Beruflich Dokumente
Kultur Dokumente
!
The Good, The Bad and The Ugly
Q2
Results
RALLYING STOCK MARKETS DUE THE IMPACT OF RISE IN CRUDE OIL PRICES
to HOT MONEY INFLOWS PG.08 ON THE INDIAN ECONOMY pg.20
FROM EDITOR’S DESK
Dear Niveshaks
I wonder when we are going to see this vicious circle coming to an
Niveshak end. The whole world witnessed the global downturn in 2008 followed by
Volume III debt crisis in Dubai and Greece. And now we see Ireland joining the league.
ISSUE XI While the US economy faced the repercussions due to reckless securitising
November 2010 of subprime mortgages and Greece collapsed under the burden of mis-
represented government spending, the Irish took an easier path to ruin:
by taking out enormous, unregulated loans. While the Irish government
Faculty Mentor might have underestimated the severity of the crisis in the last two years
Prof. N. Sivasankaran and have still not asked for assistance, but, given the kind of interconnected
framework i.e. Euro Zone in which they operate, its neighbouring countries
might not let this continue for a longer period of time. Although European
countries don’t affect our economy directly but they do affect sentiments,
THE TEAM capital flows, gold prices, and commodity prices and so on. Thus, it makes
Editor all the more important for a recovering economy like ours to maintain the
Bhavit Sharma growth momentum through timely and appropriate reforms.
The waves of concerns that Ireland and few other countries of Europe
Sub-Editors may find it difficult to meet their debt commitments couldn’t prevent them-
Durgesh Nandini Mohanty selves from reaching Indian bourses and dragged it below the psychologi-
Hitesh Gulati cal levels of 20,000 and 6,000, of Sensex and Nifty respectively. This really
Sumit Kedia makes me (and many of us) believe that we are truly an integral part of so
Tanvi Arora called Global village. Moving forward we can expect to see more down-
Upasna Agarwal side movement owing to the slowly building Asian cues specifically on con-
cerns that China may further tighten their monetary policy to curb inflation.
New Team But with the strong capital inflows from FIIs looking for greater returns and
Alok Agrawal sound Indian economy backed by solid fundamentals, our benchmark in-
Deep Mehta dices can surprise us by breaking its greatest achieved heights by the end
Jayant Kejriwal of this year.
Mrityunjay Choudhary
Rajat Sethia Last month’s cover story gave you a detailed analysis of the Coal In-
Sawan Singamsetty dia’s IPO and its future outlook. The stock, when listed on 4th November
Shashank Jain 2010, actually met all its expectations and got listed at Rs. 314 which was at
Tejas Vijay Pradhan approximately 30% above of what investors had paid. Truly a windfall for all
investors. I so wish I too had invested in it. In this month’s cover story, we are
Creative Team going to look, analyse and understand the second quarter results of differ-
Bhavya Aggarwal ent key sectors operating in India and their implications. At a time when In-
Swarnabha Mukherjee dian Financial services landscape is undergoing big time consolidation with
Vishal Goel the likes of Axis-Enam deal, we, in this edition, also present to you an article
on mergers and acquisitions. We are pleased to inform you that we have
Vivek Priyadarshi
introduced a new section in Niveshak called “Classroom” for your reading
pleasure. In this section, we will explain and elaborate a financial term with
the help of a conversation. We hope that this endeavour of ours will prove
All images, design and artwork
to be an interesting read for our readers and will help them understand
are copyright of
new terms in a much easier way with fun. Looking forward to your valuable
IIM Shillong Finance Club
feedback and suggestions.
©Finance Club Stay Invested.
Indian Institute of Management
Shillong
Bhavit Sharma
www.iims-niveshak.com (Editor -Niveshak)
Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
CONTENTS
Niveshak Times Fingyaan
04 The Month That Was 16 Mergers and Acquisitions
in a Recession
finsight
Cover Story
19 Axis Enam Merger
11 Q2 Results – The Good,
the Bad and the Ugly!
