Beyond Market - Issue 62 - Online Share Trading

For Private Circulation Volume 1 Issue 62 10th Feb ’12 

A good fund manager is one 

who has both balance 

and conviction. 

GAME 

FOR 

ANYTHING 

N Sethuram Iyer 

Chief Investment Officer 

of Daiwa Asset Management

DB Corner – Page 5 

Marriages Gone Wrong 

The recent end of joint ventures has brought to the fore issues that cause rifts 

between two companies - Page 6 

Setting Wrong Right 

The government is taking the right steps to get the beleaguered power sector 

out of the blues - Page 10 

Easy Money 

Several companies are taking the captive finance route to ensure steady funding 

- Page 13 

A Bone Of Contention 

Both land owners and industry-men are at loggerheads over the new Land 

Acquisition, Rehabilitation and Resettlement Bill, and an early resolution seems 

unlikely - Page 16 

Paths Of Glory 

The recent issuance of contracts to construct roads is a sign that this sector 

looks promising in the long run - Page 20 

Volume 1 Issue: 62, 10th Feb ’12 

Editor-in-Chief & Publisher: Rakesh Bhandari 

Editor: Tushita Nigam 

Senior Sub-Editor: Kiran V Uchil 

Art Director: Sachin Kamble 

Junior Designer: Sagar Padwal 

Marketing & Operations: 

Savio Pashana, Afsana Tamboli 

Research Team: 

Sunil Jain, Michael Pillai, 

Dipesh Mehta, Runjhun Jain, 

Manav Chopra, Vikas Salunkhe 

HEAD OFFICE 

Nirmal Bang Financial Services Pvt Ltd 

Sonawala Building, 25 Bank Street, 

Fort, Mumbai - 400001 

Tel. 022-3926 7500/7501 

CORPORATE OFFICE 

B-2, 301/302, Marathon Innova, 

Off Ganpatrao Kadam Marg, 

Lower Parel (W), Mumbai - 400 013 

Tel: 022 - 3926 8000/8001 

We, at Beyond Market welcome your views, 

comments and feedback. Do help us to grow 

better as per your liking. This is our attempt to 

reach you better while crossing horizons... 

Web: www.nirmalbang.com 

beyondmarket@nirmalbang.com 

Tel No: 022 - 3926 8047 

The Long And Short Of Private Equity 

The problems notwithstanding, experts feel the outlook for private equity funds 

looks promising from a long-term perspective - Page 23 

Flying On Hope 

The introduction of 49% FDI in the aviation sector is being looked at positively 

as it could bail out troubled domestic airline companies - Page 26 

Indian Pharma’s Foreign Connection 

Owing to easy availability of capital and increased global interest in the pharmaceutical 

and biotech industry, the sector has become a favourite for mergers and 

acquisitions - Page 30 

Savouring Sweet Success 

Due to its low leveraging and well-diversified business, Balrampuri Chini Mills 

Ltd is better placed than its peers - Page 34 

Unshackle The Bonds Of Taxation 

With equity investments not yielding good returns in the current times of 

volatility, tax-free bonds appear to be the best bet for investors - Page 38 

The Fantastic Four 

PPF, NSC, FDs and ELSS are four tools that investors can use to save taxes 

- Page 40 

“A good fund manager is one who has both balance and conviction” 

Mr N Sethuram Iyer, Chief Investment Officer (CIO) at Daiwa Asset Management 

spoke to Beyond Market about his journey from being a banker to a behemoth in 

the mutual fund industry and the factors that motivate him to give his best 

– Page 44 

Important Statistics For The Fortnight Gone By – Page 48 

Speaking Figuratively Through Metaphors 

Understanding metaphors is important for investors as they occur frequently in 

financial reports and analysis – Page 50 

First Things First 

While planning your finances for the year ahead, do focus on debt, insurance, 

taxes and investments – Page 52 

Beyond Market 10th Feb ’12 It’s simplified... 3

N Sethuram Iyer believes that 

being a team player 

and his ability to manage people 

have brought him this far. 

The 

Big 

Switch 

While some people choose to follow the well-trodden path, there are others like N 

Sethuram Iyer, Chief Investment Officer at Daiwa Asset Management (erstwhile 

Shinsei Mutual Fund), who take the road less travelled and leave a mark with their 

remarkable amount of work. 

Despite a degree in BSc (Chemistry), Mr Iyer firstly went on to be a banker. In fact, 

he served as a banker with the State Bank of India for more than 30 years. And while 

many in his position would have continued working in the banking sector, he chose 

otherwise and landed in the mutual fund industry – for good. 

The Beyond Work section in the current issue features N Sethuram Iyer and reveals 

how he turned into a biggie in the MF industry, his life and values that propel him to 

give his best shot at everything he does. Mr Iyer believes that being a team player and 

his ability to manage people have brought him this far. 

Tushita Nigam 

Editor 

Apart from this informational piece, we have articles on the surging number of 

captive financiers that ease funding processes for companies and subsequently for 

customers, the reasons for the cessation of successful joint ventures and the expected 

outlook of the private equity market in India. There is also an article on the power 

sector and the reforms being undertaken by the government to help the industry to 

beat the blues. Another article on the new Land Acquisition Act, which aims to ease 

the process of acquiring land, rehabilitation and resettling the displaced people, too 

finds a mention in this issue. 

Sectorally too, there are articles on the aviation and the road sector. While in the 

former, we detail how the government is planning to allow foreign direct investment 

to help the beleaguered sector, the latter seems to be doing really well thanks to the 

issuance of contracts to construct roads across the country. 

In the Beyond Analysis section, we have covered Balrampur Chini Mills Ltd, one of 

the largest sugar manufacturing companies in the country. The company finds a 

mention because low leveraging and diversification have given it a competitive edge 

in the sugar industry. 

And with the financial year coming to an end, most late bloomers we believe must be 

seeking tax-saving avenues to park their money in. The articles in the Beyond Basics 

section list out products like bonds, public provident funds and equity-linked saving 

schemes, among others, which will help such investors to save taxes. 

4 

Beyond Market 10th Feb ’12 

Finally, the Beyond Learning section carries an interesting piece on metaphors that 

occur frequently in the world of finance. This article will enable you to demystify the 

actual meaning of metaphors without feeling lost when you come across theM. 

It’s simplified...

In the coming fortnight, 

markets look good on declines. 

A 

gone by. 

number of undervalued 

stocks corrected 

substantially on the 

bourses in the fortnight 

The Indian rupee too appreciated on 

the back of a depreciating dollar and 

huge foreign inflows into the Indian 

markets during this period. 

Further, the previous fortnight also 

saw several corporates releasing their 

quarterly earnings results. 

Although the results were in line with 

expectations, industry experts are 

hoping that the next quarter results 

will be better than the current one, for 

certain sectors. 

Globally, the US economy has been 

showing consistent improvement. 

The deal with private lenders to clear 

off Greece’s debt is likely to be 

finalized soon. 

Chinese PM Wen Jiabao recently said 

that China is considering deeper 

involvement in the Euro zone’s 

bailout funds. Further, the new treaty 

between 27 nations from the Euro 

zone is under negotiation. 

In the coming fortnight, markets look 

good on declines around the 5,100 - 

5,200 levels. If the Nifty goes above 

the 5,450 level, it may go up to the 

5,700 level, thereafter. 

Market participants can look at 

investing in the sugar sector, 

especially Balrampur Chini Mills Ltd 

and Shree Renuka Sugars Ltd. 

Among other stocks, Hindustan Zinc 

Ltd (at current levels), Atlas Cycles 

(Haryana) Ltd (around the `320 

level), Ajanta Pharma Ltd (around the 

`280 level), Bajaj Finance Ltd 

(around the `750 level) and Sterlite 

Industries (India) Ltd (around the 

`110 – `115 levels), can be 

considered from an investment 

perspective by them. 

In the next fortnight, traders and 

investors can expect lower inflation 

numbers for the month of January, 

which could result in the RBI opting 

for rate cuts in the coming monetary 

policy review. 

However, IIP numbers are likely to be 

lower than the previous figure due to 

the previous year’s base effecT. 

Sensex – 17,707.31 

Nifty – 5,361.65 

(As on 6th Feb) 

Disclaimer 

It is safe to assume that my clients and I may have 

an investment interest in the stocks/sectors 

discussed. Investors are required to take an 

independent decision before investing. 

Investment in equity is subject to market risk. Our 

research should not be considered as an advertisement 

or advice, professional or otherwise. The 

investor is requested to take into consideration all 

the risk factors including their financial condition, 

suitability to risk return profile and the like and 

take professional advice before investing. 


Marriages Gone Wrong 

The recent end of joint ventures has brought to the 

fore issues that cause rifts between two companies 

As a proposition to further 

business interests, joint 

ventures turn out to be 

short-lived affairs. With 

too many aspirations involved and 

many perceived directions of growth, 

the cheerful congeniality of the 

relationship gets disturbed and the 

affair ceases to exist. 

In India, with its growing importance 

as a large reservoir of untapped 

consumers, joint ventures are losing 

their immediate relevance. Joint 

ventures, in particular with foreign 

entities, are hardly looked upon as an 

important event. 

Over striking a deal for a company, a 

seasoned investment banker at a 

recent meeting said, “What value 

6 



addition does a foreign partner do to a 

joint venture in a growing economy 

like India?” His opinion is not far 

from the truth one is witnessing in 

India’s corporate world of late. 

The end of JVs of Hero Honda, 

Godrej-Hershey, Mahindra-Renault 

and Lakshmi Machine Works-Rieter 

are examples to this effect. What is 

interesting is the fact that few of these 

break-ups have transpired after a long 

period of association. 

These break-ups, when read in the 

light of the fact that the government 

has removed the clause of securing 

permission for starting parallel 

businesses in the same industry from 

allied Indian partner for the foreign 

entity, sheds some light on the future 

course of JVs of Indian companies 

with foreign entities. 

To borrow a new age terminology, 

joint ventures of Indian companies 

with foreign companies have acquired 

a new meaning, that of ‘live-in’ 

relationships. This is a step before the 

final ceremony: marriage. It is a 

temporary affair in which both 

partners engage in the process of 

evaluating, assessing and ascertaining 

the possibility of an enduring relation. 

Even as one ponders over this 

classification, one important question 

that merits exploration is the reason 

behind the break-ups of joint 

ventures, which goes beyond the 

obvious liberalized norm of not 

securing Indian partner’s permission 

to start a parallel business in the same 

industry. These reasons are also 

lessons which the Indian corporate 

world has learnt over the course of 

their association with foreign entities. 

This article attempts to find reasons 

for break-ups of certain joint ventures 

between Indian and foreign entities in 

the last 20 years. As we explore 

certain joint ventures, it would bring 

to the surface the limitations of Indian 

companies, constraints of Indian 

business environment, the pace of 

growth anticipated by foreign entities 

and overall the mismatch of 

expectations that forms the pivotal 

reason for break-ups. 

DIFFERENCES 

Many a time joint ventures with 

foreign entities turn bitter due to the 

natural faith of Indian companies in 

understanding Indian markets better 

than foreign entities and the almost 

meticulous approach of foreign 

entities to see through a project. 

The Mahindra-Renault joint venture 

is one such case. When Renault 

launched Logan, it met with positive 

reviews from experts in the sector for 

being one of the fuel-efficient and 

spacious cars in the sedan category. 

The only problem with the car was its 

length, which is just over four meters. 

Due to this, the car attracted a duty of 

22%, while cars of length less than 

four meters attracted 10% duty. 

Mahindra wanted the length of the car 

to be less than four meters, while 

Renault believed that Logan is a 

global product and they wanted it that 

way. This created differences. 

Sector experts believe that there was 

no strong strategy about marketing of 

the car, which brought down its sales. 

Sensing a slim possibility of reaching 

a common meeting ground, Mahindra 

bought out the 49% stake of the 

French carmaker. 

In joint ventures, foreign entities 

sometimes miss out on the crucial 

point that the Indian partner serves as 

his face. An Indian consumer would 

be more familiar with the Indian 

partner’s brand image than the brand 

image of the foreign partner. There 

might be cases where an Indian 

consumer might not be aware of the 

foreign brand. Renault may have 

realized this. It also sensed the 

viability of the compact car story in 

India. Hence, there have been reports 

that the company in collaboration 

with Japanese car major Nissan is 

exploring the possibility of a joint 

venture with an Indian partner to 

produce compact cars. 

PLATEAU OF EXPERIENCE 

Even after a long association of over 

26 years, last year, the joint venture 

between Hero Motor Company and 

Honda Motor Company came to an 

end. Industry experts believe that the 

joint venture had reached a stage 

where they had to separate. 

After a long period of time no two 

strong companies can co-exist, says 

an expert. He says that in case of Hero 

Honda, it was a marriage of 

convenience. There are certain factors 

that have contributed to the faction. It 

is perceived that Honda did not want 

to share its technology with Hero, 

while Hero found the royalty payment 

quite high. It is also believed that 

Hero had hinted at the possibility of 

exploring opportunities in the 

overseas markets, which Honda 

found fiercely competitive to its 

corporate strategy. 

India’s two-wheeler industry is quite 

concentrated. Of the total market 

share, 75% to 85% market share rests 

with the top three players. Hence, 

there is a huge opportunity. In this 

situation, continuing with a joint 

venture does not make sense. Honda 

Motorcycle and Scooter India 

(HMSI) would not eat into the market 

share of any of the top two players - 

Hero Moto Corp and Bajaj Auto. 

The two-wheeler industry is growing 

at a fast pace and most two-wheeler 

companies have identified new vistas 

of opportunities in tier-II and tier-III 

cities. Hence, the pie of the industry 


would increase in the coming years. 

HMSI would target on the 

incremental buyers in the industry. 

For instance, if the present industry’s 

size amounts to 10 million buyers, the 

incremental customers to this 10 

million buyers’ base would be the 

target of HMSI. 

ON THE WRONG FOOT 

Most joint ventures when observed on 

a structural level could be 

sub-optimal relationships. One of the 

famous phrases often used in the 

investment banking fraternity is the 

marriage of ‘chalk’ and ‘cheese’. 

Companies which diversify into 

sectors ill-prepared and form a joint 

venture, fall in this category. 

An Indian partner could not be an 

ideal one and may not necessarily 

have the potential for business. A 

difference in perception of the 

business is one of the fundamental 

reasons for the breaking up of the 

joint venture. 

One such prominent reason for falling 

apart of a joint venture is due to 

diversification in sectors unrelated to 

the core business of either of the 

partners in the joint venture. Take for 

instance, the JV between Bharti and 

French insurance company AXA. 

Besides its core business of 

telecommunication, Bharti 

diversified into the retail sector. The 

company, however, found the 

capital-intensive nature of the 

insurance business quite tedious to 

generate handsome returns. It 

struggled to scale up the business. 

After four years, it sold its majority 

stake of 74% to Reliance Industries. 

It is perceived that Bharti exited the 

business at a very cheap valuation. 

The decision to exit from the financial 

services was a sensible one on part of 

Bharti. The business demanded a 

huge investment and would have 

taken a long time to breakeven. 

WHERE IS YOUR BIT? 

One of the chief reasons for the 

falling apart of a joint venture is the 

faltering of one partner in delivering 

his/her core competency. Take for 

instance, the Godrej-Hershey joint 

venture, which broke few months 

back. The Godrej-Hershey joint 

venture was formed in the year 2007. 

In the last four years, Godrej had 

bought in several brands in the joint 

venture. This included the acquisition 

of Nutrine. In segments such as hard 

candy, toffee, lollipop and roll, 

Nutrine had brands such as Maha 

Lacto, Maha Choco, Nutrine Eclairs 

and Honeyfab. It also contributed 

several beverage brands to the joint 

venture. This included fruit drinks, 

juices, and soya milk. 

Analysts point out that Godrej’s 

contribution to the topline of the joint 

venture would be at least 85%. On the 

other hand, the US-based chocolate 

and confectionary manufacturer 

Hershey failed to bring in a single 

brand to the joint venture. 

The chocolate category of FMCG 

business in India has been growing at 

a compounded annual growth rate 

(CAGR) of 18% to 20% per annum. 

Such a wait-and-watch game on the 

part of Hershey cost the joint venture 

a great deal. 

Apart from these, there are other 

reasons for the failure of JVs of 

Indian companies with foreign 

entities. Reasons such as having a 

larger say in the business, inability to 

match the zeal for growth (this may 

include failing to contribute in terms 

of capital) of the foreign partner and 

unwilling to part with equity stake, 

high-handedness and more on most 

occasions expectation-mismatch hurt 

the joint venture. 

