VOLUME 5.05ISSUE 91

JUNE 1, 2011

Economics is not about things and tangible material objects; it is about men, their meanings and actions.

-Ludwig Von Mises

Rates 01

Graphs 02

News 03

National & International events in the world of finance

Contemporary ArticlesOil price hike and its impact 04Government plans to raise FDI cap in DTH, 04IPTV and FM Radio

Did you Know? 07Carbon credit and how you can make money from it

Investor Focus 11VIP Industries

Buzz Words 12

RATES

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STUDENT’S CARTOON

RepoReverse RepoCall rateInflation(as on May 2011.)Forex Reserve(as on 13th May 2011)91 day T-BillIIP (for March 2011)6.90 GS 2019

7.25%6.25 %6.00%-7.50%+8.70%$ 307.493 billion

8.1439%+7.3% 8.0907-8.0907%

Source: Mike Smith’s Editorial Cartoons

44

44.5

45

45.5

46

46.5

16-May 19-May 22-May 25-May 28-May

Rs/$

GRAPHS

02

21800

22000

22200

22400

22600

16-May 19-May 22-May 25-May 28-May

Gold(per 10 gram)

5200

5400

5600

5800

6000

17,500.00

17,800.00

18,100.00

18,400.00

18,700.00

16-May 19-May 22-May 25-May 28-May

sensex nifty

104

109

114

119

124

16-May 19-May 22-May 25-May 28-May

Oil(per bbl)

INTERNATIONAL NEWS

• Japan quake reconstruction may cost $184 bn: Eco Min.

• Global economy is projected to expand by 4.2% this year, but rising oil and commodity prices

and European debt crisis could hurt the overall recovery: OECD

• Germany to abandon nuclear power by 2022.

• Japan’s unemployment rate in April rose for the first time in six months, while the nation’s

factory output posted a weaker-than-expected rebound amid sluggish output following the

March earthquake and tsunami.

• EBay and its online payment unit, PayPal, on Thursday sued Google and two executives for

stealing trade secrets related to mobile payment systems.

NATIONAL NEWS

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• Real GDP likely to grow by 8.8% this year: CMIE.

• Solar Power can save Over 30% of India’s Coal Imports.

• Tea imports in Jan-mar 2011 decline by 16%.

• Mauritius accounted for about 42% or $54.22 bn of the total $130 bn worth of foreign direct

investment in the country since April 2000.

• India could be world’s 3rd-largest economy by 2030: StanChart

• World Bank to lend $350 mn for Karnataka highway project.

“Benjamin Franklin may have discovered elec-tricity, but it was the man who invented the me-

ter who made the money.” ~Earl Wilson

By- Vaibhav Nagar II MBA L

OIL PRICE HIKE AND ITS IMPACT By- Girish Kumar Jain II MBA L

With the advancements in the Society man has been depending on the Natural Sources for his energy needs. Oil was one of the most importantly used forms of Energy used by mankind in his day to day life. With the scarcity raising for this resource the price has gone up drastically. With Oil running in the Circulation System of the economy a slightest change in the price has affected the life of the common man adversely. For the past three years there has been a continuous rise in the Oil prices and all this happening when India’s is on its way of its development. The price of Oil has nearly doubled in last one year. A rise in $10 barrel will reduce the growth of India Economy by 0.2 %.

One of the most adverse affect of the rise in Oil prices would be Inflation. Where India is still struggling with current Inflation rate of 8.82% and the hike in Oil prices would add to it. Make the life of Lower Class and Middle class miserable. Common man needs will be available at luxury prices.

This would also affect the growth rate of Indian Economy which is staggering at 8- 8.5 %. This conclusion has been drawn from the forecasts of global economic slowdown.

