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RNI No. MAHENG/2009/28962 | Volume 6 Issue 14 | 16th - 31st Aug ’14Mumbai | Pages 52 | For Pr ivate Circulat ion

A PROMISING STARTThe new-found buoyancy in the Indian economy is to some extent sentiment-driven but the efficacy of the small initiatives taken by the government and the business-friendly budget cannot be discounted

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It’s simplified...Beyond Market 16th - 31st Aug ’14 3

DB Corner – Page 5

Ripple Effect

Geopolitical uncertainties in the Middle East and Ukraine could impact an oil-importing

emerging nation like India, if global unrest is not addressed on time – Page 6

A Promising Start

The new-found buoyancy in the Indian economy is to some extent sentiment-driven but the

efficacy of the small initiatives taken by the government and the business-friendly budget

cannot be discounted – Page 9

Reaching Out

The RBI is working on creating a framework for the functioning of small, payment and other

differentiated banks to cater to the huge unbanked population of the country – Page 12

Lessons Learnt

RBI’s recently announced reform measures are aimed at reducing the probability of failure of SIBs

and their subsequent impact on the sector as well as the real economy – Page 15

Bloodbath In The Skies

Passengers will be spoilt for choice with the entry of new airlines, but there will be a slugfest

between competitors over fares – Page 18

Fillip To Development

To encourage infrastructure development and affordable housing, the RBI recently eased norms

for banks issuing infra bonds to finance projects – Page 21

Modest Gains

The Fast Moving Consumer Goods sector is expected to perform moderately well in the second

half of 2014-15 – Page 24

New Age Cinema

Film insurance is a norm these days and it is fast replacing old ways of filmmaking – Page 27

For Better Or Worse

While capping prices of essential medicines would benefit consumers, it would nonetheless

harm the profits of pharma companies – 0

“Unless some unseen catastrophe is round the corner to derail the Indian markets, we

expect the markets to keep doing better, albeit with some consolidation and then growth.”

Mr Waqar Naqvi, CEO at Taurus Mutual Fund talks to Beyond Market about the direction the

markets are likely to take along with some investment advice – Page 32

Lupin Ltd : Strong And Resilient

Owing to increased capacity utilization at its Indore SEZ, scale-up in oral contraceptives portfolio,

launch of limited competition products in the US and gradual margin expansion in the Japanese

market, the company is likely to post healthy earnings – Page 34

Strategy Rejig

Investors must rebalance their portfolios at regular intervals to make the most of their

investments – Page 39

Building Your A-Team

Build your dream team by hiring people who are as passionate about your start-up as you are

– Page 42

Crowd Management

Crowd in stock market parlance refers to bulls and bears that dominate the bourses, determining

the rise and fall of stock prices – Page 44

Technical Outlook For The Fortnight Gone By – Page 48

Important Jargon For The Fortnight – Page 49

Volume 6 Issue: 14, 16th - 31st Aug ’14

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

Art Director: Sachin KambleJunior Designer: Sagar Padwal

PR & Communications: Dwiti BhutaOperations: Shreelatha Gollavathini

Printed and published by Mr Rakesh Bhandari on behalf of Nirmal Bang Financial Services Pvt Ltd, printed at Uchitha Graphic Printers Pvt Ltd65, Ideal Ind. Estate, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 and published at Nirmal Bang Financial Services Pvt Ltd, 19, Sonawala Building, 25 Bank Street, Fort, Mumbai-400001. Editor: Tushita Nigam

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Research Team: Sunil Jain, Praful Bohra,Manav Chopra, Vikas Salunkhe

It’s simplified...Beyond Market 16th - 31st Aug ’144

It has been about three months since Narendra Modi was sworn in as the Prime Minster of the country. During this period, the Indian economy saw initial signs of recovery despite blips, both on the domestic as well as the international front. Though many say the positive changes in the economy are sentiment-driven, one has to take into account all the small initiatives taken by the new government in its maiden Union Budget.

In our cover story, we have highlighted the current state of the Indian economy and the markets following the change in government at the Centre. Though initial signs look good, we need to maintain a ‘wait-and-watch’ approach for future developments under Modi’s reign.

Other topics include reform measures announced by the Reserve Bank of India. These include plans to reduce the probability of failure of Systematically Important Banks; framing of guidelines for the functioning of small, payment and other differentiated banks to help reach out to the unbanked and underserved population of the country and the easing of norms for banks that issue infrastructure bonds to finance projects aimed at encouraging development and affordable housing.

On the sectoral front, this issue features articles on pharma, FMCG and aviation. While the article on pharma talks about the impact of capping of prices of essential medicines on consumers and the pharma industry on the whole, the one on FMCG dwells on expectations of moderate growth in the second half of 2014-15 and the state of the airline industry with the entry of new airlines and its benefits to fliers. Furthermore, there is an interesting piece on film insurance and move towards adoption of new age methods of filmmaking. Globally, geopolitical uncertainties in the Middle East and Ukraine have been worrying global economies. An article on this topic attempts to explain the impact of the crises on oil-importing countries, including India.

The Beyond Portrait section features Waqar Naqvi, CEO, Taurus Mutual Fund wherein he shares his views on the probable direction of the markets, while offering wise investment advice. An article in the Beyond Basics section highlights the importance of rebalancing of one’s portfolio at regular intervals, especially when the markets experience a turnaround. Finally, do not miss the article on “crowd” in a stock market in the Beyond Learning section. It refers to the bulls and bears and how they dominate the prices of stocks as well as the marketS.

Tushita NigamEditor

Towards A Better Tomorrow

(LTP: `82.80), CCL Products (India) Ltd (LTP: `77.65) and Marksans Pharma Ltd (LTP: `37.60).

The government may announce key policy initiatives in the coming fortnight. Market participants are advised to keep a close eye on developments in the global economies as these could have an impact on the direction of the markets, going forwarD.


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.

he Reserve Bank of India (RBI) in its third bi-monthly monetary policy review for 2014-15

kept key rates unchanged. It left the repo rate unchanged at 8%, the reverse repo rate at 7% and the Cash Reserve Ratio (CRR) at 4%.

However, it lowered the statutory liquidity ratio (SLR), by half a percentage point or 50 bps to 22% to free up more money for lending. Moreover, it did not offer any further direction for rate cuts.

A revival in rains was witnessed in the previous fortnight. The deficit in the June-September monsoon has narrowed to 27% of the 50-year average, the Indian weather department said recently.

Earnings results of India Inc have been in line with street expectations.

T Industry experts are hoping for an improvement in earnings results in the coming quarters.

Globally, geopolitical crises in the Middle East and growth concerns in the Euro zone have been dampeners.

Market participants can consider fresh buying above the 7,810 level on the Nifty. However, they are advised to avoid fresh buying if the Nifty breaks the support level of 7,690 in the coming fortnight.

Stocks that look good from trading and investment perspectives are Tata Chemicals Ltd (LTP: ̀ 359.20), Lupin Ltd (LTP: ̀ 1164.80), IDFC Ltd (LTP: `144.05), JSW Steel Ltd (LTP: `1173.25), Tata Steel Ltd (LTP: `534.70), Tata Motors Ltd (LTP: `472.65), Wonderla Holidays Ltd (LTP: `260.80), Capital First Ltd (LTP: `262.50), Sonata Software Ltd

Market participantscan consider fresh

buying above the 7,810level on the Nifty.

Sensex: 25,918.95Nifty: 7,739.55

(As on 13th Aug ’14)


2006 after they won highest number of seats in Palestinian parliamentary elections defeating the Fatah political organization after several violent clashes between the two.

Consequently, Israel imposed restrictions on the movement of goods and people citing security reasons, which has been a cause of worry for Gaza, whose borders are surrounded by Israel on one side and Egypt and Mediterranean Sea on the other side. Hamas rejects Israel’s right to exist and continues to fight against Israel’s restrictions.

Historically, tension between the two countries never settled for long as Hamas continue to infiltrate, and Israel on its part keeps on bombing and attacking Gaza. The war that went on for three weeks, before a ceasefire was announced, claimed nearly 1,360 civilian lives.

IRAQ AND ISIS CONFLICT

Another country from the Middle East, Iraq, is facing the onslaught of Islamic State in Iraq and Syria (ISIS), a jihadist group fighting government forces in Syria and making military gains in Iraq. ISIS has captured several regions, cities and oil towns in Iraq. ISIS, which is considered to be an Al Qaeda group, is motivated to establish an Islamic state, which will stretch from Iraq into northern Syria.

Recently, the same group was in news for having said to impose “fatwa” on women in Iraq. However, Iraq, which has the world’s fourth largest oil reserves and whose economy heavily depends on oil, continues its fight against ISIS.

RUSSIA-UKRAINE CRISIS

Ukrainian forces have been fighting pro-Russian separatists in the two eastern regions since months. After

he International Monetary Fund (IMF) lowered its global economic growth forecast for 2014, from its

April estimate of 3.7% to 3.4% in July, citing “negative surprises” from the United States and China and geopolitical risks in Ukraine and the Middle East.

“Geopolitical risks have risen relative to April: risks of an oil price spike are higher due to recent developments in the Middle East while those related to Ukraine are still present,” said IMF in an update of its semi-annual World Economic Outlook (WEO).

Geopolitical unrest in the Middle East is mainly due to Islamist offensive’s siege of Iraq, the ongoing fight between Israel and Palestinians in Gaza, the downing of Malaysia Airlines flight MH17 in eastern Ukraine and the widening of sanctions against Russia by US and EU over its support of separatist violence in Ukraine.

IMF spokesman William Murray warned that the sanctions could have a severe impact on trade in the region, “particularly in eastern and central Europe and central Asia”, according to reports.

Geopolitics or political relations between countries and groups of countries is important in determining actions of States and must, therefore, be understood in the context of its impact on the markets as a whole since global markets today are interlinked due to the participation of foreign investors and foreign money.

CRISIS IN SYRIA

The conflict in Syria began following protests that erupted in March ’11 in the southern city of Daraa after the arrest and torture of some teenagers who painted revolutionary slogans on

T a school wall. Several demonstrators were killed when security forces opened fire at them. After this incident, many more took to the street and the unrest triggered protests across Syria. Street protests soon took the form of an armed rebellion, with a loose coalition of groups fighting under the name of the Free Syrian Army, calling for the resignation of its President Bashar-al-Assad.

Ever since the war began, the death toll in Syria has crossed 1,00,000, according to a recent BBC report. The internal conflict has so far destroyed whole neighbourhoods and forced more than nine million people to flee from their homes.

Geographically, Syria is a country in Western Asia, bordering Lebanon and the Mediterranean Sea to the west, Turkey to the north, Iraq to the east, Jordan to the south, and Israel to the nation’s southwest.

I S R A E L - P A L E S T I N E CONFLICT

Not far from Syria, a war between Israel and Palestine is being waged in retaliation to rocket attacks between two sides. The latest conflict broke out on 8th July this year, when Israel launched “Operation Protective Edge” in Hamas Islamist-dominated Gaza, involving air and naval bombings in response to cross-border rocket attacks.

The Gaza Strip has been the bone of contention between Israel and Palestine. Gaza or Gaza Strip is an exclave region of Palestine on the eastern coast of the Mediterranean Sea that borders Egypt on the southwest and Israel on the east and north. Gaza, with a population of 1.8 million, is governed by the militant group Hamas, who came to power in


the Malaysian flight MH 17 was shot down over territory held by pro-Moscow rebels in eastern Ukraine, US and European leaders agreed recently to impose more sanctions on Russia’s key sectors like finance, defense and energy.

Western countries had earlier imposed sanctions, but only on small number of individuals and firms. This includes US government’s toughest sanction on some of the biggest Russian firms including Rosneft, the world’s largest oil company by output, producing about 4% of world oil output. It is believed that the Malaysian airliner was allegedly hit using a missile supplied by Russia.

Europe has a much stronger economic relationship with Russia than the US, but EU leaders have been reluctant to impose harsh penalties in part because of concern about the negative impact on their own economies.

IMF too has not spared Russia. IMF has predicted Russia’s growth to fall to 0.2% compared to 1.3% it predicted in April ’14. This largely reflects concerns over flight of capital caused by Russia’s involvement in the conflict with Ukraine.

Market pundits fear that further

tension or disruption in the region could impact oil supply and thus affect global oil prices, risking the recovery process of some of the developed nations in the EU.

Apart from these major events and incidences, market mavens and political analysts are keeping a close eye on the increasing influence of China over its territorial claims over uninhabited islands in the East China Sea, against Japan.

WHAT THESE GEOPOLITICAL EVENTS MEAN?

Geopolitical risks are often underestimated and hard to predict. Hence, sudden cascading impact of these events is often huge and sometimes disastrous.

On a broader level, the global conflicts could directly impact oil prices and international trade, harming global economic growth. One should also look at these events from the perspective of easy money, which has been pumped in by global central banks or easy money policies that have been pursued for quite some time, which are having an impact on various assets classes.

Since most of these regions or

countries, where conflicts are on, are oil-exporting nations. And any further escalation will immediately have a spillover impact on the oil prices which is bad news for oil-importing countries like India and other nations.

Also, escalation of tension among these countries and regions or a war-like situation could have an immediate knee-jerk impact on global equity markets as investors might pull out their money, dragging global indices down as a result of the perceived risk.

Emerging markets, including India, could be vulnerable given huge inflows of foreign money and our inability to absorb such selling.

Moreover, the balance of payment and external situation of the country in the light of foreign exchange reserves, which is almost equal to eight months import bill could have implications on our currency and thus impact the domestic economy, hitting both imports and exports.