While we consider these possibilities, 

today, joint ventures have lost their 

sheen. There are two principal factors 

that have strengthened this perception 

-availability, education and awareness 

of technology and various avenues of 

raising funds. In the early 1990s, 

when the Indian economy was on the 

threshold of opening up to FDI, these 

two factors played a crucial role in a 

joint venture. 

Today, many Indian companies are 

adopting new technologies. Many 

foreign-returned Indian entrepreneurs 

stay abreast of new technologies and 

forms of education. This section of 

foreign-returned Indians is 

contributing to Indian companies’ 

ability to keep pace with new 

technologies. Also, most of these 

companies are shaping up as global 

entities by acquiring other companies 

and raising funds overseas. 

Hence, there is no binding need for an 

Indian company to form a joint 

venture with a foreign player. A 

crucial example of how joint ventures 

are losing relevance is the emergence 

of Korean companies as brands in 

India. Koreans are highly successful 

in India and they are not into any joint 

venture. Brands such as Samsung, LG 

and Hyundai have made a strong 

impact on Indian consumers. 

Some sectors where there is no 

automatic route available for foreign 

direct investment, the concept of 

having a JV would be prevalent. 

Insurance, mining, steel, education, 

tourism, entertainment and 

government- controlled sectors would 

continue to see joint ventures. So, the 

concept of a joint venture would not 

be completely irrelevant. “The rate of 

divorces has gone up. But that doesn’t 

stop people from marrying,” says a 

veteran investment bankeR. 

8 



QUAL 

AT NIRMAL BANG, YOU’RE MORE THAN 

JUST A BUSINESS ASSOCIATE, 

YOU’RE AN EQUAL PARTNER. 

We understand and value the equation of our relationships. Which is why, we 

offer our sub-broker/authorized person/remisier equal independence and 

status that our partner merits. 

That apart, we provide unparalleled knowledge and exceptional market 

analysis to keep you ahead of the curve, to the advantage of your customers. 

After all, at NIRMAL BANG, it’s a relationship beyond broking. 

# # # 

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP 

Contact Person: Gaurav Mohta - 7738380299 & Nilesh Sonawane - 7738380027 

Address: B-2, 301/302, 3rd Floor, Marathon Innova, Off. G. K. Marg, 

Lower Parel (W), Mumbai - 400013. 

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 

Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 8601; Fax: 39268610, 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 

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 

www.nirmalbang.com

The government 

is taking the 

right steps to get 

the beleaguered 

power sector out 

of the blues 

SETTING 

WRONG 

RIGHT 

10 



P 

essimism is at its peak in 

the power sector at the 

moment. Not only 

investors but also 

promoters want to go slow due to a 

host of problems plaguing the power 

sector at present. 

First, companies that have capacities 

are suffering for want of fuel. Second, 

those companies that have capacities 

as well as fuel are facing problems of 

off-take due to the absence of buyers. 

And finally, companies with 

capacities in the development stage 

and have committed huge sums of 

money are facing hurdles owing to 

significant delays in getting 

environment and forest clearances. 

Recently a lot of companies suffered 

major setbacks due to the fall in plant 

load factors (PLF), hitting their 

profits adversely. 

Moreover, due to the lack of internal 

cash generation, companies are 

finding it increasingly difficult to 

meet their fixed costs like interest and 

repay their debts. In fact, certain 

companies are on the verge of default 

owing to these problems. 

Experts are concerned that banks with 

exposure to the power sector could 

see a rise in the number of NPAs 

(non-performing assets). And if these 

problems intensify, then they could 

take a heavy toll on the economy, 

financial institutions and also the 

consumers in the coming years. 

But there appears to be a ray of hope 

for power companies as well as 

investors, despite the gloom looming 

over the sector. The government has 

taken note of the problems that have 

besieged the sector. 

The first step is working towards 

implementing the Shunglu 

Committee report. The Shunglu 

Committee was appointed by the 

Planning Commission in the year 

2010 to address issues pertaining to 

the financial health of state electricity 

boards (SEBs) and state-run 

distribution companies. 

Of the many recommendations made 

by the Shunglu Committee, the 

suggestion for SEBs to devise a 

mechanism of regular tariff increases 

and measures to curb the transmission 

and distribution (T&D) losses are 

quite noteworthy. 

As a matter of fact, a large number of 

state-run power utilities are 

undergoing financial stress due to a 

huge pile up of T&D losses, which 

has forced power companies to opt 

for load-shedding instead of incurring 

additional cash losses. 

This decision of power companies to 

resort to load shedding hit power 

generation companies as they 

suffered losses due to the fall in 

demand as well as electricity prices in 

the spot market. Also, lower PLF led 

to the erosion of profits and the 

ability of companies to service 

interest costs. 

To address this problem, the Shunglu 

Committee has recommended the 

creation of a separate special purpose 

vehicle (SPV), a majority of which 

will be owned by the Reserve Bank of 

India (RBI). 

The RBI will provide credit to the 

SPV to purchase such loans in a 

scenario where the SEBs are not able 

to meet their payment schedules. 

However, the onus will rest on the 

respective state governments. 

This will be a big positive for power 

generation companies as most of 

them sell their power to SEBs that are 

facing cash flow problems. It is a fact 

that power companies require huge 

working capital as a result of 

significant increase in receivables. 

Also, companies are facing delays 

relating to dues from SEBs, which in 

turn has led to a drop in returns and 

increased stress on the balance sheets 

of some of these power companies. 

GOVERNMENT SUPPORT 

Apart from the recommendations 

made by the Shunglu Committee 

report, the government also tried to 

resolve the crisis. 

At a recent meeting with key persons 

from power sector companies, 

including Ratan Tata and Anil 

Ambani, Prime Minister Manmohan 

Singh assured them of support by 

chalking out a time-bound road map 

to resolve the problems faced by the 

power sector. 

At the broader level, it was decided 

that a committee of secretaries headed 

by Principal Secretary to the Prime 

Minister, Pulok Chatterji would be set 

up immediately, which will look into 

the issues or concerns faced by the 

power companies. 

It was also decided that the committee 

will chalk out 30-day, 60-day and 

90-day plans to tackle the issues. 

After 90 days since its formation, the 

leaders of power companies will 

again meet the PM to review the 

progress of the initiatives. 

SUSTAINABLE SOLUTIONS 

The key issues that will be addressed 

include initiatives to increase coal 

production from Coal India and also 

increase the supply of linkage-based 

coal from the current 50% to about 

65% to 70% of the coal requirements. 

The government is expected to start 

bidding for new coal blocks in 

mid-2012 apart from other measures 

to improve coal supply in the short- to 

medium-term. 


Coal (In million tonnes) 

Coal based 

Capacity (MW) 

Availability 

Imports 

52,000-55,000 MW of new power 

generation capacities as against the 

initial target of about 78,000 MW. 

FY10 

FY11 

FY12E 

Source: Industry Data 

85000 

95000 

115000 

Besides, most of the gas-based power 

plants have suffered a significant 

setback on the PLF front and even the 

upcoming gas-based power plants 

have been delayed due to the lack of 

availability of gas in the country. 

The committee will try to resolve the 

issue and provide preference for 

long-term PPA-based power projects 

for gas allocation. 

Also, the gas will be made available 

for the core sector or will be diverted 

to the core sectors like power sector 

from the non-core sector. In fact, the 

court too has notified about the 

allocation of gas for the core sector in 

favour of the government. 

The government is also keen on 

addressing the issue of revision of 

tariffs. A lot of companies have 

suffered in the past due to the rise in 

the price of imported coal, largely as a 

result of the depreciating rupee. 

However, their inability to pass on the 

higher coal prices, have led to losses 

and companies have threatened to 

stop power generation. If the 

companies are allowed to pass on the 

hike in coal prices, it will benefit 

them, especially those that rely on 

imported coal. 

Consensus seems to be building 

among political leaders and parties 

over tariff hike. Also, the committee 

is looking into the area of regulatory 

clearances. It is hoped that 

environment and forest clearances 

would speed up, with better 

co-ordination among different 

394 

397 

387 

ministries and state governments. 

All in all, it seems that the 

government is moving in the right 

direction to resolve the problems 

faced by the power companies now 

that politicians and policy makers 

have come together to tackle the 

menace. Further, the involvement of 

the senior leaders speaks a lot about 

the seriousness of the government and 

its intention to resolve the issues. 

While some initiatives might not 

show results in the short-term, in the 

long-run issues pertaining to fuel 

availability, clearances, health of 

SEBs and changes in tariff rates are 

most critical and if resolved in a 

time-bound manner, it will result in 

re-rating of the sector in the long run. 

Besides, it will also help in attracting 

higher investments, which is 

important given the supply-side 

issues and growing demand for power 

in the country. 

Capacity addition (MW) 

Five 

Year Target Achieved 

Plan 

6th 

7th 

8th 

9th 

10th 

11th 

19666 

22245 

30538 

40245 

41110 

78000* 

Note: * original target, ** estimated 

Source: Industry data 

17 

38 

80 

14226 

21401 

16423 

19119 

21180 

53000** 

In the eleventh five year plan which 

will be ending by March ’12, the 

country will be adding about 

There is definitely an improvement 

but under-achievement is still very 

wide. New estimates predict that the 

government is aiming to build about 

80,000 MW in the twelfth plan. 

Further, a large part of these new 

capacities are expected to be 

accounted for by the private sector. In 

this scenario, it looks like the 

government is trying to create a 

conducive environment for 

investments in the sectoR. 

12 



Several companies 

are taking the 

captive finance 

route to ensure 

steady funding 

W 

hen Jain Irrigation 

Systems evinced its 

plan of setting up an 

NBFC last year, not 

many eyebrows were raised. To a 

lesser known person it was an 

unnecessary diversification from the 

core business. But people acquainted 

with business cycles were quick 

enough to appreciate the company’s 

prudent decision. 

Setting up a captive NBFC meant an 

improvement in the working capital 

cycle for Jain Irrigation, as the brunt 

of the not-on-time subsidies from the 

government would be borne by the 

captive unit. 

The captive unit would, in turn, pay 

the company upfront, thus taking the 

load from the company’s balance 

sheet. This move from Jain Irrigation 

also meant that lesser creditworthy 

farmers will have access to funds to 

buy into the company’s various 


products like micro irrigation systems 

automation systems and water filters, 

to name a few. 

This model of setting up a ‘captive 

finance firm’ is a strategy taken by 

businesses not only in India but also 

globally to ensure that no client walks 

back due to the lack of funding. This 

also means a steady pool of buyers at 

all times for the company. 

This practice has become prominent 

especially post the financial crisis of 

2008 where banks and other lending 

institutions became risk averse and 

choosy in funding. 

This reluctance in lending hurt 

volumes of businesses. In addition to 

this, companies felt setting up a 

captive finance unit was the best 

answer to the cyclical nature of some 

of the businesses. 

Recent years have seen companies 

setting up ‘captive financing’ units in 

sectors such as automobile, medical 

tourism, construction equipment, 

consumer goods, etc. 

Internationally, captive financing has 

matured over the years and is 

prominent in the automotive sector. 

On the same lines, this form of 

financing is getting bigger and bigger 

in India, across sectors. 

WHAT IS CAPTIVE 

FINANCING? 

A captive finance company is 

basically an NBFC. But, unlike a 

typical NBFC which focuses on a 

particular segment for its business, a 

‘captive firm’ is a wholly owned 

subsidiary set in the form of an NBFC 

and its primary business is to finance 

the sales of the parent company’s 

products and services. 

A major portion of its portfolio in 

receivables is generated by the sales 

of products and services of the parent 

company or the group. It functions as 

an extension of marketing activities. 

It is registered as an NBFC with the 

Reserve Bank of India (RBI) and all 

the regulations applicable to NBFCs 

apply to a captive finance unit, too. 

PROS OF A CAPTIVE FINANCE 

COMPANY 

Being a lending institute, a captive 

finance firm competes with banks. 

However, being an extension of a 

company’s marketing initiative, a 

captive finance company enjoys the 

brand name of the parent company. 

It has the advantage of assured 

business from the parent company. 

The cost of establishment is less and 

due to it accessibility, it is more 

preferred by a customer. Hence for 

the customer, both the product and 

finance are available under one roof. 

On the regulatory front, a captive 

finance firm has an advantage over 

banks. The regulatory requirement is 

not as stringent as it is for banks. 

NBFCs have a more flexible 

regulatory frame work. 

Hence, while a bank might have 

reservations about lending to a person 

with a bad credit history, a captive 

finance company might go ahead and 

take the risk by lending at a high 

interest rate. 

This is the primary basis on which a 

captive finance company or a typical 

NBFC functions, which is high risk, 

high returns. 

Other regulatory obligations like cash 

reserve ratio (CRR), statutory 

liquidity ratio (SLR), priority sector 

lending, non-performing loans 

recognition, etc, that are applicable to 

a bank are not applicable or are 

flexible in the case of a captive 

finance company. 

Basic Requirements 

CRR 

SLR 

Priority 

Sector Lending 

Capital 

Adequacy Ratio 

Source: Industry 

Banks 

6% 

24% 

40% 

9% 

Captive 

Finance 

Firms 

/NBFC 

0% 

15% 

0% 

15% 

CONS OF CAPTIVE FINANCE 

COMPANY 

While competing with banks, the 

source of cheap funds remains the 

most difficult aspect for a captive 

finance unit. This is where banks have 

an edge. 

Banks have easy access to funds due 

to the low cost of public deposits in 

the form of current account and 

savings account (CASA). 

While not all NBFCs take deposits 

from the public, a majority of funds 

for NBFCs are borrowed from banks 

itself and these are not cheap funds. 

The business of a captive finance unit 

is inextricably linked to the fortune of 

the parent company. Due to high 

focus on the parent company’s 

products, risks get concentrated. 

Though some captive units in the 

recent past have diversified their 

portfolios by financing unrelated 

parties, a majority of them stick to 

their parent company. All this 

depends on the strategic vision of the 

parent company, while setting up the 

captive NBFC. 

“Economic cycles, competitive trends 

and regulatory changes are likely to 

affect both the parent company and 

the subsidiary NBFC, in the same 

way, is potentially amplifying risk,” 

14 



says a working group set up by the 

RBI for NBFCs in August last year. 

Rating agencies often find it difficult 

to assess the credit profiles of captive 

NBFCs on a stand-alone basis and 

they are reluctant to assign a higher 

rating than the parent company. 

Going forward, it is felt that the RBI 

would tighten the noose on captive 

NBFCs. “In general, the working 

group felt that a higher cushion of 

capital than for normal NBFCs may 

be warranted for captives,” said the 

working group of the RBI. 

AUTO FINANCING INDUSTRY 

Captive finance firms in India can be 

best understood by understanding the 

auto financing industry. The auto 

financing sector was once dominated 

by general NBFCs and banks. 

However, due to a squeeze in the 

overall liquidity in the system and the 

increased risk weightage to the 

automobile sector, NBFCs tightened 

their portfolios. 

Also competition from banks led the 

NBFCs to skip the automobile sector 

altogether. This hurt the volumes of 

auto companies. 

Steady demand for their products in 

the rural areas was an incentive for 

auto companies for setting up of 

captive NBFCs. 

In fact, some of these NBFCs have 

penetrated into unbanked areas, 

giving stiff competition to banks. 

However, while funds remain a 

challenge for auto finance companies, 

they score better in terms of credit 

assessment skills, better operational 

efficiency and higher loan yields. 

This results in better return on assets 

for auto finance companies as 

compared to banks. 

Financials 

AS ON 

Q3 (%) 

2011 

NIM 

NET NPA 

CAR 

ROA 

ROE 

Public 

Bank 

Bank of 

Baroda 

3.2 

0.51 

13.45 

1.29 

21.35 

Established captive finance 

companies like Mahindra and 

Mahindra Finance, Shriram Transport 

Finance Company and Bajaj Auto 

Finance have capitalized their 

positions over the years. 

Others like Hinduja Leyland Finance 

(HLF), jointly promoted by Ashok 

Leyland and the Hinduja Group and 

which received license in 2010, are 

banking on huge demand for their 

Standalone 

NBFC 

Magma 

Fincorp 

4.2 

0 

20 

1 

9.02 

Captive 

NBFC 

Mahindra 

Finance 

9.6 

1.09 

17.4 

3.6 

22 

Source: Industry 

ROA: Return On Asset, ROE: Return On Equity, CAR: Capital Adequacy Ratio, 

NPA: Non Performing Asset, NIM: Net Interest Margin 

Captive 

NBFC 

Bajaj 

Finance 

0.25 

17.3 

1.2 

7.5 

produce in rural and urban areas. 

