Finly November 2019 by FINLY

FINLY| November 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 November edition of our monthly magazine FINLY for the academic year 2019-20. In this edition, Our Cover Story analyses the ambiguity over Brexit and its impact on the UK, World as well as India. Next in line, is the Eco Section, which analyses in detail the Regional Comprehensive Economic Partnership (RCEP) which could be World's largest trade bloc if the negotiations are successful. In Sector Analysis, the authors inspect the Aviation sector with an analysis of the Porter's 5 forces and the Government policies for the sector and an analysis of India's largest Aviation company, Indigo (Interglobe Aviation). This month's Intriguing Indeed covers the Hong Kong crisis, the causes of its escalation, impact on India and Global Reaction. We would like to thank Shubham Shankar for sharing his experience and giving insights of his internship with Citi Bank. Further, for this month's call for articles the winning article on Index Funds is a must read. 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 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- November 2019 Faculty Incharge

Dr.(Prof) Pankaj Trivedi

Editor-in-Chief

Editor- FINLY

Mohak Shah

Saurav Jain

-Conceptualization & DesignHarsh Dhoka

Rashmi Sharma

Samarth Kumar

-Content Team-

Pranit Sawant

Akshitaa Bahl

Swikar Gupta

Joel Johnson

Manya Mohan

Shristi Sarda

Mihir Mali

FINLY| JULY 2018 | Finstreet | SIMSR

INDEX

Editorial Team Finly

04 Cover Story 08 Intriguing Indeed 11

Eco Section

Sector Analysis

Call for Articles - Winner

Intern Diaries

Brexit on Tenterhooks Joel Johnson | PGDM Core | 2019-21 Pranit Sawant | PGDM FS | 2019-21

Cover Story

What is Brexit? Brexit which means 'British-exit' is a term used to define the United Kingdom's exit from the European Union. A referendum was held on 23rd June 2016 in UK to decide whether UK should leave EU or remain a part of it. 52% of the votes cast were in favour of an exit. Brexit was due to happen on 29th March 2019, two years after the UK formally notified the EU of its intention to exit in 2017. However, the exit has been delayed twice and the latest date decided for exit is 31st October 2019.

Why the UK want to leave the EU? Economic reasons The primary contention was that economically Britain loses more than what it gains. 1.The first issue is that of membership fees paid â&#x20AC;&#x201C; about 340 pounds per year per household which is around $19 bn per year which Britain felt was too high. According to pro-Brexit supporters, this money could be put to better use if Britain is out of the EU.

2.Secondly, it was said that EU's policies were too protectionist and did not favour competitiveness to the extent that would be beneficial for the British economy. 3.Post the sovereign debt crisis, the EU introduced fiscal compact and tighter control on national budgets. Britain was not comfortable with these ideas.

Immigration issues 1.Half of the British legal migrants come from the EU. There is this feeling that they have a negative impact on UK born workers. 2.EU's obligation on its members to accommodate more refugees also did not find favour with UK, especially at a time when the refugee influx in Europe is at an all-time high in light of multiple crises in the Middle East and Africa.

About the Brexit deal The UK had arrived at a Brexit deal with the EU in November 2018 but the deal was rejected by the UK parliament thrice within three months since January this year. The rejection of the Brexit deal forced the EU to delay Brexit until 22nd May 2019

Cover Story

FINLY| November 2019 | Finstreet | SIMSR and then, until October 31st. The Conservative Party and the Democratic Unionist Party (DUP) have been against the deal due to the contentious issue of backstop in the Brexit agreement. It was an issue which Theresa May failed to resolve and it eventually led to her ouster as PM. Source: Times Of India Northern Ireland shares its border with the Republic of Ireland. After Brexit, Northern Ireland will be a part of the UK, while the Republic of Ireland will be a part of the EU. This means that the goods will have to be checked at the border which is opposed by both sides. The British and the Irish governments have committed to avoid the creation of any physical infrastructure on the Irish border and the aim is to do so by negotiating an FTA i.e. free trade agreement with the EU after Brexit. In case both sides cannot reach an agreement, then the backstop will ensure that Northern Ireland remains within the EU's regulatory and customs arrangements and prevent the emergence of a hard border. Thus, the backstop is a safety net that will ensure that there would be no hard border between Northern Ireland and the Republic of Ireland after Brexit, even if no formal deal could be reached on trade and security arrangements.

Source: Times Of India The DUP objected to this backstop as they were worried that it will lead to Northern Ireland being treated differently from the rest of the UK. The other option was for the UK to remain in the regulatory and customs orbit of the EU. But the Conservative MPs opposed this idea because

they feared that it would lead to UK being trapped in the EU regime forever and that would prevent UK from doing its own free trade deals with nations outside the EU bloc.

