Beyond Market - Issue 62 - 2

For Pr i vate Ci rcul at i on Vol ume 1 I ssue 62 10t h Feb 12
A good fund manager is one

who has both balance
and conviction.
GAME
FOR
ANYTHING
Its simplified... Beyond Market 10th Feb 12 3
DB Corner Page 5
Marriages Gone Wrong
The recent end of joint ventures has brought to the fore issues that cause rifts
between two companies - Page 6
Setting Wrong Right
The government is taking the right steps to get the beleaguered power sector
out of the blues - Page 10
Easy Money
Several companies are taking the captive finance route to ensure steady funding
- Page 13
A Bone Of Contention
Both land owners and industry-men are at loggerheads over the new Land
Acquisition, Rehabilitation and Resettlement Bill, and an early resolution seems
unlikely - Page 16
Paths Of Glory
The recent issuance of contracts to construct roads is a sign that this sector
looks promising in the long run - Page 20
The Long And Short Of Private Equity
The problems notwithstanding, experts feel the outlook for private equity funds
looks promising from a long-term perspective - Page 23
Flying On Hope
The introduction of 49% FDI in the aviation sector is being looked at positively
as it could bail out troubled domestic airline companies - Page 26
Indian Pharmas Foreign Connection
Owing to easy availability of capital and increased global interest in the pharma-
ceutical and biotech industry, the sector has become a favourite for mergers and
acquisitions - Page 30
Savouring Sweet Success
Due to its low leveraging and well-diversified business, Balrampuri Chini Mills
Ltd is better placed than its peers - Page 34
Unshackle The Bonds Of Taxation
With equity investments not yielding good returns in the current times of
volatility, tax-free bonds appear to be the best bet for investors - Page 38
The Fantastic Four
PPF, NSC, FDs and ELSS are four tools that investors can use to save taxes
- Page 40
A good fund manager is one who has both balance and conviction
Mr N Sethuram Iyer, Chief Investment Officer (CIO) at Daiwa Asset Management
spoke to Beyond Market about his journey from being a banker to a behemoth in
the mutual fund industry and the factors that motivate him to give his best
Page 44
Important Statistics For The Fortnight Gone By Page 48
Speaking Figuratively Through Metaphors
Understanding metaphors is important for investors as they occur frequently in
financial reports and analysis Page 50
First Things First
While planning your finances for the year ahead, do focus on debt, insurance,
taxes and investments Page 52
Volume 1 Issue: 62, 10th Feb 12
Editor-in-Chief & Publisher: Rakesh Bhandari
Editor: Tushita Nigam
Senior Sub-Editor: Kiran V Uchil
Art Director: Sachin Kamble
Junior Designer: Sagar Padwal
Marketing & Operations:
Savio Pashana, Afsana Tamboli
We, at Beyond Market welcome your views,
comments and feedback. Do help us to grow
better as per your liking. This is our attempt to
reach you better while crossing horizons...
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Research Team:
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Dipesh Mehta, Runjhun Jain,
Manav Chopra, Vikas Salunkhe
Tushita Nigam
Editor
hile some people choose to follow the well-trodden path, there are others like N
Sethuram Iyer, Chief Investment Officer at Daiwa Asset Management (erstwhile
Shinsei Mutual Fund), who take the road less travelled and leave a mark with their
remarkable amount of work.
Despite a degree in BSc (Chemistry), Mr Iyer firstly went on to be a banker. In fact,
he served as a banker with the State Bank of India for more than 30 years. And while
many in his position would have continued working in the banking sector, he chose
otherwise and landed in the mutual fund industry for good.
The Beyond Work section in the current issue features N Sethuram Iyer and reveals
how he turned into a biggie in the MF industry, his life and values that propel him to
give his best shot at everything he does. Mr Iyer believes that being a team player and
his ability to manage people have brought him this far.
Apart from this informational piece, we have articles on the surging number of
captive financiers that ease funding processes for companies and subsequently for
customers, the reasons for the cessation of successful joint ventures and the expected
outlook of the private equity market in India. There is also an article on the power
sector and the reforms being undertaken by the government to help the industry to
beat the blues. Another article on the new Land Acquisition Act, which aims to ease
the process of acquiring land, rehabilitation and resettling the displaced people, too
finds a mention in this issue.
Sectorally too, there are articles on the aviation and the road sector. While in the
former, we detail how the government is planning to allow foreign direct investment
to help the beleaguered sector, the latter seems to be doing really well thanks to the
issuance of contracts to construct roads across the country.
In the Beyond Analysis section, we have covered Balrampur Chini Mills Ltd, one of
the largest sugar manufacturing companies in the country. The company finds a
mention because low leveraging and diversification have given it a competitive edge
in the sugar industry.
And with the financial year coming to an end, most late bloomers we believe must be
seeking tax-saving avenues to park their money in. The articles in the Beyond Basics
section list out products like bonds, public provident funds and equity-linked saving
schemes, among others, which will help such investors to save taxes.
Finally, the Beyond Learning section carries an interesting piece on metaphors that
occur frequently in the world of finance. This article will enable you to demystify the
actual meaning of metaphors without feeling lost when you come across theM.
N Sethuram Iyer believes that
being a team player
and his ability to manage people
have brought him this far.
The
Big
Switch
In the coming fortnight,
markets look good on declines.
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 advertise-
ment 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.
Sensex 17,707.31
Nifty 5,361.65
(As on 6th Feb)
number of undervalued
stocks corrected
substantially on the
bourses in the fortnight
gone by.
The Indian rupee too appreciated on
the back of a depreciating dollar and
huge foreign inflows into the Indian
markets during this period.
Further, the previous fortnight also
saw several corporates releasing their
quarterly earnings results.
Although the results were in line with
expectations, industry experts are
hoping that the next quarter results
will be better than the current one, for
certain sectors.
Globally, the US economy has been
showing consistent improvement.
The deal with private lenders to clear
off Greeces debt is likely to be
finalized soon.
Chinese PM Wen Jiabao recently said
that China is considering deeper
involvement in the Euro zones
bailout funds. Further, the new treaty
between 27 nations from the Euro
A
zone is under negotiation.
In the coming fortnight, markets look
good on declines around the 5,100 -
5,200 levels. If the Nifty goes above
the 5,450 level, it may go up to the
5,700 level, thereafter.
Market participants can look at
investing in the sugar sector,
especially Balrampur Chini Mills Ltd
and Shree Renuka Sugars Ltd.
Among other stocks, Hindustan Zinc
Ltd (at current levels), Atlas Cycles
(Haryana) Ltd (around the `320
level), Ajanta Pharma Ltd (around the
`280 level), Bajaj Finance Ltd
(around the `750 level) and Sterlite
Industries (India) Ltd (around the
`110 `115 levels), can be
considered from an investment
perspective by them.
In the next fortnight, traders and
investors can expect lower inflation
numbers for the month of January,
which could result in the RBI opting
for rate cuts in the coming monetary
policy review.
However, IIP numbers are likely to be
lower than the previous figure due to
the previous years base effecT.
s a proposition to further
business interests, joint
ventures turn out to be
short-lived affairs. With
too many aspirations involved and
many perceived directions of growth,
the cheerful congeniality of the
A
The recent end of joint ventures has brought to the
fore issues that cause rifts between two companies
Marriages Gone Wrong
relationship gets disturbed and the
affair ceases to exist.
In India, with its growing importance
as a large reservoir of untapped
consumers, joint ventures are losing
their immediate relevance. Joint
ventures, in particular with foreign
entities, are hardly looked upon as an
important event.
Over striking a deal for a company, a
seasoned investment banker at a
recent meeting said, What value
to the surface the limitations of Indian
companies, constraints of Indian
business environment, the pace of
growth anticipated by foreign entities
and overall the mismatch of
expectations that forms the pivotal
reason for break-ups.

DIFFERENCES

Many a time joint ventures with
foreign entities turn bitter due to the
natural faith of Indian companies in
understanding Indian markets better
than foreign entities and the almost
meticulous approach of foreign
entities to see through a project.
The Mahindra-Renault joint venture
is one such case. When Renault
launched Logan, it met with positive
reviews from experts in the sector for
being one of the fuel-efficient and
spacious cars in the sedan category.
The only problem with the car was its
length, which is just over four meters.
Due to this, the car attracted a duty of
22%, while cars of length less than
four meters attracted 10% duty.

Mahindra wanted the length of the car
to be less than four meters, while
Renault believed that Logan is a
global product and they wanted it that
way. This created differences.
Sector experts believe that there was
no strong strategy about marketing of
the car, which brought down its sales.
Sensing a slim possibility of reaching
a common meeting ground, Mahindra
bought out the 49% stake of the
French carmaker.

In joint ventures, foreign entities
sometimes miss out on the crucial
point that the Indian partner serves as
his face. An Indian consumer would
be more familiar with the Indian
partners brand image than the brand
image of the foreign partner. There
might be cases where an Indian
consumer might not be aware of the
foreign brand. Renault may have
realized this. It also sensed the
viability of the compact car story in
India. Hence, there have been reports
that the company in collaboration
with Japanese car major Nissan is
exploring the possibility of a joint
venture with an Indian partner to
produce compact cars.

PLATEAU OF EXPERIENCE

Even after a long association of over
26 years, last year, the joint venture
between Hero Motor Company and
Honda Motor Company came to an
end. Industry experts believe that the
joint venture had reached a stage
where they had to separate.
After a long period of time no two
strong companies can co-exist, says
an expert. He says that in case of Hero
Honda, it was a marriage of
convenience. There are certain factors
that have contributed to the faction. It
is perceived that Honda did not want
to share its technology with Hero,
while Hero found the royalty payment
quite high. It is also believed that
Hero had hinted at the possibility of
exploring opportunities in the
overseas markets, which Honda
found fiercely competitive to its
corporate strategy.

Indias two-wheeler industry is quite
concentrated. Of the total market
share, 75% to 85% market share rests
with the top three players. Hence,
there is a huge opportunity. In this
situation, continuing with a joint
venture does not make sense. Honda
Motorcycle and Scooter India
(HMSI) would not eat into the market
share of any of the top two players -
Hero Moto Corp and Bajaj Auto.
The two-wheeler industry is growing
at a fast pace and most two-wheeler
companies have identified new vistas
of opportunities in tier-II and tier-III
cities. Hence, the pie of the industry
addition does a foreign partner do to a
joint venture in a growing economy
like India? His opinion is not far
from the truth one is witnessing in
Indias corporate world of late.
The end of JVs of Hero Honda,
Godrej-Hershey, Mahindra-Renault
and Lakshmi Machine Works-Rieter
are examples to this effect. What is
interesting is the fact that few of these
break-ups have transpired after a long
period of association.
These break-ups, when read in the
light of the fact that the government
has removed the clause of securing
permission for starting parallel
businesses in the same industry from
allied Indian partner for the foreign
entity, sheds some light on the future
course of JVs of Indian companies
with foreign entities.

To borrow a new age terminology,
joint ventures of Indian companies
with foreign companies have acquired
a new meaning, that of live-in
relationships. This is a step before the
final ceremony: marriage. It is a
temporary affair in which both
partners engage in the process of
evaluating, assessing and ascertaining
the possibility of an enduring relation.
Even as one ponders over this
classification, one important question
that merits exploration is the reason
behind the break-ups of joint
ventures, which goes beyond the
obvious liberalized norm of not
securing Indian partners permission
to start a parallel business in the same
industry. These reasons are also
lessons which the Indian corporate
world has learnt over the course of
their association with foreign entities.
This article attempts to find reasons
for break-ups of certain joint ventures
between Indian and foreign entities in
the last 20 years. As we explore
certain joint ventures, it would bring
would increase in the coming years.
HMSI would target on the
incremental buyers in the industry.
For instance, if the present industrys
size amounts to 10 million buyers, the
incremental customers to this 10
million buyers base would be the
target of HMSI.
ON THE WRONG FOOT

Most joint ventures when observed on
a structural level could be
sub-optimal relationships. One of the
famous phrases often used in the
investment banking fraternity is the
marriage of chalk and cheese.
Companies which diversify into
sectors ill-prepared and form a joint
venture, fall in this category.
An Indian partner could not be an
ideal one and may not necessarily
have the potential for business. A
difference in perception of the
business is one of the fundamental
reasons for the breaking up of the
joint venture.

One such prominent reason for falling
apart of a joint venture is due to
diversification in sectors unrelated to
the core business of either of the
partners in the joint venture. Take for
instance, the JV between Bharti and
French insurance company AXA.
Besides its core business of
telecommunication, Bharti
diversified into the retail sector. The
company, however, found the
capital-intensive nature of the
insurance business quite tedious to
generate handsome returns. It
struggled to scale up the business.
After four years, it sold its majority
stake of 74% to Reliance Industries.
It is perceived that Bharti exited the
business at a very cheap valuation.
The decision to exit from the financial
services was a sensible one on part of
Bharti. The business demanded a
huge investment and would have
taken a long time to breakeven.

WHERE IS YOUR BIT?

One of the chief reasons for the
falling apart of a joint venture is the
faltering of one partner in delivering
his/her core competency. Take for
instance, the Godrej-Hershey joint
venture, which broke few months
back. The Godrej-Hershey joint
venture was formed in the year 2007.
In the last four years, Godrej had
bought in several brands in the joint
venture. This included the acquisition
of Nutrine. In segments such as hard
candy, toffee, lollipop and roll,
Nutrine had brands such as Maha
Lacto, Maha Choco, Nutrine Eclairs
and Honeyfab. It also contributed
several beverage brands to the joint
venture. This included fruit drinks,
juices, and soya milk.
Analysts point out that Godrejs
contribution to the topline of the joint
venture would be at least 85%. On the
other hand, the US-based chocolate
and confectionary manufacturer
Hershey failed to bring in a single
brand to the joint venture.
The chocolate category of FMCG
business in India has been growing at
a compounded annual growth rate
(CAGR) of 18% to 20% per annum.
Such a wait-and-watch game on the
part of Hershey cost the joint venture
a great deal.

Apart from these, there are other
reasons for the failure of JVs of
Indian companies with foreign
entities. Reasons such as having a
larger say in the business, inability to
match the zeal for growth (this may
include failing to contribute in terms
of capital) of the foreign partner and
unwilling to part with equity stake,
high-handedness and more on most
occasions expectation-mismatch hurt
the joint venture.
While we consider these possibilities,
today, joint ventures have lost their
sheen. There are two principal factors
that have strengthened this perception
-availability, education and awareness
of technology and various avenues of
raising funds. In the early 1990s,
when the Indian economy was on the
threshold of opening up to FDI, these
two factors played a crucial role in a
joint venture.
Today, many Indian companies are
adopting new technologies. Many
foreign-returned Indian entrepreneurs
stay abreast of new technologies and
forms of education. This section of
foreign-returned Indians is
contributing to Indian companies
ability to keep pace with new
technologies. Also, most of these
companies are shaping up as global
entities by acquiring other companies
and raising funds overseas.
Hence, there is no binding need for an
Indian company to form a joint
venture with a foreign player. A
crucial example of how joint ventures
are losing relevance is the emergence
of Korean companies as brands in
India. Koreans are highly successful
in India and they are not into any joint
venture. Brands such as Samsung, LG
and Hyundai have made a strong
impact on Indian consumers.

