July 06, 2014 Volume 2
FinNiche
FinXpress
FinXpress Volume 2 July 06, 2014
From The Editorial Warm Welcome!
CONTENTS
From The Editorial In Focus: The Biggest IPO still a mystery to many: Alibaba.com Term of the Week: Derivatives Opinion: India: Pushing Jobs and Growth Market This Week News
Club FinNiche takes this opportunity to welcome the junior batch to IMT Ghaziabad. Every week we bring to you an illuminating edition of FinXpress, which updates the student fraternity with current financial updates and terms. This week, the In Focus section throws light on the topic “The Biggest IPO Still a Mystery to many: Alibaba.com�. The Opinion makes a critical analysis of the growth in India considering the scenario of jobs. The term of the week gives an idea about the financial instrument "Derivatives". Do have a look at the Market and News section to bring yourself up to speed with market volatility and the reasons behind it. Club FinNiche welcomes any comments, suggestions or criticism regarding the magazine. Please do write to us and share your ideas.
Fun Corner
Happy Reading! Regards The Editorial Team Club FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. July 2014
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FinNiche
IN FOCUS
The Biggest IPO still a mystery to many: Alibaba.com —- Nupur Gupta On 8th of August (8 is lucky number in china), the Chinese e-commerce giant, Alibaba will go on sale to public under the ticker symbol “BABA”. It is evaluated to be the largest IPO in the history with an evaluation of some $20 billion making it a $150 billion company.
In the past about 168 companies from Hong Kong and China have gone public on organized stock exchanges in the United States but were maligned by a number of accounting frauds. Looking into the past, the previous Chinese IPOs have not performed well decades due to low return on equity and weak profit Alibaba is known to be the largest e- margins of Chinese companies, in spite commerce company on EARTH reflected of the enormous growth of the Chinese by the fact it processed more than $248 economy during the last three. billion of online transactions in 2013 which is more than double the total Another reason for skepticism about transactions of Amazon (the second Chinese IPOs is due to risks arising largest e-commerce company) standing from the legal structure of Alibaba and at $100 billion worth of transactions . other Chinese companies as they have employed corporate governance Yet Alibaba remains a mystery and an structures typically used to get around unknown quantity to business people, restrictions by the Chinese government investors and consumers who are from on foreign ownership of businesses. outside China. Apart from people who work in china or deal with Chinese Alibaba needs to grow significant profits consumers, no one have a full in order to give investors good returns understanding of Alibaba, it’s working and sustain the prices as its going and the future prospects of the public at a high P/E ratio of around 50 company. at present. Although recent growth in profits justifies high P/E ratio but there According to the a survey of more than is one more risk .It can be the case of 300 institutional investors conducted by concern that Alibaba has potential to the ConvergEx Group, it was revealed grow its profits without investors that US buyers who have not yet receiving their fair share as the invested in Chinese stocks are still management control voting rights and unclear about investing in the IPO. there is a possibility that rather than paying out profits to the investors, they The survey shows that although people can directed to their Alipay subsidiary, are optimistic about Alibaba’s business and this subsidiary could be sold at model and its potential performance as dear prices to the managers. And, since a publicly-traded stock, yet they do not Alibaba operates in China, and not the plan to buy into the company. Only 43% U.S., there is little that U.S. investors of those surveyed planned to buy shares could do about this potential theft of of the company although around 63% assets if it were to happen. believed Alibaba to be a good long-term investment. Fund managers who have Come next month, it would be not yet invested in Chinese stocks interesting to watch how this much appear to be the least likely to buy anticipated billion dollar IPO deal fares Alibaba. on US stock market amongst all the skepticism and prove to be a boon According to Mr. Nicholas Colas, paving the way for other Chinese ConvergEx Group’s chief market companies. strategist, this skepticism isn’t over the company but the country it belongs to.
