The IBS Times- December 2014

INDIAN ECONOMY- ACHE DIN AANE WALE HAIN?

BY SAPTARSHI & DEBOPAM

THE IBS TIMES SPECIAL EDITION

December 2014, Issue No. 175

PSYCHOLOGY OF AN INVESTOR RECENT TRANSFER PRICING JUDGEMENTS

BY SUHANI & AMIT

BY SRISHTI KARMAKAR

A MATCH MADE IN HEAVEN? A COMPREHENSIVE ANALYSIS OF KOTAK MAHINDRA BANK AND ING VYSYA BANK MERGER

BY NAVJOTH SAHU FinStreet, IBS Hyderabad

ISSUE NO.

175

DECEMBER 2014

CONTENTS FEATURED 8

BRICS Bank- Alternative or Tokenism

10

Impact of Falling Crude Prices

17

The Psychology of an Investor

21

Shadow of Slowing Dragon

32

India’s Struggling Manufacturing Sector

37

Growth Story of SMEs

42

Indian Economy- Ache Din Aane Wale

25

Hain? (Article of the Month) REGULARS 17

12 50

2

Letter from the Editor

3

SENSEX Souring High

6

Apple’s Market Value

12

Cab Wars in India

15

Flipkart and Amazon Woo IRCTC

19

Recommendations of TSR Committee

25

Kotak Mahindra & ING Vysya Bank Merger

28

Is Saffron King of Spices?

35

The Transfer Pricing Scene in India

39

Market Watch

46

The Media and Entertainment Industry

48

The Winter Session of the Parliament

50

OPEC vs. Big Shale

52

Santa’s Stock Picks

INTELLIGENCE BEYOND SUCCESS

“I am cautioning against picking a particular sector such as manufacturing for encouragement, simply because it has worked well for China. India is different and developing at a different time, and we should be agnostic about what will work.”- Dr. Raghuram Rajan, Reserve Bank of India Governor

Letter from the Editor

THE IBS TIMES Faculty Mentor

Dr. Ravi Kumar Jain On the Cover: Merger picture of Kotak Mahindra and ING Vysya Bank

Dear Readers,

Greetings from Team FinStreet !

For an editor, the actual joy comes through the response his magazine receives.

We are very overwhelmed with your keen interest and association with The IBS Times.

Team IBS Times Chaahat Khattar (Editor-in-Chief) Akshay Gupta Atharva Solanki

Manisha Mohapatra Nikhil Acharya Nishtha Behl Shivam Tandon Vanika Sharma Alisha Singh Apoorva Anusha Avik Chakrabarty

For this edition of The IBS Times, we invited entries from other business schools of the country and we received good number of them. All articles were good in some or the other way but few stood out which we have published in this issue.

Article titled ―Indian Economy- Ache Din Aane Wale Hain?‖ has been adjourned as the Article of the Month for December 2014 issue of The IBS Times.

This issue carries analysis on recent merger of Kotak Mahindra and ING Vysya Bank as its cover story wherein we have analyzed the synergies of the merger.

This edition sheds light on the falling crude prices and its relation to the shale gas of US, competition in the Indian cab market, recent transfer pricing judgments and the growing demand of saffron. The edition also analyses the spike in SENSEX and Apple‘s market value. This issue also covers analysis on psychology of an investor and recommendations of the TSR Committee.

The magazine also covers industry analysis on the Media and Entertainment Industry. In the market watch segment, the magazine puts light on the performance of various financial markets in the past two weeks. The magazine includes a special segment on Stock Picks by Team Vriddhi Research.

Kaushik Chandell

Koisetty Sai Aishwarya

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better !

Manjari Navjoth Sahu

Chaahat Khattar

Priyanka Malik Rahul Mishra Ripu Daman Tandon Sachi Kheskani Sameena Usman Srishti Karmakar

" It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”- Robert Kiyosaki

Markets

SENSEX Souring High

- Sameena Usman, IBS Hyderabad

Sensex is soaring high, is it bubbling to ultimately

happened ? Yes absolutely the US tech bubble of the

burst? Is it really nearing an end or is it just a new

1990‘s.

beginning? Well, before jumping to any conclusions, let us get a few basics right: it‘s obvious that the ultimate driver of the markets is of course the growth in earnings, which, by the way, is in turn based upon GDP growth rates of the country right. However, there's another important factor to be taken note of, and that‘s the corporate profits as a percentage of GDP. It is this ratio which determines how much of a country's GDP falls into the lap of shareholders and

Back then their corporate profit ratio was running way above the normal band and also, the US economy was on shaky grounds as rates were already the lowest they had been in many years by then. So with no further help from (corporate profits: GDP) ratio and also interest rates, it was obvious that the forthcoming period would see stocks growing at a much lower rate than before. And we all witnessed how it ended up, didn't we?

therefore, the higher it is, the better.

Thus if we are keen on making an educated guess The forces that affect this profit to growth ratio are the share of other stakeholders such as workers, providers

about Indian stock markets, it is obvious that these are the two parameters we should start with.

of debt capital and of course the Government.

Subsequently, if the present ratio of corporate profits to growth happens to be running above the normal bands or above an average value, then it obviously is an indication of a bubble, cause what has gone out of proportion has to ultimately come back to form due to the other forces, elasticity? Yes, for obvious reasons.

Another vital factor or driver in the world of markets is the interest rates, which affect the liquidity within the share market, also lower interest rates attract investment in the stock market, so lowering them would definitely prove to be a boost for the indices.

And bingo! Fortune cards are in our favour! Turns out that corporate profits in India as a percentage of GDP are still 30% below the last 10 years average. Thus, if they were to normalise and India manages to grow its GDP in the range of about 7%, still more good gains are certainly there for the taking.

The possible flip side that may arise if the growth is not as expected is the fact that this sudden uprise in sensex may lead to opinions that the Indian market is over-priced, which could be gauged by the P/E ratio, mid this year P/E for India was 24, possibly the highest among emerging market economies. P/E in

Now, back to the big issue, diagnosing the Indian stock market, well we‘ll have to look for the symptoms, if any, in case the boom is heading to an end...when was the last time such a thing has

China was nine and 13 in Asia-Pacific countries. It is likely that the pace of the Sensex will slow down in the future unless as already mentioned; growth is given an emphasis on. This exactly was the case a couple of years ago when the growth was almost

3|DECEMBER 2014

stagnant and the Indian stock market, was believed to

sign considering the fact that the sensex depends

be grossly overvalued , although now it is slightly

heavily on these three prominent and inter related

more reasonably valued, thanks to India's continued

game changers

efforts on economic growth.

• Future growth of the Indian economy, annual

Specially in a democratic country like India, along

inflation

with the government‘s efforts towards growth, even the people‘s ability to gauge the same has a major impact on the ultimately sentiment driven stock

• The inflow and outflow of foreign institutional investments • The price/ earnings ratio & its fluctuations

markets! Hence the ‗‘achhe din aaye‘‘ slogan initiated

If the government efforts go in accordance, we might

by the government made a long way into generating

see the patience bear fruit in near future. Yes, that's

confidence among investors. It ensures the stability of

right , no denying that the indices have touched record

the government and continuity of policy. Modi‘s

highs ,but still extra points on the Sensex seem very

government is expected to adopt policies that will

much on the cards too. Hence, we seem to be on solid

facilitate and encourage business. Investment will

grounds as far as the equity markets are concerned.

revive and regenerate GDP. The rate of growth had

And you know what, we aren't even talking about

halved in three years and has to be restored in a

interest rates as yet, which if they are lowered, can

shorter time-frame.

easily provide the additional kick. There‘s a stronger

It was but obvious that FIIs rushed in to take

chance of the indices going even higher from here.

advantage of the new opportunities. The total inflow

And a correction if any should be looked upon as an

of FII investment is hovering at $25 billion, nearly

opportunity to cash up on some good quality names at

half of it in equity. Foreign direct investment will take

attractive prices.

a little longer but will definitely happen, this is a good 4|DECEMBER 2014

mark, if the sensex earnings ratio increase and sustain at a mere 25% for the coming fiscals, then sensex might as well touch 100000 points by 2025..that is in a decade or so!

Post elections, the cyclicals and industrials were the top sectoral gainers in trade in view of expected economic growth. Export companies in the IT sector resorted to selling on concerns of further rupee appreciation against the US dollar, thus Infosys, TCS & Wipro were index losers.

ICICI Bank , SBI , Axis Bank , Hero Moto-Corp were the top sectoral gainers in May-June.

As the year approaches an end, it‘s safe to say that our markets have already touched into a full bull phase, & the rally is going to continue on the basis that foreign investors see Indian markets as an appealing prospect.

Ultimately, fundamentals are the key, even if we accept the fact that the present market might as well be tagged as ‗‘living on euphoria‘‘, indicators that point towards positive factors such as industrial recovery, a reversal of the degeneration of the economy, will be the ones giving strength to the market, hence the one big thing to look out for at the moment is the upcoming budget which, if well drafted, will certainly be a strong trigger to take the Sensex to much more higher levels.

Speaking on a long term perspective, profit expansion holds the key for the Sensex to touch a six-figure 5|DECEMBER 2014

Conglomerate

Apple’s Market Value

- Kaushik Chandell, IBS Hyderabad

25th November 2014 marked itself as one of the most

company will continue to create new milestones for

significant date in the history of Apple Inc. as the

some time. With the ongoing fashion of Phablets

world‘s largest company by market capitalization

(Phone +Tablet), there couldn‘t been a better release

created a new intra-day value record of $700 billion.

time for iPhone 6 plus.

Shares of AAPL traded at 119.75$ in New York, giving the company a chance to breach a milestone of $700 billion which no other US giant has ever reached.

Since the unveiling of large screened iPhones in September and faster and lighter iPads in October, the

Just to give a better idea how big the $700 billion achievement is, let‘s take a look at the five companies that have highest market capital after Apple Inc.: • Exxon Mobil - $391 billion • Microsoft - $400 billion

confidence of has been growing. Chief Executive

• Google - $362 billion

Officer Tim Cook has emphasized on the core

• Berkshire Hathaway - $356 billion

products while pushing the users into the company‘s digital world with the introduction of a mobile

• Johnson and Johnson - $302 billion

payment system called Apple Pay and a smart watch

However, with a little drop in the value of APPL

slated to release in 2015. This confidence has led to

shares might equate to a significant loss to the

an upscale increment of revenue forecast for the

company. As of now, stock prices fell and on Dec 1,

October through December quarter to $66.5 billion as

Apple got the hit when it reached to the market cap of

compared to $57.6 billion of the same quarter for the

$674 billion.

year 2013.

The Path Ahead

INFLATES of iPhone 6 and iPhone 6 Plus

Now the big question is with Apple having the highest

Report released by Consumer Intelligence Research

market cap, which firm will cross the hefty sum of 1

Partners (CIRP) shows that about 12 percent of

trillion.

android users changed to iOS after the release of

Just conduct a random survey and ask them which

iPhone 6 and iPhone 6 Plus. CIRP co-founder Mr.

company is most likely to become the trillion titan.

Josh Lowitz attributes that users who are much

The most common response you‘ll receive will be

friendlier to bigger screens, iPhone 6 plus will be a

either Apple Inc. or Google. Apple upheld itself at the

treat for them and as a result, users who switched

first spot whereas Google managed to grab the 2nd

from iOS to android are coming home to iOS. Sales

position after Exxon Mobil in the world‘s largest

figures has already proved that the launch of the new

companies list. However the stunning similarity is the

product was a success, right after it was out of the

remarkable speed shown by both the companies to

gates. Even the investors believe that the tech

reach to the top of the chart. In just a decade, Apple

6|DECEMBER 2014

increased its market value by $689 billion, a 43 fold

their currencies are being appreciated over the long

gain from a paltry market capital of just $13 billion in

term, boosting the market value of their companies in

the year 2004.

dollar terms.

With Apple Inc. being so successful, how can Google

DARK HORSES

slouch either, with the market cap up almost 11 fold within a decade. Company still relies on online advertising for the bulk of its revenue, still Google is expanding its tentacles in the numerous innovative business areas. Some of these initiatives are Google mobile pay and Chromecast hardware whereas Android and Chrome are also contributing heavily to its revenue. But the major chunk is coming from the youth who are highly devoted to the Google products such as Gmail and YouTube. Google just needs a 10% annual overgrow in the next decade to cross a total

Apart from Apple and Google there are numerous other companies which have shown a phenomenal growth over a past few years. With such a frenetic pace, the possibility of a trillion valuation within a certain number of years is high. Top 5 throne contenders

in

the

future

can

be

Facebook,

Amazon.com, Tencent Holdings, Gilead Sciences and Alibaba.com. Firms with the most disruptive future technology can achieve the widespread adoption and it could be their ticket to the big leagues in just a matter of years.

valuation of $1 trillion market cap.

Is it just TIM COOK? THE SECONDARY COUNTRY CONTENDERS The chief executive Tim Cook, who succeeded Mr. Two sectors to have higher odds of producing the next

Steve Jobs in August 2011, stated that the demand for

$1 trillion titan are either technology or biotechnology

the new phone had been ―staggering‖. His words

/health care. This is all because these sectors are

were, ―we‘re selling what we‘re making‖ and added

capable of growing at dazzling speeds due to the

that 2014 was ―one for the world record books‖.

virtuous cycle. Billions are spend in Research & Development to develop a blockbuster product with a hefty profit margin enabling them to acquire or develop other promising technologies. However, US companies are having an advantage in the race of $1 trillion since they have had a better history of trade valuations than their overseas peers. The largest firms from the BRIC countries (Tata Consultancy Services) either have a smaller market cap or are inefficiently state run enterprise. But other countries capable of producing $1 trillion Company can be Switzerland (Nestle, Novartis or Roche) or China because only

7|DECEMBER 2014

However, analysts believe that Apple could go even higher, with Michael Corcelli, head of US fund Alexander Alternative Capital, saying that its market capitalization can go up to $1 trillion. Whether or not Apple will beat its competitors and other giants in the industry to the $1 trillion race and maintain its top position not only in the capital market but also in the heart and soul of its users, only time will tell. Till then we can just wait and watch.

Featured

BRICS Bank- Alternative or a Tokenism?

The Old World: Dominance of the West Post World WAR II, all the nations formed a consortium of power that would help prevent the recurrence of such wars. Thus the Bretton Woods Conference led to the establishment of three such institutes that facilitated harmony and stability to the

- Adrita & Ayan, SCHMRD Pune

and South Africa are the five BRICS nations. BRICS represent almost 3 billion people which accounts for 40% of the world population, with a combined nominal GDP of US $16.04 trillion i.e. 20% world GDP. The BRICS nations represented 18% of the world economy. With the emergence of the BRICS nations there was a need to have a separate bank.

world through trade and financial support. These institutes were World Trade Organisation (facilitate trade), International Monetary Fund (macroeconomic stability) and World Bank (developmental assistance).