It is also understood that TVS Motors 

has plans of setting up its own captive 

unit. Of the other sectors, Siemens 

received a nod from the RBI to set up 

a captive NBFC in May ’11 under the 

name Siemens Financial Services to 

offer products such as loans, leasing 

and other finance products to its 

customers in India in the industry, 

energy and healthcare sectorS. 

COMMODITY FUTURES 

Nickel 

$28,000/tonne 

Pepper 

`25,000/quintal 

Crude Oil $98/barrel 

Copper $8,500/tonne 

Guar Seed `3,200/quintal 

Silver $32/troy ounce 

Gold $1,500/troy ounce 

Zinc $2,100/tonne 

Chana 

`2,500/ 

quintal 

Aluminium $2,450/tonne 

Jeera 

`14,000/quintal 

Cardamom `1,000/kg 

Predicting Accurate Results. Consistently. 

Our research goes beyond numbers to identify the forces that affect the kundali of commodities - global events, domestic 

issues, and everything in between. Which is why, our predictions have invariably come true on several occasions, proving that 

we are among the best in the industry when it comes to commodity trading. 

EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* 

www.nirmalbang.com 

For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx 

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. 

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 

CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 



A 

BONE 

OF 

CONTENTION 

` 

Both land owners and industry-men are at 

loggerheads over the new Land Acquisition, 

Rehabilitation and Resettlement Bill, and an early 

resolution seems unlikely 

16 



Land, which has always 

been a controversial 

subject in India, is at the 

heart of a new controversy 

in the form of a new Land 

Acquisition, Rehabilitation and 

Resettlement Bill, which will 

eventually replace the archaic Land 

Acquisition Act, 1894. 

The Bill, which has been in the works 

for quite some time now, seeks to put 

in place a central legislation for 

acquisition of land and adequate 

rehabilitation and resettlement for 

affected persons. The draft Bill says 

compensation to land owners should 

not be less than four times the market 

value of land in rural areas and not 

less than two times the market value 

in urban areas. 

Under the Bill, the consent of 80% of 

the project affected families is 

mandatory, if the government 

acquires land for use by private 

companies for a public purpose. The 

proposed Bill further suggests that the 

government will not acquire land that 

will be used by private companies for 

private purposes. 

The Bill has been referred to a 

parliamentary committee for further 

examination. Rural Development 

Minister, Jairam Ramesh, recently 

said that the government may pass the 

Land Acquisition Bill in the budget 

session of the Parliament in March 

this year. 

“Once the report (of the 

parliamentary committee) is 

submitted, the government will take a 

final decision on whether to amend 

some provisions of the Land 

Acquisition Bill or not. But I hope 

that the Bill will become a law in the 

next Budget session (of Parliament),” 

said Ramesh. 

While the Bill is yet to be passed, it 

has already received a lot of criticism 

from industry bodies and some 

sections of the government. Pronab 

Sen, Principal Advisor, Planning 

Commission, government of India, 

says the Bill would make acquiring 

large tracts of land difficult. Citing the 

example of West Bengal, Sen points 

out that such states should have a land 

acquisition policy based on the 

number of jobs created per acre of the 

industrial project. 

Industry lobbying body, Federation of 

Indian Chambers of Commerce and 

Industry (FICCI), has said that the 

Bill, would make the land acquisition 

process more difficult as it restricted 

opportunities for land owners to sell 

their land. 

“FICCI feels that any act should 

recognize the fact that there are a 

large number of people who would 

like to move out of agriculture and 

sell their land. There are enough 

statistics to prove this, but the current 

bill seems to have overlooked this 

fact,” a FICCI statement said. 

Industry body, the Associated 

Chambers of Commerce and Industry 

of India (Assocham) wants a review 

of the Bill, because it feels the Bill 

overly favours land owners and not 

the industry. “The interests of farmers 

are protected but the affordable 

housing requirements of middle class 

have been completely ignored,” 

Assocham Secretary General DS 

Rawat said in a statement recently, 

adding that land costs will go up by 

60% to 80% because of higher 

compensation for farmers. 

The Confederation of Indian Industry 

(CII) is the only industry body which 

has welcomed the Bill. But, even the 

CII feels that the cost of rehabilitation 

and resettlement would have to be 

borne by the industry. 

“While CII is absolutely in favour of 

appropriate and adequate 

compensation for people who are 

affected by land acquisition, we 

believe that the costs have to be 

reasonable for the industry to remain 

viable,” a statement by CII said. 

On 7th Sept ’11, Jairam Ramesh, 

introduced the Land Acquisition, 

Rehabilitation and Resettlement Bill, 

in the Lok Sabha. The Bill was not 

passed because many felt it would 

increase land acquisition costs for the 

industry. Stung by criticism towards 

the Bill, the government diluted some 

provisions of the Bill to make it more 

industry-friendly. 

Meanwhile, the delay in passing the 

Bill has made land acquisition even 

more difficult. Land owners, in the 

hope that they would get a better 

compensation for their land after the 

Bill is passed, have put the sale of 

their land on hold. 

A lot of states have also seen protests 

by land owners, who want a higher 

compensation for their land. Instances 

of projects delayed because of land 

acquisition issues are many. 

For example, bureaucracy and land 

acquisition issues have delayed South 

Korean steel maker, Posco’s plans for 

a $12 billion plant in Orissa. Had the 

plant been constructed, this would 

have been the highest foreign direct 

investment (FDI) in the steel industry 

till date. 

The other notorious instance of a 

project being abandoned because of 

protest by land owners is Tata Motors’ 

plan to build a $350 million car plant 

in Singur, West Bengal. The 

controversy was over the alleged 

forcible acquisition of 997 acres of 

land by the state government for 

setting up a car factory. 

The land was acquired under the Land 

Acquisition Act of 1894. The law has 

provisions for the state taking over 


private land for public purposes but 

not for use by private companies. 

The Kolkata High Court has even 

conceded that the acquisition was 

illegal. Protests by displaced land 

owners, activists and the opposition 

party in the state, eventually forced 

the car maker, to shift its plant to 

Sanand in Gujarat. 

A more recent controversy was over 

the acquisition of land in Noida 

extension and Greater Noida, which 

has affected the construction of 1 lakh 

apartments. Land owners, who 

wanted higher compensation for their 

land, moved the high court, which in 

October ’11, ordered 64% more 

compensation for acquired land and 

return of 10% of developed land to 

the farmers. 

It is not just real estate projects. Legal 

battles over land have even forced the 

Greater Noida Authority to stop the 

construction of about 30 roads in 

areas around Sector 74 and along the 

Noida-Greater Noida Expressway. 

A look at all the controversies shows 

that the single largest problem is 

inadequate compensation for land 

owners and the issue of forcible land 

acquisition by the government for 

private purposes. 

The new land acquisition Bill 

attempts to address this major issue 

by offering higher compensation for 

land owners. However, the flip side to 

this step is acquiring land under the 

new Bill would become costly for 

land developers. 

Land developers would have to give 

each displaced family either a 

minimum cash payment or a job and 

other grants. The government would 

also have to pay land owners an 

interest rate of up to 15% annually of 

the land’s market value, from the date 

the purchase is announced until the 

land is acquired. 

The provisions of the law would 

certainly make land acquisition 

expensive and a lengthy process. 

Industry body FICCI says 

rehabilitation and resettlement 

entitlements in the bill would increase 

costs and administrative burden for 

the industry. 

Saying that there is no upper limit for 

rehabilitation and resettlement 

expenditure in the Bill, FICCI has 

called for a ceiling on the expenditure 

at 30% to 40% of the total land 

acquisition cost. 

“Since rehabilitation and resettlement 

obligations are to be fulfilled upfront, 

this is likely to result in time and cost 

over runs and will make most of the 

green field projects unviable. It is 

estimated that the new provisions will 

increase cost manifold and minimum 

by five times from the current levels,” 

FICCI said in a statement. 

The lobbying body has asked the 

government to review provisions of 

the Land Acquisition Bill, to make it 

viable for the industry to acquire land 

for projects. 

Minister Jairam Ramesh on his part 

says that the government will have to 

find a middle path to the problem of 

land acquisition. 

“I have received criticism from both 

the sides. Many institutions believe 

that this Bill is not progressive as it 

opens the door for crash 

industrialization and urbanization. On 

one hand, I have received criticism 

from capitalists that it is against 

industrialization. So we will have to 

find a middle path,” said Ramesh. 

This budget session, we will know if 

the bill finds acceptance. Till then, the 

industry can expect land acquisition 

problems to continuE. 

Micro analysis. Mega gains. 

Trading at Nirmal Bang is based on extensive research and in-depth analysis, where we 

focus on the smallest of details and turn them into an advantage for you. 

Over the years, the analytical approach coupled with decades of experience has helped 

us maximize returns for our investors and thereby inspire confidence in them. 

EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* www.nirmalbang.com 

SMS ‘BANG’ to 54646 | Contact at: 022-3926 9404 | e-mail: contact@nirmalbang.com 

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. 

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 


18 



The recent 

issuance of 

contracts to 

construct 

roads is a 

sign that this 

sector looks 

promising in 

the long run 

The National Highway 

Authority of India 

(NHAI) recently awarded 

as many as 12 road 

projects covering as much as 1,500 

km at an investment of `12,000 to 

`13,000 crore. 

Further, projects of over 1,000 km 

-15,000 km are in different stages of 

bidding. This development has come 

as a breath of fresh air for the road 

industry, which was witnessing a host 

of problems, including stoppage of 

work, till some time back. 

AIMING FOR THE TARGET 

In the current financial year, the 

NHAI has given contracts to 

construct 5,100 km of road, costing 

about `45,000 crore. NHAI’s effort to 

speed up the process of bidding has 

yielded good results in the past. 

Earlier, NHAI had allowed 

pre-qualifying bidders on an annual 

basis, instead of going ahead on a 

project-to-project basis. Also, 

initiatives undertaken to expedite the 

process of acquiring land is helping 

meet road construction targets. 

The authority is expected to acquire 

about 11,000 hectares of land in the 

current financial year, which is far 

better than last year’s land acquisition 

of 8,500 hectares. 

Positively, it has set a target to acquire 

land close to 14,000 hectares in the 

next financial year. Next year 

onwards it will start acquiring land 

for the expressways. 

Besides, concerns over funding are 

also easing on the back of NHAI’s 

improving financial performance and 

mopping up of funds through tax-free 

bonds. NHAI recently raised an 

amount of `10,000 crore through 

NHAI bonds. The authority further 

plans to mop up higher amounts of 

funds in the coming years with an 

increasing appetite for long-term 

bonds and attractive interest rates. 

However, considering the quickness 

in awarding of these projects, many 

believe that the target of constructing 

7,300 km of road for the current year 

will not be achieved. 

But if the NHAI manages to build 

6,000 km to 6,500 km of road for the 

current financial year, it will still be a 

big boost for the sector, which is 

facing challenges due to the lack of 

enough work for companies for the 

coming year. 

When compared with last year’s 

figure of 5,000 km, the new targeted 

figure looks relatively good and will 

lead to improvement in the execution 

cycle, reflecting in the financials of 

infrastructure companies, mainly 

from the road sector. 

ISSUE OF VIABILITY 

High interest rates and deteriorating 

economic conditions in the country 

are dampeners for companies in this 

sector as they are finding borrowing 

at 12% to 13% from banks quite high. 

Besides, it yields only 14% to 16% of 

the internal rate of return. This is still 

at the project level. 

If we take corporate expenses 

(administrative expenses and others) 

into account, then the returns would 

be much lower. This is also the reason 

why there was not much of an 

incentive for companies to bid 

aggressively for projects. 

Not only are high interest rates and 

returns posing hurdles, but also lack 

of funding by banks is worrying 

companies. Banks are turning risk 

averse and have become selective 

when it comes to funding of these 

projects. They look at the company’s 

financial health, existing leveraging 


and management. 

A lot of companies from the road 

sector are sitting on huge debt and 

their interest coverage ratios are also 

very low, considering that in the 

recent past the revenues and margins 

were hit due to the slowdown. This 

was especially due to delays in 

payments from the government and 

private sector clients. Also, execution 

delays from clients added to their 

woes since working capital 

requirements of some companies shot 

up, ultimately resulting in pressure on 

profitability of these companies. 

Besides borrowed funds, the 

companies are facing problems in 

raising equity funds due to poor 

equity market conditions. The 

conditions are so severe that some of 

them have had to sell stakes in their 

existing portfolio of assets. 

Importantly that too did not get much 

gain as valuations of some of these 

deals were quite low owing to 

negative sentiments about this sector. 

Although the situation is grim, if the 

awarding of projects continues, then 

the companies with robust 

capabilities, enough internal cash 

flows and strong balance sheet, 

especially those that do not require 

much equity, can actually look 

forward to turning the situation in 

their favour. 

EASING COMPETITION 

Under these conditions, companies 

have started doing a rethink and are 

bidding for projects that offer at least 

16% to 18% IRR so that companies 

can make decent returns. Moreover, 

this philosophy to earn decent returns 

has led to a decline in the number of 

companies bidding for these projects, 

thus reducing competition. 

Till about last year, with easing 

regulation as well as favourable 

opportunities in the road sector, a lot 

of companies had entered into this 

segment. In fact, at one point there 

were 20 to 25 bidders for a given 

project. However things are 

improving. If we look at the last few 

bids for projects, we notice that 10 to 

15 bids were made for some projects. 

Some others had one or two bidders. 

SIGNS OF IMPROVEMENT 

These are definitely better times. 

However, for the things to improve 

interest rates need to come down and 

the overall economic activity should 

improve so that companies can make 

decent profits. 

For long-term investors, this is a 

better time as the road sector is one of 

the many promising sectors in the 

industry. Also, if we look at share 

prices of some companies in this 

space, though they are above their 

2009 levels, a large part of investor 

concerns are near-term in nature. 

Investors focusing on companies with 

good execution capabilities, efficient 

working capital and less leverage in 

the books, should do well in the 

current environment, which is still not 

great as far as investments in the 

infrastructure sector are concerned. 

Besides, companies with a huge 

portfolio of operational assets should 

be given more preference over those 

that have large development portfolio 

of projects. Also, they must look at 

the funding needs of the companies 

for existing as well as upcoming 

projects since most of them are 

struggling to generate enough internal 

cash and are looking at diluting 

stakes, leading to erosion in earnings. 

LONG-TERM STORY STILL 

INTACT 

More importantly, investors should 

not lose sight of the long-term 

opportunities in the road sector. 

According to NHAI data, India 

currently has a network of about 33 

lakh km of roads. This is the second 

largest in the world. But in terms of 

density and quality of roads, India’s 

roads are still behind some of the 

developed and developing countries 

in the world. 

In relation to our population, our 

roads are just about 3 km per 1,000 

persons, which is significantly lower 

than the world average of about 7 km 

per person. In terms of the quality of 

roads, industry watchers say that 

about 80% of our roads are in a poor 

condition, which require huge 

investments to repair, renovate and 

increase the number of lanes. 

Surprisingly, within this vast network 

of roads, only about 2% is accounted 

for by the national highways and a 

very minuscule part of this, by 

express highways, which is very 

critical considering that about 40% of 

the total road traffic is handled by 

national highways. 

Looking at the present state of roads 

and the statistics at hand, there is 

immense opportunity in this sector. 

Even if we talk about 15 km to 20 km 

per day of road construction, the 

figure is humungous. 

This means that India will have to 

build about 6,000 km to 7,000 km of 

new roads every year, which is 

significant nonetheless. 

For the eleventh five year plan ending 

March 2012-13, about `3 trillion 

were allocated for the road sector as 

compared to `1.45 trillion that was 

invested in the tenth five year plan. 

This is still less compared to the 

estimates for the next 7 years to 8 

years, which suggest that India might 

invest `10 trillion to `11 trillion on 

the road sector alonE. 

22 



THE LONG AND SHORT OF PRIVATE EQUITY 

The problems 

notwithstanding, 

experts feel the 

outlook for private 

equity funds looks 

promising from a 

long-term perspective 

P 

rivate equity is not a new 

concept for most investors 

in India. Many foreign 

private funds have made a 

mark in the Indian markets. Although 

private equity started making strides 

in the Indian markets mainly after 

1999, global players made it big after 

2003 as capital markets across 

geographies started moving up, 

attracting the attention of investors. 

According to a KPMG estimate, 

private equity investments grew from 

US $470 million in CY2003 to US 

$8,607 million for the nine months of 

CY2011, a 38.14% rate of growth. 

