Finxpress november 10 2014

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NOVEMBER, 10 | 2014 | A FINNICHE INITIATIVE

Pressure looms over RBI to lower Interest Rates | 2

Do write to us at: finniche.imt@gmail.com

Bank of Japan’s Decision: Right or Wrong? | 4 Leveraged Buyout | 6

Benjamin Graham | 11 Chinese Mobile—A new Era of Smartphone |12

November, 10 | 2014 | Volume 20

Pressure looms over RBI to lower Interest Rates

Club FinNiche successfully held its trademark event Riscon’14 on 8th and 9th November, 2014. The first day saw eminent speakers Dr Sudipto Mundle, Member Fourteenth Finance Commission and Shri Deepak Singhal, Regional Director RBI gracing us with their presence The second day, Encephelon, a case study presentation by the five selected teams was held . The case was based on Coal De-allocation and the judge for the event was Professor S R Dash, IMTG. Team Aces from KJ Somaiya secured First Place for the event and Team Ex-Fin from IMTG were runners up for the event.

Bank of Japan’s Decision: Right or Wrong?

Leveraged Buyout

With the Riscon fever still in the air, FinNiche launches its weekly magazine FinXpress with the In Focus talking about the ‘Pressure looms over RBI to lower Interest Rates’ which talks about the economic changes presently and its implications. The Opinion gives an overview of ‘Bank of Japan’s Decision: Right or Wrong?’.

The term of the week describes “Leveraged Buyout", a transaction of an acquisition using borrowed funds. Do have a look at the market section, Tech world which brings to you about Chinese Mobile– A new Era of Smartphone and Personality of the week, Benjamin Graham.

Benjamin Graham

Hope everyone likes the revamped version of magazine. Club FinNiche welcomes any comments, suggestions or criticism regarding the magazine. Please do write to us and share your ideas.

Happy Reading!

Chinese Mobile—A new Era of Smartphone

Regards The Editorial Team Club FinNiche

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

- By Kartik Awasthi

Pressure looms over RBI to lower the Interest Rates

Surprisingly, the government

RBI will be holding its bi-monthly monetary policy review on 2nd December 2014. The anticipation of a rate cut decision by RBI during this review has led to a rally in the Indian markets. There is a huge pressure from various sectors to reduce the interest rates but RBI governor may want to get more clarity on the inflation peak-off before deciding a rate cut.

also has joined the chorus, with Finance Minister Arun Jaitley himself making a case recently.

RBI

deputy

governor

Indian Finance Minister Arun Jaitley has shown an inclination towards a cut in the interest rates to boost the demand in the construction sector but the Reserve Bank of India has signaled it will not ease policy until it is completely confident that lower inflation.

Raghuram Rajan also cautioned companies that it might be too early to celebrate the fall in the inflation and there is still a long way to

HR

Khan’s statement quashes all hopes of a rate cut.

go before there is ease in the inflation.

The reduction in the rate of inflation over the past couple of months has given a sense of optimism for a rate cut, but inflation is not the sole factor to be considered by the RBI while

taking the decision and many more factors needs to be taken into account. RBI Governor Raghuram Rajan has to get clarity on all the factors before the monetary policy review in December.

The major contributors to the lowering of the inflation include the crude oil prices which have reduced by more than twenty six percent this year, prices of the vegetables, reduction in prices of commodities, which is helped by the steady inflow of capital from foreign investors which is helping the rupee stay steady. Also, helping is the slide in the prices of global soft commodities such as wheat, cotton and metals.

Retail inflation saw a drop to a low of 6.46% in September, which was much below the target of 8% aimed to reach in January 2015, and closer to the target of January 2016 of 6%. But this measure might accelerate early next year again once the base effects starts fading. The forecast as per the model of RBI indicates a retail inflation of 7% by March 2016 which may be lower if the prices of the commodity keep falling. The recent fall does not imply that the decline is permanent.

The improvement in the job markets of United States may not be a good news as it will result in an early increase in the interest rate in the biggest economy in the world which could slow or even reverse the large inflow of the capital from the FIIs into equity and debt.

There has been a record investment from overseas funds with INR 118,312 crore in debt and INR 83,437 crore in equities so far. this

Given the bottlenecks in the structure, economists believe that a 25-basis-point cut in the interest rate will not boost the investments suddenly. So Raghuram Rajan might undergo deep cuts in the interest rate once the inflation is under control.