Some sectors where there is no
automatic route available for foreign
direct investment, the concept of
having a JV would be prevalent.
Insurance, mining, steel, education,
tourism, entertainment and
government- controlled sectors would
continue to see joint ventures. So, the
concept of a joint venture would not
be completely irrelevant. The rate of
divorces has gone up. But that doesnt
stop people from marrying, says a
veteran investment bankeR.
QUAL

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The government
is taking the
right steps to get
the beleaguered
power sector out
of the blues
SETTI NG
WRONG
RI GHT
Committee was appointed by the
Planning Commission in the year
2010 to address issues pertaining to
the financial health of state electricity
boards (SEBs) and state-run
distribution companies.
Of the many recommendations made
by the Shunglu Committee, the
suggestion for SEBs to devise a
mechanism of regular tariff increases
and measures to curb the transmission
and distribution (T&D) losses are
quite noteworthy.
As a matter of fact, a large number of
state-run power utilities are
undergoing financial stress due to a
huge pile up of T&D losses, which
has forced power companies to opt
for load-shedding instead of incurring
additional cash losses.
This decision of power companies to
resort to load shedding hit power
generation companies as they
suffered losses due to the fall in
demand as well as electricity prices in
the spot market. Also, lower PLF led
to the erosion of profits and the
ability of companies to service
interest costs.
To address this problem, the Shunglu
Committee has recommended the
creation of a separate special purpose
vehicle (SPV), a majority of which
will be owned by the Reserve Bank of
India (RBI).
The RBI will provide credit to the
SPV to purchase such loans in a
scenario where the SEBs are not able
to meet their payment schedules.
However, the onus will rest on the
respective state governments.
This will be a big positive for power
generation companies as most of
them sell their power to SEBs that are
facing cash flow problems. It is a fact
that power companies require huge
working capital as a result of
significant increase in receivables.
Also, companies are facing delays
relating to dues from SEBs, which in
turn has led to a drop in returns and
increased stress on the balance sheets
of some of these power companies.

GOVERNMENT SUPPORT
Apart from the recommendations
made by the Shunglu Committee
report, the government also tried to
resolve the crisis.
At a recent meeting with key persons
from power sector companies,
including Ratan Tata and Anil
Ambani, Prime Minister Manmohan
Singh assured them of support by
chalking out a time-bound road map
to resolve the problems faced by the
power sector.
At the broader level, it was decided
that a committee of secretaries headed
by Principal Secretary to the Prime
Minister, Pulok Chatterji would be set
up immediately, which will look into
the issues or concerns faced by the
power companies.
It was also decided that the committee
will chalk out 30-day, 60-day and
90-day plans to tackle the issues.
After 90 days since its formation, the
leaders of power companies will
again meet the PM to review the
progress of the initiatives.
SUSTAINABLE SOLUTIONS
The key issues that will be addressed
include initiatives to increase coal
production from Coal India and also
increase the supply of linkage-based
coal from the current 50% to about
65% to 70% of the coal requirements.
The government is expected to start
bidding for new coal blocks in
mid-2012 apart from other measures
to improve coal supply in the short- to
medium-term.
essimism is at its peak in
the power sector at the
moment. Not only
investors but also
promoters want to go slow due to a
host of problems plaguing the power
sector at present.
First, companies that have capacities
are suffering for want of fuel. Second,
those companies that have capacities
as well as fuel are facing problems of
off-take due to the absence of buyers.
And finally, companies with
capacities in the development stage
and have committed huge sums of
money are facing hurdles owing to
significant delays in getting
environment and forest clearances.
Recently a lot of companies suffered
major setbacks due to the fall in plant
load factors (PLF), hitting their
profits adversely.
Moreover, due to the lack of internal
cash generation, companies are
finding it increasingly difficult to
meet their fixed costs like interest and
repay their debts. In fact, certain
companies are on the verge of default
owing to these problems.
Experts are concerned that banks with
exposure to the power sector could
see a rise in the number of NPAs
(non-performing assets). And if these
problems intensify, then they could
take a heavy toll on the economy,
financial institutions and also the
consumers in the coming years.
But there appears to be a ray of hope
for power companies as well as
investors, despite the gloom looming
over the sector. The government has
taken note of the problems that have
besieged the sector.
The first step is working towards
implementing the Shunglu
Committee report. The Shunglu
P
6th
7th
8th
9th
10th
11th
19666
22245
30538
40245
41110
78000*
14226
21401
16423
19119
21180
53000**
Capacity addition (MW)
Five
Year
Plan
Tar get Achieved
Besides, most of the gas-based power
plants have suffered a significant
setback on the PLF front and even the
upcoming gas-based power plants
have been delayed due to the lack of
availability of gas in the country.
The committee will try to resolve the
issue and provide preference for
long-term PPA-based power projects
for gas allocation.
Also, the gas will be made available
for the core sector or will be diverted
to the core sectors like power sector
from the non-core sector. In fact, the
court too has notified about the
allocation of gas for the core sector in
favour of the government.
The government is also keen on
addressing the issue of revision of
tariffs. A lot of companies have
suffered in the past due to the rise in
the price of imported coal, largely as a
result of the depreciating rupee.
However, their inability to pass on the
higher coal prices, have led to losses
and companies have threatened to
stop power generation. If the
companies are allowed to pass on the
hike in coal prices, it will benefit
them, especially those that rely on
imported coal.
Consensus seems to be building
among political leaders and parties
over tariff hike. Also, the committee
is looking into the area of regulatory
clearances. It is hoped that
environment and forest clearances
would speed up, with better
co-ordination among different
ministries and state governments.
All in all, it seems that the
government is moving in the right
direction to resolve the problems
faced by the power companies now
that politicians and policy makers
have come together to tackle the
menace. Further, the involvement of
the senior leaders speaks a lot about
the seriousness of the government and
its intention to resolve the issues.
While some initiatives might not
show results in the short-term, in the
long-run issues pertaining to fuel
availability, clearances, health of
SEBs and changes in tariff rates are
most critical and if resolved in a
time-bound manner, it will result in
re-rating of the sector in the long run.

Besides, it will also help in attracting
higher investments, which is
important given the supply-side
issues and growing demand for power
in the country.
52,000-55,000 MW of new power
generation capacities as against the
initial target of about 78,000 MW.
There is definitely an improvement
but under-achievement is still very
wide. New estimates predict that the
government is aiming to build about
80,000 MW in the twelfth plan.
Further, a large part of these new
capacities are expected to be
accounted for by the private sector. In
this scenario, it looks like the
government is trying to create a
conducive environment for
investments in the sectoR.
Note: * original target, ** estimated
Source: Industry data
FY10
FY11
FY12E
85000
95000
115000
394
397
387
17
38
80
Coal (In million tonnes)
Coal based
Capacity (MW)
Availability Impor ts
Source: Industry Data
In the eleventh five year plan which
will be ending by March 12, the
country will be adding about
hen Jain Irrigation
Systems evinced its
plan of setting up an
NBFC last year, not
many eyebrows were raised. To a
lesser known person it was an
unnecessary diversification from the
core business. But people acquainted
with business cycles were quick
enough to appreciate the companys
prudent decision.
Setting up a captive NBFC meant an
W
Several companies
are taking the
captive finance
route to ensure
steady funding
improvement in the working capital
cycle for Jain Irrigation, as the brunt
of the not-on-time subsidies from the
government would be borne by the
captive unit.
The captive unit would, in turn, pay
the company upfront, thus taking the
load from the companys balance
sheet. This move from Jain Irrigation
also meant that lesser creditworthy
farmers will have access to funds to
buy into the companys various
of products and services of the parent
company or the group. It functions as
an extension of marketing activities.
It is registered as an NBFC with the
Reserve Bank of India (RBI) and all
the regulations applicable to NBFCs
apply to a captive finance unit, too.
PROS OF A CAPTIVE FINANCE
COMPANY
Being a lending institute, a captive
finance firm competes with banks.
However, being an extension of a
companys marketing initiative, a
captive finance company enjoys the
brand name of the parent company.
It has the advantage of assured
business from the parent company.
The cost of establishment is less and
due to it accessibility, it is more
preferred by a customer. Hence for
the customer, both the product and
finance are available under one roof.
On the regulatory front, a captive
finance firm has an advantage over
banks. The regulatory requirement is
not as stringent as it is for banks.
NBFCs have a more flexible
regulatory frame work.
Hence, while a bank might have
reservations about lending to a person
with a bad credit history, a captive
finance company might go ahead and
take the risk by lending at a high
interest rate.
This is the primary basis on which a
captive finance company or a typical
NBFC functions, which is high risk,
high returns.
Other regulatory obligations like cash
reserve ratio (CRR), statutory
liquidity ratio (SLR), priority sector
lending, non-performing loans
recognition, etc, that are applicable to
a bank are not applicable or are
flexible in the case of a captive
finance company.
CONS OF CAPTIVE FINANCE
COMPANY
While competing with banks, the
source of cheap funds remains the
most difficult aspect for a captive
finance unit. This is where banks have
an edge.
Banks have easy access to funds due
to the low cost of public deposits in
the form of current account and
savings account (CASA).
While not all NBFCs take deposits
from the public, a majority of funds
for NBFCs are borrowed from banks
itself and these are not cheap funds.
The business of a captive finance unit
is inextricably linked to the fortune of
the parent company. Due to high
focus on the parent companys
products, risks get concentrated.
Though some captive units in the
recent past have diversified their
portfolios by financing unrelated
parties, a majority of them stick to
their parent company. All this
depends on the strategic vision of the
parent company, while setting up the
captive NBFC.
Economic cycles, competitive trends
and regulatory changes are likely to
affect both the parent company and
the subsidiary NBFC, in the same
way, is potentially amplifying risk,
products like micro irrigation systems
automation systems and water filters,
to name a few.
This model of setting up a captive
finance firm is a strategy taken by
businesses not only in India but also
globally to ensure that no client walks
back due to the lack of funding. This
also means a steady pool of buyers at
all times for the company.
This practice has become prominent
especially post the financial crisis of
2008 where banks and other lending
institutions became risk averse and
choosy in funding.
This reluctance in lending hurt
volumes of businesses. In addition to
this, companies felt setting up a
captive finance unit was the best
answer to the cyclical nature of some
of the businesses.

Recent years have seen companies
setting up captive financing units in
sectors such as automobile, medical
tourism, construction equipment,
consumer goods, etc.
Internationally, captive financing has
matured over the years and is
prominent in the automotive sector.
On the same lines, this form of
financing is getting bigger and bigger
in India, across sectors.