In a hypothetical situation, higher oil prices, coupled with falling rupee against all major currencies could mean high inflation in the country, which could subsequently impact both interest rates and growtH.

Deadweight Loss

‘Deadweight Loss’ are costs to society created by market inefficiency. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses.

Deadweight loss occurs when supply and demand are not in equilibrium. Minimum wage and living wage laws can create a deadweight loss by causing employers to overpay for employees and preventing low-skilled workers from securing jobs. Price ceilings and rent controls can also create deadweight losses by discouraging production and decreasing the supply of goods, services or housing below what consumers truly demand.

Consumers experience shortages and producers earn less than they would otherwise. Taxes are also said to create a deadweight loss because they prevent people from engaging in purchases they would otherwise make because the final price of the product will be above the equilibrium market price.

n 26th May this year, Narendra Modi was sworn in as India’s fifteenth Prime Minister.

In the nearly three months since then, there have emerged first small signs of an economic recovery in India.

The Indian economy is still grappling with some major issues and Modi’s promised achhe din (good days) are still some distance away. But there is an unmistakable whiff of optimism in

O the air. This emerging buoyancy is not the direct result of what the Modi government has done or not done in the last nearly three months — this period is too short for the government to have achieved anything substantial.

Besides, it takes a minimum of six months for a new government to find its feet. And it must be remembered that the Indian economy has taken

A PROMISING STARTThe new-found buoyancy in the Indian economy is to some extent sentiment - driven but the efficacy of the small initiatives taken by the government and the business-friendly budget

cannot be discounted



As things stand now, the broad picture for the Indian economy appears encouraging. With inflation on a downward trend, the apex bank will have to cut rates at some point in the future, which will result in giving a fillip to economic growth.

The economic indicators also offer cause for optimism. The Index of Industrial Production (IIP) growth at 7.3% in June is the fastest since October ’13.

The core sectors have performed encouragingly and so has the export sector. Exports were up 10.22% in June this year (in dollar terms) and could touch the USD 360-billion mark this fiscal (FY15) as against just a little over USD 300-billion last fiscal (FY14).

In the last few years, India’s exports were generally around the USD 300-billion mark. The export sector is expected to fare well on the back of healthy US GDP numbers and the anticipated rebound in the global economy from Q2 2014 (as per the International Monetary Fund).

An improvement in the US economy will also impact the Indian IT sector positively. Discretionary spends in the US are likely to increase and if this happens, the Indian IT industry will be a big beneficiary.

Electricity production rose 15.7% in June this year as against 6.3% in the previous month, while coal production is also estimated to have grown at 8.1%. Cement too grew healthily at 13.6% in June as against 8.7% in May.

While coal sector’s performance in the past was affected due to legal problems, the cement sector too had lagged over the past year. The June performance of these sectors is, therefore, a healthy sign.

The Reserve Bank, over the last two years, has been primarily concerned with combating inflation and had affected a series of interest rate hikes in the not-too-distant past before pressing the pause button on them in recent months.

This time too, in its third bi-monthly monetary policy statement of 5th July, it held its rates as was expected by a majority of market participants. The repo rate and reverse repo rate, accordingly, have been maintained at 8% and 7%, respectively.

The apex bank feels confident enough that inflation will decline in the next few months and is likely be around 8% by January next year. It is targeting a 6% inflation rate by January ’16, though it warns of upside inflationary risks.

While the pause in key rates this time could be taken as an indication that a rate cut might not be too far away, it is clear from the Reserve Bank’s stance that combating inflation is the apex bank’s primary concern.

“While inflation at around 8% in early 2015 seems likely, it is critical that the disinflationary process is sustained over the medium-term. The balance of risks around the medium-term inflation path, and especially the target of 6% by January ’16, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialize.

“In the months ahead, government actions on food management and to facilitate project completion should improve supply, but as consumer and business confidence pick up, aggregate demand will also strengthen. The Reserve Bank will act as necessary to ensure sustained disinflation,” the apex bank said, during the policy meet.

such a battering in the last two to three years for any quick fixes to work their magic.

What has happened since the Modi government took over is that there has been a dramatic transformation in sentiment, which has reverberated throughout the economy.

This new-found buoyancy in the Indian economy is to some extent sentiment-driven but one must not discount the efficacy of the small initiatives taken by the government and the generally business-friendly budget presented by Union Finance Minister Arun Jaitley in adding their might to instill the much-needed confidence in Indian industries and business circles.

Add to this, the downtrend in inflation, a pick up in India’s industrial growth and exports and the increasingly healthy amounts of rainfall pan-India, which has reduced the threat of drought; and an encouraging overall picture of the economy emerges.

This is evident from the RBI’s third bi-monthly monetary policy statement, which states “sentiment on domestic economic activity appears to be reviving, with incoming data suggesting a firming-up of industrial growth and exports.

The June round of the Reserve Bank of India’s industrial outlook survey also points to improvement in business expectations in Q2 (of the current fiscal).”

While India’s central bank does flag some concerns regarding the economy, it also says that “the implementation of government policy actions that have been announced should create a congenial setting for a steady improvement in domestic demand and supply conditions.”

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Cement’s heartening performance could have a positive rub-off on the real estate sector as well. With the Reserve Bank not hiking rates, home loan borrowers will not be burdened by high interest rates, which could induce them to buy homes.

Besides, the budget too has been sympathetic to home loan borrowers by offering them Income Tax relief by raising the deduction limit on interest paid on home loans for self-occupied properties from `1.5 lakh to `2 lakh.

Greater policy clarity on issues such as Real Estate Investment Trusts (REITs) is also expected soon and all this has the potential to spur the real estate sector again.

Complementing the encouraging IIP numbers is the HSBC’s manufacturing Purchasing Managers Index (PMI), which rose to a 17-month high of 53 in July, again a sign as good as any that the business environment in India is improving.

New orders from both the domestic and overseas markets are another booster on the demand side. The domestic automobile sector too has fared very well and with the festival season just around the corner, the growth prospects for this sector seem to be bright.

An external non-controllable factor for the government - rainfall - threatened to put a spanner in the government’s works to spur an economic revival. Fortunately, July witnessed good rainfall in most parts of the country and the threat of a famine has disappeared.

Rainfall deficit in July was down to just 10% while the total deficit for the whole season was down to 22%. If this trend continues in August and in early September as well, the threat of a bad monsoon with its disastrous consequences would have dissipated. However, despite the healthy amount of rainfall in July, the government is keeping its fingers crossed on the monsoon front.

While inflation is trending downward, there are some upside risks as well. If the monsoon fails in August, it will spur food shortages and push up food prices. As the Reserve Bank said: “With some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation and its spillover to broader inflation can be discounted.”

There are also concerns about input price pressures existing in the economy. If this pressure increases, there is a possibility of manufacturers

passing on higher input prices to consumers, thereby pushing up inflation. International oil prices could also become a cause of concern going forward, if volatility in the Middle East increases.

However, while the above threats should be kept in mind, the signs of an economic turnaround are unmistakable. The stock market has signalled its acceptance of and confidence in the Narendra Modi-led government at the centre.

The union cabinet is doing its best to reverse policy paralysis, which characterized the previous Congress government. It has already approved 100% FDI in the railways and 49% in defence, subject to Indian owners exercising management control.

For the first time in nearly two years, there is talk of a 5%-plus economic growth. After a sub-5% growth for two consecutive years - in FY13 (4.5%) and FY14 (4.7%) — the Reserve Bank of India, normally a conservative organization, feels a growth rate of around 5.5% is achievable this fiscal.

Given the travails the Indian economy has gone through in the last three years, a 5%-plus growth rate will be extremely creditable indeeD.

REACHINGOUT

�e RBI is working on

creating a framework for

the functioning of small,

payment and other

di�erentiated banks to

cater to the huge unbanked

population of the country



issuers, mobile telephone operators, real estate cooperatives, supermarket chains and public sector entities qualify. The minimum capital requirement for both kinds of banks will be `100 crore. Payment banks will also be required to invest in government securities with a maturity of one year.

The major intention of such RBI initiatives is to reach out to the large unbanked population that remains in the country. They have kept in mind the problems of certain sections of society such as migrant workers who have thus far used the services of post offices or third party channels to send money from cities that they work in to their homes in far flung rural areas. This was by no means a cheap and simple process.

Payment banks and small banks are being set up to address their woes. With extensive use of technology in such banks, daily transactions and instant transfer of cash is set to become easier and simpler.

In theory, mobile telephone operators may be the biggest beneficiaries of this new move by the RBI from a service provider’s point of view. These telecommunication companies who have already reached out to a bulk of India’s population with pre-paid cards can also offer them basic banking benefits.

About 50% of their customers do not have bank accounts. So, it can indeed be a big opportunity for them. The challenge, however, will be the KYC or know your customer norm, the onus of which was on the banking industry until now.

LIKELY PROBLEMS

The Aadhar card movement will come in handy as it has to penetrate into these areas for KYC norms to

ndia, as a country, may have taken great strides in technology and innovation, but the fact remains that over 65%

of the country’s population does not have a bank account. This is set to change, if the government and the banking regulator have their way.

In his maiden budget presentation, Arun Jaitley, Union Minister of Finance, announced that the Reserve Bank of India would create a framework for the functioning of small banks, payment banks and other differentiated banks.

These new banking entities would meet the remittance and credit needs of farmers and migrant workforce, unorganized sectors, households with low income and small businesses. Clearly, the objective of this move was financial inclusion, an area that has been a long standing topic of importance to the apex bank in the nation. Wasting no time, thus, the RBI issued draft guidelines on the setting up of small banks and payment banks with the objective of giving financial inclusion a veritable push.

THE DIFFERENTIATING FACTORS

As compared to existing commercial banks, small banks will be modest in size and scale of operations. They will provide basic products in loans and deposits and will operate in limited geographic locations such as a single state to begin with. These banks will be primarily set up to serve agricultural workers, micro and small enterprises and other underserved sections of the society. Such small banks will be run majorly on technology so as to keep operating costs minimum.

The other type of banks, as the RBI proposes, are payment banks. These banks will be allowed to accept

I deposits and also facilitate the remittance of funds. However, the primary difference that payment banks will have with small banks is that they will not be allowed to lend money to people. Possible customers such as migrant labourers, low income households and other entities from the unorganized sector have been kept in mind as beneficiaries of payment banks. The access point of such banks can be their own branches, network partners and business correspondents (BCs). The idea behind such banks is that they should be able to carry out low value transactions of high volume. Technology is, therefore, going to be the keyword in such an environment as well.

Customers need not worry about the safety of their deposits either, because like all other banks, such deposits will also be covered under the deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corp of India (DIGC), that is a wholly-owned subsidiary of the Reserve Bank of India.

As per RBI guidelines, payment banks will be allowed to hold up to a maximum of `1 lakh as deposit per customer. The RBI also assures that each deposit in these new banks will be insured up to `1 lakh for both principal as well as interest amount. WHO CAN BECOME A SMALL OR PAYMENT BANK?

Those who can qualify to set up a small bank are mainly resident individuals who have at least ten years of experience in banking and finance, local area banks and microfinance institutions.

As for payment banks, non-banking financial companies (NBFCs), corporate BCs, prepaid instrument


become workable. Furthermore, there may be some resistance from potential customers as well since 95% or more of their transactions occur in cash. It may be difficult to convince such individuals to sign up for such bank accounts.

If one were to tell them that their wages or salaries were to be deposited in a no-frills bank account, they might resist the move because they will still

have to go to a banking correspondent or a bank’s branch to receive their payment vis–à–vis being directly handed over the cash by their respective employers.

The other big challenge is the actual movement of physical cash to far-flung areas. Even established banks find it difficult to move physical cash to underserved areas of the country.

Besides the law and order situation in the hinterland is not what a professionally-run oganization would like it to be. Hence, there will be many teething problems.

However, these are problems that any new business is likely to face and those interested in setting up such small or payment banks have to work their way around these challenges to make this initiative a succesS.


he Reserve Bank of India (RBI) recently laid down a framework to deal with ‘domestic systemically

important banks (D-SIBs)’ in India.

D-SIBs, as the name suggests, are banks whose failure can severely strain the entire banking system and affect the real economy.

The Reserve Bank framework highlights the methodology to select

T banks can be classified as D-SIBs.

GENESIS AND NEED

The modern financial system is highly interconnected and interdependent. Failures of few financial institutions can lead to a domino effect and impact the stability of the entire financial system.

This was prominently visible during the financial meltdown of 2008-09.

LESSONSLEARNT

RBI’s recently announced

reform measures are

aimed at reducing the

probability of failure of

SIBs and their subsequent

impact on the sector as

well as the real economy

D-SIBs and the regulatory measures to follow to avoid risks emanating from such institutions.

The central bank will, however, start announcing the names of D-SIBs by August next year. Once classified as D-SIB, the bank will have to comply with additional regulatory and supervisory requirements.

According to RBI’s criteria of choosing these banks, currently 4 to 6


applicable to D-SIBs will be effective from 1st Apr ’16 in a phased manner and would become fully effective from 1st Apr ’19. Analysis

Lending operations of Indian banks are much lower than that of their global peers. Indian banks also differ substantially from global banks in terms of operation risks. Domestic banks mainly resort to plain vanilla lending to companies and retail clients. In advanced economies on the other hand, most banks have high exposure to inter-connected complex financial products.

