FINLY August 2019 by FINLY

FINLY| August 2019 | Finstreet | SIMSR

From the Editorâ&#x20AC;&#x2122;s Desk

Dear Readers, Greetings from the editorial team at Finstreet. For the past several years Finly has been informing, engaging, inspiring and entertaining a diverse readership -- including alumni, faculty, staff, and students at KJ SIMSR by presenting an intimate, timely and honest portrait of the key activities and events in the Indian and Global economy. We are proud to unveil the August edition of our monthly magazine FINLY for the academic year 2019-20. Our Cover Story helps us in a critical evaluation of the Robinhood tax where HNI's are taxed to help the country's lower strata of the society. Next in line, is the Eco Section, which analyses in detail India's Debt to GDP ratio, its cause and certain plausible solution to the pertaining problem. In the Sector Analysis, the authors inspect of the most crucial industry in the Indian economy- Steel Sector with an in-depth analysis of the market structure, growth drivers and challenges faced by the sector and an Analysis of one top Steel manufacturer of the country, Tata Steel. This month's Fintech Funda covers the impact of the algo trading in the stock market, covering aspects of cognitive technology, and pros and cons. We express our gratitude to Prof. (Dr) Pankaj Trivedi (Course Coordinator, PGDM Core, and Faculty Coordinator, Finstreet) for providing the essential mentoring, support and backing to the Finly team. We would also like to thank our Sponsors, White Knight Ventures, for an enriching collaboration. We hope to continue the partnership for a very long time. This month's call for article competition received an overwhelming response with highquality articles coming in from various top management colleges across the country. We thank each and every participant for their sincere efforts and participation. This month's winner's and runner-up articles are a recommended read. We thank all our readers and faculty members for their constant love and support. Your reviews and feedback are much appreciated. Each edition of FINLY is the outcome of the tireless efforts and dedication of a group of individuals who call themselves Team Finly. We can't thank them enough for their constant support and initiative. Mohak Shah, MMS - Finance, 2018-2020

Saurav Jain, PGDM Core, 2018-2020

Team Finly- August 2019 Faculty Incharge

Editor-in-Chief

Editor- FINLY

Mohak Shah

Saurav Jain

Dr.(Prof) Pankaj Trivedi

-Conceptualization & DesignShubham Patel

Radhika Goyal

Indresh Naithani

Adyasha Pratihari

-Content Team-

Prateek Tripathi

Isha Koolwal

Prachi Jain

Shreyas Vaidya Madhura Shastri

Apoorva Sakhunde

Shraddha Joshi

FINLY| JULY 2018 | Finstreet | SIMSR

INDEX

Editorial Team Finly

04 Cover Story 07 Article of the

Month-Winner Article of the Month-Runner Up

Fintech Funda

Sector Analysis

Internship Diaries

Eco Section

Robinhood Taxation: A Twin Edged Sword

Cover Story

Prachi Jain | PGDM IB | 2018-20 Radhika Goyal | PGDM IB | 2018-20

In the Union Budget for FY20 presented by Nirmala Sitharaman in the Parliament a lucrative source of revenue was further tapped into. In a nation where the population can be divided into two strata of rich and poor, it was an obvious choice to tap the section that can pay a little more tax to help the poor. For individuals having income in the bracket of Rs.2-5 crore surcharge was increased from 15% to 25%, and for individuals with income higher than Rs.5 crore the raise is from 15% to 37%. What is Robinhood Taxation? Robinhood tax can be defined as a tax rule through which money can be distributed from the better-offs to others. It is also called as surcharge tax, which means an additional tax. For example, if an individual's income lies in salary band where the tax rate is 30% and there is a surcharge of 10%, then

effective tax totals up to 33%.

Source: https://www.livemint.com

Who is impacted? The effect of this increased Robinhood taxation policy will be on the individuals earning more than Rs.2 crore. A person in the income slab of Rs.2-5 crore will be paying an effective tax of 39%. And those with income exceeding Rs.5 crore will pay 42.74% of effective tax. This change will impact individual taxpayers, directors in companies on

Cover Story

FINLY| August 2019 | Finstreet | SIMSR

remuneration they receive, a partner in the firm on remuneration that receives, shareholders who get dividend or benefit from capital gain on sale of shares. Though in a population of 1.3 Billion, only 102,000 people report income above Rs.1 crore as of Marchâ&#x20AC;&#x201D;a hike in surcharge may not net significant tax revenues. History of Surcharge in Indian Budget Tax on the wealthy has seen several hikes in the past few years. It was first introduced at 10% in the year 2013, on income above Rs.1 crore. Later it was increased to 12% in 2015 and 15% in 2016. In 2017, individuals with income higher than 50 Lakhs were included in this taxation policy. Successive increase in surcharge has made it an important source of revenue for the government. The revenue from the surcharge on individuals jumped from Rs.738 crore in FY14 to an estimated Rs.39,618 crore in FY20. In percentage terms, the share has gone from 0.3% to 7% of the total income tax collected from individuals. Comparison with the world The category pushing for more taxation on the super-rich argues that the recent decision made is not an aberration but in line with what developed countries such as The United States and the United Kingdom are doing. Japan and Denmark have even higher tax rates on the upper hand classes. Though there are countries where the

