ARBITRAGE APRIL 2019
VOL. 3 ISSUE 5
ARTICLE OF THE MONTH:
MASALA BONDS: SPICING THE INDIAN BOND MARKET
FINANCE AND INVESTMENT CLUB
Index S.No.
Article
Pg. No.
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MASALA BONDS: SPICING THE INDIAN BOND MARKET
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2
LATEST CREDIT SPREAD DATA: AN INDICATOR OF IMPROVING INVESTOR CONFIDENCE IN INDIAN CORPORATES OR SOMETHING ELSE?
8
3
WILL INDIA FACE THE TARIFF IRE OF THE US?
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4
PATH TO FINANCIAL SUCCESS IS A MANGO TREE
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5
COMPARATIVE STUDY ON FAMILY MANAGED BUSINESS VERSUS PROFESSIONALY MANAGED BUSINESS OF NIFTY 50 COMPANIES
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6
ALGORITHMIC RETAILING: THE NEED OF THE HOUR FOR RETAILERS
24
7
ANALYSIS OF THE UNION BUDGET 2019-20
26
8
VENEZUELA'S PERENNIAL PROBLEM
31
9
STOCK MARKET AND ECONOMY: A COMPLICATED RELATIONSHIP
33
10
INTERNATIONAL INVESTMENT OUTLOOK
36
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ARE NBFCs LOSING THEIR NICHE?
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Masala Bonds: Spicing the Indian Bond Market : By Sonam Rastogi ( TAPMI )
Introduction With appreciating value of rupee and government policies favouring the local currency, there has been a rapid surge in the issuance of ‘Masala bonds’ in the recent past, spicing up the Masala bond market yet again. But what exactly are these Masala bonds?
This article explores in detail about Masala bonds (MBs), the reason for their introduction in the Indian economy, its subsequent impact on the economy and the way forward.
Brief Description Masala bonds (MBs) are rupee denominated bonds through which Indian companies raise money from foreign market. Since, these bonds are pegged to Indian rupee instead of US dollar, currency risk arising due to fluctuating rupee is borne by the investor rather than the issuer of the bond. They also offer Indian corporates with a wider range of investor base to meet their financing needs. These attractive features make Masala Bonds one of the most of the favourable debt financing instrument among issuers. History and Recent Progress Masala bonds were introduced in the Indian economy by International Finance Corporation (IFC) in November 2014. IFC, the investment arm of World Bank issued its first masala bond in November 2014.
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When the bond was introduced in 2014, only large Indian corporates and public institutions such as NHAI, NTPC, IREDA, HDFC with AAA credit ratings in the domestic market were able raise money using Masala bonds. The data below shows Indian Rupee bonds that are listed on London Stock Exchange till November 2017.
However, regulatory reforms by RBI in 2017, such as reduction of withholding tax payable from 20% to 5%, improved participation of other players in the Masala Bond Market. Several good credit rated firms such as Dewan Housing Finance Limited, Shriram Transport Finance Limited also raised money through Masala Bonds in 2018. However, scrutiny on the credit worthiness of corporates was also increased due to RBI regulations which badly impacted low rated corporates from issuing these bonds. In 2018, when rupee was depreciating exponentially, RBI relaxed Masala Bond regulations that it had imposed earlier, for example, it completely removed withholding tax payable by non-resident buyers till March 2019, allowed related party lending for Masala bond, reduced hedging cost norms for investors etc. These moves helped not only to increase issuance of Masala Bonds but also stabilized falling rupee.
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From Sept 2018 to March 2019, with appreciating rupee, stable political environment and relaxed regulatory norms, Kerala Infrastructure Investment Fund Board (KIIFB) ,became the first sub-sovereign entity to issue Masala bonds with the largest dual currency issuance. HDFC, India’s largest mortgage lender, also raised ₚ100 billion on 22 March, 2019 via this route. Reason for Introducing Masala Bonds Due to strict regulations implemented by RBI on banks, such as to not lend below MCLR (Marginal Cost of Fund Based Lending Rate), even top corporates were facing difficulty to raise money in the domestic market. RBI implemented these regulations to counter increasing NPAs in the Banking sector. However, since financial requirements of a developing economy is enormous, corporates switched to other sources of financing. Indian corporates started financing their activities through External Commercial Borrowings or ECBs. ECBs are borrowing instrument used by Indian companies to raise money from nonresident lenders. ECBs are raised and settled in foreign currency. Hence, currency risk is one of the major risk factors associated with ECBs, especially with fluctuating value of rupee. Corporates typically use currency swap and other instruments to hedge against these currency risks. Another financing method used by Indian corporates is US Dollar bonds. The maturity period of a US Dollar bond is typically between 3-10 years. However, US dollar bonds also carry currency risk, since they are also issued and settled in dollars. The table below sums up corporate issuance of US Dollar bonds for the year 2015.
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Bond market issuance increased highly among Indian corporates during this period. However, since revenue generated by these corporations are mostly in rupees, financing activities in foreign currency created a mismatch and exposed them to exchange rate risk or currency risk. Moreover, in 2013, when rupee hit record low against US dollar due to huge capital outflows by FIIs, currency risks on Indian corporates worsened.
This led International Finance Corporation (IFC) and Indian Government to plan for measures to support capital market development in rupees, which ultimately led to the introduction of Masala Bonds!
Benefits to the Issuers of Masala Bonds
One of the major benefits for issuers of Masala Bonds is that it helps them to tap foreign investors demand without bearing foreign currency risk. Foreign currency risk can be better explained through a simple example below: Suppose the current USDINR exchange rate is $1 = ₹50. An Indian firm issues US $100 bond at 10% annual interest rate for a tenor of 5 year. The Indian firm has to pay an interest of $10 every year. Now if rupee depreciates and $1 becomes equivalent to ₹75, the burden of repayment goes up for bond issuer. The same $10 interest will now cost the Indian firm ₹750 instead of ₹500. Hence, in this scenario, the exchange rate risk lies with the Indian corporate. However, Since Masala bonds are pegged to Indian rupee instead of US dollar, Indian issuers are protected against foreign currency risk. Another benefit for the corporates is low interest rate charged in the offshore market as compared to the Indian market. This reduces cost of borrowing drastically for the issuer. Corporates also benefit from access to wider investor base and portfolio diversification. 6
Benefits to the Investors of Masala Bonds Investors in the Masala bond market i.e. typically non-resident Indians and foreign investors, benefit from the high yield offered by Masala bonds. Due to rising inflation in the Indian economy, interest rate on these bonds are higher than major foreign currencies like EUR, JPY etc. However, investors mostly prefer Masala Bonds of shorter duration to mitigate the risk associated with currency fluctuation in the long run. The reason why foreign investors prefer Masala bonds can be explained through the below example:
From the table above, we can see that if NTPC Masala bonds are held till maturity, its yieldto-maturity (YTM) is 4.77% higher than that of its USD bonds. This higher yield attracts investor to invest in Masala bonds. Investor can also buy protection against currency risk by hedging their exposure to fluctuating rupee for an additional cost. This helps them to maximise their returns from high yielding Masala Bonds and at the same time lowering their risk. Moreover, If rupee appreciates, Masala bonds, becomes an even more profitable investment option for the foreign investors.
The Road Ahead Masala Bond market’s huge dependency on Indian rupee appreciation/depreciation makes it highly volatile platform for foreign investors. Foreign investors always look for economies with stable local currency and stable political & macroeconomic environment before investing in local currency bonds. Falling rupee might reduce the market for Masala bonds. However, relaxed regulatory norms and easy hedging cost norms by RBI will continue to encourage investors to invest in these bonds. Tight liquidity in the Indian economy currently requires other sources of financing and relaxed regulations for Masala bond will make it a good alternate source of financing for Indian corporates. This will also help aid foreign investor confidence in the Indian economy.