CLASSROOM
23 Arbitrage
TEAM NIVESHAK
IIM, Shillong
DOMESTIC BUSINESS erty loans above Rs. 75 lakhs, IDBI also increased its
Power Grid FPO garners 14.88 times oversub- interest rate for same by 25 basis points.
scription SEBI raises retail investor cap to Rs. 2 lakhs
The FPO offer from Power Grid Corporation of SEBI has doubled the upper limit for retail in-
India for its 84.17 crore shares in the price band vestment in public offers from Rs. 1 lakhs to Rs.
of Rs. 85-90 per share attracted a 14.88 times over- 2 lakhs to encourage greater investor participation
subscription of 1252.96 crore shares. The oversub- in share market through retail route. Now an inves-
scription reflects the continuing investor enthusiasm tor applying for shares up to Rs. 2 lakhs in an IPO
in stocks of state run entities which or FPO will be treated as retail investor which will
was also evident during the big- make him/her eligible for 5% discount on subscrip-
gest Indian IPO by Coal India Lim- tion’s face value. It is relatively easier to buy shares
ited. This FPO, which is estimated through retail investment due to relatively lower
to generate about Rs.7500 crore, share subscription by this category as compared to
is a part of the government plan HNI and institutional investor community. The total
to raise Rs. 40,000 crores in the shares at the disposal of retail investors shares in a
current fiscal year through stake public offer has remained unchanged at 35% and the
sale in state owned firms. After this FPO, the gov- corresponding allotments for HNI and institutional
The Month That Was
ernment’s stake in Power Grid will come down from investors has also remain fixed at 15% and 50% re-
86.36% to 69.40%. spectively.
RBI hikes interest rates by 25 basis points India and China ranked higher in IMF’s quo-
To tame the rising inflation, RBI pushed up its ta
interest rates by 25 basis points with repo and re- G-20‘s decision to increase the quota for emerg-
verse repo rate being 6.25% and 5.25% respectively. ing economies by 6% in its meeting in South Korea
Though the WPI based inflation fell down marginally has resulted in India and China being elevated to 8th
from 8.62% in September to 8.58% in October, the and 3rd positions in quota status respectively. Now
latter figure is still considered to be above “comfort India’s quota in this 187 nation body has increased
level” by central bank, thus triggering its decision to from earlier 2.44% to 2.75% signaling its emergence
continue with its trend of increasing lending rates. as a major player in
It also tightened its norms on high value property new world econom-
loans as it increased the risk weight on property ic order. Emerging
loans exceeding Rs. 75 lakhs from 100% to 125% ir- economies contrib-
respective of its LTV (Loan to Asset Value) which also ute about 47.5% to
has been subjected to an upper limit of 80%. This world economy in
is likely to increase the difficulty of access to these terms of PPP (Pur-
loans as the banks are likely to reciprocate with a chasing Power Par-
hike in lending rates for such loans. ity) whereas their
IDBI goes for a rise in interest rates corresponding share in IMF prior to this decision
stood at 39.5%.
