Beyond Market - Issue 83.pdf - Online Share Trading
Beyond Market - Issue 83.pdf - Online Share Trading
Beyond Market - Issue 83.pdf - Online Share Trading
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For Private Circulation Volume 1 <strong>Issue</strong> 83 11th Jun’13<br />
The yellow metal’s golden run seems to be over and investors can expect<br />
the price of gold to plummet further during the course of the year
DB Corner – Page 5<br />
Volume 1 <strong>Issue</strong>: 83, 11th Jun ’13<br />
Editor-in-Chief & Publisher: Rakesh Bhandari<br />
Editor: Tushita Nigam<br />
Senior Sub-Editor: Kiran V Uchil<br />
Art Director: Sachin Kamble<br />
Junior Designer: Sagar Padwal<br />
<strong>Market</strong>ing & Operations:<br />
Divya Bhurat, Shreelatha Gollavathini<br />
Research Team:<br />
Sunil Jain, Kunal Shah,<br />
Dipesh Mehta, Anand Shendge,<br />
Manav Chopra, Vikas Salunkhe<br />
HEAD OFFICE<br />
Nirmal Bang Financial Services Pvt Ltd<br />
Sonawala Building, 25 Bank Street,<br />
Fort, Mumbai - 400001<br />
Tel. 022-3926 7500/7501<br />
CORPORATE OFFICE<br />
B-2, 301/302, Marathon Innova,<br />
Off Ganpatrao Kadam Marg,<br />
Lower Parel (W), Mumbai - 400 013<br />
Tel: 022 - 3926 8000/8001<br />
We, at <strong>Beyond</strong> <strong>Market</strong> welcome your views,<br />
comments and feedback. Do help us to grow<br />
better as per your liking. This is our attempt to<br />
reach you better while crossing horizons...<br />
Web: www.nirmalbang.com<br />
beyondmarket@nirmalbang.com<br />
Tel No: 022 - 3926 8047<br />
Approved<br />
Approval of the proposal to allow put and call options in mergers and acquisitions<br />
as well as private equity transactions is hoped to encourage foreign investments<br />
and clear ambiguity surrounding SCRA – Page 6<br />
Copper Bull-Dozed<br />
Copper seems to have lost favour with investors who are no longer treating it as a<br />
hot favourite due to unfavourable global economic conditions – Page 9<br />
Notes Of Despair<br />
The rupee may continue to fall further in the coming times due to worsening<br />
macroeconomic environment in India as well as abroad – Page 12<br />
Bait And Watch<br />
Several realty companies are offering attractive deals to home buyers to boost<br />
sales. Yet, many are adopting a wait and watch approach before biting the bait –<br />
Page 15<br />
In Bad Books<br />
Public sector banks have earned the wrath of wary investors as their performance<br />
as illustrated by their quarterly earnings results has been deplorable and leaves a<br />
lot to be desired – Page 18<br />
Renewed Interest<br />
The growing number of TB cases in India is giving enough reasons to pharma<br />
companies to focus on manufacturing and marketing drugs to treat this infectious<br />
disease – Page 20<br />
Painting A Pretty<br />
High disposal incomes and rising aspirations, coupled with fiscal incentives to the<br />
housing sector by the government and increased investments in infrastructure and<br />
automobile sector is likely to boost the paint industry in the country – Page 23<br />
Exploring Newer Options<br />
Airline companies are tapping ancillary revenues to offset the fall in passenger<br />
traffic in tough times that have beset the industry of late – Page 26<br />
End Of An Affair?<br />
The yellow metal’s golden run seems to be over and investors can expect the price<br />
of gold to plummet further during the course of the year – Page 30<br />
Taking Stock And Decluttering<br />
Although it is advisable to invest a portion of one’s portfolio in mutual funds,<br />
timely overhaul of this asset class is important to keep your investments healthy –<br />
Page 32<br />
Now Is The Time<br />
In a falling interest rate scenario, investors should consider long-term debt funds as<br />
they are likely to give good returns over a period of time – Page 35<br />
Caplin Point Laboratories Ltd – Page 38<br />
Important Statistics For The Fortnight Gone By – Page 40<br />
Divide And Rule<br />
Both seasoned and amateur investors can use ratios to understand a company’s<br />
performance better – Page 42<br />
Important Jargon For The Fortnight – Page 45<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 3
LOSING<br />
ITS SPARKLE<br />
We Indians share a very special bond with gold. This affair dates back to several centuries. The importance accorded to<br />
the yellow metal is more than any other precious metal. Further, this bond has been strengthened time and again due to the<br />
rally in the markets. The latest rally in the yellow metal lasted for as long as 13 years.<br />
However, it is being felt that the golden run is almost over and the price of gold, which has fallen considerably is likely to<br />
plummet further in the course of the year. To understand better the reasons for the waning interest in this commodity, read<br />
our cover story in this issue, which has been written by Kunal Shah, Head of Research – Commodities at Nirmal Bang.<br />
Apart from this hot topic, we have covered issues like the government’s approval of the proposal to allow call and put options<br />
in mergers, acquisitions and private equity transactions, which is aimed at bringing in more foreign investments; the losing<br />
importance of copper, a key barometer of global economic conditions as well as the depreciating Indian rupee and the impact<br />
it has on the common man.<br />
On the sectoral front, we have featured articles on the attractive deals being offered to home buyers by realty players to tide<br />
over falling sales; the dismal quarterly performance of public sector banks as against private banks; the growing tuberculosis<br />
market in India and how the Indian pharmaceutical industry is reading into it; the likely boost to the paint industry in India<br />
due to various factors within the industry and how the airline companies are turning to ancillary revenues to make up for the<br />
drop in footfalls in the industry.<br />
The <strong>Beyond</strong> Basics section covers two interesting articles. While one is on the importance of reviewing a mutual fund<br />
portfolio from time to time and getting rid of non-performing funds, the other talks about long-term debt funds and the<br />
advantage of investing in them in the current scenario where interest rates have been fallinG.<br />
Tushita Nigam<br />
Editor<br />
4<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
The Nifty has strong<br />
support at the 5,870 level.<br />
In the previous fortnight, the<br />
rupee depreciated due to high<br />
trade deficit and dollar<br />
appreciation. This trade<br />
deficit is expected to continue this<br />
month too.<br />
The RBI and the government together<br />
are taking steps to restrict the import<br />
of gold, in an attempt to curb the<br />
consumption of the yellow metal,<br />
which is widening India’s trade gap.<br />
The quarterly earnings results of India<br />
Inc were in line with expectations.<br />
Although, company managements<br />
have not cautioned about a further<br />
decrease in earnings, the recovery<br />
could, however, take time. Also, the<br />
India Meteorological Department<br />
(IMD) has forecasted “normal<br />
rainfall” this monsoon season.<br />
On the international front, the<br />
Japanese index Nikkei performed<br />
well and has increased by 77% since<br />
November ’12 on the back of policy<br />
action by the government. The<br />
Japanese market is in a correction<br />
phase and has corrected by around<br />
17% from its peak.<br />
The US market too is witnessing a<br />
correction, with expectations of<br />
withdrawal of quantitative easing.<br />
And the Indian market is taking cues<br />
from these global events.<br />
The Nifty has strong support at the<br />
5,870 level. If it breaks this level,<br />
then avoid buying. <strong>Market</strong><br />
participants are advised to hold<br />
existing long positions and add if the<br />
Nifty crosses the 5,980 level. The<br />
Nifty has upper side resistance<br />
around the 6,080 level.<br />
Stocks like Aurobindo Pharma Ltd<br />
(LTP: `185.70), Sun Pharmaceutical<br />
Industries Ltd (LTP: `1,018.90),<br />
United Phosphorus Ltd (LTP:<br />
`162.75), United Spirits Ltd (LTP:<br />
`2,496.80), Mahindra & Mahindra<br />
Financial Services Ltd (LTP:<br />
`241.95), KPIT Cummins Infosystem<br />
Ltd (LTP: `116.80), MRF Ltd (LTP:<br />
`15,200.05) and Lupin Ltd (LTP:<br />
`753.50) look good from trading and<br />
investment perspectives.<br />
In the coming fortnight, market<br />
participants can look out for inflation<br />
and trade deficit numbers as well as<br />
the RBI monetary policy review as<br />
these are likely to determine the<br />
course of the marketS.<br />
Sensex: 19,519.49<br />
Nifty: 5,921.40<br />
(As on 6th Jun ’13)<br />
Disclaimer<br />
It is safe to assume that my clients and I may have an investment interest in the stocks/sectors<br />
discussed. Investors are required to take an independent decision before investing. Investment in<br />
equity is subject to market risk. Our research should not be considered as an advertisement or<br />
advice, professional or otherwise. The investor is requested to take into consideration all the risk<br />
factors including their financial condition, suitability to risk return profile and the like and take<br />
professional advice before investing.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 5
Approval of the<br />
proposal to allow put<br />
and call options in<br />
mergers and<br />
acquisitions as well<br />
as private equity<br />
transactions is hoped<br />
to encourage foreign<br />
investments and<br />
clear ambiguity<br />
surrounding SCRA<br />
6<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
R<br />
ecently the law ministry<br />
approved a proposal to<br />
allow ‘put’ and ‘call’<br />
options in share purchase<br />
agreements to permit listed<br />
companies to buy or sell equity at a<br />
predetermined price in future,<br />
clearing to a large extent the<br />
ambiguity surrounding deal-making<br />
in India.<br />
Indian companies can now use put<br />
and call options in mergers and<br />
acquisitions and private equity<br />
transactions, adding flexibility and<br />
clarity to the deal-making process.<br />
Not only was the move long overdue,<br />
the unclear policy was also a<br />
hindrance in attracting long-term<br />
foreign flows to India. Following this<br />
move, a jump in private equity and<br />
M&A deals seems quite likely.<br />
A call option gives the holder the<br />
right to buy a security at a later date at<br />
a pre-determined price. Thus, a<br />
private equity (PE) investor or an<br />
acquiring company can increase its<br />
stake on exercising its option.<br />
A put option on the other hand has the<br />
opposite function. Put option gives<br />
the holder the right to sell a security at<br />
a later date for a set price.<br />
Thus, if a company fails to provide an<br />
exit to a PE firm via an initial public<br />
offering (IPO) or some other route or<br />
fails to meet performance<br />
benchmarks, a PE firm can exercise<br />
the put option to exit the investment.<br />
As things stand now, the Finance<br />
Ministry in India will go through the<br />
proposal of the Law Ministry,<br />
following which the Securities and<br />
Exchange Board of India (SEBI) will<br />
do the necessary communication.<br />
Though it is still not clear how the<br />
revision in the law would be effected,<br />
experts think that it could be done<br />
simply by way of a notification with<br />
the SEBI amending or repealing its<br />
earlier notification (of 1st Mar ’00) or<br />
by amending the Securities Contracts<br />
(Regulation) Act, 1956 (SCRA),<br />
which will need an approval from the<br />
Indian parliament.<br />
HISTORY OF CALL AND PUT<br />
OPTIONS<br />
So far the Indian law had not<br />
acknowledged call and put option in<br />
shareholders’ agreement. An<br />
agreement gets signed whenever there<br />
is a merger or an acquisition or a<br />
private equity investment in a<br />
company. Such a clause of the right to<br />
buy more securities or sell securities<br />
at a pre-determined price in a deal<br />
agreement is not uncommon in the<br />
global arena.<br />
However, such an in-built clause in<br />
the agreement in India is not<br />
considered valid by SEBI. The<br />
enforceability of put and call options<br />
has always been a matter of debate<br />
with conflicting views on this subject.<br />
The SEBI has in the past asked<br />
contracting parties to delete such<br />
options from their agreements. Last<br />
year the issue of enforceability of<br />
these options came up before the<br />
Bombay High Court in a dispute<br />
between the MCX Stock Exchange<br />
and SEBI.<br />
Further, high profile deals that came<br />
for SEBI’s scrutiny include the<br />
Cairn-Vedanta deal and more recently<br />
the deal involving Diageo and UB<br />
Group’s United Spirits Ltd where<br />
SEBI asked for removal of the<br />
derivative clause in the contract.<br />
SEBI’s view has been an impediment<br />
for genuine acquisition transactions.<br />
It helps to mention that in India such<br />
derivative contracts do get signed<br />
between the concerned parties. But,<br />
this is done outside the ambit of<br />
SCRA, which is open to inspection by<br />
SEBI. Promoters and investors resort<br />
to the Indian Contracts Act to enter<br />
into separate accord outside the ambit<br />
of the SCRA. However, the latter was<br />
subject to a lot of dispute in recent<br />
times as enforceability of the law was<br />
very uncertain.<br />
India is amongst the few countries,<br />
which did not have such a provision<br />
on M&As. In most emerging<br />
countries, where such provisions<br />
existed, those countries attract huge<br />
amounts of investments.<br />
Experts argue that the lack of such a<br />
clause was one of the key<br />
impediments to FDI flow into the<br />
infrastructure sector in India. SEBI<br />
felt the need for fresh guidelines<br />
when it realized that some of the deals<br />
that took place in 2010 and came for<br />
its approval were in breach of the<br />
existing guidelines.<br />
It was then that the regulator decided<br />
to recommend changes in the<br />
guidelines, so that derivative<br />
instruments could also be made part<br />
of M&A deals. It sent the revised<br />
guidelines to be vetted by the finance<br />
ministry, which in turn sent it to the<br />
law ministry.<br />
BENEFITS?<br />
With SEBI reversing its stance on put<br />
and call options, private equity and<br />
strategic investors would benefit the<br />
most. In fact the PE space would be<br />
the first to feel the positive impact of<br />
the new guidelines to be cleared by<br />
the finance ministry and then notified<br />
by SEBI.<br />
By exercising the option, they can<br />
either increase or exit their stake<br />
comfortably. The flexibility so<br />
offered to PE firms will help increase<br />
investor confidence and attract<br />
foreign capital inflows. Overall the<br />
move would encourage inflow of<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 7
foreign investments into the country.<br />
Further, now with call and put options<br />
getting legal sanction, it will allow<br />
parties to enter into open and<br />
transparent agreements, which will go<br />
a long way in curbing disputes. The<br />
use of call and put options will allow<br />
parties to hedge against genuine<br />
business risks.<br />
The new provisions will also help<br />
existing promoters of listed<br />
companies who are interested in<br />
selling their stake in a multiple-stage<br />
deal to get better valuation over a<br />
period of time.<br />
BUT DO THE ISSUES END HERE?<br />
Now, even if call and put options are<br />
held valid from the SEBI regulations’<br />
perspective, these options suffer<br />
ambiguity from the perspective of the<br />
Companies Act, 1956.<br />
There are views that such options<br />
restrict free transferability of shares in<br />
case of public companies and, hence,<br />
should be considered invalid.<br />
Therefore, there is less clarity on such<br />
options from the perspective of the<br />
Companies Act.<br />
Another issue stems from the Reserve<br />
Bank of India (RBI) regulation. The<br />
central bank of the country considers<br />
an instrument carrying a put option to<br />
be a debt instrument but it is not<br />
viewed as an equity instrument.<br />
The apex bank believes that if there is<br />
a fixed return through a put and call<br />
option, then that portion adopts the<br />
nature of debt and not equity.<br />
It is considered as external<br />
commercial borrowing (ECB), which<br />
is subject to several regulations.<br />
Therefore, even if the proposal of<br />
providing legality to put and call<br />
options is approved by the finance<br />
ministry, for a foreign PE investor,<br />
there will still be issues under foreign<br />
exchange regulations until the RBI<br />
clarifies its position on the issue of<br />
put and call options.<br />
While the freedom of using call and<br />
put options in shareholders agreement<br />
will be positive, it will be interesting<br />
to see as to how the government really<br />
implements iT.<br />
The most intelligent strategy in Chess is to be ready with the<br />
next move. Similarly, currency trading involves moves that<br />
are a combination of knowledge and skill, backed by years of<br />
experience.<br />
Currency Derivatives <strong>Trading</strong> with us keeps you a few steps<br />
ahead, always.<br />
EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP<br />
Contact: 022-39268088 | e-mail: currencies@nirmalbang.com | www.nirmalbang.com<br />
Registered Office: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610<br />
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. # Distributors investment in securities is subject to market risk. investment in securities is subject to market risk<br />
8<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
Copper seems to have<br />
lost favour with<br />
investors who are no<br />
longer treating it as a<br />
hot favourite due to<br />
unfavourable global<br />
economic conditions<br />
Copper, which is widely<br />
used across industries,<br />
sectors, construction and<br />