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LATEST CREDIT SPREAD DATA: AN INDICATOR OF IMPROVING INVESTOR CONFIDENCE IN INDIAN CORPORATES OR SOMETHING ELSE? : By Sanchit Aggarwal ( Fore School of Management )
Abstract This paper is an attempt to analyze the latest credit spread data released by the RBI which shows that the yield spread or the difference between the 10-Year AAA Corporate bond yield and the 10-Year Government Bond Yield for the month of April has been the lowest in the past 4 months. A non-economic person looking at this data will conclude that the investors’ confidence in the Indian corporate bonds has increased and is thus not asking for any risk premium over the government bonds. But is this the real story or is there something which is being eluded from the eye? Background An important factor which determines the credit spreads is the monetary policy of the government. In April 2018, the government said it will sell more short-term bonds in order to cover the fiscal indebtedness. The yields on shorter-term government bonds increased significantly (see figure1). Most corporates who sell shorter term bonds with one-to-five-year maturities had to increase their rates in order to stay competitive. As a result, corporate bond sales halved from the year-ago period. Till April 24, Firms raised only 13400 Crore from bond issues as compared to 26700 Crore raised in April 2017. (Das, 2018)
Figure 1: Rising yields on short-term government bonds
(Source: Bloomberg) 8
Confused Monetary Policy After Government decision to sell more short-duration bonds yields on them outpaced growth in yields on long term bonds in April and May 2018. In June 2018, RBI increased its benchmark repo rate by 25 basis points amid rising inflation concerns which led to fall in bond prices. (Kazmin, 2018) At the same time Foreign Funds which typically buy short duration notes dumped Indian bonds and bond underwriters had to rescue Government by buying unsold short-term notes. All this prompted Indian government to reconsider its policy to issue more short-term debt and it reduced planned issuance of 10-year bonds to 29% of the total borrowings from its earlier plan of 50% of the total. (Bloomberg, 2018)
Impact On Long Term Bond Market This decision to reduce the supply of short-term bonds meant that the supply of long-term bonds (10- Year bonds) has to be increased. With Foreign investors fleeing the Indian bond market and banks already suffering with the NPA crisis meant that the demand for long terms bonds was not good. This meant that there was a mismatch in demand and supply of long-term government bonds. This led to decrease in bond prices and increase in yields in long term bonds. The yield was at its highest level for September 2018 as shown in Figure 2. At this level banks find it attractive to invest in these long-term bonds and they entered the bond market driving the yields a little down.
Il&Fs Default: Impact On Bond Market With things starting to look stable, another blow comes. One of the biggest NBFC in India IL&FS defaults, and there was a liquidity crisis in the India. Investors were worried about another default. Thus, they bought more and more short-term bonds (3 year and 5 year) thus increasing their demand and driving their yields down. On the other hand, the demand for long term bonds suffered again and their yields went up. This was evident as yields slid down 24 basis points on 3-year bond and 29 basis points on 5year maturities in February 2019, while the yield on 10-year maturities slid down by 8 basis points as shown in Figure 2. (Sircar & Goyal, 2019)
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Figure 2: Short term bonds rally while long term slid down post liquidity crisis
Consecutive Rate Cuts: An Incentive For Corporates Credit spread depends greatly on interest rates or the inflation rates in the economy. Lower the inflation, more incentive for corporates to issue bonds at higher yields, thus the credit spreads increase. This is because in the future as the inflation will increase gradually the interest rates will increase and the bond prices will come down. Thus, the investor will demand higher yields. To prove this, I collected data for Credit spreads and inflation rates for the past year till April 2019. Correlation was done to analyze the impact on each other. Here are the results:
Inflation 10 Years AAA NBFC Spreads (bps)
Inflation 1
10 Years AAA NBFC Spreads (bps)
-0.8442
1
The results clearly show that inflation is negatively correlated with credit spreads. The same thing happened in Indian corporate bond market in first quarter of 2019. Inflation was at a lower level and Corporate was expecting another rate cut in the April month which will increase inflation, Thus Corporate poured in to take advantage of this differential and took credit spreads to an all time high of 131 basis points in the past 4 years. (Das, 2019)
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After taking credit spreads to an all time high of 131 basis points, the credit spreads came down to a 4-month low of 108 basis points on account of 2 consecutive rate cuts and higher foreign inflows in India by foreign portfolio investors. (Nayar, 2019)
Conclusion Summing up all these events in the market, we can say that the reasons that the credit spreads have come down are: 1) 10- Year- Government bonds yields have gone up in the past year because of the confused monetary policy of the government and the liquidity crisis invoked by the default in IL&FS. 2) 10-Year Corporate bonds yields have come down as most of their borrowing needs have been fulfilled in the low inflation period and now, they have decreased their rates on account of 2 rate cuts and higher foreign inflows. Thus, both these events led to decrease in credit spreads and it does not mean that the investor confidence in Indian corporates has risen but a wake-up call for the Indian government to build a clearer monetary policy and quickly cope up with the liquidity crisis.
Future Outlook With the RBI, carrying on Open Market Operations and Dollar-Swap Auctions to inject liquidity in the system, such temporary shock in the corporate bond yields might not be caused and we are looking towards a stable debt market.
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References Bloomberg. (2018, June 13). Retrieved from https://m.economictimes.com/markets/bonds/yield-surge-may-prompt-india-to-cutsales-of-short-term-debt/articleshow/64571559.cms Das. (2018, May 1). Retrieved from https://economictimes.indiatimes.com/markets/stocks/news/spike-in-yields-threatensrbis-drive-to-popularise-corporate-bond-market/articleshow/63981036.cms Das. (2019, Feb 20). Retrieved from https://economictimes.indiatimes.com/markets/bonds/rate-cut-fails-to-tame-yields-incorporate-bond-market/articleshow/68085551.cms?from=mdr Kazmin. (2018, June 6). Retrieved from https://www.ft.com/content/f5f8dc76-6974-11e88cf3-0c230fa67aec Nayar. (2019, April 13). Retrieved from https://www.financialexpress.com/market/averagecorp-bond-spread-falls-to-lowest-since-december-2018/1546759/ Sircar, & Goyal. (2019, February 15). Retrieved from https://economictimes.indiatimes.com/wealth/personal-finance-news/top-fundmanagers-tweak-strategy-as-rate-equationalters/articleshow/68020093.cms?from=mobile&from=mdr
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Will India face the tariff ire of the US? : By Jeevansh Arora ( BVIMR)
Since Barack Obama was elected as the president of the US, India and the US have been enjoying close cooperation in variety of matters and issues which involves the Defence, Terrorism etc. The relationship has been taken a step ahead by the newly elected heads of the states namely President Donald Trump and Prime Minister Narendra Modi. Even though President Donald Trump never miss a chance to greet and recognise him “as a friend”, the things are completely opposite on the Trade front. President Donald Trump who has been an active proponent in demanding the same treatment as the US is giving to the other developing countries particularly, India and China. He has condemned the favourable treatment being extended to such countries in terms of many of the products from these countries entering the US as duty free when on the contrary, they are charging the US products as high as 300% duty on the product’s original price. After a bitter trade war with China in which the US threatened China to levy taxes on the imports amounting to $60 billion which led to a series of negotiations between the two countries before which this whole scenario now seems to be resolved by the joint efforts of both the nations. But this is not the case with India. President Donald Trump has quite for a time now, has adopted an aggressive position towards India in terms of the trade practices involved. The inception of this issue has its roots in the speech in which President of the US had particularly cited the instance of Harley-Davidson at the Conservative Political Action Conference (CPAC) quoting “When we send a motorcycle to India, they charge 100% tariff. When India sends a motorcycle to us, we charge nothing. This long simmering battle between the countries is due to the favourable treatment which the India enjoys under the Generalised Systems of Preferences (GSP) which was negotiated under the GATT in the year 1970. The US lately has described India as “the tariff king”. The prime reason for this tussle is that US currently had a trade deficit with India of $27.3 billion in the year 2017. Also the US has put India under the “Priority Watch List” which includes those nations who do not actively protect the Intellectual property rights particularly the patents. The US has already increased the tariffs on the steel and aluminium has definitely impacted the exports to the US but India has always restrained from issuing any retaliation against such decisions. Even tough India has threatened a retaliatory action by raising the tariffs on 29 items which are imported in India. Even though the US removes or take back the special preference given to India under the Generalised Systems of Preferences (GSP), it will affect the custom duties to the country only to the extent of $190 million per year. Also the Generalised System of Preferences (GSP) covers only limited amount of items which are generally those products, which do not exceed the annual cap of $185 million in the trade value. In case of the popular products which exceed the annual import value the country exporting them automatically loses the preferential treatment on these goods or products. Even though India has announced a cut in the duty levied on the products from the US particularly on the bikes which are imported from the US but still The US is adamant on not to provide preferential treatment to India.
