The IBS Times- October 2014- Volume II

BY AVIK

ANALYSIS OF SECOND QUARTER FINANCIAL RESULTS CHAKRABARTY

THE IBS TIMES October 2014, Volume II, Issue No. 173

INVESTING THE WARREN BUFFET WAY

BY KAUSHIK CHANDELL

THE DLF FIASCO

BY KOLISETTY AISHWARYA

MYSTERY OF FALLING PRICES OF BRENT CRUDE

BY SRISHTI KARMAKAR

MANIPULATING MARKETS AN INSIGHT INTO RIGGING OF CAPITAL MARKETS

BY RIPU DAMAN TANDON

FinStreet, IBS Hyderabad

173

ISSUE NO.

OCTOBER 2014 VOLUME II

CONTENTS 3

Goods and Services Tax

7

From Apple to Google

9

Analysis- Second Quarter

16

13 The Warren Buffet Way 16 Cover Story: Market Rigging 19 Market Watch 21 Placement Season 2014

13

36

23 Public Sector Banking in India 25 Demystifying India’s Economy

31

29 NaMo’s New Economic Team

31 Industry Analysis: DTH Industry 34

34 Falling Brent Crude Prices 36 The DLF Fiasco 39 Company in Focus: TATA Motors

INTELLIGENCE BEYOND SUCCESS

“Responsible national action and effective international cooperation are therefore required for strengthening nuclear security to prevent vulnerable nuclear material falling into hands of non-state actors.”- Abhishek Singh, First Secretary in India's UN Mission

Letter from the Editor

THE IBS TIMES Faculty Mentor Dr. Ravi Kumar Jain Cover Picture Source: Wall Street Journal

Team IBS Times Chaahat Khattar (Editor-in-Chief) Akshay Gupta Atharva Solanki Manisha Mohapatra Nikhil Acharya Nishtha Behl Shivam Tandon Vanika Sharma Alisha Singh Apoorva Anusha Avik Chakrabarty Kaushik Chandell Kolisetty Sai Aishwarya Manjari Navjoth Sahu Priyanka Malik Rahul Mishra Ripu Daman Tandon

Dear Readers, Greetings from Team FinStreet !

We are close to touching 10,000 views and we are indebted to support and continuous interest of our readers.

This issue of The IBS Times continues to follow the path of in-depth research and analysis and presenting the same to our readers in simplistic yet interesting format.

Either in an unintentional manner through a wrongful click of a button or intentional rogue trading, capital markets across the globe are vulnerable to rigging. This edition of The IBS Times covers the concept of rigging with landmark historic as well as contemporary examples.

We have started a new segment in the magazine namely Quarterly Updates wherein we discuss the recently announced quarterly financial results of top firms of the country. Accordingly in this issue we have analyzed the second quarter of 2014. The magazine also brings out the investment strategy and the portfolio of billionaire investor Warren Buffet. The magazine discusses the recent rejig of the economic team of the government, Goods and Services Tax, recent technologic launches, public sector banking in India and the placement season so far at top business schools of the country. This issue also puts light on the DLF fiasco and analyses the reasons for falling prices of crude oil. The magazine also gives a bird‘s eye view of India‘s present economic status.

The magazine also covers industry analysis on the Direct to Home Industry. The magazine includes an exhaustive report from investment point of view on TATA Motors by Team Vriddhi Research.

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

Chaahat Khattar

Sachi Kheskani Sameena Usman Srishti Karmakar

“I don't know where the stock market is going, but I will say this, that if it continues higher, this will do more to stimulate the economy than anything we've been talking about today or anything anybody else was talking about.”Alan Greenspan

Policy

Goods and Services Tax

- Alisha Singh

standard rate for goods in general. There will also Goods and Services Tax (GST) is a comprehensive

be a special rate for precious metals and a list of

tax levy on manufacture, sale and consumption of

exempted items.

goods and services at a national level. Through a tax



credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in

The GST would be levied on import of goods and services into the country.



The Central GST would cater to the needs of the

the supply chain. The system allows the set-off of

Centre and State GST would administer the State

GST paid on the procurement of goods and services

issues. This would reduce unhealthy competition

against the GST which is payable on the supply of

among the centre and the states over tax revenue

goods or services. However, the end consumer bears

that was prevalent earlier and an increase in

this tax as he is the last person in the supply chain.

harmonious functioning between them.

Evolution of GST in India:

Invocation/Need for GST in India:

GST‘S evolution dates back to the presentation of

There was string of drawbacks in the existing tax

2007-08 central budget where the then finance

structure which invoked the Indian government to

Minister Mr. P. Chidambaram

adopt the concept of GST in India. They are as

announced the

introduction of GST in India from 1st April, 2010 onwards. The essential features of the Goods and

follows: Taxation at Manufacturing Level:

Services tax undertaken by the Indian government are The CENVAT is levied on goods manufactured or

as follows: 

produced in India. This gives rise to valuation issues Two components were incorporated, one levied by the Centre (Central GST), and the other levied by the States (State GST), rates for which would be prescribed

appropriately

reflecting

revenue

considerations and acceptability. 

The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services, goods which are outside the purview of GST.



The Empowered Committee also decided to adopt a two-rate structure –a lower rate for necessary items and goods of basic importance and a

3|OCTOBER 2014

as to what constitutes manufacturing, and for determining the value on which the tax is to be levied.

It is observed that limiting the tax to the point of manufacturing is a severe impediment to an efficient and neutral application of tax as manufacturing gives way to a very narrow approach. Moreover, the effective burden of tax becomes dependent on the supply chain; where in the taxable value at the point of manufacturing is relative to the value added beyond this point. It is for this reason that majority of the countries having abandoned this form of taxation has replaced it with multi-point taxation system extending to the retail level.

purchase

of

goods.

blurring

has

also

This raised

questions on the application of tax to transactions relating to tangible

property.

For

example, disputes have arisen whether leasing of equipment without transfer of possession and control to the lessee would be taxable as a service or as a deemed sale of goods. In markets

today,

goods,

services, and other types of supplies are being termed as composite bundles and offered for sale to consumers under a Exclusion of Services: The advancement in information technology and digitization has thinned the line of distinction between goods and services. Under Indian jurisprudence, goods are defined to include intangible s, e.g., copyright, and software, bringing them within the purview of state taxation. However, intangibles are often supplied under arrangements which have the appearance of a service contract. For example, software upgrades (which are goods) can be supplied as part of a contract for software repair and maintenance services. The 窶要alue-added services (VAS) also forms a part of telecommunication services which includes supplies (e.g., wallpaper for mobile phones, ring tones, jokes, cricket scores and weather reports), some of which could be considered as goods. An on-line subscription to newspapers could be viewed as a service, but online purchase and download of a magazine or a book could constitute a 4|OCTOBER 2014

variety of supply-chain arrangements. Under the current division of taxation powers, neither the Centre nor the States can apply the tax to such bundles in a seamless manner. Each can tax only parts of the bundle, creating the possibility of gaps or overlapping in taxation. Another major concern with the exclusion of services from the state taxation powers is its negative impact on the buoyancy of State tax revenues. With the growth in per capita income, services account for a growing fraction of the total consumer basket, which the states do not account for.

With no powers to levy tax on incomes or the fastest growing components of consumer expenditures, the States have to rely exclusively on compliance improvements or rate increases for any buoyancy in their own-source revenues.

Tax Cascading:

Benefits of GST:

Tax cascading occurs under both Centre and State tax

Under GST, the taxation burden has been divided

structure. The most significant contributing factor to

equitably

tax cascading is the partial coverage of Central and

activities, through a lower tax rate by increasing the

State taxes. Oil and gas production and mining,

tax base and minimizing exemptions. It has helped to

agriculture, wholesale and retail trade, real estate

build

construction, and range of services remain outside the

administration. GST is levied only at the destination

ambit of the CENVAT and the service tax levied by

point and not at various points (from manufacturing to

the Centre. The exempted sectors are not allowed to

retail outlets).Previously, a manufacturer had to pay

claim any credit for the CENVAT or the service tax

tax when a finished product was moved out from a

paid on their inputs. Similarly, under the State VAT,

factory, and was again taxed at the retail outlet when

no credits are allowed for the inputs of the exempted

sold.

sectors, which include the entire service sector, real property sector, agriculture, oil and gas production and mining. Another major contributing factor to tax cascading is the Central Sales Tax (CST) on inter-

a

between

manufacturing

transparent

and

and

services

corruption-free

tax

GST has improved tax collections and has boosted India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate.

state sales, collected by the origin state and for which no credit is allowed by any level of government. Tax cascading remains the most serious flaw of the current system .It increases the cost of production and puts Indian suppliers at a competitive disadvantage in the international markets. It creates a bias in favor of

It has also been estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.

imports, which do not bear the hidden burden of taxes

In the GST system, both Central and State taxes will

on production inputs. It also detracts from a neutral

be collected at the point of sale. Both components (the

application of tax to competing products. Even if the

Central and State GST) will be charged on the

statutory rate is uniform, the effective tax rate (which

manufacturing cost. This has benefited individuals as

consists of the statutory rate on finished products and

prices are likely to come down. Lower prices will lead

the implicit or hidden tax on production inputs) can

to more consumption, thereby helping companies.

vary from product to product depending on the

Recent Highlights on GST:

magnitude of the hidden tax on inputs used in their production and distribution. The intended impact of government policy towards sectors or households may be negated by the indirect or hidden taxation in a cascading system of taxes.

The Modi government has left no stone unturned to bring back GST from the zone of despair to hope. It intends to bring in this reform at the earliest because the new tax will not only help remove the cascading of the two VATs (state and Centre) and service tax

5|OCTOBER 2014

but will also not entail any tax export through the



replacement of central sales tax by the destinationbased integrated GST (IGST). It will also reduce

elimination of entry permits. 

production and transactions cost of business and usher in competitive efficiency. However, the Modi government needs to pay heed to the following points: Option for the States to stay out or opt out of the GST

GST network & removal of check posts / Neutralization of Taxes / Prevention of Tax Cascading.



Classification of goods and services.

Conclusion: After a detailed analysis, It is now well-recognized

It will be appreciated that simultaneous operation of

and understood that the GST is a necessary condition

the existing VAT regime and the new GST regime

if the country has to go back to double digit GDP

negates the objective of a common market in goods

growth. It is hence of utmost importance that the GST

and services. It will also impose considerable hardship

that is to be introduced is well thought-out and is

on the industry. Further it would lead to some peculiar

introduced only upon the Central Government and the

issues such as taxability of inter-state transactions

State Governments being fully and completely ready

where, under the existing tax regime, the originating

and prepared. GST would come as an economic boon

State is empowered to collect tax whereas, under the

for our country making the lives of the people much

GST regime, it will be the consuming State which

simpler and easier bringing upon added advantage in

would demand taxes based on the destination

its wake. As we all have pinned our hopes high on

principle. Further, the dual compliance requirements

Modi government, we are sure that GST is now just at

under the two regimes would lead to complexities and

an arm‘s distance for India which would very soon

increased costs of compliance. Hence, it would be

brighten the future of our motherland.

best for the states to keep out of the GST system.

