Infineeti may2015 summer edition by InFINeeti- The Business & Finance Magazine of IIFT

InFINeeti | Summer Edition |May 2015

InFINeeti | Summer Edition| May 2015 2

FROM THE EDITOR’S DESK

Dear Friends, Greetings from Team Infineeti !!! As India gets back on the high growth path, concerns remain about inclusion and sustainability of this growth. For India to achieve these economic objectives, it is necessary that high growth is complemented with a commensurate growth in employment. With this in mind, India over the past few years has released national polices related to manufacturing and skill development. Recent years however have not been kind to the manufacturing sector with the IIP only recently gaining consistency in holding itself above the 2.5% mark. Investments in manufacturing would be dependent on regeneration of demand and a vibrant retail sector is essential to attract this investment. Keeping this in mind, in this edition we focus on the Retail sector of India. We try to uncover opportunities for investment that this sector presents and challenges on the policy and macroeconomic front. We also try to understand key past and present statistics of this sector to get a picture of where it is headed. Maintaining our focus on the Manufacturing sector, we now turn our attention to what the new government has to offer. The Union budget 2015 was perhaps the most talked about event of 2015 till now. With the new government establishing itself at the Centre, speculation rose about what would be in store for India’s manufacturing sector in the coming year. In many ways, the budget of 2015 gives a rough framework of policies likely to be followed by the government in the coming 4 years. We try to unravel the budget to bring to our readers key highlights and sops for the manufacturing sector. We try and analyse whether the budget can deliver the much needed boost that manufacturing sector needs and the likely challenges that India might face. The prolonged low growth phase that the Indian manufacturing sector is experiencing can be traced back to the 2008 Economic crisis. The crisis triggered easing across the world with governments going into spending sprees. India was no different. With growth being moderate-at-best globally with some exceptions like China and recent Quantitative Easing Tapering by the Fed, one begs the question—Was it too soon to curtail the easy money policy? We try and get to the bottom of this question in an article on the economic crisis and the events that have unfolded since. An undeniable component of India’s growth story over the past years has been the focus on Sustainability. Successive governments have strengthened environmental legislation with courts playing their role in ensuring that India remains in the race in a battle to balance environment with development. How issues related to growth and concern for the environment can be balanced would be one of the most challenging aspects of governance in the coming years. Green Financial Products present an opportunity to combine the profit making capacity of the financial markets with the growth decelerating effects of environmental regulation. With this is mind, we try and explore the possibility of finding a middle path in the growth v/s environment debate. Besides these, the edition also features regular columns like FIN-Trivia, FIN-Cross, FIN-Trend and News Chronicles. We also present to you a list of the 10 most significant financial events of 2015 till now. We also see this magazine as an opportunity to learn from our readers through their feedback. Do write to us with your suggestions and recommendations. We can be reached at infineeti@gmail.com

Happy Reading!!!

InFINeeti | Summer Edition |May 2015

CONTENTS

>>> Page 4

The euro crisis

The future of green financial products in India

Has the world come out of world economic crisis?

Indian Retail: its opportunities and challenges

Budget 2015: Does it deliver the much needed push to the manufacturing sector

>>> Page 15

>>> Page 20

NEWS CHRONICLE

FIN-CROSS

Opportunities and

EQUITY RESEARCH

Challenges

FIN TREND

Indian Retail: Its

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THE EURO CRISIS: EURO FALLS TO FRESH 12-YEAR LOW AGAINST THE DOLLAR: THE WAY OUT BY– DEVESH AGARWAL IIFT, KOLKATA

Introduction

tors that led to the decline of Euro before moving to the impact of falling currency and the way out. Why Euro has fallen to 12 year low against US dollar? Four major factors that drove the steep fall in euro against dollar are: ECB’s QE launch

The ongoing Euro Zone crisis has already caused much damage to the European economies in the past with the news of Greece exiting from the Euro zone surfacing from time to time. But so far the fate of Greece is still undecided as the country is still in the process of completing the existing bailout agreements with Eurozone and International Monetary Fund. At the back of optimistic outlook fuelled by declining crude oil prices thereby stimulating consumer spending, the ECB president Mario Draghi decided to kick off bond buying program, similar to the one started by Federal Reserves in US in the aftermath of global financial crisis in order to boost consumer spending. But as fate would have it, after few days of ECB commencing with its bond buying program, the Euro fell to a 12 year low against greenback on 13-March 2015 closing at $1.0482, the lowest since 2003. This can have both good and bad implications on European economies as well as other emerging economies of the world. It would be noteworthy to discuss the fac-

The European Central Bank launched its massive quantitative easing program on March 9 in an effort to pump 1 trillion euros into Europe’s economy, implying that the central bank will be infusing 60 billion each month over the next one and a half years in order to restore the inflation rate to a target level of 2 percent thus facilitating economic growth. The program is expected to conclude by September 2016. By pumping money, the ECB plans to weaken the euro against other major currencies thereby boosting the continent's exports and inflation. A weaker euro can boost the continent’s ailing economy by driving the exports. Through QE program, government plans to lower the bond yields. With interest rates at low levels, investors are looking to move capital overseas into countries such as the United States, where they are likely to expect a better return.

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Looming rate hikes from US Fed The Fed after spending trillions of dollars in its largest ever bond buying program, is contemplating of hiking the interest rates, owing to the improved economic situation prevailing in the States. The US central bank is thinking of tightening its monetary policy by raising the interest rates in 2015. The timing of the Fed's move to raise the interest rates is adding to the volatility in the euro as the U.S. dollar continues to surge on the prospect of higher rates. U.S. dollar was also in the same plight when the Fed started its QE program in the aftermath of the financial crisis. During the first phase of the Fed's QE program that commenced in November 2008, the dollar nosedived 16 percent against the euro, remained weak up until the Fed’s bond buying program ended in October. Post that, the U.S. dollar has risen 20 percent against the euro. ECB’s record low interest rates A third factor is ECB’s record low levels of interest rates by cutting the rates to a historic low of 0.05% in the month of September in order to fight deflation. The main motive behind doing so is to encourage Eurozone banks and lenders to provide funds easily to businesses and household borrowers at lower interest rates, with an objective to boost private spending by increasing investment and consumption. But reduction in Eurozone interest rates in comparison to interest rates in the U.S. also increases the relative attractiveness of holding dollar-denominated debt offering higher returns as opposed to euro-denominated debt that offers lower interests. Thus the investors, in order to buy the now-more-attractive dollar-denominated assets, sell their euro-denominated assets thereby buy-

ing U.S. dollars to complete the purchases and thus increasing the value of the dollar as compared to euro. Greece Crisis adding to Euro’s volatility Greece government has been granted extensions to the country’s bailout program but as the cash strapped country has been creeping back into the headlines, reigniting tensions over its possible exit from Eurozone, it has been adding downward pressure on Euro. Impact on Economies America A strong dollar is both a boon as well as bane for the U.S. economy. But whether the dollar's rise results in a net plus or a drag depends on the reaction of Federal Reserve. With unemployment dropping, Fed is most likely to raise interest rates sometime this summer in order to stave off inflation. The issue is that a hike in interest rates would strengthen the dollar further, thus attracting investors, and as investors pile into a currency, it will appreciate. At the same time, cheap imports should keep prices from surging in the near future, just like low oil prices have kept inflation under control for past several months. So, the stronger greenback gives Fed two very good reasons to be happy, by keeping inflation in check and threatening to curtail exports. Eurozone Declining Euro against dollar has both pros and cons. The biggest positive is the booming exports. According to the projections of ECB, a 5 percent decline in the euro’s trade weighted exchange rate could boost Eurozone GDP by 0.3 percent. But the downside of the falling euro is that banks will now have to lend at record-low interest rates, and will have to lend at nearloss rates as institutions keep slashing rates across the continent. India With the slide in euro against dollar, the rupee also weakened against dollar, which is a matter of concern for the Indian IT companies due to the lower rupee realization resulting from weaker euro. Because of this, there could be a shift from Europe to US with regards to marketing perspective, but not from the perspective of client concentration because it is important for Indian firms to have long term relationships with its European clients even through difficult times.