In view of policy rate hike by RBI, public sector
bank IDBI pushed up its interest rates by 50 basis India and Malaysia sign a free trade pact for
points. The benchmark prime lending rate has been next year
raised by 25 basis points to 13.50% with effect from India and Malaysia finalized a Comprehensive
4th November. It also raised its retail term deposit Economic Co-operation Agreement, CECA that is like-
rates by 10-50 basis points for its various maturity ly to increase annual bilateral trade to $15 billion by
schemes. With RBI increasing risk weight for prop- year 2015. Malaysia exports electrical and electronic
Market Snapshot
FII, DII Net activity (in Rs. Crores)
BSE
AoM Perspective
Source: www.bseindia.com
www.nseindia.com
Month That Was
Market Snapshot
KEY INDICES RESERVE RATIOS
CPI (Sep. 2010) 9.81% CRR 6%
WPI 8.58% SLR 25%
IIP (Sep. 2010) 4.4% Source: www.rbi.org.in
Source: www.mospi.gov.in
AoM
LENDING / DEPOSIT RATES POLICY RATES
Base rate 7.5% - 8% Bank rate 6%
Savings Bank rate 3.50% Repo rate 6.25%
Deposit rate 6% - 7.5% Reverse Repo rate 5.25%
Source: www.rbi.org.in Source: www.rbi.org.in
Perspective
GLOBAL INFLATION RATES
The
American inflation CPI 1.17 % Oct-10
English inflation CPI 3.13% Oct-10
Month
Dutch inflation CPI 1.56% Oct-10
German inflation CPI 1.31% Oct-10
FinGyaan
Japanese inflation CPI 0.60% Sep-10
That Was
Source: www.global-rates.com
Source: www.global-rates.com
Data as on 19th November 2010
of investments are over 6000. Sensex jumped over 15 per actively seek short-term returns
happening in the cent since January, due to huge capi- (mostly FII’s). These investors scan
tal inflows, making the Indian stock the market for short-term, high inter-
emerging econo- market as one of the best performers. est rate investment opportunities and
mies. While FIIs have move their money from one invest-
Where did the capital inflows
certain positive im- ment asset to another very quickly.
come from?
pacts on the econ- Usually, the capital inflows
Higher FII inflows to India may
omy, on the other be attributed to the unclear growth
come from both the retail domestic
prospects in the west (US has slowed
hand they can also investors and the off shore investors
down while Germany and UK are up-
affect the economy in the form of foreign Institutional
beat) and unchanged interest rates
Investments (FII’s) and Foreign Di-
in a negative man- rect Investments (FDI’s). This had
signifying lower returns with the Fed-
ner if they are in eral Reserve, European Central Bank
been the case earlier during the mar-
(ECB), Bank of England (BOE) keep-
excess. ket rise of 2007 or before, but this
ing rates unchanged. Funds seeking
time it’s different. One of the major
better returns moved to the Asian
concerns that India is facing is that
emerging markets and in particular,
this ‘hot money’ is going into the
India has received
stock market rather than new proj-
large por-
ects and startup companies in the
tion of
form of long term fund- ing.
the in-
The investment in the
vestment.
stock market has more
than doubled this year, Overall Impact of
foreign direct invest- hot money inflows
ment (FDI) into
FIIs are usually
India fell more
not concerned about
than 25 per-
the issues of devel-
cent, com-
opment of the developing
pared to the
economies, whether or not this is
same period
ethical is another debate. Though
a year earlier.
there are obvious positive out-
So far, FIIs
comes for an economy due to the
have poured
incoming FIIs, these are also accom-
AoM
Macroeconomic impact shares in China’s stock exchanges which was closed
Due to these capital inflows, enormous inflows to foreign investors till then), the domestic markets
of foreign exchange occur, which exerts an upward was opened up for the foreign investment. This strat-
pressure on the Rupee. It soared up 9 percent against egy of QFIIs was also implemented in other places like
the dollar in the last 16 months. The appreciation Taiwan to ensure a stable flow of currency so that the
of the Rupee will obviously make the imports com- economic stability of the economy was maintained.
ing into India cheap and exports more expensive. In Mexico too, significant changes in its eco-
Thus, importers stand to gain from cheaper imports, nomic and political scenario have taken place
which in turn, lead to lower prices of these imported making it a preferred investment destination.
goods in the country leading to a deflationary trend.
Negative effects of excess FIIs in markets
The Foreign Institutional Investors usually
bring with them a lot more volatility into the fi-
nancial markets of the country than what may
have been experienced before. According to some
Indian analysts, the increasing bullishness in the
developing nations is leading the stocks in these
countries to become overvalued that may not be
justified even under country’s high growth rate.