Even Indian banks’ asset size is minuscule as compared to their global peers. According to media reports, eight G-SIBs in the US have combined assets of more than 60% of the country’s GDP.

In the UK and France, four G-SIBs have an assets-to-GDP ratio of about 300%. In contrast, six big Indian banks’ assets is just over one-third of the country’s GDP.

May be this is the reason why the additional capital needs set aside for big Indian banks are much lower than those prescribed for global banks.

D-SIBs have been prescribed by the RBI to set aside 0.2% to 0.8% extra capital here as compared to 1% to 2.5% extra capital that global SIBs need to set aside.

included in the sample. After the selection of the sample, the RBI will use indicators such as size, interconnectedness, substitutability and complexity, to compute scores for these banks. Any score beyond a threshold (the RBI is yet to share the threshold) will result in the bank being classified as D-SIB. Scores will be calculated annually.

The methodology of selection will be reviewed at least once in three years. Further, D-SIBs would be segregated into different buckets based on their systemic importance scores and accordingly differentiated regulatory prescriptions will be made.

REGULATORY PRESCRIPTION

A D-SIB will be required to maintain additional capital against their risk-weighted assets. This will vary for D-SIBs of different buckets. Additional capital will be in the form of Common Equity Tier 1 (CET1) capital. CET1 is essentially a bank’s own capital and has the highest loss absorbing capacity in case of contingencies and crises.

Thus, a D-SIB in lower bucket will attract lower capital charge of 0.2% and a D-SIB in higher bucket will attract a higher capital charge of 0.8%. Simply put, Indian SIBs will have to set aside 0.2% to 0.8 % extra capital based on the category under which they fall.

Higher capital requirements

Western governments had to bailout some of these “too-big-to-fail” financial institutions.

While a series of reform measures were unveiled globally, broadly known as Basel III, to improve the resilience of banks and banking systems, these policy measures are not adequate to deal with risks posed by systemically important banks. Moreover, D-SIBs are perceived as ‘Too Big To Fail (TBTF)’ institutions. The perception that the government will bail out TBTF banks in times of distress, in fact, amplifies risk-taking.

This increases the probability of distress in the future, warranting additional policy measures over and above the Basel III norms.

In response to this, the Financial Stability Board (FSB), a global body that facilitates coordination between financial authorities at the international level, recommended a framework for Global Systematically Important Banks (G-SIBs). As many as 29 banks across 11 countries are classified as G-SIBs.

Along with G-SIBs, the FSB also recommended to extend the G-SIB framework to Domestic Systemically Important Banks (D-SIBs). The draft regulations for D-SIBs for India were released by the RBI in December ’13.

SELECTION METHODOLOGY

RBI intends to follow a two-step process to classify a bank as D-SIB - select a sample and then assign scores categorising D-SIBs depending on their importance to the system.

The size of the bank is the main criteria for the selection. Banks with an asset size of more than 2% of the GDP will be selected in the sample. Few foreign banks will also be

0.20%0.15%0.10%0.50%

0.40%0.30%0.20%0.10%

0.60%0.45%0.30%0.15%

0.80%0.60%0.50%0.40%

5 (Empty)4321

Effective Date Of Implementation1st Apr’16 1st Apr’17 1st Apr’18 1st Apr’19Bucket

Source: RBI Documents

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With Indian banks following a traditional banking model until now, the risk is already lower. However, increased capital requirement would be a drain on those entities, which already have margin pressures due to smaller deposits.

Based on their asset size, State Bank of India (SBI), Punjab National Bank, Bank of Baroda, ICICI Bank, HDFC Bank, Central Bank, Union Bank and Canara Bank, may be classified as D-SIBs. All these banks are comfortably capitalized.

Private banks can easily manage slightly more capital. However,

higher capital need for public sector D-SIBs is slightly a matter of concern as they have to rely on government for funding.

IN A NUTSHELL

Globally, banks have shifted their business models to traditional banking to reduce risks. Indian banks already follow the plain vanilla banking model. However, with increasing interconnectedness, Indian banks are exposed to global and domestic risks. In this regard, implementation of the new framework will significantly

help reduce the probability of a domino effect due to the failure of a D-SIB on the real economy.

Further, it will also create a level-playing field between D-SIBs and non-D-SIBs by reducing competitive advantages of D-SIBs in funding markets.

Remember, due to the “too-big-to-fail” perception, D-SIBs enjoy lower rates in the funding markets. These policies will thus curb the increase of risk-taking and at the same time set up additional capital buffers to prevent the failure of these systemically important bankS.


prior to boarding US-bound flights.

To woo more passengers and as a mark of celebration of the strategic alliance, Jet and Etihad announced a 20%-50% special limited period discount on fares across 135 international destinations of the two airline companies.

According to a company press release, the introductory joint special fare offer was available from 25th July to 27th July for a travel period between 1st Sept ’14 and 15th Jun ’15 for flights within India and between 1st September and 30th November this year for international flights.

This is not the only offer the industry saw. This year has seen a flood of offers and discounts. Almost each and every time these sales were initiated by SpiceJet, they were followed by other airlines.

In January, Spicejet started the year’s first flash sale by announcing up to 50% discount on air fares. Similarly, there was a 75% discount offer in February, a 30% discount offer in March and `1 fare in April.

In July, ahead of the Union Budget, Spicejet offered a million seats starting at `999, calling the offer “lower than train fares.” It cut fares for bookings between 8th July and 10th July for travel between 6th January and 24th Oct ’15.

Just a few days ahead of this offer, on 27th June, Spicejet offered `1,999 all-in-one fare to destinations across India. In less than a month, the airline has offered four flash sales to boost sales during a lean period.

Soon, Indigo and GoAir joined the flash sales. IndiGo announced an all-inclusive fare starting `1,699 on bookings till 17th July for travel between 18th August and 30th

he turbulent phase for the Indian aviation industry does not seem to end even after the change in

government at the Centre. On the one hand, existing airlines are fighting hard to trim losses and gain market share and on the other hand, the government is allowing new airlines to enter the Indian market.

The Indian aviation industry has been operating under extreme financial stress due to high fuel costs, airport taxes and general policy paralysis. Post the recently held general elections, there was hope that the newly formed government in its first budget would take steps to reduce taxes on jet fuel, exempt aircraft engines from customs duty and rationalize taxation on maintenance, repairs and overhaul (MRO).

But the budget came as a dampener for the aviation industry. According to Dheeraj Mathur, Leader Aerospace & Defence, PricewaterhouseCoopers India, “The sector was hoping for tax sops on ATF and MRO facilities so that the industry can come up in the country but this year’s budget does not have anything for the sector and the neglect continues.”

In 2012-13, the Indian aviation industry suffered a total operating loss of over `5,840 crore. This figure was given by the Minister of State for Civil Aviation GM Siddeshwara in the Rajya Sabha.

He added that out of ̀ 5,840 crore, Air India suffered a loss of over `3,159 crore, while private carriers such as Jet Airways, JetLite, SpiceJet, GoAir and the now-defunct Kingfisher Airlines showed losses of `2,682 crore. IndiGo, however, was the only airline to have reported profit during this period.

It is only going to get worse with new

T entrants in the industry. There have been many deals in the recent past. The flag carrier airline of the United Arab Emirates, Etihad Airways, bought a 24% minority equity stake in Jet Airways, India’s second largest airline by market share.

Though both airlines were code share partners since 2008, it was only in November ’13 that Etihad received approval from the Competition Commission of India that the deal would not adversely affect competition in India. This approval made Etihad the first foreign carrier to invest in India’s airline industry.

Experts believe that this deal will help both the companies in cost savings, fleet acquisition, maintenance, product development and training. “We plan to reduce losses in 2015, consolidate in 2016 and turn profitable in 2017,” Jet’s CEO Designate, Cramer Ball said.

The tie-up will also help Jet Airways ramp up international operations in Europe, China, Australia and Southeast Asia with progressive expansion to North and South America, Europe and Africa. In turn, Etihad will get a larger share on domestic routes.

“We do not just want to cater to the major Indian destinations, but also to smaller cities that have largely remained unconnected and underserved,” said James Hogan, CEO of Etihad.

As far as passengers are concerned, they have the option of daytime or overnight flights and improved connectivity between India and key markets in the Gulf region, Middle East, Africa, Europe and North America. Travellers will also get US customs pre-clearance facility at the Dubai airport whereby the traveller can clear customs and immigration


September. This was the third flash sale offered by Indigo within a one month period.

The reason for the numerous flash sales in June was the entry of AirAsia Bhd on 12th June, which opened bookings with a dramatic promotional fare of `5 (excluding taxes) for 15,000 seats on the Bengaluru-Goa and Bengaluru-Chennai sectors.

With the addition of airport taxes and fees, its Bengaluru-Goa and Bengaluru-Chennai tickets worked out to `490, while a Goa-Bengaluru ticket worked out to around `291. Indigo hit back at this promotional offer by offering `1 tickets on the same sectors.

Similarly, Air India (AI) plans to offer a free SIM card to passengers with pre-loaded talk time of £1, on flights to London. AI on 11th July this year became the first Indian airline to join Star Alliance, the world’s largest airline group operating around 18,500 flights to 1,316 destinations across 192 countries. With this alliance, AI is expecting a 3%-4% increase in its

annual revenue.

Industry experts believe that these offers are desperate attempts by airlines to mop up working capital even as the losses are mounting. India today is one of the most expensive aviation markets in the world. State taxes, which amount to 30% make jet fuel, which contributes to about 50% of an airline’s costs, the costliest in the region.

With growing competition, airlines are forced to offer discounts and other schemes to woo passengers. According to consultancy firm, Centre for Asia Pacific Aviation (Capa), the combined losses of Indian airlines would reach $1.4 billion in the current fiscal and the structural viability of airline business models would come under pressure because costs are expected to increase while yields are likely to remain soft with new entrants coming into the market.

Very soon passengers will have many airlines to choose from. The Indian government has granted no-objection certificates (NOCs) to six new

airlines. Three airlines including Air One Aviation Pvt Ltd, Zexus Air and Premier Air will operate as national airlines, while Turbo Megha, Air Carnival and Zav Airways will operate as regional airlines.

In total there will be at least eight new airlines operating this year, which includes the already launched Tata Sons Ltd’s low-cost joint venture (JV) with Air Asia Bhd and its premium JV with Singapore Airlines Ltd (SIA), which is expected to be launched in October this year.

Experts believe the entry of new airlines will be beneficial for passengers but there will be bloodbath among airlines. Ironically, even the new government is not sure about the impact the new airlines will have on the existing players.

When asked whether the entry of new airlines would put additional financial stress on the existing carriers’ earnings, the Minister of State for Civil Aviation GM Siddeshwara said, “It is too early to asses the impact of new carriers joining the industrY.”

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he Reserve Bank of India (RBI) recently issued a circular relaxing norms for long-term funding for

infrastructure projects. This was as promised in the Union Budget 2014-15 by finance minister Arun Jaitley. With this directive, banks can now raise funds by issuing long-term bonds (with a minimum 7-year maturity) specifically to finance infrastructure projects.

The Reserve Bank has also extended these sops to low-cost housing

T

FILLIP TODEVELOPMENT

To encourage infrastructure d e v e l o p m e n t and affordable housing, the RBI recently eased norms for banks issuing infra bonds to finance projects

projects by widening the definition of affordable housing. As per revised norms, home loans to individuals up to `50 lakh (for houses of value up to `65 lakh) in metros and loans up to `40 lakh (home value `50 lakh) in other areas will be considered as affordable housing.

Importantly, money raised through such bonds will enjoy regulatory leniency. These bonds will be exempted from the requirements of cash reserve ratio (CRR), statutory liquidity ratio (SLR) and priority



investment in infrastructure has slipped to around 5% of the gross domestic product (GDP). India needs to double that investment if it aspires for a double digit growth rate, according to CRISIL research.

BOND DETAILS

Bonds raised by banks for the purpose of financing infrastructure and affordable housing need to be plain vanilla (without Call or Put Options), unsecured and should have a minimum maturity of seven years.

Importantly, only incremental lending will qualify for CRR, SLR and PSL waiver, meaning existing loans will not enjoy regulatory leniency. Existing loan book will be considered gradually for the waiver as it gets replaced by new loans between now and FY20. So, by the year 2020, all loans to the infra sector will enjoy regulatory relaxation.

One more noteworthy point is that crossholding of such bonds among banks is not allowed; meaning that other banks cannot invest in other banks’ infra bonds.

Ratings agency ICRA has estimated that over the next 6 years, from FY15 to FY20, infrastructure bond issuance by banks could be to the tune of `24 trillion – `29 trillion.

regulator. Banks’ cost of funds will reduce, helping margins. Depending on how much banks pass on the benefits to infrastructure companies and bond holders (to lure them), it will result in lower interest cost to infrastructure companies, making projects more viable. Experts expect a 100-120 basis points reduction in interest rates for infrastructure and affordable housing projects, going ahead. (Hundred basis points make one percentage point).

NEED FOR RELAXATION

With an exposure of `8.57 trillion or 15% of total loans to the infrastructure sector, banks have been active in financing projects over the last decade. However, banks face a unique challenge in matching their assets and liabilities, as a bulk of their deposits have maturity periods of two-three years, while infrastructure assets mature in 10-15 years, sometimes beyond that.

Further, the infrastructure company or the project developer is expected to repay the bank loan almost fully, either by refinancing or borrowing or through internal accruals, once the project is operational. This leads to financing woes for infrastructure companies, as their concession periods are in the range of 25-30 years. Concession period is the period for which the infra developer handles the project and earns cash flow for that period (road toll, etc). Hostile economic environment and reversal in interest rate cycle can make matters worse for developers.

