The IBS Times Issue 165 by The IBS Times

THE IBS TIMES May 14 , Issue No. 165

Taxation – Abolish or Reform

BRICs and MINTs Emerging Economies Can India Make the Elephant Dance M&A Activities in Banking Sector Banking Licenses

TATA – TESCO JV Exclusive Report on Cipla

INTELLIGENCE BEYOND SUCCESS

“The United States remained the world’s largest economy, but it was closely followed by China when measured using PPPs. India was now the world’s third largest economy, moving ahead of Japan,”- World Bank’s International Comparison Program

Elections 2014- The World is Watching IN THIS ISSUE In Focus (Pg No. 2): TaxationAbolish or Reform? -

Chaahat Khattar

Future Tense (Pg No. 4): Can India Make the Elephant Dance? -

Manisha Mohapatra

Opinion (Pg No. 6): Emerging Markets – From a Breakout to Breakdown Nations -

Akshay Gupta

What is? (Pg No. 9): The TATA- TESCO Joint Venture Nishtha Behl RBI Corner (Pg No. 11): New Banking Licenses- Impact on Banking Industry -

Nikhil Acharya

International Desk (Pg No. 13): The BRICS shadowed by the MINTs -

Vanika Sharma

M&A (Pg No. 15): Plight of Indian Banking Sector Due to Mergers and Acquisitions -

Atharva Solanki

Vriddhi’s Analysis (Pg No. 17): Company in Focus- Cipla -

Ankur Chauhan

FROM THE EDITOR’S DESK The political ground below our feet is shaking across the globe. As you read on this newsletter, close to one billion people spread across six nations- India, Afghanistan, Hungary, Indonesia, Algeria and Iraq would have decided the fate of thousands of politicians accross boundaries. Soon there will be renewed diplomatic relations and as Russia dares the west in case of Ukraine, a lot is happening if you see around. On the business front, we have american companies going all out for shopping with General Electric aiming at TGV maker ALSTOM SA of France and Pfizer using all its arsenal to acquire AstraZeneca of United Kingdom to become world‟s largest pharmaceutical company. On our home soil, cricket matches and elections are the face of every news channel, the stock markets are trading at peak levels, lot of M&A activities are going around meaning we have plenty to study and research upon. But when we have a nation with estmimated total election spending crossing USD Five Billion, many otherwise struggling sectors of economy get the much needed boost such as aviation (especially private aircraft charter companies), PR agencies, marketing firms, hotels, restaurants, caterers, cab oprerators, gas stations, carbonated drinks and liquor manufacturers, singers, actors, designers, camermen, logistic services, street vendors, auto rickshaw drivers to name a few. Sharing knoweldge is gaining knowledge. With the intent of not only presenting our views but inviting the readers also to share their opinions, we bring to you another issue of The IBS Times in it‟s all new avatar. In this issue we are starting off whether we can actually do away with taxation in the economy. Also in this issue we discuss if India can have a dominant position in the world economy. Further, we talk about what we usuall otherwise refer to as ”If west sneezes, developing nations catch up with cold”. TATA has been a lot in news lately because of numerous JVs it has been entering into and we discuss one such JV it is planning to have with a leading supermarket chain. With RBI issuing banking licenses to Bandhan and IDFC, we discuss the impact of the same on banking industry. In this issue we are also putting a light on weakneing of BRICs and emergence of MINTs in international diplomacy. We also have shed some light on the impact of M&A activities in the banking sector of the country. The magazine covers an exhaustive report from investment point of view on Cipla by Team Vriddhi Research. Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better ! Chaahat Khattar

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” - William Feather

In Focus

Taxation- Abolish or Reform? April and May 2014, will probably be the most politically happening months our generation have seen so far with close to 1 billion eligible voters deciding fate of thousands of politicians (or aspiring) and probably leading to new political relations across the globe. India being the largest democracy in the world, will have many stories to tell but before that it is the election manifestos of political parties in India and their fuelled (controversial as well) speeches that steal the show. India is not only home to good number of Forbes and Fortune headlines, it is also known for one of the most stringent tax regime. The Income Tax Act, 1961 (edited and revised hundreds of times thereafter) is the bible for every tax payer in the country and concepts like Goods and Service Tax and Direct Tax Code are poised to revolutionize it. Governments after governments, targeting a common man or known industries with lucrative tax relaxations is in fashion and easy way out to get onto national newspapers for good. Known Indian Yoga guru- Swami Ramdev also found out an interesting way (initially layered and put forth by Arthakranti Prathishthan and Maharashtra Knowledge Corporation Limited) to not only enter into politics indirectly but also to challenge the economics of taxation. He went ahead to term Income Tax and other taxes such as Sales and Excise Taxes as burdens and abolishing them is the need of the hour. Initially, the Bharatiya Janata Party (BJP, a national level political party in India and a frontrunner for the Lok Sabha Elections 2014) initially backed the idea of Ramdev but later made

a U-turn and since then has not really even talked about it. Looks like BJP visited the drawing board with their economists before promising something that definitely needs a good birdâ&#x20AC;&#x;s eye view. Before we go down to discuss what Ramdev initiated and how a country with just one single tax (Banking Transaction Tax as

Ramdev mentioned) would function, let us know a bit about taxes. The Great Depression of 1929, saw the epic fall of Classical Economics and birth and rise of Keynesian Economics which stated that government always has a monumental role to play in the economics of a country as against the fundamentals of Classical Economics which strongly advocated Laissez Faire (free economy without any government interference). Fiscal Policies (policies related to revenue and expenditure of the government) is one tool in hands of federal government with which it can both directly and indirectly impact not just its vote bank but more importantly the purchasing power of a citizen (natural or artificial) thereby directing the growth of the 2

nation. Taxation is certainly the most common source of revenue in mixed economies. Taxes are compulsory in nature and there is no quid pro quo (meaning you cannot expect what for what in that). Taxes are sacrifice by taxpayers and not something they should see as a payment for some facility from the government. Governments also use taxation to encourage or discourage certain economic decisions. For example, reduction in income tax by the amount paid as interest on home loans results in greater construction activity leading to more employment. Tax rates across the nations promote or restrict (regulate) trade and transactions which are the essence of any economy. There are many uses of collecting taxes and let us know some really common to all. The most obvious usage of tax is to pay for the operation of central and state governments. The main use for the money governments collect in taxes is to provide goods and services to the public. Taxes pay for education, infrastructure and public transportation, public welfare programs such as housing and shelter programs or what we know as â&#x20AC;&#x153;yojanasâ&#x20AC;?, unemployment benefits, and health, police, and fire protection. Tax money also pays for the daily operating expenses of government, such as the salaries of government employees and interest owed on government debt. With progressive taxes, such as the income tax, the more one makes, the greater the percentage of tax one pays. When wealthier taxpayers are taxed at a greater rate than the poor, there is actually a

