Shailesh J. Mehta School of Management Indian Institute of Technology,
FINSIGHT The Fortnightly Newsletter
Issue: Nov 05, 2012
Inside this Issue
The Pandemonium that is and
The Economic Times
News of last 2 weeks
Check your Fin Quotient
capitalmarket.com in.reuters.com investorwords.com investopedia.com
F I N S I G H T
THE PANDEMONIUM THAT IS AND WAS .....A peep into the Indian Economic Bazaar and the R BI- North-Block Saga
The autumn has set in and the whole of India is gearing up for that most coveted break during this part of the year that comes on the day the cacophonous exuberance of crackers sound unimaginably sweet. Yes of course we are talking about the auspicious Diwali. You go to any Indian Bazaar and the bargain for the fireworks would seem ubiquitous. So was the case few days back in the big fat Bazaar we call the Indian Economy. A firework was indeed due from Mr. Subbarao, especially after the loud and clear signals from the fin min about the expectations the market and the north block had from the RBI Governor. But it turned out to be a damp squib. Now digressing a bit from the topic, I must say that almost all of us had once been rebuked by an irritated teacher while talking in a class in school who would say, â€œIs this a bazaar (marketplace) or something?â€? Well, Indian Bazaars are synonymous with chaos. Make no mistake; the bigger version of this bazaar we mentioned above is no exception. Let us find out why.
THE NEWS The fairytale growth story of India came to a halt somewhat one and half years ago. Number started crumbling under the measures taken to tame the inflationary pressure on our economy. The fiscal chasm widened day by day. Looking at the downturn, though, we must say that a rate cut was long on the cards for the RBI to deliver. Investors, companies and the government have clamoured for a cut in interest rates to boost flagging growth. Interest rates have been on hold since April even as many other central banks cut rates. The Reserve Bank of India left interest rates on hold on Tuesday but cut the cash reserve ratio for banks, defying pressure from the government to lower rates for the first time since April but also indicating it may ease policy in early 2013. Leaving the policy repo rate unchanged at 8.00 percent was in line with forecasts in a Reuters poll.
THE PANDEMONIUM THAT IS AND WAS .....A peep into the Indian Economic Bazaar and the R BI- North-Block Saga
A few days back Chidambaram announced a complete fiscal consolidation plan which predicted to cut the fiscal deficit to 3% by 2017. Since taking office three months ago, Chidambaram has made several moves to revive investment, clear economic bottlenecks and repair government finances. Better management of expenses has helped the government prevent any further slippage in fiscal deficit halfway through the financial year 2012-13. By the end of September, the Centre had run up a fiscal deficit of 65.7% of the budget amount, almost unchanged from the levels last month and a tad lower than first half of last financial year. Chidambaram has said the government will make all efforts to contain fiscal deficit at 5.3% by maximising revenues and containing expenditure and sought support from all political parties to deal with the economic and financial challenges faced by the economy. “Best efforts would be made to contain fiscal deficit at 5.3%, during the current financial year even though the Kelkar Committee has stated that as per the current economic trends, it could be 6.1%," he said on Tuesday in his address to the parliament's consultative committee attached to his ministry on 'economic impact of internal and external debt'. The t e x t o f h i s s t a t e m e n t w a s r e l e a s e d o n We d n e s d a y b y h i s m i n i s t r y . The minister acknowledged that the target of 5.3% is challenging but doable. "No country can live beyond its means", he said, adding that it was imperative to ensure that country's debt remains sustainable and within limits.
