Niveshak May 2015 flip version

Niveshak THE INVESTOR

VOLUME 8 ISSUE 5

LEARNING ACROSS THE PLAYING FIELD

May 2015

FROM EDITOR’S DESK Niveshak Volume VIII ISSUE V May 2015 Faculty Chairman

Prof. P. Saravanan

THE TEAM Abhishek Bansal Bhawana Saraf Maha Singh Gulati Palash jain Prakhar Nagori Ramesh Jaiswal Rahul Bajaj Sandeep Sharma Vishal Khare

All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

CONTENTS

Dear Niveshaks, The month of May, saw the two homegrown retail companies, Bharti Airtel and Future Retail, getting together driven by an expanding market. Bharti’s 200-plus stores including easy days added to Future’s larger format Big Bazaars will allow for better leverage on the formats the combined entity wants to pursue. The consumer price index fell to 4.87% from 5.25% in March, mainly on account of a fall in the prices of food items. Even though the impact of a projected poor monsoon is a potential threat to food, vegetable items this impact may not be severe since the rural demand is weak. The wholesale prices also fell for the sixth consecutive month in April dragging down the inflation to a record low of (-)2.65% in April prompting India Inc to strengthen its case for an interest rate cut by the Reserve Bank of India (RBI) in its policy review next month. The service tax was increased from 12.36% to 14% which will facilitate a smooth transition to the Goods and Services Tax (GST) regime. The Indian economy expanded 7.3% in the year ended March, in line with the initial forecast and marginally higher than 6.9% recorded in the previous year, pointing to a soft recovery. The Employees Provident Fund Organization is deducting tax at source from June 1 on PF withdrawals if the accumulated PF balance at the time of payment is more than or equal to Rs. 30,000 and the employee has worked less than five years. The government will sell its 10 per cent stake in blue-chip Indian Oil Corporation (IOC) and 5 per cent in power producer NTPC to mop up about Rs 13,600 crore in this fiscal’s first disinvestment approval which are part of Rs 41,000 crore disinvestment target for the current financial year. In the Fin Gyan we present to you about the Real estate market, which employs huge population only next to agriculture. After the correction of real estate property prices in 2008 post global financial crisis, now the property prices are soaring at highest level ever in many major cities. This over-valuation of real estate properties is due to the pseudo beliefs instilled in buyer’s mind by promoters and builders. The article examines the current situation and problems of residential real estate market is examined by bursting 5 general beliefs of investors. In the Article for month Section we analyses this time the impact of Monetary Policies f developed economies over India. An important takeover battle and the Ivestor’s interest by the two corporate houses, Deepak Fertilizers and Petrochemicals Corporation Ltd (DFPCL) and the Vijay Mallya backed Zuari Agro chemicals (Adventz Group) for Mangalore Chemicals and Fertilizers is presented in Finsight. To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. Please continue to motivate us so that we can come out with more insightful reads in the issues to come. Keep pouring in. Stay invested! Team Niveshak

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

Cover Story Niveshak Times

04 The Month That Was

Article of the month

THE ILL-EFFECTS OF MONETARY POLICIES OF ADVANCED ECONOMIES

LEARNING ACROSS THE PLAYING FIELD

FinGyaan

Finsight 5 Myths revolving around Indian Residential Real Estate 26 Corporate Battles Market Mallya vs. DFPCL

FinLife

Right Strategy To Invest In Highly Volatile Equity Market

CLASSROOM

Bankruptcy Prediction Altman Z-Score

NIVESHAK

www.iims-niveshak.com

The Niveshak Times

Team NIVESHAK

IIM Shillong Widening Of Tax Base: E-Commerce Business On Income Tax Radar The Income Tax department has trained its scanner on the burgeoning ‘e-commerce’ business in the country with the taxman deciding to monitor a host of services conducted by these popular online portals to better fill up the revenue kitty. After making an official assessment report on the online retail business in India, the department has decided to track these “huge business” conducting services for extracting the special category of Tax Deducted on Source (TDS) which is taken from the payment made by firms and organizations for getting special services done on the internet retail space. A “strategy action plan” formulated by the CBDT, the apex policy making body of the I-T department, for bolstering revenue collection in the current fiscal, has asked taxman to pay special attention to this area of business. The action plan prepared for 2015-16, also accessed by PTI, states that advertisements on different websites of various organized and unorganized agencies, payments for jobs like creating a website, translation of pages, data entry of text, research, among others are areas which can yield “significant revenue” under the TDS category. KV Kamath Named BRICS Bank President Prominent banker and non-executive chairman of India’s second largest software exporter Infosys, KV Kamath was appointed as head of the $100-billion New Development Bank (NDB) being set up by the five emerging economies of BRICS grouping. According to finance secretary Rajiv Mehrishi, NDB will start operations in a year, while Kamath, 67, will get a five-year term. He said Kamath’s appointment will take effect when he is freed from his current assignments. Kamath, a former ADB official, is also the nonexecutive chairman of India’s biggest private-sector

MAY 2015

NIVESHAK

bank ICICI. The creation of NDB is seen as emerging market economies’ answer to the delay in reforms of the Bretton Woods institutions such as the IMF and World Bank, currently dominated by Western powers. Leaders of Brazil, Russia, India, China and South Africa had in 2014 reached a deal to establish NDB, with its headquarters in Shanghai. As per the agreement, India got the right to nominate the first president. Kamath, an IIM Ahmedabad alumnus and former president of industry body CII, will be followed by a Brazilian and then a Russian as NDB head. Govt May Sell 10% IOC Stake By Early July On Improving Market Sentiments The government may sell 10% stake in Indian Oil Corporation (IOC) by early July encouraged by the recent improvement in the market sentiments on the stock following its decision to fully bear fuel subsidy burden in FY16. A 10% stake sale in IOC could fetch Rs. 8,800 crore at the current market prices. Despite the initial hesitation, the petroleum ministry has indicated their readiness for the share sale in IOC in a couple of months after subsidy sharing formula for FY16 was finalised recently, A ministry official said the IOC disinvestment should take place “in the next two-three months”, as the environment is conducive to attract investors. In a recent meeting between finance minister Arun Jaitley and petroleum minister Dharmenrda Pradhan, it was decided that the government would bear a susbidy of R18 for every kg of subsidised LPG. This means, for every 14.2 kg domestic refill, the government would foot a bill of R255.60, higher than the actual under-recovery of Rs. 200. LIC Raises Stake In Canara Bank, Bank Of Baroda Country’s largest insurer Life Insurance Corporation (LIC) has raised stake in state-owned Canara Bank

by about 7.7 per cent through preferential allotment of shares. It has also increased its stake in another public sector lender Bank of Baroda (BoB) by buying 4.7 crore shares from the open market. With the acquisition, the LIC’s stake in BoB increased by 2.1 per cent to 11.4 per cent. LIC acquired the stake for a consideration of about Rs 750 crore as per the current price. These shares were acquired over a period between January 16 and May 25, 2015 from the open market, BoB said in a Bombay Stock Exchange (BSE) filing. With acquisition of 4 crore shares for a consideration of Rs 1,520.32 crore, the stake of LIC in Canara Bank has gone up to 14.4 per cent, the lender said in a separate filing on the BSE. Prior to this preferential allotment, LIC was holding 3.46 crore shares or 6.7 per cent in Canara Bank. Govt Relaxes FDI Norms For NRIs, PIOs And OCI To boost foreign exchange remittance and capital inflows across sectors, the government approved a proposal allowing investment by non-resident Indians (NRI) to be deemed as domestic investment on a par with investment made by residents. This means NRI investment will not be included in the category of foreign investment. Since NRI investment made under Schedule 4 of FEMA (Transfer or Issue of Security by Persons Resident Outside India) regulations is on nonrepatriable basis, it needs to be clearly provided that such investments, for the purposes of FDI policy, are domestic investments, an official statement said. “This will enable investments by NRIs, Overseas Citizen of India (OCI) and Persons of Indian Origin (PIO) cardholders under Schedule 4 on non-repatriation basis, across sectors, without being subjected to the conditions associated with foreign investment,” it added. Though NRI investments under Schedule 4 of FEMA are made on non-repatriation basis, it was not stated in the extant policy that these are domestic investments.

