FIN$IGHT
For the month October 2020
FINOPSIS : FINANCE CLUB OF IIM RANCHI
BLEEDING IN THE BACKGROUND –
NEWS & FUTURE GROUP
FEATURES SYNOPSIS OF THE DEAL INVOLVING
FUTURE GROUP: The retail conglomerate
of India, Future Group, owned by Kishore
BLEEDING IN THE Biyani was nearly in the verge of ruins
BACKGROUND –
due to cash crunch consequent to the
FUTURE GROUP
P A G E 1-2 devastating impact of the COVID-19
Pandemic which has wreaked havoc
BANK CREDIT GROWTH across the worldwide economy. Mr
AND DEP Kishore Biyani in a press release earlier
OSITS IN INDIA this year had said that the group had lost
PAGE 3 almost 7000 Crores in the first 3-4
WILL THE MARKET months of this year due to closing of
CRASH stores coupled with immense pressure
PAGE 4 from its lenders, led by the State Bank of
India, to manage its debt, eventually
INDIAN ECONOMY: forced him to enter into serious
FIGURES AND
discussions with Mukesh Ambani led
PROJECTIONS
PAGE 5 Reliance Retail for selling his business as
going concern in slump sale.
STRATEGY OVERVIEW The deal was finalized in August this year
PAGE 6 wherein Mukesh Ambani's Reliance
Industries Ltd. announced the acquisition
N E W S S N IP P E T
PAGE 7
of retail, wholesale, logistics and
warehousing business from the Future
WHAT DO LEADERS SAY Group as going concern on a slump sale
PAGE 8 basis for Rs 24,713 crore.
BOLT FROM THE BLUE BY AMAZON :
W O R D O F W IS D O M
PAGE 9 On October 1, 2020, Amazon filed
litigation against the Future Group-
F IN C O R N E R Amazon deal with the Singapore
PAGE 10
International Arbitration Centre (SIAC)
claiming that the deal was in violation of
T IC K L E Y O U R B R A IN
PAGE 11
a non- compete clause and a right-of-
first-refusal pact which it had entered
with Future Group.
AMAZON-FUTURE DEAL Last year,
under a Rs 2000 Crore deal, Amazon had
bought 49% stake in Future Coupons, the
promoter entity of Future Retail. This
also gave Amazon a 3.6% stake in Future
retail. Amazon opted for this indirect
route because of strict Foreign Direct
Investment norms prevailing in the
country.
Later in the year, Future Retail modelled
a long- term business agreement with
Amazon wherein the latter would act as
the authorized online sales pipeline for
Future Retails stores. The idea was to
bring synergy of operations into the
efficiently growing retail business in India
at unparallel speeds. The technological
expertise of Amazon combined with
supply chain, and inventory of Future
retail would take Indian retail segments
to new heights. However, the
operationalization part witnessed several
challenges such as the lack of priority
given to amazon delivery boys at stores
which resulted in underachievement of
targeted deliveries by 80%.
Under legal partisans, this deal had
bestowed upon Amazon, rights under a
call option clause to acquire all or part of
the shareholding of Future Coupons in
Future Retail with an exercise right
between the third and tenth year from
the date of the deal. The deal also vested
obligation on Future Group to inform
Amazon before entering into any sale 1
agreement with a third party. On those grounds, Amazon had
expounded that the slump sale was in direct violation of its
contractual rights.
The deal with Amazon and Future retail included a non-
compete clause which included a list of companies with which
the future group couldn’t enter into business. And Reliance
was one of them.
As a counter-argument, the Future Group has said that it had
not sold any stake in the company, rather the deal merely
involved selling off its assets and had therefore not violated
any terms of the contract.
FUTURE GROUP: THE PAWN IN THE WAR FOR INDIAN RETAIL
THRONE:When you read between the lines, it can be connoted
that the legal tussle involving the debt- ridden Future group is
merely a sideshow put up by Amazon against Reliance as plain
as a pikestaff for a battle of supremacy in the flamboyant
Indian retail segment which is predicted to touch over $1
trillion by 2025, making it one of the most lucrative in the
world.
Reliance has made inroads into the e-commerce business with
the launch of Jio mart earlier this year. With the acquisition of
future group, Reliance Retail, India’s largest retailer with more
than 11000 stores would have quickly scaled up its operations
by adding Future Groups 1500+ stores to its portfolio. This
would expand its retail business and help Reliance to take on
leading e-commerce players like Amazon and Flipkart through
its Jio Mart platform. This deal with Future group would have
equipped reliance retail with technical expertise to lay strong
foothold in the Indian retail.
The e-commerce giant would have sensed a sword on its head
if life was given to the Ambani-Kishore Biyani deal and
