DIWALI SPECIAL: STOCK PICKS FOR MUHARAT TRADING 2014
THE IBS TIMES October 2014, Issue No. 172
CADILLAC MOVING OUT OF DETROIT BY RAHUL MISHRA
CHANGING PRIORITIES ROADMAP OF INDIA’S MANUFACTURING SECTOR BY SRISHTI & SAMEENA
SCOTTISH REFERENDUM BY MANJARI SHARMA
JET FUEL HEDGING BY AVIK CHAKRABARTY
FinStreet, IBS Hyderabad
ISSUE NO.
172
OCTOBER 2014
What’s Inside 2
3
6
Letter from the Editor
Mergers & Acquisitions Let us Fuse and Grow
Android One
9
13
16
Risk Management
Cover Story
Technology
Cover Story Extended
Fuel Hedging
India’s Manufacturing Sector
19
22
24
Make in India Campaign
Market Watch
Global Epidemic Ebola Virus Scare
Russian Economy
27
29
31
International Conflict Hong Kong Revolt
Politics Modi’s Foreign Policies
33
35
Cadillac: From Detroit to NYC
TATA Power
Strategy
Company in Focus
International Desk
Diplomacy Scottish Referendum
39
Diwali Special Muharat Trading Stock Tips
24
9
33
13
3
INTELLIGENCE BEYOND SUCCESS
“A major lesson of the last crisis is that accommodative monetary policy contributed to financial excesses. We are pursuing a similar policy for good reason. But there are limits - if you do this for too long, risks in the financial markets will materialise.”- Lucas Papademos, Former Vice President of the European Central Bank
Letter from the Editor
THE IBS TIMES Faculty Mentor Dr. Ravi Kumar Jain Cover Picture Source: Indian Institute of Welding
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
Dear Readers, Greetings from Team FinStreet ! We would like to thank you for an overwhelming and encouraging support to The IBS Times. This issue of The IBS Times continues to follow the path of in-depth research and analysis and presenting the same to our readers in simplistic yet interesting format. With the much in news ―Make in India‖ campaign, the new government is poised to bring the struggling manufacturing sector of India back on track. In this edition of The IBS Times, the cover story deals with an analysis on country‘s manufacturing sector and how much applicable and effective Make in India campaign will be. The magazine also brings out the outcomes of Scotland‘s decision to stay back with United Kingdom and how Ebola Virus scare is impacting the capital markets globally. The magazine also discusses move of General Motors to move headquarters of Cadillac from Detroit to New York and magazine also puts light on the economy of Russia. This edition of The IBS Times enlightens on the uprising in Hong Kong and Jet Fuel Hedging techniques. It also analyses the foreign policies of the new government and motives behind launching Android One by Google.
Kaushik Chandell Koisetty Sai Aishwarya
The magazine includes an exhaustive report from investment point of view on TATA Power by Team Vriddhi Research.
Manjari Navjoth Sahu Priyanka Malik
As the festival season kicks off, we also bring to you the stocks to look out for during Diwali Muharat Trading. Team IBS Times wishes our readers a very Happy and Prosperous Diwali.
Rahul Mishra Ripu Daman Tandon
Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better !
Sachi Kheskani Sameena Usman
Chaahat Khattar
Srishti Karmakar
“Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make.”- Donald Trump
Mergers & Acquisitions
Let us Fuse and Grow
- Kolisetty Aishwarya
Mergers & Acquisitions in 2014: News on mergers and acquisitions has become very
Global Review:
common these days. So what does mergers and acquisition actually mean? Whenever a company purchases another company and establishes its ownership the purchase is called an acquisition. On the other hand, when two companies if the same size come together and agree to operate as a single company, it can be termed as a merger. So basically, mergers and acquisitions is a way of corporate restructuring and is an integral part of the financial
Companies today have surplus cash in their pockets or lean on a bank to borrow money. Thus cash rich companies with its stable balance sheet make their way towards M and A. The year 2014 has already witnessed a great deal of mergers and acquisitions placing it on the highest level since the year 2007. Year-to-date global deal volume as of June 26, 2014 surged to $1.75trillion, according to Thomson Reuters data. Thirty-eight unsolicited or hostile bids, worth
world.
more than $150 billion, were launched in the first six Mergers and acquisitions are generally done for the growth and development of the companies.
months of the year, compared with 19 such deals worth $8 billion in the same period last year.
Reasons for M&A:
In the US market, most of the bids announced and
A company may benefit in several ways due to
made worth more than $1 billion which led to a hike
mergers
and
in the stock markets and the value of the stocks for the
acquisitions may lead to economies of scale,
first quarter of the year. Thus the M and A boom gave
economies of scope, diversifications, economies of
a chance for private companies to sell their equity at a
vertical
high price.
and
acquisitions.
integration,
These
improved
mergers
research
and
development, better purchasing power, tax benefits
Indian Review:
etc. from the 19th century, mergers and acquisitions have strengthened the economy, led to changes in government policies and has led to increase of innovation in the private sector. In addition to predicting M&A activity is considered a leading indicator of economic growth, meaning increases in GDP generally follow bull markets. This is because
Looking at India, the first half (H1) of the year 2014, the total mergers and acquisitions were valued at $17.1 billion which resulted in a 47.4 per cent increase when compared to first half of 2013. The H1 of 2013 recorded the value of M and A as $11.6 billion. The quarterly analysis shows that 78 percent
stock prices reflect investors‘ expectations for a
of the total H1 deals in 2014 occurred in the April to
company‘s future income.
June quarter and the transactions covered were worth
A high stock price today represents investors‘ belief in big profits tomorrow. 3|OCTOBER 2014
$3.7 billion. Pharmaceuticals, medical and biotech were the most active sectors during the first half of
2014 as they cornered 27 per cent of market share from deals worth $4.6 billion.
1. Sun pharma and Ranbaxy:
Top 3 Global Mergers and Acquisitions:
In India, Sun Pharma bought out Ranbaxy for $3.2
1. Time Warner Cable Inc. and Comcast Corp. Comcast corp. and Time Warner Cable closed the deal for about $45.2 billion in stock combining the world‘s two largest cable operators. The battle of the merger almost ran for 8 months and thus the transaction was completed. In the deal the Time Warner Cable shareholders would receive $158.82 a share in stock for their shares, about $23 a share above
where
TWC
has
been
trading.
TWC
shareholders would own about 23% of the combined entity. 2. Forest Laboratories inc. and Actavis PLC. On the July 1st, 2014, these two companies announced the completion of their transaction in $28 billion that includes cash as well as equity. This combination made it the fastest growing company in pharma sector and the predicted revenue for the year 2015 is estimated to be more than $15 billion. The deal set them off on a good front as the stocks of Actavis rose by % per cent to $201.47 and Forest stock moved up by 28 per cent to $91.04. 3. Facebook and Whatsapp: Early this year, a $19 billion transaction led to the acquisition of Whatsapp inc. by Facebook thus bringing the two most famous social Medias under a single ownership. Facebook said it would be paying for the deal with nearly 184 million shares, $4 billion in cash and nearly 46 million restricted stock units (RSUs).
4|OCTOBER 2014
Top 3 Indian mergers and acquisitions:
billion. The deal was an all-stock merger in which every 5 shares of Ranbaxy will fetch 4 shares of Sun Pharma.thus considering the share price immediately before the deal, shareholders of Ranbaxy would have got a premium of about 29.3 per cent.
JP Morgan, Barclays, Goldman Sachs and Co., Morgan Stanley etc. Impact of M&A: Not necessary that M and A always end up a happily ever after. Many times these mergers and acquisition lead to number of problems for eg. Ego clashes in the top level employees and probably conflict of interest in several matters which lead to the decline in
the
profitability of
the
company.
Moreover the transition phase that the employees have to go through may impact them negatively. Thus the entire purpose of mergers and acquisitions remain violated. In 2. Adani port and Dhamra Ports:
this process the shareholders are not really amplified that might bring down the company. Thus the
In the May of 2014, Adani ports acquired the Dhamra port based in Orrisa for around $1billion( Rs 5500 crore). The acquisition will help its total capacity increase to over 200 million tonnes by 2020 making it the leading private sector port. 3. Canada Pension Plan and Kotak Mahindra: Canada pension buys 50 lakhs shares of Kotak Bank for Rs.375 crores. The shares were purchased at an average price of Rs.714 per share. Financial Advisor League: M&A advisors, as experts who are familiar with sector ratios, percentages, trends, can readily position the business for sale as well as capture and defend higher valuations. As a guide for owners that are exploring an exit or wish to start building that often times elusive exit plan with the guidance of an M and A advisory firm. Some of the top advisory firms are
5|OCTOBER 2014
company has a lot to keep up even after the deal which really shows the true potential of the change brought by the merger and acquisition.
Technology
Android One It is rightly said ―Necessity is the mother of invention‖ which has stood true ever since time immemorial, surrounding us with all the comforts we have at present. We reside in the twenty first century, a century of modernization and globalization where technology has taken the lead and has become an indispensable part of our daily lives. One cannot imagine life without gadgets or in other words life would come to a complete standstill. There have been umpteen number of inventions and discoveries that has revolutionized the way the world works, one of
- Alisha Singh
Android One: Very recently Android extended its family by introducing Android one. Android one is an initiative undertaken by Google which aims to help the smart phone makers in building affordable and quality Android phones. In Google‘s words, it is a new family of Android devices, designed in collaboration with several manufacturers. All Android One devices run the latest version of Android, get software updates directly from Google, and come with a hardware package tuned for Android.
such invention is that of a mobile phone which has undergone a series of improvisations to make it one of the most ―undoable‖ gadget of all times, thereby
Benefits of Android One:
Regular and fast Android updates from Google. The software of Android One smart phones is
bringing in its wake the birth of Android.
managed by Google, so like Nexus smart phones,
Evolution of Android:
Android One phones too run on the latest version Android initially came into existence with the idea
of Android and will get Android version updates
that innovations are given adequate power and
within days of being officially unveiled by
freedom to create enthralling mobile applications while taking advantage of everything that the mobile
Google.
handset has to offer. Android is basically an operating
One was to reach out to the common masses,
system (O.S) specifically designed for mobiles based
which are still stuck on feature phones. Thus,
on the Linux Kernel developed by Google. It is
Android One phones are and will always be
designed primarily for touch screen mobile devices such as smart phones, tablets and so forth with specialized user interfaces for televisions, cars, and wrist watches. The OS uses touch inputs that loosely correspond to real-world actions, like swiping, tapping, pinching, and reverse pinching to manipulate on-screen objects, and along with a virtual keyboard. It has also been instrumental in gaming consoles, digital cameras, and other electronics. 6|OCTOBER 2014
The primary reason for Google to start Android
affordable, priced around $100.
Android One smart phone gets free data from telecom operators. In India, Google has partnered with Airtel to provide 200MB of free data for a period of six months to the prepaid account holders with Android One phones. This data can be used to download applications from Google Play. Also, the data used in downloading Android
updates for the first six months will also be free
similar features of hardware specifications also,
but only up to 100MB.