Also, the Union Cabinet meeting, chaired by PM Narendra Modi, approved the proposal that NRI includes OCI cardholders as well as PIO cardholders. This decision is to align the FDI policy with the stated policy of the government to provide PIOs and OCIs parity with NRIs in respect of economic, financial and educational fields. RBI To Soon Set Up Central Fraud Registry Mindful of the impact of frauds on banks’ financials, the Reserve Bank of India (RBI) will soon set up a Central Fraud Registry as part of an early warning system. The idea is to set up a structure for quick sharing of information about unscrupulous borrowers and help banks fight bad loans. Currently, there is no single database that lenders can access for all relevant details of previously reported frauds. The structure, which is in the works, will make available more information to banks at the time of starting a banking relationship, extension of credit facilities or at any time during operation of an account. For instance, at the time of sanctioning of a loan, banks can make use of the registry by checking the credentials of a borrower. For good measure, the CBI and the Central Economic Intelligence Bureau (CEIB) have shown interest in sharing their databases with banks which in turn can be fed into this centralised searchable database that can be accessed by banks.

The Month That Was

www.iims-niveshak.com

Market Snapshot

NIVESHAK

Market Snapshot BSE Index 2,500 2,000

25000

1,500

20000

1,000

15000

500

10000

0 -500

5000

-1,000

29-05-2015

28-05-2015

27-05-2015

26-05-2015

25-05-2015

22-05-2015

20-05-2015

14-05-2015

-1,500

FII 19-05-2015

DII

15-05-2015

BSE 13-05-2015

12-05-2015

11-05-2015

08-05-2015

07-05-2015

06-05-2015

05-05-2015

04-05-2015

-5000

BSE

FII, DII Net turnover (in Rs. Crores)

30000

-2,000

Source: www.bseindia.com www.nseindia.com

MARKET CAP (IN RS. CR) BSE Mkt. Cap

10326686 Source: www.bseindia.com

CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR/ 1 SGD

INR/1 USD

4.50% 4.00% 3.50%

Euro/1 USD

GBP/1 USD

63.76 69.91 51.48 97.80 47.30

JPY/1 USD

Base rate Deposit rate

10.00%-10.25% 8.00% - 8.75%

SGD/1 USD

CRR SLR

% change

27458.64 18529.48 20984.37 10391.39 16577.79 7699.62 16155.43 10495.18 9960.05 10408.76 9169.73 2091.66 7599.7 1549.13 10960.52 5842.78

27828.44 19079.79 21511.65 10666.11 16802 7847.38 16900 10910 9728.35 10716 9643.21 2069.81 7815.8 1537.68 11280.57 6122.23

1.35% 2.97% 2.51% 2.64% 1.35% 1.92% 4.61% 3.95% -2.33% 2.95% 5.16% -1.04% 2.84% -0.74% 2.92% 4.78%

% CHANGE

% Change

4.00% 21.50%

TECK, 4.78% Smallcap, 2.92% REALTY, -0.74% PSU, 2.84% POWER, -1.04% OIL&GAS, 5.16% MIDCAP, 2.95%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

METAL, -2.33%

8.50% 7.50% 6.50%

3.00% 2.50% 2.00% 1.50%

RESERVE RATIOS

CURRENCY MOVEMENTS 5.00%

LENDING / DEPOSIT RATES

Sensex MIDCAP Smallcap AUTO BANKEX CD CG FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK

Open

Source: www.bseindia.com 24th April 2015 to 28th May 2015

IT, 3.95% Healthcare, 4.61% FMCG, 1.92% CG, 1.35% CD, 2.64% BANKEX, 2.51% AUTO, 2.97% Sensex, 1.35%

1.00% 0.50%

Data as on 28th May 2015

0.00%

MAY 2015

Article Market of Snapshot the Month Cover Story

Article ofSnapshot the Month Market Cover Story

NIVESHAK

Niveshak Investment Fund

Performance Evaluation

Done on 30/6/14

Infosys

Wg: 3.38% Gain : 24.64%

HCL Tech.

Wg: 5.07% Gain : 35.08%

TCS

Wg: 4.19% Gain : 5.93%

FMCG (20.62%)

GODREJ CONSUMER Wg:5.40% Gain:19.81%

BANKING (6.08%)

Colgate

HUL

HDFC Bank

155

103

145

102 101

Sensex NIF

100 99 98 97

15 15 15 15 15 15 15 ay-‐ ay-‐ ay-‐ ay-‐ ay-‐ ay-‐ M M M M M M Values Scaled -‐ -‐ -‐ -‐ -‐ -‐ 6 11 16 21 26 31 to 100

ay-‐

Britannia

165

104

1-‐M

Performance of Niveshak Investment Fund since IncepDon

135 125 115 105 95 -‐Ja 26 n-‐1 -‐F 4 e 26 b-‐1 -‐M 4 a 28 r-‐1 -‐A 4 27 pr-‐1 -‐M 4 a 25 y-‐14 -‐Ju n 23 -‐14 -‐Ju 21 l-‐1 -‐A 4 u 18 g-‐1 -‐S 4 ep 17 -‐14 -‐O 18 ct-‐1 -‐N 4 o 15 v-‐1 -‐D 4 e 12 c-‐14 -‐Ja 11 n-‐1 -‐F 5 e 16 b-‐1 -‐M 5 ar -‐1 5

(12.65%)

MAY Performance of Niveshak Investment Fund

CONS NON DURABLE (5.40%)

