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Finance & Investment Club IIMPresents Rohtak
ARBITRAGE November 2021 Vol 5 Issue 3
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Our Best Read – The Future of E-commerce with Omnichannel Retail Special Mention - EVERGRANDE CRISIS: A WAKEUP CALL FOR CHINA’S ECONOMY
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INDEX S. No. 1 2
Article The Future of E-commerce with Omnichannel Retail EVERGRANDE CRISIS: A WAKEUP CALL FOR CHINA’S ECONOMY
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ESG Investing Relevance and need of risk management in a post COVID world and desired steps are undertaken to mitigate those risks
10 15
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IPO New Age Scenario
18
6
SEMICONDUCTOR FAMINE
21
7 8
The direction of India’s Foreign Trade An Analysis of Indian IPO Market
26 30
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The Future of E-commerce with Omnichannel Retail By: Hardik Agarwal (Shri Ram College of Commerce, Delhi)
When Bill Gates said- “You get greatest learnings from your most unhappy customers", Amazon took it seriously. Amazon was doing so well, serving every customer with so care that the customers were finding it difficult to complain. To everyone’s surprise, Amazon even listened to their complaint of ‘Lack of Personalization’ in online shopping. So, Amazon opened their first brick-and-mortar store in Seattle in 2015, and then acquired the supermarket chain Whole Foods Market for US $13.4 billion! Though the concept of 'omnichannel retail' started a few years back, it is Amazon that globalised it. The same experts who once claimed that e-commerce would pave the graveyard for brick-and-mortar stores are now teaching retailers the importance of having a presence in every channel (even in Social Media platforms like Pinterest, Facebook and Instagram) and that too with the feature of interlinking these channels so as to give customers a pleasurable and enjoyable shopping experience. But what is omnichannel and why is it getting so popular? The term omnichannel retail refers to an approach in sales allowing customers a seamless access to products and services no matter where they shop - on a mobile device, a laptop, or in a brick-and-mortar store. Harvard Business Review claims that 73% of customers use multiple channels before making a purchase decision. In order to make a decision, the customer gathers as much information as possible from a variety of sources. There were times when Single-channel commerce was able to suffice customers. But today’s millennials need a brand to be present everywhere. So came the concept of Multichannel Commerce which operates on multiple channels, both online and offline. But it gives different treatment to the same customer on different platforms. So, under multi-channel, the website won’t know what the customer purchased from its physical store. But omnichannel is all set to remove this obstacle too. Omnichannel commerce connects the dots between all channels, offering customers the same personalized offers and discounts across all platforms. So, a customer won’t be treated differently in a physical store and a website.
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To understand the future of e-commerce, it is very important to understand that online and offline marketplaces are not necessarily substitutes, rather they can complement each other. It is wellproven, especially after Covid-19, that online customers and online sales both have increased at an unprecedented pace. So, e-commerce is definitely the future of retail! But it can’t sustain & grow in solitude. To complement e-commerce, Retailers are establishing new physical stores or revamping the existing ones. So, no matter the channel, it should be linked to the internet and have real-time updates. In fact, that’s popularised the word Phygital stores- physical stores with a digital outlook. Under this, one can order online but to save delivery costs or have more personalisation, can choose to pick up the order in a nearby store. Similarly, one may see one cool jacket in a physical store and instead of buying it instantly, can order the same online and have it delivered at home (as the products in physical stores and the online store will be the same). Thus, consumers will have more power to choose from where to order and will have the autonomy of choosing whether to get it delivered or opt for self-pickup. Nike better illustrated it with the launch of their App that could help in providing personalized experiences to customers in physical stores. It’s not just retailers but also the manufacturers, who are pumping in their money into D2C (Direct to Consumer) omnichannel retail to harness its true potential. Even Social Commerce (selling products through social media) is gaining momentum under omnichannel strategies. To deliver an in-app e-commerce experience for users, Facebook and Instagram shops as well as Pinterest catalogues have all been developed. With omnichannel, retailers not only get better data of customers to make their shopping more personalized, but they are also able to cater to customers through various channels and provide better services. This is the reason why the topper of Fortune list and the world-famous brick-and-mortar chain, Walmart invested in Flipkart. Just as Amazon is planning to delve into brick-and-mortar stores, Walmart is planning its foray into e-commerce. When, due to Covid-19, some retailers were planning to go digital, giants like Reliance and Amazon have been fighting to acquire controlling stakes in Future Group which owns Big Bazaar and other retail chains. It shows clearly how bullish both are on the future of omnichannel retail. Reliance, under its plans to try out the omnichannel
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strategy, has launched Jio Mart and may integrate thousands of grocery (Kirana) shops in India along with their own retail chains like Reliance Fresh, Reliance Jewels, Reliance Digital, etc. It also has plans to launch SuperApp (one app for every service - be it hotel booking, banking service, grocery, furniture, medicine, etc.) so as to facilitate the omnichannel retail plans. Looking at the market competition in omnichannel-based e-commerce, it would be mainly dependent on two factors: ‘Personalised Shopping Experience’ provided by retailers and the ‘Amount of money they are able to infuse’. A perfect mixture of these two with some other requisite factors would decide who would be the future market leader. No matter what, the future of e-commerce seems brighter than ever. All the brick-and-mortar stores will invest in developing their own e-marketplaces and then link them with their stores. This would mean that those customers who were earlier only in physical stores would be able to easily purchase online and all those online customers would now, with a physical touch, get a mind-boggling experience which in turn would drive up the revenue of e-commerce platforms.
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EVERGRANDE CRISIS: A WAKEUP CALL FOR CHINA’S ECONOMY By: Harsh Mundhra (Delhi College of Arts and Commerce) WHAT IS EVERGRANDE? Evergrande is one of the biggest real estate developers in China with over 1800 projects in over 250 cities across China. The group was founded by Xu Jiayin in 1996, they provided housing to upper and middle-class dwellers. But the interests of the group extend far beyond that. The group has invested in electric vehicles, building theme parks, football teams, farming, wealth management, and even the food and beverage industry and other goods across China. They bought a soccer team called Guangzhou in 2010. That team has since built what is believed to be the world's biggest soccer school, which cost $185 million to Evergrande. And is currently working on creating the world’s biggest soccer stadium which will cost a whopping $1.7 billion to the group. The real estate market in China is a multi-trillion dollar time bomb that is somehow more ingrained into the economic systems than in real estate markets in the United States, Canada, and Europe. In the last 15 years, the home prices have increased by 6 fold. There are 3 major reasons for this insane pricing. 1.
