The IBS Times; 188th issue; April 2016

OILWELL THAT ENDS WELL BY ANUPAMA KUMARSWAMI

The IBS times April 2016, Issue No. 188

COVER STORY ELECTION OR ILLACTIONS

BY PRATEEK PANDEY

START-UP ECOSYSTEM BUBBLE BURSTING AT INDIA’S ONLINE START-UPS?

BY HEMLATA HAJONG GLOBAL ECONOMICS THE DAWN OF NEGATIVE INTEREST RATES

BY ISHAN GUPTA

BANK NPA’s

BAD LOANS EXCEED THE MARKET VALUE OF PSU BANKS

BY YAMINI NATRANJAN 1 | APRIL 2016

FinStreet, IBS Hyderabad

ISSUE NO. 188, APRIL 2016

3 LETTER FROM THE EDITOR 9 COVER STORY ELECTION OR ILLACTIONS

4 BUDGET HIGHLIGHTS 12 GOVERNMENT GOING GREEN

17 THE DAWN OF NEGATIVE INTEREST RATES

19 QUARTERLY RESULT ANALYSIS

25 BUBBLE BURSTING AT INDIA’S ONLINE START-UPS? 32 VRIDDHI’S

27 MARKET WATCH STABLE PLATFORM

RESEARCH CORNER

VARDHAMAN TEXTILES

What’s Inside

2 | APRIL 2016

6 OILWELL THAT ENDS WELL 15 CHINA ACKNOWLEDGES A WORSENING SLOWDOWN 22 SECTOR ANALYSIS

THE INDIAN BANKING INDUSTRY 29 BAD LOANS EXCEED THE MARKET VALUE OF PSU BANKS

INTELLIGENCE BEYOND SUCCESS

LETTER FROM THE EDITOR

TEAM IBS TIMES ISHAN GUPTA (EDITOR-IN-CHIEF) ROHIT TILLU (MANAGING EDITOR) ABHINAV BANERJEE ANUPAMA KUMARSWAMI CHESTHA KUMAR EYAMINI N HEMLATA HAJONG JATIN SHARMA PRATEEK PANDEY RANU SARUPRIA SANDHYA ADHAVAN SWARUPA ROY

Dear Readers, Greetings from Team FinStreet.

Team FinStreet is proud to present the 188th edition of The IBS Times.

The entire nation is under the election fever. With election in four states scheduled this year we bring our cover story titled ELECTION OR ILL-ACTION to give you a glimpse of the current election situation. Moving on we bring a wrap-up of the budget 2016 presented in our segment BUDGET HIGHLIGHTS. To give you an overview of the global economy we focus on separate but very important issues in China Acknowledges Slowdown; Targets Growth Range, OilWell that Ends Well and The Dawn Of Negative Interest Rates. Further, the banking sector is facing problems from all corners. We present the situation in our sector analysis under The Indian Banking Industry and Bad Loans Exceed the Market Value of PSU Banks. We look at the recent development on the corporate front under Is The Bubble Bursting At India’s Online Start-Ups? and Indian Government Going Green. We also look at the corporate performance under our Market watch and Quarterly result segment. From the investment point of view, this issue also brings to you an exhaustive report on Vardhman Textiles by Team Vriddhi Research.

Do make the most out of it and keep enjoying the experience of The IBS TIMES. Your feedbacks and opinions will help us make it better.

We look forward to continue our work of making available of all the latest happenings round the globe with all your gracious support in the year 2016.

Ishan Gupta Team FinStreet

3 | APRIL 2016

FROM THE NORTH BLOCK

BUDGET HIGHLIGHTS

-Rohit Tillu

At the end of every financial year, the Ministry of

A total of 13 cesses have been abolished by various

Finance prepares a set of documents that seem to

departments. These cesses might not be a material

deciding the fate of the Indian economy in the

amount individually but when we sum it up, we will

upcoming year. Those documents, the Union Budget

realize that we end up quite significant amounts by

as we call them, contain various statements about the

way of these cascading levies. Also there is more

financial performance of India Inc

power to the individual tax payer as the government

So let’s start analyzing the Union Budget of 2016

has now allowed additional deduction for interest

segment wise. Allow us to walk you through the various segments of the budget:

on borrowing. The ministry of Finance is preparing a blueprint to do away with the corporate taxes while reducing them. This is a sigil of good times as

Infrastructure and Investments

the companies will now have more cash with them.

Incentivization of Natural Gas production from deep

And with more cash comes more dividend.

water and ultra-pressure areas will help the companies

Fiscal Discipline

in the Oil and Natural Gas sector as the pricing formula has been revised by government, which will certainly raise their profit margin in the future. As a result, the stocks of Oil and Natural Gas companies might go up. Also, the Central Government plans to revive 160 airports hence broadening the scope for the airlines to operate. This is a good chance for the investors as the airlines may be looking forward to expand their operations, and for that matter, capital raising is considered to be imperative. The government has planned to invest a record sum of Rs.10000 crores in building national highways. This might be a good opportunity to associate yourself with the companies working in the Cement Industry as this project them would give them a great chance to leap ahead of competitors in terms of revenue and profits.

The government has set a fiscal deficit target equivalent to 3.5% of the Gross Domestic Product.

Now when we say fiscal deficit, it refers to the difference in the government expenditure and the government revenue. And when they say it will decrease, then they are expecting more incomes to flow in this year and also looking forward to cut down on the expenditure part. Also, the government of India wishes to incur a planned expenditure amounting to Rs. 5.5 lakh crores. This planned expenditure is nothing but an investment in newer projects across various sectors of the economy. This is definitely a good sign because when the government will put in more money towards new projects,

it

will

create

more

employment

opportunities for the workforce and will result in Tax Reforms

4 | APRIL 2016

more dispensable incomes.

Financial Sector Reforms

compared to share scrips. Also, a financial data

The financial sector is one of the most crucial sectors

management center is to be set up for analysis of

of the economy as the whole economy is dependent on

financial data. This decision is important from the

the movements in the financial sector. Any negative

point of view of a retail investor as this analytics

change in the financial sector can cause hindrances to

center will help the investors in taking better

the economy on a macro level. So let’s try to analyze

informed decisions and try to avoid scams of bigger

how the reforms in the sector impact us.

scales.

The government has also decided to set aside a whooping sum of Rs. 25000 crores for the recapitalization of public sector banks. All the public sector banks are facing a problem with their loans as the most of them are facing massive NPA figures and it is getting difficult for them to keep their capitals intact. This amount will help those banks

to

maintain

their

minimum

capital

requirements as mandated by the Reserve Bank of India.

The ministry of finance has decided to allow General Insurance companies to sell their shares in the stock market from the coming financial year. This decision would surely have a positive impact as with the entry of the General Insurers in the stock markets, the Insurance sector will be deepened and the investors will have more choice as to whose stocks to pick.

Also, this will help those insurers to raise capital for their expansion plans as the stock markets are considered to be one of the biggest destination by the companies to raise finances.

The government of India is also looking forward to deepen the Bond markets as it wishes to bring new types of bonds to the Indian markets, which are not much used to with the trading of bonds when compared 5 | APRIL 2016

OIL SAGA

Oil Well that Ends Well

-Anupama Kumarswami

"Formula for Success: Rise early, Work hard, Strike

Qatar and Venezuela had first committed to putting

OIL" – J. Paul Getty

a restriction on the production level for the January

Oil's price has been falling since a couple of months.

This has affected almost all the economies of the world and has led to the falling in their markets and the domestic companies. Falling oil had led to fall in the value of Dollars as well as fall in the value of other commodities. Why is this crude oil's price falling?

There are many reasons behind it but the prominent one is when Organization of Petroleum Exporting Countries (OPEC) had been producing oil at a rate wherein the supply has exceeded the demand. The supply and demand of any commodity directly affect its prices. When the supply goes up, the prices come down while when the supply decreases, the price of the oil increases. The supply went up while the demand was very low, and this led to the fall in the prices of the crude oil.

levels. This may or may not work because it is conditional for other producers whether they want to put a cap on the production similar to the ones doing it. Instead to cutting down the production, Riyadh and Moscow offered to clamp the production and keep it steady. This is just producing at the high-water mark and thus establishing a surplus till the demand expands.