All this warrants a long-term loan arrangement both from banking and infrastructure company perspective. Further, revival of the infrastructure sector has emerged as one of the top priorities of the new NDA government, given that the country is infrastructure-deficient and

sector lending (PSL) norms.

For beginners, CRR refers to the portion of deposits that banks need to keep with the Reserve Bank. SLR is their compulsory investments in government bonds and approved securities. And PSL regulations mandate banks to lend to agriculture and allied activities, small industries and economically weaker sections of the society.

To illustrate further, currently, CRR is at 4% of a bank’s deposits and SLR is at 22.5% of deposits. And PSL is at 40% of the bank’s loan book. Therefore, under CRR, for every `100 deposit raised, banks are supposed to keep `4 with the RBI, invest at least 22.5% of their deposits in government bonds as per SLR norms and at least 40% of their loans should go to the priority sector.

NORMS RELAXED

Now, banks are exempt from CRR, SLR and PSL norms if they raise funds by issuing long-term bonds to finance infrastructure and affordable housing projects.

Remember, CRR does not earn any interest for banks. Further, investment in government bonds (G-Sec), though safe, does not fetch higher yields as compared to advances to retail corporate borrowers.

Also, PSL being small-ticket loans, the transaction cost is high. Banks do not earn much on PSL and many banks struggle to meet the target. Foreign banks and private banks, indirectly achieve the target by lending to microfinance institutions (MFIs), who, in turn, lend to poor rural borrowers. Loans to MFIs by banks are treated as part of PSL.

Clearly the CRR, SLR and PSL relaxation is a welcome move by the

Fully paid, redeemable and unsecured, plain vanilla without Call or Put optionsIndian RupeesNo upper cap on bondPublic issue or private placementMinimum 7 yearsFixed or floating (likely to be more than G-secs)Only on incremental lending

Insurance companies, pension funds, FIIs, corporates, retail (other banks not allowed)

Type Of Bond

Currency Of Issue LimitMethod Of Issue Maturity PeriodCoupon

CRR, SLR And PSL ExemptionLikely Investors

Details

CONCERNS

While benefits of such bonds are apparent, the only constraint is

Contact - +91-22-39268244


whether banks will be able to mobilize funds for tenure over 7 years. The Indian bond market has not yet matured.

Since funds are to be raised from domestic sources (rupee bonds), there are very few players like LIC, EPFO, PFRDA, other private insurance companies and FIIs that have that kind of a long-term vision. A lot depends on FII’s appetite for the future of these bonds.

Further, why would institutional investors invest in such bonds when they can invest in very liquid and safe government bond market? In order to attract these investors, interest rates offered by banks on these bonds will have to be reasonably higher than G-sec rates, considering that these bonds are unsecured and taxable.

This essentially means that regulatory benefits to banks will have to be passed on to investors of these infra bonds. Therefore, banks’ infra bonds is positive but can be less margin accretive for banks because the benefits get divided between assets (low interest rates to infrastructure

companies) and liabilities (higher rates to bond holder).

BANKS VS NBFCS

Regulatory waiver to banks’ infra bond has brought banks on par with NBFCs. An NBFC does not have to fulfil CRR or SLR needs. Experts fear that borrowing costs of NBFCs (infra NBFC, housing finance NBFCs) will surge as banks would compete with them to raise long-term bonds. This is a negative for NBFCs.

While the home loan market is competitive and banks have limited room to lower rates as they are already lending near their base rates (below which they cannot lend), there is also a possibility of banks cutting home loan rates marginally, which is a negative for housing finance companies in the country.

FINAL WORD

The blooming of such bonds in the Indian markets depends on how the corporate bond market develops. While it might take few more years for results, infra bonds can turn out to

be the much needed trigger for development of the corporate bond market in India.

For banks, while infra bonds can help match their assets and liabilities, for infrastructure companies, it will reduce stress in servicing project loans. Even a 100 basis point interest rate reduction for a 10-15 year asset can result in substantial savings for the infrastructure project.

This development helps the real estate sector at two levels. First, the developer’s cost of funds would come down from the current level of 12%-13%, going ahead. Secondly, this would also reduce the cost of home loan to the borrower and thereby boost sales volumes and provide the much needed impetus to the real estate sector.

While currently the bigger challenge for the infrastructure sector relates to government policies, allowing banks to raise funds by issuing long-term infrastructure bonds with regulatory waivers is a step in the right direction to kick start the investment cycle in the countrY.


half of 2014-15, as the demand for the sector is yet to pick up and monsoon has not been good so far.

FMCG companies in the April-June quarter have performed moderately as volumes continued to remain under pressure. The situation has not yet improved and only if the economy picks up from the second half of this financial year, things may improve. The next few quarters could be challenging with the monsoon playing truant, the escalating costs and no respite in any of the headwinds, be it market growth, inflation or consumer spending.

Overall volume growth of the sector has declined by around 2% to 3% in April-June ’14. However, big companies like Hindustan Unilever, Dabur and Godrej Consumer Products have bucked the trend as they showed increase in volumes. Higher exceptional income from the sale of properties and tax credits in the base quarter helped Hindustan Unilever post 4% increase in June quarter profit at `1,057 crore.

The operating environment remained challenging for the fast moving consumer goods giant, with market growth slowing down further. On the whole, competitive activity remained high during the quarter despite lower media intensity.

“We continue to grow ahead of our market and have delivered another quarter of strong revenue and profit performance,” said Harish Manwani, chairman, Hindustan Unilever in a press release.

“While we are seeing headwinds on market growth, consumer spending and inflation, we remain focused on managing the business for long-term competitive and profitable growth and implementing our strategy with

global consumer confidence index study by AC Nielsen, a leading international information

and measurement company, has placed India on top globally due to a jump of seven points during the second quarter of 2014.

The study’s revelations come at a time when the new government continues to battle high inflation, with both food and vegetable prices ruling high, even as fuel bills remain on an upswing. The Reserve Bank of India (RBI) kept its key policy repo rate unchanged in its third bi-monthly monetary policy as widely expected, and voiced a commitment to bring down inflation.

As per the index by AC Nielsen, India was ranked second in the first quarter of 2013, with 121 points and is now the most optimistic country. Consumer confidence in India is now placed at 128 points at the end of Q2 of this calendar year.

According to the Nielsen study, India posted the biggest quarterly index increase of the 60 countries measured, with a rise of seven points.

“Consumers in India have indicated increased levels of confidence in the second quarter, when the country’s general elections were taking place,” said Piyush Mathur, president, Nielsen India.

“This buoyancy is yet to translate into increased consumption across sectors. Despite the ongoing inflationary trend and expectations of a poor monsoon, consumers are likely to open their purse strings as we head into the festive season in response to savvy marketing stimulus. The budget reveals a positive outlook for business. We expect this to reflect in consumer sentiment in subsequent quarters. The budget, which incorporates impetus and incentives

A for rural infrastructure, manufacturing, as well as better tax exemptions for consumers, should bode well, but it needs to be watched closely,” Mathur added.

As per the survey, 60% online respondents indicated that this is a good time to buy things they want and need, up six percentage points from last quarter (54% in Q1 2014) and well over 80% respondents were optimistic about job prospects over the next 12 months, a 9% increase from the last quarter.

“India is the most optimistic globally about local job prospects over the next 12 months,” the survey said. In addition, 79% indicated that the state of personal finances was good or excellent in the second quarter of 2014, up from 76% in Q1 of 2014.

However, top concerns amongst respondents continue to be job security (23%) and the state of the economy (20%). The concern on the state of the economy has increased by five percentage points over the last quarter (15%), it added.

Experts said sales in the retail or consumer durables sector has not really picked up. But with the government’s focus on sectors like infra and realty, people are expecting good days ahead and the consumer sentiment has definitely changed.

According to the Nielsen study, global consumer confidence increased one index point to 97 in the second quarter of 2014, marking the highest level since the first quarter of 2007. This forward momentum comes after a stagnant 2013, when confidence was stuck at 94 for three out of four quarters.

Experts feel that the Fast Moving Consumer Goods sector is expected to perform moderately in the second


even greater rigour,” Manwani said.

HUL’s domestic consumer business grew at 13% during the quarter, which was ahead of the market, with 6% underlying volume growth. The expansion was better than expected, with all segments registering double digit growth.

In April-June, Marico delivered a strong set of numbers, both on the top-line and bottom-line front. The growth has come on the back of strong performance of the domestic as well as international businesses.

Marico’s consolidated revenue for the quarter rose by 17.4% y-o-y to `1,623 crore. Adjusted for the now demerged Kaya business, the top-line growth stood at 25.3%. Marico’s India FMCG business grew by 28%, aided by a 6.5% volume growth and price hikes across its portfolio.

The international businesses posted a revenue growth of 16% during the quarter with a constant currency growth of 9.6% year-on-year. The operating margin contracted by 19 basis points from a year ago to 16.4%, owing to gross margin contraction by 636 basis points from a year ago due to increase in copra prices.

In the April-June quarter, Dabur India reported 13.3% growth in consolidated net profit from a year ago to `210.8 crore. Consolidated sales of the company grew 13.2% from a year ago to `1,863.9 crore.

“Despite a sharp fall in growth rates in most consumer products segments, Dabur continued to report strong volume-led growth across its key categories. We have managed our business dynamically through a combination of calibrated price increases and greater focus on cost efficiencies, maintaining our growth momentum and registering sales

growth ahead of the market in several key categories. “We are investing behind our brands and have taken necessary steps to improve our competitiveness in the market place and deliver profitable growth,” Sunil Duggal, Dabur India, CEO said in a post-result statement.

In April-June ’14, Godrej Consumer Products Ltd (GCPL) reported 8% increase in its net profit from a year ago on the back of 12% increase in overall constant currency net sales, the company said in a release.

Adi Godrej, chairman, Godrej Group, said in a press release, “Q1 of FY15 has been a particularly challenging one. We witnessed the fourth consecutive quarter of a significant slowdown in growth in the household and personal care sector. GCPL continued to outperform in the India market by growing at nearly 2x of the household and personal care sector growth this quarter.

“However, the overall market slowdown and high inflation in costs have affected both our top-line and bottom-line growth in India. At 17% constant currency sales growth, our international business performance was very strong, despite the macro economic challenges in our international geographies. We feel optimistic that the worst is over.

“We are beginning to see improved consumer sentiment on the ground and are hopeful that this will start translating into better consumer demand in the quarters ahead. Growth in the second half of this year should be better than the first half. Consequently, our intent is to deliver a stronger performance overall this year, compared to the previous year.”

Godrej said that the company’s teams are working hard on new market

activation programmes and several innovations, to prepare for an upturn in market sentiment and growth.“Our market position is very strong in our core categories and our product portfolio is well differentiated. So, as the market environment improves, we believe that we are in a much stronger position to capitalize on the growth opportunities ahead.

“At the same time, we continue to prudently manage our business, transform our cost structure and drive more operational efficiencies to strengthen our company. I am confident that with our clear strategic focus, innovations, superior execution and top-notch team, we will continue to deliver industry-leading results,” he added.

Experts said that India operations performance of Godrej Consumer was below par, led by muted growth in soaps and home insecticide. International subsidiaries posted healthy revenue and profit growth across geographies.

The company is further aiming at `2 billion cost savings in India and double digit margins in Latin America through cost rationalization projects.

Experts said rural markets are no longer driving sales of FMCG companies. Also, personal care products’ demand is under pressure in urban India. These factors have resulted in the overall slowdown. Still, companies are optimistic in the medium to long term.

Challenging environment for the sector may continue for couple of more quarters due to weak monsoon, competitive atmosphere, positive sentiment yet to get translated into sales and cost pressures, among others. However, if the economy starts picking up, demand is expected to revive for the sectoR.

ilmmaking is a risky enterprise. That is because the chances of predicting earnings from a film

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Let us take a look at how film

F Mughal-e-Azam, one of the biggest films of Indian cinema. This film was produced by renowned industrialist Shapoorji Pallonji.

So, the rationale behind producing films was not to make the most of the medium. Instead, it was more of diversification of business. It could also be construed that the producers were attracted to the fact that they would be rubbing shoulders with

NewAgeCinema

Film insurance is a norm these days and

it is fast replacing old ways of filmmaking

financing has become more organized and systematic and how the industry is no longer dominated by a few wealthy businessmen.

THE RISK-TAKERS

Financing of Hindi films has for long been dominated by risk-taking businessmen who could afford to produce films and also hobnob with film stars. A case in point is



The distributors’ loss of revenue is being provided by two public sector general insurers as co-insurance. If the cover and risks associated are high, especially for films starring established actors, insurers divide risks among two parties. Here, the risks could be divided 70:30 or in any other ratio determined by the two insurance companies.

Film insurance is fast becoming a trend in Indian cinema. Now, both public and private general insurers are actively offering products catering to the needs of the film industry. The share of film insurance in the overall insurance business could touch 8%-10% in the next two to four years, say experts.

At present, film insurance accounts for about 2% of the industry’s total business. As a concept, film insurance came into existence in the early 1990s. Subhash Ghai-directed Hindi film Taal was one of the first movies to be insured.

It is estimated that the premium for a film’s insurance policy is usually 1% to 2% of the film’s total budget. An applicant has to share a film’s budget, actor’s costs, schedule and shooting locations to help guage the premium.