Reforms to allocate more voting power to the emerging economies like the BRICS nations were agreed in the G20 summit in 2010; however Congress was yet to approve these recommendations. Thus the

World Bank was formed to give assistance to projects

heavy handedness of the IMF and World Bank led to

across the world through soft loans which was given

the rise of the New Development Bank –―NDB‖

solely based on the merit of the project. The ideology

(BRICS Bank). The NDB would have its headquarters

of the country or the political affiliation of the leaders

in Shanghai, China but it would be headed by an

did not hamper the dynamics of the World Bank. But

Indian president. Also the first chair of Board of

over the years, the funding from World Bank was

Governors will be from Russia and the first chair of

primarily used to rebuild Europe. Asian development

the Board of Directors will be from Brazil while a

needs suffered as the financial aid by World Bank was

regional office centre would be established in South

directed towards the West. In fact, till now India does

Africa.

not have a seat in World Bank security.

The IMF unlike World Bank is not a democratic institution i.e. larger your contribution, larger is your voting right. USA enjoys a voting right of 17.69% whereas China and India have 4.0% and 2.44% respectively. In 2011 the BRICS nations had issued a statement declaring that the tradition of appointing a European as managing director undermined the legitimacy of the IMF and called for the appointment to be merit-based.

Interesting Time: The New Dynamics The world is no more a unipolar arena where powerpolitics is dominated by the West; instead we experience a new era of economic and social growth driven by the developing economies. The dominance of dollar as a reserve currency is deemed to be undermined if the BRICS bank can transform itself into a clearing house for trade and finance in nonUSD currencies. Thus there could be a shift towards different currency pricing for trade in emerging

The New Beginning: Emergence of the ―NDB‖ out of

markets and investors will have to rethink their risk

the Political Gridlock Brazil, Russia, India, China,

models in regard to the currencies.

8|DECEMBER 2014

The

IMF

on the bank and the impact of other members. This

and World

becomes all the more crucial when BRICS members

Bank have

have diverging interests and even conflicting interests

failed

to

(such as territory disputes between China and India)

meet

the

among themselves. China should not use the bank as a

demands of

platform to favour its own national interests such as

the

the Renminbi‘s internationalization; instead China

developing

should promote equality with the bank as a common

economies. The establishment of the NDB might

platform for all developing countries to realize their

initiate a change in the status-quo of IMF and World

development dreams.

Bank wherein they would try to incorporate more voting rights for the BRICS nations. Moreover, the status-quo is already changing as India was recently invited by China to be a member of the 21-nation Asia-Pacific-Economic-Cooperation (APEC).

NBD has a planned capital base of US $50 billion, rising eventually to US $100 billion while the World Bank has US $232 billion capital reserves. We must realize that the NBD is not a competitor to World Bank but it is an attempt by the BRICS nation to

The NDB demonstrates the viability and dynamics of

provide hassle-free funding for the infrastructural

the emerging economies despite all the negative

projects through its Contingent Reserve Arrangement

criticisms by West dominated economists. The world

(CRA) framework and thus creating better conditions

is thus becoming increasingly multipolar.

of living in these nations.

Some critics argue that there would be conflict of

Thus the new BRICS bank is not going to replace the

interest and power amongst the BRICS nations since

IMF and World Bank any time soon as they will still

China

remain powerful players in the global economic arena.

would

aggressively

try

to

amass

disproportionate wealth and power through NDB.

The

China has contributed the maximum to the NBD, it

complementary relationship rather than a conflicting

has the biggest surpluses and foreign exchange

one. But in the long run the competition between the

reserves in the world (nearly US $4 trillion) and hence

two might intensify and the final outcome will depend

its influence on NBD would be greater than that of the

on the balance of power between the two poles of the

other members.

world: the developing countries and the developed

This thought is counteracted by the logic that the BRICS nations have set up the NDB for development activities in these nations. This single objective will be the unifying thread for the BRICS nations.

The NDB is a testimony to China‘s global leadership.

China needs to be careful to balance its own influence 9|DECEMBER 2014

relationship

between

these

two

is

a

countries. With the emergence of the two poles the world is becoming highly dynamic and unpredictable.

Featured

Impact of Falling Crude Oil Prices

- Priya Chauhan, MANAGE Hyderabad

Crude oil prices are the game changer of economy in

Reasons of Falling Crude Oil Prices

any country. Its looks like an imaginary situation

• Mismatch in supply and demand- Oil price is partly

when we are seeing the crude oil price in a declining phase. Lower oil prices are creating turmoil in the oil industry. Crude Oil is setting a new price point because of high production and more supply. Fall in oil prices will benefit the net importer while exporter would be oppressed. According to the economist, 30% decline in oil prices would add 0.8% growth for most advanced economies because all of them are importers. In the past years also oil prices dropped down very sharply and affected the international market very badly. In 1986, Reason for dropping in oil prices was a surge in new supplies from North Sea and Alaska. This years‘ price decline is most nearly analogous to 1986. In 1998 and 2008, Deflated oil prices were set off by unexpected financial crisis in both the years. In 1998, the failure of hedge fund long term capital management, Asian debt crisis and collapse of Lehman brothers helped in dropping the oil prices at an unexpected level. In 2008, reason was Great Recession and oil price dropped from $145 in

determined by actual demand and supply and partly by expectations. Demand for energy depends on economic activities. Demand is low because of weak economic activity and turning from oil to other fuels.

America has become the largest producer of oil.

Though it does not export the oil but it has reduced the import of oil in the country and creating the excess supply in the market. So much of high quality U.S. oil is flowing in to the area that the crude oil price has dropped sharply in that area.

• Shale oil production in US- U.S. shale oil is on booming. It will remain profitable even at crude oil price falls below $50 a barrel. But if oil prices will down so far than it will affect USA‘s recent fracking boom and it will come to an end. Forces at its play to stop USA‘s independence on energy and make it dependent again on Middle East countries. Saudi Arabia doesn‘t want to lose clutch on its highest consumer.

July a barrel to $33 a barrel in December. Oil prices

• Reluctance of OEPC countries to cut down

have been declined 35% since the beginning of the

production- Saudi and their gulf allies have decided

year and 40% since June. In June price was $115 a

not to cut their own market share by restoring the

barrel, now it is $70 a barrel. Organization of

prices. They could cut the supply sharply but it would

petroleum countries (OPEC) controls nearly 40% of

benefit the other countries like Iran and Russia. It is

international oil market. Oil exporting counties have

the politics of Saudi Arabia to hurt oil incomes of Iran

been hit by low price like Russia, Nigeria, Iran and

and Russia and make the U.S. shale production

Venezuela. But why is the oil price falling?

unviable. The threat form the U.S. shale gas to the oil producers is that U.S. would become the net petroleum exporter by 2020. Saudi Arabia produces nearly 10 million barrel a day. It is the third of OPEC

10 | D E C E M B E R 2 0 1 4

production. Saudi Arabia can bear lower oil prices

• Fall in crude oil prices will improve the inflation

because it has $900 billion in its reserve.

condition in India. Wholesale inflation could be

Saudi

Arabia wants to encounter the attempts of Rouhani regime of Iran at dominating the Middle East region.

lowered by 2 percentage point.

Every coin has two phases. Likewise in this case also,

• Slowing Economic activity- Oil demand is down

with the positive points there are also some negative

because of Eurozone‘s economic stagnation; Japan‘s

points for the Indian economy.

slipping into recession and China‘s slowdown.

Impact on Indian Economy India is the highest importer of crude oil. Nearly 70% of its requirement of crude oil is imported in India.

• Reduction in the burden of subsidies on the oil companies will constrain them to explore in the difficult areas, thereby it will affect the domestic oil production in the country.

Being an importer India may see immediate positive

• As the international oil market is slumping, total

impact on its economy because of declining prices in

under-recoveries are estimated around Rs.79000

crude oil. One dollar fall in crude oil price saves the

crore. In its current report, Oil ministry has reported

40 billion rupees in the country. It‘s a huge saving for

that unless sufficient funds are available for increased

Indian economy.

oil recovery and oil recovery schemes form the ageing

There will be three-fold effect

across the country due to the low prices.

oil fields, the country may lose more than 70 million

• If average fall in price is $4 per barrel in 2014-15,

tonnes of oil domestic crude oil production in the

than it will add $3 billion in the Indian economy.

Ultimately fiscal deficit will come down by $3 billion.

coming 10 years. This may increase the burden of import bill by Rs.3, 33,000 crore.

Recently due to the higher import duty on gold, fiscal

• There is huge presence of Indians in Middle Eastern

deficit dropped to $7.5 billion. If oil price will come

Countries and these are the oil producing countries. If

down, it will reduce the balance of payments if

due to continuous decline in oil prices affect their

handled wisely and further it will strengthen the

economies than it will ultimately affect the income of

Indian rupee in the international market and boost the

Indians residing there and remitting money to the

economic growth by adding more foreign reserves in

India. This will get down the remittances from them

the country.

to India.

• It will reduce the current account deficit of India

Oil price will stay around the current level of $65 for

because deflating oil prices will reduce the country‘s

six to seven months until OPEC changes its

import bill.

production policy or recovery in world economic

• Declining prices of oil will reduce the subsidy

growth becomes clearer or geopolitical tension arises.

burden on oil companies. Like In 2013-14 ONGC paid the subsidy of Rs.56, 384 crore which this fiscal is likely to come down to Rs.32000.

11 | D E C E M B E R 2 0 1 4

OPEC is currently thinking more in terms of market share and doesn‘t care so much about pricing.

Competition

Cab Wars in India

- Ripu Daman Tandon, IBS Hyderabad

Transportation has been one of the key elements in

radio cab industry is an inflexion point and we will

the

see consolidation in the next few years.‖

Indian

market,

especially

considering

the

Also

variables/ opt ions available for a common man to

mentioning about Meru‘s new low-cost module

commute. Great competition has been witnessed

―Meru Genie‖ whose fares are lower to its regular cab

recently in Radio Cabs services in India and probable

prices has been doing very well.

furious price wars to gain the market share. The cab

division of Carz-on-rent with a fleet of about 2,000

rental market in India has been evolving at a fast pace.

cars was sold to Sumitomo Group Company this year.

The market has been there in India for taxi rental

It also offers EasyCabs Radio Taxi and MYLES Self

services,

and

Drive Services and plans to invest around Rs. 2,000

technology enabled taxi rental services has seen new

crore in 3-4 years. The plan is to grow its network

players aggressively moving ahead and taking steps to

from 39 to 100 cities within India & in its process of

capture the market share. The segment is seeing as

taking its fleet from 7,500 to 30,000 cars. Companies

one having accelerated growth in the metro cities.

in this segment have been using various different

Less than a decade, the industry largely consists of

techniques to woo its customers by providing

private player operators backed by call centres,

additional services, different payment methods, ease

aggressive fleet acquisitions to latest technologies and

of booking or prices. Competition in the segment has

gadgets being used by these firms with inclusion of

increased drastically with large players in the segment

training modules for the drivers.

such as Meru Cabs, Easy Cabs, Ola Cabs and Uber

however,

the

new

age

mobile

Analysts have

estimated that the radio taxi segment has already attracted over Rs. 1,000 crores of investment. As per Mr. Siddharth Pahwa, CEO Meru Cabs (one of the largest radio taxi companies in India), out of the total $13 billion Indian Taxi industry, only 5% of the overall industry was organized.

Also, radio cab

services are present in 11 cities, and only around 35 Indian cities can absorb radio cab services.

The

industry has been is growing at a rate of 35% and the organised segment can grow to 25% in the next five years as mentioned by him.

The car lease

cabs.

There has been a flurry of investments in the taxi rental services segment in India.

Softbank, the

Japanese tech powerhouse led a $210 million investment in Ola cabs.

Ola Cabs aims to use

technology to dominate the car-for-hire service in India.

The Bangalore based company accelerated

expansion and started operations in 9 more cities in last few months. Business in the taxi rental services is being backed by the venture capitalists. However, one of the segments that has not been developed in

One of the factors that play a key role in the industry

India has been the self-driven car rental space. This is

is the permit costs that vary from Rs. 2,000 crore in

one of the segments in the market that may make way

Mumbai to Rs. 50,000 in other cities. As per Mr.

for the biggest sensation in the rental taxi services in

Rajiv Vij, Managing Director, Carz-on-rent, ―the

the Indian market.

12 | D E C E M B E R 2 0 1 4

One of the unfortunate events relating to the cab

documents as mandated by the Government‖. Ola

based services involving San-Francisco based Uber

cabs has a driver network of 40,000 cabs across the

cabs lead to banning of app based taxi services in

country-within regulatory cross hairs. The industry

Delhi, which may lead to other states also following

members estimate that the Delhi government may

the suit. These factors can act as a negative role, but

have set the boundaries that could be followed by

at the same time may play a key factor in terms of

other states or authorities as well. It may have a bad

policy changes in the transportation licenses and

impact on the radio taxi services, as most of the

various other aspects. The ban on the Uber cabs has

customer will shift to the traditional cab services such

raised concern about the fast growing industry where

as Meru cabs, Mega cabs and Easy cabs.

traditional radio taxi operators and technology platforms compete fiercely for the market share. One of the factors that need to be considered is the model that is being adopted by these companies and which is they do not directly employ drivers or their own cars for the services.

Instead they offer a technology

platform which links the drivers to the commuters.

As mentioned by Mr. Aprameya Radhakrishna, cofounder of TaxiForSure, ―We are a marketing and technology channel. The drivers who work with us will need to get these permits‖.

On implications of

the ban of Uber services in Delhi, Mr. Anand Subramanian,

a

spokesman

for

Ola

informed

Economic Times, ―We ensure that all vehicles on the Ola platform have the requisite permits and

As mentioned by Mr. Kunal Lalani, Head of Mega Cabs, ―The sentiments have taken a beating, and it's going to take some to reassure customers, and regain their trust‖. These factors would definitely lead to some debate on a series of measures to be taken to build customer confidence from making it mandatory to enter the final destination while booking a cab, sharing

trip

details

with

friends

and

family,

compulsory police verification, adding tracking devices in a cab and building a database for blacklisted drivers.

Ms. Preeti Sharma Menon,

Managing Director, Viira Cabs (women-only taxi services) which has a fleet of 17 cabs said the government should pick the responsibility of training drivers.

Also, in the recent days awareness about the different taxi rental services has increased and so as the queries on the features provided by these service providers from the consumers end as mentioned by Mr. Siddharth Pahwa. He also mentioned that Meru cabs has around 10,000 cabs operating daily while the overall industry constitutes of 50,000 cabs and there is a mushroom growth of the new players in an industry which constitutes to a few numbers of the Indian taxi

13 | D E C E M B E R 2 0 1 4

wallet balance is low. It's a small risk and we can take that‖.

The Taxi services aggregators such as Uber, Ola cabs and TaxiForSure are not a part of the radio taxi association.

These companies claim to be an

application and as not a radio taxi operator which needs to take licenses from each state to operate.