Rates of Tax: The tax structure should be simple and should have minimal rates. Some are of the view that: 

There should be one Standard Rate (RNR) applicable on all goods and services.



A common list of goods and services under a Concessional Rate (e.g., for basic necessities like grains, pulses, cereals, edible oils and public utilities).



A common list of exempted goods and services.

Other factors are as follows: 

Uniform Laws and Simple Tax Administration

6|OCTOBER 2014

Technology

All the Way from Apple to Google

- Apoorva Anusha

Technology these days has advanced our lifestyle.

wise also it looks like how a higher-end Smartphone

Things have become so easy. Technology is being

should look like.

used everywhere and in everything. Several devices have been introduced like laptops and tablets. Each of them has their own versions with even more advanced apps.

Google is not much interested in developing hardware because as compared to its competitors it has a lower margin business. It is less in terms of advertising as well as software. Two years back the company has

The innovation in information technology has begun

already made mistake once by acquiring Motorola.

to modify the way of doing business and has created

That is why the company has decided to close the deal

value of it. Twenty years back American economists

next year and most probably Nexus 6 is the last

had never ever imagined that in span of just twenty

Smartphone by Motorola under the Google banner.

years technology can reach this height leading to tremendous growth in economy. Because its observed that as the quality of information improves, the business can operate more efficiently.

So we can say that Nexus 6 cannot be regarded as the iPhone 6 plus‘s competitor. Rather its an initiative taken by Google to prevent Samsung from wiping out smaller competitors like HTC, LG, etc. If we talk

The use of sophisticated communication technologies

about Samsung, it already runs its own app store for

in the conduct of work has become very common in

Galaxy devices.

organisational life. It facilitates communication as well

as

improves

integration

by

enhancing

productivity and service delivery.

On one hand where Nexus 6 is launched to prevent Samsung from wiping small investors, Apple Inc. has a different plan. There is no common ground to

On a bigger scale if we see, there are two main heads

compare Nexus 6 and Apple iPhone 6 plus. Apple Inc.

at present which has come up with advanced

is a hardware company and its specializing in selling

technology – Google and Apple Inc. Google has come

expensive devices at high margins.

up with nexus 6 and Android 5.0 ―lollipop‖ and Apple Inc. has launched Apple 6 plus and iPad. With the recent introduction of two phones in communication market, Google‘s Nexus 6 and Apple‘s iPhone 6 plus, an investor should be aware that both the phones have different meaning to Google and Apple Inc.

Talking about the pricing strategy of Google where it has increased the price of Nexus 6, we can say that Nexus 5 low price was used to attract people to the Nexus line up. And when people were attracted Google tried to maintain the customer base by keeping them with the user experience and providing

Nexus 6 is about double the price of its Nexus 5

them with perks. And when large numbers of people

predecessor and the only difference that Google made

were hooked, they were free to increase the price,

up is in its parts and device‘s aesthetics. Nexus 6 is

because they knew that people will spend extra

undoubtedly more polished. And not only this, look

money.

7|OCTOBER 2014

Apple Inc. stocks are reflecting the launch of Apple 6 plus and iPad. Earlier Apple Inc. had lost $23 billion since iPhone 6 was released. These two recent

launches

have

massive impact on S&P 500. Although Apple Inc. stock is still up by 23% but investors are not used to it. iPhone was believed to be the most important Android 5.0 ―lollipop‖ is also developed by Google

and ambitious product from Apple Inc. and it was

only. Its only a new version of Android mobile

believed that it will contribute half of its stock price.

operating system. This is introducing a refreshed

But this time the company‘s supremacy is in question.

notification system. It aims to improve battery consumption through a series of optimizations known as ―project volta‖. Google has announced that Nexus 4, Nexus 5, Nexus 7 and Nexus 10 will have this latest operating system.

bunch of accessibility features but there is no much change from kitkat. There are only few things inside that will open things to new audience who are struggling to use this platform before. Animation is going to play a big part in the new design. iPad is an iOS which is designed and marketed by Apple Inc. The recent model in market is iPad Air 2 and iPad Mini 3. The iPad does not employ Digital Rights Managements, but the operating system from copying. The users cannot even transfer certain outside

of

authorization.

8|OCTOBER 2014

company always offers best in class devices and so there were similar expectations about the iPhone 6 Plus. But with the rising complaints about the vulnerability of the iPhone 6 Plus, and faulty

Although Android 5.0 ―lollipop‖ has come with a

content

The general perception among Apple fans is that the

Apple‘s

platform

without

operating system, investor‘s confidence is shaking.

Quarterly Results

Analysis- Second Quarter SECOND QUARTER: Overall data from all the firms who have reported their second quarter earning shows operating profit rose 14% from a year earlier-the slowest pace in five quarters Second quarter earnings of Indian companies are trickling in and a review of the financial statements show that a sustained recovery in earnings growth remains elusive. In fact, operating profit growth in the three months ended 30 September slowed as sales remained sluggish amid tepid demand.

- Avik Chakrabarty

Refining Margin earned by its refining business while a sequentially softer GRM in quarter 1 partially offset the gain from the improvement in the petro chemical margin. The consolidated earnings grew by 2% YoY to Rs5,972 crore but remained flat QoQ. The key take away from the Q2FY2015 results was that despite a softer GRM sequentially, the spread (premium) between RIL‘s GRM and the Singapore GRM expanded to $3.5/ bbl (the highest in four years). Further, the petro chemical margin improved sequentially led by strength in the polymer and aromatic margins. The profitability of the retail

Separately, out of the 17 Nifty companies that have reported their earnings, nine have fallen short of Bloomberg consensus analysts‘ estimates, while eight managed to beat them.

business continued to improve along with a 20% revenue growth on a low base. On the negative side, despite significant traction in the shale gas volume, the profitability of the E&P business dropped due to

The September quarter last year had seen the Indian

declining

rupee depreciate sharply against the dollar, boosting

depreciation.

the earnings of exporters. The currency had weakened 5.2%in the quarter compared with 2.5% in the three month ended 30 September.

domestic

production

and

higher

RIL managed to improve its GRM spread over the regional benchmark and reported better earnings than expected by the Street. Further, the ongoing

However, trends revealed by the earnings of the early

expansion of its downstream business (a new

birds may change as many companies are yet to report

gasification plant and a refinery off-gas cracker)

their financial results.

would be the next earnings driver in the next two to

RESULTS UPDATES:

three years. While the progress of the new business (telecom) and the ability of the retail business to a

Reliance Industries Limited: 

Beats estimates with better margins

gain critical mass would be monitored, a continued lack of clarity on the gas price revision remains a

In Q2FY2015, the stand-alone net profit of Reliance

hangover for the stock. Currently, the stock is

Industries Ltd (RIL) grew by 5% YoY and 2% QoQ

available at 13x and 12x FY2015E and FY2016E

to Rs5,742 crore, which was ahead of estimate. The

earnings respectively and the valuations are lower

Y-o-Y earnings growth was driven by a better Gross

than its historical average.

9|OCTOBER 2014

On

consolidated

and

stand-alone

bases

the

The net profit growth is the lowest after the March

outstanding debt stood at Rs142,084 crore and

2009 quarter, when profits declined by 4.5 per cent.

Rs79,725 crore while the cash balance stood at

Since then, the net profit growth has always been in

Rs83,456 and Rs26,162 crore respectively at the end

double-digits. It is after 21 quarters that the profit

of Q2FY2015. During the quarter, the net addition of

growth has slipped into single digits.

fixed assets was Rs44,895 crore including exchange rate

difference

capitalization.

The

capex

was

primarily on account of the ongoing expansion project in the petro chemical and refining businesses at Jamnagar, Dahej and Hazira, and the broadband and

The slower growth in this quarter can be attributed to increase in provisioning and tax. Provisions and contingencies jumped 133 per cent year-on-year to Rs 35 crore from Rs 15 crore in the same quarter last year. However, sequentially, it remained unchanged.

US shale gas businesses.

Tax expenses rose this quarter by 19 per cent to Rs The new refinery off-gas cracker (ROGC) project is on track and will help RIL sharply reduce its blended

541 crore as compared to Rs 455 crore in the year-ago period.

ethylene cost. Activities in the D1-D3 and MA fields to augment production are also as per schedule. Rcluster development activity is also on stream while the phase-1 development in case of coal bed methane is more than 60% complete and on track. The company expects to extract gas from the Coal Bed

The non-banking finance company has provided Rs 83.3 crore towards deferred tax liability in the quarter on special reserves, as compared to Rs 75 crore in the June quarter. This item was introduced from the latter quarter. Gross non-performing loans reduced to 0.69 per cent of the loan portfolio at the end of the quarter

Methane block by H2FY2015.

as compared to 0.79 per cent in the same period last In August 2014, Reliance Haryana SEZ returned

year.

1383.68 acre of land which was taken for setting up special economic zones due to revision of strategic

Income from operations rose 11.4 per cent to Rs 6,533 crore. The loan book was at Rs 2.12 lakh crore as on

priorities.

September-end, up 15 per cent compared to Rs 1.85 Housing

Development

Financial

Coporation

lakh crore in the year-ago period.

(HDFC) 

In the June quarter, the loan book mix (on the Neutral Rating

incremental growth) was 86 per cent individual and

Housing Development and Finance Corporation

14 per cent non-individual. The proportion of non-

(HDFC), the country's largest home mortgage

individual had increased in this quarter. The average

financier, reported 7.2 per cent growth in net profit to

size of loans has also picked up to Rs 23.1 lakh at the

Rs 1,357 crore for the quarter ended September, as

end of September as compared to Rs 22.7 lakh in the

compared to Rs 1,266 crore in the year-ago quarter,

same period last year. The spread on loans over cost

with a rise in loans to individuals.

of borrowing was stable at 2.29 per cent, the same as

10 | O C T O B E R 2 0 1 4

in the June quarter. Net interest margin for the half-

cited the organization-wide wage hike effected from

year was four per cent.

June this year as one of the main reasons.

Wipro:

In the quarter, Wipro reported a strong 4.2 per cent



sequential growth in its largest market North America.

Recommend a Buy on the stock with a target price of 697.

In Europe business declined 4.3 per cent on quarteron-quarter basis. Financial solutions, the largest

Wipro, India's third-largest information technology (IT) Services Company, met its revenue growth forecast for IT services, but it disappointed on several parameters. In the quarter ended September 30, the Bangalore-based firm reported an eight per cent rise in net profit at Rs 2,084 crore compared to the year-

business vertical accounting for 26 per cent of the company's overall IT services business, declined 0.9 per cent whereas global media and telecom vertical dropped 1.3 per cent. However, it reported good growth in health care, life sciences & services, energy, natural resources, and utilities.

ago period. The revenue also grew eight per cent at Rs 11,680 crore on the back of strong volume growth, as well as better-than-expected performance by the global infrastructure services business.