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The Implications •
•
• •
Removing such preferential treatment, Indian exporters will have to pay additional duties which will deter them from exporting goods to the US as it will involve increase in the cost of exporting for them. From a political point of view this will be seen as a setback for the current elected government in India which has made a lot of efforts in establishing deeper relationships with the other countries and the elected government will face a strong retaliation from the opposition parties at the time when the country is in middle of Lok Sabha Elections. The US market which is already a distant dream for large number of the exporters, this will further make it difficult for the Indian Exporters to enter. In case the Indian Government take retaliatory actions against the US, the latter may also modify its other policies which are in any way favouring India. For example the issue of H1-B Visa for the Indian residents which has been a long debated issue between both the governments can be affected with any retaliatory action.
The Road Ahead Since the currently elected government in India has always known to be a government which takes bold and diplomatically right decisions, the government should exert some pressure on the US in order to keep on enjoying the benefits under the GSP. Since India has a trade surplus with the US it can take retaliatory measures of levying more duties on the items specified which the country is importing from the US like California Almonds, Apples etc. But a better decision would be to convince the US that India should enjoy the preferential treatment as it’s still a developing country which need to safeguard its domestic market and the small and medium enterprises who are already facing a tough competition from the FDI in retail and the home grown e-commerce giants. India is also facing the issue of changes in the e-commerce policies which have created a lot of criticism from the American giants like Amazon and Walmart. India should opt for discussing and easing of the restrictions 14
on trade related issues should be steered by both the nations in order to maintain the cordial relationship they enjoy.
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Path to Financial Success is a Mango Tree! : By Amit Pandya ( CEO, AKruti Financial Technologies)
When I used to study at School, I was taught that our population rise has been a problem for the success of the country, but practically I put my steps in Business World I learned that the same population has become a money printing market for MNCs. I feel that how could valuation analysts give the value of billions of dollars to the businesses which have no infrastructure or employees of themselves still people sitting in pyjamas become overnight billionaires. But my granny tells me that at the speed your money comes in also goes away in the same direction. I learned a lot from Warren Buffet and Charlie Munger which no Institute ever made me learn, though the point is that here in India we need to change our mindset for a better and sustainable future. When our Economy is facing problems deep inside but still Markets are hitting higher and higher just because of the money inflow. When this money inflow would stop the reality will hit hard, when in 2008 it made mammoths playing in billions collapsed just because of too much of optimism that leads to failure. The recent report told that our World is sitting at the debt of around 22 Trillion Dollars. College life and life at work would be totally different. Not every organization would be like Google giving you amenities making you feel at home. And to the students you are thinking for their own business, this is for them, you have to face sleepless nights, don’t leverage unless you are too sure, start with small capital, success isn’t overnight, social media is full of illusionary people who aren’t really that successful! I will give an example of my friend, he took over his Father’s food truck business due to his Father’s bad health, leaving his Graduation in between, as he was Educated, he turn around and implemented his knowledge, adhering to all guidelines from Municipal Corporation and following all guidelines from Food Corporation. Today he has a daily turnover of around Rs.45,000/- now multiply it with 30 days and I am just giving you average. So, the point is that everyone cannot become Bill Gates or Jeff Bezos, recently I learned a very good point which touched my heart. When at World Economic Forum, Jeff Bezos was asked how to become Rich, he answered that solve problems of a million people and you become a millionaire and you solve the problem of a billion people and you become a billionaire. Our young generation has become too impatient when it comes to success, as I gave the heading with a Mango Tree, there is an old story that a 90-year-old man was planting a Mango Tree in his farm, someone asked him why are you doing this you won’t be able to eat the fruit, he replied that I am not planting this for myself but for the generation to come. There are many businesses which may not give you the name fame but it can generate you handsome money, the superficial life at some Institutes in our Country never really makes someone similar to Ratan Tata or Narayan Murthy, you have to have your feet stuck to the ground. I want to give another example which should open up the eyes of everyone studying business or associated with Finance World, we have a Tax Client who has a small business of Bakery Puff, he has 4-5 variants in it and it tastes great and fresh every time, we told him that if you want to expand then we can arrange you with the capital you need, but the owner told that he isn’t formally educated and with hard work he made his son go to top management school (I won’t take name of the Institute) and after studying when his son returned he told his father to close down the puff business as it made him ashamed among his peers and he will work for some MNC, I consider that irrespective of his any degree he is a failure, because if he feels ashamed 16
of the business which only made him go to that College, and by going to MNC he is giving away his financial freedom, this things cannot be taught at schools, his father’s business have an average turn-over of around Rs.50,000 daily, but he is financial free. Our young generation really needs to understand financial freedom, I hear many such incidents were his/her job gets lost and he/she is having an obligation of the loan to be repaid for a car or an apartment. Capital is getting cheap but at what cost? In the Private Sector, even the Job of the CEO is unsecured, you have to work like the same day you would get fired, then you will do think differently and will act like that. I also believe the same theme of Charlie Munger that don’t build the product which you wouldn’t buy, and it is very ironic that Steve Jobs didn’t allow his children to use Apple products before 18 years of age and Evan Spiegel of Snapchat caps the time in which his children spend time on social media. If caution isn’t taken that StartUp bubble in India will burst, because you cannot have a startup for every product, to really take our Corporate Sector and Finance Education at World level then we need Innovation, and it cannot come without giving a space to take risk of time and capital. It has been found that the most less treated job is of a housewife when we see today couple both working then the work which wife or mom used to do is now been shifted to the helper or maid, then you have to spend money they won’t work for free for you, so some things can only be lived up to the people because everyone thinks in their own terms, but the only point is that you have to manage your funds wisely, and also health is important otherwise all the money you have earned will just get shifted to Pharma Companies and Doctors! As the law of Thermodynamics tells us that matter cannot be created or destroyed, similarly I have a theory that money just gets shifted from one pocket to another and the one having more accounts on income sideWins! I wish everyone out there to have a great financial life and do learn and think out of the box and whenever life puts you down remember that Amazon was started in a 10x10 room, Google was started as a Science Project and Reliance was started by a man who used to work at a Petrol Pump. However, if everyone will become owners then who will work for you, everyone has a role to play in your life and the success of your business. And treat the lowest of the employee in the management similar to the top executive it will benefit you in the long-run.
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Comparative study on Family Managed Business versus Professionally Managed Business of Nifty 50 companies : By Sayyed Shahil N.R ( Justice K.S Hegde Institute of Management ) Introduction India is well known for its family managed business but in recent times professionally managed business are performing and gaining importance. There has been lots of research has conducted based on factors influencing family managed business and professionally managed business. Also many of the researchers have argued that there has been difference in performance of family managed business versus professionally managed business. Family managed business and professionally managed business has its own strengths and weaknesses. Defining Family managed business and Professionally managed business Family managed business refers to business Managed by Family members or decision making authority with family members or promoter will be family member or family member will be CEO, Chairman or Board of Director. Professionally managed business refers to business Managed by Professional Mangers or promoters will not be family member and professionals will be CEO, Chairman or Board of Director. Objective of the study Our main objective is to study the performance difference of the family managed business with professionally managed business using different performance parameters in order to understand how it differs from each other’s. Methodology of research We have chosen rational methodology to substantiate our study. Also we have tried to take the right procedure to reduce the biased information of the study. Below are the details given about the methodology. Population of the study Our Population for the study is Nifty 50 companies of National Stock Exchange. There are 50 companies in Nifty 50 which includes Family managed business and professionally managed business. Nifty 50 companies are considered as large companies of India, it is notably knows as highly valued companies of India Sample of the study Our sample for the study is chosen through simple random sampling technique using Microsoft Excel function and we have taken 10 samples from the each type of business. However our sample includes 40 percent of the population likewise to give less biased results.
