Sie sind auf Seite 1von 44
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st

RNI N o . MA H ENG/2009/28962

|

V olume

8

I ssue

05

|

01st -

15t h

M a y

’1 6

M u m b a i

|

P a ges 44

|

F or

P r i v a t e

C i r cu l a t io n

 
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
RNI N o . MA H ENG/2009/28962 | V olume 8 I ssue 05 | 01st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e 8 I ssu e : 0 5 , 0 1st
V o l u m e
8
I ssu e : 0 5 , 0 1st
- 15th
M a y
’1 6
Editor-in-Chief & Publisher: Rakesh Bhandari
Editor: Tushita Nigam
Senior Sub-Editor: Kiran V Uchil

Art Direc tor: Sachin K amble Junior Designer: Harshad Pawar

Operations: Namrata Sabbani

Research Team: Sunil Jain, Runjhun Jain, Vik as Salunk he, Swati Hotk ar, Nirav Chheda

P r i n t ed

a n d publ i shed

b y

M r

R a k e s h

B h an da r i

o n b e hal f of

Ni r ma l B ang

F i n ancial S e r v i c e s P vt

L

t d , p r i n t ed a t U ch i tha G r aph i c P r i n t ers P v t L t d

65 ,

Id e al

I n d .

E s t a t e ,

S enap a t i

B ap a t

M

a r g ,

L

o w er

P a r el ,

M u m b ai

– 400013

an d

p u bl i s h e d

a t

N i r ma l

S o n a w al a

B a n g

F i n an c ia l

B uild in g ,

25

S e r v i c es

B an k

Pv t S t r ee t ,

L t d ,

19 , Fo r t ,

M

umb ai -400001 . E di t o r : Tu s hita N i g a m

COR P OR ATE OF F ICE

B-2 , 301/302 , M a ra t h on I n n ova , O ff G an p a tr ao K ad am M a rg, Lower Pa re l ( W ) , M umb ai - 400 01 3 Tel : 022 - 3926 8000/800 1

Web : www.nir malb ang. co m b e y o n d ma r k et@ni r malb a n g. c o m Tel N o : 022 - 39 2 6 8 0 4 7

V o l u m e 8 I ssu e : 0 5 , 0 1st
DB Corner – Page 5 Growing Hopes If IMD’s predic tion of a good monsoon comes
DB Corner – Page 5
Growing Hopes
If IMD’s predic tion of a good monsoon comes true, it will have a positive
impac t on a host of sec tors – Page 6
Changing For The Better
Positive leading indicators are likely to bring cheer to the Indian economy as
well as corporate earnings results – Page 9
Only Sticks, No Carrots
There is a lot of pressure from investors on e-tailers who have star ted
evaluating their return on investments, forcing e-commerce players to cut
down on discounts – Page 12
Divided Rule
Exper ts are divided over the future of brick-and-mor tar stores vis-à-vis
e-commerce players – Page 15
Poised To Accelerate
The automobile sec tor is headed for a revival thanks to the government ’s
focus on the rural sec tor, drop in interest rates and lower inflation – Page 18
Promoting Efficienc y
With the launch of a trading platform for Priority Sec tor Lending Cer tificates,
margins of banks will not be hur t and lending to categories in the priority
sec tor will be enhanced – Page 21
Making The Right Connec tion
The mobile sec tor is mak ing a significant contribution to economic growth
and job creation in the countr y, while helping realize the goals of Digital India
– Page 24
Clearing Roadblocks
The government has proposed a set of reforms to revive the road sec tor
– Page 28
Veto: Making The Switch
The company has negligible debt and has posted consistent growth in
business – Page 31
Early Gainers
More and more investors have realized the impor tance of investing early and
have begun mak ing tax-saving investments at the beginning of the new
financial year – Page 34
Technical Outlook For The For tnight Gone By – Page 37
Keeping Loss At Bay
By mak ing use of the stop loss method investors can avoid more losses or
prevent erosion of profit – Page 38
Impor tant Jargon For The For tnight – Page 41

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

T he India Meteorological Department has predicted an above normal rainfall for the country this monsoon.

The India Meteorological Department has predicted an above normal rainfall for the country this monsoon. The positive expectation from this forecast has brought cheer not only to the economy but also the Indian stock markets.

A good rainfall will boost the economy to a large extent considering the deficit situation the country faced over the past two years. The trickle effect of an above normal rainfall will also be visible on a host of sectors.

Our cover story in this issue talks about the positive impact of monsoon on the rural populace, policymakers as well as various sectors in the country.

Other articles covered in this issue include the positive indicators that are likely to boost the Indian economy and corporate results, the pressure e-tailers are facing to perform and churn out profits while reducing the discounts they offer to consumers, the future of brick-and-mortar stores in comparison with e-commerce players, the push that the automobile sector has received from the government’s focus on rural areas, coupled with the drop in interest rates and lower inflation, the launch of the trading platform for Priority Sector Lending Certificates, the contribution of the mobile sector to India’s economic growth and job creation in the country as well as Digital India and, finally, the reforms proposed by the government to revive the road sector.

While the article in the Beyond Basics section covers the advantages of investing in tax-saving instruments from the start of the financial year, the one in the Beyond Learning section talks about the stop loss method and how investors can use it prudently to avoid losses and prevent erosion of their profitS.

4

B eyon d M arke t 01st - 15th May ’16

Tushita Nigam

Editor

I t’s

simplified..

.

In the coming fortnight, market participants are advised to avoid fresh buying in the markets. I

In the coming fortnight, market participants are advised to avoid fresh buying in the markets.

In the coming fortnight, market participants are advised to avoid fresh buying in the markets. I
  • I n the previous fortnight, Bank of Japan (BoJ) announced that it would keep interest rates unchanged at -0.1% and its asset purchasing value at 80 trillion yen defying market expectations. BoJ’s decision to hold rates led to the appreciation of the Japanese yen and depreciation of the US dollar.

In the coming fortnight, market participants are advised to avoid fresh buying in the markets. I

The India Meteorological Department (IMD) said monsoon rains from June to September are likely to be 106% of the long period average (LPA), which is hoped to bring cheer across the country, already reeling under drought after two continuous years to deficient rainfall during the monsoon season. Skymet Weather too echoed IMD’s views on monsoon rains.

Quarterly earnings results of India Inc are showing signs of improvement, and company managements are positive about the year, going forward.

In the coming fortnight, market participants are advised to avoid fresh buying in the markets. The Nifty futures has resistance at the 7,840 and 7,915 levels. If it crosses these levels, markets are likely to be positive.

The markets are likely to take direction from international events, remaining corporate earnings results and, most importantly, how rains actually pan out across the country in the coming monsoon seasoN.

Sensex: 25,229.70 Nifty: 7,747 (As on 3rd May ’16)

B eyon d M arke t 01st - 15th May ’16

In the coming fortnight, market participants are advised to avoid fresh buying in the markets. I

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

I t’s

simplified..

.

B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .

B eyon d M arke t 01st - 15th May ’16

B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .

I t’s

simplified..

.

 

just about

consumption in rural areas besides

Apart from the human factor,

states such as Maharashtra, Telangana

o n e - and - a - hal f

other sociological problems such as

and Karnataka in particular will be

W ith

months to

monsoon

go for the

mass migration to urban areas and

benefited by a well-distributed

season

(it

suicides. Farmers who have taken

rainfall — this will not only help

According to IMD, the monsoon this

begins in mid-June) there is good news from the weather bureau. An above normal monsoon has been predicted for this year and the news has been greeted with great joy as the last two years had witnessed scanty

loans are unable to repay them and several have committed suicides because of this.

non-repayment of loans also affects

alleviate drought conditions but will also spur agricultural growth, thereby helping bring the country’s economy back on rapid growth track.

rainfall leading to drought and severe

banks and other lending institutions,

year is likely to be 106% of the

water scarcity in several parts of the

leading to them suffering from

average of

89 cm. Rainfall within

country this year.

Non-Performing Assets (NPAs).

96%

and

104% of

this average is

 

considered as normal. This, on the

The New Delhi-headquartered India

The IMD is a Government of India

Though there have been some good

With farmers unable to raise crops,

The lack of consumption and

The Indian economy so far has been

back of

two dry years, is welcome

Meteorological Department (IMD), which is the principal agency responsible for meteorological observations, weather and seismology announced this long-awaited good news in April.

(GoI) organization under the Ministry of Earth Sciences. It operates hundreds of observation stations

foodgrains become scarce resulting in their prices skyrocketing. This leads to an inflationary situation, which becomes difficult to control.

spending in rural areas quickly percolates to other segments as well such as two-wheelers, tractors and even products such as television sets, fridges and other consumer goods.

news indeed.

Agriculture, which in India is heavily dependent on the monsoon for irrigation, contributes around 15% to the country’s GDP. A good monsoon will, therefore, spur the agriculture sector and this, consequently, will have a beneficial effect on the country’s economic growth.

across India and Antarctica and is also

This has an adversarial chain-effect

Besides an uptick in

crop and

one of the six Regional Specialized Meteorological Centres of the World Meteorological Organization.

years of adequate rainfall in between,

on the economy as several segments get negatively impacted.

spared much of the adverse consequences of scanty rainfall and

foodgrains production which will help in reducing inflation, a pick-up in agriculture will also positively impact spending and consumption in rural India.

the last few years beginning year

drought because of

its

strong

Higher earnings in rural areas (about

A point that needs highlighting here is

fundamentals. It

has

been

further

60% to 65% of India’s population

2002 in general have been marked more by rainfall-deficit and drought-like situations.

One of the reasons for the Indian economy not taking-off as expected is due to the monsoon playing truant, especially in the last two years. This has adversely affected India’s agricultural sector whose contribution to the country’s GDP and its economy is very important.

aided by a declining rate of inflation.

The Central government under Prime Minister Narendra Modi has also adroitly handled the economic situation. The country’s GDP growth last year (FY16) was a creditable 7.5%. And an optimistic Arun Jaitley, the Union Finance Minister, said recently that India had the capacity to clock an even higher growth rate.

depends on agriculture) will perk up the two-wheeler, tractor, consumer goods and even gold and jewellery segments, among others. The fertilizer sector will also be a big beneficiary of a turnaround in the agriculture sector.

that government employees will soon be beneficiaries of the Seventh Pay Commission’s recommendations for

Scanty rainfall and drought also affect rural income as farmers dependent on monsoon for their farming activities cannot raise crops with the result that their income-earning capacity is terribly curtailed. This leads to lower

The good news that the monsoon this year will be fairly well-distributed besides being above normal augurs well for India’s agriculture as well as its economy. Parched areas in several parts of the country, especially in

pay increases. This, plus a good monsoon, also has the potential to encourage consumption, especially in segments such as auto and consumer goods. All this will not only spur India’s economic growth but can

B eyon d M arke t 01st - 15th May ’16

I t’s

.

perhaps even help achieve Jaitley’s dream of a higher economic growth rate this fiscal (FY17).

Another positive that can arise from a good monsoon is further reduction in inflation, which now seems to be well under control, thanks to India’s apex bank, the Reserve Bank of India’s proactive stance in combating it.

The RBI, which cut its repo rate in early April by 0.25% (25 basis points) to 6.50% from 6.75% could be in the mood for one more cut around August this year after observing the progress of the monsoon.

By August, it will be known how monsoon has panned out and the RBI will be in a good position to take a call on its repo rate.

A good monsoon has the potential to push down inflation and this could influence the apex bank to bring about further cut in its repo rate then. If there is a rate cut around August, it will not only positively impact

sentiments but will also help perk up economic growth.

resilience to withstand turbulence, both internal and external.

With India’s economic fundamentals strong, a good monsoon will prove a big aid in pushing up India’s economic growth. As Jaitley recently pointed out, India could achieve a higher economic growth this fiscal on the back of a good monsoon. Already there is talk of GDP growth rate being higher than last fiscal and being close to around 8%.

While the Reserve Bank has pegged India’s economic growth rate at 7.6% for FY17, the PHD Chamber of Commerce has said that India could clock an 8% GDP growth this fiscal (FY17). Certainly, there is a feeling that India’s economic growth this fiscal could be higher than last year ’s.