Insurers compensate producers for production losses due to non-appearance of actor(s) (date clashes with other films, personal emergencies) theft, injury, riots or natural calamities. Post-release crises, including theatre shutdown, are also covered by insurance companies.

Exclusions include acts of terrorism, perilous activities, disappearance, unexplained inventory shortage, war or invasion. Some policies also cover advance paid to stars. About a decade ago, the film insurance segment was dominated by public general insurers. But now, private general insurers

all contributors are required to have a cogent reason for the excess.

Second, is the element of corportization. Most production houses in the country have come up with different banners under the parent company and each banner represents the budget and content specific to a particular audience.

For instance, UTV SpotBoy banner would have experimental content from a relatively unknown but promising film director. This arrangement would not necessarily work with a larger audience.

Today, things have changed for the better. Even insurance companies are willing to become a part of film projects. Take for instance, the recent blockbuster film Kick. The film was insured to protect it from potential losses. The production package policy covers all film and set-related incidents and the media liability/errors and omission (E&O) policy covers the film from any legal liability related to its content. It was insured for about `300 crore.

Usually, film production houses take such a cover to avoid unnecessary delays and issues concerned with the script of the film. Kick’s distributor has taken a policy to cover distributors’ loss of revenue that protects their interests from the date of release till 60 days.

Almost all firms take such policies since their business interests are not impacted due to a film’s poor performance at the box office. While the production package cover has been provided by a public sector insurance company, the E&O cover has been provided by a private general insurer. However, the production as well as media liability covers also encompass risks to the distributor, if any.

famous film celebrities.

Soon, independent production houses sprung up with the sole aim of producing films and deriving their sustenance from the destiny of the films they put before the public. These production houses were few and were headed by the person who owned and directed films under the same banner.

This meant that independent films never got produced. And these production houses functioned on their own methods and discipline without a proper money-management system. This worked till the late 1990s. Cut to 2000, there was increased focus on managing costs associated with filmmaking. Production houses such as UTV Motion Pictures (now UTV Disney), Yashraj Films, Viacom 18 Pictures, Kay Sera Sera and Shemaroo were prominently devising ways and means of reducing filmmaking costs and making earnings more predictable.

With an increasing number of films being released in the overseas markets, a large number of international production houses and major distributors such as Fox, Disney, and Warner Brothers began sensing lucrative markets for filmmaking in India.

This has brought two fundamental changes in the way filmmaking was being done in India. First, there is accountability among the stars, directors, scriptwriters and other contributors of films.

There is a legal contract, there are script doctors who check the viability of scripts and there is also a person who represents the production house and monitors everyday expense of the film. If a film exceeds its daily budget, it could be a serious issue and

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have also entered the scene. New India Assurance and National Insurance Company are public general insurers that offer film insurance. Among private insurers, Future Generali India Insurance, Tata AIG General Insurance, and Iffco-Tokio General Insurance offer such products.

Another development that has worked in the sphere of film financing is the emergence of alternative investment fund. There are concepts of alternative investment cinema funds in markets which have been floated and mulled over.

With a minimum investment that can be in the range of `50 lakh to `1 crore, these cinema funds diversify investments across different sizes and

languages of films. These funds function more like a special purpose vehicle where funds are collected in a pool and depending upon viable scripts, the films are produced. These films are made with a sharp focus on the marketability and acceptability of the scripts. The maths behind it is a calculated one.

These funds produce mid-sized Hindi films and regional movies, apart from buying international rights for Indian films. These funds invest in 12 to 15 films a year.

The said funds expect earnings in the early stages of about 12-18 months by selling various rights such as satellite, music as well as overseas rights. Experts say investments in cinema have managed to provide 35% returns

as against other asset classes. Some funds also invest in production companies which produce, acquire and distribute films. These are ways by which each participant in various stages of filmmaking intends to make the production of a film more viable.

It is estimated that cinema is now a `13,000-crore industry in India. There are investment opportunities in production, marketing as well as distribution of films.

A FICCI-KPMG report notes that the film industry topped off a record year in 2012, growth of 20%, with 12% growth in 2013. So, opportunities are galore. And intentions are strong. The only thing needed is a way to make the most of these investments across various platformS.

BETTER

FOR OR WORSE

While capping prices of

essential medicines would

benefit consumers, it would

nonetheless harm the

profits of pharma

companies

rug companies in India - both domestic and MNCs - are up in arms against the recent move of

pricing regulator, the National Pharmaceutical Pricing Authority (NPAA). While the Organisation of Pharma Producers of India (OPPI) has challenged NPPA’s decision to bring over 100 more drugs under price control in the Delhi High Court, India Pharma Alliance (IPA) has filed a petition against the same in the Bombay High Court.

In July this year, the NPAA issued an order fixing the price of 108 formulations of two therapeutic segments – cardiovascular and anti-diabetics, extending price control to non-scheduled drugs. With this list, the total market of cardiac molecules under price control, including the earlier released ones, stands at 57.48% and the anti-diabetic market at 20.99%.

The Drug Price Control Order (DPCO) 2013 authorizes NPAA

D Information available in the public domain indicates that the affected pharmaceutical companies may face losses ranging from less than 1% to as much as 28%. Interestingly, the NPPA has capped the prices of drugs of specific manufacturers.

TOTAL DISCOMFORT

The latest NPPA move could be the “first wave” in a series of other similar notifications that could be issued in relation to anti-cancer, HIV/AIDS, anti- tuberculosis, anti- malaria, cardiovascular, anti- diabetics, anti-asthmatic and immunological medicines. This is in addition to 348 drugs, which NPPA has included under price control DPCO 2013 regime.

As companies in the highest price bracket having volume share of about 30% are forced to reduce their prices, they will compete in the mid-segment, forcing companies in this segment to lower their prices to protect their volume share of about

under extraordinary circumstances, if it considers it necessary to do so in public interest, to fix the ceiling price or retail price of any drug for such period as it deems fit.

Moreover, as these notifications have been issued under paragraph 19 of the DPCO, the affected pharma companies will not have an option to approach the Ministry of Chemicals and Fertilizers, Government of India for a review of this decision of the NPPA. The affected companies may, however, approach the high courts or the Supreme Court by way of a writ petition against these notifications.


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the Ministry of Chemicals and Fertilisers. They committed to a consultative process with all stakeholders and transparent, market- based pricing caps on essential medicines, with continued flexibility in the pricing of other medicines.”

He added, “We were assured that there would be no volatility in pricing, that the government would work in close consultation with the industry and that the intent was to build trust and cooperation.

“However, NPPA’s arbitrary and unilateral action runs contrary to all these sentiments. It has shocked the industry and will be detrimental to the investment climate for market expansion, brand building and employment generation in future.”

“We urge the government to revisit this decision and help build a more collaborative environment, partnering and engaging with all stakeholders to find sustainable solutions to the healthcare challenges that face our country today. We hope that authorities will engage and partner with the pharmaceutical industry, to make quality medicines available at affordable prices for the most vulnerable populations, instead of resorting to arbitrary pricing decisions,” he insisteD.

“extraordinary” by any means nor are they an indication of market failure. The inter-brand differences have always existed and were in existence when the National List Of Essential Medicines (NLEM) was drawn up.

Furthermore, the inter-brand differences would be found in every single formulation, which is manufactured by more than one formulator. The result would be that every formulation, which has more than one formulator would be brought under price control thereby negating the very purpose of the NLEM - 2011 and National Pharmaceutical Pricing Policy - 2012 (NPPP) .

INDUSTRY REACTS

The pharma industry feels that there is no transparency in the price monitoring system. The price fixing of drugs under DPCO is entirely their decision. The government has not involved any association or a pharma company while fixing the price.

Reacting to the NPPA notification, Dr Shailesh Ayyangar, President, OPPI told media persons recently: “The pharma industry seeks stability and predictability in the regulatory environment and their expectation has been reinforced by assurances from several departments and officials in

40%. This lowering of prices will have a direct impact on the lowest segment with a volume share of 30%. They mainly comprise of SMEs. They would find it difficult to lower their prices further and thus become victims of price fixation orders, compressing the bandwidth of prices.

PRICING FORMULA

According to the new pricing policy, prices of medicines are now being capped by taking simple average of all pharmaceutical brands, which have more than 1% market share instead of input costs.

While invoking the DPCO 2013, NPAA stated that there exists huge inter-brand differences in branded-generics/ off patent drugs, which is indicative of a severe market failure, as different brands of the same drug formulation, are identical to each other, vary disproportionately in terms of price, thereby making medicines unaffordable and beyond the reach of the common man.

The new pricing policy is driven with an agenda aimed to achieve a delicate balance between the interests of the consumer while promoting the development and growth of the pharmaceutical industry. However, inter-brand differences are not

few wrong decisions that may impact the performance of the portfolio in the long term.

So as to give you some perspective on the direction the markets are likely to take along with some investment advice, here is an excerpt of an interview that Beyond Market conducted with Waqar Naqvi, CEO of Taurus Mutual Fund. Naqvi has a career spanning over two decades in the financial services domain and has been at the helm of affairs at Taurus Mutual Fund for a little over six years.

Mr Waqar Naqvi is an ICWA from the 1991 batch, and an MBA specialized in Finance And Marketing. He has close to 22 years of experience in investment, finance and mutual fund industry.

His extensive career spans across

The budget is behind us and the markets remain in a state of flux despite

registering steady gains. At this point in time, it is easy for the investor to get confused about the direction of the markets and take

all facets of financial services, especially all functions of asset finance and asset management. Employers in his resume include Thermax, Apple Finance, Escorts Finance and GE TFS Ltd. In his last assignment before he joined Taurus Mutual Fund, Mr Naqvi

was Business Head, Portfolio Management Services and Offshore/International Business at Birla Sun Life AMC. He is in charge of running the day-to-day business of the company and leading the team of functional heads.

Unless some unseen catastrophe is round the corner to derail the Indian markets, we expect the markets to keep doing better, albeit with some consolidation and then growth. Mr Waqar Naqvi,

CEO at Taurus Mutual Fund


What Do You Think Is The Major Event That Could Prove To Be The Next Trigger Point For The Market?

There are a few things that may happen. On the global front, the most prominent event to watch out for will be the rise in US interest rates, which may make the markets take a pause and reconsider its direction and speed of growth. A sharp rise in the GDP of China may prompt a similar reaction since FIIs may allocate some money to China.

Other events to watch out for will be Russia entering into a war with Ukraine and one of the sovereign nations in the Middle East entering the battlefield in Iraq to counter terrorist organisations. Within India, a series of policy decisions in the positive direction are expected to improve the investment climate and attract global money.

Q. What Is Your View On The Rupee’s Movement At The Moment? Where Do You See The Rupee Level By The End Of The Year?

Amongst the most difficult things to predict at this time are the movement of the rupee and the movement of crude prices since both are dependent on several factors. Chances are that the rupee will remain around 58/62 to the dollar, the predominant factor being the FII inflow/outflow, which will determine the direction of the rupee.

Q. Which Are The Top Five Sectors You Are Bullish On In 2014?

The top five sectors we are bullish on in 2014 are automobiles, information technology, banking and infrastructurE.

Q. Let Us Begin With Your Reaction To The First Budget By The Modi Government. What Do You Make Of It, And How Does It Augur For The Indian Markets And MFs In Particular?

The Budget was as good or as bad as the earlier budgets with some minor differences. The government has committed `100 crore for almost 28 different things. Perhaps this is one way of lighting several bush fires by the government and we will have to wait for the next couple of years to see which of these bush fires turn into an inferno, which will be good for the Indian economy.

To be fair to the government, they had been in power for only 45 days before the budget and that gives us reason to give them time till next year’s budget.

Q. FIIs Seem To Be Chasing Indian Stocks At Relatively High Levels, While DII’s (Domestic Institutional Investors) Do Not Seem All That Enthused. What Do You Think Is The Major Reason For It, And Will This Be A Dominating Trend For The Rest Of The Year?

FIIs’ interest in the Indian markets has peaked because the government has been sworn in with absolute majority and is expected to make decision-making, policy and direction clear. However, it will be wrong to say that there is no DII interest in the market.

Rise in the trend of consumption and other demographic features are giving a veritable spurt to the interest of DIIs in the market as well. Going forward, the Indian markets will see a rise in DII flow as well, although it may not be able to match the flow of the FIIs.

However, one needs to keep an eye on the recovery of the US (economy) and the growth in China to assess which way the FII flow will be directed.

Q. Markets Have Run Up Quite A Lot In 2014, Would You Say That Retail Investors Have Missed The Bus Or Can They Still Make Handsome Gains?

Unless some unseen catastrophe is round the corner to derail the Indian markets, we expect the markets to keep doing better, albeit with some consolidation and then growth. The retail investor can still make gains but from now on, he should not expect to make a quick buck with fast gains. The gains will now be at a slower rate over a slightly longer period of time than in recent past.

Q. At This Point In Time What Do You Think An Investor With A Low-Mild Risk Appetite Should Do - Go About Constructing Or Reallocating His Portfolio?

Assuming that the said investor has invested whatever percentage of his assets as is justifiable given the investor’s age and risk profile in asset classes; in the equity asset class he should stick to picking large-cap diversified funds and multi-cap diversified open-ended funds. A minor allocation should be made to MIPs (which have a predominant portion of debt and a small portion of equity, and in a few cases, a small allocation to gold).

Debt will do well though the equity component will give the kicker to the portfolio. However, being a predominantly debt product, an MIP needs to be held for at least three years for the investment to qualify as long-term capital gains.

