of the

Ukraine.

President

Viktor

Yanukovych

strangest events in the history of mankind. Crimea

Nation

General

Assembly

passed

the

May

was annexed by the Russian Federation and Insurgency was announced in the neighboring Towns

Landslide Win for BJP in General Elections

of Donetsk and Luhansk. The Russian authorities, the

In a historic mandate, Narendra Modi-led Bhartiya

takeover of Crimea is a propaganda success for

Janata Party coasted to a majority, the first time a

domestic consumption, but it is associated with

party has done this since 1984 (when the Congress

significant costs on the international political scene

swept the polls on a sympathy wave, following Indira

that is making itself a dangerous and unpredictable

Gandhi‘s assassination).

19 | D E C E M B E R 2 0 1 4 | V O L U M E I I

The mandate is simple: under Modi‘s strong,

this Israel and Palestine bombarded Gaza for the next

reformist leadership, voters hope India would create

7 weeks and Ground invasion

the millions of jobs its young population needs as well

NDA‘s maiden budget short on bold ideas but there

as lift the economy from a slump said to be brought

where key policy reforms to put the economy on track

on from years of the previous government‘s expansionist rule, slow decision-making and graft-

July

ridden policies.

NDA’s Maiden Budget

With voters choosing to side with the BJP in such a

Even as finance minister Arun Jaitley had all of 45

big way, the Congress found itself relegated to a

days to prepare for the year‘s full Budget, economists,

position it likely would have never imagined,

corporate and analysts were still disappointed from

notching up a mere 44 seats -- the lowest in its

the lack of bold ideas in it.

history.

Some even called Jaitley‘s Budget as an extension of

While many analysts blamed the UPA‘s disastrous

Chidambaram‘s in February, with the focus on high-

performance especially during its second stint, others

octane social-sector spending as well as an undue

believe

focus on meeting the fiscal deficit target.

the

party‘s

dynastic,

charisma-lacking

leadership, as well as its ageing ―welfarist‖ approach

The major policy reforms brought in by the NDA

to the economy put off voters.

government:

Long plagued by policy paralysis, India Inc greeted

Diesel Decontrol-

the change of guard at the centre with a sense of relief

reform decision of the year, the government

perceiving modi government to be business friendly.

deregulated diesel prices – linking it to international

June

oil prices. The move not only frees the diesel rates but

Operation Protective Edge

In probably one of the biggest

also helps easing the government‘s huge subsidy burden.

The further months in the year saw the rarest of the rare events. Israel launched a military operation against the Hamas ruled Gaza Strip. Followed to this there were huge bombardment for seven weeks by the

Bank account for all- Prime Minister Narendra Modi announced the government‘s most ambitious policy decision – Jan Dhan Yojana.

Israel and Palestine killing around 2200 Gazans. The

Divestment drive- The government has set an

Aim of the Operation was to resist the War outcry by

ambitious target of raising Rs 58,425 crore through

the Hamas ruled Gaza but which in turn went vital

disinvestment this financial year and kicked it off by

and there was heavy bombardment by the Gaza into

selling 5 percent stake in Steel Authority of India in

Israel. This also lead to killing of the 3 Israel

December. But it is still a long way off from

teenagers and a Palestinian teenager. In the revenge to

achieving the target.

20 | D E C E M B E R 2 0 1 4 | V O L U M E I I

FDI in Construction, Defense, and Railways- The

Later, the government decided to re-allocate the

NDA government allowed foreign capital for sectors

cancelled mines in an e-auction that is set to conclude

like Defense, Railways and Construction. In his

shortly.

maiden Budget speech, Finance Minister Arun Jaitley

October

said that 100 percent FDI would be allowed in some railways projects. The Cabinet also approved foreign investment up to 49 percent in the critical defense

Euro Zone Worries Mount on Sluggish Economic Growth:

sector.

Not just China and Japan, Euro zone, the fourth vital

49% FDI in insurance – A reality soon after a delay of

cog in the global economy aside of the US continued

almost seven years, FDI in insurance may become a reality. The draft report, submitted by a select committee, recommends a composite cap of 49

to struggle in a big way, expanding only 0.2 percent in the third quarter of 2014 (and 0.3 and 0.1 in the previous two quarters).

percent, which should include all foreign investment and foreign portfolio investment.

But while there is plenty of blame to go around, Euro

September

zone‘s recessionary problems are blamed (depending

SC Cancels Coal Block Allocations In a landmark judgment in the coal scam in September, the Supreme Court cancelled allocations to every single block handed out to captive miners in the 20 years ending 2012.

on who you ask) on either its ―austerity‖ drive of the last few years or the Union‘s ill-fitting one-size-fitsall approach to monetary policy.