household applications, is<br />
considered to be a true barometer of<br />
what is happening in an economy.<br />
Earlier around October ’11 when the<br />
global economic crisis was once<br />
again intensifying, copper prices had<br />
corrected from around $10,000 per<br />
tonne in January ’11 to $6,500 per<br />
tonne in October ’11.<br />
Copper prices have once again started<br />
correcting from around $8,000 per<br />
tonne levels in January ’13 to around<br />
$6,500 per tonne levels currently.<br />
This is precisely the reason why<br />
experts around the world have started<br />
doubting the recent recovery in the<br />
global economy. Since copper prices<br />
are lower, there are risks or inherent<br />
weaknesses in some of the indicators<br />
which are showing recovery in the<br />
global economy especially in<br />
developed countries like the US and<br />
Europe. Though the debate is on<br />
about the recovery of the economy<br />
and its sustainability, here is what role<br />
copper has played in it.<br />
COPPER<br />
Copper is able to predict the global<br />
economy well before anybody or any<br />
other indicator can do it. So if you<br />
read copper prices, you will get an<br />
idea as to where the economy is<br />
heading. Copper has actually earned<br />
this reputation simply because of its<br />
numerous applications.<br />
Among metals copper is widely used<br />
in different industries and products.<br />
Considering its wide application<br />
across industries it reflects the mood<br />
of the economy.<br />
So, for instance, if copper prices are<br />
dropping and there is growing<br />
inventory, it implies that people are<br />
using less copper and if they are using<br />
less copper, it signifies that there is<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 9
less demand for products where<br />
copper is used.<br />
This effectively means that industries<br />
are slowing because of low demand<br />
and thus the economy is slowing.<br />
In the same manner if the reverse<br />
thing happens, which is higher copper<br />
prices and less inventory, it probably<br />
means that copper demand is high<br />
because of industry demand and thus<br />
the economy should be doing well.<br />
BACK TESTING<br />
Many believe copper does not have<br />
any correlation with the equity<br />
markets and the global economy.<br />
However, the more reasonable<br />
explanation is that it does not have a<br />
perfect correlation.<br />
It has been proved right on many<br />
occasions like the dream run of equity<br />
markets from the year 2003 to 2008,<br />
when the global economy and equity<br />
markets moved in tandem with<br />
copper prices.<br />
Logically, the base of the theory is<br />
strong and that has more to do with<br />
the fact that copper is used across<br />
industries and products, which is why<br />
this commodity can predict the actual<br />
health of the economy.<br />
But if falling copper prices has to do<br />
with higher supply, it could distort the<br />
picture. So the best way to look at<br />
copper prices as an indicator is to also<br />
look at supply side issues.<br />
This is why today many believe that<br />
copper prices are lower because of<br />
surplus capacity or availability of<br />
copper in the global markets.<br />
The global refined copper surplus is<br />
estimated at around 98,000 tonne.<br />
However, one would also notice that<br />
the surplus in copper is also derived<br />
from lower demand.<br />
If there is less demand in the market<br />
than what is produced, then there will<br />
be surplus and thus it means lower<br />
prices. But in any case there is some<br />
component of lower demand from<br />
user industries, which is what copper<br />
is trying to predict.<br />
NOT ALWAYS RIGHT<br />
Copper as an indicator is not right all<br />
the time; it has its weaknesses too. A<br />
temporary shortage or excess supply<br />
in the market could influence the<br />
price of copper in either direction<br />
leading to wrong indications about<br />
the health of the economy as well as<br />
the markets.<br />
Preferably a combination of other<br />
indicators like PMI, industrial data<br />
and price trend of other industrial<br />
metals could give some idea and help<br />
in making a better judgment.<br />
WHAT IT MEANS TODAY<br />
Of late many have been saying that<br />
the party for copper seems to be over.<br />
Owing to liquidity and government<br />
policies across the world, especially<br />
in developing economies, the<br />
significant risk of global economic<br />
slowdown has reduced.<br />
In fact world’s major economies like<br />
the US, Japan and Euro area have<br />
seen some recovery in the recent past.<br />
However, this only implies that the<br />
risk has been reduced, which means<br />
the structural issues in the US and<br />
Europe still persist and that continues<br />
to be a cause of worry.<br />
Also, the recovery is supported by<br />
liquidity and low interest rates in the<br />
developing world, which means<br />
withdrawal of liquidity could be a risk<br />
to growth. “Recent good news about<br />
the United States has come with<br />
renewed worries about the Euro zone.<br />
Given strong interconnections<br />
between countries, an uneven<br />
recovery is also a dangerous thing.<br />
Some tail risks have decreased, but it<br />
is not time for policymakers to relax,”<br />
stated IMF in its recent world<br />
economic outlook report.<br />
Importantly, the recent weakness in<br />
copper prices could also be explained<br />
by the fact that investors around the<br />
world have started worrying about the<br />
future of the Federal Reserve’s<br />
monetary stimulus after its chief Ben<br />
Bernanke raised the prospect of<br />
cutting back on some of the stimulus<br />
measures in the next few months.<br />
Cutting down on stimulus measures,<br />
reducing its liquidity support and<br />
possible hike in rates could be the<br />
biggest risk to demand. This will not<br />
only impact home sales, but the<br />
global economy as well.<br />
More than the developed world, for<br />
now, the emerging world is more<br />
important for copper. The GDP of the<br />
emerging market and developing<br />
economies grew at 6.4% in 2011,<br />
which fell to 5.1% in the year 2012.<br />
In 2013, growth is expected to bounce<br />
to 5.3% but that is still less than the<br />
potential of these economies.<br />
Countries like China, Russia, Brazil<br />
and Mexico are in the news for the<br />
economic and industrial slowdown in<br />
their respective nations. IMF and<br />
other world agencies have predicted<br />
that the Chinese economy is running a<br />
huge risk of a slowdown.<br />
The Chinese economy which is<br />
growing at 7% to 8% currently could<br />
actually drop to may be 5% to 6%<br />
given the low demand in the domestic<br />
and international markets. China is<br />
the main contributor.<br />
For instance in the year 2012, copper<br />
demand grew at 3.1%. However, if<br />
one excludes the demand from China<br />
the actual global demand declined by<br />
2.2%, indicating that it is only China<br />
10<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
which has been driving the demand,<br />
whereas the rest of the world,<br />
particularly the US, Europe and Japan<br />
are still lacking the demand.<br />
Overall these are risks that still exist<br />
in the developed as well as the<br />
developing world, which are<br />
obviously not clearly visible or<br />
suggested by some of the leading<br />
indicators as of now.<br />
This is why many economists now<br />
argue that base metals, especially<br />
aluminium and copper, which are<br />
behaving in contrast with the<br />
economic forecasts could be the<br />
warning signs for the global economy<br />
and the equity markets.<br />
Many still argue that the economy is<br />
telling a different story even though<br />
the US equity index such as Dow has<br />
passed the crucial 15,000 mark. If the<br />
base metal is saying something else,<br />
people may start taking hopes of<br />
recovery with a little pinch of salt.<br />
And if one looks at the behavior of the<br />
base metal prices along with the PMI<br />
numbers which are down in the US,<br />
China, Europe, Germany and India,<br />
the picture may not appear as rosy as<br />
has been predicted.<br />
In fact the Chinese PMI numbers in<br />
May fell to 49.6, which was the<br />
lowest in many months. China has<br />
seen contraction in its industrial<br />
activities in the recent past.<br />
Also, retail sales numbers, consumer<br />
confidence, spending on renovation,<br />
manufacturing activities in the US<br />
continue to be loweR.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 11
NOTES OF<br />
DESPAIR<br />
The rupee may continue to fall further<br />
in the coming times due to worsening<br />
macroeconomic environment in India as<br />
well as abroad<br />
12<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
The Indian rupee is having<br />
its worst spell in the last<br />
one year or so. Not only<br />
have yearly gains of the<br />
rupee been wiped out, the hawkish<br />
stance taken by the central bank too<br />
has further dwindled its chances of<br />
appreciation against the greenback.<br />
Last week the rupee took a fall below<br />
the psychological level of 56, which<br />
is the lowest level it has touched since<br />
September ’12.<br />
The RBI Governor D Subbarao in a<br />
recent public appearance mentioned<br />
how the central bank is in a bind<br />
because of the worrisome current<br />
account deficit (CAD) as well as the<br />
rising inflation.<br />
According to estimates by<br />
economists, the year may close with a<br />
current account deficit of 4.5%. This<br />
spelt further bad news for the rupee as<br />
it plummeted downwards to touch its<br />
worst level in the past 11 months.<br />
Currency experts are of the opinion<br />
that the trend of the falling rupee will<br />
continue till the end of the year as<br />
they expect little or no change on the<br />
macroeconomic front domestically<br />
and internationally.<br />
If the current trend continues, the<br />
rupee may touch the level of 60<br />
against the dollar, before the close of<br />
the year.<br />
Here are the major reasons why the<br />
rupee has been in a free fall (has<br />
fallen almost 16% in the last four-odd<br />
months) and the ways in which it can<br />
impact you.<br />
THE DOLLAR AND THE EURO<br />
ZONE WOES<br />
The main reason for the fall of the<br />
rupee is the dollar index which is<br />
going from strength to strength.<br />
Americans are hopeful of a tapering<br />
quantitative easing as there has been<br />
considerable improvement in equities<br />
as well as the labour market in the US.<br />
The dollar’s strength can also be<br />
attributed to the crisis in the Euro<br />
zone. With economic problems<br />
intensifying in the Euro zone, the<br />
dollar is being perceived as a safe<br />
haven and there has been a flight<br />
towards the dollar by investors.<br />
Further, as compared to the other<br />
central banking authorities in the<br />
Euro zone, the Federal Reserve of<br />
America has been talking about asset<br />
purchases tapering, which implies<br />
capital preservation, which is further<br />
encouraging the rise of the dollar.<br />
To add to its woes, the rupee is not<br />
only losing against the greenback, but<br />
also feeling the heat because of the<br />
crisis in the Euro zone.<br />
Owing to deteriorating economic<br />
indicators in the Euro zone, investors<br />
are currently staying away from what<br />
they believe are risky investments.<br />
Add to that, India may see a further<br />
downgrade in its investment grade<br />
that has caused the currency to<br />
weaken further.<br />
Fundamentally speaking, there could<br />
not have been a worse time for the<br />
Indian rupee. High exports coupled<br />
with a depreciating currency should<br />
ideally spell good news for any<br />
country. India, however, does not<br />
enjoy this privilege.<br />
Crude oil is the biggest component of<br />
India’s bill for imports and though the<br />
price of crude has somewhat helped<br />
India combat its depreciating<br />
currency, the Euro zone being in the<br />
folds of a crisis has weakened its<br />
prospects further as the Euro zone is<br />
one of India’s largest trading partners.<br />
India’s biggest problem now is its<br />
current account deficit, which stands<br />
at around 4.3% and depleting foreign<br />
exchange reserves and the authorities<br />
can do little to salvage the situation,<br />
because of worsening trade deficit,<br />
rising inflation and slowing growth.<br />
With bleak fundamental outlook in<br />
the Indian economy, it does indeed<br />
seem that the rupee will continue to<br />
be on a slippery slope in the<br />
forthcoming months.<br />
THE WEAK RUPEE’S IMPACT<br />
ON YOU<br />
With the rupee on a continuous slide,<br />
consumers and investors will also be<br />
impacted in more ways than one.<br />
The first and the most prominent<br />
impact will be on your petrol and<br />
diesel bills as consumers. Crude, as<br />
mentioned earlier, is the largest<br />
component of the import bill of India.<br />
Oil companies in India need to pay in<br />
dollars to import crude oil, which<br />
means that there are likely to be hikes<br />
in your fuel costs in the days to come<br />
as the rise in import cost is passed on<br />
to the customers.<br />
A weakening rupee spells disaster for<br />
students going to study abroad as well<br />
as Indian tourists travelling abroad as<br />
they will have to shell out more<br />
dollars for their expenses and travel to<br />
foreign lands.<br />
For investors too, a weakened rupee is<br />
bad news as it will dent corporate<br />
profits (those companies that need to<br />
import raw materials) in the<br />
forthcoming quarters. This, is turn,<br />
will reflect negatively on the stock<br />
prices in the days to come.<br />
Those planning to invest in gold in the<br />
near future may, however, be<br />
encouraged in the latter half of the<br />
year. Commodities such as gold and<br />
even silver are priced in dollars. The<br />
weakening rupee is supportive of the<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 13
yellow metal. This essentially means<br />
that the price of gold, which was<br />
down by almost 15% for the year may<br />
remain supportive due to the fall in<br />
the rupee.<br />
WHO WILL GAIN<br />
There are some others too who will<br />
gain from a weakened rupee. Largely<br />
among them are IT firms and other<br />
exporters who earn a majority of their<br />
revenues in dollars.<br />
For instance, a company like Infosys<br />
gets more than half of its business<br />
from Europe and North America. A<br />
weak rupee is also good news for<br />
nearly 40% of the SMEs with<br />
export-oriented businesses.<br />
With their sources of capital drying<br />
up thick and fast as banks become<br />
more and more stringent about SME<br />
lending, they have some reason to<br />
rejoice as they too stand to gain from<br />
a weakened rupee.<br />
The other segment that has some<br />
reason to rejoice because of the weak<br />
rupee are the non-resident Indians.<br />
Remittances have already increased<br />
as several expats are left with more<br />
money to send back home.<br />
In fact the weakening rupee has<br />
supported the rise in property prices<br />
in Mumbai in the recent times.<br />
Property experts say that a lot of<br />
investments in high end properties are<br />
being fuelled by expats over the past<br />
few months.<br />
Though Mumbai is prominent, there<br />
are other bigger cities in the country<br />
too that have witnessed a rise in<br />
property rates due to a weak rupee in<br />
recent timeS.<br />
QUAL<br />
AT NIRMAL BANG, YOU’RE MORE THAN<br />
JUST A BUSINESS ASSOCIATE,<br />
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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors<br />
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14<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
Several realty companies<br />
are offering attractive<br />
deals to home buyers to<br />
boost sales. Yet, many<br />
are adopting a wait and<br />
watch approach before<br />
biting the bait<br />
Gone are the days when<br />
real estate was<br />
considered to be one of<br />
the best options for<br />
investment. Those were the days<br />
when builders and developers were a<br />
content lot.<br />
Times have changed and now the<br />
sector seems to be ruled by Murphy’s<br />
law which states, “Anything that can<br />
go wrong, will go wrong.”<br />
Real estate developers now face all<br />
kinds of problems - be it not getting<br />
requisite approvals for their projects,<br />
a slowdown in sales, land acquisition<br />
or farmer issues.<br />
Currently, everyone is cautious about<br />
the sector. Foreign investors are<br />
cautious because of rupee weakness,<br />
which has weakened 6.27% against<br />
the US dollar in the last fiscal.<br />
Banks are cautious about lending to<br />
the sector because of delays in<br />
repayment of loans and tightening of<br />
lending norms by the Reserve Bank<br />
of India (RBI).<br />
And the domestic investors and<br />
buyers are waiting for the right<br />
opportunity to take a plunge.<br />
Real estate companies have finally<br />
realized the problem and they are<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 15
trying to create the ‘right opportunity’<br />
for buyers by offering attractive deals.<br />
A majority of these deals come under<br />
what is commonly known as the<br />
‘subvention scheme’.<br />
The subvention scheme is a modified<br />
form of home loans, under which a<br />
buyer pays 20% or so of the unit price<br />
in advance for a project and the rest<br />
80% of the amount is paid by the bank<br />
to the developer.<br />
Under this scheme, the buyer does not<br />
have to pay EMI on the home loan to<br />
the bank for a period of time known<br />
as the ‘subvention period’, which<br />
could be for 2 years or alternatively<br />
till the time the buyer gets the<br />
possession of the property.<br />