redistribution of wealth. Many people feel that redistribution is required to maintain a desired level of economic health, as well as being a so-cially beneficial thing to do. Another major objective of the tax system is to give incentives to activities that government believes are good for the nation and to discourage activities that are not. For example, a tax waiver for industries promoting exports of the nation. Similarly, higher taxes for high pollution emitting automobiles. So, tax is the backbone of any economy especially developing ones which cannot really do without having huge public spending bills or even for developed nations which continue to face mammoth business cycles (coexistence of tremendous growth and steep downfall). In a modern economy like India, what would happen if we replace all prevalent taxes (and doing away with all deductions or exemptions) with one single tax such Banking Transaction Tax (“BTT”)? People proposing and backing this idea on paper has estimated close to INR 15 lakh crore in tax collection annually through BTT as against the current combined current earnings of INR 10 lakh crore. BTT is very simple to understand by virtue of its name itself. There will be a flat tax rate for all bank transactions and one would pay no other tax. If BTT is say 2%, someone transacting INR 20,000 will pay INR 400 as BTT or someone transacting INR 20 crore will end up paying INR 40 lakh as BTT. This looks and sounds very simple. It is even feasible as countries like Estonia, Lithuania and Latvia are following BTT as its sole taxation based revenue system. Interestingly, these countries have also experienced positive economic growth adopting flat tax rate policies. Coming back to India, there are two stark sides of having a single

taxation system. On the positive front, a simple BTT will significantly bring down the operational costs of administration and tax compliance. Also, zero income tax will benefit the taxpaying classes directly, the demand will significantly sprout which will flow directly to manufacturing and service sectors that have inflation lower than food. Another major benefit for the economy would be that government can cut down its subsidy bill significantly. As people will be pocketing more and may have higher disposable income, the purchasing power will be high. There are chances that the black money stacked abroad (trillions of dollars) may find its way back home as multiple taxation is abolished. On the other side of the coin, the story is different. India is a country where only 3% of its population pays income tax and indirect taxes contribute maximum to the tax revenue. As far as banking transactions are concerned, 60% of the population of the country has no bank account and mere 20% of all the transactions in the economy is through bank and rest is in the form of cash. Opening banks and promoting more non-cash based transactions (doing away with notes of higher denominations such as 500 and 1,000) might influence people to opt for transactions through banks but that will need both extensive capital and good time. A flat tax system imposes similar tax rate on all taxpayers regardless of the income. It looks to be fairer but the catch is that it has its own dark side. A person earning INR 2,000 a month will be taxed at the same rate as the person earning INR 2 lakh a month. The former spends more of his/her income on necessities against the later, hence it might be too much for him to pay BTT and maybe too little for the later. A farmer getting subsidy to a senior citizen getting a small 3

pension, everything will be slapped with BTT. From a broader perspective, it is extremely regressive and can lead to income inequality on a large scale. As far as black money is concerned, when government introduced Voluntary Disclosure of Income Scheme (VDIS), it managed to get INR 33,000 crore of undisclosed wealth into the white economy which further provided INR 10,000 crore in taxes in that respective year. The catch is that majority of that undisclosed income was in the form of jewelry and gold (37%), cash (50%) and property (5%) and not in bank accounts. So the applicability and ambit of BTT seems questionable. Another very crucial aspect is that constitutionally, it is next to impossible to abolish taxes just in case the parliament approves it, judicially it will be contested around the country. All in all, on paper the idea is definitely aimed at the right direction but a country where there is dispute on sharing revenues amongst the Center and the State on something like Goods and Service Tax (GST) will a centralized single taxation system work? It could also be a case where India would also be seen as a tax haven which may lead to illusionistic but unrealistic economic growth. Industry leaders have varied opinions but implementation seems to be the common buzzword amongst all. Reforming taxation system, paving way for GST and Direct Taxes Code (DTC) and eventually moving to something like BTT or a more applicable and feasible taxation system can well be the way forward keeping in mind the enveloping principles of India‟s fiscal federalism. -

Chaahat Khattar

Future Tense

Can India Make the Elephant Dance? Ever since the Indian Government opened its economy to the outside world the country saw a myriad of changes happening around. The time had come for realising your own potential and giving the world the taste of what you have got. In short it was a clarion call for growth and development. Some of the fastest growths we saw happened in the fields of computer technology, IT, aeronautics, fashion, food, infrastructure etc. With the public subscribing to the cable TV network to opening up of videshi fast-food joints, from swanky cars to glass-door cabins of the private sector, from internet to mobile phones Indians had the taste of all the developments happening. But all these changes did not happen over-night. Countries like China, South-Korea opened their economy and introduced FDI in 1970s while India took the decision almost 20 years later. By this time these countries had surpassed in all areas especially technology and infrastructure. As the famous English proverb says “better late than never”, India finally plunged into the deep ocean of opportunities. The growth in the sale of desktop PCs and the opening up of workstations of technology giants like Nokia, Vodafone, Google, Microsoft etc. proved that the foreign multinationals had realised the immense talent hidden in the Indian youth and that is why without wasting much time they took them on board. India had a house of talent- a pool of young people who had the zeal to succeed and to make it big in their life. The development of Indian youth lied in employment. And good employment comes with better facilities and infrastructure. The government realised this position and started a series of developmental program. The

construction of golden quadrilateral, well-connected network of highways and superways, plush air-ports, metros are examples of how fast India was responding to the required changes. It was these efforts which saw the GDP of our country rising and touching almost 9%. Another striking new feature was the falling GDP from the agricultural sector and rising GDP from services sector. The analysts around the world started feeling maybe India will become the most developed nation by 2020 and surpass USA and China. In midst of all this, we forgot one thing; if there are good effects there are also side-effects of open economy. The world witnessed some of the worst crisis: the mortgage crisis of USA (2008) and the sovereign- debt crisis which affected several countries of the Eurozone (2010). India being a client to many of the business firms of these nations was not spared. She did not face any immediate impact because she was still reaping the benefits of the GDP equal to 9%. But India could not avert the problem for a long time. The GDP decreased to 6% from 8% and CAD was equal 4

$29.8 billion which was 1.5 less than that of the year 2008. Since the leading economies of the world were going through a downturn the demand for Indian goods reduced. As a result the exports declined. The internal or domestic demand also declined and so did the investments decreased. The firms‟ production stalled which stalled India‟s growth. Also creeping in was the problem of rising inflation. India‟s CPI touched almost 11% in 2011. India was going through the twin problems of inflation and slow growth. Meanwhile in USA, as the stock markets crashed and the Federal Reserve started buying started buying Government bonds the foreign Institutional investors lost their confidence on USA economy and eyed towards east. A series of investments by foreign investors started into the Indian stock market. Not only the FIIs but also the foreign companies were interested to invest in India. Due to slow growth and lack of demand expansion became the only solution for these firms and retail giants like Wal-Mart and Tesco geared up to come to India.