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Sample companies for the study
Table 1 Parameter of analysis We have chosen 5 parameter to analyse the differences between two companies. They are Price to Earnings ratio, Revenue Growth, Total Debt to Total Equity, Return on Equity and Market Capitalization. Price to Earnings ratio is one of the important valuation ratio. Analyst calculate this ratio to get an overview of whether the company is undervalued or overvalued. It is also called as earning multiples in valuation. Price to Earning ratio can be compared with the industry which the company belongs to or with its peers. It is calculated based on quarterly or annually by the analyst by taking stock price and earning per share in to consideration. Below is the formula to calculate Price to Earning ratio P/E = Stock Price Per Share / Earnings Per Share Total Debt to Total Equity ratio is a financial solvency ratio which compares total debt obligation with Total Equity Capital of the companies. This is ratio is related financial leverage of the company. This ratio will help us get an understanding about the degree of debt used to finance the debt obligation of the company. It is calculated by taking total debt and total equity in to consideration. Debt to Equity Ratio = Total Debt / Shareholders’ Equity Revenue year on year growth rate is the increase/decrease of sales over period. In this study we have considered one year year on year revenue growth. Revenue growth is an important measure to understand the growth of the company because if any company grows at increasing growth then that companies can be called as growth oriented company. This Can be caluculated
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by taking previous year and present year revenue data. Below is the formula to calculate the Revenue year on year growth rate. Revenue Growth =Present year revenue–Previous year revenue/Previous year revenue*100 Return on equity (ROE) is a important measure to findout the profitability of the company. It measures the return on euity generated by the the company on a pertucular period of time. Return on equity is one of the major concern for the investors. Increase in return on equity infers that the company is making profitable. Below is the formula to calculate the return on equity Return On Equity = Net Income / Shareholders’ Equity Market capitalization refers to value of the company’s outstanding equity share. Market capitalization gives a fair idea about the market value of the company. If the market capitalization is higher then the company is called as highly valued and vice versa. By using market capitalization companies catagories as Large cap, Mid Cap and small cap. However we have taken Nifty 50 companies and it only includes large cap companies. Market capitalization = Current share price*Outstanding shares Comparison of Price to Earning, Return on Equity and Revenue growth We have tried to to compare three parameter of price to earning, return on equity and revenue year on year growth. Below is the figure 1 showing the changes in three parameters. Professionally Managed Business 40 30 20 10 0 -10
01-01-2013
01-01-2014
Revenue Growth Year over Year
01-01-2015
01-01-2016
Return on Common Equity
01-01-2017
Price Earnings Ratio (P/E)
Figure 1 Family Managed Business 40 30 20 10 0 01-01-2013
01-01-2014
Revenue Growth Year over Year
01-01-2015
01-01-2016
Return on Common Equity
Figure 2
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01-01-2017
Price Earnings Ratio (P/E)
We can see in the above graph that average 5 year revenue growth was 9.50 percent for Family managed business and 9.49 percent for professionally managed business. More over average 5 year Price to earnings of professionally managed business is 19.82 and 26.67 for family managed business and average five year return on equity of professionally managed business is 25.10 percen and 18.87 percent for family managed business. There is no much difference in revenue growth of family managed business versus professionally managed business as it the percentage is equal. Hence we can say there is no difference in the revenue growth for these companies. However there is a significant difference in return on common equity and price to earning ratio.
Comparison of Market Capitalization We have also tried to compare 5 year historic data about the market capitalization. Below is the graph representing market capitalization of family managed business and professionally managed business. Market Capitalization Comparison (INR,Millions) 2500000 2000000 1500000 1000000 500000 0 01-01-2013
01-01-2014
01-01-2015
MC Family
01-01-2016
01-01-2017
MC Professional
Figure 3 We found that 5 year average Market capitalization for Family managed is Rs.913.7 billion and 5 year average market capitalization of PM is Rs. 1,674.12 billion. In the above graph we can also make out that professionally managed business are having more market capitalization over the 5 year and vice versa with family managed business.
Comparison of total Debt to total Equity We have also tried to compare total debt to total equity of our sample. Below figure explains about the comparision of both the family managed business and professionally managed business total debt to equity.
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Debt to Equity Comparison 150 100 50 0 01-01-2013
01-01-2014
01-01-2015 MC Family
01-01-2016
01-01-2017
MC Professional
Figure 4 We found that average Total Debt to Total equity ratio of professionally managed 82.44. average Total Debt to Total equity ratio of Family managed 113.61. where in we can see that family managed business has taken larger debt compared to professionally managed business. Research Findings There is no difference in the revenue growth Family managed business and Professionally managed business because, average of 5 years approximately equal (9.50% for Family managed and 9.49% for Professionally managed). There was a difference in price to earning ratio of two companies which emphasis that investors are ready to pay more money to Family managed business for every 1 rupee of return and comparatively less money for Professionally managed business (P/E of Professionally managed 19.82 and 26.67 for Family managed) There is a significant difference in the market capitalization of both type the companies . 5 year average market capitalization of family managed business is Rs.913.7 billion and Rs.1674.12 billion for professionally managed business. This imply that professionally managed businesses are more valuable in thier market value. There is a significant difference in the Total Debt to Total equity ratio. 5 year average total debt to total equity of professional managed companies is 82.44% and 113.61 % for family managed businesses. This implies that professionally managed business are more solvent compared to family managed business.
Conclusion Family managed business and Professional managed business has no difference in their revenue growth. Family managed business share is costlier to buy whereas Professional managed business shares are comparatively not costlier. Professionally managed business has given higher return compared to Family managed business. Professionally managed business is more valuable compared to Family managed business. Professionally managed businesses are more liquid compared to Family managed business.