The company also saw a drop in revenue contribution from its top-5 and top-10 clients, which came down to 12.9 per cent and 21.5 per cent, respectively. The numbers had stood at 13.4 per cent and 21.8 per cent,

Sequentially, the net profit was nearly flat while the

respectively, in the previous quarter.

revenues were up 3.8 per cent.

For the quarter ending on December 31, 2014, Wipro In the IT services business, the firm posted a six per cent year-on-year growth in revenues, while it rose four per cent sequentially to Rs 10,923.5 crore. In dollar terms, the company reported $1,771.5 million in revenues, a sequential growth of 1.8 per cent slightly below the Street's estimates of two per cent.

For the July-September quarter of FY15, Wipro had given a revenue growth forecast of $1,770-$1,810 million.

has guided its IT services business to be in the range of $1,808 million to $1,842 million, a growth of twofour per cent. In the September quarter, Wipro added 6,845 employees on a gross basis, which is one of the biggest additions in the recent quarters. Wipro said the hiring was made primarily as the company reported 'strong' volume growth while at the same time managing to improve the utilization. The firm improved net utilization by 150 basis points to 79.4

However, what's surprising is the company reported

per cent. The employee attrition level, though, went

sequential decline in revenues in some of its key

up marginally to 16.5 per cent, it said.

verticals including financial solutions, global media and telecom, and Europe - a key geography accounting for 28 per cent of Wipro's IT services business. On top of that, the firm reported an 80 basis point drop in its operating margin at 22 per cent, and 11 | O C T O B E R 2 0 1 4

Biocon 

Results

below

business verticals

estimates,

slowdown

across

Statins and biopharmaceuticals maker Biocons Ltd

Branded formulations and research service businesses

reported flat September quarter net profit and

to drive growth in the interim,‖ the chairman said.

marginal increae in sales.

Ultratech Cements:

Net profit at Rs. 102 crore and a 3%sales growth at Rs. 773 crore were less than expected, the predicted

Better demand environment propels earnings growth, price target revised to Rs2,935

growth of 11% and 15% in quarterly profit and sales For Q2FY2015 the company reported a revenue

was estimated.

growth of 19.5% YoY to Rs5,381.8 crore largely The growth of their core biopharma business this quarter has been muted largely due to capacity constraints and geo-political challenges in the middle east according to Biocons chairman and managing director Kiran Mazumdar-Shaw. Biocon‘s branded formulation business, which is comparatively new and small, however, grew 17%.

driven by a higher volume (up 12% YoY) and an increased realization (up 7% YoY). A higher input cost (increase in pet coke price and high freight cost) limited the growth in the OPM, which improved by 76BPS to 15.4%. Additionally, a higher other income (up 112% YoY) led to a 55% Y-o-Y growth in the reported PAT for the quarter at Rs410.1 crore, which

Clinical progress in their key global programs for

included a lower depreciation charge (adjusting for

generic

is

the same the earnings for the quarter grew by 37%

indicative of the value accretion that is realizable in

YoY to Rs361.9 crore). During the quarter the

the foreseeable future. ―We continue to be cautious

company commissioned a 1.4 MMT cement mill at

with the stock due to lack of any major nea and

Rajashree Cement, Karnataka and with this the total

medium term triggers,‖ cautions Mahida of Antique

capacity of the company increased to 60.2MMT

Broking.

(4.8MMT of capacity added from two plants of

Insulin

Glargine

and

Trastuzumab

During the quarter, Biocon acquired 7.69% stake in its subsidiary Syngene Interrnational from GE Equity International for Rs 215.38 crore. Subsequently , the company sold 10% stake in Syngene, owned by its

Jaypee Cement). The company also commissioned a 25-MW thermal power plant at Tadipatri, Andhra Pradesh, taking its total capacity of power to 733MW (ie 80% of the total requirement).

subsidiary Biocon Research Ltd BRL for Rs 380 crore

UltraTech Cement is a preferred stock in the cement

to Silver Leaf Oak, investment vehicle of PE group

space due to its strong balance sheet and pan-India

India Value Fund Advisors.

presence. However, as per media reports, the

―The strategic investment by Silver Leaf Oak in Syngene validates the strength of our research service business and sets a good valuation benchmark. Whilst we continue to invest in R&D and capacity building for insulins and antibodies portfolio, we expect 12 | O C T O B E R 2 0 1 4

company‘s plan to acquire the Holcim-Lafarge assets in the developed markets can increase its leverage and hamper Ultratech‘s valuation, considering lower growth potential in the developed markets.

Investment Strategy

The Warren Buffet Way

-Kaushik Chandell

“Rule No.1: Never lose money. Rule No.2: Never

“I'm 15 percent Fisher and 85 percent Benjamin

forget rule No.1.” -Warren Buffett

Graham.”

Who is Warren Buffett?

Buffett

American Business magnate, most successful investor of 20th century, chairman and largest shareholder of Berkshire Hathaway and a philanthropist Warren Buffett was named as the world‘s wealthiest person in 2008, third wealthiest person in 2011 and one of the world‘s most influential people in 2012 by TIME.

has

always

followed

efficient

market

hypothesis which is not supported by many of the investors. However, investors do follow that market will favor those stocks which were undervalued previously. But Buffett is not at all concerned with the activities of the stock market. In fact his famous quote ―In the short term the market is a popularity contest; in the long term it is a weighing machine‖ implicates

Born on August 30, 1930, he was the second of three children and the only son of Congressman Howard Buffett and Leila. As a child Buffett showed key interest in making and saving money. He worked at his grandfather‘s grocery store where he used to make money by selling chewing gums, coca cola, selling golf balls and stamps and by delivering newspapers.

so. When Buffett invests in a company his sole concern is how well the company can make money as a business instead of whether the market will recognize its worth or not.

What does Buffett looks for before investing in a company?

Buffett took his first tax deduction at the age of 14

Warren Buffett, before investing in a company

where he deduced 35$ for the use of his bicycle and

analyzes a lot of factors out of which a few are -

watch on his paper route.



Back from his schooldays, Buffett had a keen interest in stock market. He used to spend a lot of his time in a regional stock brokerage near to his father‘s own brokerage office. At the age of 11, Buffett bought 3

Whether the company has performed well consistently in the past or not?

Buffett analyzes a company‘s ROE from the past 5 to 10 years to gauge the historical performances and compare it with other companies of the same industry.

shares of Cities Service for himself and his sisters whereas, in high school he invested in a business

ROE is calculated as: =Net Income /Shareholder‗s Equity

owned by his father.

Buffett graduated with a Bachelor of Science in Business Administration and later earned a Masters in Economics from Columbia University in 1951.



Debt to Equity ratio, whether the company has avoided excess debt?

A high debt level compared to equity can result in volatile earnings. In general, investors follow a rigid

How he does it 13 | O C T O B E R 2 0 1 4

method and use only long term debt instead of total

operating histories are harder to find, intangibles play

liabilities in the calculation.

a greater role in franchise value and the blurring of

Debt/Equity ratio is calculated as: =Total Liabilities/Shareholder‘s Equity 

industries' boundaries makes deep business analysis more difficult.

Following were a few of the many points which

Increasing Profit Margins or not

reflected Warren Buffett‘s style of investment. Follow

If the company has a high profit margin then it

them and you can follow the Warren Buffet‘s road to

concludes that the company is executing its business

riches.

well and the management has been highly effective

Warren Buffett’s top 5 Holdings

and efficient in controlling the expenses.

Whenever Warren Buffett buys shares of a specific Profit Margin is calculated as: =Net Income/Net Sales 

How long the company have been around?

company, the very moment market translates the move as a vote of confidence for a firm‘s long run.

However,

Buffett

does

not

make

Berkshire‘s

investment decision by himself but is accompanied by Buffett generally considers companies that have been around for 10 years which implies that the technological companies that have the IPOs in past decade are not on the Warren Buffett‘s list. Warren

two portfolio manager Todd Combs and Ted Weschler, each handling billions of dollars on their own.

Buffett has already mentioned in the past that he will

It was reported that Berkshire Hathaway shares trades

invest only in a company that he fully understands.

past 200,000$ in its second quarter portfolio. As of



now, Berkshire Hathaway holds 46 stocks for a value Question of competitive advantage

of 107.6 billion$. Following are the top 5 holdings as

Buffett looks for the offerings made by the company

of now are:

whether the company offers something different or



Wells Fargo (WFC): 22.6%

not. Any characteristic which is hard to replicate,



Coca-Cola (KO): 15.8%

Buffett calls it as competitive advantage. Wider the



American Express (AXP): 13.4%

moat, harder is for the competitor to gain market



International Business Machines (IBM): 11.8%

share.



Wal-Mart (WMT): 4.1%



The Bottom Line

Buffett‘s tenets constitute a foundation in value

1. Wells Fargo & Co.(WFC): 463,458,124 shares of the company‘s stock is held by

investing, which may be open to adaptation or

Berkshire Hathaway. It‘s is almost equal to 22.6% of

reinterpretation going forward. It is an open question

Berkshire‘s total assets managed as well as 8.80% of

as to the extent to which these tenets require

the company‘s shares outstanding.

modification in light of a future where consistent 14 | O C T O B E R 2 0 1 4

2. Coca Cola(KO):

5. Wal-Mart(WMT):

It‘s the second largest holding by Berkshire where it

Warren Buffett maintains 58,797,259 shares of the

holds a total of 400,000,000 of the company‘s stock

company‘s stock. Total portfolio holding makes up

representing a percentage of 15.8 as well as 9.10% of

for 4.1% as well as 1.82% of the company‘s shares

the company‘s share outstanding. The main inputs

outstanding. With an owners earnings of $15.1b and a

used for the discounted cash flow:

7% discount rate, 9% growth puts them at fair value

• Owner earnings of $9.4b

territory. But considering the EBIT, Wal-Mart is

• Growth rate of 7.2% • Discount rate of 7% • Terminal rate of 2%

trading at their highest level since 2005.

What can be concluded?

The most noticeable factor here is that the investing style of Warren Buffet can be compared with the

But the main concern here is the dropping ROE AND

shopping style of a practical, down to the earth,

ROIC.

bargain hunter. Even he maintains the same in his real

3. American Express(AXP):

life areas like he doesn‘t lives in a huge house nor he collects car or moves around in a heavy machinery.

Berkshire holds a sum of 151,610,700 shares of the company‘s stock which is the third largest for Berkshire Hathaway. Position makes up a total of 13.4% of its total portfolio and 14.32 of the company‘s share outstanding.

4. International Business Machines(IBM): 70,173,978 are the no. of shared maintained by Berkshire and it sums up a percentage of 11.8 of Berkshire‘s total portfolio as well as 6.93 of company‘s share outstanding.