Tax revenues fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates up Because of resistance to real declines in wages, an oil price increase typically leads to upward pressure on nominal wage levels. Wage pressures together with reduced demand tend to lead to higher unemployment, at least in the short term. As a result of high import of oil, India would experience deterioration in its balance of payments, putting downward pressure on exchange rates. Ultimately, imports would become more expensive and exports less valuable, leading to a drop in real national income. The economic and energy-policy response to a combination of higher inflation, higher unemployment, lower exchange rates and lower real output also affects the overall impact on the economy over the longer term.

04

GOVERNMENT PLANS TO RAISE FDI CAP IN DTH, IPTV AND FM RADIO

By- Naveen Kumar Kulkarni II MBA N

FDI, a word that is now-a-days buzzing in everybody’s mouth as it is the one which is shaking the Indian stock market and now it will change the face of Information & Broadcasting (I&B) sector which has been growing with a very fast pace and changing its shape day-by-day.

Just days before TRAI (Telecom Regulatory Authority of India) has recommended for an increase in the FDI limit from the present 49% to 74% in DTH, IPTV and FM radio, a move that will help attract greater overseas funds and aimed at handling the growth in the sector, convergence of technologies and the investment required to match the growth. This is good news for the broadcasting sector comprising of 500 TV channels, 100 Multi System Operators, around 7000 independent cable operators and 7 DTH operators. The consensus was to uplink the non-news

and current affairs TV channels and downlink of TV channels uplinked from abroad and in news channels and radio. When it comes to channels owned by NRI’s then there is no ceiling when it comes to downloading the TV channels uplinked from foreign countries. This move has helped to bring uniformity in FDI ceiling in carriage services. However, the ministry has put a barrier on the reduction in FDI for local cable operators from the present 49% to 26% and this limit has been set in 1995.

Segment CAGR (2006-09) 2010 (Rs. In billions)

2014 (Rs. In billions projected)

CAGR (2009-14)

TV 12% 289 521 15%RADIO 9% 9 16 16%

Source: TRAI

AnalysisIf we see the big picture then this is a positive move by the TRAI as it helps to prepare for the digitisation which is latest trend in India and this move will encourage more foreign companies in broadcasting carriage and distribution space to penetrate in the Indian market. It will challenge the broadcasters to welcome the increasing demand for TV by 2014 as given by TRAI.

This decision will also benefit MSOs (Multi System Operators) which provide DTH services like Dish TV, Sun TV etc. as they can now work with the foreign partners who can bring expertise in implementation of these services and they can also generate cash inflow by stake sale.

Snapshot of the limits in different areasS.No Segment Previous Limit (%) New Limit (%)1 Teleport (Hub) 49 742 DTH 49 743 HITS 74% (49% on

automatic route)74&

4 Cable Networks – MSOs operating at National Level

49 74 provided they undertake up gradation of networks towards digitisation

5 Local Cable Operators 49 49 (Recommended to reduce to 26)

6 Downlinking of TV Channels

100 FDI below 26% is recommended through automatic route

7 Mobile TV No Policy 74Source: TRAI

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06

SBI: PROPOSED MERGER WITH ITS SUBSIDIARIES

By- Saurabh KhatorII MBA L

IntroductionState Bank of India a public sector bank is the largest bank in India. SBI accounts for almost one-fifth of the nation’s loans. Earlier SBI had only seven associate banks that constituted the State Bank Group. These were State bank of Bikaner & Jaipur, State Bank of Hyderabad, state bank of Mysore, State Bank of Patiala, State Bank of Travancore, State Bank of Saurashtra, State Bank of Indore. In this, State Bank of Saurashtra merged with SBI in 2008 and State Bank of Indore merged with SBI in 2010.

DiscussionWhile the proposal is not something new and had been spoken about in the past, there are major issues that need to be sorted out before the market can come to a clear understanding of the impact of the merger. First is how fast the merger would come through because of regulatory, including stock market, requirements and because of opposition from the bank employees. Even earlier, SBI associate bank employees had protested against merger proposals that, however, were completed. It is possible that the two unlisted banks may be merged first before the listed entities are considered.