There is no doubt in the growth prospects of the taxi services

in

India,

especially

considering

the

unorganized taxi market which is estimated of $ 6-8 market

is

witnessing

significant

growth

with

billion with about 600,000 commercial vehicles.

Such figures give a lot of scope for radio taxi services

competition increasing from all the fronts.

and aggregators to gain market share in different cities One of the factors that the taxi rental companies have been eyeing for has been the payment processes. The Radio Taxi Association of India (RTAI) has urged the Reserve Bank of India (RBI) to do away with the twofactor authentication for small taxi fares of Rs. 5001000. They want the central bank to allow these taxi service providers to operate digital wallets without any need for payment gateways in between.

As

mentioned by Mr. Siddharth Pahwa, ―We have suggested to RBI to let us start and operate semiclosed wallets which can then be used to buy other things as well‖. Meru cabs earned revenues of Rs. 420 crores last year where most of the payments were cash payments.

The RTAI also appealed to the

central bank to allow them to offer the overdraft facilities to a certain limit to the passengers who overshoot the wallet limits during the ride.

As

mentioned by Mr. Rajiv K Vij, MD and CEO of Carzonrent that operates Easy Cabs and has a turnover of over Rs 300 crore, ―Customers won't wish to haggle with taxi drivers for small amounts if their 14 | D E C E M B E R 2 0 1 4

by various methods. However, at the same time there may be a need to continuously update and monitor the market to ensure the interest and confidence of the consumers remain intact for such services. One of the other factors that might be seen in the future and may give competition to the segment can be the development of self-driven car segment, especially in the urban cities. The competition might continue with stiff price wars and later companies can be seeing competing on different fronts such as features, various services, technology or even loyalty programs.

However, this may be too early to comment upon.

E- Commerce

Flipkart and Amazon Woo IRCTC

- Avik Chakrabarty, IBS Hyderabad

Indian Railway Catering and Tourism Corporation

The

(IRCTC), a subsidiary of the government controlled

includes service charges on tickets, sales of Railneer

Indian Railways that handles the catering, tourism and

water, onboard catering services and license fees from

online ticketing operations, is in talks with e-

outsourced catering vendors. This is similar to online

commerce companies such as Flipkart and Amazon to

marketplaces where sales don‘t include actual goods

sell their merchandise through the government owned

sold but instead count commission from sellers and

portal as they want to exploit its vast database of more

revenue from advertisement on their e-commerce

than 21 million customers. IRCTC, which for most

sites.

Indian was their introduction to e-commerce more

(commissions) of Rs 169crore while Flipkart Internet

than a decade ago. Its revenue from its online ticket

which manages the portal, had total income of Rs 179

sales exceeds the total sales of Flipkart and Amazon

crore.

India combined together.

Government-owned

Amazon

seller

portal

services

income

posted

mainly

revenue

Also e-commerce companies sell a wide variety of

While both Flipkart and Amazon each said earlier this

goods unlike IRCTC, which is mainly a ticketing

year that they had hit billion dollars in annual gross

website with no product mix, making it ales scalable

merchandise value of goods sold, IRCTC generated

business. According to a report by consulting firm

Rs 15,410 crore or nearly $2.5 billion through online

Technopak, the $2.3 billion etailing market is

ticket sales in the last financial year, up 24% from a

expected to swell to $32 billion by 2020 and account

year ago when it sold tickets worth Rs 12,419 crore.

for 3% of the total Indian retail sector by then.

Since IRCTC doesn‘t compete with any of the online

The plan is for addition source of revenue through a

marketplaces in India, both Amazon and Flipkart are

fee or other mechanism for IRCTC by leveraging the

in talks with the government –owned portal as they

database of registered customers into potential

look to tap the rail portal‘s existing database of more

consumers for third party e-commerce players.

than 21 million consumers. ―Tie-ups with portals like Flipkart, Amazon etc are in the process under which these portals would like to sell their merchandise through IRCTC‘s portal, it being one of the largets e-

Besides Flipkart and Amazon, IRCTC is in talks with other players such as Snapdeal and Jabong. There is no timeline to it, it is just a proposal from IRCTC side.

commerce sites in the entire Asia –Pacific region,‖ said Sandip Dutta, public relations manager at IRCTC, which set a record in March when it booked 5.80 lakh e-tickets on a single day. That compares with 27 tickets a day when it began in 2002.

15 | D E C E M B E R 2 0 1 4

Despite having a monopolistic position, higher web traffic and sales, IRCTC can‘t command a valuation similar to Flipkart or Snapdeal, feels expert.

fresh funding and pivoted to become an aggregator for other e-com sites.

The proposed new arrangement could be on the same lines replicating the look and feel of its e-com partner with a linking page on IRCTC. Meanwhile,

the

e-commerce

competition is getting fierce in India ―Being a government company, its slow decision making, red tapism, less innovation leads to non interest by investors, this in turn leads to a lower valuation. Margins of travel are much lower than margins commanded by selling goods online too,‖ said Rakesh Nangia founder and managing partner of Nangia & Co, a tax and transaction advisory firm.

This would be the second time IRCTC may look at tapping on to its captive customer base(it is the sole seller of railway tickets even though other OTAs, come across as additional sales channel for booking in association with IRCTC ) to cross sell consumer products.

Last year IRCTC had launched its e-commerce page which was powered by fashion and lifestyle e-tailer Yebhi. The e-commerce initiative of IRCTC had gone live with all the categories available at Yebhi.com, which included apparel, electronics, accessories, furnishings and kids.

The portal was marketed at the main IRCTC page and upon clicking it, users were redirected to a different page. It was an year long contract which was not extended, partly because Yebhi itself failed to get

16 | D E C E M B E R 2 0 1 4

with the country emerging as the most attractive online retail market after China. With local e-commerce firms like Flipkart and Snapdeal as well as global majors like Amazon set to attract huge capital investment over the next few years, the Indian online market, which is worth $3.1 billion, is expected to surge to $22 billion over the next five year.

Featured

The Psychology of an Investor

- Suhani & Amit, Welingkar Institute, Bangalore

The stock market is once again at an all time high.

financial markets in understanding irrational market

Retail investors are gate crashing into this scene lured

movements unexplained by traditional paradigms.

by the temptation of high returns in the shortest possible time. The stories of high returns apocryphal or otherwise are once again making the rounds and the retail investor does not want to miss out on his share of the cake. Not that one can find fault with individuals wanting to make a quick buck, but

Psychology is the second building block of behavioral finance because some financial phenomena can be better understood using those models in which some agents are not fully rational. To make sharp predictions, behavioral models often need to specify the form of agents‘ irrationality.

entering into a bull market when it is at its peak and exiting when there is a correction has been the bane of uninformed and misguided retail elements. This phenomenon - of entering into a market when it is at a high and exiting during corrections - leads to a vicious reverse cycle which ultimately leads to an exodus of retail investors. This state of affairs is seen more in the Indian market scenario. Such behavior casts a

Now, when it comes to investing money in financial market, researchers believe that investors tend to follow rational behavior. Modern or Conventional finance theories, Efficient Market Hypothesis (EMH) and

Capital

Assets

Pricing

Model

(CAPM)

strengthens this behavior of an investors. However, there are many instances where emotion and psychology influence our decisions, causing us to

shadow on investor rationality.

behave in an unpredictable or irrational way. While Traditional financial models are unable to explain such

enigmatic

behavior.

Therefore,

a

new

perspective in the form of Behavioral Finance has emerged to explain such behavior. This field of finance brings in a new insight to analyze those areas that traditional finance has failed to explain or had some difficulty in explaining. It is the study that aims to combine behavioral and cognitive psychological

these approaches greatly helped in revolutionizing the study of finance, many gaps were left outstanding by the

theories.

Second,

while

the

benefits

of

diversification are emphasized by modern theories, individual investors often hold only a few stocks in their portfolios. Finally, expected returns do not seem to vary in the cross-section only because of the risk which is differentiated across stocks.

theory with conventional economics and finance to explain

why

people

make

irrational

financial

decisions. It explains the influence of psychology on

We need models that describe real people in real markets to understand the functioning of markets.

the behavior of different financial factors and its

Let us take a simple example of putting money in

subsequent effect on markets. It leads us to know why

buying lottery ticket to hit jackpot, where the odds of

and how financial markets can be inefficient. This

winning are overwhelming against the ticket holders.

field of study has evoked great response in the

Despite this, people spend money on it. The answer to this, to some extent lays the Prospect Theory, which

17 | D E C E M B E R 2 0 1 4

says that people value gains and losses differently and

a

hence will base their decisions on the perceived gains

Investments.

rather than perceived losses.

wealth-management

strategist

at

Nuveen

Thus, Behavioral Finance is the buzz word of this era

Investors are endowed with a lot of biases which

that strives to find a fit in explaining market

affect their buying patterns. Most commonly seen

movements. Despite great strides in recent years,

behavior is Anchoring, in which investor get engaged

behavioral finance does not appeal to all hues of

with some reference point that influence their

researchers. Some of the more rigid conventional

decisions. For instance, if an investor buys a stock at

theorists have pooh poohed the prescriptions of

50rs and its price falls to 40rs, instead of selling the

behavioral finance on the plea that retail investments

stock at that time, which is the best thing to do, he

form a miniscule part of the financial markets.

waits for the price to recover to the 50rs, he is

However the dealing desks of large mutual funds,

anchored against.

hedge

Sometimes, we tend to choose a well known company to invest in, ignoring a good upcoming potential company, which is not familiar to us. Also, we rely on word of mouth of others, while making decision of where to invest our money. This bias is known as Familiarity. According to Recency bias, people tend

funds,

pension

funds

and

Investment

companies are manned by individuals who are also swayed by emotions and therefore the concepts of behavioral finance are equally applicable to them. An immediate example which comes to mind is the ―Hubris

Theory‖

which

influences

takeover

specialists.

to lay emphasis on what has happened recently and

Behavioral finance describes normal people in many

invest accordingly. As a result, they overreact to bull

settings. By looking at the different irrational

market.

decisions of the investors taken in the financial

Herd behavior, is dominantly seen in market where, one blindly follows the decisions of the majority rather than relying on stock price moments that may influence his risk and return characteristics. Investors also tend to feel more secure in their choices when following the herd, or doing what everyone else is doing.

market, we can conclude that the financial markets are not very efficient as they are usually driven by emotions, which makes investors assume that the markets are nothing but a game of gamble. This has been widely explained by the theories involved in the Behavioral Finance. No one person can have complete information about a market. Therefore, there is a need to redefine the existing traditional model by taking a

"This is the idea that investors feel more comfortable in making financial decisions that are validated by the actions of others. Investors become very scared if they see others heading for the exits.‖ said John Nersesian,

few constructs from the behavioral aspect into consideration. One can then hope to make a more efficient prediction of the financial markets and perhaps this can instill more faith among the new investors.

18 | D E C E M B E R 2 0 1 4

Analysis

Recommendations of TSR Committee

- Kolisetty Aishwarya, IBS Hyderabad

Sustainability has become the mantra of this hour. I

1. Assessing the implementation of each of these acts

think it was high time we started taking severe steps

and monitoring their performance in alignment to

then just this. With the new government and its high

their objectives.

on alert approach, we can say India is on a pathway to go green. Not only is the green currency rising, we are actually trying to make India a greener place. So now

2. Examination of all the judicial pronouncements pertaining to these acts and verifying if these acts function accordingly or not.

the hope that is afloat is that T S R Subramanian and his magic pixie dust is going to bring us green days

3.

Amendments

and recommendations

by the

committee to update them according to the need of the

along with good days.

hour.

About the Committee: 4. To prepare a draft with all the content and A committee was set up to manage and review the laws and acts also the functioning and processes of

amendments in regard to the above objectives and give effect to the recommendations made.

the Acts of Ministry of Environment, Forests and climate change. This committee was headed by the former Cabinet Secretary T S R Subramanian. The others

involved

in

the

committee

were

Mr.

The committee made several recommendations talks about various reforms at all levels of the functioning of the acts. It says,

Vishwanath Anand, Mr. A K Srivastav and Mr. K N

• All the approvals of the projects to be implemented

Bhat.

must be done by National Environment Management

Recommendations of the Committee:

Authority (NEMA) and not by the environment ministry.

The committee was set up mainly to review the following acts and was asked to look into them for any amendments to be made:

• State pollution control boards (SPCBs) must be merged into state level equivalents of NEMA and should be made accountable to the Union government.

• Environment protection Act, 1986 • Forest conservation Act , 1980 • Wildlife protection Act, 1972

• Regular and independent assessments of all the work must be done by the forest department.

• Just 5 out of 15 proposed members of SEMA (State

• The water prevention and Control of Pollution Act,

Environment

1974

appointed by the state government.

• The air prevention and Control of Pollution Act,

The report was submitted by the committee to Prakash

1981.

Javadekar, Minister for Environment, Forest and

The Various Terms of References being: 19 | D E C E M B E R 2 0 1 4

Management

Authority)

will

be

Climate Change and his opinion on the report

interpreted

that

would

Due to the weak enforcement of environmental laws

enhance the ministry‘s efforts to avoid undue delays

by the central and state governments in the past many

and

and

years, India has seen an abundant rise in the number

implementation of the projects. Appreciating the

of cases being filed at the National Green Tribunal

efforts of the committee for submitting the great work

(NGT). The Subramanian committee proposes an

in such a short span of time, the minister stated that

alternative, three stage formulation. It wants special

the ministry would expedite consultations with all the

environmental courts at the district level, chaired by a

stake

timely

sessions or additional session‘s judge. Above these,

implemented. He also stated that the committee was

one or more appellate boards comprising two service

built on the existing mechanisms to optimize the

secretaries to the Government of India and a retired

efforts to balance developmental imperatives causing

HC judge. Appeals can be filed at the NGT. Further,

least possible damage to the environment.

decisions of the NEMA, the SEMAs or the

ensure

holders

these

recommendations

transparency

and

see

in

that

clearances

they are

government cannot be questioned by any court or

Business Implications:

tribunal. NGT can only undertake a judicial review, Although

the

report

mainly

stood

by

the

not a technical review of the clearances.

environmental acts, since the functioning of every soul depends on the environment, the reports have

Other Aspects:

certain implications on the business as well. The

The committee gave a word of caution against

report also proposes an overhaul of how India ensures

genetically modified food and also noted that Europe

compliance with environmental clearances. In the

does not permit field trials and the average farm size

proposed architecture, the project proponent will

of our country is too small for the same and this could

inform the government about the quantum of

lead to severe adverse impact on the biodiversity

pollution from the industrial unit. Not reporting data

through gene flow. Since there are no independent

or providing false or misleading information will

expert

result in heavy penalties. In environmental and

environment Ministry could ask for greater assurance

industry circles, there is skepticism. The good faith

in respect of potential adverse effects in the short run

clause rests on the assumption that businesses will

and the long run. Thus the committee proving to be

provide accurate data even if used against them.

brilliant in their work has made the government‘s job

Better monitoring would ensue if the government sets

easier to get the acche din for the public. But the main

up its own thickly-populated grids of low-cost

aspect that still remains unsolved is the how well and

sensors, said Rakesh Agarwal, managing director of

how fast these measures are being put into action.

