October 13, 2013 Volume 12
FinNiche
FinXpress
FinXpress Volume 12 Oct 13, 2013
From The Editorial God is Retiring
CONTENTS From The Editorial In Focus: Bharti -Walmart What lies ahead? Opinion: Do growth projections matter? Term of the Week : Systematic Risk Market This Week News Fun Corner
As you open this edition of FinXpress, we at FinNiche hope that you had a great time during Passion ‘13. Continuing with our tradition we bring to you yet another edition of FinXpress to create awareness among the B-School fraternity regarding Finance as well as the current issues going across the world. A number of significant events occurred this past week. The RBI cut the MSF rate by 50 bps to bring it down to 9%. The RBI hopes to improve liquidity in the market by this step. Another major development came in the non-finance sector, where Sachin Tendulkar has announced his retirement after playing his 200th Test match. Do look over the ‘News of the Week’ section for further noteworthy news and updates. The ‘Market of the Week’ covers the latest trends in the market this preceding week. We hope that’s you find the articles in this edition of FinXpress interesting as well as useful. We look forward for your feedback, comments, acknowledgements as well as criticisms regarding the same. Do write us back and let us know your opinions.
Happy Reading!!! Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. October 2013
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IN FOCUS
Bharti-Walmart What lies ahead? —- By Jagriti Kalra
Bharti Enterprises and the world's largest retailer Wal-Mart almost decided to break up their almost six-year-old 50:50 partnership in India which runs cash-and carry stores “ Best Price”. The development, though expected is still ironical as it comes at a time when the government has opened the multi-brand retail sector to foreign investment and the Bharti-Walmart Joint Venture was expected to be the first to venture into this area. Infact, Bharti Enterprises vice-chairman said in September last year that the two extending their JV to the front-end stores was a “natural progression of the partnership”. However, strains in the
relationship had emerged later when WalMart got embroiled in bribery charges, leading the government to order an inquiry into the matter. The charges led it to sack its CFO which was later hired by Bharti Airtel. Wal-Mart is also engaged into its $100-million investment in Cedar Support Services, which is a subsidiary of Bharti Enterprises and the holding company of Bharti Retail. Bharti, however, said that the break-up of the joint venture was purely a business decision and had nothing to do with the corruption charges against WalMart. It said that all investments were done in compliance of government guidelines. Though both the companies have reiterated their commitment to the businesses they are in analysts are of the opinion that both October 2013
need a partner if they want to grow in their respective businesses. Wal-Mart can have 100% holding in the cash-and-carry business, but it does not make sense for it to remain restricted to it in a growing market like India. For front-end stores, it needs an Indian partner. Theoretically, Bharti can create an entire retail network on its own, but a foreign collaboration would help it with both finances and domain expertise. According to a joint statement issued by the two: Wal-Mart would acquire Bharti’s stake in Bharti Walmart, which would give it 100% ownership of the Best Price Modern Wholesale cash-and-carry business, which runs 20 stores. Bharti will, for its part, acquire the debentures held by Wal-Mart in Cedar Support Services, the holding company of Bharti Retail Ltd that runs the Easyday chain of retail stores. It will acquire the CCDs held by WalMart in Cedar Support Services, a company owned and controlled by Bharti.
Going forward, as said above Wal-Mart will continue to grow the cash-and-carry business while working with the government and interested stakeholders to create conditions that enable foreign direct investment (FDI) in multi-brand retail. On the other hand, Bharti Retail will continue to operate ‘easyday’ retail stores across all formats and invest in and grow the business. Page 2
IN FOCUS
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With the two companies going their Reliance Retail Ltd, Kishore Biyani’s Future separate ways, everyone’s attention is on Group and Aditya Birla Group’s More are the only retailers without foreign connections. Tata and Tesco already have a relationship. And the Reliance group is being mentioned as possible partners for Wal-Mart, although the company commented that it is unlikely to “rush into another joint venture” and would instead work with the government to create a more conducive regulatory environment for foreign retailers.
whether Wal-Mart will seek a new partner, or enter the supermarkets business here, or both, and on Bharti’s own retail plans. Bharti has already appointed Raj Jain, the former chief executive of Bharti-Wal-Mart, as an adviser. On a similar ground, WalMart has publicly articulated its ambitions to run supermarkets or invest in so-called multi-brand retail in Asia’s third-largest economy, but will need a partner to do so because India allows a maximum investment of 51% by foreign retailers in supermarkets.
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Some see the Bharti Wal-Mart breakup as something that will create doubt in the minds of other foreign retailers looking to enter India. “A situation like this is likely to raise questions on what environment India is creating to do business here,” added Kumar Rajagopalan chief executive at Retailer’s Association of India. But some of the foreign retailers who are looking to enter India said the issue was of no consequence-“What’s important is the clarification on the policy. The company will wait.”