State Bank of Bikaner and Jaipur (SBBJ), State Bank of Mysore (SBM) and State Bank of Travancore (SBT) - have rallied on the bourses on reports that SBI proposes to merge its five remaining subsidiaries with itself over the next 12-18 months. A major attraction for SBI subsidiary employees is the offer of getting a pension, in addition to provident fund benefits. SBI is the only public sector player in the country where employees get both the benefits. In addition, employees of the subsidiary banks are being given the same treatment that is available to SBI employees.

ConclusionThe consolidation exercise if systemically planned would bring in economies of scale, reduce administrative overheads, redeploy and channelize trained manpower to business development and reduce avoidable competition from different arms of the same group. With merger customers would be able to deposit and withdraw money from all the branches of State Bank of India. SBBJ has rallied 14%, followed by SBM (up 11%), SBT (up 8%) on bourses.We expect the bank subsidiaries to perform give good returns in future and investors can consider buying these stocks, with strict stop loss. The parent bank’s shares are trading at 3-4 times the value of its subsidiaries and SBI itself is planning to come out with a rights issue, which may push up its value further. The key will be the final valuation to determine the swap ratio which will be determined closer to the actual date of merger and not months ahead. If we see the negative effect of merger than currently, the branches of SBI and its subsidiaries compete through branches on the same city streets. Merger should mean closing down some of them. Not just the staff but the officers’ unions too will not like the idea of urban posts being reduced. If we see the current valuation of listed subsidiaries than SBBJ is trading at attractive valuations SBBJ (CMP: 521) and we expect to prices to go up with the planned INR 20000 crore right issue by SBI. All we can say is wait and watch situation as SBI still waiting nod from New Delhi.

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5 07

DID U KNOW?

Carbon dioxide, the most important greenhouse gas produced by combustion of fuels, has become a cause of global panic as its concentration in the Earth’s atmosphere has been rising alarmingly. This devil, however, is now turning into a product that helps people, countries, consultants, traders, corporations and even farmers earn billions of rupees. This was an unimaginable trading opportunity not more than a decade ago.

Carbon credits are a part of international emission trading norms. They incentivise companies or countries that emit less carbon. The total annual emissions are capped and the market allocates a monetary value to any shortfall through trading. Businesses can exchange, buy or sell carbon credits in international markets at the prevailing market price. India and China are likely to emerge as the biggest sellers and Europe is going to be the biggest buyers of carbon credits.

Last year global carbon credit trading was estimated at $5 billion, with India’s contribution at around $1 billion. India is one of the countries that have ‘credits’ for emitting less carbon. India and China have surplus credit to offer to countries that have a deficit.

India has generated some 30 million carbon credits and has roughly another 140 million to push into the world market. Waste disposal units, plantation companies, chemical plants and municipal corporations can sell the carbon credits and make money.

Carbon, like any other commodity, has begun to be traded on India’s Multi Commodity Exchange since last the fortnight. MCX has become first exchange in Asia to trade carbon credits.

So how do you trade in carbon credits? Who can trade in them, and at what price?

What is carbon credit?As nations have progressed we have been emitting carbon, or gases which result in warming of the globe. Some decades ago a debate started on how to reduce the emission of harmful gases that contributes to the greenhouse effect that causes global warming. So, countries came together and signed an agreement named the Kyoto Protocol.

The Kyoto Protocol has created a mechanism under which countries that have been emitting more carbon and other gases (greenhouse gases include ozone, carbon dioxide, methane, nitrous oxide and even water vapour) have voluntarily decided that they will bring down the level of carbon they are emitting to the levels of early 1990s.

Developed countries, mostly European, had said that they will bring down the level in the period from 2008 to 2012. In 2008, these developed countries have decided on different norms to bring down the level of emission fixed for their companies and factories.