super-rich pay high taxation, i.e., even higher than India, those countries are equally investing their funds through taxes in education, health, and various other social security schemes, which is absent in the case of India. Wo r l d B a n k d ata s h o ws t h at t h e government spending on education as a proportion of GDP is much lower than in other countries. India is failing miserably in all these sectors and is not able to cope up with the same. Pros and Cons The announcement of a higher tax surcharge on India's super-rich has sparked a debate between two groups. Some people say it will discourage wealth creation and on the other hand, others who call it a necessary intervention to reduce the country's entrenched and growing inequity. The decision is receiving equal criticism as well as applauds. In today's world, the skilled people are mobile, and India is 4 percent of global GDP and additionally attributing 40 percent plus taxes is not justified for the services the upper class provides. The people that will fall into this category are mostly the company's directors and CEO's. Additionally, foreign portfolio investors (FPIs) assume that their major section as trusts may get hit by the increase in a surcharge. That is because certain trusts may be assessable as associations of persons. In this anonymous condition, the finance ministry is examining and looking at their grievances and may come out with a solution as the surcharge increase was not aimed at them. FPIs are usually set up as corporate bodies or as partnerships but

FINLY| August 2019 | Finstreet | SIMSR

Cover Story

not as trusts. The increasing surcharge is being used as a means to increase collections but in tandem with a more comprehensive approach to reforming the tax structure. The successive increases in surcharge have made it an important source of revenue for the government. The revenue from a surcharge on individuals jumped from Rs.738 crore in FY14 to an estimated Rs.39,618 crore in FY20. In percentage terms, the share has gone from 0.3% to 7% of the total income tax collected from individuals. This will eventually help the weakest section of the society to eradicate poverty. Conclusion The enhanced surcharge could push more wealthy Indians to emigrate to countries where they will be paying similar levels of income tax and will get to enjoy a better living environment, unlike the polluted air and poor infrastructure in own country. India witnessed the third-highest outflow of wealthy individuals last year. Nearly 5,000 m i l l i o n a i r e s , o r h i g h - n e t- w o r t h individuals (HNWIs), left the country, making up 2 percent of the total number of HNWIs in India, according to the Global Wealth Migration Review 2019 by AfrAsia Bank and research firm New World Wealth.

many structural problems. The major proportion of the workforce is in the unorganized sector, which remains excluded from the tax base. If we witness the scenarios in the past, any process has encountered loopholes that in turn will cause leakages. Superrich individuals may incorporate limited liability partnerships (LLP) and can deliver their services through them. LLPs are relatively easy to form and pay a 12% surcharge. The income distributed by an LLP is tax-free in the hands of its partners. Additionally, middle-class families might also be affected. The families with income from property sales will face higher tax outgo in the year of sale. These individuals can make use of the deductions on capital gains tax available under Sections 54, 54 F and 54 EC in order to minimize their tax liability.

To rectify the issues, the government can widen the ambit of tax-paying individuals instead of just raising taxes on the rich. The reintroduction of inheritance tax and wealth tax can smoothen the process of development. To up welfare spending, India can widen its tax base as there are

Article of the Month - Winner

PUBLIC JEWELS : TO SHARE, OR RATION OUT? Abhijay Thacker, IIM Ahmedabad | PGP 2018-20

Divestment is a popular clarion call to prop up public coffers when deficits spike and revenues run dry. But what is it, and what does it imply? What are the longer term ramifications of the same, both financially as well as strategically? VSNL was the first Central Public Centre Enterprise to be hived off from national control and sold to the market in 19992000(1), following which successive governments have not looked back. The Department of Investment and Public Asset Management (DIPAM) was established under the aegis of the Ministry of Finance to oversee steady s e l l - d ow n o f sta ke s i n va r i o u s nationalised or public-from-inception companies in the public stable and realise a steady budgetary revenue allocation from the same. Key direct beneficiaries of this process have been public coffers (from the inflow of funds),

investors (as such divestments are large blocks that have historically tended to be below fair value), and investment bankers (via fee accrual from such mega equity issuances and follow-on raises). Looking at second order effects, there has been a positive spill over effect onto sovereign ratings due to deepening of public participation in equity capital markets and control over sovereign debt issuances by virtue of an alternate revenue source. There are however flipsides to the coin as well, with several eminent journalists foretelling that the advent of privatisation in certain hitherto protected sectors will result in price escalation loops and secession of various concessions and non-monetised services that serve the public good. Further, in case of divesting strategic stakes in natural monopoly players, it can lead to