Google apps such as Gmail, Google Maps, YouTube,
Android one delivers better hardware performance
Google Search, and Google Translate are pre-loaded
rooted to certain specifications giving you the
on the phones. Apart from the above mentioned
ability to safely over clock your processor and
features, Airtel has also offered a promotion to reduce
push your hardware to new limits.
data costs for those who buy Android One phones.
Reasons as to why Android one was first launched in India? Sadly India is still under the banner of ―developing country‖ in terms of population, literacy, technology, economy and various other parameters. Even though smart phones no longer remain a luxurious gadget, more than 5 billion people do not own a smart phone. Google in its attempt to bridge the gap introduced Android one scheme which is specifically designed to create ―high-quality‖ phones for people on a budget.
With an Airtel SIM card, Android One users can get free over-the-air (OTA) updates, and 200MB per month worth of app downloads from Google Play for the first six months which would be excluded from their mobile data plan. Additionally, Google has also introduced a data compression feature on Android One's Chrome browser. Also, the search giant introduced the You Tube app which would get an offline video playback in India, allowing users to store videos via Wi-Fi on their Android device, and watch them later without data connectivity. Google
The first phones were released in partnership with
also wishes to expand its set of hardware partners for
Indian manufacturers Micromax, Karbonn, Spice and
the Android One initiative, including Acer, Alcatel
chipmaker MediaTek. The Spice Android One Dream
Onetouch,
Asus,
UNO MI-498, Micromax Canvas A1, and Karbonn
Panasonic,
and
Sparkle V all feature 4GB of storage and 1GB of
Qualcomm. The company also aspires to introduce
RAM, plus a microSD card slot up to 32GB.
Android One phones in Indonesia, the Philippines,
Other features include 1.3 GHz MediaTek quad-core
and additional countries in South Asia by the end of
processors, 4.5-inch screens, 854 x 480 pixel displays,
this year.
5MP rear cameras, 2MP front cameras, and 1700mAh
Market Penetration of Android One:
batteries. They all run on Android 4.4 KitKat, with prices starting at 6,299 Indian Rupee ($105 or £63). In addition, they each feature a removable battery, a built-in FM radio and a dual-SIM card slot - all features that are particularly popular in India. The
HTC, Xolo,
Intex, as
well
Lava, as
Lenovo, chipmaker
The main aim of market penetration is to get in quickly with the desired product or service in order to capture a large share of the market. Market penetration is also a measure of the percentage of the market that the product or service is able to capture.
move of launching Android one phone in India is a part of larger initiative to bring high-quality smart phones to as many people as possible. All 3 smart phones released under the banner of Android one bear 7|OCTOBER 2014
Android One program offers smart phones at affordable prices to price-conscious users in emerging markets. Unlike developed countries, where smart
revenue growth has slowed down. Much of that can be attributed to pricing pressure on ads and slower growth in search queries across the Internet. The Android One launch has aimed to combat that pressure with the increased users on its Android platform by 20%, not only has that potentially increased search queries, but the sale of apps through its Play Store has also grown. Conclusion: phone penetration is above 50%, penetration is below 25% in many developing countries. While the adoption of smart phones in developed countries fueled the first wave of global growth, strong demand in emerging markets will drive the next phase. By launching Android One, Google has opened the smart phone market to a new segment of lower-income customers who want to own a smart phone with the latest software and apps. According to World Bank, the per capita income in countries targeted by Google is between $1,046 and $4,125.
This launch has
presented an excellent opportunity for Google to capture market share and strengthen Android‘s ecosystem of devices in the developing countries. To capitalize on this opportunity, Google has tied up with three
budget
smart
phone
manufacturers
i.e.
Micromax, Spice and Karbonn. While the Android One devices are a step up from entry-level phones, these smart phones leverage the use of lower-cost components. Moreover, Google has followed aggressive pricing strategy or penetrative pricing policy by pricing Android One at a range lower than its competitors to heat up the competition and albeit at a lower price point. Also, over the past few quarters, Google‘s 8|OCTOBER 2014
As it is rightly quoted by Mr Sukant Ratnakar ―Do not get obsolete like an old technology, keep innovating yourself‖, similarly Android has stuck to this saying and has innovated itself keeping in pace with the changing times and needs of the people. Through its aggressive market penetration Android one has been successful in getting hold of the common masses‘ attention capturing a huge market share and has also been successful to bridge the gap between people of various incomes bringing about a revolution in the way world works thus ―changing the world with technology‖.
Risk Management
Fuel Hedging
- Avik Chakrabarty
In fuel-intensive arenas such as the aggregates
instrument that is equal and opposite of the
industry, where high and volatile fuel prices can have
company‘s exposure in the physical fuel market.
a significant impact on the bottom line, not to mention adding to the difficult task of budgeting for future fuel expenditures. If fuel costs are not actively managed, they can lead a company to exceed budget forecasts, or worse, lower profit margins or losses. How to develop a ―system‖ that will allow an accurate estimation of fuel costs for next month? What about the next quarter, or the next year?
Hedging works because the cash price and financial price of fuel tends to have a strong correlation to their respective counterparts. Even though the difference between the cash and financial prices may increase or decrease, the risk of an adverse change happening in this relationship is generally much less than the risk presented by not hedging. Hedging is not a means for an aggregate producer to gamble on the price of fuel.
Many factors affect fuel prices. However, economic
Speculators bet on the direction of fuel prices in hopes
conditions, storage inventories and weather, as well as
that they will be able to ―buy low and sell high‖.
the market‘s perception of these factors, are the
JET FUEL HEDGING BACKGROUND
primary factor that drive fuel prices. Hedging allows market participants (companies that consume large quantities
of
diesel
fuel
and
other
energy
commodities) to lock in prices and margins in advance, while reducing the potential impact of volatile fuel prices.
The cost of fuel hedging depends on the predicted future price of fuel. Airlines may place hedges either based on future prices of jet fuel or on future prices of crude oil. Because crude oil is the source of jet fuel, the prices of crude oil and jet fuel are normally correlated. However, other factors, such as difficulties
The fluctuating price of fuel can present a large financial risk that have a significant impact on the
regarding refinery capacity, may cause unusual divergence in the trends of crude oil and jet fuel.
bottom line that is the primary reason why many large, fuel companies hedge their fuel cost. Another reason is to improve and maintain the competiveness of the firm. Being able to know and/or manage fuel costs can give a company a competitive advantage. Hedging reduces exposure to price risk by shifting that risk to companies that have opposite risk profiles or to investors who are willing to accept the risk in exchange for profit opportunity. Fuel hedging involves establishing a position in a financial
A company that does not hedge its fuel costs generally believes one, if not both, of the following: 1. The Company has the ability to pass on any and all increases in fuel prices to their customers, without a negative impact on their profit margins. 2. The company is confident that fuel prices are going to fall and is comfortable paying a higher price for fuel if, in fact, their analysis proves to be incorrect. Typically, airlines will hedge only a certain portion of their fuel requirements for a certain period. Often,
9|OCTOBER 2014
contracts for portions of an airline's jet fuel needs will
(Dh442.60) a barrel compared to $130.73 a year
overlap, with different levels of hedging expiring over
earlier, according to data from the International Air
time.
Transport Association (IATA). Fuel hedging is where
During the 2009-2010 periods, the studies for the airline industry have shown the average hedging ratio to be 64%. Especially during the peak stress periods, the ratio tends to increase. Southwest Airlines has tended to hedge a greater portion of its fuel needs than
airlines purchase fuel in advance at a fixed price in effort to protect themselves from shock increases in prices. Emirates, which do not hedge now and etihad airways which does both have decided not to change their strategies although the fuel prices are falling
other major U.S. domestic carriers. Between 1999 and
Over the 2013-2014 financial year, Emirates‘ fuel bill
2008, Southwest saved approximately $3.5 billion
increased by 10 per cent to Dh30.7 billion ($8.4
through fuel hedging.
billion).
Emirates Stories: Sheikh Ahmed
Expensive and Risky:
Dubai government-owned Emirates‘ profits slumped
United States-based analyst Addison Schonland,
76 percent in the first half of the 2011 fiscal year as
founder and partner at AirInsight, said that hedging is
fuel costs and currency fluctuations hit the carrier.
both expensive and risky.
Emirates said fuel costs took up 41 percent of total
―Once bought, you hope prices rise to offset the cost
operating costs in its half-year results for the year
of the hedge, or you‘re underwater,‖ he said.
ending March 31, 2012, up from 33percent a year before. Before that emirates used to have a hedging program but then they were looking at programs to see what exactly should be done.
Etihad was founded in 2003, but the firm's hedging programme began more recently, in 2007. Since then, the quantity of jet fuel hedged under the programme has grown from 6.5 million barrels (bbls) to reach
After a turbulent 2011 partly due to unrest in the Middle East, rising fuel prices and financial turmoil in Europe signal big problems for the international
around 23.8 million (bbls) in 2012. As of mid-June, it had hedged approximately 17.2 million (bbls) of its expected jet fuel consumption in 2013.
airline industry in 2012 which caused forced a drop in the number of flights. Sheikh Ahmed chairman of emirates is of the opinion that all the issues concerning airlines is the fuel price.
"Our board has given us a mandate to manage the price risk on jet fuel, and we follow a conservative approach with a focus on risk reduction. The airline industry is a volatile and commercially risky industry,
When Fuel Prices Fell:
so if you can mitigate some of those risks – and fuel is
Airlines in the UAE are not shifting from their fuel
between 35-40% of most airlines' exposures – you're
hedging strategies despite jet fuel prices being down
doing well," says Ricky Thirion, Etihads group
8.4 per cent compared to a year ago. As of August 29,
treasurer.
jet fuel sold at a global average of $120.60 10 | O C T O B E R 2 0 1 4
Brent Crude prices dropping below $90 a barrel for the first time in two years and Brent Crude, is a global market indicator for oil prices . The price drop comes amid general concerns over weakening demand globally and oversupply from the U.S. because of increasing shale oil production. It‘s ―a perfect storm‖ with demand being impacted by Europe‘s near recession and lower expectations for oil consumption in China. At the Etihad is fiercely independent in its hedging activities and refuses to be guided by derivatives dealers
same time, production in the U.S. has soared by over 3 million barrels per day in the last two years.
offering it more complex ways to hedge. Its hedging programme, which is set by the company's board of directors, uses a combination of plain vanilla overthe-counter swaps, as well as collars. Collars involve buying low-strike put options while selling high-strike calls, effectively limiting the firm's exposure to a range between the two strikes. Escalating violence in Iraq and Libya, as well tensions between Ukraine and Russia, have not led to an expected increase in fuel prices. Analysts say weakened global demand, especially slower growth out of China and growth of the United States shale industry is behind the decline in prices.
In addition, some market players are wondering about the traditional stabilizing role that Saudi Arabia has played in the oil markets, suggesting even that Saudi Arabia might let oil prices drop as a way to fight against the U.S. shale revolution. The
geopolitical
backdrop
for
this
oil
price
weakness—fighting in Iraq and Libya, tensions in Russia and Ukraine—has not spooked markets or led yet to a fall in production in these producing countries. The big drop in the price of oil could, if sustained, fuel the U.S. economy. It might eventually help the stock market, but it certainly didn‘t on 9th October.