During this particular period of ‘no<br />
EMI’, which is usually up to 2 years,<br />
the developer pays the interest on the<br />
home loan taken by the buyer directly<br />
to the bank.<br />
There are many variants of this<br />
scheme, offered by developers.<br />
According to experts, the schemes<br />
have started to show results in<br />
Delhi/National Capital Region. And<br />
developers such as CHD Developers<br />
Ltd, Indiabulls Real Estate, Nirmal<br />
Lifestyle and Berry Developer and<br />
Infrastructure are also offering<br />
subvention schemes to the buyers.<br />
Interestingly, many developers are<br />
collaborating with banks for offers.<br />
For example, BCC Infrastructure Pvt<br />
Ltd has collaborated with HDFC<br />
PMS for its Bharat City project in<br />
Ghaziabad, where the buyer has to<br />
pay the standard 20% of the initial<br />
payment and the remaining bank<br />
EMIs after possession.<br />
SARE Homes has collaborated with<br />
the State Bank of India for their<br />
project ‘Springview Heights’, a<br />
township at NH24, Ghaziabad. The<br />
buyer need not pay bank EMIs for<br />
three years after the initial payment of<br />
20% of the home value upfront.<br />
SARE Homes is offering the same<br />
scheme for its townships in Old<br />
Mahabalipuram Road and GST areas<br />
in Chennai. However, for Chennai<br />
they have collaborated with ICICI<br />
Bank instead of State Bank of India.<br />
While many developers are<br />
collaborating with banks, Parsvnath<br />
Developers Ltd has come up with a<br />
new scheme which is called ‘25:75<br />
House of Happiness’.<br />
According to the statement released<br />
by the company, under this scheme<br />
the buyer has to make an upfront<br />
payment of 25% and the rest of the<br />
amount only after possession.<br />
What makes this scheme unique is<br />
that it would not attract any EMIs as<br />
no bank loan is involved.<br />
The scheme, says a company official,<br />
is a move to reach out to first time<br />
home buyers and would be extended<br />
to 20 projects of the group, including<br />
four commercial and 16 residential<br />
projects underway across the country<br />
in New Delhi, Greater Noida,<br />
Sonepat, Ujjain, Bhiwadi, etc.<br />
In Mumbai, developers are coming up<br />
with their own variant of the scheme.<br />
While DB Realty allows buyers to<br />
pay 19.9% of the cost and the rest<br />
when the project is completed,<br />
Sunteck Realty is asking for 30%<br />
upfront payment.<br />
However, in case of DB Realty, it is<br />
charging about 25% more from the<br />
customers who are opting for such<br />
schemes in projects like Orchid<br />
Crown condominium.<br />
In Karnataka’s capital city,<br />
Bengaluru, most realty developers are<br />
taking the traditional route of<br />
reducing the price to attract buyers.<br />
While at one point of time, an average<br />
2BHK apartment was priced at<br />
around `50-60 lakh, many real estate<br />
developers are offering Villas,<br />
spacious luxury apartments and<br />
Villaments at a price of `50 lakh, `37<br />
lakh and `47 lakh, respectively.<br />
Another way to bring back buyers to<br />
the market is the tried and tested<br />
formula of affordable housing<br />
schemes, launched by developers<br />
such as Jaypee, Wave Infratech and<br />
Tata Housing.<br />
Wave Infratech, which has been<br />
successful in affordable housing<br />
foray, launched affordable housing<br />
project, Wave City in Ghaziabad in<br />
March and has already sold 1,800<br />
units in a month.<br />
Jaypee is offering flats in Greater<br />
Noida at a starting price of `26.5 lakh,<br />
which goes up to `58.4 lakh,<br />
depending on the size of the unit.<br />
Smart Value Homes, a fully owned<br />
subsidiary of Tata Housing, has four<br />
projects in Boisar, Vasind,<br />
Ahmedabad and Bengaluru where it<br />
is offering affordable housing in the<br />
price range of `5 lakh to `35 lakh.<br />
For Eco Village, Supertech’s<br />
affordable venture near Yamuna<br />
Expressway, the price range is<br />
between `30 lakh and `75 lakh.<br />
Surprisingly, despite all the schemes<br />
and price reduction, there is still a<br />
lack of enthusiasm among buyers.<br />
The reason being the deals offered by<br />
developers are not as white as they<br />
appear on paper and there is a general<br />
lack of trust.<br />
Experts believe that the Indian buyer<br />
does not think of buying a property as<br />
an investment.<br />
So, factors like proper pricing, good<br />
16<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
location in relation to workplace<br />
hubs, capital value and immediate<br />
availability come into play.<br />
In subvention, only the bank is safe<br />
because even if the developer stops<br />
payment, the property is already<br />
mortgaged and the buyer has to pay<br />
the rest of the amount.<br />
Sometimes the scheme turns out to be<br />
a ‘ponzi’ scheme. What happens is<br />
that many times a developer launches<br />
a project without even acquiring the<br />
land for it and starts collecting money<br />
from buyers and investors.<br />
Once the developer has collected<br />
enough money, he starts the<br />
paperwork to acquire land.<br />
So there is some truth, when a<br />
developer says the project has been<br />
delayed because of land acquisition or<br />
lack of permission. In some cases, a<br />
developer announces a project and<br />
uses the money he gets from investors<br />
to pay off interest on debt and repay<br />
debt that is maturing.<br />
Now, the developer has no money to<br />
complete the project; so he announces<br />
another project and the money he gets<br />
from this new project is used in the<br />
development of the previous project.<br />
This delays projects and the buyer<br />
does not get possession even after the<br />
period of no-EMI has ended, which<br />
results in him paying the interest to<br />
the bank. This cycle goes on and on.<br />
While affordable housing seems to be<br />
a safe option, it too has its own share<br />
of risk.<br />
The category is loosely defined and as<br />
KPMG-Credai (Confederation of<br />
Real Estate Developer’s Association<br />
of India) suggests that affordable and<br />
low-cost housing are often used<br />
interchangeably in India. But in<br />
reality they are quite different from<br />
each other.<br />
Low-cost housing comprises of bare<br />
minimum and is generally meant for<br />
lower economically weaker sections<br />
of the society, whereas, affordable<br />
housing comprises of community<br />
facilities and services like school,<br />
hospital, etc.<br />
Some developers who use the term<br />
affordable housing in reality are<br />
offering low-cost housing. Also,<br />
many experts believe that when the<br />
market is down, many developers<br />
offer the affordable housing to sell the<br />
project. But when it again starts to<br />
bounce back, they increase the price<br />
by citing value additions to the unit.<br />
There are many profitable deals out<br />
there. But to convert the investment<br />
into successful buying, a thorough<br />
research about the developer and the<br />
project is required. A little luck will<br />
also be an advantagE.<br />
Micro analysis. Mega gains.<br />
<strong>Trading</strong> at Nirmal Bang is based on extensive research and in-depth<br />
analysis, where we focus on the smallest of details and turn them into<br />
an advantage for you.<br />
Over the years, the analytical approach coupled with decades of<br />
experience has helped us maximize returns for our investors and<br />
thereby inspire confidence in them.<br />
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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.<br />
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<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 17
Public sector banks have earned the<br />
wrath of wary investors as their<br />
performance as illustrated by their<br />
quarterly earnings results has been<br />
deplorable and leaves a lot to be desired<br />
The latest quarterly<br />
earnings results have<br />
revealed that although the<br />
banking sector as a whole<br />
reported moderate performance, the<br />
difference in performance between<br />
public and private sector banks is<br />
getting wider.<br />
Public sector banks have over the past<br />
few quarters faced a slowdown in<br />
their revenue growth and their cost<br />
ratios and credit costs have escalated.<br />
Loan growth is a major concern for<br />
public sector banks as its stands at<br />
15% year-on-year (y-o-y) as<br />
compared to 18% growth (y-o-y) in<br />
private banks.<br />
Public sector banks are likely to take a<br />
further beating in the forthcoming<br />
quarters as they have to keep aside a<br />
larger chunk of their capital for<br />
provisioning requirements. This must<br />
be done to improve their coverage for<br />
bad assets or restructured loans.<br />
The fact that public sector banks have<br />
moved from the limelight they used to<br />
attract as behemoths in the system<br />
some time ago is not without reason.<br />
The numbers speak of a gory tale. In<br />
percentage terms, the share of NPAs<br />
to assets has risen to 3.9% in the latest<br />
quarter as compared to 3% about six<br />
months ago.<br />
In comparison, gross non-performing<br />
loans (NPLs) of private banks stands<br />
at 2%. And this story is far from over<br />
as the next leg of impaired loans is<br />
likely to show up very soon as<br />
corporate earnings in the balance<br />
sheets of some large banks show<br />
18<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
adequate stress, which will tell upon<br />
bank’s earnings very soon.<br />
WORRISOME ASSET QUALITY<br />
The asset quality in the books of<br />
public sector banks has been a<br />
standard concern even for banking<br />
and economic authorities in India.<br />
The Finance Ministry too has<br />
imposed stringent norms on these<br />
banks to address this issue.<br />
The Finance Ministry is concerned<br />
for another reason as it has earmarked<br />
2013 as a year when public sector<br />
banks are expected to raise money in<br />
order to meet Basel III requirements.<br />
But this may not be very successful as<br />
long as these public sector banks have<br />
such high quantity of bad assets<br />
sitting on their books. Needless to say,<br />
state-run banks are under pressure to<br />
clean up their books before they can<br />
even attempt to tap public funds.<br />
On the other hand, private sector<br />
banks have impressed with their<br />
performance. Not only are their<br />
non-performing assets (NPAs) under<br />
control, their NIMs or net interest<br />
margins too have been steady. Loan<br />
growth at 18% y-o-y also indicates<br />
that the pace of business has been<br />
good for private sector banks.<br />
The blame cannot entirely lay on<br />
public sector banks as it is largely<br />
thrust upon them to lend to sectors<br />
such as infrastructure, especially<br />
power and energy space that have<br />
been largely troubled. The massive<br />
debt restructuring in these spaces has<br />
hurt the balance sheet of these<br />
state-run banks.<br />
Private sector banks on the other hand<br />
are not under any such compulsion or<br />
pressure and can choose who they can<br />
lend to. The gap in asset quality is<br />
widening now that there is an<br />
imminent slowdown, which is staring<br />
us in the face.<br />
The gap in asset quality between<br />
public and private sector banks is set<br />
to widen even further in the days to<br />
come and this will reflect in the<br />
banks’ credit cycle.<br />
LAGGING BEHIND<br />
It’s not just the asset quality of these<br />
public sector banks but also<br />
business-wise PSBs are trailing<br />
behind their private sector peers.<br />
Loan growth of public sector banks<br />
was at 7.16% up to December ’12, the<br />
growth of private sector banks stood<br />
at 15.18%.<br />
Public sector banks who have burnt<br />
their fingers in the infrastructure<br />
sector are obviously wary of lending<br />
to other sectors for fear of further pile<br />
up of bad assets.<br />
Private sector banks on the other hand<br />
have seen loan growth despite the<br />
cautious approach in a slowdown like<br />
the one we are witnessing presently.<br />
Deposits too have grown at a faster<br />
pace for private sector banks. Private<br />
sector banks have seen a year-to-date<br />
growth of 13.96% where as for public<br />
sector banks it has only been 6.78%.<br />
VALUATION CALL<br />
It is now clearly evident that private<br />
sector banking stocks have been<br />
favoured by investors.<br />
The growth and performance of these<br />
banks has sent their stocks through<br />
the roof and most banking sector<br />
analysts would recommend holding<br />
on to the stocks of private sector<br />
banks for long-term wealth creation.<br />
However, the truth is that the wide<br />
gap between private and public sector<br />
banks is quite evident in valuations,<br />
as well.<br />
While private sector banks are trading<br />
at 3-4 times their book value, public<br />
sector banks are seen trading below 1<br />
time their book value, which makes<br />
these banks pretty attractive<br />
according to valuations.<br />
As an investor one may question the<br />
logic of shopping for PSBs especially<br />
at a time when they are far from<br />
getting their act together, in terms of<br />
cleaning up of bad loans from their<br />
books as well as enhancing their core<br />
business. But there is some merit in<br />
the argument that it may not be a bad<br />
idea to invest in some PSBs.<br />
When the Indian economy improves,<br />
there will be a case for resurgence of<br />
these PSB stocks. Therefore, holding<br />
on to PSBs may prove to be profitable<br />
for investorS.<br />
RAZOR-RAZORBLADE MODEL<br />
A business tactic involving the sale of dependent goods for different prices - one good is sold at a discount, while the<br />
second dependent good is sold at a considerably higher price is known as razor-razorblade model. When one purchases<br />
razors, they are not highly priced. But their replacement blades are comparatively more expensive. The video game<br />
industry is another user of this pricing strategy. They sell game consoles at a relatively low price, recouping lost profits on<br />
high-priced games.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 19
Renewed<br />
Interest<br />
The growing number of<br />
TB cases in India is giving<br />
enough reasons to pharma<br />
companies to focus on<br />
manufacturing and<br />
marketing drugs to treat<br />
this infectious disease<br />
20<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
Nearly 20 lakh people are<br />
affected by tuberculosis<br />
(TB) in India every year.<br />
Of these, 8.7 lakh cases<br />
are infectious in nature. It is estimated<br />
that around 3,30,000 Indians die due<br />
to TB annually, indicating the<br />
seriousness of this deadly disease.<br />
Moreover, as India accounts for<br />
one-fifth of the global TB cases,<br />
WHO India states TB as a major<br />
public health problem in our country.<br />
A number of Indian and multinational<br />
pharmaceutical companies have<br />
anti-tubercular drugs in their<br />
portfolio. However, anti-infectives in<br />
particular have remained a major<br />
therapeutic category of focus for<br />
pharma companies in India.<br />
Only recently has there been a shift<br />
towards non-communicable diseases<br />
(NCDs) by pharma companies. Indian<br />
pharma companies like Lupin,<br />
Macleods Pharma, Cadila and<br />
Wockhardt have an impressive range<br />
of anti-TB drugs in their portfolios.<br />
And among MNCs, Pfizer, Novartis,<br />
Sanofi and Abbott have been<br />
manufacturing, marketing and<br />
researching anti-TB drugs.<br />
This clearly shows the huge demand<br />
for anti-TB drugs. However, their<br />
availability is comparatively limited<br />
in this segment.<br />
Presently, R-Cinex (Isoniazid/<br />
Rifampin, manufactured by Lupin)<br />
and Forecox (Ethambutol and<br />
Isoniazid Ethambutol, manufactured<br />
by Macleods) are two of the most<br />
widely prescribed anti-TB drugs in<br />
the Indian market.<br />
Both these companies have captured<br />
close to 15% of the market share in<br />
India. AKT-4, Combutol, Akurit-4<br />
and Pyzina are the other majorly<br />
prescribed drugs for TB. These four<br />
brands manufactured by Lupin<br />
constitute approximately 20% sales<br />
of anti-TB drugs in the market.<br />
STRATEGIC DESIGN<br />
Despite the presence of numerous<br />
domestic and certain international<br />
pharma firms involved in the<br />
manufacture and marketing of drugs<br />
in the country as well as abroad,<br />
industry experts say that the<br />
Tuberculosis market is not a very<br />
lucrative segment for investments as<br />
it is primarily driven by volumes as<br />
opposed to value.<br />
Commercial feasibility indicates a<br />
much lower RoI as compared to other<br />
non-communicable diseases<br />
segments. Most TB programmes are<br />
driven and regulated by the<br />
government, thus reducing profit<br />
margins further and minimizing<br />
private sector interest.<br />
Even in terms of requirements, TB is<br />
more prevalent in developing and<br />
underdeveloped economies, clearly<br />
demonstrating how the demand for<br />
drugs would be largely confined to<br />
economies where price control is<br />
deliberate and the scope for profits is<br />
much more limited.<br />
The procurement of new drugs that<br />
are still being tested is a fairly<br />
complicated process.<br />
In addition to this, the tuberculosis<br />
bacteria have evolved over the past<br />
four decades. This could be the reason<br />
why Johnson & Johnson’s (J&J’s)<br />
Sirturo drug was approved by the US<br />
Food and Drug Administration (FDA)<br />
under its accelerated approval<br />
programme for orphan drugs, clearing<br />
innovative drugs based on promising<br />
preliminary results.<br />
While the FDA generally requires a<br />
lengthy three-stage testing process<br />
before any approval, Sirturo was<br />
approved just after two periods of<br />
