February 9, 2014 Volume 29
FinNiche
FinXpress
FinXpress Volume 29 Feb 09, 2014
From The Editorial Time for Sports
CONTENTS
From The Editorial In Focus: Telecom Spectrum Sale—A Success Opinion: How India can be the outlier of growth in BRICS?? Term of the Week: Tranche Market This Week
With the entire campus sinking in a sport frenzy, people digging out rackets, balls, and other paraphernalia out of their closets, practicing day in and day out, we bring to you yet another illuminating edition of FinXpress. This week, the In Focus section talks about the sale of spectrum and its importance to the government and companies. The Opinion makes a critical analysis of the growth rate of the India and how gradually the economy an outlier in the BRICS nations.
the telecom the telecom reeling GDP is becoming
The term of the week describes "Tranche", a term most common in structured finance. Do have a look at the Market and News section to bring yourself up to speed with market volatility and the reasons behind it.
News Fun Corner
Club FinNiche welcomes any comments, suggestions or criticism regarding the magazine. Please do write to us and share your ideas. Happy Reading! Regards The Editorial Team Club FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. February 2014
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IN FOCUS
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TELECOM SPECTRUM SALE– A SUCCESS —- By V.V.Raviteja
The Government of India’s auction of 1800 MHz & 900 MHz has gotten off to a bright start, in spite of a tepid economic growth and strong industry headwinds. This is in stark contrast to analyst’s prediction on the back of weak spectrum sales in the FY 2012 & 2013. Let us begin with analysing few of these factors that have attributed for this changed scenario.
Reliance Jio, the new kid in the block has also increased the importance of this sale. This was in line with its strategy of augmenting its 4G services by aggressively bidding for the 1800 MHz space.
Positive Sentiment was prevalent in the industry after the demon of 2G auction scam has finally settled has also Expiration of Mumbai/Delhi Licenses impacted the spectrum sale. which contribute the highest ARPU to telecom players in 900 MHz segment has Robust earnings were reported by all the called in for an aggressive bidding from telecom operators can also be a key all the firms. The established quartet of reason for this turnaround. Barring Tata Airtel, Vodafone, Idea and Tata Tele has Tele (which has become a negative net all participated in this year’s bidding, worth company), all the telecom players unlike the previous auctions. Added to were able to beat street’s expectations on this 900 MHz is also considered to be the back of increased data consumption cost effective when compared with the by customers. 1800 MHz Keeping all these reasons beside, the biggest beneficiary will be the North Block (Union Finance Ministry office). Just when Government is struggling hard to rein the fiscal deficit less than 4.8% and its expenditure has reached 95% of budgetary estimates. These spectrum Better pricing mechanism by TRAI sales proceeds of Rs.50, 000 crore (Telecom Regulatory Authority of India) is wouldn’t have come at a better time. It is also a key factor which includes lowering not all, even the possibility of rupee the reserve base price and a new formula strengthening and increased FII inflows for calculating the SUC (Spectrum Usage will all complete a cyclical effect on the Charges). SUC was previously charged on economy. the basis of revenues earned by the telecom operators is now changed to weighted average of the average cost of existing and new fees with a cap of 5%. Larger players were particularly benefited from this rule as their SUC can potentially reduce from current levels of 8.23% to 5.6%.
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Opinion
How India can be the outlier as growth in BRICS ?? —- By Jagriti Kalra
The world economy is changing rapidly. The stars of the previous year, the BRICS, are down and the stars of the world's leading developed economies are once again ascending.