accordingly went into arbitration with SIAC.
The real party who has lost blood in this battle of supremacy
between the Indian retail giants is the Future Group. It has pled
before the arbitrator that if the deal is not put through, then
the company would go into liquidation and over 29000 people
would fall prey to unemployment. But the arbitrator ruled that
economic hardship alone is not a legal ground for disregarding
legal obligations.
Future group now lay in a sandwiched condition unable to
meet its working capital requirements unless life is given to
the Reliance deal.
WHAT NEXT? The SIAC had passed an interim order in favor of
Amazon by freezing the deal for 90 days. However, Reliance
Retail has come up with a statement that its deal to acquire the
assets of Future group is fully enforceable under the Indian
laws and that it intends to enforce its rights under the
agreement and complete the transaction without any delay.
Source : Business Insider
HOW SIAC CAME INTO THE PICTURE
The SIAC is a non-profit body that provides an alternative
method of dispute resolution arising from cross border
transactions between foreign entities. It settles cases privately
outside the traditional court system, and a SIAC order cannot
be enforced in India until it is ratified by an Indian court.
In this dispute, Amazon had approached the SIAC to appoint
an emergency arbitrator before the normal procedural
completion of appointing an arbitral tribunal to take up the
case. The emergency arbitrator has passed an interim
emergency award by halting the deal after hearing both the
parties.
HOW CAN AMAZON LEGALISE THE EMERGENCY AWARD?
The statement by Reliance retail is a silent declaration that it
is not legally bound by the SIAC.
In general trade terms, the parties to the international
arbitration will voluntarily comply with the emergency award.
In case compliance is not called for, the party which has won
the emergency award can move the High Court in India under
Section 9 of the Arbitration & Conciliation Act, 1996, to get
similar reliefs as granted by the Emergency Arbitrator.
Future Group cannot challenge the emergency award through
courts in India unless Amazon moves the High court for
legalizing the emergency award in India under Section 9 of the
Arbitration & Conciliation Act, 1996. It can apply before the
Emergency Arbitrator showing cause why the order should be
vacated or modified, or it can wait for the constitution of the
arbitral tribunal and then apply before the main tribunal.
It is evident from recent actions by both the retail giants
that none of them will go down without a fight. What hangs
in the balance is the future of the Future Group. Will Future
Group become victim to the legal standoff between the
retail giants, or will it form synergy with Reliance to step
into better horizons?
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Source : DNA India
BANK CREDIT GROWTH AND DEPOSITS IN
INDIA
The pandemic of COVID 19 has adversely impacted the bank
credit flow to multiple sectors. The same is reflected in the
latest RBI data. Looking at the month of the September, the
bank overall credit growth deaccelerated to 5.8 percent (on
the year-to-year basis). We can compare it to last year where
growth was around 8.1% during the same month. More
worrisome thing that came to light was that the credit growth
to industry was ‘nil’ (in September 2020) which was 2.7% per
growth in September 2019. Going against the downtrend,
credit growth to the services sector grew to 9.1% in
September 2020 from 7.3% in September 2019, the RBI said.
In this sector, credit to ‘computer software’, ‘trade and
tourism', and 'hotels & restaurants’ registered accelerated
growth in September 2020.
The personal loan sector, too, took a hit with personal loans
registering a growth of 9.2% in September 2020 as compared
to 16.16% growth in September 2019. Within this sector,
vehicle loans performs well, registering accelerated growth in
September 2020 along with the growth in the corresponding
month of the last year. Personal loan growth slowed down
with almost all the segments including consumer durables
being the worst hit with growth falling to 8.5% from 19.3%.
Reason for Plummet of Credit Growth -
The economy was already on a downtrend even before
COVID-19. But with the onset of the pandemic, the situation
has exacerbated. A combination of factors including many job
losses and salary cuts has impacted the demand. Rising NPAs
has forced the banks to adopt a high-risk aversion policy and
weren’t willing to lend to a high-risk borrower.
Recent Rise -
As per the RBI data, the bank credit in India rose by 5.06
percent on a year basis to Rs. 103.39 lakh crore. Similarly, on