JULY 2014
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FinNiche
Opinion
India: Pushing Jobs and Growth ------ By Anureen Bhatti
After the world’s largest democracy made a decision for the change it needed and the overwhelming vote for political stability and economic change it had been longing for, it has infused the country with a new optimism that is spreading beyond borders. India may be on the cusp of a new wave of growth and promising to deliver employment to millions of fellow countrymen and women, but the truth is the that the country and the government may be able to grasp the opportunity if India has a way to unleash the potential of the manufacturing sector. If the right environment and the right opportunities are provided, India has a list of international clients who have interest in investing and have the funds and the risk appetite to be a part of India’s economic future. The government needs to focus this positive interest of the investors where it will do the most good to the country and its people. The country’s primary sectors, principally agriculture and likes can provide jobs but not growth. Also, our tertiary sector services like information technology can provide growth but not enough jobs: if the nation wants to provide jobs and growth, the drivers of the nation must encourage foreign direct investment into the secondary sector i.e. manufacturing. A renaissance in the Indian manufacturing would accelerate employment generation, boosts exports, strengthen the financial sector and attract substantial foreign capital inflows into the country. It is estimated that at optimal levels, manufacturing would account for about quarter of the GDP, rising from its current input which is lesser than 15%. It will take substantial investment to generate the
July 2014
necessary level of manufacturing growth: over the past four years, the manufacturing sector has been losing its share of GDP, expanding just 4%. If we expect the above mentioned investors to come to the country, invest, take risk and provide us both cash and expertise, we must clean up our home, make it inviting and prepare the ground. Our focus should be on making India more business friendly. We must try to improve our world ranking in the World Banks’ ease of doing business index, where the country languishes at number 134 out of 189 nations ranked in the list. The country is ranked slightly better than Ecuador, but behind Yemen or Bangladesh, and 24 places behind Pakistan. The change needs to start with the bureaucracy, where we must streamline the lengthy and complicated procedures for various approvals and environmental clearances. For example projects worth some 15 lakh crore are stuck waiting for a green light since months in the books of bureaucratic officers. Companies in India are subject to some 33% taxes as compared to 5-7% in developed countries. A relatively large proportion of India is of working age, but if we are to benefit from so called ‘demographic dividend’, we need to reform our obsolete labour laws to make the workforce more cost efficient and flexible. We need to address a looming and potentially critical shortfall through improved education and vocational training, get the hardware of development right, the national skills development corporation estimated the skill gap will widen to 90 million people over the next 10 years.
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FinNiche
FINANCIAL KNOWLEDGE
Derivatives A derivative is something which derives its price from the underlying asset. For example a Infosys stock derivative derives its price from the share price of Infosys on the stock exchange. We can broadly classify the types of derivative contracts into forwards, futures and options. A farmer who grows wheat is concerned with the price of wheat in the harvesting season. Let us say the harvesting season is 2 months away. What is the way out? Does the farmer wait for two months expecting that the price will be to his advantage i.e move upwards? Is that the only way out? Certainly not!