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The Way Out Factors that may reverse this trend of euro-dollar exchange rate movement can be following: Continuous appreciation of dollar will weaken US economic activity and therefore drive down inflation. In that case, the Fed will probably become more dovish while raising the interest rates. It is hard to say whether Asian and Middle Eastern economies will in fact want to shift more reserves into dollars, especially if they have to convert the euros they have acquired since 2003 at a loss and far below their purchasing power parity. Several countries, for both financial and geopolitical reasons, have spent decades diversifying their wealth away from dollars. With the US increasingly prone to using its currency as an instrument of diplomacy, China, Russia, and Saudi Arabia, for example, may be reluctant to shift excess of their reserves into US Treasury bonds. Huge transatlantic trade imbalance is another factor that may reverse the currency movement. According to IMFâ&#x20AC;&#x2122;s forecast, the gap is already wide with US running a deficit of $484 billion this year, versus a $262 billion surplus for the Eurozone and this gap is most likely to widen much further, owing to the euro's 20% depreciation since the IMF released its estimate last autumn. The consequence is that hundreds of billions of dollars of capital will have to flow annually to the US from Europe in order to maintain the current eurodollar exchange rate. While the higher US interest rates may continue to attract some investors, the combination of a more competitive euro, the ECB's enormous QE program, and diminishing fiscal pressures in France, Italy, and Spain can generate a genuine economic recovery in Europe thereby making Europe an attractive destination for investors to park their funds. The resulting capital influx into European shares, property, and direct investment could easily outweigh the cash and bond investments lured by rising US interest rates owing to the cheaper Euro assets than its US counterparts. Conclusion As of now, no one can say for sure what can strike a balance between the opposing forces operating on the euro-dollar exchange rate, but one thing out of all this is certain: Whereas the gains from playing transatlantic interest-rate differentials may run to the tune of 1% or 2% per year, investors may easily lose it in a single day or even in an hour by buying the wrong currency

in case of reversal of trend. From past Japanese and Swiss experience, we know very well that selling a low -interest-rate currency to chase higher US yields is often a costly mistake.

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InFINeeti | Summer Edition| May 2015 8

THE FUTURE OF GREEN FINANCIAL PRODUCTS IN INDIA BY-SAMIR CHINCHOLIKAR JBIMS, MUMBAI

promoting growth with a sense of responsibility to-

Introduction The rapid increase of carbon emission in the atmosphere has led to ecological imbalance resulting in global warming phenomenon. It is estimated that all glaciers in the world will melt by 2050 in conclusion melting of these glaciers will lead to rising sea level and frequent floods. In order to reduce the impact of this catastrophe it is necessary to increase spending on technology which will reduce carbon foot prints around the world.

wards the atmosphere. What are Green Financial Products? Green Financial products are the equilibrated convergence of Economic growth, Finance and Environment which also integrates modern technologies and Industries. These Products focus on abbreviating negative environmental impacts and rendering environmental benefits. Few of the significant Green Financial Products offered by banks are listed above. Increasing

To encourage these government policies are needed

pressure from United Nations Environmental Pro-

which will commercialize and offer financial support to

gramme (UNEP) in addition to rising public awareness

the organization working for this cause. This has obli-

has impelled the governments to bring in laws and

gated the governments across the planet to come to-

regulations which would promote sustainable growth

gether and impose strict regulations like Kyoto proto-

and act as a deterrent towards unsustainable develop-

col. While this is happening the concept of green fi-

ment exercises. This has led to rise in demand for

nance emerges as the viable solution for tackling and

Green Financial Products and Services all over the

Source: Jin Noh Hee, Financial Strategy to Accelerate Innovation for Green Growth (201

10)

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Green Finance in India With the growing importance of clean energy and the government's stress on renewable energy 27 state-owned banks have concurred to grant credit to nonconventional energy projects. PSBâ&#x20AC;&#x2122;s in India have agreed to provide 1.71 lakh crore to green energy projects over the period of next 5 years. These funds were assured last month, earlier the banks and investors were not active in the Renewable energy sector which can be seen in the above table. The schemes

Type of nvestor

Category

has to obtain satisfactory rating from the Indian Green Building Council (IGBC). The project is rated on the basis of five parameters viz. Materials and Resources, Indoor Environmental Quality, Water Efficiency, Atmosphere and Sustainable Sites. Once the ratings are obtained then the buyer has to pay 15% of the upfront margin against the traditional 20%, no processing fees will be charged and the interest rate on the loan is 25 basis points lower than other home loans. C) Green Bonds:-

Total Reg stered in nd a

Active n Renewab e Sector

Percentage of Bank Transacting n RE sector

Public Sector Banks

35%

Private Sector Banks

20%

Foreign Banks

Private Equi y

31%

Venture Capi al

180

12%

ns i u ional nves ors

Insurance Funds

46%

Development Banks

Development Financial ns i u ions

100 00%

Commercial Banks

Equity nves ors

Source: - CRISIL research- Renewable Energy Sector

which already exist in the market are explained below. Under the directions of Ministry of Non- Renewable resources the nationalised and Scheduled Banks in India have launched Green loans for the people who are interested in renovating their homes in an ecofriendly manner also the Ministry of New and Renewable Energy has advised banks in India to promote loans seekers to install rooftop solar PV (photovoltaic) and include the cost of all such equipment in their home loan. The rate of interest for this type of loans will be as low as 4%.

At present India generates 30 gigawatt power from renewable sources and has kept a challenging goal of generating 175 gigawatt power by 2022. This will require massive funding of 200 billion $. In March 2015 Exim Bank of India launched five year 500 million $ green bonds for public. As the bond was subscribed 3.2 times it was an immense success. Earlier in February 2015 Yes Bank had launched Green Infrastructure Bonds worth Rs 500 crores. Indian Renewable Energy Development agency had also issued bonds that were used to fund renewable energy projects in India.

B) Green Loans for New Residential and Commercial Projects:-

D) Green Energy Loans:-

A) Green Loans for home improvement:-

Environmental friendly constructions can avail Green loans for their projects. The Green building or Home

In order to bring down the cost of borrowing for green energy projects State owned Rural electrical

InFINeeti | Summer Edition| May 2015 10

corporation limited have revised their lending rate. The loans for renewable energy projects are lowered by 75 basis points as compared to conventional energy projects. In addition to this to simplifying the process of repayment the tenure of such loans has been increased from 12 years to 15 years. Why does India need Green Financial Products? The reasons to promote Green Financial Products in India are as follows A) Encourages technology diffusion and ecoefficient infrastructure Government Policies encouraging investments in cleaner energy substitutes will assist in bringing down the cost of these alternatives and facilitate broader technology dispersion. Green investment will help India develop Eco-efficient Infrastructure that will facilitate resource management which will in conclusion increase India’s competitiveness. B) Creates Comparative Advantage With the increase in pressure to tackle climate change and global environmental crises low carbon green growth has become crucial. To have Comparative advantage over its peers by the time the environmental regulations are in place it is necessary for a developing country like India to have green infrastructure. C) Adds Value

D) Increases Economic Prospects Renewable energy is the need of the hour. Economy needs an alternative source to facilitate growth without hurting the environment. With Green Finance India can avoid the trap of “Grow first and clean up later” which other developing countries have fallen into.

Market Opportunities for Green Financial Products in India

The growth of green financial products in India is dependent on the following factors: A) Clean and Environmental Technology:-

In the coming years generating clean energy and environment technology will need a vast amount of funds with innovative funding packages, formulated for long term gains.The government has stepped up reforms to continue the growth of the renewable energy source and to ensure the projects do not fall short of funds. Also globally the demand for greens financial products has increased in the last 10 yrs. making the surrounding in India positive for the growth of green financial products.

Businesses, organisations and corporations are increasingly looking at “Triple Bottom line” to report their overall growth. A source like green finance will attract investors and clients interested in sustainable and environmentally conscious growth.

Source: - Ministry of New and Renewable Energy, India

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B) Carbon Market:-

Companies registered in the developed world have to meet the carbon emission target kept by their governments. If the companies are not able to achieve the target they have the option of buying the carbon credits from the companies who has surplus of these credits. This lead to the formation of Clean Development Mechanism (CDM) defined in the Kyoto Protocol that provides for emissions reduction projects that generates Certified Emission Reduction units which can be traded in emissions trading schemes. With a share of 31 % (CDM) carbon market in India is one of

This number has gone up by 8 times in 2014. India has now 1.1 billion square feet green building

second only to USA which has about 3 billion square feet of green building India Green Building Council (IGBC) has kept a target of 10 billion square feet of green building by 2022. With such explosive growth targeted in the next decade it is apparent that green financial products will play a crucial role in this growth.

Conclusion Source: - United Nations Environment Programme (UNEP)

Several measures are taken by the government to en-

the fastest growing markets in the world also it has already generated 30 million carbon credits which is second highest transacted volume in the world. India is expected to earn at least five to ten billion dollars in the next decade. Indiaâ&#x20AC;&#x2122;s Multi Commodity Exchange is the also the first exchange in Asia to trade carbon credits. This clearly indicates that in coming years we will be able to see exponential growth in Carbon trading backed by Green finance.

hance the potential of renewable energy. The aim of

C) Green buildings:-

houses is required.

