A Proactive Approachbeyondmarket.nirmalbang.com/issue70/Download/magazine.pdf · Mutual Fund: Fact Check! Fact sheet is an important tool that can be used by investors to ascertain

AProactiveApproach

The new set of guidel ines for restructur ing loans formulated by the RBI are aimed

at keeping NPAs under check

For Pr ivate Circulat ion Volume 1 Issue 70 09th Aug ’12

It’s simplified...Beyond Market 09th Aug ’12 3

DB Corner – Page 5

Widening Its NetThe government is striving hard to fatten its kitty through increased revenues from taxation – Page 6

The Price Of PopulismIf subsidies on petroleum products in the name of socialism are not curbed on time, oil companies could bleed to death owing to high under recoveries – Page 9

Impending AftershocksThe slowdown in China could adversely affect India if the necessary steps are not taken to prevent foreign outflows from our country – Page 12

A Proactive ApproachThe new set of guidelines for restructuring loans formulated by the RBI are aimed at keeping NPAs under check – Page 14

Time To ActMere announcements will not help improve the conditions; there is a strong need for concrete action to prop up the capital goods sector – Page 17

Lessons Learned The Hard WayAs against its earlier practice of employing contractual labourers, Maruti Suzuki plans to absorb only permanent employees to prevent a repeat of the Manesar incident – Page 20

A Please-All SolutionIf SEBI accepts the suggestions made by the Mutual Fund Advisory Commit-tee, then it could allow all the concerned parties to live in harmony – Page 23

Towards A Common GoalExpect Central Banks from the developed world to act in tandem with all the policy tools in their armour to support the faltering economies; but for how long and how much – Page 26

Tata Global Beverages Ltd: Brewing HotGeographically diversified revenue streams and a well-developed product bouquet through acquisitions and strategic partnerships has enabled it to become a global beverage company – Page 29

Technical Outlook For The Fortnight – Page 34

Mutual Fund: Fact Check!Fact sheet is an important tool that can be used by investors to ascertain the health of a mutual fund - Page 36

A Two – Pronged ApproachTapping IDFs to meet infrastructure needs in the country will not only prove beneficial to the companies but also to the investors – Page 38

Taking Calculated RisksIf taken wisely, risks can help reap good returns from the markets – Page 41

Water WoesIf monsoon continues to play hide and seek, it could have a cascading effect on the economy as well as the stock markets – Page 44

Volume 1 Issue: 70, 09th Aug ’12

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Divya Bhurat, Afsana Tamboli

We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons...

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

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Research Team: Sunil Jain, Vikas Bairoliya,Ruchita Maheshwari, Dipesh Mehta,Anand Shendge, Manav Chopra, Vikas Salunkhe

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It’s simplified...Beyond Market 09th Aug ’124

A country’s banking sector forms the backbone of that nation’s economy. By bringing about financial inclusion, the banking sector becomes an integral part of the progress of a country. However, a hiccup in this segment can not only create turmoil within the economy, but also in foreign economies that are attached to it in some way or the other.

In the present scenario, due to the lull in the economy a number of companies in India are approaching banks, seeking restruc-turing of their loans. This has given rise to cumulative standard restructured advances. Realizing the repercussions of the dent in a bank’s balance sheet, India’s apex bank, the Reserve Bank of India (RBI), had set up a working group to come up with norms for corporate debt structuring. After several months of deliberation the committee has formulated a set of guidelines, which when followed, will prevent banks from going bust due to loans that could go bad. While these norms are likely to impact the profitability of banks to a certain extent, it will be very good for the banks in the long run. The cover story attempts to demystify the topic and help better understand the initiative being undertaken by the RBI.

Besides, the magazine also features articles on the adverse effects of subsides, especially on petroleum products, that are doled out to the common man by the government, the ground reality behind the strike at Maruti’s Manesar plant, the initiatives undertaken by the Indian government to widen its revenues through taxes, the possible impact of the slowdown in China on India as well as other economies across the globe, the state of the capital goods sector and the plans that were announced by the government to propel the segment but not yet implemented and the suggestions made by the Mutual Fund Advisory Committee to revive the sagging mutual fund industry.

The Beyond Currencies section in this issue carries an interesting article on the different policy tools being used by central banks of developed countries to pull their economies out of the gloom. For all our readers who invest in mutual funds, understanding the fact sheet of a mutual fund scheme is as important as understanding the balance sheet of a company. And hence, we have explained this topic in an article in our Beyond Basics section.

Finally, there is an article on the different kinds of risks prevalent in the stock markets, the ways to measure and mitigate them and to construct a risk pyramid, in the Beyond Learn-ing section of this magazine. Happy readinG!

Tushita NigamEditor


Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Nifty: 5,215.70Sensex: 17,197.93

(As on 3rd Aug’12)

n the previous fortnight, data from the US showed some revival. However, the situation in the Euro zone is

still bleak.

On the domestic front, India’s apex bank, the Reserve Bank of India (RBI) in its monetary policy review left interest rates unchanged over fears of rising inflation. The RBI kept the repo rate unchanged at 8% and the cash reserve ratio (CRR) at 4.75%. It, however, reduced the Statutory Liquidity Ratio (SLR) by 1% to 23% to improve liquidity in the system.

Corporate results of India Inc were mixed and in line with market expectations, except for a few pharmaceutical companies and mid-cap IT stocks. However, the coming quarter results could witness a decline. Company managements are already sounding cautious about this likely development.

Rainfall continues to play truant, with the country witnessing rains in spurts and starts, adding to the worries that it

I may lead to a further spike in inflation. All in all, the government appears to be doing nothing to uplift market sentiments. Despite this situation, FII flows into India were surprisingly good.

The Indian markets will remain volatile in the coming fortnight due to the uncertainty in the Euro zone and India. But markets look good and traders as well as investors can buy on declines around the 5,100 level on the Nifty.

Stocks like Bajaj Finserv Ltd (LTP: `745.10), Bajaj Finance Ltd (LTP: `1,046.80), JK Cement Ltd (LTP: `230.15), Supreme Industries Ltd (LTP: `249.35), Oracle Financial Services Software Ltd (OFSS) (LTP: `2,774.85), Reliance Industries Ltd

(LTP: `742.90), Cairn India Ltd (LTP: `334.60), IFB Industries Ltd (LTP: `70), Hindustan Unilever Ltd (LTP: `467.15), Yes Bank Ltd (LTP: `368.05), Axis Bank Ltd (LTP: `1,040.85) and ICICI Bank Ltd (LTP: `939.70) look good from a trading and investment perspectivE.

Markets look good and traders and

investors can buy on declines.

WideningIts NetThe government is

striving hard to fatten its

kitty through increased

revenues from taxation

axation, both direct and indirect, is an important stream of income for the government. And the

importance of tax revenue becomes more significant during the downturn. A slowdown in the corporate sector and individual earnings has resulted in reduced tax income for the government, thus impacting its balance sheet.

For India, a decade long growth till the year 2008-09 has kept the tax base of the government growing. A steady growth in the tax base and tax collection helped the country to deal with its expenditure.

In the last decade, for every 1% growth in GDP, there was a growth of nearly 1.9% in direct tax collections. For India, direct taxes contribute around 56% of total tax revenues for the central government.

The increase in tax revenue over the last decade has been due to policy innovations, rationalization of tax structure and improvement in tax administration as well as tax-payer’s services through intensive use of

T


Union Budget. For fiscal year 2011-12, the net tax collection growth stood at 12.7% as against the budgeted target of 16.6%.

Government’s optimism of higher tax collection is primarily based on the 200 bps increase in central value added tax (Cenvat) and services tax that the government has announced in the Union Budget.

The announcement of GAAR in the Union Budget, which now has been delayed for a period of one year, can also been seen as an effort in the direction to increase the tax revenue of the Indian government.

Taxes are expected to contribute close to 78% to the total revenues of the government in 2012-13 (currently at 54%). On an optimistic note, the government has estimated a little over 20% increase in net tax revenue in 2012-13 compared to a rather modest growth of 12.7% seen in 2011-12. Within taxes, the government estimates the indirect taxes to grow at a faster pace compared to direct taxes.Let’s check what the update on tax revenue, in both direct and indirect, is so far and what measures are being

taken by the government to increase the tax base and thus tax collection.

latest technology.

However, renewed global uncertainty, emanating mostly from the Euro zone area has affected domestic businesses. A tight monetary policy to tame inflationary pressures in the economy also came in the way of consolidating the recovery. This led to a point where the government started to spend more than what it could collect in taxes. This resulted into a higher revenue deficit.

The pressure point, however, is the non-planned expenditure of the government (like foreign travels of bureaucrats and politicians, subsidies, etc), which otherwise go unnoticed during the growth phase. It has now started to pinch the government. To add to the woes there is a slowdown in the corporate sector, which now pays less as tax.

While efforts are on by the government to cut down on its non-planned expenditure, it is making efforts to tweak tax norms for higher tax base and tax income. The government has estimated a 20% growth in the overall tax collection over fiscal year 2012-13 during the

A tax can be defined as a compulsory contribution imposed by a public authority. The public authority can be the central or state government or a local public authority like a municipality.

Taxes can be broadly divided into direct taxes and indirect taxes. A direct tax is imposed and collected directly from an individual (or a legal entity like a company). Examples of direct taxes are income tax, capital gains tax, gift tax, wealth tax, etc. These taxes are borne directly by the entity it is levied on. The tax payer cannot pass on his/her tax liability.

Indirect taxes include customs (a tax on imports) and excise (a tax on production). Such a tax is called ‘indirect tax’ because it is a tax, which is collected by an intermediary. The person on whom the tax is levied passes on the tax burden to some other person. He acts as an intermediary between the government and the ultimate taxpayer.


Gross direct tax collections, which include corporate and individual income tax, grew at 6.78% during the April-June quarter, less than half of

the targeted annual growth of 15%. While net figures (remember the government has to pay refunds to the tax payers in case of excess deductions) showed a significant increase for the April-June period, this upward surge in net collections was due to decline in refunds. Experts feel delay in tax refund is only a postponement of the government liability, which it will have to doll out sooner or later.

India’s indirect tax collections from April-June rose by 13.8% compared with the same period last year, although this is much slower than the 27% targeted by the government for the whole fiscal year.

Within indirect taxes, customs collections rose by 12.2%, while excise duties were up 29.8% and service tax 40.8%. The measures announced during the Union Budget having a negative list approach to the service tax has broadened the base and helped service tax collection.

While government and tax officials have said tax collection targets will be met, experts are not that optimistic. Going by the current rate of tax collection by the government, experts opine that challenges for fiscal management will continue to persist. So what is the government banking

on for higher tax revenue?

With the General Anti-Avoidance Rules (GAAR), which was read as a desperate attempt by the government for higher tax collection, now postponed for a year, it is banking on the revival of the corporate segment. A revival in both top line and bottom line will help the government to raise its direct and indirect tax kitty.

This, along with the emphasis on the electronic filing of tax, is likely to help widen the tax base. The IT department has set up tax kiosks in residential areas and localities providing a host of taxpayer-related services in big cities.

Further, in order to make the income tax return filing experience even more convenient, the income tax department has started two more taxpayer-friendly initiatives ‘Register for Home Visit’ and ‘Online Tax Help’. With these new tools, a tax payer can take the help of trained professionals either online or at their homes. The taxpayer can choose between ‘online help’ or ‘home visit’ to file their taxes.

The government is also banking on the new service tax regime based on a negative list of exempted services - except the 38 activities put on the

negative list - all will come under the ambit of taxes at an increased rate of 12%, as announced by the government in the Union Budget.

As of now, service tax is being levied on 119 services based on a positive list. The switch-over to a negative list-based approach is aimed at aligning the indirect taxation system to the proposed Goods and Services Tax (GST) regime, which is sought to be introduced to unify the levies of the Centre and the states into a composite system.

With the services sector now accounting for 60% of the gross domestic product, the Finance Ministry has set a target of `1.24 lakh crore for service tax collection during 2012-13.

This is significantly higher than the `97,000 crore mopped up during the previous fiscal.

The government has also signalled that it will take action against tax evaders. So, are we looking at some schemes under which money stashed in tax havens will be allowed back into India to fill its coffers? Only time will tell. It remains to be seen whether the Indian government is able to limit the fiscal deficit to the budget target of 5.1% of the GDP for 2012-13.

Gross Direct TaxCorporate Tax Personal Income TaxWealth Tax Net Direct Tax (Gross-Refund)STT

Indirect Tax CollectionCustomsUnion ExciseService Tax

Tax Collection

1.11 lakh crore70,594 crore40,520 crore

32 crore84,273 crore

952 crore

1.07 lakh crore38,744 crore41,147 crore28,068 crore

April-June2011-12

% Growth(y-o-y)

1.04 lakh crore68,223 crore35,858 crore

33 crore57,267 crore

957 crore

94,849 crore---

6.77%3.48%

13%-3.03%47.16%0.52%

13.80%12.20%29.80%40.80%

April-June2012-13

Source: Ministry Of Finance


The Price Of PopulismIf subsidies on petroleum

products in the name of

socialism are not curbed on

time, oil companies could

bleed to death owing to high

under recoveries

or individuals the sense of greater-good-for-all comes very easily by keeping others’ interests before

theirs. For countries, especially growing economies, to achieve this, on many an occasion can have serious implications. This is because resources are scarce and funds that chase these resources come at a hefty price. In the Indian context, the concept of subsidies - especially petroleum subsidies, seems for greater-good-for-all, but has it really served its purpose? This time we explore the implications of high petroleum subsidies and the beneficiaries of the same in the long run and its subsequent impact on the Indian economy. THE BASICS Subsidies can be broadly segmented into producer subsidies or consumer subsidies. While producer subsidies are given to companies to promote investment and augment output, consumer subsidies include providing energy, chiefly electricity, at lower price than it is sold.