Airlines seem less worried about price spikes than before — Iraq, Syria, Iran don‘t seem upset anymore
No Change in Strategies:
as they once were. If prices fall, airlines may wait to
Not all airlines can afford to lock into hedge contracts
see how far this could go — most are likely to assume
while others have made huge competitive gains by
markets will soften even more.
doing so, some have equally had their fingers burned by engaging in the practice.
11 | O C T O B E R 2 0 1 4
Emirates, which used to have a hedging policy, wrote
good move. Other airlines executives are taking a
down Dh1.57 billion in fuel hedging losses for the
cautious approach which is to keep an eye on Delta
2008-2009 financial year after it signed fuel contracts
Air success.
before the global economic crisis, which drove oil prices down.
Mike Corley, the chief executive of Mercatus Energy, an independent energy hedging, trading and risk
Hedging is an art not a science, while it can at best
management advisory firm, says airlines should take a
lead to some cost savings for an airline, which assists
more active approach to hedging fuel costs. He gave
in fuel budget planning.
the example of call options, which can be expensive
Dubai discount carrier fly dubai is not changing its fuel hedging policy that it started in the last quarter of
but then protect airlines from rises in fuel prices, whilst also letting them track falls in the oil price.
2013. Fuel is the airline‘s largest operating cost at
Airlines are very good at mitigating risk across the
39.5 per cent and it has hedged 30 per cent of fuel
business but managing commodity price risk is often
requirements for 2014. Air Arabia, which has an
an area where they fall short. However, some airlines,
active fuel hedging policy, declined to comment on its
badly burned from hedging losses in volatile oil
strategy, citing commercial reasons. A spokesperson
markets, have scaled back hedging activities and more
for Qatar Airways said they were unable to comment
may follow.
on commercial decisions when asked about its fuel hedging strategy. Combating Fuel Prices:
US Airways, which stopped hedging, and after merger with American Airlines, "We haven't entered any hedges since the merger,
Taking out complex call options or even buying a
and the hedges that were in place under American are
refinery are some of the measures airlines should
still in place. At this time we don't intend to enter into
consider as they try to combat volatile oil prices. Jet
any additional transactions," said chief executive
fuel can account for anywhere from between 20 and
Doug Parker
50 percent of an airline's operating costs, and
Leading some to question what American‘s future
predicting oil prices is a headache. No one knows where oil prices will be in six months, let alone 10 years away. Oil prices are one of the biggest risk factors in the business. Delta Air Lines (DAL.N) bought its own refinery in 2012 to address the risks from fuel prices. Even though the refinery turned only a small profit for the first time in the third quarter of 2013, over 60 percent of air finance executives believed this was a 12 | O C T O B E R 2 0 1 4
hedging strategy will be.
Cover Story
India’s Manufacturing Sector
-Srishti Karmakar
A very important determinant of a developing
its share of glory, it cannot provide employment to the
country‘s economy is its manufacturing sector.
teeming masses. The scale and nature of employment
Manufacturing holds a key position in the Indian
that is required to employ people with limited skills
economy, accounting for nearly 16 per cent of real
and education can only be provided by mid- and low-
GDP and employing about 12.0 per cent of India‘s
end manufacturing.
labor force. Growth in the sector has been matching the strong pace in overall GDP growth over the past few years. Consequently, its share in the economy has marginally increased in last 5 years – to 15.4 per cent from 15.3 per cent. Growth however has remained below that of services, an issue that has not escaped the attention of policy makers in the country. Strong growth has been accompanied by a change in the nature of the sector –evolving from a public sector dominated set-up to more private enterprise driven one with global ambitions. In fact, according to UNIDO, India (with the exception of China) is currently the largest producer of textiles, chemical products, pharmaceuticals, basic metals, general machinery and equipment, and electrical machinery. In the coming year, the sector‘s importance to the domestic and global economy is set to increase even further as a combination of supply-side advantages, policy initiatives, and private sector efforts set India
After India liberalized in 1991, the services sector was long the fastest growing part of the economy, contributing significantly to GDP, economic growth, international trade and investment. Manufacturing contributes just 16 percent to India‘s GDP, compared to a 56.5 percent contribution by services. According
on the path to a global manufacturing hub.
to the Reserve Bank of India (RBI), India‘s IT/BPO in
India‘s unique positioning in the global marketplace
2012-13. While manufacturing exports continue to
as a services-led economy is in contrast to most other
perform well, most of it remains in the skill-intensive
developing economies, including China, which took
sector (automotive, engineering, etc.). This does
the traditional route of labor-intensive manufacturing
nothing for the large swathe of low-skilled workers
followed up by higher value added part-labor, part-
who are either unemployed or laboring away in
capital intensive manufacturing. This has come back
hazardous, inhumane conditions beyond the purview
to haunt India. While the services sector – employing
of established formal state regulations. Moreover,
decently skilled English-speaking workers – has had 13 | O C T O B E R 2 0 1 4
manufactured goods as a share of total Indian exports
at 53 points in July from 51.5 in June. But then there
pales in comparison to the level in China.
is decline in the subsequent months.
We can also compare the index of industrial
The policymaking focus has now finally shifted to the
production (IIP) of both the countries to see the
manufacturing sector, with the government instituting
difference in the industrial activity.
a National Manufacturing Policy in 2011. The policy
The Indian industry ended the fiscal year 2013-14 on a negative note. Index of Industrial Production (IIP), the official measure of industrial activity in India,
laid out plans to boost the manufacturing sector by raising its contribution to GDP to 25 percent and creating 100 million new jobs by 2025.
declined by 0.5 per cent in March 2014 compared to
Even today, India‘s share of global manufacturing
the year-ago month. The main culprit behind this fall
stands at little over 2 percent. China has meanwhile
was the manufacturing sector. Continuing the trend
over the years positioned itself as the workshop of the
seen in the past few months, the manufacturing sector
world, accounting for 22.4 percent of global
registered a 1.2 per cent fall in its output in March
manufacturing. For India to achieve its stated goals of
2014. Like preceding months, the fall in March was
reviving the manufacturing sector and providing jobs
also led by the capital goods and consumer durables
to the tens of millions of unemployed youth, IT will
sectors.
need
Manufacturing activities in India rose the most in 17 months in July 2014, on increased orders, as per the HSBC Purchasing Managers' Index (PMI). PMI was 14 | O C T O B E R 2 0 1 4
massive
investment,
including
major
contributions from foreign investors. What will be particularly helpful to India‘s job creation needs is vertical foreign direct investment (FDI), wherein
will absorb the rural labor surplus that is migrating to the cities by providing employment technology
in
labor-intensive,
intensive
less
manufacturing,
regulated by humane labor laws catering to the contemporary needs of the economy. India‘s manufacturing sector is vital for its economic progress. Presently, the sector is an attractive hub for foreign investments. production in the host economy is intended not just to serve the local (host) economy but also global exports. Such FDI is more employment intensive and also responds positively to quality infrastructure. This would also ensure that India is seen as more than just a consumer economy, where the primary category of FDI is horizontal or market-seeking.
Several
mobile
phone,
luxury and automobile brands, among others, have set up or are looking to establish their manufacturing bases in the country. Hi-tech exports are also predicted to enhance India‘s manufacturing sector. Pharmaceuticals and electronic goods dominate exports of hi-tech products. And that is why the Make in India campaign was launched by Mr. Modi which
India may be able to overtake China due the various
identified twenty five thrust sectors where potential
advantages it has developed over the years. The rupee
investment and manufacturing of products can be
has fallen against dollar, making Indian export more
fruitful. Railways, tourism and hospitality, wellness,
competitive, while yuan is rising. China does not have
leather,
enough workers for many low value added industries.
pharmaceuticals, and textiles are some of them. With
The Chinese worker aspires to work in hi-tech
textiles and garments having a significant contribution
factories. Chinese wages are rising over 10 percent a
to the GDP of the nation and the country boasting to
year and Indian labor cost is less in many of the
be the second largest manufacturer of textile products,
sectors. Freight charges from India to some part of the
there are ample opportunities for investors to explore.
world are lower, for example freight cost to UK from Shanghai can be five to seven percent higher than from Chennai. The political risk has led other countries to look for options other than China. The most urgent need is to upgrade India‘s physical infrastructure to encourage domestic and foreign direct investment in the manufacturing sector. This
15 | O C T O B E R 2 0 1 4
aviation,
ports,
chemicals,
IT,
Cover Story Extended
Make in India
- Sameena Usman
India has an availability of abundant skilled, talented,
the pressure on our trade deficit; and most
disciplined labor and a large domestic market. An
importantly, it will help augment and diversify our
effective use of this strength for industrial and
exports from the manufacturing sector in near future if
technological development of the nation with the help
the campaign is implemented effectively. Also, it is
of foreign investments and progressively developing
expected that the campaign will help in procuring
India as a global manufacturing hub is the aim of
latest technology into the country and at last but not
'Make
in
campaign
India'
the least; it is possible
envisioned
that
such
local
and launched by our
manufacturing will help
present Prime Minister.
reduce few of the trade frictions we have with
It is believed that for
other nations.
long, Indian economy has
neglected
It is a fact that the so-
manufacturing
called
(currently only 15% of
countries
GDP
world build themselves
is
manufacturing
from sector)
developed of
up from
today‘s
the poorer,
and relied more on the
agrarian economies that
service
for
they were to the rich,
growth, and in this
service-dominant
sector
context the ambitious
economies
'Make
through
in
India'
of a
of
today rigorous
campaign is a welcome
phase
energetic
move and also one of
industrialization, which
the effective ways to generate employment for the
brought in billions of labor hands into factories and
large pool of young people joining the labor force
manufacturing sites and also through a cycle of new
every year.
discoveries and technological-progress. Thus Make in
Other than enhancing job opportunities within the country to a great extent; this emphasis in our foreign
India is definitively a corrective step towards a prosperous economy.
investment policy is also aimed to serve other
Thus, this campaign will be a win-win for both
multiple objectives such as minimizing the imports of
foreign direct investors and also for our domestic
various products into the country, henceforth reducing
welfare, both optimally utilizing the nation‘s rich
16 | O C T O B E R 2 0 1 4
resources and potential, hence the call ‗come, MAKE
Also, encouragement of domestic manufacturing of
IN INDIA'!
world-class standards, either by domestic or foreign
However, the implementation of this nationwide collective vision of making India a powerful
investors or both, has not been a major objective of our foreign trade policy so far.
manufacturing hub has its own share of hurdles.
