The IBS Times- October 2014

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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