Article of the Month - Winner

FINLY| August 2019 | Finstreet | SIMSR

incentive misalignment between a private player and the people, albeit in a far magnified sense than the previous instances of minority stake or small player acquisitions by existing private players. In light of this theoretical backdrop, we can analyse the current regime's move towards strategic monetisation (e.g. Air India) and portfolio monetisation (e.g. Bharat 22 ETF). Portfolio measures have largely been value destructive as they serve the interests of FPIs and DIIs, not retail investors, despite carve-outs for the same(2). Further while bundling robust performing stocks with sick firms and laggards, while the government has ticked the box on trimming their stake, they have not done so at the maximum possible price. In fact, such exercises have rocked financial markets by virtue of the fact that investors exploit the price discount of the ETF, and set off laggards in the basket via options and forwards, raising volatility without aiding price discovery in any manner. Coming to strategic monetisations, we observe a slightly better track record: not through action, but rather the lack of the same! Air India was fairly valued and hence did not receive bidding interest from traditional scalpers who are used to grabbing money left on the table by the government. By showcasing restraint and calling off the auction rather than taking a value eroding cut to the price, DIPAM is playing the repeated game strategy to ensure price rationalisation and better value capture for the state. This establishes credibility via signalling, and maximises long term inflows at the cost of a short term hit within this

financial year. Going forward, strategic divestments are the way forward. Railways is a focus area, with RITES, IRCTC, and RailTel on the block. This is a natural monopoly, and hence very attractive for private players. Further, if controlled well via price controls or market share controls (or altern atively measu res to b o o st competition such as entry incentives and tax holidays) this can result in social welfare maximisation as well. Titration of the auction, via a strong showing already done with the Air India auction, will reap rich dividends for the nation as well as for the economy.

Article of the Month - Runner Up

STARTUP INDIA! IS THE GOVERNMENT DOING ENOUGH?

Jayasankar S SJMSOM,IIT Bombay, 2018-2020

Startups are nation-building entities that contribute towards employment and economic aspects of a country. Startups are usually based around an innovative product or service based on a solid business model. The Indian startup ecosystem has been booming over the past 3 years. The basic reason is the mentality of individuals or organizations in understanding that every large organization one started up and this mentality is influenced by creating a conducive environment created by the market, technology, government and other political and economic drivers. India is the 3rd largest start-up ecosystem in the world. It is at the 57th rank in the Global Innovation Index in 2018 than at 60 in 2017. India is also the highest Unicorn holder of 8 ventures after US and China. The government has its role in all the stages of a startup's lifecycle namely Idea Validation, seed funding, growth

stage and scale up the stage. This is not just about the central government, state governments have also contributed to the growth of startups in India. States have created venture funds or fund of funds and promoted angel funding in their respective states in addition to seed funding. Initiatives, like matching the contribution made by investors, providing a percentage of angel investment as success fee to Startup and creating a p a r t n e rs h i p w i t h a g e n c i e s t o d o workshops for creating awareness among HNIs and other potential investors, are remarkable. Coming to other critical areas for Startups like complex regulatory issues and public procurement, both central and state governments have taken efforts to simplfy regulatory issues. Some examples are central government providing the benefit of self-certification under six labour laws and three environment laws. 19 states provide the benefit of selfcertification or third party certification under applicable labour laws to Startups.

Article of the Month - Runner Up

FINLY| August 2019 | Finstreet | SIMSR

The central government has relaxed the condition of prior experience and prior turnover. Majority of the 270 incubators in the country are supported by central and state governments through capital and operational grants under several schemes and some others are run by large corporates with the support of the government. Envisioned by the aim to create a country of job creators, honourable prime minister of India, Shri. Narendra Modi launched the initiative of Startup India in January 2016. Four years into this program, we will analyse the impact, efficiency of execution and identify gaps in the actionplan. The targets of this initiative were: 타 reduce regulatory barriers 타 create opportunities for learning 타d e v e l o p i n n o v a t i o n d r i v e n infrastructure on a large scale 타e n h a n c e c o o r d i n a t i o n a m o n g entrepreneurs, industry and academia Impact of Startup India Spread across 479 districts are 14,600 Startups recognized under Startup India, covering all 29 States and 6 UTs. A Fund of Funds (FFS) of INR 10,000 Crore has been setup to provide growth stage funding to Startups. INR 1,611.7 Crore to 32 Venture Capital Funds through FFS has already been committed by the government. A total of INR 13,888 Crore will be available to be used by Startups when these committed funds complete t h e i r f u n d - ra i s i n g p ro c e s s . T h e government's contribution has thus catalyzed 8X funding for Startups. These registered startups with 45% of them

headed by at least one female director provide 1.25lakh direct employment as per data.

Source: Startup India report 2018

Also, we see an increasing startup activity in all parts of the country with Tier 1 cities covering 55% of them.