F



taking a toll on the exchequer.

THE SUBSIDIES There are three petroleum products namely kerosene, domestic liquefied gas and diesel, which are sold at prices significantly lower than the international market prices. The government provides a fiscal subsidy to LPG and kerosene. It has been observed that the subsidy takes into account only a part of the difference between the cost price (this includes marketing costs of oil companies) and the selling price of these three petroleum products, which have resulted in “under-recoveries” for oil marketing companies.

Under-recoveries are calculated as the gap between the cost price and the regulated price at which petroleum products are finally sold by the oil marketing companies to the retailers after accounting for the subsidy paid by the government. A significant part of these under-recoveries is compensated for by additional cash provided by the government, which is over and above the fiscal subsidy and another part of the under-recoveries is covered by cash provided by upstream National Oil Companies (NOCs). In this, the remaining portion is not compensated to the oil marketing companies. A fact that needs immediate attention here is the way the amount is provided by the government. The amount of cash provided by the government is determined on an ad hoc basis and the amount is usually more than half of the total amount of under-recoveries incurred by oil marketing companies.

It is argued that the total size of under-recoveries, the amount of cash assistance provided by the

government exceeds the fiscal subsidy provided on kerosene and domestic liquefied gas. Besides this, since the cash provided to oil marketing companies is paid after under-recoveries are incurred, these companies encounter paucity of investible funds in the short-term. In such a situation, these companies resort to the option of securing additional loans to sustain their investments. The trend of cash assistance to oil marketing companies began after FY09.

Between FY06 and FY09, the government partially compensated the oil marketing companies’ under-recoveries by issuing oil bonds instead of offering cash assistance. For FY11, the total size of under-recoveries on petrol, diesel, kerosene and LPG was `78,190 crore. This forms close to 1% of India’s Gross Domestic Product (GDP). It must be noted that though subsidies and under-recoveries form a massive burden on government and oil companies, petroleum products are also taxed heavily by the state and central governments. For FY11, the total contribution of the sector to the central and state exchequer was `2,25,494 crore.

Hence, it is very important that the government devises a formula to deal with the problem of under-recoveries. More so because most oil marketing companies are burdened with loans whose interest expense eats into their revenues. And this has been the case for quite a while now. THE LONG AND THE SHORT It is fairly obvious to state that these subsidies are a burden on the government’s resources. Time and again experts have raised concerns over the accessibility of these

In India the element of socialist ideology is so seeped into the system that the concept of subsidies finds deep resonance. Many a time political parties have secured strong acceptance among voters - especially the poor, due to subsidies.

However, it has been observed that providing subsidies has blown up the government budgets and on many an occasion the benefits of subsidies have not reached the poor.

Among the various energy subsidies, the subsidy on petroleum products has been the heaviest burden for the government. The government changes the prices of petroleum products where the rules of free market and regulated regimes apply. Till 2010, the government controlled the prices of petrol, diesel and kerosene and liquefied petroleum gas. In June ’10, the government de-regulated the price of petrol. But prices of diesel, kerosene and domestic liquefied petroleum gas continued to be under the control of the government.

In case of petrol, the government decided that the oil marketing companies could change petrol prices every fortnight only after seeking the approval. As opposed to this, electricity subsidies have been disbursed by the state governments at a huge cost to budgets of the states. The concept of such subsidies has been met with strong scepticism from experts and analysts alike. It has been argued that the aim of providing subsidies is to make products affordable and protect consumers from volatilities in prices in markets and promote the industries that use products of these subsidies. But experts believe that the trend of providing products at prices artificially lower than market rates is


subsidies by the targeted consumers.

It has been observed that a miniscule part of the subsidies reaches the intended beneficiaries. In case of kerosene, there are large amounts of leakages and estimates suggest that close to 40% of the fuel is expended for private usage. Hence, there is a need for strong mechanism to check such loopholes in the system. Apart from this, subsidies have also exerted a lot of pressure on national oil companies and power sector utilities, which are already reeling under heavy financial burdens. Due to such discrepancies and loopholes, many a private company refrain from

entering into the oil-marketing sector. The reason is that it is absolutely unattractive to sell fuel at artificially lower prices than the prevailing market prices to consumers. Several studies suggest that reforms related to subsidies must be devised carefully. The primary objective of reforms must be to provide fuel to the poorest section at affordable prices.

It has been observed that if the public is not consulted and kept in the loop over the prices of petroleum products, and compensatory structures are not adequately addressed, the situation would not improve for the government as well as the oil

marketing companies.

In addition to this, one needs to identify and define the targeted group which benefits from subsidies. Then, strong and effective measures have to be taken to compensate for the loss of any increase in fuel prices. Lastly, awareness about realities of fuel prices needs to be created among the consumers. Because only through awareness, the importance of subsidies and its serious implications on the exchequer and oil marketing companies’ balance sheet can be understood. Consumers would, therefore, understand the preciousness of fuel and its judicious use and effective conservatioN.


the so-called BRIC-focused stock funds, with investors redeeming $787 million during the period, according to fund tracking firm EPFR.

China-focused funds were hit particularly hard, with investor redemptions totaling 88% of the $1.6 billion in new money those funds took in during the first quarter. The rush of money out of Chinese funds come as institutional investors are reworking growth estimates.

Now the worry is that with China’s economy slowing, emerging market funds may see further losses in the second-half of 2012, especially if other BRIC nations experience even slower growth. For a BRIC country like India, one of the two fastest-growing large economies in the world even at the current pace, the coin can turn either way. Multinational corporations and financial investors are sitting on large pools of liquid money. Before investors send money into India, they need policy predictability and a steady march toward further liberalization of the economy. However, this scenario looks less likely in the next one to two years.

The current economic paralysis may continue due to political complacency in India. Some of the key economic points described here indicate that we are not in an advantageous position compared to a slowing China.

The first quarter of this year saw India’s economy grow a mere 5.3%, the slowest rate in nine years. The central bank (RBI) increased the benchmark interest rates by more than 4% in the last two years to control the 9% to 10% inflation rate.

Though the inflation rate has come down, it is still not in the comfort zone. Also the infrastructure and

manufacturing sector has cooled off significantly. Another concern is fiscal deficit that the government has been unable to control.

And there are other issues too like the government’s inability to take strong reform policy, cases of corruption and scandals, etc. With general election around the corner and current issues with coalition partners, the government is unlikely to take any bold steps towards economic reforms.

In lieu of all this, India may not act as an investment substitute for China, which is still expected to grow at 8.2% in the calendar year 2012, much higher than the anticipated 6% growth rate for India during the same period.

On the other hand, the slowdown in China will reduce the global growth rate. This will reduce the global demand for goods and services. All this along with the current Euro crisis will worsen the current economic environment further.

And this will have a spillover effect on the Indian economy and in no way boost global investors’ confidence. In such a scenario, global fund managers are unlikely to reallocate the money pulled out of China towards India. But there is a chance, very little though, that this belief may turn out to be wrong. If the Indian political front can get its act together, this could be a golden period for the country.

Some steps that require attention are opening up of more industries to FDI, mainly in multi-brand retail and aviation. Some other steps are the implementation of Goods & Services Tax, ending uncertainty caused by its proposal to levy a retroactive capital gains tax on transactions in Indian assets by foreign entities. These are just a few examples. In fact, there are many other steps the government needs to take to reverse the trenD.

market mutual funds might soon follow suit. In recent months, investors have been pulling hundreds of millions of dollars out of stock funds that invest mainly in companies associated with the big four emerging market nations of Brazil, Russia, India and China (BRIC).

But it is China that is causing most of the worry for fund investors, amid signs that the world’s second-largest economy is slowing more sharply than expected. Even emerging market bull Jim O’Neill, chairman of Goldman Sachs Asset Management, who famously coined the BRIC acronym, said he’s been a bit surprised by the slowdown in China.

One sign of the Chinese slowdown is China’s purchasing managers index, which dropped to 50.2 in June after hitting a year-long high of 53.3 in May. The growing concern about China and slower growth in other BRIC nations is also starting to show up in the performance of some US emerging market funds and hedge funds focused on Asia.

Mutual fund industry tracking firm Morningstar says US emerging market funds were up 4.61% as of 30th June compared to a 5.51% gain for non-emerging market stock funds. China-focused US mutual funds are up 2.9%, lagging behind the 4.15% gain recorded by diversified emerging market funds, as per Morningstar. The benchmark S&P 500 index, meanwhile, is up by 7% this year.

Some Asia-focused hedge funds that go long and short stocks are posting mediocre numbers. HSBC Private Bank reports the Chilton China Opportunities Fund was up a little under 1% as of 22nd June, while Pinpoint China Class A Fund was up by nearly 1.3% over the same period.

The second-quarter was not kind to

for restructuring its loans. The report has been made public and is open for comments and suggestions till mid-August.

What Is Loan Restructuring?

If a borrower finds it difficult to repay a loan on time to a bank, he has the option of approaching a bank to restructure its loans. When this happens, the bank makes some changes to the original terms of the sanctioned loans. The lender could either choose to extend the tenure of the loan or lower interest rate that it had earlier agreed to. Though this is an enabling provision for borrowers

AProactiveApproach

The new set of

guidel ines for

restructur ing loans

formulated by the RBI

are aimed at keeping

NPAs under check

hough retail investors may take a beating on the banking stocks in their portfolio in the short run,

the banking industry may well be on its way to strengthening its roots and increasing transparency over time. This will be possible only if the recent recommendations on the guidelines on restructuring advances made by the RBI panel are implemented by the apex bank of India.

The report prepared by the RBI panel headed by RBI Executive Director B Mahapatra suggests changes to the current guidelines on restructuring norms. If implemented, lenders will

T

have to keep a hawk’s eye on the approval and disbursement of a loan to a corporation, while a company will think adequately before going in



sector banks, namely Central Bank of India and Punjab National Bank (PNB). Of these, two Central Bank’s position seems to be the worst of the lot, with its NPAs having grown more than two-and-a-half times over the past year. The gross non-performing assets (NPAs) or bad loans of this lender have gone up to `7,510 crore from `2,883 crore a year ago.

PNB is on a similar standing with its loans with its proportion of bad loans having doubled in the last year. Its gross NPAs have gone up to `9,998 crore from `4,894 a year back. Other public sector banks such as Corporation Bank, Union Bank and Indian Bank are in similar positions, with their bad assets having gone up significantly.

Private sector banks too are facing similar issues though it must be added that they are definitely at a better position as compared to their private sector peers. All leading private sector banks such as HDFC Bank, Kotak Mahindra Bank, Axis Bank and ING Vysya Bank have seen their NPAs rise, although in a much smaller way. ICICI Bank, which surprised the markets with its stellar first quarter numbers, though successful in bringing down its gross NPAs over the past year, has seen its NPAs rise over the past one quarter.

Rising Case Of Restructured Loans

With the economy under severe duress, things are only going from bad to worse. The Indian economy is trapped in a low growth and high inflation situation and the euro zone crisis that has spread to the top European nations is only getting worse. What’s more in the imminent face of a slowdown, the government is in no position to provide any fiscal stimulus because of its own burgeoning burden of debt. India Inc now finds another recessionary phase

staring at its face. The cash flows that were being generated by big ticket projects of most companies have now either slowed down or been stalled because of the gloom both over domestic as well as the external economy. Even large companies from sectors such as infrastructure, steel and tourism have been hit. Export-oriented companies are in a much worse situation.

Most of these corporations are now finding themselves in a bind as they are unable to repay their lenders. While some of the cases are indeed genuine, a large proportion of companies are now queuing up at the Corporate Debt Restructuring (CDR) cell seeking restructuring of their loans, simply because they had over-leveraged themselves.

As a result, banks have to grapple with more and more cases of restructuring. There has been an alarming rise in the number of cases that have come up for consideration by the CDR cell. The CDR cell is a common platform that has been provided by bankers for borrowers. When a large company that has borrowed money from a consortium of banks, is unable to repay its loans, it approaches the CDR cell.

As per the CDR Progress Report, which is available on its website, as many as 292 cases amounting to `1,50,515 crore of debt were referred to the cell. If you think this number is alarming, consider this. In the month of July alone, banks have referred as many as 19 cases amounting to `11,000 crore for recast to the CDR. Compare this to the earlier years and the intensity of the situation is as clear as the day. Between 2004 and 2007, the CDR used to register only eight to ten cases annually. From there, things have come to a situation where 29

who are in genuine trouble, it has turned out to be a bane for the banking sector as of now. Restructuring went into overdrive since recession hit India in 2008-09.