Indiaâ&#x20AC;&#x2122;s green commercial building sector is growing at an unprecedented rate. By the end of 2008, only 11% of the residential constructions were certified.

the government is to develop and deploy new and renewable energy for supplementing the future energy requirements of the country. However green finance is not popular among corporate houses because of lack of information and cost involved in it. To ensure growth of green financial products policy reforms with awareness among the citizens and the corporate

InFINeeti | Summer Edition| May 2015 12

Has the world come out of World Economic Crisis? By Trisha De Niyogi SIIB, Pune Has the world come out of World Economic Crisis? As the notion of “Too Big to Fail” was disproved by the historical collapse of the sprawling global bank, Lehman Brothers in September 2008, we witnessed the onset of the world’s biggest and scariest downturn in the last 80 years. With a decade’s hindsight, it was clear that there were multiple reasons for the crisis. The recession was triggered in the US due to the folly of the financiers. The “Great Moderation” years of low inflation and stable growth rate provoked complacency and risk-taking. The “Saving Glut” in Asia, also played an important role in pushing down the global interest rates. European banks borrowed unabashedly from the American money markets. The world seemed to have become risk free. Irresponsible mortgage lending to ‘subprime’ borrowers with hapless credit history, were passed on to the financial engineers of these big banks, who in turn pooled them together and used them in turn to back securities, popularly known as collateralized debt obligations (CDOs). But the false sense of ‘risklessness’ was to be smashed into the ground when their assumption that property markets in different American cities were uncorrelated i.e. they would fall & rise independently of one another. When the American housing market crashed, a chain reaction was triggered exposing the fragilities in the financial system. Mortgage backed securities slumped and thereafter several banks went kaput. But the bankers were not the only one to be deemed for the entire fiasco. The central bankers and other regulators are also equally responsible to keep a check on the risk taking activities as well as mishandling the crisis. Ben Bernanke had highlighted the saving glut a year prior to taking over as the chairman of the Fed in 2005. But, as the European banks drew

blind eyes on the glut, for higher gross capital flows. Dodgy American securities were bought to finance their purchases. Europeans may claim to be innocent victims, in fact their banks were quite involved in it. On the other hand, the internal Imbalances in Europe were just as crucial as those between American and China. Several Southern European nations accumulated huge current-account deficits while the northern half ran surpluses. These imbalances were financed by the credit flows within the euro-zone and thus the bad debt got spread over the entire euro zone. Seven years down the line, today, it is easier to be sanguine about the low oil prices and interest rate cuts. But, it is imperative to remember that all that glitters may not be gold. The big question is whether they are the consequence/symbol of incipient weakness or eventual act to give the economy a second wind. The tapering of Quantitative easing can be seen as a sign of recovery of the US economy. However, the zero-sum game in foreign currencies lead to another currency war, which consequently slowed the recovery of several developing and transition economies even as US pulled itself back on the track. The Fed might be considering pushing up rates but many more central banks like those of India and Poland have been cutting. That is not a sign of a global recovery. Significant economies are still trying to nurse themselves back to normalcy, but the presence of an underline condition and the absence of Dr. House (reference taken from the famous TV series ‘House’) have prolonged the diagnosis. Euro dipped below its 1999 launch rate as against US dollar. The acute deflation in the Euro zone along with record low bond yields; show a classic sign that investors are still seeking shelter. Greece is surviving on the life support via the emergency lending from the European Commercial Bank (ECB) and the Interna-

tional Monetary Fund (IMF).

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Bank (ECB) and the International Monetary Fund

other disastrous crisis. From Nigeria to Syria, and

(IMF). Irrespective of the debacle, which is ensuing in

from Ukraine to Venezuela, several hot spots have

Greece, the aging population and the slumped econo-

been identified on the world risk map where a geopo-

my may not be completely out of the recession as the

litical clash may trigger another world crisis even be-

politics also goes for a restructuring. Investors might

fore the previous crisis phased out. Unease about the

still have some trust left in the Greek economy, only

strength of the global economy is visible elsewhere

because of ‘Euro’ (pronounced as ‘Oiro’ in German)

too. This race to devalue their currency has added

acting as the big brother; however, countries like Bra-

fuel to the fire. “Each country for itself” is the current

zil still don’t seem to have risen in the eyes of the ever

stand of almost all the countries as they struggle to

so powerful investors. Brazil even though is doing

steer themselves back to the path of high growth rate.

quite well but the copious amount of capital accumu-

At the same time we see China slowing down, which

lated during quantitative easing is to look out for.

seemed to be rising up at an accelerating rate just the other day. The Chinese wall of debt has become al-

And then, the Swiss Franc collapsed. Just like the American government bonds the Swiss Franc were considered as ‘safe havens’. Yes! That’s why all that black money is secretly stored in the Swiss Banks! Keeping that aside, Switzerland had introduced an exchange-rate peg against Euro in 2011 to protect itself from the turmoil. But, by 2015 it had an excess reserve of FOREX and with the threat of hyperinflation looming over their head plus the several other reasons was forced to relinquish the peg. The removal of cap spurred panic among investors and as a result the projections of UBS forecasted the Swiss growth to be at 0.5% rather than 1.8% and will probably continue to be in deflation in the following years. Another example would be that of Japan. Japan had technically fallen into a recession in the later half of 2014 as a result of the fall in private consumption due to the higher consumption tax, which is undergoing a planned cut still thereafter the country’s GDP growth rate is predicted to be 1.1 per cent in the year 2016. The visible-to the-naked eye dead freeze in Russia

due to the sanctions levied on the country is yet another example that the global economy has still not been nursed back to good health. Thus, I believe that the world has not exited the “World Economic Crisis” truly. The pockets of the economy might have been performing better but a majority of the countries are still in the process of recuperating. Interestingly, the year 2015 is like a fork on the road leading to two paths: rigorous recovery or back to an-

most 300 per cent of its GDP with a mounting debt; it may be even safe to say that we are at a brink of another economic crisis even before we completely recover. It is like contracting typhoid as soon as we recover/ recovering from dengue. The corrective measures appear to be fixing the situation; but will be short-lived if ‘corrective’ corrective measures are not implemented ASAP. As seen above the tsunami of debts is continuously paralyzing economies and it may not be wrong when the next round of crisis hits the global economy. Moreover, we know that recovery depends on demand – consumer spending not just by the wealthy but everyone including the bottom of the pyramid. As the debt to income ratio rises, we may be looking forward to massive losses on a mark-to-market basis, even for those who have invested/saved into these bonds; because if wealth goes down so does people’s optimism about the world economy. The inequality may yet be another reason for a possible recession.

We also cannot ignore the fact that both financial and non-financial companies are now sitting on huge capital; capital huge enough to buy out an entire country (which if used for bailing it the countries under strain would do good for the world at large; boost to philanthropy- ism) and if that is unleashed, every common man would face the wrath of hyperinflation. But, it is as if a norm for the companies to be BBB-rated. Except J&J, Microsoft and Exxon Mobil, none have been

rated AAA which means that there is a probability of 4 per cent of companies defaulting/bankrupt. Hence, we may have the next Enron case.

InFINeeti | Summer Edition| May 2015 14

none have been rated AAA which means that there fault lines, but have we not learnt anything from our is a probability of 4 per cent of companies defaulting/ mistakes? So, be cautious the crisis is not over, rabankrupt. Hence, we may have the next Enron case. ther there is a bigger crisis looming over our shoulders. To conclude I would just like to quote Ronald Many such theories with great probabilities are circuReagan and leave it open for you to think whatâ&#x20AC;&#x2122;s next lating in the circle of economists, politicians, bankers, for the house of cards? central bankers (separate mention is paramount to emphasize on their role as compared to just a banker), but their words need to be heeded. Otherwise, we might be heading for another chaos. Dr

Raghuram Rajan and many others had expressed their concerns and pointed out the

â&#x20AC;&#x153;Recession is when a neighbor loses his job. Depression is when you lose yours.â&#x20AC;?

InFINeeti | Summer Edition |May 2015

COVER STORY

Indian Retail: its opportunities and challenges

Byâ&#x20AC;&#x201C; Atish Mukherjee and Dwaipayan Mukherjee IIFT, Kolkata

InFINeeti | Summer Edition| May 2015 16

COVER STORY

INDIAN RETAIL: ITS OPPORTUNITIES AND CHALLENGES BYâ&#x20AC;&#x201C; DWAIPAYAN MUKHERJEE AND ATISH MUKHERJEE The Indian Retail Milieu In the last decade, global stakeholders have been perceivably motivated by market centric aspects over efficiency centric factors while selecting investment destination. Many international retailers are incessantly increasing their existence in new countries, predominantly in emerging markets due to their high growth possibility. The emphasis of retailers is on constructing a portfolio of nations with different levels of risk, at diverse phases of maturity, and with distinctive customer profiles to balance short-term and long-term prospects. Despite certain intrinsic challenges the Indian retailing landscape is very vibrant and Indiaâ&#x20AC;&#x2122;s double growth engines, monetary liberalization and demographic profile, set it apart from other countries and presents a resounding business case for global retailers seeking to get into the market. One of the major prospects and challenges that depict the Indian retail sector is its structure. While it has developed over the years, it is still extremely fragmented, with an assessed 12 to 15 million outlets. Its overall magnitude is estimated to be INR. 31 trillion in 2014-15, with a CAGR of 15 per cent over the last five years, which in turn is much greater than the growth of the Indian GDP in the same years. Going ahead, the overall retail sector growth is expected to witness a CAGR of 12-13 %, which would be worth INR. 55 trillion in 2018-19. With over 92 % of the business being generated from the fragmented unorganized sector, such as old-fashioned family run stores and corner stores, the Indian retail sector offers enormous potential for growth and consolidation. The revenue garnered from organized retail (or modern retail) was INR 0.9 trillion in 2009, INR2.4 trillion in 2012, and is expected to continue growing at an impressive rate to a projected INR 5.5 trillion by 2019.

leaning on the mobile phone and internet revolution to fundamentally change the way businesses connect to their customers. While in nations such as the US and China, e-commerce has taken substantial strides to accomplish sales of more than 150

billion USD in revenue, the business in India is, still at the point of its infancy. Though over the last few years, the sector has increased by almost 22.1% CAGR from 2.8 billion USD in 2009 to an approximately 7.6 billion USD in 2015.