Drop being led by fall in bulk deposit

rates,

which

have

dropped below retail deposit rates — a rare occurrence for the banking system.

outflows once the Fed increases the interest rate which will put pressure on Indian currency.

Moreover, a rate cut in December will be based on the assumption that commodity prices will remain low all through 2015. But

But the reality is that RBI might refuse to budge on the interest rates during this monetary policy review even though reduction in the inflation and industrial activities. A number of reasons are being attributed to this fact.

Firstly, even though the Consumer Price Index (CPI) based inflation has dropped by 330 bps since September, 285 bps is accounted for by commodity prices, 185 bps due to fall in food prices and 100 bps due to decline in the crude prices. This can move in any direction in coming months as this is not because of the demand compression. CPI inflation stood at 9.84 percent in September of last year. This has resulted in the larger than expected fall in the CPI numbers. This implies that before the base effect begins to fade away, the retail inflation number might show a fall even when there is a rise.

Secondly, RBI could choose to wait to see the complete impact of the hike in the interest rates by the Federal Reserve of US to pass through before taking the decision to ease the monetary policy as there will be capital

the global crude prices might not fall any further, rather it’s possible that prices might harden. An increase in the global crude prices can quickly reverse the domestic inflation as the prices of both petrol and diesel are deregulated.

The good news is that the interest rate across the banking system are set to head south in the next few months whether the RBI cuts the interest rates or not. The banks are flushed with liquidity and the demand for credit remains low. This has forced the banks to start the process of bringing down rates across loan and deposit products.

- By Aditya Agrawal

The biggest question going on in the world

This brings us to the present decision by the

economy right now is whether Haruhiko

Bank of Japan. The Bank of Japan announced

Kuroda, the governor of Bank of Japan, is a

that it would increase its purchase of

genius or the craziest man alive.

government bonds from Yen 60-70 trillion a year to Yen 80 trillion a year. This in dollar

Whether Haruhiko Kuroda, the governor of Bank of Japan, is a genius or the craziest man

To understand the true impact of the decision

terms comes up to an amount of nearly US

we would have to look in the past at Japan’s

$709 billion a year. This can be seen as almost

history. The early 1990s provided the world

buying up the entire bond market of Japan.

with a new benchmark of how policy

alive.

This

step

was

taken

considering

the

stagnation of base inflation at the 1.5% level, well below the 2.0% target of the central bank.

Furthermore, the board for monetary policy review was expecting to remain at the same level or go down. This did not augment well The Bank of Japan announced

with the central bank’s objectives and would

that it would increase its pur-

undo all the good work done to overcome

chase of government bonds

deflation. The only way out seemed to be the one

from Yen 60-70 trillion a year

taken

by

Mr.

Kuroda

of

QQE,

quantitative and qualitative easing.

to Yen 80 trillion a year.

decisions can go all wrong, and change one of

One of the primary problem that Mr Kuroda

the fast paced economies into deflation. This

faces is not that of policy but of the anxiety

started off one of the longest period of

that has set in due to the era of deflation. This

deflation of a major economy in near

can be quite clearly seen from the current

memory. It also provided us with the

trend in Japan, where the rise in inflation had

parlance of an “L” shaped economy. The

been a boon for multinational companies,

country has been consistently in deflation

who have used lower priced yen to boost

over the past nearly 20 years, and only

their profits. The numbers for these rise in

recently having returned back to inflation in

profits are even more astonishing, with it

2013. Its CPI inflation rate reached 3.2% in

having increased an average of 23% in the

September, which is higher than the last 66

current reporting year and had gone up to as

years average of 3.16%. This impetus was

much as 129% for a few in the previous years.

provided by the three arms of Abenomics, initiated by the Japanese PM Shinzo Abe.

This has created a cash pile of US $2 trillion,

an increase of nearly 10% from the last

But herein comes the catch in the situation,

years. Here arises the problem for Mr.

with the 10 year bond yield still being low at

Kuroda, wherein instead of this money

0.43%. There are many popular views as to

flowing back into the economy, to fuel

the possible reasons for it. But, one of the

growth and increase wage rates, has been

largest is that of Mr Kuroda being right in

left to lie in the company’s coffers.

what he is doing.