Envirotech, a Delhi-based company that makes air

Before the environment is all the more tormented by

quality monitoring equipment.

the human species, it is strongly advised to bring into

Handling Disputes:

20 | D E C E M B E R 2 0 1 4

agencies

in

the

motion as fast as possible.

country,

perhaps

the

Featured

The Shadow of the Slowing Dragon

- Sneha Reddy, MDI Gurgaon

The emerging markets accounted for more than half

materials that have become reliant on surging Chinese

of world GDP on the basis of purchasing power in

demand over the past decade.

2013, according to the International Monetary Fund

China‘s global weight has risen tremendously since

(IMF) and the most of this credit can be attributed to the four of the biggest emerging economies coined as BRIC (Brazil, Russia, India, and China). These economies have grown in different ways and for different reasons. The shift towards the emerging economies especially China was because the cost of manufactures and labor plummeted giving it a huge competitive advantage. During the financial crisis 2008, China released about $580 billion, to stimulate its economy to avoid a downturn. This stimulus went towards low-rent housing, infrastructure in rural areas and construction of roads, railways and airports. The Chinese government has fuelled this growth by rigging interest rates to make cost of borrowing low for companies (which are mostly state-owned).It has intervened in Forex markets to further boost this growth. To hold export competitiveness, it has accumulated reserves to hold the exchange rates below the levels they might otherwise attain. This has helped the Chinese share of global exports reach 11%, with trade accounting for more than half of the country‘s GDP. Most of the G20 economies today show high exposure to China in their total exports and imports, with strong increase over the past decade.

Neighboring

countries

like

Japan,

Korea

and

Commodity producers like Australia, Brazil or South Africa saw strong increase in their exports to China.

Significantly slower Chinese growth will affect economies across the world and hurt exporters of raw

the1980s, accounting for more than 9% of global GDP in 2010 up from less than 2% in 1980, making it the second-largest economy in the world. It had enjoyed 30 years of double-digit growth. But since 2013, China has entered a rough patch putting a halt to its most thunderous phase of being world‘s major player whose growth was unmatched by any other nation post World War II. Last three year data of economic growth rate has also been very discouraging to China (9.3% in 2011, 7.7% in 2012, and just 7.6% in 2013). As we analyze the growth rate over the years, one can see that growth rate was fed by government stimulus spending, business investment in capital goods and low interest rates. The success led to 5.5% inflation in 2011, a real estate bubble, rise in public debt and severe pollution. The Government‘s focus on development based on exports and investment left little for social welfare programs. This forced the Chinese population to save for their retirement, draining the domestic demand in China.

Secondly, the one-child policy reduced birth rate and gradually the country‘s working-age population began shrinking, creating unfavorable demography for consumption.

Further, China‘s increasing dependence on rampant credit-fuelled expansion has made the financial sector fragile and risky. The IMF reported that the total debt to GDP in China‘s economy rose from 130% in 2008 to more than 220% in 2013.To offset the potential

21 | D E C E M B E R 2 0 1 4

effects of the global financial crisis, the government

interest-rate accounts as an alternative to savings

encouraged a huge credit boom. This credit was

accounts; the annual yields on which the government

largely used to finance real estate construction and

limits to a small 3%, which made customers, channel

infrastructure, helping China grow 45% from the end

their money into this. The interest they charge to

of 2008 to 2013 but more than two-thirds of the total

borrowers, naturally, is even higher. They lend to

credit, was in non-bank financing, which means credit

firms that are unable to borrow from banks, often

that flowed through a financial institution other than a

because they are in bubbling industries, such as

regulated bank. This is just an informal lending and

property or steel. The regulators have instructed banks

hence the name ―shadow Banking‖. Shadow banks,

to curb lending to firms in these sectors to avoid any

which barely existed before China‘s credit surge in

further investment. Banks typically extend these

2009, now have assets of at least $4.9 trillion or more

WMP‘s

than alarming 50% of the GDP.

Companies‖—firms that are not allowed to accept

Shadow Banking has become hidden in balance sheet of the banks, all these don't show up in the balance sheet and the liquidity status of the bank cant be found. The shadow banking includes the use of a pool of securities like trust products, bonds and stock funds that offer higher yields than bank deposits, called Wealth Management Products (WMP), which are sold as low-risk investments. Alarmingly these have been one of the main sources of credit for local governments. Chinese banks marketed these high-

22 | D E C E M B E R 2 0 1 4

via

intermediaries

called

―Trust

deposits or formally loan out money, but are allowed to manage it. But worries about China‘s shadow banking system bumped global stock markets when a wealth management product called ―Credit Equals Gold‖ was reported to be on the verge of default.

Though it was quickly restructured with a similar product known as ―Opulent Blessing‖, the concerns over the credibility of these WPM‘s remained.

fragile with the shadow banking and the banks which issued loans off falsified property values (not to forget that four of the world‘s biggest banks are Chinese).

The assumptions of what happens as a consequence of all these range from a US- style-banking crisis to a sustainable healthy growth by taking appropriate measures. Fears of a housing bubble burst have reduced a bit as the Chinese Government has enacted a number of measures which were aimed at cooling down the property market yet the policy makers began worrying about wasteful investment and asset There are striking similarities between Japan in 1980‘s - 90‘s and China. Japan has gone on the same credit fuelled investment as its export-led growth started

fading.

China

just

like

Japan

started

concentrating in strategic sectors such as steel and shipbuilding. And despite opening up stock and bond markets, China‘s financial system is still dominated by state - owned banks and the China‘s Central Bank still sets deposit rates artificially low, shifting wealth from households and solvent businesses to borrowers.

So while China‘s strategy is called an ―export-led‖ growth model, accurately it is an ‖investment-led,‖ since exporting is the imperative result of state-funded overproduction at the expense of savings of the households, which led to household consumption of just 36% of the GDP, one of the lowest in major economies. The same story in Japan has led to ―lost decade – Stagnation and deflation‖. Though China‘s stock market bubble burst back in 2007, it still has a housing bubble to struggle with. Many economists are predicting a Japan-style crisis, a real estate market collapse. And the empirical evidence points that housing bubbles usually end with a banking crisis where in China‘s case the financial sector is already 23 | D E C E M B E R 2 0 1 4

inflation. If the housing performs poorly, banks will see losses and will lead to a credit crunch. Banks were already told to cut back on lending to real estate projects and industries suffering from serious overcapacity, such as Steel and Cement and the interest rates were spiked. But two factors that might save China are: Household debt-to-disposable income has grown substantially in China since 2007, but it‘s still about one-third the size of U.S. households back in 2007, hence the housing bubble burst might not lead to a US - style banking crisis. The other cushion

unavoidable but the high profitability of Chinese banks gives them very good resilience. Also, they must provide more social services, allowing people to decrease their savings glut and start spending. Only an increase in domestic demand will allow China‘s growth to become less reliant on exports and less dependent on the sectors, which currently are suffering from over capacity. The ‗Dragon‘ will have to face pain in the short term to ensure a long-term to China is a very high national savings rate, running

sustainable growth. When does it achieve? It is a

at nearly half of G.D.P, which is both boon and a

million dollar question and the answer lies with the

bane. It might act as a buffer because these savings

future!

will keep the bank deposits growing, preventing the banks from facing liquidity crunch. China‘s raging property market is showing signs of cooling, especially in smaller cities. The fear is of a downward spiral in which the bursting of the property bubble leads to a havoc in shadow finance, which reduces access to credit, pushing property prices and economic growth down further.

Though China is trying to ensure a ―Soft Landing‖ (a gradual but not a sudden fall in growth) it stands at cross roads today. The choice has to be made between a credit fuelled, state-driven model that amazed the world for three decades and a more sustainable, consumption-driven model which will lead to a structurally reformed growth. The first step towards the latter would be to provide the access to credit to the right businesses or industries. Secondly, to make the financial system insulated from political influence of the state. To make the big banks survive, the shadow banking has to shrink today and this would create a slowdown in the credit growth, which seems 24 | D E C E M B E R 2 0 1 4

Cover Story

The Kotak Mahindra and ING Vysya Bank Merger In view to become the fourth largest private bank in India, Kotak Mahindra Bank announced its plans to acquire ING Vysya with a share swap ratio of 725:1000, which constituted to make the deal of about Rs. 16,500 Crore. According to Uday Kotak, Executive Vice-Chairman and Managing Director of Kotak Mahindra Bank and Uday Sareen, CEO Designate of ING Vysya Bank in a joint press release announced that the share exchange ratio is considered to be fair and reasonable given the underlying value of ING Vysya, as also giving shareholders the ability to benefit from the potential that can be realized upon merging into Kotak Mahindra Bank. Also added ―This exchange ratio indicates an implied price of Rs.790 for each ING Vysya share based on the average closing price of Kotak Mahindra Bank shares during one month to November 19, 2014, which is a 16 per cent premium to a like measure of ING Vysya market price".

25 | D E C E M B E R 2 0 1 4

- Navjoth Sahu, IBS Hyderabad

Kotak Mahindra Bank Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a steady and confident journey leading to growth and success.

Ventured from various services like funds syndication sector, Investment banking, Auto finance, mutual funds, brokerage and so on. It became the first company to commercialize itself in the year 2003 as Kotak Mahindra Finance Limited. Mr. Uday S Kotak, is the Executive Vice-Chairman and Managing Director of the Bank, and its principal founder and promoter. Mr. Kotak is an alumnus of Jamnalal Bajaj Institute of Management Studies. The Bank is traded in the National Stock name KOTAKBANK.

Exchange (NSE) under the

ING Vysya Bank ING Vysya Bank limited is a premier private sector bank with retail, private and wholesale banking platforms that serve over two million customers. With over 80 years of history in India and leveraging ING‘s global financial expertise, the bank offers a broad range of innovative and established products and services. The Bank, which has close to 10,000 employees, is also listed in Bombay Stock Exchange Limited and National Stock Exchange of India Limited. ING Vysya Bank was ranked among top 5 Most Trusted Brands among private sector banks in India in the Economic Times Brand Equity – Neilsen survey 2011.

for 1,000 shares of ING Vysya. This implies a valuation of R160 bn for Vysya Bank, equating to 1.9 x FY16e (e=estimates) consensus book and an 11% premium to the closing price on the day prior to the announcement. A strong presence in the south and a CASA (current account savings account) franchise is what Vysya Bank offers to Kotak in the pending deal.

The proposed merger would result in issuance of approximately 15.2 per cent of the equity share capital of the merged Kotak. This deal also include inclusion on one directors of ING Vysya in the Board of Directors of Kotak Mahindra Bank. ING Group, which owns 43 per cent in ING Vysya, has indicated that it supports the proposed transaction. ING Group will become the largest non-promoter shareholder in

The bank was formed from the 2002 acquisition of an

combined Kotak.

equity stake in Indian Vysya Bank by the Dutch ING Group. This merger marked the first between an Indian bank and a foreign bank. Prior to this transaction, Vysya Bank had a seven-year old strategic alliance with erstwhile Belgian bank Banque Bruxelles Lambert, which was also acquired by ING Group in 1998.

Shares of ING Vysya Bank and Kotak Mahindra Bank witnessed sharp rally, and hit their 52-week highs intra-day due to aggressive buying. Shares of ING Vysya shot up by Rs.54.35 (7.15 per cent) to end at Rs.814.20 while Kotak Mahindra Bank registered a 7.28 per cent gain to close at Rs.1,157.05 on the BSE. The share swap ratio announced indicates a price of

The Big Feast Day

Rs.790 for each ING Vysya Bank share based on

Kotak announced on November 20 that it is set to

average closing price this month. The valuation of the

acquire ING Vysya Bank at a share swap ratio of

deal is around Rs.15,000 Crore.

725:1000, subject to requisite approvals. That is ING Vysya shareholders will receive 725 shares in Kotak 26 | D E C E M B E R 2 0 1 4

Deal and After

Pro forma fair value range: The fair value range of

sustainable RoE (return on equity) of 23.4%, we can

the merged entity (Kotak-ING Vysya-merged) after

arrive at a target multiple of 4x using a single-stage

factoring in the potential costs and benefits of the

Gordon growth model.

pending acquisition, of R1,188-1,484 per share. Based on a pro forma fair value between our bull and bear case (R1,364) the difference to our target price would be 18%.

Impact on the Profits: Re-pricing the existing Vysya Bank Savings account may give a negative impact on the margins of the merger , but would help it to get wider customer base, distribution networks, and

Powerful Synergies: The two most significant

product suite, which shall increase the markets for

synergies are expected to include fee

selling the products of Kotak Mahindra to a

income potential and cost savings on

larger audience.

branch expansion, both adding 15 bp to RoA (return on assets) by FY17e, or about 10-15%

of

Kotak

Bank‘s

standalone

earnings and even higher over the medium term after completion of the integration process. Other synergies include the potential for higher savings account deposits and a potentially higher mix of retail loans.

Acquisition Challenges: The merger is definitely going to cost are likely to weigh down the profitability of the firm in the short run as it include various cost like legal cost, rebranding, technological cost which would be reconstructed once again by the Kotak Mahindra bank.

Credit Costs: As per calculations, factoring in a 100% coverage ratio for Vysya Bank‘s unprovided

Non-Performing

loans

in

FY16, we see an incremental impact (R0.85 bn) on the merged Profits and loss account which translates into an incremental 4bp (pre-tax) impact on FY16 RoA for Kotak-merged.

Although ING Group which is having a prominent share in the ING Vysya Bank has prominently agreed to hold their stake which is around 6.5% for next one year from the date of execution and this shall count the merger a merged entity in the FDI category. But ahead of all this productivity would be a major

Change in Shareholding Pattern: Pending acquisition

challenge to the merged entity which would cost it

of the deal is likely to reduce the promoter stake by

from head to toe. Out of 10,000 employees of ING

atleast 30-40%. While the total foreign ownership in

Vysya, 3000 employees follow the union system of

Kotak Mahindra bank will increase from 42.5% to

conduct which would be required to be negotiated

47.0%, FII ownership will dip from 34.6 to 33.6%.

regarding the wage structure and culture of the bank.

ING Group has voluntarily agreed to hold its stake

The point to see about is how the merged entity is

(6.5%) in the merged entity for a year.

going to sustain in the hardest time when the external

Valuation: Alone Kotak Mahindra bank now trades at a 12-month forward P/AB (price-to-book ratio) of 4.7x versus its five-year average of 3.1x. Based on a

27 | D E C E M B E R 2 0 1 4

factors like recession are on a brink of the world, will it float or get drowned is the million dollar question.

Spice Route

Saffronomics: Is Saffron King of Spices?