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References 1. Granata, D., & Chirico, F. (2010). Measures of Value in Acquisitions: Family Versus Nonfamily Firms. Family Business Review,23(4), 341-354. doi:10.1177/0894486510386367 2. Pwc.in. (2016). [online] Available at: https://www.pwc.in/assets/pdfs/publications/family-business-survey-2016/pwc-indiafamily-business-survey-2016-aligning-with-indias-growth-story.pdf 3. P Bolar, K. (2019). Business Strategy Journal | Performance Analysis of Family Managed Business vis-Ă -vis Professionally Managed Business in the Indian IT Industry: A Study of Satyam Computer Services Ltd. vs. Infosys Technologies Ltd.. [online]Iupindia.in.Availableat:https://www.iupindia.in/609/IJBS_Performance_Anal ysis_18.html 4. https://www.researchgate.net/publication/311208065_Family_business_characteristic s_and_differences_Some_insights_from_the_developing_countries 5. https://www.tradebrains.in/family-vs-professionally-managed-businesses-india/ 6. https://blog.oureducation.in/family-owned-business-vs-professionally-run-businesses/
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Algorithmic Retailing: The need of the hour for retailers : By Mohit Prabhakar ( DMS, IIT Delhi )
“Water water everywhere nor a drop to drink”. Hope you remember the famous lines from the classic poem- The Rime of the ancient mariner. The situation was written for the sailors that were not able to quench their thirst despite having endless sea around them because the water was salty or unfit. The same is true in today’s business context. Just the stakeholders changed. Sailors are the business owners and the impure water is the unprecedented amount of data generating every day. A tremendous quantity of transactions is done in the scale of billions in today’s economies whether it is financial transactions, payment receipts, purchase orders or sales information. As easily observable there is a huge pile of information around us to filter out. I remembered, in my childhood, my mother used to taunt me that the body is a very lazy creature; you have to use your muscles to get up and do some work. Well! True for the data also which is inherently dumb. The power of data exists in how we use it. One industry that is churning information day in day out is retail in which data is produced like sales items, price, inventory, stocks, customer details, suppliers’ information, etc. Walmart collects more than 2.5 petabytes of unstructured data from 1million customers every day. Future Group’s stores such as Big Bazaar, Food Bazaar, and Home Town have 300 million footfalls every year and the company has a database of more than 30 million customers. Everyday sales are enough to observe the basic buying behavior of the customer. It is not uncommon that you will get a coupon code on the weekend after you consecutively buy a large number of groceries from your super mart store or a credit card salesperson call when you transact a big amount. All this is possible with the emergence of digital technologies like Predictive analysis, Big data analytics, AI, Machine learning, Data discovery, etc. Retailers are employing techies and throwing enormous amounts to scrounge for the gold from the information to target markets like never before. The competition is cut through as usual in any other industry. Nowadays, usage of technologies in business follows a general set of flow only which is data access followed by data preparation then modeling and at the end- analysis and report. One would think can something more be done or creatively enhanced. Because present technologies don’t possess or not evolved until now to possess the ability to interpret the information to find insights automatically. We can go back to the find and employee an idea of algorithms. There is a concept of Algorithmic retail in which retailers are investing. According to Gartner*, “Algorithmic retailing is the application of technologies through advanced analytics across an increasingly complex and detailed retail structure to deliver an efficient and flexible, yet unified, customer experience”. Sounds similar? Every new jargon on the technology lane giving the same concept of unifying all techs to give the best of the best. That is why there is a need to know how algorithms can change the pace of analysis in retail. Already algorithm trading is done in the stock market easing the work in large stock trading. The algorithm is no more limited to the set of instructions to follow to solve a problem. The power of the algorithm lies in the optimization and time minimizing. Suppose I give you a task to count fresh apples from a pile of apples, you will count the fresh apple by given criteria step by step on the basis of a basic instruction you 24
have in your mind. Now, I give you a manual in which there is a set of instructions to group the apples before counting on some criteria which will reduce the time to count the fresh apples. What if currently you are a manager of a large retail store and you are automatically getting completely new insights by the optimal use of smart data discovery, predictive analysis, superclass machines, etc.
Figure 1: Algorithm in Action Fig 1: Taken online from article “Using Algorithmic Retailing to Drive Competitive Advantage� by Robert Hetu from https://blogs.gartner.com/robert-hetu/using-algorithmic-retailing-drive-competitive-advantage/ published on Sept 21, 2016. *Gartner, Inc. is a global research and advisory firm providing insights, advice, and tools for leaders in IT, Finance, HR, Customer Service and Support etc.
Retailers need a networked supply chain that may need to become increasingly local or regional to increase revenue and meet customer demands. This kind of unfocused area can be tapped with the help of algorithmic retail. It can help to reduce cost, optimize the supply chain, logistics, suppliers’ management and help in increasing top-line revenue and manage a business in real time. Any small scale retailer can implement this. It, firstly, requires a culture and mindset of the company to accept algo-retail at different levels. Human nature desires to have cared and needs understanding. The motive of algo-retail is to tap the mind share of the customer quickly so that we can able to make decisions and translate insights into actions to meet corporate KPIs. The scope is wide to use also-retail like COGS (cost of goods sold), General & Administrative and Labour which amounts to 60%, 15-18% and 13-16% of the cost of retail operations in that order.
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Analysis Of The Union Budget 2019-20 : By Suparv Jain ( SIBM Pune )
Key Differences between the Annual and Interim Budget The Union Budget of India is the short summary of income and expenses made by the Union government in the previous year and plans to raise the money for the development, service and the welfare expenses in the upcoming year. It is the annual financial statement and is mentioned in the Article 112 of the Indian constitution. An Interim budget is the one which is presented in the election year because any major announcement could swing the voter and he/she may form an opinion in the favour of the ruling government based on the schemes offered by the Union government in the budget. This year also like the previous years, the budget was announced by the Union Finance Minister Sh. Piyush Goyal on Feb 1, 2019. In the budget, he emphasised the need for the sustainable development. In the Union budget, the government promises a high growth rate in the coming years. As per the first estimates of the Central Statistical Office (CSO), the country managed to achieve the growth rate of 7.2% in 2018-19 which is higher as compared to 6.7% in the 2017-18. As per the government, macroeconomic stability is one of the reasons of higher growth rates. Despite the increase in the global crude oil prices, Indian economy has been able to perform extremely well. In order to increase the employment opportunities in the country and to give an impetus to the Indian Economy, government proposes to lower the income tax for the companies with an annual turnover of up to Rs.250 crore.
Banking Sector •
• • • •
The Union government has shown the positive trends in the Indian Banking Sector for the upcoming years. The Gross Non- Performing Asset of the Scheduled commercial banks have gone down to 10.8% in September 2018 from 11.5% in March 2018. To strengthen the banking sector, government has proposed the recapitalisation of the Public Sector Banks with an outlay of Rs.2.6 Lakh crore. Government has also proposed to merge few of the PSBs in order to avail the advantage of the economies of scale, and improve productivity. There is a high surge in the non-bank food credit from 8.8% in November, 2017 to 13.8% in November, 2018. Proposing the resolution-friendly mechanism institutionalised by The Insolvency and the Bankruptcy Code (IBC) so that the big business houses remain in the pressure of the repayment of loans.
Increase in Farmers’ Income •
•
In order to increase the farmers’ income by 2022, the government has fixed MSP (Minimum Support Price) for 22 crops at a minimum cost of 50% more than the produce cost. Government has launched the PM-KISAN (Pradhan Mantri Kisan Samaan Nidhi) scheme for the farmers who have their cultivable land up to 2 hectares in the vulnerable zones and ensured an income of Rs.6000 for them. The scheme is expected to benefit around 12 crore people. 26
•
Government has also increased the spending on Animal Husbandry and Fisheries sector under the Rashtriya Gokul Mission to Rs.750 crore in order to increase the productivity of the cows.
Infrastructural Development • • • • • •
Infrastructure is the lifeline of the economy whether it is roads, railways or any other infrastructural development. Government of India is developing the highways at the fastest pace @27Kms/day in the world. The inland waterways have been developed and the first freight movement took place from Kolkata to Varanasi. Government has communicated to have achieved the target of all Unmanned crossings. The first made in India high speed train “Vande Bharat Express” has been developed to give the passengers a unique experience. Mizoram, Meghalaya and Tripura have shown its presence on the rail maps of India.
Industrial Production • •
•
The Index of Industrial Production (IIP) has shown a growth of 5.0% in the AprilNovember, 2018 vis-a-vis 3.2% in the April-November, 2017. Following is the growth of individual sectors in the April-November, 2018: • Mining - 3.7% • Manufacturing - 5.0% • Electricity - 6.6% The cumulative growth shown by the eight industries of infrastructure was 5.1% in the April-November, 2018.
Tax Proposals • • • • •
Tax paid by the Indian households will provide electricity to more than 50 crore people who live in the darkness. Increase in the tax collection due to the various reforms introduced by the government and high-compliance structure. People earning up to Rs.5 Lakh annually would be exempted from any income taxes. Government has proposed to exempt any notional rent on the 2nd self-occupied house. Interest earned through the bank account/post office account would not be taxed if the earning in any year is less than or equal to Rs.40000.
Central Government Finances • • •
The Fiscal Deficit in the year 2018-19 has been 3.3% of GDP which is slightly higher as compared to the previous year of 3.2% of GDP. In 2018-19, the Fiscal Deficit is budgeted at Rs.6,24,276 crore while the Revenue deficit is at Rs.4,16,034 crore which is 2.2% of GDP. Because of the widespread schemes of the Union government, the major subsidies have been increased by 6.3% which includes food subsidy, fertiliser and food subsidy in the year April-November 2018 as compared to the same period in the previous year.
