August 25, 2013 Volume 5
FinNiche
FinXpress
FinXpress Volume 5 Aug 25,2013
From The Editorial
CONTENTS
AWAITED BREAK
From The Editorial In Focus: CAD Opinion: The Impending crisis of India Term of The Week: WACC Market This Week News Fun Corner
After a hectic and stressful week, IMTians welcome this weekend. First years had their first end terms. Great efforts were put in by the faculty to familiarize students with varied subjects from IGD to FRA. This was followed by students’ handwork and sleepless nights. After a successful completion of first term, full of quizzes, presentations, parties and events organized by various clubs, students are all set to open heartedly welcome second term. Economic situation of our country unfortunately continues to worsen. The ever-widening current account deficit is held responsible for several of the prevailing woes of economy, including fall of domestic currency in the foreign exchange market, stock market crash to name a few. Rupee, slipped to all time low of $65.75 intraday on Thursday. So far, steps taken by the government authorities have not come to the rescue. Do read ‘In Focus’ section on Current account deficit, ‘Opinion’ section ‘Impending crisis of India’ and ‘Term of the week’ includes WACC (weighted average cost of capital) We hope you enjoy reading the articles this week too. And amidst your busy schedule you’ll find time to write an article for us. Your opinions are most welcome. We are open for your suggestions, comments and acknowledgement regarding our online magazine. Have a joyful reading!! Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. August 2013
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IN FOCUS
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CURRENT ACCOUNT DEFICIT
—- By Pragun
financed which the finance minister, Mr Chidambaram assures will be done same as was done in the previous fiscal. But the question that still lingers in mind is that the reliance on foreign funds (through FDI and FII) or the capital account for this financing – how safe a bet will it prove to be given the positive signs of recovery India, 2013: Current Account Deficit of shown in the western economy. Is it that 4.8 % for the 2012-13 fiscal and expected the FIIs would gradually pull off the Indian to widen in the first quarter of the current markets? fiscal. Its impacts - the free fall of the domestic currency in the foreign exchange The government is trying to do whatever it market, stock market crash, inflation, fiscal can to stop this impending crisis by taking deficit and the list seems to be never up measures to lower the country’s ending. imports. To mention a few of them – it has raised customs duty on precious metals Question: Is it a repeat of the 1991fiasco like gold, silver and platinum to 10%. RBI on the cards for us and also reversing the imposed restrictions on import of gold path of globalization of economy? coins and medallions saying importers To begin with for those who are new to this would require license from Directorate term Current Account Deficit - it is the total General of Foreign Trade. It also imports of goods, services and transfers announced stern measures, including minus the country's total export of goods, curbs on Indian firms investing abroad and services and transfers or in other words on outward remittances by resident the gap between the inflow and outflow of Indians. Unfortunately most of these do not foreign currency. The top notch seem to work out for as per intentions of economists of the world hold the opinion the government. that a CAD of 2.5% of a nation’s GDP is We have somewhat entered in a vicious acceptable in normal economic conditions circle as the rupee depreciation is likely to (though one might wonder how to define inflate the fuel bill which in turn puts these normal conditions). pressure on the fiscal deficit and with RBI The main reasons cited by the government having limited scope of cutting down key for this ever widening deficit are lower monetary rates in view of CAD’s abnormal imports and higher degree of imports of oil, figures lets the high inflation unchecked. coal and unproductive assets like gold. As As put by Mr D. Subbarao it is only high otherwise, high imports of capital goods net fund inflows and increase in export and equipment reflect the growth in an activities which could save the crisis-ridden economy that though is not the case with economy. What lays ahead us is a rocky the Indian economy. terrain and it is yet to be determined how Now in order to keep this balance of will we be able to walk past it. payment intact, the CAD then needs to be India, 1991: Our Forex reserves a mere enough to finance three weeks’ worth of imports. And so we had to airlift our gold reserves as a pledge with the International Monetary Fund (IMF) for a loan. And thus came forward our first step on the road to globalization of economy.