The new Brexit deal Boris Johnson who replaced Theresa May as PM on 24`th July 2019 promised Brexit with or without a deal on 31st October. PM Johnson announced that a revised deal had been agreed between the UK and the EU on 17th October. The new Brexit deal replaces the backstop with a revised protocol. Under the new protocol, the whole of the UK including Northern Ireland will leave the EU customs union and Northern Ireland will be a part of the customs territory of the UK. Therefore, Northern Ireland will be able to benefit from future FTAs that the UK will sign with third countries. However, a limited set of single market rules of the EU will be applicable to Northern Ireland to avoid the hard border. EU's custom duties will apply to goods entering Northern Ireland if those goods are at risk of entering the EU's single market. Customs duties will not be payable if the goods entering Northern Ireland from the rest of the UK are not at risk of entering the single market of the EU. The UK parliament sat on a Saturday (19th October) for the first time in thirty-seven years to decide the fate of Brexit. Instead of accepting or rejecting the deal, the parliament voted to put the deal on hold through a controversial amendment. Now, the PM is required to ask the EU to extend the Brexit deadline for the fourth time. Accordingly, Boris Johnson sent an unsigned letter to the EU requesting a delay in Brexit. His letter was accompanied by another signed letter which stated that he believes a delay in Brexit would be a mistake. The PM had said that he will push through a no-deal Brexit if a deal could not be arrived at. The government sought a vote on the deal once again on 21st October which was refused by the Speaker of the House of Commons. This could now lead to a delayed Brexit or a no-deal Brexit. The PM has been categorical that in a case where Brexit does not take place by 31st October 2019, he would push for a

Cover Story

FINLY| November 2019 | Finstreet | SIMSR general election, further clouding the future of Brexit.

Impact of a no-deal Brexit A no-deal Brexit means that UK has been unable to reach an agreement with the EU on the terms of Britain's withdrawal from the bloc. In the case of a no-deal Brexit, there will be no transition period and that means Britain will have to leave the single market, customs union and other EU institutions. An extra ÂŁ2.1bn of funding has been announced to help deal with the consequences of no deal. A nodeal scenario would be the worst for sterling, with the pound expected to decline to around 1.12 versus the dollar, according to UBS. Trade would initially have to be on terms set by the World Trade Organization. A no-deal will eliminate Britain's tariff-free trade status with other EU members. Tariffs will lead to an increase in the cost of exports which will impact exporters as their goods will become costly in Europe and less competitive. Tariffs will also increase the cost of imports. EU nationals living in Britain can apply for settled status to stay even in the event of a no-deal Brexit. There could be long delays at borders if passport, immigration, and customs checks are heightened. As border checks are introduced, delays at ports will build as backlogs grow. The issue of the border between Northern Ireland and The Republic of Ireland would remain unresolved. Thus, the UK will have to face serious consequences if it opts for a no-deal Brexit. The UK's economy will be derailed due to inflation, high debt, and slow growth.

major sources of the UK's imports. Except for Germany and Sweden, the UK has a positive balance of trade with all other countries of the EU. PostBrexit, access to EU markets might be a problem for UK. 3. Immigrants to the EU are better educated and skilled and offset the demographic disadvantage. That advantage will be lost for UK. 4. Britain ranks twelfth in terms of India's bilateral trade with individual countries. It is also ranked seven in the top twenty-five countries with which India enjoys a trade surplus. India invests more in the UK than the rest of Europe combined, emerging as the third-largest FDI investor. Access to European markets, therefore, is a key driver for Indian companies setting shop in the UK. Britain coming out of EU is likely to affect the business prospects of these companies.

Impact of delayed Brexit on the UK After the referendum, Brexit has cost the UK economy almost ÂŁ66bn according to a report by S&P. Businesses have slashed their investments due to Brexit uncertainty which is expected to have wiped off around 3% of GDP. A sharp drop in the value of the pound has reduced people's purchasing power. Imports have become expensive due to weaker sterling and the rising prices have been passed on to the customers. Some of the consequences of a delayed Brexit are:

1.Weak sterling: On 23rd June 2016, the day the UK held a referendum on its EU membership, sterling was at $1.48. It tumbled on the following day to $1.36 and touched $1.20 in January 2017.

Impact of Brexit on the EU, UK & India 1.

The impending fear of greater German dominance would be a reality. Britain's presence somewhat balanced the power of Germany. With Brexit, Germany would become the vortex around whom everything would revolve. 2. EU is a large market. 45% of British exports are directed towards the EU. It is also one of the

Cover Story

FINLY| November 2019 | Finstreet | SIMSR It has almost fallen by two-thirds since 2016. Companies are worried that the UK may no longer be their gateway to Europe. Investors will prefer to stay away until a clear picture emerges about Brexit.

After the completion of phase 1 of the Brexit negotiation process with the EU in December 2017, the pound made a recovery in the first quarter of 2018 due to optimism about a full-deal Brexit. However, it once again tumbled due to fear of a no-deal Brexit and the failure of Brexit deal proposals in parliament. The currency recovered once again in October 2019, hitting a five-month high on 21st October amid high optimism over MP's passing a Brexit deal. If the Brexit deal hits a roadblock again, then sterling is expected to start its free fall again

4. Adverse impact on trade: The annual percentage growth in export and import was the lowest in 2018 since the 2008 financial crisis. The uncertainty of Brexit is impacting the trade and it is expected to remain low as the confusion over Brexit still looms.

2. Fall in GDP growth rate: The uncertainty over Brexit has impacted the economic growth of the UK. There is a steep fall in the GDP growth rate since 2017. The growth rate is expected to fall further this year. After the referendum in 2016, the gap between the growth rate of sUK and the world has widened. .