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After knowing all the finance allocation and the GDP numbers in the union budget 2019-20. Let us understand the sources of revenue and expenditure of the government. •
Sources of Revenue: The government earns the revenue in the form of tax and non-tax revenue. The main sources of tax revenues of the union government are Income Tax, Corporate Tax, Goods and Services Tax (GST) and the other levies while the major non-tax revenue of the Union government are interest earned on loans, dividends earned from investments, etc. •
Sources of Expenditure The government spends the money on the goods and services which are not produced/offered by the private sector. The examples are Defence, Infrastructure like Railways, Roadways, public transportation, etc. In addition to it, the major government spending includes the welfare schemes being run for the underprivileged sections of the society, healthcare for free, subsidies given on the products/services which are mandatory to have like LPG cylinder, to promote the economic activity in an economy.
MACROECONOMIC FRAMEWORK ANALYSIS: in Rs. crore S.NO
ITEM
APRIL-DECEMBER 2017-18
2018-19
Revenue Receipts
804861
870306
Gross Tax Revenue
1087302
1164685
Tax (to centre)
699392
731669
Non - Tax Revenue
105469
138637
Capital Receipts
673954
742902
Recovery of Loans
9471
10467
Other Receipts
52378
15810
Other Liabilities (inc. Borrowings)
612105
716625
3.
Total Receipts
1478815
1613208
4.
Total Expenditure (Revenue + Capital)
1478815
1613208
1.
2.
28
5.
Revenue Deficit
489839
551472
6.
Fiscal Deficit
612105
716625
Table 1: Macroeconomic Framework Statement
Agriculture • • • •
The total production of Kharif crop is expected to be 141.6 million tonnes in 2018-19. There has been a significant increase in the production of food grains from 275.1 million tonnes in 2016-17 to 284.8 million tonnes in 2017-18. The production of various commodities like rice, wheat have increased to 112.9 million tonnes and 99.7 million tonnes in the FY 2017-18. Total agriculture allocation was Rs.6.5 Lakh crore till September, 2018 while the allocation for the FY 2018-19 is Rs.11 Lakh crore which shows that the allocation of Rs. 4.5 lakh is yet to be done.
Future Prospects The budget is expected to strengthen the Indian economy with the help of the various reforms introduced by the government which includes the major reforms in healthcare sector like setting up of more AIIMS in the country, Ayushman Bharat scheme is expected to solve the major problems in the healthcare sector of the lower and middle class segments of the society. The biggest challenge continues to be in front of the government like increasing trade tensions, rising global crude oil prices, falling rupee etc. and it would pose a major challenge for the upcoming government. Government have to frame a policy to overcome the challenges underlying and to move towards the sustainable growth and development.
References: • • • • •
https://www.thehindubusinessline.com/economy/budget/interim-budget-2019-20speech/article26148373.ece https://www.indiabudget.gov.in/ub2019-20/frbm/frbm1.pdf https://www.ndtv.com/business/union-budget-2019-budget-glossary-here-are-5important-terms-to-know-before-budget-2019-1979118 https://www.myaccountingcourse.com/accounting-dictionary/governmentexpenditures https://www.jagranjosh.com/general-knowledge/sources-of-revenue-and-expenditureof-government-of-india-1489988085-1
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YouTube Video Link: https://www.youtube.com/watch?v=Vwq6s_aoXJc
YouTube Link: https://www.youtube.com/watch?v=3nXVkh4lC8w
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Venezuela's Perennial Problem : By Adwait Rangnekar ( SIES GST NERUL )
In the February of 1922, the Royal Dutch Shell found bitumen, the elementary form of crude in the distant village of Cabimas and the history of Venezuela was to change with oil being its greatest strength and its greatest weakness. The country's massive production of oil made headlines around the world with Venezuela being the country with the fourth highest GDP per capita by 1950. In the years between 1950 and 1980, Venezuela saw a rampant increase in immigration thanks to higher standards of living than most of its Latin American counterparts but fortunes were soon to change and in ways that threatened the lives of its citizens. During the collapse of oil prices in the 1980s, the economy suffered bouts of inflation with annual rates poised at roughly 84% but the country had a savior. A 35-year old working class revolutionary named Hugo Chavez stood out as the only hope for the country. Chavez enjoyed surprisingly high approval ratings for a military dictator and led the country through a series of socialist and capitalistic reforms. But towards the end of his regime, his ways appeared to be of little impact with deficit spending and price controls causing erosion of Venezuelan economy. The country fell into inflation again only this time it was worse, with poverty and shortages on climb, Venezuela was preparing for a rough ride. From the onset of Nicolas Maduro's presidency, the country's GDP has shrinked by 50% leading to prices doubling every month. The annual inflation in has touched a whopping 80000% being the highest in South American history and is only expected to reach levels of 30k %-40k % over the next two years if conditions don't improve. I remember reading a piece from the American investment journal, Zero Hedge, that stated how the country could reach alarmingly high credit default rates which could ultimately lead to the collapse of the money market. This was in 2015 and seems that the ill-fated prophecy is true so far. The money markets in Venezuela are down 90% compared to figures ten years ago and with total production of oil having fallen by 35%, the livelihood of its citizens is in serious jeopardy. Oil makes 25% of the country's GDP hence falling prices have turned things worse. The government has little reserves left and fiscal deficit has reached an all time high. The country's socialist structure offers free education, free healthcare and food as well as gas subsidy to all its citizens which leaves little for financing of alterative industries. The country has turned to other socialist countries such as Russia and China which inturn have invested 20 billon USD but that is barely enough to run the country. The government's attempts at economic revival have been lacking and hope is meagre. The central bank rolled out notes of lower denomination that took out five zeroes from the existing high denomination notes but economists fear that with rise in inflation the new currency is bound to face times in future previously faced by the old currency. The country also launched its own Cryptocurrency 'Petro' but that too has found little takers with most citizens terming it as a gimmick rather than a lasting reform. With the country embroiled in constant protests and demonstrations, the ensuing chaos has made life hell in the country. The crime rates have gone up and the country may be on the brink 31
of a civil war. New young leaders such as Juan Gauido have proven to be the voice of the youth with promises of economic revival and job creation. Currently Venezuela is faced with tough times but the country's renewed hope for a better future is what keeps the country going. Every country faces tough times, ours has too, and in such a critical moment in the history of Venezuela, its citizens must form a clear vision for a better future of their country. To realize this vision will require an extended evolution and prolonged unity for a common plan of restructuring. The amalgamated efforts of an democratically elected government and its people is critical in reducing the pain induced on the people and eventually will lead to a possible amelioration of the country.
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Stock Market And Economy- A Complicated Relationship : By Tanvir Singh & Rohan Pansare ( IIM_Visakhapatnam )
Does Stock Market have its very own cerebrum or Does it move in pair with the Economy? On numerous occasions, it has been noticed that the economy could be lethargic, yet the stock market is on an upsurge, or in spite of a growing economy stock exchange is static or even falling, this prompted an instinctive conviction that the stock market has its very own mind and does not reflect the economy. The following reasonings may augment to this belief 1. The Listed stock market is just a portion of the poll, and thus it does not represent the entire economy. 2. The stock market moves on future expectation rather than the current scenario, and so it will not run in tandem with GDP. 3. The foreign investment in our markets makes the stocks more sensitive to global development, and thus it reduces the effect of domestic economic growth. Though these arguments are rational and do influence the market, we tried to study the effect of GDP growth on the Indian stock market. We analyzed the yearly change of BSE SENSEX from the year 1980 (Sensex data is available from 1980) and the GDP numbers from the same year . The outcomes from this connection were fascinating once we put on our analyst glasses. It’s a YES; the Stock market does mirror the GDP growth.