As the ripple effect of the recession was felt by Indian corporations, the central bank got into the act and directed lenders to give the crisis-hit Indian companies a shot in the arm by way of restructuring their loans significantly. While this did help the economy to get back on its feet post the financial crisis, some companies soon began taking advantage of this restructuring provision even after things were back on track.

Some companies that were in a no-cash loss position were found putting pressure on the banks to restructure their loans because of their own fault. They were in an over- expansion mode and had over leveraged themselves. What’s worse, bankers conceded.

Assets Turning Bad

The Indian banking industry has been grappling with the incessant rise in its non-performing assets or NPAs over the past two years. Over the past couple of years the gross NPAs have shot up drastically from around `68,000 crore to about `95,000 crore and things seem to be getting worse.

According to rating agency Crisil, this number will move up to a whooping `2,06,500 crore by the end of the current fiscal year and account for 3.5% of the total advances of the banking sector. If recent numbers on NPAs are to be considered, the situation seems precarious to say the least. The June quarter earnings are now painting a gloomy picture for the banking industry. The earnings reveal that it is the public sector banks that are feeling the heat now. Take for instance the case of two large public


cases have been registered in the first quarter of the current fiscal alone.

Asset Classification Changes

The apex banking authority is only too aware of the risks this situation could lead to. In order to prevent any systemic risk to the banking sector, a working group of the Reserve Bank of India (RBI) recently suggested some key changes to the loan restructuring norms of the central banking authority of the country.

It is like nipping the problem in the bud, because it is the restructured loans that have maximum chances of turning into non-performing assets at a later stage. Conservative estimates show that 25% to 30% of restructured assets turn bad on non-performing loans when the economy is under stress. Those tracking banks on a daily basis state that this number could go up to as much as 40%.

Among the key recommendations of the RBI working group is one which says that banks should be made to provide a minimum of 5% against restructured loans as compared to the current 2% that they provide now. The working group has rightly pointed out that all the loans that are subject to restructuring must be classified as “sub standard” and not “standard” assets.

This is essentially because a bank must make several concessions such as prolonging the repayment schedule, reduce interest rates and even waive off part of the principal or let the defaulting company convert its high amount debt into equity (just like the ailing Kingfisher has done in recent times). The working group further says that even by international accounting standards, restructured advances are treated as bad loans and there is no reason why India should do things differently.

Promoters Should Shoulder Greater Responsibilities

The working group of the RBI has also called for a tough stance against promoters of the companies that are seeking a loan recast. If they want the lender to support their business, they must make greater financial sacrifices themselves. They must be asked to give a personal guarantee in all cases of restructuring as his commitment to the loan recast process.

During the process of the recast of a loan, a lender is required to arrive at a value diminution they suffer as a result of the restructuring and then make a provision for the same in the profit and loss account. Since it is only the banks that have been taking the hit so far, the panel has suggested that promoters be asked to make a contribution that is at least 15% of the fair value of this amount or 2% of the debt that has been restructured, whichever is higher.

What Went Wrong?

The fact that there has been a need to make such recommendations stems from the fact that there have been laxities somewhere in the banking system. It must, however, be pointed out that all restructured loans do not turn bad, but the alarming rise in the NPAs of banks does tell us that lenders had indeed taken it easy when the going was good. There might have been cases of loans that were badly appraised, or loans that may have been sanctioned without adequate documentation or guarantees.

In cases where a loan was sanctioned to a relatively large company, it may have been sanctioned by the top management of the bank itself and pushed down to the branches for disbursal. The blatant exploitation of “relationships” between head honchos of banks and company heads

seem to have cost the bankers dearly. Banks saw the quantum of bad loans rise as the companies did not, or failed to live up to their commitment as recession hit Indian shores. Though lenders have gotten wiser since then, the damage has already been done and recent changes suggested to restructuring norms seem to be the only way to salvage the situation.

How Investors May Be Impacted

Though these recommendations are aimed at strengthening the banking industry in India, bank stocks may be subdued for a little while. Anticipating the impact of the restructuring norms on the profitability of the banks in the forthcoming future, the BSE Bankex fell by 1.28% or 156 points after the report was unveiled. Though the banking stocks have recovered since then, bank stocks may not give stellar returns in the short term.

Banks, mostly those in the public sector, will take a knock on their profitability in the range of 5% to 10%. Those banks that have higher exposure to sectors such as textiles, power and aviation are more susceptible to losses. A look at the quantum of restructured loans of banks seems to suggest that banks like Oriental Bank of Commerce, Indian Overseas Bank, Punjab National Bank and Union Bank of India are likely to take the largest hit. As compared to public sector banks, private banks seem less vulnerable. The hit they will take in most cases is less than 1%.

Investors would, therefore, do well to take a re-look at their exposure to the banking stocks in their portfolio. Though fundamentally, the banking sector is still ahead of its peers, there could be some laggards in the short to medium terM.


If the economy has to be revived, the very first step the government needs to take is to revive the capex in the country, because it will automatically lead to growth in demand and revival of other sectors. Knowing this, the government is willing to come forward and address the issues relating to the revival.

In the month of June, Prime Minister Manmohan Singh announced a slew of infrastructure projects to prop up the flagging economy.

At a meeting attended by ministers and officials from power, roads, shipping, civil aviation and coal sectors in early June, ambitious targets were set for investments in ports and aviation sectors, power generation, coal production and railway freight carriage.

The government plans to award projects worth `14,500 crore in the current fiscal to increase the capacity of major ports to about 934 million tonnes (MT) per annum.

At present, India has 13 major ports including Mumbai, Jawaharlal Nehru Port Trust, Kolkata (with Haldia), Chennai, Visakhapatanam, Cochin, Paradip, New Mangalore, Marmagao, Ennore, Tuticorin and Kandla.

As far as the aviation sector is concerned, the government said that it plans to award contracts to construct new airports, including one at Navi Mumbai, which was facing problems over land acquisitions.

Emphasis was also given to investments in sectors like railways and ports, along with investments in the road sector.

About 9,500 km of new road projects in addition to 4,360 km of road maintenance projects were announced at the meeting and it was

said that these projects would be awarded soon. This is encouraging given that very few projects were awarded in the past.

The government also said it was aiming at adding another 18,000 MW of power generation capacity in the current year, which is a good indication as the average capacity addition in the year has been just about 10,000MW to 14,000 MW.

Apart from the quantitative measures, the government also assured the industry to de-bottleneck the issues such as easing out coal supply for the power sector, faster approvals, acquisition of land and selectively assessing large projects and clearing them on a priority basis.

The government also recently announced that it would impose import duty on power equipment. Though it has come at a much later stage, it could still offer some relief to domestic equipment manufacturers from next year onwards.

THE GROUND REALITY

Companies in the capital goods sector believe that the intent and efforts by the government are in the right direction as they will at least provide some support.

However, for the sector to really come out of the woods mere announcements will not help improve the conditions on the ground level as there is need for concrete action.

The three main pillars of the capital goods sector’s growth are investments in infrastructure, revival in the industrial capex and focus on the execution of power projects.

India’s infrastructure sector has suffered significantly in the last couple of years and it continues to do

However, in the near to medium-term, the story has derailed and there is an uphill task for companies before they actually start rewarding investors.

However, the real question here is how long can the pessimism sustain? Is there light at the end of the tunnel?

While there are not enough concrete indications of a revival in the economy in the immediate future, there are few positive developments. And recent announcements have set the stage for a new beginning for the capital goods sector. It can be said that the ball is now in the government’s court.

The weak economy is not only a worry for corporates and investors, but also for the government, which is battling falling revenues amidst high fiscal deficit along with currency depreciation and inflation.

The RBI forecasted that the Indian economy could grow at about 6.5% in the current fiscal year starting 1st Apr ’12 in the macro survey of economists published in July ’12. This is much lower than the forecast of 7.2% indicated in the survey conducted three months back.

The Indian economy, which was growing at 8% to 9% in the recent past, has slowed down significantly and there is less hope that this will be changing in the near future. In fact, on the contrary, economists feel that the 6.5% growth as forecasted could also be a challenging task.

The RBI itself has said that the sustained fall in investment has impacted India’s growth potential and there is a need for improvement in the investment climate by “moving quickly” to address bottlenecks in the infrastructure space and removing constraints on foreign direct investment (FDI).


so as no new projects have been announced by the government as well as private players. And those which were awarded earlier are facing several challenges.

Infrastructure projects worth `50,000 crore to `80,000 crore have been delayed and are facing challenges over execution owing to late payments or dues from clients, higher working capital, lack of funding, land acquisition issues, government approvals and uncertainties over policies such as mining policy, among others have created hurdles for the growth of the sector.

Due to the lack of new orders, companies from the sector have already seen their order book positions depleting to the historical low of about 2-2.5 times compared to their sales, which is likely to be a major cause of concern in the months to come.

Besides, the woes of the power sector have spilled on to the capital goods industry, which generates a large chunk of its demand.

From generation to transmission to distribution and finally to consumer engineering companies, both in the EPC and the equipment segment, play a larger role.

The demand from the power sector too has shrunk considerably due to problems in utilities emanating from lack of availability of fuel such as coal. This has become the biggest issue for both new and existing power projects as many of them continue to operate at losses.

Transmission and distribution capex too has taken a beating as there is neither generation nor are there consumers for the costly power, which is fuelled using costly imported coal. Although the government is

working towards resolving issues pertaining to coal and other policy issues, it will take some more time to witness improvement, indicating that there is not much positive news in the power sector in the near term. INTEREST COST

Apart from policy issues, the single important factor is interest rates in the country. Even as the industry continues to hope for low interest rates, the inflationary environment has forced the RBI to keep rates high. In the recent policy announcement, the RBI remained silent on the issue of interest rate cuts.

Though it has cut SLR - statutory liquidity ratio or the funds that are kept by the banks with the RBI as a statutory requirement - by 100 basis points that would at most provide some liquidity instead of relief from interest cost.

Lower interest rates are critical for the revival of the investment cycle in India, particularly infrastructure and industrial capex in the country.

HOPES OF REVIVAL

If interest rates continue to remain high, there would not be much incentive for corporates to borrow and invest in new projects. In fact, several projects have already become unviable and companies are looking to sell them as interest cost alone is leading to losses.

Currently, the interest cost as a percentage of the total sales for infrastructure and engineering companies is six times, which is the highest in recent times.

There is a belief that if the RBI does nothing about the interest rates for an extended period of time and if policy initiatives are not undertaken then the

revival of the investment cycle could get delayed.

A number of companies have been postponing their capex as a result of policy uncertainty, non availability of funds, high interest rates and poor economic outlook.

In a recent study by Crisil on India’s capex, it said that a poll of 200 companies (including 170 private sector companies) revealed that capital expenditure by Indian corporates will dip by 14% in the year 2012-13.

At 35%, the decline in investments of the private sector companies polled will be far steeper. Moreover, close to half of those polled indicated that they have no intention of investing in new projects this year.

The study also reveals that while in sectors like metals and infrastructure (roads, ports and power), the capex is expected to increase, a large part of the capex has been deferred.

In fact, 30 private sector companies disclosed that they had deferred or shelved projects aggregating to `35,000 crore, of which infrastructure and metals account for over 70%.

With this background, it is quite apparent that the investment cycle in our country, both in the public sector as well as private sector, has taken a significant beating.

Though the Indian government is taking certain initiatives, the actual action on the ground level is yet to bear fruits.

And since economic problems continue with a worrisome interest rate scenario, it is quite reasonable to expect that the ongoing worries of the capital goods industry are indeed far from oveR.


politicians, media, industry groups or the locals.

The Society of Indian Automobile Manufacturers, a lobby group, in a statement said, “Such acts of violence sully the image of India as a manufacturing base as an investment destination.” Ajeya Rout, the national president of the All India Centre of Trade Unions (AICTU), called the incident as unfortunate.

Similarly, Maruti has received support from local villagers and villages around Manesar. During mahapanchayats, the villagers criticized the violence and called for the ousting of all the existing labour unions. They also proposed setting up an independent body consisting of local villagers for mediation between the company and the workers. The panchayat further said that it would be a setback for Haryana if Maruti decides to leave the state and that they were fully in support of Maruti.

The crisis at the Manesar plant has created several small problems for the villagers. Several ancillary plants which supply spare parts to Maruti have taken a hit. Villagers who have invested money in construction of new houses to rent out to workers of Maruti are worried as the Maruti plant remains shut. Meanwhile, Maruti officials have denied that they are closing down their operations.

The most important support for Maruti has come from the Haryana government. Haryana Industry Minister Randeep Singh Surjewala in a statement said, “It is our bounden duty to ensure that the guilty be given exemplary punishment with speed and trial commences so that punishment to perpetrators of the crime becomes an example for others not to indulge in such incidents.”

He added that the violence was not

spontaneous but a concerted effort to disturb industrial peace. Surjewala refused to term the Maruti incident as a labour unrest issue. Meanwhile, the Haryana government has formed a Special Investigation Team to probe the incident and appointed KTS Tulsi as the special prosecutor for the trial.

