Finly January 2020 by FINLY

FINLY| Jan 2020 | Finstreet | SIMSR

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

Dear Readers,

Greetings for the New Year 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 January edition of our monthly magazine FINLY for the academic year 2019-20. Our Cover Story helps us understand the IPO mania in India, reasons for outperforming the global IPOs and future outlook. Next in line, is the Eco Section, which analyses in detail the Bharat Bond ETF, its various features and its comparison to similar investment options. In the Sector Analysis, the authors inspect of the Financial Services Sector, with specific focus on the mutual fund industry with an in-depth analysis of the market overview, market share of key players, growth drivers, risk factors, porters 5 forces model and current trends in the sector and an Analysis of one top AMC of the country, HDFC AMC. This month's Fintech Funda covers Artificial Intelligence in BFSI Sector, its uses in the various segments and its prerequisites. 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 high-quality articles coming in from various top management colleges across the country. We thank every participant for their sincere efforts and participation. This month's winner's article is a recommended read. We would also like to thank Akshay Pasad of MMS â&#x20AC;&#x201C; Finance for sharing his internship experience at B.D.Shah Securities Pvt Ltd. 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- Jan 2020 Faculty Incharge

Editor-in-Chief

Editor- FINLY

Mohak Shah Dr.(Prof) Pankaj Trivedi

Mohak Shah

Saurav Jain

-Conceptualization & DesignSheenu Jain

Rohan Thakur

Riddhi Nagda

-Content TeamMihir Mali

Anjali Pandya

Milind Verma

Smith Shah

Nihar Shah

Nilomee Savla

FINLY| JULY 2018 | Finstreet | SIMSR

INDEX

Editorial Team Finly

04 Cover Story 07

Eco Section

Sector & Company 10 Analysis

Fintech Funda

Intern Diaries

Call For Articles

IPO MANIA Nilomee Savla | PGDM FS | 2019-21 Smith Shah | PGDM Core | 2019-21

Cover Story

IntroductionThe year 2019 saw high volatility in the secondary market in India as uncertainty around the economic slowdown, deteriorating private consumption and a troubled NBFC sector -all took their toll. But despite the dismal economic indicators, the primary market held its ground and emerged to be the cash cow for investors. About 70 percent of the new entrants have been trading well above their issue prices, with some issues having already given more than 100 % returns to the shareholders. The S&P BSE IPO Index, a gauge of shares in their first two years of trading, has climbed 36% in 2019, as compared to the S&P BSE Sensex Index which made a gain of 13%. A brief summary of the performance of the top IPOs that got listed in 2019 The primary issue of IRCTC emerged as the clear winner amongst the IPOs that got listed this year. Issued in October this year, the IPO got oversubscribed 112 times and the stock more than doubled on its listing day, giving a return of 128% to the investors. Ujjivan Small Finance Bank Ltd. was another noteworthy listing. The company was oversubscribed 166 times, the most for an IPO this year and it got listed on both NSE and BSE earning a 60% gain on its debut. Other stocks that performed well were CSB bank

Ltd., IndiaMART, InterMESH Limited, and Polycab India Limited opening at 53.90%, 33.87% and 21.75% respectively, more than their offer price.

Global scenario The global IPOs did not share the same luck as their Indian counterparts. The year 2019 saw UBER, Lyft, Pinterest, Slack and many other companies go public. Uber, which had a private valuation of $76 billion ahead of its IPO in May, has seen its valuation drop steeply as its stock price has plummeted. The ridesharing aggregator now has a market cap of roughly $49 billion, a 36% drop from its private valuation. Similarly, Lyft, another ride-sharing aggregator based in California, has its market cap hovering around $11.6 billion, compared to its last private valuation of roughly $15 billion which is a 22.67% decrease. Pinterest, the social networking site, which went public in April this year also has its shares trading below its offer price. Companies like Peloton and Slack have also had less than stellar

Cover Story

FINLY| FINLY| Jan Sept2020 2019| |Finstreet Finstreet| |SIMSR SIMSR performance after going public this year. We Work which had plans to go public this year, postponed its listing after facing sharp criticism from public investors seeking to value the company at $10 billion as compared to its $47 billion private valuation by SoftBank. However, there was one positive outcome for global IPOs. Energy Giant Saudi Aramco raised $25.6 billion in the biggest-ever IPO and opened with a premium of 10 percent from its offer price. With this listing, it has become the most valued company in the world at $1.88 trillion market cap. So, barring Saudi Aramco, the overall Global IPO markets didn't give many valuable returns to the investors. So What Worked For The Indian IPOs? 1. Niche stocks An online marketplace, a railway monopoly, a diagnostics chain and a micro-finance lender were among the 11 companies that got listed this year. State-run Indian Railway Catering & Tourism Corp. more than doubled on its listing day. Investors offered to buy the entire firm 14 times over, lured by its monopoly over the ticketing, catering and supply of packaged drinking water to Indian Railways, Asia's largest rail network. India Mart InterMesh Ltd., the country's largest online platform for businesses, is trading 78% higher than its July IPO. Metropolis Healthcare Ltd., an operator of medical diagnostic centers backed by Carlyle Group, has soared more than 60% from its offer price in April. Though the capital raised by these companies was relatively small, they offered a unique business proposition for which a similar peer company in the listed space was rare or absent. The nearmonopolistic and unique businesses of these companies that are professionally run, are cash positive and carry almost no debt won the hearts of the investors. 2. Attractive Valuation Although each IPO should be judged on a case-by-case basis, the majority of the IPOs that got listed this year offered attractive valuations. One of the many reasons why IPOs did well this year was their valuations. 14