Q. The Budget Is Already Over,


Owing to increased capacity utilization at its Indore SEZ, scale-up in oral contraceptives portfolio, launch of limited competition products in the US and gradual margin expansion in the Japanese market, the company is likely to post healthy earnings

eadquartered in Mumbai, Lupin Ltd has transformed itself into one of the largest generic companies based out of India. The company is ranked third largest by revenue

and has made remarkable strides in the US market with generic as well as specialty formulations.

With strengths in manufacturing and IP-driven products, the company has made good progress in its efforts to move up the value chain in terms of product (from APIs to formulations) and markets (from less regulated to regulated markets), and we believe it is now entering a high- growth phase, with multiple drivers:

1) Big product rollout in the US, including niche/PIV opportunities; 2) Growth in emerging markets (including India) and Japan; and 3) Margin improvement by back-ending sourcing to India from Japan, and rising US sales.

Currently, three geographies (India, the US and Japan) contribute over 80% of total revenues. In terms of the product mix, formulations comprise 90% of its business while the balance is from API.

H

Strong AndResilient



growing at 2-3x the generic market growth rate. Complex generics require higher filing costs and dedicated capex. And, hence, competition in this segment is likely to remain low for the company.

Further, margins and ROCE for complex generics are higher as the number of players in the segment is likely to remain limited. Currently, Lupin derives <10% of its revenues from this segment and we expect the contribution to go up to 20%+ over the next 2-3 years. In order to cut the lead time, Lupin is gobbling up smaller-sized companies as well as entering into partnerships with established names, as highlighted below:

Lupin has entered the Mexican market with the acquisition of the Laboratorios Grin, which is engaged in the development, manufacture and sale of branded ophthalmic products. It has presence in the Caribbean, Central and South America. Laboratorios Grin is amongst the top four players in the Mexican ophthalmic space, which is valued at US$275 million and has grown at 10% (for the past five years). Lupin intends to bring its own ophthalmic products to build the Grin business as well as leverage its commercial presence to enter other promising therapy segments.

Lupin recently marked its foray into the complex injectables space with the acquisition of Netherlands-based Nanomi BV. Nanomi has patented technology platforms to develop complex injectable products. With these, the company has gained access to technology platforms to develop complex injectable products like peptides and depot injectables.

Lupin has ventured into Japan’s bio-similar market by entering into a strategic joint venture with Yoshindo Inc. (Yoshindo) to create a new entity YL Biologics (YLB), which will be jointly managed by both the entities. This JV will undertake clinical development of bio-similar drugs, including regulatory filings and obtaining marketing authorizations in Japan. YLB will in-license Monoclonal Antibodies (mAbs) from Lupin. Etanercept bio-similar (market size of US$ 496 million – March ’13) will be the first product to be licensed for clinical development. YLB will also partner with other companies across the globe for the regulated Japanese market.

Para IV Pipeline – Joker In The Pack

Lupin has some of the largest Para IV pipeline compared to its peers in the industry and we believe it can spring up positive surprises. The company has a pipeline of 97 products pending approval, of which nearly 40% are Para

INVESTMENT RATIONALE

US Business To Dominate The Growth Theme

Lupin has demonstrated exemplary execution capability in the US so far; despite late entry in 2005, it is now the fifth largest player there in terms of prescription. It ranks No 1 in 31 generic products, while it is among the top 3 by market share in 53 products. Judicious portfolio selection and strong channel relations are key reasons behind this.

From a me-too portfolio back in 2000, Lupin had moved to high-value blockbuster products (Para IV) opportunities till 2010. However, over the past few years, Lupin’s portfolio in the US is gradually transforming from oral-solid products to complex and niche generic products with incremental focus on segments like oral contraceptives, ophthalmology, dermatology, long-acting injectables, controlled substances, nasal, respiratory (MDIs, DPIs and nasal sprays) and biosimilars (Lupin currently has 10 programs in development stage. Of these, around five are in advance stages of development; the company spends 10%-15% of its R&D on biologics).

Over the past few years, the company has invested aggressively in R&D (currently at 8.4% of sales; 18% CAGR in R&D expenses over FY13-FY16E) to build a strong pipeline in these therapies.

The company expects R&D costs to scale up to 9%-10% of sales over the medium term. The company is also building a new R&D facility at Florida (Miami), which is expected to go online in the 2HFY16. With this facility, the company would be filing for nasal sprays with the first filing expected to be made in FY15 and the filing pace to pick up from FY16 onwards.

Complex generic is a US$80 billion+ market, of which nearly 70% drugs are still under patents. The market is

Source: Nirmal Bang Research, Company Data

US, 43.9

Europe, 2.8

Domes c formula ons, 2

2.4

Japan, 11.7

ROW, 9.1

API, 10.1

Revenue Break-up (%)


IV applications.

Combined, the Para IV pipeline targets a cumulative market size of US$18-20 billion. We believe the most lucrative opportunities that may materialize in the next couple of years are Loestrin Fe (market size:US$350 million), Yaz (market size:US$330 million), Renagel (market size:US$180 million), Welchol (market size:US$560 million), Ortho-Tricyclen Lo (market size:US$450 million) and Coreg CR (market size:US$220 million). We expect its US business to grow at a 19% CAGR over FY14-17E.

Source: Nirmal Bang Research, Industry Data

Molecule

RenagelPrandimetYaz

ZymarLunestaLoestrin 24 FeDetrol LARenvelaExforge HCTGeneressNexiumNamendaAprisoCelebrexWelcholOrthoTricyclen LoPristiqGlumetzaEmtrivaCoreg CR

ProlensaPrezista

NuvigilOraceaAsacol

Vimovo

PhosLoAcular LSFosrenolPennsaid

SavellaBanzelLumiganUloric

Brand

Chronic Kidney DiseaseType-2 DiabetesContraception

Bacterial Infection Of EyesInsomniaOral ContraceptiveOABChronic Kidney DiseaseHypertensionOral ContraceptiveGERDAlzheimer's DiseaseUlcerative ColitisNSAIDHigh CholesterolOral ContraceptiveMDD DepressionType-2 DiabetesHIVHypertension, Heart Attack,Heart FailureOcular inflammationHIVHIV

NarcolepsyRosaceaUlcerative ColitisAcne Vulgaris

Osteoarthritic Pain

ESRDNSAIDChronic Kidney DiseaseArthritisOral Contraceptive

FibromyalgiaEpilepsyGluacomaHyperuricemia In Gout Patients

Indication

LupinSandoz, ActavisTeva

ApotexMultipleWatsonImpax, TevaImpax, Lupin on suspensionNoneMylanRanbaxyMultipleLupinTevaImpax tabs/ Lupin suspensionNoneMultipleLupinTevaSun Pharma

LupinLupin, MylanTeva

Mylan, WatsonMylanRoxaneActavis (Watson)

Dr. Reddy's

GenericGenericNatco, Teva, MylanApotex, LupinLupin

MultipleMultipleSandoz, LupinMylan

201420142014

2014May-14Jul-14Jul-14Sep-14Oct-14FY15Nov-14Jan-15Feb-15May-15Jun-15Dec-15FY16Feb-16Mar-16Apr-16

Apr-16Jun-16Sep-16

Jan-17UnknownUnknownUnknown

Unknown

UnknownUnknownUnknownUnknownUnknown

UnknownUnknownUnknownUnknown

Who Is The First To File TentativeTimeline

1803

330

078335059070011075

2,2721,800

801,887

560450493140

25220

30900490

400310500199

40

801

1153520

105105480280

Sales(USDm)

Sevelamer HydrochlorideRepaglinide + MetforminDrospirenone + Ethinyl EstradiolGatifloxacinEszopicloneEstradiol, NorethindroneTolterodineSevelamer CarbonateValsartan + AmlodipineEstradiol, NorethindroneEsomeprazoleMemantineMesalamine ErCelecoxibColesevelamEstradiol, NorgestimateDesvenlafaxine SuccinateMetformin ErEmtricitabineCarvedilol Cr

Bromfenac SolnDarunavirAbacavir + LamivudineEpzicomArmodafinilDoxycyclineMesalamineAdapalene+Benzoyl Peroxide Epiduo GelEsomeprazole Magnesium+NaproxenCalcium AcetateKetorolac TromethamineLanthanum CarbonateDiclofenac Sodium SolnEstradiol Valerate+Dienogest NataziaMilnacipran HclRufinamideBimatoprostFebuxostat

Key Generic Launches Expected Over The Next Two Years

Strong Focus On Chronic Disease Drugs, New Launch To Aid Domestic Outperformance

Lupin’s domestic growth has been impressive. Over the past three years, it has shown 16% CAGR, which is significantly higher than the industry growth of 10%-12%.


The key reason for this strong growth has been its portfolio shift from anti-TB to lifestyle-focused (chronic) diseases and strong performance from new products launched. Lupin now derives ~60% of its revenues from drugs for chronic diseases.

We believe the company is well-positioned in core therapies. It is the third largest player in the cardiovascular segment, while the addition of Eli Lilly’s portfolio has catapulted it amongst the top three players in the anti-diabetic segment.

In the anti-TB segment, it is still the market leader with around 40%+ market share, despite its declining contribution (9% of domestic revenues in FY14 versus 33% in FY05).

Other therapies like anti-asthma, CNS and GI have been consistently growing above the industry’s growth. Given that chronic therapies are growing at 1.5x industry growth, we remain confident of the company’s growth prospects and expect 16% CAGR in domestic revenue over FY14-16E.

Largest Indian Player In Japan; IROM Acquisition Adds Another Revenue Stream

Lupin acquired Kyowa in October ’07 for `2.5 billion to gain entry into the Japanese market. Kyowa is the ninth largest generic player in Japan and has a portfolio of over 300+ products marketed by its sales team of nearly 75 medical representatives.

The company is a dominant player in the neurology segment (contributing 35%-40% to revenue) with a portfolio of ~130 products. IROM, on the other hand, is strong in the hospital segment. Combined, these two entities now contribute 12% of Lupin’s sales with around 10%-11% margins.

While its revenue growth from the Japanese business has been exemplary, the company has low margins as most of the products sold are manufactured in Japan, where the cost of manufacturing is high.

Under its leadership, Lupin has implemented a series of measures like price re-negotiations, API variations and other operational efficiencies, and managed to improve Kyowa’s margins by more than 5%-6%, despite two biennial price cuts imposed by the National Health Insurance (NHI). Lupin, the pharmaceutical major has plans to further improve this by back-ending API supplies through India.

The Japanese generic market currently contributes only 26%-28% (volume-share) of the total prescription and 10% of the total pharma market (value-share).

With a significant rise in healthcare costs, the government is undertaking various measures to promote generic drug usage and targeting to increase the penetration to 35% by the year 2017.

This implies a further 30% swing towards generics over the next two years, thereby benefiting established players like Lupin. We expect a 11% CAGR in revenue from this market over FY14-17E.

VALUATIONS

Over the past three years, Lupin’s price-to-earnings multiple has been re-rated sharply from 15x to 20x led by the following factors:

a) A radical shift in its business model from API to a formulations player, b) Exuberance related to its branded generics portfolio and its generic filings (over 97 pending filings, including Para IV/complex generics), c) Around 5x scale-up in Japan, one of the largest pharmaceutical markets in the world (the company is now the largest Indian player), and d) Consistent outperformance in India, its most profitable market.

During this period, the company outperformed both the Sensex and the BSE Healthcare Index and currently trades in line with other large-cap peers.

We believe growth drivers are still intact, but current valuations capture most of the multiple upsides and stock price movement, henceforth, will be determined by earnings growth.

Towards this end, we are of the opinion that Lupin is very well positioned – its US business is in for bumper years ahead as its large pending generic pipeline unfolds, while

Source: Nirmal Bang Research, Bloomberg

Price To Earnings

0.0

5.0

10.0

15.0

20.0

25.0

30.0

28-Jul-09 28-Jul-10 28-Jul-11 28-Jul-12 28-Jul-13 28-Jul-14

‘x’

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

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the out-performance in India is likely to continue owing to its strong chronic disease drug portfolio and addition of Eli Lilly products.

Source: Company Data, Nirmal Bang Research

Y/E Mar (`mn)

48,49925.7

9,63019.9

6,81635.915.334.125.275.951.2

FY10 FY11 FY12E FY13 FY14 FY15E FY16E FY17E

58,19020

11,77920.2

8,62626.519.329.523.760.244.7

70,82921.7

14,44720.4

8,6770.6

19.423.823.259.936.5

96,41336.1

22,69823.5

13,14151.529.328.531.139.723.5

112,86617.1

30,02826.6

18,36439.7

4130.338.128.417.6

137,93622.2

38,27027.7

23,97530.653.530.440.322.113.6

157,53914.2

42,93727.3

27,42114.461.227.536.919.312.1

180,32714.5

49,14827.3

31,92016.471.225.934.716.610.3

Net SalesY-o-Y (%)EBITDAEBITDA Margin (%)Net ProfitY-o-Y (%)EPSRoE (%)RoCE (%)P/E (x)EV/EBITDA (x)

Financials

Together, these two geographies contribute almost 70% to revenue and even higher to earnings. Further, with increased capacity utilization at its Indore SEZ, on scale-up in oral contraceptives portfolio, launch of limited competition products in the US and gradual margin expansion in the Japanese market, we expect the company to post a 20% earnings CAGR over FY14-17E.


of 60% in the last one year as against returns on gold exchange-traded funds (ETFs).

Many investors are not smart enough to move to the best sector at the right time and switch to another sector or theme fund where investments might be attractive.

