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RNI No. MAHENG/2009/28962 | Volume 11 Issue 05 | 16th - 31st May ’19Mumbai | Pages 56 | For Pr ivate Circulat ion

In its second term, the NDA government is likely to announce a few measures to

building on the foundation that

In its second term, the NDA government is likely to announce a few measures to

building on the foundation that

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Beyond Market 16th - 31st May ’19 It’s simpli�ed...3

DB Corner – Page 5

Retaining The TitleIn its second term, the NDA government is likely to announce a few measures to �x the Indian economy, while building on the foundation that was laid in the �rst term – Page 6Worrying SignsLower-than-normal monsoon, agrarian distress, reduced industrial output growth and job losses are reasons enough to believe that India could witness an economic slowdown – Page 10A Holistic ApproachIt’s important for the Finance Commission to gauge the right status of the Indian economy before drawing tax devolution plans – Page 13Best Contrarian Bets?Although PSUs are trading at their historical lows, past cycles suggest that there is opportunity in them – Page 16QuashedSC ruling gives discretion to banks to individually push stressed assets for insolvency. This may slow down the pace of bad debt resolution – Page 19Jet, Set, Plunge With no assets, loads of debt and no buyer in sight, it’s the end of the runway for Jet Airways – Page 22Lessons In EducationIndia’s education sector is growing, but is also burdening the middle class with rising costs – Page 26Teaming UpRetailers seeking an omni-channel presence could enter into tie-ups in the next one or two years – Page 30Going DownhillIndia’s consumption story is seeing a shift due to fall in volumes in recent times, despite growth factors – Page 33Global OpportunityRising speed of data connection and new arti�cial intelligence tools are providing a wide range of skilled services jobs in rich countries thanks to Globalization 4.0 – Page 36

Time To Get RealisticFMPs are a good bet for assured yield and no interest rate risk, but remember that higher rewards means higher risks – Page 39Life In Pure TermsTop private life insurers are turning to protection business than traditional ones – Page 42

Technical Outlook – Page 45Mutual Fund Recommendations – Page 46

Clever DeceptionNo-cost EMIs are a great way to entice people to make big-ticket purchases, aimed at bene�tting sellers and �nanciers – Page 51

Important Jargon – Page 54

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

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Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar, Nirav Chheda, Amit Bhuptani

Volume 11 Issue: 05, 16th - 31st May ’19

BEYOND THINKING

BEYOND BASICS

BEYOND NUMBERS

BEYOND LEARNING

BEYOND BUZZ

CONTENTS

4

Tushita NigamEditor

With the conclusion of the general elections in India this month, the Bharatiya Janata Party-led National Democratic Alliance (NDA) coalition has been re-elected with Mr Narendra Modi at its helm.

The country wants to know if the reigning party will fulfill its poll promises while achieving political stability with policy continuity. However, with the economy being far from good, one can expect immediate damage control measures to assuage economic concerns. To understand what lies ahead, read the cover story of this issue.

Other topics in this issue include the visible signs of an upcoming slowdown in the Indian economy, the suggested approach required to be adopted by the Finance Commission before it submits its report on centre-state financial relations to the government, opportunities for investors in stocks of Public Sector Undertakings (PSUs) as they are at their historical lows, the Reserve Bank’s circular (commonly known as the 12th February circular) for resolving large distressed bank accounts and the current state of the Jet Airways debacle.

We have also covered topics on the shift in India’s consumption story, the opportunities and future of education in the country, the next phase of globalization called Globalization 4.0 and its impact, and how retailers are likely to look at tie-ups in the coming years to keep up with competition while meeting demand.

In the Beyond Basics section, we have featured two interesting pieces. While one talks about insurers promoting protection plans over traditional ones, the other talks about fixed maturity plans (FMPs) and how investors should consider them in the current market scenario.

Do read the article covered in the Beyond Learning section as it talks about no-cost EMIs and how they need to be understood well before taking the plungE.

EDITORIAL

Re-ModifiedRe-Modified

Beyond Market 16th - 31st May ’19 It’s simpli�ed...

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.

The prolonged trade war between the US and China has escalated further with both sides raising tariffs on each other’s goods.

For the second time in a row, Narendra Modi’s Bharatiya Janata Party-led National Democratic Alliance (NDA) swept the general elections with a thumping majority.

Quarterly earnings results of India Inc have been below expectations.

In the coming fortnight, the Indian stock markets look good. The Nifty has support at the 11,880 and 11,810 levels. On the upper side, it could touch 12,100 and 12,540, thereafter.

Going forward, market participants are advised to look at the steps the Indian government takes to improve the liquidity situation in the economy and lend support to NBFCs.

They can also expect the RBI to announce a 0.25% cut in key interest rates at the next Monetary Policy meet. In addition to these events, they should keep a close watch on developments related to the ongoing trade war between the US and China as these could impact the marketS.

In the coming fortnight,the Indian stock markets

look good.

Sensex: 39,683.29Nifty: 11,924.75

(As on 27th May ’19)

5

DB CORNER


In its second term, the NDA government is likely to announce In its second term, the NDA government is likely to announce


BEYOND THINKING


Even as the government undertook important long-term economic reforms like Good and Services Tax (GST) implementation, Insolvency and Bankruptcy Code (IBC), demonetization, inflation targeting mechanism for monetary policy and Real Estate (Regulation and Development) Act (RERA), the Indian economy is currently facing some serious challenges.

Except retail inflation, which is under 4%, most macro parameters are vulnerable. GDP growth has slipped to 6.5%. India’s agriculture sector is stressed; bad loans in the banking system are still high while liquidity in the system is tight due to the crisis in the NBFC sector, unemployment rate is the highest in recent decades, private investment in the economy is not improving, while public savings rate has fallen.

Consumption has slowed. Increase in crude oil prices and falling global growth are headwinds to the Indian economy. The economy has entered into a cyclical downturn.

So, how will the government fix these challenges? It is highly likely that the new government may announce some immediate damage control measures. Here is a list of some near-term announcements, which can be further elaborated in the Union Budget in July.

Farm Sector: The government has a mission to double farm incomes by 2022. It has already announced `6,000 cash transfer per household to small and marginal farmers. The scheme can now be expanded. Even credit facilities can be expanded to the sector.

Infrastructure Spending: Over the last five years, there has been a massive push towards infrastructure spending. Since private investment is

expected to drive economic reforms of the government.

Second is policy continuity: From 2014 to 2019 the government has undertaken some hard policy reforms, the fruits of which will be enjoyed in the years to come.

Same government dispensation means less disruption and policy continuity. For instance, higher spending on infrastructure and digitization is the hallmark of the outgoing NDA government. This will be pushed further.

What will be the new government’s agenda for the 2019 to 2024 period? Given the resounding mandate, the new government can announce brave reforms measures in the fields on labour, land and capital for India’s long-term sustainable growth. BJP’s election manifesto is also a harbinger of what can be expected in the coming years.

SOME URGENCY

But given the economic backdrop to the general elections, it is likely that the new government may undertake some immediate measures to control damage. The tail end of the 2014 to 2019 period saw the Indian economy weakening on many fronts.

The Bharatiya Janata Party-led National Democratic Alliance (NDA) coalition securing a second term in the recently concluded 2019 Lok Sabha elections is a positive for the markets. From the economy point of view, there are two specific aspects, which will help improve fundamentals of the Indian economy. This, in turn, will facilitate higher wealth creation through financial assets.

First is political stability: Like from 2014 to 2019, the next five years will witness higher political stability. In 2019 elections, the NDA coalition, comprising of many regional parties, has won over 350 seats out of total 542 seats comfortably, more than 272 seats needed to form the government. In fact, the BJP itself has won 303 seats as against 282 won in 2014 elections. Political stability is

Elected MPs Across Political Parties

282

44

09

3418

220

011 16

37

303

52

23 22 22 18 16 12 10 9 3 10

50

100

150

200

250

300

350

BJP INC DMK YSRCP TMC Shiv Sena JD(U) BJD BSP TRS TDP AIADMK

General Election 2014 General Election 2019


lagging, the government will undertake more spending in the infrastructure sector to sustain economic growth. Jobs Creation: While there are no quick fixes to the issue of job creation, the government may take steps to fill the huge government vacancies at a faster pace.

Consumption: Sales of consumer goods and automobiles have fallen the most in recent years. As farm sector improves and the Reserve Bank of India (RBI) cuts interest rates due to lower inflation, consumption may see an uptick.

BOLD STEPS

Along with the mentioned near-term measures, the government, given the strong mandate from the elections will push for aggressive reforms. This will be in addition to the existing policies of the government.

Remember, the government has set high targets in its election manifesto on various social as well economic aspects of India. The government aims to make India a US $5 trillion by 2025 and $10 trillion by 2032 from US $2.7 trillion in FY19. For this, the government aims to invest `100 trillion by 2024 in infrastructure.

In order to encourage private investments, the government is cutting red tape and wants India to be within 50 on the ease of doing business rankings. The government is also pushing for its ‘Make in India’ scheme to kick-start private investments and create jobs.

But so far the results have been meagre. This is because of lack of hard reforms in core factors of land, labour and capital. Here is a list of a few structural reforms that the

government may undertake, which will help achieve its targets.

AGENDA FOR 2019-24

Land Reforms: Immediately after getting elected in 2014, the government tried to undertake changes in the existing land acquisition law. But the bill could not pass the Rajya Sabha muster due to lack of numbers.

Later, the government dropped the plan to amend the law as the move turned politically unpopular. It remains to be seen if the new government bites the bullet again as simplified land acquisition law is a must for infrastructure and industrial growth. The government may promote new ways of land acquisition and also encourage states to maintain digital records.

Capital And Financial Sector Reforms: Even as credit in the system has seen some uptick in the last few months, the liquidity is tight due to crisis in the NBFC sector. The government, along with the RBI, is likely to counter the situation on a war footing.

The government will also merge or privatize state-owned banks. As inflation is under 4%, the RBI is also likely to delve into a low interest rate regime. Bad debt resolution will also be the focus area of the government.

Labour Reforms: Laws on labour are made by both the Centre and individual states. The government may rationalize laws on labour, enabling hiring and firing labour. Easier labour dispute resolution mechanism and innovative labour contracts system can also be enabled.

Tax Reforms: The government is likely to overhaul the direct tax system in India. A draft in this

respect can be expected before the July Union Budget. Simplifying direct tax laws will bring transparency and remove exemptions gradually.

On the indirect tax front, the government may push for Goods and Services Tax (GST) with just one slab. Further, GST is currently not levied on auto fuels, electricity and alcohol. The government may try to bring these sectors within the GST ambit. These tax reforms will help compliance and higher tax revenue for the government.

Agriculture And Rural Sector Reforms: In order to make agriculture financially sustainable, the government may undertake efficient import-export policy, improve access to domestic and international markets, enhance leasing of farm land, expand market infrastructure, invest in irrigation projects and improve crop insurance scheme.

Miscellaneous: Besides boosting foreign direct investment (FDI), the government is also likely to apply its mind on higher privatization, fixing state-owned power distribution companies, education and skill building for labour empowerment, push affordable housing sector and nudge transparent manufacturing and trade policy.

But will passing laws be smooth sailing for the government?

UPPER HOUSE MATH

For any structural reform the government has to take the route of legislature to pass laws. While it has a majority in the Lok Sabha, in the Rajya Sabha, the BJP and its allies control 104 seats out of total 245 seats; clearly short of the majority, the support of 123 members is


needed to pass a Bill. These numbers will likely increase to 116 seats by mid-2020. Passing laws will become easier only after mid-2020.

Having said so, the government’s legislative pipeline is not all that strong unless the government decides to revisit the land acquisition bill and toughen labour laws.

IN NUTSHELL

What does any BJP-led government stand for? Generally it is deemed to be pro-market, anti-corruption, accountable, fiscally prudent, brave reformer, better tax compliant and heavy builder of infrastructure in the economy. This is besides undertaking significant social reforms in the

country. NDA’s second term is expected to build on the foundation it had laid in the first term.

India is likely to enjoy demographic dividend of young population for the next few decades. Around 1 crore people enter the job market every year.

Boosting manufacturing through its ‘Make in India’ scheme is vital to offer meaningful employment and for long-term double-digit economic growth to uplift masses out of poverty.

From the stock markets perspective, the pressure of competitive populism, for now, has waned. This is hugely positive. Now, with general elections behind us, the RBI’s monetary policy in early June and Union Budget in July will be keenly watched for any future direction in the marketS.

Projection Of NDA (BJP Alliance) Upper House Seats

Source: Rajya Sabha Website

73

1 9

83

31

2

33

0

25

50

75

100

125

BJP & Allies 2019 2020 2020 Tally

Seats

Majority = 123

104116

BJP Allies & Nominated

GRAND FESTIVAL OF DEMOCRACY

India follows a multi-party parliamentary democracy system. India also follows a bicameral house system. As many as 543 members are elected to the Lower House (Lok Sabha) directly by the citizens from 543 constituencies. Elections are held every five years. Members to the Upper House (or Rajya Sabha) are indirectly elected.

The 2019 general elections, as they are called, were held across India in 7 phases from 11th April to 19th May and results were declared on 23rd May.

The voter turnout stood at 67.11% - the best so far for any general election, out of total 90 crore registered voters. This time around 8.4 crore were first-time voters. As many as 450 parties and more than 8,000 candidates fought for 543 seats.

In the final count, the BJP under Narendra Modi won 303 seats (282 in 2014) on its own, garnering 37.4% of the votes. The NDA won 353 seats (336 in 2014) with a voter share of 45% (38% in 2014). The INC, the main opposition party, won just 52 seats (44 in 2014).

The National Democratic Alliance (NDA) is led by the BJP. Other larger parties include AIADMK (Tamil Nadu), Shiv Sena (Maharashtra), JDU (Bihar), AGP (Assam) and SAD (Punjab), among others.

Total election spending is estimated at `50,000 crore ($7 billion), up 40% from 2014 elections. Spending is more than what the US spent in its presidential elections in 2016 ($6.5 billion).

BEYOND THINKING

Is India headed for an economic slowdown? There are some who believe so. India’s former Prime Minister Manmohan Singh recently came out with a statement saying that India is headed for an economic slowdown.

“Finance Ministry’s latest monthly report now reflects that the country is headed for a slowdown and it has revised the Gross Domestic Product (GDP) growth figures for this quarter (January - April ’19) to just 6.5%,” Singh said. The Finance Ministry

WORRYINGSIGNSLower-than-normal monsoon, agrarian distress, reduced industrial output growth and job losses are reasons enough to believe that India could witness an economic slowdown



accelerating India’s GDP growth. One of the reasons for the decline in exports is the slowdown in the global GDP growth and trade frictions because of US actions.