GDP growth vs Sensex (Exhibit-1) 30000
12
25000
10
20000
8
15000
6
10000
4
5000
2
0
0
Sensex
GDP- Growth Rate
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(The picture above shows the trend of GDP growth rate and Sensex over the past 35 years, the blue line of Sensex is drawn on the axis at left ranging from 0 to 30,000, while the red line of GDP growth rate is drawn on the axis at right ranging from 0 to 15)
The data shows that whenever there is a massive gain in Sensex, e.g., an annual gain of more than 50%, is always accompanied by a turning point in GDP growth. We have portioned the results under three subcategories to break down what the numbers are proposing and attempt to give sound thinking for the occurrences. CASE- 1: When the Sensex grew more than 50% Sensex gained 92% in 1985, GDP growth improvised to 5.25% in that year compared to 3.8% the previous year, this was because of the inclusion of de-licensing of the industries in 1985 and introduction of the new VAT system. In 1988 also, Sensex gained more than 50%, and GDP growth was 9.6%. The Sensex’s other colossal gains in 1999, 2003, and 2009 they are all related to the upsurge in GDP growth compared to previous years. Recalling the famous year of 2009, when Indian Economy revamped from as low as 3.89% annual GDP growth in 2008 to an astonishing 8.48% in the following year. The Sensex grew by 81% in 2009.
Case 2: When Sensex Grew by 20% to 30% In the years 1992 & 2014, the Sensex grew by 37% and 29.8% respectively, and the GDP growth rate had shown significant uplift in those years. One plausible account for this is that as the economy picks up, the profits for the corporates also picks up, thus giving a surge in demand. Case 3: When the Sensex made a loss In the years 1995,1996 and 2015 in spite of sound financial development, the Sensex had fallen. While an intense addition in the Sensex dependably gives off an impression of being coupled with the improvement in the economy, the opposite may not be the primary reason behind it. In 2015 there was a global crash of crude oil falling about 80% in 18 months which indirectly increased the price of steel and iron, and India being a prominent steel producing nation hit the loss in Sensex also. While the crash of 1995 and 1996 was primarily due to domestic scams. In 2008, Sensex drop down by 50% and the economy also took a hit in 2008.
IMPLICATIONS OF THE RESULT Data from 35 years have shown us that any major change in the stock market has been a mimeograph on country’s economic conditions. It's subsequently clear that to check the pace at which the SENSEX will develop over the long haul, it is critical to comprehend the pace of economic development. Let’s Evaluate !!! Numerous Agencies release long term economic development numbers for major economies which also includes India. Their report ventures India to turn into the second biggest economy by 2050.
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Would it imply that currently is the ideal time to put resources into a stock exchange on the off chance that one needs to intense additions till 2050? Exhibit-1
Year
Sensex
GDP- Growth Rate
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
148.25 227.72 235.83 252.92 271.87 527.36 524.45 442.17 666.26 778.64 1048.29 1908.85 2615.37 3346.06 3926.9 3110.49 3085.2 3658.98 3055.41 5005.82 3972.12 3262.33 3377.28 5838.96 6602.69 9397.93 13786.91 20286.99 9647.31 17464.81 24509.09 15454.92 19426.71 21170.68 27499.42 26117.54 26626.46
References: 1. https://www.bseindia.com/indices/IndexArchiveData.html 2. http://statisticstimes.com/economy/gdp-growth-of-india.php 35
6.736 6.006 3.476 7.289 3.821 5.254 4.777 3.965 9.628 5.947 5.533 1.057 5.482 4.751 6.659 7.574 7.55 4.05 6.184 8.846 3.841 4.824 3.804 7.86 7.923 9.285 9.264 9.801 3.891 8.48 10.26 6.638 5.456 6.386 7.41 8.154 7.113
International Investment Outlook : By Prateek Sharma ( TAPMI )
There used to be a notion that foreign investors that is the Foreign Portfolio Investors (FPIs) and Foreign Institutional Investors (FIIs) drive the bellwether indices of the emerging market economy’s stock market. This holds true in the Indian context as well. Domestic retail investors and institutional investors’ forms a major but not so significant part of all the investments visà-vis foreign investments. International investment outlook is not bright in any sense currently in the world due to rising protectionism in developed countries like the US. Trade war ignited by the US against China and other countries is crippling for these developing economies. Rising crude oil prices, low or negative growth rates, mounting inflation, depreciating currency, increasing fiscal deficit and more importantly higher interest rates in other countries are some of the factors that can give jitters to foreign investors prompting them to drive their capital out from these countries. Foreign investments can be largely classified into 4 categories namely: 1. 2. 3. 4.
Commercial Loans Official Flows Foreign Direct Investments (FDI) Foreign Portfolio Investments (FPI)
FDI and FPI is what we will focus more here as these are the two most preferred routes of foreign investments in India and also they form the major chunk of the international investment. FPI involves the investments in financial assets like buying of shares and bonds in companies of other countries to gain profits, whereas FDI involves investing money in companies in other countries to take the ownership control in that company. FPI is thus more of an indirect investment. These investments are needed by a country for its development and economic growth since these developing countries fails to meet their capital requirements from internal sources, thus they turn to foreign investors for their capital needs. These investors either put their money in company’s stocks (equity segment) or in corporate bonds and government securities (debt segment)
What happened last year? FPI investments are usually in billions of dollars in a country. In the Indian context, we witnessed an unprecedented inflow of foreign funds which stood at ₹2 trillion in 2017. But 2018 was an altogether different story which saw a net outflow of close to ₹81,000 crores (approximately 4% of India’s GDP) from equity and debt market due to a unstable year considering the huge geopolitical and even domestic turbulences which were exacerbating trade war between two biggest economies, weakening rupee in May-October period where our currency depreciated by nearly 16%, crude oil prices were phenomenally high trading at $85 a barrel up from $54 a year before, retail inflation touched 5% in June-July period, bank’s NPAs 36
were cropping up, current account deficit was widening and touched 2.8% of the GDP and as a result of which forex reserves were getting depleted and above all the US Federal Reserve were hiking interest rates providing a safe havens to these FPI investors to fetch handsome returns. All these factors were making FPI investors apprehensive and the lucrative US pull were the reason that these investors drove their capital out from the Indian equity and debt market. 2018 was the year of net capital outflows after a span of 7 years, the last net outflow was in 2011. Thankfully the benchmark stock indices did not plunge due to humongous infusion of money by the domestic retail and institutional investors into mutual funds. Foreign portfolio investments are known as “hot money� that comes in fast but at the time of crisis, goes out even faster and it is this outward journey that hurts the most. This journey was faced by Indian capital markets (from both the equity and the debt segment) last year as shown below:
Source: NSDL
As evident from the data, close to 75% of the net outflow occurred in two months which are September and October. These were the most challenging months for India owing to the volatility everywhere from crude oil to currency depreciation and what not. Even RBI had to intervene to sell dollars in the market to control rupee depreciation after Rupee became the worst performing currency in Asia. Much of this outflow in 2018 apart from these factors were also due to a controversial circular by SEBI which later had to be amended in which SEBI 37
asked all the overseas investors had to furnish the details of their end-beneficiaries and sources of funds. Going Forward Rakesh Jhunjhunwala, the stock market veteran recently prognosticated that India is all set for the best decade in growth, if that be the case and no global headwinds haunting India’s growth then we can expect infusion of billions of dollars in India. There will be many apprehensions in the foreign investors considering this is an election year and by far no one is really sure as to which political party will be at the helm of affairs post elections but after the results are declared and if the incumbent government returns to power, then foreign investors will be equally bullish on India’s growth story and invest more in the country. Other domestic factors responsible are inflation after populist interim budget, fiscal deficit numbers, currency robustness etc. A whole lot of external factors which are in play that will determines the inflow or outflow of foreign capital and these factors are the extent to which the trade war goes, how the crude oil prices behave this year considering the supply gap after Venezuela’s cataclysm and Turkey’s crisis, Brexit result, stance of US Federal Reserve in setting interest rates etc. China and European Union’s economic slowdown is another factor that will shape the outlook of global investors this year. US Dollar should be stable in 2019 for every country to grow and perform as per their expectations. As they say, “The best of all worlds is a fairly stable USD.” On the FDI front, calendar year 2018 was a remarkable year for India as after a long wait of two decades India finally managed to beat China in FDI inflows that stood at $37.7 billion with 235 deals compared to China’s $32 billion. Mauritius was the biggest contributor with 32% of the total FDI. Other major FDI partners were Singapore, Netherlands, US and Japan. This jump in FDI is fuelled by solid fundamentals of the economy, relaxation in new FDI policy, bankruptcy code in place and booming sectors like e-commerce and FinTech. The biggest deal that brought FDI flows in 2018 was Walmart’s $16 billion buyout of Flipkart.