convergence based on differential growth rates sustaining for the long run can work only if poorer countries work hard to remove supply shortages, improve human capital and physical capital and not mistake episodes of easy money and A simple comparison of GDP growth asset bubbles as a sign of affluence. forecasts for the US, BRICS and India will prove this point. In 2006-07 India China's Slowdown came within a whisker of double-digit India has an enormous advantage in the growth and the US was growing at 3%. new economic ballgame. The majority of In 2014, US is expected to grow at 3% its problems are self-created and it is in while India would not dare to predict a a position to address them. This creates rate anywhere over 5-5.5%. In short the a fantastic opportunity for India to be a growth differential has compressed by a positive outlier. But before getting to a hefty 4 percentage points which clearly strategy for achieving outlier status, indicates the downfall in growth to be things need to be looked through a experienced by the BRIC nations. larger Asian prism. The recovery in the developed world is led by the US, but others such as Europe and Japan have also started showing signs of recovery. So money in the foreseeable future is likely to move back again to the developed economies. The dollar will strengthen, dollar interest rates will rise and, as a mirror image, emerging economies stocks and currency will fall and commodity prices can either stabilize or rise. Mercifully, the developed world needs emerging markets to grow, which in turn requires capital, and so some money must come back either into these emerging economies. But which emerging markets will manage to attract more capital depends on how quickly they get their economic act together The pundits are making all sorts of forecasts. Some of them still work on the assumption that convergence of the rich and the poo r wo rl d i s al most axiomatically inevitable. However,
February 2014
A lot of the reforms are needed to enhance India's status as an investment destination .Take GST, which is ready to roll out, if only all the states agree to this and political parties agree on a minor constitutional amendment to allow states to tax services. The implementation of a new tax dispensation is unambiguously good for g ro w th a nd re venu e bu o y anc y . The only thing holding it back is political will and consensus. Despite the much discussed drop in investment spending, India managed a respectable investment rate (gross fixed capital formation) of 30% of GDP in 2012-13. The rate is unlikely to be much lower this year. What has gone completely awry though is the incremental capital output ratio (the amount of capital needed to produce a unit of GDP) that has increased from an average of around 4 in the last decade to over 6 in 2012-13 which demands immediate attention at this point of time.
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Opinion
This drop in the productivity of capital is largely the result of delays in critical sectors like power and roads. This can be resolved if there is less arbitrariness in decision-making at the central and the state level decision making process.
FinNiche
when there are other more justifiable claims on the government.
Underpinning all this is the central issue of accountability that makes government responsible for the outcomes of its actions. We need to devise stringent Make Youth Work Ready penalties for the Centre, like penal Then there are bigger and daunting interest rates on government borrowings, challenges. We cannot just accept a when it breaches borrowing limit. young population as a blessing. To reap the so-called demographic dividend, Another problem is that of gold holdings there is need for a healthy, educated and that erode both investible financial employable population. Expenditure on savings and put a drag on the current health and education has to increase to account deficit. First, we must accept reach the threshold levels in the near that there is a sociological dimension to future. the Indians' obsession with the yellow metal and there will always be a core The target is to make them work-ready or demand for gold. However, offering employable. Studies have shown that of a instruments that mimic the returns on graduate pool of about 16 million, only gold but are not fully backed by gold 25% are employable. The focus has to be imports is one of the way of bringing the on skill creation. Industry and current account deficit in control. government need to work together to ensure the proper skill development of Finally, we must not confuse the noise of the youth population. The remedy is a an incredibly diverse democracy in combination of increased spending in the transition with the vibrancy of India. The critical sectors, enhanced efficiency of recent developments in the political and spending and greater collaboration economic scenario are welcome. We are between private and public sectors to m o v i n g towards r e p r e se n t a t i ve find viable solutions. democracy, which is transparent and accountable, fiscal prudence and The other remedy is to simply take the inclusive growth. The recent elections subsidy bull by the horns. Subsidies have served as a wake-up call to old account for 18% of total expenditure and thinking, both economic and political. We 49.5% of the total fiscal deficit. The irony are witnessing mind-boggling change, is that instead of addressing this with all sections of the population problem, we are adding to it everyday. seeking to champion performance, Take the new food subsidy bill, even if it transparency and accountability. The subsumes some of the existing programs, more noise the electorate makes, the it would still be a drag on the exchequer. more action that will follow. The only risk The decision to raise the cap on is a fractured mandate that will lead to subsidized LPG cylinders and de-link it policy paralysis and pandering to selfish from Aadhar would also bloat the interest. Barring this, our problems are subsidy bill. This is misdirected on the way to resolution. expenditure and we cannot afford it
February 2014
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FINANCIAL KNOWLEDGE
Tranche In structured finance, a tranche is one of a number of related securities offered as part of the same transaction. In the financial sense of the word, each bond is a different slice of the deal's risk. Transaction documentation usually defines the tranches as different "classes" of notes, each identified by letter (e.g., the Class A, Class B, Class C securities) with different bond credit ratings (ratings).