These investments include 56 deals in 

2003 and 322 deals in nine months of 

2011, which indicates an average deal 

size of US $8.4 million and US 

$26.73 million. A point to note is that 

the above data does not include real 

estate deals. Over a period of time 

both the number of deals and deal 

sizes have gone up. 

So what is it about these judicious and 

uncompromising investors who make 

hay even before the sun shines? We 

give you a low-down on the modus 

operandi of private equity investors 

and how important these investors 

would be in the coming years in the 

wake of macroeconomic uncertainty. 

THE BASICS 

Private equity is a pool of capital 

contributed by high networth 

individuals and institutions to invest 

in business assets both in public and 

private markets with a long-term 

horizon. A typical private equity fund 

has a life of three to ten years, with a 

median life of five years. The asset 

base of a private equity fund ranges 

from a few hundred million dollars to 

billions of dollars. An investment 

made by a private equity fund will 

typically ensure at least a seat on 

board or some way or the other to 

influence the management. 

Though private equity deals have 

shown healthy growth over a period 

of time, at the peak of the bull-run 

most private equity funds were 

finding it difficult to spot deals at the 

right price. Most companies in India 

are family-run and promoters are not 

keen to share management control. 

Private equity funds typically ask for 

a say in the operations of the company 

in the form of management control. A 

seat on the board of a company is a 

very common demand from private 

equity funds. 

In bull phases, promoters have the 

option of going public to ensure that 

they retain absolute management 

control and will not mind sharing 

their profits with ‘minority 

shareholders, primarily including 

small individual investors’. 

Even if some of the promoters agree 

to allow a private equity fund to 

invest in their company, they would 

demand top notch valuations as they 

have the alternative to go public if the 

private equity fund does not agree. 

These factors have first reduced 

possible gains of private equity 

investors as it reduces the list of 

potential deal candidates and at the 

same time the high price paid brings 

down the possible Internal Rate of 

Return (IRR). 


THE VISION 

A typical PE investor stays invested 

for more than five years but prefers to 

earn high returns over the returns 

offered by public markets – read stock 

markets. In case of realised 

investments, between 2004 and 2011, 

PE investors enjoyed a weighted IRR 

higher than the BSE Sensex IRR. One 

must see these returns in the backdrop 

of the boom and bust cycles in the 

financial markets. 

Investee companies too look at 

private equity funds for vital inputs 

beyond capital. Investee companies 

find it easy to attract talent post 

private equity funds. Private equity 

funds also help companies to develop 

new business models, improve 

corporate governance and efficiency 

as well as infrastructure capacity 

development. Investee companies can 

further raise funds as investor 

perception towards them improves. 

In knowledge-driven nascent 

businesses, private equity investors 

bring modern processes and 

operational know-how in the 

developed nations to the table. 

Investee companies thus find it 

value-accretive to have a private 

equity investor. 

As these relationships blossom and 

grow with each entity benefiting 

thoroughly, PE players also form an 

exit strategy. Exit strategies too have 

been important for private equity 

investors in India. Most private equity 

investments have been in high growth 

companies and the valuations that the 

investee business gets at the time of 

exit decides the rate of return. Many a 

time businesses are valued much 

higher than what investors in public 

markets are willing to pay at the time 

of public offers. 

Between 2004 and 2011, 38% of exits 

by private equity funds took place by 

way of open market sale. Strategic 

sale accounted for 32% exits. 

Contrary to expert expectations, only 

8% exits were in the form of initial 

public offers (IPO). For the 

uninitiated, an exit through IPO 

means that PE investors sell their 

stakes in the public offer itself. The 

company may choose to raise 

additional funds as the case may be. 

Whereas, an open market sale means 

the private equity investor offloads 

stake in the secondary market. 

But if one looks at the returns 

generated on categories of deals done 

based on deal exit, secondary sales, 

meaning sale of an investment by one 

private equity fund to another, it turns 

out to be the best, with highest 

returns. It has been observed that on 

an average 12% of deals private 

equity investors have exited using 

secondary sale. 

This high IRR is followed by exits by 

strategic sale. In both these types of 

exits, the buyer is generally an 

institutional investor (a private equity 

fund in case of secondary sale) or 

another firm. IPO and open market 

sales are dependent on sentiments in 

stock markets and, hence, the returns 

are accordingly influenced. 

The worst form of exit is buyback, 

also known as Put Option with a 

private equity fund. This is the case 

where after the deal the company 

cannot progress as expected, and in 

many cases, the relationship between 

private equity fund and promoters is 

on a rough patch. No wonder, IRR 

from buybacks is a paltry amount. 

THE CHANGE 

Though private equity funds saw 

tough times in 2007 in the deal 

market, things have changed over the 

last couple of years. Money is no 

more cheap and more importantly, the 

risk appetite of investors has gone 

down. The demand for ‘patient 

capital’ for businesses in high growth 

phases is going up. Naturally, private 

equity funds are finding their stay in 

Indian markets more rewarding now. 

But the life is surely not a cakewalk 

for most private equity funds. The 

new challenges are in the form of 

increased competition as the number 

of private equity funds investing in 

India go up and limited project flow 

leaves less options to choose from. 

The real taste of private equity funds 

will be in ‘managing’ their exits from 

the deal. According to a KPMG 

estimate, nearly US $85 billion worth 

of exits will materialize over the next 

three years till 2014. Such a large 

amount of money getting out of 

projects can really shake up the 

Indian financial markets and many 

private equity funds may find the 

value of their stakes in projects going 

down in a volatile capital market. 

In such times, investments in toxic 

sectors such as real estate and 

long-term infrastructure projects will 

be difficult to liquidate. These 

businesses are still in need of money 

and private equity investments, 

especially larger ones, will find it 

difficult to identify a buyer at the 

‘right’ price. 

Private equity funds will surely add to 

the Initial Public Offerings (IPOs) 

pipeline while exiting from their 

investments and some of the 

investments will be rolled over to 

other funds through secondary sales. 

The worse may come in the form of 

situations where promoters of 

investee companies are unable to 

carry out a buyback due to 

indebtedness or involvement in scams 

that broke out in the past few years. 

But most experts are of the opinion 

that private equity still remains an 

attractive investment avenue for those 

who are looking for higher returns 

over a longer period of timE. 

24 



The most intelligent strategy in Chess is to 

be ready with the next move. Similarly, 

currency trading involves moves that are a 

combination of knowledge and skill, 

backed by years of experience. 

Currency Derivatives Trading with us keeps 

you a few steps ahead, always. 

Contact: 022-39268088 

e -mail: currencies@nirmalbang.com 


EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP 

38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610, 

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

The introduction of 49% FDI in the 

aviation sector is being looked at 

positively as it could bail out 

troubled domestic airline companies 

FLYING 

ON 

HOPE 

The aviation sector has been 

facing a host of problems 

since quite some time. The 

issues range from change 

in demand-supply dynamics to rising 

fuel costs and huge debt in the books 

of airline companies. 

As a result of this, consolidation as 

well as rationalization of capacities 

and routes has been initiated in the 

aviation industry. 

And now there are talks of the 

government planning to allow 49% 

foreign direct investment (FDI) in the 

sector, which could be a good move 

for the Indian aviation industry that 

has suffered huge setbacks due to 

financial constraints. 

Earlier a group of ministers, including 

civil aviation minister Ajit Singh and 

finance minister Pranab Mukherjee 

met to decide on the proposal to allow 

49% FDI in Indian airlines. 

This could be a landmark 

development for the aviation industry, 

especially from the policy point of 

view, considering that the Indian 

airline companies are looking for 

reforms in the sector owing to the 

ongoing problems. 

Earlier foreign airlines were not 

allowed to invest in Indian airline 

companies, although foreign direct 

investment was allowed. The 

ministers have now agreed to the 

proposal, which has been moved to 

the cabinet for approval. 

CATCH-22 SITUATION 

The decision on the FDI comes at a 

time when the industry is facing one 

of the most turbulent times. 

According to data released by the 

Directorate General of Civil Aviation 

(DGCA), in the month ending 

26 



December ’11, passenger traffic 

growth declined to 8% to 5.63 million 

people, which is being seen for the 

first time after a gap of three years. 

This reflects the slowdown in 

economic growth and its impact on 

air traffic. 

The risk to growth is only increasing 

with expectations of a further 

slowdown in traffic due to the coming 

lean season over the next couple of 

months and the overall impact on the 

service industry as other economic 

activities like growth in the 

manufacturing sector are showing 

signs of a slowdown. 

Apart from demand, airline 

companies have recently seen a drop 

in flight occupancies as a result of 

higher capacities and lower demand. 

However to deal with the situation, 

the companies are resorting to route 

rationalization and reduction in 

flights, which is already being seen in 

some cases. Yet, the cost has 

remained the same due to the increase 

in crude oil prices in recent times. 

The aviation sector is most 

susceptible to fluctuations in crude oil 

prices, which accounts for almost 

35% to 40% of the overall operating 

cost structure of the companies. 

Globally, crude oil prices do not 

bother much, considering that fuel 

accounts for only 10% to 15% of the 

operating cost. However in India, 

experts blame this on high taxes 

levied on aviation turbine fuel (ATF), 

inadequate infrastructure as well as 

high airport charges. 

Higher operating costs at a time when 

the industry is struggling for growth 

has only increased the pressure. In the 

current competitive environment and 

higher capacities, the companies are 

not able to pass on the costs fully. 


All these factors have added to the 

woes of the sector. The biggest issue 

is debt which in many cases is close to 

one time the equity or even higher 

than one time in certain cases. 

Servicing such high debts and 

interests on them not only requires 

higher demand but higher utilizations 

of the aircraft and low operating costs 

so that enough cash can be generated. 

As there are no visible signs of 

internal cash generation, the 

companies are on the verge of 

reporting huge losses, and in some 

cases, filing for bankruptcy. 

Like in the past, the state-run airline 

has been bailed out by the 

government through fund infusion. 

However, there is no such leeway for 

private airline companies. They will 

have to infuse their own money to 

survive or else there will be immense 

pressure on the banking system in the 

form of increase in non-performing 

assets (NPAs). 

HOW WILL FDI HELP IN THIS 

SCENARIO? 

Experts believe that the wounds are 

so deep that even the opening up of 

the FDI route would not help, at least 

in the near- to medium-term. 

Also, if one looks at the global 

aviation industry and the current 

financial profile of some of the largest 

airline players in the world, he will 

find that there are very few who have 

enough financial muscle to invest in 

the country. 

Global airline companies want to 

invest in India. But most of them are 

running into losses and are sitting on 

huge debts with the stress on 

operating cash flows. 

Other noticeable thing is that even 

global giants are fearful of investing 

in India at this point in time, given the 

current policy environment. Many 

global players have expressed interest 

in the Indian aviation market. 

However, before they jump into the 

fray, it would be better if they seek 

clarity or government support or 

assurance on the policy front. 

On the positive side, the Ministry of 

Aviation feels that by allowing FDI in 

the sector, Indian companies can 

expect more money from foreign 

players, especially since there is very 

little or almost no appetite among 

domestic investors to invest in the 

sector at this point in time. 

And the FDI can provide a window 

for airline players with the ability and 

the willingness to attract investments 

from foreign players. 

In fact, even banks have now become 

risk-averse to the aviation sector and 

would not like to put any additional 

money into the sector. 

There is a high possibility that some 

of this FDI money could be used by 

companies to reduce their existing 

debt and create a sound business 

model, which is more likely to sustain 

in the long run. 

Global players will not only bring 

international expertise and advantage 

of scale, but will also bring in 

synergies in terms of network sharing, 

which will lead to improvement in the 

business and effective utilization of 

the existing resources. 

With this measure, the Indian aviation 

companies will see serious investors 

considering investing in India and 

those who are looking at expanding 

will stay committed in the long term. 

Further, industry experts believe that 

since most global airline companies 

are suffering mostly in the developed 

world as the markets have matured, 

international airline companies have 

no choice but to invest in developing 

countries like China and India, which 

are the fast growing markets. 

THE ROAD AHEAD 

The long-term story of the aviation 

sector still remains intact in terms of 

growth potential due to factors like 

very low penetration, demographic 

divide and increasing working 

population. There were hurdles, but 

despite that growth in air traffic in the 

last several years has remained in the 

range of 12% to 15%. 

Interestingly, even at current levels, 

only 2% to 3% of Indians are 

travelling by air, which is far less than 

the global average. Even if we 

compare with China, which has about 

10% to 12% penetration, India’s 

current penetration is much lower. 

However, the real question is whether 

airlines can make money. FDI is just 

one part of the issue, which could at 

best address concerns regarding 

liquidity and solvency of some of 

these companies in the medium to 

long term. 

However, the larger issue of costs, 

infrastructure, taxes and others 

persist. If the industry has to grow at 

its fullest potential, with the 

companies making enough profits, 

which is well enough to reward 

investors and investments, other 

issues particularly cost of fuel and 

related taxes have to be rationalized. 

The benefits of FDI or its 

implementation can only be achieved 

if other issues too are addressed in a 

timely manner, which will 

collectively help companies to 

operate profitably and take the 

advantage of the potential. 

Introducing FDI could be a good start, 

but investors should keep a close eye 

on other issues toO. 

28 



Now Read 

Like This... 

on the Net 

Like This... 

Like This... 

SUBSCRIBE 

$ 1.99 

1.99 

TODAY! 

http://www.magzter.com/IN/Premium-Speciality-Magazines-P/Premium/Business/ 

per issue 

12 issues 

$ 14.99 

http://magazine.premiumonline.in 

February 2012 Premium 27

Indian 

Pharma’s 

Foreign 

Connection 

Owing to easy availability of capital and 

increased global interest in the 

pharmaceutical and biotech industry, the 

sector has become a favourite for 

mergers and acquisitions 

India’s pharmaceutical industry has made 

phenomenal progress in the past 10 years. And 

pharma companies are leaving global footprints 

through mergers and acquisitions. Further, due to 

the easy availability of capital and increased global 

interest in the pharmaceutical and biotech industry, the 

sector has become a favourite for mergers and 

acquisitions. Therefore, foreign companies are lapping 

up the opportunities offered by the pharmaceutical 

industry in India. 

This phenomenon began with the acquisition of Ranbaxy 

30 



Laboratories Ltd in June ’08 by Daiichi Sankyo Company for approximately $4,538.6 million, representing a 31% 

premium. This acquisition completely changed the landscape of the merger and acquisition (M&A) space in the Indian 

pharma sector and stood out as a remarkable point in the industry. 

THE STARTING POINT 

The Daiichi Sankyo-Ranbaxy deal demonstrated the thirst of global companies to enter into emerging markets. A huge 

number of global pharma companies began increasing their share in the Indian market by acquiring additional stakes in 

their Indian subsidiaries, following this deal. 

Another deal involving Abbott Healthcare Pvt Ltd (AHPL), an Indian subsidiary of Abbott Laboratories, US (Abbott Lab) 

and Piramal Healthcare Ltd signifies a wave of consolidation within the global pharma industry. 

Abbott Healthcare Pvt Ltd acquired the branded generics business of Piramal Healthcare Ltd for $3.72 billion, valuing the 

deal at 9.5 times Piramal’s actual valuation. This deal offered Abbott a number of benefits, including a 7% combined 

market share in the Indian generics market, making it the single largest player in the Indian pharma sector and giving it 

the much required access to other emerging markets. 

M&A Valuation Trend Post-Ranbaxy Deal 

Date Target Acquirer Country Deal Value 

($ mn) 

DV/ 

Revenues 

Dec ’10 

Nov ’10 

May ’10 

Mar ’10 

Jun ’09 

Apr ’09 

Mar ’09 

Jun ’08 

Apr ’08 

Paras Pharmaceuticals 

Solvay Pharma India Ltd 

Piramal Healthcare Ltd - 

Domestic formulations business 

Aventis Pharma 

Shantha Biotechnics Ltd 

Pfizer Ltd 

Novartis India Ltd 

Ranbaxy Laboratories Ltd 

Dabur Pharma Ltd 

Reckitt Benckiser 

Abbott Capital India 

(Abbott Laboratories) 

Abbott Laboratories 

Hoechst GmbH 

Sanofi Pasteur 

Pfizer Inc 

Novartis AG 

Daiichi Sankyo Co 

Fresenius Kabi AG 

United Kingdom 

United States 

United States 

France 

France 

United States 

Switzerland 

Japan 

Germany 

720.90 

66.88 

3,720.00 

91.50 

625.20 

169.50 

75.57 

4,538.60 

220.00 

8.12X 

6.4X 

8.47X 

3.96X 

8.7X 

3.25X 

2.5X 

6X 

3.73X 

Source: Datamonitor 

WHAT IS DRIVING DEMAND 

Companies across the world are 

reaching out to their counterparts to 

take mutual advantage of the other’s 

core competencies in research and 

development (R&D), manufacturing, 

marketing and niche opportunities 

offered by the changing global 

pharmaceutical environment. 