Expectation of Future Growth This is a major factor in determining the market demand for anything but especially for things that are considered assets, although buying real estate is a long and tiring process, all these issues are not a big barrier for future expectations in china because real estate in China is viewed as a speculative asset first and a place to stay second. The enthusiasm for real estate is so strong in China that the government had to put a cap on how many properties a single household can own. The growth in China has been remarkable and the best way for people to piggyback off that growth is to invest in real estate.
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Lack of Alternative Investments In China the stock markets have not been a great store of wealth for the retail investors. Being a communist country the government doesn't like giving even slight decision making power to the people.
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Societal Pressure In China owning a home is not similar to owning a house in the United states. There are various structural advantages to owning a home in china. The govt tracks household registrations and decides where they will have access to services like healthcare and education which is why everyone wants to buy houses in the big cities.
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To support this rapid expansion in the real estate projects and other sectors the company’s debt has skyrocketed over the years. They have gained over $330 billion in debt and are the most indebted developers in the world.
Investor
Land
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In china properties are not owned, they are leased from the government for a set amount of time that is 70 years, these leases are purchased by developers like Evergrande, these developers design the buildings and presale the units to the retail investor, the developers then use this money to put down payment to borrow more money from the banks to buy more land leases or to start construction. This system works well for expansion but if you take any piece out of the puzzle, it would collapse. This brings us to August 2020, the government is now aware of the leverage that is present in the real estate market, the policymakers introduced new laws that control the amount of debt the developers can take, these are called “three red lines”. These are basically three metrics to assess a company's debt tolerance and will be allowed to grow their debt balance on the basis of how many lines they breach. Developers wanting to refinance are being assessed against three thresholds:
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● 70% ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract, ● 100% cap on net debt to equity ratio, ● A cash to short-term borrowing ratio of at least one. Evergrande failed to meet all three thresholds and was no longer allowed to grow its debt balance. In late 2020 this led to a cash crunch in Evergrande as they couldn’t borrow more. This issue resurfaced in September 2021 as the company approached its bond interest payment of around $83 million, that’s not it the company still has $670 million in coupon payments through the end of the year and $7.5 billion in debt maturing in 2022. With the debt cutoff Evergrande have been discounting their assets to make their presales look attractive but the customers started to notice this behavior and red flags started to show up and they started to hold off from booking presales. WHAT WILL HAPPEN IF EVERGRANDE DEFAULTS? In the event, if Evergrande defaults on its payment, there is a possibility that the company might go into liquidation and have to fire sell its assets. The Chinese economy and fiscal system will suffer a huge blow along with a spillover effect on other sectors, various stakeholders will be affected ● General Population: around 1.5 million people who paid for presales will suffer a huge financial loss, the financial services arm will not be able to pay back the deposits. ● The real estate market will take a massive hit if Evergrande is forced to fire sale its assets, which will depress the prices of other properties. The economy will have a huge setback as it is a huge part of the GDP. ● The default will impact people up the supply chain and they might not be able to fulfill their obligations. Evergrande’s problems have not just popped up in a day but have been due to years of aggressive borrowing. But now that source of funds are cut off they are struggling to make interest payments. This shows that China's rapid growth is rotten from the inside. This unsustainable over-leveraged business model will one day collapse just a matter of when. The fact that China is the 2nd largest economy in the world, investors all over the globe are worried that this could be another “Lehman Brothers” moment. It's not unreasonable to think that this could spread to the rest of the world.
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If the government does not intervene now , Evergrande will go into liquidation and 1.5 million people who paid deposits will lose that money and properties will be sold as fast as possible flooding the market with properties for sale. Even in a country like China where the demand for real estate is generally so high, this will drive down the prices substantially and will put more eyes on other developers like Country Garden and Poly Real Estate who are in the similar situation but not in the limelight. SO WILL THE GOVERNMENT BAILOUT EVERGRANDE ? Well the answer is yes and no, Beijing is reluctant to bail out Evergrande as this would be a moral hazard for them. They believe that the company is in a terrible situation because of the decision that they made and now they can't rely on the government to clean up the mess they made. So it's clear that the government will not help evergrande directly but they are working behind the scenes to pull the local creditors out of this situation. Assets of Evergrande were recently purchased by Vanke, a state owned developer.The company also sold its stake worth $1.5 billion of Shengjing Bank to Shenyang Shengjing Finance Investment Group (another state owned subsidiary). The central bank injected $19 billion into the banking system to solve the short-term liquidity problems. Meanwhile, efforts are made to provide more investment avenues to the retail investors , with the plan to launch a stock exchange in Beijing. Xi announced that the share market in the capital city would benefit technology firms. But this still doesn't solve the problem that is embedded in the Chinese system. This systematic problem is not about one firm, this is about the Chinese real estate sector which begins with local government selling land to government-affiliated developers who then get financed by government favoured banks and selling to the public. This is a business model that is flawed at its core, not just a company that is out of control and it will be a problem for a country where real estate is one-fourth of the GDP. This is a wakeup call for the economy, historically real estate has been a safe store of household wealth and the government has sort of acknowledged that but this model will be a challenge in the future, I think that this event will lead to a redistribution of wealth and potentially more flow of money in the public markets.