out of the 16 IPOs that went public this year are significantly above. One of the newly listed companies that offered a great valuation was Ujjivan Small Finance Bank that got listed in December on both the BSE and NSE with a 60% gain on its opening day. Ujjivan Small Finance Bank IPO saw the highest subscription among all IPOs since January 2018 as investors found the valuation attractive and asset quality strong. The company has a PE of 16.5 which is half of its listed peer AU SFB and PB of 2.3 where AU SFB is trading at PB of 6.9. 3. Growth outlook Companies with strong potential business dynamism and growth outlook did well in the listing this year. Many of the companies have witnessed a growth of two-digit in the last 3 years. Also, the IPOs that got listed in 2019 were more from the services and financial sector rather than manufacturing which witnessed the worst hit during this year's economic slowdown. 4. Past IPO listings success

The heavy demand that the IPOs have seen is, in fact, a derivative of the listing performances that earlier IPOs in 2019 have delivered for investors. Having made good returns, investors seem to be coming back for more. In 2019, very few companies got listed. But the IPO experience has been great for the investors. Because one or two unsuccessful listings, every other issue has performed phenomenally well. So, investors have had a positive view of investing in IPOs in the Indian markets. THE FUTURE OUTLOOK FOR THE IPO MARKETS. A lesson learnt from 2019, is that investors will reward IPO listings whose business models are proven and that show continued profitability alongside requirements. ongoing predictable growth. The Indian initial public offering (IPO) market is expected to achieve a higher pace in 2020 as compared to this year. The capital market participants are expecting a

Cover Story

FINLY| FINLY| Jan Sept2020 2019| |Finstreet Finstreet| |SIMSR SIMSR Exchange Board of India for planned IPOs and are looking to raise a total of about 300 billion rupees. Out of a total of 21 companies, 11 have already been given the nod to tap the market for next year. The consumer, real estate and aviation sectors could also see significant IPOs, and the market will likely witness it's second REIT IPO and first REIT qualified institutional placement (QIP) in the first half of 2020. Even the global markets are expecting a flurry of companies hitting the public exchanges in the year 2020. One of the best-known contenders to get publicly listed is Airbnb. The online marketplace for rentals was originally expected to IPO in 2019, but it has now pushed its plans to get listed in 2020. It also looks to be gearing up for a direct listing, similar to that of Spotify and Slack. Stripe, the fintech startup and rival to Jack Dorsey's Square is also planning to go public in 2020. The company, which processes online payments, is valued at $35 billion and is backed by Sequoia Capital and high-profile investors like Elon Musk, Peter Thiel, and Google's CapitalG. The on-demand delivery services company Postmates is another potential 2020 IPO candidate. The UK markets will also see a pipeline of IPOs. O2, the largest mobile carriers in the UK; Dangote Cement (a Nigerian company owned by Africa's richest man, Aliko Dangote); Asda (Retail giant Walmart' s subsidiary) are some of the many companies planning to get listed.

FINLY| Sept 2019 | Finstreet | SIMSR

ECO Section

Anjali Pandya | MMS | 2019-21 An Exchange Traded Fund or an ETF is a basket of securities that usually tracks a certain index. ETFs are very similar to mutual funds except they can be bought and sold on the stock exchanges during trading hours. A bond ETF invests in a basket of securities of the prior index. The Government of India has come out with a first corporate bond ETF, which they are calling it as 'Bharat Bond ETF'. The Finance Minister Nirmala Sitharaman said this will provide additional funding for the public sector units. Edelweiss Asset Management Co launched the ETF and will be managing it. The ETF will have a base size of Rs. 7000 crore, with mostly a green shoe option of Rs. 8000 crore. While there are many corporate debt funds one can invest in the market, but Bharat Bond ETF is different because it will invest only in bonds issued by a select few public sector units. It will only invest in 'AAA – rated' bonds which are issued by public sector units. The units of this ETF will be held in the Demat account. The ETF will have two target maturities. One will be of three years and another will be of ten years. The three year ETF Bond will follow the Nifty Bharat Bond Index – April 2023, while the ten year Bond will follow the Nifty Bharat Bond Index – April 2030. The issue size of the three year type will be Rs. 3000 crore with the option to extend it by additional Rs. 2000 crore, While the issue size of ten year class will be for Rs. 4000 crore also with

the option to extend it by extra Rs. 6000 crore. As seen below, the three year Bharat bond ETF will hold the debt of thirteen public sector companies like National Bank for Agricultural and Rural Development (NABARD), Power Finance Corporation Limited (PFC) and Small Industries Development Bank of India (SIDBI) and more. The ten year Bharat Bond will keep the debt of 12 public sector units like Indian Railway Finance Corporation (IRFC), Rural Electrification Corporation (REC) and National Highways Authority of India (NHAI) and so on. These companies maybe listed or unlisted. th