Source: Startup India report 2018

The above figure highlights the top 10 industries where startups are focussed in. Inorder to channelize resources and knowledge towards the Startup Ec o sy s t e m , t h e g o v e r n m e n t h a d connected various departments and ministries and created initiatives which are opportunities for the budding entrepreneurs like Swachh Bharat Challenge for supporting startups in the area of waste management and sanitation and Agriculture Grand challenge for agritech startups. Regulations regarding taxation were relieved under section 56 of the Act and 100% exemption from tax on profits from income for three years out of seven

Article of the Month - Runner Up

FINLY| August 2019 | Finstreet | SIMSR

consecutive assessment years under section 80 IAC of the Act has been implemented. Other reformatory initiatives include Minimum Alternate Tax carry forward period increased to 15 years, 25% corporate tax slab for companies with an a nnual turnover of less than INR 250 crores etc. These happened over a period of time indicating that the government identified the problems faced by entrepreneurs and were devoted to aiding their growth. Another notable initiative is The Startup India Hub to enable the growth of Startup businesses, drive sustainable economic growth, and generate large scale employment opportunities. The Government aims to empower Startups to grow through innovation and design using this portal.

Ÿ Invest heavily in Research &

Development (R&D) by state governments technologies, to ensure first mover advantage Ÿ Startup policy and implementation had

13 actions points, whose measurement has to be done effectively. A significant effort needs to be taken up to enable Startup ecosystem across States and Uts Ÿ More organised development and

capability building, than just capacity needs to be focussed. Ÿ There is an immediate need to

encourage new business ideas and transform them into successful businesses by supporting them through state infrastructure and policies. Ÿ Also, the extent of government support

to seed funding should be increased as well as opening up the market for startups through public procurement is the right way to a go-ahead

Startup India program helped in connecting Indian Startup ecosystems to global Startup ecosystems through various engagement models like the Indo-Israel Innovation bridge, IndoSingapore Entrepreneurship bridge, IPSH etc.

benefits of revised regulations of taxation

Startup India Yatra has been executed in 9 States covering 99 districts aimed at scouting grassroot level entrepreneurs from the non-metro cities of the country.

The government could usher in such a policy now to focus on scaleup phase more also improving the initial stages of startup lifecycle to achieve the goal of creating a nation of job creators.

Ÿ More startups are yet to receive the

The road ahead: Ÿ Governments at both levels should

adopt a targeted approach for social issues, new emerging technologies, to scale up the Startup India program

INDIAâ&#x20AC;&#x2122;S DEBT-TO-GDP RATIO

ECO Section

Apoorva Sakunde | PGDM - Core | 2018-20 Madhura Shastri | PGDM FS | 2018-20

The debt-to-GDP ratio is the country's debt as a percentage of its annual economic output, which is the market value of all the final goods and services produced in a financial year and measures the financial leverage of an economy. This ratio directly compares the public debt with what the country produces and thus, indicates the ability of a nation to be able to service its debts. This ratio is generally expressed as a percentage, but properly has units of years â&#x20AC;&#x201C; debt is measured in units of currency and the gross domestic product (GDP) is expressed in the units of currency per year. This dimension of time can be interpreted as the number of years required to repay the debt if all of GDP is devoted to debt repayment. Every nation, whether developing, under-developed or developed, does hold debts to finance its government and economy. The debt-to-GDP ratio is

used as an indicator of a nation's economic health that gauges the countr y's financial and economic potential thus affecting the country borrowing costs and government bond yields. Defaulting on repaying debts can make the domestic economy vulnerable to foreign flows and global uncertainties. Keynesian economics explains that government debt is nothing but a repercussion of the government's spending and is required to boost the economy. The borrowing practices of a nation is influenced by the economic parameters like interest rest, war, recessions which further increase the debt. The volume of the government's final consumption expenditure influences the government's borrowings decision, which further affects the government debt level. The government usually increase the debt level through public spending to support the public and profitable investment in terms of infrastructure as well as human resources.

ECO Section

FINLY| August 2019 | Finstreet | SIMSR

The government strives to boost the economy through a fixed capital formation for enabling growth in the economy. And this extent of growth of gross fixed capital formation, in turn, influences the level of government debt. The following chart depicts the trend in India's Debt to GDP ratio :

A high debt-to-GDP ratio implies a h i g h e r r i s k o f d e fa u l t w h i c h i s undesirable for any country. According to a study conducted by The World Bank, a debt-to-GDP ratio greater than 77% may harm the economic growth of the country. It was found that with an increase in 1% change of debt, the annual real growth decreased by 1.7%. When the ratio is high i.e. greater than 80%, there is a probability that the country will exhibit a slowdown in economic growth. For the developing economy like India, the conditions seem to be worse as for a 1% increase in debt above 64%, the economy slows down by 2%. T h e d e b t- t o - G D P ra t i o i s o f te n misinterpreted as the ratio increasing 1 0 0 % i n d i c ate s a c o n d i t i o n fo r bankruptcy or insolvency for the

