RAINS AND RISING HOPES BY HEMLATA HAJONG
The IBS times COVER STORY
CAUSES AND IMPACT OF BREXIT BY EYAMINI N.
DEFENCE PROCUREMENT POLICY
UNLOCKING THE CITADEL BY ANUPAMA KUMARSWAMI
PATANJALI: THE RISE OF HERBAL CONGLOMERATE BY ROHIT TILLU
SAUDI ARABIA STARTS A SOVEREIGN WEALTH FUND BY SANDHYA ADHAVAN
FinStreet, IBS Hyderabad
ISSUE NO. 189, JUNE 2016
What’s Inside
2
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. Thank you everyone who has contributed and made us where we stand today. We look forward to continue our work of making available to all the latest happenings round the globe with in all our future endeavors. Team FinStreet is proud to present the 189th edition of The IBS Times. The global markets are under a great turmoil due to the fear of Britain’s exit from the euro zone. This will be the first time that an economy will be exiting a monetary union. We look at this development in our cover story Causes And Impact Of Brexit. No industry has generated this much interest in recent years as the defence sector in India has. To divulge deep into the topic we look at the defence procurement policy as well as the VVIP chopper scandal in Unlocking the Citadel and Chopp(error) – AW101. the Indian economy is heavily dependent on monsoon for a strong growth. We look at the monsoon forecast and its impact in our segments Come Soon Monsoon and Rains And Rising Hopes. From the investment point of view, this issue also brings to you an exhaustive report on United Phosphorus Limited 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.
Ishan Gupta Team FinStreet
3
AUGUSTA WESTLAND HELICOPTER DEAL
CHOPP(ERROR) – AW101
-Prateek Pandey
Venturing back, why was a helicopter deal so disputable? In 2010, the Indian government and AgustaWestland marked a Rs3,546-crore
What appears to host maneuvered the gathering into the chaos is a letter composed by implied agent Christian Michel to Peter
deal to purchase 12 AW-101 helicopters for the Indian Air Force (IAF). Manmohan Singh was PM then and Sonia Gandhi, the Congress pioneer—as she is currently. These helicopters were to supplant the maturing Soviet-made Mi-8 choppers used to transport the president, PM, and the VP, among other VVIPs.
Hulet, Agusta's then India locale deals and contact head in March 2008. The letter peruses: "Dear Peter, since Mrs. Gandhi is the main thrust behind the VIP, she will no more fly with MI8… Mrs. Gandhi and her nearest counselors are the point of the High Commissioner, senior consultant Prime Minister Manmohan Singh clearly the primary figure, then there's Ahmed Patel Secretary."
In spite of the fact that the IAF had been requesting substitutions since 1999, tenders for the task were issued just in 2005. These were later amended in 2006 and the arrangement was marked in February 2010. The Italian organization even transported three helicopters by 2013.The remaining nine weren't on the grounds that India put the task on hold after the Italian police captured the head of Finmeccanica SpA, Giuseppe Orsi, in Sept. 2013 on charges of paying bribes to win the agreement. Soon after this, the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) began their own particular examinations and the helicopter contract was put on hold. A larger part of the cash paid out to AgustaWestland has been recuperated. In 2014, India scrapped the agreement.
Rajiv Pratap Rudy said: "truly the Italian court archives convey a few truths and her (Gandhi's) name is there. Names of some senior members (of UPA government) are additionally there. She should have some contacts in Italy. She ought to discover from her old relations why the court gave such request following two years." A week ago, the Milan courts of offer—like an Indian high court—additionally said there were "unmistakable signs with respect to debasement" of an IAF officer. Since the emergency ejected, previous IAF boss Tyagi has been under the scanner as his cousins were seen as recipients of the arrangement. Tyagi is likewise blamed for decreasing the stature prerequisite of the venture, to permit AgustaWestland to take an interest in the undertaking. 4
At first, the choppers were to have a roof prerequisite—the height at which they can fly
arrangement was set apart by occurrences of debasement. Besides, it noticed that
at 6,000 meters, however this was later allegedly reduced to 4,500 meters this deliberate attempt brought Augusta Westland back in the game.
installments in the event that and through wire exchanges were done out to individuals from the Tyagi family, some of which were to be sent to Tyagi himself.
Presently, India's Central Bureau of Investigation (CBI) is looking for the outside service's assistance for clarity on the matter before making any move. Aside from the
A great part of the court's judgment depends on tapped telephone discussions between the charged brokers of the deal – Guido Haschke and Carlo Gerosa. All the more essentially, it
CBI, India's Enforcement Directorate—the organization in charge of battling monetary wrongdoings—has likewise summoned Tyagi regarding the tax evasion test. AgustaWestland had allegedly planned somewhere in the range of 30 million euros for installment of commissions to legislators, aviation based armed forces authorities, and administrators.
has additionally recognized that the UPA government wasn't excessively excited in assisting Italian powers amid their examination.
The BJP is outfitting to target Congress pioneer Sonia Gandhi in the Lok Sabha and the Rajya Sabha keeping in mind the end goal to raise talks over the Italian court request which has noticed that the UPA government at the time was hesitant to "impart basic archives to agents" Why is the arrangement back in the news now? A couple of weeks prior, in any case, the Milan Court of Appeals totally toppled the 2014 judgment of the lower Italian court and noticed that there was adequate proof to demonstrate that the Agusta Westland arrangement
Tyagi, as per journalists, has kept up his request of blamelessness. One part of the new court request, be that as it may, helps go in out. A noteworthy charge against the previous IAF boss in 2013 was that he changed the helicopter flight roof particulars with a
specific end goal to keep AgustaWestland in the running for the agreement. Any move to change these proposed particulars were intensely denied by the Indian Air Force before Tyagi accepted charge. Shouldn't something be said about Sonia Gandhi, Ahmed Patel and Manmohan Singh? 5
Singh? The new Italian court request mentions the names of Congress pioneer Sonia Gandhi, previous head administrator Manmohan Singh and senior Congress pioneer Ahmed Patel, however not with relationship to them accepting influences or kick-backs. The request likewise does not prosecute these people.
several facts and figures, Defence Minister’s speech and many evidences yet to be brought
into the limelight, there is still more to come.