In its first launch on 12 of December 2019, the constituents and their weightage are in the table 2 on page 9. The unit price of each Bond ETF will Rs. 1000, and can be bought in multiples of 1000. This provides retail investors to invest in bonds with amount as low as Rs.1000, providing easy and low cost access to bond markets. Large investors who wish to buy and sell units worth more than Rs. 25 crore can directly do so with the fund houses. The units of Bharat Bond ETF can be bought or sold at the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The first series of the bond are offered with their specific maturities (3 Yr, 10 Yr). This means that the bonds will be redeemed automatically at the end of their tenure. Now, for the first series, Government is offering only growth option. There is no dividend option. However, this may change for the future series.

ECO Section

FINLY| Jan 2020 | Finstreet | SIMSR

4. Transparency – There will be daily

The Government had three main objectives for launching Bharat Bond ETF :

portfolio disclosure on an independent website, whereas the usual funds just disclose it once a month. This is also a scoring point for Bharat Bond ETF.

1. To deepen the liquidity of the Indian debt

market. 2. To solve investor's dilemma of picking

5. Tax Efficiency – If the funds are held over

premium bonds.

a period of three years, then the investors can avail the benefit of indexation rather than being taxed at slab rates. FD interest at 7.5% is taxed at the nominal rate of our income tax. Bharat Bond ETF's interest rate will be almost tax free after factoring in the indexation rate. In effect it will be 30% more post tax return, if invested in Bharat Bond ETF. This significantly reduces the tax on capital gains for the investors.

3. To help raise funds for Government

owned companies. As it can be seen below, the Bharat Bond ETF has an edge over other conventional funds in terms of liquidity, tax efficiency, low risk and return lock-in. Some of its feature are as following : 1.Low Cost Structure – The distinguishing

feature of this bond is its diminished expense ratio. The cost associated with investing is 0.0005% of the investment value. If we buy bonds worth Rs 10 lakhs (1000 bonds of face value Rs. 1000), then our expense on the transaction is only Rs. 5. This bond will be the cheapest mutual fund product in India and one of the cheapest debt funds in the world. In this market, costs matter a lot and this provides it with a huge advantage over the other usual debts. 2. High Quality Portfolio – This product

consists of only bonds issued by public companies, and hence the default rate will be very low. Fixed Maturity Plans (FMP), a kind of debt fund, takes exposure to riskier papers and have been hit by recent defaults in companies like DHFL. There will be substantially no credit risk as the debt in ETF is issued by public sector companies. In the middle of credit blow ups and the general aversion to risk, this bond offers safety to the investors seeking it. 3. Predictability of Returns – The fixed

maturity period of the bond assures investors predictability of their returns. The maturity structure of the Bond ETF lets the investors lock-in yields, if it is held till maturity by them. If the bonds are held to maturity, the investors of three year type may expect 6.69% and the ten year type may expect 7.58%

6. Liquidity – Fixed Maturity Plans (FMP),

enjoy tax and maturity advantage but their liquidity tends to be poor. Bharat Bond ETF allows not only entry and exit on any trading day, but also at different points during a trading day. Edelweiss AMC has engaged market makers to ensure adequate liquidity.

Unique Combination of Properties Bharat Bond ETF combines a set of unique properties that most of its competitors do not have (Refer to table 1 on page 9). Bharat Bond ETF is a fixed income fund that offers high quality portfolio at an ultra-low cost. However, its properties like liquidity can only be known once the Bond ETF actually starts trading. And, the Government's disinvestment may mean that the companies may not remain PSUs in the future. Also, the maximum investment for interested retail investor is only up to Rs. 2 lakhs. The interest rates in India are at a low, so locking our investments at these rates may not be remunerative. And, there is no interest income from these units. So, it won't suit investors who are looking for regular income from their investments.

ECO Section

FINLY| Jan 2020 | Finstreet | SIMSR

Source - Mint

Source - Edelweiss AMC

Sector & Company Analysis

Financial Services Sector MILIND VERMA I PGDM-B I 2019-21 NIHAR SHAH I MMS-B I 2019-21

Sector Analysis

Market Overview

INR 95 lakh crore, and a more than three-times growth in investor accounts to 130 million by 2025.

Indian financial sector is undergoing rapid expansion, in terms of strong growth as well as new entrants in the market. The sector is going through a stable growth rate phase which is experiencing an upward swing and the same can be maintained by keeping inflation down. The current growth rate of the Indian financial sector is 8.5% per annum. The rise in the growth rate indicates the growth of the economy too. The major relief and the factor leading to the growth of the financial sector was the nullification of regulations restricting the growth of the sector. As of March 2018, India's Gross National Savings (GNS), as a percentage of GDP stood at 30.5%. The Indian Financial Service sector comprises of several sub-segments which include Banking, Professional Advisory, Wealth Management, Mutual Funds, insurance, Stock Market, Treasury/Debt Instruments, Tax/Audit Consulting, Capital Restructuring & Portfolio Management. The Mutual Funds industry's AUM (assets under management) has grown from Rs. 9.75 trillion in June 2014 to Rs. 25.60 trillion in September 2019. Mutual Fund industry's AUM recorded a CAGR of 15.51% over FY07-18. India is globally considered as a golden opportunity for investments. The Association of Mutual Funds in India (AMFI) is targeting nearly five-fold growth in assets under management (AUM) to

Market Share Assets under management (AUM) is the total market value of the investments that a person or entity or an organization manages on behalf of clients. On that basis, we will have a look at the top 5 major players in the industry.