Informa(on Technology

As on 29th May 2015

ITC Wg: 6.08% Opening Por+olio Value : 10,00,000 Risk Measures: Wg:5.72% Wg:6.05% Wg:4.42% Wg:4.41% Gain:152% Gain:30.97% Gain:22.05% Gain:4.82% Gain : 1 3.96% Current Por+olio Value : 15,54,716 Standard DeviaDon : 13.59(Sensex 13.76) Sharpe RaDo : 2.46(Sensex : 2.47) Change in Por+olio Value : 55.47% Change in Sensex : 35.75% Cash Remaining:270920 Auto Chemicals Comments on NIF’s Performance & Way Ahead :The Indian economy GDP grew (9.22%) (6.58%) at 7.5 percent (Q4), gross value added (GVA): at 6.1 percent growth. The increase in private consumpDon is good news but concern remains on slowing down of Amara R aja rural wages and definitely from the reports of fast moving consumer goods Tata Motors Asian Paints BaR (FMCG) it appears that, rural demand is slowing down. On INVESTMENTS front Wg:4.95% Wg:6.58% index of industrial producDon (IIP) is geZng consecuDve months of expansion. Wg:4.27% Gain : 7.40% Gain:25.16% On the government consumpDon front, last three years have seen this in the Gain :23.27% second half and parDcularly in Q4, all the expenditure retrenchment is It may not be the case this year because the numbers are more MISC. MANUFACTURING concentrated. Pharmaceu(cals realisDc. (4.25%) (7.29%) (12.21%) On Global front, data showed that the US economy contracted in the first quarter by 0.7 percent at an annual rate a sharp turnaround from the earlier growth of Dr Reddy’s 0.2 percent but indexes in wall street sDll posted gains. Lupin Titan Company Page Industries The por+olio did not witness any re shuffle during this month, however we are Labs Wg:4.25% Wg:7.29% Wg:7.66% watchful of the current fall and correcDons in the prices of overvalued stocks and Wg:4.54% Gain : 58.80% Gain:0.85% Gain:54.37% therefore reshuffles in the next month would depend upon the momentum of Gain:22.22% the market. Scaled NIF

Scaled Sensex Values Scaled to 100

NIVESHAK

THE ILL-EFFECTS OF MONETARY POLICIES OF ADVANCED ECONOMIES Chirag Tekriwal

IIM Shillong Global Scenario Global economy is still fragile. Despite the decline in oil prices, the global growth is still projected to be at 3.7% in 2015-16, according to International Monetary Fund. The economic outlook differs significantly in various regions of the world. On one hand, the advanced economies like The US and The UK, the growth has rebounded. They are showing the signs of recovery combined with change in monetary policies. Greece, on the other hand is still hanging on the cliff of economic crisis. Japan is still away from the expectation of 2% inflation by The Bank of Japan. The domestic demand in Japan has still not risen despite the quantitative easing by the Bank of Japan last year. The credit lending to the private sector for the investment opportunities is still in the backdrop. The same situation persists in the Euro zone as well. Middle East and Ukraine are prone to geopolitical risk pertaining in the respective countries. In Emerging Markets and Developing Economies,

MAY 2015

the growth is projected to be at 4.7%, slightly higher than the developed economies in the year 2016. India is the prominent destination to put the money into. It is one of the economy which has not been hit by the downturn. Comparing it with BRICS, cracks are forming in the rest of BRICS Nation, though not very prominent at this moment in time. To start with, China’s demand for the commodities is declining. The development in the property sector in China has reached the penultimate level and the demand is no more picking up. The manufacturing purchasing managers index is below 50 except in March which shows the decline in the growth in the sector. Brazil is looking at the political and economic risk as a Black Hole which size is unknown. A poll conducted by Ibope recently showed that 74% of Brazilians say Dilma Rousseff and her government is terrible. The Brazilian currency had hit a low of R$3.10, half its value since its high of R$1.54 in July 2011. The GDP has contracted more than 40%. Russia is deeply

affected by the hit in the oil prices. 70% of the Russia’s economy depends on the oil and every dollar drop in the oil price leads to a $2 billion contraction in the Russian economy. South Africa, on the other hand is facing a declining growth in the economy as well. India Current Scenario No doubt, there has been a significant uptick in the growth of the Indian economy due to the fall in the crude oil prices as India is one of the major importer of crude oil. But the surge in the Sensex and the belief in the people’s heart came due to political stability under the leadership of Mr. Narendra Modi. The focus towards macroeconomic management and good governance has raised the business confidence and hopes in the Indian society. This combined with strong commitment towards monetary and fiscal policy by the central bank has poised a promising growth for the Indian economy in the future. The foreign reserves have reached an all-time high of $340 billion. Inflation has been curbed down to 4.12% in the month of November 2014. Challenges Ahead Though India is a reaping economy, yet many challenges lie ahead for the country. The first and foremost challenge is the recent appreciation in the US Dollar because of the strong recovery in the US economy combined with the hope of the change in the monetary policy by the Federal Bank. This has put pressure on the countries whose exchange rate are linked directly to the US Dollars and India is one of them. The most hit companies by the appreciation of the US Dollar are the ones who have borrowed in dollars but have earnings in other currencies which would accelerate the decline in the corporate profits which will certainly hamper the credit worthiness of the company. This might lead to the dampening

of the overall economy. The external debt has increased to $460 billion in January 2015. This poses a serious threat to the economy as corporate profits are the barometer of any economy. The second challenge which is alarming at the door step and is of major concern for the Indian economy is the prospective normalization of the monetary policy by the Federal Bank in the United States. The financial market volatility resulting from the capital outflows by the FII’s and the FDI’s with negatively affect the foreign reserves. This along with the spread in the interest rate are the probable outcomes for the Indian economy after the hike in the interest rate by the Federal Bank. Unconventional monetary policy in the advanced economies has had both the positive and the negative impacts in the emerging world. After the global financial crisis, FED purchased government debt in large amount to avoid the financial meltdown in the developed economies and this helped them to recover from the global recession. The large scale asset purchase by the FED depressed the US fixed income securities yield and also valued down the dollar. Quantitative easing in Japan and Euro Zone have the similar impact in the respective countries. The negative repo rate announcement by the Swedish National Bank “Sveriges Riksbank” and its decision to purchase the government bond worth SEK 10 billion has created a volatility in the financial market. As there tend to be more difference in the interest rate between the developed and the developing economy, more capital would flow from the former to the latter. The gross capital inflows to the emerging markets was around US$ 4.5 Trillion, contributing roughly 50% of the total capital flows between the year2009 to 2012. People invested heavily in India with over

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NIVESHAK

US$470 billion received by the country during the same period. This made the equity and the bond market to rally and Rupee strengthen. However, when the policy is reversed, these markets will face a sudden outflow of funds to the developed economy as it happened in 2013. The ease in policy thus led to the build-up of risks in the emerging economies. Capital investors are loyal to their assets and the markets which provide highest return adjusting the risk. Thus, there is always a possibility to pull out the money and plug it where the risk to reward equation favors the most. According to International Institute of Finance, a .5 percent raise in the rate by the Federal Bank of the US will cut down the inflows of around $30 billion going to the emerging economies. This has been seen in the mid of 2013 when the Federal Bank announced the bond tapering, which is popularly known as “Taper Tantrum”. At that point in time, nearly $8 billion left the emerging economies, resulting in the decline in the foreign reserves of various emerging economies. Dollar strengthened against many currencies, Rupee being one of the major currency hit by the “Taper Tantrum”. The Rupee went down from INR 53.76 a dollar to INR 68.97, a drop of nearly percentage 30% in a four month time. Impact of rate hike by FED on the Indian economy The Federal Bank has delivered that the hike in the interest rate is prominent and is likely to be announced in the future soon. This hike in the interest rate would lead to the dampening of the Indian economy in several ways. First, the increased volatility in the capital flows would