That India has the capability to achieve a higher growth rate and that too rapidly is undoubted. This is because of strong fundamentals that the Indian economy enjoys and which has imparted it with a strong

It

is this

which has helped India to

weather the global economic meltdown and maintain a healthy economic growth rate in the last two years. This has been aided by a proactive government in terms of creating a business-friendly environment. The government has also acted promptly to combat rising prices in the last two years and the results are now clearly visible in the form of a lower inflation.

A good monsoon this year is critical for India’s economy. The platform is available for achieving rapid growth. A healthy contribution from the agriculture sector to the country’s GDP will go a long way in speeding up growth and also pushing it up higher. After two dry years, the possibility of a good monsoon beginning mid-June has injected optimism in the Indian economy. And an 8% growth rate does not seem a distant dream any longeR.

perhaps even help achieve Jaitley’s dream of a higher economic growth rate this fiscal (FY17). Another
perhaps even help achieve Jaitley’s dream of a higher economic growth rate this fiscal (FY17). Another
perhaps even help achieve Jaitley’s dream of a higher economic growth rate this fiscal (FY17). Another

Contact: 022 39269600

E-mail: sales.mumbai@nirmalbang.com

perhaps even help achieve Jaitley’s dream of a higher economic growth rate this fiscal (FY17). Another

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

P rediction of better monsoon this year has renewed hopes that year 2016 could be the
P rediction of better monsoon this year has renewed hopes that year 2016 could be the

P rediction of better monsoon

P rediction of better monsoon this year has renewed hopes that year 2016 could be the

this year has renewed hopes that year 2016 could be the turning point for the Indian

economy and corporate earnings too.

India Meteorological Department (IMD) estimates seasonal rainfall in the forthcoming monsoon season to be around 106% of the long period average, good enough to bring cheer to the markets given that India has faced drought-like situation in the last two years. If the IMD prediction

indeed comes true, then it could be the best monsoon for India in the last two decades.

This can also be vouched from the uptick in the stock markets where a majority of Street analysts believe that the worst seems to be behind us.

A better-than-expected monsoon can have a ripple effect on sagging rural consumption, and could actually add 0.5% to the GDP growth, which is expected to be in the range of 7.7% to

7.9% in FY17 as against 7.5% last year, if IMD estimates are right.

Furthermore, India’s annual industrial output growth, measured by index of industrial production (IIP) stood at 2% in February as against -1.5% in January, on the back of strong factory output, especially electricity and mining sectors.

Also, bank credit growth has been in the region of 11% over the past three months as compared to the average of

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

10% in 2015. During the same period electricity generation grew 9% and diesel consumption stayed at 8% as against 4% and 6%, respectively in the year 2015.

That apart, cement production has grown at 9% in the last three months as against 2% growth in 2015. Two-wheeler sales grew at 13% in February vis-à-vis 1.5% growth in November, an indication of revival in rural demand.

In 2015, rural household consumption of FMCG products grew at the fastest pace of 5.4% on a year-on-year (y-o-y) basis as compared to 2.9% growth in urban consumption. This is also reflected in the growth of consumer goods, which saw a sharp increase in February, growing at 9.7%

On the policy front too the government has been able to move critical bills pertaining to real estate, national waterways and Aadhaar. The Street is hopeful that in the coming sessions, we might see similar action on key bills like bankruptcy code and GST, which will be critical in improving economic efficiencies.

lower commodity prices, pushing consumption and improving margins of Indian companies, particularly those companies whose products are dependent on price movement of international commodities.

Commodity prices are down across the board, in particular energy and metals, which form a large proportion

of

the

operating

cost

of

manufacturing sectors.

The recent recovery in commodity prices bodes well for commodity companies too as these companies have been able to recover some of their earlier losses incurred due to poor realizations that dipped below their cost of production in aluminium, oil and gas and steel sectors.

In addition to this, India’s apex bank, the Reserve Bank of India has cut interest rates by about 150 basis points since the start of January this year. While transmission of the same to consumers is taking time, going ahead this will be seen as a positive trigger as more and more banks have been cutting their lending rates in line with the RBI rate cut.

Leading indicators show recovery seems imminent, despite low earnings base of the past few quarters. For instance in financial year 2015 Sensex earnings grew at 1.3% to `1,355 and is further expected to de-grow by 2.5% to `1,321 in the concluded fiscal 2016.

As banks keep on passing rate cuts to consumers and corporates, it will help improve demand in the consumer sector and provide some relief to stressed sectors that have been facing huge pressures since awhile now because high interest costs have been hitting their profitability.

Owing to the low base of the last two years, if Street estimates are right, then the Sensex could make an earnings growth of close to `1,550- `1,560 in the fiscal 2017, which is a

strong growth of close to 16%

to

18%. So FY17 could actually be a

turning point for Sensex as well as corporate earnings.

The recovery will also be aided by

Because of lower interest rates and related savings, companies in interest-sensitive sectors will be able to report better earnings results in the coming months.

Besides, the RBI

has opened up

a

window for ample liquidity through various measures in the recent past, which is again a good sign that companies that were not able to

expand or refinance their debt will now be able to expand their sales and get adequate fundings for working

capital and other needs.

Further initiatives like reforming public sector banks, recapitalization of banks and resolving non-performing assets’ issue on a priority basis is another step that will clear stress in the banking system and allow banks to improve their credit or advances ratio.

On the external front as well the situation has improved from extreme fragility as a result of stability in the international markets led by volatility caused by China.

The Chinese government is taking measures to revive growth and abate investor concerns while announcing stimulus at the same time. It has increased fiscal deficit for the year 2016 to 3% of GDP as against 2.4% in the year 2015.

The Indian rupee, which had become volatile as a result of numerous international events, has thus seen some stability, which is again good news for exporters as a large number of companies derive their revenues from exports.

Importantly, the fear of external shocks, which prevailed in the minds of corporate India is easing as the environment improves on the back of measures taken by central banks across the globe.

In fact, the outflow of foreign investor money is now stabilizing and foreign investors have again started buying Indian equities along with a huge uptick in FDI money in the past led by the Make In India initiative.

There is ample room for growth on the demand side too. Better monsoon rains is obviously good news. Also,

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

the gradual implementation of the Seventh Pay Commission recommendation on the hike of government employees’ salaries and assembly elections in states of Tamil Nadu, Kerala, Puducherry (Pondicherry), West Bengal and Assam are reasons good enough for speeding up further demand.

On top of these events, government expenditure on agriculture and

infrastructure sectors speeding up.

have

been

The road ministry has awarded road projects of close to 10,000 km in fiscal 2016 as against the average run

rate of 3,000 km to 4,000 km earlier.

For this fiscal the government aims to award works for construction of close to 12,000 km of roads, which is a good sign for the revival in demand, particularly in the rural markets.

The government intends to spend over `2 lakh crore on the road sector in fiscal 2017, which will provide a huge impetus to demand in ancillary sectors as well as generate more employment in the labour market, leading to fresh demand.

In addition to this, in the last one year the government has cleared a number

of stalled projects in road, power and other sectors, leading to fresh demand for the economy and the labour market too.

Overall most leading indicators are showing signs of recovery. And if these indicators remain persistently up, there is reason to believe that over the next one or two quarters corporate earnings, which have been depressed so far, will start looking up.

Moreover, unlike in the past, there are enough positive triggers, which if played out well, could result in FY17 experiencing strong corporate earnings growtH.

the gradual implementation of the Seventh Pay Commission recommendation on the hike of government employees’ salaries
B eyon d M arke t 01st - 15th May ’16 I t’s .
B eyon d M arke t 01st - 15th May ’16
I t’s
.
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .
B eyon d M arke t 01st - 15th May ’16 I t’s simplified.. .

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

B rick-and-mortar retailers recently submitted a presentation to the government alleging that

B rick-and-mortar retailers recently submitted a presentation to the government alleging that e-commerce players were not

e-commerce players were not adhering to the rules announced by the government last week and even threatened that they would take legal action and approach the court on the same. Last week, the government allowed 100% foreign direct investment in online retail of goods and services for the marketplace model of e-commerce companies. New rules have however, disallowed marketplaces from offering discounts while capping total sales of group companies or one vendor at 25%.

According to the press note issued by the Department of Industrial Policy and Promotion (DIPP), a marketplace model is an information technology platform run by an e-commerce entity on a digital and electronic network to

“We expect major non-compliance by a lot of e-commerce players. While the notification said marketplace cannot influence sale price, most online retailers have private brands and can control their pricing or give huge discounts. The e-commerce players are continuing to flout government rules. Only announcement of rules by the government is not enough but it should get implemented,” said Future Group CEO Kishore Biyani.

Marketplace operators and technology platform providers have been operating against the spirit of the policy for sometime now and reports point out ambiguity in the new guidelines, which can be worked around by marketplace operators to overcome restrictions defined in the B2C e-commerce policy. This means that they can continue to operate against the spirit of the policy with no

Experts said this could lead to revival both in the retail and the real estate sector. “India is already host to some

of the largest global e-commerce players. The announcement that 100% FDI will now be allowed in e-commerce is going to open the floodgates to a host of other players in this segment,” according to a report by global real estate services firm Jones Lang LaSalle.

The new players would require large office spaces to house their back-end teams and this demand would be in major cities. The logistics and warehousing demand will also rise and that will spread across the country. As e-commerce players need to deliver products quickly to their customers, there is a sense that the most important clientele segments for them are in tier-II and tier-III cities.

Now, e-commerce players

will

be

act as a facilitator between the buyer and the seller.

checks and balances, said Kumar Rajagopalan, CEO, Retailers

unable to sell below market prices and not more than 25% of sales will

Association of India (RAI).

happen

via

one

vendor.

This

DIPP has prohibited FDI in

The new policy also mandates such

Retailers like Future Group,

announcement

brings

brick-and-

e-commerce companies that own

Since the policy forbids marketplaces

The government recently allowed

mortar retailers on a more

inventories of goods and services and

from participating in pricing directly

level-playing field, and would help to

sell directly to consumers using

or indirectly, all discounts, coupons,

still

the

outcry

over

unfair

trade

online platforms. The marketplace

vouchers be offered by the individual

practices to an extent, an expert said.

e-commerce companies will be allowed to provide support services to sellers on their platform like logistics, warehousing, order fulfilment, call centre and payment collection.

e-commerce companies to display contact details of the sellers online. The warranty/guarantee of products or services sold online will also be borne by the sellers, not the e-commerce company.

Starbazaar, Shoppers Stop and Aditya Birla Fashion & Retail, among others alleged that despite government setting clear rules for e-commerce players they were not adhering to it.

seller. These could not be issued by the marketplace. Also, all transactions are to be strictly between a seller and a buyer. Therefore, each order on the marketplace platform be between an individual seller and a buyer. None of the rules are being followed, alleged RAI members.

100% foreign direct investment (FDI) in e-commerce and online retail consumer businesses that operate as marketplaces. While it allowed 100% FDI through automatic route, it also expanded the scope of marketplace to include support services (to sellers) like logistics, warehousing, order fulfillment, call centre, payment collection and other services.

Overall it would be a positive for the retail industry and more rational behaviour will now prevail in terms of market trade practices, and mounting of losses by most e-commerce companies will be curtailed. Online sales may reduce as deep discounts disappear, although losses will also be capped.

Sanjay Sethi, CEO & Co-founder of ShopClues, said, “100% FDI in e-commerce is a great initiative for the marketplace format of e-commerce retailing as it will help attract foreign investments in the country. It will be beneficial for consumers and will help in supporting the vision of ‘Make in India’ as well

B eyon d M arke t 01st - 15th May ’16

I t’s

.

as create more job opportunities in the country. The clarity of the definition of e-commerce and marketplace model categorically will allow many players (national and international) to enter the industry through marketplace route.”

The e-commerce sector has been witnessing huge losses as they offered high level of discounts to customers to retain market share. All big retailers, including Snapdeal, Flipkart and Amazon India have been struggling and reported losses in financial year 2014-15.

Snapdeal’s financial report revealed a loss of `1,328.01 crore. Amazon India’s FY15 losses grew fivefold to `1,723.6 crore. The highest loss reported last financial year was by Flipkart at `2,000 crore. Xerion Retail, which runs Jabong, posted a loss of `43.6 crore on sales of `1,082.9 crore, according to a Registrar of Companies filing. A year ago, it had sales of `527 crore with a net loss of `16.6 crore.

