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
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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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