Corporate sector’s profit as a percentage of the GDP has been falling (2% to 3% of GDP). As per a news report, slow sales have dragged profits of companies that reported earnings for the quarter ended 31st Mar ’19 to the slowest in 13 quarters.

Data provider Capitaline estimates that aggregate net profit growth of 334 BSE-listed companies that reported March quarter earnings fell 1.5% from a year earlier after adjusting for one-time gains or losses. Net sales growth declined to 13.9% from 15.7% in the preceding December quarter. As a result, the private sector is wary of making fresh investments, fearing low demand. Investment is now heavily dependent on government capex spending.

India’s consumption story has started to falter as well. Consumer demand has softened especially in rural areas because of a liquidity crunch resulting from the twin reforms of demonetisation and the Goods and Services Tax. Low rural demand has affected even the most recession- proof sector - the Fast Moving Consumer Goods (FMCG) industry.

In the March ’19 quarter, HUL’s volume growth was 7%; its lowest in six quarters because of a slowdown in demand from rural areas.

Dabur India’s volume growth was 4.3%, which was in sharp contrast to the average 12% volume growth seen in the last six quarters. Godrej Consumer Products Ltd’s volume growth was a mere 1% growth and

have unshackled the Indian economy, unleashed its potential and made us a global leader in growth. India is the fastest growing major economy in the world and is becoming a nation where it is easier to do business,” said Finance Minister Arun Jaitley in a blog. Jaitley is right about India being the fastest growing economy in the world. But is everything else right with the Indian economy?

The Indian economy might be growing faster than it did in the UPA period but it is not without its problems. India is facing its worst ever job crisis. The agriculture sector is under stress. The rupee was Asia’s worst performing currency last year - falling by over 16%. The real estate sector is in a perennial slump. Banks have high NPAs and the aviation sector is nosediving.

Things are clearly not as rosy as some would have us believe. A look at some of the key macroeconomic indicators throws up alarming facts. India has the worst non-performing loan ratio among the world’s major economies. Gross NPAs increased four times between fiscal 2014 and fiscal 2018 to `10.4 trillion (11.6% of aggregate bank assets).

India’s aviation industry is in deep losses because of rising aviation turbine fuel prices, a depreciating rupee and intense competitive pricing. Almost every airline is facing losses. Years of profitless growth has forced Jet Airways, the country’s number two carrier in terms of market share, to shut down operations.

India’s exports do not look good either. The share of exports (goods and services) in India’s GDP has declined to 19.7% in FY19 from 25.4% in FY14. While India is not an export-driven economy like China, it does play an important role in

said the slowdown is because of declining growth of private consumption, tepid increase in fixed investment and low exports.

Singh isn’t the only one predicting a slowdown. Analysts believe that India’s GDP growth will slow down to 6.8% in FY20 from 7% in FY19. The reason it gives for the revised numbers is a slowdown in global growth and trade.

As per experts GDP growth is likely to slow down to around 6.2% in the first half of 2019 (H1-2019) from 6.6% in Q4 2018, as the (negative) trade and terms-of-trade channels weigh in. Global growth will be an important determinant of the quarterly profile of domestic growth.

India Ratings and Research also recently revised its FY20 GDP growth estimate to 7.3% from its earlier forecast of 7.5%.

The prediction of lower-than-normal monsoon for 2019, continued agrarian distress, loss of momentum in the industrial output growth - especially in manufacturing and electricity - and the slow progress on cases referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, that has led to the resolution of the non-performing assets of the banking sector becoming a long drawn-out process are cited as reasons for the revision.

Official data shows that India’s GDP growth has indeed slowed down to 6.6% in the October-December quarter of FY19, the lowest in the last six quarters. The growth rate is below expectations. This is in contrast to the claims of the government that the Indian economy is in its best shape ever.

“The economic reforms undertaken


Britannia Industries Ltd saw a 7% increase in volumes.

“You can’t say FMCG is recession proof but it is recession resistant,” said Hindustan Unilever Chairman Sanjiv Mehta during a press conference after March quarter results.

“People don’t stop bathing or cleaning their teeth when conditions become tough. What happens is the number of brands in a family gets reduced - instead of using larger packs they shift to more price-point packs. That’s the kind of shift that happens,” he added.

FMCG companies blame the weak numbers on a slowdown in rural demand. Farm incomes are not growing, resulting in a liquidity crunch. Many believe that households may have gradually reduced consumption due to insufficient income growth.

Analysts do not expect a revival in demand anytime soon. Monetary stimulus along with structural reforms may help revive economic growth in due course of time.

The slowdown in consumption demand is mostly because of the liquidity crunch, which followed the demonetisation reform carried out by the government in November ’16.

The government’s own economic survey has acknowledged that demonetisation knocked off at least 1% from the growth rate.

International Monetary Fund’s (IMF) Chief Economist, Gita Gopinath believes the figure is higher at 2%, which has resulted in a huge loss in national income.

Another problem the economy faces is that of jobless growth. According

to the latest National Sample Survey Office report, the unemployment rate in 2017-18 was 6.1%, the worst ever in 45 years. India’s unemployment rate in April ’19 increased to 7.6%, the highest since October ’16, and up from 6.71% in March ’19, according to data compiled by the Centre for Monitoring Indian Economy (CMIE).

The CMIE said in a report released in January ’19 that almost 11 million people lost their jobs in 2018 after demonetisation and the roll out of goods and services tax, which hit millions of small businesses. The CMIE report also reveals that there has been a decline in hiring in the corporate sector.

Investors have shown their lack of confidence in the economy by pulling out their investments. In fact, foreign investors pulled out net `3,207 crore from the Indian capital markets, in the first seven trading sessions of May, mostly because of uncertainty over election results.

The government that comes to power has its task cut out. The new government will have to reduce the current account deficit (2.7% at present), which has increased because of high crude oil prices and depreciation of the rupee.

Sajjid Chinoy, Chief India Economist, JPMorgan Chase believes that to ensure the CAD is financed by foreign direct investment and non-resident Indian deposits, it needs to be brought down to 1.5% to 2.5% of the GDP.

Adi Godrej, Chairman of the Godrej Group believes that foreign investment can be boosted if the new government focuses on improving the ease of doing business.

“Some good work has been done by

the present government, but more needs to be done,’’ feels Godrej.

The agrarian crisis will have to figure on top of the new government’s agenda. The government should focus on increasing agricultural productivity through measures such as improving irrigation and storage facilities.

There is also an urgent need to increase minimum support prices to boost the income of farmers, which will help in increasing rural consumption.

The new government will also have to address the problem of rising non-performing assets, which can hinder economic growth.

Profits of Indian banks have been falling and are among the lowest in the world. While the current government did take some measures to reduce NPAs, more needs to be done.

Industry experts also believe that the economy needs some kind of a stimulus package to accelerate growth, especially since the private sector is cautious about spending.

“I would think that there is a need for some kind of stimulus to bolster the economy since investments are not happening,” said Harish Mariwala, Chairman of Marico Ltd.

Job creation will also have to figure predominantly on the agenda of the new government. While a slight slowdown in economic growth looks inevitable in the short term, in the long term the Indian economy is on a strong footing. If a stable government returns to the centre and implements the right economic reforms, growth can return to its previous levelS.

A HOLISTICAPPROACH

It’s important for the Finance Commission to gauge the right status of the Indian economy

before drawing tax devolution plans

BEYOND THINKING

Recently, the 15th Finance

Commission met separately with the Reserve Bank of India (RBI), banks and eminent economists during its two-day visit to Mumbai. The purpose of these meetings was to accommodate wider views about the Indian economy before the commission submits its report on centre-state financial relations to the government.

The Finance Commission is a constitutional body set up every five years, which submits a report to the

Union government making suggestions on how the Union government should share taxes levied by it with the states. The five-member 15th Finance Commission has to submit its report in October ’19. The 15th Finance Commission was constituted on 27th Nov ’17. The recommendations will be applicable for a period of five years kicking in from 1st Apr ’20.

It is customary for the Finance Commission to move across the



Bengal, Odhisa, Punjab and many South Indian states like Kerala and Tamil Nadu have controlled their population. This should have been as an incentive. But, instead these States feel they will be punished for controlling population by receiving lesser funds. However, the centre has maintained that the 15th Finance Commission will do a balancing act.

Following are few of the challenges that the Commission is applying its mind to.

Goods And Services Tax (GST)

The implementation of GST since July ’17 has changed the fiscal federalism scenario in India. GST is expected to widen the tax base and improve revenues for the governments in the long run. But for the short term GST implementation is facing teething problems and revenue collections are volatile and far from being stabilised.

GST revenue has been clocking around `1 trillion every month on an average. In April, revenue from GST

impossible to predict the exact scale, but there are challenges aplenty in drawing up the report.

POPULATION CONTROVERSY

But before we look into the challenges faced by the Commission, a rare controversy erupted since the formation of the Finance Commission in 2017. It is asked to use population data of 2011 while making its recommendations (as against 1971 data used by the previous Commissions).

Just to inform, a certain percentage of the centre’s funds are disbursed based on the population of the State. Simply put, more the population more will be the funds received by that State. Some other factors that the Commission takes into account before deciding on the devolution are per capita income, area, and fiscal discipline of the States.

Referring to the 2011 population census has generated a fierce political debate. This is because, in recent decades many States like West

country, meet all States and institutes before submitting its recommendations to the government. Recommendations made in the report are not binding on the government. But historically, they have been accepted and included in the Union Budgets.

The last (14th) Finance Commission provided that 42% of all taxes collected by the Centre should be shared with the states, from the previous share of 32%. This was a historic move. States got more autonomy and could spend as per their priorities.

The total resources going to States including the devolution of State’s share in taxes, grants or loans, and releases under centrally-sponsored schemes has been budgeted at `13,70,620 crore for FY20, a jump of `1,24,036 crore over revised estimates of FY19 and `2,85,492 crore more than the actuals for FY18.

Can we expect the 15th Finance Commission to push for more such reformative measures? It’s

Finance Commission

India follows a federal structure. Taxation powers are divided between the Centre and the States. State legislatures may further devolve some of their taxation powers to local bodies.

The Centre levies and collects taxes such as income tax, corporation tax, central GST (CGST) and customs. State levies and collects taxes such as State GST (SGST), stamp duty, excise duty on alcohol, tax on electricity. Further, local bodies like municipalities levy and collect taxes on land, entertainment tax and vehicle tax.

Since taxes collected by the centre are large, the federal structure requires transfer of resources to the State. This ratio and the manner of fund transfer are recommended by the Finance Commission.

Article 280 of the Indian Constitution mandates formation of a Finance Commission by the President on the recommendation of the central government every five years to make recommendations about the distribution of net proceeds of taxes between the Union and States.

Canada and Australia, which also have federal governments, have a similar tax-sharing system.


stood at `1.13 trillion. Any shortfall, in case of less than 14% growth in State GST, the States will be compensated by the Centre till 2022.

The Finance Commission will have to doubly ensure whether GST collections are sustainable or not before making any suggestions.

Fiscal Deficit

An area where the Finance Commission is applying its mind is the current level of debt of the Union and the States and also on fiscal consolidation roadmap of Centre and States.

To remind, in the last few years the government has adhered to overall fiscal deficit target. For fiscal year 2019, fiscal deficit will be tamed at 3.4% (from 6% just a few years back) for the centre and for the states as a whole at around 2.7%.

However, some quarters have raised questions about the quality of the same. Different States are in different stages of fiscal consolidation. Further, off-balance sheet items like borrowings of public sector undertakings and pushing subsidy payouts to subsequent years have raised doubts about the spirit of fiscal discipline.

The existing scenario makes it difficult for the markets to analyze true and holistic picture of government’s debt position. Some recommendations on making fiscal picture transparent can be expected by the 15th Finance Commission. Data: The issue of lack of trust about data released by the government in recent times has also made the Finance Commission cautious. The Finance Commission has said that it is going to reconcile data from the government, comptroller and auditor general (CAG) and the Reserve Bank and not just depend on any one set of data.

WRAPPING UP

The Finance Commission plays a huge role in upholding the federal structure of our country and also helps promote sustainable development.

It’s important for the Finance Commission to gauge the right status of the Indian economy before drawing tax devolution plans to States for the next five years.

The scope given to the Finance Commission gives some fair idea as to what the report would include.

Apart from laying emphasis on fiscal management, transparency and population control, the Finance Commission would push for more devolution to States, which makes efforts to broaden GST, use Direct Benefit Transfers (DBT), promote digital economy, and boost the ease of doing business and control populist measures.

The Commission will travel to 9 more States and continue its consultation process before actually submitting its recommendations on 31st Oct ’19.

GST Collection

Note: GST collection includes Central GST, State GST, Integrated GST and Compensation Cess RE= Government’s Revised Estimates, BE= Government’s Budget Estimates. Source: PIB, Budget Documents

4442

7464

6464

7640

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

FY18 FY19BE FY19RE FY20BE

Rs bn

Food And Fertilizer Subsidies

Source: CEIC, FCI, Ministry Of Fertilizers

0.7% 0.7% 0.7% 0.8%

0.5%0.4%

0.7%

0.7%0.6% 0.6%

0.6%

0.5%

0.4%

0.4%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

FY13 FY14 FY15 FY16 FY17 FY18 FY19E

Food Subsidy Fertilizer Subsidy

as % Of GDP

BESTCONTRARIAN BETS?

Although PSUs are trading at their historical lows, past cycles suggest that there is opportunity in them

BEYOND THINKING



generating huge operating cash in the past. In most cases, they have been sitting on cash due to the lack of decision-making, particularly about investing in growth and scaling up the business.

Despite huge cash in their books, some of them have lost to the competition. Instead of choosing to invest in the business and scale up their operations, companies have paid back to the government in the form of dividends and buybacks.

In a bid to utilize the surplus cash, companies were forced to diversify into non-core businesses or activities such as investments in government- led programmes such as renewable energy missions and bidding for stressed assets. This gave wrong indications to the market that the surplus cash would be misallocated and erode shareholders’ returns.

INCREASED LIQUIDITY CAUSES MORE VOLATILITY

The government has aggressively divested its investment in PSU companies in the recent past to meet the fiscal targets and money needed for its programmes such as capitalization of PSU banks. Besides, through divestment, the government has consistently increased the supply of shares in the market and kept on selling the stake at lower-than- market price, thus pressurizing their share prices in the market.

MARKET WORRIES REFLECT STOCK PRICES

While there are reasons to worry as mentioned above, it may be a huge mistake to assume that these worries would stay forever. In fact, the pessimism has spread to such an extent that even the most promising PSUs have been beaten down and investors do not want to touch them.

`16 lakh crore.