With IBM expanding to more B2B and Cloud services, effect on ROE has been positive and hit the range of 90%.

IBM has a FCF yield of 6.8% and earning yield of 8.9% which shows that IBM is not in expensive territory. However, if these percentages drop below 5%, it‘s an indication that things will be getting a bit expensive.

15 | O C T O B E R 2 0 1 4

No matter what his critics say or whether anyone supports him or not but reality will always be that he‘s one of the richest person of the world with net worth is 68.4 billion$(as on 25.10.2014 maintained by Forbes).

Cover Story

Market Rigging

-Ripu Daman Tandon

Market manipulation has long been the dark shadow

of high speed electronic trading firms. As per him,

in the capital markets globally. These practices are

these firms use the speed advantage to gain profit at

the cause of making a firm more favourable in the

the expense of the other market participants.

capital market, than really justified by the market

High-Frequency Trading (HFT) has been a practice

forces. In other words, as defined by Financial Times,

carried out by various banks and proprietary trading

it is a situation when some companies in a market act

firms. It is a trading platform which uses powerful

together to hinder the normal working of the market

computers to transact a large number of orders at very

forces in order to gain an unfair advantage. Often

fast speed. The technology and trading methods that

these markets are not sustainable and dupe the

make this type of platform possible is legal and the

investors and attract them towards a project or a

stock exchanges on which HFT firms trade on, are

company. With trillions of dollars being exchanged

highly regulated.

by buyers and sellers in the market, there is a real

Detroit in today‘s time has been known as the case

person behind every transaction taking place whether it is buying of a barrel of oil or a Japanese Yen.

The

study on decline in the manufacturing base. However, the city was home to a type financial fakery which was becoming too common. The New York‘s Wall Street has seen quite a few market rigging practices in the recent past. One of the biggest examples being, Raj Rajaratnam,

a Sri Lankan American former

hedge fund manager and billionaire founder of the Galleon Group, a New York-based hedge fund management firm. Insider trading has been one of the least sophisticated and oldest means of rigging the market. Galleon Group has been one of the shocking add-on to this malpractice.

The employees were

caught on tape for rigging the system and the founder of the group was eventually found guilty and sentenced for 11 years.

One of the serious examples that were seen of market rigging was the London Interbank Overnight Rate There has been quite a speculation that the capital markets are rigged. As quoted by Michael Lewis, the author of the book ―Flash Boys: A Wall Street Revolt‖, the U.S. stock markets are rigged in favour 16 | O C T O B E R 2 0 1 4

(LIBOR) which was being manipulated by a handful of trading firms with trillions of dollars on things like student loans payments and mortgage rates are priced

off LIBOR. LIBOR rate is used as a benchmark for

would originally decide. This process of setting the

trillions of loans, mortgages and other financial

LIBOR came under scrutiny when Barclay‘s admitted

products that are traded around the world. These rates

in June 2012 that false information was submitted by

affect almost everyone involved in the market, for

the bank in order to keep the rate low. By keeping the

example, when a loan is being taken, there is being a

rates low Barclay‘s was able to make bigger profits

spread over the borrowing such as corporate loans,

and hence, traded at an advantage over its

individual loans and margin loans.

The basic

competitors. However, it was during the credit crunch

fundamentals for the rates are set globally and on

times, when the LIBOR rate rose significantly. This

which the interests are paid on daily basis are derived

is the time when banks were alleged in hedging. This

through LIBOR.

Any manipulation of such rates

is a practice wherein, with the expectation of fall in

leads to depletion of trust in the capital markets or in

interest rates (yet at the same time you are not quite

other words, can lead to erosion of trust of bonafide

sure of the happenings), banks were alleged in

investors from the capital markets.

hedging it against the futures markets. It was alleged

In July 2014, Britain‘s Lloyds Banking Group (LBG)

that the banks were bullying, cajoling or suggesting

was fined to pay $370 million in fines to the British and U.S. regulators for its part in a global interest rate rigging scandal and for attempting to manipulate fees for a government lending scheme to help banks. One

their customers in hedging the cost of either their foreign exchanges or the cost of their interest rates in borrowing

money

or

in

doing

the

business

transactions.

of the world‘s largest bank, Lloyds became the sixth

In India, market manipulation has taken its own

financial firm that was sanctioned in the international

negative sides. The mystery of 8 year cycle has seen

rate-rigging scandal.

two of the biggest scams in the market.

The misconduct by the bank

In 1992,

occurred between May 2006 and 2009 as per the

Harshad Mehta, an Indian Stockbroker, well known

British and U.S. Regulators. As per the regulators, it

for his wealth was charged for numerous financial

was said that the traders at the bank rigged the

crimes. The scam included of Rs.1000 crores from

estimates of the borrowing costs submitted by the

the banking system to buy stocks on the Bombay

bank in order to help set the LIBOR rate. This was

Stock Exchange. The scam came into notice when the

done to benefit their trading positions in the market.

State Bank of India reported a shortfall in government

Other major banks that were fined for rigging the

securities which led to an investigation, showcasing

market were British‘s Barclays and Royal Bank of

manipulation of around Rs.3500 crores and later

Scotland, Netherland‘s Rabobank and Switzerland‘s

leading to a stock market crash by 72 percent.

biggest bank, UBS. Manipulation in the market leads

Similarly in 2001, Sensex witnessed a crash of 176

to various other consequences, such as the interest

points which was a shock to the Government of India

rates would not be as per the original market forces,

and the investors at the same time. The Ketan Parekh

eventually leading to different or manipulated rates or

scam came at a point when the Union Budget was

interests being paid other than what the market forces

acclaimed for its growth initiatives and prompted an

17 | O C T O B E R 2 0 1 4

increase of 177-points in Sensex. He can be best

bookers end for the crash and refused to reverse the

described as the Pied Piper of the Dalal Street.

trades.

During the time when the technology bubble was engulfing the world and the Indian stock market sprang to life, Ketan Parekh manipulated the stock

The market manipulations play a critical role as they can affect various aspects in the capital market. As per the study by Bahram Moazeni and Farideh

prices, by making his interest apparent. After

Assadolahi in their journal of ―Manipulation of Stock

investigations by SEBI, it was evident that the

Price and its consequences‖, stock manipulation and

promoter funds and bank funds were used to rig the market. The aftermath of it saw a few changes in the market regulations such as the trading cycle was reduced from one week to one day, badla was banned and the operators could not carry forward trade in its primitive form. Also, forward trading was formally introduced in the form of exchange-traded derivatives in enduring a well-regulated futures market. Though scams like these have hurt the markets in the past and kept the trust of many away from the capital market, these situations have also lead to better policies and making the capital markets a lot a safer to invest in.

stock

price

based

on

investor‘s

insufficient

information and asymmetric information are the main causes of market manipulations. From affecting the market forces to play in the market to the investor‘s trust by using the loopholes in the policies, these market manipulations prevent in development of the capital markets.

SEBI

requires all the listed

companies to mandatorily disclose all the required financial information which directly or indirectly affects the prices of the stock, on regular basis in order to prevent manipulation of the market.

Continuously, in the market people or companies have

In 2012, in the Emkay incident at the National Stock

manipulated the market to bend the market forces

Exchange (NSE) caused a 920-point flash crash. In

towards their benefits or profits, but these incidents

an Order on October 5, 2012 a dealer at Emkay

have not stopped the stock market to grow. In order

Dealer placed an order of 17

lakh NIFTY units

to govern the market functioning and to protect the

instead of Rs.17 lakhs value of order resulting to a sell

interests of the investors, old rules have been made

order of Rs. 980 crores being entered into the systems.

stringent and new rules and regulations have been

Even-though nearly Rs.660 crores of NIFTY trade

introduced thereby, preventing manipulation and safe

was executed in seconds, it lead to a halt at the NSE

guarding bonafide investor‘s interest.

cash market.

Emkay ended with a loss of Rs.51

crores by the end of that day. The situation lead to an increase in confusion in the markets, with Emkay arguing that a trade on such a large scale constituted to an error. The NSE followed an internal probe and solely blamed Emkay and system failures at the

18 | O C T O B E R 2 0 1 4

Markets

Market Watch

-Navjoth Sahu

Stock market performance last week witnessed very

The FOMC meeting is scheduled this week, which

slight fluctuations as the festive season Diwali was

would open up the fate of the investors in the FED

around the corner to the week. Investors did not prefer

markets. The US Federal Reserve Bank, are likely to

to trade the securities at the end of the season. It was

meet on Tuesday and Wednesday.

also not auspicious for many to trade at this point of time where the year was about to end. Majority of the Indian believe that trade starting from the Diwali is considered to be auspicious and bring

green and

prosper to their families.

The Federal Open Markets Committee (FOMC) is most expected to close down the Fed's long-running bond purchasing program, known as quantitative easing or QE, this month. Also, global investors will watch out for comments on the direction of interest

Going as per last week of Stock markets show a

rates. Since last December, the US Central Bank has

upward trend of securities with S&P BSE SENSEX

been gradually scaling back its monthly bond

closing at 26851.08 points from 26434.16 and

purchases, which now stand at $15 billion per month.

similarly CNX NIFTY rose from 7896.95 points to 8014.55 points. Majorly attributed to the cut on the diesel price and the falling gold prices. Equity investors, all over the world, shook off their fears and have resumed buying last week; perhaps enticed by the sharp corrections in some stocks. Also the major push came from various regulations and policies that just launched by the present Modi Government in order to bring sustainability in the markets. The various policies include diesel regulations, gas price hike and e-auction of the cancelled coal blocks. The victory of the BJP in the Assembly elections too buoyed sentiments of the common investor.

Individually going through the sectoral indices of both the markets of BSE and NSE show a common line of increment in the points. Assessing Individually into the market Tata Motors Gain the first position with 516.95 points creating a gap of 8.66% from previous position. followed by Hero Motors and Maruti as due to the new regulation to deregulate the diesel prices, which made the people to move towards the petrol driven vehicles. Other companies showing such upward trend include Gail, Hindalco, Bajaj Auto, BHEL etc. There were also companies which showed a dramatically negative growth sign including Wipro which dip to 560.75 points making a drift of -0.89%,

Globally, markets are at their high as well, with the

ITC which dip to 350.35 with a change of -0.96%

European and US markets reversing their stocks

and INFY which dip to 3805.80 making a change of -

smartly, although the move is not convincing. The

1.25%.

move may bring a good turnaround on the equity

Money Market Review:

share prices. With the expiry of the October derivative contracts scheduled on Thursday, short-covering by traders could lend further support to the indices.

The Reserve Bank of India is to set a cut-off yield of 8.48 per cent at its 91-day treasury bill auction on Wednesday. Expected cut-off compares with a cut-off

19 | O C T O B E R 2 0 1 4

best prepared to deal with the Fed's monetary policy action to be held this Tuesday and Wednesday.