the other hand deposits too rose by 10.12 percent to Rs.
142.92 lakh crore in the fortnight ended on October 23rd. Also,
banks are hopeful that credit growth will pick up gradually as
the economy opens up and consumer demand improves. The
growth in services industry also provides a positive outlook.
Future Expectations -
SBI is expecting a credit growth of 8-9% by the end of FY21
which is more than the 7% projected last quarter. The same is
possible as the activity has gathered pace and they have
received applications of Rs. 6,495 Cr. for restructuring of
loans. There is a growth of about 6% till September 30. With
the unlocking happening, there could be in a position to reach
better than 8%.
There is a good amount of surge in home loans. Sanctions are
up about 29% year-on-year (y-o-y) in the September quarter
and disbursements have gone up by 12% in the said quarter.
In case of auto loans, there have been a growth of 29% in
terms of sanctions and 27% in terms of disbursements. In
personal loan sanctions, there was a growth of 55% during the
September quarter and sanctions have gone up by 61%.
Going further, a report from Care Rating adds, the banking
system liquidity is expected to remain in a surplus position
aided by continued growth in bank deposits as against lesser
growth in the bank credit growth. Liquidity surplus in the
banking system could be weighed down by the upcoming
government borrowings of Rs 28,000 crore by the Central
government and Rs 34,135 by state governments. The
restructuring of loans facility provided by the government is
likely to have a positive impact on the credit flow. Majority of
the banks expect an increased application for restructuring of
debt which will be good for credit flow in the country.
Concerns -
Analysts believe that danger still looms, even after growth in
major industries and a clearer picture with banks regarding
repayment (after moratorium). Even though retail demand
has accelerated however, corporate credit demand continues
to be down. Also, the growth remains lower when compared
to last year (pre COVID levels). “It’s too early to start
celebrating as a clearer picture around bank’s financial health
will emerge only in Jan-Feb,” said Jindal Haria (India Ratings
analyst). Sustaining the demand momentum beyond the
festive season will depend on the containment of COVID-19
and lender resilience, Emkay Global said.
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 W I LL THE M A RKET CRA SH?
WHAT?
On September 11,2020, Friday morning, SEBI released a circular
stating a new structure for multi-cap funds.
1. It made it compulsory to invest 75 %of the corpus in equity
from 65%earlier
2. Also,25% of the total corpus should be invested in each
small, mid, and large-cap funds. The remaining 25% is up to
the discretion of the Mutual fund manager. SEBI gave time
till January 2021 to the fund houses to restructure their
portfolios.
Why?
The main objective here is to make a multi-cap fund diversified
and make them true to their label. Earlier, there were no
minimum requirements; the only condition was that at least
65% of the corpus should be in equity, so many companies had
the majority of the corpus in large-cap funds under the name
of multi-cap. Given below is the table of top 5 multi cap MF in
India in terms of AUM.
What next?
According to AMFI, the net AUM for multi-cap funds on August
31, 2020, were 1,43,532 crore, out of which 73% was invested
in the large-cap fund only, and only 5% in small-cap. Now,
companies will have to sell large-cap funds and invest in mid-
cap and small-cap funds. It means, at least 23% of large-cap
funds must be reinvested to small and mid-cap funds to meet
the requirements. One more option available with the
Mutual funds is to recategorize their MF; for example,
Motilal Oswal Multi cap 35 declares large-cap MF.
Impact
Many assume that it will lead to the next crash. But if you go
as per the numbers, the amount required to be reinvested
from large-cap funds is just 4% of AUM of equity MF and just
1%of AUM of total MF, which are not such big numbers. We can
expect a rally in small and mid-cap funds in the upcoming
months due to their increased demand. Also, SEBI has given
enough time to AMCs to take necessary actions, so we
shouldn't expect any immediate impact on the stock market
4
 INDIAN ECONOMY: FIGURES AND PROJECTIONS
Growth rate forecasts–
October saw the IMF forecasts for Indian Economy growth rate
and the forecasts present negative view for the year 2020. As
per IMF forecasts Indian Economy is expected to contract by
10.3% during 2020 and an expected 8.8 % growth in 2021
owing to a smaller base of 2020.The RBI and World bank
expect the economy to decline at 9.5% and 9.6% respectively.