There are chances that Iran may not take the deal as it wants to re-establish itself in the market and get back its market share. The Saudis had put up restrictions on the oil production against the Tehran's illicit nuclear program. Now, Iran wants to get back their position in the market. Russia being the largest producers and non-OPEC member, its decision of getting into this agreement can bring about significant changes within the market.

To counter this fall, Saudi Arabia and Russia agreed upon freezing the oil output at near-record levels. This was the first synchronized move by two of the world's largest oil producers to counter such a crash. This deal is in its preliminary stage and doesn't involve Iran and

This stillborn deal has its own share of constraints and challenges. One big challenge is the Iranian decision regarding the agreement. The conditional nature of this deal has put forward this challenge to

Iran and Iraq's non-agreement towards the deal. is considered to be one of the noteworthy cooperation “BELIEVE YOU CAN AND YOU'RE Without Iran and Iraq, this deal would be worthless between the Non-OPEC and the OPEC producers in HALFWAY THERE.” as they are the largest producers within the OPEC. 15 years and Saudi Arabia is said to be open for any -THEODORE ROOSEVELT Baghdad had produced 4.35 million bpd (barrels per additional action. This deal aimed at fixing the day) and is expecting to expand the production to 6 production for January oil price levels. This was just million bpd by the end of this decade. Iran had the beginning of the process to stabilize and improve produced 2.7 million bpd and is expected to expand the market.

6 | APRIL 2016

its production to 5.7 million bpd by 2018. Thus, it

This agreement between the two powers can bring a

would be difficult put a cap on the production without

broad cooperation upon the Syria conflict. These

these two growing producers signing the agreement.

two powers are on the opposite sides of that conflict. Russia's military intervention and Saudi Arabia's rebel clients in Syria have been in the war mode since time was known. Despite the conflict, senior officials from Saudi Arabia, Kuwait, UAE, Qatar and Bahrain have flown to Moscow to meet Putin. These visits have had amicable results and pledges for the cooperation of trade and investment.

This agreement is a representation of the new alignment upon Syria and Riyadh-Moscow has

Iraqis are flexible towards the agreement and

aligned their interests to bring up the price of

announced they would be open towards freezing the

oil.trade and investment. This agreement is a

production levels. They are ready to help raise the

representation of the new alignment upon Syria and

petroleum prices and help balance the supply and

Riyadh-Moscow has aligned their interests to bring

demand within the market. Iranians are not going to

up the price of oil.

overlook their quota of production as they want to reclaim their market share. With Saudi Arabia, Qatar, Russia and Venezuela increasing their production and lifting up of the restrictions, Iran refuses to go by the agreement.

Saudi Arabia and Qatar are expected to rope in many other major producers in the Gulf Cooperation Council which even includes Kuwait, United Arab Emirates and Oman. The Unites Arab Emirates have already

The major challenge as well as reason behind this

signed a tentative support for the agreement. Oman

petro-diplomacy deal is U.S oil production. Without

had previously pledged for this coordinated efforts to

Iran and Iraq, Russia and Saudi Arabia can't hold on

raise the price of the crude oil. There is still fear

to their market share and until America's share price

among the oil producers regarding the dipping oil

drops. The prices are unlikely to remain low even

prices and they are ready to implement solutions to

though 60 oil and gas companies had filed

change the existing market conditions.

bankruptcy still America is stubbornly producing a record 9 million bpd. Any rise in the price of oil

7 | APRIL 2016

will incentivise new drilling in America's shale fields.

This may worsen the situation and again bring down the prices of the oil. America's production is thus one great challenge for this stillborn deal.

OPEC is weaker now than ever before and struggling to reach a common strategy when the non-OPEC largest oil producer Russia is offering them a deal to form a cartel. The other foreign petro-powers are very eager to raise the prices of oil at the expense of the industrial democracy like U.S even when their transportation sector is 90% dependent upon the crude oil.

While the petroleum dependent autocracies are concerned about their own long-term survival in the global markets. They are slow in understanding the fact that this petro-diplomacy deal between Saudi Arabia and Russia cannot be successful until America's share in the market doesn't become fragile enough so that they can implement this new cartel and bring up the prices of crude oil..

8 | APRIL 2016

COVER STORY

ELECTION OR ILL-ACTION

The Indian economy normally backs off in front of

-Prateek Panday

compared to the non-election years.

general elections even as government intervention turns crafty. New ventures become scarce in an

The slowdown in investment and economic activity,

election year. Businessmen and investors delay key

however, is more pronounced this election season

decision till another government is formed, and hold

because the government failed to take policy

up till what the future policy environment will be

decisions in the past couple of years while battling a

before propelling major projects. In the meantime, the

raft of corruption charges. Policy uncertainty may

pace of industrial credit growth decelerates as there are

not be the only reason for the decline in

less industrialists lining up for bank loans before the

consumption of raw materials such as steel and

elections. The normal rate of industrial credit growth

cement. Cement consumption declines ahead of

in decision years was 1.8 rate focuses lower in the

elections as builders divert funds to illicitly fund

previous three decades in contrast with non-election

political campaigns

years.

States at a glance

In election years, more credits are made to locale in

West Bengal

which the ruling state party had a slender edge of triumph (or a tight misfortune) in the past election.

On 4 March, the Election Commission declared the

This generally does not happen in non-election years.

dates for West Bengal get together decisions 2016.

Politically motivated loans are costly: they are less

The primary period of the six-stage voting will

likely to be repaid, and election year credit booms do

happen on 4 and 11 April. The state will direct the

not measurably affect agricultural yield.

second and third stage on 17 and 21 April separately. The last three phases of elections will

Government intervention in an election year is generally intended to favor the special interest group, where it should rather be focusing on ways to boost overall economy. It is mostly seen that, politicians control several policies before elections to cater to particular group of people, potentially in return for crusade support and to oblige to their vote bank. The measure of farm loans given by state-possessed banks are generally 5%-10 % higher in election years 9 | APRIL 2016

take place on 25 April, 30 April and 5 May. The votes

will

be

depended

on

19

May.With

heavyweight national gatherings Congress and BJP (Bharatiya Janata Party) additionally in the fight, natives must be arranged to see a furious political fight. The BJP is conquering from its late thrashing in Bihar Assembly elections and avid to make remedies. The Congress is similarly resolved to

increase some lost ground. All the major are peering

Democratic Front) won in 2011 by a thin edge of

towardscZpossible alliances.

four seats.

Assam

Despite the fact that Kerala is a long ways in front

Assam will be another state to be among the primary states to go to surveys with surveying and considering dates same that of West Bengal. The principle issues troubling the Assamese individuals are inflation, unemployment and high corruption. The condition of Assam is a critical condition of India with regards to the governmental issues, and administration of the nation. From the early day of being a state, Assam affected the governmental issues of the nation, and it has dependably been in the news for that. The state has its very own administration, which is, under the

of a few states in India when contrasted with the education levels in the nation however it still it show a few tribes to which a few individuals are obscure. Among these tribes, neediness and absence of education are the components that keep them poor and undesirable. Tribal youngsters ought to be empowered for education. They require legitimate infrastructural facilities. Numerous individuals kick the bucket on account of lack of healthy sustenance, obliviousness and superstitious convictions. There is a need to give better wellbeing facilities.

legislature of India, runs the state, and is in charge of each improvement activities of Assam. This is one motivation behind why the state needs to sort out a decision occasionally and select another government or keep the one that ran the state for most recent 5 years.