The growth of e-commerce Over the last couple of decades, increasing internet and mobile phone penetration has altered the way we interconnect and do business. E-commerce is a comparatively novel concept. It is, currently, greatly leaning on the mobile phone and internet revolution to fundamentally change the way businesses connect to their customers. While in nations such as the US and China, e-commerce has taken substantial strides to accomplish sales of more than 150 billion USD in revenue, the business in India is, still at the point of its infancy. Though over the last few years, the sector has increased by almost 22.1% CAGR from 2.8 billion USD in 2009 to an approximately 7.6 billion USD in 2015. E-retail in both its arrangements; online retail and market place, has emerged as the fastest-growing segment, growing its share from 10% in 2009 to a probable 18% in 2015. Estimations based on industry benchmarks show that the quantity of parcel check-outs in e-commerce portals

InFINeeti | Summer Edition |May 2015

COVER STORY 100 million in 2015. However, this share signifies a miniscule fraction (less than 1%) of India’s total retail market, but is expected to go for continued growth in the upcoming years. If this strong growth continues over the coming few years, the magnitude of the eretail industry is poised to be 10 to 20 billion USD by 2017-2020. This growth is likely to be led by increased customer-led buying in apparels and accessories, durables and electronics, other than traditional goods such as books and audio-visuals. E-retail in both its arrangements; online retail and market place, has emerged as the fastest-growing segment, growing its share from 10% in 2009 to a probable 18% in 2015. Estimations based on industry benchmarks show that the quantity of parcel checkouts in e-commerce portals surpassed 100 million in 2015. However, this share signifies a miniscule fraction (less than 1%) of India’s total retail market, but is expected to go for continued growth in the upcoming years. If this strong growth continues over the coming few years, the magnitude of the e-retail industry is poised to be 10 to 20 billion USD by 2017-2020. This growth is likely to be led by increased customerled buying in apparels and accessories, durables and electronics, other than traditional goods such as books and audio-visuals.

Brick & Mortar vs Ecommerce

Today a raging debate in the country is whether they will eclipse the traditional brick and mortar store. The brick and mortar brigade have time and again sought government intervention to save them but as experts in the domain say such fears are more out of the fear for unknown. It is similar to the fear allayed by the mom and pop shops when organized retail first ven-

tured into the field. In a fast dynamic environment business needs to evolve to keep pace with the changing times and the response from India’s top retail players certainly indicate that they are ready to make the necessary adjustments to hold on their shares. Some of the firms themselves have gone ahead and invested or planning to invest in the ecommerce space while others are restructuring their business model to get rid of inefficiencies and unlock synergy.

What Big Players are doing… The iconic business leader Ratan Tata has made a series of personal investments in Snapdeal, Bluestone, UrbanLadder and CarDekho after which the TATA group itself is planning to launch a marketplace based on e-commerce next year, with goods sourced from their Westside and Star Bazaar stores. Their two outlets Chroma and Landmark which already have ecommerce stores are likely to be merged to the new marketplace model. This will prove beneficial to the consumers as it would provide them with maximum choice. The giants of brick and mortar model, the Aditya Birla group is working on a restructuring plan to bring all its retail verticals such as Madura Fashion & Lifestyle, Madura Garments Lifestyle Retail and ABRL Retail under Pantaloon Fashion & Retail. The move aims to unlock value and accrue synergy benefits for the business and will take place through a share swap mode. Once the restructuring is done each investor will be allotted a maximum of 10 per cent stake of the expanded capital through a

InFINeeti | Summer Edition| May 2015 18

COVER STORY

preferential allotment of equity shares. Through this restructuring exercise, the company aims to raise additional capital from financial investors. They are also eyeing to launch an online fashion retail venture selling apparel, footwear and accessories, highlighting the growing appetite among India's cash-rich conglomerates to enter sunrise businesses. In another development, a multi-structured deal on the basis of share swap is being worked out between the two partners, Future group and Bharti Retail post which Kishore Biyani -led Future Group will become the majority partner. The move will see Bharti Retail's Easyday supermarkets, which deal in day-to-day food and grocery items, to be merged with Future Consumer Enterprise while Bharti Retail's hypermarkets under the Easyday Market brand will be merged with Future Retail. In return, Bharti will get shares in companies wherever their businesses reside in Future group companies. The deal if goes through will be the sixth retail M&A by Biyani in as many years and will strengthen its hold in northern India.

Understanding the Rationale As we can see from the above examples that restructuring through share swap is one of the frequently used modes. Let us try to understand the fundamentals behind this. Share swap permits one company to take over another company without having to pay cash for the entire operation instead it makes use of its own stock as currency. Therefore as Madura Fashion & Lifestyle will be demerged from Aditya Birla Nuvo (ABNL) and merged with PFRL, the latter will issue equity shares to shareholders of ABNL. Hence, for each share of ABNL they will get a certain number of PFRL shares. A lot of calculation goes into determining the exact ratio of the stock swap. At first, the parties involved have to calculate the value of each company. The difference in the prices of their shares and the number of shares outstanding then have to be taken into consideration, and then the acquiring company may require to throw in a little extra to get the target company's board of directors and shareholders to play ball. The result might be a proper clean ratio, such as 3-for -1 or 1-for-2, or it can be much more finessed. There are numerous advantages in restructuring a company like efficient use of resources, cost cutting, acquisition of competence or capability, avoidance of competition and tax advantage due to which companies follow this path when the going gets tough. The Indian Income Tax Act, 1961 has propounded a lot of enactments to offer specific tax concessions/ exemptions on capital gains; carry forward and set off

of unabsorbed depreciation and loss etc. in case of merger and acquisition of companies to boost up industrial and business developments. In order to motivate the business houses to go for mergers and amalgamations the Income Tax legislation has provision for various tax exemptions and advantages. They make the venture of merger/amalgamation and demerger proposals tax neutral, less hazardous and wealth prolific. A merger in India is known as amalgamation and the two terms merger and amalgamation are used interchangeably to connote the same thing. The Indian law starts on the premise that transfer of capital assets in a scheme of amalgamation by the amalgamating company to the amalgamated company will attract capital gains tax. However, if the amalgamated company is an Indian company, it is exempted from capital gains tax. The transfer of capital assets by the amalgamating company will not be considered as transfer so as to exempt the transaction from capital gains tax. The shareholder is also conferred exemption as long as the two entities are Indian companies. However in case of cross-border M&A the exemption does not take place unless the resultant company is an Indian outfit. One of the major considerations will be the carry forward of tax losses of the acquired company so as to reduce the tax burden in the hands of the profit-making acquirer company. Companies often undertake M&A to get the benefit of carry forward and set off of operating losses or tax credit. The condition insisted upon is that the acquirer should continue to operate the pre-acquisition business of the company. This will hold good even in respect of cross-border amalgamation. As per IT Tax Act when the asset is acquired on amalgamation, the cost taken will have to be as that of the amalgamating company. It is worthwhile to note here that Pantaloons Fashion posted a net loss of â&#x201A;š 187 crore in 2013-14, while Pantaloon Retail reported loss of â&#x201A;š 42.78 crore for the quarter ending December 2014. At the same time Aditya Birla Retail Limited has also piled up losses of nearly â&#x201A;š 4,800 crore after seven years of operation. Thus demerger of ABRL Retail Undertaking from Aditya Birla Retail (ABRL) into PFRL and coming together of Retail, lifestyle, fashion all under PFRL is a means of streamlining operations and monitoring them under a common platform. Thus while the E-commerce domain is surging ahead with fast paced growth and attracting new ventures far too frequently, the traditional brick and mortar players are consolidating themselves taking advantage of the rules of the nation. Indian retail indus-

InFINeeti | Summer Edition |May 2015

COVER STORY The Way Forward The landscape of Indian retail is starting to develop from the brick & mortar model to a technology dependent model for connecting and communicating with consumers. Smart companies are adopting both the approaches and creating a multi-channel presence, which many experts consider to be the way forward. In case of multi-channel retailing, a prospective customer can take help of more than one sales channel to shop from a retailer for any given transaction. They can purchase online and pick up in-store for example, or they can also make use of mobile in-store for research, or the consumers can buy in-store and initiate a return in the online platform.

As we initiate to move from the world of skeptics to primary adopters to ultimately the strategists, mobile retailing and online retailing along with the existence of the traditional stores promise to draw fresh modes of growth. The borders among cities are fading fast. Connectivity and infrastructure are improving by the month and customer alertness is at an all-time high. The Indian customer is forming the brand new â&#x20AC;&#x2DC;Indian Bazaarâ&#x20AC;&#x2122; where click as well as brick seems to be the order of the day.