Conclusion Brexit has major implications not just for Britain but also for Europe, India, and the rest of the world. Even though Boris Johnson is confident, the chances of the Brexit deal getting through this month looks very slim. It is highly likely that the Brexit deal will be delayed until January 2020. The longer the delay in Brexit, the higher the uncertainty, and the greater the adverse impact on Britain's economy. Hence, an early Brexit is the need of the hour.

3. Plummeting FDI: The FDI inflows have shown a steep downfall since 2016.

The Hong Kong Crisis

Intriguing Indeed

Akshitaa Bahl | PGDM FS | 2019-21 Swikar Gupta | PGDM FS | 2019-21

Introduction Hong Kong has been ranked the “freest economy” in the world by the Heritage Foundation based in Washington. However, this freedom is drying out since the introduction of the 'Extradition Bill' by the Hong Kong government. Critics believe that the bill would allow for criminal suspects to be extradited to mainland China under certain circumstances, it could undermine the city's judicial independence and endanger dissidents. They also argued the bill would give China even more control over Hong Kong and could be used to target activists' and journalist's freedom of the press.

The backstory of Hong Kong Hong Kong is substantially different from other Chinese cities. Hong Kong was a British colony for more than 150 years. Later, China also leased the rest of Hong Kong - the New Territories - to the British for 99 years. It became a busy trading port, and its economy took off in the 1950s as it became a manufacturing hub. Then, in the early 1980s, as the deadline for the 99year-lease approached, Britain and China began talks on the future of Hong Kong-The two sides reached a deal in 1984 that would see Hong Kong return to China in 1997, under the principle of "one country, two systems”. This meant that while becoming part of one country with China, Hong Kong would enjoy "a high degree of autonomy, except in foreign and defence affairs" for 50 years. As a result, Hong Kong has its legal system and borders, and rights including freedom of assembly

and free speech are protected.

Escalation of the Umbrella Movement The protest movement that began in June over frustrations with the proposed bill has since ballooned into a wide-ranging rebuke of Beijing's influence on the island. On Aug. 5, a strike shut down much of the city, Hundreds and thousands of people took to the streets of the semi-autonomous Chinese city, in a pro-democracy demonstration against Chinese totalitarianism. Some protesters have adopted the motto: "Five demands, not one less!" These are: ● For the protests not to be characterised as a "riot” ● Amnesty for arrested protesters ● An independent inquiry into alleged police brutality ● Implementation of complete universal suffrage The fifth demand, the withdrawal of the bill, has already been met. on Sept. 4, Hong Kong Chief Executive Carrie Lam formally withdrew the bill and said the bill would be suspended indefinitely.

How has China responded? Through all of this, China has stood firm behind Lam, letting her and Hong Kong authorities take the public lead in dealing with the protests while offering reassuring displays of support.

Intriguing Indeed

FINLY| November 2019 | Finstreet | SIMSR

While it's routine for members of China's military to maintain a presence in Hong Kong, the number of troops is growing. The prospect of a Chinese military incursion has begun to appear more likely. The nationalist Global Times tabloid tweeted that the People's Armed Police, a Chinese paramilitary unit, is assembling armoured personnel carriers near Shenzhen, a city bordering Hong Kong. The representatives and senators of the Congressional-Executive Commission said the problem could be addressed with legislation: The Hong Kong Human Rights and Democracy Act, which would impose sanctions on anyone found to be 'suppressing basic freedoms' in Hong Kong. The act would also allow the U.S. State Department to take the coverage and reporting of Chinese media outlets into account when reviewing visa applications for journalists from those outlets.

Effects on the Economy As the protest continued to escalate, retail sales have declined and consumers' appetite for spending has decreased. The protests have also affected property owners. Fearing the instability in Hong Kong, some property owners have abandoned the purchases of land. Fitch Ratings has downgraded Hong Kong's sovereignty rating from AA+ to AA since it doubted the Hong Kong government's ability to maintain the "one country, two systems" principle. It also changed the outlook of the city from "stable" to "negative". Hong Kong's nominal GDP in 2018 was $362 billion and PPP stood at $480 billion. For the last six years, Hong Kong had an average real GDP growth rate of 2.84 per cent YoY. Pertaining to the crisis, the economy has taken a blow and its real GDP growth in the first half of 2019 has just been 0.5 per cent.

Source: Hong Kong Trade Development Council

The Government's forecast of Hong Kong's economic growth for 2019 is revised downwards

from 2-3% in the May round of review to 0-1%. Overall consumer prices rose by 3.5% in August 2019 over the same month a year earlier. Carrie Lam, Hong Kong's chief executive, acknowledged that Hong Kong entered a recession in the third quarter and warned of an â&#x20AC;&#x153;unprecedentedâ&#x20AC;? economic challenge.

Chinese Impact The Chinese government has expressed its opposition to the ongoing protests. Beijing has accused the movement of allegedly displaying "characteristics of colour revolution" and "signs of terrorism". In many cases, people supporting the demonstrators were confronted by proBeijing rallies. Chinese president Xi Jinping has warned against separatism, saying any attempt to divide China would end in "bodies smashed and bones ground to powder". The state-run media has been criticizing the protests in all means possible. It is also pressurizing various companies to take a hardline approach against the employees who have taken part in the protests.