To adapt to the changing trends, 

Indian pharmaceutical and biotech 

companies have evolved distinctive 

business models to take advantage of 

their inherent strengths and the 

‘borderless’ nature of this sector. 

These differentiated business models 

provide both pharmaceutical and 

biotech companies the necessary 

competitive edge for consolidation 

and growth. 

However, a major turning point for 

the pharma industry was the year 

2005 when the Indian government 

enacted the Product Patent Act. 

Following the enactment of the Act, 

pharma companies began increasing 

their spend on R&D. 

Today, there are over a dozen new 

molecules in various stages of clinical 

trials, ready for launches in the next 

few years. A lot of pharmaceutical 

companies have out-licensed these 

molecules to mutlinational companies 

for global launches. 

Multinational companies have also 

recognized the manufacturing process 

and cost-competitiveness of 

pharmaceutical companies in India 

resulting in joint ventures (JVs) and 

other beneficial alliances for the 

global markets. 


Acquisition Of Additional Stake In Indian Subsidiaries By Global Companies (2007 - YTD 2011) 

Date Target Acquirer Country Deal Value 

($ mn) 

% Of 

Acquisition 

 

 

 

Aventis Pharma 

 

Novartis India Ltd 

Hoechst GmbH 

 

Novartis AG 

France 

United States 

Switzerland 

91.50 

133.00 

75.57 

10.27 

28.80 

25.50 

Source: Datamonitor 

M&As ACROSS THE GLOBE 

Apart from patented pharmaceutical 

and biotech companies that scout for 

newer geographies to launch their 

patented molecules, the global 

generics market too has seen an 

unprecedented wave of consolidation 

in the past two years. 

Recently, Teva acquired US generics 

major IVAX for US $7.4 billion to 

become the world’s largest generics 

company. In the year 2004, Teva paid 

US $3.4 billion for Sicor, an 

US-based company. Further, Teva and 

Sandoz, generics arm of the Swiss 

pharma group, Novartis, have been 

buying small generics companies to 

grow in size. 

Sandoz bought Hexal and Eon 

Laboratories in Germany as well as 

Croatia’s Lek, Canada’s Sabex and 

Denmark’s Durascan in 2004 and 

2005. Deflation in the generic 

industry would lead to displacement 

of weaker pharma players, thus 

leading to consolidation. 

The trend has gathered momentum 

with the $1.9 billion buyout of Andrx 

by Watson to create the third largest 

specialty pharma company. Three 

levels of integration are currently 

being sought in the generics market at 

the moment. 

 

(API/Formulation) 

 

pipeline) 

 

Distribution In The Developed World 

The US and the European generics 

companies are scouting for 

alliances/buyouts at the back end of 

the chain, which would allow them to 

offset any manufacturing cost 

advantage held by companies in the 

developing markets. 

Indian companies on the other hand 

are looking at front-end integration 

since building a front-end distribution 

set-up from scratch could take a 

significant amount of time. 

Product-side integration is common 

to both sides, with weaker 

US/European generics companies 

looking at anyone that could offer a 

basket of products. 

This is because the US/European 

pipeline is weak while Indian 

companies are aspiring to grow 

rapidly, achieving critical mass 

quickly, while considering 

geographic expansion. 

M&A TREND IN INDIA 

 

pharma industry. Size and end-to-end 

connectivity are the two major factors 

in the global markets. To achieve 

 

looking at Indian companies. 

Further, India’s changing therapeutic 

requirements and patent laws will 

provide new opportunities to big 

pharma players to launch their 

patented molecules. India’s strong 

manufacturing base will stand global 

generics companies in good stead as a 

low-cost development and 

 

due to consolidation in the domestic 

industry and investments by the US 

and European firms, the spate of 

mergers and acquisitions by Indian 

companies has ushered an era of the 

 

 

companies have gone on a global 

‘shopping spree’ to build up critical 

mass in the international markets. 

Also, given the easy access to global 

finance, Indian pharmaceutical 

companies are finding it easier to 

fund their acquisitions. 

INCENTIVES FOR MERGERS 

AND ACQUISITIONS BY 

INDIAN COMPANIES 

 

marketing, manufacturing and 

research infrastructure 

 

 

other geographies/therapeutic 

segments/customers to enhance 

product life cycle and build synergies 

for new products 

 

intellectual property portfolio 

 

Acquisitions are the quickest way to 

front-end access. What is interesting 

is that apart from market access – that 

is marketing and distribution 

infrastructure, the acquiring company 

gets an established customer base as 

well as some amount of product 

32 



integration (the acquired companies 

generally have a basket of products) 

without the accompanying regulatory 

hurdles and other issues. 

There are also entry barriers for 

pharma companies from the 

developing nations, and acquisitions 

make it easier for them to find a 

foothold in the developed markets. 

For instance, there is a cultural and 

language barrier in Europe and 

Europe is high on the radar of Indian 

pharmaceutical companies. 

The sheer heterogeneity of Europe 

and the fragmented nature of its 

pharmaceutical market make 

acquisitions an easy route to enter in 

this region and the US being the 

largest pharma market in the world, 

will always interest Indian pharma 

companies due to its sheer size. 

Over the last two years, several Indian 

companies have targeted the 

developed markets in their pursuit of 

growth, especially through the 

inorganic route. Companies such as 

Ranbaxy, Wockhardt, Cadila, Matrix 

and Jubilant have made one or more 

European acquisitions, while others 

such as Torrent are also scouting for 

potential targets. 

Besides gaining faster entry into the 

target market, one of the main 

strategies behind acquisitions is 

leveraging India’s low-cost advantage 

by shifting the manufacturing base to 

India. At the same time, the acquired 

companies also serve as an effective 

front end for Indian companies in 

these markets. 

M&A – CHALLENGES 

While growth through acquisitions is 

a sound idea in principle, there are 

challenges, as well. They relate 

mainly to the stretched valuations of 

acquisition targets and the ability to 

turn them around within a reasonable 

period of time. 

The acquisitions of RPG Aventis (by 

Ranbaxy) and Alpharma (by Cadila) 

in France are clear examples of how 

acquisitions are proving to be a drain 

on the company’s profitability and 

return ratios for several years 

following the acquisition. 

In several other cases, acquisitions by 

Indian generic companies are small 

and have been primarily to expand the 

geographical reach while at the same 

time, shifting production from the 

acquired units to their cost-effective 

Indian plants. A few have been able to 

develop a bouquet of products. 

Other than Wockhardt’s acquisition of 

CP Pharma and Esparma, other global 

acquisitions have taken at least three 

years to break-even. 

Most acquiring companies have to 

pay greater attention to the 

post-merger integration as this is the 

key for the success of an acquisition 

and Indian companies have to wake 

up to this fact. Also, with increasing 

spate of acquisitions, target 

valuations have substantially 

increased, making it harder for Indian 

companies to fund the acquisition. 

OTHER SIDE OF THE STORY 

It is not necessary that every time 

there will be a success tale to reveal, a 

few times destiny takes another way 

and gives a bitter experience. 

A similar thing is being experienced 

by India’s leading pharma firm Sun 

Pharma, which failed in its bid to take 

over Israel’s Taro Pharmaceuticals in 

2007 (eventually Sun took over in 

2010) and also of Ranbaxy to take 

over Orchid Pharmaceuticals (later 

they come to an amicable solution) 

could have really taken the Indian 

pharmaceutical industry to different 

path of growth. 

With the Ranbaxy deal failing and 

eventually. Ranbaxy being acquired 

itself opened doors for other Indian 

promoters to consider selling their 

stakes at high valuation rates, which 

was detrimental for the Indian pharma 

industry. The failure of the Sun 

pharma deal in 2007 actually pushed 

the plans of Sun pharma’s expansion 

into the US, Canada and Israel, by 

almost three years. 

IT IS NOT THE END 

An industry analyst believes the 

solution for sustainable growth in the 

industry will be a reasonable 

combination of organic and inorganic 

strategies. Given the clear 

segmentation (branded, generic and 

over the counter) of the 

pharmaceutical industry, the strategy 

has to be specific to the segment and 

the opportunity. 

Indian pharmaceutical companies 

have done quite well in the past 

decade by entering into and making a 

prominent mark for themselves in the 

generics markets worldwide, 

especially in the US. The biggest 

advantage that the Indian pharma 

industry has and continues to have is 

its low-cost talent pool. This has 

enabled the successful launch of 

many generics from India. 

However, the Indian pharma sector 

has missed out on developing a 

blockbuster patented drug which big 

MNC pharmaceutical companies are 

famous for. 

This could have provided them a 

robust cash flow for years to come 

which they could have further 

deployed for more research and 

development for both generics and 

patented drugs. Had that been the 

case, we would have seen Ranbaxy 

and Piramal of India acquiring one of 

the big pharma companies of the US 

instead of what actually happeneD. 


Balrampur Chini Mills Limited 

Savouring 

Sweet Success 

Due to its low leveraging and well-diversified 

business, Balrampur Chini Mills Ltd is better placed 

than its peers 

T 

he sugar industry is cyclical in nature wherein a 

downtrend sees an increase in the area of 

cultivation for sugar, while an uptrend sees a 

decrease in the area of cultivation. Good supply 

of sugar leads to a decrease in sugar prices resulting in 

delays in payments to farmers by mill owners. 

Meanwhile, farmers switch to other crops due to mounting 

arrears, leading to a decline in sugarcane harvest and 

sugarcane production, subsequently. All this eventually 

results in strong sugar prices, encouraging farmers to again 

switch to the harvesting of sugarcane. The whole cycle 

repeats itself in this manner. It takes 5 to 6 years for a sugar 

cycle to come full circle. 

Farmers 

Shi Back To 

Sugarcane 

Producon 

High 

Sugarcane 

Producon 

Sugar Prices 

Firm Up 

Decline In 

Sugar Prices 

Decline In 

Sugarcane 

Harvesng 

Huge Arrears 

Of Payment 

Farmers 

Shi To 

Other Crops 

Both the production of sugar as well as the prices have an 

inverse relationship with each other and they move in 

opposite directions. 

34 



Inverse Relation Between Price And Production 

35 

30 

25 

20 

15 

10 

5 

0 

SY01 SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11 

Source: Industry Estimates 

Mumbai prices 

CURRENT SITUATION 

Currently, there is surplus production in the market 

resulting in low prices of sugar, especially in UP. 

Domestic Sugar Scenario 

(mn tonnes) 

Production 

Y-o-Y Growth % 

Opening Stock 

Imports 

Total Availability 

Domestic Consumption 

Exports 

Closing Stock 

Closing Stock (months) 

Source: Industry Estimates 

All India Producon 

SS10 

18.9 

30.3 

2.5 

4.2 

27.1 

21.2 

0.3 

4.4 

2.5 

SS11E 

24.5 

29.6 

4.4 

0 

28.9 

22.1 

2.7 

4.2 

2.3 

SS12E 

26 

6.1 

4.2 

0 

30.2 

23 

3 

4.2 

2.3 

At current prices, sugar mill owners are not even able to 

recover their cost of production. Therefore, there is a high 

possibility of default in sugarcane payments. We believe 

that from SY13E (SY = October–September), we can 

witness low plantation of sugarcane, leading to lower 

production in the coming season. 

This is likely to cause a turnaround in the sugar cycle and 

lead to an increase in sugar prices, which may, in turn, 

bring sugar companies back in profits. 

INTERNATIONAL SITUATION 

Raw sugar for March ’13 is trading at a premium to the 

July ’12 contract on ICE Futures US as compared to 

discount six months ago. The switch is reflecting a change 

in outlook even before forecasts for the next season from 

the International Sugar Organization. 

SY12 is expected to be a year of oversupply as crop 

situation is better in Brazil and India, which is reflected in 

the fact that international sugar prices are hovering at a 

lower end. However, for SY13, there are supply concerns 

as crops from Brazil and India are expected to be lower. 

Cane production in Thailand, the second-largest shipper, 

may decline from a record in the year starting November 

because of dry weather. China, the second-biggest 

consumer after India, will import the sweetener to 

replenish stockpiles that were diminished by state sales, 

intended to curb inflation 

All these factors are expected to push international sugar 

prices higher in SY13. 

OUR BET – BALRAMPUR CHINI 

We are of the opinion that Balrampur Chini is a better bet 

among sugar companies as it has low leverage and high 

diversification in ethanol and power co-generation 

divisions, which provide cushion to the company in case of 

an adverse sugar cycle. 

THE COMPANY 

Balrampur Chini was incorporated in 1975 with a crushing 

capacity of 800 TCD (Metric Tonnes crushed per day). 

Balrampur Chini Mills Ltd is one of the largest integrated 

sugar manufacturing companies in India. It has eight mills 

with a combined cane crushing capacity of 76,500 TCD. 

All factories of the company are located in eastern UP, 

making it the biggest sugar company in UP. 

Capacity Of Sugar, Power And Alcohol 

Installed Capacity 

Sugar 

Distillery 

Co-generation 

Source: Company Data 

76500 TCD 

320 KLPD 

179.85 MW 

Balrampur Chini is one of the largest sugar manufacturing 

companies in India. In the current situation of surplus 

availability of sugarcane crop, Balrampur is expected to 

benefit the most as it will be able to crush more sugar, 

leading to higher production of by-products like bagasse 

and molasses. Bagasse is a raw material for power 

co-generation and molasses is used to produce 

alcohol/ethanol. As much as 1,000 tonnes of sugar yields 

50 tonnes of molasses and 325 tonnes of bagasse. 

These are the most profitable divisions of the company. 


(Co-generation posted 24% PBT margin in 9MFY12 and 

distillery posted 32% PBT margin during the same period) 

and in a down cycle, it acts as a strong back up in case of 

slowdown in sugar business. 

Some state governments have mandated 5% ethanol mix in 

fuel, which reduces costs. In October ’10, the government 

increased procurement prices (for OMCs) to `27 per litre 

from `21.5 per litre. There is a strong likelihood that 

ethanol prices may be further increased (a committee has 

been formed to derive an ethanol pricing formula, which 

would be linked to petrol prices). 

Financials 

Consolidated FY08 FY09 FY11 

` Cr 

Sales 

EBITDA 

Margins % 

Depreciation 

Interest 

Other Income 

PBT 

PAT 

Margins % 

EPS (`) 

Oct -Sept 

12 months 

1490.9 

314.3 

21.10% 

125.3 

100.1 

15.2 

104.1 

78.3 

5.30% 

3.1 

Oct -Sept 

12 months 

1747.1 

447.4 

25.60% 

116 

106.8 

8.2 

232.8 

209.1 

12.00% 

8.2 

Oct - Mar 

18 months 

2972.4 

509.7 

17.10% 

173.1 

138.4 

26.2 

224.4 

162.7 

5.50% 

6.4 


ATTRACTIVE VALUATIONS 

Balrampur Chini is trading at approximately half of its 

replacement cost. 

Price To Bookvalue (1 year forward) 

300.0 

250.0 

200.0 

150.0 

100.0 

50.0 

0.0 

Price 1 2 3 4 5 


BUYBACK TO INCREASE SHAREHOLDER’S 

VALUE 

In February ’11, the company bought back 1.5 crore shares 

from the open market at an average price of `71.2 per 

share, spending a total amount of `109.7 crore (99.7% of 

the planned buyback amount of `110 crore). This shows 

the management’s confidence in its own business model, 

which would result in increase in the value of the stock for 

shareholders in the future. 

SUGAR INDUSTRY REGULATION 

Future Road Map 

India is the world’s largest consumer and the second largest 

producer of sugar after Brazil. It is the only industry that 

provides (sales) sugar at subsidized rates through the 

public distribution system (PDS). 

At present, the sugar industry is under the government 

control, right from the level of production to distribution. 

Release Mechanism 

Valuations 

Replacement Cost Of 

Present Plant 

Equity Shares 

CMP 

Market Cap 

Debt 

EV 

Replacement Cost/ EV 


`4000 Cr 

25.6 Cr 

`49 Per share 

`1256 Cr 

`1147 Cr (Sept'11) 

`2402 X 

1.7 

Being an essential commodity, sugar sales are regulated by 

the Central government 

90% of the production is sold as free sugar under the 

monthly release mechanism announced by the Central 

government 

10% of the production is sold as levy sugar for Public 

Distribution System at lower prices as per the Central 

government directive 

Command Area 

TRADING IN THE LOWER BAND OF P/BV 

Balrampur Chini is available at a P/BV of 0.8x as 

compared to its historic average of 2x. 