For example, it makes sense to start looking at gradual investing in public sector undertaking (PSU) funds, which will benefit from the steps taken by the new government.

Investors who continue to hold poor-performing funds should move away from such investment options and start looking at pure equity funds. Similarly, if investors have many schemes that are overlapping, they should diversify into large-caps and mid- and small-cap funds.

Before investing, they should look at the ratings of the funds and their performance so that they can take well-informed decisions. Investors who are investing through lumpsum or are erratic, should invest through systematic investment plans (SIPs).

The process of regular investments leads to rupee cost averaging, which will benefit over a longer time frame. CHANGE IN INVESTMENT TARGETS

As an individual grows in his life, his needs also rise. Change in asset allocation according to need and age will bring a significant change in an investor’s personal situation notwithstanding the volatility in the equity markets.

If a particular investor has been investing `2,000 through SIPs in equity funds, it will not be sufficient to form his retirement corpus. He needs to hike this amount every year

fter several years, equity mutual fund investors are now laughing all the way to the bank. Following

the buoyant rally in the markets, almost all equity funds across sectors and themes have given positive returns in the last one year. In fact, returns of many diversified, mid-cap and sectoral funds have reported performance in the range of 30% to 100% in the last one year.

Equity markets have touched new highs and there is a strong expectation that the Indian markets might witness a bull rally in the next few years. But the most important aspect for retail investors is whether they are ready for a prolonged bull market or whether they have enough funds to ride the positive phase. While on the one hand we have investors who have a huge number of equity funds that run into double digits in their portfolios, and on the other hand there are hundreds of investors who are underinvested and hold only one fund in their portfolios.

This is the right time to rebalance one’s portfolio and be prepared to gain in the current market scenario. This article dwells on rebalancing, how it is done and what is needed to survive in such markets.

Rebalancing of a portfolio is a very integral part of investing as it allows individuals to keep their risk levels in check and curtail risks. It is important to recognize that the goal of portfolio rebalancing is to minimize risks, rather than to maximize returns. WHAT IS REBALANCING? HOW SHOULD ONE START DOING IT?

In very simple terms, rebalancing means adding or reducing funds in the portfolio in order to have a

A healthy mix of equity and debt products in one’s portfolio. The portfolio created by an individual inexorably changes with the way the market performs, which ultimately results in gains or losses in your portfolio.

There might be investors who are holding few underperformers and want to move away from them in such positive markets. Some other investors who cannot take much risk might cut their exposure to equity in favour of debt.

Investors believe that if a particular investment has worked for them in the previous year, it will perform well in the coming year too. But past performances are not always indicative of future returns, when investing in mutual funds.

If investors refrain from rebalancing their portfolios, then they may face negative consequences, which might impact the overall returns.

Rebalancing the portfolio simply means selling some of the investments that have appreciated or buying additional investments in which investors are underinvested, thus bringing the right mix of assets according to an investor’s risk profile.

For example, a 30-year-old investor should have high exposure to equities, while a person nearing his retirement should move away from equities to pure debt. REBALANCING CAN SMOOTHEN OVERALL INVESTMENT RETURNS

Rebalancing one’s portfolio every two to three years, levels the investment returns. Equity funds go through cycles. An investor, who has invested in small- and mid-cap funds, would have earned returns in excess

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DPDisclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

SMS ‘BANG’ to 54646Contact at: 022-3926 9404, E-mail: [email protected]


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by 10% so that goals he has set can be met through his investments. Investors should not change their asset allocations based on emotions because equity markets have a tendency to play with emotions.

There is no exact rule for rebalancing one’s portfolio. But rebalancing is necessary when an asset’s (equity or debt funds) weightage has changed by 5% in your portfolio. It is advisable to list out your investment targets such as child’s education, marriage, buying a house, etc and invest accordingly from a long-term perspective.

Prepare a comprehensive plan for the next five years and invest in the fund accordingly. An investor should always have diversified equity funds, multi-cap funds and mid and small-cap funds.

If an investor is risk averse, he/she can invest in balanced schemes and monthly income plans (MIPs). Having more funds can have a

negative impact on an investor’s portfolio and become cumbersome to review on a continuous basis.

Investors should have a leaner portfolio of not more than five-six funds, which includes equity, debt and international funds. GOING FORWARD

While it may seem unreasonable for some investors to invest from a long-term perspective and forget about it for certain number of years, rebalancing of one’s portfolio is important as its absence defeats the overall purpose of investment.

The most important aspect of rebalancing is that it will allow investors to stick to their original plan irrespective of the way the markets perform. It will also ensure proper asset allocation. A portfolio must also be rebalanced to ensure that a portfolio’s risk and returns’ distinctiveness remains regular over a period of time.

However, if you feel that as an investor you would be unable to rebalance your portfolio, then you might as well seek professional help.

Though rebalancing of the portfolio depends upon an individual’s investment needs, risk profile and the market environment, it is usually done in equity and debt products.

It is broadly held that investments in equity and debt products with given percentage thresholds produce a perfect balance between risk and returns for investors.

Rebalancing strategy should always be followed when an investor is likely to get some large lumpsum amount (sale of property or inheritance money coming in) because that will have a positive long-term impact on an investor’s overall returns.

But an investor should always be disciplined, have a well-designed asset allocation plan and review his portfolio on a continuous basiS.

s an entrepreneur of a start-up, you have to wear many hats at once. You are not just the

owner of your enterprise, you are also the marketer, the sales person, and the HR guy.

The last role can be particularly challenging and even scary to some extent as you perhaps have no prior experience of hiring people.

You are obviously keen to build a dream team which will be as passionate about your newly found business as you are. Here are a few tips that will come in handy while you set out to make your first hire.

HIRE VS OUTSOURCING

As a start-up, it is natural for you as an entrepreneur to want everything under your control, but it is important to think about its feasibility.

For instance, if it is the design element for your website or brochures that you need, you could consider outsourcing your design needs to a design firm or a freelancer

A SPREAD A WIDE NET

Let us face it. Finding perfect people to work for you is no easy task. However, social media is making it a tad easier these days.

As you may not be in a position to use a recruitment agency, make the best use of social media platforms. Post your job requirements on a platform like LinkedIn.

Recommendations do play an invaluable role. So don’t forget to speak to family, friends and well wishers and take suggestions, if any.

THE INTERVIEW PROCESS

You need not be as formal as an HR manager and yet you must be firm enough for a prospective employee to understand what your requirements are and where he or she will fit into the organization.

Do not be too impressed by the display of degrees that a candidate may make. Instead, try and find someone who is on the same page as you are. Even if he or she has no Prior

BUILDING YOURA-

Build your dream team by hiring people who are as passionate about

your start-up as you are

rather than bringing in a salaried team member to do the same.

Outsourcing some tasks to freelance professionals or partnering with other non-conflicting firms for your needs can work out to be a much more cost effective solution.

IDENTIFY A POSITION AND SET PRIORITIES

For start-ups, it is difficult to bring in a whole lot of people all at once because you do not have as many resources. You will, therefore, need to fill in one position at a time.

Identify these positions in your firm depending on the needs of your clients. For instance, as a new firm you probably need someone in the sales and marketing position, rather than a web designer or an SEO or a content strategist.

There is no sure shot formula that spells out the order in which you should hire and it is a judgement call you would be expected to make depending upon the direction in which your business is growing.



The first few hires you have made are people who will always be in your core team and it is, therefore, necessary for you to trust them and their judgement as much as you can possibly do.

THE POST-HIRE PROCESS

Your job does not end after you have made your first few hires. In fact, it has only begun.

As an entrepreneur, you need to make your team members feel that they are as much stakeholders in both the bouquets and brickbats that you will receive as you are.

It is important for every member of the team to be on the same page, to be able to comprehend your passion for the organization and work in a manner that justifies their position. Motivating your team is something that should, therefore, be very much on your agenda.

It is common wisdom among entrepreneurs that the first ten hires is the most important of the lot. So, do follow these tips to build a dream team of your owN!

But that does not mean you are best at everything! Therefore, when you are making your first hires, you have to cast your ego aside and judge a person’s credibility and capabilities from a third person’s perspective.

For instance, if you are hiring a salesperson or a marketing head for your organization, see to it that he or she would be better at it than you would be. Look out for real talent as talent attracts talent and he or she would probably bring in more people who are just as talented and eager to make your enterprise successful.

ARRANGE A MEETING WITH OTHER TEAM MEMBERS

If you are hiring for other positions simultaneously or have had prior hires in place, arrange a meeting with a prospective candidate in the last stage of the hiring process.

Let him or her interact with your team members and get to know your organization a little better. As a team leader, its up to you to foster a team spirit. Hence, be open to the suggestions of your other team members about the candidate.

experience, it is your job to see whether he or she possesses the necessary skill set to fill the gap in your organization and has the proverbial “fire in the belly”. Do not be afraid to ask additional questions and book the time for another interview, if need be. It is also important to be able to say no during the interview process.

If you gauge that the person who is trying to come on board wants to treat your organization as a stop-gap arrangement before he or she gets “something better”, you are better off saying goodbye to him up front.

As an entrepreneur, you are in effect playing the role of a matchmaker – between the candidate and the organization and it is, therefore, legitimate for you to do all that needs to be done to see that it turns out to be a perfect marriage!

HIRE SOMEONE WHO IS BETTER THAN YOU ARE

Being an entrepreneur who has had the courage to break out of a mould, it goes without saying that you are an immensely talented person.

POINTS TO REMEMBERGreat companies are made from great employees. So, if you are an entrepreneur who is just getting ready to hire for his start-up, here are three crucial things to remember.

Focus On The InterviewEntrepreneurs may make for great orators themselves, but can falter big time while conducting interviews with prospective hires as they tend to take it lightly or are too informal. Concentrate on the interview process and if you deem it fit, do some research on how to conduct interviews while hiring for an important position in a company. If you feel that a single interview does not work for you, do not be hesitant to set up a follow-up interview or two to take the right call.

Always Check For ReferencesYou are the sole HR manager in your company and it is up to you to get the employees who will be right for your firm. Ensure that you ask for references from your prospective employees and check with them personally to get to know more about their strengths and weaknesses.

Do Not Be In A Hurry To Fill Out A PositionDo not make the mistake of filling a position hurriedly without making proper judgment. Not only will company productivity suffer owing to the bad hire, but it will also negatively influence other employees.


winds. This is where we see bubble formation in the successful crowd.

Eventually, there will come a time when the successful crowd will become too rigid and will be unable to adjust to the changes in the market. Their expectations will begin to deviate greatly from the reality of the stock markets.

Disagreements will creep in within the crowd, leadership will be questioned. There will be utter confusion. Finally, one jolt or a shock is all that is needed to disintegrate the crowd, and the members will leave to participate in other crowds. When this happens, the crowd theme gets completed and the bubble bursts. WHY INDIVIDUAL INVESTORS USUALLY CHOOSE TO GO WITH THE CROWD WHEN IT COMES TO INVESTING

The answer to this lies in something known as ‘Herd Mentality’. There is a tendency for traders/investors to blindly follow a group and mimic the actions of a larger group.

This mentality can be driven by greed, excitement or even the fear of being left out. It is characterized by the lack of individual decision making, causing people to think and act in the same way as the majority of those around them, without any logical thinking. It is also called as Bandwagon Effect. 1. Human beings are social animals and there is an inherent need to be accepted by a group as opposed to being branded an outcast if he or she were an outsider or went against a particular group.

2. Also, individuals want to avoid the feeling of being left out. That is, when everybody around you - your friends, family, and relatives – is making

ROWD: A crowd is any group of people having something in common.

A crowd is a very powerful force capable of causing both pleasure and pain. And nowhere is this force more pronounced than the stock markets, where a constant push and pull is exerted by two opposite forces, namely bulls and bears, causing stock prices to rise and fall.

In fact, an entire branch of stock market analysis, namely, Technical Analysis is based on charting and predicting which of the two crowds is more powerful - the bull or the bear.

A crowd has a mind of its own. So, it is susceptible to the same feelings of fear, greed, hope, optimism, pessimism, etc, that individuals experience. Thus, if you are able to get a handle on the pulse of emotions of the crowd, you can predict the behaviour of the crowd well in advance and profit from it.

STOCK MARKET CROWD A stock market crowd consists of individuals whose attention is focused on an investment theme, primarily stocks or markets. Every crowd, however small, has a specific belief about the future direction of the market or the stock.

Once a substantial change in market price of the asset occurs in the direction predicted by the crowd, word spreads at neck-breaking speed. To the outside world, the crowd appears smart and successful. Other investors and general public want to be a part of this successful group and imitate its strategy. Thus, newer members get added to the crowd and it grows in strength. The price of the asset starts to move steadily.

Once a sizeable crowd has formed, it

C has a single aim - to ensure that the price keeps moving in its favour. For this, the successful crowd has to ensure two things. First, make sure that their crowd strength/numbers does not go down substantially. Second, try to propagate thoughts to the opposite crowd in the hope of bringing them to their side.

Since everything is going right for the successful crowd, ensuring that their own strength remains intact does not pose much of a challenge. For the second part, that is, getting the opposite crowd to come to their side, the successful crowd can bombard the media with their success by justifying their successful investment strategies, while also highlighting the strategic flaws of the opposite crowd.

Since the prices are moving in favour of the successful crowd, some of the opposite crowd will desert their camp and join the successful crowd. The dwindling number of their own crowd, combined with the pressure of mounting losses and negative propaganda in the media about their strategy, will start creating doubts in the minds of the opposite crowd and their confidence in their own beliefs will being to wobble.