Economic relations with India and the Impact India and Hong Kong are one of the largest mutual trade partners. The bilateral trade amounted to $26 billion in 2017 with India exporting $15 billion worth of goods. The trade figure further improved in 2018-19 to $31 billion. Between April 2000 and September 2016, Hong Kong made a cumulative total FDI of $1.97 billion in India. Hong Kong was ranked as the 16th largest source of FDI inflows to India during that period. Pertaining to the ongoing protests, Hong Kong Trade Development Council had stated that the protests have not had any impact on the trade and any sort of downtrend hasn't been observed. In the March of 2018, India and Hong Kong went into an agreement for the avoidance of double taxation (DTAA), with an objective to stimulate the flow of investment and technology bi-laterally, and prevent tax evasion and improve tax transparency.

Global reaction and its impact Protests supporting the Hong Kong movement

Intriguing Indeed

FINLY| November 2019 | Finstreet | SIMSR have spread across the globe, with rallies taking place in the UK, France, Canada and Australia. World leaders have all expressed their concerns over the ong oing protests. T hey have condemned this violence and are encouraging constructive dialouge to find a peaceful way f o r wa r d . T h e U S A h a s d e s c r i b e d t h e developments in Hong Kong as a “very tough situation”. Tourism being one of the major pillars of Hong Kong’s economy, has been badly hit by the protests. In August, protesters mobbed the airport for several days and hundreds of flights had to be cancelled. As a result of the protests, many nations have issued travel warnings for Hong Kong. Last year, Hong Kong was one of the world’s most visited cities, with 30 million tourists, which now, due to the protests has fallen almost 40 per cent. The falling retail demand and hit on tourism have made the situation more critical and the economy is moving towards a downfall.

RCEP - Challenges and Opportunities for India

Eco Section

Mihir Mali | PGDM FS | 2019-21 Shristi Sarda | PGDM FS | 2019-21 Finance Ministry initiated a review on India's Free Trade Agreements in August 2019. The purpose of this review was to assess the impact of FTAs on India's revenue and manufacturing. This review was needed because India has entered into the final stages of negotiations for the Regional Comprehensive Economic Partnership (RCEP). In November 2012, negotiations for RCEP were formally launched. If negotiations are successful as planned, then the world's largest trade bloc will be formed. It would comprise the ten member states of the Association of Southeast Asian Nations (ASEAN)(Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) and its six FTA partners (China, Japan, India, South Korea, New Zealand, and Australia). RCEP's purpose is to create an 'integrated market' spanning across 16 countries. This will make it easier for the products and services of each of these countries to be available across the region. In 2017, prospective RCEP member states accounted for a population of 3.4 billion people (around45% of the world population) with an approximate GDP of 39% of the world's GDP. According to estimates by PwC, RCEPs share in the global economy could account for half of the estimated $0.5 quadrillion by 2050. In January 2017, the US withdrew from the Trans-Pacific Partnership (TPP). This move has improved the chances of success for RCEP. Also,

RCEP promises differential and special treatment for developing economies to make it easier for them to join the bloc as RCEP implies gradual tariff liberalization and longer transition time especially for impoverishing countries like Cambodia and Myanmar. Hence it is being perceived as more development-friendly than TPP. In spite of having such positive prospects for the region, the RCEP is yet to get finalized. All participating nations aim to finalize the deal by November. The deal should provide a framework aimed at lowering trade barriers and improving market access for goods and services for businesses in the region. The negotiations are focused on areas like trade in goods and services, economic and technical cooperation, investments, intellectual property, competition, dispute settlement, small and medium enterprises, and e-commerce. While the RCEP negotiations are on the verge of conclusion, India engaged three independent consultants- ICRIER, the Centre for Regional Trade housed in the Indian Institute of Foreign Trade (IIFT), Delhi, and the IIM Bangalore, to evaluate its position and benefits and challenges of being a part of RCEP.

Opportunities for India Exports Through RCEP, India's exports will get access to a third of the world's population. India will get

Eco Section

FINLY| November 2019 | Finstreet | SIMSR greater market access in other countries not only in terms of goods but also in services and investments. Not being part of RCEP may result in losses in exports, and that may lead to foreign e xch a n g e s h o r t a g e s t r i g g e r i n g f u r t h e r depreciation of Rupee.

Investments Being a member of RCEP can boost India's inward and outward foreign direct investments. India needs export-oriented FDI to boost foreign trade. MSMEs would benefit as RCEP will facilitate to effectively integrate India's MSMEs with regional value and supply chains.

Act East Policy Relations with the East Asian neighbours is a foreign policy priority for the Indian Government. Through this policy, India is trying to bank on the opportunity created by the United States 'Pivot to Asia' stance. These efforts can benefit from RCEP as India can address challenges emanating from implementation concerns as well as overlapping agreements with ASEAN countries.

Services Sector Among all Asian countries, India enjoys a competitive advantage in the services sector such as information and communication technology, education services and healthcare etc. RCEP will create opportunities for Indian companies to access new markets.

Challenges for India RCEP associating countries will agree upon reducing or eliminating tariff and non-tariff barriers on imports and exports. Because of this reason, there is fear among the country's farmers and manufacturers. Given India's adverse experience in all the free trade agreements so far their fear is justified. According to the Asian Development Bank Institute, India has 13 FTAs in effect, 1 signed but not yet implemented, 16 under negotiation and 12 are proposed/under consultation or study. Most of these FTAs are with Asian countries.