Hence, unfortunately, a web of policies, laws, rules,
Undoubtedly several policies and mindsets stand as
regulations and variable practices, have earned India a
obstacles to translate 'Make in India' into a reality and
poor ranking of 134 out of 189 countries in the World
thus seek resolution. One most crucial among the
Bank‘s Ease of Doing Business in India index.
various factors is the uncertainty and complexity in our taxation system. The production shutdown of Nokia (Finland's Company) in India, after a troubled
We are well aware that the ease of doing business will not improve automatically. It needs a structural revolution and a holistic approach.
history of protracted tax dispute with the Indian Government is an example of one cautionary tale. One of Nokia's largest unit situated in Chennai that
Let alone the foreign investors, making in India has become a pipedream even for our very own Indian
manufactured the immensely popular Nokia‘s first
companies. Numerous startups are launched every
‗Made-in-India‘ model Nokia 1100, a cheap and
month in India but just half of these fledging ventures
durable cell phone that once became the largest selling handset in the country will cease production from coming November and this comes as an embarrassing
moment
just
as
Prime
Minister
Narendra Modi is inviting investors around the world to come and make in India, as the Finnish company in a statement blamed India government for the closure. Adding to the list of examples, the Vodafone case is also potential enough to make oversea investors shy away. Vodafone India has recently asked the Department
of
Telecommunications
(DoT)
to
immediately allocate airwaves it had won in February through a government-led auction adding that delay in earmarking (of airwaves) will seriously affect Vodafone India's services in major cities which the company cannot afford and it requires necessary corrective steps and actions from DoT.
make it past the first year laid low by several issues. The 3Ls –Land, labor and Laws are the important issues that need quicker resolutions. Large reforms in labor laws, foreign trade policies, simplification of procedures to start or end a business, fair and non discriminatory treatments, and stability in rules are some of the many needful requirements. Keeping this in mind, the Government is trying to address the issues as quickly. According to the new scheme, starting new business which used to take months is now reduced to less than 72 hours. In addition to that, a government official said, "One very strong feedback received was that the special incentives were released very late and this was hampering business," In response, the government is planning to reduce the time span within which financial support is provided to investors. However, smart phone vendors say these government steps alone won't make them consider local manufacturing.
17 | O C T O B E R 2 0 1 4
"It will take much more than just monetary support to
Thus as witnessed, several challenges lie ahead in
set up a base in the country," told a senior executive
successful articulation of the campaign and thus, the
of a smart phone vendor. Thus, the policy must also
Make in India project requires a strong will, a national
encourage freer trade of capital goods, industrial raw
drive and a huge change in mindset.
materials, components, tools and devices, as well as technology-laden imports, with a view to upgrading the quality and competitiveness of our domestic manufacturing.
Also, an important aspect is that India needs to focus on imparting continual education / knowledge on new skills instead of solely depending upon hard learned old skills because skills are transient and they become
In order for 'Make in India' initiative to be a "win-
redundant with changing technology, thus our
win" proposition, the foreign investors should not
workforce needs to keep updating itself on new skills
treat India merely as a market, but should focus on
in
turning it to a manufacturing hub with a view to
requirements.
increase the purchasing power of Indians. However, to revive manufacturing in India isn't easy as over the years we have lost ground in this area. Manufacturing in India is slowly dying, and while the impact of it is not visible, the signs are clear. For example: In Kerala , Manufacturing industries have got away and now with the shortage of labor, it would be next to impossible to regain lost ground in manufacturing. Even after giving the minimum wage set by the Kerala labor department of Rs 7,500 per month, hands are few. Apparel Park depends on labor imported from Bengal and other poorer states to woman their factories. The strange thing about Kerala is that the very person, who refuses to do manual labor there, has no problem in doing the same in the Gulf, under harsher conditions. As long as the Gulf countries remain a labor colony for Kerala youth, domestic industrial sector has no chance to grow. Likewise, several manufacturing companies in India have become just traders of branded goods made in China as it‘s a simpler business.
18 | O C T O B E R 2 0 1 4
order
to
meet
the
emerging
economy‘s
"The next generation has the opportunity to bring India to the world and bring the world to India" said Facebook co-founder Mark Zuckerberg in his recent maiden trip to India that signaled an enthusiastic leap to the vision of Digital India. Let's hope that the 'Make in India' campaign too will gradually take a leap overcoming the obstacles making India a competitive and effective manufacturing powerhouse and delivering to the expectations aroused with the campaign in the hearts of billions of Indians.
Markets
Market Watch
-Ripu Tandon
A downturn was witnessed in the stock markets over
even after global volatilities and weaknesses that have
the past month. These can be seen due to various
risen due to geopolitical tensions. As per the Mr.
aspects in the international markets such as the
D.K. Agarwal, CMD at SMC Investments and
influence of ISIS on Iraq and Syria leading to changes
Advisors Ltd. the recent consolidation in the market
in the Oil prices. Though the market has seen its own
needs to look as having long term benefits for growth
ups and downs over the past month from September
in India.
08, 2014 onwards both BSE Sensex and CNX Nifty have moved more cautiously over the period of the past month. This was a period where Sensex and Nifty struggled, however, it were the midcaps that were outperforming. One of the key reasons was the Indian Prime Minister, Mr. Narendra Modi‘s trip to the United States of America. Though the meeting with the President of the United States, Mr. Barack Obama re-energized the strategic relationship between the two largest democracies in the world, the markets
Infosys reported a profit of 7% with an increase in the revenues by 3.1% and surpassing the expectations among investors. According to the estimates provided by CNBC-TV18 poll estimates, rupee revenue was expected at Rs. 13,307 crore and dollar revenue at USD 2,195 million. Dr. Vishal Sikka sees digital transformation driving the growth of the company going forward. Also, it is evident that the Information Technology sector has been among the top gainers over the previous month.
gave a half-hearted response. In the recent events, Yahoo would be laying off The markets have more or less moved in a range of a negative bias for a near period of seven days. One of the most interesting aspects was the factor that though the markets were cautious during this time, the market participation remained high as the trading volume surged. As per Mr. Dipan Mehta, Member of BSE and NSE, the sideways movement could be a consolidation or distribution phase. The markets have been factored under the pro-growth policies under the current rule bringing in the positive factors and the negative factors of de-allocation of coal blocks.
around 300 employees in India in a restructuring effort. It was seen for years that Yahoo was building its Bangalore operations as one of its global technology centrepieces.
However, the company
would be pulling back to its Sunnyvale, California its headquarters and laying off large number of employees in India. Also, on the other hand, Nokia would be shutting down its production in India starting from November 1, 2014.
The following
decision was taken as Microsoft had terminated mobile purchase agreement from the factory & hence
As per the analysts, investments in various sectors
is left with no business. Though the exact number of
such as infrastructure, IT telecom and energy would
employees could not be ascertained, around 6600
revive the growth in India. The investor sentiments
were employed at the factory, about 5000 opted for
and consolidation in the Indian Markets remain intact
voluntary retirement.
19 | O C T O B E R 2 0 1 4
continue to provide liquidity under overnight repos at 0.25% of the bank wise net demand & time liabilities (NDTL) at the liquidity adjustment facility (LAF) under 7-day, & 14day term repos up to 0.75% of the NDTL of banking system through auctions. It was also decided to Though the Rupee fell against the dollar in mid-
continue daily one-day term repos and reverse repos
September, it has been rolling back in the month of
to smooth liquidity.
October.
This can be due to cautious market
sentiments, but positive sentiments predict Indian Rupee becoming strong in the long run, considering a stable government.
Considering the macroeconomic picture, the U.S. economy unlike the European economy seems to be stable. The major development during the month of September was the rise of US dollar amid growing
There hasn‘t been any changes be seen in the
confidence that US Official interest rates may rise
monetary policies over the week.
sometime next year.
As per the
Market attention has turned
Monetary Policy statement, a high Q1 GDP may not
lately to Europe‘s economic weaknesses which in turn
be sustained in Q2 and Q3. Also, the outlook of
could worsen the signs of data weakness in many
growth in Q4 looks promising. The next bi-monthly
emerging countries exporting strongly to Europe. As
policy statement would be on December 02, 2014. As
on October 10, 2014, the global stocks seems to falter,
per the further Bi-Monthly monetary policy statement
as measured by MSCI All-country world index fell to
made on the basis of the current and evolving macro-
a six-month low as the investors seemed worried
economic situation, the repo rate under the liquidity
about the widespread of an economic slowdown while
adjustment facility was kept unchanged at 8% as well
the U.S. monetary stimulus nears its end. With the
as the Cash Reserve Ratio at 4%.
However, it was
global economy stuttering, the International Monetary
decided to reduce the liquidity provided under the
Fund has been a prime mover in calling for some
export credit refinance facility, this was done from
governments in easing their fixation over debt and
32% of eligible export credit outsourcing to 15% with
investing in economically worthy projects.
effect from October 10, 2014. Also, the RBI would
20 | O C T O B E R 2 0 1 4
Also, the demand for gold is predicted to increase
in
India
alongside
with
the
prices, moving ahead of the festive season. The
main
factors
influencing the price of gold steady
has
been
the
inflow
of
buying jewellers and retailers which has been triggered by the festive season and at the same time a weakening rupee against
the
dollar
making imports costlier. There
have
been
concerns regarding the global economy that are putting a damper on the China overtook the U.S. to become the world‘s largest economy with a worth of $17.6 trillion as per the figures from the International Monetary Fund. The numbers were based on purchasing power parity making adjustments for the facts that goods are cheaper in countries such as China, relatively to the U.S. Brent Crude Oil fell to its lowest since 2010 which dropped below $90 a barrel. Saudi Arabia said that it upped the production levels the previous month. The production levels were raised by 100,000 barrels per day in the month of September and also raising doubts if the world‘s top exporter would be prepared on taking a unilateral decision. The demand for U.S. jewellery grew for the 5th consecutive quarter, leading to the growth in demand for Gold. 21 | O C T O B E R 2 0 1 4
equities and commodities markets.
An end to the
quantitative easing in the U.S. also adding to jitters.
Global Epidemic
Ebola Virus Scare
-Apoorva Anusha
In last few days all the news papers are flooded with
given oral rehydration therapy or intravenous fluids.
question of whether Ebola is affecting the financial
This supportive care improves outcomes. The disease
market or not. But the main question for common
has a high risk of death. 50 per cent to 90 per cent
people is that what is this Ebola and how can a viral
people who are infected with this virus are met to
disease affect financial market. This disease is
death. As of 28th September 2014, 7157 suspected
unfortunately increasing the death rate which will not
cases, 3330 resulted in death. Still efforts are made to
only affect the global market but the local economies
develop a vaccine to fight against this deadly disease,
will also suffer because today the market is goaded by
however no medicine yet exists. In this scenario, were
the people‘s emotion. If price of consumable goods
almost half of the world is fighting against this deadly
decrease people are very happy and praise the
viral disease, where the life expectancy rate has come
government as they are unaware of the reason for
down, is this affecting the financial market?? For
reduced price. It may be a sign of slowing down of
historical perspective on what a worldwide Ebola
world economy.
outbreak might mean for investors, it‘s better to
EBOLA VIRUS DISEASE (EVD) or simply Ebola is a virus disease caused to humans and other primates
consider the stock market‘s reaction to the great bird flu pandemic of 2013.
by Ebola virus. Fever, sore throat, muscle pain and
There was a slowdown in the economic activity and
headaches are the common symptoms which start
GDP was reduced. And not only this the business
after two days to three weeks after contracting the
confidence was also dented, the supply of labour was
virus.
restricted owing to illness, mortality and absenteeism
No specific treatment for the disease is yet available. People who are infected with this disease are either
spurred by fear of contracting the disease, supply chain were also affected as transportation system was disrupted. As stocks are hit by fears, it can be said that financial market effect could be bigger than that of SARS a decade ago. The Ebola outbreak has drawn comparison with Asia‘s outbreak of the airborne SARS virus in 2003. At that time the impact was short lived but it doesn‘t seem the same this time because of the pronounced fall in retail sales, tourism and china stock exchange. Earlier this disease was confined to areas like Gunea, Liberia and Sierra Leone but now it‘s
22 | O C T O B E R 2 0 1 4
spreading outside Africa. And the impact of financial
The
market mainly depends on it‘s spread or reach in the
transportation. There was a drastic fall in shares of
outside world. If the virus becomes endemic in its
airlines and other transportation means. The NYSE
current locations, this would greatly increase its
ARCA airlines index came down 3.1 percent which is
threat. More than 3330 people have so far died from
the biggest percentage decline since January 2014. As
Ebola in the West African countries but it is felt that
compared to large caps, small caps are more affected.
many more will suffer the economic consequences.