Alternatively, the farmer can enter into a contract to sell wheat at a predetermined price today. Such a contract is called a forward contract which fixes the transaction price of an asset at a specified date in the future. By entering into such a contract, the farmer effectively reduces the risk of any price decline in the next two months. However, there is also a downside. What if the current price rises above the contract price? In such a case, the farmer would effectively make a loss as he is obligated to transact with the other party at the price decided in the forward contract. For example, if the farmer enters into a contract to sell wheat for Rs. 15 per kilo and the price rises to Rs. 17 per kilo, the
July 2014
farmer is obligated to sell at Rs. 15 which is Rs. 2 less than the current market price also called the spot price. The above example explains a very unstandardized contract which any two parties can enter into. With time as more and more people started entering into these contracts, a need was felt for standardisation and making sure that the default risk is minimised. This led to such contracts being traded on exchanges where the counterparty was the exchange to both the buyer and seller. This potentially eliminated the default risk. Each party to a futures contract is expected to deposit a certain percentage of the total contract value called initial margin with the exchange. This deposit acts as a security against default. Another important feature of futures contracts is that they are marked -to-market. For example, if the contract price is Rs. 200,000 (assuming the wheat farmer is selling 1000 kilos of wheat at Rs. 20 per kilo) and the parties are required to deposit 10% as initial margin, both the buyer and seller will pay Rs 20,000 to the exchange. Now, if the next day the price of wheat falls to Rs. 19 per kilo, the seller of wheat makes an expected loss of Re. 1 per kilo and his margin of Rs. 20,000 is reduced to Rs. 19,000 (1000 kilos x Re. 1 loss). Another type of derivative contract is Option. As the name suggests, it gives the holder the right but not the obligation to transact on the date of maturity. This limits the downside risk as a person would transact if and only if it will result in a gain. Unlike futures and forwards however, entering into an option contract requires payment of a non-refundable option premium to the seller of the option. So, the buyer of the option is in a way transferring the risk of price volatility of the asset by making payment to the seller.
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week After three-weeks of consolidation, equity benchmarks gathered momentum with the Sensex and Nifty ending at record closing high ahead of Budget and AprilMarch quarter earnings started off with Infosys next week. Hopes of better monsoon after a dry spell in June and fall in crude oil prices on easing Iraq conflict too supported the market. The Nifty gained 3.2% this week to close at 7,751.60 while Sensex gained 3.4% to close at 25,962.06 points. The rupee has depreciated against the US dollar from last week to close at Rs 59.79 per $1.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days
25,172.68 24.435.48
Hundred Fifty Days Two Hundred Days
22,328.74 21,850.97
CNX Nifty
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FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
7,523.28
Fifty Days
7,298.56
Hundred Fifty Days
6,657.91
Two Hundred Days
6,507.88
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
27,584
0.44
Silver
1 Kg
45,056
0.47
Crude Oil
1 bbl
6,227
0.27
Lending / Deposit Rates Base Rate
10.00%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
8.00%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
9.00% 8.00%
Reverse Repo Rate
7.00%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 22.5%
Exchange Rates
July 2014
INR / 1 USD
59.79
INR / 1 Euro
81.32
INR / 100 Jap. YEN
58.60
INR / 1 Pound Sterling
102.66
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FinNiche
FINANCIAL KNOWLEDGE
NEWS OF THE WEEK Lufthansa to sign join venture deal for about $250 million to reduce group with Air China this weekend debt. Tata Power, part of India’s largest business conglomerate, signed option agreements with a Bakrie Group entity for the stake. The agreement would include the sale of Tata Power’s entire 30 percent stake in Kaltim’s associated po we r i nfrast ru ct u re co mpani e s The news is a strategic move for reducing TATA Power share to just 25 Lufthansa as it has struggled to keep percent in coal mining companies. up with competition from low-cost and the gulf rivals which are performing The company has been reporting extremely well . It has been in talks losses in the past three fiscal years, with Air China for months as it seeks to largely driven by below-cost power sales strengthen its position in Asia, where at its 4,000-megawatt power plant in Dubai-based Emirates and Turkish Mundra in the western Indian state of A i r l i n e s h a v e b e e n e x p a n d i n g Gujarat. The contracted tariff for the plant, which runs on coal imported from continuously. Indonesia, became unviable after a Rupee sees biggest weekly gain in 1- change in law led to a jump in prices of 1/2 months the fuel in Indonesia, the world’s biggest exporter. The rupee rose 0.6 percent for the week, posting its strongest gain since the But this sale would not affect coal week of May 16 that saw the election of supplies to Tata Power’s power plants, Modi as prime minister, although the as there would be no dilution in its unit has ceded ground since hitting a rights as a shareholder of the company. three-week intraday high of 59.52 on Thursday. Emerging Stocks Rise to 15-Month High on U.S. Jobs Report The Reserve Bank of India was also spotted buying dollars, continuing its Emerging-market stocks rose for a pattern of intervention to prevent the fourth day after the U.S. jobless rate slid rupee from gaining sharply. The rupee to an almost six-year low, boosting the is likely to trade in a range of 59.60 to outlook for global growth. U.S. 60.40 until the budget. The budget due employers added more workers than to be presented on July 10 will be a key forecast in June and the unemployment test of investors' faith in Modi and his. rate dropped to 6.1 percent, Labor Department figures showed today. The Tata Power May Sell $250 Million report adds to global optimism after Stake in Indonesian Coal Mine data on July 1 showed China’s manufacturing expanded in June at the Tata Power Co. Ltd. (TPWR), suffering fastest pace this year, while a private losses at its largest power plant in gauge signaled gains in India. The Mundra, western India may sell a 5 Shanghai Composite Index added 0.2 percent stake in Indonesia’s Prima Coal percent to a two-week high on its fourth Lufthansa and Air China are planning to set up a joint venture which would allow them to share revenue on certain Asian routes by selling tickets for each other's flights but the routes have still not been specified.