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OPINION
Do Growth Projections Matter? —- By Mukul Gupta
International Monetary Fund (IMF) has revised its projection of India’s GDP growth rate to 3.75% in 2013 from 5.7% estimated earlier due to poor demand and weak manufacturing and services sector performance. Terming this estimate as "pessimistic", the Planning minister Rajiv Shukla sees this figure close to 5%. The IMF, in its latest World Economic Outlook report, also said India is among the economies that may require more tightening to address inflation pressure. In the beginning of 2013, the EAC had projected a year-end inflation rate of between 6.5% and 7% and a current account deficit (CAD) of 3.6%. While its inflation projection has come true — in fact, WPI based inflation has gone below 6 per cent, its CAD forecast will most certainly prove to be a gross underestimation, unlikely to come down to below 5% even in the most optimistic scenarios.
rate fuels consumption as people expect incomes to rise in the future. This in turn kick starts the entire circular flow leading to higher output levels. If these forecasts go wrong, people who have overspent would be left with very little money in their hands to sustain. This would in turn lead to higher borrowings and debt pile up.
It is in that context that the track record of some of these forecasters assumes significance. Last year (2012-13), many of them were way off the mark, with their initial projections being disconcertingly higher than those published subsequently by the Central Statistics Office (CSO). The above two cases are just a few of the multitude of estimates which have completely been at variance with the actual figures. This sharp divergence among the projections of the official forecasters is, however, a matter of concern as it diminishes the value of these forecasts as a whole. Obviously, the validity of these forecasts matter.
One can argue that projections are based on current and historical data and hence do not always come true. However, that would oversimplify things and be an absurd justification to estimate forecasts which will eventually go wrong. Growth forecasts form the basis of many economic estimations and hence one should carefully evaluate all possible factors that affect an economic variable. One can also argue that projections deviate due to unforeseen events like natural disasters or global economy collapses. Such events, however, seldom occur in a long time.
In a market economy, these occupy an important place in decision-making. And, naturally plenty of public finance assumptions are themselves based on GDP growth rates. An increase in GDP growth
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Another issue that can be raised is that overestimated forecasts are merely to serve the populist agenda of the government. This raises the question "Can we trust any growth estimate projected by the Government of India in the coming months"?
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FINANCIAL KNOWLEDGE
Term of the Week —- By Mukul Gupta
Systematic Risk Systematic risk is a term mostly used in portfolio management. A risk averse investor generally adopts a strategy which gives the best possible return at minimum risk. To achieve this objective, the investor invests in asset classes which are negatively correlated, a technique most commonly known as diversification. By doing so, the investor is able to eliminate some part of the risk called unsystematic risk. However, risk also depends on general market conditions which cannot be diversified away. This type of risk is called systematic risk or market risk.
market risk. One study showed that it only took about 12 to 18 stocks in a portfolio to achieve 90% of the maximum diversification possible. Another study indicated it took 30 securities. Whatever the number, it is significantly less than all the securities. The graph provides a general representation of this concept. Note, in the graph, that once you get to 30 or so securities in a portfolio, the standard deviation remains constant. The remaining risk is systematic, or nondiversifiable risk.
The concept of systematic risk applies to individual securities as well as to portfolios. Some securities' returns are highly correlated with overall market returns. Examples of firms that are highly correlated with market returns are luxury goods manufacturers such as Ferrari automobiles and Harley Davidson motorcycles. These firms have high systematic risk (i.e., they are very responsive to market, or systematic, changes). Other firms, such as utility companies, respond very little to changes in the systematic risk factors. These firms have very little systematic risk. Hence, total risk (as measured by standard deviation) can be broken down into its component parts: unsystematic risk and systematic risk. Mathematically: Total Risk = Systematic Unsystematic Risk
Risk
One important conclusion of this discussion is that return on a stock depends on the level of systematic risk and not total risk. The argument supporting this conclusion is that investors will not be compensated for the risk which can be diversified away. It is however based on the assumption that diversification is free. In other words, since unsystematic risk can be completely diversified away as the number of stocks in the portfolio increase and + diversification is free, investors will not be compensated for bearing unsystematic risk.
Do you actually have to buy all the securities in the market to diversify away unsystematic risk? No. Academic studies have shown that as you increase the number of stocks in a portfolio, the portfolio's risk falls toward the level of
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To sum up, systematic risk is measured by the contribution of a security to the risk of a well-diversified portfolio, and the expected equilibrium return (required return) on an individual security will depend on its systematic risk.