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According to a market attractiveness survey conducted by Emerging Market Private Equity Association (EMPEA), India has become the most attractive emerging market for global partners (GP) investment. As per a report by a Swiss investment bank UBS, Annual FDI inflows in India are expected to rise to US$ 75 billion over the next five years. Thus, if everything goes as per these estimates and the global uncertainties eases then we can expect an unprecedented surge northwards in the foreign capital flowing into India and will beat China for the second time in two consecutive years.
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Are NBFCs losing their niche? : By Swetha R ( Christ University )
Role of NBFC in Today’s India Non-banking financial companies plays a vital role in the growth of the Indian financial system. NBFCs play an important role in promoting financial inclusion and financial stability in the economy. NBFC’s has undergone a significant transformation over the past few years and it has grown tremendously which is evident from growing liquidity in markets and diversification of financial risks. NBFC’s has carved a niche for themselves in the financial sector with customized products delivered at customer’s doorstep, leveraging technology for quick business processes and credit assessment and improves customer experience by processing application within minutes, robust risk management and building up the Fintech ecosystem. With the ongoing crisis in the banking system with raising bad loans and farm loan waivers the lending activities of banks have slowed down paving the way for NBFCs. NBFCs plays a major role in the development of the Indian economy through employee generation, wealth creation, bank credit in rural segments and supports financially weaker sections of the society. The share of NBFCs in the total credit system has been steadily rising—from 15.2 percent in FY14-15 to 19.2 percent in FY18.
NBFC vs Banks In the last few years we have been observing that NBFC’s are gaining more momentum in the financial markets rather than banks. The share of NBFCs in total credit across India increased to 17 percent in 2018 from 13 percent in 2013 which is majorly because of the slowdown in lending by banks, rising NPAs, quicker response time and last mile connectivity NBFCs. Over the years the credit growth gap between NBFCs and banks widened. Since there was credit demand in the economy because of negative credit growth rate of banks it got channeled to NBFCs leading to increase in their overall share in credit. Reducing asset quality and inadequate capitalization of banks paved more way to NBFCs. Apart from that falling interest rates since 2014 till 2017 and growth of asset under management of mutual funds increased about 75% between March 2016 and March 2018 adding more 9 lakh Crore. In March 2016 NBFC issued commercial papers to MFs was about 50,000 crore and in further increased to 1.2 lakh crore in September 2018.The bank’s exposure to NBFCs have been steadily increasing too. In the past 2 years the overall growth in the credit to NBFC sector was around 20%. All this lead to the immense growth of NBFCs in the recent years outperforming banks.
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Causes for the downfall Stringent RBI Norms NBFCs have been regulated by RBI only from December 1st 1964. Since then RBI has been continuously imposing rules and regulations to govern NBFCs. Some of the norms are KYC norms, rating norms, financing norms, outsourcing norms, borrowing and lending norms and asset securitisation norms. These norms have been constantly modified by the RBI according to the economic situation in the country. With recent liquidity crisis RBI has been imposing stringent norms to align NBFCs with banks to strengthen the asset-liability management framework which is hampering the unique model of NBFCs that enabled it to gain more customers.
Increasing Interest Rates Interest rates started increasing in the beginning of 2018 whereby SBI increased its one-year marginal cost of funds-based lending rates two times. In July 2018 RBI increased the Repo rate from 6% to 6.25% for the first time in four and a half years and again it increased in August from 6.25% to 6.50%. An increase in the interest rate led to an increase in the cost of funds for NBFCs. So the NBFCs were struggling to meet customers requirement. In addition, there were credit concerns that started emerging in the sector, without distinguishing the different players and models in the market.
Macroeconomic Factors Macroeconomic factors became one of the challenging factors in 2018. Brent crude price crossed $86 in October 2018 and the value of rupee depreciated rapidly making the market conditions more complicated for NBFCs as they were not able to borrow from banks. The 41
situation eased a little at the end of 2018 but NBFCs still find it difficult to recover from the impact.
NBFC Liquidity Crisis IL&FS defaulted on over five of its obligation in 2018 and also DSP offloaded 200-300 crore worth of commercial papers of housing finance company DHFL at higher yields, it sparked off fears. There were rumours that NBFC sector was facing a systematic liquidity risk and some analysts said that there was asset liability mismatch among most players. The cost of funding has actually been falling, despite a spike in systemic rates, as commercial papers were relatively cheaper. Many home finance companies migrated towards shorter-tenure borrowings in recent times, as the shorter-tenure borrowing became cheaper by about 100 basis points that longertenure ones, said JM Financial. But there lies the problem, as it has now created an assetliability management (ALM) mismatch in the shorter tenure bucket of up to one year, These rumours spread like forest fire causing free fall of NBFC stocks.
NBFCs need a paradigm shift in their business model to survive NBFCs has evolved and grown at a tremendous rate for the last 3 decades with an annual compounded growth rate of over 19% over last few years. NBFCs have expanded by harnessing increased demand, banking stress, digital disruption, banking stress, credit bureaus and distribution. They must now remodel and align their assets and liability tenures to survive. To align their outbound cash flow with the inbound the NBFCs need to securitise the liabilities or hive them off their books.
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The RBI is constantly making efforts to ease the liquidity crisis of NBFCs by open market operations to inject liquidity in the system. Long-term funding like insurance, pension and provident fund should be concentrated more to maintain the liquidity in the system. For NBFC lending the RBI could look at relaxing the risk weights. To fund growth steps should be taken to increase bank flows to NBFCs and HFCs. A asset-liability mismatch like having long-term assets funded by short term borrowings like CPs is not a desirable situation for the NBFCs. They, therefore, need to focus on a more robust asset-liability management framework and also look at diversifying their borrowing mix to reduce over-dependence on any one source of lender or instrument. Relaxation of monetary policies by lowering interest rates and to boost the liquidity of NBFCs by the sales of secured loans with suitable margin. Also concerted policy action to promote large-scale securitization of NBFC assets so that asset-backed securities can be easily traded thereby imparting liquidity to otherwise illiquid balance sheets. This will expand and deepen India’s bond market so that it can meaningfully complement the banks as a source of long-term funds. The liability side of the NBFCs should be diversified and the dependence on bank and mutual funds for capital should be reduced. Already market sources say the proportion of NCDs in the total borrowings by NBFCs is up to 41 per cent from 25 per cent in FY12. The focus now should be on tapping resources from new avenues like retail NCD, deposits, insurance, pension and EPFO funds.
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While the peak of the recent liquidity crunch may be over, we are yet to return to normal. Fostering the growth of NBFCs is important for the economy as they complement banks, and provide credit to parts of the economy that banks can’t or don’t. Credit is the lifeblood of an economy, and given the issues that banks are facing, alternative sources of credit augment economic growth. In the absence of a vibrant bond market, medium- to long-term funding for such entities can come from other pools of capital, namely banks, mutual funds, insurance and pension. Other than these, accessing public money directly and accessing offshore markets are options, but are not available to all. We also need to think about overall systemic risk and what could be done to fund the larger NBFCs over time as they become larger than midsize banks and need access to funds.
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