One of the outright positives

This issue of dealing with the inflation rate,

One of the outright positives from the

from

though gets more complicated due to the

announcement of QQE was the change in

the

announcement

of

QQE was the change in the

the policy board’s consensus estimate of

policy board’s consensus esti-

inflation increasing to 1.7%, providing a

mate of inflation increasing to

boost to the markets. This has been followed

1.7%, providing a boost to the

by the Nikkei touching new heights and forming new seven year highs almost

markets.

everyday, and providing ripple spill over positivity in all major indices across the world.

Mr Kuroda, though is not alone in this varied interests of the Abe government.

conundrum. His decision has put added

With the finance ministry pushing through

pressure on Mario Draghi, the president of

with its interests of reducing the size of the

ECB, to follow suit and increase its bond

sovereign

gets

buying to help rejuvenate the economy. This

exemplified. The Abe government has been

debt,

the

problem

has been coming at a time when the US Fed

going ahead with its increase in sales tax, in

has announced the end of its QE policy.

spite of large scale dissent and protest against it. Clubbing this with the opposition

Mr Kuroda would have to hope for the Be

Mr Kuroda has been facing from his own

government to come true on its promises of

board, it seems to be a step fraught with

structural changes for his decision to have

foolhardy.

the impact he intends it to have. A lack of a step in this direction would mark him as

There is also a popular view arising which

crazy in history, otherwise naming him as

believes that the Bank of Japan might just

one of the biggest geniuses present. The jury

have created a huge bond bubble, which

is still out and only history would be able to

would lead to the fall of the whole economy

judge him for his step.

once it starts collapsing.

It occurs when an investor acquires a controlling interest in a company's equity and substantial

portion

of

the

purchase price is financed by leveraging or borrowing.

A leveraged buyout (LBO) is a transaction of an acquisition of a company or any particular segment of a company funded mostly with borrowed funds. Here, a financial buyer (e.g. private equity fund) invests a small amount of equity (relative to the total purchase price) and uses leverage (debt or other non-equity sources of financing) to fund the remainder of the consideration paid to the seller.

Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets.

Basically, an LBO is the acquisition of a company financed with a substantial amount of debt/ loans that lever up the balance sheet of the entity being acquired.

LBO activity accelerated in the 1980s as investors looked to extract additional value for shareholders from companies. One of the largest LBOs so far was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch.

The three companies paid around $33 billion for the acquisition.

In LBO transactions, financial buyers seek to generate high returns on the equity investments and use financial leverage i.e. debt to increase these potential returns.

Financial buyers evaluate these investment opportunities by analyzing expected internal rate of return from such investment. The returns in an LBO transaction are driven by

some factors namely, de-leveraging ability, operational efficiency and revenue growth of the company.

Along with the returns, there are some risks involved.

For equity holders, due to high amount of debt company has to pay huge interest as a fixed finance cost. As the company is highly levered a small amount of change in the enterprise value can affect the value of equity.

For debt holders, due to substantial amount of loan a company may be over burdened.

Therefore, for debt holders company may be assumed to have default risk.

INDIAN MARKETS

Moody has reversed its India

This week the Indian markets were closed for two days due to Muharram and Guru Nanak Birthday on Tuesday and Thursdays respectively which had an impact on the volumes traded in the market. The market saw new highs (Sensex-28,010.39 and Nifty—8365.55). The markets retreated from theirs highs immediately, as the traders booked profits in the recent out-performer stocks. The market has a positive sentiment as the FED has ended QE and also due to success of BJP in state assembly elections in Haryana and Maharashtra.

Outlook, may upgrade India’s

Open

High

Low

Close

SENSEX

27943.04

28010.39

27745.37

27868.63

NIFTY

8348.15

8365.55

8290.25

8337.00

rating if Long Term Inflation is under control.

Japan

and

extending

Europe their

are

Monetary

Easing Policy allowing cash flows into Indian Markets.

RBI may lower interest rates earlier expected

than

expected

inflation

RBI’s target zone.

is

as

under

BSE SENSEX

COMMODITIES Commodity

Unit

Rs / Unit

% Change

Gold

10 grams

25932.00

1.85

Silver

1 kg

34796.00

1.53

Crude Oil

1 bbl

4861.00

0.98

US FED has ended its QE program started 5 years ago but maintains status quo on interest rates

EXCHANGE RATES INR/ 1 USD

61.65

INR /1 EURO

76.48

INR/ 100 JAPAN YEN

53.58

INR / 1 POUND STERLING

97.47

US Non Farm Payrolls rise by 214,000, whereas the consensus was at 235,000.