Now the question which comes can we revive back the lost glory? When it comes to bringing India back to track one name goes without mentioning and he is Dr Raghuram Rajan. He joined as the Governor of Reserve Bank in the year 2013. A time when India was facing multiple problems like inflation, high fiscal and current account deficit, a depreciating rupee and slow growth with decreasing exports. He very skilfully held the reins and took the horse to the right direction. He executed the monetary policies well like increasing the statutory requirements in spite of the opposition from the industrialists. Also by hiking the gold import duties the current account deficit came down. Indiaâ&#x20AC;&#x;s exports also showed marked improvement with a rise in 2.2% in the third quarter of 2013. With a better monsoon this year Mr Rajan is confident of bringing down the pressure of inflation. With these conditions and a stronger rupee India is also prepared for the tapering of the fiscal stimulus by the Federal Reserve. Then we have a pool of talented people who are making news in the world of entrepreneurship. These people have ideas, guts and risktaking ability to make their business successful. For e.g. a very talented young man started an online shopping site where handicrafts made by Indian craftsmen would be sold. Some of the leading companies of Europe are planning for a merger or starting their subsidiary unit in India because they feel that the modern population of India is ready to experiment and buy new products from these countries. Some popular mergers and take overs which have benefited Indian companies are the Tata-Jaguar take-over and the Jet-Etihad partnership. There is also a lot of scope in the domestic manufacturing industries that manufactures semi-conductors and IC chips. This is the reason

why the Government has allocated Rs. 100 crores towards the growth of the sector. Many new Indian companies have come up with innovative products and services like booking bus ticket online and buying houses online. The above mentioned factors and a stable government put together can surely make the Elephant dance for the Indian Economy. -

Manisha Mohapatra

Opinion

Emerging Markets – From a Breakout to Breakdown Nations All of us after the housing bubble burst in 2008 had formed a preconceived notion that the golden era of the west is over, however when we read the above quote today most of us feel how right this phrase is. Over the past several years, the most talkedabout trend in the global economy has been the socalled rise of the rest. The primary engines behind this phenomenon were the five major emerging-market countries, popularly known as the BRICS: Brazil, Russia, India, China and South Africa and other emerging markets like Indonesia, Turkey, Mexico where the world was witnessing a once-in-a-lifetime shift, the argument went, in which the major players in the developing world were catching up to or even surpassing their counterparts in the developed world. However, the truth is that at present, the emerging markets are a safe haven for investor‟s most unwanted asset: fear. Here‟s why. Let‟s roll back to 2007, emerging economies have lost nearly $2 trillion in the stock market blame of which can be placed at the door of their state owned companies which account for 1/3rd of these economies roughly $9 Trillion market capitalization. Over the past 5 years, the value of private companies in emerging economies such as BRICS and economies such as Mexico, Indonesia and turkey have remained stable but the kicker is that the value of their

state owned companies has dropped by 40%. The market mayhem that began in May 2013, where Ben Bernanke outlined a tentative plan to reduce extraordinary monetary stimulus, global investors since then, have been pulling money out of

emerging markets. The equity prices have wilted, bonds yield have climbed and currencies have tanked. So how has all this hampered the emerging markets? Brazil‟s GDP grew by only 1% and may not grow by more than 2% this year, with its potential growth barely above 3%. The major predicament with the Brazilian economy is that it overheats at slow speed as the investment rate is at low. This is the reason why Brazil‟s economy has stagnated for many years at just 19% investment rate, one of the lowest rates in the emerging world. Frequent visitors to Rio look at empty fields where stadium of 2016 Olympic Games are supposed to be built and wonder if Brazil is going to pull it off. Same is the case with Russia. Despite oil prices being around $100 a barrel, Russian Economy Minister Alexei Ulyukayev suggests that Russia is likely to grow at 2.5% since the economy is too dependent on oil and gas, afflicted with corruption and lacking a credible legal framework for business. South 6

Africa, a developed market wrapped around an emerging market, grew by only 2.5% and with its currency depreciating; it would not grow faster than 2% this year. When it comes to India, the economy seems to be in denial. Why in denial? The GDP is at a 10 year low (Around 5%) but the government still is optimistic to achieve breakthrough results by the next quarter. The Rupee is at an all-time low - 1$=Rs. 62 which clearly states how vulnerable the economy is to any sort of policy measures. We need to focus on Commerce, and not only on Finance. The government is blaming it on the QE measures by the fed‟s, however, the truth is that the economic downfall is more of a swadeshi crisis than a foreign one. The haemorrhaging started on heavy selling by foreign institutional investor (FII). In order to fund the current account deficit (CAD) which stands at $70 billion, Indian authorities, with their infinite wisdom thought they could do that with the FII inflows –which in lucid terms is like paying your monthly rent with the money borrowed from your moneylender and not from your savings or capital account. Since the trading rules were simplified and foreign investment limit in bonds were raised to attract investors, the short term traders were trying to make quick money but this hot money came in fast and left in a hurry. Most of these borrowers borrowed in dollars and did not hedge so they thought they were borrowing at 2% but the catch is that they

were actually borrowing at 20% and the first principle of business is to borrow in your currency or else you are a Forex speculator. What FII‟s have done now is that it has increased the level of external volatility and dependence when our fundamental commercial problems are not fixed. Perception of lack of clarity on policy front has also been fanning speculative demand wherein RBI on one day is tightening liquidity and on other is injecting $1billion in the market. People get all hunky dory when it comes to investing in China. Here is the best way to approach China GDP figures, ignore them. Even if we take into account the 7.5% growth rate at face value, its components suggest a more ominous scenario. What‟s really the issue in the country is this unhealthy obsession with GDP numbers. Even in the best of times, China‟s data can be about as accurate as tossing a dart at a chart on the wall. It‟s a structurally imbalanced economy distorted by top down policies and considerable “gray” activities that are hard to measure, not at least which is the sprawling shadow banking sector which is suffering from the predicament of over investment , seeds of which were planted way back in the housing bubble crisis of 2008, where China appeared to dodge the global financial meltdown by implementing a huge half a trillion dollar stimulus