- Sachi Kheskani, IBS Hyderabad

Variety adds spice to life! or its the other way round,

and colour. (Refer Exhibit I for Nomenclature).

spice adds variety to our life. The distinctive aromatic

Saffron's no less than Weblen good as it is world's

smells of any kitchen are the result of the variety of

most expensive spice. It bestows super-luxury status

spices lining on the shelves that are loaded with

which ensures the extra demand that keeps its price

flavour and are the key ingredients to gourmet

and demand high.

cooking. Spices are myriad ingredients that add

History of Saffron:

pungency, tang and flavour to savoury cooking as well as desserts, soups and snacks. Saffron is a coveted spice in the world of trade and also known as the "King of Spices" or "Golden Spice". It's right up there with gold and ivory, except that it tastes better!

It is exquisite, elusive, exclusive, exotic, delicate and the most expensive, this is a spice to be reckoned with and is worth its weight in gold! Elusive because saffron is the stigma of the saffron flower (Crocus Sativus) and each saffron flower contains only three stigmas. These stigmas or saffron threads are handpicked by elderly women from the centre of the crocus flower and it takes anywhere around 70,000 to

Besides being rooted in soil, Saffron is deeply rooted in ancient history of the Sumerian, Phoenician, Minoan, Egyptian, Greek, Roman and Persian myths, saffron was initially used as a dye, perfume and medicine. The Minoans used saffron to adorn their bodies, homes and temples. Bright yellow saffron bindings, to which urine was added, (to preserve the deep golden color) were used to wrap Egyptian mummies. Cleopatra used saffron infused water in her bath, while Alexander the Great swore by the healing powers of this spice and encouraged his army to use saffron in their cooking.

250,000 flowers to get one pound of saffron.

According to Greek mythology, handsome mortal

However, only a very little quantity is required to be

Crocos fell in love with the beautiful nymph Smilax.

added to a dish to get that distinctive aroma, flavour

But unfortunately, his pursuit of her ended when she didn‘t reciprocate his love for her. And thus, he was turned into a beautiful purple crocus flower. The word saffron derives from the Arab word "zafaran", meaning yellow, and it was mentioned as far back as 1500 B.C. in many classical writings, as well as in the Bible.

Saffron is a very versatile herb and has many Culinary, Medicinal, Cosmetic and Commercial benefits. In spite of its prohibitive price, this spice finds pride of place in most Indian households and is used in special dishes, desserts and soups. Saffron

28 | D E C E M B E R 2 0 1 4

also features in gins like Boudier's Saffron Gin from

will go down well. India's elite loves it, too, and it

France and Old Raj from the UK, both of which claim

provides the most pleasing link between politically

to be based on colonial Indian recipes. It is also the

troubled Kashmir and the rest of the country. It's

main ingredient in Kesar Kasturi, the famous heritage

saffron, the world's most expensive spice. Its

liquor from Rajasthan.

economics is made for super premium pricing and,

International Trade:

when it intersects with global politics, it also produces a fascinating underground trade.

Saffron will never be cheap and, like all luxury goods, it is very often adulterated.

Iran being the biggest saffron producer, means two things. First, there's always excess demand for saffron

Many spices come from plants that grow in the tropical zone, where most of India falls, and it is why these are sometimes called the "Land of spices". But the saffron crocus, from which the stigmata are harvested as the spice, grows best in the subtropical zones that surround the tropics and can even, given a sheltered location and mild weather conditions, be grown in fairly cool climates. As a result, saffron's growing range is very wide. Iran accounts for the most production by far i.e 95%, followed by Spain, but pockets of saffron cultivation are found in unexpected places. The Swiss village of Mund harvests a few kilos a year and the town of Saffron Walden not far from London commemorates in its

and prices always remain high. Second, given sanctions on Iran and high demand from the US, nonregular trade in saffron thrives. Saffron smugglers are called pigeons in the trade and the fact that metal detectors are of no use against this pricey spice is an incentive for non-regular saffron supply chains.

Iranian saffron is bought by traders in countries like Dubai and then shipped to other parts of the world, including Canada. Canada to the US, with country of origin masked, is an easy supply route for saffron.

Washington-Teheran tensions, a regular fixture in international relations, haven't stopped American consumers from getting their hand on Iran's premium quality saffron.

name a historical tradition of growing saffron, though this no longer takes place. German migrants are said to have taken saffron to the US where the community known as the Pennsylvania Dutch (from Deutsch) were known for growing and using it. Germany, Italy, United States, Switzerland, U.K and France are amongst the largest consumers of saffron.

India is no stranger to the spice from Iran coming through non-regular trade routes! India imposes a high duty on saffron imports. Iranian saffron prices can be almost 50 per cent less than Indian prices-the incentive for avoiding official channels is therefore high. Unsurprisingly, there's saffron ego- as in my saffron is better than your saffron claims. The world

Sooner or later Smuggling saffron would be more rampant in comparison to Gold! The rich and the blue blooded around the world have loved it for millennia.

The richest country in the world, the United States, loves it so much that even secret imports from Iran 29 | D E C E M B E R 2 0 1 4

considers Iranian saffron to be premium quality.

Saffron needs unpolluted environment to grow best and Iran offers plenty of these.

per 10 grams in 2008-09, the selling price of saffron today for farmers is around Rs 1200 today. This is a real catastrophe for growers. To produce a kilogram of saffron, a farmer has to spend his one year of family labour, including over Rs 30,000 worth hired labour and money on fertilizers, rodent control, weed control, etc. This cost is excluding the initial investment on sowing the corms, which cost now Rs 12000-Rs 15000 a quintal.

Saffron is largely grown in Pampore town in Pulwama district of Jammu and Kashmir, a state tethered to

So to expect a farmer to continue his romance with saffron growing would be unjust.

Sovereign India via a legal contract (the Instrument of Accession, 1947). It is distressing that Kashmiri saffron production has tanked drastically by 85% in

National Saffron Mission was expected to overcome all these challenges and make saffron growing a viable business. In theory it was not a bad idea, as

past 3–5 years.

some farmers seem to suggest. When we look at the The reasons for declining productivity in Kashmir is because of poor irrigation facilities, pollution, terrorist attacks, natural calamities and growing urbanisation.

Moreover Farmers conduct a simple benefit analysis.

They prefer selling off their lands and depositing the amount in banks to cultivating saffron. Earning a

outcomes of the mission, some outcomes do look good: it has encouraged poorer farmers who could not afford basic investment to grow saffron now. It has also done well by introducing the idea of drip irrigation – which sadly very few growers have adopted.

fixed interest is a better option than employing labourers and paying them. In case of other commodities when supply decreases prices increases.

In case of saffron that doesn‘t seem to be the case. As Kashmir saffron‘s production goes down, traders in rest

of

the

country

import

Iranian

saffron

clandestinely in huge quantities and prices are kept

Despite low production, well, Government of India ( hereinafter referred to as GOI) has been protecting economic interests of ‗Kesar‘ farmers from the valley.

GOI has imposed a stringent ban on both export and import of saffron, which protects interests of cultivators, by keeping prices high in the nation.

low. The fundamental reason for all this is that saffron

In a time when global prices of saffron have

economics, as it stands today, does not make

plummeted with high yield from Iran (90%–93% of

economic sense to the farmers. No matter what better

global production), followed by Greece and now

technologies are introduced, no matter what all is

Afghanistan joining the bandwagon leaving Morocco

done to enhance marketing and purity branding, if

and Kashmir behind, Indian price of the maroon-spice

farmers don‘t get returns worth their efforts, Kashmir

is all time high. While international retail price of

saffron‘s survival is difficult. From Rs 2700-Rs 3000

saffron is seen around $11.2 per gram. The purple

30 | D E C E M B E R 2 0 1 4

influenced and regulated system, as against the global norm of a market-driven system will actually work. Government‘s initiatives of helping some farmers in marketing their produce may do some good in the short term but in the long term it is better to let the market forces determine the trade. At the end of the day it is the market driven by cost-determination through the normal supply-demand principles - that should be allowed to work. Unless the farmer gets his due returns Kashmiri saffron will have a difficult autumn-flower‘s stigma is sold domestically, across

time ahead. Thus, it shall not be deemed incorrect if

India, at a exorbitant price of Rs. 180 per gram, i.e.

interpreted that Indian Government is protecting

$10,800 (considering US Dollar at Rs. 60). In recent

Kashmir‘s saffron rights!

years, Afghanistan, which is popular for poppy production, has been increasingly switching to saffron cultivation. On the contrary, Kashmiri saffron‘s cultivation has been on decline for already mentioned reasons.

Global production-giants of saffron supply the herb in international markets, as their governments levy export tax (Iran has imposed a 5% export tax on saffron). Levying of export tax increases the consumer surplus and thereby decreases the price (See Graph). However, in Indian market price of the herb is not to be affected at all. It is understandable that when there is a price hike in a commodity which hits the buying capacity of buyers, government in India lowers import duties on such commodities and prices are stabilised. Such thing is allowed to happen with Kashmir‘s saffron perhaps for the reason that many people in the country feel that Kashmiri saffron is over-priced. As explained above, Kashmiri saffron is not over-priced. Although a Saffron Mandi is soon to come up at Pampore, it is still not clear how a state31 | D E C E M B E R 2 0 1 4

Featured

India’s Struggling Manufacturing Sector

- Shantanu & Arshdeep, FMS Delhi

The manufacturing sect or in India needs a lot of

With this money, people can buy necessary items

attention. The people of the country have given the

needed for survival. Today, 1/3rd of the population of

helm to Narendra Modi. Now, it is up to him to

India doesn‘t even get 2 square meals a day. So, the

deliver what all he promised before the elections.

industries can basically provide the needy people with

India is a developing country. So is China. But, why

the basic essentials. Once, the need of food is

is China today an $8.1 trillion economy, where as

satisfied, a person can buy medicines, clothes, or send

India is just $1.8 trillion. This is despite the fact that

children to school. Hence, an employment can

in 1991, India was a $325 billion economy, while

actually make India move forward in terms of not

China was just $355 billion. So, what happened? The

only one aspect, but many interrelated aspects as

answer is in manufacturing.

mentioned above.

India has lagged behind other developing countries

It is clear that the manufacturing sector is the key for

because

the

India to come back to a high growth trajectory. But,

manufacturing sector. Consider the comparison with

wait. How India came down from a high growth

China. China‘s domestic savings rate is 45%, while

trajectory? This is the question that needs some

that of India is 28%. This is the key difference which

thought. India was growing near 10% few years back.

has restricted India from expanding its wings and

Then how the growth nearly halved in just 4 years

flying, i.e. improving in terms of education, health,

period. The answer to this lies in how the government

poverty, and various other important segments.

utilises the most important resource, i.e. money. And,

Domestic savings rate can, in simple terms, be seen as

it has not been properly utilised by the UPA

the investment done so that some sustainable return

government. For that, let us talk about the budget. A

can be obtained. Now, India‘s domestic saving rate is

budget

low because not much has been invested in the

Expenditure. Receipt is the total amount obtained by

manufacturing sector. The challenge for the new

the government through its sources, like tax

Prime Minister of India, Narendra Modi, is primarily

collection,

to boost the manufacturing sector. Before discussing

spending of the government. Expenditure itself can be

about what Mr Modi is doing, let us first see the

of two types. One can be planned and the other non-

importance

sector.

planned. The planning commission allocates capital to

Manufacturing sector deals with the building of

various sectors like education, healthcare, etc. It

industries, plants, etc. These industries when operated,

allocates these from the amount allocated to it by the

provide employment to people. As a result, the

government. The other is non-planned expenditure

condition of the people, who were earlier unemployed

and that is the amount directly spent by the

and now, provided work by these industries,

government. It has been seen that the Planning

improves. The net income of the society increases.

commission allocates the amount allocated to it more

of

the

of

lack

the

32 | D E C E M B E R 2 0 1 4

of

investment

manufacturing

in

has

two

components

borrowing,

etc.

–

Receipt

Expenditure

is

and

the

wisely than that done by the government directly.

making them private. It is evident from the fact that

Capital expenditure is the key to growth, since it is the

the domestic savings rate of private sector is 9%,

investment which will yield good results. This is

while that of public sector is -4%. Yes, you saw it

basically like investing in those industries about

right, it is negative. That means, public sector is

which we talked about. In the budgets given by the

harming the country the way investment is being done

UPA, it has been seen that the capital expenditure is

in the public sector. A big challenge in front of the

around 1/8th of the total expenditure. This is where

Modi government is to disinvest these PSUs. That can

the problem lies. The major chuck of money has gone

help in increase in the manufacturing activities,

in revenue expenditure, which is basically non-

resulting in higher growth of India.

productive. Wait, let us see what Narendra Modi has done in the July 10 budget. The total expenditure has been increased to Rs 1794891 crores from Rs 1590434 crores. Capital and revenue expenditures, both have increased. UPA had allocated Rs 229128 crores last year to the total capital expenditure, though it actually happened to be Rs 190894 crores only, when the revised estimated came. But this time, the target is not even equal to the previous target. The capital expenditure proposed by the Modi government is just Rs 226780 crores. This is less than the previous set target. However, more important than setting a target is to actually achieve it. So, it is yet to be seen whether Modi will be able to achieve this target or he will be like the UPA government.

Another important factor restricting the country is the SLR. This is the percentage of the amount of the banks that has to be put in the government bonds.

Now, these bonds give low return. As a result, to make profit, banks have to charge higher interest from its customers. This results in lower growth of the businesses. Also, the money put in the bonds is with the government. This large amount with the government results in improper spending by the government. The large revenue expenditure, including subsidies, which barely reach the ones it is intended to give to, is a result of extra money with the government. If the SLR is reduced from 22.5% to somewhere around 10%, then government will get less amount of money, and will spend it wisely. Banks

It is high time that the government be accountable to

will provide loans at lower interest rates and hence,

whatever it says or does. In the last budget presented

businesses will get a tremendous boost in India.

by UPA, it was around 40,000 crore rupees (80,000 crore rupees according to moody) were deferred to the PSUs. This helped show the fiscal deficit of the government to be Rs 529,000 crores. The government should be strictly accountable to any decision it takes.

The deferred amount to the PSUs will hamper any growth possibilities of these PSUs. Anyways, it is high time to improve the status of these PSUs. One possible solution is by disinvesting these PSUs and 33 | D E C E M B E R 2 0 1 4

Modi government has taken some new steps recently.

The FDI limit has been increased in insurance from 26% to 49%. This will help in the inflow of capital as foreign players know of the tremendous opportunity in insurance In India. 6 out of every 7 people in India are uninsured. But, insurance companies play an important role in nation building. The profit of the insurance companies (most of the revenue is profit) is

years, India is full youngsters. With so

much

youth,

surely

comes

optimism, hope, and the courage to face challenges. India will no doubt be a superpower after 15 years. But, for that, manufacturing sector needs to be improved. And, to do so, the person

at

helm

should

think

selflessly of the future, and not think of the present and jeopardise the future of the country. invested in long-term projects. This helps in the development of the country. So, giving such a sector to foreigners is not wise. But, more important than that is the retention ratio, i.e. how much capital is invested in India from the total. If it is made sure that investment is in India, then even foreign ownership of insurance does not matter.