There are also fears that some of the lessons from
Fig 1: Monthly Trade deficit in million dollars the recent financial crisis have been forgotten.
On the flip side, the appreciation of the Ru- According to Eswar S Prasad, Professor of Eco-
pee makes Indian exports less competitive in the nomics at Cornell University, there can be fairly
international markets. The major commodities that serious risks associated with the escalating equity
are exported are gems and jewelry, chemical and market if the hot money keeps pouring in India.
related products, engineering goods and textiles He fears that this might just be the boom phase
among others. If the Rupee appreciates, these sec- of a boom-bust cycle, with all the given risks.
tors would become less competitive due to exports
Mr. Prasad worries that one day or the oth-
becoming expensive and thus possibly would expe-
er most of the FIIs could suddenly withdraw their
rience a slowdown in growth. Earlier, exports would
invested money, as was done in early 2008, if
have led to the growth of these sectors. Thus, with
they saw any signs of a slow down in the In-
the fall in exports the possibilities of layoffs and
dian economy. The outflow of money from the
slower growth rates in these highly labor intensive
market could then decrease the real economic
sectors have increased. On the other side, a positive
growth in India, and hurt it tremendously, by de-
Cover Story
B a d
the
and
U g ly !
t h e
Jayant kejriwal & deep mehta
Team Niveshak Results
With the economy growing at 8-9%, and robust de- ance was on account of higher-than-expected
mand of goods and services, the quarterly results of Q2 increase in raw material costs which were up
FY-11 were mostly in line with estimates. The Sensex hit 150bps Q-o-Q, after having risen 400bps in Q1FY11.
an all-time closing high of 21004.96 points on 5th No- Going forward, the major concerns are like-
vember 2010, mainly fuelled by FII inflows. The average lihood of a split in the joint venture of Hero and
growth of capital goods production remains healthy at Honda, with Hero group to acquire Honda’s 26%
over 28% in 2010-11, though the growth of IIP index in stake, around Rs. 9000 Crore at current mar-
September at 4.4% fell short of expectations. Data for ket prices. Also the Production at the Haridwar
the first six months of the fiscal year presents a trend plant is 1.4 million units annually which can be
of declining growth of capital goods over the course of stretched to 1.8 million. Hence, the possibil-
both Q1 and Q2 of 2010-11. The pace of growth of con- ity of further benefits from this plant is limited.
sumer durables, although healthy at 10.9% in September
Mahindra and Mahindra (M&M) reported a
2010, was considerably slower than the growth rates in
excess of 20% registered since April 2010. The healthy
growth in the production of consumer durables during
the previous months may have partly reflected building
up of inventory prior to the festival season in India. With
interest rates expected to climb following the lagged
transmission of monetary tightening, and the US Federal
Reserve announcing the second round of quantitative
easing (QE2) of USD 600 billion, it would be interesting
to see how the economy unfolds in the coming months.
Auto
The top-line performance in Q2FY11 for the in-
dustry, on the whole, has either been in line with the
estimates or has exceeded the estimates. The industry strong set of results in Q2FY11 with revenues of
is expected to grow at a CAGR of 13-15% for FY10-12E the automotive segment growing 23.7% YoY driven
aided by boisterous economic activity, favourable demo- by strong volume growth of three wheeler/small
graphics and higher income levels. The major concerns, trucks. Also, the segment’s revenues were boost-
however, are steep raw material prices and untoward ed by robust exports volume growth. The PAT grew
forex volatility, which could cause serious concern to by 7.9% YoY to Rs 758 crore further supported by
the whole of the value chain, going forward, as margins lower interest expenses. Since the successful in-
and bottom-line, could shrink to a certain extent. How- troduction of Gio and Maximo the company is ag-
ever, commodity prices could see some slowdown from gressively planning to expand its product portfolio
Q4FY11 with the easing of the demand-supply mismatch. in the Heavy Commercial Vehicle segment (~25-
50 tonnes category) with the Navistar vehicles.