INTERNATIONAL MARKETS

Open

High

Low

Close

NYSE Comp

10834.40

10870.90

10704.00

10864.58

NASDAQ

4633.17

4638.80

4594.91

4632.53

S&P 500

2019.50

2034.26

2001.00

2031.92

FTSE 100

6546.47

6608.23

6444.89

6567.24

CAC

4225.81

4275.30

4118.50

4189.89

DAX

9305.73

9467.36

9148.78

9291.83

NIKKEI 225

17169.00

17194.00

16729.00

16880.00

SSE 50

2420.18

2453.93

2402.15

2419.15

Hang Seng

24133.25

24133.45

23430.00

23550.24

Indian e-commerce market to reach USD 20 billion next year The e-commerce market in the country is expected to grow 37 percent to reach USD 20 billion by next year on the back of growing internet population and increased online shoppers. E-commerce in India is a USD 11 billion market, and is estimated to reach USD 20 billion by 2015, growing at a CAGR of 37 percent over 2013-15.

Currently, online travel dominates the e-commerce market but in the future, e-tailing will drive the growth. Online travel constituted 71 per cent of the e-commerce market in India, The increase is mainly due to increase in foreign currency assets which increased by USD 2.033 billion to USD 290.365 billion

during

However,

same

Special

followed by e-tailing (16 per cent). However, going forward, e-tailing will be the biggest growth driver, with expected CAGR of over 60 percent to USD 7 billion in 2016 from USD 1.7 billion in 2013. Within e-tailing, fashion is likely to be the driving segment. Fashion was USD 559 million in 2013, and estimates peg the growth in fashion e-tailing to anywhere between USD 3 billion and USD 6 billion by 2016.

week.

Drawing

Rights and the India’s reserve position

in

Monetary

international Fund

were

decreased by USD 19.5 billion and USD 7 million respectively while Gold reserves decreased

by USD 275 billion to USD 19.738 billion.

Online insurance sales to touch Rs 15k crore by 2020 The insurance industry expects online sales to grow by around 20 times to Rs 15,000 crore by 2020. Digitalization influence is quite high in the country with the Internet access is growing at a phenomenal pace and rising smart phone penetration. It is expected that sales in the insurance sector to grow by 20 times to Rs 15,000 crore by 2020 through the digital medium.

The online insurance market is now is over Rs 700 crore, in which life insurance sales contributed Rs 300 crore, motor insurance around Rs 250 crore and other segments like health and travel make up for about Rs 150 crore. It has been estimated that by 2020, three in

every four insurance policies would be influenced by digital channels during either

the pre-purchase stage, purchase or renewal stages, the report said. In insurance, term life plans and travel insurance have already picked up substantially in the last few years, the report said. The report explained that Google's Consumer Barometer 2013 showed that since 2008 search queries for motor insurance has grown six times, that of health insurance has grown by 4.5 times and life insurance queries have grown by 4.5 times.

Pay Rs 20 for more than 3 ATM uses at SBI, Axis, HDFC Bank Banking consumers will have to pay more if they are prolific with ATM transactions as largest lender SBI and its private sector peers HDFC Bank and Axis Bank have capped the free-usage at three in six metros. The capping and additional fees on excess usage come following the recent Reserve Bank circular allowing banks to limit the number of free ATM transactions to five -- three in the largest six cities and two Laxmikant Parsekar was sworn

elsewhere -- a month.

in as New Chief Minister of Goa along with nine other

Under the new norms, which have been accepted by the RBI, a customer can do just

Ministers at a ceremony held at

three free ATM transactions in the six largest cities at own-bank machines and two

Raj

elsewhere. The SBI, which had reported close to Rs 400 crore loss by way of paying

Bhavan

today.

Goa

Governor Smt Mridula Sinha

other banks as inter-bank ATM

usage in FY14, was the first one to cap ATM

administered the oath of the

transactions at three and impose fees of Rs 20 per subsequent transaction. Since

office and secrecy to the new

November 1, the new norms are effective at SBI.

Chief Minister.