MAY 2015

lead to the increase in the Volatility Index(VIX) which currently trades at 14.25, leading to the volatility in the equity, debt and the forex market. The foreign investment going out would also hamper the investment in various infrastructure as well as the other sectors which would lead to the weakness in the Indian economy. Also the “Make in India” plan would be tattered in some way or the other. This could also lead to the downgrading of the Indian economy by the various credit rating agencies. The S&P had upgraded the credit rating of the economy from negative to stable in the month of September last year and it currently holds a BBB- rating. Second, the Current Account Deficit would widen as there would be less inflows by the FII’s, the FDI’s or the NRI’s to fund the CAD. This would poise the risk of inflation in the economy, thereby reeling the risk to the National Income. When there is a foreign inflow, the money is pumped into the economy in terms of dollars. This is when RBI comes into picture, sucks the dollar into the foreign reserves and pumps the Rupee against the Dollar into the market. This helps the Rupee to strengthen and stabilize against the dollar. But when the event is other way round, with huge money flowing out of the market, the dollar is sucked out which leads to the lesser foreign reserves, thereby weakening the Rupee against the dollar. With the advent of strong dollar, it would be difficult for the corporate bodies to raise the foreign capitals, as a result of which they would

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NIVESHAK

be unable to reap any investment opportunity leading to the stagnation in the economy. Another very major issue is the instability caused in the governance due to the sudden rift in the economic condition of the country. The people might lose faith in the governance and the government’s policies. Is It Really A Concern? A lot of debate have been going on whether there would be a serious impact of the rate hike on the Indian economy. Is it really posing a concern to the economy? With strong monetary and fiscal measures taken by the governor Dr Raghuram G. Rajan, he is quite confident that the economy would not plunge due to any external difficulties. Even IMF chief Christine Lagarde has shown her confidence in the Indian economy and is very less concern about the unconventional monetary policies likely to be taken by the Federal Bank. Though it had been affected at the time of the “Taper Tantrum” but the economy is much more stable as of now compared to the past. The Foreign Exchange reserve has reached to $340 billion providing an import cover of roughly eight and a half months as well as acting as a shield in the phase of external volatilities. The current account deficit have come down from 4.2% in June 2013 to 1.2% presently. This has been due to the strict monetary policies regarding the import of gold as well as the decline in crude oil prices. The corporate tax has been lowered down from 30% to 25% in the span of 4 years. This would ease the shoulders of the corporate and will eventually transform into growth. Though the external borrowing in terms of dollars might hit the profitability but the RBI is looking forward

to this concern by extending Rupee bond to be traded outside, an alternative for the External Commercial Borrowings. The consumer price index has come down to 4.12% in the month of November 2014, lowest for the year, though it has gone up in the recent month due to stabilizing of oil price but according to Dr Raghuram G. Rajan is still under the control. The Reserve Bank of India has cut down the repo rate twice this year bringing it down to 7.5% seeing a promising growth ahead. It has also cut down Statutory Liquidity Ratio from 22% to 21.5% making it easy for the banks to lend the funds for the development of the country. Thus, India is well placed now than two years back to resist the external vulnerabilities.

NIVESHAK

Cover Story

LEARNING ACROSS THE PLAYING FIELD

Vishal Khare

IIM Shillong “The pleasure of rooting for Goliath is that you can expect to win. The pleasure of rooting for David is that, while you don’t know what to expect, you stand at least a chance of being inspired.” Summer in India has got to be synonymous with the IPL. In my home, everything spins around which group is playing against whom, on which evening. While me and my father viewing IPL match where Deepak Hooda was playing massively good. I asked my father Rajasthan Royals don’t have any rockstar players still they won the first IPL and years by years figure out how to do well. He said they don’t go for lavish buys yet get the best out of calm players. Rajasthan Royals have a background marked by uncovering underrated or incredible players. In the initial few seasons, they issued us Ravindra Jadeja and Yusuf Pathan, and after that later any semblance of Sanju Samson and Pravin Tambe After we finish our dinner I was sitting in my room and discovered a book by Michael Lewis “Money Ball.” In ‘Moneyball’, Billy Beane the General Manager of the Oakland Athletics, a local baseball team with a minor budget plan, confronts the test of winning matches in Major League Baseball beating teams, for example, the New York Yankees whose budget is around four seasons

MAY 2015

of the Oakland Athletics’. As they chase for the right players to purchase to embellish the team, Billy recommends a radical thought – chase out less valued players whose commitments will help the Athletics’ win matches regardless of the possibility that they are not geniuses or traditionally celebrated players. His baseball scouts contradict him clutching decades old doctrine that a player needs to ‘resemble a ballplayer’ to succeed and they ought to be attempting to purchase such ability that they can manage. Eventually, Billy and his computer database analyst colleague Peter, have the last chuckle assembling a team on a shoestring spending budget that goes ahead to win the most matches that season including an American League unsurpassed record of 20 successive wins. The movie lets you know not to swing your bat at each senseless pitch. It instructs you to stay far from overrated players. It teaches you to play to your qualities. It lets you know that with littler players who have their abilities and wrinkles yet have been neglected by the others, you can

even now build a team and win matches. Royals are the “Moneyball” team of the IPL. Furthermore, now it appears to be as if they have done it again this season with Deepak Hooda.The truth that ABD Villiers and Powell are profitable is not a Sherlock-level reasoning. Additionally, you don’t have to do the math to realize that the multi-million purchases for Yuvraj Singh and Karthik were plain hare-brained. An investor faces the test of a financial matters variant of “Moneyball” He needs to boost his riches (consider it the wins in baseball) yet as powerful adversaries with fatter handbags experiment with the ordinary systems like expanding spending , investor’s situation is that he mostly can’t stand to do that despite a dubious monetary atmosphere And there are the obdurate teachers (simply like the baseball

scouts declining to alter their opinion) who invariably are foreseeing loss unless the one figures out how to spend more . In this regard, the investor and the Billy Beane confront the same dilemma. The way to change is constantly excruciating. The Oakland Athletics didn’t begin winning promptly after they began this methodology. They had a poor begin to the season. What’s more, accomplishment in baseball is completion a long and challenging season with a triumphant record which means conveying as time goes on. In baseball, you score on the off chance that you make a hit and consider every base by running. On the off chance that you hit the ball out of the ground, you get the keeps running in one shot. However, frequently, such alternate routes are not accessible in the financial sense, or simply

NIVESHAK

Cover Story

NIVESHAK

like the likelihood of swinging and missing, convey a high hazard. The other approach to score is gather hits or strolls (getting on base without a hit in light of the fact that the pitcher tossed an excess of balls, much like wide in cricket) and run the bases in portions (or augmentations) to cobble together a run. It may not look pretty. However, it then prepares for wins. To do that you need to be quiet and bear a lot of harsh times. When you deal with a team, comparable circumstances emerge where you continually confront resource limitations and are held prisoner to ‘tried and true way of thinking’. The “Moneyball” approach sort of urges you to look past the undeniable and make sense of the inefficiencies that others have ignored and exploit it. In the meantime, however, recall that purpose isn’t all that matters, most disappointments are recognized for achievement in light