The request references Michel's letter to AgustaWestland's India deals head, which takes note of that "Sonia is the main thrust" and that her nearest counselors ought to be focused so as to secure the arrangement. Nonetheless, "Sonia as the main thrust" behind the arrangement essentially alludes to the way that the Congress pioneer no more needed to fly in the current MI-8 choppers; not that she particularly needed AgustaWestland helicopters. It's far-fetched that Indian examination will move quicker promptly or that Tyagi is liable to be arraigned by Indian courts sooner rather than later. As indicated by The Indian Express, the CBI has drawn closer the Ministry of External Affairs keeping in mind the end goal to get a duplicate of the Milan court request. The CBI's legal solicitations to eight nations are as yet pending and it is likely that simply after data is shared between the different gatherings that the examination can begin grabbing pace. Finally it can be said that after 6
TATA – CORUS SAGA MAKING WAY
The Corus Group British Steel Corp. was a giant British steel producer, consisting of the assets of former private companies which had been nationalized on 28 July 1967 by the Labor government of Harold Wilson. On 5 December 1988 the company was privatized as a result of the British Steel Act 1988. Koninklijke Hoogovens was a large Dutch steel producer founded in 1918, located in Ijmuiden. In October 1999, British Steel joined hands with Koninklijke Hoogovens to form Corus Group. During its formation the steel company was the largest in Europe and stood third worldwide. The French steel company Sogerail, specialized in rail manufacture was acquired in 1999 shortly before the merger by BSC(British Steel Corp. ) for £83 million. In 2001 Corus announced it will be cutting almost 6,050 jobs between 2001 and 2003. In 2003 Corus found itself to be the sole owner of SEGAL, a galvanizing company established 1983 as a joint venture. In March 2006, Corus announced that it had agreed to sell its aluminum rolled products and extrusions businesses to Aleris International, Inc. for €728million (£572 million). Corus was to retain its smelting operations
-Abhinav Banerjee operations and supply Aleris under a longterm agreement. On 1st August, the sale to Aleris Europe was completed. The sale took
place in May 2006. Tata Corus Merger The Anglo-Dutch merger was meant to resuscitate the infirm British Steel which had incurred a loss of £81 million in the ended March 31, 1999. But it did not help much as rationalization, labour unrest and cultural mismatch followed soon. Kwintessential, which helps businesses wade through the challenges of globalization, drafted the company's problems as: absence of clear leadership, bg gap of communication between departments, low morale of labour force, poor productivity and poor organization.
Cultural differences apart, there was another major problem. When Corus was formed out of the merger, bulk investments were made in the Dutch side of the operations. As a consequence, the Dutch operations (Ijmuiden) became a world-class unit while British Steel continued to be on a drag. The issues were clearly reflected in the company's financials. Corus' stock market value in 1999 was $6 billion and it fell to $230 million in 2003, prompting Corus to look 7
look for a buyer. Many companies, including ArcelorMittal, explored the circumstances. Finally, in 2007, Tata Steel bought Corus in a $12 billion deal, which was the largest foreign acquisition by an Indian company till then. Steel was at the crest of its cycle and Tata Steel paid 608 pence a share, a premium of 34 per cent to the original offer price to ward off a challenge from Brazilian miner and
steelmaker CSN. For CSN, however, it might have been different issue because of the raw material support.
director of Corus Strip Products, a unit of Tata Steel Europe, was not surprised that Tata
Steel is exploring the option of divesting its UK units. "I had foreseen in 2012 that this would happen. Tata Steel had put in huge amount of financial resources but the technical resources were not there," Chaturvedi said. Tata Steel's former managing director, J J
Irani, also said he was happy that the Tata Steel board had taken the decision to divest the UK business.
Compromising one good year, Corus has remained a problem for Tata Steel. The steel market started declining from the second half of 2008-09, and the company went for redevelopment. The fact that there were three
CEOs since acquisition didn't help. "All the CEOs were from different European backgrounds. It would have made more sense to have an Indian CEO at helm," an industrialist then said.
Parting Ways
During March 2011, Tata Steel sold Teeside Cast Products to Sahaviriya Steel of Thailand for $467 million. So the latest idea to explore
The Tatas finally resolute to replace the Corus name with the Tata brand and logo, bringing the curtains down on an era that started in the
all options for portfolio restructuring, including the potential divestment of Tata Steel UK in whole or in parts, is a
UK in 1967.The move to replace the Corus name with Tata Steel Europe also indicates that the synergy between the Indian parent and the UK steelmaker, which had taken a major blow during the recession, has been complete, said people associated with the development.
culmination of events and not completely out of the blue. Uday Chaturvedi, who has been with Tata for almost 40 years and had a stint as managing
8
"The Tata Steel name and logo will now appear on all of Corus' transactional
on almost 1,200 jobs, was averted after Tata Steel managed to sell the Teesside unit to
documents that also include product deliveries, locations and vehicles," was a statement from Tata Steel on Monday. This indicated that the Mumbai-headquartered conglomerate's blue logo will now be seen in place of the distinctive red sign of Corus.
Thailand's SSI for $500 million, satisfying employees at Teesside who had turned hostile towards the Tatas.
While the Tata Group had acquired companies earlier also, not all the acquisitions
have seen a brand transition. Jaguar and Land Rover, the premium car brands acquired by Tata Motors, has not yet been renamed. The group's retail business, Trent, also does not use the Tata name.
"The workers understand this is a name change and also realize that the Tata board has been supportive for the employees," Duncan Harrod, a spokesperson for Community Union representing a section of
Corus employees.