misdirected towards wasteful projects such as unneeded steel and aluminium plants. In 2014, China and India will both grow faster than their rich counter parts but the emerging market upstarts aren‟t what they used to be. Most of the emerging economies will do better than the developed economies in terms of numbers, but the performance gap will narrow. As the fed‟s tide of cash recedes, money will flow out of many developing economies exposing weaknesses that were overshadowed and ignored during good times. India‟s infrastructure remains appalling, bad loans are piling up. Brazilians still don‟t invest enough and Turkey‟s current account deficit is widening. China is a global wild card. Its bloated banks, fat with loans that companies will find hard to repay are actually a replica of what Japan‟s Banks looked like in the 90‟s. Also it‟s “shadow” banks shuffle trillions more yuan between investors and borrowers in ways dangerously invisible to others. China has been fighting on 2 fronts: Yuan Depreciation of 1% in a week and widening spread between sovereign yield to interest-rate swap. These indicate higher risk perception and stress among lenders and if the situation worsens, it can unnerve investors as they cut exposure to emerging markets. The other emerging markets such as Mexico,

Indonesia, Nigeria, Turkey (MINT) are still a low income country and has got a lot of work to do when it comes to making their economies business friendly. So what is ailing the BRICS and other emerging economies? Firstly, what economists called the period of “Golden Era” for emerging markets, these economies were actually overheating in that period with growth above potential and inflation rising and exceeding targets due to which many of them followed the herd by tightening the monetary policies in 2011, with consequences for growth in 2012 that have carried over in this year. Secondly, the notion that the BRICS could fully decouple from economic weakness in advanced economies was far-fetched given the fact that recession in USA and Eurozone were likely to affect emerging market performance via financial links, trade and investor confidence. Thirdly, the BRICS are moving towards a variant state capitalism which implies slowdown in reforms which increase the private sector‟s productivity and economic share as well as resource allocation, trade protection and imposition of capital control. Fourthly, the commodity super-cycle that helped markets like Brazil, Russia and South Africa may be over. Indeed, a boom would be difficult to sustain, given China‟s higher

investment in energy-saving technologies and less emphasis on capital and resource-oriented growth models. And lastly, the deficits in countries like South Africa, Brazil and India are being financed in riskier ways: more debt than equity, more short term debt than long term debt, more financing from fickle cross-border interbank flows and more foreign currency debt than local currency. Huge dollar holdings are also not a financial strength but a trap, It‟s about time Asia devised an escape. Loading up on dollars helps Asia‟s exporters by holding down local currencies, but it causes economic control problems. When central bank buys dollars, they need to sell local currency, increasing its availability and boosting the money supply and inflation, so they sell bonds to mop up excess money. It‟s an imprecise science made more complicated by the US Fed‟s QE policies which could sink the emerging markets. One should not forget the example of Japan, where bets against government bonds (Similar to today‟s QE policies) ended in grief so often that the whole trade came to be known as the “widowmaker” which was a catalyst in the ‟97 crisis. Instead of adding to its dollar holdings these economies should consider bringing these funds home and use it for infrastructure, education, research and development which these economies lack. The West is looking sprightlier. The American Economy has created 4.3 million jobs in the past 2 years and will create another 2 million in 2014 adding more to global economy than China and India. The Federal Reserve which has kept printing money will slow the presses in 2014 as the economy recovers. This will not only boost the economy but will also lure footloose capital back to American shores. Productivity is improving and once large current-account deficits in Italy, Spain and Portugal

are disappearing. Britain is also growing again, and Japan is cheering Abenomics, a bet-thefarm recovery plan named after its prime minister. What‟s the definition of insanity, it means doing the same thing over and over again, and expecting a different result every time. The new law in the corporate world seems to be, the survival of the unfittest where government and investors of these emerging markets go bonkers over cheap credit and over react every time to any sort of policy changes in the West. It‟s high time the government stands up and takes initiative to stabilize the market and start correcting the basic fundamentals of their economies. If these predicaments are not dealt with properly and in a systematic manner then, we might just have to remove the word “emerging” from these economies. -

Akshay Gupta

What Is?

The TATA – TESCO Joint Venture Joint Venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. The task can be a new project or any other business activity. In any joint venture, each of the participants is responsible for the profits earned, losses suffered and all the costs incurred in the functioning. However, the joint venture is its own entity, which is separate and distinct from the participant‟s other business activities. TESCO is a British multinational grocery and general merchandise retailer. Its headquarters are in Cheshunt, England, UK. It is the second largest retailer in the world measured by profits and the third largest retailer in the world measured by revenues. It has its stores in 12 countries across Asia, Europe and North America. The British giant intends to invest $110m in India‟s closely-protected retail sector. It will set up a chain of supermarkets in partnership with the Indian TATA Group. Tesco is the first global food retailer to get approval to invest in India‟s $500 billion pounds retail sector since the government decided to open up the supermarket sector last year. Tesco has entered into a 50:50 joint venture with the TATA owned TRENT HYPERMARKET LIMITED, after receiving approval from the Indian Foreign Investment Promotion Board. Trent runs hypermarkets under the STAR BAZAR brand. Since 2008, Tesco has had franchise agreement to provide support to Star Bazar, it made an application to India‟s FIPB in

December. Tesco‟s plans for expansion have been approved by the country‟s government. The approvals are seen as a vote of confidence in India's slowing economy which has struggled to attract foreign investment in the past because of restrictive

bureaucracy and political opposition. Upon completion of the deal, Trent Hypermarket will operate 12 stores selling a range of items from food and grocery to home and fashion. The stores are operated under the Star Bazaar and Star Daily banners, and spread across the Southern and Western regions of India. The government has mandated that foreign companies invest a minimum of $100 million and half the total FDI go in back-end infrastructure within three years of the first tranche. Yet, Tesco is taking a 50 per cent stake in the Tata-owned Trent, which already runs hypermarkets under the Star Bazaar brand. Although the multi-brand FDI retail policy mentions fresh investment of $100 mn, the subsequent clarifications made it

seem that funding in new facilities was mandatory. However, how much must be spent by foreign retailers on new investments is still a grey area. Previously, it was compulsory for foreign supermarkets to source 30% of their products from small Indian firms. The government now allows foreign firms five years in which to reach that target, giving them the option of importing goods from overseas initially. Foreign retailers will also be allowed to set up shop in cities with a population of fewer than one million - they had previously been banned. Trent has said the proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka, thereby triggering a debate on new ventures versus expansion of existing ventures. Consutants and retailers spoke to Business Standard that the sector would closely watch how the Tesco-Tata JV would comply with the prescribed rules. “We need to see whether they will bring the existing stores under the JV or operate these separately,” said a director of a top management consultancy firm, on condition of anonymity. Kishore Biyani, founder and chief executive of Future Group, was more forthcoming: “If it (Tesco) is making investments in a brownfield (existing) venture (Trent Hypermarkets), it is