Whatever be the case, it is clear the bloc‘s problems are not ending in a hurry – and continuing sluggishness continues to add to the nation that the

These mines were given away virtually free of cost to

union idea was not a good one.

private and state companies in the power, steel and cement sectors (in which coal is a vital input) to allow

China GDP Growth Falls to 5 Year Low:

them to mine the mineral for their own end use, after

China, the bulwark of global growth since the global

the only legally-allowed miner, Coal India, was seen

crisis, finally appeared to be slowing down, some of it

failing to meet their, and the economy‘s, surging

consciously after the government slammed the fiscal

demand for coal.

brakes and reined in credit growth by tightening bank

But the court termed the decision as ―arbitrary and illegal‖ and asked companies to pay a fine of Rs 295 (roughly the profit Coal India makes) for every tonne

lending norms – after concerns over rapidlyincreasing wage prices and a real estate bubble engulfed the economy.

of coal mined over these years – leading to a total

In the third quarter, the world‘ largest economy was

penalty of well over Rs 10,000 crore.

seen growing at 7.3 percent, the slowest in five years, as Beijing tries to engineer a ―soft landing‖ as well as

21 | D E C E M B E R 2 0 1 4 | V O L U M E I I

calibrates its growth model from export-driven to

increase interest rates in 2015 or not, with many

internal consumption driven.

leaning towards the former.

China will keep slowing both monetary and fiscal

Japan Announces QE; Snap Polls Soon After

policy won`t be enough to prevent growth from weakening further to 6.5 percent next year. While poor by China`s standards, these growth rates are the envy of all major economies.

If less is good, more must be better. With this philosophy

in

mind,

Japan,

the

inventor

of

quantitative easing, announced a massive USD 720 billion program in November, after its economy

US Economy is Powering Ahead

shrank a mammoth 7.1 percent in the recent quarter.

The world`s largest economy started to outperform its

Japan to emerge from recession after suffering

peers, driven by strengthening domestic demand,

through its fourth recession in six years, the Japanese

specifically

dynamics

economy will rebound in 2015, albeit only to around 1

underpinning consumer spending-which accounts for

percent. The Bank of Japan`s (BOJ) easing and

70 percent GDP-remain positive, including strong

additional government stimulus, combined with lower

jobs growth, improved household finances and low

energy prices, will push growth back into positive

gas prices. The economy will grow in the 2.5 to 3

territory.

consumer

spending.

The

percent range.

After emerging stronger in a snap election, it appears

As outlined by Federal Reserve in 2013, where it had

Shinzo Abe is determined to lift the Japanese

signaled it would start tapering its bond-purchase

economy out of 20 years of deflation using an

programs known as ―quantitative easing‖ gradually,

unprecedented monetary experiment that already

the US central bank unwound it this year.

some critics are warning could have side effects: in

QE is an unconventional monetary policy tool that Fed has resorted to in the wake of the global financial crisis in which it buys long-dated bond securities in order to bring down long-term interest rates down, in

the form of currency wars (as yen depreciates from more money in the economy, other exporter countries will be forced to follow suit) and a potential chance of uncontrollable inflation in the future.

the hope low borrowing costs would push consumer

In every country there is one organization which

spending higher.

works as the central bank and its function is to control

But Fed promises to keep interest rates low even though Fed unwound its QE, the central bank pledged to keep interest rates – the standard monetary policy tool used to set the tone for the economy – low ―for a considerable period of time‖.

However, of late, the resurgence in the US economy has rekindled the debate whether the Fed would 22 | D E C E M B E R 2 0 1 4 | V O L U M E I I

and monitor the banking and financial system of the country. In India, the Reserve Bank of India (RBI) is the Central Bank.

Airline

Spicy SpiceJet

- Sameena Usman

They say not all bad things are bad, exactly the same

Deccan as Kingfisher Red, resulting in a major but

case with the much talked about ‗spicejet fiasco‘ ,

obvious slump.

wouldn‘t say it‘s the best thing that could have happened but definitely a good eye-opener in terms of exposing the structural challenges eminent in our aviation industry.

Indian aviation industry has been slapped earlier too, in the form of ‗kingfisher fiasco‘, but such incidents were sidelined as ‗externalities‘, Kingfisher's decline in particular which should have been a good enough reason to look into reforms was very conviniently attributed to Vijay Mallya's extravagance that his diverse business interests had left him barely any time

But our realm of concern, first the King and next the Spice of indian aviation- two successive major downfalls could just not be mere co-incidences or a matter of negligible externalities.