WHAT IS CAPTIVE
FINANCING?
A captive finance company is
basically an NBFC. But, unlike a
typical NBFC which focuses on a
particular segment for its business, a
captive firm is a wholly owned
subsidiary set in the form of an NBFC
and its primary business is to finance
the sales of the parent companys
products and services.
A major portion of its portfolio in
receivables is generated by the sales
CRR
SLR
Priority
Sector Lending
Capital
Adequacy Ratio
6%
24%
40%
9%
0%
15%
0%
15%
Basic Requirements
Captive
Finance
Fir ms
/NBFC
Banks
Source: Industry
says a working group set up by the
RBI for NBFCs in August last year.
Rating agencies often find it difficult
to assess the credit profiles of captive
NBFCs on a stand-alone basis and
they are reluctant to assign a higher
rating than the parent company.
Going forward, it is felt that the RBI
would tighten the noose on captive
NBFCs. In general, the working
group felt that a higher cushion of
capital than for normal NBFCs may
be warranted for captives, said the
working group of the RBI.
AUTO FINANCING INDUSTRY
Captive finance firms in India can be
best understood by understanding the
auto financing industry. The auto
financing sector was once dominated
by general NBFCs and banks.
However, due to a squeeze in the
overall liquidity in the system and the
increased risk weightage to the
automobile sector, NBFCs tightened
their portfolios.
Also competition from banks led the
NBFCs to skip the automobile sector
altogether. This hurt the volumes of
auto companies.
Steady demand for their products in
the rural areas was an incentive for
auto companies for setting up of
captive NBFCs.
In fact, some of these NBFCs have
penetrated into unbanked areas,
giving stiff competition to banks.
However, while funds remain a
challenge for auto finance companies,
they score better in terms of credit
assessment skills, better operational
efficiency and higher loan yields.
This results in better return on assets
for auto finance companies as
compared to banks.
Established captive finance
companies like Mahindra and
Mahindra Finance, Shriram Transport
Finance Company and Bajaj Auto
Finance have capitalized their
positions over the years.
Others like Hinduja Leyland Finance
(HLF), jointly promoted by Ashok
Leyland and the Hinduja Group and
which received license in 2010, are
banking on huge demand for their
produce in rural and urban areas.
It is also understood that TVS Motors
has plans of setting up its own captive
unit. Of the other sectors, Siemens
received a nod from the RBI to set up
a captive NBFC in May 11 under the
name Siemens Financial Services to
offer products such as loans, leasing
and other finance products to its
customers in India in the industry,
energy and healthcare sectorS.
NIM
NET NPA
CAR
ROA
ROE
3.2
0.51
13.45
1.29
21.35
4.2
0
20
1
9.02
Financials
AS ON
Q3 (%)
Public
Bank
2011
Bank of
Baroda
Standalone
NBFC
Magma
Fincorp
9.6
1.09
17.4
3.6
22
Captive
NBFC
Mahindra
Finance
0.25
17.3
1.2
7.5
Captive
NBFC
Bajaj
Finance
Source: Industry
ROA: Return On Asset, ROE: Return On Equity, CAR: Capital Adequacy Ratio,
NPA: Non Performing Asset, NIM: Net Interest Margin
Crude Oil $98/barrel
Nickel
$28,000/tonne
Pepper
`25,000/quintal
Silver $32/troy ounce
Zinc $2,100/tonne
Aluminium $2,450/tonne
Chana
`2,500/
quintal
Copper $8,500/tonne
Jeera
`14,000/quintal
Cardamom `1,000/kg
Gold $1,500/troy ounce
Guar Seed `3,200/quintal
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`
Both land owners and industry-men are at
loggerheads over the new Land Acquisition,
Rehabilitation and Resettlement Bill, and an early
resolution seems unlikely
A
BONE
OF
CONTENTION
from industry bodies and some
sections of the government. Pronab
Sen, Principal Advisor, Planning
Commission, government of India,
says the Bill would make acquiring
large tracts of land difficult. Citing the
example of West Bengal, Sen points
out that such states should have a land
acquisition policy based on the
number of jobs created per acre of the
industrial project.
Industry lobbying body, Federation of
Indian Chambers of Commerce and
Industry (FICCI), has said that the
Bill, would make the land acquisition
process more difficult as it restricted
opportunities for land owners to sell
their land.
FICCI feels that any act should
recognize the fact that there are a
large number of people who would
like to move out of agriculture and
sell their land. There are enough
statistics to prove this, but the current
bill seems to have overlooked this
fact, a FICCI statement said.
Industry body, the Associated
Chambers of Commerce and Industry
of India (Assocham) wants a review
of the Bill, because it feels the Bill
overly favours land owners and not
the industry. The interests of farmers
are protected but the affordable
housing requirements of middle class
have been completely ignored,
Assocham Secretary General DS
Rawat said in a statement recently,
adding that land costs will go up by
60% to 80% because of higher
compensation for farmers.
The Confederation of Indian Industry
(CII) is the only industry body which
has welcomed the Bill. But, even the
CII feels that the cost of rehabilitation
and resettlement would have to be
borne by the industry.
While CII is absolutely in favour of
appropriate and adequate
compensation for people who are
affected by land acquisition, we
believe that the costs have to be
reasonable for the industry to remain
viable, a statement by CII said.
On 7th Sept 11, Jairam Ramesh,
introduced the Land Acquisition,
Rehabilitation and Resettlement Bill,
in the Lok Sabha. The Bill was not
passed because many felt it would
increase land acquisition costs for the
industry. Stung by criticism towards
the Bill, the government diluted some
provisions of the Bill to make it more
industry-friendly.
Meanwhile, the delay in passing the
Bill has made land acquisition even
more difficult. Land owners, in the
hope that they would get a better
compensation for their land after the
Bill is passed, have put the sale of
their land on hold.
A lot of states have also seen protests
by land owners, who want a higher
compensation for their land. Instances
of projects delayed because of land
acquisition issues are many.
For example, bureaucracy and land
acquisition issues have delayed South
Korean steel maker, Poscos plans for
a $12 billion plant in Orissa. Had the
plant been constructed, this would
have been the highest foreign direct
investment (FDI) in the steel industry
till date.
The other notorious instance of a
project being abandoned because of
protest by land owners is Tata Motors
plan to build a $350 million car plant
in Singur, West Bengal. The
controversy was over the alleged
forcible acquisition of 997 acres of
land by the state government for
setting up a car factory.
The land was acquired under the Land
Acquisition Act of 1894. The law has
provisions for the state taking over
and, which has always
been a controversial
subject in India, is at the
heart of a new controversy
in the form of a new Land
Acquisition, Rehabilitation and
Resettlement Bill, which will
eventually replace the archaic Land
Acquisition Act, 1894.
The Bill, which has been in the works
for quite some time now, seeks to put
in place a central legislation for
acquisition of land and adequate
rehabilitation and resettlement for
affected persons. The draft Bill says
compensation to land owners should
not be less than four times the market
value of land in rural areas and not
less than two times the market value
in urban areas.
Under the Bill, the consent of 80% of
the project affected families is
mandatory, if the government
acquires land for use by private
companies for a public purpose. The
proposed Bill further suggests that the
government will not acquire land that
will be used by private companies for
private purposes.
The Bill has been referred to a
parliamentary committee for further
examination. Rural Development
Minister, Jairam Ramesh, recently
said that the government may pass the
Land Acquisition Bill in the budget
session of the Parliament in March
this year.
Once the report (of the
parliamentary committee) is
submitted, the government will take a
final decision on whether to amend
some provisions of the Land
Acquisition Bill or not. But I hope
that the Bill will become a law in the
next Budget session (of Parliament),
said Ramesh.
While the Bill is yet to be passed, it
has already received a lot of criticism
L
private land for public purposes but
not for use by private companies.
The Kolkata High Court has even
conceded that the acquisition was
illegal. Protests by displaced land
owners, activists and the opposition
party in the state, eventually forced
the car maker, to shift its plant to
Sanand in Gujarat.
A more recent controversy was over
the acquisition of land in Noida
extension and Greater Noida, which
has affected the construction of 1 lakh
apartments. Land owners, who
wanted higher compensation for their
land, moved the high court, which in
October 11, ordered 64% more
compensation for acquired land and
return of 10% of developed land to
the farmers.
It is not just real estate projects. Legal
battles over land have even forced the
Greater Noida Authority to stop the
construction of about 30 roads in
areas around Sector 74 and along the
Noida-Greater Noida Expressway.
A look at all the controversies shows
that the single largest problem is
inadequate compensation for land
owners and the issue of forcible land
acquisition by the government for
private purposes.
The new land acquisition Bill
attempts to address this major issue
by offering higher compensation for
land owners. However, the flip side to
this step is acquiring land under the
new Bill would become costly for
land developers.
Land developers would have to give
each displaced family either a
minimum cash payment or a job and
other grants. The government would
also have to pay land owners an
interest rate of up to 15% annually of
the lands market value, from the date
the purchase is announced until the
land is acquired.
The provisions of the law would
certainly make land acquisition
expensive and a lengthy process.
Industry body FICCI says
rehabilitation and resettlement
entitlements in the bill would increase
costs and administrative burden for
the industry.
Saying that there is no upper limit for
rehabilitation and resettlement
expenditure in the Bill, FICCI has
called for a ceiling on the expenditure
at 30% to 40% of the total land
acquisition cost.
Since rehabilitation and resettlement
obligations are to be fulfilled upfront,
this is likely to result in time and cost
over runs and will make most of the
green field projects unviable. It is
estimated that the new provisions will
increase cost manifold and minimum
by five times from the current levels,
FICCI said in a statement.
The lobbying body has asked the
government to review provisions of
the Land Acquisition Bill, to make it
viable for the industry to acquire land
for projects.
Minister Jairam Ramesh on his part
says that the government will have to
find a middle path to the problem of
land acquisition.
I have received criticism from both
the sides. Many institutions believe
that this Bill is not progressive as it
opens the door for crash
industrialization and urbanization. On
one hand, I have received criticism
from capitalists that it is against
industrialization. So we will have to
find a middle path, said Ramesh.
This budget session, we will know if
the bill finds acceptance. Till then, the
industry can expect land acquisition
problems to continuE.
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The recent
issuance of
contracts to
construct
roads is a
sign that this
sector looks
promising in
the long run
he National Highway
Authority of India
(NHAI) recently awarded
as many as 12 road
projects covering as much as 1,500
km at an investment of `12,000 to
`13,000 crore.
Further, projects of over 1,000 km
-15,000 km are in different stages of
bidding. This development has come
as a breath of fresh air for the road
industry, which was witnessing a host
of problems, including stoppage of
work, till some time back.
AIMING FOR THE TARGET
In the current financial year, the
NHAI has given contracts to
construct 5,100 km of road, costing
about `45,000 crore. NHAIs effort to
speed up the process of bidding has
yielded good results in the past.
Earlier, NHAI had allowed
pre-qualifying bidders on an annual
basis, instead of going ahead on a
project-to-project basis. Also,
initiatives undertaken to expedite the
process of acquiring land is helping
meet road construction targets.
The authority is expected to acquire
about 11,000 hectares of land in the
current financial year, which is far
better than last years land acquisition
of 8,500 hectares.
Positively, it has set a target to acquire
land close to 14,000 hectares in the
next financial year. Next year
onwards it will start acquiring land
for the expressways.
Besides, concerns over funding are
also easing on the back of NHAIs
improving financial performance and
mopping up of funds through tax-free
bonds. NHAI recently raised an
amount of `10,000 crore through
NHAI bonds. The authority further
plans to mop up higher amounts of
T
funds in the coming years with an
increasing appetite for long-term
bonds and attractive interest rates.
However, considering the quickness
in awarding of these projects, many
believe that the target of constructing
7,300 km of road for the current year
will not be achieved.
But if the NHAI manages to build
6,000 km to 6,500 km of road for the
current financial year, it will still be a
big boost for the sector, which is
facing challenges due to the lack of
enough work for companies for the
coming year.
When compared with last years
figure of 5,000 km, the new targeted
figure looks relatively good and will
lead to improvement in the execution
cycle, reflecting in the financials of
infrastructure companies, mainly
from the road sector.
ISSUE OF VIABILITY
High interest rates and deteriorating
economic conditions in the country
are dampeners for companies in this
sector as they are finding borrowing
at 12% to 13% from banks quite high.
Besides, it yields only 14% to 16% of
the internal rate of return. This is still
at the project level.
If we take corporate expenses
(administrative expenses and others)
into account, then the returns would
be much lower. This is also the reason
why there was not much of an
incentive for companies to bid
aggressively for projects.
Not only are high interest rates and
returns posing hurdles, but also lack
of funding by banks is worrying
companies. Banks are turning risk
averse and have become selective
when it comes to funding of these
projects. They look at the companys
financial health, existing leveraging
and management.
A lot of companies from the road
sector are sitting on huge debt and
their interest coverage ratios are also
very low, considering that in the
recent past the revenues and margins
were hit due to the slowdown. This
was especially due to delays in
payments from the government and
private sector clients. Also, execution
delays from clients added to their
woes since working capital
requirements of some companies shot
up, ultimately resulting in pressure on
profitability of these companies.
Besides borrowed funds, the
companies are facing problems in
raising equity funds due to poor
equity market conditions. The
conditions are so severe that some of
them have had to sell stakes in their
existing portfolio of assets.
Importantly that too did not get much
gain as valuations of some of these
deals were quite low owing to
negative sentiments about this sector.
Although the situation is grim, if the
awarding of projects continues, then
the companies with robust
capabilities, enough internal cash
flows and strong balance sheet,
especially those that do not require
much equity, can actually look
forward to turning the situation in
their favour.
EASING COMPETITION
Under these conditions, companies
have started doing a rethink and are
bidding for projects that offer at least
16% to 18% IRR so that companies
can make decent returns. Moreover,
this philosophy to earn decent returns
has led to a decline in the number of
companies bidding for these projects,
thus reducing competition.
Till about last year, with easing
regulation as well as favourable
opportunities in the road sector, a lot
of companies had entered into this
segment. In fact, at one point there
were 20 to 25 bidders for a given
project. However things are
improving. If we look at the last few
bids for projects, we notice that 10 to
15 bids were made for some projects.
Some others had one or two bidders.
SIGNS OF IMPROVEMENT
These are definitely better times.
However, for the things to improve
interest rates need to come down and
the overall economic activity should
improve so that companies can make
decent profits.
For long-term investors, this is a
better time as the road sector is one of
the many promising sectors in the
industry. Also, if we look at share
prices of some companies in this
space, though they are above their
2009 levels, a large part of investor
concerns are near-term in nature.
Investors focusing on companies with
good execution capabilities, efficient
working capital and less leverage in
the books, should do well in the
current environment, which is still not
great as far as investments in the
infrastructure sector are concerned.
Besides, companies with a huge
portfolio of operational assets should
be given more preference over those
that have large development portfolio
of projects. Also, they must look at
the funding needs of the companies
for existing as well as upcoming
projects since most of them are
struggling to generate enough internal
cash and are looking at diluting
stakes, leading to erosion in earnings.
LONG-TERM STORY STILL
INTACT
More importantly, investors should
not lose sight of the long-term
opportunities in the road sector.
According to NHAI data, India
currently has a network of about 33
lakh km of roads. This is the second
largest in the world. But in terms of
density and quality of roads, Indias
roads are still behind some of the
developed and developing countries
in the world.
In relation to our population, our
roads are just about 3 km per 1,000
persons, which is significantly lower
than the world average of about 7 km
per person. In terms of the quality of
roads, industry watchers say that
about 80% of our roads are in a poor
condition, which require huge
investments to repair, renovate and
increase the number of lanes.
Surprisingly, within this vast network
of roads, only about 2% is accounted
for by the national highways and a
very minuscule part of this, by
express highways, which is very
critical considering that about 40% of
the total road traffic is handled by
national highways.
Looking at the present state of roads
and the statistics at hand, there is
immense opportunity in this sector.
Even if we talk about 15 km to 20 km
per day of road construction, the
figure is humungous.
This means that India will have to
build about 6,000 km to 7,000 km of
new roads every year, which is
significant nonetheless.

For the eleventh five year plan ending
March 2012-13, about `3 trillion
were allocated for the road sector as
compared to `1.45 trillion that was
invested in the tenth five year plan.
This is still less compared to the
estimates for the next 7 years to 8
years, which suggest that India might
invest `10 trillion to `11 trillion on
the road sector alonE.
rivate equity is not a new
concept for most investors
in India. Many foreign
private funds have made a
mark in the Indian markets. Although
private equity started making strides
in the Indian markets mainly after
1999, global players made it big after
2003 as capital markets across
geographies started moving up,
attracting the attention of investors.
According to a KPMG estimate,
private equity investments grew from
US $470 million in CY2003 to US
$8,607 million for the nine months of
CY2011, a 38.14% rate of growth.
These investments include 56 deals in
2003 and 322 deals in nine months of
2011, which indicates an average deal
size of US $8.4 million and US
$26.73 million. A point to note is that
the above data does not include real
estate deals. Over a period of time
both the number of deals and deal
sizes have gone up.
So what is it about these judicious and
uncompromising investors who make
hay even before the sun shines? We
give you a low-down on the modus
operandi of private equity investors
and how important these investors
would be in the coming years in the
wake of macroeconomic uncertainty.
THE BASICS
Private equity is a pool of capital
contributed by high networth
individuals and institutions to invest
in business assets both in public and
private markets with a long-term
horizon. A typical private equity fund
has a life of three to ten years, with a
P
median life of five years. The asset
base of a private equity fund ranges
from a few hundred million dollars to
billions of dollars. An investment
made by a private equity fund will
typically ensure at least a seat on
board or some way or the other to
influence the management.
Though private equity deals have
shown healthy growth over a period
of time, at the peak of the bull-run
most private equity funds were
finding it difficult to spot deals at the
right price. Most companies in India
are family-run and promoters are not
keen to share management control.
Private equity funds typically ask for
a say in the operations of the company
in the form of management control. A
seat on the board of a company is a
very common demand from private
equity funds.
In bull phases, promoters have the
option of going public to ensure that
they retain absolute management
control and will not mind sharing
their profits with minority
shareholders, primarily including
small individual investors.
Even if some of the promoters agree
to allow a private equity fund to
invest in their company, they would
demand top notch valuations as they
have the alternative to go public if the
private equity fund does not agree.
These factors have first reduced
possible gains of private equity
investors as it reduces the list of
potential deal candidates and at the
same time the high price paid brings
down the possible Internal Rate of
Return (IRR).
AND SHORT OF PRIVATE EQUITY
LONG
THE
The problems
notwithstanding,
experts feel the
outlook for private
equity funds looks
promising from a
long-term perspective
THE VISION
A typical PE investor stays invested
for more than five years but prefers to
earn high returns over the returns
offered by public markets read stock
markets. In case of realised
investments, between 2004 and 2011,
PE investors enjoyed a weighted IRR
higher than the BSE Sensex IRR. One
must see these returns in the backdrop
of the boom and bust cycles in the
financial markets.
Investee companies too look at
private equity funds for vital inputs
beyond capital. Investee companies
find it easy to attract talent post
private equity funds. Private equity
funds also help companies to develop
new business models, improve
corporate governance and efficiency
as well as infrastructure capacity
development. Investee companies can
further raise funds as investor
perception towards them improves.
In knowledge-driven nascent
businesses, private equity investors
bring modern processes and
operational know-how in the
developed nations to the table.
Investee companies thus find it
value-accretive to have a private
equity investor.
As these relationships blossom and
grow with each entity benefiting
thoroughly, PE players also form an
exit strategy. Exit strategies too have
been important for private equity
investors in India. Most private equity
investments have been in high growth
companies and the valuations that the
investee business gets at the time of
exit decides the rate of return. Many a
time businesses are valued much
higher than what investors in public
markets are willing to pay at the time
of public offers.