Not surprising that discount levels have declined and the trend is prominent post-Diwali. All big players, including Flipkart and Amazon, among others, have reduced discounts. While margins of e-tailers are expected to improve with this, it is still a long way for them to become profitable as cost of infrastructure and delivery continues to remain high. To become profitable, they will have to bring down discounts further and focus on profitability.

In Indian start-ups investments have dropped sharply in the first three months of this year, falling by over one third compared to the same period in 2015. Investors are terming this slowdown as the “new normal,” as it comes on the back of a frenzy of funding in the last two years. The number of venture capital deals fell

by 35% during the first quarter of 2016 to 90 as compared to 138 in the same period one year ago, according to data from risk capital data monitoring service VCCEdge.

The total value of venture capital invested took a drastic fall of over 80% in Q1 FY16 to $337 million from $1.79 billion, as mega-financing rounds disappeared and deal sizes turned modest. The reduction in the number and size of transactions has been the sharpest at growth deals stage or the so called Series-C, where the number of deals fell by 75% to 80%. In earlier stages of Series-A and Series-B, the fall in number of transaction has been around 50%.

The rush of capital for Indian start-ups began in 2014, after online marketplace Flipkart raised a mammoth $1 billion in July ’14. Soon after, China’s e-commerce giant Alibaba successfully listed its stock in the US markets, providing further fillip to the global e-commerce boom.

Investors such as Japan’s SoftBank, which benefited handsomely from the Alibaba IPO, turned their attention to India, lavishing money on promising start-ups here. Since then the mood has changed with few hedge funds making new investments over the last three quarters, and global Internet investors like SoftBank and DST Global turning cautious.

discount can be found only on stock clearance sales today. Hot-selling items like women’s apparel and footwear have taken the worst hit, with discounts dropping to around 30% to 35% from above 50%. Discounts on smartphones, another bestselling item, are down by more than 10%, to 20% to 25%. Furniture discounts have moved down to around 10% to 15%. There’s more bad news for consumers as discount levels are expected to fall further.

Experts too said that given the current environment, in the last couple of quarters, online retailers have been focusing on bringing down discounts as there is pressure from investors to turn businesses profitable and the trend may continue as online retailers can no longer sustain the continuous cash-burn with no returns. Investors too are wary and have become cautious to invest in the sector.

Private equity deals in the online space have dropped 119% in the second half of FY15-16 compared to the first half. Between April ’15 and September ’15, there were 118 private equity deals in the e-commerce space, amounting to $273.41 billion. From October ’15 to March ’16, there were 108 private equity deals in the space, amounting to $124.83 billion. There is also a lot of pressure from investors on e-tailers as they have started to evaluate their return on investments.

Online retailers like Flipkart, Myntra, Jabong and Shopclues, among others, are waking up to the harsh realities of business. Offering deep and competitive discounts for years have got them loyal customers, but mounting losses cannot be ignored further, as investors have begun seeking returns on their investments.

Discounts of 50% and above - a norm sometime back - are now a thing of the past, and this high level of

Sanjay Gupta, chief marketing officer, Urban Ladder says it is difficult to run businesses at a loss for too long. “From the launch itself, our focus was on profitability. We believe in honest pricing and we try not to sell products below the cost price, while trying to remain competitive at the same time. We have also seen discounts dropping in the past one year as online retailers have realized it is impossible to run businesses on loss for too long.” he saiD.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

I n April ’16, Spanish high-end fashion retailer Zara leased out 50,000 sq ft space in
I n April ’16, Spanish high-end fashion retailer Zara leased out 50,000 sq ft space in
I n April ’16, Spanish high-end fashion retailer Zara leased out 50,000 sq ft space in
  • I n April ’16, Spanish high-end fashion retailer Zara leased out 50,000 sq ft space in South Mumbai’s Flora Fountain for an

I n April ’16, Spanish high-end fashion retailer Zara leased out 50,000 sq ft space in

annual rent of `30 crore. The deal

raised eyebrows for being the largest space transaction ever by any international retailer in India.

Zara has 17 outlets in India including three stores in Mumbai. But the Flora Fountain outlet is its first high street retail store in Mumbai. Zara’s expensive store lease comes at a time

when most of the retail action has shifted to the online space.

Recently, ITC group said

it

is

considering introducing its John Players brand in categories such as foot wear, eye wear, bags, etc in the online marketplace. The company is encouraged by the success of the

brand’s online sales on sites such as Myntra and Snapdeal. ITC plans to launch an exclusive line of clothing for John Players, which will be sold only online.

Even Kishore Biyani, the father of Indian retail who has been quite skeptical about e-commerce, signaled his interest in online retail with the recent acquisition of online furniture retailer FabFurnish.com.

Online retail space in India is growing rapidly and is expected to touch $48 billion - $60 billion in size by the year 2020 from $4.47 billion in 2014, according to UBS AG, a Swiss global financial services company. Home-grown online retailers such as

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

Flipkart and Snapdeal have grown rapidly attracting over $9 billion in investments from venture capitalists in the last two years.

This has come at the cost of physical retailers who have been denied access to foreign funds. India still does not allow Foreign Direct Investment (FDI) in multi-brand retail (retailers that sell more than one brand). This rule, however, does not apply to online retailers, which gives them an unfair advantage over offline retailers in the country.

focus to tier-II and tier-III cities.

The ratings agency, however, believes that in the future online retail could overtake offline retail in some product categories such as books, music and consumer durables.

“In our target audience, pretty much everyone is going online,” said Ritesh Ghosal, Chief Marketing Officer, Infiniti Retail Ltd, which runs Croma, the electronics and white goods chain from Tata Group in an interview to a leading business daily.

up. For instance, consumers are not just buying electronic goods and mobile phones online. They now buy

everything online from clothes, cosmetics, medicines, lingerie to even household items such as dust bins.

Consumers prefer online shopping because it is convenient and products are usually cheaper online. Payment options such as digital wallets have made online shopping easier. It helps that e-commerce giants flushed with foreign funds often offer heavy discounts to buyers.

“Ideally we would like FDI in multi-brand retail. However, there has been no change on the government’s stand for allowing it. Meanwhile, online retailers who had access to funds were functioning like retailers,” said Kumar Rajagopalan, chief executive officer, RAI in an interview to a leading business daily.

“There are 10% consumers who don’t go online at all. They may go to 2-3 physical stores and make a choice. There will be an equivalent 10% to 15% who don’t step out of their home and do all their research online and get everything delivered home. The remaining 75% to 80% buy across mediums,” added Ghosal.

A PwC report says e-commerce companies have incurred combined losses of around `1,000 crore because of their heavy discounting strategy. The consultancy firm believes this model is not feasible in the long run. But e-commerce companies continue to offer discounts to increase their market share.

A February ’15 report by property

Arvind Singhal, Chairman of

Physical retailers cannot offer such

consultancy firm Knight Frank India

management

consultancy firm,

heavy discounts. They are at a severe

Pvt Ltd and Retailers Association of

Technopak isn’t all that optimistic

disadvantage here. Thanks to

India (RAI) shows that the share of

about online retail. He believes that

government policies, brick-and-

e-commerce in retail expected to

online retail will

still be a small

mortar stores do not have access to

increase from 2% in 2014 to 11% in

percentage of the overall retail pie for

FDI and they are struggling to make

2019, while the share of organized brick-and-mortar retail is expected to fall from 17% to 13%.

three reasons.

Firstly, consumer spending is dominated by food of which over

profits because of the huge rents they pay for real estate. This has left several physical retailers disgruntled.

Does this mean brick-and-mortar

50% is accounted for by perishables

A few

months back, the Retailers

retailers are in trouble? Opinion seems to be divided on this. Average Indian consumers seem to prefer both online and offline shopping. This means that we will continue to see a growth in physical retail stores.

that include dairy, vegetables, meat, and fruit. Secondly, almost 50% of consumer spending happens in rural areas where e-commerce has not made a big impact and the third reason Singhal cites is that important e-commerce categories such as

Association of India moved the Delhi High Court demanding a level-playing field in FDI rules for retail. Their point was that the FDI rules do not affect e-commerce companies because they present themselves as technology platforms.

A research report by credit rating agency Crisil says that brick-and-mortar retailers will grow between 13% and 15% over the next two to three years. This contrasts with 60% growth for online retailers.

consumer electronics, durables and appliances, apparel as well as footwear and furniture account for a mere 18% of the total consumer spending on merchandise.

In March, the government allowed 100% FDI in online retail. Retailers, such as Future Retail, Shoppers Stop, Arvind Lifestyle, Infiniti Retail and Aditya Birla Retail have raised

Crisil says physical retailers are sustaining business by shifting their

While Singhal makes some good points, the other side of the argument is that online shopping is fast catching

concerns over this and have asked for a level-playing field in the retail sector in the country.

B eyon d M arke t 01st - 15th May ’16

I t’s

.

Small retailers seem to be more affected by this discrepancy in FDI rules. For instance, in the last one year, cash-strapped apparel retailer Provogue (India) has shut over 60 stores and is struggling to pay salaries of employees. One of the reasons cited for its revenue loss is the competition from online retailers. It is impossible for physical retailers to offer the kind of discounts that online retailers offer to lure customers.

In contrast, the larger retailers especially foreign ones seem to be doing well. For instance, UK-based retail giant Marks & Spencer plans to open new stores across the country for maintaining around 20% growth. The company is present in India

through a joint venture with Reliance Retail. Marks & Spencer has opened 31 outlets in India in the last three years and on an average opens 10 to 12 stores in a year.

Walt Disney Co plans to open retail stores in India in collaboration with DLF Brands, a subsidiary of real estate developer DLF Ltd. Disney sees an opportunity in the growing demand among Indian consumers for branded kids clothing and accessories for them.

Disney will open retail stores on a licensing and franchisee basis. It even plans to have large flagship stores of about 10,000 square feet in size though most of its stores would be

1,000 sq ft in size.

While there is a growing divide between online and offline retailers, analysts believe the future will not be a tug off war between the two. The future retail model will be omni-channel, where a retailer sells to consumers through both offline and online medium.

Large retailers have started preparing for it by consolidating. Last year, Bharti Retail and Future Retail merged their operations and Aditya Birla acquired Jubilant’s retail business. E-commerce players such as Amazon also have some offline presence through their pick up and drop facilitieS.

B eyon d M arke t 01st - 15th May ’16 I t’s .
B eyon d M arke t 01st - 15th May ’16
I t’s
.
U nion Budget 2016 did not bring much cheer for the Indian automobile sector. Industry insiders
U nion Budget 2016 did not bring much cheer for the Indian automobile sector. Industry insiders
U nion Budget 2016 did not bring much cheer for the Indian automobile sector. Industry insiders
U nion Budget 2016 did not bring much cheer for the Indian automobile sector. Industry insiders

U nion Budget 2016 did not bring much cheer for the Indian

automobile

sector.

Industry

insiders felt the government should

have announced some measures to revive the

ailing automobile sector.

Automobile industry was hoping that the Budget would focus on creating demand in the automotive sector and introduce long-awaited reforms to spur growth in the sector. The Budget, however, turned out to be a dampener. In the last four years, India’s automobile sector has been growing in single digits. According to Society of Indian Automobile Manufacturers

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

(Siam), in 2013-14, passenger vehicle sales declined by 6.05% for the first time in 13 years; in 2014-15 it grew

7.24%.

reduction in interest rates and high discounts, the Ernst and Young research report said.

The Indian government’s ‘Make in India’ initiative is expected to give a big push to the automobile sector. The

by 3.90% and in 2015-2016 passenger vehicle sales grew by

Ernst and Young expects market growth to pick up gradually and

initiative focuses heavily on the automobile sector. According to the government’s ‘Make in India’

Low domestic demand and a failure

domestic passenger vehicle sales to reach 4 million units to 4.5 million

website, India will become the third largest automobile market by 2026

on

the part

of the government to

units by FY20 (CAGR of 9% to 11%

after China and the US and will

introduce reforms - in

particular a

during FY15-20).

account for 5% of global vehicle

delay in

the roll

out of Goods and

sales. India is now the sixth largest

Services Tax (GST)

has

hit

the

Commercial vehicle demand will

automobile market, behind China,

automobile sector.

grow from the lifting of mining bans,

US, Japan, Brazil and Germany.