Source: The Economic Times In the above chart, it can be noted that India has a trade surplus in the case of FTA with South Asian nations. On the other hand, it has a trade deficit with South Korea, Japan and ASEAN countries with whom India is supposed to finalize RCEP. Hence the biggest challenge that India faces with proposed RCEP is to curb its trade deficit with member nations which include New Zealand and Australia as well. And India has a trade deficit with Australia and NZ as well.

Sector-wise challenges for India in the proposed RCEP agreement are explained below: Manufacturing Tariff on imports of a few industrial products had been increased by the government from 10.8 per cent in 2017 to 13.6 per cent in 2018. But becoming a part of RCEP will nullify these increased tariffs going against the government's policies of promoting and protecting the manufacturing industries. Other countries are being able to produce products at a much lesser cost and the only way domestic sellers could compete with them was through the implementation of tariffs on them at the border and increase their domestic prices. After being a member of the RCEP this will not be the case and domestic producers will face heavy competition from their foreign counterparts.

Agriculture RCEP may pose challenges for agriculture as well. Cheap imports of cardamom and black pepper from ASEAN countries and Sri Lanka have been

ECO Section

FINLY| November 2019 | Finstreet | SIMSR hurting farmers in Kerala. Rubber at cheaper rates from Vietnam and Indonesia are getting dumped into India. According to farmer groups, this situation may only worsen because of the new trade pact. Also if dairy products from New Zealand and Australia flood the market, the domestic dairy sector will be adversely affected.

I n f o r m a t i o n Te c h n o l o g y a n d Communication (ICT) Hardware There is a growing concern about the ability of Indian companies, especially in the ICT hardware segment, to withstand further competition from state-supported firms in China and other Asian countries. It is not secure to depend upon imported telecom and control devices for India's critical digital infrastructure. It is a challenge to ensure that RCEP's terms will not undermine capital-intensive efforts taken by the Indian Government to help realize its target of achieving net-zero electronics import by 2022. RCEP grouping has put the onus on India to convince the other 15 members bilaterally on its demands failing which pending issues will be put th before the heads of the states on 4 November 2019 in Bangkok to announce the conclusion of negotiations. India's demands are as follows: 路

路路

路

India wants to change the base year of tariffs from 2013 to 2019. As India started charging higher tariffs in 2019, by changing the base year to 2019, it can continue with higher charges. Auto-trigger to control a sudden surge in imports India wants exemptions from Ratchet obligations meaning it wants to be able to bring in restrictive measures in future if required India wants all countries to have the right to protect data ( 14 out of 16 countries have opposed it)

It is difficult to quantify the probable gains or cost that India will enjoy or incur as a result of RCEP as the terms of the agreement have not been finalized yet. Still from the past history of India's FTAs and overall sentiment of other member countries, it can be concluded that challenges for India because of RCEP weigh more than opportunities offered.

Civil Aviation Sector and Company Analysis Harsh Dhoka | PGDM Core | 2019-21 Manya Mohan | PGDM CORE| 2019-21

Sector Analysis

Overview India is the fastest-growing airline market as per the International Air Transport Association (IATA) for the past three years. India has risen to be the third-largest air travel market in terms of domestic passenger traffic behind only the United States and China, according to Centre for Asia Pacific Aviation India Private Limited (CAPA).

Key Players and Market Share The key players in the aviation market currently are Indigo, Spice Jet, Air India, Go Air and the Tata Group(Air Asia and Vistara). Indigo is the largest and most profitable among all the airlines and is followed by Spice Jet. Tata group has its presence in the industry through Air Asia India( Joint venture with Air Asia) and Vistara( Joint Venture with Singapore Airlines).

Domestic passenger air traffic has grown at a compounded annual growth rate(CAGR) of 10.76%, while international air traffic has grown at a CAGR of 8.32% during the periods of 200708 to 2017-18. The industry contributes approximately $35 billion to the Indian economy and supports approximately 8 million jobs.

Source: DGCA Indigo commands almost half of the entire market share (47%), followed by Spice Jet (14.5%), Air India (12.9%) and Go Air (10.6%). Both the Tata Group airlines together have a market share of 11% and other regional airlines have a market share of 8.9%.

Porter's Analysis Source: DGCA Competitive Rivalry After the collapse of Jet Airways the industry has moved towards consolidation and increased pricing

Sector Analysis

FINLY| November 2019 | Finstreet | SIMSR power is being seen with the airlines but according to past trends after a period of stability, the airlines start a price war to increase market share and this hurts the margins of the sector. The competition in this sector can be said to be intense. Threat of new entrants Potential new entrants to the marketplace represent a minimal threat to existing airlines. The barriers to entry in the airline industry are remarkably high. The operating costs are massive, and the government regulations a company must navigate are numerous and exceedingly complex. The number of slots available at airports is limited and hard for new entrants to get since most airport operators have long term arrangements with the existing players. Bargaining power of Suppliers The airline suppliers are mostly aircraft manufacturers, fuel vendors and airports and the likelihood of suppliers integrating vertically is also very low. Since the number of operating airlines is low the suppliers of this industry generally do not have high bargaining power. Hence it can be said that the bargaining power of suppliers in the aviation industry is low. Bargaining power of customers Buyers have enormous bargaining power over airlines because the cost and effort required to switch from one carrier to another is minimal. Most travellers do not contact an airline directly to book a flight. Customers access sites or apps that compare rates across all carriers, enter their trip itineraries and then choose the least expensive deal that accommodates their schedules. Threat of Substitutes The threat of substitutes is extremely low for international routes since air travel is the most common and feasible medium while travelling internationally.