Hero Honda Motors’ Q2FY11 net profit, down
15% Y-o-Y, was below market expectations. The vari- M&M with its proposed buy-out of South-Korea
Cover Story
gest quarter in the last four years. The growth TCS 7267.45 1812.65 9.24
was visible across all segments and verticals. Infosys 6425 1641 28.59
TCS, the largest software exporter from India, Wipro 6556.9 1172.1 4.81
showed Q2 US GAAP consolidated net profit up 14%
Revenue and Net Profit in Rs. Crores
at Rs 1813 crore. The stock markets reacted posi-
tively with share price touching a 52-week high of Banking
Rs 1030.5. 53.7% of the revenue comes from North Banking sector showed very good growth in
America, with UK and India contributing 15.3%, this quarter with increase in focus on CASA (Current
9.9% resp. BFSI contributes to 44% of its revenue, and Savings Account) which reduces the cost of de-
followed by Telecom (12.8%) and Retail and Distri- posits (interest on savings account=3.5%,interest on
bution (10.9%).The streamlining in operations dur- current account=0%,lending rate= approx. 10%) and
ing slowdown was the major reason for expanded helps banks to increase NIM (Net Interest Margin).
margins. TCS added 19,923 employees in the quar-
ter which was the largest ever. The superior per-
formance was driven by volume growth of 11%.
For Infosys, 16% QoQ PAT growth was assist-
ed by addition of 27 clients in the quarter. North
America is even more significant with 65.8% con-
tribution. Europe with 21.8% and India just 2.1%.
Onsite revenues contributed 50.2% for this quarter.
Company was conservative on its guidance and so
stock prices took a minor beating. On the innovation
front, Infosys applied for 18 patent applications in
India and US taking the aggregate to 256 and it has SBI, the country’s leading lender, showed a
been granted 15 by US Patent and trademark office. 22% decline in consolidated profit on YoY basis, and
The third biggie Wipro announced IT services a marginal 0.5% growth YoY on a standalone basis.
revenue growth of 5.7% QoQ. Volume growth of It was a 14.2% decline QoQ. Probable reason could
6.6% was highest in 12 quarters. Strength of the ru- be higher provisions for bad loans which were partly
pee did cause margin squeeze by 2.5%. Americas due to acquisition of State Bank of Indore in August.
with 56% contribution, Europe with 27% and India Bank’s loan portfolio is well diversified with
9% formed the revenue dynamics for the quarter. no segment accounting for more than 21% of the
Financial services and Technology, Telecom and Me- loan book. There was a healthy growth in Non-
dia contribute 27%, 25% resp. to the revenue. Wipro Interest income on account of growth in loan pro-
cessing, cross selling, commission from increase in
government business. Higher slippages impacted
the asset quality of the bank. Mainly this was due
to defaults in Dubai and Agri-loan waiver scheme.
ICICI Bank, top private sector lender, showed
results that beat street estimates that were driven by
good credit growth and drop in provisions for bad loans.
Here, Net slippages were lower and NPA’s declined. A
concern was increase in operating expenses, which
will increase due to integration of Bank of Rajasthan.
announced a decrease in margins due to salary
hikes. It won a key project from the UID authority For HDFC Bank, 33% rise in Net profit (YoY) was
for the critical enrolment process for 2 states in In- driven by increase in NII (Net Investment Income - dif-
dia. It was particularly a disappointing quarter for ference between interest earned and paid). Again, the
Wipro, when its peers showed double digit growth. growth was due to stable margins, robust loan growth
and good CASA ratio. Retail loans which constitute
Overall, expect the volume growth to con-
52% of the total, grows when GDP slows down. Depos-
tinue on account of stable pricing through-
its increased by 30%, out of which half are low cost.
out the industry. Attrition remains a major con-
cern due to increase in demand of the laterals. Andhra and Axis bank showed 27%, 26%
Also, currency fluctuations can take a toll on the growth on the basis of interest earned due
to good loan approval and disbursement.