Challenges are many, but Modi has proved it before that he has the capability to deliver when it comes to manufacturing sector. He is considered as business friendly person. He has built a number of dams in Gujarat and that has helped the farmers a lot. The average agriculture growth rate of India is close to 3%, whereas that of Gujarat is 11%. This is despite of the fact that Gujarat is one of the states in India which receives the lowest rainfall. This shows that if the right things are done, then even the impossiblelooking things can be made possible. But, for that a visionary is needed Modi seems to be that man. But, there is long time for him to set thing right.

Considering the grave situation the country is in, a long time is in fact required to get the country back on track. But, once India gets back on track, then there is no stopping. With a median age of population as 26.5 34 | D E C E M B E R 2 0 1 4

Taxation

The Transfer Pricing Scene in India

- Srishti Karmakar, IBS Hyderabad

Tax regulations in itself are extremely complicated

T department in the High Court in the month of April

and major companies can find gaps to evade income

last year. On 18th November 2014, Bombay High

tax for transactions happening within their own

Court ruled in favor of Shell India, the principle being

subsidiaries. This is what is seen in the recent cases of

that issuance of shares by an Indian company to its

transfer pricing with companies like Vodafone, Shell,

foreign parent is not eligible to transfer-pricing

and Nokia. Should we call it evading or taking

provisions, as there is no income arising from there.

advantage of the loopholes existing in the tax

―We welcome the high court decision. Shell has

regulation relating to transfer pricing.

always maintained that equity infusion by a foreign

Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities based in different countries within an enterprise. Transfer pricing is mainly aimed at evaluating the financial performance of different subsidiaries under a big company or to shift earnings

parent company into an Indian subsidiary cannot be taxed as income. This is a positive outcome, which should provide a further boost to the Indian government‘s initiatives to improve the country‘s investment climate,‖ said a spokesperson for Shell in India.

from a high tax jurisdiction to a low tax one. Tax

Another transfer pricing case which came to the

authorities frown upon transfer pricing aimed at tax

notice of the I-T department was the transferring of

avoidance as companies undervalue the arm‘s length

share from Vodafone India Services to parent

(market price) of the transaction.

company in Britain. This took place in FY10.

Shell was caught in two transfer pricing adjustment made by the income tax department, one for the year 2007-2008 valuing Rs. 15,000 crores and other for the year 2008-2009 valuing Rs. 3,000 crores. The Indian arm of Royal Dutch Shell Plc had issued 870 million shares at Rs 10 per share to an overseas entity, Shell Gas BV in March 2009. This was contested by the I-T department. I-T department valued a share at Rs 180, hence challenged the valuation methodology of Shell India. The difference was taken to be taxable income for the year 2008-2009. Earlier this year, the I-T department issued a show case notice and total income tax payable by Shell India was Rs 3100 crores. The company challenged this decision of the I-

35 | D E C E M B E R 2 0 1 4

Vodafone India sold shares to the parent company for Rs.246 crore at a value of Rs.8, 519 per share. The tax department has valued the shares at Rs 53,775 per share and the additional is income to be taxed on Vodafone India which amounted to Rs 3200 crore. A

show cause notice was issued on 17th January 2014

determining reasonable, fair and equitable profits and

and the additional tax payable was ordered to be paid.

tax especially for multinational enterprises.

On 27th January 2014, Vodafone India moved to the court challenging the I-T department. The Bombay High Court had ruled in favor of Vodafone India as there is no taxable income on share premium received

Since the introduction of Indian transfer pricing regulation in 2001, so many cases of tax litigation have been order on major companies. More than 20 companies such as HSBC sercurities, Bharti Airtel Ltd, two Essar Group firms, Havells India Ltd and Patel Engineering Ltd are contesting transfer-pricing tax orders similar to Vodafone and Shell. Until and unless transfer pricing cases get a systematic solution, foreign investors will be discouraged from coming to our country. The ruling party, Bharatiya Janta Party has assured that foreign investor will get fair tax treatment. Finance minister Arun Jaitley has promised to end the malpractices taken up by the previous Congress led government.

on the issue of shares. This is not the only case of transfer pricing which Vodafone has faced in India.

There are two other pending cases wherein Vodafone is liable to pay Rs 3700 crores and Rs 400 crores.

Similar cases of transfer pricing with Nokia and WNS has been happening making it difficult for both, the government and the industry to take a proper stand on the transfer pricing policy. In case of Vodafone India, the then Finance Minister, Pranab Mukherjee had issued a retrospective tax law under which Vodafone would have been liable to pay. This had sent a wrong message to the international investors hampering the overall inflow of FIIs. The increasing demand for such investment also needs the introduction a uniform and

internationally

accepted

36 | D E C E M B E R 2 0 1 4

mechanism

of

Featured

Growth Story of SMEs

- Nisarg, Goa Institute of Management

SME stands for Small and Midsize enterprises. The

our goal of inclusive growth and equal distribution of

definition defers from country to country. A business

resources. SMEs prompts private ownership, instils

that maintains its revenue or employees below a

entrepreneur skills in the youth and establishes

certain standard is called an SME. The European

powerful market supply chain. The report published

definition for SMEs is ―The businesses which have

by Ministry of Small and Midsize Enterprise says

less than 250 employees and the annual revenue is

around 45% of the total output and 40% of the total

less than 50 million euro (or annual balance sheet

export of the country comes from SMEs by

total less than 43 million euro) are called SMEs.‖ India has defined SMEs under Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. It says for a small sized enterprise the investment in plant and machinery should be between 25 lakh and 5 crore and for a medium sized enterprise it should be minimum 5 crore and should not exceed 10 crore. This definition is applicable to the enterprises which are in manufacturing sector. For the enterprises which render services, if the investment is between 10 lakh to 2 crore they are called small sized

employing 106.1 million people over 26 million units in 2013. It contributes around 22% to the nation‘s GDP.

and if the investment is between 2 crore to 5 crore

Now instead of discussing the past the immense

they are called medium sized enterprises.

potential ahead prompts me to throw some more lights

The SME sector has been of prime importance for India as it involves less capital investment and is highly labour intensive. It boasts of being second highest in providing employment and contributes to

on future of SMEs and how India can fulfil its ―Make in India‖ dream through it. Now in the world of cut throat competition it is very important that we use all the technological resources we have. The next generation is to be driven by innovations and technology. The initial development in our SME sector was the result of the government policy of promotion and protection of small business units. But now after 1991 reforms and in the era of globalization the small business units are open to extensive competition from small and big giants all over the world. Therefore it has become essential that India shifts

37 | D E C E M B E R 2 0 1 4

from

technology transfer to

technology

innovation.

information about electricity usage, can give utility

The recent research work published by BCG says if

and customers alike a real time picture of how much

Indian SMEs adopt latest IT tools they could generate

power they are using at any point in time. The

additional revenue of $56 billion and can add 1.1

electricity can be used efficiently at time when the

million jobs. One such tool is cloud computing which

overall demand is low and the meter helps in doing

has changed the way IT solutions are being delivered.

that. By doing so we are smoothing the demand

Cloud computing can provide cheaper solutions as it

curves of power plants and utilizing the current power

adopts pay per use policy. It reduces total operation

plants fully instead of establishing the new ones.

cost and total cost of ownership by alleviating the risk for the cash strapped SMEs. The cloud facility enables secure storage and transfer of data. As the maintenance and software up gradation is taken care by the service provider it saves the company‘s time and resources.

market their products on social media. There are many cost effective tools available like websites, blogs, emails etc. One of the most popular and heavily used such tool is Facebook. It provides facility of flexible budgeting and provision to target a highly

To improve our supply chain further we can use computerized tracking and shipping devices along with electronic billing systems. There are plenty of supply chain related mobile apps like MCSA, Mobile TMS applications, Mobile Solutions by SAP and Oracle products. With barcode scanning, speech recognition features, high quality digital cameras and other auto run instruments provide high class warehouse functioning.

software platform

specific audience as shown below.

Along with all the benefits that we extract from our SMEs we must ensure that we don‘t harm our environment and use green technology as much as we can. The e-waste produced by the enterprises have to be managed properly. CloudBlue, based in New Jersey, helps tech companies process their e-waste on the site as well. So in nutshell technology is the answer to the question posed by the harmful effects

Let me give an example to exhibit that. John Deere used SmartOps

Apart from that the SMEs can use technology to

and

helped

equipment supplier increase it‘s on time shipments dealers from 63% to 92%, while reducing inventory by nearly $1 billion.

produced by the technology.

Hence I think India must keep including SMEs in its five year plans and should highly focus on the use of technology and innovation to develop this sector. We must use our executive wing to make time to time

Here one more thing to note is that we are in 21st

reforms. If taken as national goal I am confident our

century but our electric grid is a 20th century

poor and middle class will surely come out of

structure. It is highly inefficient and may breakdown

mediocrity and contribute to the development of the

any time. In 2003 we observed east-coast wide black

nation and we will be able to drive this third global

out in India. The first step to resolve the issue can be

cycle of development along with China.

the use of Smart Meters. It can relay a range of 38 | D E C E M B E R 2 0 1 4

Regular

Market Watch

- Alisha Singh, IBS Hyderabad

With the advent of globalisation, the Indian market

gold last year than in the previous year which reveals

has undergone a sea change bringing in a lot of hope

the fact that the yellow metal certainly plays a very

and also sensitising the market regulators thereby

important role in the Indian economy.

stimulating the market conditions.

• Pepper exports since September has shown a rise of

The other reasons that have attributed to the Indian

6% in quantity and a 30%-increase in value at 10,100

Market are as follows:

tonne worth Rs 515 crore. According to Shamji, green

Technology: As we all are well aware of the adage

pepper arrivals that precede black pepper harvest have

―Necessity is the mother of invention‖, the technology

been poor so far and the harvest is delayed. The

in today‘s century has taken a leap giving rise to an all

International

new era all together and also promoting cut throat competition among the industrialists and businesses

Pepper

Community

(IPC)

reports

indicated a surplus production of 38,300 tonne in the global markets in 2015, according to Mr S Kannan, director, finance of Spices Board. This is mainly due

across the globe.

to good production in Vietnam and India. IPC projects Market Leaders: In the Indian Marketing Scenario, the market success goes to those companies that are best

matched

to

the

current

environmental

Indian pepper production to go up from 37,000 tonne in 2014 to 70,000 tonne in 2015, which again brings in a lot of hope and zeal among the exporters.

imperatives. Those companies that can deliver what the people want and can delight the Indian customers

MONEY MARKET

are the market leaders and at present India has the best

The Indian Money market has been the topic of

of market leaders.

discussion and debate recently, with RBI‘s decision to

Currently the Indian market seems to be doing fairly well in various fields. Some of the major highlights

cut rates which was vehemently opposed by Mr Raghuram Rajan, the Governor of RBI stating that it

are as follows: COMMODITY MARKET • Gold prices have soared by Rs 650 to Rs 27,470 per ten gram in the bullion market on strong seasonal demand as firm trends in global markets.

According to the most recent survey by Economic Times of India, Indian households spend more than 8% of their daily consumption on Gold, the survey shows 77% of respondents bought gold at least

is premature to go in for a cut at the moment, but held

once during 2013 and more than half bought more

out hope of a cut if inflation falls. However, The

39 | D E C E M B E R 2 0 1 4

Reserve Bank of India (RBI) is expected to lower

sold Indian shares worth 2.21 billion rupees on

policy rates by 50 basis points in 2015 with the first

Tuesday 9th December, 2014, which also weighed on

rate cut likely as early as February next year on the

the rupee. Analysts expect the rupee to remain range-

back of slowing inflation, global brokerage. This step

bound ahead of consumer price inflation data due in two or three days. "Upcoming month- and quarter-end demand for dollars from banks and corporates would keep the rupee weak," stated Anil Bhansali, vice president at Mecklai Financial.

BOND MARKET • RELIANCE INDUSTRIES HIT OVERSEAS

by RBI has led to mixed reactions by various industrialists, where some have supported and some

DEBT MARKET WITH $ 1 BILLION BOND SALE

have resented the idea of rates not being slashed. Real

On the 10th December, 2014 Reliance Industries hit

estate players have stated that the housing demand is

the international debt market to raise up to $ 1 billion

likely to remain weak in the near term and sought the

(about Rs 6,150 crore) by selling 10-year dollar-

government's help to facilitate low-costing funding for

denominated bonds. While the company refused to

buyers and developers. CREDAI, the apex body of

confirm or deny the development citing market

realtors, expressed disappointment over the RBI

sensitivity of the issue, market sources said the dollar-

policy and demanded a stimulus package in form of

bond sale programme is in progress and the issue

cut in interest and tax rates, to boost housing demand

would close soon. The largest private sector company

and supply.

government's

has raised $ 3.3 billion in overseas debt this year so

intervention to facilitate low cost funding for buyers

far and the current issue will take the overall debt

as well as developers.

On the other hand, The

raising to $ 4.3 billion. It can be noted that in April

Finance Ministry stated that it looked forward to the

this year the company had tied up for $ 550 million

Reserve Bank of India (RBI) supporting the revival of

from Japanese investment agency JICA and $ 800

growth and employment, after the apex bank resisted

million in September this year from the Korean Exim

pressure to lower interest rates.

Bank. Traditionally, much of RIL's investments are

It

also

sought

the

THE FOREX MARKET

being funded through overseas borrowings. Despite sitting on a cash pile of close Rs 84,000 crore, the

The Indian rupee fell to its weakest against the dollar in 1-1/2 weeks recently, declining for a third consecutive session on the back of dollar demand from oil companies. Foreign institutional investors 40 | D E C E M B E R 2 0 1 4

company is one of the most prolific borrowers with its total debt outstanding standing at over Rs 1.4 trillion as of the September quarter.

• OFFSHORE DEBT MARKETS ARE MUCH MORE

would

ATTRACTIVE TO INDIAN CORPORATES- FITCH

cancellations by SpiceJet.

According to the Rating agency Fitch, it expects

• The founders of Infosys sold shares worth $1.1

Indian corporates to increasingly access offshore debt

billion in India's second-largest IT services exporter

markets to meet their funding requirements. The

on 8th December 2014 cashing in on a more than 20

offshore bond issuances by non-financial Indian

per cent gain in the stock since the company picked its

corporates is estimated to have crossed USD 13

first outsider as chief executive. The shares were sold

billion so far in 2014 as against around USD 9 billion

by N.R. Narayana Murthy, Nandan Nilekani, S.D.

in 2013. The growth in access to bond market is likely

Shibulal and K. Dinesh, members of a group of seven

to be driven by the need to refinance debt and fund

engineers who founded Infosys in 1981 by pooling

capex once the investment cycle restarts, it added. The

together $250, stock market filings showed that

offshore markets now present a relatively more cost-

Infosys shares have so far risen 23 per cent since the

effective funding source as compared with onshore

company in June named Vishal Sikka, a former

funding for Indian corporates, it said. Also the

executive at global software firm SAP, as its CEO in a

reduction of withholding tax on interest payments of

bid to revive growth .Investors said the share sale had

offshore bonds to 5 per cent with effect from July

little bearing on their outlook for Infosys under

2014, compared with 20 per cent earlier, has

Sikka's leadership. The company is in the midst of a

incentivised investment in such instruments.

strategy overhaul aimed at boosting earnings and

benefit

from

the

recent

mass

flight

stemming a staff exodus.