Kerala The state is getting prepared for an intriguing political fight

in

the summer of 2016. The Election

Commission has declared 16 May as the date when all the 140 assembly constituencies will go to surveys. As

Tamil Nadu

per the declaration, the polling will be directed in

The 234 assembly constituencies in Tamil Nadu

single phase. The votes will be counted on 19 May.

will go to polls on 16 May. On 4 March, the

The BJP did not have a solid vicinity in Kerala as of

Election Commission declared that the polls to the

now. It is in the consequence of empowering results in

state will happen in single phase. The votes will be

local body surveys that the gathering has restored its

counted on 19 May. Ruling party AIADMK (All

aspirations in the state. The Congress-led UDF (United

India Anna Dravida Munnetra Kazhagam) would be

10 | APRIL 2016

warming up to a conceivable organization together

It is generally seen that economic activity loses its

with BJP. Since, AIADMK is concerned over losing

pace significantly every time there was a general

its bolster base because of mishandling of Chennai

election. Government spending goes up in an

floods, the BJP then again would hope to partner with

average election year, which tended to fuel inflation

the gathering to fortify its own particular prospects in

rather than spur growth. Nevertheless, it would be

Tamil Nadu.

really exciting to see what the polls have to say for the same.

Puducherry The date for the 30 assembly elections 2016 has been declared by the Election Commission as16 May proceeded by counting on 19 May. Puducherry is the third most populated state in India. Tourism and fisheries are the two essential commercial enterprises in this union region. As of late, the Union Government reported its intention to allocate â‚š85 crore for Puducherry tourism division. Road safety is a vital issue concerning Puducherry. On the event of International Yoga celebration held as of late in Puducherry, boss priest N. Rangaswamy implied at making yoga a part of the school educational programs. Since Puducherry is thought to be an imperative destination for educational tourism.

It is generally seen that economic activity loses its pace significantly every time there was a general 11 | APRIL 2016

election. Government spending goes up in an average

INDIA’S GREEN DRIVE

INDIAN GOVERNMENT GOING GREEN

-Ranu Sarupriya

In the effort to sync environmental goals with the

for

various

pollutants

Centre's agenda of improving 'ease of doing business'

(Protection)

and in order to take the Centre’s ‘MAKE IN INDIA’

Notification, 1989 issued by MoEFCC.

concept ahead and give a significant push, the

The old system of categorisation was creating

Environment Ministry introduced new classification

problems for many industries and was not reflecting

of industries, exempting 36 types of industries from

the level of pollution caused by these. The new

taking environmental clearance. The Ministry of

categories will remove this problem.

Act,

1986

under and

Environment Doon

Valley

Environment, Forests and Climate Change introduced a new categorisation of industries on the basis of t The Government has released a new categorization of industries based on their pollution load. The new category of White industries which is practically nonpolluting will not require Environmental Clearance (EC) and consent and will help in getting finance from lending institutions.

Red (60 sectors), Orange (83 sectors) and Green (63 sectors) categories existed earlier also. Those like automobile manufacturing, big hotels, oil and gas exploration industries are clubbed as Red Industries — the highest pollutant category. Building and construction

(over

20,000

sqm),

ceramics,

automobile servicing, ayurvedic and homoeopathic medicines and refractories are considered Orange

Re-categorization of industries based on their pollution

Industries and small hotels, dal mills, flour mills

load is a scientific exercise. The old system of

and small bakery are Green Industries.

categorization was creating problems for many industries and was not reflecting the clear picture of the pollution of the industries.

The Pollution Index (PI) of any industrial sector is a number from 0 to 100 and the increasing value of PI denotes the increasing degree of pollution load from

The Ministry of Environment, Forest and Climate Change (MoEFCC) has developed the criteria of categorization of industrial sectors based on the Pollution Index which is a function of the emissions (air pollutants), effluents (water pollutants), hazardous

the industrial sector. 

score of 60 and above - Red category  

Industrial Sectors having Pollution Index score of 21 to 40 - Green category

Water (Prevention and Control of Pollution ) Cess (Amendment) Act, 2003, Standards so far prescribed

Industrial Sectors having Pollution Index score of 41 to 59 - Orange category

wastes generated and consumption of resources. For this purpose the references are taken from the the

Industrial Sectors having Pollution Index



Industrial Sectors having Pollution Index score upto 20 - White category

12 | APRIL 2016

Red (60 sectors), Orange (83 sectors) and Green (63

technologies, ultimately resulting in generation of

sectors) categories existed earlier also. Those like

fewer pollutants.

automobile manufacturing, big hotels, oil and gas exploration industries are clubbed as Red Industries — the highest pollutant category. Thermal and nuclear power plants, oil and gas extraction, oil refining are in red category. Coal washeries and dry coal processing, building ceramics,

and

construction

automobile

homoeopathic

(over

20,000

and

lies in facilitating self-assessment by industries as the subjectivity of earlier assessment based on pollution load, with a dedicated section for nonpolluting industries called "white industries”.

sqm),

ayurvedic

and

Another issue of Renewable Energy also has been

refractories

are

taken under consideration by the Government.

servicing,

medicines

Another feature of the new categorization system

considered Orange Industries and small hotels, dal

Prime Minister, Narendra Modi articulated his

mills, flour mills and small bakery are Green

strategy for India’s creaky energy sector. He aimed

Industries.

at“energy revolution” by harnessing sources of

Generation of emissions, effluents or hazardous waste

energy such as solar and wind power.Modi’s

and their resulting contamination of air, water and soil

National Democratic Alliance (NDA) government

are the determining criteria of PI. This revamped

put renewable energy at the top of its agenda after

classification done by Central Pollution Control Board

taking

also

overwhelming

considers

the

size

of

the

industry

and

office,

seeking dependence

to

reduce on

India’s

coal-fuelled

consumption of resources. No Red category of

electricity.

industries will be permitted in the ecologically fragile

The targets are ambitious. An earlier target of

area / protected area under normal circumstances

installing 20,000 megawatts (MW) of solar energy

The newly introduced White category of industries

capacity by 2022 has been raised fivefold to

pertains to those industrial sectors which are

100,000MW. The government also wants to put in

practically non-polluting. This category includes

place 60,000MW of wind power capacity by then in

Electric lamp (bulb) and CFL manufacturing by

a country that’s the world’s third largest emitter of

assembling only, Solar power generation through

greenhouse gases, behind only the US and

photovoltaic cell, wind power and mini hydel power

China.Tasked with the job of translating Modi’s

(less than 25 MW).

vision into reality policy action has been reinforced by corporate backing. The new government has

The purpose of the categorization is to ensure that the industry is established in a manner which is consistent with the environmental objectives. The new criteria will prompt industrial sectors willing to adopt cleaner 13 | APRIL 2016

secured pledges from 213 companies to set up renewable energy capacity of 266 gigawatts (GW) over the next five years.

The companies—a mix of public and private entities—

Earlier, green energy sources were looked more like

include state-run thermal power producer NTPC Ltd,

a part of one’s corporate social responsibility.

which has agreed to set up 10,000MW of renewable

However, the world has changed, and so has India.

energy in the next five years. In the private sector, the

It now has a very important place in our growth

largest commitment for generation is from US-based

strategy. Green energy is being considered as a

SunEdison Inc. for 15,200MW; while ReNew Power

pivot of India’s drive to achieve energy security.

Ventures Pvt.Ltd has promised 11,500MW.

The NDA government has the ambition of supplying 24-hour power to all households in a chronically power-short country.Partly, the government’s focus on renewable energy forms stems from the fact that India has an energy import bill of around $150 billion, expected to reach $300 billion by 2030, which it wants to reduce.India imports 80% of its crude oil and 18% of its natural gas requirements.

Certainly, the timing of the government’s renewable energy drive is opportune, coming as it does in the backdrop of both solar and wind energy nearing grid parity—a point in time at which they will cost the same as power produced from traditional sources and available on the nation’s transmission and distribution grid.