to open banks, competition will increase and de- ume growth may be prioritized over margin growth.
celerate the pace of expansion. Also, focus on le- Moving onto Dabur, margins expanded by
veraging branches, promotional activities to at- 29bps to 22.4% despite increased inflation and tax-
tract customers will be the broad theme so as to ation. Hair care, its largest category grew at 5.8%.
increase market share. Also, rising NPA’s will also Reduction in employee costs (% of sales) and ef-
be a challenge, especially in retail and SME seg- ficient operations were main reasons for increase
ment where loans are provided without adequate in margins. But, on the negative was 2nd succes-
securities. RBI’s recent increase in Repo, Reverse sive quarter of de-growth in Shampoo business.
Repo rates will influence the banks other income.
ITC showed good performance in ciga-
Company Revenue Net Profit EPS rettes despite hike in prices. For its FMCG
space, margins have improved with person-
SBI 19808.09 2501.37 39.39
al-care products and biscuits gaining stability.
ICICI 6309.1 1236.27 10.91
Overall, high inflation will prevent companies
HDFC 4810 912.14 19.8
from raising prices significantly in order to preserve
Axis 3624.25 735.14 18.01
market share. But, good monsoons augur well for the
Revenue and Net Profit in Rs. Crores FMCG sector. While competitive intensity will remain
high, focus will be on cost and cash management.
FMCG
Talking of the FMCG sector, it was a mixed Company Revenue Net Profit EPS
bag. It has been a story of declining margins due HUL 4764.67 566.12 2.59
to rising raw materials cost across the sector. MARICO 540 59.66 0.98
DABUR 800.5 126.18 0.72
ITC 5147.18 1246.74 1.63
Revenue and Net Profit in Rs. Crores
Conclusion
India Inc. is set forth for a good second half
going by the Q2 numbers. But it remains to be seen
if they can reduce the impact of higher input costs.
Also, with increasing recruitment, salary costs
will also tend to reduce margins.With selling pres-
Hindustan Unilever Ltd. reported Q2FY11 sure seen in domestic markets due to Chinese and
net profit of Rs. 566.12 crores versus Rs. Irish concerns, it will be interesting to see the impact
420 crores in Q2FY10 i.e. gain of 34.76% YoY. it will have on different sectors.Good demand was
After adjustments, PAT stood at Rs.533.65 vs. seen in Auto and IT sectors, but 2G spectrum scam
499 crores i.e. a growth of 6.8%. All the three ma- will definitely impact telecom companies which are
jor segments viz. soaps and detergents, personal already struggling due to competitive pressures. For
products, and beverages showed growths of 6.3%, banking, second half of the year usually sees an in-
14.7% and 9.3% resp. But again, due to increasing crese in credit growth - which is good news. FMCG
ad-spend the EBIT margins have slipped, by 190bp, space will continue to see rising product costs as the
330bp and 160bp respectively. Costs of basic raw companies will pass on the load to customers so as
materials like palm oil, benzene have increased by to protect margins. Also, incresing participation by
46% and 100% resp. Company had to hike prices FMCG companies in international territories is some-
in certain products so as to protect margins. Pre- thing to look forward to. With promising recruitment
launch of brands like Rin, Lifebuoy did help to im- figures from Wipro, TCS and Infosys and good growth
prove the bottom-line. It was 6th successive quarter guidance from HCL, IT is likely to take off. So, overall
of double digit growth for personal care products. India Inc, looks set to continue their growth story and
For Marico, there was a volume growth across tackle the competetive dynamics and international
businesses with PAT growing 15% over Q2FY10. The pressures so that we continue to report many such
main contributor was Parachute Coconut oil at 10%, success stories in the issues ahead.