InFINeeti | Summer Edition| May 2015 20

BUDGET 2015: DOES IT DELIVER THE MUCH NEEDED PUSH TO MANUFACTURING SECTOR? BY– ARJUN KV & DAYA KISHAN JOSHI NMIMS, MUMBAI

Introduction

and measures undertaken in favor of it.

The advent of Industrial revolution in India dates back

The newly formed Government came to power bank-

to early 20th century gradually shifting its laborers

ing on policies that are in consonance with capitalism,

from Agriculture to Industries. What puzzles many in

promising to deliver much expected Industrial growth.

India and globally is why India still employs 50%

The announcement of “Make in India” in 2014 is wide-

(roughly) of its working population in Agriculture,

ly acknowledged and welcomed by Industrialists

Dairy, Horticulture and related activities in a techno-

around the world. It was a breath of fresh air to resus-

logically advanced world. The answer to the question

citate a stagnant manufacturing sector in India which

is no black and white, but it can be broadly put under

grew at 1.1% and -0.2% during 2012-13 and 2013-14.

two categories, viz. Economic Mismanagement (red

In India, Manufacturing is a private sector enterprise

tape, bureaucracy, corruption, lack of infrastructure,

with over 90% of the investments and output generat-

etc.) and Ludditic Resistance from people. The former

ed in the private sector. The union budget 2015 has

can be tackled through economic and political reforms

taken many minor initiatives to support the manufac-

while the latter can be dealt only through awareness

turing sector through indirect channels to provide a

and education. Ironically, India transformed itself into

turnaround to the slump in growth over the last few

a service economy after its liberalization in 1991 be-

years.

fore creating a strong intrinsic Industrial base. Popular

Infrastructure:

sentiment in India says manufacturing sector was passed over for service sector with only few reforms

Manufacturing is highly dependent on the infrastruc-

InFINeeti | Summer Edition |May 2015 21

ture sector. Moving raw materials and finished goods

maximum job opportunities throughout the country.

easily helps manufacturing processes. The budget

Boost to MSME :

lays focus on public investments, which will crowd in private investment and have large impact on growth if

MSMEâ&#x20AC;&#x2122;s provide a stimulus to major manufacturing

implemented effectively. The budget has special fo-

companies by supplying various parts for production.

cus on Roads and Railways. Focus on these sectors

The budget has reduced taxes on Technical Services

is important again because of the multiplier impact on

to 10% from 25%. This will facilitate cheaper technol-

output. Multiplier for rail equipment is 2.7. This means

ogy transfer to small businesses by halving the rate of

one unit increase in demand for rail equipment raises

income tax on royalty and fees for technical services

overall output by 2.7 units. The output multiplier for

to 10%. Benefit of deduction on additional wages can

rail transport services is 1.9, while that for electricity is

be availed at threshold of 50 workmen from 100 work-

2.2. This emphasis on strengthening transportation

men earlier.

infrastructure will also boost manufacturing. The

Goods & Service Tax :

budget has allocated Rs.70000 crore extra on infrastructure investment. Setting up of National Investment and Infrastructure Fund and tax-free infrastructure bonds will facilitate overall infrastructure development, which in turn will benefit the manufacturing sector. Other measures like doubling the resources for DMIC corridor is expected to contribute to this. 100%

FDI under automatic route permitted in construction, operation and maintenance in specified Rail Infrastructure projects is a welcoming move.

Tax and Duties Incentives:

GST is a single integrated tax that will do away with the regime of multiple central and state government taxes. It will convert the country into one unified tax market. The manufacturing sector will be the biggest gainer from the new tax regime and the benefits of it

will be passed on to consumers too. Finance Minister has reiterated that GST will be implemented from 1 April 2016. It is much needed impetus to the growth of manufacturing sector as India is one of the last few countries to bring a simple tax system which will

make it attractive for investments. Corporate tax will be reduced from 30 % to 25 % over next four years. The reduction of customs duty on 22

Making energy available :

items (inputs and parts) will make imports cheaper for

Dropping global oil prices have reduced energy cost

Indian companies. Minimum Alternate Tax (MAT) was

for manufacturing industries. However, we are still far

expected to be reduced. MAT is levied on tax compa-

from providing the necessary power to the manufac-

nies making high profits and declaring dividends to their shareholders but have no significant taxable incomes because of exemptions deductions and exclusions. This ensures that no company with high income gets away with marginal tax. The MAT is currently at 18.5% which could have been reduced to 10% to foster growth. Micro, Small & Medium Enterprises (MSME) is the backbone of the manufacturing sector and creates the

InFINeeti | Summer Edition| May 2015 22

turing industries to continuously run their operations.

Investment Funds are expected to help small busi-

Coal ordinance has paved the way for proper alloca-

nesses in accessing credit.

tion of coal mines that will increase coal output. In this budget, allocation has been announced for renewable energy. An ambitious target is set for Renewable energy, i.e., by 2022, India is expected to have 100000 MW in solar; 60000 MW in wind; 10000 MW in biomass and 5000 MW in small hydro; 5 ultra mega pow-

Skill Development: National Skills Mission will consolidate skill initiatives spread across several ministries. Rs.1500 crore has been allocated for skill development and entrepreneurship. Again, this also depends on the effectiveness of the program.

er projects, each of 4000MW. Since India is currently

Attracting investment in high technology, defense and

facing a power shortage, it hampers the investments

aerospace: Indian organizations have already proved

in manufacturing sector and much is dependent on

their manufacturing capabilities in the auto and engi-

translation of these industrious projects into reality.

neering sector. Permission of 100% FDI in defense

Ease of doing business :

E-

Biz portal has been introduced where 14 regulatory permits will be integrated and the introduction of digitally signed invoices and application for Industrial License

Industrial

Entrepreneur

Memorandum

through online portal on 24Ă&#x2014;7 basis provides simple methods. Deferment of GAAR by two years is also a

commendable move

sector for modern and state of the art technology on case to case basis and caters to many needs. However, we are yet to see any major investment in high technology, defense and the aerospace sectors. Allocation to defense sector has been increased from Rs.222370 crore to Rs.246727 crore. This could have been higher as 11% increase in outlay is too modest to achieve the government's ambition on greater self-

sufficiency in making defense equipment, including aircraft.

Easy Finances: The proposed Micro Units Devel-

Special Economic Zones: SEZ offer unique benefits

opment Refinance Agency (MUDRA) Bank, with a

for manufacturing products with the view of export.

corpus of Rs.20,000 crore and credit guarantee cor-

SEZ units enjoy 100% exemption from income tax on

pus of Rs.3,000 crore and tax breaks for Alternative

export income. Development of SEZs has been slug-

InFINeeti | Summer Edition |May 2015 23

the past few years. The budget could have worked a way to remove MAT and Dividend Distribution Tax (DDT) on SEZ and SEZ developers to boost the sector. Although the newly formed state Seemandhra is extensively developing SEZs in cities like Sri City having proximity to Chennai port, there is an urgent need to boost the exports to counter the Current Account Deficit. More SEZs along with new ports would be a decisive move and foreign investments will pour into

the country for having the advantage of huge labor. Despite getting into all vital areas to boost manufacturing, little has been seen in reality. Deepak Parekh was the first among the top industry leaders to press the reminder button on government’s snail’s pace at implementation. Industrialists’ emphasis on ease of doing business is a genuine concern when India is ranked 142 globally for it. Government should hit the baton when it is hot. When there is a lot of hope and optimism surrounding the government, delays and hurdles frustrate Industrialists. India has a history of poor enforcement of policies and reforms mired with corruption, red tape and bureaucracy. If this is what is expected from the current government too, foreign investments will be pulled out pushing the economy back to square one. Lights are on to spot the actors; camera is rolling, what about action that adds the meaning to the play?

InFINeeti | Summer Edition| May 2015 24

NEWS CHRONICLE India Emerges Hero Of Massive Yemen

The policy repo rate under the liquidity adjustment facility (LAF) is cut by 25 basis points to 7.5 per cent from 7.75 per cent.

Rescue Operation

Lok Sabha passes GST Bill The Goods and Service Tax (GST) Bill, a key reforms

India wrapped up Operation Raahat, a massive evacuation exercise, amid global praise for the timely, brave and highly precise rescue of nearly 5000 nationals from volatile Yemen where a Saudi-led air campaign against Shi'ite Houthi fighters has left hundreds dead and injured.

RBI cuts interest rate by 25 basis points The Reserve Bank of India has cut the key policy rate

measure seeking to create a national market, was approved by the Lok Sabha with support from parties like BJD and TMC and a walkout by the Congress after a promise that the recommended tax rate of 27 per cent will be diluted. While the Constitution Amendment bill was approved by the mandatory two-thirds majority with ease, there are question marks over its fate in the Rajya Sabha where the ruling BJP-led NDA lacks majority. The Upper House is yet to take up the GST Bill for consideration.

Snapdeal buys Freecharge in biggest startup M&A

by 25 basis points, setting the tone for a reduction in lending rates by banks. This will prod banks to drop interest rates on home and car loans.

InFINeeti | Summer Edition |May 2015 25

NEWS CHRONICLE Prime Minister Narendra Modi's Europe Trip to Push 'Make In India'

British Prime Minister David Cameron's Conservative Party defied the polls and won an outright majority of Parliament, election results showed. The party won 331 seats, enough to form a government without a coalition partner.