study. The second phase of the testing<br />
process is still going on.<br />
In spite of a few untoward incidents,<br />
the FDA permitted its entry with a<br />
caution. It warned that the drug<br />
carries risks of potentially dangerous<br />
heart problems and should be<br />
prescribed carefully by doctors.<br />
However, the FDA judged the<br />
benefits of accelerated approval<br />
process to outweigh the negative side<br />
effects, especially when the medical<br />
fraternity has been told about the<br />
possible negative side effects,<br />
necessitating due care in the<br />
prescription process.<br />
This is the first TB medication to be<br />
approved in four decades, the FDA<br />
informed. The FDA says that Sirturo<br />
has been approved for use with older<br />
medications for a very hard-to-treat<br />
TB strain that has not responded<br />
properly to other drugs.<br />
The agency added that Sirturo should<br />
be prescribed with caution because it<br />
carried major risks of potentially<br />
lethal heart problems.<br />
TREATMENT METHODS<br />
The treatment of TB usually involves<br />
taking several antibiotic drugs for at<br />
least six months and sometimes for as<br />
long as 12 months. Four of the biggest<br />
high-burden countries - India,<br />
Indonesia, Pakistan, and Philippines -<br />
have a large private sector pharma<br />
presence, capable of producing<br />
enough TB drugs to treat all TB<br />
patients with a full TB drug regimen.<br />
However, the problem arises in the<br />
case of multi drug resistance TB<br />
(MDR-TB) because very few patients<br />
receive MDR-TB treatment and data<br />
reveals that the private sector seems<br />
to be still finding its feet in bridging<br />
the gap.<br />
Drug resistance in tuberculosis is a<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 21
serious problem compromising both<br />
the treatment and control<br />
programmes. Poor usage of the<br />
available anti-TB drugs has led to<br />
progressive drug resistance-multi<br />
drug resistance (MDR), extensively<br />
drug-resistance (XDR) and even total<br />
drug resistance (TDR).<br />
While drug-sensitive TB is<br />
completely curable, MDR-TB is<br />
difficult to treat, XDR and TDR are<br />
often fatal. Non availability of new<br />
drugs to treat drug resistant cases<br />
further complicates the problem.<br />
The treatment of multi drug resistant<br />
TB (MDR TB) is more difficult than<br />
the treatment of drug susceptible TB,<br />
and it requires the use of ‘second line’<br />
or reserve drugs that are more costly,<br />
cause more side effects and have to be<br />
taken for up to two years.<br />
Cure rates for MDR-TB are lower,<br />
typically ranging from around 50% to<br />
70%. The drugs that are used for the<br />
treatment of drug resistant TB are<br />
grouped according to the<br />
effectiveness of the drugs, experience<br />
about their usage and the drug class.<br />
SOCIAL RESPONSIBILITY<br />
According to data available in the<br />
public domain, Lupin has been a trail<br />
blazer and still remains the<br />
undisputed global heavy weight in the<br />
anti-TB drug space. Leave alone<br />
India, where they have close to 50%<br />
market share, as per IMS Health data,<br />
the company is also a global leader in<br />
a drug like Rifampicin where it has<br />
close to 80% market share.<br />
With the highest number of TB cases<br />
in India, a number of domestic<br />
pharma companies are engaged in the<br />
manufacture and marketing of<br />
anti-TB drugs.<br />
Lupin also partners with various<br />
agencies and organizations for their<br />
TB eradication programmes. It<br />
supplies anti-tuberculosis drugs to<br />
many government agencies, the<br />
national TB programme, the Stop TB<br />
Partnership and various other<br />
international agencies.<br />
Lupin is pre-qualified as a preferred<br />
supplier to the Global Drug Facility<br />
(GDF). These formulations are being<br />
supplied to more than 50 countries<br />
through GDF procurement. The<br />
company also supplies to various<br />
international institutions like Pan<br />
America Health Organisation<br />
(PAHO), Medicines Sans Frontier<br />
(MSF) and the Damien Foundation.<br />
The company is now looking at<br />
expanding its offerings in the anti-TB<br />
range to include Active<br />
Pharmaceutical Ingredients (APIs) in<br />
the MDR-TB category. The areas of<br />
MDR-TB and Paediatric TB provide<br />
additional opportunity for the<br />
pharmaceutical company, Lupin to<br />
strengthen its global leadership.<br />
In India, the government has been<br />
implementing the Revised National<br />
Tuberculosis Control Programme<br />
(RNTCP), which is based on the<br />
WHO-recommended DOTS strategy.<br />
Phase II of the RNTCP started in<br />
October ’05.<br />
Since 2006, RNTCP has been<br />
implementing the WHO<br />
recommended Stop TB Strategy,<br />
which in addition to DOTS, addresses<br />
all the newer issues and challenges in<br />
TB control.<br />
RNTCP also offers treatment to<br />
patients with multi drug resistant TB<br />
(MDR-TB) at DOTS-Plus sites. One<br />
of the important activities in this<br />
process is laboratory strengthening<br />
for quality assured culture and drug<br />
susceptibility testing, including the<br />
use of recommended newer<br />
technology for rapid detection of<br />
MDR-TB.<br />
The majority of funding for RNTCP<br />
is through government sources, which<br />
includes a World Bank credit. The<br />
programme is also supported by funds<br />
from donor agencies including DFID<br />
of UK, the Global Fund and USAID.<br />
The Global Drug Facility (GDF)<br />
procures about half of the drug<br />
requirement of RNTCP using funds<br />
from DFID.<br />
CAVEAT EMPTOR<br />
It is a Latin phrase for “let the buyer beware.” The term is primarily used in real property transactions. Essentially, it<br />
proclaims that the buyer must perform due diligence when purchasing an item or service.<br />
In other words, consumers need to know their rights and be vigilant in avoiding scams. For example, in the private<br />
purchase of a used car, caveat emptor places an onus on the buyer to make sure that the car is worth the purchase price.<br />
This is because once the transaction is complete the buyer will not receive a warranty or return option from the seller.<br />
22<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
High disposable incomes<br />
and rising aspirations,<br />
coupled with fiscal<br />
incentives to the housing<br />
sector by the government<br />
and increased investments<br />
in infrastructure and<br />
automobile sectors is<br />
likely to boost the paint<br />
industry in the country<br />
Long ago, branding of paint<br />
companies was less<br />
intense and done quite<br />
infrequently. There are,<br />
however, a few exceptions of paint<br />
companies such as Asian Paints and<br />
Berger Paints India, which continue<br />
to do strong marketing and<br />
advertising of their products.<br />
But things have changed in the last<br />
decade. With increasing incomes and<br />
flourishing businesses, the awareness<br />
about paint companies’ brands has<br />
increased among the masses, thanks<br />
to the strong recall value of<br />
well-thought out commercials.<br />
Despite this, the knowledge and<br />
information of the paint industry is<br />
very inadequate especially when one<br />
takes into account the fact that the<br />
paint industry is expected to grow<br />
almost two times the country’s GDP<br />
in the next five years.<br />
Painting<br />
A Pretty<br />
Picture<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 23
And with experts expecting a<br />
re-rating of the paint industry, it is<br />
quite appropriate to understand the<br />
dynamics that drive the industry.<br />
Because in understanding these<br />
dynamics, one would comprehend the<br />
increasing role paint industry would<br />
play in India’s growth story. Here is a<br />
low-down on India’s paints industry.<br />
THE INDUSTRY<br />
At present 35% of India’s paint<br />
market is controlled by the<br />
unorganized part of the industry,<br />
while a majority 65% is controlled by<br />
the organized sector. It is estimated<br />
that there are about 2,000 units, which<br />
have small and medium sized<br />
manufacturing plants.<br />
In the organized part of the industry,<br />
there are players such as Asian Paints,<br />
Kansai Nerolac, Berger Paints and<br />
ICI. Interestingly, these players have<br />
been able to dominate the industry<br />
due to some strong barriers of entry<br />
for new players. These barriers<br />
include distribution network, working<br />
capital efficiency and technology.<br />
Besides, any new player has to face<br />
the challenge of bargaining power of<br />
suppliers and high availability of<br />
choices in the form of<br />
long-established players.<br />
These factors present strong<br />
competition to any new player,<br />
making it tough for a new entrant to<br />
establish its presence strongly and<br />
penetrate deeply. It is observed that<br />
companies in the organized part of the<br />
sector focus on brand building and<br />
these companies develop new<br />
products with a bit of differentiation<br />
and charge these products higher than<br />
their unorganized peers.<br />
India’s paint industry is mostly raw<br />
material-intensive with strong<br />
co-relation to international<br />
demand-supply situation. Typically,<br />
price fluctuations in pigments such as<br />
titanium dioxide and solvents and<br />
crude derivatives impact domestic<br />
production costs of paint and its<br />
related products.<br />
It is estimated that production cost of<br />
paint industry is highly susceptible to<br />
crude oil prices since 60% to 65% of<br />
ingredients used in the paint industry<br />
are based on oil and crude derivatives.<br />
Besides, nearly 30% to 35% of raw<br />
materials used in the paint industry<br />
are imported, indicating that costs are<br />
susceptible to currency fluctuations.<br />
At present, due to increase in global<br />
capacity and adequate supply, prices<br />
of titanium dioxide and other raw<br />
materials have come down.<br />
It is estimated that softening of raw<br />
material costs would help paint<br />
companies in enhancing their gross<br />
operating margins by 100-150 bps in<br />
the next couple of years.<br />
THE BASICS<br />
In the last five years ending FY12,<br />
India’s paint industry has grown at a<br />
compound annual growth rate<br />
(CAGR) of 15% in FY12. Economic<br />
growth, rural and urban development,<br />
changing lifestyles and rising<br />
aspirations have contributed to the<br />
growth of the paint industry.<br />
It is estimated that paint volumes<br />
have increased and volumes have<br />
been closely related with GDP growth<br />
rate. And experts estimate that paint<br />
volumes have grown on an average<br />
2.1 times the GDP.<br />
Going ahead, with enhancement in<br />
individual lifestyles and aspirations,<br />
India’s paint industry is expected to<br />
grow at a CAGR of 15% for the next<br />
three years to be an industry of around<br />
`44,300 crore by FY15E.<br />
The paint industry can be divided into<br />
two parts. One is decorative paints,<br />
the other is industrial paints.<br />
Decorative paints has 77% market<br />
share, while industrial paints form the<br />
remaining 23% of market share of the<br />
paint industry.<br />
At present, emulsion constitutes a<br />
majority share of decorative paints.<br />
Besides, it is the fastest growing<br />
segment of the paint industry. The<br />
growth of India’s paint industry is<br />
coming from new pockets - primarily<br />
from tier-II and tier-III cities<br />
indicating the increasing acceptance<br />
of branded paint products. This also<br />
indicates a shift in the demand from<br />
unorganized players to organized<br />
players. This has also shifted the<br />
focus of demand to premium paint<br />
segment - emulsion category from<br />
‘distemper and primer’ category.<br />
At present, the supply in the industry<br />
exceeds demand both in decorative<br />
and industrial paints segments. The<br />
demand for decorative paints hinges<br />
on the housing sector and adequate<br />
monsoon, while the demand for<br />
industrial paints is connected to user<br />
industries like auto, engineering and<br />
consumer durables.<br />
a) Decoratives<br />
The decoratives segment includes<br />
exterior and interior wall paints,<br />
wood finishes, enamel and ancillary<br />
products such as primer and putties.<br />
At present, it is estimated that<br />
decorative paints account for over<br />
77.3% of the overall paint market in<br />
India. Asian Paints is the market<br />
leader in this segment.<br />
A substantial portion of decorative<br />
paints arises from household painting,<br />
architectural and other display<br />
purposes. The peak business period<br />
for decorative paints is during the<br />
festive season from September to<br />
December. The prices are high in this<br />
period and hence, it is a high margin<br />
business for paint companies.<br />
24<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
) Industrial<br />
The industrial segment of the paint<br />
industry includes automotive<br />
coatings, powder coatings and<br />
protective coatings. Kansai Nerolac is<br />
the market leader in this segment.<br />
This segment caters to sectors such as<br />
automobile engineering and<br />
consumer durables.<br />
In terms of business, the industrial<br />
paint segment is more technologically<br />
intensive than the decorative<br />
segment. With increasing investments<br />
in infrastructure from the government<br />
and private entities, these two<br />
segments are expected to do well in<br />
the coming quarters.<br />
GOING AHEAD<br />
As regards the two segments, the<br />
decorative segment is expected to<br />
show high growth owing to fiscal<br />
incentives by the government to the<br />
housing sector. This should benefit<br />
long-established players immensely.<br />
Besides, the demand for industrial<br />
paints is expected to increase given<br />
the increasing investments in<br />
infrastructure and automobile sectors.<br />
The demand for industrial paints<br />
would also be boosted by domestic<br />
and global automotive companies’<br />
expansion plans. This works well for<br />
paint manufacturers like Kansai<br />
Nerolac and Asian-PPG.<br />
Experts believe that increased<br />
industrial paint demand, especially<br />
powder coatings and high<br />
performance coatings will also<br />
enhance revenue growth of paint<br />
majors in the medium term.<br />
In the coming quarters, with changing<br />
business dynamics, from business to<br />
business (B2B) to business to<br />
consumers (B2C) has worked in<br />
favour of organized players.<br />
These players’ aggressive marketing<br />
initiatives, which include allowing<br />
customers to participate in the paint<br />
selection process, creating awareness<br />
about product differentiating features<br />
like zero volatile organic compound<br />
(VOC), and low VOC, have gone<br />
down well with customers.<br />
Apart from this, these companies<br />
have also developed concept stores<br />
like ‘Colour World, Impression<br />
Stores, Kids World’ for customers to<br />
touch and feel ‘textures, designs,<br />
glow and Disney themes’, unique<br />
professional services of product<br />
consultancy as well as colour<br />
consultancy through ‘home solutions<br />
and home stylers.’<br />
Interactive call centre and simulation<br />
software-based websites have<br />
garnered huge customer acceptance in<br />
recent years. These initiatives should<br />
give paint companies strong business<br />
opportunities in tier-II and tier-III<br />
cities, which will provide a huge bank<br />
of customers who have high<br />
aspirations to enhance their lifestyles<br />
and live life at a level comparable to<br />
posh urban citieS.<br />
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<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 25
Insignificant growth in passenger traffic<br />
has marred the prospects of airline<br />
companies. According to the website of<br />
the Directorate General of Civil Aviation<br />
(DGCA), in the last four months ending April<br />
there has been a decline of 0.35% in passenger<br />
traffic to 2 crore in comparison with the same<br />
period last year.<br />
This has resulted in stiff competition with most<br />
players resorting to introducing discounts in<br />
tickets for immediate and future travels. As a<br />
result of this, there has been pressure on yields of<br />
a number of airline companies as well as subdued<br />
growth in revenues.<br />
However, to compensate the fall in passenger<br />
traffic, airline companies have not resorted to<br />
price wars this time around. These companies are<br />
focusing on ancillary revenues.<br />
A case in point is the increasing charges for<br />
check-in of baggage depending on its weight.<br />
Such small sources of revenues are known as<br />
ancillary revenues. It is estimated that ancillary<br />
revenues have added meaningful growth to the<br />
topline of most airlines across the globe.<br />
EXPLORING<br />
NEWER<br />
OPTIONS<br />
Airline companies are<br />
tapping ancillary revenues<br />
to offset the fall in<br />
passenger traffic in tough<br />
times that have beset the<br />
industry of late<br />
26<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
Hence, one cannot ignore these<br />
revenues. This time we present to you<br />
the emergence of ancillary revenues<br />
and how going ahead, it is going to<br />
ensure consistent flow of revenues<br />
through various sources even in times<br />
of weak passenger traffic.<br />
<br />
Ancillary revenues are revenues,<br />
which airline companies make<br />
through sources other than the sale of<br />
tickets. This can be through baggage<br />
fees, food as well as other<br />
requirements on flights.<br />
Basically, ancillary revenues can be<br />
classified as revenues which airline<br />
companies earn beyond the sale of<br />
tickets in the overall travel experience<br />