favourable demographics, rising per capita income, huge untapped market, policy support by the government and increasing investment in aviation infrastructure. India's air passenger traffic is at a phase observed by China in 2004 when it's GDP per capita crossed the $1,500 mark for the first time. With a GDP per capita of $1509, China's annual trips per capita stood at 0.09. Over the next 6 years in spite of global turmoil in 2008, China's annual trips per capita doubled to 0.20 and have been growing at a steady-state ever since. Taking this cue, India having entered this phase only in 2014, is set to witness strong growth in passenger traffic over the coming few years. The number of airports and other aviation-related infrastructure is also set to increase since large investment outlays have been planned for them. Government agencies projects requirement of around 250 brownfield and green-field airports by 2020 and $120 billion worth of investment in airport infrastructure is underway.

Recent Policies/Initiatives in the sector The government recently came up with the National Civil Aviation Policy(NCAP) 2016, to boost the aviation sector, the major features of this policy wereUDAN As part of the National Civil Aviation Policy (NCAP) 2016, the government launched the Regional Connectivity Scheme (RCS) known as UDAN, the primary objective of which is to connect regional airports and make flying more affordable for the common man by capping fares on 50% of the seats. In order to incentivize the airlines, the government is offering subsidies in the form of viability gap funding (VGF), reduction in taxes, waivers/concessions on certain airport-related charges and three years' exclusivity on routes is awarded.

Growth Drivers

Scrapping of 5/20 rule The government scrapped the 5/20 rule which entailed that an airline must be operational for 5 years and have a fleet of 20 aircraft to start international operations. The condition of 5 years of operations was being removed but an airline should still have 20 aircraft to start international operations. Since this was unfair to new airlines and hindered the flow of fresh capital in the sector, it was scrapped.

The major growth drivers of the sector in India are

Current Scenario and the Road Ahead

For Domestic routes, there can be substitutes like trains, road, etc. but that depends on factors such as cost and time taken to travel.

Sector Analysis

FINLY| November 2019 | Finstreet | SIMSR

Currently, the Indian airline industry is at a crucial juncture. On one side the air traffic is ever increasing but at the same time Jet Airways has collapsed and public sector airline Air India is only afloat because of government support. This can be attributed to the point that in the domestic sector, Full-service carriers like Jet Airways and Air India have struggled to compete with Low-cost carriers (LCCs) like Indigo, Spice Jet, etc. The major reason for this has been that most of the flyers in India are very price-conscious and are not willing to pay for better service while flying. Many airlines fail when high crude oil prices are prevalent, the reason being that airlines cannot pass an increase in their costs to customers since an increase in ticket prices by an airline will not be matched by other airlines and a decrease in price by an airline leads to a price war in the industry. After the collapse of Jet airways, the sector seems to be consolidating and pricing power seems to have returned to airlines and if this trend continues it can be a big positive for the sector in India. Indigo remains the dominant player in the sector, followed by a distant second Spice Jet and with the government privatizing Air India and scrapping the 5/20 rule, Vistara seems to be the only possible candidate which has the financial backing to challenge Indigo's dominance over Indian skies. India is expected to cater to 520 mn passengers by 2037 and India has been projected to be the second-fastest-growing country in the world for passenger traffic by the Airports Council International (ACI) in its traffic forecasts between 2017-40. To meet the forecasts the aviation sector has many positive factors on its side such as a huge untapped market, rising number of airports and increasing per capita income of Indians. If the economy keeps on rising the aviation sector is set to fly.

Company Analysis: IndiGo

Overview: IndiGo is India's biggest passenger airline with a market share of 46.9 per cent as of March 2019. Standalone total income of IndiGo in FY19 is Rs.28496.8 crore. The firm mainly functions in India's domestic air travel market as a low-cost carrier with concentration on three pillars – being on-time, offering low charges, and delivering a polite and hassle-free experience. IndiGo has become synonymous with the virtue “being on-time”.

Source: Indigo Since its commencement in August 2006, it has matured from a carrier with 1 plane to a 221 aircraft fleet. A constant and uniform fleet for each category of operation, great operational dependability and an award-winning service brand has made IndiGo one of the most trustworthy airlines in the world. It presently operates flights to 70 destinations – 16 international and 53 domestic.

Business Model: IndiGo, operated by Interglobe Aviation, has reverted to the sale and lease model, at least for now, as a replacement for buying aircraft, as it inspects to preserve cash in trying circumstances. With 143 of 169 aircraft on lease, IndiGo has been the most vigorous user of this style.

Sector Analysis

FINLY| November 2019 | Finstreet | SIMSR Till 2017, the airline had advocated the sale and leaseback model. But that year, it converted to purchasing aircraft and owning them to bring down ownership cost and stabilize rising lease rentals.