After the incident, there were talks that the Maruti management was thinking of relocating the plant to Gujarat, which was promptly denied by Chief Minister Bhupinder Singh Hooda, after he had a meeting with Maruti Chairman RC Bhargava in New Delhi. After the meet, Bhargava said, “There is no question of Maruti shifting of Maruti from Haryana. How many times do I have to tell that the question (of Maruti shifting to Gujarat) is 100 percent fiction? The state government is with us and we are one.”

In the meeting, apart from Chief Minister Hooda and Chairman RC Bhargava, the Managing Director & CEO of Maruti Suzuki India Ltd (MSIL) Shinzo Nakanishi was also present. The 65-year-old, Shinzo said, “There have been labour troubles in Japan after the second World War. But I had never expected anything like this. What led to this violence, I do not know.” Though he admits that this is the worst labour unrest he has seen in his 41-year career, he is pretty confident that the plant will resume operations at the earliest.

This is not the first time Shinzo Nakanishi has come into the picture. He was one of the key people in the early years of Maruti during 1980s. He likes to keep a low profile. But his role is evident during the time of crisis as was seen in the 1990s when the Indian government and Suzuki Motor Corp waged a bruising battle for control of the joint venture. Later in December ’07, he was appointed as the MD and CEO of Maruti Suzuki

aruti Suzuki is facing another shutdown at its Manesar plant in Haryana, just nine

months after the end of the previous strike. Unlike the previous strike, the latest one took an ugly turn after a disciplinary incident with a single employee. In reaction to the disciplinary move, riots erupted, which resulted in the death of a manager, several injured employees and damage to a portion of the assembly plant.

According to reports, workers attacked the plant with iron rods and wooden sticks, used by police for crowd control. They attacked the managers, smashed equipment and set fire to some parts of the factory. Furthermore, they attacked and destroyed the mezzanine floor where Maruti officials used to sit. At present, over 90 employees are in jail and the entire factory’s workforce is under investigation for murder.

The labour unrest at Maruti is largely over the issue of contractual labour hired through labour contractors. The contractual workforce is generally underpaid and doesn’t receive the benefits given to regular employees. This has led to a face-off between the workers and Maruti management earlier as well.

It is not the first time that Manesar has been home to violence in protests. On 25th Jul ’05, workers at Honda’s motorcycle plant went on a rampage and clashed with the police. Several people including the policemen were injured during the incident.

Protests and sit-in demonstrations are not uncommon in India. Political parties, workers’ unions and social groups have all protested during labour unrest. However, the Maruti labour protest has sparked an all around condemnation; be it from

M


and in 2010, his tenure was extended for three years. Although he is in sharp contrast to Jagdish Khattar, the former Maruti managing director, his colleagues have faith in him, which is evident in the way the company has handled the volatile situation.

Nakanishi is confident that the company will stay put with its plan to expand capacity at Manesar and he has also dismissed rumours of moving out of the region. The expansion will consist of constructing a third plant at the site by the middle of next year.

Undeterred by the violence, Maruti Suzuki is planning further investment apart from the expansion at the Manesar plant. According to Deepender Singh Hooda, son of Haryana Chief Minister Bhupinder Singh Hooda and Member of Parliament Rohtak, Maruti Suzuki plans to set up a Research and Development Centre at Rohtak and a new diesel engine facility at Gurgaon.

The company is investing `1,700

crore to set up a new diesel engine manufacturing facility. The project will be completed by 2014 and will have a capacity to manufacture 3 lakh engines. For the Research & Development centre at Rohtak, the investment will be made over a period of two and a half years. The centre will be developed on 600 acres of land and would design and develop vehicles for the Asian markets.

In order to prevent further such incidents, Maruti has decided to hire only regular or permanent workers in all core areas of manufacturing across its five factories in Gurgaon and Manesar. The core areas of manufacturing include the press shop, welding shop, paint shop and the intricate assembly line. Also, the entire recruitment process will be channelized through its own human resources department. Currently, about 50% to 55% of its employees are contract labourers.

The management is also working on its materials management systems and processes. It will also look into

the inventory and systems to avoid concentration of components and other spare parts at its factories as the components were used by its workers during the violent protest.

The much delayed wage negotiation is also being finalized. It was due in April this year and according to the company it would be implemented with retrospective effect. Currently, Maruti pays its employees half the compensation as basic salary and the other half as incentive based on production and efficiency of the workers at the factory.

Chief Operating Officer (Administration) SY Siddiqui said, “We are planning to increase the cash component to our workers in the new wage agreement. We would be focusing on employee satisfaction both at the worker and technician level to minimize such occurrences in our plants.”

With such initiatives, hopefully, peace will return to Maruti’s manufacturing plant in ManesaR.

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this, owing to the uncertainty in the capital markets, thanks to the turmoil in the Euro zone, equity schemes have been badly hit over the past few years. This, in turn, has driven away hordes of investors from mutual funds to safer financial instruments.

Further, it is very well known that the retail equity participation in our country is abysmally low and that mutual funds can prove to be a great investment vehicle for retail investors. Small investors can take advantage of augmenting their savings by investing in various

If SEBI accepts the

suggestions made by the

Mutual Fund Advisory

Committee, then it could

allow all the concerned

parties to live in harmony

he `6.92 trillion mutual fund industry may soon get a shot in the arm from the capital market regulator,

the Securities and Exchange Board of India (SEBI). It seems SEBI is very likely to grant the wishes of the flagging mutual fund industry by accepting the suggestions of the Mutual Fund Advisory Committee.

UNENDING WOES

The mutual fund industry had been going through a rough patch since quite some time now. In addition to

T

A Ple

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All Sol

ution

A Ple

ase-

All Sol

ution



PAVING THE WAY

The 14-member mutual fund advisory committee met with SEBI on 17th July to bring some kind of equilibrium between the interest of investors as well as distributors. After much deliberation the committee told SEBI that the annual expense ratio should be hiked by 25 basis points or 0.25%. It also suggested that the fund houses should be allowed “fungibility” on their total expenses.

This means that a fund house will get to decide how much to incentivise their distributors without increasing the overall cost for investors. The current regulations stipulated by SEBI impose limitations on how much of the total fund expenses should be allocated towards fees of the fund managers and how much should be spent on marketing.

The mutual fund advisory committee has conveyed to the market regulator SEBI that while they are strictly not in favour of bringing back entry loads on mutual funds, this kind of micro management of fund houses is really not necessary.

BENEFIT TO INVESTORS

The mutual fund advisory committee has also suggested that the service tax liability be removed from the fund house to the investors of their schemes. The customers have for long borne the burden of service tax for a variety of services, and therefore representatives from the mutual fund industry believe that making them liable for additional service tax is in keeping with industry practices. While both these recommendations are aimed at improving the mutual fund industry, it has not gone down well with the investors.

If both these suggestions are indeed implemented by SEBI, then it will

result in the expense ratio going up. Expense ratio, which is now calculated on the value of the assets, could go up by as much as 55 basis points. This may not seem too much in isolation, but can indeed have a larger impact in the long run.

Consider an example. You are investing an amount of `1 lakh in an equity scheme for a period of 25 years, and the fund is generating annual returns of 15%. If the expense ratio of the fund is hiked, then the growth rate is notched down to around 14.45%.

If a 15% growth rate is considered, then the ̀ 1 lakh investment will move up to `32.9 lakh over a period of 25 years, whereas if a 14.45% growth is considered, then the amount will come down to `29.2 lakhs, which is a difference of close to around `4 lakhs and cannot be called a small sum!

The other point that critics point out against the overall rise in expense ratio is that it is skewed towards the larger asset management companies. Here’s how.

PROTECTING SMALLER FUND HOUSES AND INVESTORS

The 2.5% limit on expense ratio was set as early as the mid nineties. Since then the corpus managed by top equity funds have gone up significantly from about an average of `500 crore to the current `8,000 crore or so.

But this is true of larger fund houses. If this expense ratio blanket rise is indeed implemented, it would put smaller fund houses in a spot as they would have to impose higher costs on investors, who would ultimately move out of their schemes.

A better way to implement this would perhaps be to tweak the expense ratio

mutual fund schemes.

By doing so, they will be reposing their faith in expert fund managers whose job it is to invest money in the capital markets in order to procure the best possible returns under any market condition.

As is widely advertised, mutual fund investments do have an element of risk. The fund manager’s task is to bring down the risk by investing prudently and maximizing returns in the bargain. While fund managers may have been doing their job right, the uncertainty in the capital markets has driven many to safer pastures.

Add to this the ban on entry loads that compounded the woes of the investors. It was in August ’09 that SEBI barred mutual fund schemes from imposing an entry load on the investors to put an end to the practice of distributors advising investors to take out the money parked in mutual fund schemes that were performing well and invest in new fund offerings.

While investors who gave in lost money in the markets; the distributors earned a fat commission from the asset management company for having driven investments towards its new fund offering.

Although the banning of the entry loads did stop the malpractice to some extent, it had an adverse effect on the mutual fund industry. The distribution of mutual funds virtually came to a standstill as brokers and distributors felt that they were not being compensated enough for the efforts they were putting in to sell mutual fund schemes. Since then, distributors started promoting other investment schemes that appeared more rewarding instead of selling mutual fund schemes.


in a manner where the 2.5% limit can be imposed on schemes of up to `500 crore, while lower limits can be worked out for schemes that manage a corpus beyond that.

This way smaller fund houses would find the middle path for keeping both their investors as well as their distributors happy and would not lose out on business to larger fund houses.

In an attempt to protect the fund

industry, the mutual fund advisory committee has not forgotten the investor community. One of the suggestions they have made to SEBI is to impose a cap on the exposure of debt schemes to a maximum of 30% to any one sector.

This move is essentially aimed at reducing the exposure of debt schemes towards the NBFC sector, which remains vulnerable to interest rate risks. A cursory study of

allocation of debt funds towards the banking and NBFC sector shows that at least 30% of the assets held by debt funds by the end of March were allocated to the NBFC issuances.

While it remains to be seen which of the suggestions made by the mutual fund advisory committee will be implemented, it certainly does seem like SEBI will pay heed to the crying needs of the mutual fund industry sooner than lateR.

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

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underscores their urgency to respond to progressive deterioration in world economies. In no time tables have turned from inflationary risks to

Expect Central Banks from the developed world to act in tandem with all the policy tools in their armour to support

the faltering economies; but for how long and how much

he recent string of policy actions by central banks from the emerging and developed markets clearly T

Towards A Common Goal

deflationary risks.

A range of policy actions - from policy rate cuts by Peoples’ Bank of



sidelines as it awaits more jobs and consumer spending numbers before it acts further. The recent block of numbers hardly signal any turnaround in slowdown progress as unemployment remains sticky above 8% and consumer spending continues to be at a standstill.

US economic growth slowed to an annual rate of just 1.5% from April through June, down from the 2% pace in the first quarter. The US Labour department has reported a Non-Farm Payroll addition of less than 1,00,000 in the last three consecutive readings.

In fact, Fed officials have signalled their concern about weakening job growth and consumer spending of late, which have brought the economy closer to a standstill.

It is evident that the focus of the Federal Reserve has now shifted to improve the job and housing markets from price stability.

Moreover, inflationary expectations remain very well anchored as the current breakeven rate (indicating inflationary expectations over a span of 10 years) is just below Fed targeted rate of 2%, which gives Fed the cushion to act now.

Furthermore, with the US presidential elections hanging late this year, the Fed will have all the political backing to go ahead with a set of policy actions in the near future. Undoubtedly, the father of all could be the announcement of another round of quantitative easing (called as QEIII) from the US Federal Reserve.

The Fed could also cap Treasury rates, cut interest rates it pays banks on excess reserves, which stands at 25 basis points, extending further its conditional promise to keep rates low, or perhaps considering some form of credit easing. The likelihood of this

event is likely to put the US dollar on a downward spiral against major currencies like the euro, pound and the Australian dollar as well as other high-yield currencies.

EUROPEAN CENTRAL BANK

After politicians at the last European Summit responded well by taking some bold steps, to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled members like Spain and Italy, the ball moved to the ECB’s court where Mario Draghi followed up with a 25 basis point cut in main refinancing rates, coupled with reducing deposit rates to zero levels from 0.25% then.

The underlying of bringing deposit rates to zero was to release over 750 billion euros, which European banks had parked with the ECB to improve liquidity in the banking system and credit flow in the economy at large.

Perhaps, the purpose was defeated as is evident from chart (on the next page). The chart indicates that the funds flowed to the current account from ECB overnight deposits.

Judging by the gyrations in yields on peripheral bonds since the ECB’s meeting, however, markets were evidently disappointed that the ECB did not announce further unconventional measures to shore up Europe’s dysfunctional bond markets.

Even after ECB president Mario Draghi’s “we will do whatever it takes to save the euro” statement on 26th July, we still have not seen yields on outer peripherals dropping to sustainable levels.