Things are changing though. The automobile sector is headed for a revival thanks to the government’s focus on the rural sector, drop in interest rates and lower inflation.

government’s infrastructure push, increased freight movement, pent up demand and positive consumer sentiment. “We expect the Indian CV industry to grow at a CAGR of 7% to

According to the government’s ‘Make in India’ pitch, passenger vehicle’s sales will grow at a CAGR of 16% between 2013 and 2020 to more than

“India’s automotive industry is expected to witness a gradual recovery during 2016.” informed Cyrus Mistry, Chairman, Tata Motors while addressing Tata Motors’ shareholders at the company’s 70th annual general meeting.

Mistry said India’s passenger vehicle

9% during FY15–20 to reach around 0.9 million units by FY20,” the Ernst and Young report said.

In an interview to to a website, Vinod Aggarwal, CEO, commercial vehicles, Eicher Motors mentioned that in 2016 commercial vehicles industry will grow because of investments in infrastructure - primarily road construction.

6 million units and two-wheelers and three-wheelers will grow at a CAGR of 9% between 2013 and 2020.

India’s automobile sector accounts for 45% of India’s manufacturing gross domestic product (GDP) and 7.1% of the total GDP. KPMG’s 2015 Global Automotive Report says India’s automobile industry employs over 20 million people and the industry is estimated to be valued at US $115

sales will grow as the macro- economic scenario improves and the

Ernst

and Young has, however,

billion by 2020.

growth of the commercial vehicle industry will hinge on execution of infrastructure projects and a revival in

warned that the commercial vehicle industry needs to prepare for upcoming regulatory changes such as

India is expected to become the fourth largest automobile producer in the

the mining sector in India.

the uniform bus body code and

tightening emission

norms.

world by 2020. It is the backbone of India’s manufacturing sector and,

A September ’15 Ernst and Young

industry will

also

The have to explore

therefore, an important part of the

report says the automobile industry

innovative sales and service formats

‘Make in India’ initiative.

will see an increase in demand in

to widen

reach as

well as reduce

FY17 as economic environment

vehicle downtime.

 

Automobile companies have reacted

improves. “To translate the growth potential into reality, automakers need to identify profitable niches, introduce exciting new models, offer improved customer experience, invest in localization, create flexible production capacity and supply chains,” the report said.

The two-wheeler market will also pick up in FY16. It will see single-digit year-on-year growth. The Indian two-wheeler industry is expected to grow at a CAGR of 8% to 10% during FY15–20 and reach around 25 million units by FY20.

positively to the government’s ‘Make in India’ campaign. Giants such as Ford, Delphi, Bosch, Aisin Seiki, Denso, ZF, FAG, Magna, Honda, and TRW have already started investing in India in the states of Gujarat and Tamil Nadu.

After a moderate recovery in FY15, the automobile sector will have a good FY16 on the back of new model launches, low fuel prices, possible

B eyon d M arke t 01st - 15th May ’16

However, there seems to be no revival in sight for tractors though. The tractor market could pick up in the second half of FY16.

American automobile giant General Motors has announced a $1 billion additional investment in its Indian subsidiary, Chevrolet India. The company will launch as many as 10

I t’s

simplified..

.

new models from the Chevrolet family in the next five years. It will manufacture its vehicles from Talegaon in Maharashtra.

German luxury car maker BMW has said that it will increase the level of localization at its BMW plant in Chennai to 50%. “The future belongs to India. If you want to benefit from the dynamics of the Indian market, you need to act today,” affirmed Philipp von Sahr, President, BMW

The government is offering several incentives to lure foreign manufacturers such as reduction in tax, customs exception, allowing 100% FDI investment, automatic approvals for foreign companies, technology modernization funds for Small and Medium Enterprises (SMEs). The central government is also working on removing red tapism to ease the entry of foreign investors into the automotive industry.

and indirect jobs that can be created by the Indian automotive industry over the next decade is 65 million.

The Automotive Mission Plan 2026 is a collective vision of the government and the Indian automobile industry on “where the vehicles, auto components, and tractor industries should reach over the next 10 years in terms of size, contribution to India’s development, global footprint, technological maturity, and

Group India.

The Automotive Mission

Plan

competitiveness.” It envisages that

2016-26 announced by the

the Indian automotive industry will

Austrian motorbike maker KTM-

government pegs

the automotive

grow 3.5 to 4 times in value to about

Sportmotorcycle is likely to develop

industry as the engine of the ‘Make in

`18,88,500 crore by 2026.

India’ programme. Over

the

next

and produce bikes at the Bajaj facility in Chakan, Pune from 2016.

The engine and components produced and developed in India will be shipped and assembled at the KTM headquarters in Austria, and then sold across the globe. The first batch will be dispatched to the international markets from the Chakan facility in early 2017.

decade, the Indian automotive sector is likely to contribute to 12% of the country’s GDP.

The government also wants to make the automotive industry one of the largest job-creating engines in the Indian economy. According to a government estimate, the potential for incremental number of both direct

This year, we can expect many other developments that will benefit the automobile industry. Automobile manufacturers have lined up several new launches to meet the new demands of consumers and to adhere to stricter emission norms. With the government’s help, a turnaround in the automobile industry’s fortune seems eminenT.

Now, Commodity Trading

Com modi t y t r a d ing c a n be c o n f u si n g especial l y if o n e

i s in e xpe r ien c ed a n d lac k s t h e ne c e s sa r y s k il l s t o t r a d e

k n ow ledge c an he l p you spot t he u n de r ly i ng c l ues a n d

Is No More A Puzzle.

Now, Commodity Trading Com modi t y t r a d ing c a n be
Now, Commodity Trading Com modi t y t r a d ing c a n be

c om m o d i t y t r ad i ng req u i reme n t s.

t eam of sea s one d

Now, Commodity Trading Com modi t y t r a d ing c a n be

s u c c e s sf u ll y.

i nves t me n t

e xpe r i en c e

s t r a t e g ie s

i n - dept h

a na l y s t s

N i r m a l

c re a t e

Ba n g,

yea r s

yo u r

wi t h

best

t h a t

a nd

s uit

o u r

t he

At

of

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

ww w.nirmalbang.com

e -m a il : s a le s . mumbai@nirmalban g . c om

C o n t a c t : 0 22 -3 92 696 00

w w w .n i rmalban g . c o m

|

|

REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510

CORPORATE OFFICE:

BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

R eserve Bank of India (RBI) on 7th April issued instructions on trading in Priority Sector
R eserve Bank of India (RBI) on 7th April issued instructions on trading in Priority Sector

R eserve Bank of India
(RBI) on 7th April issued instructions on trading in Priority Sector Lending

Certificates (PSLCs) for banks. PSLCs are instruments that can be traded by banks with an aim to achieve priority sector lending targets in the event of shortfall and at the same time incentivize banks that have a surplus in priority sector lending. A trading platform was also launched to trade in PSLCs.

Priority sector refers to those sectors of the economy which are socially

important to the economy but may not get timely and adequate credit. PSL or directed lending has been in existence for the last three decades in India. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

The RBI has mandated that 40% of all loans of commercial banks should be to the priority sectors. Banks are needed to achieve broader targets, and sub-targets too.

B eyon d M arke t 01st - 15th May ’16

R eserve Bank of India (RBI) on 7th April issued instructions on trading in Priority Sector

I t’s

simplified..

.

Targets And Sub-targets For Banks Under Priority Sector

Categories

Domestic Commercial Banks/ Foreign

Foreign Banks With Less Than 20

Banks With 20 And Above Branches

Branches (As A Percentage Of ANBC

(As A Percentage Of ANBC Or Credit Equivalent Of Off-balance Sheet Exposure, Whichever Is Higher)

Or Credit Equivalent Of Off-balance Sheet Exposure, Whichever Is Higher)

Total Priority Sector

40

32

Total Agriculture

18

No Specific Target

Advance To Weaker Section

10

No Specific Target

Source: RBI FAQ

THE PSL CHALLENGE

While the intention behind PSL is bona fide, it doesn’t make good business sense. Banks often miss the target or meet the target albeit not in the right spirit. Many banks, especially private sector banks, find lending to the priority sector a losing proposition mainly due to higher costs and higher risks.

Banks that miss the PSL target have to deposit the shortfall with the Rural Infrastructure Development Fund (RIDF) of National Bank for Agriculture and Rural Development (NABARD). RIDF offers low-cost fund support to rural infrastructure projects like irrigation, soil conservation, watershed management. Banks thus indirectly achieve their PSL targets.

However, banks are on the losing side as deposits with RIDF have comparatively lower yields than what they would have earned lending to other sectors, thus, serving as a key disincentive for banks to fall below their priority sector lending targets.

Total Agriculture Credit As Percentage Of ANBC*

5.0 7.0 9.0 Public S ec tor Banks Prlvate S ec tor Banks Agriculture Lending Target
5.0
7.0
9.0
Public S ec tor Banks
Prlvate S ec tor Banks
Agriculture Lending Target
21.0
19.0
17.0
15.0
13.0
11.0

1995 1996 1997 1998 1999 2000 2001 2002 2003

2004 2005 2006

2007 2008 2009 2010 2011 2012 2013 2014

Source: Report On Trend And Progress Of Banking In India, RBI *Adjusted Net Bank Credit

PRIORITY SECTOR LENDING CERTIFICATES

RBI has acknowledged the practical difficulties of banks in meeting PSL targets and some flexibility was desired by the industry. PSLC bridges the gap to some extent. The Raghuram Rajan Committee on Financial Sector Reforms had recommended the introduction of PSLCs. More recently, the RBI comprehensively revised priority sector

guidelines in April ’15, which provided for the introduction of PSLC as a mechanism to incentivize banks having surplus in their lending to different categories of the priority sector.

Simply put, PSLC are instruments, very much like shares, bonds or mutual fund units, which can be traded by banks bilaterally to meet their PSL obligations. Secondary market trading in PSLC is yet not allowed, but it is something that can be expected in the future.

The bank with a shortfall in PSL target can buy PSLCs from the bank that has a surplus. This will happen at a market-determined price on a trading platform. Banks can issue four kinds of PSLCs - agriculture, small and marginal farmers, micro-enterprises and those issued for overall lending targets. The certificates will have a standard lot size of Rs 25 lakh and multiples thereof and all PSLCs will expire by 31st March every year.

Most importantly, the loan would remain in the books of the seller bank implying that the buyer of PSLC will not bear underlying credit risk from that loan.

THE CONCEPT

Every bank has its comparative strength as far as its

lending audience is concerned. For instance, a bank with

an expertise in lending to small farmers can overperform in

lending to farmers or a bank that is better at lending to

small industry, may lend more than required as per PSL

norms to small industry.

Now, with PSLC, the RBI has made it easier for banks to meet their PSL targets by enabling PSL deficit bank to buy PSL achievement from these PSL-surplus banks.

To Illustrate: Bank A may sell PSLCs with a nominal value of `100 crore to Bank B on 15th Jul ’16. Bank B will reckon `100 crore towards its priority sector achievement as on the reporting dates of 30th Sept ’16, 31st Dec ’16 and 31st Mar ’17, while Bank A will subtract the same from its

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

achievement figures for the respective reporting dates.

IN A NUTSHELL

ADVANTAGES

Besides helping meet the PSL target, PSLCs will help seller banks make additional fee income. The certificates are a cost to buyer and an income to the seller. Since the underlying credit risk remains with the seller bank, not much due diligence will be required by the buyer bank. They only have to bear the fees, which will be market-determined.

So far, banks had to buy out priority sector loan assets from other entities to be counted as part of their priority sector lending obligations, thereby the credit risk.

Since buyers of PSLCs have almost no downside risk and no capital is blocked for the loan amount for buyers, many experts think the platform can be misused. But since fees are market-determined, it can be a major disincentive for banks to misuse, as fees might jump or fall depending on the supply of such certificates, thereby allowing the demand-supply rule of economics.

On the positive side, PSLCs will encourage specialization within the banking sector. Banks will focus more on their core competencies. Most importantly, trading in PSLCs is credit positive due to lower hit on margins as compared to the existing practice.

Experts feel that PSLC fees will be lower than the cost that banks are paying currently for non-compliance with the priority sector loan norms in the form of lower yielding RIDF deposits.

Further, PSLCs may turn out to be a good business proposition in terms of higher fee income for banks that have a surplus in PSL. With PSLCs even RBI will be able to fulfil its social mandatE.