country. For example in Japan, in spite of the debt-to-GDP ratio being over 200% for a decade, there were no signs of default on government borrowings. This ratio does not give a strong insight into the country's likelihood of default. According to a report published in February 2019, India's rank in the debt-toGDP ratio is second-lowest among the emerging markets. Followed by Brazil, India's government debt-to-GDP ratio is 68.4%. However, the Asian counterparts like Thailand, Indonesia, and China have outperformed in this. As per a report of International Monetary Fund (IMF), advanced economies of North America, Europe, Korea, and Japan have a very high debt-to-GDP ratio. For the advanced economies, the average debtto-GDP ratio is 103%. The prevailing causes of high debt-to-GDP ratios are mentioned below: Unexpected Slowdown: Countries that are developing quickly may borrow more debt to support that growth. But in this process, it can suffer from an unexpected slowdown which will further increase their debt-to-GDP ratio. For example, Japan's economy got stagnated after its rapid growth in the 1980s which resulted in increased debt now. Ĺ¸

Demographic Changes: Due to aging populations in the country, the economy may suffer from the social security systems front, which might be funded in a way by debt. For example, the U.S. Social Security System is partly responsible for its Ĺ¸

ECO Section

FINLY| August 2019 | Finstreet | SIMSR

forecasted increase in public debt and also for the predicted rise in its debt-toGDP ratio. Government Spending: The increase in government spending can result in a higher debt-to-GDP ratio or even higher inflation if they outperform the country's growth rates. 타

The below mentioned are some common solutions to the high debt-toGDP ratio: Reduction in Government Spending: Governments with high debt-to-GDP ratio can reduce their spending to decrease their debt burden. But care should be taken not to hamper the growth and undermine the GDP portion of the equation. 타

Encourage Growth: Central banks can encourage growth by reducing the interest rates, which will ease the commercial lending. Higher growth rates increase the GDP and thereby reduces the overall debt-to-GDP ratio. 타

Income Tax Income: Governments can pay off debts by increasing taxes. H o w e v e r, i t s h o u l d t a k e i n t o consideration that the increase in taxes should not affect the GDP growth and consequently affect the debt-to-GDP ratio. 타

ALGO TRADING

Shraddha Joshi | MMS Finance | 2018-20 Shreyas Vaidya | MMS Finance | 2018-20

Fintech Funda

What is Algo-Trading? Algorithmic trading, also referred to as Black-box trading or automated trading uses a computer program that follows a d ef i n e d s et o f i n st r u c t i o n s ( a n algorithm) to place a trade. This type of trading can generate profits at a frequency that is practically impossible for a human trader to execute. For instance, we give instructions to the program to sell some definite quantity of shares below a certain definite amount. Then on reaching the levels, the program automatically executes the trade. The sets of instructions are based on quantity, price, timing, as well as on mathematical models. Along with the profit generation opportunities, algotrading makes the markets more systematic and liquid by cancelling the effect of human emotions on trading activities. However, this concept & procedure of carrying out the algorithmic trade is not as easy as it

seems. Algorithm trading requires creation of a very complex set of programming instructions and finding the broker who is permitted to carry out a l g o r i t h m i c t ra d e b y t h e sto c k exchange. The Markets in Financial Instruments Directive (MiFID) has introduced certain requirements to reduce the risks for investment firms that carry out trading with the help of algorithms. What are the benefits of Algo Trading? 1. Trades are expected to be at the best possible price as at the exact digit the buy/sell commands are executed. 2. Instant and accurate trade order placement. 3. Trades timed correctly and instantly. This avoids significant price changes. It is a known fact, that the price undergoes movements within minutes or sometimes even seconds. Thus, the program immediately executes the

FINLY| August 2019 | Finstreet | SIMSR

Fintech Funda

trade instantly when the levels are reached. 4. Reduced transaction cost due to lack of human intervention. 5. Simultaneous automated checks on multiple market conditions. 6. Placing & executing trades without any manual error risk. 7. Human traders often make mistakes due to the emotional and psychological factors. Algo trading reduces this possibility. Traders often fall prey to fear i n c a s e o f b e a r i s h m a r ke t a n d greediness in case of bullish markets and fail to take the actions. However, the programs purely run on numbers and instructions and thus are immune to emotional mistakes. 8. The most significant portion of present day algorithmic trading is high frequency trading. This trading method attempts to capitalize on placing a large number of orders at breakneck speeds, across multiple markets and multiple decision parameters, based on preprogrammed instructions.

reached. However, the Algorithm fails to identify in case of sinuous market movements. It only understands the set of instructions and numbers. Due to this it will continuously go on buying and selling the stocks when levels are reached. Thus, at the end of the day, even with large number of trades, the net profit is low. 2. The size and capacity of computer systems along with proper internet and electricity supply. Even though these needs are easy to fulfil, a failure in any one of the factors may cause a major loss to the trader. For instance, if the system undergoes certain problem and is not able to execute the trade at the right levels, then the trader may lose the opportunities of entering or exiting the market. 3. Small traders carryout only few small value trades in a day. The high capacity systems are of no use to the small traders provided the high costs associated with it. 4. Failure of IT systems or failure of algorithms has resulted into heavy loses & fines for various institutions. Future of Algorithmic Trading