The small caps have lost their leadership and the
Government reckons the worst of those effects are yet
reason is the lack of liquidity. Large caps are not that
to be felt, but they are still busy trying to calculate
affected because there is sufficient liquidity with them
what the outbreak is going to cost them. The post-
now. The latest decline followed signs of an uneven
conflict country has been growing at upward of 8 per
expansion in US economy was S&P500‘s which was
cent over the last couple of years, but same thing
third in a row. Growth in US factory activity slowed
cannot be expected again. The government is still
more than expected in September even as hiring in the
number-crunching with the International Monetary
private sector accelerated. Among airlines stock,
Fund, but it reckons that Ebola will share more than 2
south-west airlines fell 3.6 percent to $32.55 and delta
per cent of growth rates this year, putting estimates at
airlines dropped 3.5 percent to $34.90. The Dow
3.5 per cent. The finance ministry is bracing itself for
Jones industrial average fell 238.19 points. About 8
up to $30m in lost revenues. A ‗significant‘ amount, it
billion shares changed hands on US Exchanges.
says, in the context of its meagre budget. Add to that
Where the entire sectors share was going down there
the high cost of fighting the virus, and the country
were two sectors whose shares were climbing high.
will run up a big fiscal deficit, even in light of
One was pharmaceutical sector and the other was
international assistance. The government is putting in
agricultural sector. Shares of drug makers with Ebola
place fiscal austerity measures to compensate the loss
treatments in the pipelines rose up sharply. US shares
caused due to extra cost incurred in fighting against
of Tekmira Pharmaceuticals climbed 18.2 percent.
Ebola, including suspending all official foreign travel.
The largest percentage gainer on the New York Stock
But it may still have to turn to the IMF for additional
Exchange was China Green Agriculture, which rose
help.
13.64% to $2.25, while the largest percentage decliner
Now, the government‘s priority should be to allocate
was Centrus Energy, which fell 25.27% to $7.63.
sufficient money to the health care sector rather than
All we can really say with confidence is that a
paying its public servants. It‘s more important to
pandemic of such proportions doesn‘t guarantee a
focus towards the health care sector instead of any
stock market crash. But isn‘t that all a contrarian
other welfare benefit at this particular crucial time.
needs to say in response to those who think the world
And then next weightage can be given to enforce
would come to an end.
quarantines and curfews.
23 | O C T O B E R 2 0 1 4
Ebola
news
has
mainly
affected
the
International Desk
Russian Economy in Doldrums? Nonetheless!
World
Trade
has
been
-Sachi Kheskani losing
Before analysing the state of Russian economy it is
momentum! This news has made headlines when
quintessential to know about Crimean crisis or
World Trade Organisation (hereinafter referred to as
Ukraine Crisis. The main issue is whether Crimea is a
"WTO") confirmed a reduction in its forecast for 2014
part of Russia or Ukraine? As per Public International
from 4.6% to 3.1% and for 2015 from 5.3% to 4%.
Law, there are two types of jurisdiction: de facto (by
Russia has been in news lately for its tumbling stock
facts) and de jure (as per law). Ukraine has De jure
markets, recession and economic pain caused due to
jurisdiction whereas Russia has De facto jurisdiction
Ukraine. Before coming, to the crux of it, let us
over Crimea. Russia has many benefits in terms of
understand the Russian economy and its history.
exports as all its trade is via Mediterranean Sea and it
Speaking Geographically, on spanning 9 time zones, Russia stands the largest country on earth in terms of
exports gas to various countries via Ukrainian pipelines.
surface area. Earlier Russia was a communist which
Moreover Russia is hostile towards Ukraine's attempts
converted to a mixed economy with state ownership
to achieve European Integration. Russia opposes
in strategic areas of the economy. Much of Russian
Ukrainian integration with the West for various
industry and agriculture, with notable exceptions in
reasons foremost being fear of NATO expanding to
the energy and defence-related sectors were privatized
Russia's Western borders. For which at the end of
in 1990's. Russia emerged victorious from a decade of
2013, protests began in Ukraine after President Viktor
post-Soviet economic and political turmoil to reassert
Yanukovych postponed the signing of Ukraine–
itself as a "World power." It withstood Economic
European Union Association Agreement under severe
collapse of 1998 as it generated income from its vast
economic
natural resources. These vast natural resources
previously he had considered this agreement one of
included oil, natural gas and precious metals and they
his key objectives and stated it on multiple occasions.
form a major chunk of Russian Exports. Russia
Instead of European deal, Yanukovych struck a deal
stands second only to US when it comes to
with Putin which meant, among other things, that
manufacturing of sophisticated arms including combat
Russia would buy $15 billion in Ukrainian bonds, and
aircraft, air defence systems, ships and submarines.
discount gas prices to Ukraine by one-third.
As per International Monetary Fund (IMF) report, the Russian economy was already in recession from early 2014 mainly as a result of the 2014 Crimean crisis. But this turned out to be false and the IMF revised it's rhetoric to close to being in recession and a forecast of 0.2% growth in 2014 and 1.0% through 2015. 24 | O C T O B E R 2 0 1 4
pressure
from
Russia,
even
though
Opposition leaders were suspicious of the true cost to Ukraine for Russian support. The majority of protesters held liberal pro-European values which instigated the entire incident.
After Effects:
Chart 1: Looking at the after effects of Ukraine crisis,
The United States government imposed sanctions against persons they deem to have violated or assisted in the violation of Ukraine's sovereignty. The European Union suspended talks with Russia on economic and visa related matters; and is considering more stringent sanctions against Russia in the near future,
including
asset
freezes.
While
Japan
announced sanctions which include suspension of talks relating to military, space, investment, and visa requirements. On March 12, the European Parliament rejected the upcoming referendum on independence in
Economists have reacted by slashing their forecasts for economic growth in Russia. Expectations for consumer price inflation this year are considerably higher than they were a few months ago, while expectations for GDP growth and the current account surplus are lower. Russia's recent incursion into Ukraine has sparked significant turmoil in Russian financial markets and capital outflows, both of which have in turn clouded the outlook for economic growth. Chart 2: The U.S. dollar-Russian ruble exchange rate
Crimea, which they saw as manipulated and contrary to international and Ukrainian law. The G7 bloc of developed nations (the G8 minus Russia) made a joint statement condemning Russia and announced that they will suspend preparations for the upcoming G8 summit in Sochi in June. NATO condemned Russia's military escalation in Crimea and stated that it was breach of international law while the Council of
(number of rubles worth one dollar). A weaker ruble is not necessarily bad for the Russian
Europe expressed its full support for the territorial integrity and national unity of Ukraine. China recognizes independence, sovereignty and territorial integrity of Ukraine. Increased geopolitical risks and the new environment of policy uncertainty and sanctions had an additional negative impact on economic activities in the first half
economy in and of itself, but the volatility associated
of 2014. It hit the economy through three channels:
with the move is.
(1) increased volatility on the exchange rate market and a significant depreciation of the national
Chart 3 illustrates the associated plunge in the Russian stock market.
currency; (2) limited access to international financial markets for banks and non-financial corporations, and (3) suppressed business and consumer confidence about future growth prospects.
As a result of the crisis, the two leading indexes of the Moscow Exchange fell in trading on March 3,2014, the MICEX 10 declined 10.79 percent, equating to a loss in market capitalization of nearly $60 billion, and
25 | O C T O B E R 2 0 1 4
been growing, while it was oil and gas investment that was holding back overall investment activity. A positive view on 2014 GDP was critically dependent on the assumption that government-led oil and gas investment would come out of its 2013 doldrums, with new projects coming on stream. But due to lack the RTS Index declined 12.01 percent to its lowest
of confidence in business investment growth is
level since September 2009. The next day, though, the
doubtful.
MICEX rose 5.25%, recovering part of the losses.
Consumer spending will also feel the pain. While
Chart 4 displays the concurrent surge in Russian
consumption is the only bright spot in Russian macro,
borrowing costs.
it has been on a downtrend recently as fears of a
In response to this and the decline of the ruble, the
consumer boom turning into a bubble have led to more restrictive regulatory behaviour. Now broader uncertainty will further weigh on real private consumption spending, which we cut to 3.2% from 4.2% previously. In 2015 Russia will need an oil price of about $105 a barrel to balance its budget (see chart). But crude is currently trading in the mid-$90s, down by about 10%
Central Bank of Russia raised its interest rate from 5.5
since May. Weak demand from China and healthy
to 7.0% and spent up to US$12 billion in reserves to
supply from America help explain the drop.
bolster the currency. The possibility for international sanctions against Russia has also been raised. The rate hike "will seriously damage the country's economic growth through a sharp slowdown in private consumption, an extended fall in fixed investments and increased volatility in money market rates. The rate hike was designed to stabilize financial markets and capital outflows, but it probably has not been very successful to that end. An offshoot of Ukraine crisis is that investment and consumer spending is likely to suffer. The sectoral breakdown of last year's investment suggested that private-sector consumption-related investment has 26 | O C T O B E R 2 0 1 4
All we can do is sincerely hope that Mr. Putin and his advisors shall in Russia's own best interest shall find a negotiated settlement. Russia has been exceedingly aware in the past how much of its legitimacy rests on economic performance, so it‘s high time that they should get back to their business as usual or else financial sanctions if more serious, would be damaging to the economy as market volatility is likely to worsen and forecasts could be revised even lower.
International Conflict
Hong Kong: Revolt Anatomy
-Kaushik Chandell
“Behind every successful protest, lies a divided
housing,
economy.”
working conditions have significantly narrowed.
Protests and Campaigns of civil disobedience has
Difference this Time: The Student revolts and the
been a part of Hong Kong ever since the Chinese
Impact on Economy
stormed the gates of heaven twenty five years ago.