MAY 2015

of one definitive component – execution or implementation. Presently look at, it with Stock Markets. The pitcher is Mr Market. He tosses a ball consistently at you, the player. The team is your portfolio. Furthermore, your prosperity rate relies on upon the sort of player (stock) you purchased at a specific cost. It isn’t diverse. What you have to do is, have persistence. Try not to attempt to swing at each ball and endeavour to toss it out of the stadium. Be a Rahane and Dhoni not a Maxwell in the share trading system. End of the day, you will aggregate runs (returns) gradually yet with a higher level of surety. You will wind up with a bigger number of runs when you resign than the Maxwell. In the movie. Brad Pitt’s normal expense every match is $260,000 versus the other teams that spent approx. $1.4 million, i.e. Heavy cash to

accomplish a comparable or lesser achievement. Thus, don’t purchase overrated stocks. In the event that you purchase cheap you will dependably win out over all comers. The traditional cricketing assessment includes the utilization of batting average, strike rates (for batsmen) and economy, speak balls, normal and strike rate (for bowlers). Are these adequate to recognize the high effect players? We can use some other factors also: • Team’s efficiency in slog overs -we can relate this with free cash flows Top teams in that classification, are the Chennai Super Kings and Rajasthan Royals. The three best stocks, utilizing comparative criteria, are Bhel, Cummins, and TCS • For Percentage of runs scored by the batsmen to the team score as for rate of conveyances expended We can relate this to cash returns on investment to a company’s cost of capital The three best players: Brendon McCullum, Virat Kohli, and David Warner. The three best stocks: Larsen & Toubro Ltd, Mahindra & Mahindra Ltd., and Hindustan Unilever Ltd. • Economy rates of the bowler in the powerplay overs, slog overs (last five) and the middle overs,” we can utilize dividend yield The three best players in that classification are Ashish Nehra, Bhvneshwar Kumar, and Chris

Morris. Their relating business sector pioneers are ITC, P&G Hygiene, and Asian Paints Chris Morris, who had awed for Chennai Super Kings amid his introduction IPL season, scalping 15 wickets in 2013. Morris was side-lined last season because of a damage however once he was accessible for IPL 2015, he turned into a prime focus for Royals in the closeout. On the off chance that all else was fine, it is worth purchasing at the point. Mr Market continues tossing such circumstances occasionally. Mastering ‘monetary Moneyball’ isn’t straightforward. The investor will need to concentrate on the less refreshing however satisfactory measures like Dravid set his confidence in players who weren’t whiz material yet had strongly applicable details that showed they would score runs – and scoring runs, not looking cool, wins you amusements and commit to the conviction-based move. Also, for that he’ll need to depend generally as savagely as Royals on crunching the right

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5 Myths revolving around Indian Residential Real Estate Market Maruthappan S

IIM Ranchi

This investor was numerically challenged to realize that his friend’s investment had generated CAGR of only 12% and Sensex over the same period had generated 11.75%. To track the prices of real estate & residential houses in different zones, RESIDEX, with 2007 as base year, was introduced by National Housing Bank. RESIDEX index compares the real estate property prices across 26 different cities of the country. Cities Chennai Pune Mumbai Bhopal Ahmedabad

2007 100 100 100 100 100

2014 362 242 238 232 217

CAGR 20.18% 13.46% 13.19% 12.77% 11.70%

Table 1: Top 5 Cities having RESIDEX index > 100

Cities Kochi Hyderabad

2007 100 100

2014 88 93

CAGR -1.81% -1.03%

Table 2: Cities having RESIDEX index < 100

Based on the CAGR of RESIDEX, the real estate properties in 2 cities (Kochi and Hyderabad) failed to earn the principle amount invested by the buyer in 2007. Out of the 26 cities, 14 cities disappointed their investors with return of less than that of fixed deposit schemes (9%) in banks. Introduction Real estate market, which employs huge population only next to agriculture, compromises the construction of residential, commercial and hospitality or service properties. Residential projects, occupy large pie of all the 3 sectors that is currently contributing 5-6% of GDP. Unlike commercial and hospitality sector, residential projects touch the life of end-users. Either end-user or buyer would dictate terms in such transactions based on the demand and supply of the product in the market. After the correction of real estate property prices in 2008 post global financial crisis, now the property prices are soaring at highest level ever in many major cities. This over-valuation of real estate properties is due to the pseudo beliefs instilled in buyer’s mind by promoters and builders. Here

MAY 2015

the current situation and problems of residential real estate market is examined by bursting 5 general beliefs of investors. Belief-1: By Infusing Few Lakhs In Real Estate, An Investor Can Reap Crores People would go frenzy on hearing those words and they also believe that ‘Investing in real estate would always fetch them higher returns’. Here the significant link is the time (investment duration) factor which generally goes unnoticed by many investors. They are more attracted towards the whole aggregate return & do not heed due attention towards CAGR. For example, in a seminar, an attendee mentioned that his friend purchased a house at OMR, Chennai worth Rs. 18 lakhs in 1998 and now his friend’s investment worth is Rs. 1.25 crore (700% returns) and thus he has decided to invest in real estate.

Indices 2007 RESIDEX of 26 2600 Cities Sensex 13,827

2014 4706

CAGR 8.85%

28,844

11.08%

Table 3: RESIDEX Vs Sensex

On comparing the CAGR of the RESIDEX & Sensex over the period of FY 2007-14, clearly Sensex indices yielded higher return than RESIDEX despite of sub-prime crisis, the global financial catastrophe. Belief-2: Land Available To The Huge Indian Population Is Meagre Indian investors believe that since land cannot be expanded, demand for lands would surge in future to house the people of this 2nd highest populated country. On exploring further about

the land availability in the sub-continent: 1. Based on the population density report (as published by World Bank), 21 more countries are densely populated than India. 2. Apart from it, supply of land can be increased by increasing the FSI ratio. Floor Space Index (FSI) is the ratio of total gross floor area to the total plot (land) area. Increasing the FSI ratio could increase the building (apartment) area, which in turn could increase the number of households, residing in the same plot area as in the case of Bandra, Mumbai which has been raised to 0.6 from 0.33. 3. Is the land area of 3.28 Million Km2 not sufficient for 1.26 Billion people? Assume that Indian population consisted entirely of families having 4 members residing in 1200 feet2 house & 2 members of the family working in an office area space of 500 feet2. Now 1.267 Billion people would be grouped in to 316.75 Million families/households. For these households, residential space required would be 380.1 Billion feet2 and office space required would be 316.8 Billion feet2. With just 1-2% of land available (3.53*1013 feet2), the whole population could reside in the country. Here FSI assumed to be 1. Belief-3: Real Estate Property Would Always Sell Like Hot Cakes Investors generally believe that residential properties such as flats, land & villas would earn them higher return as well as liquidation of property will be easier. But the current trend of real estate properties is indicating otherwise. Based on the inventoried houses available across 10 major cities, it is expected that it will take at least 4 years (16 Quarters) to clear off the built houses. QTS (Quarters to sell) is defined as the number of financial quarters taken to sell the constructed houses. Considering the projects under construction as well, QTS ratio would further inflate. For a balanced & dynamic market, healthy inventory of houses is 2 QTS (6 months). HSI (Housing Sentiment Index) denotes the expectation of prospective residential property buyers about the investment in residential