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ESG Investing By: Nishant Kumar Satyam and Vasu Golyan(IIM Indore) Putting the Environmental, Social & Governance in the Profitable An analysis of ESG Relevance, Drivers & Impact with a Strategy for ESG Integration for the Present-Day investor “When it’s done right, ESG investing is good business” INTRODUCTION: Environmental, Social and Governance investing has taken the financial world by storm, and it has received a fillip in the years of the pandemic. Pandemics and environmental challenges have come to be viewed similarly by investors in terms of impact, and as Covid-19 presents the first major sustainability challenge of the 21st century, the corporate world has awoken to its increased relevance in the upcoming years. The pandemic has proved to be a catalyst for ESG concerns all around the world, in terms of where investors want their funds to be parked, and how companies adapt in order to be more ESH-investment friendly. Thereby, it becomes important to understand the relevance of this trend on the investment as well as the corporate world, its impact on how companies go about their businesses, and what the future beholds for the ESG way of investing. ESG: PRESENT-DAY RELEVANCE & DRIVERS: But the pandemic has not been the only thing going forward for ESG investors or corporates. A host of other factors have been at play silently for years, which further validates the spotlight that the trend is enjoying currently. Some of these factors are: ● HYPER-TRANSPARENCY: Mounting empirical evidence is driving the speed at which ESG concerns are becoming material to corporates. A host of industry 4.0 technologies such as artificial intelligence, blockchain, and virtual reality are creating unprecedented levels of transparency. These shifts, along with changing regulations in some form or the other across countries, have enabled investors and other stakeholders to look beyond just publicly reported ESG data. ● STAKEHOLDER ACTIVISM: Emphasizing Freeman’s stakeholder theory, key organizational influencers—such as the media, public figures, or NGOs—can increase the materiality of a sustainability issue to businesses. Given the informational hyper transparency that exists today, when these stakeholders disseminate evidence, they create narratives that change societal expectations from corporates and prompt action by regulators or investors. For example, the world’s largest wealth fund - Norway’s Sovereign Wealth Fund with assets over one trillion dollars, declared that it’s working on a strategy to ensure that its investments live up to the carbon neutrality goals as set by the Paris Agreement. In order to draw attention to the malpractices of corporates and force them to tow on ESG lines, the power of social media comes to play—with the increased sophistication of campaigns we can see the impact of campaigns particularly in the case of the 2019 UN climate change
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conference, where-in within 20 days the Polluters Out campaign successfully created a website, issued a video/press release in numerous languages, and even put forth a list of demands. Driven by social media, the group remains active in over 40 countries, using tools like Slack, Zoom, & Google Drive allowing for the organization of collective action & global engagement. ESG: THE INVESTOR IMPACT: Now that we have established the relevance of ESG, let’s take a look at its impact across various facets of the business world. As expected, the phenomenon is not limited just to investors or companies, but the entire value-chain has become much more aware about these issues, including suppliers, employees and of course, consumers. Even the regulators and governments are taking proactive steps towards integrating environmental, social and governance-based concerns in their policymaking. The following points validate the same: ● Consumer Attitude: As per a BCG analysis, nearly 72% of European consumers reported choosing products that came in environmentally friendly packaging. Another 46% of consumers worldwide said that they would choose eco-friendly products over a preferred brand if given a choice.
Increasing Importance of ESG Adoption for Customers, Employees & Corporates Alike ● Employees: Another BCG research revealed that nearly 67% of millennials expect their next employer's organization to be purpose-driven and their jobs to have a societal impact. More importantly, such employees are also more willing to criticize their employers' climate policies publicly. Many such employees are forming ESG-advocacy groups or submitting shareholder proposals to drive change on the ground. ● Policymakers: Germany, for example, the government recently decided to phase out coal power by 2038. On an international scale, multi-lateral agreements have garnered more and more participation, with the emphasis being on sustainability and equity. In the investing world, investors perform two core functions with respect to the ESG trend. The first one is decisional. Investors have increasingly started to evaluate companies from an ESG
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perspective, apart from the usual standard financial metrics. These concerns now weigh heavily on portfolio construction and asset allocation. Which in turn, determines where capital flows. The second function is influential. Investors shape the market and the workings of organizations by pushing for greater transparency. Their control over capital flows gives them the leverage to do so. The Brumadinho dam disaster serves as a good example of this. In its aftermath, the Investor Mining and Tailings Safety Initiative, which was formed by investors representing a cumulative $13 trillion in assets, called on nearly 700+ companies active in the mining-extraction industry to routinely disclose information on their tailings storage facilities. This prompted the creation of the first global database of tailings dams. ESG INTEGRATION FOR EFFECTIVE IMPLEMENTATION: Going ahead, ESG investing seems to have a bright future and is set to fundamentally redefine how investments will be made in the future. We can expect more and more MNCs to adapt their practices in order to be ESG compliant. As mentioned above, this shift would not only be from an investor-oriented push but due to pressure from all stakeholders including employees, consumers, governments etc. ESG investing is set to play an important role in how the world as a whole delivers on its sustainability promise. But there are a few hiccups along the way. ESG funds tout their relatively strong returns. Yet, they don’t make clear that the real drivers are sectoral characteristics, riding on global business cycles. For example, a heavy emphasis toward technology companies that have seen above-average rates of growth can partially explain the above normal returns and not just ESG practices alone.
Procedure to create wealth management for Asset Managers, integrating the customized ESG mandate.
However, the ESG trend will allow leading asset managers to carve out a differentiating niche for themselves in the domain of portfolio construction. In the upcoming years, the ability to create a portfolio that reflects how a client thinks about sustainable investing will transform the ESG product landscape. Personalized investment portfolios will be the way to go for many climate-
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conscious HNIs, who wish to invest responsibly. Institutions, advisors, and individual investors will increasingly be able to express their views on what they want to own and act accordingly. This level of thematic customization would generally require an expensive and complex separately managed account (SMA) structure and the associated tracking and operationalization costs. But emerging mechanisms such as direct indexing and fractional ownership have broken down that barrier, granting such investors the weapon of "choice" at a very low price. The future will behold an era where asset managers will be able to build deeply personalized portfolios involving small sums and do so at scale while representing the client's preferences. CONCLUDING OPINION & THE WAY FORWARD: In our opinion, strong performance with regard to ESG factors such as carbon-reduction & enhanced gender-equality can unlock a significant positive impact for society, companies, and investors. Similarly, integrating future-ready ESG considerations into strategy and practice will lead to long-term business resilience and improved allocation of capital. We believe that consumers, activists, and employees all play a role in determining which ESG issues become material to the business, but companies & investors can become influencers in this materiality-process. Adopting an ‘always-on’ approach towards such aspired materiality allows investors to develop a competitive advantage throught the optimization of performance with respect to issues thatr are material, both currently & in the future. There is simply no denying that sustainable investing is a indeed both messy & confusing as well as an exciting topic for asset-managers, with the potential to stirr up the industry & develop new sources of competitive advantage. The scale will continue to matter, performance will always matter, and so will fees. But now, sustainability will matter as well. At its roots, the best investor has a deep-desire in understanding how the world works. Markets, economies, & people are all connected, as they always have and only now can we put a name to it—ESG.