of a passenger.<br />
Most low-cost carriers in Europe and<br />
the United States have skillfully<br />
employed this concept to create a<br />
crucial component of their toplines.<br />
According to various sources,<br />
ancillary revenues have been<br />
classified into categories such as à la<br />
carte features, commission-based<br />
products and frequent flier activities.<br />
One of the earliest proponents of<br />
ancillary revenues was Europe’s<br />
low-cost airline company Ryanair. It<br />
has been observed that Ryanair<br />
charged pay-per-view entertainment,<br />
onboard shopping, internet gaming,<br />
car hire and hotel bookings. These<br />
revenues formed a meaningful and<br />
significant portion of the airline<br />
company’s total revenues.<br />
One of the chief reasons for the<br />
emergence of ancillary revenues in<br />
airline companies’ total revenues is<br />
the realization of limitations of the<br />
price war strategy.<br />
For instance, if a country has four<br />
airlines, it is quite natural that the<br />
fourth player would find it difficult to<br />
emulate and sustain the price war<br />
strategy followed by its three peers.<br />
Hence, the fourth player has to come<br />
out with a strategy to outdo its peers<br />
and in the process also make money.<br />
The increasing revenues from<br />
Ryanair benefited the company and it<br />
has also convinced other airlines to<br />
emulate Ryanair. This put the seeds of<br />
the growing importance of ancillary<br />
revenues. Slowly it became an<br />
industry trend.<br />
Another reason for this huge<br />
acceptance of ancillary revenues is<br />
the cyclical nature of the airline<br />
industry. Strong dependence on crude<br />
oil prices, erratic passenger traffic and<br />
overall business and political<br />
environment make business for<br />
airline companies cyclical.<br />
Hence, having a meaningful portion<br />
of total revenues from sources other<br />
than the sale of tickets helps airline<br />
companies to reduce their dependence<br />
on these factors.<br />
A STUDY<br />
According to a study published by<br />
Amadeus and IdeaWorks, it was<br />
estimated that airline companies’<br />
ancillary revenues would increase to<br />
$22.6 billion in 2010 from $13.5<br />
billion in 2009, a growth of 67%.<br />
In 2009, it has been estimated that in<br />
the United States, the contribution of<br />
ancillary revenues to the total<br />
revenues of most airline companies<br />
was in the range of 22% to 30%.<br />
The study divided airlines into four<br />
categories based on their ability to<br />
generate ancillary revenues. These<br />
categories are:<br />
<br />
This category represents a catch-all<br />
for the largest number of airline<br />
carriers. The ancillary revenue<br />
activity for airlines may consist of<br />
fees associated with excess or heavy<br />
bags and limited partner activity for a<br />
frequent flier programme.<br />
The average percentage of revenue<br />
remained at 2.9%. Examples include<br />
Air Canada, Air New Zealand, Copa,<br />
Etihad, Finnair and also South<br />
African Airways.<br />
<br />
US-based majors generate strong<br />
ancillary revenue through a<br />
combination of frequent flier revenue<br />
and baggage fees.<br />
The percentage of revenue for this<br />
group was 10.1%, which is a drop<br />
from the 2011 rate of 11.9%.<br />
Examples include Alaska, American<br />
and United.<br />
<br />
These carriers generate the highest<br />
activity as a percentage of operating<br />
revenue. The percentage of revenue<br />
achieved by this group was 19.7%,<br />
which is down slightly from 19.8%<br />
for the year 2011. Examples include<br />
AirAsia, Allegiant Air, easyJet and<br />
Spirit Airlines.<br />
<br />
LCCs throughout the world typically<br />
rely upon a mix of à la carte fees to<br />
generate good levels of ancillary<br />
revenue. The percentage of revenue<br />
for this group was 7.2% and is above<br />
last year’s 6.5%. Examples include<br />
Jazeera Airways, JetBlue, Norwegian,<br />
Pegasus, Southwest and GOL.<br />
It was found that ancillary revenue<br />
would reach $36.1 billion worldwide<br />
in 2012. The study took into account a<br />
large list of 176 airlines. The study<br />
found that the US airline category<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 27
produces a significant share of global<br />
ancillary revenue. It estimated that<br />
around $12.4 billion result (34.3% of<br />
the global total) is generated by just<br />
six airlines: Alaska Airlines,<br />
American, Delta, Hawaiian, United,<br />
and the US Airways.<br />
The joint study by Amadeus and<br />
IdeaWorks Company observed that a<br />
majority of ancillary revenue for<br />
major US airlines is generated by the<br />
sale of frequent flier miles notably<br />
those linked to airline credit cards.<br />
This financial activity exceeds $6<br />
billion annually in the US alone.<br />
Baggage fees for US carriers<br />
represent approximately 20% of their<br />
ancillary receipts. The remaining<br />
revenue for airlines is produced by an<br />
array of à la carte as well as<br />
commission-based products.<br />
Other sources include onboard sale of<br />
food, beverages, wifi and<br />
commissions from hotel bookings. In<br />
addition, airlines offer an<br />
ever-increasing selection of services<br />
that add to traveller convenience such<br />
as priority security screening, early<br />
boarding, exit row seat assignments<br />
and single visit access to lounges at<br />
the airports.<br />
Interestingly, the study makes an<br />
interesting point as regards the future<br />
trend of ancillary revenues.<br />
It says, “The current situation has<br />
made ancillary revenue more<br />
attractive and needed, for airlines all<br />
over the world. If airlines were to<br />
forego the revenue contribution from<br />
the provision of ancillary services, it<br />
would mean a loss for a great number.<br />
Ancillary revenue provides good<br />
amount of cash to buy new aircraft<br />
interiors, invest in new equipment<br />
and provide funds for expansion.”<br />
GOING AHEAD...<br />
Going ahead, the trend of weak<br />
passenger traffic is expected to<br />
continue given the economic<br />
slowdown and expectation of high<br />
crude oil prices. Considering these<br />
factors, ancillary revenues should<br />
compensate for the loss of revenues<br />
due to weak passenger traffic and<br />
high expenditure. It is estimated that<br />
India’s airline companies earn 3% to<br />
5% of the total revenue from ancillary<br />
services alone.<br />
Experts are of the opinion that airline<br />
companies can enhance this<br />
contribution in the range of 6% to 8%<br />
in the coming quarters.<br />
In the Indian context, though the size<br />
of ancillary revenues would not be as<br />
big as their western counterparts, yet<br />
it forms a meaningful portion of the<br />
total revenues.<br />
Jet Airways plans to double its<br />
ancillary income to 10% in the next<br />
two years, Air India plans to sell<br />
meals on board like budget carriers,<br />
providing choice to customers to save<br />
some amount on ticket charges.<br />
In a good business season, this rate<br />
can fetch the company anywhere<br />
between `125 crore and `200 crore.<br />
Industry sources say that budget<br />
carrier IndiGo has over 6% income<br />
from ancillary services and the airline<br />
is consistently taking new steps to<br />
increase the share of ancillary<br />
revenues in the coming quarterS.<br />
CHINESE WALL<br />
It is the ethical barrier between different divisions of a financial (or other) institution(s) to avoid conflict of interest. A<br />
Chinese Wall is said to exist, for example, between the corporate-advisory area and the broking department of a financial<br />
services organization to separate those giving corporate advice on company takeovers from those advising clients about<br />
buying shares.<br />
The “wall” is thrown up to prevent leaks of corporate inside information, which could influence the advice given to clients<br />
making investments and allow staff to take advantage of facts that are not yet known to the general public.<br />
Maintaining client confidentiality is crucial to any firm, particularly large multiservice businesses. Where firms are<br />
providing a wide range of services, clients must be able to trust that the information about themselves will not be exploited<br />
for the benefit of other clients with different interests. And that means clients must be able to trust in Chinese Walls.<br />
Some Wall Street scandals in recent years, have made some people doubt the effectiveness of Chinese Walls, as<br />
well-placed executives of respectable firms have traded illegally on inside information for their own benefit.<br />
28<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
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G<br />
old prices have rallied<br />
from $300/ounce to<br />
$1,900/ounce in the last<br />
13 years. And the yellow<br />
metal has outperformed most asset<br />
classes in the last five years.<br />
Traditionally, buying gold is<br />
considered to be an auspicious form<br />
of investment in India.<br />
In the past five years, gold has<br />
generated a tremendous amount of<br />
wealth (which is still notional as most<br />
people have not booked their profits)<br />
for millions in the country.<br />
In India, especially in rural areas<br />
where awareness about other<br />
financial instruments is very low, gold<br />
is still one of most preferred<br />
investments after land.<br />
In the last decade no one has seen any<br />
bear market in gold and there is a<br />
notion amongst a majority of Indians<br />
that gold prices will continue to<br />
The yellow metal’s<br />
golden run seems to<br />
be over and investors<br />
can expect the price of<br />
gold to plummet<br />
further during the<br />
course of the year<br />
appreciate. But they must be aware of<br />
the scenario when real interest rates<br />
start picking up or even the<br />
expectation of real rates shooting up,<br />
gold prices correct sharply.<br />
For more than 20 years – from 1981<br />
to 2000 – there was a bear market in<br />
gold, with real rates moving up in the<br />
US. And a decade before that, gold<br />
prices shot up from 1971 to 1980,<br />
with a regime of negative real rates<br />
that continued during this period.<br />
Either the retailers are not aware of<br />
these statistics or they are ignoring it.<br />
In the last two months we have seen a<br />
significant correction in the prices of<br />
gold. It was followed by a sharp pull<br />
30<br />
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ack owing to strong physical<br />
demand from India and China.<br />
We believe more than physical<br />
demand it is other factors such as the<br />
US dollar outlook going forward,<br />
interest rate expectations, investment<br />
demand, additional quantitative<br />
easing programme or withdrawal of<br />
the same and various other macro<br />
factors that are more important in<br />
determining the outlook of gold.<br />
Interestingly, despite massive<br />
liquidity infusion drives by the central<br />
bankers, inflation and inflationary<br />
expectations remain subdued.<br />
Moreover, in spite of rising money<br />
supply and negative rate regime, gold<br />
prices corrected, raised doubts in the<br />
minds of many and created ambiguity<br />
among gold bulls.<br />
The fact is that the global economy is<br />
actually overcoming a rough patch<br />
and showing signs of stability. There<br />
is more than one evidence which<br />
points to the fact that in spite certain<br />
bitter spots, the global economy is<br />
continuing to recover.<br />
The US economy is showing<br />
significant strength since the start of<br />
the year and most economic<br />
indicators are pointing towards<br />
sustainable recovery.<br />
Even the dollar index has been<br />
moving up. During the current quarter<br />
or the one after that, we may see the<br />
Federal Reserve reducing the pace of<br />
its bond purchase programme and<br />
stop it later on.<br />
We have never witnessed such huge<br />
unconventional programmes in<br />
history. Therefore, there is a lot of<br />
ambiguity about what will happen<br />
after the tapering off of the bond<br />
purchase programme or its end.<br />
But in both the scenarios, we are of<br />
the view that prices of the yellow<br />
metal are likely to correct. This means<br />
that if the economy continues to<br />
improve, only then will the bond<br />
purchase programme end and gold<br />
prices will drop.<br />
There has been major redemption in<br />
gold ETFs. Since the start of the year,<br />
we have been observing a moderate<br />
growth in ETFs and investment<br />
demand is likely to remain lacklustre,<br />
going forward.<br />
The 10-year US bond yield has been<br />
moving up from 1.80 to 2.00 since the<br />
last two quarters and is likely to shoot<br />
up further to test 2.25 – 2.30, thus<br />
reducing the appeal of gold, the safe<br />
haven instrument.<br />
The biggest lesson this crisis has<br />
taught us is that in spite of gold’s safe<br />
haven status, investing in it does not<br />
lead to economic growth.<br />
Investing in gold has never led to<br />
economic growth and never will.<br />
Hence, all your gold investments will<br />
neither lead to economic growth nor<br />
will they give you any returns until<br />
you sell them.<br />
Therefore, the strong physical<br />
demand from Asia seen recently will<br />
not be enough for gold prices to move<br />
up. It cannot bring any sustainable<br />
rally in gold.<br />
We believe the yellow metal’s golden<br />
run is over and during the course of<br />
the year the price of gold will keep<br />
drifting lower. Yet, there is euphoria<br />
among people to buy gold in India.<br />
This is a classic example of an asset<br />
bubble burst. But people are still not<br />
realizing it.<br />
AN AFFAIR WITH GOLD IS<br />
COSTING A LOT TO OUR<br />
NATION<br />
Gold’s share in India’s total import<br />
bill has risen from 8% in 2001-02 to<br />
almost 12% in 2011-2012, in value<br />
terms from $4.17 billion to $56<br />
billion during the same period.<br />
Last month when gold prices dropped<br />
sharply, the frenzy to buy gold was<br />
quite evident and there were long<br />
queues at jewellery stores across the<br />
country to buy gold.<br />
Premiums in the spot market shot up<br />
and the country’s gold imports rose<br />
138% to about $7.5 billion, which is<br />
one of the main reasons as to why<br />
India’s trade deficit worsened to<br />
$17.8 billion in April from $10.3<br />
billion in March this year. And in<br />
spite of good inflows, rupee moved<br />
up from 54.5 to 57, which breeds<br />
inflation, going forward.<br />
Everything we import has been 5.5%<br />
more expensive in the last two<br />
months due to weakness in the Indian<br />
rupee, which eventually will lead to<br />
tighter monetary policies by the<br />
Indian central bank, hurting growth<br />
prospects of our country.<br />
Our love for gold has become a major<br />
cause of concern for the Indian<br />
government as all efforts so far to<br />
curb gold imports have failed and<br />
imports in the yellow metal continue<br />
to remain robust.<br />
Investing in gold has not led to<br />
economic growth and never will. If<br />
our gold imports drop by 20% to<br />
25%, which roughly comes to $11<br />
billion to $16 billion, and this amount<br />
is diverted into the real economy, then<br />
it will boost the economy and reduce<br />
our trade deficit dramatically. Hence,<br />
it will have a dual advantage.<br />
The time has come for Indians to<br />
break-up their affair with gold to<br />
reduce the country’s current account<br />
deficit and to protect the people from<br />
losses in an event where gold prices<br />
drop sharply in the months to comE.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 31
Taking Stock And<br />
DECLUTTERING<br />
Although it is advisable to invest a portion of one’s portfolio<br />
in mutual funds, timely overhaul of this asset class is<br />
important to keep your investments healthy<br />
Although mutual funds<br />
(MFs) form a huge<br />
chunk of our investment<br />
corpus, most of us<br />
hardly ever dabble in them or keep<br />
track of them as religiously as we<br />
would of direct equities.<br />
We treat mutual funds almost as a<br />
fixed investment instrument and,<br />
therefore, miss out on booking profits<br />
or getting out of the fund when the<br />
losses are still small.<br />
This may be because:<br />
1. Most of us feel that mutual funds<br />
are a relatively safer investment than<br />
stocks and, hence, we would not lose<br />
as much as we would with direct<br />
stocks and still maintain a good<br />
equity exposure.<br />
2. Keeping track of mutual fund NAV<br />
is not as easy as tracking stock rates,<br />
which are constantly flashing on TV,<br />
newspapers and readily available with<br />
brokers. Mutual fund tracking needs<br />
some effort.<br />
3. Individuals often invest in mutual<br />
funds since they are regarded as a<br />
tax-saving instrument instead of an<br />
investment instrument and, hence, it<br />
has a compulsory lock-in before<br />
which we cannot sell. And even after<br />
the lock-in period is over, we<br />
completely forget about it.<br />
4. Many of us have ongoing SIPs in<br />
mutual funds and, hence, we feel that<br />
whatever be the markets, in the long<br />
run we will definitely make money<br />
due to rupee cost averaging.<br />
5. Most of us do not bother to find out<br />
the exact portfolio or weightages of<br />
the various stocks in a mutual fund<br />
scheme and, therefore, are not able to<br />
take decisions.<br />
Buying a mutual fund is a relatively<br />
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easy affair done either during the New<br />
Fund Offer (NFO) or finding the best<br />
existing mutual fund schemes based<br />
on the previous track record, dividend<br />
history and stock portfolio analysis.<br />
Selling, on the other hand, is a new<br />
ball game altogether. Selling is<br />