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Table 5: No. of years taken to acquire a property based on avg. disposable income of different countries

Fig 1: Movement of Buyer HSI & Seller HSI (FY 2013-15)

properties. Out of the 10 cities surveyed, respondents of 9 cities answered that prices of residential houses would decline over the next six months. Compared to April-June’14, presently Buyer’s HSI had fallen by 29% indicating the negative sentiment prevailing in the market about the possible correction in residential property prices. Ever since the inception of buyer’s HSI in 2013, the index has never dropped below 100 (negative sentiments) till the current period of Jan-Mar’15. On plotting HSI (buyers & sellers) for the past 4 quarters, the dwindling confidence of investors is depicted in Graph-1. Hence with the huge pessimistic views, investors can’t expect their properties to sell overnight which may take months to sell at this unaffordable price level. Belief-4: In India, Residential Properties Are Relatively Cheaper Than International Markets Indian investors believe that real estate

properties are relatively valued lower in India compared to other markets. The belief contrasts with the report published by Bank of International Settlements on Housing Price Index across the world. In most of markets, residential property price against average income had fallen over the period of FY 2011-14. The report also indicates that pure property prices in India had grown at the rate of 31.4% during FY 2011-14 while the per capita income had grown only 6.7%. This denotes the widening gap between the house prices and income. Table-5 depicts time period taken to acquire a residential property located outside city center by a person in the city. To buy an apartment in India, the resident’s 15 year disposable income is required. To buy the same 1000 Feet2 area flat in other countries (except China), the property can be bought with lesser period of resident’s disposable income. Hence definitely India is one of the costliest markets for purchase of

Table 4: QTS & Buyer’s HSI index of 5 metro cities

MAY 2015

residential properties compared to average disposable income of an investor. Belief-5: Investing In Residential Property Is Absolutely Safe Investors are not wary about the various risk associated with the properties till they encounter it. Recently, in metro cities such as Delhi NCR, Mumbai, Bangalore & Chennai, the builders are not handing over the apartments on time to the buyers. Here the hold-up period has increased to years putting pressure on the first time home buyers who have to pay rent of the residing house as well as EMI for the not-in-sight house. In the 4 metros, 60% of the projects are delayed on an average of about 25 months (8 Quarters) with Delhi NCR leading the list. On questioning what could be attributing to such delay in handing over the flat, one will find that payments made by the buyer are diverted towar ds other projects & businesses of the builders and promoters, resulting in Ponzi scheme. The fail point of this scheme would be when the principle paid by the new investors is not enough to pay the old investors. The biggest risk, not mentioned here, could be builders running away with the investor’s money. With number of daily blooming builders and huge chunk of money-on-hand transactions, it would be difficult for the investors to trace back the builder whereas in case of financial products such as equity and mutual fund, this risk cannot be associated. Path Leading To Due to the on-hand cash transactions involved in purchasing a property, lot of illicit money has

been parked in physical assets investment and they served as the stimuli for the over valuation of those assets. Currently with the central government’s initiative to curb black money, such as imprisonment for holding foreign assets with the illicit money being equated to criminal offence, there would be little room for the illegal money transactions. With the implementation of Jan Dhan Yojana & other financial inclusion schemes, large population is expected to be financially included in this country which has the financial illiteracy rate of more than 50%. These measures would lower the leakage in govt. expenditures & elevate the multiplier effect of govt. spending on public projects. As a result, it would further reduce the black money parked in physical assets which would divert the investors towards financial products. This would create adverse situation for the black money chasing behind real estate projects. Always demand would exist for a reasonably priced property even in big/metro cities. Hence, on the correction of real estate property prices, which is expected to take around five years, demand would surge. In such market, the circumstances would be favoring more of buyers with negotiating or bargaining power.

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Right Strategy To Invest In Highly Volatile Equity Market Sandeep Sharma

IIM Shillong

“When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever” – A very deep and insightful thought by the most successful investor of the 20th century Anyone who would have invested in Hawkins Cooker in 2007, and followed the advice of Warren Buffet by staying long on 1000 shares would have earned nothing but 2 million rupees in 2014. However, it is despite the fact that the whole world was fighting with slow growth, unemployment etc. So, can it be generalized that staying long always earns huge profits? The answer is – obviously not. As we look at the story of Abban offshore, Kingfisher, Unitech, Jai Corp and Suzlon Energy tells us an entirely different story altogether, if someone would have made the mistake of investing half a million rupees in these companies, he would have ended up with

MAY 2015

only 50000 rupees by the end of 2011. It is quite perplexing to figure out the right strategy, given the high volatility of the equity markets. If we look at the BSE 30 share index - Sensex, from 1990 to the dawn of the fall of the markets in 2008 and till the latest upward movement in 2014, we will find out that most of the time the market has rallied because of the news. It is highly sensitive towards the happenings in a political arena, like one of the major reasons of last six months upward movement of the Indian Stock Markets was the election victory of BJP in the centre with a clear

majority. Global investors are regularly investing in Indian equity markets because of the business friendly approach of our Prime Minister Mr. Narendra Modi. Also global news like the policy changes, release of the various data in U.S. economy affects the Indian markets. To have a clearer idea, let us trace some of the biggest rise and fall in Indian markets. In July 1990, Sensex touched the magical no. of 1000 for the first time in the wake of good monsoon and extraordinary industry performance. Few years later in June 2005 it ended up at 7000 points, after the news of settlement between Ambani brothers which boosted the sentiments of investors and then the huge crash of markets happened in 2008 when it reached to the level of 8500 points from 21000 points. The point here is that instead of investing in the books of the company we invest on the basis of speculation. Not only our retail investors but also the big institutional investors are afraid of booking losses, they want to earn as much as they can and as early as possible- this is where the root cause of the problem lies. If an informed investor would have looked at the books of Kingfisher in 2005, he could have easily figured out that the company will not sustain for long – the huge debt burden and the inappropriate business model will definitely drown the company sooner or later. What Is The Right Strategy? Of course there is no panacea for all the investment risks, and no exact formula for making large bucks of money, but yes there is a way out specially for the retail investors who are new to the market and not aware about the technicalities of the stock market. The first and foremost thing is patience- the Indian market fell from as high as 21000 points

to as low as 8500 but it again started correcting. Now, it has passed all the records and is moving towards the magic mark of 30000. This phenomenon was very well explained by John Maynard Keynes after the great depression of 1930s. He said that, each business cycle can be divided in four parts which are1. Expansion : Growth of the business cycle started with increase in demand, spending etc. 2. Peak : Generating the maximum allowable output 3. Recession : End of the period of growth of the business cycle i.e. demand, spending etc. starts decreasing 4. Trough : Bottoming out of the economy Once the market or the economy starts bottoming out, it ends a business cycle; which means that the dark days are over now and it’s time to stay long. But here comes the beautiful word “patience”it can’t be predicted accurately as to when that moment will come which is awaited by everyone. You have to regularly watch out in the market and analyse it. However, keeping long term view on stocks would help you to take the complete benefit of the expansion phase of the business cycle. Before investing in any company, analysis of company’s fundamentals and the latest news related to company is very important. Even a company’s share is generating profit for its investors, we have to look whether it is due to the better performance of the company or the speculation about the company. Speculation can give profits only in the short run and are highly risky phenomenon as we have no control over it. What matters most in the long run is the company’s performance. Thus if a company fundamentals are strong it will be able to perform better and the markets accordingly pay for it