Sugar producers are not allowed to own cane fields in 

India 

New sugar mills cannot be set up within 15 km of the 

existing units 

36 



Sugar mills have to purchase all the cane sold to them, 

even if it exceeds their requirement 

SAP And FRP 

The Centre decides the minimum price, called the Fair and 

Remunerative Price (F&RP) known as the Statutory 

Minimum Price or SMP at which sugar mills have to 

purchase sugarcane from farmers. 

However, different states fix their own prices known as 

State Advised Price (SAP), which is usually 30% to 40% 

higher than FRP. For SY11, FRP was `139/quintal whereas 

UP’s SAP was `205/quintal. Recently, the UP government 

increased the SAP further to `240/quintal for SY12. 

Export Sales 

Export of sugar from India is subject to a quantitative 

ceiling announced annually for each financial year. The 

government decides the quantity of sugar to be exported 

every year. In the current year that is SY12E, 1 million 

tonnes of sugar export has been allowed. 

Private sugar industry body ISMA is pushing for 

de-control of the sector. It is seeking the removal of levy 

obligation by giving freedom to sell sugar in open markets. 

To consider the above issues, the government has set up a 

committee to take steps in this direction. Any news in this 

regard would act as a positive trigger for the industry in 

general and for Balrampur Chini, in particular. 

IN A NUTSHELL 

We expect the sugar cycle to turnaround in SY13 resulting 

in up movement of sugar prices, which would benefit the 

whole industry, including Balrampur Chini. We believe 

Balrampur Chini will be one of the major beneficiaries due 

to its low leveraging and well-diversified business. 

The current valuation of the company also makes it a better 

pick in the industry. It is currently available at less than the 

replacement cost of its existing facilities and is available at 

the lower band of its historic P/BV. Further, any step 

towards decontrol of the sugar industry would act as the 

icing on the cake for the companY. 

Now, Commodity Trading 

Is No More A Puzzle. 

Commodity trading can be confusing especially if one 

is inexperienced and lacks the necessary skills to trade 

successfully. At Nirmal Bang, our team of seasoned 

analysts with years of experience and in-depth 

knowledge can help you spot the underlying clues 

and create the investment strategies that best suit 

your commodity trading requirements. 


For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx 

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. 

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 



Unshackle 

The Bonds 

Of Taxation 

With equity 

investments not yielding 

good returns in the 

current times of 

volatility, tax-free 

bonds appear to be the 

best bet for investors 

The year 2012 seems to be 

the year of tax-free bonds 

for investors with a whole 

host of bond issuances 

such as those from Power Finance 

Corporation (PFC) and National 

Highways Authority of India (NHAI) 

receiving resounding response from 

the investors. 

Other organizations such as the 

Indian Railways Finance Corporation 

(IRFC), Housing and Urban 

Development Corporation Ltd and 

Rural Electrification Corporation 

(REC) are gearing up for similar bond 

issuances, that has revived the 

appetite of debt investors. These 

tax-free bonds are good news for 

investors, especially now, as the 

interest rate cycle is about to reverse. 

Financial advisors are advising their 

clients to go the whole hog on these 

tax-free bond issuances, as the 

appetite for debt investments is on the 

rise, with equity investments not 

yielding such good returns in the 

current times of volatility. 

These tax-free bonds are an excellent 

opportunity for investors to lock their 

free funds in long-tenure bonds that 

give them the advantage of an interest 

rate that is higher than any fixed 

deposit, plus the benefits of capital 

appreciation. This is because these 

bonds are listed and can be traded like 

38 



ordinary securities on the stock 

exchange. When interest rates fall, the 

prices of bonds go up, giving an 

individual investing in them the 

benefit of capital appreciation. 

THE TIMING IS RIGHT 

Unlike 2011, when interest rates were 

on a rise, 2012 is expected to be a year 

of rate cuts. The Reserve Bank of 

India has also given broad indications 

that the appreciation of interest rates 

may be stopped from March onwards. 

This is why tax-free bonds will give 

you better returns. 

Besides, these bonds come with the 

highest AAA rating from reputed 

rating agencies such as Crisil and 

ICRA. This is because these bonds 

are quasi-government; so it is as good 

as getting a sovereign guarantee. 

Though the interest rate of 8.2% and 

8.3%, for a 10-year and a 15-year 

bond, respectively (the coupon rate 

that is being offered by these bonds) 

may seem unattractive to you first, 

you must remember that the interest 

that will be paid out on these bonds is 

entirely tax-free in your hands. 

However, any capital gain if and 

when you decide to sell these bonds, 

will be taxed on a short-term or a 

long-term basis. 

If you decide to sell these bonds 

within a year of purchase, short-term 

capital gains tax will have to be paid 

on the normal tax slab. If you sell 

them after a year, they will be taxed at 

10%. On the other hand, if you hold 

these bonds till maturity, you do not 

have to pay any tax. 

COMPARISON WITH PEERS 

In times such as these, tax-free bonds 

make a lot of sense for retail investors 

who want to put a certain portion of 

their portfolio into debt instruments. 

Let us compare these bonds with your 

normal bank deposits (10-year tenure) 

that are currently offering you an 

interest rate of 11% to 12%. 

Effectively, you get only about 7.7% 

interest on these bank FDs post tax. 

That’s a lot lower than these tax-free 

bonds that are all offering interest 

rates of 8.2% to 8.4% annually. 

One may argue that that there are 

other instruments such as the PPF that 

offers 8.6% interest and is also 

tax-free in the hands of investors. You 

can get the full benefit of tax 

deduction in a PPF under section 80C. 

However, these tax-free bonds still 

score over the PPF that seemingly 

offers a better rate of return. 

Firstly, these tax-free bonds are like 

trade-able securities and thus give 

you the advantage of liquidity as 

against a PPF that is highly illiquid 

with a lot of restrictions on the time of 

withdrawal as well as the quantum 

that can be withdrawn. 

Secondly, investment in these PPFs is 

restricted up to `1 lakh per year, 

whereas in these tax-free bonds you 

can invest up to `5 lakhs. 

In the current situation when the 

markets are fraught with volatility 

that have made other financial 

instruments less attractive, 

distributors too are betting big on 

such tax-free bonds. 

Some distributors are even pitching 

for these bonds against mutual fund 

systematic investment plans (SIPs), a 

lot of which have foreclosed because 

of dwindling renewals. Rough 

estimates suggest that over the past 

six months or so, for every 2 lakh 

folios that were added each month, 1 

lakh SIP folios have been closed. 

WHO ARE THEY FOR? 

Financial planning advisors are thus 

suggesting these tax-free bonds to 

those individuals who are in the 

highest tax bracket. 

If you are an individual investing an 

amount of `1 lakh in these tax-free 

bonds (which are offering a coupon 

rate of around 8.3%) your annual 

interest income works out to be 

`8,300 for a period of 15 years 

(assuming that you hold these bonds 

till maturity), which is completely 

tax-free in your hands. 

As compared to this, if you were to 

put the same amount in a fixed 

deposit that gives you 9% interest and 

you fall in the highest tax bracket of 

30.9% your interest income post tax 

will only be `6,219. For any salaried 

individual, this tax-free element is a 

big bonus. 

Financial advisors also suggest that 

these tax-free bonds can be 

considered by investors who have a 

lumpsum surplus that they are not 

sure where it could be invested. 

For those who are willing to hold on 

to such investments till maturity, this 

is indeed an attractive option. This is 

when compared to other traditional 

schemes such as post office monthly 

income schemes and national savings 

certificates, on which interest rates 

will vary annually, from the 

beginning of this year, because they 

have been linked to 5- and 10-year 

government bond yields. 

However, financial advisors do not 

advise you to redirect your entire 

portfolio towards these tax-free 

bonds. As investors, you should 

invest in bonds along with your PPF 

and FDs to get highest returns from 

your debt portfolio. 

But if you do not have a long-term 

outlook on your investments, tax-free 

bonds are not always the best thing 

for yoU. 


The Fantastic Four 

PPF, NSC, FDs and ELSS are four tools that 

investors can use to save taxes 

As we come closer to the 

end of the current 

financial year, numerous 

investors in the country 

can be seen reaching out to their 

financial agents seeking investment 

options to save taxes. 

This article presents four investment 

avenues such as Public Provident 

Fund (PPF), National Savings 

Certificate (NSC), banks term Fixed 

Deposits (FDs) and Equity Linked 

Saving Schemes (ELSS) by which 

investors – everyone from a 

30-year-old to a retiree - can claim 

benefits under section 80C of the 

Income-tax Act and generate better 

returns over a period of time by 

keeping their capital safe. 

80C OF THE INCOME-TAX ACT 

The government gives tax breaks on 

certain financial products under 

section 80C of the Income-tax Act to 

promote savings. Under section 80C 

40 



of the Act, certain investments are 

deductible (up to a maximum of `1 

lakh) from the gross total income. 

If the investor invests a maximum of 

`1 lakh and if he is in the highest tax 

bracket of 30%, he saves a tax of 

`30,000. Given below are some of the 

options that can be taped by investors 

in the busy tax season. 

PUBLIC PROVIDENT FUND 

(PPF) 

Public Provident Fund (PPF) is one of 

the finest investment instruments 

available not only for an unorganized 

sector but also at the disposal of 

self-employed investors. 

It is said that PPF plays an integral 

part in an individual’s financial plan, 

along with instruments like life 

insurance and health insurance. 

Not only does it create wealth over a 

long time frame, a 15-year lock-in 

period to be precise, but investors can 

also avail of tax deductions under 

section 80C of the Income-tax Act. 

Earlier the maximum limit was 

`70,000 per annum, but the 

government hiked it to `1,00,000 in 

November last year. The government 

also hiked its interest rates from 8% to 

8.6% per annum making it more 

investor-friendly. 

PPF is a great instrument for 

risk-averse investors seeking to create 

wealth. It is backed by the 

government, which makes it among 

the safest instruments a person can 

invest in. 

The main plus point of a PPF is that 

investors can claim tax deductions 

while investing in a particular year 

and the interest is also tax-free. 

Further, on final maturity the 

investors do not have to pay any 

income tax on it. 

Where To Buy: 

Any post office in the country or 

certain nationalized banks. 

Tenure: 

15-years. It can later be extended by a 

block of 5 years 

Investments: 

A minimum of `500 per annum and a 

maximum of `1,00,000. A maximum 

limit of 12 installments in one 

financial year is permitted by the 

Indian government. 

NATIONAL 

CERTIFICATE (NSC) 

SAVINGS 

The National Savings Certificate, 

commonly known as NSC, is one of 

the safest investment options 

available to investors. In November 

last year, the government hiked 

NSC’s interest rates to 8.4% from 8%. 

This might turn to be an excellent 

investment option for retail investors. 

The scheme will benefit investors 

who do not wish to take the equity 

market risk. It not only qualifies for 

tax rebate under Section 80C of the 

Income-tax Act, but also is a strong 

investment mechanism to build a 

corpus for retirement or to meet 

future expenses. The scheme is 

backed by the government, which 

ensures that the investments are 

completely risk-free. 

Investors can also pledge their NSC 

certificates to obtain loans; however, 

the loan amount will be decided by 

the lender. NSC certificates are 

transferable from one post office to 

any other post office across the 

country. It can also be transferred 

from one person to another person 

before maturity. 

Since there is no maximum 

investment limit in NSC, investors 

are free to use this invesment avenue 

as per their wants. 

Where To Buy: 

Any post office in the country 

Tenure: 

5 years (Earlier it was 6 years) 

Investments: 

Minimum `100 per annum. 

Certificates are also available in 

denominations of `100, `500, 

`1,000,`5,000 and `10,000. 

TAX SAVER FIXED DEPOSITS 

It is an ideal product for senior 

citizens and investors who do not 

bargain for excessive returns as it can 

aid their need for tax exemption by 

keeping the principal amount safe. 

This scheme was announced in the 

Union Budget of 2006. Under this 

investors can avail of exemptions up 

to `1 lakh on five-year term deposits. 

However, the interest rate varies from 

bank to bank. Currently, the over 

five-year term fixed deposit can fetch 

investors interest in the range of 8.5% 

to 9%. 

For the same FD, senior citizens can 

get interests at the rate of 9.25% to 

9.5%. Hence, it becomes an ideal 

investment opportunity for senior 

citizens in current volatile times. 

Unlike ELSS schemes which have a 

lock-in period of 3 years, FDs have a 

lock-in period of 5 years, from the 

effective policy date. Further, the 

money cannot be withdrawn 

prematurely in case of an emergency. 

The other disadvantage of tax saver 

fixed deposits is that investors cannot 

pledge term deposits as a collateral to 

secure a loan. Also banks do not offer 

overdraft facility on such instruments. 

Where To Buy: 

Most banks across the country 

Tenure: 

A minimum period of 5 years 

Investments: 

A minimum of `100 per annum and a 


maximum of `1,00,000. 

EQUITY LINKED SAVINGS 

SCHEME (ELSS) 

Investors can also consider investing 

a part of their investible income in 

equity linked savings scheme (ELSS) 

of mutual funds as it is a competent 

investment mechanism that offers the 

dual advantage of smart capital 

appreciation and fall in tax burden. 

ELSSs could be open-ended or 

close-ended in nature. Most schemes 

are open for subscription on all 

business days. However, the scheme 

has a lock-in period of three years and 

any investment made is considered a 

fresh investment. 

As the name suggests, the scheme 

primarily invests in the equity market 

by buying equity stocks of companies 

listed on stock exchanges. 

Equity has in the past given higher 

returns over the long-term. Investors 

have the option to choose from 

dozens of schemes in the market. 

Following weak equity markets, most 

ELSS funds in the last one year have 

given negative returns. But if invested 

for a longer duration, investors can 

and have received decent returns. 

ELSS has the potential to give 

substantially higher returns as 

compared to other products like PPF 

or NSC, which generate declared 

returns. This scheme is 

growth-oriented and invests 

pre-dominantly in equities. 

Growth opportunities and risks 

associated with this scheme are like 

any other equity-oriented scheme. 

Where To Buy: 

Banks, distributors, fund houses and 

even online. 

Tenure: 

A minimum lock-in period of 3 years 

Investments: 

A minimum of `500 per annum 

(depending on the fund house). 

Systematic Investment Plans (SIPs) 

are also available under the scheme. 

As said earlier the main aim of 

Section 80C is to encourage 

long-term saving and investments. 

We have provided you with the best 

of the tax-saving instruments for the 

season which can save tax and build 

substantial corpus for any emergency. 

However one should choose a 

combination of fixed income 

instruments and market linked 

investments depending on one’s age 

and risk profile. 

For a 60-year-old retiree, 

combination of tax-free bank FDs and 

NSC can come handy. While for a 

young individual in his 30s, a blend of 

PPF and ELSS will be useful for his 

future lifE. 

42 



SMS ‘BANG NRI’ to 54646 | nri@nirmalbang.com | www.nirmalbang.com 

Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610, 

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

GAME FOR 

ANYTHING 

N Sethuram Iyer 

Chief Investment Officer 

Daiwa Asset Management 

A good fund manager is one 

who has both balance 

and conviction. 

N 

Sethuram Iyer who is 

currently at the helm of 

fund management 

affairs as the chief 

investment officer of Daiwa Asset Management 

is perhaps the only person in the mutual 

fund industry who has the distinction of 

being a banker with India’s largest commercial 

bank - State Bank of India - for more 

than three decades. 

If he had chosen the set path of progression 

for any banker who has served at SBI for this 

long, he would have perhaps retired with a 

plush designation and enough accolades to 

speak for. But today Sethuram does not have 

an iota of regret. 

In fact, Sethuram silently chuckles as he 

divulges how everyone thought he was “a 

little crazy” when he chose the path less 

travelled and landed up in the mutual fund 

44 



industry for good. This was when he 

joined the erstwhile Shinsei Mutual 

Fund in India (which was eventually 

taken over by the Daiwa Group). 

But Sethuram was convinced. Having 

spent four years as Senior Vice 

President credit and investment of 

SBI in Tokyo, he was well versed 

with the Japanese style of working 

and as he says “rather fascinated by 

them too.” 

Anyone who is familiar with the 

financial industry in India would 

wonder why such a distinguished 

banker would choose to be a part of a 

financial outfit that was a new entrant 

in the mutual fund industry - Japanese 

or otherwise. 

The answer is simple. Like any other 

passion that is all consuming in a 

human being, the passion for investing 

had planted its seed in Sethuram 

long before he even recognized it. 