According to the forecasts of IMF India mission Chief if the new government follows through with structural reforms India can see a growth of 7 percent to 8 percent. But this is not very clear yet what would be the next step after U.S. federal reserve starts reversing yield of 8.4782 per cent the previous week. The highest yield for the 91-day bills as per the poll was 8.52 per cent, while the lowest was 8.44 per cent. The RBI is expected to set a cut-off of 8.55 per cent on the 182-day t-bills, the poll showed, versus the previous 8.6177 per cent two weeks ago.

The highest yield for the 182-day bills as per the poll was 8.60 per cent, while the lowest was 8.48 per cent.

The RBI will sell Rs 9000crore of 91-day and Rs 6000crore of 182-day t-bills.

Also the International Monetary Fund's (IMF) India Mission Chief have given a clear indication about the future growth of the markets by saying the nation being a emerging markets and BRICS countries member stands out for accomplishing the sharpest turnaround in its macro economy since U.S. Federal Bank Reserve started reversing its zero-interest monetary policy. Amongst all the economies, India is 20 | O C T O B E R 2 0 1 4

its monetary policy.

B School

Placement Season 2014

-Priyanka Malik

One of the most attractive features which enable the

construction and mining. Further, due to favorable

B-schools to enroll the students in packs is the

economic conditions the companies are coming on

lucrative jobs after the completion of the program.

board

Acquiring of the managerial skills not only rolls out

compromising on the salaries. Cognizant, JP Morgan,

several opportunities in front of the students but also

HSBC, Goldman Sachs, Bank of America Merrill

take the responsibilities and salaries to a new level

Lynch, ICICI, Accenture and Deloitte were the top

altogether. Since, the hiring trends are dependent on

recruiters with Cognizant and ICICI hiring above 100

the market trends and activities therefore; analysis of

graduates each. Also, the war for hiring the talent pool

the job market is a crucial aspect in forecasting the

was fought between the e-tailer Flipkart and Amazon.

placement trends in the B-schools.

The number of students hired and the packages

with

higher

number

of

jobs

without

offered were in the same range.

Among the other hiring giants were RIL, Boston Consulting Group and Mckinsey and Co. E-commerce industry is leading the job market to resurgence. The hiring trends were favorable not just for the top graded IIMs but also others ranked below them.

Revival of the job market is also evident as there is a significant hike in the PPOs (Pre-Placement Offers) and PPIs (Pre- Placement Interviews). The offers are provided not only for the IIMs but also for the institutes of the same league. Campuses such as 2013 has witnessed a comparatively slow economy.

Sluggish market activities were accompanied by disappointing hiring trends. Also, the economy was

XLRI, XIM (Bhubaneswar), MDI Gurgaon, NMIMS (Narsee Monjee Institute of Management Studies) are witnessing the surge in the numbers by 20-100%.

moreover influenced domestically rather than the impact from the global activities. Whereas, 2014 was considered more promising with the formation of a Modi government elected unanimously. Finally, it can be seen that the forecasting of the bullish prospects was true and market displays positive hiring trends.

After the summer internships there are several companies which consider PPOs to be the more informed and convenient way to hire the talent pool as the companies have already invested their resources in training these students which further goes on to save the resources of accompany in the near future. Major

The sectors driving the job market include ecommerce, IT, healthcare, education, development,

21 | O C T O B E R 2 0 1 4

PPOs were seen from BFSI (Banking, Financial, Service and Insurance), FMCG( Fast Moving

Consumer Goods), telecom and conglomerates.

Further, the increasing number of PPOs and PPIs are also indicative of the belief of several companies in the promising market trends.

The top management institutes have reported a marginal increase in their salaries. B-schools like IIMIndore, FMS Delhi and XLRI have reported an increment of 0.24%, 1.12% and 0.3% respectively.

IIM-Rhotak has reported a hike of 7% unlike IIMkozhikode with an increment of 11% as compared to the previous year. SPJIMR Mumbai reports a hike of 6.63% with the highest average salary of Rs 17.2 lakh per annum. On the other hand MDI Gurgaon reported 15.5% hike with the average salary being Rs 14.74 lakh per annum as compared to 12.8 lakh last year.

IIFT has reported a figure of 15.48% increment.

Given the colleges performing exceptionally well certain institutes have also reported a decrease in their average packages. IIM-Ranchi, IIT- Delhi and IMT Ghaziabad gave figures of -5.64%, -0.63% and -2.82% respectively.

Since, the market seems to be promising and the future prospects appear to be bright therefore, if the students maintain their focus on delivering quality in their respective selection process; the opportunities are right up there and the campus recruitment process can turn out to be a huge success for all the B-schools of decent ranking inclusive of the tier II colleges as well.

22 | O C T O B E R 2 0 1 4

Banking

Public Sector Banking in India

-Rahul Mishra

India has a large number of PSU banks which

The PSU banks under pressure from the government

account for 70 percent of the total banking system but

have invested a lot to develop markets and, even in

are going through a critical situation of bad loans; the

the stock exchanges and other agencies. These stakes

country's PSU banks, are witnessing bad loans and

can prove to be handsome sources of cash as the

uninspiring profits, because of which they might

banks require billions in capital for the coming years

begin the sale of unwanted assets summing up billions

to comply with the Third Basel Accord of global

of dollars to help raise cash needed to meet stiff

banking rules. The major capital needs of the banks‘

regulations.

will met through the sale of shares and debt in bank

Central Bank of India a public sector bank could be first among the banks, which is planning to sell a part

themselves but the government wants the banks, to sell some of their assets.

or its entire home finance unit by the end of this

According to Industry advisers the time is most suited

December. Another state-owned bank, IDBI Bank Ltd

for sales as the Indian equity markets have risen

- which owns stakes in the country's top rated and

greatly, backed by Prime Minister Narendra Modi‘s

stock exchange agency Credit Analysis and Research

government making India the best performing stock

Ltd: could put some of its non-core stakes on sale by

market in Asia for this year. Punjab National Bank,

March. The bank is looking for the opportunity to sell

which

its family gold (stakes) as referred by Bank‘s MS

Management Company hopes to good appreciation

Raghavan.

from its assets. The major issue is finding a strategic

has

stakes

in

ICRA

and

UTI

Asset

investor as unlisted assets are less transparent and are not easy to meet the expectations

of

banks.

instance

For

the

IDBI tried to sell its 16 percent stake of CARE but the bids failed to meet

the

targets.

According to Analysts State run banks are trading

below

their

book value and a much needed

reforms

are

required to consolidate and 23 | O C T O B E R 2 0 1 4

improve

attractiveness of the banks to its investors.

Another factor in PSU banks is high level of NPAs

remove the loan from the balance sheet and the amount of capital will be reduced.

(non performing assets), as compared to the private

To give a conclusion to this problem is a tough task as

sector banks. But, blaming the PSU bankers alone for

mentioned earlier PSU banks have done remarkable in

that would be partial as these banks are under scrutiny

areas where privatized banks have not yet reached

of government regulators, ministry of finance, press

though they provide better services and experience to

and other such bodies still these banks have shown a

the customers is it viable to privatized whole of the

phenomenal growth in fields like medium and small

banking sector ? We saw that United Bank of India

business enterprise, agriculture, etc. and have

was near to bankruptcy in 2013 and government has

expanded tremendously in every corner of the nation,

already asked for its merger with IDBI bank so, these

as these banks are under government intervene, are

are the issues coming up where larger PSU banks are

therefore affected by various factors, for example the

being asked to look for takeover targets but, it is more

directors or chairpersons reports to the bureaucrats

of a problem than solution because if there are NPA

who in turn report to the respective ministers and the

issues with smaller banks than it can shake the

tenure for these ministers is short lived thereby

stability of the larger bank.

neglecting the underperformance and the cause for it.

But we can see there is not much of a damage if a

The next issue is that many of the PSU banks have

smaller bank is merged with a larger bank as both will

been functioning without full time chairmen and

remain PSU bank there won‘t be privatisation so the

directors and positions remain vacant for several

services would remain same and also the operations

months and if the government wants its initiatives like

will remain the same the only unanswered question is

Jan Dhan Yojana to flourish then it needs to fill these

whether the shareholder value will increase or not? So

vacant positions.

to answer such questions we need to wait and look for

Let us now look at the other aspect also, there is a relaxation provided by RBI which will lower bank‘s cost of raising Tier 1 capital which will help big public sector banks like Bank of Baroda, SBI, Punjab National Bank attract investors. These banks will also be benefitted with lower cost of funds.

So, looking at the scenario an innovative solution can be opted which is not so prominent in PSU banks but is visible in private sector banks; it is securitization or selling off a portfolio of performing loans. This will

24 | O C T O B E R 2 0 1 4

the impact of these mergers; for now we can only say that if the problem of capitalisation is solved then it would be good for the system.

Economy

Demystifying India’s Economy

-Sameena Usman

India has been rolling out a lot of whizkids through time immemorial and still continues to do so. Almost anywhere across the globe, you can drop in on any random place right from a bookstore to a renowned university or a prospering firm and likely as not be confronted by bright Indians offering sharp analysis on various fields &. economics obviously is not one that is left behind! there are Indians who are aware of how best to fight poverty, create wealth and promote innovation. Yet the performance of the Indian economy itself, over the last few decades, lags well behind most of the rest of Asia at least!

Despite, innovate efforts on increasing FDI (foreign direct investment) in india such as ‗make in India‘ campaign, is there enough surety of prosperity? Well, even if such campaigns result in a significant increase in FDI inflows, it should be kept in mind that at present FDI contributes only to 1.3% GDP (gross domestic product: total value of all finished goods & services in a country) for India which is way below the world average for countries comparable to our country in terms of GDP per capita. So for these to result in a significant overall increase in the GDP

High inflation rates (fall in the purchasing power of rupee), an almost unmanageable CAD (current account deficit: imports > exports) and the slump of our domestic currency in the international market are likely to reflect in the economic recovery of our country, if any.

Yes, all the hype of

Well, citing an example, speaking of the latest,

growth rate, is a bit of a stretch.

Also, a country's ability to take advantage of FDI is measured by the quality of its institutions, policies, market structures. Thus, along with the process reforms that the 'Make in India' campaign seems to emphasise on, there has to be deep policy reforms as

India being a superfast

developing economy is mere hype, or rather,

it

definitely is a developing country ,but at a ‗‘superfast pace‘‘ ? Well that‘s of sceptical concerns, even so!

Are we satisfied with India always being a ‗developing‘ country no matter at what pace, or won‘t we want it to bear the fruits of finally being a ‗developed nation‘?!

well in order to see some significant improvement.