Most airlines in Indian aviation sector face a sustained growth rate but no profits because of low profit margins that result from anti-market practices, punitive taxation and policy uncertainty. These factors contribute to India being a growing, yet toxic environment for airlines. Few of the major issues that lead to this are:

for dedicated attention to his aviation business. Could be true to a major portion but why not dig deeper now that we have other major players following suit.

Especially the spicejet, which was once a leader in terms of domestic market share has now been issued warnings upon non payment of dues and salaries and also the oil companies refusing to re fuel its stranded planes, a classic fiasco.

The aviation sector in itself makes huge losses due to the very high capital required to start and then run it.

Interestingly, airlines do not have control over their expenditures. With the rising fuel prices, their expenditures go on rising and given the steep competition,they generally are not in a position to pass on the increasing cost to the customers, back then what clearly did not work in favour of KFA was the merger with Air Deccan. Kingfisher Airlines, which itself was reeling under losses chose to rebrand Air

23 | D E C E M B E R 2 0 1 4 | V O L U M E I I

High Expectations on Demand: . Indian aviation industry like many others grossly overestimated India's growth, irrational expectations of demand led to an excessive supply. When Kingfisher went bankrupt, it had in place an order for over 50 aircrafts, which were not justified by the projections of that time. ―Sticky prices‖, as we all famously know: Aviation as such is a highly competitive industry. Most Indian airlines use fare wars and predatory pricing from time to time to gather market share. To top it off, Indians are notorious for demanding cheap prices, when airlines

raise

prices,

passenger

numbers

drop

excessively. Most airlines price below their operating costs to gather market share, but are unable to adjust prices back to profitable levels later.

AI losses: Aptly quoted as "a cancerous cell at the

infamous for resisting change and SpiceJet

heart of Indian aviation" AirIndia‘s total losses were

eroding provides excellent logistical reasons to do

over $12 billion, it had not shown profits since ages

so. This will also boost investor confidence in

and was continuously being bailed out by successive

Indian aviation industry which has waned with the

governments with the only rationale being perhaps

decline of Kingfisher and now SpiceJet.

some misplaced sense of national pride.

AI's losses were continuously underwritten by



'Deep discounts' and other misleading fare wars techniques could be regulated by the DGCA.

taxpayers money. It runs in loss but cuts prices to

However, Indian government has always been keen

undercut competitors hence distorting Indian aviation

on bailing out fading airlines, but there is no

market and preventing proper price discovery. It is

economic rationale behind asking banks to extend a

almost impossible for smaller airlines to compete with

line of credit to SpiceJet or imposing a price ceiling.

such a fiasco.

Funds affiliated to JPMorgan Chase might team up

Someone rightly nailed the truth with this humorous

with Ajay Singh to invest around Rs 1,200 crore in

statement ― The government should sell Air India off

our illiquidated SpiceJet - a move that will help the

and give the money to ISRO, they might use it better‖.

ailing airline to take off again, is what they think but

Taxation: A major portion of the costs incurred by airlines in India is because of the excessively high rates of taxes on ATF. There is a scope for improvement if the Modi sarkar doesn‘t bow down to the demand of the states to exempt ATF from GST.

what about any other airline in the present or future of this industry ?

Bailouts will almost certainly lead to a downgrade of Indian airlines by all major overseas lenders and aircraft manufacturers simply because a bailout has never saved an airline, just given it a new lease of life which is pointless if the underlying causes for its

Hitting back onto the main issue in hand, SpiceJet

decline are not fixed .

fiasco's overall effect on Indian aviation industry largely depends on how the government decides to handle it, all we can do right now is to rationally speculate.

Hence, it would be in the best interest of all if the structural challenges exposed by the airline fiasco‘s would be fixed asap. It‘s for us to wait and watch if the future has our major aviation players including

Its high time already and the spicejet turbulence could pave way to positive reforms:

Arun Jaitely could use this fiasco as a valid excuse to push for the GST Bill to bring the cost of ATF down.



A neat aviation policy could be framed, standing firm against the various trade unions which are

24 | D E C E M B E R 2 0 1 4 | V O L U M E I I

spicejet landing on a runway to success our crashing mid-air.

Market Watch

Last of 2014

- Apoorva Anusha

India is a mixed economy with an inward-looking,

Rs 36,810 previously. Spot gold was sharply higher at

centrally planned economy. After a fiscal crisis in

$ 1,197.00 an ounce in early trade.