CAUSE OF PAIN

Historically, it has been proven that PSU growth follows a cyclical pattern. During an economic downturn, while they manage to survive on the strength of their balance sheets, they tend to report depressed earnings and suffer due to investors’ concerns.

In 1993, 2000, 2003, 2008 and 2013-14, PSUs exhibited similar patterns and survived in most phases except MTNL, BHEL and others whose business dynamics suffered owing to competition. Recently, the Central Statistics Office revised its FY19 GDP growth estimates to 7% as against 7.2% earlier, the lowest growth in the past five years.

More recently, India’s industrial production output declined by 0.1% in March ’19, which is a 21-month low as a result of contraction in the manufacturing sector and deteriorating consumer spending. In fiscal 2019, IIP grew at 3.6%, which was the lowest in last three fiscals.

In this light, it is obvious that growth has suffered and PSUs have been a victim of industrial slowdown. At the peak of the cycle in FY14, excluding PSU banks and financials, their fixed assets turnover, which is an indication of capacity utilization, was about 2.5 times.

This ratio has slipped to below 2 times in FY18 and is expected to slip further in fiscal 2019. Besides, the recent spike in crude oil prices has raised market’s apprehension about growth in the near term.

Today on top of industrial downturn investors worry about growth, low return ratios and misallocation of cash. Most PSUs have been

Contrarians love uncertainty because that is the time when others fear to invest and stocks trade below their intrinsic value or long term valuations. One segment of the market that offers a similar opportunity is the PSU space. PSU stocks have been the biggest underperformers in the past few years.

In the last five years, the BSE PSU Index has given a negative return of close to 17%. It is currently trading at 7,201 level, eroding 23% from the peak of 9,400 level seen last in the month of January ’18. PSUs have underperformed the broader indices such as Sensex and Nifty.

PERFORMANCE DIVERGENCE

In terms of valuations, the index is trading 1.2 times its price to book value and is currently offering a dividend yield of close to 3%, which is most attractive as seen in the recent past. Compared to the Sensex, which is trading at 2.88 times its book value and offering a dividend yield of mere 1.24%, PSUs certainly offer more value.

To further illustrate divergence in performance, the combined market capitalization of 61 BSE PSUs constituents is about `18.97 lakh crore, which is slightly more than the combined market capitalization of Reliance Industries and TCS of about

It’s Simplified


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But this is where the opportunity for savvy investors emerges.

PSUs such as oil and gas companies as well as mining and engineering companies have inherent advantages and huge competitive edge in the market. Importantly, when the economy revives, they would also benefit from the reported growth in earnings, which is lacking at this point in time.

Most PSUs such as banks and engineering companies operate in the so-called old economy sectors whose upturns coincide with the growth in capex and economy.

It is expected that post elections in the country political stability will resume and the policy environment will be clear.

Both private and government companies, which are waiting in the sidelines will resume capex. Besides, lower interest rates, stable global

environment, banking reforms and efforts to revive the job market should benefit these companies.

Today, lack of these triggers offers an opportunity and investors can take advantage of the volatility and the depressed prices of PSU stocks selectively.

While many of these companies might take longer to revive, a selective pick of promising PSUs with a huge competitive advantage, strength of balance sheet, adequate growth visibility, inherent operational advantage in terms of sound operating ratios and strong return on capital could be the best one to ride the next cycle, which could possibly start post the general election and political stability in the country.

TRIGGER FOR EARNINGS GROWTH

Interestingly, these companies are

sitting on huge spare capacity. As indicated by their depressed asset turnover ratios, once the economy revives, they will be able to use their spare capacity and thus benefit from the operating leverage.

Operating leverage alone could be a big trigger for earnings growth. Companies like SAIL, BHEL and others have turned losses into profits as a result of improved utilizations. Investors love earnings and improving profitability.

Once the earnings cycle revives, the market would also pay valuation premium, which is absent today. For contrarians, this, growth in earnings and valuations rerating, could possibly be the best time to reap the rewards.

Even a 10% to 12% growth in earnings over the next two years and a 4x to 5x jump in the price to earnings multiple could lead to huge price appreciatioN.

BEYOND THINKING

A Reserve Bank of India (RBI) circular dated 12th Feb ’18 (commonly known as the ‘12th February circular’) to resolve large distressed bank accounts has been struck down by the Supreme Court of India.

The apex court has ruled that the circular is unconstitutional and beyond the authority of the RBI.

The Supreme Court ruling means that banks will not be forced to take large stressed accounts to insolvency courts (National Company Law



all default cases above `2,000 crore. Hence, the Supreme Court invalidated the entire circular.

NOW WHAT

Ratings agency ICRA estimates the total debt impacted by the 12th February circular at `3.8 lakh crore across 70 large borrowers, including `2 lakh crore across 34 borrowers in the power sector.

The ratings agency further adds that as of 31st Mar ’18, 92% of this debt had been classified as non- performing, and banks have made provisions of over 25% to 40% on these accounts.

Will the RBI challenge the Supreme Court verdict? It looks unlikely. On 4th April, the RBI said that it will take necessary steps, including the issuance of a revised circular for expeditious and effective resolution of stressed assets.

The revised circular will have to be in compliance with the existing legal provisions and also the latest Supreme Court judgment.

Will the previous RBI directions to resolve bad debt stand invalidated? No. The RBI in June ’17 issued the names of 12 specific defaulters for resolution under the Insolvency and Bankruptcy Code (IBC).

Again a second list was issued in August ’17 including around 29 defaulters more.

These 40 odd cases were already non-performing when the 12th February circular was issued.

Further, these were specific cases and not general in nature. Therefore, these default cases are not being invalidated by the latest apex court judgment.

would force promoters to lose their hard-earned assets. This was not accepted by benevolent promoters of these bad assets. THE CHALLENGE

In light of these issues, several companies from power, infrastructure, sugar and shipping sectors, and also several industry bodies challenged the constitutional validity of the RBI’s circular in the law courts.

The RBI has wide powers, which are derived from an act passed by the parliament – the Banking Regulation Act.

One provision (Section 35AA) in the act mandates the RBI to issue directions to any banking company or banking companies to initiate insolvency resolution process under the provisions of the Insolvency and Bankruptcy Code of 2016. But the government has to authorize it.

Secondly, such power of the RBI has to be in respect to “a” particular default. The RBI had categorized all defaulted accounts into one single bucket. The 12th February circular failed on both the counts.

Neither the government authorized the circular nor was the circular specific in nature. In fact, it covered

Tribunal) as mandated by the 12th February circular. The 12th February circular took away the flexibility from lenders in working out a resolution plan.

Till 15th May, the Reserve Bank has neither appealed against the SC verdict, nor has it issued a fresh circular to help resolve bad debt in the system.

To remind, the 12th February circular wanted all the banks to refer all stressed accounts above `2,000 crore to insolvency courts if a resolution plan was not worked out within 180 days starting from the first day of the default. Approval of all lenders was needed for a valid resolution plan.

While the Reserve Bank’s intention was quite laudable – to help timely bad debt resolution, it met with some practical challenges on being viewed from the ground level.

One, the 12th February circular was generic and applicable to all sectors, which was unfair to some sectors facing genuine challenges.

Two, approval of all lenders for designing a resolution plan in just 180 days was simply impractical.

Three, triggering insolvency under the Insolvency and Bankruptcy Code on failure to design a resolution plan

Admission Of Cases Into The NCLT

Source: Insolvency And Bankruptcy Board Of India (IBBI)

0

75

150

225

300

Q4FY

17

Q1FY

18

Q2FY

18

Q3FY

18

Q4FY

18

Q1FY

19

Q2FY

19

Q3FY

19

No Of Cases Admitted


Having said thus, a fine reading into the Supreme Court verdict, some litigation can be expected over past resolutions done on the basis of the 12th February circular.

BANKING IMPACT

Some sections of the banking community were unhappy with the 12th February circular. This is because mandatorily taking defaulting accounts to IBC meant higher haircuts for banks, thereby impacting their profitability.

The 12th February circular also took away the flexibility from the bankers to deal with specific cases bilaterally.

In that sense the Supreme Court verdict is kind of a respite for the banks. Now, banks have the discretion to deal with defaulting cases as they wish.

It helps to mention that even as the 12th February circular is invalidated, banks in the country can still approach insolvency courts separately outside the purview of the circular and individually push stressed assets for insolvency.

However, until the RBI comes up with a revised circular, there is some uncertainty for the banks. It is not clear what all tools are available with lenders for bad debt resolution post the apex court judgment.

This is because the circular

discontinued the then existing restructuring schemes like Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), and Sustainable Structuring of Stressed Assets (S4A). It remains to be seen if any of these tools will be revived again.

POWER SECTOR

The power sector is facing a unique challenge. External factors, such as lack of availability of coal and gas to generate power, delay in payment by power distribution companies, lack of power purchasing agreements with States even if the plants generated power had made the sector unviable forcing companies to default on loans.

Remember, these companies were all from the private sector. According to the government, about 40 Giga Watt power assets are classified as stressed by banks.

Loans worth `2 lakh crore across 34 borrowers in the power sector will heave a sigh of relief post the Supreme Court verdict.

Under heavy pressure from their lenders, power sector assets referred to the insolvency courts fetched heavy discount to their investment value.

The Supreme Court verdict now will stop lenders from any power company in the country to

insolvency. Banks will deal with companies from this industry in a bilateral matter.

Other sectors like sugar, shipping companies and infrastructure - aggrieved by the 12th February circular - will also benefit from the apex court ruling.

IN A NUTSHELL

While a revised framework for bad debt resolution is expected from the Reserve Bank very soon, there is common fear that the bad debt resolution process, which had actually picked pace in the last few months will slow down.

It helps to mention that the 12th February circular had some positives too. It pushed banks into recognizing stress assets immediately on default.

Even large borrowers started regularizing their account with threat of a referral to the IBC.

Earlier, RBI schemes to resolve bad debt were grossly exploited by banks by delaying recognition and ever greening of these bad loans. Effective resolutions remained elusive, reflecting an unreal picture of the health of the banks.

With bad debts of over `12 lakh crore in the system, it is important to resolve them without losing value of the assets. Therefore, the RBI will have to act sooN.

Sequence Of Events

12th Feb ’18: The RBI issues circular revising resolution mechanism for stressed assets 27th Aug ‘18: Allahabad High Court refuses to grant interim relief to power firms seeking a stay11th Sept ’18: On appeal, SC orders status quo on the circular and asks all pending cases challenging it to be

transferred to it 2nd Apr ‘19: SC rules Feb 12 circular as ultra vires RBI’s authority.

JET,SET,PLUNGE

BEYOND THINKING



it tried to compete with low-cost carriers, while its partnership with Etihad in 2013 led to clashes with Goyal. Jet tried to compete with the low-cost carriers on price while offering the entire gamut a full-service carrier offers.

Taxes on jet fuel as high as 30% added to its expenses even as price-conscious travellers refused to pay a premium for on-board meals and entertainment. There are also allegations of mismanagement and the Serious Fraud Investigation Office is also looking into its books.

THE FUTURE OF JET

Anyone interested in taking over the airline needs to pay off about `11,000 crore debt. Additionally, separate infusion of funds will be required to kickstart operations and send out salaries to its employees.

Even if an investor clears the debt, the only thing they’ll be acquiring is the Jet branding, may be slots, and employees. There are no physical assets like aircraft or infrastructure. Lessors have taken away most of the aircraft.

Exim Bank of the US is looking to seize the Boeing 777 aircraft; a few Airbus A330 are already being deregistered, and SpiceJet plans to induct 40 of their Boeing 737. The Airports Authority of India has sealed Jet’s offices and counters at airports. The government has started distributing Jet’s slots to competing airlines to fill capacity constraints. While the slot allotment is for three months, if Jet doesn’t make a comeback, they will be lost forever. International operations would be hard to restart as long-haul aircraft are leaving, and precious slots at airports like London would be gone.

domestic airline, which had successfully navigated fuel price hikes, currency fluctuations and fierce competition for decades.

Just in January ’19, Jet had a fleet size of 119 planes, a 17% market share in domestic space and commanded a 14% market share of overseas traffic by Indian carriers.

Jet, saddled with a staggering debt of more than `11,000 crore, including `3,000 crore to various supporting vendors, defaulted on payments, leading to lessors taking away the aircraft and lenders taking possession of the airline this year.

Now, promoter Naresh Goyal has stepped down and the top brass, including CEO, CFO, HR head, company secretary and directors has quit, leaving the airline rudurless, and over 16,000 employees in a limbo.

The lenders are now looking for a buyer, but only Etihad has emerged as a sole bidder, but it won’t be the majority stakeholder. The other three bidders TPG Capital, Indigo Partners, and National Investment and Infrastructure Fund didn’t submit bids within the 10th May deadline.

WHY JET CRASHED

The airline started tottering in the beginning of 2019 as its aircraft were taken away by lessors due to non-payment of lease rentals, finally leading to suspension of operations in April. According to experts, the airline was the victim of unsustainable price wars and competition with loss-making another full-service carrier Air India, which is kept alive by government funds.

Jet’s acquisition of budget carrier Air Sahara in 2006 put it under strain as

When Richard Branson, the maverick owner of Virgin Atlantic, was once asked how to become a millionaire, he had a quick answer: “There’s really nothing to it. Start as a billionaire and then buy an airline.”

Ironical as it may sound, given his success in aviation, Branson’s words ring true for India, which has been a graveyard for airlines. From Modiluft, Damania, East-West to Deccan Aviation, several have crashed and the state-owned Air India has perpetually been on a ventilator.

The worst was Kingfisher, which reduced its liquor baron owner Vijay Mallya, once called the Donald Trump of India, to a fugitive of law.

Yet, India is the fastest-growing market in the world, with over 1,000 planes on order, and several foreign carriers such as Qatar Airways waiting in the wings to pour moneybags.

The latest to plunge is Jet Airways, which retained the tag of being India’s finest full-service carrier till recently, though challenged by Kingfisher Airlines and now Vistara. So what went wrong?

THE SITUATION

Last year Jet celebrated its 25th Anniversary with a pompous celebration, a commemorative logo and looked back proudly at its heritage of being a world-class


Overseas operations require even more capital to run and codeshare agreements are going to be hard to fulfill.

Even as a full-service carrier, questions are raised about Jet’s survival given that Air India and Vistara offer the same product. The margins are slim and hugely depend on global crude oil prices, making it a risky investment. The government, saddled with loss-making Air India, is also of no help.

The only ray of hope now is the unsolicited bidders who have reportedly reached out to Etihad. Hindujas, Lakshay Uttam, founder of Amsterdam-based hospitality firm My World Ventures, have contacted Etihad while some Jet employees too are readying a bid with the backing of an investor.