Between 2004 and 2011, 38% of exits
by private equity funds took place by
way of open market sale. Strategic
sale accounted for 32% exits.
Contrary to expert expectations, only
8% exits were in the form of initial
public offers (IPO). For the
uninitiated, an exit through IPO
means that PE investors sell their
stakes in the public offer itself. The
company may choose to raise
additional funds as the case may be.
Whereas, an open market sale means
the private equity investor offloads
stake in the secondary market.

But if one looks at the returns
generated on categories of deals done
based on deal exit, secondary sales,
meaning sale of an investment by one
private equity fund to another, it turns
out to be the best, with highest
returns. It has been observed that on
an average 12% of deals private
equity investors have exited using
secondary sale.
This high IRR is followed by exits by
strategic sale. In both these types of
exits, the buyer is generally an
institutional investor (a private equity
fund in case of secondary sale) or
another firm. IPO and open market
sales are dependent on sentiments in
stock markets and, hence, the returns
are accordingly influenced.
The worst form of exit is buyback,
also known as Put Option with a
private equity fund. This is the case
where after the deal the company
cannot progress as expected, and in
many cases, the relationship between
private equity fund and promoters is
on a rough patch. No wonder, IRR
from buybacks is a paltry amount.
THE CHANGE
Though private equity funds saw
tough times in 2007 in the deal
market, things have changed over the
last couple of years. Money is no
more cheap and more importantly, the
risk appetite of investors has gone
down. The demand for patient
capital for businesses in high growth
phases is going up. Naturally, private
equity funds are finding their stay in
Indian markets more rewarding now.
But the life is surely not a cakewalk
for most private equity funds. The
new challenges are in the form of
increased competition as the number
of private equity funds investing in
India go up and limited project flow
leaves less options to choose from.
The real taste of private equity funds
will be in managing their exits from
the deal. According to a KPMG
estimate, nearly US $85 billion worth
of exits will materialize over the next
three years till 2014. Such a large
amount of money getting out of
projects can really shake up the
Indian financial markets and many
private equity funds may find the
value of their stakes in projects going
down in a volatile capital market.
In such times, investments in toxic
sectors such as real estate and
long-term infrastructure projects will
be difficult to liquidate. These
businesses are still in need of money
and private equity investments,
especially larger ones, will find it
difficult to identify a buyer at the
right price.
Private equity funds will surely add to
the Initial Public Offerings (IPOs)
pipeline while exiting from their
investments and some of the
investments will be rolled over to
other funds through secondary sales.
The worse may come in the form of
situations where promoters of
investee companies are unable to
carry out a buyback due to
indebtedness or involvement in scams
that broke out in the past few years.
But most experts are of the opinion
that private equity still remains an
attractive investment avenue for those
who are looking for higher returns
over a longer period of timE.
Contact: 022-39268088
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for the Indian aviation industry that
has suffered huge setbacks due to
financial constraints.
Earlier a group of ministers, including
civil aviation minister Ajit Singh and
finance minister Pranab Mukherjee
met to decide on the proposal to allow
49% FDI in Indian airlines.
This could be a landmark
development for the aviation industry,
especially from the policy point of
view, considering that the Indian
airline companies are looking for
reforms in the sector owing to the
ongoing problems.
he aviation sector has been
facing a host of problems
since quite some time. The
issues range from change
in demand-supply dynamics to rising
fuel costs and huge debt in the books
of airline companies.
As a result of this, consolidation as
well as rationalization of capacities
and routes has been initiated in the
aviation industry.
And now there are talks of the
government planning to allow 49%
foreign direct investment (FDI) in the
sector, which could be a good move
T
The introduction of 49% FDI in the
aviation sector is being looked at
positively as it could bail out
troubled domestic airline companies
FLYING
ON
HOPE
Earlier foreign airlines were not
allowed to invest in Indian airline
companies, although foreign direct
investment was allowed. The
ministers have now agreed to the
proposal, which has been moved to
the cabinet for approval.
CATCH-22 SITUATION
The decision on the FDI comes at a
time when the industry is facing one
of the most turbulent times.
According to data released by the
Directorate General of Civil Aviation
(DGCA), in the month ending
December 11, passenger traffic
growth declined to 8% to 5.63 million
people, which is being seen for the
first time after a gap of three years.
This reflects the slowdown in
economic growth and its impact on
air traffic.
The risk to growth is only increasing
with expectations of a further
slowdown in traffic due to the coming
lean season over the next couple of
months and the overall impact on the
service industry as other economic
activities like growth in the
manufacturing sector are showing
signs of a slowdown.
Apart from demand, airline
companies have recently seen a drop
in flight occupancies as a result of
higher capacities and lower demand.
However to deal with the situation,
the companies are resorting to route
rationalization and reduction in
flights, which is already being seen in
some cases. Yet, the cost has
remained the same due to the increase
in crude oil prices in recent times.

The aviation sector is most
susceptible to fluctuations in crude oil
prices, which accounts for almost
35% to 40% of the overall operating
cost structure of the companies.
Globally, crude oil prices do not
bother much, considering that fuel
accounts for only 10% to 15% of the
operating cost. However in India,
experts blame this on high taxes
levied on aviation turbine fuel (ATF),
inadequate infrastructure as well as
high airport charges.
Higher operating costs at a time when
the industry is struggling for growth
has only increased the pressure. In the
current competitive environment and
higher capacities, the companies are
not able to pass on the costs fully.
All these factors have added to the
woes of the sector. The biggest issue
is debt which in many cases is close to
one time the equity or even higher
than one time in certain cases.
Servicing such high debts and
interests on them not only requires
higher demand but higher utilizations
of the aircraft and low operating costs
so that enough cash can be generated.
As there are no visible signs of
internal cash generation, the
companies are on the verge of
reporting huge losses, and in some
cases, filing for bankruptcy.
Like in the past, the state-run airline
has been bailed out by the
government through fund infusion.
However, there is no such leeway for
private airline companies. They will
have to infuse their own money to
survive or else there will be immense
pressure on the banking system in the
form of increase in non-performing
assets (NPAs).
HOW WILL FDI HELP IN THIS
SCENARIO?
Experts believe that the wounds are
so deep that even the opening up of
the FDI route would not help, at least
in the near- to medium-term.
Also, if one looks at the global
aviation industry and the current
financial profile of some of the largest
airline players in the world, he will
find that there are very few who have
enough financial muscle to invest in
the country.
Global airline companies want to
invest in India. But most of them are
running into losses and are sitting on
huge debts with the stress on
operating cash flows.
Other noticeable thing is that even
global giants are fearful of investing
in India at this point in time, given the
current policy environment. Many
global players have expressed interest
in the Indian aviation market.
However, before they jump into the
fray, it would be better if they seek
clarity or government support or
assurance on the policy front.
On the positive side, the Ministry of
Aviation feels that by allowing FDI in
the sector, Indian companies can
expect more money from foreign
players, especially since there is very
little or almost no appetite among
domestic investors to invest in the
sector at this point in time.
And the FDI can provide a window
for airline players with the ability and
the willingness to attract investments
from foreign players.
In fact, even banks have now become
risk-averse to the aviation sector and
would not like to put any additional
money into the sector.
There is a high possibility that some
of this FDI money could be used by
companies to reduce their existing
debt and create a sound business
model, which is more likely to sustain
in the long run.
Global players will not only bring
international expertise and advantage
of scale, but will also bring in
synergies in terms of network sharing,
which will lead to improvement in the
business and effective utilization of
the existing resources.
With this measure, the Indian aviation
companies will see serious investors
considering investing in India and
those who are looking at expanding
will stay committed in the long term.
Further, industry experts believe that
since most global airline companies
are suffering mostly in the developed
world as the markets have matured,
international airline companies have
no choice but to invest in developing
countries like China and India, which
are the fast growing markets.
THE ROAD AHEAD
The long-term story of the aviation
sector still remains intact in terms of
growth potential due to factors like
very low penetration, demographic
divide and increasing working
population. There were hurdles, but
despite that growth in air traffic in the
last several years has remained in the
range of 12% to 15%.
Interestingly, even at current levels,
only 2% to 3% of Indians are
travelling by air, which is far less than
the global average. Even if we
compare with China, which has about
10% to 12% penetration, Indias
current penetration is much lower.
However, the real question is whether
airlines can make money. FDI is just
one part of the issue, which could at
best address concerns regarding
liquidity and solvency of some of
these companies in the medium to
long term.
However, the larger issue of costs,
infrastructure, taxes and others
persist. If the industry has to grow at
its fullest potential, with the
companies making enough profits,
which is well enough to reward
investors and investments, other
issues particularly cost of fuel and
related taxes have to be rationalized.
The benefits of FDI or its
implementation can only be achieved
if other issues too are addressed in a
timely manner, which will
collectively help companies to
operate profitably and take the
advantage of the potential.
Introducing FDI could be a good start,
but investors should keep a close eye
on other issues toO.
February 2012 Premium 27 http://magazine.premiumonline.in
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L
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is
...
ndias pharmaceutical industry has made
phenomenal progress in the past 10 years. And
pharma companies are leaving global footprints
through mergers and acquisitions. Further, due to
the easy availability of capital and increased global
interest in the pharmaceutical and biotech industry, the
sector has become a favourite for mergers and
acquisitions. Therefore, foreign companies are lapping
up the opportunities offered by the pharmaceutical
industry in India.
This phenomenon began with the acquisition of Ranbaxy
I
Owing to easy availability of capital and
increased global interest in the
pharmaceutical and biotech industry, the
sector has become a favourite for
mergers and acquisitions
Indian
Pharmas
Foreign
Connection
WHAT IS DRIVING DEMAND
Companies across the world are
reaching out to their counterparts to
take mutual advantage of the others
core competencies in research and
development (R&D), manufacturing,
marketing and niche opportunities
offered by the changing global
pharmaceutical environment.