Finally, the conflict will be resolved when the opposite crowd relents and disintegrates and transfers its resources (finances) to the other side. There is a surge in resources committed to the successful crowd and prices will rise or fall sharply.

Riding high on their success and basking in their own glory, the successful crowd, will, however, begin getting complacent and overconfident. What will happen is that they will give no consideration to the fair value of the asset. Even adverse news flows and visible problems will be overlooked. Basically, all caution is thrown to the


money while you are not. It is not a good feeling.

3. Conversely, there is a risk of being ridiculed on making a loss by going against the crowd. Nobody likes to be laughed at.

4. Individuals feel the constant need for reaffirmation of their trading decisions and being in a like-minded group satisfies that need.

5. Even though the investor feels that a particular idea is wrong or is against his/her own strategy, he/she may continue to follow the crowd because he/she may feel that “so many people cannot be wrong!”

PROS OF GOING WITH THE CROWD

a. There is safety in numbers. The sheer size of a crowd scares away most predators. The moment a calf strays away from the herd, it becomes an easy prey. Thus, by investing with the crowd, the chances of making a loss are reduced.

b. The force of a crowd is so strong that small hurdles and obstacles are easily overcome. Bad news, adverse conditions, or many other negatives are easily overcome and do not change the overall trajectory of a market that is driven by the crowd.

c. Since you are going with the crowd, a trend is already established and, hence, momentum is on your side.

d. You do not need to put in much effort in researching a stock or a market. Just gauge the flow of the crowd and you are set.

e. First-time investors or inexperienced investors are best served by going with the crowd because at least they will be assured that they are with the majority.

f. A successful crowd automatically attracts more crowds. And, hence, the trajectory of the trend is more likely to continue. CONS OF GOING WITH A CROWD

a. A crowd panics quite quickly and disintegrates at the first sign of distress. There is a mad dash for the exit and you might be trampled or crushed in the stampede. Usually when a stock market crowd panics, there is a massive sell off and stock prices crash very fast. If you are not careful, you could lose a lot of money in a short period of time.

b. There is a very good chance that you are entering a trade when the crowd has already taken advantage of the upmove and ready to move out. In such an event, you would be left in the lurch by buying the high point and the stock might be set to fall as the crowd is already exiting.

c. Crowds are very fickle and often change their fads and preferences very quickly. The moment the crowd feels that something better is on offer, they abandon the existing theme and board the next bus. You may not be so quick, and are likely to suffer losses owing to the same.

d. The crowd cannot be right 100% of the time. Just following the crowd all the time, is not a sane thing to do.

SENTIMENT INDICATORS

It may seem improbable, but there are ways by which investors can gauge the sentiments of a crowd and predict the future course of a market. These are known as sentiment indicators:

Compare the number of stocks making new lows with the number of

stocks making new highs. If more stocks are making newer highs than lows when compared to the previous period, it indicates that the crowd is bullish. Conversely, if more stocks are making newer lows than newer highs when compared to the previous period, it indicates that the crowd is bearish. When the price action reaches any extreme, there is a significant spike in this number.

This is similar to the high-low difference. Here the number of stocks that are trading higher than the previous trading period is compared to the number of stocks trading lower than the previous trading period. It is a short-term crowd sentiment indicator where if the number of advancing stocks is higher than the declining stocks, the crowd is bullish and if the declining number is greater than the advancing number, the crowd is bearish.

If the number of stocks trading above their 50- or 200-day moving averages is increasing when compared to the previous period, it indicates that the rally is more broad-based and likely to continue. Conversely, if the number is decreasing in comparison, the markets may fall. This is because if the crowd is excited by just a few stocks, it is unlikely to be a strong rally and a reversal is imminent.

Stocks that break out of a trading range with significant volumes and continue to move above/below their resistance/support levels for a few trading sessions can be ideal buying/selling candidates because they are doing so only on the back of substantial crowd support.

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not o�ering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.


DERIVATIVES INDICATORS

The VIX or volatility index is also known as the fear index. It is a tool to measure the volatility in the markets. It is used to gauge the amount of confidence or non-confidence in market movements by the crowd. When the VIX is high, it means that the crowd is fearful and there will be increased volatility and consequently increased risk. Alternatively, when the VIX is low, the crowds are complacent as they believe that there will be less volatility and consequently lesser risk.

It compares the number of Put Options with the number of Call Options. If the Put-Call ratio is high, it means that the crowd feels the upside is limited and is buying more Puts as insurance and the markets may be poised for a downturn. Conversely, if the Put-Call ratio is low, it means the crowd feels that the

downside risk is low and, hence, the markets can go up in the near term.

Open interest tells us the number of Options contracts that are still open, that is, not yet squared off. It is calculated by adding all the contracts that are opened minus the contracts that are closed out. It indicates the strength of the price movement. Therefore, if the OI is increasing and the stock price is also increasing, it means that the crowd is bullish on the stock. However, if the open interest is decreasing but the prices are increasing, it indicates that the crowd is turning bearish.

a. Do your homework thoroughly before following any crowd.

b. In the short term, the crowd is seldom wrong. Therefore, if your investment horizon is short, always go with the crowd.

c. If the crowd is moving in the direction of your own trading system/belief, go long. However, if the crowd is moving against the direction of your trading system/belief, stay away until such time that both the thought processes are aligned.

d. Plan your exits well in advance. A crowd can disintegrate faster than it can form and one should be prepared to get out quickly.

e. When in a crowd, the ability of an individual to think logically becomes suppressed. Be vigilant about this and follow your trading plan.

f. Keep strict stop losses.

g. The age-old axiom: “Buy on rumours, sell on news” should be followed diligently when investing with the crowd.

h. If you plan to go contrary to the crowd, be ready for some pain in terms of price damage against you in the short terM.


ATECHNICAL OUTLOOK FOR THE FORTNIGHT

fter a sharp uptrend, the Nifty has declined from its recent highs and tested crucial support

areas in the last fortnight. Several distributive patterns are visible in numerous sectors, suggesting a possible decline in the near term.

The Nifty has an immediate resist-ance area, which indicates that 7,700-7,750 level is a curial hurdle to be crossed immediately. The recent emergence of multiple bearish candles near all-time highs on weekly charts halted the advance. These entire patterns indicate exhaustion, also confirmed by negative divergence in momentum indicators, which point towards continuation of profit-booking.

In the past few weeks, we have seen rotation across sectors. Defensives like FMCG and pharma were outper-formers along with the IT sector due to rupee deprecation. The correction in banking sector, along with the oil & gas sector was the main reason for the underperformance of the index.

Most of these stocks have entered into the oversold zone and are due for a bounce back. There is an immediate support at the 7,540 level and on a decisive close below, expect a down-side target of 7,350-7,150 levels.

Overall, the market is in a bull structure trend and dips, if any, are an opportunity for initiating long positions at lower levels. The current formation would add bullish momen-tum only if the Nifty manages to close above the 7,750 level.

Since the past few trading sessions, the Bank Nifty has been in a range and has declined from its recent highs of 15,500 level, which indicates lack of momentum. The oscillator situation suggests the presence of a negative divergence pattern and the appearance of bearish candles indicates that there could be a short-term decline in the near term.

However, there is insufficient evidence for any top unless the index breaches the support of the 14,600 level. The Bank Nifty faces immedi-

ate resistance around the 15,250 level on the upside and will continue to face selling pressure.

There is an important support at the 14,600-14,550 levels, which coincides with its lows of 14th July. And a decisive close below, would confirm a trend reversal.

The cement sector, particularly Ultratech Cement and Ambuja Cement have confirmed a short-term trend reversal and resumption of the original uptrend. The long-term pattern structure continues to remain bullish, which gives us an upside target of 25% from the current levels.

The oil & gas sector has also witnessed a corrective decline and has formed a probable bottom and should be bought on dips for medium-term investments. PSU banks have corrected by over 25% from their recent highs and provide a good risk-reward ratio for a long-term call. Bank of India and Punjab National Bank are our top picks from the banking sectoR.

Nifty Daily Chart

Brazil, Russia, India, China and South Africa (BRICS) announced last month the setting up of a BRICS Development Bank to fund social and infrastructure projects in developing economies.

They also announced an emergency reserve fund, which member states can tap in case of balance of payment crises. The decision was taken by BRICS countries at the Summit held in Fortaleza, Brazil on 15th Jul ’14. The Bank will start lending to its clients from 2016.

What Is The Objective Behind The Development Bank?

The major objective behind setting up the Bank is to support infrastructure and sustainable development projects, public or private, in the BRICS nations and other emerging and developing countries.

The bank would provide loans, guarantees, equity participation and support through other financial instruments. They will also provide technical assistance for the preparation and implementation of infrastructure and sustainable development projects to be supported by the Bank.

But, Do We Not Have Other Institutions Doing The Same Function At The Global Level?

Yes, we have the International Monetary Fund (IMF) and the World Bank that do the same functions. But the IMF and the World Bank have faced criticism for imposing onerous conditions before lending for projects.

They also do not have wider representation of developing

IMPORTANT JARGONFOR THE FORTNIGHT

nations on its controlling committees, which is mainly filled by developed nations like the US and the UK.

So, Does The BRICS Bank Rival The Existing Organizations?

Yes and No. BRICS nations admit that they will co-operate with international organizations, in particular with international financial institutions and national development banks, and complement the existing set-up.

But, experts believe there is a wider political message of these nations wanting to stretch their political clout. Also, there is such a huge gap for infrastructure financing that all institutes will be accommodated.

What Is In It For India?

The Bank will be an additional source of long-term finance for infrastructure projects in India. In addition, such a Bank will also be instrumental for increasing economic co-operation among BRICS countries, which will ensure more productive use of resources among BRICS countries including India.

What Is The Structure?

The new development bank will have an initial capital of $50 billion and an initial authorized capital of $100 billion.

The shareholders and beneficiaries of the BRICS Bank will be member nations. Shanghai in China would be the headquarters and the president will be named on a revolving basis and will have a term of five years. The first president would be from India, followed by Brazil and Russia, who will have a five-year term each.

What Are The Details Of The Emergency Fund?

The Contingent Reserve Arrangement (CRA) is not a fund

BRICS NATIONS TO SET-UP DEVELOP-MENT BANK AND EMERGENCY RESERVE FUND


attract long-term finance from foreign and domestic sources including NRIs.

What Are The Conditions?

In case an InvIT proposes to invest at least 80% of the value of the assets in completed infra projects, fund-raising has to be compulsorily through public offer with a minimum subscription size of `10 lakh and a trading lot of `5 lakh. The remaining 20% can be invested in under-construction projects.

As a prudential measure, InvITs also have borrowing limitations. The proposed holding of an InvIT in underlying assets has to be more than `500 crore and the offer size of the InvIT shall not be less then `250 crore at the time of the initial offer of the units.

What Will Be The Tax Treatment For InvITs?

InvITs will have to distribute at least 90% of its net distributable cash flows to investors. The finance minister announced in the budget that InvITs will have a pass-through status in relation to income from the project. This will eliminate multiple taxation. Thus, the dividends would be taxed in the hands of investors and not the InvIT.

What Are The Benefits?

InvITs will open up an additional window of funding support to the infrastructure sector. It will also offer an exit option to existing players like infrastructure developers, private equity players and most importantly commercial banks that have heavy exposure to the infrastructure sector, reducing pressure on the banking system.

As banks’ capital frees up, they will be able to participate in new projects. Further, this instrument will help pull cheap and long-term international money. It will also help mobilize domestic savings for infrastructure financing.

For investors, since investments in InvITs will be backed by assets, they will be ideal for individuals who want to get a piece of the Indian infrastructure story.

So far, the infrastructure sector has been heavily dependent on commercial banks for funding. With InvITs, it reduces exposure risks to any one entity (bank) while creating an innovative mechanism for channelling the much needed financing into the infrastructure sector.

InvITs, to some extent, can revive private interest in PPP-based projectS.

SEBI RELEASES FINAL NORMS FOR INFRASTRUCTURE INVESTMENT TRUSTS (InvITs)

Infrastructure investment trusts (InvITs) - a new instrument aimed at attracting more investments into the infrastructure sector - were approved by the SEBI board on 10th August. InvITs is a modified version of real estate investment trusts (REITs) and was mentioned in this year’s Union Budget.

The InvITs consultation paper was released in December last year. Draft norms for the same followed in July this year. Such instruments of investments are common in the US, the UK and Singapore.

What Are InvITs?

InvITs are pooled vehicles. They can be set up by the infrastructure developer or a private equity fund by pooling together funds into a trust and invest in infrastructure projects. The InvITs can also be set as a mutual fund scheme.

An InvIT issues units that are traded like a mutual fund unit on any exchange that it is listed on. Just as shares represent ownership in a company, a unit of InvITs represents ownership of a pool.

Profits from this instrument can be distributed to unit holders as dividends. These instruments are expected to

but a bilateral promise to make foreign reserves available to BRICS nations in trouble.

The initial size of the CRA is $100 billion. And the contributions are $41 billion from China, $5 billion from South Africa and $18 billion each from India, Russia and Brazil. Every country will be able to utilize a multiple of its initial contribution.

What Are The Challenges For The Bank And The CRA?

Diversity - political and regional - between these nations is a big challenge. While Brazil, South Africa and India have democracy, China and Russia have authoritative regimes. The Parliament of each nation has to ratify the proposals of this new bank. Size of their economies and their infrastructure needs also vary massively. Setting up an institute is easy but running it would be difficult.
