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China's surprise devaluation of Yuan is seen as an admission of economic weakness, compounding the levels of uncertainty in the global financial markets

RNI No. MAHENG/2009/28962 | Volume 7 Issue 9 | 01st - 15th Sept ’15Mumbai | Pages 56 | For Pr ivate Circulat ion

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DB Corner – Page 5

Revival ModeThe government has launched mission “Indradhanush” to revamp PSBs – Page 6The Chinese CarnageChina’s surprise devaluation of yuan is seen as an admission of economic weak-ness, compounding the levels of uncertainty in the global financial markets – Page 10A Strong ProbabilityLow inflation and slowing growth could push the RBI to cut rates – Page 14 Accounting The UnaccountedA SC-appointed committee has recommended SEBI to enforce tighter KYC norms and scrutiny of final beneficial owners of P-Notes to curb money laundering – Page 17Faith ReposedInvestments in equities indicate that people are regaining their faith in this avenue – Page 20Time To InnovateIt is high time banks adapted themselves and set up an efficient and effective electronic banking platform – Page 23Small Town WondersTech start-ups from small towns are showing that such ventures are not limited to big cities alone - Page 26Ethnic ChicWith the boom in ethnic wear industry driving apparel sales, retailers have started vying for this segment – Page 29On Firm GroundGiven the potential for demand growth, cement companies have embarked on an acquisition and merger spree – 2A Digital CurePharma companies can turn the government’s ‘Digital India’ project into a huge success by leveraging opportunities in this space - Page 35From Bad To WorseSteel sector’s earnings are expected to remain subdued due to lower realisations, sales volumes and inventory losses for the next few quarters – Page 38

In A Solid State: NCL Industries LtdThe southern market will drive slow and steady growth for NCL with prices holding at high levels – Page 42

Technical Outlook For The Fortnight Gone By – Page 45

A Sign Of MaturityEquity products have evolved with changing times and AMCs have begun offering equity saver funds that give returns in line with debt products, but with tax efficiency – Page 46

Heuristics: A Mental Short CutHeuristics are useful tools to simplify decision-making in a complex scenario in the markets - Page 49

Important Jargon For The Fortnight – Page 53

It’s simplified...Beyond Market 01st - 15th Sept ’15 3

Volume 7 Issue: 09, 01st - 15th Sept ’15

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

Art Director: Sachin KambleJunior Designer: Harshad Pawar

PR & Communications: Dwiti BhutaOperations: Shreelatha Gollavathini

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Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar, Nirav Chheda, Varsha Bang

4 It’s simplified...Beyond Market 01st - 15th Sept ’15

Tushita NigamEditor

The last fortnight saw a drastic slump in the global markets. This was mainly due to the devaluation of yuan by the People’s Bank Of China. The main reason for the devaluation, as many believe, was to stimulate a slowing Chinese economy and to contain the free-falling Chinese stock markets. Being an export-driven economy, a strong currency tends to have a negative impact on its growth. Read the cover story on devaluation of the Chinese currency to get a broader perspective on this topic.

The other articles in this issue include the government’s newly-introduced seven-pronged strategy called “Indradhanush” to revive public sector banks; the probable steps to be announced by the Reserve Bank of India (RBI) in its next monetary policy meet to be held at the end of this month; the likely introduction of regulations as proposed by a committee appointed by the Supreme Court to curb tax evasion and money laundering through participatory notes, and the renewed faith of market participants in equities.

We have also featured articles on the need for banks in India to set up an efficient and effective electronic banking platform, ways by which tech start-ups from small towns are proving their mettle, the growth in demand and supply in the Indian ethnic wear industry, how pharma companies are looking to tap opportunities offered by the “Digital India” project and the dismal state of the steel sector in India.

Finally, the Beyond Basics section covers an article on mutual fund companies offering equity saver funds that give returns in line with debt products, and with tax efficiencY.


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.

n the previous fortnight, China devalued its currency yuan by 2%, creating fear of a slowdown in the second-largest economy of the world and sent shockwaves throughout the global markets. It

pushed shares sharply lower and sent commodity prices further down.

Experts fear the Chinese economy is in a worse condition than expected. Also, the devaluation may start a currency war and destabilize the world economy.

In India, cumulative rainfall has been below normal by 12% (season to date) across the country on the whole, according to a release issued by the India Meteorological Department (IMD).