14 | APRIL 2016

CHINA ECONOMIC WOES

CHINA ACKNOWLEDGES SLOWDOWN; TARGETS GROWTH RANGE

-Swarupa Roy

China, also known as the People’s Republic of China

In March 2016, the Chinese Prime Minister Li

(PRC) is a country known worldwide for several

Keqiang in National People’s Congress conference

things. Be it politics, business, economy, inventions or

announced the growth target for the year 2016 to be

culture, the Chinese have their mark in almost all the

between 6.5 - 7 percent. In the light of recent

fields. In the last few decades or rather the last

happenings where China is being faced by financial

century, China has emerged as one of the powerful

market volatility and economic slowdown, the

countries of the world which has the capability to

world debate on the Chinese strategies to overcome

influence anything on a global platform. Hence, it is

the slowdown has begun with the release of the

no surprise that the world’s most populous country’s

target range. A number of experts believe that the

(China) economic slowdown has became a concern

Chinese leaders are reanalyzing their plans to take a

not only for the Chinese government but also for the

different approach towards their economic goals

other nations in an international level.

and recovering from the slowdown. In the year

The Chinese economy has been quoted to be the second largest economy in the world. The growth of Chinese economy can be credited to the success of its major industries which include mining and ore processing,

telecommunication

and

industrial

equipments, metals like iron, steel and aluminum, heavy machinery and engineering, consumer products, electronics and toys, chemicals and fertilizers, automobiles and many more. Every March, China launches a growth target for its financial year.

Amongst all the nations and major economies of the world, China is the only one said to set a strong annual growth target. The decided target is usually set after monitoring and analysis of various trade and economy factors. This growth target is further tracked down and studied by economists and policymaker from all over the globe indicating the potential and the importance of it in the world economy.

15 | APRIL 2016

2015, the growth target was 6.9 percent, while this year the range is set for 6.5-7 percent which indicates that the progress and growth might take a further dip, and along with China the global economic might also face few downfalls.

China is the world’s largest manufacturer and exporter of goods and commodities catering to the demand of some of the well-known and powerful nations. With an amazingly huge consumer market and stronger manufacturing and export, the Chinese economy has witnessed a spectacular rate of economy growth until now. As far as national and international trade goes, China is named as the largest and biggest trading nation leaving behind the United States. If we speak about the international

figures

then

the

International

Monetary Fund (IMF) ranked the country at 75th position by the nominal GDP. Today, the Chinese

economy plays a very pivotal role in the global

To control the effects of slowdown and also to

economic front in almost all quarters especially in

reach the goals which include doubling of the

trade and exports. While the socialist economy market

Chinese economy size and personal income capita

of China has set many benchmarks, the recent

by 2020 as compared to that of in 2010, the Chinese

slowdown of the economy has raised innumerable

leaders have decided to maintain a minimum annual

questions. In January 2016, China’s export fell by 11.2

growth of 6.5 throughout the current year. The

percent while imports were down by 18.8 percent. In

government also released a copy of the 13th five-

2015, the economic growth of the country reported a

year plan regarding the same in the National

25-year low of 6.9 percent. The Chinese commodities

People’s Congress conference. China is now trying

market is witnessing a weaker scenario and along with

hard to regain its progress and development without

that some of the investors have started selling their

further harming the economy growth. Policymakers

assets to raise money.

believe that maybe the time has come when the

The devaluation of Yuan the last year made the country spend a huge amount of money in hundreds of billions of dollars to strengthen it. Besides that, it is also battling corruptions in top levels, heavy debt, out flow of money from the country and weakened exports. Considering all of the on-going situations, experts believes that setting the growth target in midst

leaders need to focus on quality rather than quantity and use measurements standards like purchasing power of households to calculate development and growth. In short, China should now be more concerned about how the GDP will rise in much better way rather only being serious about how the number can be achieved.

of these might actually makes things go down more

The current setbacks faced by the Chinese economy

rather than improving them. Setting targets has its

along with the recent devaluation of currency has

own drawbacks with the officials trying to hide and

the world pondering over the financial and

falsify data to show the target achievement. Plus, it

economic circumstances of the Chinese economy

encourages a high competition installing ‘growth-at-

today and the effect that it will have in future. If the

any-rate’ thinking which in the long and short run

country continues to focus on number then it will,

causes harm to the growth. Over the time, the Chinese

in nearer future, face severe drawbacks which will

economy has became so target and GDP focused that

also have a major impact on the global economy

now its own hard set goals are affecting itself. The

and the countries with which China is actively and

external factors like weak global demand and debt,

majorly involved in trade. What strategies the

and internal factors like corruption, politics and

government will employ now along is something

unachievable targets have now lead to some serious

the entire world has its eyes on.

problems for the country.

16 | APRIL 2016

GLOBAL ECONOMICS

THE DAWN OF NEGATIVE INTEREST RATES

-Ishan Gupta

After the collapse of the global economy initiated by

most recent central bank to hitch this bandwagon is

the sub-prime mortgage crisis of 2008, central banks

the Bank of Japan.

of the developed world were in a fix. The traditional method suggested that they should lower the policy rates so that interest rate reduces and the economy inflates due to higher credit. But, they were caught in something called a liquidity trap. There interest rates were already so low that there was no scope of reducing them. To overcome this problem the central banks came up with an unorthodox tool known as the quantitative easing. Using this tool banker bought their bonds and flooded the market with liquidity. This tool also had a secondary purpose of flattening the yield curve i.e. increasing long term rates and decreasing the short term rates. This policy has supported the global economy for the past many years and the US fed has started decreasing its allocation to quantitative easing.

However, not all central banks have the legroom to reduce this tool. In fact this tool has not met its intended purpose and some banks are further expanding it. To further stimulate their economies they have made their policy rates negative.

A negative interest rate simply means that both the consumer and the bank will be penalized for saving money. The customer will be penalized because he will earn a negative rate on his deposits which will reduce their savings over the period. The banks will be penalized because the funds they keep with the central bank will lose their value directly hurting their bottomline. The central banks hope to achieve three things through this policy. First, Bring more liquidity in the economy by lending more money and increasing expenditure. Second, the commercial banks will push more loans and not try and keep money with them. Third, they are looking at depreciating their currencies. The banks are asking people to borrow more in their currency and invest in stronger currency. The negative rate only inflates your earnings from foreign securities. They are essentially trying to import inflation from other currencies and boost their exports from weaker currencies.

The Riksbank of Sweden, their central bank, was the first monetary authority to introduce negative interest rates in the economy. The bank is small and did not have a huge impact on the Global economy. However after 6 years this policy is now being adopted by other central banks. In 2014 this policy was adopted by The European Commercial Bank (ECB), The Danish National Bank and The Swiss National Bank. The

17 | APRIL 2016

This creates a problem for the US Federal Reserve which is trying to increase the short term interest rates. Persistent negative interest rates will further strengthen the dollar as more money will flow into the US economy as it offers better return at lower risk. This will increase the demand for American bonds which will reduce their yields. This will also

hamper exports from the US and create more political

highly subsidized rates.

and economic problems. The biggest irony is that there

It has been suggested that the emerging economies

are trillion dollars worth of negative yield bonds on

will be the drivers for growth in the near future, but

the market and private investors are purchasing them.

what we forget is that to a certain extent they are

They are ready to lose some amount for safety. Other

also dependent on the developed world for that

than the US treasuries the biggest gainer from negative

extra push. If the developed world projects a

interest rates is gold. After a sudden decline in prices

gloomy picture then the developing economies will

in 2013, gold is back as the shining star. The demand

only be able to support a basic level of growth.

for the yellow metal has added considerably to its

Negative interest rates not only add to the fear in

prices as investors are rushing to the everlasting safe

the market but only add to the existing liquidity

haven. The price of gold has rallied in 2016, gaining

glut.

nearly 19% in value since this January. It is now trading at its highest level since early last year.