To adapt to the changing trends,
Indian pharmaceutical and biotech
companies have evolved distinctive
business models to take advantage of
their inherent strengths and the
borderless nature of this sector.
These differentiated business models
provide both pharmaceutical and
biotech companies the necessary
competitive edge for consolidation
and growth.
However, a major turning point for
the pharma industry was the year
2005 when the Indian government
enacted the Product Patent Act.
Following the enactment of the Act,
pharma companies began increasing
their spend on R&D.
Today, there are over a dozen new
molecules in various stages of clinical
trials, ready for launches in the next
few years. A lot of pharmaceutical
companies have out-licensed these
molecules to mutlinational companies
for global launches.
Multinational companies have also
recognized the manufacturing process
and cost-competitiveness of
pharmaceutical companies in India
resulting in joint ventures (JVs) and
other beneficial alliances for the
global markets.
Dec 10
Nov 10
May 10
Mar 10
Jun 09
Apr 09
Mar 09
Jun 08
Apr 08
Paras Pharmaceuticals
Solvay Pharma India Ltd
Piramal Healthcare Ltd -
Domestic formulations business
Aventis Pharma
Shantha Biotechnics Ltd
Pfizer Ltd
Novartis India Ltd
Ranbaxy Laboratories Ltd
Dabur Pharma Ltd
Reckitt Benckiser
Abbott Capital India
(Abbott Laboratories)
Abbott Laboratories
Hoechst GmbH
Sanofi Pasteur
Pfizer Inc
Novartis AG
Daiichi Sankyo Co
Fresenius Kabi AG
United Kingdom
United States
United States
France
France
United States
Switzerland
Japan
Germany
720.90
66.88
3,720.00
91.50
625.20
169.50
75.57
4,538.60
220.00
8.12X
6.4X
8.47X
3.96X
8.7X
3.25X
2.5X
6X
3.73X
M&A Valuation Trend Post-Ranbaxy Deal
Date Target Acquirer Country Deal Value
($ mn)
DV/
Revenues
Laboratories Ltd in June 08 by Daiichi Sankyo Company for approximately $4,538.6 million, representing a 31%
premium. This acquisition completely changed the landscape of the merger and acquisition (M&A) space in the Indian
pharma sector and stood out as a remarkable point in the industry.
THE STARTING POINT
The Daiichi Sankyo-Ranbaxy deal demonstrated the thirst of global companies to enter into emerging markets. A huge
number of global pharma companies began increasing their share in the Indian market by acquiring additional stakes in
their Indian subsidiaries, following this deal.
Another deal involving Abbott Healthcare Pvt Ltd (AHPL), an Indian subsidiary of Abbott Laboratories, US (Abbott Lab)
and Piramal Healthcare Ltd signifies a wave of consolidation within the global pharma industry.
Abbott Healthcare Pvt Ltd acquired the branded generics business of Piramal Healthcare Ltd for $3.72 billion, valuing the
deal at 9.5 times Piramals actual valuation. This deal offered Abbott a number of benefits, including a 7% combined
market share in the Indian generics market, making it the single largest player in the Indian pharma sector and giving it
the much required access to other emerging markets.
Source: Datamonitor
M&As ACROSS THE GLOBE
Apart from patented pharmaceutical
and biotech companies that scout for
newer geographies to launch their
patented molecules, the global
generics market too has seen an
unprecedented wave of consolidation
in the past two years.
Recently, Teva acquired US generics
major IVAX for US $7.4 billion to
become the worlds largest generics
company. In the year 2004, Teva paid
US $3.4 billion for Sicor, an
US-based company. Further, Teva and
Sandoz, generics arm of the Swiss
pharma group, Novartis, have been
buying small generics companies to
grow in size.
Sandoz bought Hexal and Eon
Laboratories in Germany as well as
Croatias Lek, Canadas Sabex and
Denmarks Durascan in 2004 and
2005. Deflation in the generic
industry would lead to displacement
of weaker pharma players, thus
leading to consolidation.
The trend has gathered momentum
with the $1.9 billion buyout of Andrx
by Watson to create the third largest
specialty pharma company. Three
levels of integration are currently
being sought in the generics market at
the moment.
Back-end ManuIacturing Capability
(API/Formulation)
Product Integration (ANDA
pipeline)
Front-end Marketing And
Distribution In The Developed World
The US and the European generics
companies are scouting for
alliances/buyouts at the back end of
the chain, which would allow them to
offset any manufacturing cost
advantage held by companies in the
developing markets.
Indian companies on the other hand
are looking at front-end integration
since building a front-end distribution
set-up from scratch could take a
significant amount of time.
Product-side integration is common
to both sides, with weaker
US/European generics companies
looking at anyone that could offer a
basket of products.
This is because the US/European
pipeline is weak while Indian
companies are aspiring to grow
rapidly, achieving critical mass
quickly, while considering
geographic expansion.
M&A TREND IN INDIA
M&A is currently very high in the
pharma industry. Size and end-to-end
connectivity are the two major factors
in the global markets. To achieve
these things, western MNC`s are
looking at Indian companies.
Further, Indias changing therapeutic
requirements and patent laws will
provide new opportunities to big
pharma players to launch their
patented molecules. Indias strong
manufacturing base will stand global
generics companies in good stead as a
low-cost development and
manuIacturing destination. Besides,
due to consolidation in the domestic
industry and investments by the US
and European firms, the spate of
mergers and acquisitions by Indian
companies has ushered an era of the
Indian Pharmaceutical MNC`.
Many top and mid-tier Indian
companies have gone on a global
shopping spree to build up critical
mass in the international markets.
Also, given the easy access to global
finance, Indian pharmaceutical
companies are finding it easier to
fund their acquisitions.
INCENTIVES FOR MERGERS
AND ACQUISITIONS BY
INDIAN COMPANIES
Build critical mass in terms oI
marketing, manufacturing and
research infrastructure
Establish Iront-end presence
DiversiIication into new areas: tap
other geographies/therapeutic
segments/customers to enhance
product life cycle and build synergies
for new products
Enhance product, technology and
intellectual property portfolio
Catapult market share
Acquisitions are the quickest way to
front-end access. What is interesting
is that apart from market access that
is marketing and distribution
infrastructure, the acquiring company
gets an established customer base as
well as some amount of product
Mar `10
Mar `09
Mar `09
Aventis Pharma
Matrix Laboratories
Novartis India Ltd
Hoechst GmbH
Mylan, Inc
Novartis AG
France
United States
Switzerland
91.50
133.00
75.57
10.27
28.80
25.50
Acquisition Of Additional Stake In Indian Subsidiaries By Global Companies (2007 - YTD 2011)
Date Target Acquirer Country Deal Value
($ mn)
% Of
Acquisition
Source: Datamonitor
integration (the acquired companies
generally have a basket of products)
without the accompanying regulatory
hurdles and other issues.
There are also entry barriers for
pharma companies from the
developing nations, and acquisitions
make it easier for them to find a
foothold in the developed markets.
For instance, there is a cultural and
language barrier in Europe and
Europe is high on the radar of Indian
pharmaceutical companies.
The sheer heterogeneity of Europe
and the fragmented nature of its
pharmaceutical market make
acquisitions an easy route to enter in
this region and the US being the
largest pharma market in the world,
will always interest Indian pharma
companies due to its sheer size.
Over the last two years, several Indian
companies have targeted the
developed markets in their pursuit of
growth, especially through the
inorganic route. Companies such as
Ranbaxy, Wockhardt, Cadila, Matrix
and Jubilant have made one or more
European acquisitions, while others
such as Torrent are also scouting for
potential targets.
Besides gaining faster entry into the
target market, one of the main
strategies behind acquisitions is
leveraging Indias low-cost advantage
by shifting the manufacturing base to
India. At the same time, the acquired
companies also serve as an effective
front end for Indian companies in
these markets.
M&A CHALLENGES
While growth through acquisitions is
a sound idea in principle, there are
challenges, as well. They relate
mainly to the stretched valuations of
acquisition targets and the ability to
turn them around within a reasonable
period of time.
The acquisitions of RPG Aventis (by
Ranbaxy) and Alpharma (by Cadila)
in France are clear examples of how
acquisitions are proving to be a drain
on the companys profitability and
return ratios for several years
following the acquisition.
In several other cases, acquisitions by
Indian generic companies are small
and have been primarily to expand the
geographical reach while at the same
time, shifting production from the
acquired units to their cost-effective
Indian plants. A few have been able to
develop a bouquet of products.
Other than Wockhardts acquisition of
CP Pharma and Esparma, other global
acquisitions have taken at least three
years to break-even.
Most acquiring companies have to
pay greater attention to the
post-merger integration as this is the
key for the success of an acquisition
and Indian companies have to wake
up to this fact. Also, with increasing
spate of acquisitions, target
valuations have substantially
increased, making it harder for Indian
companies to fund the acquisition.
OTHER SIDE OF THE STORY
It is not necessary that every time
there will be a success tale to reveal, a
few times destiny takes another way
and gives a bitter experience.
A similar thing is being experienced
by Indias leading pharma firm Sun
Pharma, which failed in its bid to take
over Israels Taro Pharmaceuticals in
2007 (eventually Sun took over in
2010) and also of Ranbaxy to take
over Orchid Pharmaceuticals (later
they come to an amicable solution)
could have really taken the Indian
pharmaceutical industry to different
path of growth.
With the Ranbaxy deal failing and
eventually. Ranbaxy being acquired
itself opened doors for other Indian
promoters to consider selling their
stakes at high valuation rates, which
was detrimental for the Indian pharma
industry. The failure of the Sun
pharma deal in 2007 actually pushed
the plans of Sun pharmas expansion
into the US, Canada and Israel, by
almost three years.
IT IS NOT THE END
An industry analyst believes the
solution for sustainable growth in the
industry will be a reasonable
combination of organic and inorganic
strategies. Given the clear
segmentation (branded, generic and
over the counter) of the
pharmaceutical industry, the strategy
has to be specific to the segment and
the opportunity.

Indian pharmaceutical companies
have done quite well in the past
decade by entering into and making a
prominent mark for themselves in the
generics markets worldwide,
especially in the US. The biggest
advantage that the Indian pharma
industry has and continues to have is
its low-cost talent pool. This has
enabled the successful launch of
many generics from India.
However, the Indian pharma sector
has missed out on developing a
blockbuster patented drug which big
MNC pharmaceutical companies are
famous for.
This could have provided them a
robust cash flow for years to come
which they could have further
deployed for more research and
development for both generics and
patented drugs. Had that been the
case, we would have seen Ranbaxy
and Piramal of India acquiring one of
the big pharma companies of the US
instead of what actually happeneD.
Due to i ts l ow l everagi ng and wel l -di versi ed
busi ness, Bal rampur Chi ni Mi l l s Ltd i s better pl aced
than i ts peers
he sugar industry is cyclical in nature wherein a
downtrend sees an increase in the area of
cultivation for sugar, while an uptrend sees a
decrease in the area of cultivation. Good supply
of sugar leads to a decrease in sugar prices resulting in
delays in payments to farmers by mill owners.
Meanwhile, farmers switch to other crops due to mounting
arrears, leading to a decline in sugarcane harvest and
sugarcane production, subsequently. All this eventually
results in strong sugar prices, encouraging farmers to again
switch to the harvesting of sugarcane. The whole cycle
repeats itself in this manner. It takes 5 to 6 years for a sugar
cycle to come full circle.
T
Savouring
Sweet Success
Both the production of sugar as well as the prices have an
inverse relationship with each other and they move in
opposite directions.
Balrampur Chini Mills Limited
High
Sugarcane
Producon
Decline In
Sugar Prices
Huge Arrears
Of Payment
Farmers
Shi To
Other Crops
Decline In
Sugarcane
Harvesng
Sugar Prices
Firm Up
Farmers
Shi Back To
Sugarcane
Producon
CURRENT SITUATION
Currently, there is surplus production in the market
resulting in low prices of sugar, especially in UP.
SY12 is expected to be a year of oversupply as crop
situation is better in Brazil and India, which is reflected in
the fact that international sugar prices are hovering at a
lower end. However, for SY13, there are supply concerns
as crops from Brazil and India are expected to be lower.
Cane production in Thailand, the second-largest shipper,
may decline from a record in the year starting November
because of dry weather. China, the second-biggest
consumer after India, will import the sweetener to
replenish stockpiles that were diminished by state sales,
intended to curb inflation
All these factors are expected to push international sugar
prices higher in SY13.
OUR BET BALRAMPUR CHINI
We are of the opinion that Balrampur Chini is a better bet
among sugar companies as it has low leverage and high
diversification in ethanol and power co-generation
divisions, which provide cushion to the company in case of
an adverse sugar cycle.
THE COMPANY
Balrampur Chini was incorporated in 1975 with a crushing
capacity of 800 TCD (Metric Tonnes crushed per day).
Balrampur Chini Mills Ltd is one of the largest integrated
sugar manufacturing companies in India. It has eight mills
with a combined cane crushing capacity of 76,500 TCD.
All factories of the company are located in eastern UP,
making it the biggest sugar company in UP.
Inverse Relation Between Price And Production
Balrampur Chini is one of the largest sugar manufacturing
companies in India. In the current situation of surplus
availability of sugarcane crop, Balrampur is expected to
benefit the most as it will be able to crush more sugar,
leading to higher production of by-products like bagasse
and molasses. Bagasse is a raw material for power
co-generation and molasses is used to produce
alcohol/ethanol. As much as 1,000 tonnes of sugar yields
50 tonnes of molasses and 325 tonnes of bagasse.
These are the most profitable divisions of the company.
0
5
10
15
20
25
30
35
SY01 SY02 SY03 SY04 SY05 SY06 SY07 SY08 SY09 SY10 SY11
Mumbai prices All India Producon
Production
Y-o-Y Growth %
Opening Stock
Imports
Total Availability
Domestic Consumption
Exports
Closing Stock
Closing Stock (months)
18.9
30.3
2.5
4.2
27.1
21.2
0.3
4.4
2.5
Domestic Sugar Scenario
(mn tonnes) SS10
24.5
29.6
4.4
0
28.9
22.1
2.7
4.2
2.3
SS11E
26
6.1
4.2
0
30.2
23
3
4.2
2.3
SS12E
Source: Industry Estimates
Sugar
Distillery
Co-generation
Capacity Of Sugar, Power And Alcohol
Installed Capacity
76500 TCD
320 KLPD
179.85 MW
Source: Company Data
Source: Industry Estimates
At current prices, sugar mill owners are not even able to
recover their cost of production. Therefore, there is a high
possibility of default in sugarcane payments. We believe
that from SY13E (SY = OctoberSeptember), we can
witness low plantation of sugarcane, leading to lower
production in the coming season.
This is likely to cause a turnaround in the sugar cycle and
lead to an increase in sugar prices, which may, in turn,
bring sugar companies back in profits.
INTERNATIONAL SITUATION
Raw sugar for March 13 is trading at a premium to the
July 12 contract on ICE Futures US as compared to
discount six months ago. The switch is reflecting a change
in outlook even before forecasts for the next season from
the International Sugar Organization.
(Co-generation posted 24% PBT margin in 9MFY12 and
distillery posted 32% PBT margin during the same period)
and in a down cycle, it acts as a strong back up in case of
slowdown in sugar business.
Some state governments have mandated 5% ethanol mix in
fuel, which reduces costs. In October 10, the government
increased procurement prices (for OMCs) to `27 per litre
from `21.5 per litre. There is a strong likelihood that
ethanol prices may be further increased (a committee has
been formed to derive an ethanol pricing formula, which
would be linked to petrol prices).
BUYBACK TO INCREASE SHAREHOLDERS
VALUE
In February 11, the company bought back 1.5 crore shares
from the open market at an average price of `71.2 per
share, spending a total amount of `109.7 crore (99.7% of
the planned buyback amount of `110 crore). This shows
the managements confidence in its own business model,
which would result in increase in the value of the stock for
shareholders in the future.
SUGAR INDUSTRY REGULATION
Future Road Map
India is the worlds largest consumer and the second largest
producer of sugar after Brazil. It is the only industry that
provides (sales) sugar at subsidized rates through the
public distribution system (PDS).
At present, the sugar industry is under the government
control, right from the level of production to distribution.
Release Mechanism
Being an essential commodity, sugar sales are regulated by
the Central government
90% of the production is sold as free sugar under the
monthly release mechanism announced by the Central
government
10% of the production is sold as levy sugar for Public
Distribution System at lower prices as per the Central
government directive
Command Area
Sugar producers are not allowed to own cane fields in
India
New sugar mills cannot be set up within 15 km of the
existing units
ATTRACTIVE VALUATIONS
Balrampur Chini is trading at approximately half of its
replacement cost.
` Cr
Sales
EBITDA
Margins %
Depreciation
Interest
Other Income
PBT
PAT
Margins %
EPS (`)
Oct -Sept
12 months
1490.9
314.3
21.10%
125.3
100.1
15.2
104.1
78.3
5.30%
3.1
Financials
Consolidated FY08 FY09 FY11
12 months
Oct -Sept
12 months
1747.1
447.4
25.60%
116
106.8
8.2
232.8
209.1
12.00%
8.2
Oct - Mar
18 months
2972.4
509.7
17.10%
173.1
138.4
26.2
224.4
162.7
5.50%
6.4
Equity Shares
CMP
Market Cap
Debt
EV
Replacement Cost/ EV
Valuations
Price To Bookvalue (1 year forward)
Replacement Cost Of
Present Plant

(Sept'11)
25.6 Cr
`49 Per share
`1256 Cr
`1147 Cr
`2402 X
1.7
`4000 Cr
TRADING IN THE LOWER BAND OF P/BV
Balrampur Chini is available at a P/BV of 0.8x as
compared to its historic average of 2x.
0.0
50.0
100.0
150.0
200.0
250.0
300.0
Price 1 2 3 4 5
Sugar mills have to purchase all the cane sold to them,
even if it exceeds their requirement
SAP And FRP
The Centre decides the minimum price, called the Fair and
Remunerative Price (F&RP) known as the Statutory
Minimum Price or SMP at which sugar mills have to
purchase sugarcane from farmers.
However, different states fix their own prices known as
State Advised Price (SAP), which is usually 30% to 40%
higher than FRP. For SY11, FRP was `139/quintal whereas
UPs SAP was `205/quintal. Recently, the UP government
increased the SAP further to `240/quintal for SY12.
Expor t Sales
Export of sugar from India is subject to a quantitative
ceiling announced annually for each financial year. The
government decides the quantity of sugar to be exported
every year. In the current year that is SY12E, 1 million
tonnes of sugar export has been allowed.
Private sugar industry body ISMA is pushing for
de-control of the sector. It is seeking the removal of levy
obligation by giving freedom to sell sugar in open markets.
To consider the above issues, the government has set up a
committee to take steps in this direction. Any news in this
regard would act as a positive trigger for the industry in
general and for Balrampur Chini, in particular.
IN A NUTSHELL
We expect the sugar cycle to turnaround in SY13 resulting
in up movement of sugar prices, which would benefit the
whole industry, including Balrampur Chini. We believe
Balrampur Chini will be one of the major beneficiaries due
to its low leveraging and well-diversified business.
The current valuation of the company also makes it a better
pick in the industry. It is currently available at less than the
replacement cost of its existing facilities and is available at
the lower band of its historic P/BV. Further, any step
towards decontrol of the sugar industry would act as the
icing on the cake for the companY.
CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 REGD. OFFI CE: Sonawal a Bui l di ng, 25 Bank St reet, For t, Mumbai - 400 001. Tel : 022 - 39267500 / 7501; Fax: 022 - 39267510
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.
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#
Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
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your commodity trading requirements.
he year 2012 seems to be
the year of tax-free bonds
for investors with a whole
host of bond issuances
such as those from Power Finance
Corporation (PFC) and National
Highways Authority of India (NHAI)
receiving resounding response from
the investors.
Other organizations such as the
Indian Railways Finance Corporation
(IRFC), Housing and Urban
Development Corporation Ltd and
Rural Electrification Corporation
(REC) are gearing up for similar bond
issuances, that has revived the
appetite of debt investors. These
tax-free bonds are good news for
T
With equity
investments not yielding
good returns in the
current times of
volatility, tax-free
bonds appear to be the
best bet for investors
Unshackle
The Bonds
Of Taxation
investors, especially now, as the
interest rate cycle is about to reverse.