But with time running out fast, a month down the line there will hardly be anything left. In the best-case scenario, the airline may return with very few aircraft, and even if it does, given the competition, regaining the lost position built over 25 years will be an onerous task.

PASSENGERS

Over the years, Jet had built a loyal passenger base on the back of its service quality, a vast network and codeshare tie-ups with airlines like Delta, KLM, Flynas and Etihad.

With the sudden fall of Jet Airways, connectivity to cities like Toronto, Paris, Hong Kong, London, Amsterdam has been hit with lesser options leading to ticket prices rising as high as over `1 lakh. According to industry experts, there is a shortage of over 180 aircraft in the Indian market, which has led to fares spiralling.

Since the government is clear that the slots vacated by Jet will only be given to airlines that bring additional capacity, the supply remains insufficient. According to experts, industry fleet addition of 140-150 in this fiscal would be insufficient to meet the demand that is expected to grow 10%, resulting in higher fares for some time.

SLOTS TO OTHER AIRLINES

The civil aviation regulator DGCA has been giving away Jet Airways’ slots to other carriers for an interim period, with a total of over 400 slots up for grabs just for Delhi and Mumbai.

SpiceJet has got the most number of slots at Mumbai and Delhi, followed by IndiGo. Other carriers have been able to launch under 100 flights so far, and given that Jet was operating around 450 flights a day, the vacuum is far too large to be filled.

SPICEJET – THE BIGGEST BENEFICIARY

SpiceJet, which holds around 13% of the market share, has aggressively stepped in to fill this gap. As it leases Jet’s grounded planes, the airline has announced 77 new domestic flights and new international flights.

However, experts say the carrier is taking a gamble on Jet’s planes, which are older and less fuel-efficient than its current fleet and come with business-class seats, which does not fit within SpiceJet’s low-cost model. The airline’s goal is to secure the coveted airport slots, awarded to it on a temporary basis.

SpiceJet has added at least 22 Boeing 737-800 aircraft on a temporary lease, most of them repossessed from Jet by lenders and plans to take it to 40. However, as it inducts older Jet

planes, maintenance costs are also set to increase. A typical Jet plane has 168 seats, including 12 business class ones that are charged several times higher than the economy class.

SpiceJet, on the other hand, has a seat configuration of 189. Hence, to recover costs, SpiceJet will have to increase fares and market the business class seats separately, a difficult task, given the cut-throat competition.

FATE OF EMPLOYEES

Jet’s collapse has left over 16,000 people, including 1,350 pilots, jobless. While other domestic as well as international airlines have hired some Jet Airways employees, it is still a small number.

SpiceJet has absorbed over 500 Jet employees, including 100 pilots, and is open to inducting more. Vistara is hiring around 50 to 100 pilots and 400 cabin crew - mostly from Jet. Vistara is in the process of inducting 100 pilots, besides 400 cabin crew. Around 100 Jet pilots have applied for jobs in foreign carriers like Qatar Airways, Emirates.

In the 2-3 months before Jet collapsed, about 250 of its pilots resigned. The remaining Jet employees are now facing stress over employment, though some are also hopeful of a turnaround of the carrier. They may have to either shift base to tier-2 or 3 cities or work on lower pay.

INTERNATIONAL SLOTS

Most of the domestic airline carriers eyeing a share of Jet Airways foreign flying rights are rather unhappy with the allocation formula worked out by the government, reportedly claiming that it gives an unfair edge to IndiGo, one of the leading airlines in India.


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Flying rights are to be apportioned in accordance with the Aeronautical Information Circular, which gives Air India first claim on the entitlements. After the state carrier, the rights would be allotted to airlines in the order of their size, meaning that after Air India, IndiGo would get the lion’s share of the remaining entitlements.

The government’s decision to give priority to Air India is also being questioned. Air India stands to bag about half of Jet Airways’ slots on high-demand routes. The clarity over allotment is expected to emerge over the next few days.

THE LESSON

The fall of Jet Airways and other airlines in the past offers a lesson to

both the existing and upcoming players in this sector.

Each quarter is important and profits are what matter or things can quickly spiral down.

In all this, the domestic air traffic growth has fallen for the first time in April after cruising in double digits for the last five years, which is not a good sigN.

BEYOND THINKING



recent years, several organized players have entered into the market.

There are many organized players such as KidZee, Euro Kids, Bachpan, Apple Kids, Shemrock, Kangaroo Kids, and Podar Jumbo Kids. It has been observed that there is a clear preference for organized pre-school brands. K12 K-12 stands for schooling from the Kindergarten to the 12th grade covering primary and secondary education. The target population for this segment is from the age group of 3-17 years.

Post playgroup years, a child would be enrolled in a recognized school registered or affiliated to any of the education boards.

The K-12 institutions can broadly be classified into: government-owned and managed, privately-owned but government-aided and privately-owned but unaided.

With the government restricting private K-12 institutions to be established for ‘not- for-profit’ and to be run only by trusts or societies, the K-12 scenario in India continues to be dominated by government schools, including Madrasas and unrecognized schools totalling 11,18,268 during FY17 and accounting for 76.2% of the total schools in India.

However, private schools managed by trusts, political, religious/ charitable organizations are fast scaling up, aggregating 3,49,412 during FY17, accounting for 23.8% of the total schools in India. The entry of corporations and the growing number of institutes under an umbrella brand has revolutionized

Pre-schools Pre-schools, which are also known as play group schools, cater to approximately 4% of the Indian population belonging to the age group of 1 to 3 years. These schools are primarily aimed at urban children.

The increasing awareness among parents about the benefits of quality education has been boosting growth in the segment.

With rising urbanization, increasing proportion of working women and disposable incomes, penetration is expected to increase significantly.

The industry is highly fragmented and unorganized due to low entry barriers. However, of late organized chains have set up schools across the country led by the entry of corporations, and entities in other value chain of the education sector. A pre-school follows two business models. One is the franchisee model and the other is the ownership model.

Organized players have scaled up their operations through the franchisee model in which the franchise owner benefits from the brand in return for payment of franchisee fee or royalty to the concerned corporations or the brand owner.

In the ownership model, there are a large number of regional standalone pre-schools. It has been observed that low entry barriers, minimal capital requirement and absence of regulatory restrictions have resulted in a fragmented pre-school industry in India with many unorganized players.

The pre-school market continues to be highly unorganized. However, in

India’s education sector has undergone a considerable change. According to a research by ratings agency CARE, there are more than 1.4 million schools with over 200 million students enrolled in them.

In addition to this, there are 850 universities and 40,000 institutes of higher education.

An important aspect to understand in this growth is the cost associated with education.

Also, with the mushrooming of various types of schools, how is the burgeoning middle class dealing with rising costs associated with education in India? Here is a low-down on these facts: THE BASICS Broadly speaking, India’s education sector follows the structure of pre-school, primary and higher secondary education. Then there is the higher education segment, which includes professional and technical education.

In addition to this, the segment also comprises vocational training, coaching classes, distance education through e-learning platforms and the like. Quite naturally, investments from the public sector and private sector are spread across these categories.


the concept of K–12 in India.

With schools being required to run on ‘not for profit’ motive, the corporations have adopted a two-tier structure, wherein a trust is created to run the school with the company’s subsidiary or management company being the primary revenue earner for the services rendered to the school such as consulting, teacher training, etc.

The corporations have adopted a mix of franchisee and owned school model to scale up their operations. According to the Right to Education (RTE) Act, private pre-schools providing elementary education are required to admit 25% of the students from the weaker sections and disadvantaged groups and offer free education to them.

Moreover, the RTE also mandates closure of private schools if they fail to meet the stipulated teaching and physical infrastructure requirements. However, public schools are exempted from such penal provisions.

Such regulatory measures deter private investments in the segment. Hence the K-12 segment continues to be dominated by public sector schools in India, with government schools accounting for 76.2% of the total number of schools in India.

K-12 education is provided primarily through schools affiliated to the State Education Board, Indian Certificate of Secondary Education (ICSE), Central Board of Secondary Education (CBSE), International General Certificate of Secondary Education (IGCSE) and International Baccalaureate (IB).

These schools are run by the government or the private sector.

a) Non-Formal Education Non-formal education is the unorganized education acquired by an individual. This segment is operated by the private sector.

Non-formal education includes pre-schools for children and coaching classes (organized as well as unorganized) for both school children as well as for candidates appearing for competitive examinations.

This type of education is not governed by any regulatory authority. The informal education service providers remain fragmented with players catering to diverse areas of informal education. The total number of government schools in India grew at a Compound Annual Growth Rate (CAGR) of 1.2%, from 10 lakh in FY08 to 11.2 lakh in FY17. Government schools accounted for 76.2% of the total K- 12 schools in India during FY17.

With an increasing shift towards private schools in the country, the total number of private schools in India grew at a CAGR of 4.1% from 2.4 lakh during FY08 to 3.5 lakh during FY17.

The share of private schools in the total number of K-12 schools in India grew from 19.6% during FY08 to 23.8% during FY17. ISSUES Such encouraging growth in investments has ensured that the quality of the Indian education system has improved considerably.

But there are certain fundamental issues, which are affecting the middle class and the sector itself. For the rich, these factors do not affect.

But considering the fact that India’s largest pool of population is middle class, it is reeling under the burden of fundamental issues affecting the sector. There are three fundamental issues. They are: a) Weak Student-teacher Ratio This is a key challenge in India. Parents often complain that the number of teachers addressing students is extremely low when compared with countries in the west.

In developed countries, the student-teacher ratio stands at 11.4. According to Unified District Information System for Education (UDISE), the ratio at national level for elementary schools is 24:1 and for secondary schools it is 27:1. b) Fees This has become the bane of the middle class. Often one hears that the cost of education pre-1990s was economical and students who took that education are employable and have not only secured jobs in Indian companies but also in multi-national ones.

Regulating school fees is one of the key legal and political challenges in India’s education sector. Almost every year one sees a steep rise in tuition fees. Besides, there are additional costs such as fees for transport, extra-curricular activities and sports.

In a lighter vein but not far from reality, parents say that the amount of money spent on school education today is more than the costs associated with their education till graduation.

There are international schools which

28

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charge between 3 to 4 lakh rupees a year for high school students. It is estimated that school fees are rising almost 9% every year. c) Weak Laws Such expensive costs for basic education is almost unfair on the middle class population. There is a lack of jurisprudential clarity on the fees charged by private schools.

In a legal case between TMA Pai Foundation versus State of Karnataka (2002), the Supreme Court held that regulatory measures imposed on unaided private educational institutions must, in general, ensure the maintenance of proper academic standards, atmosphere and infrastructure and the prevention of mal-administration by the school management.

In another case, Islamic Academy of Education versus State of Karnataka and Ors (2003), a Constitution Bench

of the Supreme Court held that these institutions have the autonomy to generate “surplus”, which must be used for their betterment and growth.

The court observed that while private schools are ‘entitled to a reasonable surplus for development of education and expansion of the institution, there has to be a balance between autonomy of such institutions and the measures taken to prevent commercialization of education.’

Experts say the definition of ‘surplus’ is being misused by private schools by raising fees by a considerable margin almost every year. There has to be a proper law to regulate school fee hikes in a certain limit. Some states have been proactive in addressing this problem. Tamil Nadu follows fee fixation model in which a government committee verifies and approves fee structures proposed by private schools. Karnataka is for a formula

that caps fees for schools by way of framing rules under its school education legislation. Maharashtra has a weakly enforced legislation to regulate fees and has multiple government bodies to approve school fees.

Recently, the Maharashtra government’s decision to cap proposed fee hikes at 15%. But these are proposals and are yet to be implemented. A key challenge is the legal muscle of private schools, which ensures that private schools have an edge over government schools. In the coming years, a lot would depend on how the government shows proper concern over these issues. Providing basic education is a right and not a luxury or privilege. Unless the government brings in laws to cap rising fees, it would mean that it is sending a message that education is more about running a viable business than a basic neeD.

Retailers seeking an omni-channel presence could enter into tie-ups in the next

one or two years

BEYOND THINKING

TEAMINGUP

TEAMINGUP



stores. At present Spencer’s operates 156 stores in more than 10 states. Spencer’s Retail for the first time reported its full-year net profit of around `7.94 crore on revenue of `2,187.19 crore in fiscal year 2019.

Tanya Dubash, Godrej Group Executive Director, said that to further unlock the “immense potential” of the Nature’s Basket brand and to reach greater heights, the group decided to “pass on the torch to owners who have prioritized retail in their portfolio strategy and have the relevant ecosystems to take the business to the next level.”

Nature’s Basket posted a turnover of `338 crore in 2018-19 and 36 stores operational in Mumbai, Pune and Bengaluru. “Nature’s Basket is positioned as an aspirational brand like ours and, hence, fits our business. We will continue with Nature’s Basket brand and may even extend it to other markets, where it is not present since it is positioned in the premium segment,” Goenka said.

The sector, which employs over 60 million people and received one of the largest foreign direct investment (FDI) in 2018 would continue to invest in supporting tools like data analytics, virtual reality and artificial intelligence to boost trade volumes, while entering into new tie-ups, innovative thinking and accelerated adoption of omni-channel systems, experts said.

Earlier this month, through its Reliance Brands subsidiary, RIL said it had signed an agreement to buy the 250-year-old chain from Hong Kong-listed C Banner International Holdings Ltd.

Reliance did not disclose the price of the deal, but in 2018, C Banner wrote off $49.8 million in goodwill and brand value related to Hamleys, its

consolidation in the sector.

Consolidation in the retail sector continued as predicted by experts. On 18th May ’19, Spencer’s Retail, Sanjiv Goenka Group’s flagship retail venture, acquired the Godrej Group’s premium food retailing business Nature’s Basket for `300 crore in an all-cash deal.

On 10th May ’19, Reliance Industries (RIL) announced the acquisition of Hamleys, the world’s oldest toy retailer, which is set to pass from Chinese to Indian control after RIL said it had agreed to buy the British high street icon.

Walmart Inc, the world’s largest retailer, acquired a 77% stake in India’s leading e-commerce marketplace Flipkart in 2018 for approximately $16 billion, making it the largest deal in India.

Industry experts had predicted that like 2018 the retail sector will continue to consolidate with mergers and acquisitions rapidly. It is the sign of any matured sector.

Pinakiranjan Mishra, Ernst & Young’s Partner and National Leader (Consumer Products and Retail), said, “Partnerships and acquisitions will continue as players look to gain access to new capabilities in this space.”

Anil Talreja, Partner, Deloitte India also said the retail sector in India would continue to grow and there would be more mergers and acquisitions in 2019.

Spencer’s Retail revealed that this deal will enable it to access the western India market where it has no presence, which makes it a national player and strengthen its capabilities. Spencer’s had exited Mumbai in 2013 to get rid of its loss-making

India’s retail sector is growing at an unprecedented rate. This growth has brought in structural changes and the sector is becoming more organized. It is adopting modern technology, thus spawning new platforms, both multi-format stores in malls and internet driven e-commerce.