1991, India has increasingly adopted free-market

• Prices of thoor dal and moong dal increased while

principles and liberalised its economy to international trade. There were many news of different sectors like in banking sector by Rajiv Mehta, AVP, India Infoline "We see long-term value in private sector banks and niche NBFCs". In automobile sector according to Gaurav Dua, Headof Research, ShareKhan "A fall in interest rates is expected to create a conducive environment".

all other commodities ruled steady in the wholesale food grains market during the last week of the year 2014. Prices of thoor dal and moong dal advanced to Rs 8,200 and Rs 9,800, respectively, with an increase of Rs 200 and Rs 100 per quintal each, respectively, on Monday from its previous rate of Rs 8,000 and Rs 9,700, and maintained the same trend till Friday. Urad dal price at Rs 8,200, gram dal at Rs 4,000,sugar at Rs

But towards the end of calendar year 2014 the country

3,100 wheat at Rs 2,750, maida (90 Kg) at Rs 2,500

did fairly well. The major highlights of different fields

and sooji (90 kg) Rs 2,900 ruled steady during the

are as follows.

week.

THE COMMODITIES MARKET

THE FOREX MARKET

• Gold prices sharply returned to its former condition

• After remaining stable for most part of the year, the

and closed to a more than one-week high at the

rupee showed some depreciation in later part of

domestic bullion market and as a result the, with

November and early December. It started getting

uncontrolled excitement and emotion buying started

weak but somewhat recouped on lost ground towards

by jewellery stockists and traders amid robust retail

the middle, but very soon it lost track and the losses

demanded ahead of year-end festivities and wedding

turned steeper towards the end of 2014. In the end,

season.

rupee remained a 'senior citizen' or 60-plus versus the

Moving in line with the general trend, silver also

US dollar for most part of this year.

jumped to Rs 37,000-mark on the back of heavy

On an annual basis, the rupee has also lost ground for

speculative buyout. Standard Gold (99.5 purity)

at least fourth year in a row, although the decline was

zoomed by a extremity of Rs 400 to end at Rs 26,915

not much and remained lower at about 2 per cent

per 10 grams from 24th December ‗14 closing level of

against the US greenback so far in 2014. In

Rs 26,515. Pure gold (99.9 purity) also shot-up by the

comparison, the rupee had depreciated by over 11 per

same margin to finish at Rs 27,065 per 10 grams, as

cent in 2013 and by more than 18 per cent in 2011.

against Rs 26,665. Silver (.999 fineness) galloped by

The decline was relatively smaller at about 3 per cent

Rs 970 to conclude at Rs 37,780 per kg compared to

in 2012. After starting at about Rs 61.80 level against dollar at the beginning of 2014, it is now near Rs 63.6

25 | D E C E M B E R 2 0 1 4 | V O L U M E I I

against the US dollar, while just three days are left for

from 8.00 per cent. The 8.15 per cent government

trades this year.

security maturing in 2026 also fell to Rs 101.32 from

Some experts, however, see a silver lining in the fall and said the volatility has come down sharply and that

Rs 101.46, while its yield moved up to 8.97 per cent from 7.96 per cent.

bodes well for the Indian currency. According to N S

The 8.27 per cent government security maturing in

Venkatesh, executive director and head of treasury at

2020, the 9.20 per cent government security maturing

IDBI Bank ―The rupee performed exceedingly well

in 2030 and the 8.83 per cent government security

this year among emerging market currencies. We saw

maturing in 2023 were also quoted lower at Rs

volatility coming down during this year,"

100.78, Rs 109.67 and Rs 104.59, respectively.

He also said that "The RBI's stance to fight inflation

The overnight call money rates ended lower at 7.50

and strong mandate to BJP gave the government a

per cent from 24th December ‗14 close of 7.95 per

firm hand to carry out the much needed reforms,

cent. However, 3-day call money rates resumed

resulting in positive sentiments in the market and that

higher at 8.20 percent and moved in a range of 8.50

boosted the rupee," .

and 7.75 per cent.

After remaining sub 5 per cent for two years, the

• IFCI is planning to raise 790 crore from non-

country's GDP grew at 5.5 per cent in April-

convertible debentures to fund its business growth.

September, 2014, reflecting revival in the economy.

IFCI said in a statement-"Total amount for which the

The GDP growth in the same period last year was 4.9

securities will be issued - Rs 250 crore (base issue

per cent.

size) with an option to retain over-subscription up to

THE BOND MARKET • Government bonds (G-Sec) declined further on sustained selling pressure from banks and corporate amid profit-taking by market participants. The call money continued to remain lower at the money market on 28th December ‗14 due to lack of demand from borrowing banks following tight liquidity conditions in the banking system.

the residual shelf limit that is Rs 790.813 crore‖.