Growth Drivers India's savings-oriented culture is beneficial for the Mutual Fund industry. Indians have moved to invest in mutual funds from physical savings in the form of gold and real estate. There has been a positive change of 10% from previous figures which sums

Sector Analysis

FINLY| Jan 2020 | Finstreet | SIMSR AMCs who are endowed with powerful financial firms as parents are working with different investment strategies which lead to highly competitive rivalry at the ground level. As the information related to a fund's performance and comparison of the performance of various funds is readily available, high performing funds seem to be attracting more AUM over a period of time. This gives a competitive advantage to good performing funds. This causes AMCs to invest more towards knowledge management and attract good talent for fund management, putting additional pressure on margins.

up to Rs. 3 lakh crores. The industry's debt AUM was Rs.8 lakh crore while the equity AUM grew to Rs.9.20 lakh crore in the FY17-18. Such numbers will increase the profitability of the industry. In the last few years, there has been a tremendous increase in retail investors participation through SIP. 55% of SIPs are active for five years. There has been a growth in SIP per month from Rs. 3100 crores to Rs. 7500 crores in the past two years.

Risk Factors The Indian economy has faced a slowdown â&#x20AC;&#x201C; the most severe of which is ongoing. From an average GDP growth rate of 8-9% during the 2008-2011 years, the Indian economy is now growing at a lacklustre 4.8% growth rate in Q2 2019. Coupled with a steep decline in the value of the Indian rupee, the mutual fund industry now finds itself in an unpredictable global economic environment. The major issue which the mutual fund industry faces is the lack of participation from the people of the country. The AUM to GDP ratio is an important indicator of how much of the yearly income in a given region is being invested into mutual funds. For the country as a whole, the AUM to GDP stands at 7%. When this ratio is calculated for the first decile of districts, the ratio is 29.52% - slightly lower than the world average. However, the rest of India shows a dismal picture with the AUM to GDP ratio standing at 1.82% only.

2. Threat from New Entrants: Threat from new entrants can be considered moderate as start-up costs from the perspective of financial firms are low, so we see that most financial institutions have their own mutual funds. Mutual Funds try getting their names associated with bigger brand names which help them instantly increase their market share and form a formidable place. Also, SEBI requires a firm to have a sound track record and a general reputation of fairness and is carrying on business in the financial services sector for a period of not less than five years. Most financial institutions satisfy these requirements and hence we see such a large number of AMCs entering into the business.

Porter's 5 Force Model 1. Competitive Rivalry: As seen in the above table that the companies operating in this sector have high AUM, which makes them compete with each other for the top position. 3 out of the 10 major companies are competing for the top spot and others are also not far behind. HDFC AMC th IPO was listed on 25 July 2018 which helped them increase their market share. Lack of differentiation between Growth to AUM and Growth to total (fixed + current) assets is very high. This clearly indicates that AMCs with higher AUM have shown profitability, indicating the trust that the investors place in them.

3. Threat from Substitution: Threat from substitutes is very high. There are three categories of substitutes for mutual fund products; namely life insurance, bank fixed deposit and selfinvestment in equity/real estate. Life Insurance products are majorly for wealth transfer. Bank fixed deposit is for wealth preservation. Lastly, Self-investment in equity/real estate is for wealth creation. PMS (Portfolio Management Services)

Sector Analysis

FINLY| Jan 2020 | Finstreet | SIMSR poses a great threat to mutual funds. Usually, people who have less time to invest in stocks or different bank products subscribe to PMS services. Many mutual fund companies provide this service, but this scheme is suited for large net worth investors as the entryamount is 25 lakh rupees, which is being further raised to 50 lakh rupees by SEBI and is applicable from January 1 2020. Its fees are also more than that of equity mutual funds, which is 2 percent.

4. Bargaining Power of Supplier: Bargaining Power of Suppliers is comparatively high. The only supplier category that is relevant to the mutual fund industry is that of traders. Traders/dealers are the actual people who trade in the markets and ensure that the returns on the funds of their companies are higher than that of their competitors. In India, qualified finance professionals in this field are less in number and often demand a premium for retention. There is a very low bargaining power to suppliers as the industry is highly regulated by RBI.