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leading to the price appreciation in company’s share value. There are various parameters to look to analyze the fundamentals of the company like a) Business model of the company:- Company is operating in which business and the expected demand of the company products in the future years. Also the current market share of the company in the business area, the competitive advantage a company has against its competitiors matters a lot. b) Revenue and net profit of the company:Company with growing revenue and net profit in the recent years is better managing its resources and doing well in the market. c) Earnings per share:- It shows the profitability per share of the company. A company with consistently increasing EPS is a good option to invest. You can also compare the EPS of the company with the other companies but in the same industry/sector to check the performance of the companies. d) Debit Ratio:- This ratio shows the debit position of the company. The higher the ratio, the

MAY 2015

more risky it is for the company as the profits generated by the company would go in paying the interests and debts of the company. There are other important parameters too like Price to Earnings ratio, Price to Book ratio, Dividend Yield to analyse the company. While there is no guarantee that a company having better parameters would always give better returns on their stocks but analyzing these parameters would help the investors not to fall into the stocks of companies which have more probability to erode the wealth of investors. Also, it is very important to get the stocks of better companies at an attractively lower price otherwise it would be a big mistake to invest in stocks when it is already overpriced i.e. to look out for the appropriate business cycle of the economy. Investors have to remain careful of the various devils which initially attracts and promises to give huge profits but ultimately lead them in a situation where they make their mind not to invest again in the market.

The Devil – “Margin” Mr. A is an astute investor; he does not invest in any stock without proper research. Now, he wants to buy XYZ shares which is currently trading at Rs 4000, but has only lakh rupees to invest. He is very bullish on this stock but the irony is that with the amount of money that he has, he can buy only 25 shares. He is surely not very excited now, so he starts looking for someone who can help him out. There comes Mr. B- a broker by profession, he asks A not to worry as he can give him a buffer of 9 lacs so that he can buy 10 times what he can actually buy, but he has to return the money at the end of the day with some brokerage, seems very profitable to A. He takes the money and places a buy order on exchange. But, the day is not very good for him; the market ends in red, and the share falls to 3500. The loss which would have been just 12500, magnified to 125000. Mr. A curses the market and decides to stay away from it in future. But, he fails to identify the devil- “The margin”. In Intraday trading, it is the real enemy and after losing a huge money investor understands the risk taken by him. Investors are often driven by speculations and their greed forces them to take bigger risks, which finally make them loose huge amount. Again reiterating the fact-“Invest in a company not in the market sentiment”. The best strategy would have been to buy shares in cash and hold it for some time. The stock market is very volatile and holding the shares for long time actually absorbs the volatility of the market and the risk eventually averages out.

and kept on investing in the dot com startups, without analyzing their books. At that time it was said, that every 60 seconds a new millionaire was created. The start-ups used excessive debt to fund their expenses, raise IPO, and spend the money in throwing frivolous parties. There was a market sentiment that software technology will never book loss, as there were huge profits involved as compared to hardware technology. If there was anyone, who was intelligent enough to stay away from this herd mentality, he would have survived that bearish trend. The crux of the story is that, no strategy will work for speculation. The best strategy is always to “invest in a company with healthy books”, all those dotcom startups which were responsible for the crash did not show profits. However, there were some who are still waiting to break even. Lessons Learned There is no clear cut golden rule to invest in the market and get hefty returns. But the right strategy to invest in highly volatile equity market is to hold patience and to look at the fundamentals of the company before investing into it. Retail investors who are new to the market, have to try to invest in a company with healthy books and take a long approach rather than looking for short term profits.

Dot Com Or Dot Bomb The era of internet, which marked the presence of a new kind of economy, where the inflation was virtually nonexistent and the recessions were the relics of the past. But, when we go deep and search why all this happened, we will find out that it was again the lack of patience, and greed to earn more money in minimum time that caused the markets to collapse. Investors started speculating that the bull market is there

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Article of the Month Finsight Cover Story

Mallya vs. DFPCL

Yashvardhan Kabra & Ramesh Jaiswal

IIM Shillong

Introduction The occasions of any excitement in fertilizer industry are few. But things have certainly tuned to an exciting tug of war happening between the two leading players in the industry. Deepak Fertilizers and Petrochemicals Corporation Ltd (DFPCL) and the Vijay Mallya backed Zuari Agro chemicals (Adventz Group) are eyeing Mangalore Chemicals and Fertilizers. The war of acquisition was through revisions in the open offer prices and acquisition of stakes on several occasions. Like all industries the basic route to grow is two folded, first is organic i.e., to expand your business internally by say diversification/ capacity expansion and the second is inorganic i.e., acquiring other industries to expand your

MAY 2015

product portfolio. Deepak fertilizers has been aggressive on both the fronts, on the internal front the company has developed blueprints for doubling of NPK Fertilisers, growth in the chemical and TAN sector through its capex at Taloja plants. Currently the company operates with more than 4500 dealers and sub dealers to ensure its penetration into the states of Maharashtra, Gujarat, Punjab, Karnataka, Punjab, Madhya Pradesh and Haryana. In one instance it is targeting to augment its capacity with a 6,00,000 MT NPK Plant at Taloja and 30,000 MT BS Plant . The company has done well in climbing the ladder of value chain of quality fruits and vegetables. The markets have applauded company’s strong performance on the fronts of volume growth, improving efficiencies,

The Bidding Wars It all started in April 2013 when Zuari group bought about 10 percent stake in MCFL through open market. In July, Deepak Fertilizers bought 24.6 percent stake in MCF at the rate of Rs.61.75 per share, totaling Rs.180 Crores through open offer route. The Burman family, one of the influential shareholders of the company too, sold their holdings to Deepak Fertilizers. The Burmans had invested in MCF mainly as a portfolio investor since fertilizer is not their core areas of business and therefore they could not reject the good valuation of their holdings. Zuari group increased its stake to 16.43 percent in the same month. In April 2014, Deepak Fertilisers further hiked its shareholding in MCFL to 25.31 percent -thereby triggering the mandatory open offer clause under SEBI norms. On 23rd April 2014, the company launched a hostile bid for MCFL at Rs.63 per share. Very soon, Vijay Mallya in collaboration with Zuari group launched a counter-bid to this at Rs.68.55 per share. In the months to follow, the Mallya Zuari group raised its offer to Rs.81.60 per share and the DFL raised its offers by 48% to Rs.93.60 per share. This resulted in a sudden surge in the market price of the stock and the stock hit upper circuit several times. Both the offers hit market on October 1. At this time, the stock was trading around Rs.88 per share. By the time the offer closed on Oct 17, the UB group could acquire only about 44000 shares owing to the higher prices of the other offer. But the surge in the stock price resulted in many investors not doing away with their shares and DFL could acquire only about 6% of the proposed 26% offer. Only 3637% of the company’s shares were widely held. The promoter UB group along with the Zuari group had a total stocks of 38% and needed only 12% to gain the control of the company when compared to 26% required by DFPCL. There was another angle to all these events. The UB group promoted Kingfisher airlines was grounded on October 12th and the promoter was grappling a financial crisis at that front. On 1st September, the chairman of UB group Vijay Mallya was termed as a willful defaulter by court. Following this, he had to step down from