A Framework for ESG Integration at the Investor’s Level
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We think that integration of these concepts will be key to how successful they become, and we acknowledge that there is indeed grave confusion regarding the integration of material ESG-info into the investment decision-making process. The translation of data in the form of ESG scores to meaningful cashflow impact, is a rather new line of thought for many, and the lack of empiricallyestablished links doesn’t help the cause either. At the end, we believe that in order to effectively integrate, investors need to acknowledge ESG info for what it is—a highly flawed, yet meaningful source of data that operates alongside the traditional investment criterion. Much like other data sources—be it credit scores or investment notes, ESG data is not be taken at face value; rather it is imperative that asset managers should engage in doing their own homework aided with the triangulation of numerous sources of internal & external information, allowing for increased confidence in their decision-making process as well sift the credible information from noise. REFERENCES: 1. https://www.bcg.com/en-in/publications/2020/esg-commitments-are-here-to-stay 2. https://www.bcg.com/en-in/capabilities/social-impact-sustainability/how-sustainable-finance-isshifting-future-of-investing 3. https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corpor ate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-thatESG-creates-value.ashx 4. https://m.economictimes.com/small-biz/money/the-need-for-esg-pluralising-developmentthrough-environmental-social-and-corporate-governance-investing/articleshow/81360222.cms
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Relevance and need of risk management in a post COVID world and desired steps are undertaken to mitigate those risks By: Mehar Kaur (NMIMS Mumbai) The Covid-19 pandemic was an epidemic no one saw coming. Even with the rumors of China going under lockdown spreading like wildfire, only a few truly understood the Calm before the storm. These individuals mitigated the risk to a large extent by taking the required precautions in time and indeed benefited as an ounce of protection is worth a pound of cure. While the others laid back and saw their plans crumble to pieces. The key difference in both these parties was not that of being the early bird but of accurate risk management. The period of the pandemic was an eye-opener for many to inculcate risk management in their operations and reduce risk to a large extent. While not all risks are as peculiar as the pandemic, it is essential to be equivalently prepared for both the seen and unseen with due diligence. Risk management has been a vital component of any business even before the pandemic but with the pandemic, even the best-laid plan has gone to astray. This period had reiterated the need of risk management and the need for it more than before as we step into the Post Covid Era. To essential understand the need for risk management, it is important to understand that one should always hope for the best but prepare for the worst. Nothing in life goes as planned and although optimism is necessary, it is also advisable to have back-up plans in hand in case things go south. It not only prevents one from being blind-sighted and reduces uncertainty to a large extent but also ensures successful planning. Furthermore, it cuts costs to a large extent and ensures that the reputation of a business is maintained. It acts as a blanket of protection and provides agility to unforeseen circumstances in the dynamic environment. In the volatile, uncertain, complex, and ambiguous (VUCA) environment, nothing is predictable. Although a lot of damage can be contained with the right strategy, you can’t unscramble a scrambled egg. The key to mitigating the risk is to understand it in a timely otherwise lack of vision could lead to a lack of business. The following graph highlights the process of risk management:
In order to be on the greener side, one must start by identifying the risk. While most rely on historic data and past trends to predict future risk, the pandemic has proven the need to evaluate the strategy and weigh future possibilities with equivalent importance. While no one can predict the future we can take hints from our surrounding. Our business environment is unstable it is
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important to take into consideration even the environment external to our own business. For instance, during the period of Covid-19 in China, a lot of business turned a cold eye to the turn of events simply because their businesses were unaffected by the occurrence of a pandemic in the country. But only a few months later, these businesses were hit hard to what they termed as irrelevant. After the risk has been identified it needs to be analyzed. This involves understanding the scope of the risk and the resources the company has to undermine it. Key risk indicators need to be calibrated to provide a “red flag” prior to a risk event occurring. The risk needs to be analyzed from the perspective of each stakeholder and the impact it would have on them. By leveraging the company’s resources and using modelling tools the risks need to be broken down into smaller segments and then studied both as a whole and in parts. This would ensure better understanding of the risk and provide a bigger picture into the endangers. This step is crucial especially during the post covid time and has helped a lot of companies recover from covid damages. Companies who have correctly analyzed the risk have also been able to dive into indications of damages from adjustment risks and have devised plans accordingly. Once the risk has been analyzed it needs to rank. Not each risk is equivalently catastrophic and on the based severity of losses, each risk might portray it needs to be ranked from highest to the least. Ranking of risks helps in prioritising the limited resources and ensuring their optimum usage. By ranking each risk as per the business environment and the companies positioning, companies were able to control the jeopardy of risks and allocate their resources efficiently. For example, Mumbai Mirror one of the prominent newspaper agencies decided to print papers weekly instead of daily and turned to online mode as their primary medium of business during covid. They were able to do so because they studied the initial impact of Covid and their resources and saw decreasing users, rising competition, shift in need, uncertain government decision regarding lockdown as some of the most prominent risks. Upon ranking the same, the first decided to use the online medium as a secondary source of income but later decided to make it as their primary source. The next step is the treatment of risk. In order to accurately treat the risk multiple viable solutions, need to be devised and be run in a prototype environment. The impact needs to note and the solution which provides the most relief should be selected. The treatment should be taken keeping in mind all stakeholders and how they would react to it. For example, As Paytym launched its Initial Public Offer (IPO) in the period of new normal, despite its IPO being oversubscribed by retail investors it saw a massive crash in share prices. Upon being questioned Vijay Shekhar Sharma, CEO compared the fall to that of Teslas’. After the response, the shares have again seen a rise in price. He was able to make such a comparison because he had already anticipated the risk of the initial crash and was prepared with a response of increasing shareholders’ confidence. The last step of risk management is to monitor and review the risk. While a corrective action has been taken as per the circumstances it is not necessary that the action would always be correct even after the circumstances change. In order to be certain and control risk even in the future, it is ideal to reassess the risk and the treatment and change the strategy if the risk goes beyond the ascertained level. For instance, many companies had earlier halted new hiring and laid off employees as a response to the uncertain covid environment are now extensively hiring
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employees. They are doing so because the circumstances have changed and they see the economy recovering at a phenomenal rate. The period of Covid has proven that while several risks cannot be completely eliminated their severity can be mitigated to a large extent. It has been an eye-opener for many organisations and has acted as an opportunity in disguise. When the going gets tough, the tough get going is exactly what the post covid era has bought upon. Most companies are now not only dedicated to risk management but have also reinvented the way they manage risk. A risk managing culture has been embedded in these organizations in order to treat any risk from its core. More power and autonomy have been provided to each stakeholder in order to prevent chronic damages. Indeed, Adversity and loss make a man wise.