As far as the Indian stock markets are concerned, market participants are advised to avoid buying at current levels. The Nifty has resistance at the 7,930 and 7,980 levels. One can sell at rise around the resistance levels with a stop loss at the 8,020 level.

In the coming fortnight, traders and investors are advised

I to look out for steps taken by the RBI at its next policy meet later this month, where an announcement on rate cut is quite likely. Also, any rate hike by the US Federal Reserve should be watched keenly by market participants as any decision on this front could determine the course of the marketS.

Market participantsare advised to avoid

buying at current levels.

Sensex: 25,696.44Nifty: 7,785.85

(As on 1st Sept ’15)

REVIVAL MODEhe government unveiled a seven pronged strategy called “Indradhanush” on 14th August to revive

public sector banks (PSBs).

The seven elements laid out in the plan to revive PSBs are appointments, bank board bureau,

TThe government has launched mission

‘Indradhanush’ to revamp PSBs

capitalization, de-stressing (of balance sheets), empowerment, framework of accountability and governance reforms.

The government also came out with a detailed recapitalization plan weeks before the revival plan was announced officially.

Years of weak governance and poor credit appraisals put PSBs in a tight spot. Corruption and economic downturn too impacted them negatively. The ever-increasing provisioning for bad debt eroded their capital base.

Further, lower profitability forced

It’s simplified...Beyond Market 01st - 15th Sept ’156


next four years. According to the plan, the government will infuse `70,000 crore in PSBs for the next four fiscal years till FY19. An amount of `25,000 crore will be infused in phases during FY16 and FY17. Further, `10,000 crore will be infused in PSBs in FY18 and FY19. Earlier capital infusion plans for FY16 as per Union Budget stood at `7,940 crore.

The government has estimated that PSBs will need `1,80,000 crore of extra capital over the next four years. Of this amount, the government plans to pump `70,000 crore into PSBs and the rest `1,10,000 will have to be raised by banks from the market.

A credit growth of 12% to 15% in the next four years has been assumed for these estimates. The government has also said that for now banks are adequately capitalized to meet both Basel 3 and Reserve Bank of India (RBI) norms.

Analysis

There are differences in capital requirement estimations by various agencies. This will alter the capital requirements by PSBs. Many analysts feel that the allotted capital will fall short of the requirement.

Having said that the government has not denied future infusion of capital if needed. Further, banks can also tap the market for raising funds thereby filling the capitalization gap.

decision-making will be quicker at these banks.

B - BANK BOARD BUREAU (BBB)

The announcement on the BBB was made by Finance Minister Arun Jaitley in his FY16 Union Budget speech. BBB is a body that will guide policy, functioning and appointments at PSBs. It will comprise of a chairman and six other members and would constantly engage with the board of directors of all PSBs to formulate appropriate strategies for banks’ growth and development. The Bank Board Bureau will start functioning from 1st Apr ’16.

Analysis

This move will ensure an arm’s length distance between the government and the PSB. The Bank Board Bureau is a predecessor to the Banking Investment Holding Company (BIC) structure that the government plans to form for all PSBs. Like any holding company, BIC will only hold shares in PSBs. The government as owner will not be supervising the banks directly. BBB will function independent of the government and act as a link between the government and PSBs.

C – CAPITALIZATION

The government has charted a capitalization plan for PSBs for the

India’s 25-odd PSBs to knock on government’s doors for capital every year. Weak capital base, coupled with lack of structural reforms had forced investors to ignore PSBs in the last few years.

The latest move to revive PSBs was long overdue. With the revamp plan, investors have once again turned their eyes on to PSBs. Shares of state-run banks have been rallying since the recapitalization announcement was made on 31st July.

Let us look at each of the seven points in greater detail:

A – APPOINTMENT

Many PSBs have remained headless for more than a year now. With the revamp plan, the government announced appointments of managing directors (MDs) and chief executive officers (CEOs) of Bank of Baroda, Bank of India, Canara Bank, IDBI Bank and Punjab National Bank. Even candidates from private sector were allowed to apply for vacant posts at PSBs.