This is the balance out of the shelf limit of Rs 2,000 crore, it said, adding that the fund would be raised through

secured,

redeemable,

non-convertible

debentures. The proposed issue would open for subscription on January 1 2015 and close on February 4, 2015. In the first tranche that opened for subscription in October 2014, the company had raised around Rs 1,210 crore from NCD issuance. The

The 8.40 per cent 10-year benchmark bond maturing in 2024 dropped to Rs 102.78 from Rs 102.90 previously, while its yield moved up to 7.98 per cent from 7.96 per cent. The 8.60 per cent government security maturing in 2028 dipped to Rs 104.70 from Rs 104.8950, while its yield edged-up to 8.02 per cent 26 | D E C E M B E R 2 0 1 4 | V O L U M E I I

allotments were made on a first-come-first-served basis, subject to allocation ratio for various categories of investors.

The NCDs were offered in three different tenures of 5

versus 8.2242 per cent previously. The highest yield

years, 7 years and 10 years, with varying coupon

for the 364-day bills in the poll was 8.28 per cent,

rates, ranging from 9.4 per cent to 9.10 per cent. They

while the lowest was 8.23 per cent. RBI is selling 130

also carried a cumulative option for all three tenures

billion rupees ($2.05 billion) of treasury bills,

of 5, 7 and 10 years. The money raised was for fresh

including 80 billion rupees of 91-day t-bills and 50

loans - 25 per cent for general business purposes and

billion rupees of 364-day t-bills.

75 per cent for specific purpose.

THE MONEY MARKET • 5-year overnight index swap (OIS) rate dropped 5 bps to 7.37 per cent. This is its lowest level since July 2013. The 1-year rate also fell 5 bps to 7.97 per cent.

Traders expect RBI to cut rates sooner than previously estimated on falling inflation. The OIS curve is pricing in 50-75 bps in rate cuts over the next 6-9 months, says a trader.

• India's overnight cash rates ended at 8.50/8.60 after hitting a more than one-month high of 8.90/8.95. The three-day cash rates had ended at 7.90/8.00 on 26th December ‗14. Intraday high of 8.95 per cent was last seen on 22nd October ‘14.There is a likely rush for rupee liquidity because according to the traders oil payment deadline will end on Monday 30th December ‗14. India is scheduled to pay third tranche of $400 million to Iran due to which the collateralised borrowing and lending obligation (CBLO) rate also touched a high of 8.99 per cent.

• RBI is expected to set a cut-off yield of 8.35 per cent at its auction of 91-day treasury bills on Wednesday, according to the median forecast in a Reuters poll of six traders. Expected cut-off compared with a cut-off yield of 8.3528 per cent last week. The highest yield polled for 91-day was 8.35 per cent, while the lowest was 8.30 per cent. RBI is expected to set a cut-off of 8.25 per cent on the 364-day t-bills, the poll showed, 27 | D E C E M B E R 2 0 1 4 | V O L U M E I I

Economy

0% Inflation: Good or Bad?

- Alisha Singh

Zero Inflation is a state when the economy reaches a

investors are willing to invest money for a long

state when there is no inflation. From a state of

time without any risk.

inflation when an economy progresses towards



Reduction in

Transaction Cost:

An often-

lowering the rate of inflation it endeavours to reach a

mentioned benefit of eliminating inflation is a

point when there is no inflation at all and therefore the

reduction in the efforts people would make to

situation of zero inflation is achieved. Whether zero

decrease the amount of cash they hold available

percent inflation is a good or bad sign for the

for spending. This transaction cost benefit would

economy has become a topic of discussion and debate

actually be very small. The idea here is that

with economists voicing their opinion belonging to

inflation encourages the waste of resources each

varied school of thoughts.

time people convert interest-earning assets into money, so eliminating inflation would save those

Benefits of Zero Percent Inflation:

resources for productive uses. Resources are There are several benefits of a zero inflation economy. Few of them discussed are as follows: 

wasted with inflation because it raises market interest rates, and people naturally want to earn as

The zero inflation economy enables to lessen the

much interest as they can. They can't earn much

price distortion; it also reduces the uncertainty

with some forms of money used in transactions:

involved in price drift. The zero inflation also aids

currency and demand deposits. Hence, with

in enhancing the economic growth along with

inflation raising market interest rates, people try to

adding liquid money to the economy. The benefits

decrease their balances of currency and demand

of zero inflation are far reaching.

deposits and increase their assets that earn market

Example: US had faced a high inflation during the

rates of interest. When people want to spend, this

1970s but after a long effort they could establish an

involves some costly juggling—frequent trips to

economy that was clear off inflation. They reached a

the bank or the cash machine, for example, to get

stage of zero inflation.

cash or move funds between accounts. (These



costs are also known as shoe-leather costs.)