Government Policies and Regulatory Work Equity Linked Savings Scheme or ELSS is a scheme that helps people save up to Rs. 46,800 under section 80C of Income Tax by investing Rs.1.5 lakh annually and one can also invest their money with an aim to generate wealth. ELSS has a lock-in period of 3 years which makes it one of the most attractive products amongst all taxsavings instruments. At least a four-times security cover is mandatory for investment by MF schemes in debt securities having credit enhancements backed by equities, directly or indirectly. MFs so far offer a cover of 1.5-2 times for loans against shares, the Business Standard reported. Moreover, prudential limits on total investments by such schemes in debt and money market instruments having credit enhancements as a percentage of their respective debt portfolios

are prescribed at 10 percent. Under the Union Budget 2019-20, the government has provided a huge boost for Financial Institutions by allocating them US$340.39 million. US$650.06 million is allocated to the Department of Financial Services. The GST on financial services transactions like banking transactions, mutual funds, insurance and the stock market has been increased from 15% to 18%. Bombay Stock Exchange (BSE) introduced weekly futures and options contracts on the Sensex 50 index from October 2018. There has been a reduction in securities transaction tax from 0.125% to 0.1% on cash delivery transactions and from 0.017% to 0.1% on equity futures. Insurance products are also covered under the EEE method of taxation. This translated to an effective tax benefit of approximately 30% on selective investments every financial year.

Current Trend and Future Opportunities In FY09, SEBI removed the entry load to bring about more transparency in commissions, encouraging longer-term investments. In its effort to encourage investments from smaller cities, SEBI allowed AMCs to hike expense ratio up to 0.3 percent on the condition of generating more than 30 percent inflow from these cities. Some private players are coming up with innovative products like third-party money market mutual funds to cater to rural investment needs. Innovative products such as ULIPs (Unit Linked Insurance Plans) have been launched in the Insurance Sector. India's mobile wallet industry is seeing a steady growth due to the digitalization initiative. It is expected to grow at a staggering CAGR of 148% to reach US$4.4 billion by 2022. In FY19, over 3133 crore digital transactions were registered and it has reached 1527 crores till September 2019. Non-Banking Financial Companies are expected to raise their market share to 19-20% by recapitalization program for the public sector.

Sector Analysis

FINLY| Jan 2020 | Finstreet | SIMSR

Company Analysis: HDFC AMC

was oversubscribed by 192 times, NonInstitutional Investors (HNI) by 195 times and Retail Individual Investors by 6.7 times. A total of 25.46 million shares of the company got issued for a price of ₹1,100 each, and it's currently trading at ₹3,122 on the NSE, which is 183% more than the price at which it got listed on the NSE and BSE.

Corporate Governance Share Holding Pattern (in % terms)

Business Overview HDFC Asset Management Company Limited (HDFC AMC) is the investment manager of HDFC Mutual Fund (HDFC MF), the largest mutual fund in India, with a total AUM of ₹3,43,938 Crore (market share of 14.5%) as of March 31, 2019. It has been the most profitable AMC in India since FY 12-13. Its principal shareholders include Housing Development Finance Corporation Limited (HDFC) and Standard Life Investments Limited (SLI) with 52.8% and 29.9% stakes in the company, respectively. HDFC AMC offers a large suite of savings and investment products across various asset classes, providing income and wealth creation opportunities to customers. This diversified product mix provides them with the flexibility to operate successfully across various market cycles, cater to customers ranging from individuals to institutions, address market fluctuations, reduce the concentration of risk in a particular asset class and work with diverse sets of distribution partners which helps them to expand their reach. As of March 31 2019, they offered 147 schemes comprising 22 equityoriented schemes, 115 debt schemes, 3 liquid schemes and 7 other schemes (including exchange-traded funds and fund of funds).

From the pie chart, we can observe that a major stake in the HDFC AMC is held by Housing Development Finance Corporation Limited (HDFC) and Standard Life Investment Limited, which is 52.77% and 29.95% respectively. Star Fund Manager

Prashant Jain is the Chief Investing Officer at HDFC AMC and has become the first Indian Manager to complete 25 years managing a single fund. He achieved this by managing HDFC Balanced Advantage Fund since 1994, which has been generating an Alpha of 9.54% over the Sensex. “Jain has a sharp ability to spot cycles ahead of time. He adopts a long-term approach to stock picking, sticks to his investment mandate and is not worried about underperformance in the short term,” says Himanshu Srivastava, senior research analyst at Morningstar India.

Blockbuster IPO HDFC AMC raised a total of ₹2,800 Crore from the Initial Public Offering (IPO), which was oversubscribed by 83 times and received approximately 25 lakh applications. The Qualified Institutional Bidders (QIB) portion

Sector Analysis

FINLY| Jan 2020 | Finstreet | SIMSR We can observe from the above line Chart that Prashant Jain has been beating the market as well as his fellow fund managers throughout the year in generating better Alpha. According to Morningstar Direct show, when compared to other global funds managed by a single manager for 25 years or more, Jain's fund has generated an Alpha of 9.54% over the Sensex, second only to the legendary Peter Lynch who managed Fidelity Magellan till 1977, generating an Alpha of 10.92%.

company. Hence, no commission was paid by the company on sales post-October 22, 2018.