However, one cannot completely neglect the shortcomings of this concept What are the fundamental drawbacks of Algo Trading? 1 . A l go r i t h m i c t ra d e s a re m o st profitable when the market is having either a rising or falling trend. It can exit or enter the markets immediately after certain predetermined levels are

Currently about 40-50% of the trades happening in the National stock exchange

Fintech Funda

FINLY| August 2019 | Finstreet | SIMSR

are done by algorithmic trading as reported by SEBI and is expected to grow even more in the future. However, the greatest strengths of algo trading is also its weakness i.e it merely runs as per the instructions provided to it. Thus, there is an increasing demand for AI technology in the algo trading market where the algorithm can learn from past experiences, mitigate the risks and a d a p t t o t h e c h a n g i n g m a r ke t conditions. Moreover, many financial institutions are investing into developing the technologies in similar directions. The traders are also trying to enter the non-equity segments through Algo tradings. Thus, the financial world is rapidly moving towards automated trading & dealings. Till then, the regulating bodies like SEBI will have to set restrictions on the extent of use of AI and Algorithm in trading due to the current inability of the systems to understand risks and decision making with the changing market conditions on daily basis. In short, Automation is the key to trading of future. Thus, a basic understanding of algorithms and programming will be expected from the traders of the future.

STEEL SECTOR & COMPANY ANALYSIS Adyasha Pratihari | PGDM FS | 2018-20 Prateek Tripathi | PGDM FS| 2018-20

Sector Analysis

Overview Steel Sector, being the backbone of Industrialization is one of the most crucial sectors of the Indian economy contributing over 2% to the GDP. Second, only to China, India produced 106.56 million tonnes of crude steel during 2018. As per the World Steel Association's report, India is projected to grow at a rate of 7.1% in 2019 despite the global steel demand for the same period being 1.3%. India is the thirdlargest finished steel consumer for 2018 with per capita consumption being 70.9kg. Some of the key players in the Indian steel sector are state-run SAIL, Rashtriya Ispat Nigam Ltd and private players like JSW, Tata Steel, Jindal Steel and Power Ltd, etc.

producers into integrated steel producers, primary steel producers, and secondary steel producers stands void now. The step is taken to provide a fair playing field to steel manufacturers, both in the small and medium sector and large players, with different capacities who follow different routes for steel production. Another way of classifying steel producers is by the way of process routes which are mainly Basic Oxygen Furnace (BOF), Electric Arc Furnace (EAF) and Induction Furnace (IF). As per the latest data released by the Joint Plant Committee for April-December 2017-18, the crude steel production through BOF, EAF ,IF are 32.63 MT(43% ), 22.88 MT(30% ) and 20.132MT(27%) respectively .

Production, consumption and growth of steel As per a recent report by the union steel ministry, the classification of steel

Sector Analysis

FINLY| August 2019 | Finstreet | SIMSR

As per the above data, it can be seen that India has become a net exporter of total finished steel from the year 201617, owing to higher production which has, in turn, led to greater exports. The consumption has also increased over the years at a rate of CAGR 3.4% which can be attributed to growth in the production of the core industries.

Construction and Infrastructure sector are the largest consumer of steel followed by automobiles which are predicted to grow at a higher rate in the subsequent years. As per the World Steel Association (WSA) figures the per capita consumption for the world is 224.5kg while it is only 70.9kg for India. Even if there was a growth of 7% from the previous year, India still lags behind the global consumption level. However, the WSA is optimistic about the growth in demand for steel in India in the subsequent years since it has risen above the shocks of demonetization and GST implementation, also additionally due to numerous infrastructure projects. PORTER’S ANALYSIS Competitive rivalry

Source: JPC

Crude Steel production has shown a steady rise over the last 4 years along with the working capacity. It has grown at a rate of 5.71 CAGR from 2012-13 to 2017-18, and this growth can be attributed to the expansion in capacity over these years.

The industry is moving towards consolidation with top 6 players holding about 70% of the capacity. The FTA countries are diverting steel to India due to the trade war between the US and China. However, imports comprise of around 6% only. Hence the competition in the sector is moderate. Threat of new entrants The steel industry is capital intensive with top 5-6 companies occupying around 70% capacity, hence enjoying the economies of scale. Some companies also have their own mines from where they source key raw materials. Also, there are many policies of government regarding the a l l o cat i o n o f i ro n o re s a n d l a n d acquisition.

Source: “India Steel Asia Insight”, Morgan Stanley

Sector Analysis

FINLY| August 2019 | Finstreet | SIMSR

Bargaining power of suppliers The bargaining power is low for fully integrated players who have their own mines for raw materials and High, for non-integrated players who have to depend on outside suppliers for sourcing raw materials. Bargaining power of customers Top steel consumption industries like Infrastructure and construction that generally gets bulk deals enjoy a higher bargaining power but the smaller customers don't enjoy this benefit.