Down the line it is apparently believed that the bank will do whatever it possibly can to prevent the Economic and Monetary Union

China and European Central Bank (ECB) to further quantitative easing by Bank of England (BoE), has been unveiled by central banks of emerging and developed markets.

However, financial markets did not sound too optimistic about the actions as we witnessed mixed reactions in asset prices broadly.

In the current macroeconomic scenario, when most global institutions and governments are in the process of deleveraging, it becomes imperative for central banks of developed markets to act more aggressively to smoothen the deleveraging process by promoting conditions aimed at inflating the value of financial and real assets that would otherwise almost certainly fall in price.

By boosting asset prices, central bankers will seek to promote economic growth and buy time for fiscal authorities of the developed world to formulate and implement growth-oriented policies.

Global investors have been quite patient, but the repeated failure of policymakers to put their respective houses in proper order is indeed testing their patience.

Nevertheless what little impact will these policy initiatives have on real economies, a full-fledged bag of policy actions are waiting on the anvil. We have tried to compile and analyze various policy actions that could materialize in the coming future and the possible outcomes and impact of these actions on the currencies of the respective nations.

US FEDERAL RESERVE

After announcing an extension in Operation Twist in early June, the Federal Reserve has remained on the


(EMU) from breaking up. The costs of not doing so would be too great as the ECB currently holds a little over €200 billion in securities from previous forays into the bond market.

Second, there is hardly any participation by foreign investors in Spanish bond auctions, which calls for revival of the Securities Market Program (under which ECB bought

government debt in 2010 and 2011). Moreover, as credit to the EMU’s private sector declines – the natural consequence of deleveraging after a credit boom – the risk of deflation in Europe is likely to rise.

We think deflationary forces will intensify, making a further reduction in the main refinancing rate to 0.5% likely and perhaps necessitating

quantitative easing. It’s a given that through these measures the ECB can only provide a bridge for the European monetary union’s structural problems, but it cannot offer solutions on the same.

Nevertheless, this bridge will inevitably create time for political and fiscal agents to implement durable solutions in the times to come.

PEOPLES’ BANK OF CHINA

Policymakers in China face different limitations today than those in the US and Europe. But they too have had to respond to the strain in the global economy, especially as slowing global demand exerts downward pressure on China’s export-investment-driven growth model.

In a surprise move, the People’s Bank of China (PBOC) cut its benchmark rate by 25 bps twice within a month. It also deregulated deposit rates, allowing a 10% float above the benchmark, which largely offsets the cut’s effect on deposit as well as lending.

The latest rate cut is not surprising in the light of weakening growth and a slowing inflation outlook. Second quarter growth at 7.6% is barely above target and inflation risk is easing fast with CPI likely to stay below 2.5% over the next two to three quarters versus the PBOC’s target of 4%. Even though rates are cut by 50 bps, China’s real rates are still rising because CPI is heading down toward 2%. If PBOC targets positive real deposit rates as a floor in the medium term, then there is still room to cut another 25 bps to 50 bp as the 8% to 9% average lending rates remain too high for borrowers amid a deepening industrial slowdowN.

Source: Thomson Reuters

1000

800

600

400

200

0

1000

800

600

400

200

0

ECB Overnight Deposits, Current Account

ECB - recourse to the deposit facility – bn euros

Lehman collapse

Greece asks for aid

First 3 year LTRO

ECB – current account holdings – bn euros

2008 2009 2010 2011 2012

2008 2009 2010 2011 2012

337

519

Geographically diversi�ed revenue

streams and a well- developed product

bouquet through acquisitions and

strategic par tnerships has enabled it

to become a global beverage company

ata Global Beverages Ltd (formerly Tata Tea Ltd) is an Indian multinational non-alcoholic beverages company headquartered in Kolkata, West Bengal, and a part of the Tata Group.

It is the world’s second-largest manufacturer and distributor of tea and a major producer of coffee. Set up in 1964 as a joint venture with UK-based James Finlay and Company to develop value-added tea, Tata Global Beverages Ltd (TGBL) has now product and brand presence in 50 countries.

It is one of India’s first multinational companies. The operations of Tata Global Beverages and its subsidiaries focus on branded product offerings in tea, coffee and other non alcoholic beverages.

Tata Global Beverages markets tea under major brands like

the biggest-selling tea brand in India.

Tetley is the biggest-selling tea brand in the United Kingdom and Canada and the second biggest-selling in the

biggest-selling tea brand in the Czech Republic.

Tata Global Beverages owns five brands in India: Tata Tea, Tetley, Kanan Devan, Chakra Gold and Gemini.

T

BREWING HOT



The company has a 100% export-oriented unit (KOSHER and HACCP certified) that manufactures instant tea in Munnar, Kerala, which is the largest such facility outside the United States. Tata Global Beverages has subsidiaries in Australia, Great Britain, United States, Czech Republic as well as India.

Tata Tea has 57.48% stake in Tata Coffee. The well-known brands here include Mr Bean, Mysore Gold, Coorg Pure, Tata Cafe and Tata Kaapi. The coffees are grown on 19 estates in the southern states of India. These states produce about 10,000 tonnes of natural shade grown Arabica and Robusta coffees.

Tetley Group

Feb ’00

GBP 271mn

Good Earth

Corporation

Oct ’05

USD 31mn

JEMCA

May ‘06

GBP 11.6mn

Eight O’ Clock

Coffee Company

Jun ‘06

USD 220mn

Jockels Tea Packers

Sep ‘06

GBP 0.91mn

Vitax & Flosana

Apr ‘07

GBP 4.8mn

Grand

Mar ‘09

NA

Rising Beverages

LLC

Oct ‘10

USD 10.7mn

Source: Company & Nirmal Bang Research


TGBL has made a strategic shift from being a local tea company to a global beverage company through various acquisitions and strategic partnerships with global beverage giants like PepsiCo and Starbucks.

INVESTMENT RATIONALE

A Fast-Emerging Global FMCG Player

Tata Global Beverages is an integrated beverage business that has set out to become a global leader in branded, good-for-you beverages through innovation, strategic acquisition and organic growth.

TGBL, led by its various acquisitions in recent years, has become a global non-alcoholic beverage company.

The company has a commanding position in tea and coffee categories in North America and South Asia. With leadership positions in India, UK and Canada in the tea market, TGBL has been consistent in maintaining its market share.

TGBL has time and again demonstrated its ability to assimilate large-sized acquisitions. These acquisitions perfectly synergized with the company’s operation and have enabled TGBL to evolve from an old economy plantation company to a global, brand-focused company with size and scale.

Over the past decade, Tata Global has emerged as a beverage player of global scale, with geographically diversified revenue streams and a well-developed product bouquet.

The company has proved its competence in the ability to successfully assimilate multiple acquisitions of varied size, scale and complexities. The company has consciously evolved into a brand player, thus enabling it to be an asset-light company with low debt, proving advantage in tackling operational and competitive pressures.

Strong Brands

The company has a strong repertoire of brands that it has built and nurtured assiduously over a period of time. This has enabled it to make strong inroads into most major markets.

The shift towards brands, coupled with brand equity has enabled TGBL’s Indian operations to improve realizations and manage input cost pressure quite commendably. Some of the noted brands under its portfolio include Tata Tea, Tetley, Tata Coffee, JEMCA, Eight O' Clock, Grand, Himalayan, t4kidz and Good Earth.

70%

20%

9%1%

TeaCo eeNon-BrandedWater & Others

FY12 Sales Break-up

Tata Global Acquisition History:Acquired

Company

Year

Cost




Source: Company PPT & Nirmal Bang Research

Tetley

VitaxJemca

PhendulaTata TeaEight O’ ClockGrandGood EarthHimalayanT4 KIDZLaagerActivateTata Water PlusTata Gluco PlusSukk

Black tea, herbal tea, fruit teaFruit teaBlack tea, green tea, herbal tea, fruit teaTeaTeaCoffeeCoffee and TeaTeaMineral WaterHot flavored drinkTeaFlavored waterNutrient WaterFlavored DrinkDrinkable Jelly Snack

UK and Canada

PolandCzech

South AfricaIndiaUSARussiaUSAIndiaUKSouth AfricaUSAIndia & Intl. marketsIndia & Intl. marketsUK

Brand PortfolioBrands Category Country

Improvement In Margins Going Forward

Raw-material and advertisement spends form a major chunk of the costs for the company. The advertisement expenditure as a percentage of sales, which stood at 16.6% in FY12 eased from 19.1% in FY08.

We feel that the advertisement expenses have fallen down as the company has been able to establish its brands on both domestic as well as international front.

FY12 was relatively stable in terms of movement of raw-material (tea and coffee) prices, but we saw FY13 (the first three months) turn out to be volatile. Tea witnessed an inflationary movement of prices and Arabica coffee prices were up.

The change in business model led to a significant jump in raw material costs as TGBL now has to procure tea (which has been on a sustained uptrend) from external sources. This has taken a toll on EBIDTA margins and it has eased from 15.8% in FY08 to 9.4% in FY12, compressing capital efficiency ratios.

While TGBL has the ability to pass on costs, it is not to the extent of input cost inflation and always occurs with a lag.

Going forward, we expect TGBL to maintain its ability of passing on costs, unless there is extreme volatility in raw material prices. This, along with the ability to cap A&P spend on an absolute basis, would afford the company a strong opportunity to improve its EBIDTA margins in domestic operations.

Newer Business Lines

Joint Venture With Pepsico: NourishCo

Tata Global Beverages strengthened its initiative to provide consumers with nutrient enhanced hydration products. The company entered into a joint venture with PepsiCo India with the objective to introduce a number of nutritionally positive drinks in India. NourishCo, the joint venture, launched Tata Water Plus, India’s first nutrient water brand.

This was more than a product launch as the launch created the category in India. The nutritionally rich brand, available in zinc and chromium variants, extends beyond the mere quenching of thirst to the overall promotion of good nutritional health.

NourishCo also launched Tata Gluco Plus, a glucose-based lemon flavored drink in a unique cup format, with the promise of providing instant energy. Conceived as an affordable on-the-go re-hydration solution, the product is targeted at the mass consumer segment.

The breakthrough of the product was the convenient 200ml cup that ensured product quality at a low price point without compromising on taste or aroma. The launch was supported by large scale sampling activities in other states

28.1%33.5% 35.6%

45.2% 46.7%

19.1%18.1% 17.0%

16.9% 16.6%15.8%12.8% 11.8%

10.1% 9.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

FY08 FY09 FY10 FY11 FY12

Cost Trend vs Operating Margin (Consolidated)

Raw-material Adver sement Exp. Opera ng Margin

Average Kolkata Price 08-12

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

130.00

140.00

150.00

160.00

170.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

Sale2009 2010 2011 2012


and sizeable investment in branding activities.

New Product Launches For Wider Customer Offerings

Tata Global Beverages has a strong track record of innovation. The company has launched various new products to widen consumer offerings and to strengthen the bond between brands and its consumers.

� The Indian market is turning to premiumization. The Indian consumer is moving up the value chain from loose to packet tea and also from mid-priced to premium teas, providing robust opportunities at both ends of the market.

� Green tea, positioned as a ‘good-for-you’ drink, is gaining quite a lot of acceptance with increasing competitive intensity. To effectively cater to this opportunity Tata Global Beverages Ltd ventured into the luxury tea segment by launching Tea Veda, the first high-end Tata badged tea brand in six variants.

� For the green tea segment in India, the company launched three new Tetley Green tea variants comprising cinnamon and honey, citrus and spice and aloe vera, which will occupy shelf space in high-end retail outlets and supermarkets in key Indian metros.

� In Canada, the company launched New Chai blends (dark chocolate and vanilla bean) and Green Pomegranate 80s.

� Specialty tea gained distribution in Australia. Launched in early 2011, Tetley Chai Latte, an exciting new product, achieved significantly higher sales volumes than estimates.

� The company partnered with its Portuguese distributor, Delta, to launch a new business venture to create a range of Tetley branded infusions that complement their new Delta Q coffee pod machines and coffee range.

The new capsule-based Tetley tea pods were launched in three different varieties: Relax (camomile and peach), Delight (Rooibos strawberry and vanilla) and Refresh (ginger mint).

� Tetley also launched Gaffer-shaped (one of the best loved Tea Folk characters) biscuits. These biscuits are available in three different flavours like choco chip, golden crunch as well as ginger.

We believe with the continuous launch of new products and brand extensions’ widening consumer’s offering, which according to us will drive the top-line growth for this beverage company.

Continuous Investment In Growing Strong Brands

Strong brands are the life-blood of consumer goods companies. The company has invested significantly in brand building initiatives, ensuring that brands retain top-of-the-mind recall with consumers.

Tata Tea continued its dominance in the Indian packaged tea space with volume and value leadership. To continue its unabated leadership in the beverage space, Tata Global has launched various advertising campaigns to tap new customer profile and to ensure that the brand does not lose its presence.

Tata Tea created an advertisement, which helps the people of India to connect with the social problems faced by Indians and this created a lot of ripples in the media.

Tata Tea launched its ‘Jago Re’ and ‘Soch Badlo’ campaigns, against the backdrop of scams and corruption when the morale of the entire country was very low.