While the long term impact of negative interest on the world economy may be debatable, its impact can be estimated in the shorter term. It is a golden opportunity for the practitioners of carry trade. In finance carry trade means borrowing in a currency with lower yield

Weighed by political and economic factors central

and investing in a currency which offers higher

banks have entered the negative territory and it is a

returns.

trend that is catching on. One can only speculate

It is a golden opportunity for India to attract large

what will be the consequences in the future but at

capital and cheaper rates as the poor global economy

present there is nothing to suggest that it is helping.

has left few countries worth investing. It is widely

It only creates more fear, excess liquidity and

known that we are a capital starved nation. We need

unwanted uncertainty. This also raises an important

large amounts of money to spend on creating and

question are the central banks ineffective in

maintaining our infrastructure. There is push from the

handling economic crisis? Economists suggest that

new government in the direction of infrastructure and

the central banks may be fast running out of options

there are signs of improvement that can be seen from

and both traditional and unorthodox tools might be

increase in laying of road networks each day. Apart

ineffective in handling crisis. One also wonders

from infrastructure investments, this also represents a

what the banks might turn to if the global economy

golden opportunity for the corporate to raise

is hit with another downturn and all the existing

significant amounts of debt from foreign lenders at

tools prove ineffective.

18 | APRIL 2016

CORPORATE UPDATE

QUARTERLY RESULT ANALYSIS

-Sandhya Adhavan

“The stock market is a device for transferring money

quarter. In a year the quarters are segmented into

from the impatient to the patient” - Warren Buffett

four quarters three months each as January-March (Q4); April-June (Q1); July-September (Q2) and

Over the last few years, the interest of a person in

October-December (Q3).

stock market has grown tremendously. Stock market has become an important component for a free market

Let us take a look at some of the sectors in the

economy. From a company’s perspective, a stock

economy analyze the quarterly results of the top

market is where they can raise capital. From an

players in the respective sector:

investor’s perspective, a stock market is a place to make money. Therefore, it is of utmost importance for the investors to know how their shares they are holding are performing. To have a glance of the performance of the stock market, we have the stock indices like BSE Sensex, NSE–50 etc. Stock market is defined as a centralized market for buying and selling stocks and the stock market index acts as a benchmark to measure the performance of the stock. The stock index not only measures the performance of the stock but also the economy and the various sectors as well.

Hero

MotorCorp

Ltd.,

is

a

largest

Indian

motorcycle and scooter manufacturer based in New Delhi. It is a Large Cap company with a market cap of Rs.57, 317.30 Crore operating in Auto sector. It registered a growth of 3.07 per cent of its Net profit from Rs.772.06 crore to Rs.795.81 crore in the fourth quarter (Q4). Country’s largest two-wheeler

For the investor’s purpose, the companies release the

maker had a marginal increase in sales at 550,731

quarterly results to determine whether it would be wise

units in November 2015. It had sold around 1

to invest in the same company or to shift to another

million unit sales during the 35 day festive period

company to avoid losses. These reports will help the

starting with Navratri. Sales had a growth of 6.36

stakeholders, which includes financial institutions,

per cent from Rs.6745.11 crore to Rs.7174.16 crore

investment bankers, market experts etc. in order to

in Q4 of 2015.

evaluate their returns and access the risk involved. The investor’s confidence plays a major role in the stock market. The investment decisions of the investors directly has an impact on the economy.

The quarterly results of a company is disclosed every

19 | APRIL 2016

ITC is an Indian conglomerate headquartered in

Kolkata. The company has diversified its business into Fast-Moving Consumer Goods (FMCG), Hotels, Information Technology and other segments. In the fourth quarter, the net profit increased about 9.11 per cent from Rs.2431.25 crore (Q3) to Rs.2652.82 crore

Tata Consultancy Services (TCS) is an Indian

(Q4). Despite the growth in the profit margin, it was

Multinational information technology service,

said that there was supply chain disruption of

consulting and business solution company

stationery and other items caused by rainfall and

headquartered in Mumbai. It is placed among the

floods in Chennai. Also the company had stated that

most valuable ‘Big 4’ IT services brand worldwide.

the performance in the quarter was gloomy due to the

TCS missed its revenue growth estimate

legal pressure on cigarette industry and also the

consequently for the 6th quarter. Its Net sales were

demand for the FMCG products were sluggish.

down by (-0.06 per cent) from Rs.21635.91 crore to

Cigarette is recognized as the dominant commodity for

Rs.21620.83 crore and the Net profit was up by

both revenues and profit.

4.53 per cent from Rs.5698.45 crore to Rs.5956.72 crore in the fourth Quarter. The spokesperson of the company said that the segments of its industry had exhibited growth in a traditionally weak quarter, due to the impact of the Chennai floods as it disrupted the normal business functioning of the

Bharti Airtel limited is an Indian Global

company. The company has won 9 big deals and

telecommunication service company, headquartered in

numerous client base thereby increasing its revenue.

New Delhi. It is the largest mobile network operator in

The digital segment accounts for almost 14 per cent

India and the third largest in the world. In the fourth

of the overall revenue.

quarter in 2015, it registered a sales growth of 1.62 per cent from Rs.14824.5 crore to Rs.15065 crore in Q4.

The Net profit had plunged to (-23.14 per cent) from Rs.2223.7 crore to Rs.1709.10 crore. The loss is recognized with increased interest cost and spectrum payouts. In India, mobile data revenue at Rs.31884 crore registered a growth of 50 per cent with the customer base of data user increasing by 29.9 per cent and traffic by 73.3 per cent.

20 | APRIL 2016

We find that most of the sectors of the economy like Automobile, Fast-Moving Consumer Goods, and Information Technology had registered a positive growth in the final quarter for the year State Bank of India (SBI), an Indian Multinational public sector banking and financial services company is headquartered in Mumbai. It is one of the Big 4 banks of India along with ICICI Bank, Bank of Baroda and Punjab National Bank. The nation’s top lender’s net profit decreased by 71 per cent from Rs.3879.07 crore to Rs.1115.34 crore. Income on Investment increased from Rs.10564.66 crore to Rs.10712 crore for about 1.39 per cent. The asset quality of the bank declined due to the impact of stressed account review conducted by our Central bank, Reserve Bank of India (RBI). And the Net Investment de-grew by 1.2 per cent year-on-year due to slippages (It is the difference between expected price of trade and the actual trade price). The provision coverage ratio stood at 65.2 per cent as a result the net NPA grew by 40.8 per cent from Rs.28591.96 crore to Rs.40249.12 crore.

Wherein the biggest highlight was the gross NPA Rs.72791.73 crore, which was better that their competitors.

21 | APRIL 2016

2015. But due to the natural factors like Chennai floods, many companies couldn’t achieve their target estimates. The banking industry, which is the backbone of our economy, saw a lot of NPAs (NonPerforming Assets) in 2015 which had a direct impact on its revenues.

SECTOR ANALYSIS

THE INDIAN BANKING INDUSTRY

-Jatin Sharma

Indian banking sector has become the new centre of

for everybody.

financial world’s attention after budget deficit of the

Indian banking industry comprises of 26 public

union government was on target as per the fiscal

sector banks, 20 private sector banks, 43 foreign

consolidation roadmap. Budget has raised hopes from

banks, 56 regional rural banks and 95139

India, which is relatively stronger among emerging

cooperative banks with 99% of them based in rural

economies but saw reduced attention after patience of

India. Public sector banks dominate the banking

the developed world waiting for reforms ran out.

system, with a market share of 72.1 %. Private

Banks are the building block of capitalism. A healthy

lenders have 15.9 % share, while foreign banks and

banking system lays the foundation for a robust

private lenders have 4.9 % and 7.2 % of the banking

economy. Baking industry, which catapulted the

pie respectively, as per the Reserve Bank of India’s

Indian economy into high growth trajectory in the first

(RBI) 2014 data. According to Anil Aggarwal,

decade of this century, is witnessing newer problems

Analyst at Morgan Stanley, market share of

which, if not treated early, can stunt the entire

commercial banks is expected to rise at a sharp pace

economy. The problem is a novel one and the tried and

as most Public sector banks (PSBs) remain

tested cure of cutting REPO Rate is not going to work.

constrained by higher NPAs. According to RBI

Banks are unable to give loans due stricter capital

report PSBs recorded the highest level of stressed

adequacy norms and high NPAs so a repo rate

assets at 13.5 per cent of total advances as of March

reduction which leads to a lower cost of funds won’t

2015, while it was 4.6 per cent for private lenders.