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Corporate Battles

business competitive ness and a strong revenue and profitability in the future. In the financial year 2014, the revenues for the company grew by 46% to 3920 crore and net profits touched 250 crore, up by 90%. MCF is a prized company for any acquirer because of its recent turnaround and exponential growth in last few years. The company has grown from a brink of negative net worth to Rs. 600 crores of net worth now. One of the primary objectives of looking out for this company from Deepak’s perspective is the presence of MCF in the urea business which would enable Deepak to diversify into a business of subsidies. The potential demand in this category exceeds by far against the supply therefore there are high chances of exponential growth in this category. Indian annual requirement of urea is 30 million tons whereas the supply is limited to 22 million tons. Besides this the Indian farmers have a strong inclination towards the use of urea as their staple means of fertilizers. Market analysta also expect a strong expansion of demand in this category, therefore any stock in this category is nowhere overvalued. Other synergies that the company expects from this acquisition are related to geographical locations, both the company’s plants being in close proximity with each other. MCF has an annual capacity of 380,000 tones which could be scaled up further it has got plenty of scope of production expansion with in its 60-acres vacant plot. Gain in terms of complex fertilizers business could also be incorporated as Deepak currently has 180,000 tonnes of complex fetilizers capacity and MCF has 2,60,000 tonnes of capacity . The additional capacity not only increases the capacity but also provides a horizontal width in terms of product range. The Company’s (Deepak) presence has largely been concentrated in terms of market and distribution in the northern part of the country, acesss to MCF would ensure access to South including but not limited to Karnataka, Andhra Pradesh, Tamil Nadu and Kerala. At present approx. 40 percent of the company’s revenues come from the Agri and Farm Solutions business while 38% from Mining chemical business and the rest comes from the industrial chemicals category.

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Article of the Month Finsight Cover Story

Bankruptcy Prediction Altman Z-Score

Sir, a few days back I have read that PQR Ltd has filed for bankruptcy. What exactly does this mean? Bankruptcy is a legal proceeding concerning a business that is unable to repay outstanding debts. Then it is a crisis condition for an organization. Is there some way to avoid it? Figure 1: Share price movement of DFPCL

stake in MCFL. It was heavily over-subscribed. On May 18, 2015 Zuari Agro Chemicals Ltd, the parent company of ZFCL, notified the exchanges that the company had acquired an additional 36.56% in MCFL through an open offer, taking its total shareholding to 53.03% making MCFL a subsidiary of Zuari Agro Chemicals Ltd. This development brought this corporate tussle which lasted for about 2 years to a permanent end. Was Mangalore Chemicals Price Justified The stock was hitting all time high when the open offers from two parties were anticipated by the market however, the premium as offered by the acquirers (Deepak and the Zuari) looked justified as the stock was scoring above 15 times with P/E of ~ 13 times and the EPS was at Rs. 6.18 per share which justified a valuation till Rs. 93 per share. Post acquisition revenues for Deepak are projected at Rs. 4500 crores and PAT of Rs. 260 crores so any price at Rs.90 to Rs.93 range is justified, However the recent surge of the price at Rs. 104 levels had some troubles of the acquirers.

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the board of MCFL and in the next few days his step mother Ritu Mallya was appointed as director on the board of MCFL. In December 2014, Zuari group offered a voluntary open offer for buying MCFL shares at Rs.91.92 a piece. Zuari group revised its open offer size to 4,33,29,000 equity shares, representing 36.56 per cent of the total share capital of MCFL. With the increase in the offer size, Zuari will have to spend Rs 398.2 crore from Rs 282.19 crore earlier. This fierce battle witnessed a twist in the tale recently. Deepak Fertilisers surprised the markets by selling a 2.2 per cent stake in Mangalore Chemicals & Fertilisers Ltd (MCFL). The move triggered speculation whether the company has thrown the towel in the takeover battle for Vijay Mallya led MCFL. In a filing to the BSE, Deepak Fertilisers informed that it has sold over 26 lakh shares, through nine different open market transactions. Deepak Fertilisers’ stake in MCFL came down to 29.05 per cent from 31.25 per cent. As expected, Deepak Fertilizers decided not to throw a counter offer to the open offer of Zuari group. It soon started offloading its stake in big amounts. On April 13, it offloaded a stake 12.07% in MCFL. On April 20 this year, the Zuari Group launched its open offer to acquire an additional 36.56 percent

It will be difficult to avoid it if you as a company owner is not cautious enough. But you can handle it beforehand by prediction. Sir, can we predict the occurrence of bankruptcy? Definitely yes and the results are correct 95% of the time.

Parsita Kundu IIM Shillong Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where A = working capital / total assets B = retained earnings / total assets C = earnings before interest & taxes / total assets D = market value of equity / total liabilities E = sales / total assets And Z = overall index But why are these ratios considered here? Because 1. Can measure liquid assets with respect to the size of the company 2. Indicates profitability that reflects the company’s earning power 3. Denotes earning from its operations which is also a measure of its long-term viability 4. Shows how much a company’s market value could decline before liabilities exceeded assets 5. Measure for total asset turnover. Wow! This sounds easy!

And the Zones of Discrimination are as follows: Z>2.99 signals Safe Zone, 1.8<Z<2.99 implies Grey Zone and Z<1.80 then it is By Altman Z score. It is based on in Distress Zone. Any Score below 1.80 five financial ratios that can be calculated indicates that a company is in financial from data given on a company’s financial distress and seem likely to declare bankruptcy. statements. It was developed to explicitly address the likelihood that a company Sir, can I test it on any company? would go bankrupt. But before going into details, do you want to know the history of this score? Initially, it was designed originally for publicly held manufacturing companies with That will be more interesting. assets of more than $1 million .But now it has been adapted to fit different situations Edward I Altman, a professor of like Private Firms and Non-Manufacturer Finance at NYU, developed this theory in Industrials and Emerging Market Credits. But Z score 1968 which Predicts the likelihood of a is reliant on the quality of the underlying financial company going bankrupt within 2 years. data. If a company is cooking the books, then its It is based on MDA, a statistical technique ﬁnancial statement data is not a true representation used to classify an observation into one of several of the strength (or lack thereof) of the company. a priori groupings dependent upon the observation’s individual characteristics. Thank you sir. Now I can understand Sir, it seems a bit complicated. Can you the concept of bankruptcy and how we can please elaborate this? predict it with Z score There is less need to go into this. The main formula is very simple: Sir, I am curious to ask you “How?”

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NIVESHAK

WINNERS Article of the Month Prize - INR 1500/Chirag Tekriwal IIM Shillong May FinQ Winners 1 st Prize - INR 1000/Yashvardhan Kabra IIM Shillong 2 ND Prize - INR 500/Mayur Gupta IIM Indore

ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1500/- along with a certificate. Instructions »» Please send your articles before 10th Jun, 2015 to niveshak.iims@gmail.com »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 1500- 2000 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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