According to a senior executive in the group, the conglomerate does not push a new company to meet the standards. "The transition is made only when the new company is ready and also when the group is satisfied," the executive added. Corus merged the Tata Steel family in April 2007, after the Jamshedpur-based steelmaker paid almost $12 billion, in a transaction that created one of the world's largest steelmakers with presence in Europe and Asia. However, soon after the acquisition, the world faced recession due to the liquidity crisis in Europe and the blow was felt by Corus that had to temporarily shut its Teesside unit after a buyer revoked a contract. The closure, which led to a potential impact 9
THE RISE OF PATANJALI
PATANJALI: THE RISE OF AN HERBAL CONGLOMERATE
–Rohit Tillu
It is a profound fact that the early Indian scriptures contained all the secrets to for a healthy body and an enriched lifestyle. All
by the financial year 2016 to Rs.20000 crore by the financial year 2020. Patanjali’s current revenue is more than the established players
those yogis of the past knew the cure for all sorts of diseases and remedies for all the problems of mankind. After all these years, a modern yogi has revisited his history textbooks and seems to be showing everybody the might of the Indian scriptures. Baba Ramdev is kneecapping all the giants in the Fast Moving Consumer Goods (FMCG) sector with its marquee brand ‘Patanjali’ which drives its strength from the Indian roots.
in the consumer goods industry like Dabur, Emami and Godrej. Desi ghee and its toothpaste are the money spinners for Patanjali.
It has been a decade since the phenomenon known as ‘Baba Ramdev’ arrived on the Indian social scene. At a time when all the yogi gurus and babas were busy in minting
If we take the Fast Moving Consumer Goods (FMCG) sector, the average earnings multiple, which is a metric describing how much average earnings are being multiplied every year by an organization is 46. If we multiply it by the Rs.300 crore after-tax
money in their own wayward ways, he was the only one to promote his venture through nothing else but consumerism. Patanjali Ayurved Limited (PAL) was established in the year 1997, as a small research laboratory in Haridwar, is poised to growth as a giant in the consumer goods sector. Today, this company is also being considered as a disruption factor in the consumer goods sector. According to various reports, Patanjali’s revenue, which was Rs.450 crore in the financial year 2012, is expected to reach a whooping Rs.5000 crore
profits made by Patanjali, we get a value close to Rs.14000 crore. So, if the company would be trading on the stock exchanges of the country, the enterprise value would have been Rs.14000 crores. The companies particularly in the consumer goods sector are highly profit oriented, and the ‘Return on Investment’ which is the income generated by the use of investment, is used as a performance metric. Following table gives a comparative idea of Patanjali’s profit margins and RoE with respect to its peers.
The Financial Dossier
10
These numbers clearly indicate that how Patanjali has been beating its peers on their own turf. One interesting fact here is that, all the companies are on the horizon for more time than Patanjali. But Patanjali has overtaken them all in very less amount of time. Also, a few companies used here are dedicated to only a small range of products, like Colgate, focusing only on Oral Health segment. If we see the product range and the lines offered by Patanjali, we can see that
they are clocking the same numbers, but with a bigger product range. There are a few success factors which can be attributed to Patanjali’s mammoth growth across the years on the Indian FMCG scene. Those factors are as follows:
his teachings blindly. One of the major reasons behind Patanjali’s success can be regarded as its attachment with the Yoga guru. Product Pricing Patanjali Ayurved believes in the principle of ‘Vyapaar nahi Upkaar’ meaning ‘not business but assistance. Hence, Patanjali’s products are reasonably priced. Their pricing strategies have helped them to expand their reach as by pricing premium quality products at fair prices, they have brought the lower middle and the lower classes into their customer gamut. A table has been given below covering a few products that Patanjali offers at discounted prices as compared to its peers. Swadeshi Advantage
Baba Ramdev’s Image
Patanjali has surfaced at the time when the
Patanjali is the brainchild of Baba Ramdev, who is regarded as one of the biggest yoga teachers in India currently. The Yoga guru has attained this image in the minds of public through rigor and a commitment to pass the ancient art of Yoga to the masses. Millions in the country today follow Baba Ramdev and
focus of Indian Government is to boost manufacturing in India. There could not be a better time than today when the Central Government is promoting the ‘Make in India’ campaign for bolstering the Industrial growth. As a part of this ‘Make in India’ initiative, Patanjali has received a lot of blessings from the Indian Government which puts it ahead of 11
its competitors who are Multi-National Organizations selling products made outside the Indian subcontinent. Excellent Distribution Chain Patajali Ayurved has entered into contracts with all the local stores in every city to showcase and sell their products. These stores have been selected according to the areas of the cities. Such selection and planning allows Patanjali to virtually penetrate nearly all the areas of all the major cities all at once. The company recently entered into a contract with Kishore Biyani’s Big Bazaar for buying shelf space in big bazaar. The company will be able to tap into the working class who have the habit of buying the month’s necessities at
once from these shopping malls.
and no synthetic chemicals have been used in the production process. Also, they claim that no animal parts are used in the production of their product range. All the products manufactured by Patanjali Ayurved are genuine and made from 100% natural resources. Looking from a bigger perspective, Patanjali
is emerging as a giant who has already overtaken quite a few established names in the consumer goods industry and is on the verge of swallowing even bigger firms in the industry. In the years to come, Patanjali Ayurved would be regarded as a conglomerate who stood tall over its international competitors with deep pockets thriving majorly with its Swadeshi philosophy.
The ‘Organic’ Approach Nearly, all Patajali products come with an ‘Organic’ tag, meaning that they have been produced using all the organic methodologies 12
DEFENCE PROCUREMENT POLICY
UNLOCKING THE CITADEL “Some goals are so worthy, it’s glorious even to fail.” – Capt. Manoj Kumar Pandey, PVC 1/11 Gurkha Rifles Indian defence forces are the third largest armed forces in the whole world. India is one of the biggest importers of conventional defence equipment and the government spends 31.5% of the budget on the capital acquisitions. Out of all the requirements, 60% of it is met through imports. In the coming 78 years, the Indian government is expected to
spend INR 250 billion in the defence sector. In 2011, Defence Production policy was set up to encourage indigenous manufacturing of the defence equipment while Defence Procurement Procedure has been also amended to support the Defence Production policy. The government has also initiated under Make In India, MAKE procedure which targets at promoting the Research and Development in the defence industry and the placement of the orders are also being revised to attract investments from the private sector.
-Anupama Kumarswami dumping of archaic technology in the Indian markets. The 100% FDI would signify that the control of manufacturing the equipment
would be totally in the hands of foreign entities. FDI in this sector is very important at this phase of time because the current technology will soon become an obstacle. It’s not just the technology, the security matters too. When the defence equipment is imported, there are chances of high risk regarding the usage of the weapons. If the weapons are produced within the country, this risk can be avoided with the help of foreign Original Equipment Manufacturers (OEMs). The import expenditures can also be reduced and this would have a multiplier effect on the economy. The government has set up a longterm integrated procurement plan till 2027 and to meet this plan’s objective, the industry would need a capital of INR 50000 crore in the next three years. For this, FDI would be the best available option.