Contac t at: 022 - 3926 9600 E-mail: sales.mumbai@nirmalbang.com 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh
Contac t at: 022 - 3926 9600
E-mail: sales.mumbai@nirmalbang.com
38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 01; Fax: 39268610
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981
E Q U ITIE S
|
D E RI V A TIV E S
| C OM M O D ITIES *
|
C U RR E N C Y
|
MU T U AL
F UN D S #
|
IPO s #
|
IN S URANC E # |
D P
Disc laim e r: In su ran ce is a subje c t m atte r o f so licitation. M u tu a l Fund investments a re subje c t to m a rket risk . Ple a se read the
schem e related do cu ment ca re fully b e fore investin g.
# Distribu to rs

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16

@

@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16
@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16
` `
`
`
@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16
@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16

`

`
`
@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16
@ ` ` ` ` B eyon d M arke t 01st - 15th May ’16

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

T oday, mobile has outlived its purpose of basic communication. It has gone beyond that. With

T oday, mobile has outlived its purpose of basic communication. It has gone beyond that. With

increasing use of Internet-enabled smart phones, mobile is contributing to two main spheres of the society.

According to a detailed research carried out by Global System for Mobile Communications (GSM) Association, the contribution of mobiles to India’s economy has been increasing by leaps and bounds. Here are some quick facts:

T oday, mobile has outlived its purpose of basic communication. It has gone beyond that. With

app services sector generated nearly `22,000 crore in 2014

are statistics, which support this. One of the chief reasons for this is the lack of alternative infrastructure. It is estimated that fixed broadband penetration in India stands at a meagre 2.5% only. On the other hand, it is estimated that 60% to 90% of India’s population has access to at least 2G service of Internet pack of leading service providers.

The number of individuals accessing the Internet over mobile devices has expanded from less than 100 million subscribers in 2010 to nearly 300 million at the end of 2014. The

penetration of mobile Internet has seen a more than threefold increase over this period, reaching 24% of the population by mid-2015.

important to scale up money transactions on mobile. It is estimated that only 2.4% in India currently have

mobile money account compared with nearly 6% in Pakistan and an average of 2.6% in South Asia.

In the past, due to regulatory issues India’s mobile money industry could not see its full potential being exploited. But the government has realized the role service providers could play in achieving its dream of financial inclusion. Through their relationship with customers and their reach and distribution, mobile operators are expected to play a meaningful role in financial inclusion and drive to digitize India.

Recently, the Reserve Bank of India
 

Recently, the Reserve Bank of India

consolidated

Indian

mobile

towers

This figure is expected to almost

(RBI) issued differentiated bank

and

infrastructure

sector

generated

double again in the next five years to

licenses to companies which are also

just under `30,000 crore

reach 44% of the population by 2020, with around 600 million mobile

service providers. The RBI granted ‘in-principle approval’ to 11

Internet subscribers by this date. applicants to set up payments banks,

Internet subscribers by this date.

 

applicants to set up payments banks,

manufacturing

sector

generated

out of which five are mobile operators

`36,000 crore

Given these

statistics,

users

have

at their core: Aditya Birla Nuvo

access to higher speed mobile

(Idea), Airtel M Commerce Services,

broadband technologies which Reliance Industries (Reliance Jio),

broadband technologies which

Reliance Industries (Reliance Jio),

support

a

variety

of

feature-rich

retail sector generated approximately `37,000 crore in value-added services.

Given this scale of value generation it is important to see the role of mobile industry in digitizing India and in creation of jobs for Indians in the sector. As these are two important parameters to gauge the contribution of the mobile sector to the GDP, let us

content and value-added services. By working closely with mobile operators, the government is more likely to realise the goals of the Digital India programme.

The GSM Association report spells out two critical areas of Digital India initiative where mobile technology can play an important role. These are:

Dilip Shanghvi (Telenor India) and Vodafone mPesa.

The mere fact that the government is using the medium of mobiles to achieve its objective of financial inclusion and digitizing India shows the potential use of mobile technology in future financial transactions and interactions. In fact, it would not be an exaggeration to

emerge as a one-stop solution for

understand in detail how the mobile sector is contributing to different

understand in detail how the mobile sector is contributing to different assume that mobile technology could

assume that mobile technology could

spheres of our society.

to citizens to support mobile money and mobile-enabled bank accounts

most basic interactions, which would otherwise be carried out on a

DIGITISING INDIA

computer desktop.

T oday, mobile has outlived its purpose of basic communication. It has gone beyond that. With

According to GSM Association, mobile technology will play a major

available to customers on demand by making financial transactions

JOB CREATION

 

role in realizing the Digital India

electronic and cashless.

Another

area

where

mobile

vision. It says mobile has already

technology is expected to

play

a

become the dominant platform for

Given the scope and role of mobile

critical role is in the creation of jobs.

Internet access in the country. There

technology in digitizing India, it is

The report by GSM Association

 

B eyon d M arke t 01st - 15th May ’16

I t’s

.

states, “The direct economic contribution to GDP of mobile network operators and the mobile ecosystem is calculated as the value-added generated by companies operating in the mobile ecosystem in India. In 2014, the total value added generated by the mobile ecosystem was `2,50,000 crore (2% of the GDP), with the greatest economic contribution among all mobile ecosystem players coming from mobile operators, with a total direct impact of `1,26,000 crore or around 1% of GDP.”

It says, “As mobile operators and the ecosystem purchase inputs and services from their providers in the supply chain, a multiplier effect on other Indian businesses is produced, generating sales and economic value added in other sectors and industries.

“For example, distribution and transport companies draw a part of their revenue from supporting the operations of tower companies when upgrading and expanding their mobile Internet networks. The same effect can be observed in many other sectors of the economy, including energy, retail and professional services such as finance or insurance. We conservatively estimate that a value added of around `50,000 crore (0.4%

of the GDP) was generated through these indirect impacts in India in the year 2014.”

In 2014, it is estimated that mobile operators and the ecosystem provided direct employment to approximately 2.2 million people in India. The GSM Association estimates that around 1.9 million people were employed in the informal sector through the retail and distribution of mobile technology, primarily mobile handsets.

Formal employment in the mobile ecosystem reached approximately 3,00,000 in 2014, with the largest employment numbers in the content, applications and services sector, with approximately 1,50,000 jobs. A large number of jobs in this sector are on a part-time or self-employed basis.

Indian mobile network operators have also employed a significant amount of people, estimated at 67,000 in 2014. Handset manufacturers and the formal retail sector (large retailers, small chains and increasingly also general retailers) generated 46,000 and 33,000 jobs, respectively.

A number of mobile manufacturers have reported plans to open or strengthen their presence in India, while the formal retail sector is also

growing and expanding faster than traditional retailing. These figures are expected to increase in the next few years if emerging trends continue.

Additional jobs have also been created indirectly from the activity of the mobile industry. A case in point is direct supply chain.

The GSM Association estimates that in 2014 around 1.9 million jobs were indirectly supported in this way, bringing the total impact (both direct and indirect) of the mobile industry to around 4 million jobs in 2014.

Another impact of the adoption of mobile technology is improved productivity. The GSM Association report points out that the productivity impacts brought about by the widespread adoption and use of mobile technology by individuals, businesses and governments generated approximately `4.7 lakh crore in 2014, an estimated 3.7% of India’s GDP.

Overall, considering direct, indirect and productivity impacts, in 2014 the mobile industry supported a total contribution of `7.7 lakh crore to the Indian economy in value-added terms, equivalent to 6.1% of India’s total GDP.

states, “The direct economic contribution to GDP of mobile network operators and the mobile ecosystem is

Black Swan Effect

The ‘Black Swan Effect’ refers to a rare and surprise event, which has extremely impactful consequences in hindsight. The term comes from an ancient Western saying that “all swans are white.” Thus black swans were an impossible occurrence - until they were discovered in Australia in the 17th century.

The theory is described by Nassim Nickolas Taleb in his 2007 book ‘The Black Swan’. Taleb regards many scientific discoveries - undirected and unpredicted - as black swans. They also exist in almost all fields of life - from government policymaking and stock market predictions to decisions made in everyday life.

Black swan events include the 1987 stock market collapse, the September 11 attacks and snowstorms across China in 2008. A black swan event may occur more often in the financial markets but it would be one that causes great and unexpected losses to investors.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

Contact : +91-22-39269600 | E-mail: sales.mumbai@nirmalbang.com | www.nirmalbang.com 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody

Contact : +91-22-39269600 | E-mail: sales.mumbai@nirmalbang.com | www.nirmalbang.com

A fter years of mindless aggression that stretched the balance sheets of road companies beyond acceptable

A fter years of mindless aggression that stretched the balance sheets of road companies beyond

acceptable limits, business in this segment had come to a standstill, subsequently impacting public-

private partnership model severely.

However, with the road sector catching the eye of policymakers, the

FINANCE

Modi-led government proposed new

The

government has proposed

set of reforms to revive the sector. Let

measures,

which

cover

the

entire

us understand these reforms in terms

gamut of project financing – right

of various streams of the road sector.

from its inception to sustaining and

Here is a low-down on the reforms

maintaining

it.

These

are

the

proposed by the government:

following recommendations:

A fter years of mindless aggression that stretched the balance sheets of road companies beyond acceptable
A fter years of mindless aggression that stretched the balance sheets of road companies beyond acceptable
A fter years of mindless aggression that stretched the balance sheets of road companies beyond acceptable

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

infrastructure ministries and state consortium. governments. POLICIES ` BUILD OPERATE AND TRANSFER (BOT) RISKS activities. B
infrastructure
ministries
and
state
consortium.
governments.
POLICIES
`
BUILD
OPERATE
AND
TRANSFER (BOT)
RISKS
activities.
B eyon d M arke t 01st - 15th May ’16
I t’s
.

provide

guidance

to

project

has been 69% increase in project

first eight months of 2015-16 to 2,649

The report noted a few reasons for

Analysts say that with interest rates

authorities.

awards by National Highways

increase in pace of execution. It said

Full disclosure of long-term costs,

Full disclosure of long-term costs,

Authority of India (NHAI) during the

measures such as award of projects only after 80% right of way

risks and potential benefits

km from 1,572 km in the same period of the previous fiscal.

(permission to make a way from one piece of land to another) is secured,

Comparison with the financial position of the government at the time of signing of the concession agreement - a negotiated contract between a company and a government that gives the company the right to operate a specific business within the government’s jurisdiction, subject to certain conditions

Comparison with the financial position of the government at the time of signing of the concession

The research agency in its report noted that long hindered by execution delays, project cancellations, stalled projects, loss of lender confidence, leveraged balance sheets of developers and sluggish traffic growth, the sector now appears to be on the path to regain its lost sheen.

focus on quick resolution of stalled projects, delegation of power to regional offices to grant forest clearances and allowance to file online applications to construct rail under and over bridges.

coming down even liquidity issues in the road sector may come down. They

Comparison with the financial position of the government at the time prior to re-negotiation.

Comparison with the financial position of the government at the time prior to re-negotiation.

It pointed out that under the new land law though the cost of land acquisition has risen by 122% to `30

point out that the government’s assurance of compensation to developers in case the delay is not

THE WAY AHEAD

million per hectare from `13.5 million in FY15, it would not impact the private sector.

attributable to them and relaxation in exit norms should also address liquidity issues faced by developers.

With implementation of some of the aforementioned reforms, the government is slowly reviving the interest of private companies and investors alike.

On the impact of reforms undertaken by the Modi-led government, ICRA, research and rating agency, said, “The Indian road sector is showing signs of revival drawing on several measures announced by the government over the last 18 months including a policy decision to award projects only after acquisition of 80% of land.”

According to the ratings agency, there

The ratings agency’s research points

out that efforts made by the government to clear bottlenecks in

execution have started

yielding

results and are reflected in the 45% increase in the pace of execution to 4.96 km/day during April-November ’15 from 3.41 km/day during April-November ’14.

It foresees that if the current pace of execution continues during FY16, execution of road projects will exceed 1,800 km, which would be higher than the figures for both FY15 (1,500 km) and FY14 (1,779 km).

With these aforementioned reforms, business activity in road sector in the country is expected to pick up further.

However, investors need to bear in mind a key fact that since road projects are long-drawn one cannot expect supernormal growth in earnings for road companies in the next few quarters.