Carbon credit and how you can make money from it By- Anubhav Jain II MBA M

A company has two ways to reduce emissions. One, it can reduce the GHG (greenhouse gases) by adopting new technology or improving upon the existing technology to attain the new norms for emission of gases. Or it can tie up with developing nations and help them set up new technology that is eco-friendly, thereby helping developing country or its companies ‘earn’ credits.

India, China and some other Asian countries have the advantage because they are developing countries. Any company, factories or farm owner in India can get linked to United Nations Framework Convention on Climate Change and know the ‘standard’ level of carbon emission allowed for its outfit or activity. The extent to which I am emitting less carbon (as per standard fixed by UNFCCC) I get credited in a developing country. This is called carbon credit.

These credits are bought over by the companies of developed countries -- mostly Europeans -- because the United States has not signed the Kyoto Protocol.

How does it work in real life?Assume that British Petroleum is running a plant in the United Kingdom. Say, that it is emitting more gases than the accepted norms of the UNFCCC. It can tie up with its own subsidiary in, say, India or China under the Clean Development Mechanism. It can buy the ‘carbon credit’ by making Indian or Chinese plant more eco-savvy with the help of technology transfer. It can tie up with any other company like Indian Oil [ Get Quote ], or anybody else, in the open market.

China and India are ensuring that new technologies for energy savings are adopted so that they become entitled for more carbon credits. They are selling their credits to their counterparts in Europe. This is how a market for carbon credit is created.

Every year European companies are required to meet certain norms, beginning 2008. By 2012, they will achieve the required standard of carbon emission. So, in the coming five years there will be a lot of carbon credit deals.

What is Clean Development Mechanism?Under the CDM you can cut the deal for carbon credit. Under the UNFCCC, charter any company from the developed world can tie up with a company in the developing country that is a signatory to the Kyoto Protocol. These companies in developing countries must adopt newer technologies, emitting lesser gases, and save energy.

Only a portion of the total earnings of carbon credits of the company can be transferred to the company of the developed countries under CDM. There is a fixed quota on buying of credit by companies in Europe.

How does MCX trade carbon credits?This entire process was not understood well by many. Those who knew about the possibility of earning profits, adopted new technologies, saved credits and sold it to improve their bottomline.Many companies did not apply to get credit even though they had new technologies. Some companies used management consultancies to make their plan greener to emit less GHG. These management consultancies then scouted for buyers to sell carbon credits. It was a bilateral deal.

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However, the price to sell carbon credits at was not available on a public platform. The price range people were getting used to was about Euro 15 or maybe less per tonne of carbon. Today, one tonne of carbon credit fetches around Euro 22. It is traded on the European Climate Exchange. Therefore, you emit one tonne less and you get Euro 22. Emit less and increase/add to your profit.MCX decided to trade carbon credits. Let people judge if they want to hold on to their accumulated carbon credits or sell them now.

MCX is the futures exchange. People here are getting price signals for the carbon for the delivery in next five years. Exchange is only for Indians and Indian companies. Every year, in the month of December, the contract expires and at that time people who have bought or sold carbon will have to give or take delivery. They can fulfill the deal prior to December too, but most people will wait until December because that is the time to meet the norms in Europe.

Say, if the Indian buyer thinks that the current price is low for him he will wait before selling his credits. The Indian government has not fixed any norms nor has it made it compulsory to reduce carbon emissions to a certain level. So, people who are coming to buy from Indians are actually financial investors. They are thinking that if the Europeans are unable to meet their target of reducing the emission levels by 2009 or 2010 or 2012, then the demand for the carbon will increase and then they may make more money.

So investors are willing to buy now to sell later. There is a huge requirement of carbon credits in Europe before 2012. Only those Indian companies that meet the UNFCCC norms and take up new technologies will be entitled to sell carbon credits.