make much of a difference. Banking sector is

Table 1 provides a detailed list of NPAs and

witnessing a plethora of activities like entities getting

profitability of Banking and financial sector

new bank licenses, Wilful defaulters making it hard

industry (BFSI). NPA is a term used to classify a

for banks to recover money, bigger banks talking

loan on which borrower has failed to pay interest or

about taking over smaller banks, government infusing

principal payments for 90 days. NPA ratio is ratio

fresh capital to assist bank balance sheet clean up.

of net NPA, which is gross NPA minus provisions,

Bank bureau which consist of experts from Indian

and loan advanced. As per estimates, PSBs would

incorporation would further streamline management of

need Rs 240,000 crores capital infusion by 2018 to

Indian banks under the chairmanship of ex-CAG

meet the Basel III capital adequacy norms, put in

Vinod Rai. IMF chief, Christine laggard, lauded RBI

place to safeguard the banking industry after the

governor for taking NPAs problem head on but how

2008 US financial crisis. The Finance minister,

will banking industry fare out is a question of interest

Arun Jaitely, has set aside 70,000 crores for capital

22 | APRIL 2016

infusion of public sector banks. This amount will be

With government sticking to a tight budget and

released in four annual instalments of 25,000 crores in

banks busy with cleaning up their balance sheets,

2016-17, another 25,000 crores in 2017-18, and

from where will money supply needed to achieve

10,000 crores each in 2018-19 and 2019-20. Forty per

the targeted growth numbers of 7.6 % come?

cent of the amount will be given to banks which

Interest rate sensitive sectors like housing and

require support and all PSBs will be brought at 7.5 per

automobile are already reeling under pressure of

cent core capital by the end of fiscal year 2016. In the

weakening demand and high debt might face newer

second tranche, forty per cent of capital will be

problems. The new banks formed last year, stuffed

allocated to State Bank of India, Punjab National

with money and eagerness to lend, appears to be a

Bank, Canara Bank, Bank of Baroda, Bank of India

ray of hope. The proposed change in method of

and IDBI Bank. The remaining twenty per cent will be

calculating base rate can turn out be a game

allocated based on the performance of banks in the

changer. Currently banks use average cost of capital

remaining three quarters of the current year. For

to calculate base rates and after March 2016 banks

speedier resolution of stressed assets, Arun Jaitley

will start using marginal cost of capital for

said, the Debt Recovery Tribunals will be strengthened

calculation of base rate. This move has potential to

with a focus on improving the existing infrastructure,

save huge amount of limited money banks have.

computerised processing of court cases, reduction in

With Finance minister meeting the fiscal deficit

the number of hearings and quicker disposal of cases.

target, there is room for RBI to further cut REPO

The government on Sunday named former CAG

rate. The possibility of rate cut seems even brighter

Vinod Rai the first chairman of the Banks Board

after recent inflation numbers, both CPI and WPI,

Bureau that will give advice on how to recover the bad

were within targeted rates. FED has brushed aside

loans of state-run banks. Other board members board

the possibility of further rate hikes till mid of this

elected are Anil K. Khandelwal, former chair of Bank

year, the air of uncertainty covering International

of Baroda, HN Sinor, former joint managing director

financial landscape have cleared. With China

of ICICI Bank and Rupa Kudwa, former managing

showing speedy recovery, the situation looks

director and chief executive of Crisil. The bank board

optimistic for bulls to return to the markets.

bureau will streamline management of banks towards a holding company structure, will recommend appointment of new directors in PSBs and advise on ways of raising funds and dealing with stressed assets.

The Bank Board Bureau (BBB) will be operationalised during 2016-17 and a roadmap for consolidation of Public Sector Banks will be spelt out.

The budget push and expectations of a rate cut by RBI have pushed the markets in green and sentiments are at positive. The predictions of a good monsoon

and

record

rural

outlay

that

the

government has earmarked in its current budget has set the stage for the bottom lines of companies to improve. With problems of most sectors getting addressed and stock markets creating a buzz it looks

23 | APRIL 2016

like FIIs can soon turn more favourable towards India bringing in huge chunks of money and giving

improve. With problems of most sectors getting addressed and stock markets creating a buzz it looks like FIIs can soon turn more favourable towards India bringing in huge chunks of money and giving further impetus to the already buoyant economy.

Public Sector Bank NPAs (Q3 FY2015) Profitability ( in Crores) Corporation Bank 3.27% 584.26 Dena Bank 3.33% 265.48 Central Bank of India 3.58% 606.45 Andhra Bank 3.70% 694.6 Punjab National Bank 3.82% 3,061.58 Allahabad Bank 3.89% 983.93 UCO Bank 4.25% 4,087.74 Indian Overseas Bank 5.52% -454.33 United Bank of India 8.50% 255.99 IDBI Bank 3.05% 1,770.16 SBI 2.80% 13,101.89 Bank of India 2.50% 1,708.92 Canara Bank 2.42% 2,702.62 Syndicate Bank 2.38% 1,522.93 Private Sector Bank Yes Bank 0.10% 5,212.82 HDFC Bank 0.26% 24,870.07 IndusInd Bank 0.32% 4,417.05 Axis Bank 0.44% 20,859.27 Karur Vysya Bank 0.73% 465.39 Kotak Mahindra 0.83% 5,871.27 South Indian Bank 1.04% 347.06 ICICI Bank 1.12% 24,493.94

24 | APRIL 2016

START-UP ECOSYSTEM

-Hemlata Hajong

IS THE BUBBLE BURSTING AT INDIA’S ONLINE START-UPS?

Start-ups in India have demonstrated significant

them find new jobs. One year old Gurgaon-based

growth and had run ahead of time. This is because

online

India has the second largest internet user base.

temporarily closed operations in 9 cities- Bhopal,

Majority of start-ups launched via the internet such as

Bhubaneswar,

Flipkart, Snapdeal, Paytm, Zomato, Grofers, Ola Cabs

Mysore, Nashik, Rajkot and Vishakhapatnam due to

etc are worth more than any established company.

lack of adoption for its service. From a start-up hero

This sector is fed on rich diet of risk capital funding.

it became zero. An IIT-Delhi alumnus start-up

Flipkart received $200 million from Tiger Global,

Qditty, an online content platform for news, videos

Naspers, Accel partners and ICONIQ Capital.

and books lay off the team of 25 and rolled down its

Snapdeal is backed by Softbank of Japan, Alibaba,

shutters as no investor was willing to bankroll the

Foxconn, Kalaari Capital and Nexus Venture Partners.

start-up. Even established players like Zomato,

Pepperfry received $100 million investment from

Snapdeal are going through a period of churn. In

Goldman Sachs and others. Indian start-ups raised

February 2015, Zomato had job openings of 1,200

$3.5 billion funding in the first half of 2015. These

positions and within 6 months ahead it laid off 10

deals surpassed the total number of deals in 2014.

percent strength (mostly in the US). It also had to

They have become the flavour of the season. People

shut down operations in four cities. Snapdeal’s

now prefer working for a start-up than as a metal

notice to 200 people in its consumer service

manufacturer or a toothpaste marketer. But since few

department became viral in the social media. They

months the dreams of many have shattered as many

were asked to either increase work efficiency or

start-ups are downsizing or are shutting down

ship out. The company was already in the news

businesses. Currently India might be the hottest place

when brand ambassador Aamir Khan got caught up

for start-ups but they are losing talented employees to

in the intolerance controversy. Industry leader

harsh competition.

Flipkart is also having a setback. A raft of top talent

Housing.com, a Bangalore based start-up was the first to be in the news when their plans to lay off employees became public. 600 employees were laid off in November 2015. Similarly, food delivery app Tiny Owl also let go almost 100 employees, stating cost cutting as the reason. Employees were given a month’s salary as severance and promised to help

25 | APRIL 2016

grocery

delivery

Coimbatore,

company

Kochi,

Grofers

Ludhiana,

left the company. Top HR officers Mekin Maheshwari and Pooja Gupta left in 2015 and in February 2016 Mukesh Bansal resigned as the head of commerce and advertising business. A major blow came in late February when a unit of Morgan Stanley marked down the value of the company by 27% from $15.2 billion to a little over $11 billion.