Additionally, the ‘Gaon Chalo’ initiative strengthened the footprint in relatively under-penetrated rural and semi-urban areas. During the festive season, special festive packs were launched so as to maintain brand visibility, which drives volume growth for the company.

Strategic Alliances

Joint Venture With Starbucks

To strengthen its dominance in the Indian market, TGBL entered into a strategic joint venture with Starbucks Coffee, which is an international coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffee house company in the world, with 19,763 stores in 59 countries.

Tata Starbucks, the joint venture company, will own and operate Starbucks outlets in metros as well as other key cities across the country. Tata Starbucks will collaborate in other areas, including partnering in the distribution of consumer packaged goods through grocery channels across the country.

Tata Coffee will source and roast coffee to supply Tata Starbucks on the one hand and could also export to Starbucks Coffee globally on the other hand, catalyzing the global discovery of Indian Arabica coffee varieties.

However, we believe that operational benefits of such moves will be visible from FY14E onwards.


Y/E - MarchRevenues - Net % ChangeEBITDAEBITDA Margin %InterestOther IncomeEBDTDepreciationExtraordinary/ExceptionalPBTTaxPATMinority InterestProfit/Loss Of Associate CompanyExtraordinary ItemsAdj PATShares O/S ( No In Cr.)*Adj EPS*

Consolidated Financials Profitability (` In Cr)

19.1%4309.6

7.1%682.0

15.8%219.866.32528.5

91.61622.42059.3

153.41905.9

392.228.9

0.01542.5

61.625.0

18.1%4847.912.5%619.4

12.8%54.2

59.43624.6

98.7730.4

1256.3424.4831.9156.3

24.90.0

700.561.611.4

17.0%5783.019.3%683.7

11.8%27.9

72.04727.8102.9

16.1641.0247.7393.3

36.033.0

0.0390.3

61.66.3

16.9%6003.2

3.8%608.1

10.1%121.097.19584.3

99.49.5

494.4202.3292.0

58.020.2

0.0254.3

61.84.1

16.6%6631.210.5%623.19.4%70.4

94.52647.2

96.122.5

573.6141.7431.9

60.7-15.1

0.0356.1

61.75.8

FY08 FY09 FY10 FY11 FY12


CONCLUSION

Most of the uncertainties related to volatility in raw material prices have been adequately factored in the share price. We believe higher revenue visibility from the recent joint ventures and further expansion in non-alcoholic beverages would result in higher revenue growth and the ability to pass on cost escalation will improve margins, going forward. Though the hardening of raw material prices and the failure of new launches will negatively impact the profitability for the companY.

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DPDisclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

SMS ‘BANG’ to 54646Contact at: 022-3926 9404, E-mail: [email protected]


Registered O�ce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006Corporate O�ce: B-2, 301/302, 3rd Floor, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010


n the previous fortnight, Nifty Futures lost around 1.35% in July owing to weak advent of monsoon, lack of

firm policy initiative by the government and RBI’s decision to keep key rates unchanged.

As expected, the RBI kept all the key rates unchanged (except SLR). It, however, raised inflation forecast to 7% from 6.5% and revised GDP growth lower to 6.5% from 7.3% for the financial year 2012-13, dampening investor sentiments.

The bigger-than-expected 1,63,000 increase in US non-farm payrolls in July, along with the increase in the ISM non-manufacturing index, eased fears that the US economy may follow Europe into recession. This has improved hopes regarding the global economic outlook.

In the absence of any other news trigger, the Q1 FY 12-13 earnings results are expected to provide further cues to the Indian equity markets. All major auto stocks, along with SBI are yet to declare their results, which has the potential to provide direction to the markets.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options is hovering between a very narrow range of 1 and 1.11 since the past fortnight. The current PCR OI stands at 1.09 and going forward, we see the PCR moving upwards near the level of 1.2 till the end of the August expiry maintaining a positive bias for expiry.

On the Nifty Options side, for the August series, highest build up is witnessed near 5000PE since the start of the August expiry even when the Nifty July series expired at 5,042.

I Since then aggressive Put writing has been seen at strikes 5000, 5100 and 5200 making the Nifty climb up to levels above 5,300. At present (as on 6th August), highest OI for Call and Put is seen at 5,500 and 5,000 to the tune of 8.36 mn and 10.27 mn, respectively. We believe the markets may retest any of the above levels in the current expiry itself.

The thing to notice in Options these days is the Volatility Index (VIX), which is hovering near its historical lows of 15-16. Looking at the uncertainty on the global as well as the domestic front (concerns over scarcity of rainfall and lack of political action), we think Indian equity options are at considerably cheaper rates and would recommend traders to go long on volatility from these levels for a short-term target of 20-22.

The short-term trend has slightly turned positive but the overall medium trend remains cautious and weak. The Index has witnessed a volatile trading session since the past few weeks. The pattern suggests an immediate resistance at the 5,350 level and support resides around the 5,080 level.

The Nifty is also trading above its long-term 100-200 day moving average, which is also a healthy sign. The current month’s Nifty Option suggests that the market will trade in the tight range of 5,100-5,350 and a big move could be seen only if the Nifty closes on either side of the range. The Nifty has managed to close above the Fibonacci retracement (61.8%) that is, the 5,210 level in the last two trading sessions. Till the time 5,230-5,170 levels are intact, there is a valid possibility that

TECHNICAL OUTLOOK FOR THE FORTNIGHT

the Nifty may make an attempt to scale higher.

However, the Nifty is facing a strong resistance of 5,350 level Fibonacci Retracement levels. Important oscillators RSI & MACD on the daily have turned positive, giving a sense of a short rally taking place. Immediate resistance of 5,300 and stability above this could extend the rally to 5,370/ 5,450 levels. A strong support is seen at the 5,080 level and fresh selling can be seen only if the Nifty starts trading below this point. The overall mode of markets will turn positive only if the Nifty starts trading above the 5,280 level. Till then, any sharp rally in the market should be used as a selling opportunity.

The Bank Nifty faces strong resistance around the 10,500 level on the upside; on a decisive close above, investors can expect it to rise to 10,620 and 10,700 levels. The short-term moving averages have converged and are placed with buy signals. On the oscillator front, RSI is placed with a positive signal on the midway. There is an immediate support at the 10,275-10,250 levels on the downside.

STRATEGY FOR AUGUST EXPIRY

Long Straddle On Nifty: It can be initiated by buying 5200CE and 5200PE of August series. The net combined premium outflow comes around `180, which is also the maximum loss (i.e. if the Nifty August series expires at 5,200). The break-even stands at 5,380-5,020 levels. There is unlimited profit beyond the break-even range. Traders can square off their strategy when the 5,200 straddle rate crosses above 250.


Source: Capital Line

Company Name Current Market Price11th Nov'10

Book Value Price /Book Value

233.51102.53143.35253.28239.54

52.1144.24

165.42126.76144.70405.62

14.70223.50

51.32199.21

90.32409.63

20.4387.35

124.63141.73114.50123.76

80.80135.28254.57114.65305.98142.78218.36

72.5450.2436.00

161.34319.86

50.26188.93135.34140.42218.93154.11

36.6231.64

121.4151.21

115.1521.81

178.96594.98113.56

0.240.260.280.320.350.350.350.360.380.380.390.400.420.420.430.440.440.450.450.450.450.460.460.470.470.470.470.480.480.490.530.530.530.530.530.540.540.540.560.570.570.580.580.580.600.600.600.600.600.61

Source: Capital Line

PRICE TO BOOK VALUE

Reliance Communications LtdAnsal Properties & Infrastructure LtdGammon India LtdGreat Offshore LtdHousing Development & Infrastructure LtdElectrosteel Castings LtdAlok Industries LtdEscorts LtdAnant Raj Industries LtdShipping Corporation Of India LtdBilcare LtdSujana Towers LtdUnited Breweries (Holdings) LtdSREI Infrastructure Finance LtdPatel Engineering LtdNCC LtdJindal Poly Films LtdFirstsource Solutions LtdHCL Infosystems LtdIndiabulls Real Estate LtdPunjab & Sind BankPunj Lloyd LtdJai Corp LtdJyoti Structures LtdPrakash Industries LtdChennai Petroleum Corporation LtdUnited Bank Of IndiaEveronn Education ltdRolta India LtdShree Ganesh Jewellery House LtdOnmobile Global LtdS. Kumars Nationwide LtdMercator LtdGujarat Narmada Valley Fertilizers Company LtdVideocon Industries LtdUsha Martin LtdAmtek Auto LtdIndian Overseas BankD B Realty LtdGujarat Alkalies & Chemicals LtdA2Z Maintenance & Engineering Services LtdUnitech LtdSuzlon Energy LtdCentral Bank Of IndiaAdhunik Metaliks LtdJindal Stainless LtdJM Financial LtdUflex LtdState Bank Of Bikaner & JaipurKalpataru Power Transmission Ltd

Company Name Current Market Price(As on 2nd Aug'12)

Book Value Price /Book Value

56.2026.9040.8581.1082.8518.1015.7059.6548.3055.55

156.505.91

93.2021.6085.1539.30

178.759.12

39.0556.5064.4552.2056.8037.9063.75

120.3054.45

145.8069.00

108.0538.2026.5519.0585.45

171.1026.95

102.5073.5079.10

125.0088.2521.2518.5071.0030.5068.7513.03

107.45358.40

68.95

The table represents companies listed on the BSE that are low on Price to Book Value

he mutual fund sector is in the news of late owing to market regulator Securities and Exchange Board of

India’s focus on the performance of mutual fund (MF) houses in the present market conditions.

Interestingly, SEBI has made references to the role of distributors and increased the expense ratio to revive and resurrect the dwindling interest of distributors selling MFs.

Therefore, it is just a matter of time before you come across a distributor selling a MF scheme, preferably equity. There could be situations where the investment pitch of

T distributors would be very convincing and promising. But as an investor you should be wary of a number of things.

Being an educated and prudent investor you should read the fact sheet of the scheme to ascertain the authenticity of the investment pitch of the distributor. There are various details that succinctly capture the performance of a fund. These include the fund’s investment objective, portfolio and changes in it, and essentially its performance in relation to its benchmark index.

Recently the market regulator found that nine fund houses’ schemes had failed to outperform their benchmark

indices and these fund houses are, therefore, being monitored by SEBI. In such a situation it is important that you be familiar with the fact of a fund before investing - because at times, selling a fund is the only motive and not necessarily selling the right fund.

Understanding A Fact Sheet

THE OBJECTIVE

Most investors ignore this section under the assumption that all equity or debt schemes invest in the same manner. But investors miss the point in this assumption. The investment objective of a scheme could also inform about the risk the fund entails.



fund. It is here that most investors choose to ignore since it is too technical and like patients who leave it to the doctor for proper medicine, these investors also leave the fate of the fund to a fund manager.

A portfolio composition generally includes two sections - the top 10 investments in terms of holding of the portfolio of the fund. A glance through the fund’s composition reveals whether a fund has concentrated exposure to a particular stock or spread across investments, across sectors and companies. It is estimated that if top 10 stocks form over 40% of the net assets of the fund, then the fund is termed as concentrated fund. Otherwise, the fund is termed as a diversified fund.

One of the disadvantages of having a concentrated exposure is the uncertainty of market movements and earnings of companies. If certain companies fail to deliver the expected results due to some factors in the industry in which they operate or its inherent reasons such as the overall negative sentiment in the markets, then performance of the fund is jeopardized. Hence, it is important to have a well-diversified exposure.

Another major factor that investors need to keep in mind is sector allocation in the portfolio section. Again, having a diversified exposure to sectors serves the larger interest in securing reasonably good returns. There are cases in which companies which are fundamentally sound suffer due to sectoral issues. Hence, a concentrated sectoral exposure is not always a sensible option. THE PERFORMANCE

It is obvious that performance of a fund is of importance especially for a long period of time. Longer a fund performs well, better are its chances

of performing well in the future. This is the principle an investor should keep in mind while investing in a fund because an asset class like equities takes time to do well over a period of three years or more. Consistency in performance is the key.

Before gauging the performance of a fund, investors should keep in mind the concept of a net asset value (NAV) of a fund. Just like the share price of a company, the NAV of a fund functions as its share price. Hence, investors should follow the fluctuations in the NAV of a fund.

Apart from this, investors should also gauge a fund’s performance with respect to its benchmark. Every fund follows a benchmark to give a relative picture to the investor as regards its performance with the broader markets. Hence, only if the fund has outperformed its benchmark over a longer period of time, preferably five years, then it makes a sensible investment option.

THE EXPENSES

Every fund has costs attached to it. One of these costs is the expense ratio. An expense ratio can be defined as the cost an asset management company incurs in operating a mutual fund. It has a bearing on the overall returns of the mutual fund. A fund’s net asset value is declared after taking into account the expense ratio of the fund. Hence, high expense ratio can also reduce the overall returns of a mutual fund scheme.

To get a fair idea of the viability of a scheme, investors should compare with its peers, which have the same investment objective. A fund’s scheme having a low expense ratio and same investment objective must be a lucrative option. But such funds can be considered only when their track record is consistently gooD.