Industry analysts point out that investors need to wait for at least two years to notice healthy impact of the government’s reforms in earnings’ growth of road companieS.

provide guidance to project has been 69% increase in project first eight months of 2015-16 to

Sinking Fund Bond

Sinking fund bond is a bond that contains a provision stipulating systematic amortization/ retirement of outstanding debt (notes, bonds, preferred stocks, etc). Conventionally, the issuer puts interest and principal payments aside into a sinking fund account to pay out or retire portions of the bond issue’s outstanding debt periodically (usually each year).

Sometimes, the timing of individual payments is determined randomly (by a lottery), leaving bondholders uncertain as to whether their bonds will be redeemed at a specific time or not. Infrequently, the issuer may have to deposit repayment money with a trustee (which invests the funds at its disposal and uses the accumulated amounts to repay the bonds on maturity). Such compulsory redemptions or uncertain payout timings would mean bondholders may not be able to make profits if secondary market price moves above the redemption price (usually par). This bond is also called a sinker.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

B eyon d M arke t 01st - 15th May ’16 V ETO Switchgears & Cables
B eyon d M arke t 01st - 15th May ’16 V ETO Switchgears & Cables

B eyon d M arke t 01st - 15th May ’16

B eyon d M arke t 01st - 15th May ’16 V ETO Switchgears & Cables
  • V ETO Switchgears & Cables Ltd (Veto) is engaged in the manufacture and marketing of wires and cables, electrical accessories, industrial cables, fans, CFL lamps, pumps,

modular switches, LED lights, immersion heaters, MCB and distribution boards.

Veto is a dominant player in Rajasthan with 12% to 13% market share. For FY16, the company is likely to get 75% of its revenues from Rajasthan (from 80% in FY15), 12% from Gujarat (10% in FY15) and 13% from Rest of India (10% in FY15).

Product-wise Revenue

L ED (2%) S witc h & A c c e sso r ie s (3
L ED (2%)
S witc h &
A c c e sso r ie s (3 8%)
W ir e (4 5%)
C F L (1 0%)
F an (2%)

Source: Company Data, Nirmal Bang Research

The company supplies products under brands “VETO” and “VIMAL POWER” (“VIMAL POWER” for its wires & cables and “VETO” for its electrical accessories).

I t’s

simplified..

.

Apart from VETO switchgear, the Group has operations in Dubai also under a separate company, which has a turnover of ~ `340 crore and ~ `60 crore of EBITDA.

For Rajasthan and Gujarat, the company mainly follows Dealer Retailer Model for sales, which provides higher margins and direct control over inventory.

The company got listed on the Bombay Stock Exchange’s SME platform in December ’12 and has shifted from there to the main platform.

The company has plants at Haridwar and Vasai, and is setting up a new plant at Mahindra SEZ, Jaipur.

INVESTMENT RATIONALE

Increasing Pan-India Presence

Veto Switchgears Ltd (Veto) started operations as a small retail shop in Jaipur in 1968 and gradually it became the leading dealer in the market. It has become one of the largest players in Rajasthan with a market share of 12% to 13%. The company has a strong network of 2,000 dealers in Rajasthan with deep penetration.

Currently, Veto gets 80% of its revenues from Rajasthan, 10% from Gujarat and the balance 10% from other states.

Business Model

However, this business model has its own demerits as well. The company requires huge investments to fund working capital needs. The industry usually follows Distributor Dealer Retailer model, which has lower margins but gives scalability. Hence, Veto has also decided to expand its presence through distributors in various parts of the country to further increase its reach. For the next three years, the company is targeting 50% of sales from regions outside Rajasthan.

Currently, Veto enjoys higher EBITDA margins (FY15 15.6% vs V-Guard’s margins of 8%) due to lack of distributor level of layers in distribution network. However, the flip side of such a trade is high working capital (NWC days 178 days vs V-Guard’s 65 days).

There are two aspects to the above expansion strategy. Due to addition of distribution level, the company would take a hit on EBITDA, but its need for working capital would reduce, benefitting returns ratios.

   

Co

Dealer

Retailer

Co

Distributor

Dealer

Retailer

Veto is moving from

Veto is moving from

Advantages

Higher Ma rgins

 

Lower Working Capital

 

Dealer Retaile r Model to

Control Over Inventory

Higher Return On Capital Employed

Distributor Dealer Retaile r Model

 

Scalability

 

Disadvantages

Higher Working Capital

Lower Ma rgins

 

Lower ROCE

   

Source: Company Data, Nirmal Bang Research

Comparison

FY15

Veto

V-Guard

Sales

97.3

1745.9

EBITDA

15.2

133

Margins

15.6%

7.6%

     

Working Capital In Days

178

65

     

ROCE

12.3%

19.5%

ROE

9.8%

20.3%

     

Distributors

10

536

Dealers

2500

6120

Source: Company Data, Nirmal Bang Research

The strategy mentioned hereiin would provide higher

scalability to the company due to lower requirement of

funds and would gradually increase returns ratios of the

Rajasthan-based company.

Consolidating Business

The group has wire and electrical accessories business in

different companies. Apart from India, it has operations in

Dubai as well. In India, the holding company of Veto

Switchgears has an old manufacturing plant at Jaipur,

which manufactures wire and electrical accessories and in

turn supplies to its company in Dubai. The company has

revenues of `30 crore. This plant has become inefficient and the Group has planned to set up a new plant in listed company (Veto Switchgears) at Mahindra SEZ, Jaipur with an investment of `11 crore.

The production from this plant will commence from June ’16 and sales to Dubai company will shift to this plant. The plant is likely to do sales of `30 crore in FY17, which will add to the company’s revenues.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

Also, the Group has an associate company in Dubai – JMTC, which has revenues of ~`350 crore and EBITDA of `60 crore. JMTC markets electrical accessories, wires and appliances in the Middle Eastern and African market.

Veto Switchgears has floated a 100% subsidiary in Dubai to partially transfer the business of its associate company.

Q3 was the first quarter of the subsidiary and has managed to earn revenues of ~`43 crore and PAT of `4.3 crore. Veto has so far invested around `15 crore in the company’s Dubai subsidiary.

Dubai Associate Financials - JMTC

(in Diraham mn)

CY14

Revenues

200.9

EBITDA

35.6

Margins

17.7%

PAT

4.6

Source: Company Data

RISKS AND CONCERNS

Also, the Group has an associate company in Dubai – JMTC, which has revenues of ~

expected to improve on the back of addition of the distribution level). Due to this, it has negative cash flow from operations in the past 2 out of 4 years. In FY15, the operating cash flow was positive as sales growth was nominal. In FY16 and FY17, the operating cash flow is

again likely to be negative on account of addition of international operations, which has a high working capital cycle.

Also, the Group has an associate company in Dubai – JMTC, which has revenues of ~

company, which may face hurdles on account of ownership structure of three brothers in Indian and Dubai operations.

OUTLOOK

The company has grown at a CAGR of 12.4% between FY12-15 and EBITDA has grown 11% during the same period. The base business of the company is expected to grow at a CAGR of 19% for the next 2-3 years based on expansion outside Rajasthan.

Besides, the Group is consolidating the business. The

group has wire and electrical accessories business in

different companies.

Apart from India, it has operations in Dubai too. In India the holding company of Veto Switchgears has an old manufacturing plant at Jaipur which the Group is bringing under the fold of the listed company by setting up a plant at

Mahindra SEZ with an investment of `11 crore.

The production from this plant will commence from June ’16 and sales to the Dubai company will shift to this plant. The plant is likely to do sales of `30 crore in FY17, which will add to the company’s revenues.

Financials

Year

Net Sales

G rowth

EBITDA

Margin

PAT

Margin

EPS

PE

ROE

Consolidated

(` cr)

(%)

(` cr)

(%)

(` cr)

(%)

(` )

(x)

(%)

FY14A

 

27.4%

  • 94.5 11.4%

10.8

   
  • 6.1 6.4%

3.3

 
  • 28.7 9.3%

FY15A

3.0%

  • 97.3 15.6%

15.2

  • 7.1 7.3%

3.9

  • 24.4 9.8%

FY16E

73.7%

  • 169.0 13.2%

22.3

  • 12.6 7.5%

6.9

  • 13.8 15.2%

FY17E

 

64.1%

  • 277.3 13.0%

36.1

   
  • 18.2 6.6%

9.9

9.6

18.3%

Source: Company Data, Nirmal Bang Research

Veto can achieve multiple of 12x easily and success in the planned strategy would further re-rate the stocK.

Also, the Group has an associate company in Dubai – JMTC, which has revenues of ~

Garbatrage

Garbatrage is an increase in price and trading volume in a particular sector of the economy that occurs as a result of a recent takeover, which initiates a change in sentiment towards the sector. Garbatrage is also known as “rumortrage”.

Garbatrage is usually used to refer to firms that are not directly related to the takeover. Speculators feel that the initial takeover is a precursor to more takeovers within the sector.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

G one are the days when investors waited till the end of March to invest in

G one are the days when investors waited till the end of March to invest in tax-saving instruments to

claim exemptions. More and more people have realized the importance of investing early during the year, which can bring relief to them and make investments sensible too.

in five-year bank fixed deposits (FDs) or endowment insurance schemes. Now, instead of going in for these routine options, they have begun putting the same amount in equity-linked saving schemes (ELSSs), which will enable them to enjoy the benefits of compounding and rupee cost averaging.

To give an example, it is widely seen

With

rising

awareness

not

only

that young investors put money either

individuals

but

also

financial

institutions have started promoting tax-saving financial products at the start of the year.

The beginning of a financial year is a good time to start tax planning as it will give enough time to understand various financial products and thus help get more returns. In India, there are a range of tax-saving products from Public Provident Fund (PPF) and National Saving Certificates

G one are the days when investors waited till the end of March to invest in
G one are the days when investors waited till the end of March to invest in
G one are the days when investors waited till the end of March to invest in

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

(NSC) to ELSS.

pension as the NSC starts maturing.

interest they would otherwise earn if it was kept till maturity.

However, instead of blindly putting in money to save taxes, investors need to

National Savings Certificates are not inflation-protected. If inflation is

PUBLIC

PROVIDENT

FUND

above interest rates, it will fetch

(PPF) AND NATIONAL PENSION

plan for their future and invest accordingly.

In this article we will explain where investors can invest and how they can benefit from investing in right

negative returns. But in present scenario where inflation is low, investors can earn real return from this investment product.

SCHEME (NPS)

Despite interest rates being cut for the current financial year from 8.7% to 8.1%, Public Provident Fund (PPF)

products at the right time.

FIVE-YEAR

BANK

FIXED

remains the top choice for tax savers

DEPOSITS (FDS)

since many years. PPF is completely

NATIONAL CERTIFICATE (NSC)

SAVINGS

Five-year bank fixed deposits are not

FDs offered by various banks have a

Currently, many private banks offer

risk-free in nature as it is backed by the government of India.

National Savings Certificate also known as NSC is a successful tax-saving instrument in both rural and urban India. NSC is backed by the government of India, and is one of the safest investment options available at post offices across the country. Currently, NSC offers interest at the rate of 8.10% and is a popular and safe small savings instrument that combines tax savings with guaranteed returns.

The interest is paid at maturity but is taxable annually. Investment up to `1 lakh per annum qualifies for income tax rebate under section 80C of the Income-tax Act. However, the interest that accrues every year is included in your taxable income and is liable for tax payment.

picked as often as other investment products despite it giving rebate under section 80C of the Income-tax Act. Five-year bank fixed deposits is a tax-saving investment product with a shorter duration and can be opted by risk-averse investors.

lock-in period of five years and the interest is taxable. Different banks offer different interest rates on their tax-saving FDs. Account holders can earn better interest through FDs as compared to the 4% to 5% interest they would otherwise earn from their savings bank accounts.

7% to 8.5% interest on five-year FDs. The main draw for such FDs is the guaranteed higher interest on them instead of regular bank deposits.

A person cannot open more than one account in his or her name or even have a joint account. The minimum amount of investment in a PPF account is `500 per annum and the maximum amount of investment in a year is `1.5 lakh. In case of a minor ’s account, the investment in the minor ’s and guardian’s account together cannot exceed `1.5 lakh per annum.

Deposits can also be made in 12 installments at the most in a year. PPF comes with a lock-in period of 15 years, which makes it a long-term investment option. PPF also offers liquidity to the investor. If investors need money, they can withdraw after the fifth year, but withdrawals cannot exceed 50% of the balance at the end of the fourth year, or the immediate preceding year, whichever is lower.