definitely a welcome move from the policy perspective.” Where Tatas lack, Tesco comes in A chief executive of a national retail chain said Tesco would invest in new facilities at back-end and front-end stores once the JV becomes operational. “The Tatas might not have invested a lot in back-end, since they run just 16 stores. So, Tesco can invest in the back-end infrastructure now. Otherwise, it is difficult to deploy those funds,” said the chief executive. Adding: “I believe Tata is adjusting whatever they have invested so far as equity. So, in a 50:50 JV, Tesco is paying for front-end created by Tatas.” Kumar Gopalan of RAI said, “It is first in the market and a great signal that overseas retailers will look at Indian retail now.” However, he also believes everything depends on government approvals. Government has to clear the venture. A lot of reading between the lines will happen. Tatas and Tesco must have done detailed work to comply with policy guidelines. Mohit Kampani, president and chief executive at Spencer's Retail, said: “All the money which will be brought in towards new facilities in back- end and front-end is a welcome move for the industry. If equity investments come from foreign retailers, it is better, as they understand the business better. As Indian consumers are increasingly becoming the focus for other global retailers too, there are many other deals under way. Hennes & Mauritz (H&M), have also been given final approval by

India's government to open stores there. The Swedish retailer announced in early December it planned to invest 7.2bn rupees ($115.5m; £70.2m) and open 50 stores across the country. Marks and Spencer has also been keen to seize the potential of India's retail market. It already has a presence in India, and it plans to double its store count to 80 making the country its biggest overseas market. India's Foreign Investment Promotion Board (FIPB) also approved a proposal by the British telecoms group, Vodafone, to take full ownership of its Indian business. On the flip side, in October, the world's largest shop group WalMart terminated its joint venture with India's Bharti Enterprises, after it faced regulatory hurdles, as there were protests in some cities against the opening up of the food sector. The proposed Tesco-Tata joint venture announced on Tuesday would be a test case for foreign direct investments (FDIs) in Indian retailing. Tesco's venture is being seen as positive for other global retailers too as we are likely to witness many more foreign brands coming and investing in India. -

Nishtha Behl

RBI Corner

New Banking Licences- Impact on Banking Industry

Over the past decade, the Indian economy has witnessed a sharp shift and is on a strong growth path. The Indian economy recently has boasted of healthy annual growth rates, deep capital markets and its opened-up foreign direct investment opportunities in some sectors which have encouraged a wide range of global companies to look at India as a promising investment center. As history has shown, India opened up its economy in 1991 and since then has never looked back in. As a result of liberalization, India‟s GDP has been a growing at an average of 6% annually which is a big change from the 4% growth reported in the first 40 years post-independence era. India is one of the few countries which felt the effects of the global financial crisis but still stood strong unlike some of the other well developed global giants such as the Americas and countries in the Eurozone. But in spite of harsh atmosphere caused by the financial crisis, India‟s GDP has still been growing at about 5% - 8% per year. The resilience of the Indian economy along with the liberalized foreign exchange policy has attracted many global multinational conglomerates as well as many Indian companies to go abroad and capture overseas markets. The financial sector reforms in the early 1990‟s, brought about a

complete change in the way banking was done in India. The banking sector In India is a highly regulated and administered sector by the Reserve Bank of India (RBI), the main regulator which enforces all bank policies and ensures that all banks follow the rules and guidelines. The RBI has recently shed positive life back in the sector by offering to grant new banking licenses. This announcement has been an extremely popular move by the RBI and central government. Part of the reason for the attractiveness of banking as a business has been the scarcity of bank licensesgiven and the fact that granting bank license, has only been a once-in-a decade type of event.The next generation of banking policies soon to be introduced by the RBI will make the Indian banking industry the third largest banking economy in the world. Granting of additional banking licenses by RBI to both public as well as private companies has changed the outlook of banking in India. With many of the biggest names and industrialists present in the Indian economy applying for the banking license and given the opportunity to expand their business into a new sector. But of course this will not be as easy as it sounds as there is a careful scrutiny done at each level before such a license is given. The Bimal Jalan Committee in consultation with other senior members of RBI finalized upon giving principal approvals to IDFC Limited and Bandhan Financial Services. There were 25 applicants in for the coveted license. The list included some of the top business houses in India such as the Aditya 11

Birla group, India Post, IFCI, Reliance, Religare, Bajaj Finance, Muthoot Finance, Shriram Capital. But the biggest surprise was when Tata Sons and Mahindras decided to retract their application, saying that the stringent criteria that the RBI expects every applicant to meet, they would be better off continuing their existing NBFC services at the moment. Banking is given a great importance in India. The central government has been pushing banks to open commercial centers in the rural areas and villages. The RBI has a new mandate that at least one fourth of the branches of all banks need to be opened in unbanked regions of India. The central government is trying to get more and more villages to connect with the financial world through proper channels and not rely on sources from the unorganized sector such as money lenders which unfortunately many farmers and poor are forced to do so. If new banks are to succeed they have to explore the opportunity by probably associating themselves with micro finance institutions that are also willing to be present in these areas. For new upcoming banks, opening of new branches right from inception isn‟t considered a very good idea for bankers. This is because of the low volume of transaction, both in terms of value of transaction and frequency. Industry experts say that it does not compensate for the costs the banks will incur for setting up a unit in these areas. Also it is important to keep in mind that if profitable opportunities existed for banks to operate in these designated unbanked areas in the country, the existing banks most likely would have already attempted to make their presence felt and have opened branches. This requirement by the RBI to

have 25% of banks to have their branches in rural areas, will be a challenge for analysts to predict the success or failure, as no bank in India has actually operated with the prescribed branch ratio from inception and almost no bank stands to the test of the rural to urban ratio as of now. The Indian Banking sector still has a tough time ahead. The economic depression in the country has resulted in the decrease of the quality of loans and assets, with time the number of nonperforming assets (NPA) to increase. But in spite of the financial crisis, the Indian banking industry has stood strong in terms of required capital to sustain operations, solvency, liquidity and profitability measures during and after the financial crisis, even though there has been a steady rise in non-performing assets.Hence, analysts believe, new banks can only be successful if they come up with innovative approaches that combine technology and low cost operating strategy for the banks that can process small volume transactions. Another challenge that IDFC and Bandhan will face is with respect to priority sector lending that is also a new mandate set by the RBI for any of the new banks. NPAâ&#x20AC;&#x;s and not performing loans are high in some of these sectors and there is a possibility the figure will increase. The new upcoming banks would have to develop superior legal and underwriting expertise to ensure profitability in lending to such sectors to avoid financial loss. Despite these challenges, India has opened up the biggest opportunity for new players.In addition to improved customer services and opportunities to customers who have no banking facilities, opening of new banks will also help the industry to change and challenge the current market share which is currently held by the State Bank of India (SBI) which currently holds almost 70% of the customer