Depending on an aggressive or conservative approach, investors can make a decision about the period for which one should be invested.

There have been cases in the past when a fund meant to invest in the Futures and Options segment invested in fixed deposits. This is because the fund’s objective is to go for capital appreciation. It has been observed that a number of large-cap equity funds invest in stocks that rally in uncertain markets.

These can be companies with medium-sized or small-sized market capitalization. Also, it has been observed that a balanced fund may increase its equity investment to cash in on the rally in the equity markets.

Hence, investors must read and sift through details of the investment objective and accordingly match its investments. Some funds may have substantial exposure to mid-cap companies, which means that it is a high-risk high-return fund, while some follow traditional conservative approaches of investing in large-cap companies, which are widely tracked and have strong revenue visibility.

Besides, investors should also compare the scheme with its peers in the industry. For this, there are web sites which help in providing in-depth detail about a fund’s performance for a long period. These web sites have their own rating and methodology to recommend a fund. Also, these web sites, like newspapers, interview the fund managers of funds to provide an insight into the fund’s investment strategy. Following these strategies can help investors to tide over any basic difficulty in investing in a fund.

PORTFOLIO COMPOSITION

Portfolio composition forms the most important part of a fact sheet of a

und houses in India have started offering infrastructure debt funds (IDFs) to investors.

Although the product has not seen much demand from the public, it can still be considered as a good start for a product, which can address the issue of sourcing long-term debt for infrastructure projects in India.

Recently, Reliance Mutual Fund filed an offer document with the Securities and Exchange Board of India (SEBI) to launch infrastructure debt funds, a close-ended debt fund that requires a minimum application size of `1 crore.

Apart from Reliance Mutual Fund, SBI Mutual Fund along with IDBI Mutual Fund, Axis Mutual Fund and L&T Mutual Fund too have filed an offer document with the similar theme. Up till now only IDFC has obtained SEBI’s approval to start its infrastructure debt fund.

The framework for the establishment of infrastructure debt funds was announced by the then Finance Minister Pranab Mukherjee in the Union Budget 2011-12, wherein IDFs were allowed to be set up either structured as an Non Banking Financial Companies (NBFCs) or as a mutual fund.

IDFs can be an integral part of raising money for key infrastructure projects as currently banks are the main source of funding for such products. Market players highlight that in the past few

F

ATwo-Pronged

Approach

Tapping IDFs to meet infrastructure needs in the country will not only prove beneficial to the companies but also to the investors



shall be listed either on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) depending upon the fund houses.

Each series of the scheme shall have a firm commitment from strategic investors for contribution of an amount of at least `25 crore before the allotment of units of the scheme is marketed to other potential investors.

Each series of the scheme shall have a minimum of five investors and no single investor shall hold more than 50% of net assets of each series. Each series under the scheme will come to an end on the maturity date. On maturity of the series, as a default mechanism, the outstanding units shall be redeemed and proceeds will be paid to the unit holders.

There are, however, concerns among various investors regarding the difference between infrastructure schemes and IDFs. There are several infrastructure schemes in the country right now, which invest in equities of infrastructure companies. IDFs aim to invest in debt papers of these companies. Sometimes even debt papers can yield better returns then shares of infrastructure companies and also they cannot be volatile as shares listed on the stock exchanges.

Mukherjee had also asked NBFCs to start IDFs. But fund houses will have an advantage in terms of cost, as fund houses can launch schemes within their existing set up, while NBFCs will have to float a new company to launch IDFs, which could have some impact on overall returns.

Where Will The Scheme Invest And Investment Strategies

As said earlier, IDF is a type of scheme, which can be in great demand for high net worth individuals (HNIs) and mature

investors. Since IDF schemes will be close-ended, the corpus will be invested in a mix of securities such as securitized debt instruments of infrastructure companies and infrastructure capital companies.

Apart from this, it can also be invested in short-term papers such as certificates of deposits or even fixed deposits or commercial papers to meet sudden liquidity requirements.

On the equity side, the fund will invest in equity shares of companies engaged in infrastructure as well as infrastructure development projects that are listed on a recognized stock exchange in the country.

However, the usage of credit default swaps, interest rates futures and interest rate swaps will be limited for the purpose of hedging and portfolio rebalancing. The fund shall be managed according to the investment objective, which is to generate regular income and capital appreciation by investing in investment themes within the infrastructure sector.

The investment strategy would be to identify a diversified universe of infrastructure investment options with due consideration given to sectors, nature of project and the capital structure. Within this universe, the fund manager will identify and invest in securities with acceptable credit quality and those options that generate an optimal risk-reward ratio on a relative basis.

What Should Investors Do

In current times when incomes of people are going up, they need to consider alternative investment avenues apart from equities and debt. In this scenario, infrastructure debt funds can play an important role and become an integral part of any individual’s portfolio.

years infrastructure companies have been facing difficulties in raising money following asset-liability mismatches and loan exposure limits set by the Reserve Bank of India (RBI). It is also important as in the current 12th Five Year Plan (2012-17), India’s Planning Commission has projected an investment of $1 trillion for infrastructure development.

An IDF can be set up either as a trust regulated by the SEBI or as a company regulated by the RBI. However, this article will dwell on the fund houses that have either come out with IDFs or are in the process of launching the product.

However, there are few concerns over the infrastructure sector in India, which has resulted in a slow pick-up in IDFs by fund houses. Hardly 5-6 players are coming out with IDFs, despite India boasting of over 40 asset management companies in India.

Take for example the Reliance Infrastructure Debt Fund. The investment objective of the scheme is to generate regular income and capital appreciation by investing in investment themes within the infrastructure sector such as transport, energy, communication, social and commercial infrastructure that fall under its purview.

The Reliance Infrastructure Debt Fund in its offer document with SEBI stated, “Being a close-ended scheme, the units can be purchased only during the New Fund Offer (NFO) period of the scheme. No redemption or repurchase of units shall be allowed prior to the maturity date of the scheme.”

It further said that units held in dematerialized form can be traded on the stock exchange, where the units are listed. The units of the scheme


Given the sky-rocketing prices of real estate in most parts of urban India, many investors want to invest in real estate but are unable to do so with a sum of `20 lakh to `30 lakh. Such investors can definitely look at infrastructure debt funds. In fact, it has already generated a lot of interest among various investor classes.

Apart from this, if we look at some of the real estate stocks as well as infrastructure stocks, we find that

they have been beaten down badly by the markets in the past few years. Moreover, the prices of such stocks haven’t moved to great heights and have remained volatile since the global meltdown.

Many infra and real estate companies are cash-strapped and will therefore be raising debt, which can be available at a higher rate. And if infrastructure debt funds invest in that paper, then they might fetch god

returns for investors.

However as per SEBI’s rule, mutual fund houses cannot indicate returns. But this scheme is for informed investors and not for the masses.

On the flip side, investors will not be able to get the returns they will earn if they want to invest in such schemes. Hence, they will have to stay fully invested for the whole tenure to earn decent returnS.

Registered O�ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP

The most intelligent strategy in Chess is to be ready

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Currency Derivatives Trading with us keeps you a few

steps ahead, always.

Contact: 022-39268088 | e -mail: [email protected] | www.nirmalbang.com

Taking

Calculated

Risks

e only fear that which we do not understand. Fear stems from

ignorance. Once you gain knowledge, fear is dispelled. Similarly, the irrational fear about the stock markets being a risky proposition and one that should be stayed away from can only be removed by gaining knowledge about this risk.

Before entering the world of deep-sea diving, isn’t it prudent to know how many sharks are there in the water, what are their chances of attacking you, and what can be your defence mechanisms in case of an attack?

Similarly, before entering the stock markets, an investor or a trader should be well aware of the different types of risks that he may be facing in the coming times, the measurement of these risks, and the techniques of mitigating those risks so as to have a safe,sound and prolonged career in the stock markets.

This article will enable you to banish the fear of the dreaded four letter word R-I-S-K and befriend it.

WHAT IS RISK

In the context of the stock markets,

W

If taken wisely,

risks can help

reap good returns

from the markets



volatility, greater is the chance of profit. At the same time there is also a risk of greater loss. Less volatile stocks have less profit potential but risk of loss is equally lower.

Economic RiskSometimes an economy on the whole can become quite weak. The best example is the recent Greek economic crisis. The investment outlook for such economies turn quite negative and the worst hit are the stock markets, with both foreign as well as domestic investors dumping stocks in large quantities leading to a crash.

Interest Rate And Inflation RiskInterest rate changes affect investments across all asset classes because the cost of borrowing has a significant impact on returns. Basically, when interest rates become high, money flows out of the stocks and flows into fixed assets and bonds and vice versa.

In other words, when inflation is high, interest rates are also high and the disposable income in the hands of investors is less. Hence, investors flock to safer pastures such as bonds from riskier assets such as stocks.

Corporate Governance RiskAn army cannot win a battle if the commander is weak. Similarly, if the top management/directors of a company are dishonest, unethical, are not transparent in their dealings, manipulate their books of accounts or are involved in frauds, etc, such companies are punished severely by the markets. Investors should always do a background check on the company management and carefully study the balance sheet before investing in its stocks.

Business RiskSome industries or businesses are inherently more risky than other industries. These may be industries

involved in fields of rapidly changing technologies, highly competitive markets, government policy-sensitive industries or niche players, etc. Any negative news on any of these parameters can take the stock down.

The best piece of advice to an investor is to invest in businesses that he/she can easily understand. The more basic the industry, more is the chance that such companies will be less volatile, more predictable and better insulated from the vagaries of these parameters affecting it.

MEASUREMENT OF RISK

There are various risk measurement techniques at the disposal of a stock investor. Let us look at some of them in brief:

Standard DeviationIt measures the dispersion of data from its mean. Basically, it measures by how much the return on investment is deviating from the expected normal or average returns. A highly volatile stock would have a high standard deviation and vice versa. In other words, if you are considering two stocks whose expected returns are the same, then the stock with a lower standard deviation would be considered as less risky or more safe.

BetaIt is the measure of the volatility of a stock or a portfolio in comparison to the markets as a whole. Beta is calculated using regression analysis. As a standard, the beta of the markets is taken as 1. So, if a stock has a beta of 1, then it means that it will move in line with the markets.

A beta of more than 1 for a stock means that it will be more volatile than the markets and, hence, will have a higher risk and higher return potential. Similarly, a stock with a

risk can be defined as the chance that an investment’s actual return will be different from the expected return. This includes the possibility of losing some or all of the original investment.

TYPES OF RISKS Systematic Risk: It is also known as market risk. It is a risk that affects the entire market. For example, war, recession, inflation, political uncertainty, natural calamities, economic crisis, etc fall under market risk. An individual investor cannot hope to achieve protection against this type of risk just by diversifying his portfolio. One can gain protection against this risk by hedging.

Unsystematic Risk: It is also known as specific or idiosyncratic risk. Unsystematic risk is that risk which is industry- or company-specific. For example, labour unrest in a specific automobile company or a new industry-unfriendly policy affecting a specific sector such as sugar or cement. Unsystematic risk can be mitigated to an extent by diversifying one’s portfolio.

Let us now look at some other types of risks:

Liquidity RiskThis risk is mostly seen in low volume and penny stocks. It is a risk where you are not able to sell your shares when you want, either to limit your losses or book your profits just because there are not enough buyers for your stock. Hence, always look at the trade volumes in a stock and avoid investing in illiquid stocks.

Volatility RiskIn the context of the stock markets, the rate of change or fluctuation of a stock price is known as volatility. In other words, the risk associated with the daily fluctuation of a stock price is known as volatility risk. Higher the


beta of less than 1 means that the stock will have lower returns and lower return potential than the markets return.

Sharpe RatioIt measures the risk-adjusted performance of a portfolio. It tells us whether the returns on a portfolio are due to skill and ability of the investor and his investment decisions or merely due to the excess risk taken on the portfolio. Greater the Sharpe ratio of a portfolio/fund, better is its risk-adjusted performance. It is useful when comparing a portfolio/fund with its peers and understanding whether the fund with higher returns has taken on higher risk to achieve those kinds of returns.

R-squared or Bogle’s Ex-marksIt measures the correlation of a fund’s movement to that of the underlying index. A portfolio with a high R-squared means that it will move very much in line with the benchmark index and a low R-squared number means that its movement will be more independent of the index. An R-squared of 100 means full correlation whereas an R-squared of 0 means no correlation.

MITIGATION OF RISK

DiversificationIt is a technique that reduces risk by spreading your investments across various asset classes such as gold, real estate, stocks, bonds, etc, so that the effect of volatility gets reduced. Within stocks itself one can achieve diversification by investing across various sub-segments such as large-caps, mid-caps, and small-caps.

Furthermore, an investor should have a prudent mix of high and low beta stocks. He should not concentrate on just one or two select sectors such as banks or pharma. Instead, he should invest across various sectors and

industries. He should not get overzealous and buy penny or dirt stocks just for the sake of diversification. An investor is advised to not buy more than 10 to 12 stocks so that each stock can be monitored and tracked properly.