In such an environment the corporation is in a better position to plan for the economy and implement new rules, policies for the betterment of the economy. The government can cope better

Lowering inflation to zero is expected to reduce these costs by lowering market interest rates and so people's incentive to juggle funds between accounts.

with the problems as they do not have to face the sudden

shocks

of

supply.

There

is

an

accumulation of long-term investments as the

INDIA EXPERIENCES 0% INFLATION For an economy that has been battling with a very high rate of inflation, an inflation of zero percent,

28 | D E C E M B E R 2 0 1 4 | V O L U M E I I

should come as a welcome relief. But it‘s easier said



than done.

The month of November witnessed a fall in oil prices. Petrol and diesel prices have fallen by around 10 percent and 3 percent respectively in

The devil, as they say, lies in the detail. The question

comparison to November 2013. In fact, the

to ask here is why is inflation at zero percent?

government increased the excise duty on diesel Reasons as to why India faced 0% Inflation: 

and petrol twice since October; else inflation as

The price of food products which make up for

measured by the wholesale price index would

around 14.34 percent of the index rose by just

have been negative for the month of November

0.63 percent in comparison to the last year. Onion

2014.

prices are down 56.3 percent from last year.

Vegetable

prices

are

down

28.6



Manufactured products make for around 65

percent.

percent of the wholesale price index. The inflation

Nevertheless, potato prices have gone up by 34.1

in this case was minus 0.3 percent in November

percent. But this seems like a temporary trend and

2014, in comparison to October 2014. Since the

may soon reverse. The kharif (summer-autumn)

beginning of this financial year, the manufactured

season has seen a decline in production of most

products inflation has been at 0.8 percent. And in

crops, due to a poor south-west monsoon this year.

comparison to November 2013, the number is a

Over and above this, recent data from the ministry

little over 2 percent.

of agriculture points out that the total area



According

to

the

above

given

statement,

coverage under rabi (winter) crops has fallen. It

manufactured products inflation has more or less

stood at 470.74 lakh hectares while last year‘s

collapsed. A major reason for the same lies in the

sowing area was at 503.66 lakh hectares. Several

fact that people are going slow on buying goods.

important rabi crops have seen a fall in total

This becomes clear from index of industrial

sowing area. As the ministry of agriculture press

production (IIP) for the month of October 2014,

release points out: ―Wheat`s sowing area is at

when looked from the use based point of view. IIP

241.91 lakh hectares as compared to last year‘s

is a measure of industrial activity in the country.

251.32 lakh hectares. The area under sowing of



The consumer goods number is down 18.6 percent

Gram is at 71.51 lakh hectares this year while the

from October 2013. It is down 6.3 percent since

last year‘s figure was 85.75 lakh hectares. Area

the beginning of this financial year. The consumer

coverage under Total Pulses is at 111.13 lakh

durables number is down 35.2 percent from last

hectares while the last year‘s sowing area

year and 16 percent from the beginning of this

coverage was 124.78 lakh hectares.‖ This is an

financial year. And finally, the consumer non-

alarming sign, which could push food prices up in

durables number is down by 4.3 percent from last

the months to come.

year and up only 1 percent from the beginning of this financial year.

29 | D E C E M B E R 2 0 1 4 | V O L U M E I I

This clearly explains the reasons that despite falling

expectations fall to very low levels, then consumers

inflation, people still haven‘t come out with their

might also start postponing purchases, in the hope of

shopping bags. When consumers are going slowly on

getting a better deal. That might happen if zero

purchasing goods, it makes no sense for businesses to

inflation stays for a while.

manufacture

them.

Also,

that

explains

why

manufactured goods inflation has almost been flat through this financial year.

This is an alarming sign, if consumer spending is slower than usual, businesses suffer and this translates into slower economic growth. Further, businesses have no incentive to expand also in this scenario. The capital goods number in the IIP is down 2.3 percent from last year.

A possible explanation as to why consumers are not spending lies in the fact that inflationary expectations (or the expectations that consumers have of what future inflation is likely to be) continue to be high.

The wounds of high inflation are yet to fade away.

People need inflation to stay low for a while, before they will really start believing that low inflation is here to stay. As and when that happens, they will come out with their shopping bags all over again.

As per the previous Reserve Bank of India‘s Inflation Expectations Survey of Households, the inflationary expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent.

CONCLUSION In a nutshell, if inflationary expectations fall, then it is likely that the consumer demand will improve and the broader economy will pick up as well. If inflationary

30 | D E C E M B E R 2 0 1 4 | V O L U M E I I

Whether that happens, we don't know as yet. Until then, we will have to wait and watch.