Certificates can be bought from any head post office or general post office. The NSC is liquid, despite the 5- and 10-year stipulated lock-in period. The liquidity is offered in the form of loans and withdrawals are subject to conditions. The amount and rate at which the loan is permitted depends on the lending institution.

This scheme is mainly for small businessmen and salaried individuals.

People buy NSC every month for 10

years,

which

is

re-invested

on

maturity as after retirement it will

automatically fetch a monthly

Here again investors can enjoy the benefits on their products when inflation is below the rates offered by banks. The interest rate is fixed and guaranteed for the duration of the deposit at the commencement of the deposit. The bank deposit is liquid, despite the lock-in during the tenure of the deposit.

The liquidity is offered in the form of loans and withdrawals are subject to conditions. In case of an emergency, investors can close their FDs prematurely at the cost of losing the

Also, only one withdrawal is allowed in a financial year. You can also take a loan against PPF. But it cannot exceed 25% of the balance in the preceding year. Invest before the 5th of the month if you want your contribution to earn interest for that month as well. The biggest advantage of the scheme is that, it is EEE in tax status, meaning investments are exempt, interest earned is exempt and final corpus is tax free in the hands of the investors.

The biggest advantage of NPS is the additional tax benefit of `50,000

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

under Section 80C of the Income-tax Act, which means investors would get tax benefits of `2 lakh.

In order to bring parity among pensioners, in the last Union budget it was announced that investors can withdraw 40% of the total corpus at the age of 60, which would be entirely tax free. This new announcement will have a positive impact on NPS and might attract fresh flows as one of the major issues of taxation has been resolved by the government.

However, one of the major drawbacks of the scheme is that investors cannot take out money before 60 years. But it is one of cheapest schemes available to investors who want to enjoy an additional tax exemption of `50,000 and are willing to wait for retirement.

However,

investors

have

to

understand that the potential to earn high returns comes with high risks.

These funds can even give negative returns when markets are volatile and are in the red. Though most tax- saving schemes can get better returns than the broader index, there are many schemes that have lost 12% to 14% in the last one year.

Therefore, only those investors who have the patience to stay invested for a longer duration and can face volatility should consider this option. Investors should avoid the dividend reinvestment option for ELSS schemes because the lock-in period will prevent them from exiting fully. Their best option is to take the SIP route since the start of the year.

should evaluate the performance of previous ULIPs. Additionally, they should find out if they are single or regular premium ULIPs.

Consider choosing a policy tenure of at least 15 years, which can give good amount of money. It is always seen that investors disband their insurance policies and not complete their full term, which impacts their savings. It is always advisable to either pay premiums for the full term or take other life insurance policies.

While investors who want to look at other insurance products should also look at investing in term insurance, endowment or retirement plans that offer tax benefits under the Income-tax Act.

For many investors, this is a positive

UNIT-LINKED

INSURANCE

In India, life insurance still remains the most preferred tax-saving

feature as it prevents premature

PLANS

(ULIPs)

AND

LIFE

instrument and many believe that by

withdrawals. But a number of them

INSURANCE POLICIES

paying insurance premium they save

refrain from investing in PPFs due to

 

taxes

as

well

as

money

for

their

the long tenure.

Unit-linked insurance plans (ULIPs)

retirement purposes.

But

investors

are a category of goal-based financial

should invest only if they are sure of

EQUITY-LINKED

SAVINGS

solutions and are long-term plans

what they will get after the

SCHEME (ELSS)

offering investors the dual benefit of insurance and investments. In ULIPs,

investment matures.

Equity-linked savings scheme or

a part of the investment goes towards

Investors

should always remember

ELSS gives investors the option to

providing for your life cover.

that

investing

in

life insurance

invest 100% in equities and claim tax

policies should not be made only to

exemption under Section 80C of the

The remaining portion of the ULIP is

However, insurance plans have their

avail

tax

benefits

but

to

get

life

Income-tax Act. ELSS has the

invested in a fund, which, in turn,

benefits also. The main aim of an

shortest lock-in period of three years

invests in stocks or bonds; the value

insurance product is to ensure a

among all tax-saving options under

of investments alters with the

financially-secure

future

for

your

Section 80C.

performance of the underlying fund

family members.

 

Being equity funds, these schemes can generate good returns for investors over long term. If they invest regularly through systematic investment plans (SIPs) they can earn better returns compared to other tax- saving products.

In the past five years as well as 10

opted by you. There are options for investors like investing in equity, debt balanced or corporate bonds.

own pros and cons. So, investors must research well before investing in insurance policies and not jump merely with the intention to save taxes by investing in such products.

Finally, remember that before buying any investment product such as ULIPs, endowment or money back policy, investors should always calculate their need for insurance. If investors do not believe that insurance can fulfil their needs, then they can certainly invest in a term plan and the remaining money can be

years,

this

category

has

created

put in ELSS through SIPs, which can

wealth

for

investors

with

average

Investors must ascertain whether the

offer both tax advantage as well as

returns in the range of 16% to 18%.

plan meets their goals. Also, investors

exposure to the equity marketS.

B eyon d M arke t 01st - 15th May ’16

 

I t’s

.

TECHNICAL OUTLOOK FOR THE FORTNIGHT T echnically, hovering 200-DMA the Nifty is near (day the moving

TECHNICAL OUTLOOK FOR THE FORTNIGHT

T

echnically,

hovering

200-DMA

the

Nifty

is

near

(day

the

moving

average), i.e. 7,840-odd level, indicating that the short-term trend has turned slightly positive but Nifty should hold 7,840 level on closing basis at least for 2-3 trading sessions only then are we likely to witness some positive move in the coming trading sessions.

Interestingly, on the weekly chart the Nifty is trading near support levels of the upper trend line of the channel, showing signs of relief. The channel indicates that the Nifty is taking support of the upper trend line and we are witnessing a bounce back rally from 7,740-7,700 levels. Taking into consideration the channel pattern, the short-term support for Nifty is 7,740-7,700 levels.

Another fascinating development on the weekly chart is the formation of the inverse head and shoulder pattern. The Nifty has formed double tops in the range of 7,972-7,992 levels, which are acting as resistance levels. In the coming days, if the Nifty fails to hold 7,700-7,640 levels’ support provided by the channel as well as the Gap support formed on 13th Apr ’16, then it may correct towards 7,570- 7,550 level, which may help the Nifty to form the right shoulder of the inverse head and shoulder pattern. On the flip side, if there is any move above the 7,992 level on the closing basis, the Nifty may ride towards

8,040/8,170.

Technically, the short-term trend has turned slightly positive to sideways. But the overall medium trend remains cautious and sideways. The Index has observed volatile trading sessions since the past few weeks. The Nifty has an immediate resistance at

7,972-7,992 levels and support at 7,800-7,770 level. The Nifty is also

trading above its long-term 100DMA-200DMA, which is also a healthy sign.

On the Nifty Options front for the May series, the highest OI build up is witnessed near 7,700 Put strike, whereas on the Call side, it is observed at the 8,200 level. We believe the market will remain volatile this month with strong resist- ances at 8,000 and 8,200 levels. We expect markets to remain within the range of 7,500-8,200 this month.

In the last expiry we witnessed higher than average (75%) rollovers in Nifty and Bank Nifty with a positive cost of carry, indicating long rollovers for the month. Power (88% - long rollover), technology (80% - short rollover), oil and gas (85% - long rollover) and banking (82% - long rollover) saw much higher rollovers as compared to the previous expiry. We expect select stocks from power, banking and oil and gas sectors to outperform in the May expiry.

India VIX, which measures the imme- diate 30-day volatility in the market, remained subdued for most part of April in the range of 13-19. Going forward, VIX will be rangebound.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 0.75-1.15 in the month of April and is quoting at 0.95 currently, implying a neutral under- tone in the market.

Going forward, the Nifty may test supports placed at 7,700 and eventu- ally gain strength in mid- May and move towards 8,000-8,200 levels.

OPTIONS STRATEGY NIFTY LONG STRADDLE

It can be initiated by ‘Buying 1 lot 7800 CE (`125) and buying 1 lot 7950 PE (`120) of the May series’. The net combined premium outflow comes to nearly `245, which will also be the maximum loss for the strategy. The strategy will break-even above 8,045 or below the 7,555 level. The maximum profit for the strategy will be unlimited.

We expect the Nifty to witness more than 250 points move in either direction. So, if the Nifty moves towards 8,000 or below the 7,600 level, then the strategy would give gains. One can book profits if the total premium comes in the range of `340- `360 points. One should keep a SL of 50 points premium or when the total premium reduces to 195.

Nifty Daily Chart

Nifty Daily Chart

Beyond Market 01st - 15th May ’16

It’s simplified ...

S top loss is a system meant to stem losses. It is a means to avoid
S
S

top loss is a system meant to stem losses. It is a means to avoid more losses or to prevent erosion of profit.

`90. Now, if the price falls to `90, then your stop loss is triggered and your position is squared off.

To overcome this problem, there is a brilliant system known as Trailing Stop Loss. As the name suggests, instead of staying at a fixed level, the stop loss follows or trails the price

After

taking

a

position

in

a

However, if the stock moves up to `130, then your stop loss is still at

action as it moves in your favour.

stock/index, you set a fixed price below which you do not want to keep your position open. In other words, you do not want to incur a loss greater than this price. This fixed price is where you keep your stop loss.

`90. If you do not book your profits anywhere along the route from `100 to `130, and the price reverses from `130 and falls all the way back to `100 and below `90, then your stop loss gets hit. Therefore, instead of a `30 profit you would incur a loss of

Basically, a trailing stop loss is a stop loss that keeps moving in the direction of your profits, locking in bits of profits as the price moves in favour of either your long position or your short position.

Consider this:

you have

bought a

`10. In such a scenario, you curse

stock at `100, and are willing to take

yourself for not booking your profits

Thus, in the above example, after

a

maximum

loss

of

`10

on

the

when you had the chance and blame it

buying the stock at `100, you set your

position.

So, you set a stop loss at

on luck instead.

initial stop loss at `90 and specified

S top loss is a system meant to stem losses. It is a means to avoid
S top loss is a system meant to stem losses. It is a means to avoid
S top loss is a system meant to stem losses. It is a means to avoid
S top loss is a system meant to stem losses. It is a means to avoid

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

that for

every

1

point upmove in

from the current market price (below

fluctuation in prices, always

price, your stop loss will

the market price in case of long

maintaining the same percentage

consequently move

up

by

1

point.

positions and above the market price

away from the current market price.

Then, if the price moves to `101, your

in case of short positions). The stop

This way the trader is always aware of

stop loss moves to

`91. And if the

moves point to point in the direction

the minimum assured profit that his

price moves to `118, your stop loss moves to `108.

of the profitable trade.

position will garner.

Hence, at any given point in time, you are just `10 away from maximum profit. In other words, what you have done is you kept on locking a part of the profit with every upmove in price.

Note: A trailing stop loss moves only in one direction; that is in the direction of your profit. It does not move in the opposite direction. So, if after hitting `118, the price falls to `115, your stop loss does not move down. It is still at the last kept level of `108. If the price eventually falls to `108, then the order gets activated and the stock gets sold off at `108, giving you a profit of ` 8.

By slowly earning small bits of profits, a trailing stop loss frees you from the worry of losing your entire profit in case of a countermove. In other words, you can have your cake and eat it too.

Many online trading sites have the provision for trailing stop loss automatically wherein you set your preferred criteria. But this facility is not available on all trading sites.

For the benefit of our readers, we shall, therefore, discuss manual trailing stop loss placement. This requires the trader to manually shift the trailing stop loss in accordance with his/her criteria.

For example, if a stop loss is kept at `90 when the current price is `100, then for every point move in the price, the trailing stop moves higher by same points. So, if the price moves to `100.40, the stop moves to `90.4. And if the price moves to `107.8, then the stop too moves to `97.8. Thus, at any given point in time, you always know your exact minimum profit.

  • Price Bands-based Trailing Stop Loss

In this method, the trader specifies a price band by which the price has to move to cause a change in the trailing stop loss. So, if the price is at `100 and the initial stop is placed at `90 and the trader has specified that for every 5-point move in the market price, then the trailing stop will move by 2 points.

Further, if the price moves to `105, the trailing stop will move to `92. If the price moves from `105 to `109, then there will be no change in the trailing stop since the criteria of 5 points has not been met and the trailing stop will remain at `92. Only when it crosses `110 will there be another 2-point move in the trailing stop loss.

