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.
33 | APRIL 2016
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.
THE IBS TIMES
The IBS Times is an academic print and is not for any commercial sale. Reliability and Responsibility for sources of data for the articles vests with the respective authors. Please feel free to drop in your suggestions or any feedback at editor.ibstimes@gmail.com © IBS Times – FinStreet, The Official Capital Markets Club of IBS Hyderabad. All Rights Reserved Visit us at www.finstreetibs.org
36 | APRIL 2016