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FINANCIAL KNOWLEDGE
Market This Week This week witnessed NSE Nifty witnessing its highest three week intra-day trading levels. Riding on the back of record high sales of Jaguar unit for Tata motors and Infosys raising its low end fiscal outlook. Benchmark BSE index also gained up to 0.73%, with investors hopeful about a positive resolution on ongoing USA debt ceiling crisis. Market sentiments was further bolstered by the fact that the likes of JP Morgan are in talks to gain entry in to Benchmark indices for emerging markets debt.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
19,661.60 19,286.24 19,359.73 19,424.52
CNX Nifty
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FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages
Thirty Days Fifty Days Hundred And Fifty Days Two Hundred Days
5,870.8 5,773.5 5,843.5 5,881.6
Commodities
Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 28350.00 46850.00 6216.00
% Change -1.76% -2.93% -1.91%
Lending / Deposit Rates
Base Rate Savings Deposit Rate Term Deposit Rate
9.8%-10.25% 4.0% 8%-9.0%
Key Policy Rates and Reserve Ratios
Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
9.00% 7.50% 6.50% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
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61.15 82.78 62.15 97.77
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Financial Knowledge
NEWS Bharti Walmart part ways Bharti Enterprises and Wal-mart ended their 6 year old partnership after deciding to operate retail stores independently in India. Wal-mart will buy out the Indian firm’s stake in their 50:50 cash – and – carry joint venture, which runs 20 Best Price Modern Wholesale stores in India, for an undisclosed sum. Bharti will acquire $100 million of compulsory convertible debentures held by Wal-mart in Cedar Support Services, a company owned and controlled by Bharti. Flipkart's valuation neck to neck with P&G India, Tata Global Beverages Flipkart, the Amazon of India mopped up $160 million (Rs 976 crore) from mostly new investors and is now valued at over $1.6 billion, or Rs 9760 crore. Flipkart is worth more than the total market cap of all 15 listed retail companies, including Future Retail, Shoppers Stop etc. This huge investing is indicative of the growth potential of the online retailing industry in India which is expanding at 54% annually.
the 24th chairperson of the country’s largest lender bank and the first ever woman to do so for SBI. Her biggest responsibility is to cut the share of bad loans which has surpassed 5% of the total loan book Even GOD has to retire Try to digest the numbers…463 ODIs, 18426 runs, 49 centuries and now 198 tests, 15837 runs, 51 centuries! The first batsman to score a 200 in ODIs, the first and only batsman to score 100 centuries in international cricket…..the records keep on pouring. Yes finally the curtains will fall on the 24 year long illustrious career of Sachin Tendulkar who will retire after playing his 200th test against West Indies on the Indian soil. The cricket fans across the world will surely miss this legend on the field and cricket would never be same as before.
Launch of $1-bn offshore rupee denominated bonds The International Finance Corporation (IFC) has launched India’s first offshore rupee bond issue, which looks to raise $1 billion, in Washington DC. It is a key step in the MSF rate cut by 50 bps to 9% to improve process of internationalization of rupee liquidity bond market and to check its acceptance by The RBI reduced the rate under the the world. marginal standing facility (MSF) by 50 basis points to 9%, and introduced lending to Infy surprise for markets banks for 7 and 14 days instead of the Infy on Friday announced its second current practice of just 1 day to expand the consecutive quarter better than expected financial markets. This is considered to be results. The company managed a 3.8% the passing of the benefits of the rupee growth in dollar denominated sales against stabilization and to improve the liquidity in the forecasted figure of 2.5% - 3%. Its share the system. closed at Rs 3278, 4.70% higher than the previous day’s close, irrespective of the Arundhati Bhattacharya – The first declared fall of operating margins. woman to head SBI The current performance is seen to be a Arundhati Bhattacharya after contending result of greater flexibility in taking on against 3 top notch officials of the SBI was outsourcing contracts at lower price points confirmed elevation as the chairperson of and willingness to accept higher risks which the State Bank of India. She will serve as also form part of the contracts.
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FUN CORNER
Fun Corner FinQuiz 1. Perpetual bonds are ______.
2.The worst bear market in the US history is also called ————— 3.Index funds are ________. 4.Sudden rise/drop in stock prices is called ______. 5.Inflation is characterized by rise in prices. It causes worth of dollar to be _________.
Last week’s FinQuiz answers
1. 2. 3. 4. 5.
CARTOONS
Floatation Government Financial Times Stock Exchange Zero Delinquency
Answers given by:- Ankit Agarwal
**Rush in your entries to: finniche.imt@gmail.com The right entries will get their name featured in the next issue of FinXpress. So hit the quiz fast & get yourself visible among 1000 odd in the campus.
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October 2013
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