Recent Policies/initiatives in the sector Two landmark policies have been rolled out by the government of India are: 1. National Steel Policy, 2017:

Substitute products The threat of substitute products is quite low although aluminium and plastics have been used as replacement of steel in few cases in the automobile sectors. The threat, however, isn't significant as steel cannot be replaced completely.

Growth drivers The major growth drivers of steel sector in India are the growing demand in the construction and capital goods, policy support by the government, investment in the sector. Figures from the Joint Plant Committee state a 7.8% rise in steel consumption which has been backed by inventory restocking and driving volumes. As per SBICAP Securities, long steel product's demand increased by 9.6% during the April 2018February 2019 period. Relatively, the demand for flat products, which largely is due to the automobile sector, is up

4.8%. National steel policy and make in India initiatives have also boosted the growth in the industry. The government has also allowed a 100% FDI in the sector. Availability of raw materials in India is a major factor in driving investments. As per reports $14-15 billion of investment is underway for the Indian steel sector that would increase the production capacity substantially.

The main goals of NSP, 2017 is to build a globally competitive industry with a crude steel capacity of 300 MT by 2030, increase per capita steel consumption to 160kg by 2030 and the expansion of the MSMEs. Establishments like Steel Research Technology Mission of India (SRTMI) have been set up to focus on R&D. 2. Policy on Preference to Domestically Manufactured Iron & Steel Products (DMI&SP) This policy has been introduced for giving preference to DMI&SP in government tenders. The policy mandates for domestic value addition of 15% on the imported input steel to be eligible for bigticket public procurement in steel. It encourages the downstream companies to set up capacities for steel products which were getting directly imported in the past otherwise. The policy is valid for all such projects and procurements, where the estimated value of the "iron & steel products" is either INR 50 crores or

Sector Analysis

FINLY| August 2019 | Finstreet | SIMSR

more. COMPANY ANALYSIS: Tata Steel Company Overview: TATA Steel Limited is a diversified steel producer. The company is involved in the business of steel making which includes raw materials and finishing operations. The Company's segments are broadly classified into automotive, construction, industrial & general engineering and agriculture. Its products comprise of flat products, including hot rolled, cold rolled, metallic coated, direct rolled, tubes, pre-finished steels, packaging steels, electroplated steels, electrical steels, a n d n a r ro w st r i p ; co n st r u c t i o n products, including structural steel, floors, walls, roofs, modular and building components; agricultural

implements, and bearings. It also offers auto assembly components such as ball bearings, tapered roller bearings, magneto bearings, clutch release assemblies, fan support assemblies, and cylindrical roller bearings. Tata steel's brands include Tata Structura, TISCON, Tata Shaktee, Tata Astrum and Tata Steelium. When it comes to the Steel Processing Centres, Tata Steel has 37 SPCs spread across 11 locations. It has six zonal hubs in Delhi, Faridabad, Ko l ka t a , C h e n n a i , N a g p u r, a n d Vijayawada. Apart from these, Tata steel has 18 stockyards, 202 distributors, 27 sales offices and over 12000 dealers. Tata Steel is one of the most integrated steel manufacturers in India with a current steelmaking capacity of 18.6 MTA (Million Tonnes per annum).

The chart on the left shows capacity utilization of Tata Steel, Jamshedpur plant. We can observe that for the past three years, the plant has been utilizing its capacity exceptionally well. When we compare the numbers with its competitors such as JSW and Posco (South Korean steel company) whose numbers are 89% & 93% respectively, we come to understand as to why Tata Steel is considered as a benchmark in capacity utilization.

Sector Analysis

FINLY| August 2019 | Finstreet | SIMSR

Tata Steel caters to a variety of sectors. The pie chart below shows the sectorwise breakup of Tata Steel's domestic Sales.

Non-executive director of Tata Steel Limited. Share Holding Pattern When it comes to the owners, it can be observed that 50.30% of the shares are held by institutions, 16.58% shares are held retail shareholders, while the remaining 33.12% is held by the Promoter and Promoter Group.

Source: Tata Steel's Investor Presentation

Corporate Governance As an organization, Tata Steel was recognized as one of the world's most Ethical Companies by Ethisphere in 2019 for the eighth time and it is the only Indian company to win the award in the Metals, Minerals, and Mining sector. The company's core values function on the basis of four pillars namely, Leadership Engagement, C o m m u n i c a t i o n , a n d Tr a i n i n g , Compliance Structure and Measurement of Effectiveness. The Board of Directors of Tata Steel consists of ten members out of which five are Independent Directors. Mr. Natarajan Chandrasekaran is the Chairman and

Source: Tata Steel's Investor Presentation

Recent Acquisitions and their Implications In the past one year, Tata Steel has made two noticeable acquisitions â&#x20AC;&#x201C; Bhushan Steel and Usha Martin India Limited. Bhushan Steel is a valueaccretive acquisition which delivers several benefits to the firm. Some of them include, additional capacity to retain market share in the growing market, higher downstream integration and value addition with a complementary product mix, closer access to key markets in the North and the West and the option to scale up through Brownfield Expansion*.