There is evidence that e-commerce is growing rapidly in tier-2 and tier-3 towns and in areas where the demand for variety is not being met by brick-and-mortar outlets. E-commerce is making inroads into less well-off households, and one can only imagine the impact it will have when internet in rural areas improves with the completion of the much-delayed Bharatnet project.

On the demand side, the rise in e-commerce across urban and rural households alike can be attributed to the sharp shift in consumer preferences for convenience, variety and brands.

E-commerce platforms such as Flipkart and Amazon attract customers using their deep discount models. Other spillovers that a strong e-commerce sector promises are improved logistics, reduced prices and jobs that labour-abundant India so desperately needs.

With the gap between online and offline retailers blurring and retailers trying to have presence both online and offline is leading to faster


annual report showed. The cut reduced the carrying value of the toy retailer by 36% to 626 million yuan ($91.85 million).

The acquisition by Reliance Industries, owned by billionaire Mukesh Ambani, marks the conglomerate’s first foray in an overseas retail brand. The Chinese group bought Hamleys in 2015 for 100 million pounds ($130.2 million) from France’s Groupe Ludendo.

“The worldwide acquisition of the iconic Hamleys brand and business places Reliance into the frontline of global retail,” said Reliance Brands Chief Executive Darshan Mehta.

Founded in 1760, Hamleys resonates with adults and children alike, with its flagship Regent Street store in central London recognized around the world. The toy seller runs 167 stores across 18 countries, the majority of which are in India, RIL said in a statement.

The Indian company, which already holds the master franchise for the brand in India, currently operates 88 stores in 29 cities.

Reliance Industries has established itself as India’s leading telecom player with JIO and has been firming up plans for a retail onslaught to combine its traditional outlets with an online foray aimed at becoming the biggest retailer in the country and taking on Amazon.com Inc and Walmart Inc in the country.

Its strategy is to diversify beyond refining and petrochemicals has seen its fast-growing telecom and retail operations driving quarterly profit to record highs when its gross refining margins have taken a hit from oil price volatility and slowing global demand. The group’s retail business doubled revenue to $5.1 billion in the

three months to 31st December.

Last year, Jeff Bezos-controlled e-commerce giant Amazon strengthened its presence by investing in offline formats such as K Raheja-promoted Shoppers Stop and Aditya Birla group’s retail arm More.Amazon is also believed to be in talks with Kishore Biyani-led Future group to pick up a stake.

Amazon India, which is currently only involved in online retail space in the country through its marketplace, said it “will continue to invest and innovate for India by working in close partnership with the local network of small and medium businesses. We continue to remain committed for the long term for India and it’s still just Day 1 here.”

The retail sector ended the year 2018 with a record level of foreign direct investment (FDI). The year 2018 brought big ticket investments across all formats while bridging the online and offline divide to bring their customers closer and the trend is likely to continue further.

With young demographics, increasing disposable income and digital payment-assisted consumption acting as key enablers, the retail sector expects to be more consumer-friendly, while competition may grow manifold to lure customers.

“Whether offline or online, retail will continue to drive the virtuous cycle of growth,” Walmart India President and CEO Krish Iyer said.

Echoing a similar view, Metro Cash & Carry India Chief Arvind Mediratta said, “With India becoming one of the largest preferred retail destinations globally, the Indian retail industry is growing at a fast pace. Digitization in retail has

changed the landscape of the segment.”

Industry body Retailers Association of India’s Chief Executive Officer, Kumar Rajagopalan said there is increasing focus by various retailers on evolving towards an omni- channel presence and large online retailers might start looking at an offline presence, and large offline retailers would start looking online, resulting in various tie-ups in the next one or two years.

There would be co-existence across all formats as the Indian retail industry is still in early stages of evolution compared to its peer developing and developed markets.

The retail industry, estimated to be around $680 billion to $700 billion, would continue its double-digit growth. “It will grow steadily. Our expectation is that a growth rate of at least 15% per year is what would take the retail industry in the country to the next level,” said Rajagopalan.

In 2018, organized retail sales saw healthy double-digit growth with e-commerce firms expanding into grocery, and launching private labels in fashion and electronic accessories.

Moreover, the role of small kirana, mom-and-pop stores would continue to increase and many of them would tie-up with big retailers.

“India is actually multiple markets of various sizes and it’s not possible for a handful of players to take over the market. Kiranas fulfil a very valuable role of last mile fulfillment, which will retain their importance for consumers. We expect that many more hyper-local players would enable kiranas to become more relevant to consumers that they already deal with,” added RajagopalaN.

GOINGDOWNHILL

India’s consumption story is seeing a shift due to fall in volumes in recent times, despite growth factors

BEYOND THINKING

The statement ‘India is a growth story’

has almost become an hackneyed expression. There is a certain amount of truth to it. But there are certain nuances, which a lay person may miss in his/her assessment and understanding of the term consumption.

An important question that pops up in the lay person’s mind is does everything that India consumes become a consumption theme? Or should one bear in mind the distinction when it comes to

understanding what falls under consumption and what does not? Let us understand these observations in detail: THE GREAT INDIAN CONSUMPTION STORY Broadly speaking, India’s consumption theme covers products from sectors such as food and beverages, clothing and footwear, alcohol and tobacco, household goods, education, transport,



by HUL management during a press meeting after the March ’19 quarter results underscores the current scenario faced by the companies that rely on consumption-led demand. The volume of passenger cars dropped in the nine of the last ten months, while the two-wheeler volume growth fell to the lowest since the currency notes swap exercise in November ’16.

Indian passenger car volume growth moderated to just 2% in the previous fiscal year, the lowest in five years. The volume growth of leading FMCG companies which derive more than one-third of sales from the rural market has dropped to a six-seven quarter low.

Indian airlines carried 11.6 million passengers in March, 0.1% higher than a year earlier, representing the slowest increase since June ’13. The slowdown has been due to three major factors. First, agricultural income growth has been weak for over two years due to meagre agricultural price inflation.

The nominal gross domestic product (GDP) from agriculture was 2% in the December ’18 quarter, the lowest growth in any of the quarters since June ’12.

Second, the benefit of reduction in consumer goods prices to FMCG companies after the implementation of Goods and Services Tax (GST) is now a thing of the past.

The liquidity crunch since September ’18 is the third reason for slower demand. The velocity of money in the system has dropped.

According to Credit Suisse, money supply as measured by M3, has lagged GDP growth since 2016.

7%, respectively today,” the report added. The World Economic Forum observes that “while India’s top 40 cities will form a $1.5 trillion opportunity by 2030, many thousand small urban towns will also drive an equally large spend in aggregate.”

Through improvement of infrastructure and access to organized and online retail, India can also unlock nearly $1.2 trillion of spending in developed rural areas, it added.

Experts point out that the biggest channel disruption over the past 10 years has been e-commerce.

From almost nothing to close to a $15 billion to $20 billion channel, e-commerce has ushered in the growth of smartphones, increased the availability of low cost, high-speed (internet) data and multiple innovations like cash on delivery to build trust with Indian consumers to buy online. THE REPERCUSSIONS Despite these growth factors, the Indian consumption story appears to be fizzling out with volume growth of carmakers, two-wheelers, air passenger numbers and Fast Moving Consumer Goods (FMCG) companies dropping to multi-quarter lows.

Factors including insufficient income growth in urban and rural areas, falling money supply in the economy, and rising uncertainty over how customers would respond to regulatory actions have resulted in lower demand over the past few quarters.

“FMCG sector is recession-resistant but not recession-proof.” The remark

communications, healthcare, housing, hotels, and leisure. Massive sale of products in these sectors has ensured the rise of India’s consumption story. According to a report by the World Economic Forum and Bain & Company, India is set to become a truly middle class-led economy, fuelled by growth in income.

Consumer spending in India will grow from $1.5 trillion at present to $6 trillion by 2030, making the country the third largest consumer market in the world after the US and China, points out the report.

According to the report titled ‘Future of Consumption in Fast-Growth Consumer Markets,’ the upper-middle and high-income segments are expected to grow from being one-in-four, to one-in-two households by 2030. Domestic private consumption contributes to 60% of India’s GDP (against 40% in China), which means that the Indian economy is protected to a great extent against external shocks and cycles of low or high public investment.

The report added that by 2030, India will lift nearly 25 million households out of poverty; less than 5% of households will be below the poverty line by 2030, down from 15% today.

During the same time, it will add about 140 million middle-income and 21 million high-income households, overall nearly doubling the total share of these segments to 51%, the report said.

“Upper middle-income households will drive 47% ($2.8 trillion) of total consumption, and high-income households will drive another 14% ($0.8 trillion), compared to 30% and


Household savings data, sector and company volume data suggest that households may have gradually reduced consumption due to insufficient income growth.

Economists point out that income growth pattern and nominal agricultural GDP growth had provided a fair bit of indication that consumption growth should have slowed down from 2017.

However, disruptions from demonetisation and GST implementation have delayed the process of moderation. Maruti Suzuki’s volumes dropped 17.2% in April, the highest decline since August ’12. In April, the company’s top selling models such as Beleno, Dzire and Swift witnessed a volume drop of 15% to 31% year-on-year. The company has guided for 4% to 8% volume growth for the current fiscal. The lower end of the guidance implies slowest growth in five years.

Maruti’s CFO Ajay Seth in the post-earnings conference call said that the current fiscal is quite unpredictable since how customers will respond to price changes due to new regulatory norms pertaining to emissions is unknown.

Due to regulatory disruptions carmakers have two options – one, either show 5% to 6% volume growth in the current year, and negative growth for the next year, or calibrate the current year volume growth to 1% to 2% and restrict themselves from posting negative growth for the next year. Experts believe that volume growth is unlikely to recover before the early second half of the current fiscal as inventory adjustment between wholesale and retail will take some

months. Hero MotoCorp in a post-March quarter conference call said that inventory levels are ten days higher than average.

The worst affected segment in two-wheelers has been the scooter segment, where growth turned negative in FY19, the first time in 13 years - the scooter segment is typically known as the urban transport vehicle.

The average volume growth of HUL, Britannia, Dabur and GCPL was 6% in the March quarter, 266 basis points lower than the previous quarter.

Management commentaries indicate further moderation in the June quarter. HUL’s volume growth fell 7%, the lowest in six quarters with the narrowest margin expansion in ten quarters.

According to HUL, the rural growth was 1.1 times of the urban demand in the March quarter compared with 1.3 times in the previous quarter. THE KEY ISSUE In the past few years, earnings’ growth in large pockets has eluded the markets. Valuations have been a key hurdle in spotting interesting ideas.

The universe of investible ideas is shrinking almost day by day. To deal with this, astute fund managers and other experts began expanding the definition of consumption.

An example to support this line of argument is cement sector. In recent years, fund managers have been viewing cement stocks as consumption theme. But this is exactly not the case. Now, cement is largely a business-to-business product. It is not much of a

business-to-consumer product.

In consumption theme, a key idea defines the consumer who consumes, and revolves around basic needs and certain luxurious indulgences, which a consumer can afford. So, an important question that needs examination is: how does one deal with the trap of what comes under the consumption theme?

It is important to understand not everything that is consumed comes under consumption theme and most importantly, not everything that we consume is an interesting consumption idea.

One needs to weed out companies, which have business models in a commoditized mould. This can be understood with an example.

A company named X manufactures product A, and another company Y, which came after X in the same sector, manufactures the same product. Then one needs to understand how company Y is different from company X.

An important question to ask is: Is Y just replicating the business model of X or is it offering something different in the same product?

A key example is cement sector wherein it is not cement, which distinguishes the big player from mid-sized and small-sized ones. But there are certain inherent business strengths, which distinguishes the big players from mid-and-small-sized players.

Hence, investors are required to look at those companies which have a clear distinction of not replicating others and at the same time offer least risk in terms of strong cash flows and high earnings’ visibilitY.

GLOBAL OPPORTUNITYRising speed of data connection and new artificial

intelligence tools are providing a wide range of skilled services jobs in rich countries thanks to Globalization 4.0

BEYOND THINKING

At the recent World Government Summit, UAE’s Minister of Cabinet Affairs and the Future Mohammad Abdulla Al Gergawi made a telling

observation. He said, “We are moving from the age of information to the age of imagination. Governments with their old thinking cannot impact the future. Those who own ideas and imagination own the future.”

Gergawi made this important observation in the context of the fourth phase of globalization. At the same summit, it was stressed that governments across the globe have to shape up and realign their goals in the context of Globalization 4.0 or face the dire consequences of being left behind.

This brings us to an important question: how did we reach the fourth phase of globalization? Also, what factors resulted in four phases of globalization? Most importantly, did globalization have an earlier phase?

Let us understand these facts in detail:

Typically, economic globalization happens when goods, ideas, people, services, and capital move from one nation to another. On a larger scale, globalization is quite advantageous. It produces jobs, leads to income



in arbitrage costs triggered a sequence of changes that had a huge effect on the global economy: As markets expanded globally, industry clustered locally. These clusters were in today’s developed nations. Today’s developing nations de-industrialized. Globalization 2.0 began after World War II and ended around 1990. Globalization accelerated again around 1990. Baldwin and other economists point out that globalization’s second phase was reignited because of Information and Communications Technology (ICT) revolution.

Economists point out that knowledge moves from developing nations (north side of the globe) to firms based in G7. Today, digital technology is helping people and companies to benefit from relative wage difference between developing and developed nations.

This has provided high level of export opportunity for developing nations like India and China. High internet facility in urban areas in these countries provides strong opportunities for business for developed nations. This works in favour of developing nations. The third phase of globalization is the intensification of what happened in the second phase of globalization.

Famous economist Thomas Friedman notes that Globalization 3.0 is the intensification of everything that was invented in Globalization 2.0 - the bandwidths, the fiber-optics, the PCs, and the software capabilities that connected them - but intensified to such a degree that it became a difference in kind.

And so if Globalization 2.0 shrank the world from a “Size Medium” to a “Size Small,” and really was about

mechanism of buy-low, sell-high arbitrage. The only trend almost constant is arbitrage. There is also arbitrage in ideas and people. Richard Baldwin observes that the high cost of moving goods, people and ideas created three constraints that bound together the production and consumption of goods. Therefore, apart from elite goods and essential raw materials, most things that people consumed were made within walking distance of their homes.

We know from books and paintings that royalty and the rich could enjoy goods made far away, but most people lived in villages. For the rest, consumption meant locally-made food, shelter, and clothing. This isolation meant that the world economy was little more than a patchwork of village-level economies.