deposit base in India. The market share would begin to shift in favor of those banks that offer better products and services from few under performing banks, along with better financial exposure to the country, another consequence of this expansion would include increase in competition amongst players, better business and service models and product innovation will be developed. Banks will prefer a more cost efficient structure and customers would have a greater access to credit. Basically at the end of the day there would be more focus on customer service. The new reforms encourage big private players and maybe even foreign banks thus making the banking sector more of a market driven sector with increased efficiency and productivity thus helping the Indian economy to grow and develop in future. -

Nikhil Acharya

International Desk

The BRICs shadowed by the MINTs The next economic leaders among world nations will be Mexico, Indonesia, Nigeria, Turkey. These new MINT countries are destined, to take over from the BRICS countries, now deemed out-of-date after just a decade in the limelight generated by the economists. It‟s stimulating stuff for the hibernating time of year. The former Goldman Sachs economist Jim O‟Neill will forever be associated with the term BRIC, which he coined as an acronym for Brazil, Russia, India and China (now commonly bracketed with South Africa to make BRICS). The term caught on and has been common jargon for a decade now. And now O‟Neill, though no longer with Goldman, has a new one: the MINT countries. Mint? This term refers to Mexico, Indonesia, Nigeria and Turkey, and O‟Neill‟s foundation is that these will be the next economic powerhouses. They are bound by a few key themes: young populations, useful geographical placement, and (Turkey excepted) by being commodity producers. First, the good news, Mexico and Nigeria have some of the best predictions in all emerging markets. Nigeria, in particular, is thought to be in an economic sweet spot and has gathered increasing attention from world investors over the last year. It is about to undergo a GDP re-basing – a reassessment of the country‟s GDP – and when that happens, it may well prove to be the biggest economy in Africa, bigger even than South Africa. Renaissance Capital, for example, estimates that Nigeria‟s economy was worth $405 billion in 2013, compared to $355 billion for South Africa. On top of that, Renaissance points out, it will become 20% of the MSCI frontier index, is undergoing a period of reform with some considerable ability in the public sector (notably the finance

minister and central bank governor), and even without reform has grown by 7% a year since 2000. There are considerable challenges, from corruption to theft of natural resources, but Nigeria is a high-population market of growing wealth and opportunity. Mexico, too, is increasingly the Latin American market that investors like most. It is increasingly common for investors to say they like Mexico “because it isn‟t Brazil”, and although that remark is naturally a bit superficial, there is some truth in it: whereas Brazilian companies have tended to be lazy and hindered in state policy, Mexico‟s benefit from market-friendly reforms and a sense of national momentum under President Enrique Pena Nieto, expected to attract steady increases in foreign investment. The thing about Indonesia and Turkey, though, is that they are both the market darlings of about two years ago. Back then, Indonesia was much the most adored market in Asia by both debt and equity investors: a country that had made the successful transition from military dictatorship to democracy, and which had elected a stable and admired government; a very strong domestic demand story which segregated it from the global financial crisis; a young demographic; and plentiful supplies of coal at a time when China‟s need for fuel had never been greater. But several things have since gone wrong. The fiscal picture has been damaged by twin deficits, the currency has fallen, concerns have grown about foreign outflows from the country, there is an election coming in which President Susilo Bambang Yudhoyono cannot stand again, commodity prices have fallen, and 13

there has been disappointing progress in infrastructure development. Then there‟s Turkey. In November, the IMF (International Monetary Fund) put out a report on Turkey saying that it “can only sustain high growth at the expense of growing external disparities.” It called for a mighty 250 basis point rate hike in the key policy rate, one of the most aggressive IMF reports in memory. Turkey‟s inflation rate is close to 8%, and it also faces deficit problems and a weakening currency. There are some who think there is a meltdown coming in Turkey and while not everyone takes that view, it‟s worth quoting Renaissance again on the relative merits of these MINT economies: “We like Nigeria for the first quarter of 2014. We‟re not at all sure about Turkey.” One point O‟Neill makes about these countries is their location: Indonesia as the heart of southeast Asia, Mexico benefiting from proximity to the USA, Turkey with its combination of eastern and western attributes, and Nigeria as the most flexible illustration of a rising African continent. It‟s true that these locations do have a likely positive impact on trade. But beyond all of this is the broader point of whether being the next BRICS is a good thing anyway. O‟Neill, of course, is painting an economic picture that will take shape over decades and generations; his observations should be seen in that very longterm light. But for ordinary investors, perhaps hoping to invest in the stock markets of these countries, it is worth noting that BRIC equities have lagged the developed world for several years now and are very likely to do so again in 2014. All four BRICS face considerable economic challenges of one kind or another, and even when they‟re growing

fast, that does not necessarily equate to good growth in stock markets. The picture may be worse still in the debt markets, with emerging market debt considered to be particularly vulnerable to narrowing in the US. Oâ&#x20AC;&#x;Neill coins catchy phrases and the long-term ramifications of his ideas are illuminating and important. But for the ordinary investor trying to earn a good return, itâ&#x20AC;&#x;s well worth forgetting the acronym and instead looking at individual countries on their merits, because right now, they are varied. -

Vanika Sharma

Mergers and Acquisitions

Plight of Indian Banking Sector Due to Mergers and Acquisitions Like other business entities, banks also want to mitigate from risks, as well as exploit available opportunities indicated by existing and expected trends. Mergers and acquistions have been on the rise in banking sector from quite a few time both globally and in India. M&A is a strategic decision for any firm to consolidate,expand and for the cost benefit analysis. The International banking scenario has shown major turmoil in the past few years in terms of mergers and acquisitions. Deregulation has been the main driver, through three major routes - dismantling of interest rate controls, removal of barriers between banks and other financial intermediaries, and lowering of entry barriers. It has lead to disintermediation, investors demanding higher returns, price competition, reduced margins, falling spreads and competition across geographies forcing banks to look for new ways to boost revenues. Consolidation has been a significant strategic tool for this and has become a worldwide phenomenon, driven by apparent advantages of scale-economies, geographical diversification, lower costs through branch and staff rationalization, cross-border expansion and market share concentration. The new Basel II norms have also led banks to consider M&As. The history of Indian banking can be divided into three main phases:Phase I (1786- 1969) - Initial phase of banking in India when many small banks were set up Phase II (1969- 1991) Nationalisation, regularisation and growth Phase III (1991 onwards) Liberalisation and its aftermath With the reforms in Phase III the Indian banking sector, as it stands today, is mature in supply, product