August 2013
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OPINION
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The Impending Crisis in India —- By Mukul Gupta
With Indian Rupee falling down an abyss, a declining GDP growth rate, FIIs flooding capital out of the country, stock markets showing no clear sense of direction, falling industrial production figures and a failed government's overconfidence to set it all right, the Indian economy clearly has tough times ahead. The primary reason for this impending crisis as cited by many economists is the decline in consumption, investment and exports due to high inflation. The International Monetary Fund (IMF) would typically prescribe higher interest rates to suppress domestic demand and lower imports to address the current account deficit. Both however seem less reasonable to the government with general elections next year. Everyone in UPA, from P Chidambaram to Manmohan Singh and to every UPA defender claims that the current economic crisis is a result of the global meltdown of 2008. Mihir Sharma’s column in Business Standard further vindicates this fact. To justify, he puts forth similar problems faced by five emerging economies - Indonesia, Thailand, South Africa, Brazil and Turkey. However, P Chidambaram, in an interview with Mihir Sharma indirectly admitted that the problem lay as much with the government as with the global crisis. He said: “We have delayed taking decisions. We’ve paid a price for it.” Still, recent moves by RBI show that the government is (or rather wants to stay) oblivious to the gravity of it all and is believing in the miracle of "It Will Bounce Back Sooner or Later". The extent of the crisis can be gauzed from the fact that the country's growth rate
August 2013
has fallen to a meagre 5 per cent this year, the index of industrial production is into negative territory and CPI inflation has shot to a 5 month high of 9.64 per cent YOY. UPA's flagship programmes like NREGS, Food Security Bill, employment guarantee schemes have proved to be colossal missteps. In times when the economy is slowing down and we need some quick fix solution, the government should rely on short term measures like fiscal consolidation and curbing depreciation of Rupee rather than on eon long schemes plagued with corruption and inefficiencies. According to Jim Walker of Asianomics “The way the policy has been acting in India over the course of 2-3 years has been surprising that the market has held up so well. Companies are under pressure, earnings are under pressure, fiscal deficit is out of control". This has even led to big multinational firms like Nokia, Royal Dutch Shell, Vodafone, LG Electronics etc. to threaten the government to exit India on grounds of political risk, weak policy reforms and a hostile business environment. Nokia for example is deciding to shut down its plant in Tamil Nadu, which is its largest in the world. This decision was fuelled by the income tax department slapping a Rs 2080 crore tax demand on the company alleging that the Indian arm did not deduct the stipulated 10 percent tax on royalty payments made to the parent. If such an exodus does take place, there would be huge job losses leading to mounting unemployment levels and a struggling industrial index.
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FINANCIAL KNOWLEDGE
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Weighted Average Cost of Capital (WACC) —- By Divya Shree
WACC-A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources common stock, preferred stock, bonds and any other long-term debts are included in a WACC calculation. Else being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.
targeted capital structure as opposed to the current capital structure. While a separate discount rate can be developed for each projection interval to reflect the changing capital structure, the discount rate is usually assumed to remain constant throughout the projection period.