The extreme separation of production hindered innovation, because small-scale production meant innovation was worth little to the innovator, and their dispersion meant that it was difficult for innovation to spread quickly. Modern growth, in other words, was stymied until Globalization 1.0 took off. The cost of moving goods was the first of the three to fall dramatically. From the early 19th century, steam power and transport technologies improved in a process that helped evolution, aided by Industrial Revolution.

With cheaper international shipping, more people bought goods from far away. Kevin O’Rourke and Jeff Williamson, two economists of the history of trade, date this to 1820. But while shipping got cheaper, the cost of moving ideas and people fell much less. This unbalanced reduction

distribution and salaries.

Richard E. Baldwin, a professor of international economics at the Graduate Institute of International and Development Studies in Geneva, who is known for his book The Great Convergence: Information Technology and the New Globalization, observes that globalization leapt forward in the late 19th century when steam power slashed the costs of moving goods internationally. This ‘old globalization’ came in two waves. Globalization 1.0 started in 1820 and ended at the start of World War I, and Globalization 2.0 began after World War II and ended around 1990. In between, globalization retreated. Economists concur that today’s rich nations who are known as G7 - France, Germany, Italy, Britain, US, Japan and Canada - benefited highly from old globalization. These nations recorded extremely high growth in their exports, and incomes in comparison with poor nations. This led to what Kenneth Pomeranz, a historian, calls the Great Divergence.

The share of these seven nations in the world’s Gross Domestic Product (GDP) grew two-thirds in 1988 from one-fifth in 1820. Its share of world trade rose to more than 50% in this period. An important factor, which triggers off any phase of globalization, is arbitrage. Arbitrage means that if the cost of goods, say a mobile is cheaper in country A than in country B, then country B buys mobiles from country A and sells it at a higher price in its own country. This is clearly evident.

When companies exploit price differences – buying low and selling high – there is international trade. Trade is driven by a two-way



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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities quoted are exemplary and

are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research Analyst Registration No:

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the globalization of companies, Globalization 3.0 shrank the world from a “Size Small” to a “Size Tiny.”

Now, economists are talking about the fourth phase of globalization. Economist Richard Baldwin, in his new book The Globotics Upheaval provides an interesting definition of the fourth phase of globalization. He says, “The simplest way to think about it: If all previous waves were about the trade in goods then the next one is about digitally-enabled

services. Or, put in a darker way, if in the rich world the last surge of globalization was about lost blue-collar jobs this one is coming for white-collar workers.”

He adds, “That’s what the future of globalization will be and that’s what Globalization 4.0 is.” Economists point out that rising speed of data connection and new artificial intelligence tools like machine translation (for instance, real-time Google Translate) are providing a

wide range of skilled services jobs in rich countries ranging from architecture to accounting and web design to new competition from practitioners in emerging economies.

They talk of the possibility of telecommuting in which the skilled migrants never have to leave home and offer their services. This means that artificial intelligence would snatch white collar jobs in the coming years. This would be one of the key aspects of Globalization 4.0.

Time To GetRealistic

FMPs are a good bet for assured yield and no interest rate risk, but

remember that higher rewards means higher risks

BEYOND BASICS

Since September last year after defaults of Infrastructure Leasing and Financial Services (IL&FS) on short-term debt obligations, there has

been a series of either defaults or downgrades, which have impacted mutual funds, particularly debt mutual funds. Fund houses had to mark down (which means hair cut or write-off) their investments in stressed assets, which has not been taken kindly by investors.

Recently, a company defaulted in repaying its debt paper at the time of maturity.

Due to this, mutual fund houses had to give partial money to investors and roll-over fixed maturity plans (FMPs), which were holding those

stressed papers.

Despite the crises in the non-banking finance (NBFC) sector, mutual funds have an exposure of over `70,000 crore in those papers. By June-end, mutual funds have an exposure of around `2,200 crore in the group companies of several large corporates through FMPs, amounting to over `1,200 crore.

This means that if companies that had taken money from debt funds failed to repay money at the time of maturity, there could be mark downs and investors may lose money in



failed to honour its commitment to repay, a few lenders sold stocks worth hundreds of crores that were held by them as collateral. It led to a 30% drop in the stock price of that company.

So, mutual funds realized that if everybody started selling the collateral, the stock price would collapse and everybody would lose money. So, mutual funds collectively decided not to sell the collateral but instead tried to get the money back through negotiations.

Consequently, a meeting was held between the promoters and a group of lenders and it was agreed to provide additional time to promoters to complete their ongoing strategic sale plan of one of their holding companies.

The promoters had assured that the strategic sale would be completed in a time-bound manner. This is likely to help promoters reduce their debt and release the pledge against the shares. The stake sale is expected to be completed by 30th Sept ’19.

There was a security cover with regards to the exposure of mutual funds. The minimum security cover required to be maintained was 1.5x (secured by promoter shares only) or 1.75x. This means that if stock prices of promoter companies go below a certain limit, fund houses can sell the shares or promoters have to provide them with more security cover.

However, around the same time, few FMPs with investments in such papers had maturities in April and May. Since the maturity amount was not going to come when FMPs matured, fund houses gave partial money to investors and one fund house rolled over the scheme to another year, meaning that FMPs were extended by a year and

returns at a much lower tax rate (due to the benefit of indexation in long-term capital gains).

But FMPs are designed to protect investors against interest rate risks. But illiquidity leads to risks in FMPs; they are allowed to sell the units on exchanges, but hardly there is any liquidity. The credit portfolio in the plan can suffer in case of downgrades by ratings agencies as has been seen in the past few weeks.

Downgrades bring down the price of securities as investors demand higher risk premium on the asset, leading to higher credit spreads. So with FMPs it is not always capital appreciation, but in many cases even loss of some part of the capital.

HOW DID THE CRISIS START

Here we will discuss only those crises that have led to problems in FMPs and not the NBFC crisis, which has been going on since September ’18. Only a few mutual funds have a debt exposure to group companies of Nifty-listed companies that are secured by pledge of shares.

In the last week of January, the share price of that Nifty company and its listed subsidiary fell sharply owing to reports that the pledged shares of its promoters were being invoked and sold.

This resulted in a security cover against our exposures falling below the prescribed threshold as per the non-convertible debentures (NCD) documents. But the promoters conveyed their inability to provide additional equity shares as most of their domestic shareholding was already pledged.

Meanwhile, when the company

debt funds, mainly FMPs.

This article attempts to explain how the crisis started, how it has impacted returns, steps fund houses have taken and what should investors’ strategy be with regards to debt funds.

WHAT ARE FMPs AND HOW DID THEY GAIN PROMINENCE

FMP is a close-ended debt fund. Those who invest in FMPs can take out their money only at the time of maturity as it is close-ended in nature. One of the major advantages of FMPs is that their returns are more predictable because the fund manager buys and holds debt papers whose tenure coincides with the expiry of the term of the FMPs.

Another major advantage of FMPs is that they are tax-efficient. The selling point of FMPs is indexation of gains. For example, a person invested `1 lakh in an FMP in March ’19, which is set to mature in April ’22 (most FMPs are for over three years).

Assuming that the FMP earns annualized returns of 7.5%, then the value of investments at the time of maturity would be around `1.24 lakh and capital gains would be `24,000.

Since the investment is made in 2018-19, but matures in 2022-23, the investor would be eligible for four years of indexation though the investor’s money remained invested for a little over three years. So post-tax, returns would be around 7%, which is better than the returns on a bank FD, which gives investors around 5% returns post-tax.

FMPs could be useful for investors in high-income tax brackets. These investors usually end up paying huge amounts as tax on the interest earned on the FDs held by them. FMPs give them the option of earning similar

�ere is no shortcut to reach your �nancial goals. But there is always a proper path. We help simplify the path for you through in-depth research backed by decades of valuable experience in the industry.

7



Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities quoted are

exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research

Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX Member ID -0362 /ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300 Nirmal Bang Securities Private Limited CIN: U99999MH1997PTC110659;

Nirmal Bang Commodities Private Limited CIN: U67120MH1995PTC093213Regd. O�ce: B-2, 301/302, 3rd Floor, Marathon Innova, O� Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400013. Tel: 62738000/01; Fax: 62738010



investors are stuck in FMPs for another year.

WHAT CAN INVESTORS DO

There is a lesson to be learnt for retail investors. Most fixed-income investors look at the highest yielding FMP of a company and then invest in the new one.

When one matures, they again re-invest in the one which offers them higher returns. But in investing, no extra return comes without assuming greater risks. Higher risks will only hurt investors as has been seen in the past.

Also, investors can look at investing in open-ended debt funds, liquid funds or short-term income funds where they can redeem their money any time they want.

If we look at the returns, then we see that returns are more or less 1% to 2% higher or lower than such funds and it does not make sense to invest large sums of money for few percentage returns. Investors in the 30% tax bracket should look at debt funds as they are more tax efficient, but with some riders.

Having said so, FMPs have been an important part of the industry for a long time as they were sold as alternatives to bank fixed deposits (FDs).

With a pre-tax rate of bank FD under 5%, still debt funds give better returns than traditional FDs.

Firstly, investors need to look at the investment time horizon and how much risk they are willing to take by investing in debt funds.

Investors investing in equity funds know that they are taking risks as rewards are also higher.

But with debt investors, they think it is a safe investment, but even in debt funds there are chances of interest rates risk and credit risk.

Investors should have some exposure to liquid or ultra short-term debt funds as they are safer than other debt funds. If investors want to invest in FMPs, they should look at the history of the fund house and the fund manager.

They should spread out their investments in two to three FMPs. If investors need money over the next one to two years, then they should clearly look at investing in liquid and ultra short-term debt funds and not lock their money in FMPs.

LIFE INPURE TERMS

Top private life insurers are turning to protection business than traditional ones

BEYOND BASICS



FOCUSING ON PROTECTION BUSINESSES

In financial year 2018-19, HDFC Life Insurance saw its net profits going up by 15% to `1,277 crore, while total premiums stood at `29,186 crore, up by 24%. However, if we look at their protection business, then term protection annualized premium equivalent (APE) has increased to `1,045 crore during FY19 compared to `624 crore for FY18, recording a solid growth of 67%.

For FY19, the share of the protection business increased to 16.7% of the total APE (7% on an individual APE basis). HDFC Life continues seeing a significant potential in the annuity and protection business and expects further improvement in the product mix, which should support profitability.

APE is calculated by the sum of annualized first year regular premiums and 10% weighted single premiums and single premium top-ups.

Not only HDFC Life, but also ICICI Prudential Life Insurance had started focusing on protection business a long time ago. In FY19, the protection APE recorded a growth of 61.9%, rising to `722 crore in FY19 as compared to `446 crore in FY18.

In FY19, the contribution of protection business in total new policy premiums received nearly doubled from 11.2% in FY18 to 20.6% in FY19. However, their profit after tax decreased from `1,620 crore in FY18 to `1,141 crore in FY19 primarily on account of higher new business strain resulting from new business growth of protection business. According to the company, new business strain

companies focusing on this segment and should investors have term plans.

WHAT IS A PROTECTION PLAN

In the past few years, several people might have heard of a life insurance product called ‘term insurance’ from their friends, family members and/or from the media. Even after advertisements by insurance companies and financial planners explaining the need to have a term plan in a financial portfolio, less than a percentage of people have bought a term insurance plan.

The concept of a term plan is very simple. The risk is covered if he is covered under the policy and if the policyholder whose life is insured dies, the sum assured is paid to the family members of the nominee. But on maturity, if the policyholder is alive, then no benefits are given.

A term life insurance plan is one of the most important and the first life insurance policy investors buy irrespective of their profession. Not buying a term plan can put family members of the deceased in financial stress by not having a source of regular income.

Many people are unaware of the fact that premiums of term plans are less than other life insurance products. It can offer flexibility and is simple to understand.

Term plans are the basic insurance cover, which will protect them till their retirement or even till 99 years of age. It is a time when one should have clear bifurcation of an investment plan and a protection plan. There is no other better and cheaper product than a term plan for protecting lives with higher sum insured.

WHY ARE INSURERS

With top private life insurers like SBI Life Insurance, HDFC Life and ICICI Prudential Life Insurance having listed on the bourses, the focus has shifted to profitability and not just gaining their market share.

Also, with listed insurers now being answerable to investors for their financial performance, they are turning to selling more protection business than traditional ones.

Life insurance has many products like endowment, money-back, term plans, whole life policies and unit linked insurance plans (Ulips), among others. But insurers can earn higher margins only in protection business and more or less focus has now shifted to the sale of more and more protection plans.

Since the past few quarters, life insurance companies in India have started focusing more on protection business, which can boost their profits in the long run.

With the penetration of life insurance in India still under 3%, this method adopted by insurers will increase the reach of investors and provide them with cheap insurance as compared to other traditional plans.

In the recently announced results of life insurance companies, all three listed entities have centred their new business towards protection and even annuities business. In this article we will focus on what protection business is, why are insurance



Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We

do not offer PMS Service for the Commodity segment .The securities quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139,

INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX

Member ID -0362 /ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300 Nirmal Bang Securities Private Limited CIN: U99999MH1997PTC110659; Nirmal Bang Commodities Private Limited CIN:

U67120MH1995PTC093213


arises when the premium paid at the commencement of a contract is not sufficient to cover initial expenses including acquisition costs and any mathematical reserve that the company needs to set up at that point.

Even SBI Life Insurance which saw its net profit up by 15% at `1,330 crore their total protection new business premium has increased by 174% from `600 crore in FY18 to `1,640 crore in FY19. The share of total protection NBP (individual and group) has increased from 5.5% in FY18 to 11.9% in FY19.

SHOULD INVESTORS BUY TERM PLANS

There are hundreds of investors who think that at the end of policy term they will not receive anything as that is one of the reasons why they stay away from buying term insurance. But one should understand that insurance is not an investment product; it’s a protection product. If investors want returns from their investments, then they should look at investing in equity markets, mutual

funds or even conventional products like bank fixed deposits (FDs) or public provident funds (PPFs).

Even if investors are worried that they will not get anything at the end of the policy, then they can consider a product called returns of premiums - where premiums paid are returned back to the investors. But premiums in term plan return premiums plans are higher than pure term plans.

Typically, people tell that a term plan should be 10 times of their annual income. So if someone is earning `10 lakh per annum, he should have at least `1 crore cover through term plans.

Again, buying term plans will have little benefit. In order to get most out of buying term plans, policyholders should also buy additional riders with the policy. These riders will allow the policyholder to have peace of mind.

One should buy riders of critical illnesses, accidental death or permanent disability, as they can give policyholders money when they need

it the most in crises. Not only benefits discussed above, even premiums paid for term plans are eligible for tax exemptions under section 80C of Income-tax Act.