STOCK MARKET • The S&P BSE Sensex plunged as much as 259

CONCLUSION

points in trade on 10th December, 2014 tracking weak

Mr Ratan Tata once quoted ―Ups and downs in life

trend seen in other Asian markets. The fall in the

are important to keep us going‖ likewise the

index was led by losses in Infosys, Tata Motors, RIL,

fluctuations in the stock market are necessary in order

ONGC and L&T. Tracking the momentum, the 50-

to keep the market going. In a nutshell, the market has

share

crucial

fairly done well in the past instilling a sense of new

psychological support level of 8300, weighed down

hope and zeal among the investors taking the

by losses in FMCG, capital goods, consumer durable,

economy to a different level of euphoria all together.

metal and auto stocks.

We hope the best for the market in time to come.

Nifty

index

slipped

below

its

• Jet Airways BSE 1.13 % has been among the top performers on Dalal Street in the last two weeks as savvy investors bought the share amid troubles at rival Spicejet BSE -7.10 % and due to declining fuel prices.

Jet shares have soared 80% since November 25, 2014 outpacing the BSE 500 index, on hopes the company 41 | D E C E M B E R 2 0 1 4

Article of the Month

Indian Economy- Ache Din Aane Wale Hain?

- Saptarshi & Debopam, SIBM Pune

India seems to be the only economy that is projected

Household savings form 28% of the GDP, thus we are

to be on the growth curve, whereas mixed trends are

still struggling to reach the necessary target. So in

forecasted for the rest of the world. But when the

order to have a GDP of above 9% growth, India‘s

entire world is looking optimistic towards a 5.6 per

gross capital formation should be 35%-48% of our

cent growth rate for India this year, the bigger

GDP.

question still looms large: will India ever be able to

Reasons pertaining to the sluggish growth rate

achieve the 9% growth rate in the next five years?For this we need to look at a few important factors

(I) Fiscal and Current Account Deficit: Fiscal consolidation is a conscious policy effort needed by

prevalent in the world economy:

the Government to live within its means, thereby If we look at the GDP growth rate of the World economy as well as the BRICS, we can understand that India is going quite strong at a 5% growth rate. If we compare it to other countries across the globe, we can understand that excepting China, which generally exhibits an exorbitant growth rate, the other nations are all struggling to keep pace with a 5% growth rate

bringing down the fiscal deficit and public debt. It includes, among other things, efforts to raise revenues and

bring

down

expenditures

like

subsidies,

unnecessary bills and reforms which never reach the intended recipient. Economic growth and stability are needed to revive investor sentiment and put India on a high growth path.

that India is currently growing at. But if our country needs to prosper in terms of growth and development, there are certain aspects which our esteemed economists and finance ministers need to look at.

Fiscal Consolidation is also critical for lowering India‘s debt-to-GDP ratio. The internal debt of the Government stands around 48% of GDP in the last two years. The declining trend of the debt ratio post

India ranked 132 in Ease of doing business. Today as we are moving into the 2020s, India is suffering from a chronic ailment of red-tapism and bureaucracy.

Infrastructure and manufacturing projects require huge investments and have long gestation periods. If someone is

looking to

put

money into the

infrastructure or the manufacturing sector, the Government has to ensure that the project doesn‘t get stuck in Red Tape. There have been many examples like POSCO where corporations have come up with huge investment plans and found themselves stuck in some government clearances.

42 | D E C E M B E R 2 0 1 4

fiscal 2009 has been driven more by high inflation rather than lower fiscal deficit or faster GDP growth.

In the coming days, a strong commitment to fiscal consolidation will be the key to lowering India‘s debtto-GDP ratio.

(II) Volatility of High Inflation Rates:

as well as the RBI Governor.

A look at the inflation rate of India will probably give

(III) Reforms being Stalled or Policy Paralysis: The

us a clearer picture about where our economy is

state of policy paralysis in India has hurt almost all

currently headed towards. A modest inflation rate of

sectors in India. In order to revive the investor

5.52 (CPI) should be pleasing to the eye, but a close

confidence, policy reforms should be carried out at a

look at the world economy will give us a different

brisker pace. Policies like implementation of the GST

view altogether. The price of Crude oil which forms

have to be implemented at a much faster pace to instill

the main chunk of our import has fallen from $100

the investor confidence to invest in India.

last

summer

to

below

$80

in

just

three

months.Inflation is likely to head even lower with international crude prices falling further and the winter vegetable crop likely to push prices down.

The key priorities being closely monitored by the PMO are financial inclusion, the Digital India campaign, rural sanitation and the Make in India manufacturing-for-export

initiatives.

The

This has obviously been a rather sweet tempting

Government‘s focus should be on consolidation,

situation for the RBI Governor, Raghuram Rajan to

execution and ensuring that the plans and policies are

cut the interest rates to stimulate the economy in order

rolled out efficiently. The nitty-gritties of key policies

to prop up growth, but credit should be given to Rajan

like rural sanitation, financial inclusion and other key

for refraining from doing so.

programs should be ironed out so that the reforms can

RBI has set a target of bringing down inflation to 8%

by January 2015 and 6% by January 2016 and has talked of breaking the back of inflation once and for all, rather than relenting too early in the war on prices.

Sound fundamentals are very essential for the growth of Indian economy and the RBI has probably hit the head on the nail when it said ―it is actually not interest rates, but other factors that have been hindering growth‖. Combating those ―other factors‖ has been one of the key agendas for the current Prime Minister

be rolled out soon.

(IV) Slow Industrial Growth in India: The India Industrial Production Index gives us a clear view about the growth and development of the industries in India. The current IIP stands at around 2.5. The volatility in the industrial numbers has not really helped in devising a growth strategy for the Indian economy.If we look at the chart below, we can clearly spot a range of values, which need to be stabilizedif India has to floow the steep curve of a 9% growth. High inflation and weak IIP data are two of the main causes of concern and the government has to devise ways in order to shore up manufacturing and industrial production within the country.

(V) Global Economic Uncertainty: India‘s economy is attached to the United States and the global

43 | D E C E M B E R 2 0 1 4

(II) Increase in Foreign and Domestic Investment: Accelerating economic growth requires an increase in the investment rate in India. India needs to increase its investment to around 45% of the GDP from 30% currently through a proportionate increase in the savings rate, FDIs, lower inflation and fiscal consolidation.

But most importantly India needs to create a large economy. It is now more coupled than ever before.

This is very evident from the fact that with the slightest movement of the US dollar, Indian rupee tends to react in a big way. This gives rise to volatility in the Indian economy, as a result of which the magic

employment pool in order to engage them in the rebuilding strategy of India and also to ensure a selfsustaining

growth

level

of

around

9%-12%.

Unemployment rate in India stands at around 7.6% reaching an all time high of 9.4% in December, 2010.

figure of a 9% growth seems vulnerable. In order to ensure a sound currency and awell-balanced economic system, Indian monetary and fiscal policies have to

(III) Eradicating poverty & ensuring a healthy environment for all

play a major role.

The GDP per capita for India stands at 1498.87 USD which is measly compared to the US PPP of 53142.89 USD. Even if we compare India with the rest of the world, India lies at a lowly 126. In order to ensure a balanced growth of above 9%, we have to ensure a self-sustained growth of Indian economy which is only

possible

through

industrialization

and

globalization.

Like Modi‘s budget speech, India needs to invest in improving the health, water supply and sanitation facilities. The level of investment in sanitation has

Key factors required for 9% growth rate (I) Increased productivity and efficiency: Productivity level of India has slowed down considerably in the last 2-3 years to about 2.5%. Considerable efforts and reforms should be put into place to ensure an increase of the productivity level by about 5% through a

continuously increased in size since the 2000s.

In 2008, 88% of the population had access to improved water source, but only 31% had access to improved sanitation. So efforts should be devoted to improve the water and sanitation conditions in the rural as well as in the urban colonies.

combination of structural and administrative reforms and executive actions.

In 2013, the Government of India put the population under the poverty level at around 21.9%. According to

44 | D E C E M B E R 2 0 1 4

a UNDP estimation, about 29.8% of Indians live below the poverty line. Poverty in India is a historic reality. So to encounter poverty, the Government of India has come up with various policies and reforms in order to alleviate the poverty rate in the country and to ensure a healthy and prosperous life style for the people.

Growth Plan for the Next Few Years

The early signs have been quite impressive. India‘s exports are expected to rise by 5.2% to $329.5 billion

If we look at a recent research study conducted by GPC Research, we will understand that the keys factors to a 12% growth are increased investment which will contribute to an addition of 4% to the

in 2014-15 as well as there are signs of improvement for India‘s merchandise trade deficit. The foreign investment inflows have also showed signs of improvement in September, 2014.

annual GDP figure, an increased productivity which will contribute to a 2% net increase in GDP and Labor Force Addition whose contribution is approximately .5%.

So the days of economic gloom and policy paralysis and high fiscal deficit seem to be a thing of the past.

We are looking forward to a revised fiscal deficit target of 3.6% and 3% for FY16 and FY17

Besides the key factors of growth, Indian economy

respectively and a growth of 7% in the coming years.

today requires a holistic approach towards its various development indices.. Apart from this some of the other factors have also been taken into consideration

The report released by Investment Bank Morgan Stanley probably sums up our sentiments:

like the Gross Capital Formation for GDP Growth

―If our projections were to come to fruition, India‘s

Rate.

economy would pass the $5 trillion mark (by 2025), a

Conclusion

feat that has been achieved by only the US and China thus far and would make India the fifth largest

The challenge with Indian economy mainly lies in the fact that the new Government has to implement its policies and go ahead with the reforms in face of stiff opposition in order to fulfill the dream of a +9% GDP growth rate. A growth rate in Indian GDP means an increase in average per capita income from the current $92 to around $400, thereby giving thousands of Indian youth an opportunity to be lifted out of unemployment.

45 | D E C E M B E R 2 0 1 4

economy

in

the

world.

Accordingly,

India‘s

consumption and investment opportunities would rise to $3.6 trillion and $1.9 trillion, respectively.‖ It said in a report titled The Next India: From a cyclical downturn to a structural upturn.

Indutry Analysis

The Media & Entertainment Industry

- Rahul Mishra, IBS Hyderabad

Whoever co ntrols the media controls the mind… but,

the industry has a huge Indian population to cater and

the industry itself seems to be in a controlling

with technology as its tool and support of the

position. It saw a revenue growth which was higher

government policies it can exploit the opportunities.

during 2013 in comparison to 2012, due to the rise in

Industry Attributes:

both subscription and advertising revenues, and looking at the pace the overall industry revenues are expected to further grow for the year 2014. The forecasted reports suggest that the pace would continue and revenues generated will cross the 1.5 trillion mark by 2018.

Since the launch of Star TV and Zee TV Indian television industry has covered a long distance and is serving its audience with a bouquet of almost 800 hundred channels. The next big achievement is witnessed by newspaper industry, despite a big challenge by the internet newspaper circulation

These results are obvious due to a sharp increase in the digital subscriber base, due to government‘s mandate for overall digitization which has and would result in subscription revenues. This will provide the chain effect to advertising revenue as advertisers can benefit from the television‘s wide range. As per a FICCI (Federation of Indian Chambers of Commerce and Industry) and KPMG report, India‘s media and entertainment

industry reaches 161 million TV

households, 94,067 newspapers, 1700 multiplexes, and 214 million internet users of which 130 million are mobile internet users. So, it is clearly visible that

consistently growing with regional languages and Hindi newspaper making up a market share of nearly 90 percent and remaining being covered by the English dailies. The third in the list is the Film industry, though it is small yet it comes at second position in terms of producing films and theatrical admissions with multiplexes proving to be a silver lining. Last but not least is the radio and music industry, being the most cost effective source of entertainment reaches almost every household of the country and with privatisation it has further spread its wings.

Regulatory Policies: Television segment is regulated by TRAI and Ministry of Information and Broadcasting. Foreign investment is different for different application and technology in this segment and even for distribution and

television

bandwidth.

For

publication

or

newspaper the foreign investment is different depending on the publication with FDI cap of 26 percent and for non news publication it is cent percent. If we look into film industry again a 100 46 | D E C E M B E R 2 0 1 4

Company, moreover Infosys may use cloud based platform to

improve its

viewer

experience.

There

are

various

other

government

initiatives like the audio visual coproduction deal early this year with the Canadian government to harness co cultural exchanges so that both the nations can benefit. The Centre has also given licences to forty five percent FDI is favorable but due to high rates of

new channels both news and entertainment to add

entertainment tax the industry is facing difficulties. In

variety and competition in the market.

radio space the third phase has been accepted and eauctions will start soon. In music the copyright

Future prospects: The major breakthrough has been provided by

amendment bill,2010 is cleared by the government.

digitization and research show that digitization

Investments:

mandate by the government would help in complete

A Memorandum of Understanding has been signed

shut down of analogue TV transmission by the end of

between Prasar Bharati and Deutsche Welle (German

the year which would shift consumers to digital

public

platform

broadcaster),

to

expand

the

realm

of

providing

better

addressability

and

Doordarshan India into Europe, Central Aisa and the

transparency in the distribution process but it might

Middle East. It would be free to air on Hotbird 13B a

take some more time.

DTH platform in Europe.

We would see a Zee-Star joint venture which together

Discovery Communications India has launched its

has a forty percent viewership and nearly 80 channels

Investigating Discovery channel and now the portfolio

in their portfolio would provide them ability to

stands at 11 channels in India. On the other hand

negotiate to have a higher share of subscription and

Multiplex chain INOX has bought 100 percent share

lower fee with MSOs. It might also help in upgrading

capital in Satyam and the acquisition will help INOX

the deteriorating business model of MSOs.

to firm its grip in north India.

The internet will generate huge revenues as it has got

Carnival Group has acquired Broadway Cinema and

a huge user base of over 200 million which is

with 80 percent stake in Big Cinemas, a division of

constantly

Reliance Media Woks is all set to acquire it, although

opportunities not only in India but outside also with

discussions are going for 100 percent buyout.

Africa and Middle East as potential markets where the

Infosys might soon come up with internet TV as it has

M&E companies can do great.

entered into an agreement with Orange Telecom

47 | D E C E M B E R 2 0 1 4

growing.

The

M&E

industry

has

Politics

The Winter Session of Parliament of India

- Manjari Sharma, IBS Hyderabad

The winter session of Parliament began on 24th

considered are Bills that had been examined by

November 2014, will have 22 sittings and shall end on

standing committees, like the Juvenile Justice Bill,

23rd December 2014.