But more importantly, even if we nail the growth, there is very little evidence in the Indian context that higher growth leads to a significant reduction in poverty - the key ingredient of 'achha waqt ' for the masses. To measure this, people use what is called the growth elasticity of poverty, which captures the responsiveness of poverty to economic growth (extent

Having said that, it‘s not like there are zero efforts

to which poverty falls when there is a unit increase in

being made either, but instead of focusing on the

growth). India's performance in this respect during the

minute attempts which have been successful in gold

post-liberalisation era has been worse than that of

plating the actual economic ore of our country, let‘s

China and other comparable countries.

have a look into why or what is stopping India from touching THAT peak of economic Everest!!

25 | O C T O B E R 2 0 1 4

Don‘t get disheartened as yet!, well there have been

• India is also racing its way up to becoming one of

few good indicators as well, the ones which aid in the

the largest retail markets in the world. Yet again

so mentioned ‗gold plating‘ ! Thus, flashing off the

among the star rankers, the retail industry of our

mix of Indian assets, here‘s a list of few interesting

country is at about $450 billion.

Indian economic indicators:-

• Agriculture is definitely our forte! With a globally

• India has the ninth-largest economy in the world by

second position in farm output, and also a remarkable

nominal GDP (at $1876.8) ,GDP can be defined as the

first place in the production of milk, jute and pulses.

market value of all the officially acknowledged goods

• We are also the network masters with the world's

and services that are produced in a nation within a specific time period.

third

largest

road(

4.3

mn

kilometres

of

interconnected roadways) and the fourth largest rail

• Thanks to economic-math duo! the projected GDP

network in the world, with a track length of 114,500

of our country would be at $13,716 billion, by 2030.

kilometers. And also, a national tele-density rate of

• Present-economic-data

74.15 % .

Currency :

61.28 USD/INR

GDP

1876.8 billion $ ( 3.03% of world

• Almost half of India's population is below 25 years.

By 2020, the average age of an Indian is expected to

:

economy)

be 29 years. The demographics of a young population offer a distinct growth advantage

Sector wise contribution to GDP:

• Speaking of the talent pool, India has the second-

Service sector :

60% of GDP

largest pool of scientists and engineers in the world.

Industry sector:

26% of GDP

• Region wise excellence can also be seen, for

Agricultural sector: 14% of GDP.

example: Chennai, the Detroit of Asia, accounts for 35-40 per cent of India's total automobile industry.

GDP Annual growth rate:

5.63% • Few sectors have proven to be beneficial such as the

Unemployment Rate:

5.20%

aviation sector in India has attracted foreign direct

( Agriculture & textile industry are the only major

investment (FDI) worth $449.26 million in the last

employers)

one decade.

Inflation rate:

6.46%

• The term ‗sunehra bharat‘ holds true with the

Industrial production:

0.40%

official gold holdings of India at 557.7 tonnes, thus ranking 10th in gold reserves.

Our nation stands 11th in terms of factory output generation.

• It also managed to grab a seat in G20 ( group of 20 major economies of the world) 26 | O C T O B E R 2 0 1 4

• India's Forex ( foreign exchange reserves) stand at $280.17 billion.

low exports, which implies higher imports and hence a higher CAD ( imports-exports). High CAD will inturn lead to high inflation thus lower business activities directly leading to low GDP of the nation!

These factors can as well be worked upon by stringent and innovative policies being slowly being taken up by our present government but apart from these, there are few ailments which have struck our economy like malaria jaundice and what not ! let‘s peek into these major factors or the prominent characteristics of our economy !

Corruption Decelrates Economic Growth: Corruption is often held culprit for lower tax revenues than expected and yes, corruption is indirectly associated with lower growth rate in many instances.

For example, some estimates show that only 10% of • Eight companies from India appeared in the Fortune

the public distribution system (PDS)money in India

500 ranking. Reliance Industries, Tata Motors and

reach the targeted population with the rest being all

Tata Steel also figured in list. Showing signs of

leakages. Not only do such leakages drastically reduce

industrial excellence.

the effectiveness of anti-poverty schemes, but also it

But despite all these, as already mentioned we are not able to reach that pinnacle of success owing to the

accompanied with the lack of tax revenues leads to large fiscal deficit.

factors such as high fiscal deficit(country‘s expense-

Growth?! yess!, but unequal growth?! Nay!!

income), rising farm wages, domestic supply-side

With a Gini coefficient (measure of the un-equality in

constraints, unexpected weather patterns, rise in

economic wealth within a country) of 33% , it can be

international oil prices, rupee depreciation( drastic fall

safely said that India has an unbalanced growth. The

in the value of a single rupee), volatile or

fruits of growth haven‘t reached the bottom 20 %

unpredictable

expansionary

(roughly 250 million) of our population. Locally too,

monetary policy ( increased money supply further

the difference between incomes of different states is

aiding depreciation).

spot on ! There‘s a 10 fold difference between the

The Economic Loop Hole:

richest state Goa and the poorest state Bihar. This is

capital

flows

and

Thus in simple terms, a slow economic growth ushers negative business sentiments, high interest rates and 27 | O C T O B E R 2 0 1 4

larger than the real income gap between the GDP per capita of the USA and Angola!! The fact that

differences within India are comparable to cross-

world‘s merchandise exports has improved. Trade

country differences is astounding!! The growing

was & will most definitely continue to serve as an

regional disparities have discouraged political resolve

engine of growth in the years to come.

for further economic reforms that might further amplify the inequalities.

initiate

Inflation:

judicious

economic

reforms

thereby

preventing the deceleration of growth in the country

Inflation (presently at 6.46%) is a major challenge for the economy of our country. , inflation in India is slightly high, continuous inflation impacts allocation of resources negatively, slows down growth and worsens

Hence, it is in the hands of the new government to

income

distribution.

High

wages

in

agriculture with low productivity can be inflationary.

Secondly, the fiscal deficit, which is an additional source of inflation, has spilled over into the current account leading to a lot of exchange rate volatility restricting the realisation of our growth objectives.

Developed economies such as US, UK and EU have been experiencing inflation lower than their central bank targets and hence, their central banks have been engaging in printing money by buying large volumes of government securities.

Hence, these 3 major factors are juggling with the future of our economy, none the less there are rays of hope too as in:With standing these challenges, the Indian economy has almost quadrupled in size since 1991, growing at an average of 6%. Savings and investment rates are comparatively higher at around 31% of GDP. Also a comparatively younger population offers a distinctive growth advantage for our nation. Service sector productivity, the biggest sector in the economy , has also increased over a couple of years. Our share of the

28 | O C T O B E R 2 0 1 4

and from individualistic perspective, facing away from corruption, not giving in to working for foreign MNC‘s & thus refraining from indirectly contributing to the brain drain attempts by foreign countries, investing in our own nation, trying and using only made in India utilities , all these contributions might look minimal & unrealistic but as we all know, „‟every drop makes an ocean‟‟ so does „‟every Indian make up the Indian economy‟‟...let‟s all do our economic bit !

Politics

Unveiling The New NaMo Economic Team BJP's victory

-Sachi Kheskani

in Haryana and Maharashtra state

chief secretary of Rajasthan after the BJP government

elections has capped several days of action on the

came to power in the state last year. During this

economic front and has given Hon'ble Shri Narendra

tenure, state initiated chief labour reforms. Mehrishi

Modi plenty of room to cut through hurst of

was a joint secretary in the department of corporate

regulations and state controls. Amidst all of the

affairs in the law ministry between 2001 and 2004.

reforms, Mr Arun Jaitley puts up that "Reform is the

Between 2003 and 2004, Jaitley was law minister in

art of possible" hinting that there is more to come.

the previous NDA government. Mehrishi belongs to

While the newly formed Government takes its baby

the same Rajasthan cadre and 1978 batch as

steps, reforms are much easier now than in the later

Mayaram. Watal, also of the 1978 batch, belongs to

years may hold as a postulate. With a thumping

the Andhra Pradesh cadre. One of the two is likely to

majority Mr. Modi was elected in May on promises of

become the finance secretary. The tradition is, if the

rejuvenating the Indian economy and increasing

two most senior bureaucrats in the ministry are of the

employment

and

same batch, their ranks in the Union Public Service

economists were disappointed by his first budget and

Commission (UPSC) examination are taken into

a lack of progress in initial stage for fixing structural

consideration. If that is maintained, Watal will

economic problems. In order to quell these concerns,

become finance secretary.

opportunities,

but

investors

NaMO constituted a reform minded team at the finance ministry, which includes US based well known economist Arvind Subramanian

as chief

Economic Advisor to help formulate the next budget and policy. It all started when the new government took

over,

speculations

were

widespread

that

Mayaram and (the then) revenue secretary Rajiv Takru, considered close to the former government, would be transferred from the finance ministry. Takru was replaced by Shaktikanta Das in June and posted to the department of the Northeast region, while Mayaram continued as finance secretary, contributing to many tasks, including the Budget presented by Finance Minister Arun Jaitley in July. The budget was not very effective and criticised by many including Mr Arvind Subramanium as it did nothing to Kick Start the economy. Rajiv Mehrishi was appointed 29 | O C T O B E R 2 0 1 4

Rajasthan Chief secretary Rajiv Mehrishi will replace Mayaram, who will then take charge of Tourism Ministry. Mayaram will replace Pervez Dewan as tourism secretary on November 1,2014. However, Mayaram will chair Foreign Investment Promotion Board (FIPB) meeting on October 21 that is expected to decide on raising foreign direct investment in HDFC Bank. Mayaram‘s transfer was part of the first major shuffle of top civil servants since the NDA came to power. In all, 20 bureaucrats were moved, many at the level of secretary, the senior-most rank in a ministry. This clearly indicates that Modi wants his own team to draw up the next Budget, which will be a symbol of the new thrust on economic reforms. The timing is significant as the Prime Minister's Office and the Finance Ministry have just begun work on the first full-fledged Budget of the NDA government.

Hence, Bharatiya Janata Party-led government might

In other bureaucratic changes, Anil Swarup, a 1981

slowly transfer bureaucrats considered close to the

batch IAS officer from the Uttar Pradesh cadre, has

earlier regime, which might lead to a deliberations

been appointed as coal secretary. He was appointed as

over fixed tenures for secretaries. Mayaram was

an officer on special duty in the coal ministry. He will

brought

P

join office as secretary from November 1, after in

Chidambaram in 2012 after he replaced Pranab

office S K Srivastava retires. His selection came at a

Mukherjee as finance minister. Mayaram had worked

time when the ministry is preparing implementation

previously in the finance ministry, including in the

of the Supreme Court's decision on deallocation of

infrastructure division.

coal blocks. He was active in clearing delayed

back to

the

finance

ministry by

Now, only two of the five secretaries in the finance ministry - Financial Services Secretary G S Sandhu and Expenditure Secretary Ratan Watal - stay behind from the previous regime. In September, Aradhana Johri was appointed the new disinvestment secretary.