Country in Focus

Country of the Year: Tunisia

- Priyanka Malik

Hope is a Waking Dream - Aristotle All‘s well that ends well. The year 2014 is on the verge of ending and amidst a lot of disappointment faced by several countries like falling oil prices witnessed by OPEC countries, Recession in Euro zone countries with Germany fearing the worst, rise in consumption tax pushing Japan towards a downturn, stagnant economies of Russia; Brazil and many more such reasons for misery there are reasons for optimism as well. It can be better expressed by considering the accolades on a collective level. Unlike Uruguay, which was being nominated as the country

turn-out during the first round and legislative

of the year in 2013 by the Economist for legalizing

elections in October. Elections ended and democratic

gay marriage and consumption of cannabis, this year

rule was established as Beji Caid Essebsi won with a

the winner is TUNISIA.

clear margin securing 55.68% of the votes against incumbent Moncef Marzouki who secured 44.32%.

Here symbolism matters more than size. Generally, Arab Spring arouses a feeling deep sunk in intense

Essebsi already had a strong impact on the

blood-shed and extremism. Country of the year:

countrymen and a large proportion of supporters. He

Tunisia has not only set an exception amidst the

had already served as a speaker of Parliament during

surrounding Arab nations but also has provided with a

Ben Ali‘s regime and as foreign and interior minister

ray of hope. It has resolved the trade-off between the

for his predecessor Habib Bourguiba. Although, he

Presidential

by

served in a one party administration and dictatorial

conducting both. Finally, it decided to walk through

government he was chosen as the leader probably

the enlightened path of democracy by adopting a

because of his declaration of himself as a technocrat

constitution. Although the country is struggling with

and thereby formation of a secular party Nidaa

its economy and has a fragile policy framework but

Tounes (Call for Tunisia). He won 39% votes in the

still is capable instilling optimism amongst the

last month‘s first round against 33% by Marzouki.

darkness prevailing in the Arab Spring.

Hence, after defeating the main Islamic party in the

and

Parliamentary

elections

country Essebsi‘s victory would allow him to Since, independence from France in 1956, this

consolidate power and restore prestige of the country.

election was considered to be the first free Presidential elections in the nation. The turn-out rate

Currently the economic freedom score of Tunisia is

was 60.11%, which was less than the nearly 70%

57.3 making its economy 109th freest in the 2014

31 | D E C E M B E R 2 0 1 4 | V O L U M E I I

and tyranny. However, the dreadful past also makes them apprehensive of the fact that Essebsi might restore to some of the dictatorial measures curbing their little amount of freedom whatever they have earned post revolutions.

The apprehensions also lead to some of the demonstrations after the results were declared due to which police released tear gas to disperse the crowd.

On the other hand Essebsi‘s supporters were celebrating on their victory. Tunisia‘s moderate Index. Over the 20 year history of the Index, its score has declined by over 6 points which is one of the biggest drops in this Index. Its economy is majorly dependent on manufacturing, agriculture, tourism and mining. The overall tax burden accounts for 21.1% of gross domestic income. The licensing requirements

Islamists, who still have a great deal of backing in the country, did not officially back any of the candidates although; they had a visible inclination towards Marzouki. Probably a coalition government would rule Tunisia in the near future where both the major parties would contribute to the governance.

cost over twice the level of annual average income.

The stringent labors also pose a problem. The tariff rate is 14.1% and the foreign investments are subject to government screening. Considering the market openness and regulatory efficiency its ratings have declined substantially. An overbearing regulatory framework

and

constrained

environment

continues

to

stifle

entrepreneurial the

economy

restricting its recovery.

The new government has the onus to restore political and economic stability of the nation. Major reasons for the 2011 upheaval were poverty, intense corruption, rising food prices, inflation, human rights violation and high unemployment leading to immense dissatisfaction amongst citizens. The prevalence of young voters, increase in the number of women voters and presence of businessmen on party lists are clear indicators of keen interest of Tunisians to participate in the public affairs after a long period of isolation 32 | D E C E M B E R 2 0 1 4 | V O L U M E I I

Thus the year ends by marking a new beginning for some !

Vriddhi’s Corner

Company in Focus: Maruti Suzuki India Limited

- Abhinav Baruah

Economy Overview

Industry Overview

With the economy 5.3 per cent in the November 2014

The Automobile industry is a large sector which is

quarter, the auto indus try‘s growth stood at 9.52 per

split into four major segments namely passenger cars,

cent backed by falling crude oil prices. The main

two wheelers, three wheelers and commercial vehicles

factors influencing the automobile sector are inflation

with major players like Maruti Suzuki, Hero

rate, interest rate, crude oil prices, credit availability

Motorcorp, Bajaj Auto, Tata Motors, Mahindra and

and cost of ownership.