It‘s all about 2017, the year Hong Kong‘s voters were
Every year on 4th of June tens of thousands of Hong Kong people come out to remember the fallen.
income,
consumption,
education
and
supposed to gain the rights to elect their leader. However, National People Congress (NPC) of China
―One country, two system‖; Hong Kong Special
announced that the candidates would be chosen by
Administration Region is one of the two Special
selected 1200 notables. Pro-democracy groups saw
Administration Region of China (other one being
this pre-approval as a way to limit the will of voters.
Macau). They are called so because these two belong
A protest started under the name of ―Occupy Central‖
to China only but they are very much different in
trying to reverse the Beijing‘s decision. The Hong
political and economic system than China.
Kong Federation of Students (HKFS) called a strike
History Between Hong Kong and China
on 22nd September and claimed thirteen thousand students in just two hours and with time it grew more
Hong Kong was once a British Colony for 157 years between 1840 AD to 1997 AD. Qing Dynasty was
than tens of thousands of youth taking on the streets of Hong Kong demanding democracy.
defeated by the allied forces of Britain and France. In 1899, British forces invaded the Kowloon wall city and drove the Qing soldiers away thus, capturing the Hong Kong as we know it today. An agreement was signed on 19th December, 1984 according to which
Talking about economy, Hong Kong is a very privileged region. Hong Kong‘s Per Capita Income is almost as high as it is in United States, and four times higher than that of China.
British Government promised to return the whole of
With the recent protest led by the student union, few
Hong Kong to China. As per the agreement, Hong
doubt that the protest has paralyzed the central
Kong was returned to China but the political and
business district. Even the Financial Secretary John
economic system remained the same.
Tsang admitted that Government was not prepared for
Both Hong Kong and China has been struggling with similar resistances for the past seven years and the theme lies upon corruption, abuse of authority, absence of consultation.
a protest on this scale. Government felt that the student protest were confined to the bankrupt countries such as Greece where youth unemployment percentage is high and not in a place like Hong Kong where Government regulates mountains of budget
Talking about the living conditions for both of them, in the last twenty five years distance in terms of 27 | O C T O B E R 2 0 1 4
surplus from its citizens. But, in reality Hong Kong has its own brand of economic failure that does not
show up in fiscal balances or unemployment rates.
sales in Hong Kong to continue. Meanwhile CLSA
Instead the jobs are paying wages that are extremely
analyst didn‘t expect any impact on the stock market.
low (3.87$ per hour) and property prices way too high
Mark Mobius of Templeton‘s Emerging Marketing
to find someplace big enough to live. Even successive
Group said that they were planning to buy the stocks
governments failed to address such basic social
that were sold off during the protests.
demands thus turning them into political demands.
How Will it End?
Even the rise of Yuan has perhaps been more painful than inflation. Although China had integrated its people, trade and capital markets with Hong Kong but still there has been no currency integration.
Political reform, through civil nomination, since every citizen in Hong Kong will be able to vote for the first time in history which‘ll be remembered for a long time because of its peculiarity. A genuine, freely
Talking about the stock market scenario many commenters pointed to Hong Kong‘s stock market selloff and luxury store closures as a sign of protest ultimately adding to the pains of Hong Kong. But reality was something else. Report suggested that on 3rd October Hong Kong‘s Hang Seng Stock Index actually rose half a percent. Closed banks reopened and some barricades were even removed from various roads. Raymond Yeung, a senior economist in Hong Kong for Australia and New Zealand commented that the protest had only hampered the retail sectors and about financial sector, market has carried out smoothly depicting that there‘s been no impact on banking or on their stock exchange.
elected executive representing Hong Kong will be able to operate with more ease and power working towards the welfare of the society. Hong Kong remains one of the most unequal societies in the world, with some of the most hardworking and enterprising people which means that even they are among one of the most exploited of all. However, the endgame depends upon the actions of Hong Kong business community that whether they choose to go with the protesters which will put a ton of pressure on Beijing to rethink its methodology or whether they choose law and order over the democratic demands isolating the protesters. It‘s only a matter of time as 2017 is not far enough to see whether a democratic
Fear for Hong Kong government was that the tourism
leader takes over Hong Kong or whether a Leader
and retail which comprised 10% of Honk Kong‘s
elected by people but chosen by the 1200 notables,
GDP would collapse as a result of protest but the real
runs the country.
collapse remained far off as visitors to Hong Kong during its Wednesday National Day fell only by 7% from a year earlier gathering. Analyst at Barclays London said that they expected the decline in luxury
28 | O C T O B E R 2 0 1 4
Politics
Securing India: Modi’s Foreign Policies
-Priyanka Malik
“Peace, commerce, and honest friendship with all
have consistently been in a state of war because of
nations…entangling alliance with none.”- Thomas
Pakistan‘s keenness on acquiring Kashmir. Since, on
Jefferson
his last visit Sharif didn‘t meet the separatist
With 2014 Election results and formation of Modi government, masses thought they have come closer to the realization of the dream of a truly progressive India. Although he didn‘t make any major speeches on the foreign policy yet he emphasized the fact that there will be a shift from his predecessors and he also pledged to have a strong foreign policy. It consists of initiative towards other nations to improve ties with them. The Ministry of External Affairs headed by
government was expecting the same from the high commissioner. But, the diplomatic violation led to India calling off the foreign secretary talks. Due to which opportunities and challenges are not clear with Pakistan. It can also be said that this stringent step by Modi has given a clear indication to Pakistan that India‘s approach isn‘t going to be liberal and unconditional. Considering ties with Japan, Modi has already built
Sushma Swaraj is
a personal rapport
majorly
with Japan‘s PM
responsible
for
Shinzo Abe, as he
carrying out
the
travelled
the
foreign
policy.
country twice for
Therefore,
within
trade
100
days
formation
and
of
commerce during
of
his reign as Chief
government visits
Minister
of
were made to Bhutan, Japan, Nepal followed by US.
Gujarat. India seeks not only investment and
As a Chief Minister he made several visits with
technology from Japan in the area of infrastructure but
economic motives but with the onus of the Prime
the special relationship will also strengthen the
Minister there is a strategic motive attached as well.
bilateral defense ties. With Japan the ship building
Modi started taking initiatives for building strong ties with the inauguration ceremony wherein the invites were sent to the heads of SAARC nations. Although it was a step one of its own kind as nothing of this sort has ever been done before. Further, arrival of Pakistan‘s PM- Nawaz Sharif was heralded as a new chapter of India-Pakistan ties. Post-Independence we
29 | O C T O B E R 2 0 1 4
sector also might experience a revival. Ties with Japan balance the threats from China. Modi is trying to build strong linkages between the cities as a memorandum of understanding has been signed between
Kyoto
and
Varanasi
thereby helping
Varanasi to become a smart city. Further, historical linkages are also emphasized upon. Modi‘s speech
eludes China expansionism and gives stern indications
an investment destination. The recent meet of Modi
regarding the intolerance of belligerence.
and
The prime concern while dealing with China is maintaining security of the nation without disruption of the bilateral trade and commerce. Therefore, India and China should indulge in practical talks like two equal powers respecting each other. While, resolution of the Arunachal Issue and clear recognition of the
Mark Zuckerberg is indicative of the same
wherein Facebook is willing to help India attain the dream of digitization. With Modi trying to build bilateral
ties,
the
biggest
challenge
lies
in
transforming opportunities into outcomes. Therefore, India needs to reduce the political and bureaucratic barriers.
Mc Mohan Line might be the topmost priority but,
Finally, it can be said that Foreign Policy by Narendra
countering the growing influence of Beijing on the
Modi is way different than his predecessors and the
Indian Ocean region is also on the to do list.
steps taken are carefully calculated as poor policy
For long, India has been a mute spectator of astounding success of Beijing‘s ―maritime silk route‖ proposal. But now India is all set to launch Project Mausam in order to revive its ancient maritime routes. The project focuses on the natural wind phenomenon which was being used by the ancient mariners for maritime trade. The recent BRICS summit also plans on creating a bank for the BRICS nations by pooling in the funds as these nations are projected as the leading economies of the future and hence can‘t be
nations as has been witnessed in past. Therefore, the framework suggested by Modi is inclusive of in depth engagement with the neighboring countries while simultaneously balancing its interests with major players like US, Japan, China etc. The country hopes that under the guidance of our Prime Minister Mr. Modi the country would not get stuck in the strategic crisis unlike the previous governments, as he is consistently trying to manage the bilateral ties with multilateral cooperation.
ignored. Israel might become one of the major allies as India might be willing to seek the support of Israel for antiterrorism,
framework can disrupt the harmony amongst the
agriculture
and
advance
defense
technology. Also, the other beneficial site could be wherein India could use Israel‘s ties with US to attain favors from US. Although, Modi might still have grudges against USA for denying his visa but still keeping the grudges aside his recent visit was successful. He was able to build an image of India, wherein it shares the same grounds on anti terrorism. Also, he convinced the business people there to look India as a potential market and as 30 | O C T O B E R 2 0 1 4
Diplomacy
Scottish Referendum 2014 The Union stands. That is all! Scotland voters decided to remain part of the UK on
-Manjari Sharma the Union intact. The official name of this campaign was Better Together.
Friday, 18th September 2014, rejecting independence
The three main political parties in London - Labour,
in a historic referendum. By a margin of 55% to 45%,
the Tories and the Liberal Democrats - were against
and on a vast 86% turnout, Scots voted to stick with
independence and all these added to the referendum's
the UK on September 18th. Thereby they ensured the
failure. Some of the facts are dealt in detail further.
continuation of the nation state; one which still retains great capacity for good. They also preserved the identity of Britain which consists of a third of Scots, English, Welsh and Northern Irish. Scotland has a population strength of over five million; a small proportion of more than 64 million in the broader U.K. Scotland is currently allotted 59 seats in British Parliament out of 650 in total. This decision of Scots has prevented a bond of a 307-year union with England, bringing a huge sigh of relief to the British political establishment. The Act of Union between Scotland and England was signed on Jan. 16, 1707.
If Scotland had left, the deeper impact would be on British identity. The Union Jack, on the national flag, would have to change, since the blue in the flag came from Scotland‘s Saltire. New upcoming artists had offered a full range of options with new ideas of how the new British flag might look like. Many other countries likes of Australia and New Zealand would also have to change their flags, as those flags feature the Union Jack. Financial markets reacted adversely to polls which might have spooked undecided voters. The value of the pound deteriorated more on September 8th 2014, after a poll showed a narrow
The question in the ballot asked voters simply: Should
margin in favor of independence. Stocks in Scottish
Scotland be an independent country?
companies also plummeted on that news; with the
To answer this one question lakhs of voters turned out for their chance to weigh in on Scotland‘s future. There were about 4.2 million voters who were already registered, which represents roughly 97 percent of all eligible voters. Scotland residents as young as 16
Standard Life, Royal Bank of Scotland and the SSE utility company each falling more than 2 percent, and the Lloyds banking group loosing around 3 percent. This kind of irregularity might have convinced few of the voters that independence was too financially risky.
were among the voters. With all 32 reporting centers,
Delusions of oil grandeur- All these uncertainties
for No votes parked were 2,001,926, to 1,617,989 for
would have sharpened the debate over the future of
Yes. Turnout for the referendum was 84.6%.
the oil in the North Sea. Scotland considered the
There were two groups fighting for a cause during referendum: The Yes campaign was in favor of independence. The official name for this campaign was Yes Scotland. The No campaign wanted to keep 31 | O C T O B E R 2 0 1 4
North Sea to be a Scottish lake, and the rest of Britain reminded the Scots that it was British taxpayers‘ money and British companies‘ investments that had enabled oil production in the sea.