range and reach, with banks having clean, strong and transparent balance sheets. The major growth drivers are increase in retail credit demand, proliferation of ATMs and debit-cards, decreasing NPAs due to Securitisation, improved macroeconomic conditions, diversification, interest rate spreads, and regulatory and policy changes (e.g. amendments to the Banking Regulation Act). Certain trends like growing competition, product innovation and branding, focus on strengthening risk management systems, emphasis on technology have emerged in the recent past. In addition, the impact of the Basel II norms is going to be expensive for Indian banks, with the need for additional capital requirement and costly database creation and maintenance processes. Larger banks would have a relative advantage with the incorporation of the norms. For HDFC Bank, merger with Centurian Bank provided an opportunity to add scale, geography (northern and southern states) and management bandwidth. In addition, there was a potential of business synergy and cultural fit between the two organizations. For CBoP, HDFC bank would exploit its underutilized branch network that had the requisite 15

expertise in retail liabilities, transaction banking and third party distribution. The combined entity would improve productivity levels of CBoP branches by leveraging HDFC Bank's brand name. Benefit The deal created an entity with an asset size of Rs 1,09,718 crore (7th largest in India), providing massive scale economies and improved distribution with 1,148 branches and 2,358 ATMs (the largest in terms of branches in the private sector). CBoP's strong SME relationships complemented HDFC Bank's bias towards highrated corporate entities. There were significant crossselling opportunities in the shortterm. CBoP management had relevant experience with larger banks (as evident in the Centurion Bank and BoP integration earlier) managing business of the size commensurate with HDFC Bank. The merged entity will not lend home loans given the conflict of interest with parent HDFC and may even sell down CBoP's homeloan book to it. The retail portfolio of the merged entity will have more by way of unsecured and two-wheeler loans, which have come under pressure recently.

ICICI Bank Ltd wanted to spread its network, without acquiring RBI's permission for branch expansion. BoM was a plausible target since its cash management business was among the top five in terms of volumes. In addition, there was a possibility of reorienting its asset profile to enable better spreads and create a more robust micro-credit system post merger. BoM wanted a (financially and technologically) strong private sector bank to add shareholder value, enhance career opportunities for its employees and provide first rate, technology-based, modern banking services to its customers The branch network of the merged entity increased from 97 to 378, including 97 branches in the rural sector.9 The Net Interest Margin increased from 2.46% to 3.55 %. The Core fee income of ICICI almost doubled from Rs 87 crores to Rs 171 crores. IBL gained an additional 1.2 million customer accounts, besides making an entry into the small and medium segment. It possessed the largest customer base in the country, thus enabling the ICICI group to crosssell different products and services. Since BoM had comparatively more NPAs than IBL, the Capital Adequacy Ratio of the merged entity was lower (from 19% to about 17%). The two banks also had a cultural misfit with BoM having a trade-union system and IBL workers being young and upwardly mobile, unlike those for BoM. There were technological issues as well as IBL used Banks 2000 software, which was very different from BoM's ISBS software. With the manual interpretations and procedures and the lack of awareness of the technology utilisation in BoM, there were hindrances in the merged entity. Based on the cases, we can narrow down the motives behind M&As to the following :

Growth - Organic growth takes time and dynamic firms prefer acquisitions to grow quickly in size and geographical reach. Synergy - The merged entity, in most cases, has better ability in terms of both revenue enhancement and cost reduction. Managerial efficiency - Acquirer can better manage the resources of the target whose value, in turn, rises after the acquisition. Strategic motives - Two banks with complementary business interests can strengthen their positions in the market through merger. Market entry - Cash rich firms use the acquisition route to buyout an established player in a new market and then build upon the existing platform. Tax shields and financial safeguards - Tax concessions act as a catalyst for a strong bank to acquire distressed bank. Regulatory interventionTo protect depositors, and prevent the de-stabilisation of the financial services sector, the RBI steps in to force the merger of a distressed bank. In 2009, further opening up of the Indian banking sector is forecast to occur due to the changing regulatory environment (proposal for upto 74% ownership by Foreign banks in Indian banks). This will be an opportunity for foreign banks to enter the Indian market as with their huge capital reserves, cutting-edge technology, best international practices and skilled personnel they have a clear competitive advantage over Indian banks. Likely targets of takeover bids will be Yes Bank, Bank of Rajasthan, and IndusInd Bank. However, excessive valuations may act as a deterrent, especially in the post-sub-prime era. Persistent growth in Indian corporate sector and other segments provide further motives for M&As. Banks need to keep pace with the growing industrial and agricultural sectors to serve them effectively. A bigger player 16

can afford to invest in required technology. Consolidation with global players can give the benefit of global opportunities in funds' mobilisation, credit disbursal, investments and rendering of financial services. Consolidation can also lower intermediation cost and increase reach underserved segments. Conclusion Based on the trends in the banking sector and the insights from the cases highlighted in this study, one can list some steps for the future which banks should consider, both in terms of consolidation and general business. Firstly, banks can work towards a synergy-based merger plan that could take shape with minimisation of technologyrelated expenditure as a goal. There is also a need to note that merger or large size is just a facilitator, but no guarantee for improved profitability on a sustained basis. Hence, the thrust should be on improving risk management capabilities, corporate governance and strategic business planning. In the short run, attempt options like outsourcing, strategic alliances, etc. can be considered. Banks need to take advantage of this fast changing environment, where product life cycles are short, time to market is critical and first mover advantage could be a decisive factor in deciding who wins in future. PostM&A, the resulting larger size should not affect agility. The aim should be to create a nimble giant, rather than a clumsy dinosaur. At the same time, lack of size should not be taken to imply irrelevance as specialised players can still seek to provide niche and boutique services. -

Atharva Solanki

Vriddhi’s Analysis

Company in Focus: Cipla

Call: BUY

Target: 420

CURRENT PRICE

NSE CODE

INDUSTRY

392

CIPLA

PHARMACEUTICALS

52 WEEK HIGH/ LOW 450/364

Time Horizon: Medium Term

MARKET CAP

FACE VALUE

INDUSTRY P/E

COMPANY P/E

20,403.96 Cr Rs.