India is struggling to achieve self-sufficiency in production of defence equipment. It is lagging way behind. The weapons used by the soldiers are mostly purchased from the global market. To become self-reliant, the government has opened up the defence sector for FDI. What everyone is afraid of this Defence FDI is that it would result in the dumping
13
The Indian Defence Industry has a distorted market. The exports are very minuscule thus
amount of capital. This capital is usually funded by the government or taken as
making the market an oligopoly with the government being the sole client. The demand is increasing while the supply is stagnant. The only way the industry can meet its demand is by sharing the Research and Development and all the risks related to production with the global OEMs. India is one of the largest buyer’s market, thus making the country able to dictate terms in the market. Thus, FDI in the Defence sector can ensure that latest technology is purchased, national security is ensured while using the technology to manufacture the weaponry and also leveraging the defence offsets as the advanced technology may not be available in the open market.
investments from the interested foreign players. Indian defence market has very less interested investors as there is need of huge investments and it takes a long time to get returns. The investors already in this sector are risk-averse, thus, it results in fewer investments. With the government opening the sector for foreign players, it is making sure that this sector doesn’t lag behind anymore. The FDI in the Defence sector would ensure that the R&D within the country shores is boosted. There are disadvantages too associated with FDI as mentioned earlier, but it will be a huge step towards the growth of the sector in the Indian economy.
The Research and Development of is one of the most important aspects of any sector in the manufacturing industry. The R&D of the industry helps the sector to keep itself afloat in the global markets. To be a successful sector globally, its R&D should be the USP. R&D makes sure that the products are advanced according to the global standards, can create sufficient demand and as well be the reason for the success of the sector. Indian Defence sector is lagging behind if R&D is considered. This sector has high-end quality weaponry and machines which are brought from the global sellers. There is no in-house development of this sector. For a good amount of R&D, any sector requires a huge
The FDI will warrant the increase in R&D
and reduction in the import expenditures. This will allow more revenue that can be allocated for better and more investment in the research of better technology as well as the increase in the usage of indigenous weaponry in the sector. The better R&D would signify the increase in the employability of the sector.
14
Good employees and better reward system would help in the growth of the sector
defence sector can be only avoided through well planned FDI within the sector. This will
internally. More FDI and better returns would signal the strong performance of the sector. This would attract more and more investments from the global markets. This would naturally not just have positive effects upon this sector but also other developing sector. Boosted R&D will ensure that the technology never gets obsolete and is in pace with the global changing standards. An enhanced R&D not only can supply its products to just one sector but also other sectors which implement these advanced technologies in its procedures. The FDI in Defence sector thus, in turn, help the economy as a whole.
not only ensure that the industry grows but also will help in making the Indian Army as the best in the world. The country as a whole would be benefitted through this decision of the Ministry of Defence.
This is after so much time that the government has decided to open up the defence industry. Yet these are tiny steps towards the Defence Procurement Procedure. Other sectors of the Indian manufacturing industries like the automobiles have become globally successful as compared to the defence sector. The obsolescence in the defense 15
BRITAIN’s EU REFERRENDUM
CAUSES AND IMPACT OF BREXIT Almost half of the British public is in favor of British leaving the European Union. Half of Conservative MPs, five cabinet ministers,
Labour MPs and the DUP wants to leave the EU. Why do they want the UK to leave? They believe Britain is being completely controlled by the EU, which they say levy’s too many rules on business and charges membership fees which comes up to billions of pounds a year but get a very little in return. They also want Britain to take back full control of its borders and reduce the number of people coming here to work. One of the main propositions of EU membership is "free movement", which means you don't need to get a visa to go and live in another EU country. It is a move towards the creation of a "United States of Europe". Who wants the UK to stay in the EU? Prime Minister David Cameron wishes Britain to be retained in the EU. Sixteen members of his cabinet also back him. The Conservative Party has promised to be neutral in the campaign - but the Labour Party, SNP, Plaid Cymru and the Lib Dems all of them
support to stay in the EU. US president Barack Obama also wants Britain to remain in the EU, as do other EU nations such as France and Germany. According to recent polls, half
-Eyamini Natranjan of the British public agree to stay and the other half wants to leave. Why do they want the UK to stay? It is a major plus for them to stay in. It is easier to sell things to other EU countries and, they proclaim, the flow of immigrants, most of the young and keen workers, boosts economic growth and assist in making payments for public services. They also believe Britain's status in the world would be damaged by leaving and that we are very secure as part of the 28 nation club, rather than doing it alone. How it affects business? A Lot of big business is in favour of Britain staying in the EU since they have a few expectations . It is easier and simpler for the money to move people and products all over
the world. Big business - with a few exceptions which happens to be in favour of Britain staying in the EU because it makes it easier for them to move money, people and products around the world. A European Union exit will enable the UK to transact trade deals as their country instead of being one among the 28 nations. Many small and mediumsized companies would welcome a cut in red tape and which works as petty regulations.. The British Chambers of Commerce says 55% of members support staying in a reformed 16
reformed EU.
Britain for having a different currency.
If the UK left the EU will UK citizens need
Protection for the City of London: To prevent
special permission to work in the EU?
Eurozone regulations being imposed on it, they Safeguard for Britain's large financial services industry.
It will depend on the deal the UK will agree with the European Union after they exit the EU. If it stayed within the single market, it will definitely retain free movement rights permitting UK citizens to work in the EU and vice versa. If the government decides to
impose work permit restrictions, then Britons will have to apply for VISA to work. What about EU nationals who want to work in the UK?
Running its own affairs : Mr Cameron also obtained a "red card" system for national parliaments, making it simpler for governments to work together to block
unwanted legislation. If 55% of national EU parliaments goes against a part of EU legislation it will be reevaluated.
It totally depends as to what the UK government decides, as to whether to introduce a ‘work permit system’ which is similar to that to the one which is currently is applied to non-EU citizens.It is limited only to skilled working professionals where there are shortages. The main points of the deal are: Child benefit: Migrant workers will still be permitted to send child benefit payments back to their home country.