July 2014
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FinNiche
FINANCIAL KNOWLEDGE
NEWS OF THE WEEK gauge signalled gains in India. The Shanghai Composite Index added 0.2 percent to a two-week high on its fourth day of gains. The Philippine Stock Exchange Index gained 0.7 percent, while Taiwan’s Taiex Index (TWSE) rose 0.4 percent. Indian Bonds Complete First Weekly Gain in a Month Before Budget India’s 10-year bonds completed their first weekly gain in a month on signs Prime Minister Narendra Modi’s new government will boost efforts to curb the fiscal deficit in next week’s budget. The yield on the 8.83 percent bonds due November 2023 fell nine basis points, or 0.09 percentage point, this week to 8.66 percent in Mumbai, according to the central bank’s trading system. That’s the first decline since the period ended June 6. The rate was little changed today.
the Federal Reserve will bring forward the timing of interest-rate increases. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, posted 0.24 percent weekly increase after data showed that U.S. nonfarm payrolls rose more than the economists estimated and the unemployment rate fell to an almost six-year low thus spurting hopes of an economic recovery soon . Asian Currencies in Weekly Advance as Export Outlook Brightens Asian currencies advanced the most last week in almost two months, led by Indonesia’s rupiah, as signs of improvement in the world’s two largest economies spurred optimism that regional exports will pick up.
U.S. companies added more jobs in June than economists estimated while China’s manufacturing grew at the fastest pace of the year, reports Markets are hinging a lot of hopes on published last week. the budget and we expect the government’s focus to be on fiscal The Bloomberg-JPMorgan Asia Dollar consolidation, which is positive for Index (ADXY), which tracks the region’s bonds. Some small progress in the 10 most-active currencies excluding the yen, rose 0.3 percent last week, the monsoon has also aided sentiment. biggest advance since the period ended Dollar Has Biggest Weekly Gain in Six May 9. The rupiah strengthened 1 percent to 11,880 per dollar in Jakarta, on Faster Job Growth while the Malaysian ringgit gained 0.9 The dollar posted its biggest weekly gain percent to 3.1860 and India’s rupee in six as signs of an accelerating U.S. added 0.6 percent to 59.7350. recovery spurred speculation
July 2014
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
Name the bond whose interest rate is tied to rate of inflation?
2.
Who was independent India’s first Defense minister?
3.
Which is the Tata group’s oldest surviving brand?
4.
Which airline had the tagline ‘Flying for everyone’?
5.
Which is India’s first fully indigenous passenger car?
Last week’s answers 1. 2. 3. 4. 5.
Plain Vanilla interest rate swap Term sheet Less than 1 White squire defence Exchange Clearing House
Last Week’s Quiz Winner
Aditya Bhavanasi
CARTOONS
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Publisher: Aditya Agrawal
July 2014
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