referred to as ‘redemption’ in mutual<br />
fund parlance.<br />
Let us understand why, when and how<br />
investors can sell their respective<br />
mutual fund holdings.<br />
INTERNAL/PERSONAL<br />
REASONS<br />
Need For Funds<br />
This would be the prime reason for<br />
redeeming your mutual funds. Say<br />
there is an emergency in the family or<br />
you need some additional cash to buy<br />
a house or a car.<br />
In such a scenario, it would always be<br />
better to fund your needs through<br />
your own corpus instead of borrowing<br />
money on high interest rates.<br />
Levels Hit<br />
Like in stocks, you should exit if your<br />
mutual fund hits your target returns.<br />
Say, if you had aimed for a 70%<br />
return from your mutual fund in a<br />
three-year period and your fund gave<br />
a 75% return in one-and-a-half years<br />
itself, then you can redeem your<br />
mutual fund schemes.<br />
Similarly, if your stop loss level is hit,<br />
you should exit. For example, if you<br />
have bought a mutual fund at an NAV<br />
of `10 and 40% to 45% is the<br />
maximum loss that you can bear, then<br />
you should exit at an NAV of 6 or<br />
maximum of 5.50.<br />
Growth In Confidence<br />
Many first time stock market entrants<br />
enter through the mutual fund route<br />
because of lack of knowledge, time,<br />
and research. And this is the right way<br />
to do.<br />
But over a period of time, many of<br />
them develop the expertise of picking<br />
up quality stocks, achieving adequate<br />
diversification and consistently<br />
outperforming the index and, hence,<br />
prefer to redeem their MFs and invest<br />
directly in equities.<br />
Portfolio Rebalancing<br />
With time, our risks, goals and<br />
priorities change drastically. For<br />
example, as you near your retirement,<br />
your goal is more about capital<br />
protection with moderate returns and<br />
low risk.<br />
So, you would do well to sell some of<br />
your equity-oriented mutual funds<br />
and shift to some other mutual funds<br />
which have lower equity exposure<br />
and more debt and fixed income<br />
exposure. Also, some of this<br />
redeemed amount can be invested in<br />
other asset classes such as bank FDs,<br />
bonds, gold, etc.<br />
Downsizing<br />
Many times, an investor bites more<br />
than he can chew. That is, he<br />
accumulates far more mutual funds in<br />
his kitty than he can effectively<br />
monitor and manage.<br />
The first sign of this is when you<br />
cannot recollect the names of a<br />
number of mutual fund schemes from<br />
your own portfolio. The best thing is<br />
to redeem a few of the funds that have<br />
consistently performed badly.<br />
Instead, they should keep just 4 to 5<br />
better performing mutual fund<br />
schemes in their portfolio. These<br />
funds should have diverse objectives<br />
such as equity-oriented index funds,<br />
monthly income funds, FMPs, debt<br />
funds, etc.<br />
Gut feeling<br />
If you have a negative personal view<br />
about the markets or certain sectors<br />
on which your mutual fund has some<br />
amount of exposure and you want to<br />
get out before it can impact your<br />
returns, then it is time to trust your gut<br />
and get out.<br />
EXTERNAL REASONS<br />
Consistent Underperformance<br />
Consistent underperformance of a<br />
scheme is the most important factor to<br />
consider when selling your mutual<br />
funds. For this, compare the fund with<br />
the benchmark index or peer group<br />
mutual funds.<br />
If you notice that while most peer<br />
funds have given returns of 20% to<br />
25% in a 1- to 3-year period and your<br />
fund has given a mere 5% return or if<br />
peers have shown an average loss of<br />
10% to 12%, whereas your mutual<br />
fund has shown a loss of 24%, please<br />
exit the fund.<br />
To cement your decision, check if the<br />
underperformance is consistent for a<br />
number of years and not just a one-off<br />
event. If it is so, then simply get rid of<br />
such a laggard.<br />
Change In Fund Structure<br />
The original objective of holding<br />
value-oriented stocks are slowly<br />
being replaced by focus on growthoriented<br />
stocks. Even the low beta<br />
ones are being replaced by high beta<br />
stocks. Also the original weightages<br />
given to the stocks in the portfolio<br />
may be seeing a change.<br />
For example, the weightages of<br />
sectors like fast moving consumer<br />
goods (FMCG) as well as capital<br />
goods is reduced and exposure to<br />
rate-sensitive sectors such as banks,<br />
autos, etc, is increased.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 33
Although this may yield good returns,<br />
if it does not suit your investment<br />
style, you should exit.<br />
Change In Fund Manager<br />
How can you explain the difference in<br />
performance and returns of two<br />
purely pharma or IT focussed funds?<br />
It is the expertise and efficiency of the<br />
fund manager in picking out the<br />
winners and constantly getting rid of<br />
the laggards.<br />
Many of us invest in a mutual fund<br />
solely on the basis of the name of the<br />
fund manager with a proven stellar<br />
past track record.<br />
And if mid-way, the fund manager of<br />
that fund changes, then you might be<br />
sceptical of the new manager and,<br />
hence, opt to sell the fund. Yet, it<br />
would be prudent to wait for a while<br />
and give the new fund manager time<br />
to prove his worth.<br />
Change In Fund Size<br />
If a fund becomes too large, then it<br />
can become difficult for the fund<br />
manager to manage it effectively.<br />
This is not as much apparent in<br />
large-cap focussed funds as on funds<br />
with mid- and small-cap focus where<br />
liquidity is less, risk is more, and<br />
buying and selling of huge quantities<br />
becomes problematic.<br />
Congruency<br />
Sometimes funds or schemes from the<br />
same fund house or from the same<br />
fund manger have similar stocks in<br />
their portfolios.<br />
In such a case, it does not make sense<br />
to hold multiple funds with same<br />
stocks in your portfolio, because you<br />
are not adequately diversifying and it<br />
is best to keep only one such fund in<br />
your kitty.<br />
DIFFERENT WAYS TO SELL<br />
YOUR MUTUAL FUNDS<br />
Clear The Cobwebs<br />
If you have a number of mutual funds<br />
in your portfolio, it is always<br />
advisable to sell off the laggards and<br />
gross underperformers first. They<br />
bring down the overall returns<br />
achieved by the better performing<br />
funds as well.<br />
Free Your Holdings<br />
If you are sitting on a profit, you can<br />
sell those number of units which will<br />
recover your initial capital invested,<br />
and you can stay invested in the<br />
remaining units. This way you will<br />
not risk losing your base capital<br />
during a downturn.<br />
Over a period of time, if you practice<br />
this religiously you might end up with<br />
a portfolio consisting purely of free<br />
units with no investment corpus from<br />
your side.<br />
SWP (Systematic Withdrawal<br />
Plan)<br />
We all know about SIP or Systematic<br />
Investment Plan. SWP or Systematic<br />
Withdrawal Plan on the other hand, is<br />
the exact opposite of SIP.<br />
While in an SIP you are investing a<br />
fixed amount at fixed intervals, in an<br />
SWP, you are systematically<br />
withdrawing fixed amounts at fixed<br />
intervals from your mutual fund. It<br />
can act as a secondary regular, fixed<br />
income source for you.<br />
STP (Systematic Transfer Plan)<br />
The Systematic Transfer Plan (STP)<br />
is a type of portfolio rebalancing and<br />
asset reallocating tool.<br />
In an STP, you withdraw fixed<br />
amounts from an existing scheme of a<br />
mutual fund and invest that amount in<br />
a different scheme.<br />
For example, if you feel that equity<br />
markets have reached a peak and a<br />
fall is very much on the cards, but at<br />
the same time you do not want to get<br />
out of equities completely as you do<br />
not want to be left out if there is a<br />
further rise in the stock, here is what<br />
you can do.<br />
You can start a systematic transfer<br />
plan, whereby a fixed amount will be<br />
transferred from your equity–oriented<br />
scheme to a debt-oriented scheme at<br />
regular intervals.<br />
This way, you will not only add a debt<br />
component to your existing portfolio,<br />
but also will continue maintaining a<br />
fair degree of equity exposure to<br />
benefit if the stock markets are seen<br />
rising any further.<br />
DTP or Dividend Transfer Plan<br />
This too is a type of portfolio<br />
rebalancing tool. Here the dividend<br />
that is given out by a scheme is<br />
withdrawn and invested as an SIP in a<br />
different scheme.<br />
Therefore, instead of reinvesting that<br />
dividend in the same scheme and risk<br />
losing that dividend in case of a fall in<br />
that fund, the dividend is invested in a<br />
different scheme with a different<br />
theme, such as debt, index, MIP, etc.<br />
So while your investment corpus in<br />
the base scheme remains intact, you<br />
now have a whole new mutual fund<br />
scheme in your portfolio without<br />
having to make a fresh investment.<br />
Remember mutual fund investments<br />
should ideally be done with a<br />
long-term time horizon and an<br />
investor should not sell the mutual<br />
fund units merely by looking at the<br />
ups and downs faced by the stocks<br />
markets alonE.<br />
34<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
NOW IS THE TIME<br />
In a falling interest rate scenario, investors should consider<br />
long-term debt funds as they are likely to give good returns<br />
over a period of time<br />
In the past few years, several<br />
investors have managed to<br />
generate decent returns by<br />
investing in products such as<br />
bank fixed deposits (FDs) and Fixed<br />
Maturity Plans (FMPs).<br />
But now things are changing for the<br />
better with interest rates set to come<br />
down as inflation along with<br />
commodity prices is plummeting,<br />
which might ease fiscal deficit and in<br />
turn lead to the much needed cut in<br />
interest rates.<br />
But we are not aware of the quantum<br />
of the rate cut and the outcome of the<br />
monetary policies of the Reserve<br />
Bank of India (RBI). We have already<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 35
seen few rate cuts in the past and<br />
market participants in general are<br />
expecting a further decline in interest<br />
rates in 2013-14.<br />
So what should investors do when<br />
equity markets turn volatile and<br />
returns of bank FDs start heading<br />
southwards? In a scenario where<br />
interest rates are likely to come down,<br />
investors should have a decent<br />
exposure to long-term debt fund<br />
products such as income funds or<br />
bond funds.<br />
Long-term debt funds include income<br />
funds and gilt funds. Income funds<br />
invest in long duration papers of<br />
government securities and debt<br />
instruments issued by corporates.<br />
Such papers or securities can be as<br />
low as one to three years and can even<br />
go up to 20 years.<br />
Gilt funds on the other hand invest<br />
only in long-term government<br />
securities, which are issued by the<br />
central government as well as the<br />
state government.<br />
First let us try and understand why<br />
interest rate is such a critical aspect<br />
for returns in debt mutual funds. It is a<br />
thumb rule that interest rates are<br />
inversely related to bond prices,<br />
which means that bond prices rise<br />
when interest rates fall and vice versa.<br />
But many investors are curious to<br />
know how it functions in the real<br />
sense and how interest paid on any<br />
bond or securities is fixed. This is<br />
what actually happens, as most<br />
changes takes place only during the<br />
fall or rise of interest rates.<br />
Say a fund manager buys a bond<br />
maturing after 10 years and pays out<br />
interest of 9.5% per annum. In such a<br />
scenario when interest rates fall,<br />
newer bonds are sold at 8.5%, which<br />
results in the old bond having more<br />
value than the new one.<br />
So fund managers hold longer<br />
duration bonds as they can easily<br />
make profits by selling such bonds in<br />
a falling interest rate scenario.<br />
Hence, net asset value (NAV) of any<br />
debt fund replicates prices of<br />
underlying securities (in this case<br />
long-term securities or bonds). So<br />
when interest rates fall, the net asset<br />
value of such funds rises.<br />
Making appropriate scheme selection<br />
as well as having the right time<br />
horizon would be the key to<br />
investment success. It is important for<br />
investors to know that the major<br />
differentiator between different types<br />
of income funds is the maturity<br />
duration of their portfolios. Currently,<br />
many income funds and gilt funds<br />
have an average maturity of over<br />
12-15 years.<br />
In fact, the returns on gilt funds and<br />
income funds have already touched<br />
double digits in the last six months.<br />
On an average, gilt funds give returns<br />
of 10.1%, while income funds give<br />
returns of 9%.<br />
Many funds in the income category<br />
have given returns as high as 17% in<br />
the last one year. SBI Income Fund<br />
and ICICI Prudential Income Funds<br />
top the charts with returns of 16.85%<br />
and 16.23%, respectively in the last<br />
one year.<br />
This is not the first time when we are<br />
seeing a decline in interest rates and<br />
some recovery in debt funds. For the<br />
whole decade since 1994 to 2003<br />
when interest rates were coming<br />
down, debt funds gave spectacular<br />
returns. Some funds even gave double<br />
digit returns.<br />
But after the economic meltdown of<br />
2008, the Reserve Bank of India<br />
(RBI) has been steadily hiking rates,<br />
which has negatively impacted debt<br />
funds and they have remained out of<br />
favour for quite some time.<br />
The Reserve Bank of India has often<br />
been criticized for not taking strong<br />
measures to boost growth and lower<br />
interest rates. But the RBI had clearly<br />
stated that interest rates will be<br />
brought down only when they feel it<br />
is comfortable.<br />
So inflation is down as it was a year<br />
back and the current account deficit<br />
(CAD) is expected to come down<br />
following the fall in crude and gold<br />
prices, which makes it very tempting<br />
to cut rates.<br />
However, before getting into<br />
long-term debt funds investors should<br />
keep in mind that both gilt and<br />
income funds carry market risks<br />
owing to interest rate movements.<br />
Also, there might be credit risks as<br />
income funds invest in corporate<br />
paper. However, such credit risks are<br />
less in gilt funds as they invest only in<br />
government securities.<br />
Ideally, gilt funds are meant for<br />
conservative investors who want<br />
safety of their investments. These<br />
funds also open a window for small<br />
retail investors seeking to invest in<br />
government securities which is<br />
mainly dominated by large<br />
institutional investors.<br />
Investors should, therefore remain<br />
very careful about high volatility in<br />
gilt funds compared with other debt<br />
funds as these are prone to interest<br />
rate fluctuations.<br />
On the other hand, income funds tend<br />
to provide more stable returns in the<br />
long term and also have the flexibility<br />
of taking exposure to bonds or<br />
securities where they invest (invest in<br />
higher maturity when interest rates<br />
will fall and vice versa) according to<br />
the interest rate scenario.<br />
Income funds also provide investors<br />
36<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
exposure to high rated corporate<br />
securities that trade at higher yields<br />
compared with gilt prices, providing a<br />
cushion to additional risk.<br />
In the current situation, long-term<br />
corporate papers usually get around<br />
50-70 basis points as against<br />
government securities.<br />
Investments in such products is not<br />
entirely risk free as income funds<br />
have both credit risk as well as<br />
interest rate risks. Investors having an<br />
investment horizon of around 12-15<br />
months can look at investing in such<br />
investment schemes.<br />
Short-term players should completely<br />
stay away from income funds as the<br />
NAV might witness some volatility.<br />
Allocation to gilt and income funds,<br />
based on the time horizon should be<br />
considered by investors.<br />
A falling interest rate scenario gives<br />
confidence to investors that these<br />
instruments could give inflationbeating<br />
returns.<br />
Even in the past as said earlier,<br />
long-term debt funds have given<br />
superior returns in a falling interest<br />
rate scenario. There is potential for<br />
bond markets to rally further based on<br />
the expectation that the central bank<br />
may continue monetary easing on<br />
account of softening inflation and<br />
slowing growth.<br />
But major factors that could trigger<br />
the fall in interest rates is commodity<br />
and gold prices coming off, which can<br />
bring down the current account deficit<br />
and it should give the RBI more<br />
flexibility and space as far as<br />
monetary easing is concerned.<br />
Many fund managers and industry<br />
players are expecting over 75-100<br />
basis points cut in the benchmark<br />
repo rate in the current financial year.<br />
This itself makes long-term debt<br />
funds an ideal investment avenue for<br />
retail investors who can earn on<br />
interest and appreciation toO.<br />
Debt Fund Performance<br />
NAV (as on 31st May'13) Annualized (%) CAGR (%) Fund Fact<br />
Scheme Name Latest<br />
NAV(`)<br />
6 Months 9 Months 1 Year 3 Year 5 Year Since<br />
Inception<br />
AUM<br />
(` in cr)<br />
Expense<br />
Ratio<br />
Exit<br />
Load<br />
Lock<br />
In Period<br />
SBI Magnum Income(G)<br />
Birla SL Income Plus(G)<br />
SBI Dynamic Bond(G)<br />
ICICI Pru Income-Reg(G)<br />
UTI Bond Fund(G)<br />
30.5319<br />