Impacts:
Migrant welfare payments:
New arrivals
Migration from Europe per annum has
cannot claim the tax credits and other welfare payments at the first instinct only, but the longer they stay they will gradually obtain the right to more benefits. The rate is not decided yet.
increased to more than double of the value which comes up to 183,000 by March 2015. Because of the Immigration the workforce is getting boosted up by 0.5% a year. It supports economic growth without increasing the inflation or the wage growth and holding the interest rates still at a low.
Pound: Britain will never join the euro. The Eurozone countries will not differentiate Britain
Immigration
17
Trade and manufacturing The European Union is the hub for about half of all British goods exports. They have a free trade agreement with the European Union, thus there are a few countries that UK trades freely with..
The United Kingdom’s economic growth is pretty good whether they stay or leave the
European Union. Britain has made better progress than that of the European Union in recent years, and you may expect that gap to spread further over the next few years whether or not Brexit occurs.
Financial services and the City The financial loss could be only for a short term, but will not suffer huge loss. Exiting the EU would help UK to a broker or enter into trade deals with the upcoming markets, which could pay them dividend for the financial services sector in the long run. Foreign investment Britain would remain a retreat for foreign direct investment flows even if it exits the
European Union. There might be a period of weak foreign direct investment as the new relationship of the UK is held up. But if Britain is able to establish favorable terms, then foreign direct investment could regain easily. Public sector The British government will be able to save about £10bn per year, which is the contribution it makes to the European Union’s budget if it leaves the EU. Even though the overall impact of Brexit on the British economy is not known and uncertain, there will be no long term losses. 18
MARKETWATCH
COME SOON MONSOON
-Jatin Sharma
Current scenario of Indian stock markets is best defined by the term ‘volatile’. Long-term outlook of most brokerage houses towards
Japan), improvement in commodity prices especially oil and positive monsoon prediction have led to significant turbulence
India is positive but as far as short-term outlook is concerned there is no clear consensus as per what direction the markets will take. Government’s adherence to fiscal consolidation roadmap and RBI’s bold move of combating bank’s NPA problem head on have made India first choice of the of investors across the globe. Market await signs of pickup in demand and supply so that numbers will reassures their long term faith in India. MSCI (Morgan Stanley Capital International) indexes clearly shows that the global markets are not having a good time and with China struggling with its own woes, India emerges as the only ray of hope.
in the markets. The above average monsoon prediction of 106% that came in early April boosted the sentiments of the markets. After two consecutive years of bad monsoon, rain gods have finally come to rescue the heavily monsoon dependent Indian economy. After that bullish phase the bears took over after BOJ’s undertook quantitative easing to meets its inflation target.
MSCI Index
EU EURO EUROPE NORTH AMERICA PACIFIC PACIFIC ex JAPAN PAN-EURO WORLD
Last
MTD
348.088 927.614 1,433.207 2,066.555 2,198.318 1,101.873 992.518 1,627.615
-4.650% -5.290% -4.550% -1.510% -3.930% -5.230% -4.700% -2.580%
Stock Markets Markets in India have significantly improved from the levels seen in March 2016 but lost momentum around end of May. Global events like quantitative easing by BOJ (bank of Japan
Commodities Markets Commodities having been reeling really low due to weakening global demand and excessive supply (of which China is a major source). Recently commodities have witnessed an uptick in value. Gold has spearheaded this rally of commodities but the
real relief has come has from crude. After touching lows $30 per barrel, oil has now crossed $40 per barrel mark. The global output of crude has decreased and that has caused crude prices to soar. Strenghtening of crude is a huge positive for oil exporting countries which have been struggling to restrict production levels and as a result suffering huge losses. Indian core industries, which include coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity, growth jumped to 16 months 19
NIFTY (March 21,2016 – May 19,2016)
MCX (March 21,2016 – May 19,2016)
high of 6.4%. Among core industries fertilizers and cement grew at the fastest pace of 22.9 % and 11.9 % respectively. Because of this, Index of industrial production (IIP) also showed improvement. Also, there have been some attempts by Organisation of Petroleum Exporting Countries (OPEC) to strike an agreement to curb production levels. Currency Markets Ever since the budget came rupee has continuously strengthened against U.S. Dollar. Overall there is a clear downward movement of USDINR and currently it is hovering around Rs. 67 per dollar. A major event
event relating to overseas investment has been revision of Mauritius treaty which taxes money coming from Mauritius at 7.5 % (Confirm). The Treaty is viewed as a welcome move by the industry and a step in the right direction. But the revised treaty is only applicable on equity. Debentures and bonds are kept out of its purview as per tax experts. Discontinuation of tax exemptions to money coming from Mauritius would also curb round tripping of funds. Currency
Last
EUR/INR
75.662
GBP/INR
98.219
INR/JPY
1.6342
INR/CNY
10.30
20
Great Britain Pound (GBP) has been getting more expensive this entire month and is
take the dollar index up and historical data shows that the relation between NIFTY and
currently trading at Rs. 98 per GBP. The Chinese Yuan Renminbi (CNY) has strengthened against INR in the month of May and has now reached Rs. 10.30 against Rs. 10.26 in April 2016. Japanese Yen has maintained the same level throughout the month of May after the upward rally in April caused by BOJ’s quantitative easing.
Dollar index is inversely correlated. At the same time if the possibility of a rate hike is indeed strong then sectors like IT, pharmacueticals, auto etc. could see their value soaring. The third event that the markets are looking up to is the decision on Brexit i.e. Britain’s exit from the Eurozone. Eurozone is a group of 19 countries which use EURO and two other countries (Denmark and UK) that use their national currencies and Euro. The move is very tricky which will give Britain freedom to draft their own monetary policy but it will also affect trade. Both these effects need to be carefully weighed against each other before taking a final call. UK is a big trade partner of India and if the decision backfires then the ill-effects could spill over to India. Fourth event is the election results of five states announced on 19th of May. This can give a shot in the arm of the ruling NDA to fastrack reforms. In the elections five states were contested and BJP had government in none but that has changed that now and BJP has formed government in Assam by defeating three times CM Tarun Gogoi (Confirm). This open up possibilities of increasing strength in Rajya Sabha, the upper house of the parliament, which has blocked the passage of the highly awaited GST bill. In June when monsoon session of the parliament begins we may see history being made and the biggest tax reform finally rolling out.