She took charge from October 1, when Ravi Mathur

projects as head of the project monitoring group set up by the former government to revitalize investments in key sectors. His batchmate Anuj Kumar Bishnoi has been appointed as secretary, ministry of water resources, river development and Ganga rejuvenation which is one of the Prime concerns for BJP government as the neighbouring states economy

retired.

depends upon Ganga. Alok Rawat, a 1977 batch IAS Talking about qualifications of our new "CEA" who is,

Oxford-educated,

is

an

alumnus

of

IIM-

Ahmedabad and St Stephen's College. Subramanian is

officer,

has

been

appointed

secretary

in

the

department of administrative reforms and public grievances.

appointed for a tenure three years will get the rank and pay of a Secretary to Government Of India. The CEA is responsible for producing the Economic Survey, a document on the state of the economy that provides the base for drafting of the budget. He also brings out a mid-year economic update that is presented to Parliament. His focus will be on growth, investments and providing equitable growth for all Indians. An economist of international repute, Subramanian has closely worked with Reserve Bank of India Governor Raghuram Rajan during his tenure at the International Monetary Fund (IMF). One of the prime factors that made Modi take this decision was the excellent understanding Subramanian shares with Rajan.

30 | O C T O B E R 2 0 1 4

Indian economy is showing some signs of renewal and inflation has decreased rapidly, aided largely by a drop in global oil prices. Narendra Modi also begun an overhaul of obsolete labour rules, reducing power of labour inspectors and the red tape for small companies that makes India one of the most difficult places in the world to do business. Indian Bonds, shares and rupee currency all have performed strongly in response to the new economic policies. Also a reduction in Interest rate is expected as per mandate of Mr Jaitley. Lets see if remains no more a dream!

"SONE KI CHIDIYA"

Industry Overview

DTH Industry in India

-Manjari Sharma

DTH stands for Direct-To-Home television. It was

launched its services in 2007 with a drastically low

first proposed in India in 1996. At first they could not

onetime cost involved for the subscribers. The market

pass approval because there were concerns over

became quite competitive where every player came

cultural invasion and national security. In 1995

with new innovative offerings and the DTH

government felt the need to regulate Cable TV and

companies are taking huge costs upon themselves in

passed the Cable TV networks regulation Act. In

acquiring new customers. Analysis shows one clear

2001, TRAI issued a set of instructions for operating

trend among the subscribers, more company tries to

DTH. In 2003, Country‘s 1st private DTH license was

acquire new consumers; it puts a bent in the profits. In

awarded to dish TV which started operations in 2004.

this situation, Dish TV is positioned quite uniquely

However, the cable operators increase in strikes, tariff

because it already has a large consumer base to

plan, selective broadcast and poor services were the

cushion the negative effects of adding new customers.

main cause of dissatisfaction among the customers.

Let‘s have a look at the SWOT ANALYSIS of this

Thus, creating an opportunity for DTH. DTH offered better quality picture than cable TV because cable TVs in India are analog. Despite digitization, the cable transmission is still analog whereas DTH provides consumers stereophonic effects. Its network penetrates to rural areas where

industryStrengths-

Increased

high

definition

services,

declining content acquisition cost, rural penetration, and presence across almost all geographies of India, customer friendly multi-tiered regional packages, and Diversified content.

other terrestrial transmission fails. Besides enhanced picture quality, it also allows for interactive TV services such as Internet access, movie-on-demand and video conferencing. CAS was introduced in metro cities of India to provide the subscriber the choice of channel they wish to view. In the beginning Dish TV was the main player in the DTH industry and was registering growth mainly in the areas where cable TV was not available. The viewers were not ready for the cost of STB. In 2007 CAS mandate was started in selected metro cities, where subscribers had to invest in a set top box. Though it was not very successful, it provided a wider platform to the DTH and consumer became more aware and geared up to pay for the set top box. Looking at the opportunity Sun Direct 31 | O C T O B E R 2 0 1 4

Weakness- High Subscriber Acquisition Cost (SAC), low ARPU, which is an area of concern. With an increasing amount of channels, after a point of time the quality of the signal had been lowered to accommodate more channels (example BIG TV).

DTH services has a problem in the monsoon season too, the cloud cover and density manages to disrupt service as India has 3 to 4 months of rains, this has yet not been rectified and exists with all DTH service providers. One-third of its revenue, not profits, is taken by the license fee, entertainment and service taxes. DTH is the only category that pays tax on the same

service

to

both

the

state

and

central

governments. On the cost front, cable players do not

need to bear any transponder or spectrum charges,

As per the regulator, a vertically aligned broadcaster

which burden the DTH players.

can be permitted to control only one distribution

Opportunities- Cutting down license fees and one time entry fees as well as better technology for STB so it‘s easy switching to some other frequencies for DTH

broadcasts

during

rainy

season.

With

platform operator. For example, Sun network owns and operates television channels under the Sun TV brand, a cable service under Sun Cable Vision (SCV cable) and a direct-to-home service under Sun Direct.

penetration of TV in India standing at approximately

Customer churn rate may negatively impact bottom

65 percent, at present the country has close to 80

line – constant attention and strategy needed to

million non-TV households, which presents a key

manage and control subscriber base.

opportunity for the television distribution players.

This low level of penetration holds great potential for players to increase their subscribers and revenues.

Drivers such as rising incomes, decreasing household size and rising urbanization would only provide a further leap. With the government‘s digitization mandate slowly but steadily progressing towards its target, the television distribution space is filled with prospects however, it would call for investments and improvements. All metros except Chennai have been largely digitized and the Phase-II of digitization, which covers 38 cities, is also nearing completion.

Phase III and Phase IV of digitization target December 2014 for their completion. This would mean

digitization

of

additional

40-50

million

household in the balance towns.

Competition can cut revenues by forcing price-cuts and reduced margins. Also, improved quality by cable and

IPTV.

The

recently

issued

recommendations for direct to home companies by market regulator TRAI threaten to send the Rs 91,800-crore media and entertainment sector into a tail-spin, as it seeks to curb monopolies and restrict cross-holdings in distribution platforms.

32 | O C T O B E R 2 0 1 4

the government to push through DAS, despite tough resistance from thousands of small cable operators.

Under DAS, the government had deadlines for conversion from analog to digital, which began with metros. Earlier, local cable operators under-reported the subscriber base so that they do not have to share the subscription fee with MSOs and broadcasters.

Local cable operators realized if they did not move towards digitization, subscribers, who now had an alternative, would move to DTH. It is also aimed at promoting government's ambitious financial inclusion scheme 'Pradhan Mantri Jan Dhan Yojana', as Dish TV has announced that it will offer 10 per cent discount to subscribers paying their bill through RuPay-enabled cards.

Threats- DTH is currently a 5 player market.

operators

DTH unknowingly also played a key role in helping

2014 it is growing at a rate of about one million per year. DTH operators opine that technological edge will continue. DTH used a cautious approach to begin with and focused on rural areas. Within ten years of its launch, DTH has become a force to reckon with.

Its subscribers are not just limited to rural India with over 60 percent belonging to top 20 cities. All DTH players in India are backed by large organizations with significant ability for marketing, thus creating a

language barriers and gaining acceptance with rural and urban subscribers. Currently, the future looks promising as estimation says that the Indian DTH industry is all set to grow to $3.9 billion and 63.8 million subscribers by 2017 and $5 billion and 76.6 million subscribers by 2020.

unique brand. With no intervention by the middlemen and its direct access to customers, DTH has successfully addressed the issue of accessibility. to be technologically stronger as it offers a higher bandwidth and a natural return pipe.

The last decade brought remarkable changes in the Indian TV industry as DTH services were introduced, which forever changed the way people viewed and used content on television. Customers for the first time had a choice of selecting channel and paying accordingly, an option that never existed before. DTH industry outshines most markets by surpassing 33 | O C T O B E R 2 0 1 4

International

Falling Brent Crude Prices

-Srishti Karmakar Libya's oil industry has started pumping out oil again

The oil prices have not seen such a fall in the last

— with exports unexpectedly rising to about 810000

couple of years. Oil is in the middle of one of its

barrels per day in September. And, at the same time,

steepest selloffs since the financial crisis, with prices

oil demand in Asia and Europe has started to weaken

on the international market falling 18 percent since

particularly in China and Germany. So now oil prices

mid-June, to $94 a barrel on Sept. 30. There can be

are falling, from their June peak of around $115 per

two explanations either not enough demand or too

barrel down to around $85 per barrel at the end of

much supply. According to the International Energy

October.

Agency, in 2014 world demand for oil will grow only 1.5 percent.

Oil prices rose throughout the 2000s because global oil demand surged especially in fast-growing China and there simply wasn't enough oil production to keep up. That led to the sharp oil spike in 2008 and subsequent recession. And once the financial crisis waned, the same dynamics returned. Oil has hovered around $100 per barrel since 2011. Since 2011, the

Brent crude, the international oil benchmark has also struggled, falling as low as $84.85 a barrel on 22nd of October. That‘s the lowest since November 2010.

The abrupt acceleration of an over 26 percent slide in prices since June was triggered by three news items that epitomized the market's turn: a downgrade in global oil consumption forecasts; projections for another big boost in shale oil; and reluctance by OPEC members to cut output.

US oil boom has been offset by geopolitical disruptions elsewhere. As oil prices surged, many energy companies suddenly found it profitable to start extracting oil from difficult-to-drill places. In the

The diminishing outlook for consumption is colliding with an unrelenting rise in U.S. shale oil, leading to a glut of crude that has knocked Brent lower since June.

United States, companies began using techniques like

This situation can be compared with the bubble

fracking and horizontal drilling to extract oil from

bursting crash of 2008, although there are some things

shale formation in North Dakota and Texas. That

different in this case. The 2008 crash was demand

helped foster a boom in "tight oil" production. But

driven and the sharp drop in price is being caused due

until recently this did not have much effect on the

to supply. Continued growth in U.S. shale production

global oil prices. That is because, at the same time, we

and increase in non-OPEC countries oil exports have

were also seeing all sorts of geopolitical conflicts

led to excess capacity. Slowing demand is making the

elsewhere in the world. There was a civil war in Libya

supply glut even worse. The International Energy

in2011 that hurt oil output. Iraq was a mess. The

Administration

United States and Europe slapped oil sanctions on

projections for 2014 to about 200,000 barrels per day

Iran and pinched that country's exports. But over the

from the current 700,000 barrels per day. The IEA

past month, those disruptions have started easing a bit.

forecast is the lowest since 2009.The reason behind

34 | O C T O B E R 2 0 1 4

lowered

its

crude

oil

demand

the lower projection is because of the softening

with Saudi Arabia over whether to cut output. How

Chinese and German demand and the Euro zone

OPEC responds in November could go a long way to

recovery. Total world oil demand is expect to grow at

determining the course of oil. If the group agrees to

1.05 million barrels per day this year. That is well

curtail production, oil prices might rise again (or at

below the expected increase in production from non-

least stabilize). But if OPEC lets things be, then oil

OPEC countries alone, which is anticipated to grow

prices could conceivably keep falling.

by 1.68 million barrels per day in 2014, according to KAMCO research. Dragging oil demand may continue longer than many economists would like as global economies struggle to post strong recoveries, and some nations, such as Japan, substitute oil for natural gas and alternative fuel sources. The demand is set to remain soft due to the global growth downgrade by International Monetary Fund. The strong U.S. dollar is also a key point pressuring the oil market. This is in addition to the pressures from the weak economic data from the world‘s biggest energy consumers. If the U.S. dollar were to fall, oil prices would have been supported more than what the market has seen recently.