Re 2

28.4

18.75

Overview of Pharmaceutical Industry    

The Indian Pharmaceutical industry has been growing at a compounded annual growth rate (CAGR) of more than 15% over the last five years. (According to PwC – CII report titled “India Pharma Inc.: Gearing up for the next level of growth”. The Indian Pharmaceutical industry is today, the third largest market globally in terms of volume and 14th largest by value. The domestic Pharmaceutical market is expected to grow at CAGR of 15 to 20% annually to be a USD 49 billion to 74 billion market by 2020. Irrespective of the state of Economy, spending on healthcare per capital continues to grow. Technological advancements will create new business prospects both in terms of new therapy systems and service provisions. Low cost of skilled manpower and low cost of innovation, manufacturing and operations are some of the advantages of Indian Pharmaceutical Industry, but is negatively affected by low investment in innovative R&D.

Company Overview: It was founded by Dr.Khwaja Abdul Hamied as 'The Chemical, Industrial & Pharmaceutical Laboratories' in 1935 in Mumbai. The name of the Company was changed to 'Cipla Limited' with effect from 20 July 1984, wherein the word Cipla came from the first letters of each word in the old name 'The Chemical, Industrial &Pharmaceutical Laboratories'. In 2001, CIPLA pioneered the access to HIV treatment by making antiretrovirals (ARVs) available at less than a „Dollar a Day'. The cost of treatment dramatically fell from $12,000 per patient per year to $300 per patient per year. This caused a revolution where HIV treatment became a reality for the world and millions of lives could be saved. During the 2005 Bird Flu epidemic, they produced an anti-flu drug immediately after the breakout. In 2012, CIPLA made another development by reducing the prices of cancer drugs, thus making world-class medicines affordable and accessible to cancer patients. Cipla offer over 100 APIs (Active Pharmaceutical Ingredients) and a wide portfolio in excess of 1000 drug formulations. Financial Analyses: The Company‟s revenue from operations during the financial year 2012-13 amounted to Rs. 8,295 crore against Rs. 7,075 crore in the previous year recording a growth of more than 17 percent. The domestic turnover increased by more than 14 percent, from Rs. 3,213 crore in the previous financial year to Rs. 3,681 crore in the financial year under review. Total exports increased by about 20 percent during the year to Rs. 4,426 crore. During the year under review, operating margin increased by 34 percent. This was primarily due to reduction in material cost on account of improved realizations, changes in the product mix. As a result, profit after tax increased by more than 34 percent to Rs. 1,507 crore from Rs. 1,124 crore in the previous financial year.

Shareholding Pattern: 1% 27%

Promoters 37%

Institutions Non-Instituions ADRs/GDRs

35%

Business Model: Cipla has 34 manufacturing units in 8 locations across India across the country from Sikkim, to Baddi in Himachal Pradesh, Patalganga and Kurkumbh in Maharashtra, Indore in M.P., Bengaluru and Goa and has presence in 170 countries. Exports accounted for 52% of its revenue for FY 2012-13. Cipla has a 70 % market share in inhaler segment and its key brands in the same segment are: Seroflo, Foracort, Budecort and Aerocort. Cipla cooperates with other enterprises in areas such as consulting, commissioning, engineering, project appraisal, quality control, know-how transfer, support, and plant supply. Cipla manufactures a range of pharmaceutical and personal care products. The company offers active pharmaceutical ingredients (APIs); and formulations in therapeutic areas, such as allergy, analgesic, anti-malarial, anti-infectives, cardiology, dermatology and cosmeceuticals, dialectology, gastroenterology, HIV-AIDS, hormones and steroids, iron chelators, musculoskeletal, neuropsychiatry, nutritional and ophthalmic products, oncology, respiratory, urology, and womenâ&#x20AC;&#x;s health in various dosage forms. It also provides veterinary products for various animals, including companion, equine, general care, livestock, and poultry. In addition, the company offers inhaled medication and devices, such as dry powder inhalers, single-dose capsule and multi-dose dry powder inhalers, breath-actuated metered dose inhalers, non-static spacers, baby and infant masks, and nasal sprays. Further, it provides consulting, commissioning, plant engineering, and technical know-how transfer and support services. Cipla has over 2000 products in 65 therapeutic categories available in over 40 dosage forms. Its key products include the following drugs - Escitalopram (anti-depressant), Lamivudine, Fluticasone propionate. On July 2013, the Company has acquired 100% of the South African company CiplaMedpro. CiplaMedpro is the third largest pharma company in SA. Financials:

EPS

BETA

Rs. 18.75

0.23

BOOK VALUE Rs. 110.47

P/B

R&D to Sales 5.00%

3.56 18

DIVIDEND DIVIDEND% Rs. 2.00

100%

Sales:

Exports North,Central & South America Europe Middle East

33%

34%

13%

14%

Company has a wide demand in for its products in domestic as well as international markets. Comparison with Indices: Return on CIPLA (For a period of 1 year) Return on Nifty (For a period of 1 year) Return on BSE Healthcare (For a period of 1 year)

-1.81% 11.59% 24.22%

If we look the historical data for the return on CIPLA stock and compare it with return on NIFTY, we can see that it has given decent returns. YEAR CIPLA NIFTY

2010 10.42% 15.86%

2011 -0.72% -15.85%

2012 28.6% 25.77%

2013 -4.03% 5.93%

Peer Comparison: COMPANY NAME Cipla Lupin Dr. Reddy’s

2011 6,371.32 5820.54 2,204.95

2012 7,128.82(+11.88%) 7082.92(+21.69%) 2,443.82(+10.84)

2013 8,279.33(+16.15%) 9641.30(+36.12%) 2,721.52(+11.38)

Future Prospects CIPLA has been granted about 100 patents. Patent filing includes drug substances, drug products, platform technologies, IP on polymorphs and crystallinity, and medical devices. 

139 DMFs, 87 registered ANDAs and 25 ANDAs under review in the US.



About 1000 DMFs for a total of 101 APIs; 49 COS approved.



Over 700 marketing authorizations in Europe.



Over 10,000 product registrations globally.



49 products pre-qualified by World Health Organization (WHO).



Supported 2 NDA filings for our partners and have 16 NDAs of our own. 19

Final Recommendation On Valuation and looking at the decent Business/ Revenue model of the company the final recommendation is to BUY at the current price for a medium term. The company is a value generator and can be held for a much longer time also because of revenue generating APIs and patents of crucial medicines. The current market price of the stock is quite low, which makes it a good entry point. Company has a high promoter stake of 37%, which is a good sign as it has shown the faith of promoters in the company. All the plants of CIPLA (and Subsidiaries) are cleared by USFDA and they maintain their standards for better production.

Ankur Chauhan Equity Analyst Vriddhi Research 3.0