IN A NUTSHELL

This trend shows that once listed insurers are focusing more on their profitability as it is expected that protection business makes more profits compared to traditional plans or unit-linked insurance plans (Ulips). However, we need to see whether insurers deal with Indian policyholders who are risk-averse and consider insurance as an investment.

But from investors’ point of view, before buying the insurance policy, one should do his/her own research, look out for best features and also decide whether family members will need lumpsum, or staggered pay-outs and plan systematically for the same.

It is highly important to have a term plan as not having one could pose a serious challenge to their financial stability and long-term investmentS.


TECHNICAL OUTLOOK

BEYOND NUMBERS

level, indicating a positive view. Going ahead, the Nifty is likely to carry its positive momentum towards 12,200-12,500 levels. On the flip side, 11,400 and 11,200 levels may act as strong support on the closing basis.

Overall, the view is positive; market participants are advised to hold long positions at current levels. If the Nifty manages to breach the all-time high again, then we may witness a fresh rally towards the 12,200/ 12,500 levels.

Market participants should be stock-specific and follow the trend till it reverses. On the downside though, the next major support exists at the 11,600 level, and subsequently at the 11,400/ 11,200 level.

The Bank Nifty is likely to extend its rally towards 32,300/ 32,500 levels, whereas support lies at the 29,500-mark. If it moves above the 31,400 level, then we may witness a rally towards 32,050-33,000 levels. On the Nifty Options front for June series, the highest Open Interest (OI) build up is witnessed near 11,500 and 11,000 Put strikes, whereas on the Call side, it is observed at the 12,000 and 12,500 strikes.

India VIX, which measures the immediate 30-day volatility in the market, remained in the range of

22-30 for most part of May. Going forward, VIX will continue to remain elevated due to global risks.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 1.05-1.6 in the month of May. Going forward, it is expected to remain in the range of 1.3-1.8 in June.

The markets are believed to remain positive in the month of June with underlying buying demand near important supports of 11,700 and 11,500; profit-booking is likely near important resistances of 12,000 and 12,200. OPTIONS STRATEGY

Bull Call Spread

It can be initiated by ‘Buying 1 lot 27JUNE 11900 CE (`190) and Selling 1 lot 27June 12200 CE (`78).’ The net combined premium outflow comes to around 112 points, which is also your maximum loss. Keep a Stop Loss of 42 points (112-70=42). Maintain a Target of 100 points premium gain. The maximum profit that one can get is 188 points if the Nifty expires above the 12,200 level in June. The volatility is likely to continue in the next month with VIX at elevated levels. Expect buying near supports in the next expirY.

landslide victory for Narendra Modi led-National Democratic Alliance (NDA) infused a sense of euphoria on Dalal Street on 23rd May ’19. The back-to-back victory marked a first for the single-party majority since 1984.

Foreign institutional investors (FIIs) cheered the landslide victory, saying the focus of the new government must now shift towards pushing more reforms and improving the state of the economy. The rally was broad-based with all indices in the green.

The latest new buzz on Dalal Street is about an eminent ‘mid-cap rally.’ Mid-caps are ready to take off and should deliver handsome gains from here on. Flows into domestic mutual funds, usually a key driver of mid-caps, should revive as political uncertainty has ended.

Technical factors, too, are at play, the biggest being the formation of a ‘Golden Cross’ on the mid-cap index, where the medium-term 50-day moving average has crossed the long-term 200-day moving average, sending out a strong buy signal.

Technically, the weekly chart indicates that the Nifty is closed at an all-time high, that is, above 11,840

A

Nifty Daily Chart

SCHEME NAME 1 Year 10 Years5 Years 7 YearsAUM (Cr)

3 YearsNAV

Historic Return (%)

130.9285.914.2

650.934.7

13871.9

4.5 4.9 -1.3 6.9 5.5 1.5

15.6 15.5

- 15.4

- 12.2

14.2 12.7 14.3 15.1 14.9 13.5

11.4 13.5

- 11.4 16.0 11.8

14.1 16.7

- 15.4 18.6 14.7

11603632306

2237624297

-

Canara Robeco Equity Diversified Fund - Growth

ICICI Prudential Multicap Fund - Growth

Edelweiss Multi-Cap Fund - Reg - Growth

HDFC Equity Fund - Growth

Kotak Standard Multicap Fund - Reg - Growth

Nifty 500 TRI

Multicap Funds

BEYOND NUMBERS


MUTUAL FUNDRECOMMENDATIONS

Here are a few mutual fund schemes we recommend you to consider from an investment perspective.

Large & MidCap Funds

SCHEME NAME

91.143.1100.46961.9

-3.1 -4.7 -8.5 -2.2

1 Year

24.2 12.2 20.8 14.5

10 Years

14.7 11.9 13.5 13.5

21.3 11.2 18.4 13.9

5 Years

22.4 13.7 21.3 16.4

7 Years

467529542190

-

AUM (Cr)3 Years

Historic Return (%)

NAV

Canara Robeco Emerging Equities - Growth

IDFC Core Equity Fund - Reg - Growth

Principal Emerging Bluechip Fund - Growth

NIFTY Large Midcap 250 TRI

Large Cap Funds

SCHEME NAME1 Year 10 Years5 Years 7 Years

514416705218461231512772

-

AUM (Cr)3 Years

Historic Return (%)

Axis Bluechip Fund - Growth

HDFC Top 100 Fund - Growth

ICICI Prudential Bluechip Fund - Growth

Mirae Asset Large Cap Fund - Reg - Growth

Reliance Large Cap Fund - Growth

Nifty 50

NAV

28.5484.641.349.734.1

11407.1

7.9 9.8 3.4 6.6 6.9 6.8

- 13.8 16.2 19.6 15.3 10.2

14.5 15.3 13.4 15.7 15.3 13.1

12.5 11.1 12.1 15.9 14.2 9.6

16.6 14.9 15.5 18.6 16.6 12.9

Mid Cap Funds

SCHEME NAME1 Year 10 Years5 Years 7 Years

6074874168340284503

-

AUM (Cr)3 Years

Historic Return (%)

DSP Midcap Fund - Reg - Growth

Edelweiss Mid Cap Fund - Growth

ICICI Prudential MidCap Fund - Growth

Kotak Emerging Equity Scheme - Reg - Growth

L&T Midcap Fund - Reg - Growth

Nifty Midcap 100 TRI

NAV

52.325.192.136.8126.3

21672.7

-8.2 -14.5 -9.0 -8.4 -12.3 -11.2

21.0 20.9 18.7 19.3 20.4 15.2

12.1 10.0 11.6 10.7 12.9 9.8

17.3 16.2 15.2 19.1 18.6 13.4

18.4 19.3 17.7 19.1 20.0 15.1


Small Cap Funds

SCHEME NAME

51.641.323.138.449.5

7462.3

-14.8 -10.6 -17.2 -14.6 -14.2 -22.6

1 Year

21.7 18.4

- - -

12.2

10 Years

8.0 15.8 15.5 13.9 14.4 6.2

5 Years

21.8 18.5

- 23.7 25.3 11.1

16.8 16.3 17.8 20.7 25.0 8.7

7 Years

74037660598980501992

--

AUM (Cr)3 Years

Historic Return (%)

Franklin India Smaller Companies Fund - Growth

HDFC Small Cap Fund - Growth

L&T Emerging Businesses Fund - Reg - Growth

Reliance Small Cap Fund - Growth

SBI Small Cap Fund - Growth

Nifty Smallcap 100 TRI

NAV

Dynamic Asset Allocation Funds

SCHEME NAME

35.228.713.2

9792.9

5.3 -0.5 1.7 8.7

1 Year

14.0 14.1

- 11.6

10 Years

10.2 10.7 8.5 12.1

10.9 10.7

- 10.3

5 Years

13.7 14.1

- 12.4

7 Years

290341007649

-

AUM (Cr)3 Years

Historic Return (%)

ICICI Prudential Balanced Advantage Fund

Invesco India Dynamic Equity Fund - Growth

SBI Dynamic Asset Allocation Fund - Reg - Growth

NIFTY 50 Hybrid Composite Debt 65:35 Index

NAV

Focused Funds

SCHEME NAME

27.135.3140.0

14767.2

-0.6 -11.4 2.6 -

1 Year

- 10.6 20.9 11.1

10 Years

15.2 11.8 13.8 12.1

15.1 8.8 17.6 10.5

5 Years

- 11.4 17.6 13.1

7 Years

758416324234

-

AUM (Cr)3 Years

Historic Return (%)

Axis Focused 25 Fund - Growth

IDFC Focused Equity Fund - Reg - Growth

SBI Focused Equity Fund - Growth

S&P BSE 500

NAV


3 YearsNAV

52.6131.514.551.3155.69792.9

0.8 4.2 7.1 -6.2 4.6 8.7

12.2 16.0

- 14.4 15.0 11.6

10.6 12.6 12.9 8.1 11.8 12.1

8.9 13.3

- 11.2 13.2 10.3

11.3 15.9

- 13.5 14.4 12.4

22384261291843118722124

-

HDFC Hybrid Equity Fund - Growth

ICICI Prudential Equity & Debt Fund - Growth

Mirae Asset Hybrid - Equity Fund - Reg - Growth

Reliance Equity Hybrid Fund - Growth

Canara Robeco Equity Hybrid Fund - Growth

NIFTY 50 Hybrid Composite Debt 65:35 Index

Hybrid Aggressive FundsHistoric Return (%)

ELSS Schemes (Tax Saving u/s 80-C)


3 YearsNAV

30.343.554.349.017.1

5639.1

-4.4 1.0 -7.9 -1.8 4.6 3.6

16.4 -

16.5 18.1

- 12.6

11.7 12.9 12.4 12.0 19.0 13.9

18.3 20.1 17.7 17.3

- 14.9

16.1 16.4 14.6 14.8

- 11.9

86851910919968391949

--

Aditya Birla Sun Life Tax Relief 96 - Growth

Axis Long Term Equity Fund - Growth

IDFC Tax Advantage (ELSS) Fund - Reg - Growth

Invesco India Tax Plan - Growth

Mirae Asset Tax Saver Fund - Reg - Growth

S&P BSE 200 TRI

Historic Return (%)


Contra/Value Funds

SCHEME NAME

51.6129.759.1

13871.9

3.6 -7.5 -0.7 1.5

1 Year

14.9 17.6 14.1 12.2

10 Years

15.2 15.3 9.7 13.5

12.3 15.9 8.9 11.8

5 Years

15.0 17.6 12.1 14.7

7 Years

81154644551

-

AUM (Cr)3 Years

Historic Return (%)

Kotak India EQ Contra Fund - Reg - Growth

Tata Equity P/E Fund - Reg - Growth

UTI Value Opportunities Fund - Growth

Nifty 500 TRI

NAV

Liquid Funds

SCHEME NAME

2084.02814.33806.44581.23077.8

-

7.37.67.17.67.38.2

1 Week

7.6 7.7 7.4 7.6 7.6 -

1 Year

7.2 7.5 7.1 7.4 7.2 8.4

7.0 7.3 6.9 7.1 7.0 7.2

1 month

7.4 7.5 7.1 7.4 7.4 -

3 months

304609643275773442236731

-

AUM (Cr)2 Weeks

Historic Return (%)

Axis Liquid Fund - Growth

Franklin India Liquid Fund - Super IP - Growth

Kotak Liquid Scheme - Reg - Growth

Reliance Liquid Fund - Growth

UTI Liquid Cash Plan - Reg - Growth

CRISIL Liquid Fund Index

NAV

Equity Saver Funds

SCHEME NAME

12.836.414.2

-

6.0 4.4 5.2

-

1 Year

- 9.8 - -

10 Years

8.3 10.9 8.3

-

- 8.6 - -

5 Years

- 9.2 - -

7 Years

75757582193

-

AUM (Cr)3 Years

Historic Return (%)

Axis Equity Saver Fund - Reg - Growth

HDFC Equity Savings Fund - Growth

Kotak Equity Savings Fund - Reg - Growth

CRISIL Hybrid 50+50 - Moderate Index*

NAV

Arbitrage Funds

SCHEME NAME

23.526.719.1

9.19.2

10.3

1 Month

6.2 6.3 6.4

3 Years

7.4 7.3 7.3

6.4 6.3 6.3

6 months

6.7 6.6 6.8

1 Year

3626125748276

AUM (Cr)3 months

Historic Return (%)

IDFC Arbitrage Fund - Reg - Growth

Kotak Equity Arbitrage Fund - Reg - Growth

Reliance Arbitrage Fund - Growth

NAV


3 YearsNAV

37.833.458.2140.9

64.4

276.313871.9

0.5 0.1 10.2 1.7

7.9

3.6 1.5

14.9 16.5 12.0 1.8

21.7

18.5 13.5

15.8 15.7 14.3 10.4

18.2

14.8 11.8

17.5 17.5 18.3 14.0

22.3

18.3 14.7

- -

22.4 20.8

21.1

19.0 12.2

3277424762711

3068

2991--

Canara Robeco Consumer Trends Fund - Reg - Growth

Mirae Asset Great Consumer Fund - Growth

ICICI Prudential Technology Fund - Growth

Reliance Pharma Fund - Growth

ICICI Prudential Banking and Financial

Services Fund - Retail - Growth

Reliance Banking Fund - Growth

Nifty 500 TRI

Sector/Thematic FundsHistoric Return (%)


SCHEME NAME

4001.720.838.335.0

2.75.86.25.1

1 month

8.9 7.5 7.1 7.1

3 Years

6.2 8.5 8.9 8.3

9.9 8.9 9.8 9.3

6 months

9.3 8.4 8.8 8.2

1 Year

13260768169858703

AUM (Cr)3 months

Historic Return (%)

Franklin India STIP - Growth

HDFC Short Term Debt Fund - Growth

IDFC Bond Fund - Short Term Plan - Reg - Growth

Kotak Bond Short Term Plan - Reg - Growth

NAV

Short Term Funds

SCHEME NAME

13.621.926.7

2587.4

1.35.07.10.9

1 month

7.3 8.8 7.6 7.4

3 Years

6.1 7.5 8.3 6.2

7.7 9.3 8.5 7.3

6 months

7.9 9.0 8.3 7.6

1 Year

2886710733865220

AUM (Cr)3 months

Historic Return (%)

DSP Low Duration Fund - Reg - Growth

Franklin India Low Duration Fund - Growth

IDFC Low Duration Fund - Reg - Growth

UTI Treasury Advantage Fund - Reg - Growth

NAV

Low Duration Funds

SCHEME NAME

15.142.514.1

6.58.0

-71.6

1 month

7.5 7.7 4.8

3 Years

9.2 9.1

-18.7

10.1 9.8 -8.7

6 months

8.9 9.1 -0.8

1 Year

30011432200

AUM (Cr)3 months

Historic Return (%)

HDFC Banking and PSU Debt Fund - Reg - Growth

Kotak Banking and PSU Debt Fund - Reg - Growth

UTI Banking & PSU Debt Fund - Reg - Growth

NAV

Banking & PSU Bond Funds

SCHEME NAME

372.710.610.730.2

4182.73819.6

7.76.97.66.96.97.1

1 month

7.9 - -

7.4 7.4 7.6

3 Years

8.5 8.3 8.3 8.0 7.9 7.7

9.0 8.5 8.6 8.4 8.4 8.4

6 months

8.6 - -

8.1 8.4 8.4

1 Year

1538758121986

126898143

-

AUM (Cr)3 months

Historic Return (%)

Aditya Birla Sun Life Savings Fund - Reg - Growth

HDFC Ultra Short Term Fund - Reg - Growth

IDFC Ultra Short Term Fund - Reg - Growth

Kotak Savings Fund - Reg - Growth

SBI Magnum Ultra Short Duration Fund - Growth

NIFTY Ultra Short Duration Debt Index

NAV

Ultra Short Term Funds

SCHEME NAME

252.7261.22850.02119.1

-

7.57.37.47.47.2

1 month

7.5 7.3 7.4 7.4 -

3 Years

8.2 8.0 8.2 8.3

-

8.5 8.2 8.6 8.4

-

6 months

8.4 8.1 8.5 8.3 -

1 Year

11363927139524932

--

AUM (Cr)3 months

Historic Return (%)

Aditya Birla Sun Life Money Manager Fund - Reg - Growth

ICICI Prudential Money Market Fund - Reg - Growth

Reliance Money Market Fund - Growth

UTI Money Market Fund - Reg - Growth

CRISIL Liquid Fund Index

NAV

Money Market Funds


Disclaimer : Mutual Fund Investments are subject to market risks. Please read the offer document carefully before investing. Past performance is no guarantee of future performance. Returns are of Growth option of Regular plans.