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IPO New Age Scenario By: Viren Deshpande and Deepak Deshmukh (Welingkar Mumbai) IPO (Initial public offering) is undertaken with the main objective of raising capital from the sale of the shares and taking advantage of a higher valuation. At present, there is high momentum of IPO in the market. The increasing scenario of investment in IPO changes with time as a result of IPO listings represents that India's IPO markets have improved during the last three years. To understand changing new age scenario of IPO, there is a need to observe the several factors from the past to relate with the present. Earlier Scenario Benchmark of Maturity Earlier, there was a strong belief that maturity comes with age. Thus, companies prefer to approach the public market only after they had built reasonably strong financials in terms of revenue, profits, and return on capital employed (ROCE) nearly with a supporting argument period of 3 years to have a successful listing of the company. Safety Net There was an idea of providing capital protection for a risk instrument known as Safety Net. The primary objective was to focus on performance is being attributed to aggressive pricing and avoid push away of retail investors due to poor post-listing performance. But, the idea of providing capital protection for a risk instrument, always leads to backfiring drastically. As it restricts investors to make informed decision-making and built pressure on investors to support the market with a high price. All this was making the situation unimaginable for the Investor in the past. Example of Justdial -the first company to adopt the safety net scheme. Unfamed Way The process of IPO required a long time which was the reason the company considered it as an unfamed way. Instead of this companies were willing to adopt the Special Purpose Acquisition Company (SPAC) route to list their companies on NASDAQ. A Special Purpose Purchase Company (SPAC) is a shell company with no commercial operations that was formed to generate cash through an initial public offering (IPO) to complete the acquisition of target companies in the future. They are traded on the stock exchange just like any other stock.
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At Present Focus on Business Model In recent years, IPO investors have demonstrated a better level of maturity in embracing problem-solving solutions, where a sound business model is embraced and the loss-making tag is avoided. At the time of listing Zomato was a loss-making startup still responding, but still, it gets oversubscribed. Future substantial gains Markets are relying on savvy promoters, digitally-driven revolutionary company ideas, and longterm rewards. Today's investors do not want to be like Warren Buffett, who missed Google and Amazon because he did not invest early enough. The lessons of Google, Amazon, and Alibaba have been learned by today's investors. They do not want to miss a chance by delaying admission; if they see promise in a firm, they want to become involved as soon as possible. Recent Paytm IPO, explain the same thing that investors are looking for an idea, thus the firstday response of Paytm IPO was overwhelmed.
Young Investor According to studies, 27% of individuals who applied for Zomato shares on the company's platform on Day 1 of the IPO were under the age of 25, and 60% were under the age of 30. Young investors who entered the market over the last 12-18 months (about 1 and a half years), and are building their portfolios, are looking at these consumer internet firms. Young investors are uncertain how a non-traditional business that does not have a public competition and is not profitable is valued, even as they stay enthusiastic about investing inside a product they use. Secondary Exit Startups raise financing from venture capitalists in today's fast-paced and disruptive world. As the company grows, it receives successive rounds of funding, which raises the company's
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valuation. The company is fully valued or near to it by the time it reaches the IPO stage, leaving little money on the table for ordinary investors. As seen by the number of times the issue is overcrowded, there is a wild hunt for allocation. Because the number of shares designated for retail investors is limited, they hurry to buy on the secondary market on the day of the listing, driving the price up quickly. Unfortunately, most significant investors that enter during the preIPO stage quit after earning a quick buck at this point. Trend Set by Unicorn Companies In India, in the previous 18 months (about 1 and a half years), Tech businesses have led the rise, generating around Rs15,000 crore through initial public offerings (IPOs). So far this year, India has added about three unicorns every month. According to research by Hurun India, this has virtually increased the overall number of unicorn firms in the country to 51 as of August end. Source: https://tradebrains.in/ Beyond Border With investors concerned about China's regulatory changes, India has moved to enhance its legal frameworks to allow capital to flow in and play. The public markets will be the first to be affected, followed by the private sector. This will act as a driver for the fund in India for IPO in some instances. Conclusion There is a significant difference between the boom of 2007-08 and 2021 as this time boom is supported by the new age factor of technology, business model, and investor trend. Over 137 issues during 2007-2008, a total of Rs 51,084 crore was obtained. In the year 2021, Rs 60,588 crore was raised through 37 offerings in just 8 months. While the third wave of IPOs has not been ruled out, the companies announcing plans to go public have. Investors will undoubtedly need to exercise some restraint and discretion when deciding where to lay their bets. Also, considering that world-class startups are in the pipeline, India's IPO might last for a long time. These IPOs coincide with a broader rush by companies to enter the market, as well as the fear of missing out factor that has pushed benchmark indices to new highs. Reference 1. https://economictimes.indiatimes.com/markets/stocks/news/why-startups-will-keep-theipo-market-buzzing/articleshow/86725658.cms 2. https://yourstory.com/2021/09/current-ipo-boom-zomato-nykaa-indian-startups/amp 3. https://www.primedatabase.com/article/2017/8.Article-Shilpa%20Kumar.pdf 4. https://economictimes.indiatimes.com/should-a-safety-net-be-mandatory-foripos/articleshow/20258906.cms
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SEMICONDUCTOR FAMINE By: Bhavya Khattar (Lal Bahadur Shastri Institute of Management, Delhi) The Scarcity Story of the Semiconductor Chips The impact of Covid-19 on economies around the world is quite diverse. It has been a challenge for countries to deal with public health, unemployment, education systems, and the workings around the world. The economic and social cycles were disrupted by the pandemic and they are still in the process of recovery. The nations went under lockdown, economic activities were halted temporarily. Although, many manufacturing units were permitted to function despite lockdowns, the disruptions in supply chain models created a chip vacuum in the market. With remote work and schooling culture, the demand for consumer electronics like laptops, PCs, smartphones increased considerably. Even though countries are gradually easing restrictions, there remain the chances of lockdowns. And advances in technology and network services, reports suggest that the demand for consumer electronics will remain high for the coming months. Simultaneously, the demand for automobiles fell sharply in 2020. With work from home models, people did not consider buying an automobile a feasible option and this led to dip in the sales numbers of automobiles. However, this reported 'scarcity' of semiconductor chips is not a new phenomenon. In the last three decades, the shortage has erupted at different times and the impact has been prominent every time. Till now, the focus was on consumer reaction to covid-19 shocks. But it is important to understand the relative fall in the supply of automobiles. This brings us to the point of understanding what a semiconductor is, why it is essential and what led to an acute shortage. What are semiconductors?