THE GENESIS 

Cut to early 1970s. A young 

Sethuram, barely out of college had 

taken up a job in Mumbai. Pursuing a 

course in cost accountancy after his 

graduation in the stream of Chemistry, 

he was rather intrigued with the 

concept of stock markets. 

As they say the best way to follow the 

markets is to be a part of it; so he 

decided to take the plunge. Having 

saved some money from the sales and 

marketing job he was pursuing, he 

wanted to invest in shares. But as he 

was to find out, investment was 

anything but an easy task. 

Just to get an entry into a broker’s 

office, Sethuram had to coax his 

father for an introductory letter from a 

reputed trader, just to go and meet a 

broker. Excited to have made his first 

breakthrough, he walked into the 

office of the broker and requested him 

to buy 50 shares of Hindustan Lever 

(now called Hindustan Unilever). 

The broker on account of goodwill 

did make the purchase, which according 

to Sethuram seemed like a 

princely sum of `1,000. But the next 

time he walked into the broker’s 

office to buy the shares of L&T, he 

was politely told that the broker did 

not entertain requests for lot sizes that 

were less than 10,000 shares. But the 

broker gentleman did not have the 

heart to douse the enthusiasm of this 

new market entrant and introduced 

him to his sub-broker. 

Thus began his tryst with destiny. 

Sethuram recalls how he had built a 

well-diversified portfolio rather 

inadvertently. “I had decided that I 

would have no more than two companies 

representing each sector in my 

portfolio. The only exception to this 

rule was the FMCG sector that I 

thought was the real outperformer. 

Sethuram Iyer holds a degree in B.Sc. 

(Chemistry) and is a Certified Financial 

Planner. He has an experience of over 30 

years with the State Bank of India (SBI) in 

areas of investments, credit and forex. He 

was deputed to SBI Funds Management 

Pvt Ltd as the CIO. During his tenure, SBI 

Mutual Fund has grown to be one of the 

leading fund houses in India. Post 

completion of his deputation as the CIO, 

Sethuram rejoined SBI as the GM of the 

Mumbai Circle. He has also been Senior 

VP (Credit & Investments) of SBI, Tokyo 

for over 4 years. Currently, he is the CIO 

at Daiwa Asset Management. 


The remaining sectors seemed to be 

following a cyclical pattern. 

“The other ground rule I followed for 

investing was that I would not invest 

in any company that had an annual 

turnover of less than `100 crores. 

Therefore, without realising it, I had 

built a rather strong portfolio.” says 

Sethuram. What he did not realize 

then was that this was what he was 

really good at. A natural knack for 

investing, if you will. 

A BANKER BY CHANCE 

But it’s not just a hunch that takes you 

places, as Sethuram too admits. His 

real learning came during his first 

stint as a banker in the mid 70s. On 

his father’s insistence, Sethuram had 

taken the banker’s examination with 

little expectations as there were over 

35,000 candidates jostling for a few 

hundred jobs. But much to his 

surprise he did make it, much to the 

relief of his father, who wanted him to 

be in a more “stable” job. 

Thus began his learning from the year 

1976 when State Bank of India was 

the number one choice of all the big 

companies in India for borrowing 

credit. “The commercial branch that I 

started work with at SBI was directly 

dealing with over 220 companies. 

This was kind of baptism by fire for 

me. For not only did I learn how to 

read balance sheets, I also learned to 

make the distinction between a good 

and a not-so-good management,” says 

the maverick CIO of Daiwa. 

It was not just sitting at office and 

reading balance sheets for Sethuram. 

“Interacting with company officials 

on a regular basis gave me insight 

into the products and the manufacturing 

process of each sector. Whether it 

was the cement industry or the textile 

industry, I slowly came to understand 

the product and the technology used 

in manufacturing it,” he says. This 

was also where his Chemistry 

background came in handy. 

Having interacted with so many 

companies from his earlier years, 

Sethuram provides valuable insight 

into why the Tatas and Birlas are still 

counted among the top industries and 

why those companies, especially in 

the textile sector that were dominating 

the markets in the 1980s, have 

disappeared today. 

“This is what distinguishes a good 

management from the ordinary ones. 

The good companies were able to see 

the changing trends and adapt to it 

fast by diversifying, while those who 

focussed on one business only had to 

eventually shut shop,” says Sethuram. 

His experiences and steady progress 

at the SBI soon got him noticed 

within the bank and he was soon 

moved to the large value credit 

departments where he dealt with the 

bigwigs of the corporate sector, 

disbursing larger advances of `100 

crores and more. 

Those were the days when a company 

trying to raise more than `10 crore 

had to raise it from a consortium of 

banks. In roughly about two decades 

when Sethuram was in this department 

of large value credit, he saw the 

entire corporate landscape change. 

“It was interesting to see the growth 

of industries such as auto ancillaries 

from scratch. From the License Raj, 

we were moved to a liberalized 

economy and we saw the mental 

make-up of Indian corporations 

change and there was a willingness to 

match up to global standards. 

“The other thing that changed drastically 

was corporate governance.” 

Sethuram admits that good corporate 

governance is something that he 

watches out for essentially in any 

company, till date. 

INITIATION INTO MUTUAL 

FUNDS 

After deftly dealing with credit and 

forex for well over two decades, 

Sethuram was deputed as the CIO of 

SBI Asset Management in the winter 

of 2003. He recalls how he had to deal 

with the fact that not only were all the 

schemes of SBI in the last quartile, 

the fund managers were high handed 

and had a notion that as a banker he 

would have no credibility or knowledge 

of investments. 

The problem was also when the 

bankers who came on deputation 

earlier treated the asset management 

business as a step child and did not 

know how to make the distinction 

between a company that was being 

assessed for credit as against a 

company that was being assessed for 

the purpose of investments. 

But Sethuram was not to give up 

easily and he did not pay heed to his 

predecessors who told him “to spend 

two or three years and then come back 

to the bank”. He was determined to 

make a difference to the fund 

management business. Although it 

took him a good four to five months 

to break the mindset of fund managers 

and let them know that he too 

knew a thing or two about investments, 

Sethuram finally did start 

making a difference. 

The first thing Iyer advised the then 

head of equities was to clean out the 

portfolio. The other ground rule he 

laid out was that no small-cap 

company would have a weightage of 

more than 3% in any portfolio and no 

mid-cap company would have a 

weightage of more than 5%. 

Though his decisions were met with 

resistance earlier, the fund managers 

began to see the merit in them soon. 

Also Sethuram did not believe in 

curbing the personal style of any fund 

46 



manager. He encouraged the fund 

manager to go about his own style of 

investing as long as he stuck to the 

basic principles that he had laid out. 

Also, he did his best to accelerate the 

long drawn process that SBI Asset 

Management generally took just to 

approve an investment. 

A DREAM RUN 

Even in 2003, each investment would 

have to be taken to the committee 

meeting and would only be approved 

in 24-48 hours. This was not to be 

when market dynamics were changing 

rapidly. “I knew that to start 

performing we had to accelerate 

processes and, therefore, I promised 

my fund manager that I would give 

him approval for an investment 

within half an hour at best,” he says. 

It also helped that the then CEO of the 

fund, PGR Prasad who Sethuram says 

was till date one of the best minds in 

SBI, had given him a free hand. The 

changes he made started yielding 

results soon. But mid-2004 the SBI 

funds had moved up to the third and 

second quartile and by the fag end of 

2004, nearly 90% of SBI funds were 

in the first quartile. From there on, 

there was no looking back. 

Between 2005 and 2007, SBI Mutual 

Fund managed to acquire all the 

best-performing fund awards in 

award ceremonies with much aplomb. 

Thanks to Sethuram’s efforts, SBI 

Fund Management was running like a 

well-oiled machinery, even after the 

exit of a star fund manager who 

Sethuram had initially worked with. 

In five years, the fund house had seen 

a sea change. 

Till date, he maintains that an 

individual’s style of investing should 

not be tampered with as it hampers 

the growth of a fund manager. But 

keeping an overall vigil and asking 

the right questions makes a lot of 

difference. Having spent nearly a 

decade in fund management now, 

Sethuram prides himself on the ability 

to identify what is wrong with a 

portfolio when he sets his eyes on it. 

“For instance, if there are 40 scrips in 

one portfolio, I know that the fund 

manager is just playing it safe and 

does not have conviction,” explains 

Sethuram. Once a month he looks at 

the entire portfolio and makes suggestions 

to his fund managers. Of course 

this means he has to do his homework 

well and keep an eye on the macro 

picture, be it in equity or 

debt-oriented funds. 

Superlative performance has never 

been his goal. Having been there and 

done that Sethuram says that a good 

fund manager is one who has both 

balance and conviction. After having 

seen the best of both worlds in investment 

and credit, Sethuram is happy to 

be in the place that he is today. He 

believes that being a team player and 

his ability to manage people has 

brought him this far. Even as he 

approaches retirement age, today his 

enthusiasm is heartening. “Change is 

the only constant thing in life and 

given an opportunity, I would rise to 

any challenge all over agaiN!” 


PRICE TO BOOK VALUE 

The table represents companies listed on the 

BSE that are low on Price to Book Value 

Company Name 

Book Value Current Market Price Price / 

11th (3rd Feb'12) Nov'10 

Book Value 

Jai Balaji Industries Ltd 

Mahanagar Telephone Nigam Ltd 

Great Offshore Ltd 

Ansal Properties & Infrastructure Ltd 

Housing Development & Infrastructure Ltd 

Electrosteel Castings Ltd 

Firstsource Solutions Ltd 

Gammon India Ltd 

United Breweries Holdings Ltd 

Reliance Communications Ltd 

Shipping Corporation Of India Ltd 

ARSS Infrastructure Projects Ltd 

Geodesic Ltd 

Prakash Industries Ltd 

Kesoram Industries Ltd 

Escorts Ltd 

Karuturi Global Ltd 

Punj Lloyd Ltd 

Alok Industries Ltd 

Anant Raj Industries Ltd 

HCL Infosystems Ltd 

Triveni Engineering & Industries Ltd 

Patel Engineering Ltd 

Videocon Industries Ltd 

Punjab & Sind Bank 

Rolta India Ltd 

Jai Corp Ltd 

Shree Ganesh Jewellery House Ltd 

Gujarat Narmada Valley Fertilizers Company Ltd 

Dhanlaxmi Bank Ltd 

Sujana Towers Ltd 

Usha Martin Ltd 

Jindal Poly Films Ltd 

IFCI Ltd 

Bilcare Ltd 

Piramal Healthcare Ltd 

Amtek Auto Ltd 

SREI Infrastructure Finance Ltd 

REI Agro Ltd 

Jindal Stainless Ltd 

Mercator Lines Ltd 

Network18 Media & Investments Ltd 

NCC Ltd 

Vardhman Textiles Ltd 

Karuturi Global Ltd 

Jyoti Structures Ltd 

Great Eastern Shipping Co Ltd 

Shree Ashtavinayak Cine Vision Ltd 

Gujarat Alkalies & Chemicals Ltd 

Chennai Petroleum Corporation Ltd 

Source: Capital Line 

152.72 

105.50 

305.43 

100.33 

226.44 

51.56 

21.42 

137.50 

223.34 

233.26 

153.89 

302.16 

107.52 

116.54 

283.64 

165.42 

11.18 

107.05 

39.32 

123.52 

87.35 

39.39 

191.11 

310.65 

127.74 

142.78 

153.07 

176.95 

147.14 

99.21 

13.53 

51.10 

358.06 

50.98 

382.49 

678.03 

182.96 

50.75 

24.23 

120.40 

40.85 

63.24 

92.72 

301.38 

131.96 

73.16 

361.44 

6.00 

201.50 

252.75 

41.20 

30.10 

104.25 

35.00 

80.45 

19.40 

8.51 

55.00 

90.45 

96.85 

66.60 

131.35 

48.90 

53.35 

133.05 

78.85 

5.63 

54.85 

20.20 

64.35 

45.80 

20.75 

104.15 

171.95 

71.00 

80.95 

86.95 

101.55 

84.65 

57.60 

7.88 

29.95 

213.90 

30.50 

231.50 

417.05 

112.75 

31.50 

15.10 

76.05 

26.15 

40.90 

60.30 

197.20 

87.00 

48.45 

240.05 

3.99 

136.25 

171.10 

0.27 

0.29 

0.34 

0.35 

0.36 

0.38 

0.40 

0.40 

0.40 

0.42 

0.43 

0.43 

0.45 

0.46 

0.47 

0.48 

0.50 

0.51 

0.51 

0.52 

0.52 

0.53 

0.54 

0.55 

0.56 

0.57 

0.57 

0.57 

0.58 

0.58 

0.58 

0.59 

0.60 

0.60 

0.61 

0.62 




0.63 

0.64 

0.65 

0.65 

0.65 

0.66 

0.66 

0.66 

0.67 

0.68 

0.68 

48 



TECHNICAL OUTLOOK FOR THE FORTNIGHT 

T 

he Nifty continues its 

upward journey in the 

February expiry, led by 

sectors such as banking, 

oil & gas and metals. With good FII 

inflows, better-than-expected 

earnings results of certain heavy 

weight companies and appreciation 

of the Indian rupee, the Nifty has 

gained over 3% since the start of the 

February expiry. (CMP: 5,345 as on 

2nd Feb). Year-to-date (that is since 

January) it is already up 14%. 

The Bank Nifty, which witnessed 

significant long positions, has nearly 

added 19.2% OI in the February 

series and is already up 3.3%. 

On the PCR OI front for the Nifty, the 

continuous increase in its value from 

1.28 to the current level of 1.4 (as on 

2nd February), suggests an increase 

in the Put activity, which is expected 

to be dominated by sellers. This 

clearly indicates that the market is 

likely to remain bullish. 

On the Options side, aggressive Put 

writing has been seen at strikes 4,900, 

5,000 and 5,100, and now even at 

5,200 since the start of the February 

expiry. On the other hand, a forward 

shift in the 5,200 Call to 5,400 Call 

has been observed. The 5,400 call has 

witnessed a significant addition in OI 

and, hence, it is likely to provide a 

strong resistance to the market. 

Also, Volatility Index (VIX) on the 

Options front has been increasing 

despite the up-move in the market. 

With healthy rollovers in the 

February series and increasing 

volatility, oscillating movements are 

likely to continue in the market. 

FIIs have recently pumped in a fair 

amount of liquidity into the Indian 

markets, taking the Nifty closer to its 

6-month high of 5,434 (4th Aug’11) 

after touching a 52-week low of 4,531 

(20th Dec’11). In 2012, FIIs have 

bought over `13,000 crores (2nd Feb) 

in the equity cash market and MTD 

over `4,000 crores (2nd Feb). 

On the other hand, domestic 

institutions who had bought over 

`27,000 crores in 2011 remained net 

sellers in the current market rally. In 

2012, they sold over `6,600 crores 

and `1,500 crores on month-to-date 

in the cash segment. 

Technically, the Index recently 

formed a series of higher tops and 

bottoms since the lows of 

December’11, which is a bullish Dow 

signal. There is an immediate 

resistance at the 5,410 level on the 

upside and support lies at the 5,280 

and 5,210 levels. The oscillator 

situation suggests the presence of a 

negative divergence pattern. But there 

is no sufficient evidence for any top 

and, therefore, we conclude that the 

advance is not done yet. 

The Index has also managed to close 

above the falling channel pattern from 

the highs of November’10, which is a 

bullish sign. Currently, the index is 

trading above its 100- and 200- 

simple moving averages. And if it 

sustains above the 5,250 level, the 

rising window pattern formed in the 

recent trading session would mean the 

short-term uptrend will continue. 

We maintain a medium-term target of 

5,410 and 5,460 levels on the upside 

and recommend some profit-booking 

near this zone. The recent rise in the 

index from the lows of Decmeber’11 

coupled with a sharp rise in volumes 

and breadth, is again a bullish signal. 

Of course, we do need to look at price 

action if the rise continues further. 

The short-term uptrend will remain 

intact till the support level is not 

breached. The weekly charts have 

formed a bullish pattern. This is a 

positive and, hence, we should look 

for more gains ahead in this month. 

The cement sector has outperformed 

the broader index and we are positive 

on ACC, Ambuja Cements and 

Ultratech Cement for an upside of 

10% to 15% from current levels. 

Most Nifty stocks are reflecting a 

positive divergence pattern, 

suggesting a medium-term bottom is 

in place. Many stocks are exhibiting a 

long-range bar for the month, which 

is a strong bullish signal. 

The Bank Nifty faced crucial hurdles 

near the 200-DMA and has confirmed 

the uptrend by closing above its 

recent high of the 9,980 level. The 

index has managed to breach the 

crucial hurdle of 10,100 and if it 

sustains above this level, we can 

expect it to rise to the 10,220, 10,350 

and 10,460 levels. It has support at 

the 9,940 level on the downside. 