Returns which are below 1 year period are Annualized Returns. Source: - ICRA MFI, NAV as on 17th May ’19

SCHEME NAME

66.220.9

2492.2

2.86.97.4

1 month

8.4 7.8 8.0

3 Years

7.5 10.2 9.1

10.2 10.4 9.6

6 months

8.6 9.1 8.6

1 Year

909126841637

AUM (Cr)3 months

Historic Return (%)

Franklin India Corporate Debt Fund - Growth

HDFC Corporate Bond Fund - Growth

Kotak Corporate Bond Fund - Std - Growth

NAV

Corporate Bond Funds

SCHEME NAME

22.425.041.2

14.614.310.2

1 month

8.1 8.8 8.8

3 Years

14.1 11.7 12.1

13.2 12.6 10.8

6 months

11.4 11.0 8.6

1 Year

422962475

AUM (Cr)3 months

Historic Return (%)

IDFC G Sec Fund - Invt Plan - Reg - Growth (Re-launched)

Reliance Gilt Securities Fund - Growth

UTI Gilt Fund - Growth

NAV

Gilt Funds

SCHEME NAME

25.859.415.3

6.39.44.4

1 month

6.9 6.9 7.3

3 Years

9.5 11.8 7.4

9.8 11.3 8.0

6 months

8.2 9.5 7.1

1 Year

32893254074

AUM (Cr)3 months

Historic Return (%)

ICICI Prudential Bond Fund - Growth

Reliance Income Fund - G P - Growth

Kotak Medium Term Fund - Reg - Growth

NAV

Medium to Long Duration Funds

SCHEME NAME

22.231.315.3

0.96.44.4

1 month

8.5 7.0 7.3

3 Years

4.8 9.1 7.4

7.7 8.9 8.0

6 months

8.0 8.3 7.1

1 Year

378523444074

AUM (Cr)3 months

Historic Return (%)

Franklin India Income Opportunities Fund - Growth

IDFC Bond Fund - Medium Term Plan - Reg - Growth

Kotak Medium Term Fund - Reg - Growth

NAV

Medium Duration Funds

SCHEME NAME

19.515.325.229.6

2.35.1

-26.9-10.0

1 month

8.5 7.3 6.5 7.1

3 Years

4.8 8.2 -4.6 2.6

8.8 8.2 2.4 5.9

6 months

8.6 7.4 4.7 6.6

1 Year

72291596692925407

AUM (Cr)3 months

Historic Return (%)

Franklin India Credit Risk Fund - Growth

HDFC Credit Risk Debt Fund - Reg - Growth

Reliance Credit Risk Fund - Growth

SBI Credit Risk Fund - Growth

NAV

Credit Risk Funds

SCHEME NAME

19.023.222.424.4

-

8.57.89.47.4

-

1 month

7.2 8.5 7.4 8.4 -

3 Years

10.2 10.2 11.5 9.7 -

10.4 9.6 10.0 11.7

-

6 months

8.9 8.0 9.3 10.3

-

1 Year

13526471919597

-

AUM (Cr)3 months

Historic Return (%)

Axis Dynamic Bond Fund - Growth

ICICI Prudential All Seasons Bond Fund - Growth

IDFC D B F - Reg - Growth (Re-Launched)

Kotak Dynamic Bond Fund - Reg - Growth

CRISIL Corporate Bond Composite Index*

NAV

Dynamic Bond Funds


CLEVERDECEPTION

No-cost EMIs are a great way to entice people to make big-ticket purchases, aimed at benefitting

sellers and financiers

BEYOND LEARNING

An advertisement during the IPL cricket match break showed a well-known personality promoting a bottle of mineral water that has the same name as a liquor brand -

51


of this facility and only select banks that provide this facility. If you do not have a credit card, there is an option to get an EMI card, which can be used on select products from a non-banking finance company.

A fee is charged for the EMI card i.e. joining fee and annual fee which can be used across several outlets/ franchises. It comes with a pre-approved loan limit based on financial assessment, which means submission of documents are required. Bajaj Finserv is a player that offers the EMI card.

There are a few things that you must be aware of. These include:

No-cost EMI is offered on select products: It is important to note that this facility is offered only on select products online and also offline by retailers. The strategy is to push sales of select brands or products to sell stocks faster. More often than not, this facility is available on more expensive products.

Card limit blocked to the extent of the purchase: It is important to note that whichever card you use for the purchase, that is a credit card or an EMI card, the credit limit will be blocked to the extent of the total purchase amount and not for the EMI amount.

Repayment tenure: The repayment schedule for most of these loans are as little as three months extending to a year at the most. Thus, before making that purchase you should be aware of how much time you have to repay and more importantly how much has to be paid so that it’s not a stretch as most of us likely have existing obligations/routine expenditures.

Is “no cost EMI” real or is there more to it than what meets the eye?

now have “no-cost EMIs”, which are being offered by many online portals and even retailers of white goods. What is a ‘no-cost EMI’? It means borrowing without having to pay any interest. It is short term in nature with most of them being between 3 months and 6 months. It is the seller and not the financier that calls it a no-cost EMI. The financier can either be a bank or a financial institution.

Picture this. A new television has been recently launched. This one is a bigger television with far better features than the one you currently have. Hence, you are keen on buying it as it feels aspirational. However, you know that you don’t have the money in the account for an outright purchase.

What if somebody came up to you and said, buy it right now, don’t worry about the payment, you can pay it gradually over the next 3 months through EMIs with no interest charged. Therefore, if the television costs `60,000 and the tenure of the loan is 3 months, then your EMI will be exactly `20,000.

Given the fact that this proposition is so enticing, you will definitely buy the television right now instead of postponing the decision to buy it because the borrowing costs you nothing, and hence you have nothing to lose. That is exactly what the objective of a no-cost EMI is – to entice customers into buying now rather than allowing them to postpone their decisions.

What is the modus operandi? There are essentially three parties involved here - the seller from whom you buy the product, a financier (who provides the loan) and the buyer. For the borrowing, the buyer will have a direct relationship with the financier. You need to possess the credit card of the financier if it is a bank to avail

surrogate advertising at its best! We all know what the intention of the advertisement is. One product is being promoted under the guise of the other. It is an advertising gimmick to bypass law, which does not permit advertisements on liquor.

The seller goes to great lengths to find ways and means to get the consumer to first know about the product and then buy the product. That is what happened with zero percent interest loans that were being promoted - they were not really zero percent interest; the customer was being fooled by the way it was being promoted.

Sellers and financial institutions were happy as they both benefited from it, the former because their product was being sold and the latter because they were growing their loan books. Consumers believed that it was interest-free, while under the guise of transaction fee, administration fee, etc, interest was being recovered, keeping the customer in the dark. The RBI thus came out with a policy notification dated 17th Sept ’13, which stated that the concept of zero percent interest is non-existent.

This stance was taken by the banking regulator to educate the investor on the basic principle on which financial institutions function, that is, there are no free lunches.

Just like you expect interest to be paid on the deposits you make in the bank account, financial intuitions too expect returns on the funds that they lend to consumers. Otherwise, they would not be able to survive. So, if they do not directly state what the interest portion is, they camouflage it through other costs such as transaction fees, processing fees, etc.

As the RBI has given a thumbs down to “zero percent” interest loans, we


Is this a free lunch on offer or another way to lure a consumer into buying something because this time the offer seems more genuine - no transactions/administrative fees are charged by the financier and no upfront payment is needed.

As per the RBI, there is no concept of zero percent interest. In other words, no financial institutional will lend money to you for free, then how can a no-cost EMIs be a reality? There is definitely something more than what meets the eye.

If the regulator is so sure of it, then the customer is definitely paying the financier in another way, which is not termed as interest. How is that possible?

There are two ways in which the “no cost EMI” option is available. No Discount: The seller sells the product to you at the MRP and does not give you any discount, which he perhaps would have given for an outright purchase because he gets the product from the manufacturer at a much lower cost. So, the discount portion goes to the financier, which is nothing but the interest on the amount he has lent to you.

So, if the phone, for example, costs `15,000, and the normal upfront discount is say `2,250, this amount

goes to the financier, which, in turn, amounts to an interest rate of 15%. So, ultimately you have paid interest on the loan you have taken by not getting the discount.

However, since you have been told that it is a no-cost EMI, you are enticed into buying the product immediately. You did not get an opportunity to assess if you want to pay that kind of interest or wait for a few months to make an outright purchase because you have no idea about the behind-the-scenes arrangement between the seller and financier.

Reimbursement Of The Interest Portion To The Buyer: Under this arrangement, it is very clear that the interest waiver is not coming from the financial institution. The way this works is that whatever the interest cost on the loan is, it is reimbursed to the customer as a discount/cash back and then netted off in the invoice, effectively making it a no-interest loan.

However, the customer will be paying the financial institution the EMI along with the interest portion. It is also important here to note that GST will be charged on the interest portion, which should be considered at the time of the purchase.

This proposition seems interesting as

the buyer has a very clear idea that there is an interest cost associated with the borrowing, which is being refunded by the seller in effect making it interest-free.

How does the seller manage to do this? He already has an in-built buffer in the price, which enables him to provide this offering. Otherwise, it does not make any economic sense.

To sell a product, you need to make it attractive for the customer to buy it, especially if it’s a big-ticket item. So, sellers have worked around a way to get the customer thinking hard by offering ‘no-cost EMIs’ and also by retaining the attractiveness/ newness of the product by not offering discounts. What happens with this marketing gimmick is that people end up buying things that they don’t necessarily need just because they don’t have to pay any additional cost.

So long as the customer understands that it is not a free lunch and that although the borrowing is portrayed as ‘no-cost’, it is not, he can opt for a ‘no-cost EMI’. After all it gives him the flexibility to make a purchase if it is so needed and he doesn’t have the funds to purchase it. Make the buying decision because you need the product and not because the no-cost EMI option is available on the producT.

BEYOND WORDSPigovian Tax

A Pigovian tax is a tax on any market activity that generates negative externalities. The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the social cost of the negative externalities. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of such externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drink consumption. Pigovian taxes are named after English Economist Arthur Pigou (1877–1959) who also developed the concept of economic externalities.

Recently, the Reserve Bank of India (RBI) appointed an additional director on the board of YES Bank. The RBI here invoked its special powers given by the law as a precautionary measure.

What Has The RBI Done?

As per a stock exchange filing by YES Bank, the RBI has appointed former Deputy Governor R Gandhi as Additional Director on the board of YES Bank till 13th May ’21 or till further orders. The appointment has been made under Section 36 AB of the Banking Regulation Act, 1949. However, the RBI’s additional director can exit from the board even before the term ends.

When Can The RBI Trigger Such Special Powers?

As per the Banking Regulation Act, 1949, the RBI can appoint additional directors in the interest of the bank, to safeguard public policy or in the interest of depositors.

But Why YES Bank?

YES Bank has been in the news of late. One, it had to appoint Ravneet Gill as the Chief Executive after RBI denied a fresh term to founder Rana Kapoor over some corporate governance issues. Two, there was worry about YES Bank’s large exposure to ADAG and Essel Group. Three, the RBI had undertaken asset quality review in the past, which led to a jump in bad debts for the banks.

How Will The Additional Director Appointee Help?

RBI’s Additional Director is likely to ensure smooth transition to new management. RBI’s oversight is also likely to improve credit approval standards, reduce

IMPORTANT JARGON

portfolio concentration and improve risk management for the bank, besides helping resolve bad debts.

What Are The Immediate Concerns For The Bank?

One, YES Bank has announced an asset watch list worth `10,000 crore for early signals of bad debt. Recognizing and resolving bad debt is an immediate concern for the bank. Two, as more write-offs loom, the bank desperately needs capital, else problems could compound further.

How Does The Balance Sheet Look Like?

The bank is not in good health. It has reported a loss of `1,506.64 crore for the quarter ended 31st March. The bank had recognized non-performing assets (NPA) of `3,480 crore. More worrying is the capital position. Its core equity capital (most reliable capital to fall back on if the bank fails) stands at 8.4%. Top-rated banks have core equity capital upwards of 11%. Can The Bank To Raise Money Immediately?

The issue of capital-raising is a challenge for the bank as ratings agencies have recently cut the bank’s ratings. The bank has received approval from the board for raising equity capital of `7,000 crore. But investors’ appetite may not be strong enough. The bank will also need capital if it wants to grow its loan book. The bank is aiming for a 15% to 20% growth in the coming quarters. Should Investors Worry?

The Additional Director’s oversight may help correct some issue faced by the bank. But many investors fear that there could be more skeletons in the closet for the bank as far as its corporate portfolio is concerned. Yes Bank is a much larger bank and any failure here could have serious systemic implicationS.

APPOINTMENT OF RBI DIRECTOR FOR YES BANK

BEYOND BUZZ


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Financial Advice That Suits Your Investment Needs. Simply

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