Financial advisors are advising their
clients to go the whole hog on these
tax-free bond issuances, as the
appetite for debt investments is on the
rise, with equity investments not
yielding such good returns in the
current times of volatility.
These tax-free bonds are an excellent
opportunity for investors to lock their
free funds in long-tenure bonds that
give them the advantage of an interest
rate that is higher than any fixed
deposit, plus the benefits of capital
appreciation. This is because these
bonds are listed and can be traded like
Let us compare these bonds with your
normal bank deposits (10-year tenure)
that are currently offering you an
interest rate of 11% to 12%.
Effectively, you get only about 7.7%
interest on these bank FDs post tax.
Thats a lot lower than these tax-free
bonds that are all offering interest
rates of 8.2% to 8.4% annually.
One may argue that that there are
other instruments such as the PPF that
offers 8.6% interest and is also
tax-free in the hands of investors. You
can get the full benefit of tax
deduction in a PPF under section 80C.
However, these tax-free bonds still
score over the PPF that seemingly
offers a better rate of return.
Firstly, these tax-free bonds are like
trade-able securities and thus give
you the advantage of liquidity as
against a PPF that is highly illiquid
with a lot of restrictions on the time of
withdrawal as well as the quantum
that can be withdrawn.
Secondly, investment in these PPFs is
restricted up to `1 lakh per year,
whereas in these tax-free bonds you
can invest up to `5 lakhs.
In the current situation when the
markets are fraught with volatility
that have made other financial
instruments less attractive,
distributors too are betting big on
such tax-free bonds.
Some distributors are even pitching
for these bonds against mutual fund
systematic investment plans (SIPs), a
lot of which have foreclosed because
of dwindling renewals. Rough
estimates suggest that over the past
six months or so, for every 2 lakh
folios that were added each month, 1
lakh SIP folios have been closed.
WHO ARE THEY FOR?
Financial planning advisors are thus
suggesting these tax-free bonds to
those individuals who are in the
highest tax bracket.
If you are an individual investing an
amount of `1 lakh in these tax-free
bonds (which are offering a coupon
rate of around 8.3%) your annual
interest income works out to be
`8,300 for a period of 15 years
(assuming that you hold these bonds
till maturity), which is completely
tax-free in your hands.
As compared to this, if you were to
put the same amount in a fixed
deposit that gives you 9% interest and
you fall in the highest tax bracket of
30.9% your interest income post tax
will only be `6,219. For any salaried
individual, this tax-free element is a
big bonus.
Financial advisors also suggest that
these tax-free bonds can be
considered by investors who have a
lumpsum surplus that they are not
sure where it could be invested.
For those who are willing to hold on
to such investments till maturity, this
is indeed an attractive option. This is
when compared to other traditional
schemes such as post office monthly
income schemes and national savings
certificates, on which interest rates
will vary annually, from the
beginning of this year, because they
have been linked to 5- and 10-year
government bond yields.
However, financial advisors do not
advise you to redirect your entire
portfolio towards these tax-free
bonds. As investors, you should
invest in bonds along with your PPF
and FDs to get highest returns from
your debt portfolio.
But if you do not have a long-term
outlook on your investments, tax-free
bonds are not always the best thing
for yoU.
ordinary securities on the stock
exchange. When interest rates fall, the
prices of bonds go up, giving an
individual investing in them the
benefit of capital appreciation.

THE TIMING IS RIGHT
Unlike 2011, when interest rates were
on a rise, 2012 is expected to be a year
of rate cuts. The Reserve Bank of
India has also given broad indications
that the appreciation of interest rates
may be stopped from March onwards.
This is why tax-free bonds will give
you better returns.
Besides, these bonds come with the
highest AAA rating from reputed
rating agencies such as Crisil and
ICRA. This is because these bonds
are quasi-government; so it is as good
as getting a sovereign guarantee.
Though the interest rate of 8.2% and
8.3%, for a 10-year and a 15-year
bond, respectively (the coupon rate
that is being offered by these bonds)
may seem unattractive to you first,
you must remember that the interest
that will be paid out on these bonds is
entirely tax-free in your hands.
However, any capital gain if and
when you decide to sell these bonds,
will be taxed on a short-term or a
long-term basis.
If you decide to sell these bonds
within a year of purchase, short-term
capital gains tax will have to be paid
on the normal tax slab. If you sell
them after a year, they will be taxed at
10%. On the other hand, if you hold
these bonds till maturity, you do not
have to pay any tax.
COMPARISON WITH PEERS
In times such as these, tax-free bonds
make a lot of sense for retail investors
who want to put a certain portion of
their portfolio into debt instruments.
s we come closer to the
end of the current
financial year, numerous
investors in the country
can be seen reaching out to their
financial agents seeking investment
options to save taxes.
This article presents four investment
A
PPF, NSC, F Ds a nd E L SS a r e f our t ool s t hat
i nve s t or s c a n us e t o s ave t a xe s
The Fantastic Four
avenues such as Public Provident
Fund (PPF), National Savings
Certificate (NSC), banks term Fixed
Deposits (FDs) and Equity Linked
Saving Schemes (ELSS) by which
investors everyone from a
30-year-old to a retiree - can claim
benefits under section 80C of the
Income-tax Act and generate better
returns over a period of time by
keeping their capital safe.
80C OF THE INCOME-TAX ACT

The government gives tax breaks on
certain financial products under
section 80C of the Income-tax Act to
promote savings. Under section 80C
income tax on it.
Where To Buy:
Any post office in the country or
certain nationalized banks.
Tenure:
15-years. It can later be extended by a
block of 5 years
Investments:
A minimum of `500 per annum and a
maximum of `1,00,000. A maximum
limit of 12 installments in one
financial year is permitted by the
Indian government.
NATIONAL SAVINGS
CERTIFICATE (NSC)
The National Savings Certificate,
commonly known as NSC, is one of
the safest investment options
available to investors. In November
last year, the government hiked
NSCs interest rates to 8.4% from 8%.
This might turn to be an excellent
investment option for retail investors.
The scheme will benefit investors
who do not wish to take the equity
market risk. It not only qualifies for
tax rebate under Section 80C of the
Income-tax Act, but also is a strong
investment mechanism to build a
corpus for retirement or to meet
future expenses. The scheme is
backed by the government, which
ensures that the investments are
completely risk-free.
Investors can also pledge their NSC
certificates to obtain loans; however,
the loan amount will be decided by
the lender. NSC certificates are
transferable from one post office to
any other post office across the
country. It can also be transferred
from one person to another person
before maturity.
Since there is no maximum
investment limit in NSC, investors
are free to use this invesment avenue
as per their wants.
Where To Buy:
Any post office in the country
Tenure:
5 years (Earlier it was 6 years)
Investments:
Minimum `100 per annum.
Certificates are also available in
denominations of `100, `500,
`1,000,`5,000 and `10,000.
TAX SAVER FIXED DEPOSITS
It is an ideal product for senior
citizens and investors who do not
bargain for excessive returns as it can
aid their need for tax exemption by
keeping the principal amount safe.
This scheme was announced in the
Union Budget of 2006. Under this
investors can avail of exemptions up
to `1 lakh on five-year term deposits.
However, the interest rate varies from
bank to bank. Currently, the over
five-year term fixed deposit can fetch
investors interest in the range of 8.5%
to 9%.
For the same FD, senior citizens can
get interests at the rate of 9.25% to
9.5%. Hence, it becomes an ideal
investment opportunity for senior
citizens in current volatile times.
Unlike ELSS schemes which have a
lock-in period of 3 years, FDs have a
lock-in period of 5 years, from the
effective policy date. Further, the
money cannot be withdrawn
prematurely in case of an emergency.
The other disadvantage of tax saver
fixed deposits is that investors cannot
pledge term deposits as a collateral to
secure a loan. Also banks do not offer
overdraft facility on such instruments.
Where To Buy:
Most banks across the country
Tenure:
A minimum period of 5 years
Investments:
A minimum of `100 per annum and a
of the Act, certain investments are
deductible (up to a maximum of `1
lakh) from the gross total income.
If the investor invests a maximum of
`1 lakh and if he is in the highest tax
bracket of 30%, he saves a tax of
`30,000. Given below are some of the
options that can be taped by investors
in the busy tax season.
PUBLIC PROVIDENT FUND
(PPF)
Public Provident Fund (PPF) is one of
the finest investment instruments
available not only for an unorganized
sector but also at the disposal of
self-employed investors.
It is said that PPF plays an integral
part in an individuals financial plan,
along with instruments like life
insurance and health insurance.
Not only does it create wealth over a
long time frame, a 15-year lock-in
period to be precise, but investors can
also avail of tax deductions under
section 80C of the Income-tax Act.
Earlier the maximum limit was
`70,000 per annum, but the
government hiked it to `1,00,000 in
November last year. The government
also hiked its interest rates from 8% to
8.6% per annum making it more
investor-friendly.
PPF is a great instrument for
risk-averse investors seeking to create
wealth. It is backed by the
government, which makes it among
the safest instruments a person can
invest in.
The main plus point of a PPF is that
investors can claim tax deductions
while investing in a particular year
and the interest is also tax-free.
Further, on final maturity the
investors do not have to pay any
maximum of `1,00,000.

EQUITY LINKED SAVINGS
SCHEME (ELSS)
Investors can also consider investing
a part of their investible income in
equity linked savings scheme (ELSS)
of mutual funds as it is a competent
investment mechanism that offers the
dual advantage of smart capital
appreciation and fall in tax burden.
ELSSs could be open-ended or
close-ended in nature. Most schemes
are open for subscription on all
business days. However, the scheme
has a lock-in period of three years and
any investment made is considered a
fresh investment.
As the name suggests, the scheme
primarily invests in the equity market
by buying equity stocks of companies
listed on stock exchanges.
Equity has in the past given higher
returns over the long-term. Investors
have the option to choose from
dozens of schemes in the market.
Following weak equity markets, most
ELSS funds in the last one year have
given negative returns. But if invested
for a longer duration, investors can
and have received decent returns.
ELSS has the potential to give
substantially higher returns as
compared to other products like PPF
or NSC, which generate declared
returns. This scheme is
growth-oriented and invests
pre-dominantly in equities.
Growth opportunities and risks
associated with this scheme are like
any other equity-oriented scheme.
Where To Buy:
Banks, distributors, fund houses and
even online.
Tenure:
A minimum lock-in period of 3 years
Investments:
A minimum of `500 per annum
(depending on the fund house).
Systematic Investment Plans (SIPs)
are also available under the scheme.
As said earlier the main aim of
Section 80C is to encourage
long-term saving and investments.
We have provided you with the best
of the tax-saving instruments for the
season which can save tax and build
substantial corpus for any emergency.
However one should choose a
combination of fixed income
instruments and market linked
investments depending on ones age
and risk profile.
For a 60-year-old retiree,
combination of tax-free bank FDs and
NSC can come handy. While for a
young individual in his 30s, a blend of
PPF and ELSS will be useful for his
future lifE.
SMS BANG NRI t o 54646 | nri @ni r mal bang. com | www. ni r mal bang. com
Registered Oce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610,
Corporate Oce: B-2, 301/302, 3rd Floor, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
N
Sethuram Iyer who is
currently at the helm of
fund management
affairs as the chief
investment officer of Daiwa Asset Manage-
ment is perhaps the only person in the mutual
fund industry who has the distinction of
being a banker with Indias largest commer-
cial bank - State Bank of India - for more
than three decades.
If he had chosen the set path of progression
for any banker who has served at SBI for this
long, he would have perhaps retired with a
plush designation and enough accolades to
speak for. But today Sethuram does not have
an iota of regret.
In fact, Sethuram silently chuckles as he
divulges how everyone thought he was a
little crazy when he chose the path less
travelled and landed up in the mutual fund
GAME FOR
ANYTHING
N Sethuram Iyer
Chief Investment Officer
Daiwa Asset Management
A good fund manager is one
who has both balance
and conviction.
industry for good. This was when he
joined the erstwhile Shinsei Mutual
Fund in India (which was eventually
taken over by the Daiwa Group).
But Sethuram was convinced. Having
spent four years as Senior Vice
President credit and investment of
SBI in Tokyo, he was well versed
with the Japanese style of working
and as he says rather fascinated by
them too.
Anyone who is familiar with the
financial industry in India would
wonder why such a distinguished
banker would choose to be a part of a
financial outfit that was a new entrant
in the mutual fund industry - Japanese
or otherwise.
The answer is simple. Like any other
passion that is all consuming in a
human being, the passion for invest-
ing had planted its seed in Sethuram
long before he even recognized it.
Sethuram Iyer holds a degree in B.Sc.
(Chemistry) and is a Certified Financial
Planner. He has an experience of over 30
years with the State Bank of India (SBI) in
areas of investments, credit and forex. He
was deputed to SBI Funds Management
Pvt Ltd as the CIO. During his tenure, SBI
Mutual Fund has grown to be one of the
leading fund houses in India. Post
completion of his deputation as the CIO,
Sethuram rejoined SBI as the GM of the
Mumbai Circle. He has also been Senior
VP (Credit & Investments) of SBI, Tokyo
for over 4 years. Currently, he is the CIO
at Daiwa Asset Management.
to buy 50 shares of Hindustan Lever
(now called Hindustan Unilever).
The broker on account of goodwill
did make the purchase, which accord-
ing to Sethuram seemed like a
princely sum of `1,000. But the next
time he walked into the brokers
office to buy the shares of L&T, he
was politely told that the broker did
not entertain requests for lot sizes that
were less than 10,000 shares. But the
broker gentleman did not have the
heart to douse the enthusiasm of this
new market entrant and introduced
him to his sub-broker.
Thus began his tryst with destiny.
Sethuram recalls how he had built a
well-diversified portfolio rather
inadvertently. I had decided that I
would have no more than two compa-
nies representing each sector in my
portfolio. The only exception to this
rule was the FMCG sector that I
thought was the real outperformer.
THE GENESIS
Cut to early 1970s. A young
Sethuram, barely out of college had
taken up a job in Mumbai. Pursuing a
course in cost accountancy after his
graduation in the stream of Chemistry,
he was rather intrigued with the
concept of stock markets.
As they say the best way to follow the
markets is to be a part of it; so he
decided to take the plunge. Having
saved some money from the sales and
marketing job he was pursuing, he
wanted to invest in shares. But as he
was to find out, investment was
anything but an easy task.
Just to get an entry into a brokers
office, Sethuram had to coax his
father for an introductory letter from a
reputed trader, just to go and meet a
broker. Excited to have made his first
breakthrough, he walked into the
office of the broker and requested him
The remaining sectors seemed to be
following a cyclical pattern.
The other ground rule I followed for
investing was that I would not invest
in any company that had an annual
turnover of less than `100 crores.
Therefore, without realising it, I had
built a rather strong portfolio. says
Sethuram. What he did not realize
then was that this was what he was
really good at. A natural knack for
investing, if you will.
A BANKER BY CHANCE
But its not just a hunch that takes you
places, as Sethuram too admits. His
real learning came during his first
stint as a banker in the mid 70s. On
his fathers insistence, Sethuram had
taken the bankers examination with
little expectations as there were over
35,000 candidates jostling for a few
hundred jobs. But much to his
surprise he did make it, much to the
relief of his father, who wanted him to
be in a more stable job.
Thus began his learning from the year
1976 when State Bank of India was
the number one choice of all the big
companies in India for borrowing
credit. The commercial branch that I
started work with at SBI was directly
dealing with over 220 companies.
This was kind of baptism by fire for
me. For not only did I learn how to
read balance sheets, I also learned to
make the distinction between a good
and a not-so-good management, says
the maverick CIO of Daiwa.