Semiconductors also known as integrated chips are a crucial element in a variety of products. It sits between an insulator and a conductor. Their conductivity and other properties can be altered with the introduction of impurities, called doping, to meet the specific needs of the electronic component in which it resides. Common elemental semiconductors are silicon and germanium. In no time, semiconductors were declared as the engine of the modern-day industrial revolution.
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The usage of these chips ranges from consumer electronics like mobile phones, laptops, refrigerators, etc. to automobiles. These microchips have replaced bulky tubes in electronics thereby reducing the size and cost of devices we use every day. In automobiles, the chips help in performing functions like sensing, power management, driver’s assistance, connectivity, and safety measure in vehicles. The innovative trends that have stepped up have led to an increased demand for semiconductors. Companies are coming up with more tech-savvy solutions and to be able to deliver such solutions, there is an increased requirement for these chips. Shortage of Semiconductors for Automobiles There has been quite a talk about the semiconductor shortage. As introduced earlier the chip famine was seen by the world at different intervals of time. In the last three decades, the shortage was first experienced in 1988 due to the American-Japanese trade agreement. Second, the situation aroused in 1994-95 as a result of the computer boom. Last this shortage occurred when Japan saw its 2011 earthquake. In 2021, the world is again undergoing a similar situation. However, it was not only the supply crunch but also the shift in the priority of the microchip's manufacturer that created a chip vacuum. The manufacturing of semiconductors requires a special environment for production with advanced technologies. These production houses are majorly concentrated in South-East Asia with Taiwan’s TSMC being the biggest manufacturer followed by South Korea’s Samsung. These manufacturers were functioning at their full capacity long before the pandemic came into the picture.
With remote working structures, the market saw a surge in demand for laptops, PCs, smartphones, tabs. This completely changed the demand and supply scenario for chips. To meet the instant demand, manufacturers shifted their resources and attention to microchips used in consumer
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electronics. From February 2020, worldwide automakers were preparing themselves for a squeezed demand and hence, renewed their commitments and production targets. This is where automakers started struggling because, despite all assumptions and calculations, the demand bounced back in no time. On the whole, there are three probable reasons for the resulting shortage. Firstly, the shift of resources of chips from automobiles to consumer electronics. Secondly, the supply chain disruptions. It is claimed that supply networks for these chips are complex. The chips are majorly manufactured in Taiwan and South Korea, and distributed through companies operating in Malaysia. With restrictions tightened in these nations, further added to the problem. Lastly, the overloaded production lines. It could not add more to its burden therefore, the waiting time for chips increased. In the early months, it was 8-10 weeks but later climber to 15-18 weeks. Geopolitics in the Semiconductor Industry
The semiconductor industry is in a scuffle and has been a source of geopolitical tensions between the US, China, and Taiwan. This further tells us that the impact, the trade and technological war between two sides of the pacific can subject to a longstanding loss. The discord first started between China and the U.S back in 2017, when President Donald Trump decided to impose restrictions on China’s leading semiconductor manufacturer ‘Semiconductor Manufacturing International Corporation (SMIC)’. The tension escalated between the two nations when in 2020 U.S claimed SMIC to be working with the Chinese military (PLA). Since then, the bilateral relationship took downhill. However, this is not the sole reason for the geopolitical turmoil. For decades, the U.S has been the dominant force of product design and innovation. Given the gravitas of the current scenario, the U.S has analysed a growing dependence and outsized role of Taiwan in the semiconductor industry. Taiwan’s leading company Taiwan Semiconductor Manufacturing Co. (TSMC) attributed to more than 54% of the revenue generated last year. Also, TSMC accounted for more than 60% of the total manufacturing of microchips in the last year. The concentration of the semiconductor hub in Asia is one of the worst fears of the U.S, as leaders see it as a huge dependency on Asian manufacturing and supply chains that even the slightest disruption can trigger the industry in depths.
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As far as the relationship of China and Taiwan is concerned, the political embroil between them has been a long-standing conflict. In the last year, the ties worsened due to growing tensions between China and the U.S. While, Taiwan is an independent self-governed nation, the mainland China wishes to reunite the two. As a result, Taiwan has resorted to the U.S for support. This has angered the Chinese.
However, analysts believe that the Taiwan’s silicon shield will continue to protect it from China. The dragons although being the manufacturing alpha in Asia could not get ahead in the semiconductor race. This is because it faces a three-phased problem, technological, manufacturing, and supply chain constraints. As China is the world's biggest importer of chips, it will not create a problem for itself by deteriorating ties with Taiwan. Hence, the tiny island nation is the driving force of the chip industry and it is crucial to see how the future of the island nation unfolds in the coming years. Impact The impact of the shortage has been clear. The automobile industry has been hit hard and the electronic industry is operating on a supply chain bottleneck. The auto industry which was in survival mode due to covid-19 and the chip shortage was just another blow. Some of India's biggest automakers like Maruti Suzuki, Mahindra & Mahindra, Tata Motors, Hyundai, and Honda saw a double-digit dip in their outputs. Maruti Suzuki reported 54% year-on-year decrease in its sales due to chip shortages in September 2021. While Mahindra & Mahindra faced a 22% fall in the year-on-year sales in September. As for the future, automakers have announced six to eight months of waiting time to customers to be able to deliver certain models. This makes us conclude that automobile demand bounced back earlier than anticipated, may not be at a very progressive rate. But the problem lies with the automakers failing to deliver them on time due to acute shortage of chips.
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This graph shows the declining numbers of production units in each quarter of 2021.