There are parameters set and detailed audit is done before you get the entitlement to sell the credit. In India, already 300 to 400 companies have carbon credits after meeting UNFCCC norms. Till MCX came along, these companies were not getting best-suited price. Some were getting Euro 15 and some were getting Euro 18 through bilateral agreements. When the contract expires in December, it is expected that prices will be firm up then.

On MCX we already have power, energy and metal companies who are trading. These companies are high-energy consuming companies. They need better technology to emit less carbon.

Is this market also good for the small investors?These carbon credits are with the large manufacturing companies who are adopting UNFCCC norms. Retail investors can come in the market and buy the contract if they think the market of carbon is going to firm up. Like any other asset they can buy these too. It is kept in the form of an electronic certificate.

We are keeping the registry and the ownership will travel from the original owner to the next buyer. In the short-term, large investors are likely to come and later we expect banks to get into the market too. This business is a function of money, and someone will have to hold on to these big transactions to sell at the appropriate time.

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Isn’t it bit dubious to allow polluters in Europe to buy carbon credit and get away with it?

It is incorrect to say that because under UNFCCC the polluters cannot buy 100 per cent of the carbon credits they are required to reduce. Say, out of 100 per cent they have to induce 75 per cent locally by various means in their own country. They can buy only 25 per cent of carbon credits from developing countries.

Tell us what’s the flip side of your business?

Like in the case of any other asset, its price is determined by a function of demand and supply. Now, norms are known and on that basis European companies will meet the target between December 2008 and 2012. People are wondering how much credit will be available in market at that time. To what extent would norms be met by European companies. . .

As December gets closer, it is possible that some government might tinker with these norms a little if the targets could not be met. If these norms are changed, prices can go through a correction. But, as of now, there is a very transparent mechanism in which the norms for the next five years have been fixed.

Governments have become signatories to the Kyoto Protocol and they have set the norms to reduce the level of carbon emission. Already companies are on way to meeting their target.Other than this, it’s a question of having correct information. How much will be the demand for carbon credit some years from now? How much will the supply be? It is a safe market because it is a matter of having more information on the extent of demand and supply of carbon credit market.

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“The ‘private sector’ of the economy is, in fact, the voluntary sector; and the ‘public sector’ is, in fact, the coercive sector” ~Henry Hazlitt

“It isn’t so much that hard times are coming; the change observed is mostly soft times going. ” ~Groucho Marx

14 CHAANAKYA VOL 4_131511

INVESTOR FOCUS By- Madhukar Das II MBA G

VIP Industries The market seems to have found support after falling from the highs of year’s beginning. Sensex managed to sustain it next support level of 18000 levels. Last week the markets ended flat with some upmove in final session and we hope to see a recovery underway soon. However interest in metals, especially silver may result in lesser volumes than ex-pected in the stock scene.

Fundamentally Speaking VIP Industries manufactures luggage products and accessories in India and internationally and commands 60% market share in the organized market. The company owns brands such as VIP, Aristocrat, Alfa, Skybags, Delsey and Footloose. They have massive presence in Asia and Europe and also owns international brand Carlton. Furthermore, VIP industries has presence in moulded furniture business. The market share is small however they have a huge potential in that business. The scrip has continually outperformed the broader market recently and is expected to have more steam left. This started in February with CRISIL’s upgrade of the bank loan rating for VIP from A- to A+/Stable for cash credit facilities & term loan and to P1 from P2+ for short term loan. The company witnessed a rise of 27.35% in revenue for Q4 as predicted in the previous research paper on VIP Industries. The net profit for Q4 rose 55.56% . With the growth of travel industry, the demand for luggage products and accessories are bound to increase and thus growth will be sustainable. Rakesh Jhunjhunwala continues to hold a s iz-able chunk in the company and may have even hiked his holding though no official infor-mation is available. At current market price the stock is trading at 23.20 times of trailing twelve months earnings. Debt to market capitalization now stands at 0.04 therefore it is a relatively debt free company. P/B ratio stands at 12.23. The sales growth for past three years have been at a CAGR of 14.3% whereas the growth YoY from FY10 is 22% there-fore the growth is accelerating. Also three years’ earnings growth stands at a CAGR of 51.7%.