Financial mismanagement- Scotland‘s banks during
major industries – manufacturing, IT, finance – to the
referendum became a byword for chaos and
country would face a threat from independence.
catastrophic losses, after the hubris of the 1990s turned into the near-collapse of the mid-2000s with
Britain is strong, Scotland is not. Scotland after separation would not benefit from the protection of
massive rescue packages needed for Royal Bank of
the UK‘s still considerable military assets. Despite
Scotland RBS and Lloyds (both of them based in
defense cuts, Britain‘s military forces kept all its
Edinburgh). Under these pressing situations the SNP announced on November 2013 that Bank of England ‗would become a lender of the last resort‘ following any future crises. This would mean taxpayers in the rest of the UK bailing out Scottish banks, despite them being in an ‗independent‘ country.
ability to protect domestic assets starting from fisheries to oil while also retaining the capacity to project power abroad thus remained significant. Such large force duplication is highly expensive. The UK‘s anti- terrorist, intelligence and security assets are among the most sophisticated in the world. Scotland
Loss of credibility- The UK with all ups and downs
would fall back in order to match them and to build
had continued to remain the world‘s sixth-largest
such resources. Terrorism comes in many guises. It
economy and the second-largest in Europe after
had its imprint in areas of the globe that one might not
Germany. This confers all kinds of useful benefits for
have expected. Scotland would have to bear the
example, a permanent seat at the UN Security
expense of setting up its own agencies, which in
Council, leadership in NATO, a major role at G20
reality would offer very limited protection. In
conferences and among many others. For decades,
diplomacy, Britain is a leader in all spheres, but
even centuries, Scots have been at the heart of this
Scotland would be an unknown quantity.
economic presence, as Chancellors or as Prime Minister (Brown again, Tony Blair – even David Cameron has Scottish roots). They all have helped to build and maintain the Empire. An independent Scotland might not be able to guarantee that its citizens would be able to live and work in the rest of the UK.
After the poll in favor of Better together (No Campaign), the pound rose against the dollar to £$1.652 - up 1 percentage point since midnight in the Asian Markets. The pound is at its strongest against the euro at Euro1.27 - the best in two years. A political union of 307 years is still on. Scotland continues to be a part of the United Kingdom. Border
Lack of natural resources- Once the oil runs out, what
posts are not thrown up in the Cheviots. UK‘s
does Scotland had that would sustain its fabulously
nuclear-armed submarines remain based in Scotland.
wealthy future? It had whisky, but even with this
The pound may wobble but does not tumble in the
contribution of £3 billion ($4.8 billion) across the
market. Investments made in Scottish banks mostly
economy, as estimated by the Scotch Whisky
stays put. The biggest constitutional crisis in British
Association, it‘s a small beer. The ability to attract
history does not happen.
32 | O C T O B E R 2 0 1 4
Strategy
Cadillac Moving Out of Detroit Very often a change of self is needed more than a change of scene, the quote rightly seems to portray the need for Cadillac, once a symbol of American success and the top selling luxury car brand in the United States during 90‘s is now struggling to position itself
-Rahul Mishra operations. Cadillac came into existence in 1902, and named after Antoine Laumet de La Mothe, sieur de Cadillac, who founded the city of Detroit later General Motors, bought the brand in 1909.
in the luxury car market due to tough competition. Its executives have tried almost everything but little to revive its fortunes.
Cadillac is under new leadership which has given it the initial momentum, and the automaker is now committed to transforming itself, into a global luxury
Recently General Motors announced that it is moving the global headquarters of its Cadillac luxury brand to the Soho section of New York City in 2015 so that it is close to its premium market. General Motors also said that the move establishes Cadillac as a separate business unit giving it more freedom. It will be a move of expansion for GM in New York, GM said creating the new business unit will open new growth opportunities in the luxury automotive segment. This move though creates an entirely new unit for Cadillac; it will still very much remain part of the GM portfolio, it is being elevated from its existing status
automobile producer. It's got a strong product offensive with new products on the way like the crossovers, SUVs etc., and with a new location to call its home Cadillac is all set to go. Johan de Nysschen, who joined Cadillac last month as its new president, from Infiniti where he took a similar shift for Infiniti away from Nissan, already planned the move with G.M.‘s leaders before taking the job. The brand required an overall development and reinvention and for that, it needed more autonomy, more focus and more of a connection to what is more in vogue and is fashionable.
as a GM brand, which will certainly mean more autonomy but also more responsibility for its own
The move from Detroit to New York is the first major change being instituted by new Cadillac chief Johan de Nysschen, who as mentioned earlier took a similar shift for Infiniti moving it away from Nissan headquarters to its own facility in Hong Kong. Ford too did a similar move in relocating its luxury portfolio under the Premier Automotive Group, (which then included Lincoln, Mercury, Land Rover, Jaguar, Aston Martin and Volvo) from Dearborn to Irvine, California, but ended up moving Lincoln back to Michigan. Other luxury automakers like Audi and Maserati with their parent companies Volkswagen and
33 | O C T O B E R 2 0 1 4
Fiat respectively are headquartered away from their
to impress the elite class ,higher end technology like
parent companies but now have a long history of
Super Cruise; which will allow drivers to take their
independent
hands off the steering wheel on some highways which
operation
and
have
established
themselves as premium brands As the above mentioned quote emphasises on self
is planned for 2017, might give Cadillac a chance to distinguish itself.
change or modification the same can be personified
The goal Cadillac will set for sales is to double them
with Cadillac, it has taken the much needed change in
worldwide in near future which is also an ambitious
its location i.e., New York, as there is no city in the
one and it will rely heavily on increasing its business
world where the inhabitants are more immersed in a
in Asian countries, specially China and to increase the
premium lifestyle than in New York but, the major
new customer base, Cadillac has announced that it
increase in sales can only be achieved if the company
would create a new product line including larger
can increase the prestige factor and if that cannot be
sedan which is lined up for next year, with buyers
achieved then they should look for the technical
with an average age of 59½, Cadillac's core base is
aspect and they can position the car as one of the most
depleting at a high rate, resulting in decreasing sales,
advanced in the market. New York is considered as
an older demographic and less market share than other
the world‘s medium capital so it is a logical move
premium brands like BMW, Lexus or Mercedes.
altogether.
So, the move to shift Cadillac's base of operations
Mr. de Nysschen said that he would take aim at
from Detroit to New York can be concluded as a
changing perceptions and that he intended to
smart one as auto business is driven by word of mouth
revitalize Cadillac as an aspirational brand. Part of his
but re-establishing the brand might take another
strategy involves recruiting new executives; at least
decade to witness significant changes. It is no doubt
half of the new Manhattan headquarters will most
an expensive and risky decision and the process will
likely be new recruits. He said he was even open to
take its time yet, it can be said that Cadillac would
changing Cadillac‘s traditional design which includes
require a lot more to rule again.
sharp and angular shapes which is not so popular among women. He said that, there is no doubt that the design has to continue to evolve, and he can absolutely confirm his audience that the design language of Cadillac will continue to do so. Cadillac aims to be a luxury brand leader and for that it must improve its style and quality factor with covering all the variations like crossovers, smaller SUVs and many other hot trends, most difficult of all, it needs to change consumers‘ perceptions if it wants 34 | O C T O B E R 2 0 1 4
Vriddhi Research’s Corner
Company in Focus: TATA Power
Economic Overview
- Saurabh Prabhu
India‘s Per Capita Electricity Consumption is less
India‘s Total Power Generation Capacity as recorded
than average world per capita consumption of
in FY 14 is 2,34,600 MW. India has more than
2782KWh. The government is striving to increase the
doubled it‘s power Generation Capacity in last 10
per capita consumption to 1200 KWh. It is imperative
Years.
for the government to increase the per capita
After 1947, all new power generation, transmission
consumption in order to achieve projected growth rate
and distribution in the rural sector and the urban
of 5.5%.
centers (which was not served by private utilities) came under the purview of State and Central government agencies. State Electricity Boards (SEBs) were formed in all the states. The Electricity (supply) Act, 1948 provided for creation of central generation companies for setting up and operating generating facilities in the Central Sector. The Central Electricity
Industry Scenario • Power Industry on a whole is in a down turn and all the private players are going through a tough phase because of the poor state of the SEB‘s. The Power companies therefore face losses because of less payments by the SEB‘s. The Power companies cannot price their supply as per their will because of
Authority constituted under the Act is responsible for
regulations by the government and on the other hand,
power planning at the national level. GOI has
the state run SEB‘s don‘t get subsidized enough by
promulgated Electricity Regulatory Commission Act,
the government and in turn run they default in their
1998 for setting up of Independent Regulatory bodies
payment to power producing companies who in turn
both at the Central level and at the State level. The
run into losses.
Central
Electricity
(CERC)
and
the
Regulatory State
Electricity
Commission Regulatory
Commission (SERCs) at the Central and the State levels respectively. The main function of the CERC is to regulate the tariff of power generating companies
• The Global macroeconomic factors also affects this sector in major way. The fluctuating crude oil prices is a big worry for this sector since increase in crude oil prices means paying higher prices to acquire coal.
owned or controlled by the Central Government and
• The political instability in Ukraine-Russia therefore
to regulate the tariff of power generating companies,
affected this sector
other than those owned or controlled by the Central
• The high investment required for setting up Hydel ,
Government.
wind and solar power plants is also a big deterrent since most companies already have a big leverage on
35 | O C T O B E R 2 0 1 4
their balance sheets. Hence, it is difficult to take more
Tata Power is India‘s largest integrated power
debt to start these plants which have high initial cost
Company with a growing international presence. The
but incur less operational expenses.
Company together with its subsidiaries and jointly
• However, the month of July saw some revival with
controlled entities has an installed gross generation
FSA signed between Coal and 16 Private Power plants worth Rs.84,500 Crore. • However, the low Plant Load Factor of 55% recorded in July 2014 still remains a worry
capacity of 8584 MW in India and a presence in all the segments of the power sector viz. Fuel Security and Logistics, Generation (thermal, hydro, solar and wind), Transmission, Distribution and Trading. With a customer base of 1.9 million, the Company plans to
Related Issues
have 18,000 MW generation capacity, 4000 MW of
• Recently, the State Regulator Maharashtra
distribution, 25 million tonnes per annum of energy
Electricity Regulatory Commission granted
resources and 10-X growth in value added businesses
distribution License Power for a period of 25 years in
by 2022.
Mumbai and Mumbai Suburban Areas.
Tata Sons is the Biggest shareholder in the firm with
• In a major relief, Delhi Electricity Regulatory
29.81% stake followed by LIC with 12.61% stake.