Jet Airways board approves raising up to $300 million via NCDs

In a stern warning to Pakistan, India today said there cannot

The board of Jet Airways has given its nod to raise long-term finance of up to USD 300 million via redeemable preferential shares or non-convertible debentures (NCDs). The fundraising will be its largest after Etihad’s USD 330-million investment in the airline.

be a dialogue with Islamabad if ceasefire

are

While the timeline of the fundraising has not been outlined, the move will help Jet

repeated. "……….if repeated

violations

Airways bring down its debt. Meanwhile, the airline has reported its first quarterly

ceasefire violations take place

profit since 2012 on Friday, thanks to the sale of its frequent flyer business, but the

then environment for dialogue

airline continued to lose money once one-off gains were excluded. Jet, which has

itself suffers," Defence Minister

struggled to make money amid fierce competition for fares and high operating costs,

Arun

said net profit totaled Rs 69.8 crore in the three months to September 30 after it banked

Jaitley,

who

is

also

holding the portfolio of the Finance Ministry, said at the India Global Forum meeting.

a Rs 305 crore gain from the sale of its Jet Privilege frequent flyer program.

Anderson School of Management.

Graham’s work He wrote two books Security Analysis and Intelligent Investor. Security analysis was published in 1934 and has been considered a bible for serious investors since then and The Intelligent Investor was published in 1949.

Warren Buffer has described The Intelligent Investor as “the best book about investing ever written”. In Security Analysis, he proposed a clear definition of investment which was distinguished from what he deemed speculation. He drew a fundamental distinction between investment and speculation. Graham recommended that investors should spend time and effort to analyse the financial state of companies.

May 9 , 1894

Columbia University

Security Analysis (1934) The Intelligent Investor (1949)

Benjamin Graham was a London born American professional investor. He was a scholar, financial analyst and widely recognised as the father of value investing.

This investment approach he began teaching at Columbia Business School in 1928 and subsequently refined with his famous book Security Analysis.

Benjamin and his disciples Graham had many disciples, many of whom went on to become successful investors themselves. His most well-known disciples include Warren Buffet, Irving Kahn, Walter J. Schloss and William J. Ruane to name a few.

Buffet described Graham as the second most influential person in his life after his own father. Graham also taught at the UCLA

In The Intelligent Investor, he wrote that investment is the most intelligent when it is most business-like. He said that the stock investor is neither right nor wrong because others agreed or disagreed with him, he is right because his facts and analysis is right.

Graham’s favourite allegory is that of Mr. Market, a fellow who turns up every day at the stock holder’s door offering to buy or sell his shares at different price. Usually, the price quoted by Mr. Market seems plausible , but occasionally it is absurd.

Alongside his revolutionary work in investment finance, Graham also made significant contributions to economic theory.

He devised a new basis for both United Sates and Global currency.

- By

Abhinay Gandotra

A Chinese electronics company

The first image that comes to our mind when we talk about Chinese mobile phones : cheap phones with low quality display features. The people with whom we associate these phones belong to lower class and lower middle class.

The image though is changing or rather I should say is evolving. With introduction of brands like Xiaomi, Chinese mobile phones have positioned themselves quite differently. With its initial positioning of low end smartphones it has positioned itself as high end smartphones but at a lower cost and no compromise on quality.

Xiaomi already has captured the largest market share in China and is emerging as a global smartphone superpower. For the first time it has jumped to the number 3 spot in the worldwide smartphone market behind Samsung and Apple. As per the data given by the International Data Corporation (IDC) Xiaomi shipped around 17.3 million handsets and captured a market share of 5.3 percent worldwide. These results are largely due to the focus towards the Chinese and other adjacent markets.

Xiaomi’s launch in India has been very successful. It entered Indian markets through online flash sales via flipkart and since then each and every time Xiaomi has put its mobile on sale they have been sold within seconds. Xiaomi has already sold over 500,000 handsets within four months of its operations in the Indian market.

Talking about the specifications Xiaomi sports a 5 inch full HD IPS LCD touchscreen display (1920Ă—1080 pixels resolution) with 441 ppi pixel density. The operating system Xiaomi supports is Android 4.3 Jelly Bean and it has been optimized with MIUI version 5. It is powered by 2.3GHz quad-core Qualcomm Snapdragon 800 8274B processor with Adreno 330 GPU. It has 2GB of RAM and 16 GB of internal memory with no further memory expansion available. It also sports a 13 megapixel rear end camera with 2 megapixel front facing camera.

There is no doubt that Xiaomi with its specification and marketing strategy is giving a run for money to Samsung and Apple....