Mahindra

The falling Crude oil prices has translated into lower petrol and diesel prices for the Indian Consumers as the ownership cost of vehicles will come down. A further Rs 4 per litre fall in petrol prices will lead to annual savings (assuming running of 30 km/day and mileage of 12 km/litre) of around Rs 4,000 for car owners. The fall in the CPI inflation to 4.38 per cent in November 2014 too has helped the auto industry‘s growth. The reduction in Inflation rate could lead to a reduction of the bank lending rates which will help in easy availability of loans and credit facilities from banks. These leading economic factors and the overall economic growth across the globe prove to be a welcoming note for the boost of the automobile industry.

etc.

catering

to

various

types

of

automobiles. Currently India is the World‘s 6th largest manufacturer of passenger and commercial vehicles and the largest 2 wheeler manufacturer and it is expected to become the third largest automobile industry in the world by 2020. The policies provided by the government like 100% FDI and introduction of GST would benefit the manufacturers and thereby benefitting the consumers in the long run as they would pass on the tax benefits to the consumers, thereby reducing prices. The rising rural demand and the growing young population would benefit the automobile industry in the near future. To match this demand auto makers have started to invest heavily in various segments in the industry, for example Hero Motorcorp plans to set up the world‘s largest scooter plant in Gujarat. Looking at the current demand pattern and the positive sentiments the auto industry is poised to observe a 12 per cent Y-o-Y growth in FY 15.

33 | D E C E M B E R 2 0 1 4 | V O L U M E I I

Company Overview

MSIL provides constant dividends which is suitable

Maruti Suzuki India Ltd (‗MSIL‘) was incorporated

for risk averse investors. Its P/E is above the industry

on February 24, 1981 with the name Maruti Udyog Ltd. The company was formed as a government company, with Suzuki as a minor partner, to make a people's car for middle class India. Over the years, the company's product range has widened, ownership has changed hands and the customer has evolved. MSIL is the largest manufacturer of passenger vehicles in India with a market share of 42.1 per cent. The FY 2014 the company sold 1,155,041 vehicles of which

average. Its operating margins stand at 11.68 per cent which is below the industry average.

Valuation: A major problem faced while valuating MSIL is that its major competitors i.e. Hyundai, Honda, Ford and Toyota are not listed in India. Thus, a relative valuation tends to be erroneous. A relative valuation with its Indian peers places MSIL at Rs. 2402.79.

Analyst’s Recommendation:

3,36,463 vehicles were sold in 93,500 villages (a growth of 16%). MSIL boast of having 4 out of 5 top selling vehicles in the country. MSIL‘s exports sales stood at 101,352 units, with about 72 per cent contribution from non-Europe markets. During the year, non-Europe sales declined due to non-tariff barriers and political unrest in certain major markets.

MSIL is the market leader in passenger car manufacturing with a market share of 42.1 %. It has a wide portfolio of products catering to both affluent and middle class segments. It also has very extensive distribution network with a presence in over 980 cities in India. It has a huge opportunity to concentrate in rural sales due to the growing rural demand for

Pros: a) The Company is a market leader. b) Company is virtually debt free

vehicles. The introduction of Celerio, the first automatic transmission vehicle in its segment has proved to be a potential game changer for the company.

Cons: Over the past the stock has up from a low of Rs. 1541 a) Company has a low return on equity of 13.32% for last 3 years. b) Dividend payout has been low at 10.03% of profits over last 3 years MSIL‘s sales have grown at a CAGR of 16.72 per cent from FY 2007-14 the profits have grown at a CAGR of 8.71 per cent in the same period. Its current and quick ratio is below the industry average but its debt equity ratio is above the industry average. Its EPS and DPS have been increasing in a constant rate.

34 | D E C E M B E R 2 0 1 4 | V O L U M E I I

to a high of Rs. 3459 and is currently trading at Rs. 3347. Seeing the fundamentals I recommend buying Maruti Suzuki.

35 | D E C E M B E R 2 0 1 4 | V O L U M E I I

The IBS Times is an academic print and is not for any commercial sale. Reliability and Responsibility for sources of data for the articles vests with the respective authors. Please feel free to drop in your suggestions or any feedback at editor.ibstimes@gmail.com Š IBS Times – FinStreet, The Official Capital Markets Club of IBS Hyderabad. All Rights Reserved

36 | D E C E M B E R 2 0 1 4 | V O L U M E I I