THE FUNDAS Ά Ά SOURCES OF FUNDS
APPLICATION OF FUNDS
REVENUE EXPENDITURE CAPITAL EXPENDITURE REVENEUE EXPENDITURE
THE PANDEMONIUM THAT IS AND WAS .....A peep into the Indian Economic Bazaar and the R BI- North-Block Saga
As we know that the fiscal deficit actually refers to the amount of public borrowings that our government go for. Moreover, this borrowing has to be done incidentally when the other sources of funds are not adequate for the expenditures to be carried out. This year the tax revenue has already been increased to meet the fiscal cliff. As there is no windfall gain in the form of capital receipts for the Government in sight, the only way to meet the projections is to go for tightening budgets in terms of over-shooting the non-planned expenditures. Noteworthy is the fact that planned expenditures are the part of the five-year plan and playing with them is relatively difficult. Now with respect to the fiscal deficit, we must also take into account that the more prosperous the economy and henceforth the GDP, the more the national income and
more is the tax revenue to meet the deficits. So now we can see how the interest rate cut is closely linked with the fiscal deficit as the rate cut would make money cheaper for the firms thereby making more and more projects financially feasible which in turn would increase the GDP and lower the deficit.
THE PANDEMONIUM The chaos that existed since long in our economy can be equated with the question: whether to go for growth or tame inflation and the marginal propensity to consume in our population being on the lower side, the RBI has always been hawkish in controlling the monetary policies and taken conservative stances. True that such measure helped us in waving off the recession that came in 2008 but then now that the slowdown is eating up our share of growth for quite some time, the continuation of those cautious stepshave actually affected the economy more than needed.
THE PANDEMONIUM THAT IS AND WAS .....A peep into the Indian Economic Bazaar and the R BI- North-Block Saga Now the quandary that remains is that taming inflation hurts growth big time and stifling growth multiplies the fiscal gap. Hence, the difference of opinions became pretty stark between the Ministry of Finance and the RBI recently. The lack of will hurt for a long time in the recent past and the indication was clear from RBI this time that the Government has to deliver its promises to get the desired cut needed for further development. Not to mention in this respect is the proper implementation of FDI and FII roadmap and revamp of the existing tax codes. "FDI is not an option, but an imperative, failing which we will have to rely on borrowings to meet the current account deficit", Chidambaram said, while seeking support of members of all the political parties in strengthening the government's efforts to contain both the fiscal deficit and the current account deficit.
CONCLUSION Looking at the bigger picture of the Indian political and economic situation, inflation is often considered to be a bit hyped than needed. Recently the famous economist Joseph Stiglitz was quoted saying, "I don't think inflation has as adverse an effect as many people say in the financial market". So, although the RBI was acutely conscious that growth was sliding in India to an eight-year low, it hasn't had the elbow room to lower interest rates, which is what FinMin has been pushing it to do. Subbarao has argued all along that it would need reciprocal action on the fiscal side before he can start easing rates, but the UPA government did not even begin to acknowledge that there may be a case to rein in spending. Simultaneously, the policy gridlock of the past three years when the government was grappling with monumental corruption scandals also meant that clearances for projects, which might have eased supply-side constraints that were also feeding inflation, were held up. After nearly two years of being in denial that it was profligate spending that had caused fiscal deficits to exceed the target by a mile, the Finance Ministry, under P Chidambaram, has grudgingly begun to concede the point that it was at fault. No wonder Subbarao declined the market speculations by being cautious of the steps taken by the Government. How's that Mr. Chidambaram?
By- Abhishek Banerjee , SJMSOM, M.Mgt, 1stYear
News of last 2 weeks Disney to buy "Star Wars" producer for $4.05 bln
to a new generation of filmmakers." He will become the second-largest individual holder of Disney shares, with a 2.2 percent stake. Disney will pay about half the purchase price in cash and issue about 40 million shares at closing. "This is one of the greatest entertainment properties of all time," Iger said.