The major events that hold great significance as to which direction the Indian markets are going to take this year are monsoon, outcome of federal open market committee (FOMC) meeting in June where a rate hike is expected, Brexit and passage of GST. When we talk about monsoon the things that matter is volume, spatial distribution and timing of rains. If the predictions indeed prove to be true, then market would see an unprecedented bull run. Good rainfall this year could end the streak of consecutive below normal rainfalls, bring relief to drought affected and water shortage prone districts, lift rural income and give a push to demand side factors curtailing production. In fact, prediction of good monsoon was among the biggest reasons for the uptick in investing activities seen in midApril. Monsoon has huge potential to lift stock prices of agricultural and agriculturalallied industries. After monsoon the second most important factor that will effect stock markets will be the outcome of fed next FOMC meeting in June. A rate hike could take
21
QUARTERLY RESULT UPDATE
LOOKING AT BFSI AND OIL & GAS SECTOR It is the end of another year for corporate India. This year has had its share of ups and down as well. With the end of the euphoria
surrounding the new government, people realized that the road ahead was not easy. The government faced some daunting challenges and they did not enjoy the full majority to take tough steps. It was a year where expectations got corrected. We focus on one of the most sector for the Indian economy, The Banking, Financial Services and Insurance (BFSI) sector. BFSI has been a high beta sector. Major market indices are weighted heavily towards these sectors. If they perform well, then the indices do well and vice versa. Also, India has a strong focus on the services sector and they form an integral part of it. The banks have been trying to avoid huge NPA’s this year, but the RBI has been stringent regarding provisions for bad loans and the asset quality board has forced banks to quickly recognize such bad loans as NPA’s. This is a large sector and we will be looking at a few of the top listed players in the industry.
-Ishan Gupta
net importer in the field it had limited issues. The major gainers in this were the refiners whose margins improved considerably. Let us look at results for some of the biggest listed players in this industry. Punjab national Bank It is one of the oldest financial institutions in the country. With a history of more than 100 years, the bank is one of the most important institutes in the country. For the year ended
March 2016 the bank reported a total income of Rs. 54,301 Cr. Its Net Interest Income was Rs. 15,312 Cr. The reported operating profit was Rs. 12,216 Cr. and the net profit was Rs. (3,974) Cr. It reported one of the worst results among public sector banks. Its gross NPA ratio stood at 12.9% against 8.6% last year. The provision coverage ratio was a huge 51%. To tackle the problem of NPA’s the company has created a war room for swift auctioning and sale of assets to Asset Recovery Companies. HDFC Bank
It has been an interesting year for the oil and gas industry. With bent crude bottoming out to its lowest in decades, some companies in
It is one of the largest and the most profitable private bank in the country. It is one of the first private institutions which were given a
the sector stood to gain and some lost. All exploration majors faced a very tough time as their revenue margins tanked. Since India is a
banking license by the RBI. For the fourth quarter of 2015-16 the bank reported a total income of Rs. 18,862.6 Cr. (up 21.1% year on 22
year). Its Net Interest Income grew to Rs. 7,453.3 Cr. (up 24.0% year on year). The
(up 61% year on year). The company cost to income ratio reduced from 61.1% last year to
reported net profit was Rs. 3,374.2 Cr. (up 20.2% year on year). For the year ended March 2016, the bank reported a total income of Rs. 70,973.2 Cr. The bank achieved a net interest margin of 4.3%. The cost to income ratio came down marginally to 44.3%. Its net profit for the year was Rs. 12,296.2 Cr. (up 20.4% year on year).
48.3% this year. However, its return on average gross loan portfolio also fell by 0.3% to 5.3%
Overall, the bank reported very strong results. Even in such a tough environment, High rate of defaults, the bank was able to achieve good growth. Its Gross Non Performing Assets are a miniscule 0.94% and restructured loans are 0.1%.
Infrastructure for this code will take time to shape and some more time to show results.
SKS Microfinance
On the forefront of micro lending is SKS microfinance. One of the rare listed financial institutions which has been able to raise funds for this venture. It started as an NGO and has been credited with creating a stable model for Microfinance. The company has recently decided to change its name to Bharat Financial Inclusion, to get rid of its past related to the microfinance crisis. For the quarter ended on March 2016, the company reported net revenue of Rs. 370 Cr. (up 64% year on year). It also reported a net profit of Rs 84 Cr. (up 108% year on year). For the year ended March 2016, the company reported net revenue of Rs. 1,321 Cr. (up 64% year on year) and a net profit of Rs. 303 Cr.
It has been a tough year for the banking industry. With the results still pouring in, the situation is bound to get worse. The government has passed the bankruptcy code which will be good for them. But the
Oil and Natural Gas Corporation (ONGC) It is the largest producer of crude oil and natural gas in India, contributing about 70% of the domestic production. ONGC Videsh (OVL), its wholly owned subsidiary, is the
biggest Indian multinational in the energy space, participating in 36 oil and gas properties in 17 countries. The company reported gross revenue of Rs. 78,569 Cr. (-5.5% year on year) for the year ended March 2016. It also reported a lower net profit of Rs. 16,004 Cr. (-9.8% year on year). These are the standalone figures for the
company. It is in line with other major oil exploration companies which are reeling from low crude price in the commodity market. The only profitable companies in the oil sector are the refineries, like reliance industries, which have been able to profit from declining prices and increasing margins. 23
SAUDI ARABIA WEALTH FUND
SAUDI ARABIA STARTS A SOVEREIGN WEALTH FUND
-Sandhya Adhavan
What Is A 'Sovereign Wealth Fund A sovereign wealth fund (SWF) is a pool of money derived from a country's reserves, set aside for the purpose of investment that will benefit the country's citizens and its economy. The funding for a sovereign wealth fund comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. Since 2000, the number of sovereign wealth funds has increased dramatically. The first SWFs were non-Federal U.S. state funds established in the mid-19th century to fund specific public services. There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the business cycles' adverse effect on
government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. It is believed that SWFs in resource-rich countries can help avoid resource curse.
financial markets. A large persistent fall in oil prices could cause a reversal of these outflows. According EIA report on February 2013, Saudi Arabia has almost one-fifth of the oil reserves. This abundant oil reserves of which 90 per cent constitute the country’s economy, has now planned to diversify into other areas to protect from the risk effect of purely depending on one sector. As of June 2015, Middle East has the highest share in the market with 40.24 per cent in Sovereign Wealth Fund. The next followed by Asia with 39.74 per cent.