References: 1. https://www.hitachi-hightech.com/global/products/device/semiconductor/about.html 2. https://www.cnbc.com/2021/03/16/2-charts-show-how-much-the-world-depends-on-taiwan-forsemiconductors.html
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The direction of India’s Foreign Trade By: Vempati Sai Vivekand Namratha Routhu (NMIMS Mumbai) The Indian economy relies heavily on international trade. Because the country has to import a wide range of items, international trade is critical. India exports a large number of goods and buys a similar number of goods. Despite the fact that India's economy has progressively opened up, its tariffs remain high in comparison to other nations, and its investment requirements remain tight. But India is currently pressing hard for a more open global trade regime, especially in the services sector. Historical Changes: The process of globalisation has gained traction as a result of economic integration and the development of international trade volume. Since its opening up to world commerce only began after the crisis in 1991, India has been a relative newcomer to the process of international trade expansion. The opening up of the economy to foreign commerce should be considered as a critical component of the new economic policy approach and a necessary part of the reform process. The economic changes, with an emphasis on liberalisation, openness, transparency, and globalisation, have allowed the Indian economy to become more integrated with the rest of the globe. The content and direction of India's international commerce have changed dramatically, especially since liberalisation and globalisation under the framework of the World Trade Organization. Import licencing requirements on intermediates and capital items have been substantially lifted, and tariffs have been drastically cut. Exports and Imports of India: India now exports over 7500 goods to approximately 190 countries and buys approximately 6000 commodities from approximately 140 nations. Exports and imports aren't limited to just commodities (merchandise). Service is another significant export/import component. Exports: India's exports in FY 2020-21 were US$291.80 billion. Agriculture employs the vast majority of India's workforce; the industrial and service sectors each account for around 25% of the country's GDP. The United Arab Emirates, the United States, and China are India's key export partners; the country's top exports include textiles, software, and petroleum products. India imports crude oil, chemicals, and machinery, among other things, from China, the United States, and the United Arab Emirates. Top Export Items: Petroleum products, precious stones, drug formulations & biologicals, gold and other precious metals are the top exported commodities. Top countries to which India exports the most: USA, UAE, China, Hong Kong, Singapore, UK, Netherlands, Germany, Bangladesh, Nepal Imports: India's imports in FY 2020-21 were US$394.43 billion. The value of products and services imported into India as a percentage of GDP was anticipated to be above 35 trillion Indian rupees in fiscal year 2021, a major decline from the previous year. One of the major reasons for this
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being the shift in mindset of people towards using goods made in India. Government’s policies and regulations also helped its cause. ‘Aatmanirbhar Bharat’ initiative also made its presence felt, especially during the lockdown period. Top Import Items: Crude petroleum, gold, petroleum products, coal, coke & briquettes constitute top import items. Top countries from which India imports the most: China, USA, UAE, Saudi Arabia, Iraq, Switzerland, Hong Kong, Korea, Singapore, Malaysia Direction of India’s Foreign Trade: While the worldwide trade recession caused by the COVID-19 epidemic is projected to persist longer than the global financial crisis of 2008-09, India's international trade data provide cause for hope. India's foreign trade fell 6.8%, which was better than the World Trade Organization's (WTO) prediction of a 9.2% drop in world trade in October 2020. Due to unusual market demand and supply chain disruptions, foreign trade for FY 2020-21 showed expansionary patterns developing in specific industries and destinations, notwithstanding the eventual economic slowdown caused by the pandemic. We will look into the trends with respect to the countries India trades with Trends: Exports to the United States continued to dominate, accounting for almost 17% of India's overall exports. Following that, China and the UAE switched places, with exports to the UAE dropping sharply in 2020-21.
In FY 2020-21, India's top three sourcing destinations were China, the United States, and the United Arab Emirates, with imports from Switzerland moving to fourth place. Gold imports from Switzerland make for a major share of India's precious metal imports.
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When looking at the percentage of exports by region, the data shows a consistent increase in exports to North America, from 15.31 percent in 2014-15 to 19.77 percent in 2020-21, offset by a reduction in Asia's contribution, from 48.52 percent in 2014-15 to 46.52 percent in 2020-21. In June of this year, goods trade between the United States and India increased by 40%, and it is anticipated to reach pre-COVID-19 epidemic highs. The Chinese economy also contributed to the decline in 2020, increasing 18.3% in the first quarter of 2021 before weakening in the second. Over the last several years, Asia's part of India's export basket has steadily decreased, while commerce with western nations has increased. This is most likely due to India's shift away from east-west trade alliances in favour of forging new economic ties in western nations' underserved markets. Foreign Trade Policy: The next Foreign Trade Policy (FTP) (after FTP 2015-20) aims to increase India's annual good and services exports to exceed US$1 trillion by FY 2026-27. The new FTP is much anticipated since it will provide government-backed plans for capitalising on forecasted global economic development. Ensure India's stronger integration with the global supply system, as well as lower logistics costs, would be key objectives. New Bilateral Pacts: Also, India’s rank in Ease of doing business keeps improving and according to the latest report by World Bank, India ranks 63 out of 190 economies under the indicator Trading across borders and it keeps improving. India has begun talks with the United Arab Emirates, with the goal of concluding trade talks and signing a mutually beneficial Comprehensive Economic Partnership Agreement (CEPA) by March 2022. The CEPA agreement intends to boost bilateral economic relations, extend existing trade and investment links, and serve as a stepping stone for India to expand its commercial
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relationships with the UAE's surrounding Gulf nations, which are now dominated by energy products. Negotiations on a free trade deal between India and the EU have begun after an eight-year hiatus. As formal discussions on two important pacts on investment protection and geographical indications began in September, political consensus on critical regional and global concerns provides background support. Meanwhile, discussions between India and the United Kingdom are slated to resume in November, with the goal of reaching an interim agreement by March 2022, followed by a comprehensive agreement. What the future holds: While it appears that foreign commerce is on the mend, COVID-19 has had a significant impact on the goals of governments all over the world. The epidemic needed more national investment to bolster exports and overseas commerce, but this has stretched government budgets, especially India's, to breaking point. When assessing the prospects of any one country, it is critical to examine the economic health of the whole global trade network. The steady recovery of economies around the world is a positive sign, but breakdowns in multilateral relations, geopolitical rivalries, or supply chain blockages due to COVID shutdowns, logistics barriers, and high shipping and container costs suggest that more pain is on the way for international trade in the near future. Nonetheless, these obstacles and dangers, particularly those stemming from the pandemic and trade rivalry, are likely to push India to maintain its focus on improving its trade profile and pursuing trade deals more aggressively. References: 1. https://pib.gov.in/PressReleasePage.aspx?PRID=1698184 2. https://ezproxy.svkm.ac.in:2307/statistics/914306/india-imports-from-volume-index-of-foreigntrade/ 3. https://www.india-briefing.com/news/indias-import-export-trends-in-2020-21-tradediversification-fta-ftp-plans-23305.html/ 4. https://www.phdcci.in/wp-content/uploads/2018/11/Structural-Changes-in-Indias-Direction-ofForeign-Trade.pdf