The deal unites a boutique Northern California film studio that brought special effects into the digital era with a venerable Hollywood powerhouse that has shown a knack for getting the most out of bigname entertainment brands. Disney plans to release at least three more films in the Star Wars sci-fi saga that ranks among the biggest movie franchises of all time, Chief Executive Bob Iger told analysts on Tuesday. The last "Star Wars" picture was "Revenge of the Sith" in 2005. Although Lucas has in the past denied plans for any new "Star Wars" movies, he said in a video i n t e r v i e w r e l e a s e d Tu e s d a y o n Starwars.com that he had already created story treatments outlining three more films as well as many other Star Wars story lines. Lucas, an icon in the industry known for exercising control over the most minute details of the fictional universe he created, will remain a creative consultant on the new films, although in the video interview he cast the sale as part of a long-held personal desire to exit the mainstream film industry. In a statement on Tuesday, Lucas said: "It's now time for me to pass 'Star Wars' on
Microsoft C E O says Windows 8 demand outpaces Windows 7 "We're seeing preliminary demand well above where we were with Windows 7,
which is gratifying," Ballmer said at an event launching new Windows phones. Windows 7 is the best-selling version of Windows so far, selling more than 670 million licenses in three years since release in 2009. "Over the weekend we saw an incredible response around the globe to Windows 8 and the Microsoft Surface," said Ballmer, referring to Microsoft's first own-brand tablet, designed to challenge Apple Inc's iPad. He did not give out any sales figures. On Friday, there were moderate lines at Microsoft's 60 or so stores across the United States for the Surface.
News of last 2 weeks continued.. RBI leaves repo rate unchanged, cuts CRR "As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher going in the next few weeks," CEO growth trajectory," the Reserve Bank of Sanjay Aggarwal told reporters at India Governor Duvvuri Subbarao wrote. the Delhi airport after meeting staff members. S.C. Mishra, who The RBI kept its policy repo rate at 8 represents Kingfisher engineers based percent and cut the cash reserve ratio, or in Delhi, said the airline had agreed to the amount of deposits that banks must pay March salaries immediately, April keep with the central bank, by 25 basis salaries by October 31, May salaries by points to 4.25 percent. the Diwali holiday on November 13, and June salaries between December 20 and December 31, after which payment would be made monthly. The remaining three- to four-month lag in salary payments would be addressed "after the company regains financial health and gets recapitalised," Mishra told reporters. The move to cut CRR would inject about April-Sept fiscal deficit at $62.6 bln 175 billion rupees into the banking system i n o r d e r t o p r e - e m p t p o t e n t i a l l y India's fiscal deficit during the AprilSeptember period rose to 3.37 trillion tightening liquidity, the RBI said. rupees, or 65.6 percent of the full fiscal Kingfisher staff return, licence still year 2012/13 target, government data suspended showed on Wednesday. During the Kingfisher, once India's second-largest same period in the previous fiscal year, airline, has not flown since the start of the deficit was 68 percent of the budget October after an employee protest turned target. The net tax receipts during the violent. On Saturday, the Directorate April-September period stood at 2.94 General of Civil Aviation (D G C A) t r i l l i o n r u p e e s a n d t h e t o t a l suspended its licence after Kingfisher expenditure was about 6.94 trillion failed to address its concerns over safety. rupees. New Delhi is aiming to keep the deficit at 5.3 percent of GDP "All employees have agreed to resume this fiscal year, a revision to the duty right now. They are on duty as we previous target of 5.1 percent in speak ... We are all in this together and the March 2012 budget. looking forward to getting the airline
Markets The market edged higher in last week of October on the back of optimism over the reshuffle of Cabinet on Sunday, 28 October 2012. The strength, however, could not be sustained due to the Reserve Bank of India's unwillingness to lower key interest rates in the Second Quarter Review of Monetary Policy 2012-13 on 30 October 2012. Gains were also capped as investors were concerned about the impact of Hurricane Sandy in the US.