It was not just sitting at office and
reading balance sheets for Sethuram.
Interacting with company officials
on a regular basis gave me insight
into the products and the manufactur-
ing process of each sector. Whether it
was the cement industry or the textile
industry, I slowly came to understand
the product and the technology used
in manufacturing it, he says. This
was also where his Chemistry
background came in handy.
Having interacted with so many
companies from his earlier years,
Sethuram provides valuable insight
into why the Tatas and Birlas are still
counted among the top industries and
why those companies, especially in
the textile sector that were dominat-
ing the markets in the 1980s, have
disappeared today.
This is what distinguishes a good
management from the ordinary ones.
The good companies were able to see
the changing trends and adapt to it
fast by diversifying, while those who
focussed on one business only had to
eventually shut shop, says Sethuram.
His experiences and steady progress
at the SBI soon got him noticed
within the bank and he was soon
moved to the large value credit
departments where he dealt with the
bigwigs of the corporate sector,
disbursing larger advances of `100
crores and more.
Those were the days when a company
trying to raise more than `10 crore
had to raise it from a consortium of
banks. In roughly about two decades
when Sethuram was in this depart-
ment of large value credit, he saw the
entire corporate landscape change.
It was interesting to see the growth
of industries such as auto ancillaries
from scratch. From the License Raj,
we were moved to a liberalized
economy and we saw the mental
make-up of Indian corporations
change and there was a willingness to
match up to global standards.
The other thing that changed drasti-
cally was corporate governance.
Sethuram admits that good corporate
governance is something that he
watches out for essentially in any
company, till date.
INITIATION INTO MUTUAL
FUNDS
After deftly dealing with credit and
forex for well over two decades,
Sethuram was deputed as the CIO of
SBI Asset Management in the winter
of 2003. He recalls how he had to deal
with the fact that not only were all the
schemes of SBI in the last quartile,
the fund managers were high handed
and had a notion that as a banker he
would have no credibility or knowl-
edge of investments.
The problem was also when the
bankers who came on deputation
earlier treated the asset management
business as a step child and did not
know how to make the distinction
between a company that was being
assessed for credit as against a
company that was being assessed for
the purpose of investments.
But Sethuram was not to give up
easily and he did not pay heed to his
predecessors who told him to spend
two or three years and then come back
to the bank. He was determined to
make a difference to the fund
management business. Although it
took him a good four to five months
to break the mindset of fund manag-
ers and let them know that he too
knew a thing or two about invest-
ments, Sethuram finally did start
making a difference.
The first thing Iyer advised the then
head of equities was to clean out the
portfolio. The other ground rule he
laid out was that no small-cap
company would have a weightage of
more than 3% in any portfolio and no
mid-cap company would have a
weightage of more than 5%.

Though his decisions were met with
resistance earlier, the fund managers
began to see the merit in them soon.
Also Sethuram did not believe in
curbing the personal style of any fund
manager. He encouraged the fund
manager to go about his own style of
investing as long as he stuck to the
basic principles that he had laid out.
Also, he did his best to accelerate the
long drawn process that SBI Asset
Management generally took just to
approve an investment.
A DREAM RUN
Even in 2003, each investment would
have to be taken to the committee
meeting and would only be approved
in 24-48 hours. This was not to be
when market dynamics were chang-
ing rapidly. I knew that to start
performing we had to accelerate
processes and, therefore, I promised
my fund manager that I would give
him approval for an investment
within half an hour at best, he says.
It also helped that the then CEO of the
fund, PGR Prasad who Sethuram says
was till date one of the best minds in
SBI, had given him a free hand. The
changes he made started yielding
results soon. But mid-2004 the SBI
funds had moved up to the third and
second quartile and by the fag end of
2004, nearly 90% of SBI funds were
in the first quartile. From there on,
there was no looking back.
Between 2005 and 2007, SBI Mutual
Fund managed to acquire all the
best-performing fund awards in
award ceremonies with much aplomb.
Thanks to Sethurams efforts, SBI
Fund Management was running like a
well-oiled machinery, even after the
exit of a star fund manager who
Sethuram had initially worked with.
In five years, the fund house had seen
a sea change.
Till date, he maintains that an
individuals style of investing should
not be tampered with as it hampers
the growth of a fund manager. But
keeping an overall vigil and asking
the right questions makes a lot of
difference. Having spent nearly a
decade in fund management now,
Sethuram prides himself on the ability
to identify what is wrong with a
portfolio when he sets his eyes on it.
For instance, if there are 40 scrips in
one portfolio, I know that the fund
manager is just playing it safe and
does not have conviction, explains
Sethuram. Once a month he looks at
the entire portfolio and makes sugges-
tions to his fund managers. Of course
this means he has to do his homework
well and keep an eye on the macro
picture, be it in equity or
debt-oriented funds.
Superlative performance has never
been his goal. Having been there and
done that Sethuram says that a good
fund manager is one who has both
balance and conviction. After having
seen the best of both worlds in invest-
ment and credit, Sethuram is happy to
be in the place that he is today. He
believes that being a team player and
his ability to manage people has
brought him this far. Even as he
approaches retirement age, today his
enthusiasm is heartening. Change is
the only constant thing in life and
given an opportunity, I would rise to
any challenge all over agaiN!
Source: Capital Line
Company Name Current Market Price
11th Nov'10
Book Value Price /
Book Value
152.72
105.50
305.43
100.33
226.44
51.56
21.42
137.50
223.34
233.26
153.89
302.16
107.52
116.54
283.64
165.42
11.18
107.05
39.32
123.52
87.35
39.39
191.11
310.65
127.74
142.78
153.07
176.95
147.14
99.21
13.53
51.10
358.06
50.98
382.49
678.03
182.96
50.75
24.23
120.40
40.85
63.24
92.72
301.38
131.96
73.16
361.44
6.00
201.50
252.75
0.27
0.29
0.34
0.35
0.36
0.38
0.40
0.40
0.40
0.42
0.43
0.43
0.45
0.46
0.47
0.48
0.50
0.51
0.51
0.52
0.52
0.53
0.54
0.55
0.56
0.57
0.57
0.57
0.58
0.58
0.58
0.59
0.60
0.60
0.61
0.62
0.62
0.62
0.62
0.63
0.64
0.65
0.65
0.65
0.66
0.66
0.66
0.67
0.68
0.68
Source: Capital Line
PRICE TO BOOK VALUE
Jai Balaji Industries Ltd
Mahanagar Telephone Nigam Ltd
Great Offshore Ltd
Ansal Properties & Infrastructure Ltd
Housing Development & Infrastructure Ltd
Electrosteel Castings Ltd
Firstsource Solutions Ltd
Gammon India Ltd
United Breweries Holdings Ltd
Reliance Communications Ltd
Shipping Corporation Of India Ltd
ARSS Infrastructure Projects Ltd
Geodesic Ltd
Prakash Industries Ltd
Kesoram Industries Ltd
Escorts Ltd
Karuturi Global Ltd
Punj Lloyd Ltd
Alok Industries Ltd
Anant Raj Industries Ltd
HCL Infosystems Ltd
Triveni Engineering & Industries Ltd
Patel Engineering Ltd
Videocon Industries Ltd
Punjab & Sind Bank
Rolta India Ltd
Jai Corp Ltd
Shree Ganesh Jewellery House Ltd
Gujarat Narmada Valley Fertilizers Company Ltd
Dhanlaxmi Bank Ltd
Sujana Towers Ltd
Usha Martin Ltd
Jindal Poly Films Ltd
IFCI Ltd
Bilcare Ltd
Piramal Healthcare Ltd
Amtek Auto Ltd
SREI Infrastructure Finance Ltd
REI Agro Ltd
Jindal Stainless Ltd
Mercator Lines Ltd
Network18 Media & Investments Ltd
NCC Ltd
Vardhman Textiles Ltd
Karuturi Global Ltd
Jyoti Structures Ltd
Great Eastern Shipping Co Ltd
Shree Ashtavinayak Cine Vision Ltd
Gujarat Alkalies & Chemicals Ltd
Chennai Petroleum Corporation Ltd
Company Name Current Market Price
(3rd Feb'12)
Book Value Price /
Book Value
41.20
30.10
104.25
35.00
80.45
19.40
8.51
55.00
90.45
96.85
66.60
131.35
48.90
53.35
133.05
78.85
5.63
54.85
20.20
64.35
45.80
20.75
104.15
171.95
71.00
80.95
86.95
101.55
84.65
57.60
7.88
29.95
213.90
30.50
231.50
417.05
112.75
31.50
15.10
76.05
26.15
40.90
60.30
197.20
87.00
48.45
240.05
3.99
136.25
171.10
Jai Balaji Industries Ltd
Mahanagar Telephone Nigam Ltd
Housing Development & Infrastructure Ltd
Electrosteel Castings Ltd
REI Agro Ltd
Jyoti Structures Ltd
Great Eastern Shipping Co Ltd
Shree Ashtavinayak Cine Vision Ltd
The table r epr esents companies listed on the
BSE that ar e low on Pr ice to Book Value
he Nifty continues its
upward journey in the
February expiry, led by
sectors such as banking,
oil & gas and metals. With good FII
inflows, better-than-expected
earnings results of certain heavy
weight companies and appreciation
of the Indian rupee, the Nifty has
gained over 3% since the start of the
February expiry. (CMP: 5,345 as on
2nd Feb). Year-to-date (that is since
January) it is already up 14%.
The Bank Nifty, which witnessed
significant long positions, has nearly
added 19.2% OI in the February
series and is already up 3.3%.
On the PCR OI front for the Nifty, the
continuous increase in its value from
1.28 to the current level of 1.4 (as on
2nd February), suggests an increase
in the Put activity, which is expected
to be dominated by sellers. This
clearly indicates that the market is
likely to remain bullish.
On the Options side, aggressive Put
writing has been seen at strikes 4,900,
5,000 and 5,100, and now even at
5,200 since the start of the February
expiry. On the other hand, a forward
shift in the 5,200 Call to 5,400 Call
has been observed. The 5,400 call has
witnessed a significant addition in OI
and, hence, it is likely to provide a
strong resistance to the market.
Also, Volatility Index (VIX) on the
Options front has been increasing
despite the up-move in the market.
With healthy rollovers in the
February series and increasing
volatility, oscillating movements are
likely to continue in the market.

FIIs have recently pumped in a fair
amount of liquidity into the Indian
T
markets, taking the Nifty closer to its
6-month high of 5,434 (4th Aug11)
after touching a 52-week low of 4,531
(20th Dec11). In 2012, FIIs have
bought over `13,000 crores (2nd Feb)
in the equity cash market and MTD
over `4,000 crores (2nd Feb).
On the other hand, domestic
institutions who had bought over
`27,000 crores in 2011 remained net
sellers in the current market rally. In
2012, they sold over `6,600 crores
and `1,500 crores on month-to-date
in the cash segment.