Out of the surplus revenue in the Sovereign Wealth Fund, the major allocation is for oil and gas related with around 56.6 per cent share.
Background:
As of 2013, Saudi Arabia is the largest crude oil exporter and the only producer with significant spare capacity. Massive allocation of the oil receipts have been invested in the financial
24
SWFI – Sovereign Wealth Fund Institute The
Saudi
Arabian
Monetary
Agency
(SAMA) is the central bank of the kingdom of Saudi Arabia. The SAMA has a massive pool of foreign currency reserves. Since 1986, SAMA has a fixed exchange rate regime, with a dollar peg. Foreign exchange profits mainly from crude oil exports are deposited with the Saudi Arabian Monetary Agency.
Saudi Arabia launched its first sovereign wealth fund in 2014 to manage budget surpluses from a rise in crude prices estimated at hundreds of billions of dollars. Saudi Arabia’s SAMA foreign holdings started in the year 1952 has $598 Billion in this fund for Oil reserves which is preceded by Norway with $847 billion, United Arab
Emirates with $773 billion and China with $ billion. Recent News Of Saudi Arabia’s Investment In Uber
the country's first international debt offering. In other words, bond investors will be
indirectly purchasing Uber shares however without any of the upside, and all the downside should oil resume it slide. "We’ve seen first-hand how this company has improved urban mobility around the world, and we’re looking forward to being part of that progress," Al Rumayyan said in a statement. "As the Kingdom of Saudi Arabia's
sovereign investment arm, we’re focused on achieving attractive long-term financial returns from our investments, while supporting Saudi Arabia’s Vision 2030, the blueprint for diversifying our economy away from oil. This ambitious and far-reaching plan presents a number of goals, including unlocking strategic sectors such as tourism and entertainment, boosting employment opportunities and women’s participation in the workforce, and encouraging entrepreneurship.” Conclusion
On June 1st 2016, Saudi Arabia sovereign wealth fund bought a 5 per cent stake in Uber for $3.5 billion. This would be the largest single investment ever made in a private company. In total Uber has raised around $10.7bn from outside investors, excluding a $2.3bn convertible debt facility, making it the best funded start-up in the world. What is most surprising is that the investment comes at a time when the Saudis are planning on issuing $15 (or more) in international bonds, the
The value of acquisitions involving sovereign wealth funds has risen 62 percent to $28.6 billion in the year to date, the highest level since 2008, Thomson Reuters data showed on Friday. With oil prices languishing and market volatility increasing, SWFs are focusing on new disruptive platform that would fetch more return for them in future.
25
MONSOON 2016
RAINS AND RISING HOPES
-Hemlata Hajong
Two years of consecutive drought has left many farmers to believe into superstition. The farmers of a village near Maharashtra invited
with an above-normal monsoon. If the forecast turns out to be true it will boost economic and business sentiment after a long
a man known to have powers to find water. That man marked the area with a stone where the villagers could find water. According to them that was their last hope. And by miracle or by coincidence they did find water.
phase of farm distress and overall demand slump. Moreover a good monsoon will also help keep prices in check and restore the confidence of Reserve Bank of India to maintain its accommodative monetary policy stance.
When Indian summers reach their peak only rainfall can change large parts of India from a kind of semi-desert into green lands. A good
monsoon is always a sign of good fortune. But since two consecutive years India has been facing drought. As 68.84% of the total population live in rural areas and survive on agriculture, insufficient water for irrigation and farming led to less production, denting rural customer’s ability to spend. Agriculture contributes 15% to India’s GDP and employs about 60% of the country’s population. Due to poor monsoon in 2015-16, there was a decline in the demand of consumer goods whose majority of the customers lives in villages than cities. Many of the top Indian companies reported their weakest pace of growth in two years in the quarter to March. The scenario was so bad that the center sanctioned a relief package of about Rs 10,000 crore to help farmers of 10 states that declared drought. Also 2015 has been recorded as the hottest year. But the companies expect to reverse with
The Indian Meteorological Department announced on 12th of April that the forecasters are eyeing above average rainfall from June to September with a probability of more than 94 percent precipitation after two straight years of drought. Monsoon will be 106 percent of normal rains or the long period average (LPA) with widespread distribution throughout the country. Anything less than 90% of the LPA is termed as a deficient monsoon and 90-96% of the LPA is considered as below normal. Monsoon is considered as normal if the LPA is between 96-104% of the LPA. Above-normal monsoon is between 104-110% of the LPA and anything 26
anything beyond 110% of the LPA is considered as excess. The monsoon would
Indian companies is expected to hit five year high as consumer inflation had fallen below
deliver 6% surplus rain in its famed fourmonth journey from the Kerala coast to the lofty mountains in Kashmir. But Northeast India and Southeast India, particularly Tamil Nadu, may get slightly less than normal rainfall. IMD said the probability of excess rainfall was 30% and that of below normal was 5%. Along with this came another positive news from the Central Statistics Office that India’s factory output for February logged a growth of 2% from a year ago, even as annual retail inflation fell to 4.83 percent in March, from 5.26 percent in February. This news kindled hopes of India Inc. and cheered farmers who expect good harvest this year.