* Brownfield Expansion â&#x20AC;&#x201C; A Brownfield expansion is when a company or a government entity purchases or leases existing production facilities to launch a new production activity.

Sector Analysis

FINLY| August 2019 | Finstreet | SIMSR

Usha Martin Ltd. which is a leading wire rope manufacturer was acquired by Tata Sponge which is a subsidiary of Tata Steel. Tata Steel's strategic rationale behind acquiring UML's business was to retain long products market share in wire rods and also to enter into a special steel market. Other reason to acquire the business was to enhance product basket for automotive consumers and also to leverage the customer base and provide better customer service through a wide offering of products. But to expand their business through such acquisitions, Tata Steel had to take up considerable amount of debt due to which its debt rose close to Rs 1 trillion, which is also one of the reasons as to why the stock of Tata Steel has taken a hit. It would be interesting to see how Tata Steel manages to cope up with these high levels of debt with the acquired synergies.

Peer-to-Peer Ratio Analysis The two top competitors of Tata Steel are SAIL and JSW Steel. Looking at the numbers in the table below, we observe that Tata Steel clearly stands out in terms of Operating Profit Margin and Net Profit Margin. It has an operating and net profit margin of 29.12% and 14.91% respectively, which are pretty healthy numbers. It also has a healthier interest coverage ratio when compared to SAIL and JSW. When it comes to Debt to Equity ratio, we observe that Tata Steel is the least leveraged amongst the two with JSW being next and SAIL being the most. The two ratios where JSW Steel beats Tata Steel are ROCE and Inventory Turnover Ratio. JSW Steel has a 23.07% ROCE compared to 19.28% of Tata Steel, which shows that JSW is able to employ its capital more efficiently to convert them into profits.

Internship Diaries

DIARIES

a worldwide reputation for successful investing based on innovation and risk management. The Hedge Fund has a long list of big shot clients who commit capital and help the firm grow. The culture at the firm is such that is rewards analytical rigour and values high ethical and legal standard. As a result of this, the firm has seen excellent results across all years and has been successful in recovering from global financial setbacks with ease.

Isha Koolwal

Process

PGDM FS | 2018-20 Company Overview D.E. Shaw India Private Limited is a part of the D.E. Shaw group which is a global, investment and technology development firm founded in 1988. It manages more than $50 billion in investment and committed capital as of June 1, 2019, and has offices in North America, Europe, and Asia. The firm has

Since D.E. Shaw puts excessive emphasis on analytical capabilities of the human capital it employs, the first round of the selection process was an aptitude test. It was a 40 minuteonline test with questions covering sections such as general awareness, language skills, quant and logical reasoning. There was a total of 30 questions and there was negative marking for incorrect answers.

Internship Diaries

FINLY| August 2019 | Finstreet | SIMSR

Out of the pool of candidates who had taken the aptitude test, 47 were shortlisted for the next round which was a Group Discussion Round. We were divided in groups of 10-12 for the purpose of the GD. Topic for my group was What if you don't have to work for money. Each group has about 15 minutes to discuss and the panel consisted of people from the Talent Acquisition team, a manager from one of their sub teams, and an OC member. 11 people were shortlisted for the next round which was a personal interview round. There were 3 rounds of interviews with different panels two of which were technical interviews and one was an HR interview. Questions in the technical round included a wide range of macroeconomic concepts (mainly because I am an Economics Graduate) like exchange rate, rate of interest, agricultural production and other general awareness related issues. Briefly, the sports world was also talked about. The HR round consisted of questions meant to judge my attitude towards work and my understanding of various things. My Experience I was working with the Financial and the Regulatory Reporting team which was in plain simple words involved with the auditing and the monitoring of the various funds that D.E. Shaw has. The primary tasks which I had to perform included creation of various risk return reports, agency specific reports, comparison reports along with other ad hoc tasks like new feature testing on

various platforms.Working with the firm taught me the basics of the hedge fund industry. It gave me a deep insight of how the capital and returns flow in such a structure and how the funds actually make money. I also got a chance to observe and understand the financial statements of various entities. My work at the firm also helped in getting accustomed to some of the processes and jargons used in the hedge fund industry. Work culture wise, Shaw is of the best companies to work for. They focus on development of each and every individual and the atmosphere and the facilities provided ensure that you stay in your comfort zone at all times. A Piece of Advice In general, for any selection process you sit for, make sure that you know where the boundary lies. Be regular with the newspaper and make sure you know every line mentioned in your CV. Being aware of the events happening around gives immense opportunities to talk about in the interview. And, most importantly, do not be disheartened if you do not have a finance or related field exposure. There are ample of other things that the company will want to know. All they want is a committed and an eager to learn individual. All the very best for your future endeavours!

FINLY| August 2019 | Finstreet | SIMSR

We welcome your valuable feedback Finstreet, The Finance Committee of K.J. S.I.M.S.R.

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