Source : Forbes
Inflation-
Retail inflation in India in September rose to an 8-month high
of 7.24% majorly owing food inflation reaching double-digits at
10.68%. For the previous month, this rate was at 6.69%.

Source : India Times

Industrial Production-
India’s Industrial Production contracted to 3.8% month on
month making it the third consecutive month with negative
growth rate as per the Index of Industrial Production released
by Central Statistics Office
Majority of the Industries showed negative growth rate, with
companies still battling out the impact of COVID-19.
Manufacturing sector showed negative growth of 2.1 % in
output and and there was 8 % negative growth for mining
output. Surprisingly even the Consumer durables and Non-
Durables have shown a negative growth at 18.0% and 1.1%
respectively, non-durables being less impacted by COVID
outbreak due to the regularity of their nature.
Source : Financial Express
Monetary Policy-
On October 8 2020, RBI announced the new monetary policy
where it kept the repo rate unchanged at 4% and Reverse
repo rate at 3.35% similar to the previous data. Marginal
Standing Facility, a facility which allows scheduled commercial
banks to borrow additional amount of overnight money from
the RBI against their excess SLR securities.
Source : Flipboard
Rise in Business Sentiments –
From a record low in the previous quarter, the business
sentiment shot up by 41% during the July-September quarter.
Also, after recording a massive drop to 46.4 in the first quarter
of the ongoing fiscal, the think tank’s Business Confidence
Index (BCI) rose to 65.5 in the second quarter. Although, these
figures are less than last year’s levels by 36.5% but it
showcases a growth trajectory, especially post COVID-19.
The BCI covered around 600 firms across different
geographies, sectors and sizes. They focused on four aspects
including - economic conditions, financial position, investment
climate and capacity utilization.
The survey found growth trajectories in 3 out of the 4 sectors,
with largest improvement required in capacity utilization.
About 58% of the survey respondents said that levels were
either close to or more than in September as compared to
37% in July.
In terms of sectors, there was an increase by a huge margin of
89% in the intermediate goods category, followed by 44% for
cons non-durables, 39% for cons durables, 36% for capital
goods and finally 32% for the services sector.
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 STRATEGY OVERVIEW

PROTECTIVE PUT

The m a r k e t is c u r r e n tl y volatile a n d m a n y investors are h o l d i n g a b u l li s h v i ew o f t h e m a r k e t at

least i n t h e s ho rt t e rm . A g o o d w a y t o b e n e f i t f r o m this b ul l is h m a r k e t k e e p i n g a l i m i t o n t h e
d o w n s i d e is b y d e p l o y i n g t h e P rotective P u t Strategy. It involves t h e f o l l o w i n g t r a d e t o b e
executed:
• L o n g a s t o ck
• B u y a n ATM o r slightly OTM strike P u t o p t i o n

Thus, i t involves e n t e r i n g i n t o t w o p o s i t io n (Long o f sto ck a n d l o n g o f Put). A p r o t ec t iv e p u t

l i m i t s t h e d o w n s i d e losses w h i l e e ns u r i ng u n l i m i t e d u p s i d e pro fits if t h e sto ck prices rises.
However, t h e p r o f i t is r e d u c e d b y t h e cost o f p u t p r e m i u m . M a x i m u m loss occurs w h e n t h e
p r i c e o f t h e u n d e r l y i n g s t o ck is less t h a n o r e q u a l t o t h e strike p r i c e o f t h e l o n g p u t .

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 NEWS SNIPPETS
Sep’20 – Highest formal jobs creation
In the current fiscal, in the month of September, highest
number of formal jobs have been created under both the
Employees Provident Fund Organisation and the
Employees’ State Insurance Corporation. This signalled a
rise in demand for the formal workers. The subscription in
National Pension Scheme rose month-on-month after
touching the lowest in June’20 in the current fiscal year.
The net new additions under the EPFO stood at 14.9 lakh
while the number of newly registered employees under
ESIC stood at 11.4 lakh in September.
Tatas to pick majority stake in e-pharmacy
firm 1mg
The Tata group is in talks to acquire a majority stake in
online pharmacy firm “1mg”. This decision is into
consideration due to the rapid growth of e-pharmacies in
India due to the Covid-19 outbreak. If this acquisition
takes place, it could significantly change the face of India’s
fledgling e-pharmacy sector. The talks have been ongoing
as Tatas look to build their super-app platform. The Tata
group’s strategy is to pick up controlling stake but keep
the management to run the operation.
At valuation of $2 billion, Unacademy raised
fresh funds
Unacademy, an education tech platform, has raised a
fresh round of funding from Tiger Global Management
and US-based Dragoneer Investment Group. The
company's funding amount is not disclosed but said it
values Unacademy Group at $2 billion. Before this
funding round, Unacademy raised $150 million led by
SoftBank Vision 2.
ECLGS 2.0 scheme
Government has extended Emergency Credit Line
Guarantee Scheme (ECLGS) to the health sector and 26
other sectors identified by the Kamath Committee. Under
the ECLGS 2.0, the entities with an outstanding credit
above Rs 50 crore and not exceeding Rs 500 crore as on
February 29, 2020, and which are less than or equal to 30
days past due as on February 29, 2020, are eligible. The
loans provided by ECLGS 2.0 will have a tenor of fiver
years and will also include moratorium on repayment of
principal.
Moratorium on Lakshmi Vilas Bank to be
lifted and going to operate as DBS
All the branches of the Lakshmi Vilas Bank Ltd. Will
function as a branch of DBS Bank India Ltd. From
November 27, 2020, onwards. Union Cabinet gives the
amalgamation a green signal. The moratorium on the
bank, which was earlier imposed, will be lifted on the
same day. Customers, including depositors of Lakshmi
Vilas Bank Ltd. Will be able to operate their accounts as
customers of DBS Bank India Ltd. With effect from
November 27, 2020
40% return clocked by Zerodha co-founder’s
hedge fund in first year of launch
Zerodha co-founder Nikhil Kamath reported a 40.7%
return over the past year on True Beacon, the hedge fund
launched by him. The fund is classified as Category III
Alternative Investment Fund (AIF) and is ₹400 crores odd
fund. The fund was launched on 1st September 2019. The
fund does not charge any administrative or management
fees. The 10% of gains made by fund would be paid to the
fund manager. The fund can go long(profit from gains)
and short(profit from correction)
7
 What do leaders say?