Technically, the Index recently
formed a series of higher tops and
bottoms since the lows of
December11, which is a bullish Dow
signal. There is an immediate
resistance at the 5,410 level on the
upside and support lies at the 5,280
and 5,210 levels. The oscillator
situation suggests the presence of a
negative divergence pattern. But there
is no sufficient evidence for any top
and, therefore, we conclude that the
advance is not done yet.
The Index has also managed to close
above the falling channel pattern from
the highs of November10, which is a
bullish sign. Currently, the index is
trading above its 100- and 200-
simple moving averages. And if it
sustains above the 5,250 level, the
rising window pattern formed in the
recent trading session would mean the
short-term uptrend will continue.
We maintain a medium-term target of
5,410 and 5,460 levels on the upside
and recommend some profit-booking
near this zone. The recent rise in the
index from the lows of Decmeber11
coupled with a sharp rise in volumes
and breadth, is again a bullish signal.
Of course, we do need to look at price
TECHNICAL OUTLOOK FOR THE FORTNIGHT
action if the rise continues further.
The short-term uptrend will remain
intact till the support level is not
breached. The weekly charts have
formed a bullish pattern. This is a
positive and, hence, we should look
for more gains ahead in this month.
The cement sector has outperformed
the broader index and we are positive
on ACC, Ambuja Cements and
Ultratech Cement for an upside of
10% to 15% from current levels.
Most Nifty stocks are reflecting a
positive divergence pattern,
suggesting a medium-term bottom is
in place. Many stocks are exhibiting a
long-range bar for the month, which
is a strong bullish signal.
The Bank Nifty faced crucial hurdles
near the 200-DMA and has confirmed
the uptrend by closing above its
recent high of the 9,980 level. The
index has managed to breach the
crucial hurdle of 10,100 and if it
sustains above this level, we can
expect it to rise to the 10,220, 10,350
and 10,460 levels. It has support at
the 9,940 level on the downside.
STRATEGY
With a view of a range-bound market,
traders can initiate a short Strangle on
the Nifty at strikes 5,000 and 5,400.
They can sell 5,000 Put and 5,500
Call, fetching a combined premium
inflow of over 65 points. The
break-even for the strategy will be
4,935 on the downside and 5,565 on
the upside. The initiator can earn a
maximum of `3,250 (65*50) if the
Nifty February series expires between
5,500-5,000 levels. However, the loss
remains unlimited beyond the
break-even rangE.
etaphor is a figure of
speech, which is used
to compare two
different things
indirectly. Simile, another figure of
speech, on the other hand compares
two things directly with the use of
words as and like.
Heres an example to differentiate
between the two figures of speech.
Simile: His teeth are as sharp as a
razor.
Metaphor: His teeth are razor-sharp.
We do not intend to give you
grammar lessons but the objective of
this is to teach you to recognize a
metaphor when you come across it in
financial newspapers or business
channels and understand its true
M
meaning and appreciate its beauty.
A metaphor can add richness to a
language and at the same time convey
a lot in a few words. This is the reason
why news anchors, especially those
from business channels, have a
penchant for incorporating a lot of
metaphors during their monologues.
While some metaphors are self-
explanatory and easy to understand,
there are also those that leave us
scratching our heads. This article
attempts to cover some commonly-
occurring metaphors in business talk
and enable you to understand them
without racking your brains.
DEAD CAT BOUNCE
It means that even a dead cat will
Understanding
metaphors is
important for
investors as they
occur frequently in
financial reports
and analysis
SPEAKING
FIGURATIVELY
THROUGH
METAPHORS
bounce before finally resting on the
ground, if it is thrown from a
20-storied building. The bounce does
not mean that the cat is alive and
jumping in delight.
In the same way, a small rise after a
huge fall in the markets or the value
of a stock does not mean that the
stock is making a comeback and is
poised for an uptrend. Most of the
times there is a valid reason for the
battering of a stock, resulting in the
fundamentals becoming weak. Dead
cat bounces dont last long.
Inadvertently, a thud is just round the
corner. So beware.
CATCH A FALLING KNIFE
Have you ever tried to catch a knife
that has slipped from your hands? If
yes, you will know that the likelihood
of you cutting your hands in the
bargain is more than you catching the
knife. Doesnt it then make proper
sense to stay away from it while it is
falling and then pick it up once it has
landed firmly on the ground?
In the same way, dont try and buy a
stock just because it has fallen a lot.
You never know there might still be
some more pain left in it. Look for a
clear reversal of trend and only then
invest in such a stock.
FOAM THE RUNWAY
Before an emergency crash landing,
the ground crew at the airport sprays
the runway with fire-retardant foam
to reduce friction and sparks.
Similarly, a company on the verge of
bankruptcy may bring fresh cash into
the company at the last minute to
prevent it from going bankrupt.
If you are an experienced investor,
you would know that last minute cash
infusion will only delay the fall of the
company; but not avert it. It is,
therefore better to stay away from
such stocks or at least wait until it
shows some signs of a firm reversal.
SWING FOR THE FENCES
It is a term derived from the game of
baseball. But we will try to
understand it with the example of
cricket. In cricket, most batsmen try
to hit the ball hard in the air and swing
for fences so as to score a six. But in
their attempt to score sixes, most
batsmen get caught.
Similarly, many investors try to swing
for the fences and in an attempt to
earn huge profits quickly, they take on
huge uncalculated risks. However, in
doing so, they more often than not
end up losing their hard earned
money instead of amassing profits.
The best piece of advice is to take
singles by playing small and within
your risk profile. Keep booking small
profits from time to time.
ELEPHANT IN THE ROOM
Is it possible for anyone to not see a
big elephant in a room full of people?
Of course not. But people sometimes
tend to ignore or avoid the elephant,
read a problem or news and pretend
that everything is hunky-dory. This is
quite reflective of the sentiments in
the markets currently, which is going
up in leaps and bounds, but the
elephant in the room in the form of
the European crisis, lower domestic
growth numbers, corruption, scams,
etc, that is looming large is being
completely ignored by investors.
BUTTERFLY EFFECT
It is a concept from the chaos theory
which is an exaggeration and states
that if a butterfly flaps it wings in
some part of the world, it will cause a
small insignificant ripple in the wind
in that part but that ripple will travel
on to cause a hurricane in some other
part of the world.
Though unlikely, we sometimes feel
the butterfly effect in the stock
markets, where a small event in some
part of the world triggers a small
selling there, but compounds at each
level leading to a global stock market
sell-off in another part of the world.
FIGHTING THE TAPE
The tape here refers to the stock
market ticker, which keeps scrolling
at the bottom of all news channels. It
shows the general direction of the
markets. Fighting the tape is a
metaphor used to describe a trader or
investor who takes a call or initiates a
trade in the opposite direction of the
market movement.
In other words, it is used to describe a
contrarian view. Fighting the tape
requires courage and conviction as
one is taking a call against the general
consensus/trend. So there is a chance
of being run over.
DEATH BY A THOUSAND CUTS
It is based on the premise that one or
two small cuts wont cause you much
harm, but if you have a thousand cuts
all over the body, you could bleed to
death. Similarly, the occurrence of a
singular negative event would not
dent the market sentiments too much,
but a barrage of negative news all at
once such as rising inflation, poor
growth numbers, weakening rupee,
rising interest rates, global debt crisis,
etc, together can cause the stock
markets to crash.
CHERRY PICKING
It is a stock-picking strategy which
aims to do away with the tedious
process of intensive researching of a
stock by picking only stocks that are
in the portfolio of other investors and
have given good returns for them.
For example, most investors try to
buy stocks that Warren Buffet holds
in his portfolio, believing that if he
has made billions, then they will be
multibaggers for them also. It is just
like the person who buys fruits
believing that the harvester will only
pluck the best and the ripest cherries
and his entire harvest is excellenT.
he year 2011 is finally
behind us. And what a year
it has been. Financially, it
was a year that most of us
would want to put behind us. More so
because of myriad problems like
surging inflation, weakening rupee,
declining industrial growth and the
European crisis to name a few, that
led to the fall in investor wealth world
over and India was no exception to
this after effect. However, we hope
that the year 2012 will be better than
the year that went by.
But as we know, hope alone cannot
steer our boat and that each one of us
needs to build his/her fortress to
weather such unforeseen events,
without surrendering. And the best
way to do this is to learn from our past
T
mistakes, learn about the various
financial avenues with their pros and
cons and then put a proper plan in
place to achieve full utilization.
Listed below is a small checklist of
things to do when planning your
finances for the year ahead.
DEBT
We are often advised to live within
our means and avoid taking loans, at
all costs. This is because a loan is like
a sword, which constantly hangs over
our head. And if it is not negotiated
properly, it can cut our financial
lifeline short in no time. Yet, the norm
in the present times is to live beyond
our means as everything is available
on easy finance and quick loans.
While planning
your finances for
the year ahead, do
focus on debt,
insurance, taxes
and investments
While many argue against taking
loans, there are those who cite
genuineness behind seeking loans.
Whatever the reason behind it, certain
pointers or checklists, if followed, can
prevent you from getting caught in
the black hole of a debt trap.
Never sign any loan papers before
reading the fine print very carefully.
Beware of the various charges and
fees such as processing fees, late fees,
prepayment fees, cheque bouncing
charges, etc, that are levied by the
loan giver, so that you are not caught
off guard at a later date.
Do some window-shopping and
scout for the most competitive loan
rate before fixing a lender.
Do not be late on your interest
payments and never default on any
loans. Not only does it adversely
affect your credit score, but also legal
hassles can land you in a bad soup.
If you have taken several loans,
such as home loan, car loan, personal
loan, credit card loan, try and clear off
the credit card and personal loans on a
priority basis since the interest outgo
on these loans is usually quite high
compared to other types of loans.
If you have a life insurance policy,
certain government securities, or even
gold, you can get a loan against them
at relatively low interest rates.
Unless unavoidable, refrain from
taking a second loan to repay an
existing loan, lest you might get
caught in a vicious cycle of debt.
Some loans have certain tax
exemptions to them. Understand them
and make full use of them.
INSURANCE
This is the most important entity in
any individuals financial plan.
Insurance is sort of a safety net to
protect you or your family members
financially against any unforeseen
and unfortunate incidents. Do not
make the mistake of considering it as
a waste of money. The benefits of
taking an insurance policy far
outweigh the short-term expenditure.
There are different types of insurance
policies, some of which are almost
compulsory for every individual, such
as life insurance and medical
insurance, among others. In addition
to these insurance policies, a person
may also buy a good retirement plan
or go in for household insurance,
accident insurance, insurance for
spouse and kids, etc, depending on
his/her needs and goals.
The main thing is the total premium
outgo and the premium paying date.
Important checklist and points to
consider when formulating your
insurance management are as under:
Undertake a thorough analysis of
your current and future finances,
liabilities, goals and obligations
before buying your insurance policy.
If you are already insured, but feel
that you are underinsured, add an
appropriate additional cover.
Calculate the exact premium outgo
and check whether you can commit to
such a long-term obligation without it
pinching your pocket, too much.
Always pay premiums on time and
never let policies lapse.
Intimate your insurance company
immediately about changes in your
address or your contact information.
If you have a lumpsum amount
presently but are not confident that
you can pay premiums regularly for a
long-term, you can go in for a
one-time single premium policy.
Remember the golden rule -
insurance is not an investment
instrument. Many agents might try to
lure you to invest in a policy with the
promise of huge returns. Do not fall
prey to such false claims.
Medical emergencies can wipe out
your lifelong savings in no time. So
an adequate medical insurance is a
must for each and every individual
irrespective of age and state of health.
Do not be lax in this regard. Insure
yourself and also your family, either
individually or under a family floater
plan. Senior citizens are in more need
of medical insurance and even though
the premium for them may be high,
do not shrug it off. Also, add a good
accidental cover to a medical plan.
A good retirement insurance plan is
also an integral part of ones portfolio
as it will see you through your golden
years without any financial turmoil.
The earlier you start, the better it is as
you can garner a larger corpus.
It makes good sense to add a rider to
your insurance plan. It costs very little
and can offer good benefits.
TAXES
They say the only thing certain in life
is death and taxes. As a responsible
and honest citizen of this country, we
should all pay our taxes correctly and
on time. It is not only our legal
obligation, but also our moral
responsibility to pay taxes. The
money we pay as taxes helps run the
country and also comes back to us in
the form of infrastructure and various
public services.
Listed below is a comprehensive
checklist of things that can help you
in effective tax management.
List your income from all sources
and classify them under different
headings, such as salary, business
income, interest income, dividends,
short-term and long-term capital
gains, exempt incomes, etc. If you do
not have a proper understanding of
these things, please approach a
certified professional for the same.
Ascertain your appropriate tax-slab
under which you fall; after all
applicable deductions in the taxable
income have been incorporated while
computing tax.
Stay abreast of the changes/
modifications that have been made in
the tax regime in each financial year.
Pay your taxes diligently before the
due date. Also pay your advance tax if
applicable, and on time.
Make sure you have your
paperwork like bills, interest
certificates, salary certificates, etc, in
place and well before time to enable
easy calculation and maintenance of a
proper record for the future.
There are various tax-saving
products at your disposal to reduce
your overall tax liability. Scout for
these instruments in advance so that
you know which is the right one for
you with respect to returns, lock-in
periods, term and investment amount.
Keep a proper record of previously
filed tax returns, tax refunds and any
correspondence with tax authorities.
Intimate the tax office immediately
about any change in address or
contact information.
INVESTMENTS
Now comes the most important aspect
of any financial setup. Investments. If
our hard-earned money is kept idle, it
will actually decrease the purchasing
power as time goes by. Therefore, it is
very important to put your money to
work for you. Proper investment
spread across various asset classes,
keeping in mind your risk profile,
time horizon, goals, etc, is the key to
long-term capital appreciation and
financial independence.
Let us go through the different types
of investment options and a detailed
checklist for each of them.
Debt Or Fixed Investments
If you are a risk-averse investor, debt
or fixed income instruments should
be the right avenue for you. These
include bank fixed deposits, company
fixed deposits, savings certificates,
government bonds, etc. These are
low-risk, low-return investment
avenues. Hence, even though you
may not get great returns, the chances
of capital erosion are quite low.
Investments in fixed instruments
often do not beat inflation and, hence,
in principle offer a negative rate of
return. Do not invest a majority of
your portfolio in such instruments.
Be sure to monitor your investments
at regular intervals. If your
investments are locked in at lower
rates than the prevailing market rates,
reinvest or renew at the existing rates.
Keep a reminder of redemption or
maturity dates and redeem or reinvest
accordingly, on those dates.
If you are investing in
non-government fixed instruments,
such as company deposits, be sure to
check the credit rating awarded to
such instruments, indicating the
safety of your investments.
Check for liquidity of these
instruments. That is, your funds
should be easily redeemable in case
of emergencies.
Also check for the penalty, if any,
for premature withdrawal, if needed.
Allocate a portion of your portfolio
to safe havens such as gold and real
estate. In times of financial turmoil,
these are likely to fall the least.
Equity Investments
Over the long term, equity
investments have been found to give
the best returns. But at the same time,
the risk of capital erosion is also very
real. You should invest in equities
only after understanding your
risk-taking capacity.
You can invest directly into the
stock markets if you have a thorough
knowledge of the working of the
stock markets or you may invest via
mutual funds, which have
experienced fund managers who can
manage and invest your money.
Keep a list and copy of documents
such as account opening form, power
of attorney, bills, contract notes, etc,
when transacting with any
intermediary in the stock market.
Keep a check on charges like demat
charges, brokerage and various other
taxes incurred during share trading.
Keep in mind the tax implications
of trading, that is short-term and
long-term gains or losses.
Remember, investments in stock
markets should be with a long-term
view because in the short-term, the
stock may be subject to erratic market
forces and fluctuations.
If you are investing via mutual
funds, check for its past track record
and performance before investing.
Avoid investing in new fund offers
since there is no past performance to
compare it with.
If you are new to investing, instead
of a lumpsum amount, invest via a
systematic investment plan (SIP).
This helps to spread your investments
across various time frames and prices,
thereby bringing down the overall
cost of you investment.
Learn to take your profits at regular
intervals and book your losses when
you go wrong.
Never invest on the basis of tips.
Invest only that amount which you
can stand to lose without giving you
sleepless nights.
Never invest with borrowed or
leveraged money.
SOME GENERAL POINTERS
1. Keep a dairy where details of all
your investments, insurances, loans,
etc are available at a glance.
2. Keep your family members
updated about your finances so as to
not be at sea during an emergency.
3. Make a monthly budget and stick to
it. Check where you are going
overboard with your expenses and try
to curtail them.
4. Keep aside at least 3 to 6 months
worth of your monthly expenses as
emergency/contingency funds.
5. Make nominations for all your
investments, deposits, etc.
6. Review your investments from
time to time and make appropriate
changes, if required.
7. Make a proper wilL.

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For Pr i vate Ci rcul at i on Vol ume 1 I ssue 62 10t h Feb 12

A good fund manager is one

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