Financial Analysis Debtors Turnover Ratio

Two things that pop out in the Statement of Profit and Loss above are the Other Income & Fees and Commission Expenses. Let's understand why is there such a drastic change in these sections when compared to last year's Income Statement. Other Income There is a 61% increase in the Other Income, primarily because of higher income from investments in the form of interest and dividend. The investment book rose in value due to retained surpluses and inflows on account of the issue of share capital. Other income also included the reversal of certain provisions made for expenses related to the previous year which were not spent due to regulatory changes. Fees and Commission Expenses It primarily consists of commissions paid to the distributors. We can see a 27% decrease in these expenses as compared to the last year majorly because of the circular issued by the SEBI, which came into effect from October 22, 2018, post which all such expenses were to be borne by the respective mutual fund schemes and not the

Also known as the account receivable turnover ratio. It's an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. In the case of HDFC AMC, it has increased from 20.04 to 22.15. This is because the Net Credit Sales has increased with respect to the fall in the Average Accounts Receivable Current Ratio The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. We can see a significantly improved Current Ratio 1.88 to 6.11 because of the drastic increase in investments that are maturing within 12 months from the reporting date including the new purchases Operating Profit Margin The operating margin measures how much profit a company makes on a dollar of sales, after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company's operating profit by its net sales. There is an 8.5% increase in the operating profit margin as compared to the previous year. This is because the operating earnings have increased marginally with respect to the increase in revenue.

Sector Analysis

FINLY| Jan 2020 | Finstreet | SIMSR

Future Outlook This sector has seen steady growth in the past few years. Although there were some hiccups in the for m of revolutionary policies like Demonetization and GST, they have eventually accelerated share of financial savings. India has seen a remarkable growth in terms of financial inclusion, the catalyst being the bank accounts opened under the Pradhan Mantri Jan Dhan Yojana, which brought in â&#x201A;š1 lakh crores into the banking system. As inflation is under check, household incomes are rising, resulting in a rise in household savings. Additionally, there has been a shift in the trend of people preferring Financial Assets over Physical Assets. Further, technology has been a facilitator for the Mutual Fund industry. Digital platforms offer high convenience and speed to consumers, enabling the financial services companies to acquire, retain and expand their customer base at much lower costs. Everything is working in favour of HDFC AMC right now. SIPs are pouring in and their schemes are performing well on the stock exchange. The only hurdle they can face right now is when the AUM becomes too big to generate Alpha. In simple terms, it means that it becomes difficult to imitate the same kind of returns when the AUM becomes too large and reaches a saturation level. Other than this, they need to work with platforms like Coin by Zerodha or Paytm Money to penetrate the market and spread awareness about their products, as our industry is still just a fraction of the global average of the developed as well as developing countries..

Fintech Funda

Mihir Mali | PGDM FS | 2019-21 Until recently machines were thought to be

aiding in decision making to a great extent, they

dumb things that take specific instructions to

are still heavily dependent on us for functioning.

execute tasks. But there is a revolution that is

The kind of data that is now being generated

rising and it will not only change the perception

every second is beyond the imagination of human

towards machines but also will change the

capabilities. To make sense of this data is crucial

whole paradigm of how tasks are executed.

to our success. And when it comes to taking

That revolution is Artificial Intelligence ( AI )

advantage of technologies to make profits, who

and Machine Learning ( ML ). Yes, it is a

do you think is more eager than others? Has to be

revolution! With the help of AI and ML

the world of financial businesses. And who has

machines will be more in control of their

the most financial data in terms of volume and

decisions in the future. Humans' intelligence is

value? Without doubt it is Banking, Financial

not only dependent on biological factors but

Services, and Insurance Sector.

also limited by it. Our brain is fixed in size and can't do distributed processing that is parallel

According to a survey of IT decision-makers in

processing. On the other hand, machines are

the BFSI segment conducted by NASSCOM,

capable of doing parallel processing. Humans

75% of the respondents felt that there is a strong

till now are trying to use tools that make them

need for AI in the segment. In the same survey

overcome these limits, like using calculators,

whether it is banking, financial services, or

computers, etc. Although these devices have

insurance, over 50% of respondents everywhere

helped to reduce the processing time and are

agree that AI will dramatically improve

FINLY| Jan 2020 | Finstreet | SIMSR

operational efficiency and fundamentally transform core financial processes. Now one

Fintech Funda

may wonder why there is so much confidence about the capabilities of AI. Well that's what we will try to understand with the help of this ·

article.

What is AI and ML?

In Financial Services:

AI in the field of computer science is the study of 'intelligent agents', that is any device that perceives its environment and takes actions that maximize its chance of successfully achieving its goals. With the help of software that has selflearning capabilities, AI helps machines to develop cognitive capabilities so that they can recognize their environment and solve problems, like humans. ML is a subset of AI. ML is a scientific study of algorithms and statistical models that computer systems use to perform specific tasks without using specific instructions, relying on patterns and interface instead. The sample data that is used in ML to build a mathematical model is called 'Training Data'. ML is closely related to computational statistics, which focuses on making predictions using computers. Internet has proved to be a breakthrough as machines can now look at amounts of data that they'd never been able to access before due to storage limitations. In this way AI and ML are related. Expanding reach of internet and its increasing use in financial transactions has set stage for adoption of AI in BFSI.