The outcome defies months of polls forecasting a statistical dead heat between the two major parties â&#x20AC;&#x201D; Conservative and Labour â&#x20AC;&#x201D; with neither expected to win an outright majority, setting the stage for the country's second coalition government in a row. Prime Minister Narendra Modi took his push to turn thriving India into a major manufacturing and investment hub to the Eurozone's two biggest economies on his maiden visit to the continent. Mr Modi flew out to France, whose government was desperate to save a troubled $12 billion defence deal, before heading to Germany to inaugurate one of the world's biggest trade fairs. He also visited Canada at the end of the three-nation trip, home to a large Indian diaspora.

David Cameron's Conservatives win outright in U.K. election

InFINeeti | Summer Edition| May 2015 26

FIN CROSS

InFINeeti | Summer Edition |May 2015 27

FIN CROSS Across

Down

2. Country with world's highest number of millionaires

1. An acronym introduced by Spanish bank BBVA in 2010 to describe the emerging and growth-leading economies of Korea, Indonesia, Mexico, Turkey, Egypt and Taiwan along with the BRIC countries Brazil, Russia, India and China 3. This company was the first to come out with the credit card in 1951 7. The difference between an investment's lowest current offering price among dealers and the higher price a dealer charges a customer 8. Designed to tax companies making profits and declaring dividends under companies act but having no income due to exemptions, deductions and incentives under IT Act 10. A defence strategy where the company issues a large number of bonds with the condition they must be redeemed at a high price if the company is taken over

per capita 4. An economic instance in which the unemployment rate is substantially higher among men than it is among women. The term was coined during the financial crisis of 2008-2009, during which men bore the brunt of the job losses in the United States, at rates close to 50% higher than those of women 5. A Company that continues to operate even though its is insolvent or near bankruptcy 6. Country which experienced the highest recorded inflation ever at 6.5 sextillion percent 9. His uncle wrote 'Jingle Bells' in 1857 11. A contractual provision stating that the seller of a business is to obtain additional future compensation based on the business achieving certain future financial goals 13. Vice-chairman of NITI Aayog 14. First bank to introduce ATM in India 15. first bank to introduce internet banking

12. Country with the world's first bank named 'Monte Dei Paschi di Siena', still in operation today

For solutions, check Page No. 44

InFINeeti | Summer Edition| May 2015 28

EQUIT Y RESEARCH REPORT ON ADIT YA BIRLA NUVO LIMITED

-BY GAYATHRI BHUVANAGIRI

Fundamental Analysis: About the Company: Aditya Birla Nuvo Limited, which was founded in the year 1996, is an Indian based diversified conglomerate. The company built many business from the scratch. The revenue size of the conglomerate is US $ 4.5 Billion. ABNL is a part of the Aditya Birla Group which is a US $ 40 Billion Indian Multinational. ABNL operates across a diversified business sectors namely Financial Services, Telecom, Fashion & Lifestyle, IT & ITES and manufacturing. It offers varied products and services through more than 30 popular brands with Idea Cellular, Louis Phillippe, Van Heusen, Allen Solly, Peter England, Pantaloons, Linen Club, Birla Sun Life Insurance, Birla Sun Life Mutual Fund, Aditya Birla Finance, Birla Shaktiman and Ray One amongst the most admired brands. Financial Services:

The financial services include life insurance services. It has other services in its portfolio such as asset management, non-banking financial services, private equity, commodity and equity broking, wealth man-

agement and general insurance advisory. This ranks among the top 5 fund managers of the country.

Telecom Services: The company is engaged in the telecommunications sector as well. Idea has been one of the biggest reve-

nue market share gainer in the country over the past 5 years.

Fashion and Lifestyle: It has even diversified itself into the business of

branded apparels and accessories. Aditya Birla Nuvo Ltd.’s Fashion and Lifestyle is the largest branded apparel player in the country which sells 2 branded apparel on an average every second.

Manufacturing Sector:

Manufacturing sector comprises agri-business, which is engaged in fertilizers, seeds and agro chemicals, insulators, carbon black, rayon yarn, which is engaged in viscose filament yarn, caustic soda, allied chemicals, and textiles which is engaged in Linen Yarn and fabric, worsted yarn, and wool tops. For the financial year 2014, the company’s total income from its operations grew by 1.58% to around Rs. 26 Lakh Crores. For the same period, the net profit also went up by about 7.93% to around Rs. 1.2 Thousand Crores.

Indian Economy: During the previous financial year i.e. 2013-14, the country’s economy has witnessed many challenges

InFINeeti | Summer Edition |May 2015 29

mainly because of the persistently high inflation and high interest rates leading to the slowdown in the consumption and the investment demand. The fluctua-

which affected the consumer’s ability to commit for a long term. Hence this volatility might continue in the macro-economic environment in the short run. India having one of the highest savings rates in the world comprises a large proportion of financial savings deployed in bank deposits indicating a huge market for non-banking financial services and products.

Life Insurance: The Indian Life Insurance industry comprises about 23 life insurers and LIC (a public sector life insurer). Because of the macro-economic environment of the country and the transition of the product to meet the regulatory norms the sales growth of the industry were shown impact upon. Major regulatory changes after 2009 leading to the slowdown in the economy had however given the insurance players an opportunity to review their existing models so as to improve upon their efficiencies.

Indian Life Insurance Industry:

Asset Management: tions of the Indian rupee against the dollar leading to the depreciation in the currency also escalated the issue. But going forward, the country’s GDP growth is expected to improve and is already in the process.

A snapshot of the US $ 4 Billion conglomerate: Overview of the other Industries in stake: Financial Services: The economic environment of the previous financial year had an adverse impact on demand and growth of the financial services and products in the country. The impact led to a decrease in the consumer confidence

The mutual funds industry of the country comprises of 46 asset management companies. The top 10 companies of the country under this sector hold about 78% of the assets under management and the country’s average assets under management rose by about 11% year on year the growth of which is mostly driven by debt and liquid assets which grew by an about 10% and 28% respectively. Whereas the country’s share of equity under assets under management de grew by about 3%.

Non-Banking Financial Services: The role of NBFCs has always been well recognized for their ability to take quicker decisions and the customization of services as per the client in-spite of the greater risk they possess. The outlook of this industry remains quite positive which is backed by lower credit penetration and a massive capital raising require-

InFINeeti | Summer Edition| May 2015 30

sector.

Standalone:

Telecom: India has always primarily been a voice market and this market is expected to continue dominating the mobile sector over the next few years. But the rural penetration still to be done clearly points out that potential of the sector. With the 3G operations in place, data which is rapidly growing will outpace the growth due to voice in the coming few years.

Manufacturing Businesses: Aditya Birla Nuvo has formed its market position across its manufacturing businesses of Agri, Insulators and Rayon with all the manufacturing unitsâ&#x20AC;&#x2122; leaders in their respective sectors. Divestment of the businesses in the company: The Aditya Birla Nuvo Limited has divested 2 of its businesses namely IT and ITES and its Carbon Black Business.

Financial Analysis:

(In Crore) Though the revenues has decreased, the net profit of the company has increased indicating the company is trying to efficiently spend on its expenses.

MARKET CAP (RS CR)

23,685.62

P/E

43.7

BOOK VALUE (RS)

623.01

DIV (%)

70.00%

MARKET LOT

INDUSTRY P/E

34.28

EPS (TTM)

41.65

P/C

31.96

PRICE/BOOK

2.92

DIV YIELD.(%)

0.38%

FACE VALUE (RS)

InFINeeti | Summer Edition |May 2015 31

Important Financial Ratios:

Financial Year

Mar-15 Mar 2014 Mar 2013 Mar 2012 Mar 2011

Investment Valuation Ratios Face Value

Operating Profit Per Share (Rs)

353.48

314.58

259.91

217.85

139.64

Net Operating Profit Per Share (Rs)

1990.5

2120.42

1924

1602.31

1893.65

Operating Profit Margin(%)

17.75

14.83

13.5

13.59

7.37

Profit Before Interest And Tax Margin(%)

11.39

9.61

8.38

8.32

2.9

Gross Profit Margin(%)

11.54

9.75

8.5

8.42

2.93

Return On Capital Employed(%)