Saffola Oil at 18%. Revenues from Kaya Skin Clin-
2 Oligopolies
Wave 1950s-1973 Conglomerate Growth through Equity
3 Mergers diversification
Wave 1981-1989 Hostile Takeovers, Elimination of Debt Financed/
4 Corporate Raiding inefficiencies Cash Paid
Wave 1993-2001 Cross Borders Adjustment to Equity
5 Mergers globalization
processes
..
“Going downhill, everybody
picks up speed.”-Business
Proverb
FinGyaan
Exhibit 1: Deal Value, $ billion and volume
Year 2008 saw a reversal of trends in previ-
ous years. Some of the key changes observed were:
• Cross border M&A activity decreased from
41% in 2007 to 35% in 2008.
• There was a shift in focus from megadeals
(>$10 bn).
Exhibit 3: Average annual deal value added
• Hostile activity, generally resulting from
Advantages of M&A in recession ers. Several strategies can help the companies to
Contrary to the popular beliefs, M&A activ- successfully carry out M&A activity in recessions.
ity in recessionary times can lead to significant Firstly, organizations should define a corporate
benefits. Companies that are strategically and fi- strategy which is at the core of the company and
nancially superior will find rare opportunities in allows it to invest with a clear thesis. Danaher Cor-
recession to improve their competitive position. poration can be a suitable example in this regard.
For buyers, strong companies with short term It engages in M&A to strengthen its base of real as-
risk may be available cheaply. For sellers, reces- sets. It made 10 acquisitions in last downturn, in-
sion provides opportunity for strategic divestures cluding Gilbarco. Gilbarco turned out to be the part
and portfolio rebalancing. As seen from exhibit 4, of the third most profitable product line in 2008.
Acquisitions completed during and right after the Secondly, companies should also buy and di-
last recession (2001-02) generated almost triple vest frequently and consistently through cycles.
the excess returns (“Excess returns” is defined as They should always keep in mind a list of po-
shareholder returns from four weeks before to four tential targets. For example, Cintas maintains a
weeks after the deal, compared to peers) of ac- pipeline of priority targets and cultivates strong
quisitions made during the preceding boom years. relationships with them. Thus, it can often ap-
According to Bob Filek, partner with PwC Transac- proach a target long before other acquirers. Cin-
tion Services, “M&A activity in 2010 will be driv- tas has sustained its sales growth for 39 years.
en by strategic buyers who have access to capi- Thirdly, companies should tailor merger in-
FinGyaan
tal and the strategic vision to capitalize on some tegration efforts to deal thesis and the sources
of the best values we have seen in recent times.” of value. This can be accomplished by increased
due diligence from the M&A team. Often, buyers
Strategies for M&As during recession
in the same industry overlook the details as they
From the previous discussion, it can be in- believe that they know the industry. They con-
ferred that M&A activity in recession can lead to duct cursory reviews of the target company and
significant benefits, and separate the leaders from are often surprised to find out the actual valua-
the laggards. Organizations that proceed carefully tions to be much cheaper than they anticipated.
can generate significant returns for their sharehold-
Perspective
further widening of the trade deficit. the potential to derail the government’s plans as
they eat into the amount of disbursal available with
c) INCREASE IN OIL UNDER RECOVERIES: As the
the government for infrastructure & social develop-
pricing of Diesel, LPG & Kerosene is still under gov-
ment schemes.
ernment control, any rise in international oil prices
is not reflected in the domestic market. The inability A continuous rise in the subsidy bill & worsen-
of OMCs to sell fuel at the market defined rate re- ing fiscal deficit has forced the federal government
sults in higher under recoveries. to deregulate the petrol prices in the domestic mar-
ket while in-principle approval has been given for
d) MOUNTING FUEL SUBSIDY BURDEN: Any hike
deregulation of diesel prices.
in price of imported crude oil is absorbed by the
OMCs along with the Upstream Oil Companies & IMPACT OF HIKE IN FUEL PRICES IN THE DO-
the federal government. The fuel subsidy bill has MESTIC MARKET
witnessed a continuous rise for the past few years.