56.3095<br />
15.4618<br />
39.2596<br />
36.7047<br />
19.32<br />
21.19<br />
19.42<br />
19.15<br />
18.99<br />
17.18<br />
18.05<br />
16.92<br />
17.12<br />
16.63<br />
15.98<br />
15.48<br />
15.21<br />
15.17<br />
15.14<br />
10.50<br />
9.86<br />
11.87<br />
9.02<br />
10.68<br />
8.02<br />
10.10<br />
7.31<br />
10.61<br />
9.29<br />
7.99<br />
10.30<br />
4.75<br />
9.61<br />
9.08<br />
4920.69<br />
4568.99<br />
6556.84<br />
4441.82<br />
2738.43<br />
1.7700<br />
1.5500<br />
1.7500<br />
1.7600<br />
1.9700<br />
1.0000<br />
1.0000<br />
1.0000<br />
1.0000<br />
1.0000<br />
1year<br />
365 days<br />
365 days<br />
1year<br />
365 days<br />
Source: ACE MF<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
CREATIVE DESTRUCTION<br />
It is a term coined by Joseph Schumpeter in his work entitled “Capitalism, Socialism and Democracy” (1942) to denote<br />
“the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly<br />
destroying the old one, incessantly creating a new one.”<br />
Creative destruction occurs when something new kills something older. A popular example of this is personal computers.<br />
The industry, led by Microsoft and Intel, destroyed many mainframe computer companies. But in doing so, entrepreneurs<br />
created one of the most important inventions of this century.<br />
Schumpeter goes on to say that the “process of creative destruction is an essential fact about capitalism.” Unfortunately,<br />
while a great concept, this became one of the most overused buzzwords of the dotcom boom (and bust), with nearly every<br />
technology CEO talking about how creative destruction would replace the old economy with the new.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 37
100 100 100 100 100 100 100 100 100<br />
0 100 100 100 100 100 100 100 100 10<br />
100 CAPLIN 100 100 POINT 100 LABORATORIES 100 100 100 LIMITED<br />
100 100<br />
I<br />
ncorporated in the year 1990,<br />
Caplin Point Laboratories (CPL)<br />
manufactures pharmaceutical<br />
formulations in the form of tablets,<br />
ointments and capsules, liquid orals<br />
and oral powders.<br />
The company is constructing a<br />
facility, which would be in compliance<br />
with the US Food and Drug<br />
Administration (FDA), the UK<br />
MHRA and other regulatory bodies<br />
for multiple dosage forms such as<br />
liquid injectibles, ophthalmic drugs<br />
and lyophilized bio-tech products.<br />
With the commencement of this<br />
facility in 2013, CPL will be starting<br />
operations in fully-regulated markets<br />
of Europe, United States of America,<br />
Mexico and Brazil.<br />
SHIFT IN BUSINESS MODEL AT<br />
AN OPPORTUNE TIME<br />
The company management has been<br />
proactive enough to shift the business<br />
model at the right juncture. The<br />
company has shifted from conventional<br />
style of exports (diminishing<br />
margins) to sale points at strategic<br />
locations in Central/South America<br />
and parts of Africa.<br />
The company has more than 1,500<br />
products registered in various<br />
countries with more number of<br />
registrations in the offing.<br />
CPL is not just a manufacturer and<br />
exporter, but also the importer and<br />
distributor of its products by its<br />
collaborators. Secondly, working<br />
capital issues have been impacting the<br />
industry. However, the company’s<br />
differentiated strategy has helped it<br />
chip a significant portion of net sales<br />
as advances. The net sales to<br />
advances figure for FY12 (June-year<br />
ending) stood at 34%.<br />
CLEAN BALANCE SHEET<br />
The company has a clean balance<br />
sheet with net cash and cash equivalents<br />
totaling to more than `27 crore<br />
(more than 25% of the present market<br />
cap). The expansion plan to the extent<br />
of `75 crore would be majorly funded<br />
through internal accruals.<br />
The commencement of operations in<br />
these facilities would begin in various<br />
phases as highlighted in the table:<br />
Commencement Of Operations In Phases<br />
Particulars<br />
Details<br />
CP I<br />
CP II<br />
CP II<br />
CP IV<br />
Source: Company, Nirmal Bang Research<br />
Near Puducherry (Manufacturer of parenterals, sterile powder for injection,<br />
lyophilized products, tablets, capsules, liquid)<br />
Tamil Nadu (R&D)<br />
Baddi (tablets, capsules, ointments, creams, dry syrup)<br />
Under construction – dedicated facility for formulation development,<br />
product development in sterile and non-sterile dosage forms<br />
EARNINGS BACKED BY DIVIDENDS<br />
The earnings of the company have been backed by a proportionate increase in dividends. With the commencement of the<br />
new facility, we expect this trend to continue going forward as well.<br />
Earnings And Dividends<br />
Particulars (`Cr) FY07 FY08<br />
FY09<br />
FY10<br />
FY11<br />
FY12<br />
FY13E<br />
Net Sales<br />
PAT<br />
Dividend<br />
37.9<br />
1.4<br />
0<br />
62.3<br />
1.04<br />
0<br />
59.1<br />
2.2<br />
0<br />
58.1<br />
3.3<br />
10%<br />
83.1<br />
6.3<br />
15%<br />
107.2<br />
8.2<br />
20%<br />
120.2<br />
17.1<br />
30-35%<br />
Source: Company, Nirmal Bang Research<br />
38<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981<br />
With the net profit almost trebling compared to FY11 and doubling compared to the previous year, we expect the dividend<br />
of Caplin Point Laboratories Ltd to be minimum `3 (30%) for FY13, translating into a dividend yield of approximately<br />
4.5% at the given price at present.<br />
RETURN RATIOS HAVE IMPROVED SIGNIFICANTLY<br />
On the back of improvement in earnings, the return ratios of the company have improved significantly. We have modeled<br />
a PAT of `17 crore for FY13E on net sales of `120 crore for FY13E (June-year ending). With the commencement of the<br />
new facility in FY14E, we expect the ratios to improve further.<br />
Return Ratios<br />
Particulars FY07 FY08<br />
FY09<br />
FY10<br />
FY11<br />
FY12<br />
H1 FY13E*<br />
RoE<br />
RoCE<br />
14.1<br />
18.6<br />
5.2<br />
8.1<br />
11.7<br />
15.1<br />
15.9<br />
15.3<br />
21.4<br />
28.2<br />
29.1<br />
33.1<br />
42.04<br />
56.6<br />
Source: Company, Nirmal Bang Research, *June year-ending<br />
Like any other pharma company catering to the western world, Caplin Point Laboratories is also exposed to the risk with<br />
regard to regulations. However, considering the improvement in profitability and return ratios, backed by an increase in<br />
dividends, the risk seems to be worth the returnS.<br />
Note: The market price of Caplin Point Laboratories as on 6th Jun ’13 is `61.10<br />
SMS ‘BANG’ to 54646<br />
Contact at: 022-3926 9404, E-mail: contact@nirmalbang.com<br />
Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006<br />
Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010<br />
EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS # | IPOs # | INSURANCE # | DP<br />
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd.<br />
# Distributors<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 39
TECHNICAL OUTLOOK FOR THE FORTNIGHT<br />
The Nifty started the May<br />
series expiry with a strong<br />
positive momentum. It<br />
gained more than 4% in<br />
first half of the May series to touch a<br />
52-week high of 6,229.5 level on the<br />
20th of May.<br />
Continuous improvement in monthly<br />
inflation, coupled with less-thanexpected<br />
IIP number, improved<br />
optimism of RBI regarding further<br />
rate cut. In addition to this, heavy<br />
buying by FIIs was the major reason<br />
for the rallies in the markets.<br />
But the markets corrected thereafter.<br />
The Nifty Futures May series expired<br />
at 6,124, which is much below the<br />
52-week high of 6,229. Negative<br />
global cues, led by the downfall in<br />
Nikkei caused a trend reversal in<br />
Nifty Futures.<br />
According to government data,<br />
India’s fourth quarter GDP increased<br />
by 4.8% on a year-on-year (y-o-y)<br />
basis. The Q4 GDP growth was<br />
slightly better as compared to 4.7%<br />
growth in Q3 FY13, which was the<br />
lowest in the last 15 quarters. With a<br />
4.8% increase in Q4, India’s FY13<br />
GDP growth recorded at mere 5%,<br />
the lowest GDP growth registered in<br />
the past 10 years.<br />
On the Nifty Options front, at the start<br />
of the June series, highest OI build<br />
up is witnessed at 5900PE and<br />
6200CE, (highest being at 5900 Put)<br />
to the tune of 6.64 million and 6.23<br />
million (as on 5th June), respectively.<br />
India VIX, which measures the<br />
immediate 30-day volatility in the<br />
market, has been very choppy of late<br />
and is trading in the range of 15-19<br />
[(currently at 16.96) (as on 5th June)].<br />
Going forward, we believe that it has<br />
already formed a strong base of 15<br />
and we may see an upward breakout.<br />
Levels of 19 and 22 can be seen on<br />
India VIX in the days to come.<br />
The Put Call Ratio-Open Interest<br />
(PCR-OI) for Nifty Options remained<br />
at the upper end throughout the May<br />
expiry and traded between a narrow<br />
range of 0.98-1.25 since the start of<br />
the previous expiry.<br />
The current PCR-OI stands at 0.98 (as<br />
on 4th June), which seems to be a<br />
very good trend indicator. The PCR-<br />
OI near 1 indicates a balance position<br />
for the markets.<br />
OPTIONS STRATEGY<br />
SHORT STRADDLE ON NIFTY<br />
(June Series)<br />
It can be initiated by ‘selling 6000CE<br />
and 6000PE of the June series’. The<br />
net combined premium inflow comes<br />
around `191, (which is also the<br />
maximum profit) and it can be<br />
achieved if the Nifty June series<br />
expires at 6,000.<br />
The break-even is at 5,808-6,192.<br />
(Traders will incur `50 per unit loss in<br />
case of Nifty Futures expiry beyond<br />
break-even points). There is<br />
unlimited loss beyond the break-even<br />
range. Traders can square off their<br />
strategy when the combined rate of<br />
the Straddle crosses 240+ or comes<br />
below 100, whichever is earlier.<br />
The short-term trend has slightly<br />
turned positive. But the overall<br />
medium trend remains cautious and<br />
weak. The Index has observed<br />
volatile trading sessions since the past<br />
few weeks.<br />
The Nifty has been fairly<br />
range-bound between 6,200 and<br />
5,800 levels since the past couple of<br />
weeks and continues to trade with a<br />
sideways bias. The current month’s<br />
Nifty option suggests that the market<br />
will trade in the tight range of<br />
6,200-5,800 and a big move could be<br />
seen only if the Nifty closes on either<br />
side of the range.<br />
The Nifty is keeping a positive<br />
closing above the 50-DMA.<br />
However, the Nifty is facing a strong<br />
support of 5,850 level, that is, 50%<br />
Fibonacci Retracement. The<br />
important oscillator RSI is showing a<br />
positive cross over in daily chart,<br />
indicating strength and MACD on the<br />
daily chart has turned positive. Once<br />
it manages to close above the 5,920<br />
level at least for one more trading<br />
session, the upward trend will<br />
confirm for a target of the 5,970 level.<br />
In the immediate term, the 5,850/<br />
5,800 level is the cluster support for<br />
the Nifty since it is supported by the<br />
trend line. Till the time 5,970/6,100<br />
level is intact, there is a valid<br />
possibility that the Nifty may try to<br />
scale higher.<br />
In an alternative scenario, if the Nifty<br />
breaches the level of 5,780 on a<br />
closing basis, then a further sell-off<br />
till the recent swing low of 5,500 is<br />
likely and below that a downside till<br />
5,400 cannot be ruled out.<br />
Traders having long positions are<br />
advised to hold their existing long<br />
positions and protect their capital<br />
with a strict stop loss of 5,850. The<br />
Bank Nifty has closed below the<br />
important support of 12,400 level and<br />
if it closes below 12,250 level, one<br />
can expect further weakness and<br />
decline to 12,000 levels. There is a<br />
strong resistance at 12,380 and<br />
12,400 levels on the upsidE.<br />
40<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
PRICE TO BOOK VALUE<br />
The table represents companies listed on the<br />
BSE that are low on Price to Book Value<br />
Company Name<br />
Book Value Current <strong>Market</strong> Price<br />
Price /<br />
(as on 11th 06th Nov'10 June'13)<br />
Book Value<br />
Gammon India Ltd<br />
Housing Development & Infrastructure Ltd<br />
Patel Engineering Ltd<br />
GOL Offshore Ltd<br />
Prakash Industries Ltd<br />
Shipping Corporation Of India Ltd<br />
IVRCL Ltd<br />
Welspun Corp Ltd<br />
Bajaj Hindusthan Ltd<br />
Jyoti Structures Ltd<br />
Uflex Ltd<br />
NCC Ltd<br />
BEML Ltd<br />
Punjab & Sind Bank<br />
Monnet Ispat & Energy Ltd<br />
Jindal Poly Films Ltd<br />
Simplex Infrastructures Ltd<br />
Rolta India Ltd<br />
Punj Lloyd Ltd<br />
Indiabulls Power Ltd<br />
HCL Infosystems Ltd<br />
Orchid Chemicals & Pharmaceuticals Ltd<br />
Anant Raj Industries Ltd<br />
Amtek Auto Ltd<br />
Mercator Ltd<br />
Indian Overseas Bank<br />
Gujarat Narmada Valley Fertilizers Company Ltd<br />
United Bank Of India<br />
Jai Corp Ltd<br />
SRF Ltd<br />
Usha Martin Ltd<br />
Anant Raj Industries Ltd<br />
Hindustan Oil Exploration Co Ltd<br />
Onmobile Global Ltd<br />
Titagarh Wagons Ltd<br />
SREI Infrastructure Finance Ltd<br />
Jindal Saw Ltd<br />
Reliance Infrastructure Ltd<br />
Dhanlaxmi Bank Ltd<br />
GVK Power & Infrastructure Ltd<br />
Reliance Communications Ltd<br />
Tata Steel Ltd<br />
Escorts Ltd<br />
DB Realty Ltd<br />
IDBI Bank Ltd<br />
India Cements Ltd<br />
Sintex Industries Ltd<br />
Indiabulls Real Estate Ltd<br />
Steel Authority Of India<br />
Indian Bank<br />
117.29<br />
243.00<br />
209.37<br />
264.17<br />
146.31<br />
142.04<br />
73.89<br />
167.45<br />
64.03<br />
87.61<br />
205.71<br />
93.57<br />
499.50<br />
173.38<br />
402.57<br />
420.79<br />
259.66<br />
152.84<br />
115.77<br />
20.27<br />
86.01<br />
130.47<br />
9.47<br />
200.50<br />
27.35<br />
133.20<br />
174.81<br />
119.01<br />
115.93<br />
345.16<br />
50.70<br />
130.14<br />
92.55<br />
73.26<br />
314.90<br />
52.62<br />
134.84<br />
733.72<br />
77.28<br />
15.84<br />
221.75<br />
568.46<br />
128.16<br />
140.43<br />
145.89<br />
119.10<br />
88.51<br />
127.30<br />
99.32<br />
242.89<br />
18.85<br />
41.75<br />
42.80<br />
58.05<br />
34.35<br />
35.25<br />
18.85<br />
47.05<br />
18.40<br />
26.85<br />
64.90<br />
30.45<br />
171.70<br />
60.15<br />
145.00<br />
156.80<br />
99.35<br />
58.75<br />
44.95<br />
7.91<br />
33.70<br />
52.50<br />
4.03<br />
87.10<br />
12.10<br />
59.80<br />
78.90<br />
53.95<br />
54.35<br />
162.65<br />
23.95<br />
61.95<br />
44.30<br />
35.30<br />
152.75<br />
25.90<br />
67.80<br />
372.75<br />
39.40<br />
8.18<br />
116.35<br />
299.15<br />
67.65<br />
74.80<br />
78.55<br />
65.40<br />
49.25<br />
72.30<br />
57.45<br />
140.65<br />
0.16<br />
0.17<br />
0.20<br />
0.22<br />
0.23<br />
0.25<br />
0.26<br />
0.28<br />
0.29<br />
0.31<br />
0.32<br />
0.33<br />
0.34<br />
0.35<br />
0.36<br />
0.37<br />
0.38<br />
0.38<br />
0.39<br />
0.39<br />
0.39<br />
0.40<br />
0.43<br />
0.43<br />
0.44<br />
0.45<br />
0.45<br />
0.45<br />
0.47<br />
0.47<br />
0.47<br />
0.48<br />
0.48<br />
0.48<br />
0.49<br />
0.49<br />
0.50<br />
0.51<br />
0.51<br />
0.52<br />
0.52<br />
0.53<br />
0.53<br />
0.53<br />
0.54<br />
0.55<br />
0.56<br />
0.57<br />
0.58<br />
0.58<br />
Source: Capital Line<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 41
Investing in markets has never<br />
been an easy task - both for<br />
seasoned as well as<br />
inexperienced investors. The<br />
only difference between the two is<br />
that a seasoned investor has the<br />
experience of dealing with losses<br />
while an inexperienced one does not.<br />
Yet, an inexperienced investor can<br />
make sound investment decisions<br />
with the use of certain financial ratios.<br />
These ratios provide the scope for<br />
evaluation of the past performance of<br />
a company and help an investor gauge<br />
the possible future course of growth<br />
of the company.<br />
This article explains to you certain<br />
operational and performance-related<br />
financial ratios, which will help you<br />
understand a company better.<br />
DEBT RATIOS<br />
Understanding the extent of leverage<br />
of a company is very important when<br />
it comes to investing in a company.<br />
Higher the debt of a company in an<br />
Both seasoned and<br />
amateur investors can<br />
use ratios to understand<br />
a company’s<br />
performance better<br />
industry, not so capital-intensive,<br />
clearer is the sign of mismanagement<br />
of business. While capital-intensive<br />
industries such as infrastructure<br />
(roads, power, construction and oil<br />
and gas) and airlines would have high<br />
debt on their books, it is important to<br />
gauge the operating profit of these<br />
companies in terms of its topline.<br />
Here are a few debt ratios:<br />
<br />
This ratio provides information about<br />
the company’s total liabilities to its<br />
total shareholders’ equity. It gives an<br />
investor the measurement of how<br />
much suppliers, lenders, creditors and<br />
other obligators have committed to a<br />
particular company. Since the debt to<br />
equity ratio provides a bird’s eye view<br />
of the leverage position of a company,<br />
it is a very important ratio among<br />
most financial ratios.<br />
Debt To Equity: Total Liabilities/<br />
<strong>Share</strong>holder’s Equity.<br />
It means lower the debt position of a<br />
company, better is its operations and<br />
vice versa. More so, it shows high<br />
equity base, indicating the fact that<br />
the company is a quality enterprise.<br />
<br />
Capitalization ratio of a company<br />
measures the ability of the debt part of<br />
capital structure to support the<br />
company’s operations and eventually<br />
growth. It is very meaningful as it<br />
provides a key insight into the extent<br />
of the leverage of a company.<br />
Capitalization Ratio: Long-term Debt<br />
/(Long-term Debt + <strong>Share</strong>holders’<br />
Equity)<br />
42<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...