11.23

11.17

11.72

12.05

5.75

Interest Cover

2.13

2.15

2.59

3.17

1.12

Total Debt to Owners Fund

1.65

1.76

1.46

1.18

1.41

16.79

14.04

14.74

24.84

8.62

9.14

11.67

13.47

15.52

Investments Turnover Ratio

16.79

14.04

14.74

24.84

Fixed Assets Turnover Ratio

1.71

1.74

1.72

1.58

1.87

Total Assets Turnover Ratio

0.56

1.32

1.58

1.75

0.78

Asset Turnover Ratio

0.65

1.13

1.3

0.84

1.87

Profitability Ratios

Debt Coverage Ratios

Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio

InFINeeti | Summer Edition| May 2015 32

Profit & Loss account

------------------- in Rs. Cr. -----------------AB Nuvo

Grasim

Voltas

3M India

Century

Mar '14

8,020.35

5,603.50

5,151.36

1,742.34

6,665.92

Income Sales Turnover Excise Duty Net Sales

8,020.35

5,603.50

5,151.36

1,742.34

6,665.92

Other Income

395.48

384.79

128.05

19.94

28.26

Stock Adjustments

204.43

-4.05

-115.8

5.06

-10.42

8,620.26

5,984.24

5,163.61

1,767.34

6,683.76

4,269.69

3,177.76

3,928.28

1,085.48

2,710.80

955

814.58

4.13

12.22

1,386.89

638.69

378.8

483.77

243.06

501.48

Other Manufacturing Expenses

74.09

23.86

Selling and Admin Expenses

1,487.01

292.89

455.65

271.89

1,339.17

Total Income Expenditure

Raw Materials Power & Fuel Cost Employee Cost

Miscellaneous Expenses

Preoperative Exp Capitalised Total Expenses

7,350.39

4,738.12

4,871.83

1,636.51

5,938.34

AB Nuvo

Grasim

Voltas

3M India

Century

Mar '14

874.39

861.33

163.73

110.89

717.16

1,269.87

1,246.12

291.78

130.83

745.42

266.56

41.52

15.99

14.17

362.8

1,003.31

1,204.60

275.79

116.66

382.62

199.02

219.61

18.96

47.6

354.62

Other Written Off

Profit Before Tax

804.29

984.99

256.83

69.06

PBT (Post Extra-ord Items)

804.29

984.99

256.83

69.06

Tax

130.34

75.34

26.08

25.28

Reported Net Profit

673.95

895.99

181.48

42.99

2.72

Total Value Addition

3,080.70

1,560.36

943.55

551.02

3,227.54

Operating Profit PBDIT Interest PBDT Depreciation

Extra-ordinary items

Preference Dividend Equity Dividend Corporate Dividend Tax

0.01

91.06

192.84

61.21

51.18

6.67

7.48

10.4

9.09

1,300.85

918.27

3,308.85

112.65

930.46

51.81

97.57

5.48

38.16

0.29

210

185

623.26

1,179.13

48.29

620.88

187.8

Per share data (annualised) Shares in issue (lakhs)

Earning Per Share (Rs)

Equity Dividend (%)

Book Value (Rs)

InFINeeti | Summer Edition |May 2015 33

Competition with Peers in terms of Profit & Loss: In comparison with its peers it can be easily seen that ABNL is the biggest player in terms of its Sales turn over and Total Income. But in terms of profitability, Grasim has an upper hand and this is because of the more amount spent by ABNL as expenses. Even in terms of earnings per share, it’s doing well but Grasim is giving more earnings per share of it. Recent News and Analysis of the company: The recent news of demerging Madura Garments from ABNL and merging it into Pantaloons Fashion and Retail Ltd has played a huge role in the surge of its Share price. Merging its subsidiary Madura Garments into Pantaloons Fashion will act in the favour on both the operational and valuation fronts. This focussed approach will help the organization not only in terms of their fashion retail businesses but also in improving the capital allocation. Synergies in terms of sourcing and selling fronts is observed and this will help in the efficiency of the organization. Merger’s effect on the Valuation of ABNL:

It has so happened that the good performance by one entity has been overshadowed by the poor performance of the other. Hence, as per analysts it’s said that ABNL has been trading at 75% discount to its intrinsic value. This discounted value is mostly because of the value businesses funding the growth businesses. Now that the growth business has become selfsufficient, the discounted value is expected to be reduced to 25%. By leveraging on the brand leadership, the company can scale up its retail presence and enrich the product portfolio in the branded apparel segment.

With an improvement in the macro climate, extension of sub categories and new launches, as per few analysts it is expected that the fashion retail segment’s revenues would escalate by 18%. With the merger of the fashion retail arms, the gains are further boosted. After the Merger: With the consolidation in place, the shareholders will be benefitted in terms of value as the ABNL shareholders will be allotted 26 new equity shares

Disclaimer Utmost care has been taken so to ensure accuracy and objectivity while preparing this report based on the information available in the ABNL annual report, Bloomberg and the public domain or from sources considered reliable. However, neither accuracy nor completeness of information is guaranteed. Opinions expressed herein are my current opinions as on the date of this report. The recommendations is also based upon my individual view and is hence not be taken for granted. So the reader is sincerely requested to do his/her valuation before

investing in this particular stock. The impact of market factors can distort the price of the security thereby deviating from the intrinsic value over an extended period of time. This report should not be constructed as recommendation to buy, sell or hold a security, whatsoever. The reader assumes the entire risk of any use made of this report or data herein. Research is not responsible for any errors or omissions in analysis or for results obtained from the user of this information contained in this report.

of PFR for every 5 shares held in ABNL before the demerger. The shareholders of MGLRC are to get 7 equity shares of PFR for every 500 shares held in MGLRC before the merger. The ABNL stock surged 9% due to the merger. Valuation: The current P/E ratio of ABNL is 43.70 As per the forecasted values of the future Earnings per Share, it is expected that the value of the EPS will be around 45.252. Based on this forecasted value of EPS, the Share price of ABNL is expected to reach around Rs. 1977. The Current Market price stands at Rs. 1820 whereas the intrinsic price lies around Rs. 1977. This clearly points out the fact the shares of ABNL are currently undervalued and have the potential to go up in future by about 8.5% indicating that the recommendation for this stock is to buy.

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FIN CROSS SOLUTIONS

E 2

G L 3

E R

C 8

A 9

I T

A L

N C

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FIN TREND Capital Account Convertibility: TO be or not to be by

Adhiraj Bandyopadhyay The deliberation on capital account convertibility returns again. In every few years, the same argument is proposed that India must embrace fuller capital account convertibility. From Bureaucrats, Government officials to academia and investors all weigh in on the pros and cons of fuller convertibility until the regulator extinguishes the debate by declaring that India will eventually move towards fuller convertibility, but it is not the appropriate time to do so. That has been the story yet. This time the argument was sparked off after a comment from Raghuram Rajan, the governor of Reserve Bank of India. While addressing a lecture to the students at the Gokhale Institute of Politics and Economics in Pune, he said, “My hope is that we will get to full capital account convertibility in a short number of years.” As of now we still have the grip over the debt markets, where RBI controls the foreign fund inflows, both in terms of quantity as well as the quality. First let’s see what capital account convertibility is all about. If we consider balance of payments (BoP) of a country, the capital account records the transactions that lead to changes in the financial assets and liabilities abroad. These consist of overseas investments as well as inflow of capital. Full capital account convertibility talks about the

liberty to convert domestic financial assets into foreign financial assets and especially at a rate determined by the market and vice versa. For a broad understanding it will lead to individuals and firms’ liberty to invest in overseas financial instruments e.g. equity, bond and obtain proprietorship of overseas firms. On the other hand foreign investors will be equipped to take back the profits freely. Ideally as a country loosens the grip over capital control there bound to be a surge of capital flows. The countries which have inadequate capital will see the influx of foreign funds, it would help to fan the financial and industrial growth as foreign firms would be ready to finance the businesses. Also the country would be in a better position to utilise its resources and hence to increase total output. On the other hand the countries which have surplus funds will experience its citizens investing abroad & hence great diversification of investment portfolio which can help them to mitigate any shock coming from domestic turmoil. For global investors, it will help them to look at better return by means of risk sharing and in addition to that with more and more country accepting convertibility the liquid market would become wider and deeper. For cash strapped countries, it can help the government to cut its

InFINeeti | Summer Edition| May 2015 36

FIN TREND The deliberation on capital account convertibility returns again. In every few years, the same argument is proposed that India must embrace fuller capital account convertibility. From Bureaucrats, Government officials to academia and investors all weigh in on the pros and cons of fuller convertibility until the regulator extinguishes the debate by declaring that India will eventually move towards fuller convertibility, but it is not the appropriate time to do so. That has been the story yet. This time the argument was sparked off after a comment from Raghuram Rajan, the governor of Reserve Bank of India. While addressing a lecture to the students at the Gokhale Institute of Politics and Economics in Pune, he said, “My hope is that we will get to full capital account convertibility in a short number of years.” As of now we still have the grip over the debt markets, where RBI controls the foreign fund inflows, both in terms of quantity as well as the quality. First let’s see what capital account convertibility is all about. If we consider balance of payments (BoP) of a country, the capital account records the transactions that lead to changes in the financial assets and liabilities abroad. These consist of overseas investments as well as inflow of capital. Full capital account convertibility talks about the liberty to convert domestic financial assets into foreign financial assets and especially at a rate determined by the market and vice versa. For a broad understanding it will lead to individuals and firms’ liberty to invest in overseas financial instruments e.g. equity, bond and obtain propri-

etorship of overseas firms. On the other hand foreign investors will be equipped to take back the profits freely. Ideally as a country loosens the grip over capital control there bound to be a surge of capital flows. The countries which have inadequate capital will see the influx of foreign funds, it would help to fan the financial and industrial growth as foreign firms would be ready to finance the businesses. Also the country would be in a better position to utilise its resources and hence to increase total output. On the other hand the countries which have surplus funds will experience its citizens investing abroad & hence great diversification of investment portfolio which can help them to mitigate any shock coming from domestic turmoil. For global investors, it will help them to look at better return by means of risk sharing and in addition to that with more and more country accepting convertibility the liquid market would become wider and deeper. For cash strapped countries, it can help the government to cut its foreign borrowing and hence reaching one step closer to fiscal discipline. On the flip side what can remain as a headache for the government is prospect of outflow of funds or so called speculative short term flow. As the country will have a large local assets funded by foreign currency, it may also lead to higher interest rate which is a concern for every country irrespective of size of the economy. The volatility in interest rate and exchange rate cause due to massive inflow of foreign funds may lead to specious funding and hefty foreign currency liability.