The BSE Sensex rose 130.11 points or 0.70% to 18,755.45 in the week ended Friday, 2 November 2012. The 50-unit S&P CNX Nifty rose 33.40 points or 0.59% to settle at 5,697.70. The BSE Mid-Cap index rose 0.64%. The BSE Small Cap index fell 0.31%. Both these indices underperformed the Sensex. The pace of foreign liquidity in the Indian equity market slowed in October 2012 compared with September 2012. Foreign institutional investors (FIIs) bought shares worth net Rs 11364.20 crore in October 2012. They had purchased shares worth net Rs 19261.50 crore in September 2012. Worried over high budget deficit derailing growth, Finance Minister P Chidambaram on Monday, 29 October 2012, unveiled a plan of fiscal consolidation during the period of the 12th Plan, i.e. from 2012-13 to 2016-17. Data released by the government on 31 October 2012, showed that the year-on-year inflation measured by monthly Consumer Price Index Numbers for Industrial Workers (CPI-IW) eased to 9.14 % in September 2012, from 10.31% in August 2012 and 10.06% in September 2011. The core sector recorded a growth of 5.1% in September 2012, much higher than 2.5% growth in September 2011, the Ministry of Commerce & Industry said after trading hours on 31 October 2012. The modest growth in the core sector in September 2012 was on account of double digit growth witnessed in the production of coal, petroleum refinery products and cement, The eight core industries viz. coal, crude oil, natural gas, petroleum refinery products, fertilizers, steel, cement and electricity, have a combined weight of 37.9 in the Index of Industrial Production (IIP).
Markets continued.. Key Highlights Infosys outlook disappoints again; profit rises 24 pct Indian software services provider Infosys again disappointed investors hoping for a more robust growth outlook, undermining its standing as the country's information technology bellwether and sending its shares down by almost 9 percent. The company that once symbolised India's rise as an outsourcing powerhouse has delivered a series of disappointing growth targets since January as its internal reorganisation to better compete with the likes of Accenture PLC takes longer than hoped. Infosys expects revenue of at least $7.34 billion, or growth of 5 percent, for the year ending March, the company said on Oct 12, unchanged from its previous outlook. That excludes any additional revenue from its acquisition of Swiss consultancy Lodestone.
Market- ICICI Bank posts record Q2, PNB disappoints India's biggest private sector lender ICICI Bank posted its highest ever quarterly profit, while state-owned Punjab National Bank disappointed
investors with lower profits, sending its shares down more than 7 percent. The results highlight the contrasting performance of state and private sector lenders in India. During tough spells in the economy, loans made by state-run banks, which account for 70 percent of the market but whose lending decisions are not always driven by purely commercial factors, are more likely to fall into default. I C I C I posted a forecastbeating net profit for the JulySeptember quarter of 19.56 billion rupees, compared with 15.03 billion rupees a year ago. By contrast, PNB's net profit fell 11.5 percent in the same quarter, with bad loans as a percentage of total assets rising to 2.69 percent, from 0.84 percent a year ago. Reliance Industries shares hit by Kejriwal's allegations Shares in Reliance Industries Ltd recover after falling as much as 2.1 percent on Nov 1, a day after anticorruption activist Arvind Kejriwal accused the energy conglomerate of hoarding natural gas and exerting pressure on the government to favour it. The company denies the allegations. Kejriwal, whose group India Against Corruption (IAC) has won publicity in India by accusing ruling Congress party chief Sonia Gandhi's son in law Robert Vadra of taking part in shady dealings, said on Wednesday that Reliance has profited from cosy relationships with a string of government ministers.
Markets continued.. Key Highlights RIL meets street estimates; refining margins rebound Reliance Industries Ltd posted its fourth consecutive drop in quarterly profit but met market estimates, as refining margins rebounded and treasury gains from its huge cash pile bolstered profits. Reliance Industries, controlled by billionaire Mukesh Ambani, Asia's second-richest man, said its quarterly profit fell 5.7 percent from a year before to 53.76 billion rupees. Net sales for the September quarter rose 15 percent to 903.35 billion rupees. Profits from the refining segment, which accounts for nearly 80 percent of the company's revenue, rose 15 percent. Reliance's petrochemicals business posted a 1 percent rise in revenue on higher demand and prices, but margins declined. The petchem business is likely to see growth from the first quarter of 2013, the company said. Biocon Q2 net beats estimates, shares rise Biocon, India's top listed biotech firm, beat expectations with a 4.7 percent rise in quarterly net profit, sending its shares up over 3 percent on Wednesday. The Bangalore-based company said consolidated net profit rose to 900 million rupees in the fiscal second quarter ended September from 860 million rupees a year earlier. Revenue rose 19.3 percent to 6.42 billion rupees. "This (investment) takes us closer to our commitment of taking Syngene through an IPO (initial public offer) at the most opportune time," Biocon Chairman Kiran Mazumdar-
Shaw said in a statement.