Hundreds of layoffs and closed operations of several

and so they had to spend it in some way. For

Indian start-ups have already created fears of bubble

example, TaxiForSure had 1800 employees with

burst for e-commerce companies. Despite the billions

presence in 47 cities in contrast with Uber who has

of dollars invested in recent years, most of India’s

less than 900 employees operating in over 50

online start-ups are yet to turn profits and investments

countries. Now that the funds have dried there is no

are largely based on speculative future earnings. When

way other than downsizing. But some stakeholders

foreign investors first invested in these tech start-ups

believe that if start-ups need to be 10 times better

they overlooked profitability and invested based on the

than government-run companies, they need to fire

idea and growth of the company. The perception

10 times faster.

among both the entrepreneurs and investors was that a start-up had to build a rapidly scalable venture. Now the investors are demanding of results after years of cash burning growth. They are taking longer time to decide on investments and are pushing entrepreneurs to build viable and long term businesses. On one hand, companies such as Snapdeal are spending big bucks entering new categories and pushing further into the hinterland and on the other, they have to keep an eye on the cash-burn as investors have tighten their string to give away funds. Snapdeal is also planning to outsource most of its customer service requirements to companies

such

as

Concentrix

in

Bangalore,

Competent Synergies in Mohali and Firstsource Solutions in Mumbai in order to save on costs. Some ventures have put a stop to their ambitions. Flipkart shuttered its grocery delivery business. Ola is shuttering its food and grocery delivery businesses, and returning to its core business. It even added motorcycle rides to its fleet of options but as the Karnataka government has declared two-wheeler taxis illegal this dream burnt down to ashes. All of these have resulted in mass firing as these companies overhired and raised huge funds during their growth period 26 | APRIL 2016

Employee attrition is inevitable in start-ups, almost as much as it is inevitable in the rest of industry.

The only difference would be that start-ups are young with little experience. So when they add new businesses they require new skillsets and let go of old ones. According to Ravi Gururaj, NASSCOM product and executive council, startups fire employees under three circumstances: They don’t have money, and want to raise funds; they don’t plan properly and over hire; or they hire the wrong talent. Also the current global environment is not ideal and it is likely that global growth is going to be weaker this year compared with that in 2015. A lot of these start-ups would fall once the US Federal Reserve starts raising rates and funding dries up.

Hopefully

Prime

Minister

Narendra

Modi’s

initiative to create an ecosystem for the growth of start-ups would change the present scenario as the government has allotted $1.5 billion funds for startups in the current budget.

MARKET WATCH

STABLE PLATFORM

-Chestha Kumar

Markets are rallying because the budget was good.

The fiscal deficit commitments were adhered to and there was no tinkering on the capital gains tax structure. Markets also gained tracking advances in Asian markets following China's monetary easing and downbeat manufacturing and service surveys that raised hopes of additional stimulus measures. This month seemed pretty positive and settled for Indian Markets as the positive hit trend was seen after a huge

The BSE sensex closed at its highest as hopes of

dip.

aggressive rate cuts by the Reserve Bank of India offset both profit taking and global uncertainty.

Equity Currency The sensex and nifty posted their biggest gains in more than two years. The nifty and sensex rose to 3.4 percent each, their strongest daily gains since September 2013.

A sharp fall in domestic equity market also affected the rupee sentiment. The dollar index is up 0.19per cent against a basket of six currencies. The dollar was lower against the yen in the late Asian trade, following the Bank of Japan's widely expected decision to stand pat after its two-day policy meeting. China's Yuan hits strongest against dollar so far.

27 | APRIL 2016

Commodity market

Conclusion

As dollar strengthens and U.S stock future weakens, it

A combination of a rate cut intended to support

has affected the oil prices and gold. Brent Crude falls

economic growth along with the government's

$1 and Gold has suffered the biggest weekly loss in

pledge for fiscal discipline is also raising hopes of a

four months. The gold prices in the commodity market

reversal in some of the strong foreign outflows this

have been seeing dripping for some time. The demand

year. The overall performance of the market seems

cannot be revived as the anticipation is inclined

to satisfy the investors and make them a little more

towards the strengthening of the U.S dollar.

confident.

Commodity

Prices

GOLD

28,600

SILVER

36,842

NATURAL GAS

120

CRUDE OIL

2,605

Stock market & Sector market Here we see the performances of various sectors that have gained. The top performing sector were pharmaceuticals followed by computer storage devices , medical-biochemical, lasers- system and components, transportation. The pharma sector is really performing well.

Top 5 sector picks 

Medical -Drugs



Computer-Storage Devices



Medical- Biochemical



Lasers - Systems& Components



Transportation

28 | APRIL 2016

BANKING ENIGMA

BAD LOANS EXCEED THE MARKET VALUE OF PSU BANKS

-Eyamini Natranjan

For every Rs 100 deposited in shares of public sector

REASONS: The reason for such alarming level

banks, investors at present are facing the burden of Rs

was due to high levels of inflation and the downturn

150 as bad loans, which have all together come up to

in the economy, which led to decline in the demand

Rs 4 lakh crore or 1.5 times the market value of these

across various sectors resulting in decreasing

lenders. The Reserve Bank has set a deadline for the

capacity utilization. This resulted in large stress on

banks to clean up their balance sheets, compelling

industries, utilities, pharmaceuticals, etc. To counter

them to punctually reveal all their Non Performing

this situation major central banks adopted easy

Assets, take remedial measures and also make

money policy which resulted in liquidity in

necessary entries in their financial statements by

emerging markets. It pushed up the asset prices,

March 2017. The banks have begun to act in

which resulting in inflation. To curb these high-

accordance with their latest set of financial results.

interest rates were adopted which resulted in no-

The gross NPAs of the banking sector is evaluated to

payment of the credit users. Among the Public

be 5 percent of total loans, while the total burdened

Sector Banks, Kolkata- based UCO Bank has been

assets (which are declared and potential bad loans)

the highest in terms of NPAs level followed by

comes to 11 percent.

Indian Overseas Bank, Bank of Maharashtra, Dena bank and Corporation Bank.

A non performing asset (NPA) is a loan or advance on which the principal or interest payment remained overdue for a period of 90 days. Non-Performing Assets (NPAs) have reached an unacceptable level due to inaction, indiscretion and challenges faced in some sectors of the economy. Public sector banks have piled up the amounts of bad debt which has led to NPAs reach an amount of Rs 2.67 lakh crore, which constitutes around 86 percent of the gross NPAs of the entire banking industry. The Government of India has taken initiatives to bring down the level of NPAs by infusing more money, restructuring the balance sheet, providing an autonomous working and hiring the best talent at the top level for improving the performance of the banks and to bring new life to the economy.

29 | APRIL 2016

MAJOR CASE: The State Bank of India (SBI), which has lent the maximum amount to Mallya's airline, could get back only Rs 155 crore out of the Rs 1,623 crore due from it. The value of Kingfisher Airlines pledged to the bank has now slumped from Rs

4,000 crore to Rs 6 crore! SBI is not able to find even

current assets being pledged. Central Bank of India

a single buyer for the 'Kingfisher' trademarks. And

has lent a term loan of Rs 350 crore on an

Kingfisher Airlines has told Indian courts that it is not

agreement that all sale proceeds and lease rents

in a position to pay back its debts.

would be transmitted in an escrow account(

According to the hypothecation deed signed between SBI and Kingfisher Airlines on August 10, 2010, SBI was given ownership of all trademarks and goodwill if Kingfisher Airlines failed to repay its debts.

temprorary account)with the bank. The airline was crumbled within a year and the bank couldn't recover any money from them anymore. Banks like Corporation Bank, State Bank of Mysore and Vijaya Bank lent loans up to Rs 400 crore for all the movable assets, movable assets and plant & machinery of the airline being pledged.