5% while industrial output had bounced back after contracting for three months. The markets have already sensed the positive outcomes. As soon as the predictions came, Sensex shot up with a gain of 0.49%. India's industrial production growth also bounced back into positive zone. Industrial growth got a boost from 9.6% increase in electricity generation and 5% increase in mining output. Manufacturing, which makes up over 75% of the India’s industrial production, rose 0.7%. Sales of tractor improved which is generally considered as the barometer to measure customer sentiments in the rural markets. India's largest tractor company Mahindra and Mahindra posted 22% growth in sales for April, compared to same period last year, of over 20,704 units. They had forecasted for a 10% growth in the first quarter of FY17. While Faridabad-based Escorts saw tractors sales grow 10.3% in volumes to about 4000 units and Sonalika International Tractors posted a 7% growth in sales for April to 5392 units. Beside tractors, scooters and motorcycles also sold fast after the prediction. The valuation of TVS Motor, India's second largest motorcycle maker has increased significantly. This comes as good news as a motorcycle dealer in Aurangabad district of Maharashtra, one of the worst hit in the drought, was stuck with unsold bikes. Car companies like Maruti Suzuki have outlined a growth rate of 6-7 per cent for 2016 27
Monsoon directly boosts rural income, increases the demand of fertilizers, controls inflation and stock market gains. The predicted monsoon will not only improve the farm sector but also many other Indian companies. Heavy showers will boost demand for scooters, motorcycles, small cars, ice creams, consumer goods, tractors and farm equipment, which has been hit by frequent monsoon failure in recent years. And this year the pace of sales growth of indian
2016-17. For them the rural sector is crucial. Consumer goods’ production also increased
economy in the world will grow at an even faster pace this year.
to 0.8% compared to last year. Housing finance and commercial vehicle finance companies rallied on the back of expectations of better loan growth from good rural demand. Can Fin Homes, GIC Housing finance and Muthoot Finance had gained more than 8% in trade. Mumbai’s Bonanza Portfolio Ltd, which manages about Rs 1 billion of investments, is planning to target companies that target low-income buyers of honey, herbal tonic and similar products, from Marico Ltd to Dabur India Ltd.
The expected heavy rainfall was 8 days late but has started in some parts of Tamil Nadu
and Kerala. It will end the water shortage in many parts of the country, particularly Maharashtra and parts of southern India, where reservoirs have hardly any water left, although it will take a few months to ease the situation. If the predictions come true India, already being the fastest growing major economic 28
VRIDDHI RESEARCH REPORT UNITED PHOSPHORUS LIMITED
-Manikantha Kosuri
Company Background: United Phosphorus had started as a small scale unit to manufacture Red Phosphorus about 40 years
each of them boast of strong support from the on-site technical services and the quality control teams. Each of its units operates under
ago. Through backward and forward integrations respectively, today it is a leading global producer of crop protection products, intermediates, specialty chemicals and other industrial chemicals. Being the largest manufacture of agrochemicals in India, it offers a wide range of products that includes Insecticides, Fungicides, Herbicides, Fumigants, PGR and Rodenticides.
the strictest international quality standards and has been certified under ISO 9001 for Quality Assurance, 14001 for Environment Pollution Control Norms and OHSAS 18001 for Health and the Society.
UPL has team of experts in different parts of the world which conducts a proper study of the market and the other competitors, charts out growth plans through mergers, acquisitions and strategic alliances. It operates in every continent and have a customer base in 123 countries with their own subsidiary offices in Argentina, Australia, Bangladesh, Brazil, China, Canada, Denmark, France, Germany, Hong Kong, Indonesia, Japan, Korea, Mauritius, Mexico, New Zealand, Russia, Italy, Turkey, Spain, South Africa, Taiwan, USA, UK, Vietnam, Zambia, Shanghai, Columbia and Netherland. It is ranked amongst the top 5 post patent agrochemical industries in the world. With 24 manufacturing sites (10 in India, 4 in France, 2 in Spain, 3 in Argentina, 1 each in UK, Vietnam, Netherlands, Italy, China) and
Share Holding Pattern:
Fundamentals: • Growth in UPL is driven by strong volume, operating efficiency and marginal price increase. The company reported revenues of Rs.4,340cr, a growth of 20% YoY, led by volume (up 25%) and price (up 1%) growth. However, the negative effect of the currency, around 6%, limits the growth for the quarter. The operating performance for the quarter improved on account of decline in input cost and better operational efficiency. The reported net profit improved by 25% YoY to Rs552cr which includes extraordinary expenses of Rs58cr, 29
• adjusting to that PAT stood at Rs610cr, a growth of 33% YoY.
• long). Going ahead, the merger of Advanta Seeds is likely to take three to four months
• Strong growth in revenue was largely driven by Latin America where revenue grew by 57% YoY largely on account of fungicide and ease on exports tax on commodity in Argentina, strong performance in Mexico and Columbia. The Latin American and domestic markets are expected to play a key role in the revival of
and after the merger, the management is confident of maintaining RoCE in the range of 18-20%. Going ahead, the company has planned a capex of Rs650 crore in expansion of its capacity in technicals (India, France, Colombia) and formulation (India, Rotterdam, Brazil and US) which will be kicked in from FY2018 and will be the key growth drivers.
the demand for agrochemicals as both the markets are witnessing uneven weather patterns. • The net working capital cycle for the quarter increased from 86 days in Q4FY2015 to 91 days in Q4FY2016. Increase in working capital was largely on account of increase in debtors in the domestic and other markets due to drought situation. Going ahead, the management believes that the company will be able to maintain the working capital cycle between 90 to 110 days as the company’s main focus will be to manage the working capital going ahead. •
In FY2016, the UPL’s net debt has
Conclusion: The management has maintained its guidance of 12-15% growth in revenue and improvement in earnings before interest, depreciation, tax and amortisation (EBIDTA) margin by around 60-100BPS in FY2017. The growth in revenue will be driven by new launches of innovative products and increase in market share (especially in Latina America where the company is young player). Hence, Finstreet gives a buy rating for the stock valuing the company around its average price multiple of 13x and arrived at the target price of 650. Valuations
increased in the range of Rs860 crore to Rs3,230 crore largely on account of stake increase in subsidiary (from 75% to 100%), registration of new products and rise in debtors (tough weather condition and high growth exposure from Latin America where working capital cycle is long 30
Results
Technicals
31
32
FINANCIAL TRIVIA In 1790, to pay for war debt, the federal government refinanced all federal and state Revolutionary War debt by issuing $80 million in bonds. These become the first major issues of publicly-traded securities and marked the birth of the U.S. investment markets.
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 Š IBS Times – FinStreet, The Official Capital Markets Club of IBS Hyderabad. All Rights Reserved Visit us at www.finstreetibs.org
33