World shares see modest rise as U.S. storm impact assessed World shares rose modestly in subdued trading on Tuesday Oct 30 as investors waited to see the full impact of a massive storm that wrought destruction across the eastern United States. The monster storm, codenamed Sandy, was responsible for at least 15 deaths, left millions without power, and has closed much of New York's financial district. Wall Street shut for a second day, and bond trading was also halted as the focus switched to whether markets would be able to resume activity on the final day of the month on Wednesday, which is key to pricing investment portfolios. StanChart profit up; India weakness weighs Asia-focused bank Standard Chartered Plc said its operating profit grew by a mid-single digit rate in the first nine months of the year, keeping it on track for a 10th straight year of record earnings. Earnings, though, would have risen by at least 10 percent but for a $340 million settlement paid to New York regulators who threatened to strip the bank of its state licence over allegations it hid some $250 billion worth of transactions with Iran.
Markets continued.. Currencies: Rupee rises on fund flows; down 1.8 percent in October
The rupee rose on Wednesday Oct 31, but snapped two successive months of gains to fall in October as the euphoria over economic reforms petered out and the R B I kept rates on hold, with global events expected to determine the currency's near-term direction. Domestically, with key state elections coming up and the winter session of parliament starting later in November, any major reform moves look unlikely in the interim. In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.08 with a total traded volume at $4.3 billion.
Commodities: Gold â€“ Gold firms as Wall Street re-opens; set for monthly dip Gold prices rose nearly 1 percent to their highest in a week on Wednesday as stock markets firmed as the New York financial markets re-opened, but were on track to end a four-month winning streak as October drew to a close. Prices broke back above $1,720 an ounce as U.S. traders returned to their screens after a two-day closure following a storm that battered the U.S. east coast. Spot gold was at $1,723.60 at 1149 GMT, up 0.9 percent, while U.S. gold futures for December rose $11.90 to $1,724.00. The metal remains on course for a monthly drop of nearly 3 percent, its first one-month decline since May. BSE Sensex posts biggest monthly fall since May on Oct 31 The BSE Sensex rose on Wednesday, recovering from steep falls in the previous session, as auto makers such as Maruti Suzuki India rose on hopes sales would rebound, while drug makers including Glenmark Pharmaceuticals extended a recent rally on the back of robust earnings. Investors had hoped the Reserve Bank of India would help stem losses by cutting interest rates on Tuesday, but the central bank opted instead to tackle liquidity via a cut in the cash reserve ratio, sending shares lower.
Tata Motors shares gained 2.9 percent after Goldman Sachs said the auto maker's market cap has potential to reach $30 billion by fiscal 2017, from its current value of $13.8 billion, should unit Jaguar Land Rover take action such as launching smaller engine and lower priced vehicles.
Campus Buzz Finesse club of SJMSOM organized a workshop on 'FinancialModelling and Microsoft Excel', conducted by Forevision. Forevision is a growing and provider of educational solutions. The trainers Mr. Abhishek Salecha and Ms. Divya Killawala shared their rich industry experience in the field of Banking & Financial services .