Many of the banks have reached an end point. A realization has emerged that Rs 7000 crore of public deposits they lent to Kingfisher Airlines have evaporated. The Chances of even recovering even a small percentage of the amount from the airlines seem to be declining day by day. This case has led all the banks to Revalue their balance sheets and locate and wipe out their NPA’s. The RBI has given a deadline of March 2017 for the banks to clean up their balance sheets.

However, more inquisitive is the case of Indian Overseas Bank. The airline had to pay IOB a sum of Rs 108 crore, which was issued to then against the mortgage of two helicopters in 2008. It was observed that the helicopters were not in flying condition and the bank is struggling to unload them to recover its bad debts. The IOB is now facing major losses which are estimated to be around Rs 516-crore loss this quarter.

There are other smaller banks in the bunch which have lent money to Kingfisher Airlines in return to their

The high level of NPAs affects the financial soundness of the banks and the availability of credit. The various aspects where it impacts the

30 | APRIL 2016



balance sheet are:

In order to keep a check whether the accounts

IMPACTS:

are working or not and to have a better control



Profitability: It impacts the profitability as banks

various committees has been evolved such as

stop to earn a higher income and generate a higher

Debt

provision for assets. 

Credit contraction: It also decreases the ability of

which further leads to economic decline.

Managing liability: Banks lower their interest rate on deposit and increase the rate on credit this hampers the business. 

Confidence Level:

Decrease in credibility and

profitability further leads to decrease in the confidence level of shareholders and the public which further affect the performance of the banks.

To overcome these condition banks have started to pay attention to their workings and focus on their asset and liabilities.

STEPS TAKEN: 

Credit portfolio evaluation helps in a better decision regarding funding of unviable projects.

Decentralized working model of many bank needs to be centralized. Credit given during earlier years for which the payment has not been cleared is also getting reconstructed to the present value of the asset and tighter underwriting standards are being maintained.



Latest credit risk techniques incorporated by banks to protect them from insolvency. Selection of right borrowers, timely disbursement, timely recovery of loans is the focus to minimize the bad debt.

31 | APRIL 2016

Tribunals

(DRT),

Asset

Reconstruction Companies (ARC), Joint Lender

banks to provide loans and contracts the stock 

Recovery

Forum (JLF), Corrective Action Plan (CAP) which look into the performance of the banks and helps in restructuring loans.

VRIDDHI’S RESEARCH CORNER

STOCK REPORT- VARDHMAN TEXTILES

-Aditya Jaiswal price which will increase prices

Industry at a glance 

Domestic textile and apparel industry expected to grow at a CAGR of 11.2% from USD 67 billion in 2014 to USD 141 billion by 2021.



Textile and apparel industry exports from India



Basic customs duty on specified fibers and yarns has been reduced to 2.5% from 5%, though the implication isn't clear as the specified fibers have not been spelled out

expected to grow at a CAGR of 12.06% from USD 41.4 billion to USD 82 billion by 2021. 

Abundant availability of raw materials such as cotton, silk, wool and jute and a skilled labor workforce gives India a competitive advantage relative to major textile producers.



100% FDI via automatic route is allowed in the Indian textile sector.



Free trade with ASEAN countries and proposed agreement with European Union will give a boost to exports.



Porters 5 Forces analysis

The fundamental strength of the textile industry in India is its strong production base of wide range of fiber/yarns from natural fibers like cotton, jute, silk



and wool to synthetic /man-made fibers like

Vardhman textiles is the leading manufacturer and

polyester, viscose, nylon and acrylic.

exporter of cotton yarn as well as a leading

Urbanization is expected to support higher growth

manufacturer of piece-dyed fabric. The company is

due to change in fashion and trends.

also the second largest producer of sewing threads

Budget – 2016 

and market leader in the area of hand-knitted yarns.

The company’s yarn product basket is divided into

The excise duty on branded garments retailing at Rs 1,000 and above has been increased from zero to 2%



About Vardhman Textiles

Tariff value for excise/countervailing duties on readymade garments and other textile materials has been increased to 60% from 30% of the retail sale 32 | APRIL 2016 price

three categories – commodity, compact and specialized yarn – and delivers the widest range of specialized

greige

and

dyed

yarns

(cotton,

polyester, acrylic and other blends). The company’s yarn business is the largest revenue generator,

accounting for nearly 60% of its topline. The company’s yarn consumption is divided equally between domestic, international and captive fabric consumption.

Analysis of Financial Statements With net sales growing at a compounded rate of 9.49% gives strong indication of the strength of the company. The growth has mainly been due to its



Market leader in the hand-knit yarn category.

constant capacity addition to keep up with both the



Pan-India presence; 1,800 retail outlets across 650

domestic and export demand over the years. By

cities and towns.

looking at the current quarterly results we can

45 sub-brands in various packaging categories

expect a much better performance by the company

under the umbrella brand.

in terms of topline growth.

 

Products marketed to around six million domestic consumers.



Accounts for 40% share of India’s organized sector and 30% of the total market.



Exports comprised about 35% of the company’s fabric output in 2014-15.

Some of the prominent customers include 

Esprit

The PAT of the company is showing a cyclical



GAP

nature. Comparing it with growing net sales of the



Banana Republic

company it could be attributed to growing expense



Old Navy

to increase in cotton prices in India due to low



H&M and Benetton

rainfall.

With a growing population a key driver in this sector

To mitigate itself from further volatile prices of

and India’s population set to touch 1.34 billion by

cotton it has selected to manufacture a significantly

2019 the company has been continuously increasing

large proportion of the yarn basket, comprising

its capacity over the years to meet the demand of both

niche, value-added varieties marked by lower

the domestic as well as the export market a total of

margin volatility. It is trying to expand its customer

14,000 spindles were added last year, enhancing

so as to over-reliance on a small customer base

capacity to a million-plus spindles; 7300 spindles were

The day sales of inventory is constantly showing a

commissioned at the Satlapur unit. This would give

downtrend which means an improving efficiency of

the company a strategic advantage over its competitors

the company to convert its raw materials into cash

and maintaining its market share.

faster.

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34 | APRIL 2016

1 year stock movement

Looking at the above ratio the company is showing a

of 1.35% and gave dividend per share of Rs 10 in

healthy growth over the five years in analysis. Sales

FY15.

growth is showing a good growth rate with operating profit margin steadily increasing. FY15 has shown lower performance due to the reason discussed above.

With monsoon expected to recover this year, leading to a reduction in cotton prices, we can expect a boost to the financials of the company this

The debt-equity and interest coverage ratio has been

fiscal year. With the stock twelve months trailing

moving in opposite direction showing the company’s

P/E of 9.21 compared to industry P/E of 16, it is

ability to pay off its debt in a timely manner. Net

undervalued and we could see an upward

working capital cycle has also been decreasing

movement till Rs 850 in the coming year and

highlighting the company’s effectiveness in operations

analyzing the discounted cash flow of the stock we

over the years.

can expect an upward movement till Rs 1500 in the

Analyst Recommendation

coming 5 years.

Vardhman Textiles has given a 5 year return of 300%

Looking at the technicals, with RSI at near about 50

and a 1 year return of 45%. This has occurred even

and 30 day SMA of Rs 767, we would like to hold

when the benchmark index gave a return of -5% and

off on buying the stock till it reaches a level of Rs

the company had a poor FY15, giving an indication of

760.

its strong fundamentals. The beta of the stock with the

The analyst would give a BUY call for

benchmark SENSEX is a mere -0.04% thus showing a

VARDHMAN TEXTILES.

cyclical nature. The company gives out good dividend yield

35 | APRIL 2016

“FINANCIAL TRIVIA” Before the formation of the Federal Reserve in the 1913, most banks were dependent on big industrialists for their liquidity needs. During the bank panic of 1907 all the big banks requested the steel tycoon JP Morgan to bail them out.

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36 | APRIL 2016