Commission(DERC) agreed to hike power prices in
FII‘s show high interest in investing in TATA Power
Delhi by 8.32%. • Tata Power imports the coal from it‘s two Indonesian mines apart from supplies from Coal India. • In view of increasing oil prices, Tata Power is facing losses in its operations of CGPL as it is not able to recover the fuel prices through its tariff. Hence, Tata Power has written about in to CERC. • Tata Power does not face coal supply shortages like other firms because of the deficit supply being met by its two Indonesian subsidiaries • The Solar and Wind Energy Plant projects in pipeline will help in its operations in the long run. Company Overview Tata Power was Established in 1911 as Tata Hydroelectric Power supply 36 | O C T O B E R 2 0 1 4
which shows a very positive sentiment towards this
to have better ratios than Tata Power. The Net Profit
company. Insurance Companies also have a 20.99%
Margin is getting better which is a good sign. In the
stake which means that Tata Power is perceived as a
infrastructure sector, where the expenses Involved are
safe investment.
very high it is difficult to maintain NPM of more than
Peer Comparison:
10%.Hence, 10.27% for Tata Power is a good number. The Inventory Turnover has been decreasing
Here, we compare the stock movement of Tata power with it‘s Reliance Power in the last year. Tata Power has outperformed the gains on Reliance Power for major part of the year except in July when Reliance Power announced its acquisition of Hydel power
which is not a good sign, however the power industry had been hit by major shortages in the coal which led to decrease in this ratio. The only firm again to outperform has been JSW Energy with Inventory Turnover of 15.50.
plants from JP Associates. However , the P/E of Reliance Power is 1209.09 which is almost 40 times
Stock Performance:
Tata. Power‘s P/E 28.79. JSW Energy has outperformed the performance of Tata Power in the last one year due to their strategy of vertical integration which has lead to adequate availability of Coal. However the P/E of JSW Energy is also very high and hence it is expected to consolidate. The stock saw a sharp rise in the pre election rally Important Ratios:
when all the infrastructure stocks gained due to positive
sentiment.
However,
the
stock
has
consolidated now and is trading again in 90‘s level. The stock has a strong support at 80 and resistance at 110.The 52 week high is 115.25 and low is 67.36.The 30 day simple moving average of the stock is 104.61, 50 day is 104.81 and 150 day is 87.81 on BSE. Discounted Cash Flow Valuation: The biggest issue for any infrastructure company is the Debt/Equity Ratio. Tata Power has a comfortable D/E Ratio and the ratio has improved over the FY 13. The Current Ratio has decreased over FY 13, however it is in line if not better compared to its peers. JSW Energy has current ratio of 1.30 which is the only firm
Using Discounted Cash Flow Valuation, I have valued the share at 101.89. The growth of the firm has been considered as 7.035% taking into consideration the CAGR for the last 10 years. The growth till perpetuity is assumed 3.5% by taking into consideration the growth of other firms in the industry. The operating
37 | O C T O B E R 2 0 1 4
margin for FY 14 I felt was bit high compared to
Final Recommendations:
previous years and hence, I have used the average of
• One may enter the stock at the current levels from a
the last 3 years to calculate the Base operating Margin. 28% is the operating margin I have considered for sustainable growth of the firm. The average Corporate Tax is 32.13% for the last 10 years
long term point of view. • The Business of the firm is very strong and the top line will continue to see strong growth in the future.
and hence I have used 33% as Tax for valuation. The
• The coal de allocation may affect the firm in the
working capital involves only non-cash working
short run, however the fundamentals are intact for the
capital.
long run.
After taking the data of last ten years, I have got the
• However, taking only 6 months as time horizon, the
value of market return as 13.5% and beta as 1.103.
stock may touch 110 where it has its resistance.
This means that the stock has very less correlation
• Hence, I recommend BUY for present investors and
with market movements and hence we can conclude if the fundamentals are decent, the stock will give consistent returns irrespective of market performance. The risk free rate is equated as 8.5% following the 10 years T bonds rate. Relative Valuation: The average P/E of the 5 other companies in the same sector is 20.06 and P/C is 9.606. The EPS of Tata Power is 3.15 and the Price equates to 63.65 which is much less than the current price at which stock is trading. Similarly, FCFF/Share of the firm is 7.143 and hence the price equates to 68.62 which is again much less than the current trading price of the stock. Therefore, going by relative valuation Tata Power doesn‘t stand out as a good pick. However, the valuation in this sector is more driven more by the assets owned by the firm since the implementation of projects has delay due to government regulations and approvals.
38 | O C T O B E R 2 0 1 4
expect a return of 20% in the given time horizon.
Diwali Special
Stock Picks for Diwali Muharat Trading 2014
- Team IBS Times
A new year, a new beginning and things will change.
expectations of tough reforms from the Modi
Somewhere deep inside each and every person
Government and reviving macroeconomic variables.
considers this saying. World, in general follows the
Indian Government‘s proactive confidence building
calendar year which indicates 1st January as the start
steps like allowing FDI in several sectors, railway fare
of a new year. But in a diverse country like India
hike has largely fuelled the rise.
people celebrate their new year on different occasions.
Further it‘s complemented by robustness in economic
Like for many Hindus, the New Year begins in the summer.
However
for
Marwari
and
Gujarati
community, it starts in Diwali.
data point. GDP growth has revived to a nine quarter high of 5.7%, strengthening hopes of an economic turnaround. Next comes the softening of Crude oil
People of these two communities generally dominate
priceswhere it‘s at a 27 month low of 88$ per barrel
the stock market hence, every year, Diwali assumes a
would help balancing the current fiscal account.
special place in stock market and the trading is considered as Muhurat trading.
Current rally marks an odd trend wherein investors prefer for a cyclical and sector linked to capex cycle
Muhurat Trading is basically nothing but a session
revival but not opted for a blank sector rotation.
that opens for an hour and a half for trading. Muhurat
Excellent growth has been noted by consumer
means an auspicious moment to start something new.
durables, banking and automobile with a range of 40-
For years Muhurat trading has become a tradition in
55% whereas FMCG has underperformed with only
Bombay Stock Exchange and other Gujarati and
10% appreciation. Healthcare and IT sectors has done
Marwari stock broking community. The sessions
quite well for themselves with a growth percentage of
mark the end of the traditional financial year and
47 and 29. Though we cannot ignore volatility
beginning of the new one. The general feeling is that
however, India with its emerging market will remain a
people seek blessings of Lakshmi, Goddess of wealth
sweet spot and will continue to attract global
which will help them in wealth creation.
investors.
Since last Diwali, Equity market has rallied over 25%.
The Axis Bank is expected to grow at a CAGR of
Reason behind has been large corporate earnings,
17% over the FY2014-16E. As per the evaluation by
39 | O C T O B E R 2 0 1 4
being the industry leader, this stock becomes a preferred buy. Rallis India has been a major crop protection player in the Indian domestic market. Also is has a notable presence in the contract manufacturing segment where
Angel Broking, Axis Bank remains a recommended buy for this time. Bank of India is expected to narrow
it
manufactures
chemicals
and
different
reputed
various
formulations industry
for
players.
Rallis possesses a relatively better working capital in comparison to the industry average.
the valuation gap with improving fundamentals. ICICI‘s expansion in branches along with strong capital adequacy at 18.3% have positioned itself to gain and credit market share. Also, The State Bank of India have been consistently being able to manage a market share of 16-17% in both deposits and advances, making a positive sentiment to buy. With positive prospects for the automobile industry and
Understanding the demand for the automobile industry, Goodyear India (GIL) has been a market leader, in the tractor tyre industry. Goodyear India Ltd. is a debt-free and a cash rich company and hence, is a recommended buy as the Tractor industry looks a promising segment in the automobile industry with a growth rate of 9%.
Gold, banks look a positive investment opportunity.
Exide industries have been the market leader in India
Banking plays is one of the preferred sectors as this
for battery manufacturing and also the largest supplier
plays on the overall revival of the economy. With
of batteries for passenger vehicles, motorcycles,
WPI inflation hitting the lowest in near 5 years, looks
trucks and tractors. The company‘s performance has
a positive sign for the FMCG companies to maintain
been improving in the past couple of quarters. This
costs, however, currently the prices are still on hold.
was seen after underperformance of 3 years, in
UltraTech Cement has been the most geographically diversified & an undoubtedly, a leader in the Indian Cement market with a market share of 17%. Consistently the company has remained ahead of its competitors in terms of capacity expansion with a CAGR of 23%. Also, the company has been aiming to reach its total capacity of 70MT by FY2016. As per the ICICI Mahurat picks, a pan-India forecast
financials with low utilization levels. However, with the expectations of a strong pick-up in demand from the automobile sector and increasing levels of industry activities leading to higher volume levels and hence, utilization levels the profit margins are likely to improve. With the expected increase in demand, Exide batteries become a recommended buy during this time.
utilization of 78% by FY16E may offer a pricing
Auto: The trend of automobile sector is showing a
power. Considering this scenario, UltraTech Cement
significant growth from 2013 to 2014.we have the two
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wheeler market growth at 11.67 per cent and tractor
The other commodities that are looking at an upward
sales registered a growth of 9 per cent .Also the FDI
trend are aluminum trading at Rs. 118 , copper at Rs.
contribution
420, Nickel at Rs. 1,005 and zinc at Rs. 143.
in
this
sector
was
recorded
as
USD$9885.21 million. Moving on to government involvement Component
in
this
industry,
Manufacturers
the
Automotive
Association
of
India(ACMA) plans to make the sectors contribution double to the country‘s GDP by 2016 by taking its
Therefore, this Muhurat session expects a hike in the prices of major commodities like gold, silver as the buying these precious metals is considered to be auspicious in nature. Further, the automobile sector expects the growth as well.
turnover to US$145 billion also initiating a drastic increase in employment in the sector. Hence with automobile industry shining, we can be safe to say that the sector is on the positive direction.
Due to festive season being round the corner, the easy availability of loans to make luxuries affordable favors the banking sector stocks and investment in the same may result to be profitable. Finally, the
Not just the stocks but commodities also form a major
infrastructure development is the key for developing a
chunk of the investments during this session.
nation and the government‘s prime focus is also
Gold: The mid October of this year has seen the gold
shifted to heavy construction of roads and buildings
prices revolver around Rs.27000 per ten grams in
which indicate the cement industries to do pretty well.
India. The month of October has seen an upward trend
Since for ages, the Muhurat session is believed to
in gold prices. Gold being the major attraction of the
bring prosperity and profits for the entire year
Indian crowd this festival, investing in gold before the
therefore, even with higher volatility, the market is
month end seems a good option.
expected to end on a positive notch this year as well.
Silver: Looking at the next most interesting metal after gold in the Indian markets it is in the mid of October trading around Rs. 38,700. The fluctuations in silver also seem positive and the analysts quote the market looks favorable till Rs. 39,200 levels. Crude: It‘s a sad time for all the Saudi Arabia as the prices of the Brent crude oil don‘t seem to move upward. The prices have been declining for almost 4 months now. The prices have hit its lowest at US$88 a barrel. These falls have been favorable for the countries on the importing end and the ones involved in the oil price hedging.
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