In situations where projections are judged to be aggressive, it may be appropriate to use a The WACC equation is the cost of each higher discount rate than if the projections are capital component multiplied by its deemed to be more reasonable. While proportional weight and then summing: choosing the discount rate is a matter of judgment, it is common practice to use the weighted-average cost of capital (WACC) as a starting point. Where: Considerations in Calculating WACC: Re = cost of equity 1. WACC must comprise a weightedRd = cost of debt average of the marginal costs of all E = market value of the firm's equity sources of capital (debt, equity, etc.) since D = market value of the firm's debt UFCF represents cash available to all V=E+D providers of capital. E/V = percentage of financing that is equity 2. WACC must be computed after corporate D/V = percentage of financing that is debt taxes, since UFCFs are computed afterTc = corporate tax rate tax. 3. WACC must use nominal rates of return Businesses often discount cash flows at built up from real rates and expected WACC to determine the Net Present Value inflation, because the expected UFCFs (NPV) of a project, using the formula: are expressed in nominal terms. 4. WACC must be adjusted for the NPV = Present Value (PV) of the Cash systematic risk borne by each provider of Flows discounted at WACC. capital, since each expects a return that compensates for the risk assumed. Broadly speaking, a company's assets are financed by either debt or equity. WACC is 5. While calculating the weighted-average of the returns expected by various providers the average of the costs of these sources of of capital, market value weights for each financing, each of which is weighted by its financing element (equity, debt, etc.) must respective use in the given situation. By be used, because market values reflect taking a weighted average, we can see how the true economic claim of each type of much interest the company has to pay for financing outstanding whereas book every dollar it finances. The discount rate to values may not. be used is a weighted-average of the returns expected by the different classes of capital 6. Long-term WACCs should incorporate assumptions regarding long-term debt providers (holders of different types of equity rates, not just current debt rates. and debt), and must reflect the long-term August 2013
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week In the week of Aug 19 -23 , the SENSEX opened at 18587.38 and slumped 0.40% to close at the 18519.44 mark. The Nifty fell by 0.70% to close at 5471.75. The Indian rupee which fell to its lowest level of 65.56 this week, has taken a massive toll on the Indian equities. It eventually closed at the 63.20 level after some pep talk by the government. Sensex slumped nearly by 8.8% in the last one month, while the Nifty fell by 10% in the same period of one month. The depreciating rupee has eroded the confidence of traders and subdued the risk sentiment in the market on the whole. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
19,313.49 19,237.52 19,373.28 19,338.02
CNX Nifty
August 2013
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FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages
Thirty Days Fifty Days Hundred And Fifty Days Two Hundred Days
5,749.07 5,756.42 5,844.04 5,844.72
Commodities
Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 BBL
Rs / Unit 31910.00 53460.00 6461.48
% Change 2.47% 4.42% 0.23%
Lending / Deposit Rates
Base Rate Savings Deposit Rate Term Deposit Rate
9.70%-10.25% 4.0% 8.0%-9.0%
Key Policy Rates and Reserve Ratios
Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
10.25% 7.25% 6.25% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
August 2013
63.20 84.38 63.83 98.28
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FinNiche
FINANCIAL KNOWLEDGE
NEWS Short Covering pushes up markets Sensex, which had surged 408 points on Thursday, rose further by 206.50 points, or 1.13 per cent, to end at 18,519.44. Nifty rose 63.30 points, or 1.17 per cent, to 5,471.75.
has seen a 17 percent fall, Philippines 11 percent and India more than 10 percent.
Experts say nearly a third of the money invested in bond funds of BRICS have been pulled out since May this year and weight is shifting towards US. Ballooning current account deficit and slowing growth This rise is seen mainly because of short have turned the sentiment against these covering and as well as due to sustained emerging market economies. value buying in refinery, banking and auto stocks along with Rupee recovery. The RBI ups FII investment limit in Mahindra capital goods sector index rose 2.04 per Life space to 49% cent banking index by 1.91 per cent to Reserve Bank of India has increased 10,791.32. Oil and Gas sector index rose foreign investment limit in Mahindra Life by 1.59 per cent to 8,191.04 and the auto space Developers (erstwhile Mahindra index by 1.5 Gesco Developers) to 49 percent from 30 percent. Forget $, Re 1 = 1.5 Cents Rupee fell by 6% this week breaching the 65 mark to an all-time intraday low, touching 65.56 on Aug 22, 2013. However Rupee closed at 63.20 on Friday, making a stunning comeback, second-biggest rise in a decade in absolute terms. The experts’ opinions are as volatile as rupee itself, some say it will reach 70 mark due to high inflation, continual downgrades in growth and the ineffective measure of RBI whereas some are strong on 60 mark as current account deficit to fall to 3.9 per cent of GDP in 2013-14 compared with 4.8 per cent last year foreign capital inflows are expected to pick up and attract $11 billion. Emerging Markets not Emerging Across the world, emerging market currencies fell between 3 and 6 percent this week. The rupee itself was down 6 percent on Thursday. All emerging markets indices are also on a fall and Indonesia with a 20 percent fall, Thailand
August 2013
The holdings of FIIs in the company has reached 29.23 percent of the paid up equity capital, according to filing on August 19. Promoter Mahindra & Mahindra holds 51.04 percent stake in the company as of June 2013. The stock was down 0.2 percent to close at Rs 438.55 on Friday. RBI penalizes six more Banks The Reserve Bank of India (RBI) on Friday imposed penalty of Rs 50 lakh to 2 crore on six more state-owned banks for violation of Know Your Customer (KYC) and anti-money laundering (ALM) norms. Those public sector lenders included Allahabad Bank, Bank of Maharashtra, Corporation Bank, Dena Bank, IDBI Bank, and Indian Bank. Gold hits 9-month high; silver regains Rs 54K mark Gold staged a smart rally and hit a nine-month high at the domestic bullion amid jewellery and investment demand in
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FinNiche
FINANCIAL KNOWLEDGE
NEWS the backdrop of surge in global commodity Industries and NMDC were up 1.5-2.5 market. Silver also surged on heavy percent on Aug 22, after the Chinese speculative as well as industrial demand. August HSBC flash manufacturing PMI data increased to four-month high at 50.1 Standard gold finished at Rs 31,790 from as against 47.7 in July. According to Friday's closing level of Rs 31,160 and Nomura, the rupee depreciation will benefit Silver ready finished at Rs 54,260 per kg Indian companies significantly and from its previous closing level of Rs bottoming out of global metal prices will be 52,000. helpful. Globally, gold vaulted by a hefty USD 25 gain to touch a two-month high after Govt bans duty free TV imports by air weaker-than-expected housing and jobless travelers claims data. The government on Aug 19, banned dutyfree import of flat screen television by air FM meets top bankers to shore up fund travelers in a bid to prop up rupee, which inflows declined below the 63 level against US Finance Minister P Chidambaram held a dollar. closed-door meeting on Aug 24 with top In an order to contain the Current Account bankers to take stock of the situation in the Deficit (CAD) and arrest declining value of wake of rupee volatility and ways to shore rupee, the government has raised duty on up foreign capital to bridge the widening gold, platinum and silver to 10 percent. current account gap. The minister had said that there is no need ITC to consider demerger Wimco for "excessive or unwarranted pessimism" and said the recent liquidity control measures taken by the Reserve Bank to reduce volatility in Forex market and quell speculation would be revisited with return of stability. Diesel price hike of Rs 3/L likely Adding to the chorus of a possible diesel price hike, Jal Irani, managing director-oil & gas research, Macquarie says the government is likely to hike prices by Rs 2-3 per liter. Steep correction seen in the Indian currency has made a fuel hike a desperate need of the hour. Metal stocks shine manufacturing PMI data
on
A meeting of the board of directors of the company will be held on August 28 to consider a proposal for demerger of the non-engineering business comprising safety matches business and agri (forestry) business of Wimco into the company as reported by ITC to BSE. ITC along with Russell Credit, a wholly owned unit, holds 98.21 per cent of Wimco's share capital. ITC shares rose 0.10 per cent to Rs 308.25 at the close on the BSE.
Chinese
Tata Steel shares rallied more than 4 percent while Jindal Steel, SAIL, Sterlite
August 2013
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FinNiche
FUN CORNER
Fun Corner Last Week’s Answers
Fin Quiz 1.
What is a Balloon Loan?
1. EBITDA
2.
Identify the person who is known to be the pioneer in mutual fund industry and often referred as the Father of Index Fund investing ?
2. Put Option 3 Capitalization Ratio 4. Repo
3.
What is a bad credit loan?
4.
First Indian woman CEO of a foreign bank?
5.
Where is paper currency manufactured in India?
5 Debt Ratio
CARTOONS
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Volume 5 Publisher : V.V.Raviteja
August 2013
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