or more classes of securities whose rating is higher than the average rating of the underlying collateral asset pool or to generate rated securities from a pool of unrated assets". This is accomplished through the use of credit support specified within the transaction structure to create securities with different risk-return profiles. The equity/firstloss tranche absorbs initial losses, followed by the mezzanine tranches which absorb Working: some additional losses, again followed by All the tranches together make up what is more senior tranches. referred to as the deal's capital structure or liability structure. They are generally paid For the investors that have to invest in sequentially from the most senior to most highly rated securities, they are able to gain subordinate and generally unsecured. The "exposure to asset classes, such as leveraged more senior rated tranches generally have loans, whose performance across the higher bond credit ratings (ratings) than the business cycle may differ from that of other lower rated tranches. For example, senior eligible assets." tranches may be rated AAA, AA or A, while a junior, unsecured tranche may be rated BB. Risk: However, ratings can fluctuate after the debt Tranching can add complexity to deals. is issued and even senior tranches could be Beyond the challenges posed by estimation of rated below investment grade (less than the asset pool's loss distribution, it requires BBB). detailed, deal-specific documentation to ensure that the desired characteristics, such Tranches with a first lien on the assets of the as the seniority ordering the various asset pool are referred to as senior tranches, will be delivered under all plausible tranches and are generally safer investments. scenarios Typical investors of these types of securities tend to be conduits, insurance companies, With increased complexity, less sophisticated pension funds and other r i s k investors have a harder time understanding averse investors. them and thus are less able to make informed Tranches with either a second lien or no lien investment decisions. are often referred to as "junior notes". These are more risky investments because they are Modeling the performance of tranched not secured by specific assets. The natural transactions based on historical performance buyers of these securities tend to be hedge may have led to the over-rating and funds and other investors seeking higher underestimation of risks by end investors of asset-backed securities with high-yield risk/return profiles. debt as their underlying assets. These factors Benefits: have come to light in the subprime mortgage Tranches allow for the "ability to create one crisis. February 2014
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FINANCIAL KNOWLEDGE
Market This Week India's benchmark BSE index gains 0.61 percent, while the NSE index is up 0.56 percent, marking their highest in a week. The FMCG index gained the most among BSE sectoral indices by rising 1.36 percent as HUL and ITC jumped. Consumer durables sector was second best performer as it gained one per cent, followed by metal index that gained 0.92 percent. Foreigners bought 107.5 million rupees ($1.7 million) worth of Indian shares on Thursday to snap their five-day selling streak totaling $542 million in secondary markets. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Fifty Days Two Hundred Days
20,846.06 20,885.77 20,180.45 20,023.59
CNX Nifty
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FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages 6,195.08 6,212.35
Thirty Days Fifty Days Hundred Fifty Days Two Hundred Days
5,995.46 5,977.97
Commodities Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 28754.00 44369.00 6161.00
% Change (.02) .02 (.002)
Lending / Deposit Rates Base Rate Savings Deposit Rate Term Deposit Rate
9.80%-10.25% 4.00% 8.00%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
9.00% 8.00% 7.00% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
February 2014
62.16 84.50 60.86 101.64
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FINANCIAL KNOWLEDGE
NEWS OF THE WEEK Toyota close to $1 billion deal to settle US Probe Toyota Motor Corp is close to a deal to pay $1 billion to settle a U.S. criminal investigation into how it disclosed customers' complaints about unintended acceleration years ago. Toyota could reach a deal with U.S authorities within weeks, ending a four-year probe into one of the Japanese au to make r's mo st e mbar rassi ng international episodes. The deal under negotiation could still collapse, or the settlement amount could change.
(GDP) at factor cost at constant (2004-05) prices in 2013-14 is likely to be Rs.57.5 lakh crore as compared to Rs.54.8 lakh crore in the previous year, registering year-on-year increase of 4.9 percent, according to data released by the Central Statistics Office (CSO).