The price chart shows a sharp upmove in last few sessions and has crossed 21-day moving average.

The volumes suggests there is a continuing bullish inter-est in the scrip which mat further take the stock higher

The stochastics have en-tered an overbought zone. However with increasing volumes it may remain in the zone for some more ses-sions before making a re-turn crossover.

Momentum chart affirms the above inferences.

The moving averages con-vergence divergence (MACD) chart has crossed over coinciding with 21-day average crossover hence we may see the current uptrend to continue further for the short term.

Special points of in-terest: Since we are looking at a trading horizon of 15-30 days, we shall give more weightage to technical analysis and price trend of the stock. We shall also study the fundamental as-pects of a company to avoid getting into loss making trade posi-tions in case of movement of market in direction opposite to that of my predic-tion.

Technically Speaking

Recommendation : BUY CMP : `749 Target Price : `800 Stop loss : `725

BUY : Amtek India CMP—`85.05 Target—`92 Stop Loss—`81.5

Escorts CMP—`123 Target—`133 Stop Loss—`119

Sell : Modern Dairies CMP—`14.4 Target—`13.1 Stop Loss—`15.1

Other Picks

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BUZZ WORDSCash collateral Cash collateral is defined as any negotiable assets that may be converted into liquid assets if necessary. Some of the examples of cash collateral include funds that are deposited in interest bearing accounts, documents of title, and investment securities. The concept of cash collateral is important in several different types of financial situations, including settling estates and in working through a bankruptcy.Exchange Traded Note (ETN)ETN is a type of unsecured, unsubordinated debt security that was first issued by Barclays Bank PLC. This type of debt security differs from other types of bonds and notes because ETN returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exists.

Credit Inquiry Credit enquiry is a transaction whereby a bank or other credit-issuing institution views an individual’s credit report in connection with a loan or credit card application. The purpose of a credit inquiry is to evaluate an individual’s likelihood to repay money that is lent to them (known as creditworthiness).

There are two main types of credit inquiries - a “soft” inquiry and a “hard” inquiry. A soft inquiry is normally initiated by the individual (such as checking one’s own credit report for errors) and is not recorded on the individual’s credit report. A hard inquiry is recorded on an individual’s credit report when a third party views the credit report in response to an application for credit.

Affordability Index A measure of a population’s ability to afford to purchase a particular item, such as a house, indexed to the population’s income. An affordability index uses the value of 100 to represent the position of someone earning a population’s median income, with values above 100 indicating that an item is less likely to be affordable and values below 100 indicating that an item is more affordable.

Credit Score Credit score is a statistically derived numeric expression of a person’s creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person’s past credit history. It is a number between 300 and 850 - the higher the number, the more creditworthy the person is deemed to be.

Preferred Stock ETFA preferred stock ETF is an exchange-traded fund that either tracks a preferred stock index or invests primarily in preferred shares. A preferred stock ETF appeals to investors who desire above-average yields, especially in a low interest rate environment. The advantages of a preferred stock ETF include diversification and low management fees.

CROSSWORDS

Across

4. The new CEO of Infosys5. The company that Jyothi Laboratories Ltd. recently acquired6. The winner of 2011 Pulitzer Prize Winner

Down

1. The name of IMF boss who was arrested recently after allegedly involved in a scandal2. The state that has the highest Gross State Fiscal Deficit3. According to U.S ABC News, this famous person’s name is spelled in 112 differ-ent ways

12

By- Naveen Kulkarni II MBA N

Quiz1 c. Henkel India2.a. 3,6503 c. IDBI Bank4.d. Phiroz Vand-revala5.a. $ 1126.b. $8.5 billion

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ANSWERS TO PREVIOUS ISSUE

TEAM

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Madhukar Das

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