2014, Factories Amendment Bill, 2014 and Railways

In this session the government is expected to push its economic reforms agenda through amendments and Bills. The agenda is anticipated to bear two distinct facets - a) wider macro-economic reforms and b) long overdue tax policy and administrative reforms to

Amendment Bill, 2014. There are other drafts Bills that are in the process of being finalized by individual ministries that may be introduced. They include the Road Transport and Safety Bill, 2014, which might replace the Motor Vehicles Act of 1988. Besides, other issues of importance like the government‘s

address ease of doing business.

efforts to curb repeated Chinese intrusions in the These include a Bill seeking to raise the cap on foreign direct investment in insurance from 26% to 49%. In order to allow foreign pension and insurance funds to access the sector, which requires about $8

Himalayas bring back black money, the Nanavati commission report on the Gujarat riots and the deaths caused due to forced sterilization in Chhattisgarh are also expected to be raised.

billion of capital investments? In addition, a proposed goods and services tax (GST) Act, which needs a Constitutional amendment, is key to the government‘s plan to roll out GST by 2016. A total of 67 Bills are pending before both houses of Parliament, and 22 sittings are slotted for the winter session. With 282 members, the ruling Bharatiya Janata Party has a majority in the Lok Sabha but is in a minority in the Rajya Sabha where it has 55 out of 245 seats.

According to independent research agency PRS Legislative, there are two new Bills to be introduced: Coal

Mines

Ordinance,

2014,

and

Textile

Undertakings Laws Ordinance, 2014 in the winter session. Bills that have already been cleared by the cabinet in the last three months are also likely to come up for consideration. This session is also likely to see few bills relating to family and health welfare comes up for passage, including the Mental Health Care Bill and the HIV Bill, 2014. Also expected to be

With 67 bills of varying nature and importance pending in the Parliament, India‘s supreme legislative body has its task cut out ahead for itself, in this crucial Winter Session. Despite the BJP obtaining an absolute majority still loads would also depend on how the key opposition parties such as the Congress decide to play ball, specially on some of the UPA‘s projects. Except for contentious issues such as the Land Acquisition Act, in which the Congress party has pledged not to allow alterations, most bills are fairly uncontroversial.

Till now the government has tried to put those bills upfront that had the highest chances of going through smoothly. It has already started making progress on the GST, which aims to bring together a single tax that would subsume all state and national level indirect

taxes.

Also,

rationalization

of

Land

Acquisition law to tone down the restriction on covenants and facilitate reasonable pricing and labor reforms would possibly stand low in priority for the

48 | D E C E M B E R 2 0 1 4

session. Nonetheless, the government recognizes its

Tax policy and administrative reforms: Considering

relevance in fostering the flagship 'Make in India'

that the technical work on the GST is almost

initiative.

complete, the amendment is widely expected to be

The Finance Minister has signaled financial sector and capital market reforms by committing to implementing recommendations of the Financial

tabled, and if approved, GST implementation will become a reality in April 2016. However, a probable threat on the rate of GST is lack of consensus, as the government has moved between rates prescribed by

Sector and Legislative Reforms Commission

the 13th Finance Commission to the recent proposal The government has its task cut out for the ongoing session of Parliament with growing expectations for a barrage of policy reforms - both fiscal and macroeconomic. Finance Minister Arun Jaitley, on the other hand, has set out an encouraging tone with public announcements in the past few weeks at various leadership

forums.

This

session

presents

of

twenty seven per cent by an empowered sub-

committee, far above the global average of sixteen to twenty. Although, rate calibration could be an effective means to build righteousness with states, the government might wish to push the constitutional amendment in the present session.

an

opportunity to streamline bold policy initiatives without harming its electoral prospective, provided the outcome of state elections.

In summary - a bold legislative agenda and considering that it has only 22 sessions, the order of priority shall be crucial - watch out as the winter unfolds!

The FM has signaled financial sector by agreeing to implement the recommendations of the Financial Sector and Legislative Reforms Commission. A key recommendation is to bring together a super regulator - Unified Financial Regulator Agency. Knowing that the expenditure commission has been in operation for the past few months, a stage has been set for recommissioning of the Fiscal Responsibility & Budget Management Act to chart a path for stricter fiscal prudence. Moderate inflation and crude oil prices afford the FM this opportunity.

The fiscal deficit target of 4.5 per cent for Financial Year 2015 is still far ahead of the three per cent target for 2017, and the actions will be based on improvements in tax revenues and unplanned expenditure allocations.

49 | D E C E M B E R 2 0 1 4

Oil & Gas

OPEC vs. The Big Shale Although, Organization of the Petroleum Exporting Countries (OPEC) aims at stabilizing the oil markets to ensure efficient, economic and regular supply of oil to its consumers, still slumping oil prices have yet another story to tell. The oil prices have plummeted to all time low by 44% since its peak in mid-June and

- Priyanka Malik, IBS Hyderabad

of fuel on the daily basis.

This might give a feeling of déjà vu to many people as the descendents of wildcatters from 1930s are the producers of shale oil today. They are again on a roll, pushing down the prices of Brent Crude in the market by flooding the oil market with barrels of oil each

currently selling is done at $64 a barrel. The decision

day. Further, it‘s unlikely for the OPEC to call in the

taken by OPEC in the recent meet, to produce the

National Guard against them as; oil isn‘t getting

same quantity in the existing pre-slump has further pushed down the prices. The recent shift might have a far reaching effect on the global economy.

drained from the neighbors plot like it happened in the thirties. OPEC‘s decision of pumping at the same rate was probably taken to choke off the US shale boom

On one hand if apart from OPEC, oil production in

but it all went in vain. Further other major countries

other countries has increased manifolds, the demand

that have been affected are Iran, Venezuela and high

side has declined as well in places like Japan and

cost producers in North America which require high

Europe. The most benefitted nation out of the recent

prices to generate profits.

scenario is US, as not only their supplies have increased due to the shale oil revolution and new technologies like horizontal drilling but also, the shale oil production is at a rate which can further push down the price of crude oil by 10-20% in the near future. Another factor which contributes on behalf of US is their fuel efficient cars which save a great deal

Conoco Phillips one of the major players of the shale in US has declared that they will be slashing their spending and budget by 20% in the following year.

This high cut is expected to set trends for the other players as well in the US. Although, the CEO Ryan Lance says that lowering down the budget seems to be prudent in the given scenario. Yet, it shows the

company‘s pessimism regarding the rebounding 50 | D E C E M B E R 2 0 1 4

and Iran who were major players in the oil market till now redrawing the international code of diplomacy.

Continuation of the slump might also

make

the

OPEC

cartel

insignificant and irrelevant. The oil would become more abundant and easily

accessible

crashing

the

historically established autocracies prices due to which the stocks of the firm came down

in the world. Finally, not just the oil prices but cost of

by 3% recently. Not only Conoco Phillips but also

production of several other products might come

Morgan Stanley seems to second the view with the

down in the coming year thus, increasing the

consideration that prices might hit the rock-bottom of

affordability of a common man.

$35-$40 per barrel making the crude oil a worst traded commodity.

It is expected that other giants like Chevron (CVX), Exxon Mobil (XOM) and other producers might soon announce the marginal spending cuts. All of this can be taken as an alarming situation for the oilfield servicing companies dependent heavily on the investment from the big oil firms for their survival.

Consequences can be seen already wherein the shares of Schlumberger (SLB) and Halliburton (HAL) declined by 2% recently.

Although, the tumbling prices of crude oil comes as a great gift from Santa to the consumers with Christmas and New Year being round the corner. Yet, the fact that it is creating turmoil in the energy markets can‘t be overlooked. It comes as great news for country like India which imports oil in significant quantities. The shift in prices would result in equitable reallocation of the resources. The scenario can also undermine Russia

51 | D E C E M B E R 2 0 1 4

Vriddhi Research’s Corner

Santa’s Stock Picks

- Sunay Kumat & Saurabh Prabhu

Vinati Organics

• India is expected to double its power generating

• Indian Chemical Sector is set to boom with China

capacity in the next 5 years and NTPC would be a

reducing the production owing to environment

major player in this development

concerns. India being the next destination will see a

• The stock has been giving a healthy dividend payout

substantial increase in revenues.

of 32.50 %

• We see Vinati Organics, a small cap as a good Pick

• The stock is currently trading at 11.83x of EPS.

in this sector. With Stable Operating Margin of

Therefore, assuming a 10% growth in EPS for the

around 20% and reducing debt, the firm will see

next 3 fiscals and the trading price at 16X of EPS, the

impressive financials for FY 15.

target price for NTPC would be 287.49 in a 3 year

• The ROE for the last 3 years has been 32.00% and

time horizon

the company has seen good consistent growth of 29%

Ashok Leyland

in the last 5 years

• The severely battered commercial vehicle (CV)

• The EPS has seen a growth of 16.56% annually

industry has shown the first signs of recovery with a

• The stock is currently trading at 20.88x of

20% growth in August 2014. Given the highly

EPS.Therefore, assuming 17% growth rate in EPS for FY 15 and trading price at 23x, the target price would be 467.8 for a 6 month time Horizon

cyclical nature of the industry and the sharp fall in volumes in the current down cycle, we expect the recovery to be also sharp once the economy picks up.

Ashok Leyland (AL) being a pure CV play would be a

NTPC • With the GDP of India, expected to grow at 6.1% from FY 16, the power sector will see a major boom as power sector in closely correlated to overall growth of nation.

key beneficiary of the recovery.

• Over FY2011-14, AL has made significant investments in its business including the Pantnagar greenfield facility, joint venture with Nissan for light commercial vehicles and R&D expenditure for

• The sector has been underperforming in the last two

complete overhaul of its vehicle and engine platform.

fiscals. However, the new government has taken

Increased expenditure coinciding with the CV down

major steps for the improved performance of this

cycle led to a negative free cash flow of Rs1,800 crore

sector and has announced fresh round of investments

over FY2011-14 leading to a debt spiral. The sale of

• We see NTPC as the best pick in the Power Sector

non-core assets (land, IndusInd Bank shares and

for a long term Investment. NTPC is expected to be

investment in some subsidiaries) and reduction in

the most valuable power generating company by FY

working capital have enabled the company to reduce

19.

its

52 | D E C E M B E R 2 0 1 4

debt

burden.

With

no

significant

capital

expenditure going forward, improving business

Biopharma, for $21.9 million to GSM Holdings at a

prospects should enable AL to generate positive free

premium of 50% which showcases the underlying

cash flow of Rs1,500 crore over FY2015-17E which

value in the biotech business.

will further aid in debt reduction.

• Strides is likely to give a special dividend out of the

• An expected pick-up in CV volumes, reduction in

$150 million received from Mylan which would be

the elevated discounts in the system, efforts of the

favourably looked upon by investors.

management to curb the debt levels along with a

• As per our rough estimates for the combined entity,

better capacity utilisation would give an impetus to the overall financial performance. The de-leveraging of the balance sheet and improving return ratios are positive triggers. We remain positive on the stock and

the Strides stock is currently trading at 14x FY2016E EPS (without considering the special dividend); this leaves scope for an 18-20% upside from here in the next three to four months.

roll forward our valuation to FY2017 estimates. We Max India

recommend a Buy rating on the stock with a revised price target of Rs55, discounting the FY2017E

• Max India reported a strong growth of 26% YoY in

earnings 14x.

PBT (consolidated) contributed by a strong uptick in Strides Arcolab

operating revenues (up by 15% YoY). The life insurance subsidiary, Max Life reported a 21.3% Y-o-

• Strides Arcolab (Strides) has approved the scheme of merger with Shasun Pharmaceuticals (Shasun) under a share swap deal. As per the deal, the shareholders of Shasun will get five shares of Strides for every 16 shares held. As a result, the equity of Strides would expand by 31.5% (excluding the share warrants issued by Shasun, which would be transferred to Strides).

Y growth in shareholder profits and has given a dividend of Rs107 crore to parent company. In view of a strong earnings performance and healthy treasury corpus the Max India announced interim dividend of Rs 4 per share.

• Healthcare business (Max Healthcare) continued to show traction in revenues and profits. The EBITDA margins improved to 10.34% while new hospitals

• The merger would help Strides to expand its product portfolio and manufacturing base, carry out a higher degree of vertical integration and enter the CRAMS space. The profit margin of Shasun will affect the profitability of the combined entity initially, though the management expects a 20% cost synergy in a couple of years.

have broke even at EBITDA levels. We have reviewed our valuations for the healthcare business to factor in the healthy growth and transaction with Life Healthcare.

• Max Life has outperformed the sector and it has the best operating metrics among the peer group. We have revised our SOTP-based price upwards to Rs485

• Apart from the merger deal, Strides has also struck a deal to sell 25.1% stake in its biotech arm, Stelis

53 | D E C E M B E R 2 0 1 4

(mainly due to rolling life insurance valuations to FY17 estimates). While the stock has appreciated

sharply in the past few weeks (partly factoring in

provided for subsidy at the rate of $56 a barrel in this

insurance reforms and premium positioning in

quarter which would be adjusted at the end of the year

insurance business), we believe the upside triggers

considering the falling crude oil prices. We don't rule

will remain from value unlocking from insurance and

out a declaration of a fixed formula for subsidy

healthcare business. We maintain our Buy rating on

sharing by the end of the year, before the follow-on

the stock.

public offering of ONGC. We expect a net realisation of $50-55 per barrel per annum and see better days

Oil India Ltd. • Oil India Ltd (OIL) reported a weak set of numbers for Q2FY2015; its earnings declined by 33% YoY and 29% QoQ, with a cascading effect on revenues, which dropped by 22% YoY and 17% QoQ, and were below our as well as the Street's estimates. The revenues of the oil segment were adversely affected by a lower net realisation (after accounting for subsidy)

and

a

marginal

drop

in

volume.

Consequently, the EBIT of the oil segment declined sharply (down 47% YoY and 50% QoQ) and pulled down the overall PAT of OIL. Though the natural gas and other divisions grew handsomely, but their contribution to the overall revenues is relatively very low.

• While the gross realisation of crude oil (7% down on both Y-o-Y and Q-o-Q basis) remained low on weak global prices during the quarter, the provisional subsidy

was

unchanged

at

$56

per

barrel;

consequently, the net realisation was lower by 14% at $45 per barrel. Further, weak oil volume (down 7% YoY but up 3% QoQ) and dollar realisation against the rupee (down 3% YoY but up 1% QoQ) caused the revenues of the oil segment to fall. However, backed by better volume and realisation, the revenues of the natural gas segment grew by 7% YoY and 2% QoQ. • We believe in the absence of any fixed formula for the sharing of the subsidy burden, the company 54 | D E C E M B E R 2 0 1 4

ahead for OIL, in view of the positive structural changes pertaining to diesel deregulation and gas price revision (which will reflect in the company's Q3FY2015 numbers as effective from November 2014). Therefore, we advise investors to use the current stock price correction on the event of the Q2FY2015 numbers as an opportunity to buy.

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