“The Indian economy may contract or stagnate this fiscal but it will
bounce back to be among the fastest growing in the world next
year.” - Nirmala Sitharaman, Finance Minister

“The fatality rate in India is 83 out of every 10 lakh population in India, whereas it is
more than 600 in countries like the US, Brazil, Spain, Britain 5,500 people out of
every 10 lakh in India are infected, whereas in countries like the US Brazil this figure
is around 25,000”- Shri Narendra Modi, Prime minister

“All our youngsters have created many critical applications which have helped
many sectors go digital and face the problems of the pandemic with confidence
emerge successfully as we unlock economy and expand economic activity”-Shri
Piyush Goyal, the Union commerce and Industry Minister

“I see no reason why we’re not going to a bull market.”- Rakesh

Jhunjhunwala, Stock Market Veteran

“I’ve been investing for over 50 years. I don't remember a time when I’ve seen
such volatility as we see today. Just look at US markets, we’re up one day 300,
400 points and then next day, down by 400 points”- Henry Kravis, Co-founder,
KKR & Co.

8
 WORD OF WISDOM

Tanay Agrawal
MBA Second Year
Student IIM Ranchi
CFA Level 1 Passed

Question. Which method would you recommend between DCF and

Pricing Multiples for the purpose of Valuation?
Tanay : From what I have learnt, I would prefer DCF for two reasons.
Firstly, it allows you to factor in your story about a company
objectively in your numbers. Secondly, it allows you to identify
intrinsic value of a share which I believe is a better measure to
identify mispriced shares than peer to peer pricing. Also, as
Professor Aswath Damodaran says, the problem with Pricing
Multiples is that those who use it are lazy and they solely rely on
ratios and not on the underneath drivers of every ratio. Another
issue is that some of the ratios that are used might not even be
Question. How can we value young companies or consistent. But then most people use Pricing Multiples because they
startups using DCF? think it is easy to use which it is if you don't do it correctly.
Tanay : If we remove our bias that DCF is based on
historical data, you can actually use DCF to value
young companies. So what we do is that we estimate
the size and the growth rate of the market.
Thereafter, we estimate the market share of our
company at maturity if we believe our company
would be successful. This can be used to get your
terminal year revenue. You can also estimate your
margin based on the peer group of companies. You
can use Sales to Investment Ratio to identify the
Investment you need to make each year. Now all we
need is truncation risk and discount rate.

Source : G2 Learning Hub

Question. Can you tell us more how we can use Pricing Multiples?
Tanay : For example let us talk about EV/Sales. So, if your
company's EV/Sales is higher than the average EV/Sales for peer
group of companies, it does not necessarily mean that your
company is overvalued. The drivers of EV/Sales if you expand its
formulae are After-Tax Operating Margin, Reinvestment Rate,
WACC and Growth Rate. What we actually need to compare is each
of these drivers to understand whether or not your company is
actually mispriced. Another way to identify mispriced securities is to
use the market price to identify what are the expectations of
market for different drivers of value based on the current market
price. Then if your story and numbers about these values drivers is
consistent with market expectations, the stock is correctly priced.
Question. Any suggestions for someone who wants
to learn valuation?
Tanay : I would recommend one to visit Professor
Aswath Damodaran's website & YouTube channel
and access the resources shared by him. You can
also go for this book Expectations Investing by
Rappaport and Mauboussin. It discusses in detail
about the method related to market expectations I
talked about. Lastly, I would say that there is no
correct value of a company and doing valuation
may not be sufficient because the market also
needs to correct itself for you to earn money.

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FinCorner

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Tickle your Brain

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