The hike in fuel prices in the domestic market
From FY 2005-06 to FY 2008-09, Government’s fuel
has a cascading effect on the Indian Economy. The
subsidy bill amounts to Rs. 1,42,203 Crores.
same is explained below.
a) INFLATION: Rise in fuel prices has a direct
impact on the prevailing inflation rate in the econ-
omy. Higher fuel prices (in particular Diesel) lead
to increase in transportation costs across the coun-
try. As a result, the price of essential commodi-
ties (such as food items, cement etc) shoots up.
An inflationary expectation among traders leads to
hoarding which pushes the spiraling inflation rate
further up.
b) EROSION OF PROFIT MARGINS: Rise in infla-
tion rate in turn leads to erosion of profit margins
of business enterprises as the key inputs for busi-
ness become costlier & consumers reduce their
& dearer cost of funds, corporate India Refining Industry (higher under recoveries),
puts it Capital Expenditure (CAPEX) plans Paint Industry (crude oil is a major input
in the cold storage. The idea is to wait for for solvent based paints) and many others.
the inflation & interest rates to come down
NEED FOR REFORMS
before initiating any new projects.
It is imperative that the Indian government
e) REDUCTION IN CREDIT GROWTH: A reduced
brings about the necessary reforms to strengthen
level of investment in the economy due to increase
the domestic oil market. The key reforms include:
in interest rates leads to a slowdown in the credit
growth of banks, the lubricant of every economy. 1) Rational pricing of petroleum products
f) FALL IN EMPLOYMENT OPPORTUNITIES: As 2) Reducing the rate of taxes levied on petro-
business activity in the economy takes a hit, gen- leum products
eration of employment opportunity also suffers a 3) Tapping alternative sources of revenue to
compensate the loss due to reduced taxation.
As the Indian Economy treads the path of
growth, its appetite for crude oil as a crucial source
of energy will only increase. Given India’s chronic
dependence on imported crude oil, the Indian Econ-
omy will continue to remain vulnerable & sensitive
to fluctuations in world oil prices.
Classroom
possibility of higher returns with lower
risk which is what happens in the case From what you are saying, it
of arbitrage. Arbitrage involves buying seems that arbitrage can make you
and selling of same or closely related securities money without any risk, only you need
at the same time. Buying and selling correlated or to spot the right opportunity.
same assets at same time creates a natural hedge
and hence the risk is less.
I wish it were that simple. In real life
situation, there is always some risk and
Sir, I have watched a movie called so even in arbitrage. There are various
the “Rogue Trader” in which the pro- risks involved in arbitrage transactions
tagonist makes millions arbitraging the viz. execution risk, counterparty risk and
Nikkei Index between the Singapore liquidity risk. While counterparty and liquidity risks
and UK exchanges. are rare, the execution risk is more common and one
should be wary of execution failures while closing a
Yes, that’s a nice movie which inci- large transaction.
dentally made arbitrage famous. In that
movie, the arbitrageur takes advantage Having discussed the very basics
of price differences between interna- of arbitrage trading, as a closing com-
tional markets to make huge money. In a ment, I would like to point out that
similar manner, arbitrageur can also take advantage some of the most exciting things in
of price differences between two national exchanges finance such as options arbitrage and
where similar securities are traded. Lastly, the price calendar spread arbitrage happen to
differences between the spot and futures market be related to arbitrage. We will discuss more on
can also be tapped to make money. these in the coming lectures.
(Note: All the clues given refer to Financial terms and not personalities
unless explicitly mentioned)
FinLounge
Across
4. Who is the Chief Economic adviser to Government of India? (person)
7. The total amount of credit issued to the user determined by the credit card company is called
Crossword Winner
The Crossword Winner for the month October 2010 is
Ankit Bansal
of SJMSOM, IIT Bombay
He receives a cash prize of Rs.500/-
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