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An Analysis of Indian IPO Market By: Isha Sharda and Sargun Kaur (Shri Ram College of Commerce, Delhi) What is an IPO? Going public is a crucial juncture and decisive turning point for any privately owned company, as it transitions to a publicly traded and owned entity. In simpler terms, an initial public offering is a process of raising capital from public investors by offering shares of a private company in a new stock issuance. This allows corporations access to large sums of capital, as well as gain credibility in the stock market which further empowers them to negotiate favourable terms while borrowing funds for expansion. According to the guidelines of the Securities and Exchange Board of India (SEBI), there are different types of investors who can bid for shares when a company goes public. Qualified Institutional Buyers (QIBs) are commercial banks, public financial institutions, insurance companies, investment banks, mutual fund houses, and other institutional investors with sufficient expertise and financial resources to invest in the capital market. Non-Institutional Investors (NIIs) primarily include High Net Worth Individuals (HNIs) who invest more than Rs. 2,00,00 while bidding for shares. Retail Individual Investors (RIIs) are investors who bid for shares less than Rs. 2,00,000 in an IPO. According to a report by PwC, as of Q3 2021 the global IPO proceeds already see an increase of 35 per cent ($115bn) as compared to the full year 2020. In India, the interest in investing in IPOs has piqued considerably as displayed by the record number of listing gains. In a report by Ernst & Young, Indian stock exchanges ranked 12th in the world in terms of the number of IPOs in year-to-date (YTD) 2021. Seventeen IPOs were launched in the first quarter, and seven IPOs in the second quarter. Further, the report adds that over 40 companies have filed their Draft Red Herring Prospectus (DRHPs) and are gearing up for their debut in the stock market.
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What determines the success of an IPO? There are no absolute determinants of an IPO’s success but, according to PwC’s listing, the performance of an IPO can be predicted if it ticks off the following boxes: 1. A large, growing addressable market 2. A unique and differentiated business model 3. An attractive product or service, preferably one with a competitive advantage and isolating mechanisms 4. Strong revenue growth with sustainable and visible projected revenue growth 5. Strong margins and cash flow generation Even if a firm ticks off all the determinants, it does not imply a guaranteed success, but it makes investors much more willing to take their chances. To provide further insight into the current state of investment in IPOs in India, we shall use a case study that is recent and relevant. Among the high-profile IPOs launched in recent times that have stirred conversations about the future of IPOs in India are Paytm's parent company, One97 Communication and Nykaa, a leading fashion retail brand. Nykaa and Paytm: A Comparison Nykaa made its stock market debut on 10 November 2021, with the share price nearly doubling from the issue price. Nykaa shares rallied by Rs. 1081.70 or 96.15 per cent to close at Rs 2,206.70 against issue price of Rs 1,125 on the BSE. On the National Stock Exchange, it rose up 96 percent to close at Rs 2,205.80. Nykaa founder and CEO Falguni Nayar made headlines as she became India’s richest self-made woman billionaire, according to the Bloomberg Billionaires Index. Paytm had a less than stellar debut as the share prices plummeted to Rs. 1,560.80 against the issue price of Rs. 2,150 recording a fall of 27.4 per cent. Zomato, another loss-making company closed the share price on its listing day at Rs 126 leading to a rise in its share prices by 66 per cent or Rs 50 from issue price of Rs 76. Retail investors saw 35 per cent of their value disappear after just two trading sessions.
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One of the ways to gauge the success of an IPO is by evaluating the number of times it was oversubscribed. It is a term used to indicate when the demand for a new issue of stock exceeds the number of shares available to buy. It reflects the eagerness of investors to purchase the shares of the corporation, causing the underwriters to adjust the prices to a higher level and/or offer more shares to meet the increased demand. Paytm’s IPO was oversubscribed 1.89 times, with the retail portion being oversubscribed by 1.66 times and the for non-institutional portion by just 0.24 times. In simpler terms, for every 100 shares offered by Paytm, retail investors bid for 166 shares and NIIs bid for only 24 shares. The stock price pummelled as those seeking buyers for their IPO allocation were let down by the lukewarm response. Nykaa’s performance was considerably better as the IPO was oversubscribed around 82 times, with the retail portion being oversubscribed by more than 12 times and around 112 times for non-institutional investors.
Analysts have zeroed down on overblown evaluations and an unclear business model as the reason behind the fall in the stock prices of Paytm. The introduction of Unified Payment Interface (UPI) by the National Payments Corporation of India (NPCI) blocked Paytm’s first mover advantage in a market already saturated with other e-payment platforms such as GooglePay, PhonePe, Whatsapp Pay etc. In comparison, Nykaa, which is often hailed as the Amazon of Beauty & Skincare products in India, currently lacks a strong competitor and has displayed consistent growth. According to the consulting firm RedSeer, around 75 per cent of India’s beauty & cosmetics market is unorganised. The future of IPOs in India The Paytm debacle has led to growing scepticism in the stock market as the upcoming IPOs face much closer investor scrutiny. This cynicism is especially evident for fintech business models, as e-payments firm MobiKwik delays its IPO launch after it grapples to secure foreign investment at the right valuation. Other fintech models, Ola and Oyo are also expected to underperform in the stock market. According to Richa Agarwal, Editor and Research Analyst, Hidden Treasures, “The real differentiators create sustainable value and virtuous feedback loop. However, most start-ups, despite claiming to be disruptors, are growing on borrowed money, creating unsustainable and non-self-reliant business models.” Amid growing investor pessimism, the performance of LICs IPO, touted to be the largest Indian IPO in history is expected to shape and transform the future of investment and capital markets in India.
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References: 1. 2. 3. 4.
https://www.livemint.com/ https://www.pwc.com/us/en https://www.deccanherald.com/ https://assets.ey.com/content/dam/ey-sites/ey-com/en_in/topics/ipo/2021/ey-india-ipo-trendsreport-q2-2021.pdf 5. https://www.pwc.com/gx/en/audit-services/ipo-centre/assets/pwc-global-ipo-watch-q32021.pdf 6. https://timesofindia.indiatimes.com/
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