  • Percentage-based Trailing Stop Loss

For example, if the trader sets a stop loss 15% from the current market price of `100, then his stop loss will be at `85. Now, if the price moves to `124, the stop loss will move to `105.4, which is 15% from `124.

  • Target-based Trailing Stop Loss

After entering a trade, the trader marks the different target level on a

chart. These targets can be random or as per technical indicators that the trader follows.

When the price reaches the 1st target level, the trailing stop moves to the initial purchase or sell price, which is the breakeven or the no-profit-no-loss point. When the price reaches the 2nd target, we move our trailing stop to the 1st target level, locking in at least that much profit. Similarly, as the price keeps moving up, we keep moving our trailing stop upwards with each target level achieved.

  • Pivot Point-based Trailing Stop Loss

Pivot point calculators are available on most trading sites and even if they are not available, there are formulae by which they can be easily calculated manually. These pivot

point calculators help determine the various support (S1, S2, S3) and resistance levels (R1, R2, R3).

TYPES

OF

TRAILING

STOP

In this method, the trader simply decides on a precise percentage below

In a long position, when the price

LOSS

the market price in case of a long position or a fixed percentage above

moves from R1 (1st resistance level) to R2 (second resistance level) move

Price-based Trailing Stop Loss

Price-based Trailing Stop Loss

the market price in case of a short

your stop loss from pivot level to

In this method, a trailing stop loss is maintained at a fixed price interval

position where he keeps his stop loss. The trailing stop loss is then continually adjusted based on the

below R1. When the price moves from R2 to R3, move your stop loss below the R2 level and so on.

B eyon d M arke t 01st - 15th May ’16

 

I t’s

.

Similarly, keep trailing your stop

Swing Highs And Lows

Swing Highs And Lows

 
  • 4. Sometimes the price swings wildly,

losses from S1 (1st support level) to S2 (second support level) and so on for a short position.

If you are long in a trade, look to trail your stop loss beneath each significant low. If you are short, look

goes below the trailing stop loss briefly and then moves back to the

original level. In such a scenario, your trailing stop loss will be triggered and

  • 5. If there is a gap down or a quick

Parabolic SAR to trail your stop above each you may lose out on your profit

Parabolic SAR

to

trail

your

stop

above

each

you may lose out on your profit

Parabolic SAR or Parabolic Stop And

Parabolic SAR appears on charts in

significant high. The key here is to stick only to the main or major highs

potential.

Reverse is an indicator developed by

or lows. Avoid minor high-lows as

price drop, your trailing stop loss may

Welles Wilder, which helps in determining when a trend reverses

they can be detrimental to your trade.

not be triggered and you may have to sell at a much lower price.

and helps in placing trailing stop

Closing Price-based Trailing Stop

Closing Price-based Trailing Stop

  • 6. You give up your power to make

losses. Although the calculation of Parabolic SAR is quite complicated,

Loss

informed decisions as per conditions in the markets.

and is usually done by using software, the indicator itself is easy to

The simplest way to keep a trailing stop loss is to keep the previous day’s

POINTS TO PONDER

understand and interpret.

the form of dots. These dots are found

closing price or the lowest closing price for the past 2 or 3 days as the trailing stop loss level.

  • 1. When price rises, the trailing stop

loss also rises. But when price falls, the trailing stop loss does not fall with

below the price action when prices

ADVANTAGES

OF TRAILING

it. It is fixed at the last kept level,

are rising and above price action

STOP LOSS

ensuring minimum profit.

when prices are falling.

 
  • 2. Always use a trial and error method

Thus, the indicator will keep trailing the price until the price stops and starts reversing. The Parabolic SAR dots take time to catch up with the price maintaining a healthy distance from the price.

Keep your trailing stop loss at the level of the Parabolic SAR dots until such time that the dots appear on the other side of the price action, which indicates that a reversal has set in and you should exit your trades.

  • Moving Average-based Trailing Stop Loss

As the price moves up, the moving average also rises. Traders can either use simple moving averages or exponential moving averages to keep their trailing stop losses.

Some important moving averages are 10-day, 50-day, 100-day, 200-day moving averages. Decide which of these work best for you and trail your stop losses by keeping your stops at or just below these levels.

  • 1. You can let your profits run without

the fear of entire profit erosion in case

of a counter move in price.

  • 2. There are no transaction charges for

placing a trailing stop loss order. Only

when the stop loss order is triggered, does it incur a transaction charge.

  • 3. No need for regular price

monitoring since your downside is

capped. You do not have to stay glued to your terminal.

  • 4. It does not put a cap on profits.

  • 5. It is flexible. That is, the criteria

and conditions can be changed any time.

  • 6. It takes emotional quotient out of

your trade.

DISADVANTAGES TRAILING STOP LOSS

OF

  • 1. You have to constantly reset your

trailing stop loss according to your

preset criteria.

  • 2. If the trailing stop loss is too close,

it may be hit too soon.

  • 3. If the trailing stop loss is too far or

wide, you risk leaving too much profit on the table and will not be able to capitalize on sizeable profits.

to determine which trailing stop loss method works for your trading setup

and style.

  • 3. Track the historical price

movement of the stock or index in

question. This will help you

understand how much the stock

moves on an average in a day or week or month. This will enable you to set your trailing stop loss in such a way that you do not get stopped out

prematurely.

  • 4. Check the volatility of the stock or

the index in question. If the stock is too volatile, it could easily hit your

stop loss and eventually move in the opposite direction. Exercise caution when placing trailing stop losses in such counters.

  • 5. Never chase a trade once your

trailing stop loss has been hit. In other

words do not try and execute the same trade again in the hope of recovering the marginal profit that you lost

because of your trailing stop loss. Instead, you must be happy and

satisfied with the fact that you did the right thing by keeping a trailing stop loss and ensuring risk protection of your investmenT.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

IMPORTANT JARGON FOR THE FORTNIGHT FCNR REDEMPTION WORRIES MARKETS of India (RBI) in September ’13 to
IMPORTANT JARGON FOR THE FORTNIGHT FCNR REDEMPTION WORRIES MARKETS of India (RBI) in September ’13 to

IMPORTANT JARGON

FOR THE FORTNIGHT

IMPORTANT JARGON FOR THE FORTNIGHT FCNR REDEMPTION WORRIES MARKETS of India (RBI) in September ’13 to

FCNR REDEMPTION WORRIES MARKETS

of India (RBI) in September ’13 to stop the free fall of the Indian currency against the US dollar.

A likely redemption of over $30 billion due to maturity of foreign currency non resident (FCNR) deposit scheme in September-November has kept all markets - bonds, currency, commodities and stocks - on the edge. This event has the potential to keep the markets volatile.

What Are FCNR Deposit Schemes?

FCNR deposit schemes are like fixed deposit schemes for non-resident Indians (NRI) and people of Indian origin (PIO). NRIs have the option to invest in other deposit schemes like Non Resident Ordinary account (NRO) account and Non Resident External (NRE) account.

While both these accounts mandate investment in Indian currency, FCNR deposit scheme allows investment in foreign currency.

What Are The Benefits To NRIs?

In NRE and NRO schemes, foreign currency needs to be converted into Indian rupee at the investment stage and reconverted into foreign currency at the redemption stage. This exposes investors to foreign exchange risks, which might lower the returns for investors.

Back then fears of the US Fed withdrawing quantitative easing had spooked currencies across emerging markets. Even the Indian rupee was badly hit.

The logic behind the announcement of a special three-year FCNR deposit scheme was to bring dollar into the economy thereby increasing the demand for the rupee so that the attack on the rupee stops.

What Was The Response?

India witnessed a tremendous response to the scheme (along with other facilities announced by the RBI then) garnering $34 billion. This stopped the free fall in the rupee. The scheme made an instant hero out of the newly elected RBI Governor Dr Raghuram Rajan in 2013.

What Is The Issue Now?

The three-year period ends in September and redemptions are slated for the September-November period. Commercial banks will require the US dollars to repay depositors. There are concerns that redemption of these deposits could lead to substantial outflows impacting the rupee and other asset classes too.

In contrast, in FCNR schemes, investors need not bear exchange rate risks. Investors can put money in any approved foreign currency in the FCNR scheme. Investors in FCNR will get a fixed return as promised by the bank on their investments irrespective of currency levels.

Why Were They Announced?

A special three-year FCNR deposit scheme along with a special swap facility was announced by the Reserve Bank

How Big Is The Risk?

The redemption on FCNR schemes is a one-off payment, the amount and timing of which is well-known to the market participants.

However, markets can witness volatility in debt and currency markets around the time of redemptions in September-November ’16 period. Markets do not think the outflow will be entirely of $34 billion as the amount

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.

includes money from other facilities announced by the RBI in 2013. But even $15 billion to $20 billion outflow as expected by experts is not an insignificant amount.

How Good Is India’s Position?

investors by selling units to lend money to infrastructure projects. Thus, they can be set as either IDF-Mutual Fund (MF) or IDF-NBFC.

What Are IDF-NBFCs?

From a macroeconomic perspective, India of 2013 is different from India of 2016. India’s external position is far stronger now than it was in 2013.

Foreign exchange reserves of $360 billion are good enough to cover imports for 10 months to 11 months. So, even with $15 billion to $20 billion redemption, the Reserve Bank can drawdown reserves to curb volatility in the Indian rupee.

IDF-NBFCs have sponsors as banks and NBFCs having equity between 30% and 49% in IDFs. Presently, there are two IDF-NBFCs and three IDF-MFs in India.

L&T Infrastructure Finance set up an IDF in 2013, while India Infradebt was set up in the same year jointly by ICICI Bank, Bank of Baroda and Life Insurance Corporation of India and are two IDF-NBFCs that are operational in India.

Will

The

Outflow

Change

India’s

Among Ratings Agencies?

Credit

Profile

Even with huge outflows, a change in ratings profile or India’s image among foreign investors is unlikely as it is a one-off event, with policymakers well adept at handling the situation without much deterioration at the macroeconomic level.

What Is The Role Of IDFs?

IDFs are meant to refinance existing debt of infrastructure companies. IDFs were also envisaged to take some pressure off commercial banks by providing long-term loans to infra projects. IDF-NBFCs will provide medium-term loans to banks against banks long-term infrastructure exposure.

What Can Spoil The Party?

What Is The Policy Move Now?

The global economy is still weak, with central banks across developed and developing economies experimenting with their monetary policies.

Any rapid deterioration of the global situation that coincides with the FCNR redemption period will complicate matters for the economy and the markets. It remains to be seen if Indian policymakers are well placed to manage the ensuing volatility in the markets.

RBI

ALLOWS

IDF-NBFCs

TO

RAISE

SHORT-TERM CAPITAL

Recently, the Reserve Bank of India (RBI) allowed Infrastructure Debt Funds (IDF) – Non Banking Finance Company (NBFCs) to issue short-term bonds and commercial papers (CPs) (IDF-NBFC). This is a significant policy shift to support infrastructure financing in India.

The RBI, which regulates the IDF-NBFC, has been liberalizing the way IDFs function in India. For example, earlier IDF-NBFCs were allowed to lend only in public-private partnership (PPP) projects.

However, the RBI relaxed the norm last year allowing them to invest in non-PPP projects. Also, earlier IDF NBFCs were allowed to issue bonds of minimum five year maturity. Now, IDF-NBFCs are allowed to issue short-term bonds (to the extent of up to 10% of their total outstanding borrowings) and also commercial papers.

How Will This Move Help?

The move will help IDF-NBFCs manage their asset liability mismatch better. Earlier IDF – NBFCs had to either raise long-term debts to pay their short-term obligations or were forced to exit their existing investments in infrastructure assets to meet their liabilities.

What Are IDFs?

IDFs are an innovation in infrastructure financing. IDFs are investment vehicles, which can be sponsored by commercial banks and NBFCs or Mutual Funds. IDFs can raise money by issuing bonds or raise money from

Now, IDF-NBFC will be able to raise short-term funds from the open market without selling their existing long-term investments. With short-term bonds allowed, the liquidity situation for IDF-NBFCs will ease, which will help long-term infrastructure projects. This is yet another reform by authorities to support Indian infrastructurE.

B eyon d M arke t 01st - 15th May ’16

I t’s

simplified..

.