Operational Highlights:

Earnings Per Share: From the chart above it is evident that IndiGo has been experiencing a zig-zag ragged growth over the past 5 years with alternative highs and lows. The drop of EPS from 60.03 in 2018 to 35.06 in 2019 is rather shocking but mostly predictable given the fact that the airline industry itself globally is in a slowdown. EBDITA Margin:

Financial Highlights:

EBITDA margin is a measure of a company's operating profit as a percentage of its revenue. Here we can account the decline in the margin in 2019 at 3.92% and 16.95% to the faulting Boeing airplanes and their benching. From an industry perspective, IndiGo still has the best margins and is still profitable against Spicejet which is running into losses. Return on Capital Employed:

Income: Âˇ

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Passenger ticket revenue improved from Rs. 199,432.69 million in FY18 to Rs.251,576.91 million in FY19 giving a 26.1% growth. Revenue from ancillary products and services primarily include cargo, special service requests, ticket modification and cancellation, in-flight sales and tours. Revenue from ancillary products and services increased by 17.6% from Rs. 25,778.36 million in FY18 to Rs. 30,309.56 million in Fy19.

This financial ratio is used to measure a company's profitability and the efficiency with which its capital is used. ROCE in case of IndiGo has been falling continuously since 2017. There has been a very sharp downfall between 2018 and 2019 such that now ROCE stands at 2.11 down from 14.94. This tells us that IndiGo is losing its ability to efficiently use its capital over the years. The main reason for this can be the rise in flight operating expenses, limited suppliers and increasing competition in the aviation sector. Asset Turnover Ratio: Firms with small profit margins have a tendency to have a high asset turnover, while those with good profit margins have a low asset turnover. A similar pattern is observed here that with drastically declining profit margins, asset turnover has increased from 108.95 to 113.93 indicating how IndiGo's fleet hasn't been optimally utilized and benching of the Boeing aircrafts have made a huge dent on the operations and profitability of the company.

Peer Comparison:

Source: Indigo

In the industry, IndiGo is the market leader by a wide margin with 48.2% market share, followed by Spicejet, Air India and GoAir. Similarly, the maximum passenger traffic load is with IndiGo, which is 55.59 Lakh passengers followed by Spicejet, Air India and GoAir.

FINLY| November 2019 | Finstreet | SIMSR

Sector Analysis

Road Ahead: September's Domestic Passenger (Pax) Traffic rose by 4.1% YoY from 83.1 Lakh passengers in 2018 to 86.5 Lakh in 2019 but is amongst the lowest in the last 15 months as high flight cancellations (Jet Airways operations suspension & grounding of Boeing 737 Max) in holiday season led to capacity constraints. Audit firms have projected the FY20 & FY21 EPS to be 18% & 20% respectively given that 1) Strong yield environment following Jet suspending operations 2) Industry-leading capacity growth of 27% over FY1921 3) Focus on expanding the international footprint and optimizing network shall enable unit revenues (RASK) to grow by 5% over FY19-21. We remain positive on IndiGo as we believe it stands to gain the most from the capacity vacuum created in the industry due to Jet suspending operation & grounding of Boeing 737 Max over safety concerns. With approximately 50% domestic market share & a strong management team in place, IndiGo is well placed to leverage its large domestic network to fuel its international growth. Given the uncertainty relating to Jet's survival & moderation of domestic pax & capacity growth, we expect high fares to improve the profitability of IndiGo. Given its strong balance sheet, high operating efficiency & industry-leading cost structure, we expect IndiGo to continue outperforming industry growth with ASK & Revenue growing at a CAGR of 27% & 34% over FY19-21. Another aspect to highlight in IndiGo's case is the feud between the two founders airline co-founders, Mr Rakesh Gangwal and Mr Rahul Bhatia, which came to light on June 8 after the former wrote a letter to market regulator SEBI raising issues related to RPTs and corporate governance. Gangwal and his family hold a 37% stake in the company while Bhatia and family control 38%. Gangwal alleged that basic governance norms and laws were not being followed by the company apart from questionable RPTs. He said that the lapses, if not corrected, will lead to unfortunate outcomes. Highlighting that Bhatia has unusual controlling rights over IndiGo with the right to appoint three out of six directors besides MD, CEO and President, he implied that such rights were not being exercised fairly. Industry experts believe that the corporate governance issues and deep misunderstandings between the 2 can be disastrous for the company's future.

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Viranch Damani, NMIMS Hyderabad

Origins of Index funds – Index funds owe their existence to a man named John Clifton “Jack” Bogle. John graduated from Princeton University in 1951 and was hired by Wellington Fund. Bogle eventually became the chairman of Wellington before he was fired in 1970 for a merger that he had approved. In 1974, Bogle founded the now iconic Vanguard Company. Vanguard started off with an index fund that closely mirrored the S&P 500 index. Vanguard as of today has around $5.3 trillion under management making it the second largest asset management company by AUM just behind Black Rock.

Efficient Market Hypothesis – One of the most powerful hypotheses in recent times when it comes to investing and something that has changed the way we think about investing is the efficient market hypothesis. The efficient market hypothesis states that in today's age of ultra-fast communications networks and algorithms that constantly try to squeeze profits from even the most minor inefficiencies that may be present in the stock market, it is practically impossible for any one person or even a group of people to be able to beat the market or generate any “alpha”. The efficient market hypothesis is being proven correct as time passes. Look at the Exhibit 1 which shows the percentage of actively managed funds that trail the S&P 500 index. It shows a steady increase of funds that are trailing the S&P 500 index.