The interest coverage ratio is used to<br />
find out how easily a company can<br />
pay interest expenses on its<br />
outstanding debt. The ratio is<br />
calculated by dividing a company‘s<br />
earnings before interest and taxes<br />
(EBIT) by the company’s interest<br />
expenses for the same period.<br />
The lower the ratio, more is the<br />
company burdened by debt expense.<br />
Experts believe that when a<br />
company’s interest coverage ratio is<br />
only 1.5 or lower, its ability to service<br />
its interest expense is in doubt.<br />
<br />
<br />
This ratio gives a clear picture of the<br />
productivity of a company’s fixed<br />
assets, which can comprise of<br />
property, plant and equipment in<br />
relation to its sales. For most<br />
companies, their investment in fixed<br />
assets represents the single largest<br />
component of their total assets.<br />
This annual turnover ratio is designed<br />
to reflect a company’s efficiency in<br />
managing these significant assets. To<br />
put it simply, higher the turnover rate<br />
every fiscal, better it is for a company.<br />
Fixed Asset Turnover = Revenue/<br />
<br />
<br />
<br />
This ratio indicates how profitable a<br />
company is in comparison with its<br />
total assets. It throws light on how<br />
better a company management<br />
<br />
Experts believe that higher the return,<br />
the more efficient is the management<br />
in utilizing its asset base. The ROA<br />
ratio is expressed as a percentage.<br />
Return On Assets: Net<br />
Income/Average Total Assets<br />
<br />
This ratio indicates how profitable a<br />
company is by comparing its net<br />
income to its average shareholders'<br />
equity. The return on equity ratio<br />
(ROE) shows how much the<br />
shareholders earned from their<br />
investment in the company. The<br />
higher the ratio percentage, the more<br />
efficient the management is in<br />
utilizing its equity base and the better<br />
returns it gives to investors.<br />
Return On Equity: Net Income/<br />
Average <strong>Share</strong>holders’ Equity<br />
<br />
The return on capital employed<br />
(ROCE) ratio is an extension of return<br />
on equity (ROE) ratio. It is<br />
constructed by adding a company’s<br />
debt liabilities or funded debt to<br />
equity to give a clear picture of a<br />
company’s total capital employed. It<br />
is a better parameter which gives a<br />
comprehensive profitability of a<br />
company since it assesses the<br />
company’s ability to generate returns<br />
from its available capital base.<br />
Return On Capital Employed: EBIT/<br />
Capital Employed<br />
Capital Employed: Average Debt<br />
Liabilities + Average <strong>Share</strong>holders’<br />
Equity<br />
<br />
<br />
<br />
picture of the amount shareholders<br />
are paying for the assets of a<br />
<br />
<br />
of a company’s assets reflected on its<br />
<br />
balance sheet assets and balance sheet<br />
liabilities and presents an idea of the<br />
amount one would get if he/she were<br />
to liquidate a company.<br />
<br />
<br />
<br />
<br />
of the widely used investment<br />
valuation parameters. The financial<br />
reporting of both companies and<br />
investment research services uses a<br />
<br />
<br />
<br />
<br />
<br />
<br />
have no relevance and meaning as<br />
<br />
forward earnings of a company.<br />
Because it is believed that the past<br />
performance of a company does not<br />
guarantee that it would perform with<br />
the same growth as in the past.<br />
<br />
<br />
<br />
<br />
<br />
annual percentage and is calculated as<br />
the company’s annual cash dividend<br />
per share divided by the current price<br />
<br />
<br />
dividend-paying companies.<br />
<br />
<br />
<br />
a novice investor, both these<br />
individuals can use these ratios to<br />
<br />
investment decision<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 43
IMPORTANT JARGON<br />
FOR THE FORTNIGHT<br />
GOODWILL IMPAIRMENT<br />
Recently Tata Steel announced $1.6 billion impairment,<br />
mainly of its goodwill asset from takeover of Corus, the<br />
British steelmaker. This did not come as a surprise to<br />
many. In the recent past, in India as well as abroad, many<br />
companies have resorted to goodwill write-offs.<br />
Goodwill asset on the balance sheets of companies have<br />
always been a controversial subject in accounting. There is<br />
a grey area in which goodwill assets are defined,<br />
accounted and impaired. In India, accounting standard<br />
(AS) 38, 36 and 103 pertain to treatments given to<br />
goodwill assets.<br />
What Is Goodwill Asset And How Is It Accounted For<br />
Goodwill is an intangible asset. There are many ways of<br />
defining a goodwill asset. It can be defined as a set of<br />
unidentified intangible assets. They can be influenced by<br />
other intangible assets. From an accounting view, goodwill<br />
is the excess of total consideration paid for the business<br />
over its net assets (assets-liability) in an acquisition.<br />
Indian accounting standard defines goodwill as, “An asset<br />
representing the future economic benefits arising from<br />
other assets acquired in a business combination that are not<br />
individually identified and seperately recognized.”<br />
Typically, goodwill is expected to be smaller within<br />
intangible assets and more importantly justifiable. If<br />
company X pays `100 for acquiring company Y, which has<br />
a book value of `80, the extra `20 paid for the acquisition<br />
gets accounted into the books of company X as goodwill.<br />
The excess payment may be attributable to reputation,<br />
business connections, synergies, intangible benefits such<br />
as assembled workforce, and so on. The goodwill gets<br />
recorded as an asset in the buyer’s financial statements.<br />
Why Is Impairment Needed<br />
In accounting, the term impairment is used in the context<br />
of an asset, the value of which has declined. An asset gets<br />
impaired if the value stated in the balance sheet exceeds its<br />
resale value. And the difference between the two values<br />
gives the impairment loss on account of that asset. Since<br />
goodwill is an indefinite asset, it does not depreciate like<br />
fixed assets or amortized like other intangible assets.<br />
It is tested for impairment on an annual basis, typically at<br />
the financial year end to assess if the goodwill amount will<br />
continue to be carried at the original value or needs to be<br />
written down. The treatment is the same irrespective of<br />
whether the acquired entity is Indian or foreign. Each year,<br />
the goodwill balance is compared to its estimated market<br />
value. If the book value is low, no adjustment is permitted.<br />
But, if the book value is high, the balance must be<br />
impaired by marking it down to fair value. Thus to give a<br />
fair idea of its assets, companies take impairment of<br />
goodwill assets.<br />
What Triggers Impairment<br />
Indicators for impairment could be external or internal. It<br />
could include technological obsolescence of the product or<br />
asset, economic meltdown, high interest rates, plans to<br />
discontinue a particular business and adverse economic<br />
performance of an asset. For instance, Tata Steel has<br />
estimated impairment charges for FY13 mainly due to<br />
weaker macroeconomic and market conditions in Europe.<br />
What It Means To Investors<br />
Impairment of goodwill assets can be viewed as an<br />
admission of the company’s management of the fact that<br />
not all went as planned regarding a merger or acquisition.<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13 It’s simplified... 45
Recent years have been characterized by continuously<br />
high merger and acquisition activity.<br />
A company’s management in its drive to acquire<br />
companies at any cost (happens mostly during a bull run)<br />
tends to pay more in terms of goodwill, thereby bloating<br />
goodwill balances. Acquisitions are done based on higher<br />
premium, ignoring the true value of the assets. For<br />
investors, impairment could indicate that there are<br />
concerns with regard to a company’s earnings in the near<br />
future. There are other implications on the company’s<br />
books as an impairment charge would reduce the net worth<br />
or book value of a company.<br />
While goodwill impairment would give investors a truer<br />
picture of a company’s worth, one that is more in<br />
accordance with reality, doubts can be raised about the<br />
management’s capability if a company writes off<br />
substantial amounts on account of asset impairment. A<br />
good management should assess and communicate<br />
whether there are any indicators of asset impairment so<br />
that investors can take informed decisions.<br />
GUIDELINES FOR ALGO TRADING<br />
Algorithmic trading is picking up in India. Ever since<br />
the Securities and Exchange Board of India (SEBI)<br />
allowed algorithmic trading on Indian stock exchanges in<br />
2008, its share of the overall turnover on the Indian<br />
bourses has augmented.<br />
It is estimated that currently one-third of the total trades on<br />
the Indian bourses are algorithmic trades. However, such<br />
machine-generated trades have been accused of flash<br />
crashes. Regulators world over are busy tightening the<br />
noose on algorithmic trading, and SEBI is in the forefront.<br />
SEBI recently announced guidelines for algorithmic<br />
trading in India which came into effect from 27th May.<br />
The broader guidelines were framed in March ’12.<br />
What Is Algorithmic <strong>Trading</strong>?<br />
Algorithmic (Algo) trading refers to orders generated by<br />
use of advanced mathematical models that involve<br />
automated execution of trade. The models do the decision<br />
making like handling the trade timing and the buy and sell<br />
price without any human intervention. It is synonymous<br />
with “program trading”, “auto-trading”, “black-box<br />
trading” and “high-frequency trading.” It is mostly used<br />
by large institutional investors. Proponents believe algo<br />
trading can lead to efficient price discovery that is less<br />
influenced by human behavioural biases and reduce<br />
impact costs. The opponents, on the other hand, argue that<br />
such machines fulfill no social objective and gives rise to<br />
adverse side-effects on market liquidity and volatility. It<br />
has raised concerns that algo exposes small investors to<br />
possible systemic risks.<br />
The New Guidelines<br />
New guidelines mandate stock brokers and traders offering<br />
algo facility to subject their algorithmic trading system to<br />
audit every six months so as to ensure compliance with the<br />
requirements prescribed by SEBI and the stock exchanges.<br />
Such audits would need to be undertaken by a system<br />
auditor with relevant certifications. Stock exchanges will<br />
have to periodically review their surveillance<br />
arrangements in order to better detect and investigate<br />
market manipulation and market disruptions.<br />
Further, the new guidelines dis-incentivises excessive<br />
flood of orders. Exchanges have been asked to double the<br />
fine for higher order-to-trade ratio. This will prevent order<br />
flooding as many algo trades give a high number of orders,<br />
while the number of actual executed trades remain low.<br />
Higher order-to-trade ratio puts stress on the trading<br />
system while hampering the price discovery mechanism.<br />
Brokers with repetitive instances of high daily<br />
order-to-trade ratio will face additional penalty in the form<br />
of suspension of their proprietary trading book.<br />
The SEBI has also allowed the stock exchanges to impose<br />
suitable penalties in case of failure of the stock broker or<br />
trading member to take satisfactory corrective action<br />
within the time period specified by the bourses.<br />
Algorithms would not be allowed to quote beyond a<br />
certain number of securities per orders.<br />
What It Means To Retail Investors?<br />
As technology comes at a cost, retail investors will always<br />
be pitted against cash rich institutional investors as far as<br />
algo trading is concerned. While algo trading helps in<br />
better price discovery, it would be difficult to compete<br />
with machines and life would be difficult, especially for<br />
day traders as machines would be ahead of them, always.<br />
With the new guideline, the SEBI has signalled that it has<br />
plans to ban algo trading. Instead, it has taken the bull by<br />
its horn by putting adequate regulations. With the<br />
guidelines, the market regulator has acknowledged that<br />
certain algos are useful to both investors and traders.<br />
Experts hail the new guidelines as sensible response to<br />
ever-changing world of stock marketS.<br />
46<br />
<strong>Beyond</strong> <strong>Market</strong> 11th Jun ’13<br />
It’s simplified...