The big unknown is how OPEC might respond to this fall in prices. OPEC countries — including Saudi Arabia, Iran, Iraq, and Venezuela — still produce 40 percent of the world's oil. And OPEC members can, in theory, coordinate to cut back on production in order to prop up prices. But it's unclear whether OPEC will actually do this at its next meeting in November. For one, there are bitter divisions within the organization.

Some OPEC countries need a very high price to "break even" on their budgets and pay for all the government spending they've racked up in recent years. Iran, for instance, likely needs prices at around $130 per barrel. But Saudi Arabia can probably live with prices closer to $90 per barrel. Iran is at odds

35 | O C T O B E R 2 0 1 4

Oil is still much, much pricier than it was a decade ago. And it's entirely possible that the recent drop could prove only temporary (after all, we saw price dips in 2012 and 2013, but new conflicts flared up in the Middle East and prices soon popped back up). But assuming the current drop is real and sustained it could have a very large impact around the world. But it is hardly guaranteed that world oil prices will keep falling. We might have entered a new era of oil "abundance." The world is highly unpredictable.

Perhaps new conflicts will arise in oil-producing regions. Or perhaps the US oil boom will lose a bit of steam. Or perhaps something else unexpected will happen. Predicting the future is always difficult but it's especially difficult when it comes to oil.

Controversy

The DLF Fiasco

-Kolisetty Aishwarya

A huge company like DLF supposedly has everything

generation of power, recreational and hospitality

on its platter. But to get every glitter in the world, the

services and life insurance.

company might have crossed some boundaries which were out of limits for everyone. Now why exactly will the SEBI not react to such a deal when smashing such a large company can bring it amazing goodwill and reputation

plus

don‘t

forget

safeguarding

the

investors‘ interest. When a scam happens in India, it

DLF has more than 60 years of record with approximately 308msf planned projects and 55msf projects under construction. It is now spread across 15 states and 24 cities in India. The development projects include both residential and commercial complexes.

The company went public in the June of 2007.

definitely has to be backed by spicy reveals that would glorify the capabilities of our countrymen in

IPO of DLF:

this very fraudulent line. Today after 7 prolonged

• On the 14th of June, 2007, the bid resulted at per

years, a well driven controversy has been brought to

share priced at Rs.550 and the IPO collected around

light and a look at it would lead to us rethinking about

RS.2944crores.

the company DLF

• Among the institutions, the FIIs bid for about 48.55 crores shares and other institutions like banks and domestic financial institutions went out for about 3.5 crores worth shares.

• The mutual funds went for about 3.52 crores worth shares. In total, DLF‘s IPO passed out to be one of India‘s largest IPO‘s of those days.

About DLF:

• The HNIs which includes the corporates went for around 1.9 crores of an allowable 1.7 crores and as far

Founded by Chaudhary Raghvendra Singh in the year

as the retail part of the IPO is concerned, it witnessed

1946, DLF today is supposedly one of the largest

around 5.09 crores shares bidding, of total allowable

commercial real estate. It mainly engages in the

5.22 crores shares.

development of residential, commercial and retail properties. Right from the land acquisition to planning, execution, construction as well as marketing the real estate projects DLF undertakes all the activities. Deviating from the real estate business, this company also indulges in other activities like

36 | O C T O B E R 2 0 1 4

• Also the company allocated 10 lakhs shares for its employees and overall saw 78% had been subscribed.

the auditors are also the same despite the change in owners.

Judgment: SEBI concludes as DLF under fault and goes about to ban the company and it six top executives from capital markets for the period of three years. The 6 people include the founder chairman of DLF as well.

The judgment is by far one of the harshest judgment given out by SEBI till date. The judgment was backed by the accusation of deliberate suppression of important information in a huge initial public offering.

DLF in action: The tip of a sharp pin will definitely wake the The Fiasco:

sleeping tiger. Now that the entire negative strikes

After almost 7 years, today the securities exchange

DLF at once the company finally decided to roar

board of India has pointed its finger at this company

back. DLF has challenged the securities Appellate

accusing it of suppressing important information

Tribunal that before the company decided to go

regarding the subsidiary companies of DLF during the

public, Mr.Kimsuk Krishna Sinha, took up the matter

IPO back in 2007. Allegedly the company had de-

to SEBI and seven years back, SEBI did not take the

subsidiarised companies which it previously owned

matter seriously which drove Mr. Sinha to court that

through a sham transaction. This was done to put a

put up SEBI to this case. Thus if SEBI had taken up

cloak on the various legal cases the companies were a

the case seriously on the first moment itself, it could

part of over land disputes that they owned. The proof

have saved many investors from investing into a

of selling at least 3 subsidiaries have been acquired

sham. DLF thus filed two appeals against the above

which were reported to be sold off to the wives of the

order.

top managers of DLF. Further enquiry showed that

2014 for DLF:

these were housewives not involved in any sort of business and the loans for the purchase were all arranged by the company itself. To this, SEBI went on to say that, although there was a change in the ownership of the subsidiaries, the subsidiaries are managed by the same executives who managed it before the ownership was changed. Also the authorized bank signatories, the registered office and 37 | O C T O B E R 2 0 1 4

After the entire set back, the stocks of DLF have been trading at around Rs110 per share. In March and June 2014, the company‘s stock price had rallied over by 50per cent. The decision of SEBI denies the company from raising low cost funds against its malls and office properties. Also the company has been facing other complications in this year as well.

downward

trend

since the beginning of this year when it could not achieve its sales target of 2.5 million square feet and

reached

its

highest at 0.44msf in Gurgaon. Taking a look at its cash flows, DLF‘s operating cash flows

have

been

• Supreme Court imposed a penalty of Rs.630 crores

significantly lowering down as it reaches rs.2734crore

on DLF in regard to the allegations of Competition

from rs.3822 core last year.

Commission of India.

The stocks of DLF have been trading all time low

• September 2014, Punjab and Haryana High court de

compared to its IPO in 2007 where per share of DLF

allocated 350 acres of its prime land in Gurgaon.

was priced at rs.550 and has reached its all-time low

• August 2014, the UP pollution Control Board sent

at Rs.110 bringing it down to one fifth of its worth.

them a notice to stop their conduction activity in Noida.

• June 2014, the Riverside Luxury Project by DLF in Kochi was put on hold when the government cancelled its clearance.

The financials and overview of the company are as follows: A company that maintained a reputation for delivering best quality at minimal price is down in a pot hole today facing the worst under the watch of SEBI. So the question here stands whether the judgment and the

Apart from there allegations, the company is trapped under several minor legal cases binding the future of DLF.

allegations hold well for the company, or are they simply going to be facing hardships in the future setting an example for all the ill minded companies

Impact on DLF:

out there trying to reap shining profits out of evil

The current debt on the company stands at rs.19000

seeds?

crores and the company would face a problem to reduce its indebtedness as raising equity or REITs are no longer an option for them. Moreover the company‘s cost of borrowing is likely to increase in the future. The growth for this company is also on a 38 | O C T O B E R 2 0 1 4

Vriddhi Research’s Corner

Company in Focus: TATA Motors

- Ajay Arora

Company Overview

opportunity. Global Markets are also weak because

Tata Motors Limited is India‘s largest automobile

of problems in Euro-zone, stagnation in Germany &

company, with

INR

fear of missing GDP forecast in China. Therefore

2,32,834 crores (USD 38.9 billion) in 2013-14.

markets can take a hit from those factors, which could

Through subsidiaries and associate companies, Tata

further hamper the possibility of capital gain in

Motors has operations in the UK, South Korea,

particular stock. Investor need to very active while

Thailand, South Africa and Indonesia. Among them is

entering any stock or taking any position.

Jaguar Land Rover, the business comprising the two

• We had already witnessing a decreasing open

consolidated revenues

of

iconic British brands. It also has an industrial joint venture with Fiat in India. With over 8 million Tata vehicles plying in India, Tata Motors is the country‘s

interest with decrease in price, which is bearish signal: its major hint that stock may correct to lower level in coming trading days.

market leader in commercial vehicles and among the top in passenger vehicles. Tata cars, buses and trucks

• Negative global cues, as Indian markets are no

are being marketed in several countries in Europe,

longer isolated to global hits.

Africa, the Middle East, South Asia, South East Asia, South America, CIS and Russia.

Fundamental Rationale • Production of Nano is down by 14 percent

in

September (Y-0-Y) • Production Super Ace is down by 27 Percent in September (Y-O-Y) • Production of SUMO also come down Valuations

• Most of vehicles have seen decrease in production

As per valuations, currently stock is 5 percent

apart from the facts automobile industry has revived

overvalued. We should enter the stock if it goes below

from sluggish growth.

to 490 levels, which is the intrinsic value of stock or

• It has seen decrease in domestic sales of various

Investor can sell the future of Tata Motors stock of

vehicles whereas its competitor has market share

December Expiry. Also Investor can buy the put of

during same time.

490 of same expiry to make the gain of this 39 | O C T O B E R 2 0 1 4

huge return if one enter at corrections & holds the stock for the same time horizon. One can enter the stock if it slips below 490 levels.

Rationale behind long-term Investment: • Revival in GDP numbers & favorable Inflation numbers could trigger rate cut in coming monetary policy which could be the direct beneficiary to AutoMobile Sector.

• As Tata Motors is market leader in commercial vehicle, with increased industry activity Tata Motors will be hugely favored.

• After deregulation of Diesel & Brent Crude reaching below 84 $ bbl will be benefitting sale of commercial vehicles in India.

• Jaguar Land Rover sales volume has been growing at a CAGR of 20.08 percent from past 5 years in international market. Exports to China, which has Stock has already started correcting from 540 odd levels. As charts depict that RSI which is trading at 51 is on the downward move which is bearish signal.

MACD is trading below Signal line again a bearish sign.

Stochastic, Momentum & OBV every indictor is on the downward move which is confirming the trend that stock might correct to further levels. Investor should refrain in taking a new position at current levels.

Stock has support has 490 level; Here investor can initiate fresh long positions.

Stock is BUY for Long-term: • Although this stock is good buy for the long term taking 3 year time frame. An investor can expect a 40 | O C T O B E R 2 0 1 4

merely 5 percent in FY09 is been increased to 24 percent.

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

41 | O C T O B E R 2 0 1 4