InFINeeti | Summer Edition |May 2015 37

FIN TREND Again in 2006, Manmohan Singh, the Prime Minister of India, had discussed about revisiting the matter, in a speech at RBI. Accordingly another committee was constituted to come up with a complete roadmap toward fuller capital convertibility. Though capital flow has been liberalized gradually but still turning to full CAC needs to be backed by superior macroeconomic management and et al. For example, the 1997 committee on CAC recommended bringing down the fiscal deficit to 3.5% of the gross domestic product and inflation between 3% and 5% (average for three years) by 1999-2000. These targets were difficult to achieve as inflation and fiscal deficit both were on the higher side. Hence without having the protections turning to full CAC could have made India vulnerable to financial instability. Of late it has been the talk of the town due to better macroeconomic scenario of India. CAC is in vogue in terms of freedom to take out proceeds relating to FDI, FPI for overseas investors and NRIs besides leeway for firms to invest abroad in JVs or getting hold of assets, and for individuals and mutual funds to invest abroad in equity and bonds with some restrictions. It seems, India is taking the tactic that easing of capital controls would be marked by removal of capital outflow restrictions first on NRIs, then next the corporates and subsequently followed by banks and liberty for individuals at the end. Letâ&#x20AC;&#x2122;s have a look around the world. There are countries where CAC is already implemented. Letâ&#x20AC;&#x2122;s see how their experience had been. The ini-

tial phase led to an improvement in their balance of payments condition. In Malaysia, Indonesia, Mexico and Argentina, the rush in capital flows caused a widening of their current accounts. Inflation was also under control for some time and the reserves were strengthened. But after the current account deficit (CAD) could be not sustained, some of these countries forced to introduce some controls. Whereas Mexico and Argentina reintroduced controls in the 80s, Chile also placed restraints after it faced a crisis from 1982 to 1989. Nevertheless, all of them finally opened up. Coming back to India, we need to move towards full CAC and deepen its capital market to become a leading global economy according to minister of state for finance Jayant Sinha. He said, "There are many policy measures and many things that we have to do over a period of time, if indeed India has to become a leading global economy... We have to make it possible for our capital markets to be broader, deeper and for that to happen, capital account convertibility also becomes important." Incidentally, International Monetary Fund (IMF) predicted that India will overtake China as the fastest growing emerging economy in 2015-16 by clocking a growth rate of 7.5%, backed by its recent policy reforms, hike in investments and reduced oil prices. World Bank too is positive and forecasted a similar GDP growth for India for the current fiscal.

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FIN TREND Gradualism is the signature, the way the Indian policy formation has managed the capital account. First, there has been a clear order of priorities: capital inflows were liberalized before capital outflows; also equity was more favoured than debt regarding capital inflows; corporates enjoy more freedom than individuals when it comes to sending money overseas. Second, successive policy documents such as the 2006 report of the committee on fuller capital account convertibility (as mentioned earlier) have argued that it is risky to rush towards a more open capital account unless certain prerequisites are met, including a low fiscal deficit, a sound banking sector, controlled inflation, a central bank that has operational freedom, and national financial sector reforms that integrate various asset markets. Also then there are the practical concerns such as preferential tax treatment to certain classes of investors or to money that is routed through certain countries that have signed tax treaties with India. These are all strategic issues about how capital account restructurings should be sequenced. But there is also mounting economic research that essentially questions the need to rush into CAC. One part on this thinking is that national policy authorities are justified having capital controls in their quiver. Even the International Monetary Fund has come round to this opinion after the financial disaster in 2008. The second part of emerging research is even stronger. It asks whether an open capital account actually helps to stoke the development prospects for a coun-

try. In a monograph published in 2012, Who Needs to Open the Capital Account, the economists Olivier Jeanne, Arvind Subramanian and John Williamson seized the essence of previous research by doing a meta-regression of 2,340 earlier statistical studies. They found that free capital mobility has very little effect on development in a long run. Capital flows are essential for an integrated economy. From the accounting perspective, they are the mirror image of current account balances. India has traditionally run a CAD repetitively needs capital influxes. So the point is not whether the country needs an open capital account or not. The more relevant question is whether all methods of capital controls need to be done away with. One must also understand that capital controls are not easy to carry out in current globalized economy. It is for this reason that opponents of all forms of capital controls quite rightly point out that India already has de facto if not de jure capital account convertibility. One of the problems of current economic policy is that the scenario of global financial integration is far less clear than that of global trade integration. The empirical research too shows only a weak relationship between unrestricted capital flow and economic development. Policymakers are also upset by pro-cyclical capital flows that obscure monetary management as well as impend financial stability. And there are the latest episodes of financial catastrophes

InFINeeti | Summer Edition |May 2015 39

FIN TREND The rest of the world seems to have agreed upon the Indian view that the capital account needs to be opened only gradually. Though India does not score well on capital account openness as measured by the standard Chinn-Ito index. Capital control are not a magic bullet but nor is total capital account openness a clear panacea. Since the debt market is where most of the regulations are there, let’s look at how the RBI has controlled this market over the past couple of years. The total upper limit for inflows of foreign funds into government debt has remained static at $30 billion since 2013. This limit was completely utilised last year when overseas investors rushed to purchase Indian debt on the anticipation that dipping inflation and lesser interest rates in the economy would boost the bonds. Ever since, investors have keenly urged for an amendment of the limit, but the RBI has not yielded yet. The influxes into corporate bonds are controlled at $51 billion and this hasn’t changed recently also. Clarifying the limit on inflows, the RBI has pointed to the chance for instability in debt flows when the US is starts to normalize the monetary policy. In February 2015, the RBI barred incremental investments from overseas investors into commercial paper owing to the temporary nature of these investments. The anxiety was that a sudden drainage of funds from this market caused by global reasons might lead to a needless spike in corporate funding costs. A similar resolution had been taken on the subject of foreign investments in government T bills in April 2014 after

the experience of August-September 2013. Then due to heavy selling by FIIs in government debt, particularly short-term debt, had headed to a steep drop in the INR. As of now, all future investments from foreign institutional investors (FIIs) into Indian debt will need to have a bottom limit residual maturity of 36 months. Also, the central bank has kept a strict watch on external commercial borrowings (ECB) from Indian companies. There are sectorial limits in place, restraints on the cost and use of the debt. Whereas a number of experts, most lately a committee led by M.S. Sahoo, has recommended relaxing ECB norms, though the RBI has not yet declared any major liberalization. Largely, the RBI’s argument is that India’s economic fundamentals have to be sound and far more robust, also the international environment more benign, before the country can actually ponder upon easing some of the restrictions on debt flows. Recently, Rajan said, “I think most people would agree that opening up to shortterm debt flows is usually not very clever for reasons of financial stability,”. Considering all these, most of which direct to the extreme caution with which the RBI approaches the issue of fuller convertibility, the interpretation that Rajan is batting for a move towards convertibility in the near term appears faulty. Is that the direction that India will finally move in? Probably. But is it likely to happen in coming next one or two years? Unlikely. ****************** **************** ******************

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CREDITS

MEET THE TEAM

EDITORIAL TEAM

ADHIRAJ BANDYOPADHYAY

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Mechanical Engineer from BESU, Shibpur

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Design Engineer in L&T power for 3 years

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Finance & Economics enthusiast

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Also a die hard Orwell fan and a torrid football goalkeeper

GAYATHRI BHUVANAGIRI MEHUL GAHRANA SURYAARAYAN PANDA

GAYATHRI BHUVANAGIRI

FEEDBACK/QUERIES infineeti@iift.edu infineeti@gmail.com

Published by students of Indian Institute of Foreign Trade

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Has finished B.E (Hons) from BITS Pilani, Hyderabad Campus

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Intends to specialize in Finance & Marketing and wants to pursue a career in banking industry

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Moreover likes to travel during her free time

MEHUL GAHRANA

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A software engineer Prior work experience with TCS Limited

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Intends to specialize in finance and pursue a career in the same domain

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Loves playing football and likes to read non-fiction in his spare time. He also has an avid interest in watching movies

New Delhi | Kolkata SURYANARAYAN PANDA

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Software Engineer from K J Somaiya

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Prior experience with Infosys Limited

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Has deep interest in politics and economics and intends to specialize in finance

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An avid reader and loves reading newspapers , magazines and books

InFINeeti | Summer Edition |May 2015