Uses of AI and ML

Using AI and ML, a powerful platform for advanced statistical analysis of structured and unstructured data can be built. This can provide the solution for the problem of identifying statistically important relationships among alternative and traditional time series data sets. Identifying such statistically important relationships is foundation of meaningful trading and investment decisions. Synechron Inc., a New York-based information technology and consulting company has recently released AI Data Science Accelerators for financial services firms which apply AI to financial services business problems. These accelerators use correlation and causation analysis to solve complex business challenges by discovering meaningful relationships between events that impact one another and cause a future event to happen. AI can guide investors on stock picking decisions. It can also help cover more companies in exchanges all over the world, do their research and portfolio management.

In Insurance businesses:

In Banking: ·

in the way banking is personalized. It will help banks to gather unprecedented number of data points on how their customers are u s i n g v a r i o u s t o u c h p o i n t s. T h i s information can be used to customize the bank's applications, products and services to better meet the customer expectations. Also compliance is another area where AI can help.

At most what banks are currently trying to achieve is that, they are trying to obtain data and use ML models which when fed with data can provide insights into a particular customer's behaviour. Use of AI and ML will enable banks to create a forecasting model for a particular customer. This will also enable them to create solutions for futuristic problems which the customer might face, through in-depth predictive analysis. One of the areas likely to benefit significantly from AI and ML adoption is

Insurance Companies have different kind of adoption of AI and ML than Financial Institutions and Banks. Insurance companies are more focused on implementing AI and ML to create personalized customer experience, having error-free back-end processes which run without human intervention and faster turnaround-time.

Few areas that are common to all segments in BSFI and will be impacted significantly are:

FINLY| Jan 2020 | Finstreet | SIMSR

1. ·

Security and Fraud Prevention ML models will help in creating a behaviour profile of each user based on the way the user interacts, this can be called creating base profile. New transactions can be compared with the base profile and an additional authentication mechanism to prevent frauds can be introduced in case of differences. Minimizing the need to add continuous manpower to detect and block security attacks.

2. Compliance · One of the most important objective is to

monitor all the processes and data for regulatory compliance and security. · Use AI to examine lengthy documents and flag potential issues in seconds, which would otherwise take many hours. Ÿ AI can aid in money laundering as well as risk management activities. 3. Human Resource · AI can save HR manager's time in various

recruitment processes e.g. engage with new recruits, shortlist resumes from social media sites, pre-screen candidates over chat, determine candidate drop out chances, etc.

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4. Marketing · Tracking consumer behaviour and offer

customized products. · Emotional AI, a branch of AI to enable machines to detect human emotions with advanced facial and voice recognition technologies.

a challenge. That's why their outcome must be continuously monitored and validated. Have to Remove Algorithm Bias: Outcomes from algorithms should not be in favour of a particular outcome, which is why it is essential to have the right data and do continuous monitoring of output. Need Right API Standards for Data Sharing: The data sharing and integration must be proper. It is critical to ensure that the right API standards are used to avoid data from getting compromised.

In Conclusion Although the BFSI sector is extremely positive about using AI there are some concerns such as AI based solutions lack common standards to differentiate between different vendor offerings. With so many AI technologies to choose from and no common framework to evaluate various offerings, it becomes a hindrance to their deployment plans. It also becomes difficult to determine how an AI system could be plugged into their IT infrastructure and the outcomes it would deliver. Different stakeholders like vendors, third party advisories, consultants, etc. should get together to create a framework, evaluation criteria, and CSFs (Critical Success Factors) to help choose between various AI offerings. AI systems have to deliver outcomes that are both practical and mathematically correct. Otherwise, it would be a waste of time, effort and cost. This is only possible if business professionals are also a part of the team to ensure that the outcomes have business value. Data Scientists must ensure that algorithms behave correctly and are not biased in any way.

Though there are numerous applications of AI and ML even more than stated above, there are some prerequisites for implementing AI as follows: Data Digitization: Before AI can be implemented to BFSI data, they must first be digitized and made searchable.

Centralized and Clean Data: Companies have to centralize their data from different servers and clean it before applying AI on it Validate Algorithm Outcomes: Algorithms used to process data must be cleaned in order to deliver the right outcome. Since they're very complex, understanding their inner working can be

FINLY| April 2019 | Finstreet | SIMSR

Internship Diaries

DIARIES

IPOs, OFS, NFO. The product and services offered by the company are as follows: 1. Depository 2. Equity and Derivatives 3. Distribution 4. Commodities 5. Financial Planning 6. NRI services

Process

Akshay Pasad MMS | 2018-20 B D SHAH SECURITIES LTD Company Overview From a sub broker in 1980 to a full-fledged corporate broking house today, B D Shah is a name entrusted by a long list of clientele, many of whom have been with them since inception. They are purely retail focused stock brokers with membership of NSE | BSE | MCX | CDSL Depository Services| Distribution services â&#x20AC;&#x201C; Mutual funds, Corporate deposits,

The process for B D Shah Securities Ltd consisted of an aptitude test that focused on fundamental concepts of finance, verbal ability, logical reasoning and quants. Questions majorly tested basic finance knowledge. The test was MCQ based and was conducted in the auditorium itself. It was used as a filter and the highest scoring candidates were selected for the next round. The shortlisted students were called for a personal interview. The panel consisted of 3 members. They asked questions about the job description and basic accounting and finance.