The government recently lowered the economic growth number for 2012-13 to 4.5 percent from the earlier projection of 5 percent. The agriculture sector is expected to grow at 4.6 percent, manufacturing is projected to contract by 0.2 percent and mining Tata Power posts Q3 net growth of 16 output will drop by 1.9 percent year-onpercent year in 2013-14. Tata Power Friday reported a 16 percent rise in standalone net profit in the third India’s forex reserves down $1.16 quarter ending December 31 at billion Rs.251.13 crore as compared to India's foreign exchange (forex) reserves Rs.216.38 crore in the same quarter of decreased by $1.16 billion to $291.07 the last fiscal. billion for the week ended Jan 31, Total income decreased, however, from Rs.2,580.93 crore in the previous fiscal, to Rs.1,998.59 crore for the quarter ended December 31, 2013. Its cost of fuel during the quarter decreased to Rs.2,307 crore, from Rs.2,696 crore in the same period last year. Tata Power shares closed Friday at Rs.75.00 a share, 0.25 points, or 0.33 percent, lower than on the BSE. Indian Economy to grow at 4.9 % in 2013-2014 The Indian economy is expected to grow by 4.9 percent in the financial year ending March 31, 2014 as compared to 4.5 percent expansion recorded in the previous year. The country's Gross Domestic Product
February 2014
Reserve Bank of India (RBI) data showed. The foreign exchange reserves had increased by $157.3 million to $292.23 billion for the week ended Jan 24. According to the RBI's weekly statistical supplement foreign currency assets, the biggest component of the forex reserves, fell by $1.48 billion to $264.56 billion. The foreign currency assets had risen by $1.20 billion to $265.93 billion in the previous week. RBI said that the foreign currency assets, expressed in US dollar terms, include the effect of appreciation or depreciation of non-US currencies held in reserve such as the pound sterling, euro and yen. The value of special drawing rights (SDRs) decreased by $25.6 million to $4.43 billion during the week under review.
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FINANCIAL KNOWLEDGE
NEWS OF THE WEEK India's reserve position with the IMF fell by $11.5 million to $1.99 billion. The value of India's gold reserves grew by $351.2 million at $20.07 billion.
Ministry further said it will respond within 6 months to the observations of the report which was tabled in Parliament by PAC Chairman and senior BJP leader Murli Manohar Joshi earlier Thomas Cook to merge with Sterling in the week. Holiday in $140 million deal Tour operator Thomas Cook (India) Ltd Nestle looking at options to reduce said on Saturday it will merge its L’Oreal stake operations with resort owner Sterling Nestle, the world's biggest food company, Holiday Resorts India Ltd in a deal is looking at ways to reduce its $30 billion stake in cosmetics firm L'Oreal, valued at 8.7 billion rupees. Bloomberg reported on Saturday. Nestle The deal will be structured in a multi- has told L'Oreal of its intentions, and the stage process in which 100 shares of two companies have discussed the issue Sterling will be swapped for 120 shares with banks, though no decision over the of Thomas Cook (India). Thomas Cook, in possible timing of any sale, which could a statement, said it will first make a take years, has been made, the report preferential allotment for 23.24 percent said. Nestle is under pressure to make its of Sterling at about 1.9 billion rupees intentions clear towards the cosmetics and will then purchase another 23.63 firm, its partner of 40 years, when the percent of Sterling for 2.7 billion rupees. ties that bind them loosen in April. The The merger, which is expected to close by Swiss company owns a 29.5% stake in the fourth quarter of 2014, will give L'Oreal and the expiry of a 10-year right Thomas Cook access to Sterling Resorts' of first refusal agreement with the 19 properties in 16 holiday destinations Bettencourt family in April should make it easier for Nestle to sell, though it has across India. no urgent need to do so. Finance Ministry disagrees with PAC’s China Central bank urges proper views on interest on tax refund Disagreeing with the observations of management of risk, liquidity Public Accounts Committee, the Finance China's central bank urged commercial Ministry today said it has followed banks to properly manage liquidity while standard practice and has not violated reiterating its promise to keep monetary any Constitutional provision by not policy stable and to clamp down on risky showing interest on tax refund as lending, noting that the world's secondseparate expenditure in the Budget. largest economy has yet to find a stable The statement comes in response to a base for growth. In its quarterly report of the PAC which observed that an monetary policy report released on expenditure of Rs 37,365 crore was made Saturday, the People's Bank of China on interest on refunds by the CBDT (PBOC) said it would step up oversight of during 2006-07 to 2010-11 without lending in risky areas such as the obtaining approval of Parliament through property sector and industries struggling necessary appropriations. The Finance with overcapacity.
February 2014
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FUN CORNER
Fun Corner FinQuiz 1. 2. 3. 4. 5.
In Indian economic scenario what significant reform was introduced by the Indian Government on April 1, 1957? Who founded the famous Wall Street Journal? What is the exchange rate of one currency for another over a fixed period of time called ? In which country's coins you can found the following lines imprinted, 'This is the root of all evils' ? Name the first private sector corporate launched the gold fund in India?
Last Week’s Answers 1. 2. 3. 4. 5.
BSE Meera Sanyal Benjamin Graham McKinsey Naina Lal Kidwai
Congratulations to Vineet Maniar for winning the Volume 28 quiz!
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Volume 29 Publisher: Aditya Agrawal
February 2014
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