STRATEGY 

With a view of a range-bound market, 

traders can initiate a short Strangle on 

the Nifty at strikes 5,000 and 5,400. 

They can sell 5,000 Put and 5,500 

Call, fetching a combined premium 

inflow of over 65 points. The 

break-even for the strategy will be 

4,935 on the downside and 5,565 on 

the upside. The initiator can earn a 

maximum of `3,250 (65*50) if the 

Nifty February series expires between 

5,500-5,000 levels. However, the loss 

remains unlimited beyond the 

break-even rangE. 


SPEAKING 

FIGURATIVELY 

THROUGH 

METAPHORS 

Understanding 

metaphors is 

important for 

investors as they 

occur frequently in 

financial reports 

and analysis 

Metaphor is a figure of 

speech, which is used 

to compare two 

different things 

indirectly. Simile, another figure of 

speech, on the other hand compares 

two things directly with the use of 

words “as” and “like”. 

Here’s an example to differentiate 

between the two figures of speech. 

Simile: His teeth are as sharp as a 

razor. 

Metaphor: His teeth are razor-sharp. 

We do not intend to give you 

grammar lessons but the objective of 

this is to teach you to recognize a 

metaphor when you come across it in 

financial newspapers or business 

channels and understand its true 

meaning and appreciate its beauty. 

A metaphor can add richness to a 

language and at the same time convey 

a lot in a few words. This is the reason 

why news anchors, especially those 

from business channels, have a 

penchant for incorporating a lot of 

metaphors during their monologues. 

While some metaphors are selfexplanatory 

and easy to understand, 

there are also those that leave us 

scratching our heads. This article 

attempts to cover some commonlyoccurring 

metaphors in business talk 

and enable you to understand them 

without racking your brains. 

DEAD CAT BOUNCE 

It means that even a dead cat will 

50 



ounce before finally resting on the 

ground, if it is thrown from a 

20-storied building. The bounce does 

not mean that the cat is alive and 

jumping in delight. 

In the same way, a small rise after a 

huge fall in the markets or the value 

of a stock does not mean that the 

stock is making a comeback and is 

poised for an uptrend. Most of the 

times there is a valid reason for the 

battering of a stock, resulting in the 

fundamentals becoming weak. Dead 

cat bounces don’t last long. 

Inadvertently, a thud is just round the 

corner. So beware. 

CATCH A FALLING KNIFE 

Have you ever tried to catch a knife 

that has slipped from your hands? If 

yes, you will know that the likelihood 

of you cutting your hands in the 

bargain is more than you catching the 

knife. Doesn’t it then make proper 

sense to stay away from it while it is 

falling and then pick it up once it has 

landed firmly on the ground? 

In the same way, don’t try and buy a 

stock just because it has fallen a lot. 

You never know there might still be 

some more pain left in it. Look for a 

clear reversal of trend and only then 

invest in such a stock. 

FOAM THE RUNWAY 

Before an emergency crash landing, 

the ground crew at the airport sprays 

the runway with fire-retardant foam 

to reduce friction and sparks. 

Similarly, a company on the verge of 

bankruptcy may bring fresh cash into 

the company at the last minute to 

prevent it from going bankrupt. 

If you are an experienced investor, 

you would know that last minute cash 

infusion will only delay the fall of the 

company; but not avert it. It is, 

therefore better to stay away from 

such stocks or at least wait until it 

shows some signs of a firm reversal. 

SWING FOR THE FENCES 

It is a term derived from the game of 

baseball. But we will try to 

understand it with the example of 

cricket. In cricket, most batsmen try 

to hit the ball hard in the air and swing 

for fences so as to score a six. But in 

their attempt to score sixes, most 

batsmen get caught. 

Similarly, many investors try to swing 

for the fences and in an attempt to 

earn huge profits quickly, they take on 

huge uncalculated risks. However, in 

doing so, they more often than not 

end up losing their hard earned 

money instead of amassing profits. 

The best piece of advice is to take 

singles by playing small and within 

your risk profile. Keep booking small 

profits from time to time. 

ELEPHANT IN THE ROOM 

Is it possible for anyone to not see a 

big elephant in a room full of people? 

Of course not. But people sometimes 

tend to ignore or avoid the elephant, 

read a problem or news and pretend 

that everything is hunky-dory. This is 

quite reflective of the sentiments in 

the markets currently, which is going 

up in leaps and bounds, but the 

elephant in the room in the form of 

the European crisis, lower domestic 

growth numbers, corruption, scams, 

etc, that is looming large is being 

completely ignored by investors. 

BUTTERFLY EFFECT 

It is a concept from the chaos theory 

which is an exaggeration and states 

that if a butterfly flaps it wings in 

some part of the world, it will cause a 

small insignificant ripple in the wind 

in that part but that ripple will travel 

on to cause a hurricane in some other 

part of the world. 

Though unlikely, we sometimes feel 

the butterfly effect in the stock 

markets, where a small event in some 

part of the world triggers a small 

selling there, but compounds at each 

level leading to a global stock market 

sell-off in another part of the world. 

FIGHTING THE TAPE 

The tape here refers to the stock 

market ticker, which keeps scrolling 

at the bottom of all news channels. It 

shows the general direction of the 

markets. Fighting the tape is a 

metaphor used to describe a trader or 

investor who takes a call or initiates a 

trade in the opposite direction of the 

market movement. 

In other words, it is used to describe a 

contrarian view. Fighting the tape 

requires courage and conviction as 

one is taking a call against the general 

consensus/trend. So there is a chance 

of being run over. 

DEATH BY A THOUSAND CUTS 

It is based on the premise that one or 

two small cuts won’t cause you much 

harm, but if you have a thousand cuts 

all over the body, you could bleed to 

death. Similarly, the occurrence of a 

singular negative event would not 

dent the market sentiments too much, 

but a barrage of negative news all at 

once such as rising inflation, poor 

growth numbers, weakening rupee, 

rising interest rates, global debt crisis, 

etc, together can cause the stock 

markets to crash. 

CHERRY PICKING 

It is a stock-picking strategy which 

aims to do away with the tedious 

process of intensive researching of a 

stock by picking only stocks that are 

in the portfolio of other investors and 

have given good returns for them. 

For example, most investors try to 

buy stocks that Warren Buffet holds 

in his portfolio, believing that if he 

has made billions, then they will be 

multibaggers for them also. It is just 

like the person who buys fruits 

believing that the harvester will only 

pluck the best and the ripest cherries 

and his entire harvest is excellenT. 


While planning 

your finances for 

the year ahead, do 

focus on debt, 

insurance, taxes 

and investments 

The year 2011 is finally 

behind us. And what a year 

it has been. Financially, it 

was a year that most of us 

would want to put behind us. More so 

because of myriad problems like 

surging inflation, weakening rupee, 

declining industrial growth and the 

European crisis to name a few, that 

led to the fall in investor wealth world 

over and India was no exception to 

this after effect. However, we hope 

that the year 2012 will be better than 

the year that went by. 

But as we know, hope alone cannot 

steer our boat and that each one of us 

needs to build his/her fortress to 

weather such unforeseen events, 

without surrendering. And the best 

way to do this is to learn from our past 

mistakes, learn about the various 

financial avenues with their pros and 

cons and then put a proper plan in 

place to achieve full utilization. 

Listed below is a small checklist of 

things to do when planning your 

finances for the year ahead. 

DEBT 

We are often advised to live within 

our means and avoid taking loans, at 

all costs. This is because a loan is like 

a sword, which constantly hangs over 

our head. And if it is not negotiated 

properly, it can cut our financial 

lifeline short in no time. Yet, the norm 

in the present times is to live beyond 

our means as everything is available 

on easy finance and quick loans. 

52 



While many argue against taking 

loans, there are those who cite 

genuineness behind seeking loans. 

Whatever the reason behind it, certain 

pointers or checklists, if followed, can 

prevent you from getting caught in 

the black hole of a debt trap. 

Never sign any loan papers before 

reading the fine print very carefully. 

Beware of the various charges and 

fees such as processing fees, late fees, 

prepayment fees, cheque bouncing 

charges, etc, that are levied by the 

loan giver, so that you are not caught 

off guard at a later date. 

Do some window-shopping and 

scout for the most competitive loan 

rate before fixing a lender. 

Do not be late on your interest 

payments and never default on any 

loans. Not only does it adversely 

affect your credit score, but also legal 

hassles can land you in a bad soup. 

If you have taken several loans, 

such as home loan, car loan, personal 

loan, credit card loan, try and clear off 

the credit card and personal loans on a 

priority basis since the interest outgo 

on these loans is usually quite high 

compared to other types of loans. 

If you have a life insurance policy, 

certain government securities, or even 

gold, you can get a loan against them 

at relatively low interest rates. 

Unless unavoidable, refrain from 

taking a second loan to repay an 

existing loan, lest you might get 

caught in a vicious cycle of debt. 

Some loans have certain tax 

exemptions to them. Understand them 

and make full use of them. 

INSURANCE 

This is the most important entity in 

any individual’s financial plan. 

Insurance is sort of a safety net to 

protect you or your family members 

financially against any unforeseen 

and unfortunate incidents. Do not 

make the mistake of considering it as 

a waste of money. The benefits of 

taking an insurance policy far 

outweigh the short-term expenditure. 

There are different types of insurance 

policies, some of which are almost 

compulsory for every individual, such 

as life insurance and medical 

insurance, among others. In addition 

to these insurance policies, a person 

may also buy a good retirement plan 

or go in for household insurance, 

accident insurance, insurance for 

spouse and kids, etc, depending on 

his/her needs and goals. 

The main thing is the total premium 

outgo and the premium paying date. 

Important checklist and points to 

consider when formulating your 

insurance management are as under: 

Undertake a thorough analysis of 

your current and future finances, 

liabilities, goals and obligations 

before buying your insurance policy. 

If you are already insured, but feel 

that you are underinsured, add an 

appropriate additional cover. 

Calculate the exact premium outgo 

and check whether you can commit to 

such a long-term obligation without it 

pinching your pocket, too much. 

Always pay premiums on time and 

never let policies lapse. 

Intimate your insurance company 

immediately about changes in your 

address or your contact information. 

If you have a lumpsum amount 

presently but are not confident that 

you can pay premiums regularly for a 

long-term, you can go in for a 

one-time single premium policy. 

Remember the golden rule - 

insurance is not an investment 

instrument. Many agents might try to 

lure you to invest in a policy with the 

promise of huge returns. Do not fall 

prey to such false claims. 

Medical emergencies can wipe out 

your lifelong savings in no time. So 

an adequate medical insurance is a 

must for each and every individual 

irrespective of age and state of health. 

Do not be lax in this regard. Insure 

yourself and also your family, either 

individually or under a family floater 

plan. Senior citizens are in more need 

of medical insurance and even though 

the premium for them may be high, 

do not shrug it off. Also, add a good 

accidental cover to a medical plan. 

A good retirement insurance plan is 

also an integral part of one’s portfolio 

as it will see you through your golden 

years without any financial turmoil. 

The earlier you start, the better it is as 

you can garner a larger corpus. 

It makes good sense to add a rider to 

your insurance plan. It costs very little 

and can offer good benefits. 

TAXES 

They say the only thing certain in life 

is death and taxes. As a responsible 

and honest citizen of this country, we 

should all pay our taxes correctly and 

on time. It is not only our legal 

obligation, but also our moral 

responsibility to pay taxes. The 

money we pay as taxes helps run the 

country and also comes back to us in 

the form of infrastructure and various 

public services. 

Listed below is a comprehensive 

checklist of things that can help you 

in effective tax management. 

List your income from all sources 

and classify them under different 

headings, such as salary, business 

income, interest income, dividends, 

short-term and long-term capital 

gains, exempt incomes, etc. If you do 

not have a proper understanding of 

these things, please approach a 

certified professional for the same. 

Ascertain your appropriate tax-slab 

under which you fall; after all 

applicable deductions in the taxable 

income have been incorporated while 

computing tax. 

Stay abreast of the changes/ 

modifications that have been made in 

the tax regime in each financial year. 

Pay your taxes diligently before the 


due date. Also pay your advance tax if 

applicable, and on time. 

Make sure you have your 

paperwork like bills, interest 

certificates, salary certificates, etc, in 

place and well before time to enable 

easy calculation and maintenance of a 

proper record for the future. 

There are various tax-saving 

products at your disposal to reduce 

your overall tax liability. Scout for 

these instruments in advance so that 

you know which is the right one for 

you with respect to returns, lock-in 

periods, term and investment amount. 

Keep a proper record of previously 

filed tax returns, tax refunds and any 

correspondence with tax authorities. 

Intimate the tax office immediately 

about any change in address or 

contact information. 

INVESTMENTS 

Now comes the most important aspect 

of any financial setup. Investments. If 

our hard-earned money is kept idle, it 

will actually decrease the purchasing 

power as time goes by. Therefore, it is 

very important to put your money to 

work for you. Proper investment 

spread across various asset classes, 

keeping in mind your risk profile, 

time horizon, goals, etc, is the key to 

long-term capital appreciation and 

financial independence. 

Let us go through the different types 

of investment options and a detailed 

checklist for each of them. 

Debt Or Fixed Investments 

If you are a risk-averse investor, debt 

or fixed income instruments should 

be the right avenue for you. These 

include bank fixed deposits, company 

fixed deposits, savings certificates, 

government bonds, etc. These are 

low-risk, low-return investment 

avenues. Hence, even though you 

may not get great returns, the chances 

of capital erosion are quite low. 

Investments in fixed instruments 

often do not beat inflation and, hence, 

in principle offer a negative rate of 

return. Do not invest a majority of 

your portfolio in such instruments. 

Be sure to monitor your investments 

at regular intervals. If your 

investments are locked in at lower 

rates than the prevailing market rates, 

reinvest or renew at the existing rates. 

Keep a reminder of redemption or 

maturity dates and redeem or reinvest 

accordingly, on those dates. 

If you are investing in 

non-government fixed instruments, 

such as company deposits, be sure to 

check the credit rating awarded to 

such instruments, indicating the 

safety of your investments. 

Check for liquidity of these 

instruments. That is, your funds 

should be easily redeemable in case 

of emergencies. 

Also check for the penalty, if any, 

for premature withdrawal, if needed. 

Allocate a portion of your portfolio 

to safe havens such as gold and real 

estate. In times of financial turmoil, 

these are likely to fall the least. 

Equity Investments 

Over the long term, equity 

investments have been found to give 

the best returns. But at the same time, 

the risk of capital erosion is also very 

real. You should invest in equities 

only after understanding your 

risk-taking capacity. 

You can invest directly into the 

stock markets if you have a thorough 

knowledge of the working of the 

stock markets or you may invest via 

mutual funds, which have 

experienced fund managers who can 

manage and invest your money. 

Keep a list and copy of documents 

such as account opening form, power 

of attorney, bills, contract notes, etc, 

when transacting with any 

intermediary in the stock market. 

Keep a check on charges like demat 

charges, brokerage and various other 

taxes incurred during share trading. 

Keep in mind the tax implications 

of trading, that is short-term and 

long-term gains or losses. 

Remember, investments in stock 

markets should be with a long-term 

view because in the short-term, the 

stock may be subject to erratic market 

forces and fluctuations. 

If you are investing via mutual 

funds, check for its past track record 

and performance before investing. 

Avoid investing in new fund offers 

since there is no past performance to 

compare it with. 

If you are new to investing, instead 

of a lumpsum amount, invest via a 

systematic investment plan (SIP). 

This helps to spread your investments 

across various time frames and prices, 

thereby bringing down the overall 

cost of you investment. 

Learn to take your profits at regular 

intervals and book your losses when 

you go wrong. 

Never invest on the basis of tips. 

Invest only that amount which you 

can stand to lose without giving you 

sleepless nights. 

Never invest with borrowed or 

leveraged money. 

SOME GENERAL POINTERS 

1. Keep a dairy where details of all 

your investments, insurances, loans, 

etc are available at a glance. 

2. Keep your family members 

updated about your finances so as to 

not be at sea during an emergency. 

3. Make a monthly budget and stick to 

it. Check where you are going 

overboard with your expenses and try 

to curtail them. 

4. Keep aside at least 3 to 6 months 

worth of your monthly expenses as 

emergency/contingency funds. 

5. Make nominations for all your 

investments, deposits, etc. 

6. Review your investments from 

time to time and make appropriate 

changes, if required. 

7. Make a proper wilL. 

54

Beyond Market - Issue 62 - Online Share Trading

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?