My Experience The two months here at BD shah were a great learning experience for me. Coming from an engineering background, it was my first time working hands on in the field of finance. I got to interact with people having deep insights into different industries. Also, working on a

Internship Diaries

FINLY| Jan 2020 | Finstreet | SIMSR

particular industry taught me how to go about fundamental research. How micro and macro level economic factors affect the industry was a very important thing learned while working here. Along with my own industry I also understood the workings of various other sectors. It was challenging to perform the discounted cash flow model for forecasting and coming up with an intrinsic value for the selected stocks. I got to analyze the financials and understand why they are important. Overall, a good experience to understand the basics of research!

Piece of Advice Just be yourself and try to understand what the question is asking. This is a research job, so try and show some inclination toward that. Know the basics of fundamental and technical research, current affairs and their effects on stock market.

FINLY| Jan 2020 | Finstreet | SIMSR

Call for Articles

Mystery Behind Rate Cut Krishnan L IFMR GSB Krea University On 5th December, 2019 Monetary Policy Committee had announced that the policy repo rate will remain unchanged. In the past one year alone RBI had reduced the 135 bps to revive the economy from the slowdown. But Despite an expectation of 25 bps rate cut, MPC maintained status quo on repo rate at 5.15%. But why? And what could be the reason behind expectations?

Lower GDP growth? Many economists believed that Monetary Policy Committee would lower the interest rate once again as GDP growth in the Q2 fall to a six-year low of 4.5%. There is a steady and constant slowdown in the GDP growth rate for the past six quarters from 8% to 4.5%. Especially in manufacturing and Auto mobile sector, currently manufacturing sector facing a negative growth rate of 1.6%, 4%, and 2.1% from July to October even after the corporate tax cut. This is a clear indication that the overall GDP growth may be positive but not all the sectors are growing positively. So there was an expectation that further interest rate cut will put the money on the common man which will lead to increase in consumption and demand can be created which can boost to the current growth rate. Though there are so many valid reasons and expectations in the current economy MPC had announced that the policy repo rate will remain unchanged.

Increased inflation?

will barrow more and spend more. So liquidity in the market will increase so there will be an increase in inflation. Because of the continuous reduction in interest rate inflation crossed RBI's mid-term target of 4% and reached 5.54% for the period of November 2019. Increase in onion price gave a boost to food inflation and reached 9.8% for the same period from 7.2% (October, 2019). YOY inflation increasing at a faster rate than in the past. Data shows that after the August interest rate cut of 35 bps the inflation started rising at a much higher phase. 5.54% (Nov 2019) was the highest inflation rate since July 2016. Increase in prices especially food prices puts pressure on MPC. High inflation is generally coupled with a fall in exchange rate, so we need to pay more for imports in rupees when our currencies fall against other currencies.

Increase in unemployment rate? Unemployment Rate in India increased to its all time high of 8.50% in October from 7.20% in September of 2019. The average Unemployment Rate in India is 5.16% from 1983 until 2019. The current unemployment rate is 3% than the average unemployment rate. This unemployment rate numbers are indirectly proportional to the GDP growth rate. The steady slowdown in GDP growth rate is a key reason for increase in unemployment rate. October data of 8.5% is a clear reflection of slowdown of growth rate from 5% to 4.5%.

Should we bother about GDP growth rate?

Whenever there is a high interest rate cut people

Reduction in 1% of GDP growth rate will

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FINLY| Jan 2020 | Finstreet | SIMSR

approximately affect 1.5 million direct jobs and 4.5 million indirect jobs. If you assume that each of these 6 million people have 5 members to feed in their family. Then every 1% reduction in GDP growth rate will affect 30 million people. In the past six quarters alone growth rate reduced by 3.5%which means we are talking about the life and pain of 105 million (1o crs) Indians approximately. It is a very crucial time for both government and MPC to consider further rate cuts.

no significant growth in the GDP and now MPC is forced not to reduce the interest rate further because of the increased inflation. So MPC may be waiting for the response from the government in the annual budget. There is a high chance of rate cut that during next MPC meet depending on the central government's fiscal policy.

Conflict of interest? Though MPC had reduced interest rate for the past six quarters. Banks have not reduced the interest rates in the same ratio. Which means the benefit of reducing interest rates are not transferred to the common man or borrowers. In this case MPC reduced the interest rates to increase the money lending but banks are not ready to do so. Banks are not ready to lend more money because of the current economic slowdown. There is a high chance that barrowers may not be able to pay back the loan amount because there are no significant signals in the economy for future growth. So before reducing the interest rate further RBI and MPC should make sure that banks pass the rate cut benefits to barrowers. Another important factor to consider is reducing in interest rate also affects the senior citizen who completely depends on the interests from their savings. Expectation on FISCAL policy? As mentioned earlier, already MPC reduced 135 bps interest rate cut in the past one year but still there is no improvement in the economy or GDP growth. Even after the corporate tax cut there is