The most awaited Annual Business school festival by SJMSOM - Avenues 2012 was scheduled from Nov 2nd - Nov 4th. This time Avenues saw participation from around 400 colleges across India in events like Mahayodha, Moolyankan, Prakalp, Ashwamedh etc. Finesse Club flagship event â€“Moolyankan tested the financial acumen and real time decision making capabilities of the participants. The winner of Moolyankanâ€™12 was team CrackJack from SPJIMR. The min attraction of Avenues 2012 ws Alankar - The Distinguished lecture Series, the flagship event of AV ENUES 2012 which aims to bring together renowned personalities from diverse fields who have been inspirational to the masses, scaled new heights in their professional endeavours and exhibited an exemplary attitude towards life. As promised, Avenues 2012 saw esteemed speakers who shared their insights on diverse topics covering media, cricket, information usage in business, etc. The speakers included Mr. Harsha Bhogle , Mrs. Anita Bhogle, Mr. Ajit Balakrishna, Mr. N. Santosh Hegde, Mr. Prabhu Chawla, Mr. D. Shivakumar and Ms. Shaheen Mistri.
Knowledge Section Incentive fee Fee paid as an incentive to the general partner of a hedge fund or, less frequently, the manager of a mutual fund, the amount of which depends on his/her performance, usually relative to some benchmark index. Such a form of compensation could in fact extend to any financial professional, but tends to be most common among people directly responsible for managing funds. Since managers are compensated based on actual results, they will try to get the best results for their clients, but the argument is sometimes made that an incentive fee might encourage the manager to take more risks than he/she otherwise would in pursuit of maximum returns. Cyclical stock It is the stock of a company which is sensitive to business cycles and whose performance is strongly tied to the overall economy. Cyclical companies tend to make products or provide services that are in lower demand during downturns in the economy and higher demand during upswings. Examples include the automobile, steel, and housing industries. The stock price of a cyclical company will often rise just before an economic upturn begins, and fall just before a downturn begins. Investors in cyclical stocks try to make the largest gains by buying the stock at the bottom of a business cycle, just before a turnaround begins. It is opposite of defensive stock. Fisher effect The effect proposes that if the real interest rate is equal to the nominal interest rate minus the expected inflation rate, and if the real interest rate were to be held constant, that the nominal rate and the inflation rate have to be adjusted on a one-for-one basis. Real interest rate = nominal interest rate - inflation rate. In simple terms: an increase in inflation will result in an increase in the nominal interest rate. For example, if the real interest rate is held at a constant 5.5% and inflation increased from 2% to 3%, the Fisher Effect indicates that the nominal interest rate would have to increase from 7.5% (5.5% real rate + 2% inflation rate) to 8.5% (5.5% real rate + 3% inflation rate). J-curve The theory suggests that the Internal Rate of Return of a fund will be low in its early stages, particularly due to costs incurred in starting the fund, but then as the firm becomes more stable and profitable, its internal rate of return will increase. The shape of this, if graphed over time, would look like a J. Similarly, the shape of a country's trade balance after it devaluates its currency. The immediate effect of this devaluation is an increase in the trade deficit, though this will shift into an increased international demand for the country's exports due to a lowerechange rate, as well as a decrease in the demand for more expensive imports. An appreciation in the value of a country's currency can result in an inverted J-curve.
Knowledge Section Coupon bond The coupon bond is an unregistered, negotiable bond on which interest and principal are payable to the holder, regardless of whom it was originally issued to. The coupons are attached to the bond, and each coupon represents a single interest payment. The holder submits a coupon, usually semi-annually, to the issuer or paying agent to receive payment. Coupon bonds are being phased out in favor of registered bonds. Coupon bond is also called bearer bond.
Check your fin quotient 1. Name the company that has acquired Lucasfilm for $4.05 billion in cash and stock and announced a new Star Wars movie to be released in 2015. 2. If a company's share price falls, then what happens to its P/E ratio and dividend yield? 3. The satellite TV broadcast services arm of this company plans to riase between $150 million and $200 million through an initial public offering of shares. Identify the company 4. A stock XYZ trading at 88 has EPS of 12.5, and a dividend payout ratio of 60% for FY12. Calculate the dividend yield (%). 5. The gradual and systematic writing off of an intangible long term asset or an account over an appropriate period is known as___________________
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