How do index funds work? The efficient market hypothesis forms the bed rock of the rational behind index funds. Since it is presumed that no one person or a group of people can beat the market, it is wise for the average investor to just mimic the market as it moves along rather than try and beat it. It would be a time consuming and difficult task for the average investor to reconstruct the market's constituents and reshuffle them every few months to ensure that the investor's portfolio's constituents and the index's constituents match each other on a weighted basis. An index fund helps the investor by mimicking an index, so that they don't have to do it on an individual basis. The index fund would hold the same stocks as the index and in a proportion like the index. This proportion is usually on a market capitalization basis although other forms of proportions such as market price, equally weighted etc also exist. The index fund, having mimicked the index, issues “units” to investors which can be bought and sold by the investor at his or her convenience.

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Each unit of the index fund acts like a unit of a stock market index. An investor holding onto a unit of the index fund is indirectly holding onto a portfolio that mimics the index or the market. The gross return of an index fund is the gross return of the index that the fund tracks.

Why choose index funds over actively managed funds? Index funds generally come along with a very low management fee. One of the major factors that determines the return from a mutual fund is the fee that the asset management company charges to the fund's investors. Since actively managed mutual funds require personnel to gather information and research stocks, they require more efforts and correspondingly more resources than an index fund. An index fund only requires a person to track the index and reshuffle the various constituents of the index at intervals such as once every six months or so. A fund's net returns are its gross returns â&#x20AC;&#x201C; asset management fees. Since index funds come with very low asset management fees, the net returns on index funds are better than that of actively managed funds unless and until the actively managed fund manages to generate a significant alpha over and above the index.

Index funds in India â&#x20AC;&#x201C;

years, the performance of many actively managed funds in India has been trailing the performance of Nifty 50. However, the mid-cap and small-cap indices of the Indian stock market are not yet efficient enough for index investing to be profitable over actively managed index funds. Many actively managed smallcap and mid-cap index funds in India manage to beat the small-cap and mid-cap indices on a net return basis.

Can Index Investing be the only form of investing? Index Investing works only because of the assumption that markets are efficient, and markets are efficient only because market participants are continuously gathering data on the basis of which they trade and stock prices reflect all available information. If everyone however depends on index investing, then there will be no one to trade and stock prices will diverge from their intrinsic value to a significant amount. Thus, there is a case to be made that as index investing or passive investing becomes more and more prevalent, there will be less active investors in the market and there will come a time w h e n a c t ive i nve s t i n g w i l l h ave e n o u g h opportunities to profit from market inefficiencies. When that time will come is anyone's guess, however.

The Indian stock market, unlike its American counterpart does not command the same type of efficiency which means that active fund managers can exploit market inefficiencies and generate alpha or a return above the market index. However, the Indian stock market is a very broad category and can be further sub-divided into various indices. Specifically. The large â&#x20AC;&#x201C; cap indices such as the Nifty 50 and the Nifty Next 50 have stocks which are actively traded by various Domestic Institutional Investors and Foreign Institutional Investors. The stocks in Nifty 50 and Nifty Next 50 indices are tracked by various analysts. These two indices are efficient in the sense that any material market information is reflected in the stock price in a very short amount of time. There are various index funds in India that track the Nifty 50 and Nifty Next 50 indices such as UTI Nifty Junior Index fund, the SBI Nifty 50 Index fund and so on and so forth. Over the past few

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Interview Process

Internship Diaries

It consisted of 2 Technical Rounds & 1 HR Round. Technical Round 1: About Banking Industry, P&L Statement of Banks, Revenue Drivers and Cost Drivers of Bank, Financial Ratios related to Banking Industry Technical Round 2: Keyboard shortcuts in Excel, Citi's Business HR Round: CV Based: Family Background, Strengths, Weakness, Why MBA Finance

Shubham Shankar PGDM Finance|2018-20

Citi Bank Company Overview Citi, the leading global bank, serves more than 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial services and products. It is the 3rd largest bank in the United States.

Internship Experience I worked in the Financial Planning & Analysis Division. There I worked on following two Projects: 1.

Value Addition in Library of Expense Analytics: In this project, I had to analyze the expense lines of Citi and come up with p o s s i b l e a l t e r n a t i ve s t o r e d u c e t h e discretionary expenses. In addition to this, I also worked on the automation of routine processes using Excel Macros.

Gap Identification for the Convergence of Planning & CCAR: Citi being a diverse

Internship Diaries

FINLY| November 2019 | Finstreet | SIMSR company has multiple business units and each business unit follow a different planning process. In addition to Planning, Citi also does the CCAR process which is submitted to Federal Reserve. My project was to identify the gaps between planning and CCAR process. Through these projects, I got a chance to analyze the financials of multiple business units, understand businesses in detail, understand the planning & CCAR process of multiple business units. I also got a chance to interact with people from various business units which was highly enriching. It was a great learning experience interning with Citi and it has added immense value.

Valuable Tips My piece of advice to everyone would be to be thorough with an understanding of the Banking Sector. Acquaint yourself with recent advancement in Banking Industry in terms of technology and automation. In addition to this, try to learn Excel and Macros. Citi provides a great learning opportunity and it is a great company to start your career.