Invest via Mutual FundsIf you think that you cannot devote time, energy, or lack the skill for proper research and investing and diversifying, yet want to take on the risk of investing in the stock markets, invest via a mutual fund. These funds are managed by professionals who research and monitor the stocks in their portfolios actively and understand the risk and returns involved. The only hard work on your part is to find out funds which have a good track record and sustained growth history.

Stop Losses And Profit BookingOne cannot but stress enough the importance of keeping stop losses. What a stop loss does is that it prevents huge losses on individual trades so that one’s capital does not get eroded rapidly and the person can survive today and come back tomorrow. Also, the investor must practise trailing stop losses if his stock is going up, so that he can keep on locking in part of the profits and at the same time keeping a safety buffer in case the stock starts to fall again.

Hedging With OptionsMany people are terrified at the mere mention of the word Futures and Options. But the role of F&Os as risk mitigators cannot be undermined. If you have an existing long position in a stock, buying protective Put Options or applying the covered call strategy in the same stock can help mitigate the losses in case the stock starts to decline.

Dollar-cost Averaging (DCA)It is a technique, which involves

systematic purchase of stocks at predetermined intervals and predetermined fixed amounts.

The basic principle is that when you are practicing DCA, you will buy more shares when the prices are down and buy less shares when prices are up and over a period of time your price-per-share will come down and at the same time you will be protected against the risk of investing a large corpus at the wrong time.

CONSTRUCTING YOUR OWN RISK PYRAMID

Determine your risk-taking abilities and find out whether you are a risk-taker or are risk-averse. Also, determine your time horizon, your goals, and your allocation percentages and construct your own Risk Pyramid.

Given below is a sample risk-pyramid structure. You can construct or customize it according your risk capacity and expected returns.

Base Of The Pyramid: Government bonds, bank fixed deposits, cash and cash equivalents. Basically, investments with low risk, known as fixed returns, but very little room for capital appreciation. Allocation 50% to 60%.

Middle Of The Pyramid: Real estate, gold, stocks, mutual funds. Medium-risk investment with stable returns but with room for capital appreciation. Allocation 25% to 35%.

Top Of The Pyramid: Options, Futures, Forex, Commodities, etc. Very high risk and return instruments. Only commit that money which can be lost without making a dent in your coffers. Allocation 10% to 15%.

Remember, don’t avoid risk but take calculated riskS.


interest outgo on loans. This can also have a cascading effect on interest rate sensitive sectors such as housing, automobiles and banking. With more and more people choosing to put their buying plans on hold or at least postpone them, these stocks may see some pressure.

Believe it or not, banks may face the maximum brunt of a deficient rainfall. With almost 60% of the country involved in agricultural activities either directly or indirectly, a deficient monsoon could directly hit the sole income source of all these people. This, in turn, can lead to the inability to repay on time the loans they had taken for farming purposes. This can cause a steep rise in the NPAs of banks. Banking stocks across the board may see a sharp fall.

Since interest outgo is higher during inflation, it is an added cost for companies. Also, companies have to purchase power at higher rates since hydropower, which is a major source of power production, suffers due to water scarcity and tariffs often go up.

All this means added expenditure for industries, which can pass on the extra burden to consumers as increased product cost. Hence, the cost of almost all items goes up leading to a rise in inflation. Most stocks can plunge.

Almost all industry segments witness a slump in demand. FMCG companies bear the biggest brunt since nearly 2/3rd of their revenue comes from the rural market. As a majority of our rural population is dependent on agriculture and allied industries for their livelihood,

delayed monsoon means failed crop and huge losses for this very important consumer segment.

Their income comes down drastically and consequently their spending also decreases. Not just FMCG, even sectors such as electronic goods, textiles, luxury items, autos, etc witness a slowdown. This reflects in their balance sheet as decreased sales and lower net profits and their stocks take a beating.

Decreased rainfall leads to large scale water and power cuts, for example water and power supplies on alternate days. Many industries have to stop work on days witnessing water and power cuts, which would lead to loss of productivity.

Water crisis dictates that more funds are allocated or diverted towards drought affected areas and food and water management and reform activities such as infrastructure, healthcare and education may take a back seat.

As a result not many orders or fresh contracts are awarded to companies such as construction and engineering who are involved in the infrastructure space. At the same time existing projects get delayed due to lack of funds. The stock markets are harsh on such companies.

Poverty and hunger may grow. Healthcare can also be under pressure due to increased malnutrition. People may resort to criminal activities like corruption, scams, frauds, etc, dampening investor sentiments, both domestic as well as international who take an aversion towards such kinds

onsoon has been inadequate this year. The deficiency will have a heavy bearing

on agriculture and will lead to food shortage too. While food shortage is one of the major concerns, to think that it is the only problem would be a very myopic view.

A single year of deficient rainfall or below normal monsoon can have disastrous effects on almost all spheres of the economy. And if an investor believes that all is hunky-dory with the markets, he is sadly mistaken. That’s because the deleterious effects of a delayed or deficient monsoon will be felt the most by the stock markets.

Let us see how monsoons have a cascading impact on the economy as well as the stock markets.

Low monsoon means decreased crop output leading to food scarcity resulting in increase in prices of vegetables, fruits and other food grains and consequently an increase in inflation.

Obviously during times of high inflation, the amount of disposable income in the hands of the people goes down and the purchasing power of money also goes down. This means lower sales for companies across sectors, and the stock markets on the whole can witness a slump.

Rising inflation is often accompanied by increase in interest rates. This means that loans would be available at higher rates and the common man who is already facing the burden of extra expenditure owing to increase in food prices and other products will have to shell out more by way of

M


of markets.

Finally the stock market can on its own witness a sharp and prolonged downtrend in the year the monsoon is deficient due to attacks from multiple fronts. As inflation goes up, people struggle to make ends meet.

In such scenarios, who would have the luxury of putting money into a risky asset class like stocks? Alternatively, investors would look to sell their existing stock holding so that they can have some extra cash in hand. Since most sectors of the

economy can also witness a weakness, this will add to the already gloomy mood. Institutional investors will take their money out and look for greener pastures.

Please bear in mind that the scenarios mentioned in this article are only possibilities not reality and if the monsoon situation improves, all these negatives can turn into positives.

Can we do our bit? Yes we can.

1. Don’t waste water. Remember water conservation is the moral responsibility of each and every citizen of the country.

2. Conserve electricity.3. Do not cut trees and thereby, prevent deforestation .4. Use less paper.5. Plant saplings.6. Reduce emissions that are responsible for global warming.7. Practice rain-water harvesting.8. Try and use alternative energy sources such as solar, wind, gas, etc.9. Pray to the rain Gods to drench this parched earth.

Remember every drop of water saved will be like an added income for each and every one of us as it will come back in the form of lower food prices and reduced inflatioN.

Crude Oil $98/barrel

Nickel$28,000/tonne

Pepper`25,000/quintal

Silver $32/troy ounce

Zinc $2,100/tonne

Aluminium $2,450/tonne

Chana`2,500/quintal

Copper $8,500/tonne

Jeera`14,000/quintal

Cardamom `1,000/kg

Gold $1,500/troy ounce

Guar Seed `3,200/quintal

Our research goes beyond numbers to identify the forces that affect the kundali of commodities - global events, domestic issues, and everything in between. Which is why, our predictions have invariably come true on several occasions, proving

that we are among the best in the industry when it comes to commodity trading.

Predicting Accurate Results. Consistently.

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.

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Date: 20th July, 2012.Venue: The Grand Chandiram Hotel,

Kota.

LEARN THE ART OFCOMMODITY INVESTING

LEARN THE ART OFCOMMODITY INVESTING

Exchange Partner

BeyondPresent

&



BEYOND MANDIVISITS KOTA

Expert guidance and right advice by

industry experts can help market

participants to make the most from the

commodity markets

Beyond Mandi, the one-of-its-kind investor education camp was organized by Nirmal Bang Commodities Pvt Ltd in association with Zee Business at The Grand Chandiram Hotel in Kota on 20th July.

The camp was held with the aim to educate traders and investors in the art of investing in commodities by inviting experts from the industry to give sharp insights into the commodity markets, thus helping them take right investment decisions.

Experts like Anjani Sinha, MD & CEO of the National Spot Exchange Limited (NSEL); Kunal Shah, Head – Commodity Research at Nirmal Bang Commodities Pvt Ltd and Vijay Data, MD of Vijay Solvex discussed the opportunities in the commodity markets with Amish Devgan, Commodity Editor and Anchor, Zee Business. Amish Devgan started the event by introducing the speakers and briefed the audience on the topics that would be covered at the camp. He also congratulated Mr Anjani Sinha on MCX being recognized by SEBI as a stock exchange in India.

Anjani Sinha, MD & CEO, National Spot Exchange Limited, who was the first speaker at the camp, lauded MCX for being recognized as a stock exchange and also informed the audience that it stands in the second place among world commodity exchanges in terms of number of contracts.

Moving on, Sinha told the audience that in 2009, a MoU was signed between the government of Rajasthan and NSEL to set up electronic spot market of NSEL in Rajasthan. After the association, NSEL established various trading centres across the state, including one at Kota. He also highlighted the benefits of electronic spot exchange. Then he focused his talk on the various investment products available to the investors and traders in the commodity markets. He said NSEL has launched various commodities in e-series like e-gold, e-silver and e-platinum, among others.

Elaborating on the same, he said, “These commodities can be bought in the demat form in both small as well as large denominations. Also, these can be held for as long as the investor wished without paying the storage or holding cost.” He added, “This mechanism provides a very simple process for investment in gold, silver, platinum, etc. As of now, investors can choose seven commodities in the e-series, that is, e-gold, e-silver, e-platinum, e-copper, e-nickel, e-zinc and e-lead. But NSEL is planning to increase this number to 20 commodities in the future,” he added.

He ended his talk by saying that the Food Corporation of India (FCI) will auction the wheat stock in Rajasthan soon.

Anjani Sinha,MD & CEO of NSEL

Amish Devgan, Commodity Editor andAnchor at Zee Business

Anjani Sinha is the MD & CEO of National Spot Exchange Ltd (NSEL). He has over two decades of experience and deep knowledge of commodity derivatives and spot markets. His previous stint was with the Ahmed-abad Stock Exchange. Prior to that, he was associated with the Bombay Commodity Exchange Ltd, Interconnected Stock Exchange of India Ltd (ISEI) and Magadh Stock Exchange.


Kunal Shah, Head of CommodityResearch at Nirmal BangKunal Shah serves as the Head of Commodity Research at Nirmal Bang. He closely tracks precious metals, base metals, energy and agricultural commodities. He addresses seminars on the outlook of commodities across the country. He appears regularly on business channels. He is also sought by the print media and wire services, on a regular basis. Prior to Nirmal Bang, he was associated with Motilal Oswal Commodities Pvt Ltd, where he managed the research desk.

Vijay Data,Managing Director of Vijay Solvex.

Kunal Shah on his part gave an overall outlook on agri commodities, precious metals and oil. He started by highlighting about poor monsoon in the country. “According to the Indian Meteorological Department (IMD), monsoons are 22% in deficit. But the biggest problem of monsoons is that there is no widespread distribution of rainfall. This is not due to the El Nino effect but due to the Indian Ocean dipole,” he said.

“Due to scanty rainfall, the sowing of agricultural commodities has dropped by 35% to 40%. Although agri commodity exports has increased by 97% from the previous year, this has led to increase in prices of a majority of agri commodities,” he stated.

He said he was bullish on cotton, edible oil – soyabean, jeera and spices like turmeric. Going forward, he explained the contrasting trends in gold prices in the Indian as well as international markets.

“Gold prices in the international markets have fallen from $1,700/ounce to $1,500/ounce, while in the Indian markets, they have risen from `28,000/10 gm to `31,000/10 gm. This is a very frustrating time for brokers because both the markets are extremely contradic-tory and the reason for all this is the Indian currency which has killed the beauty of commodity trading, especially for international commodities,” said Shah.

Elaborating on the same, Shah said, “India’s gold demand has always been robust but since the last six months it is witnessing a downfall. This is because the government has doubled the custom duty and is also discouraging gold exports. Hence, we could lose the number one position to China in terms of being the largest consumer of gold. Also I do not see any major correction in gold in the long-term.”

Finally, he dwelt on crude oil and said: “Overall, oil demand is decreasing while the supply is increasing and, therefore, prices are expected to go down in the next few months, indicating that the year does not appear good for crude oil.”

In a brief address, Vijay Data spoke about the two perspectives of edible oil. The first being the drought-like situation in America, which is the worst of its kind in the last 40-50 years, leading to high temperatures, low rainfall and slackness in the growth of agri commodities.

And the second one being, expectations of tremendous increase in oil consumption in India as the country is one of the least oil consuming nations of the world. “There is a lot of profit in the commodity sector if we invest cautiously,” he concluded.

The event ended with a round of questions and answers between the august audience and the expert panelists.

The next Beyond Mandi camp will be held at Kolkata.

Documents

A Proactive Approachbeyondmarket.nirmalbang.com/issue70/Download/magazine.pdf · Mutual Fund: Fact Check! Fact sheet is an important tool that can be used by investors to ascertain