Analysis

While the move is positive, new appointments will need time to turn around fortunes of PSBs. PSBs with no senior staff have seen steady deterioration in their balance sheets and profitability in the recent past. With new appointees,

Capital

Capital essentially means funds in the form of equity or debt, which can be used in a business to generate future revenue. Banks need capital for two reasons: expansion and to fulfill regulatory requirements. The Reserve Bank of India (RBI) mandates all banks to keep a minimum amount of capital in proportion to their exposure to risky assets.

As banks grow their business, their risk weighted assets also grow. This means that banks have to increase their capital base in line with the growth of their loan book. Now, capital comes from two sources for Indian PSBs: retained profits and fresh infusion of capital from an old shareholder (government) or a new shareholder (stake sale to public).

D – DE-STRESSING

PSBs are reeling under huge bad debts, especially from infrastructure, steel and power sectors. The government is taking a two-pronged approach to de-risk PSBs’ balance sheets. One, resolving issues in painful sectors. And two, strengthening the recovery framework for banks.

Analysis

The government has already started work on these issues by engaging regulators, government, corporates and PSBs. To resolve issues on various sectors, the government had set up a project monitoring group to facilitate the issue of pending approval expeditiously, alter import duty structure and ask promoters to bring in more equity. Green shoots are visible in these sectors. Banks have been given flexibility in restructuring loans, dealing with wilful defaulters. The government has also decided to establish six new debt recovery tribunals (DRTs) to speed up recovery. All the steps will help de-stress banks.

E – EMPOWERMENT

The government has reiterated its zero political interference in the functioning of PSBs. And PSBs will be encouraged to take independent

decisions keeping the commercial interest of the bank in mind.

Analysis

This is a positive move as there is a clearer distinction between interference and intervention by the government. Being a majority shareholder in the PSB, the government can intervene but cannot interfere in banks’ operations. PSBs would also have greater flexibility in hiring manpower.

F - FRAMEWORK OF ACCOUNTABILITY

A new framework of Key Performance Indicators (KPIs) to measure performance of SOE banks is being announced. Banks’ performance would now be evaluated based on both quantitative (weightage: 80%) and qualitative (weightage: 20%) performance indicators as against only balance sheets and top line growth.

Analysis

The operating performance of the bank will be linked to the performance bonus to be paid to the MD & CEOs of banks. The government is also considering employee stock options (ESOPs) for top management of PSBs. This will help incentivize efficient employees

and be accountable to their roles.

G – GOVERNANCE

The government plans to improve governance in PSBs through continuous dialogues and regular review meetings with banks. The government will not interfere in banks’ operations. The government will also work on incentivizing employees of PSBs.

Analysis

Non-interference in operations will uphold PSBs’ commercial interests and lead to better professionalism in the sector.

NEED FOR PSB REVAMP

PSBs roughly account for 70% assets of India’s `92.5 trillion banking industry. They play an important role in the economy. State-owned banks are predominant lenders to the infrastructure sector. Lending growth is only going to improve as the Indian economy gets better. Thus, banks will need capital, better governance and professionalism to ride on to the next wave to support their lending growth.

Another important reason for the government’s PSB revamp plan is to follow best international practice in the sector and abide by Basel 3 norms that kick in from 2019.

An appropriate level of capital adequacy sends a positive signal to investors that the said public sector bank can absorb losses from its loan exposures. Since the overall profitability of Indian PSBs is low, every now and then, they go to shareholders to raise fresh capital.

Capitalization in the Past

Capital infusion from the government has a cost in the form of higher fiscal deficit. Perhaps this is the reason why the government has been cautious about providing continuous capital in the past. In FY15, even though `11,200 crore was allocated for the purpose of capital infusion, only `6,900 crore was infused into nine public sectors banks, based on their performance. The government has infused more than `81,000 crore capital in PSBs in the past 15 years, a majority of which was pumped in between 2010 and 2014.


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IN A NUTSHELL

The ‘Indradhanush’ framework for transforming PSBs is a reform effort undertaken since nationalization of

banks in the year 1970. PSBs are reeling under the stress of poor governance, deteriorating asset quality, lack of leadership and impairment of capital. In this

backdrop, the government has made a path-breaking attempt to resurrect PSBs. They need to utilize capital efficiently and make profits to provide better returns to investorS.

Tranche 1: About 40% of this amount will be given to weak PSBs, and every single PSB will be brought to Tier-I capital level of at least 7.5% by FY16. Tranche 2: Almost 40% of the capital will be allocated to top six big banks, viz, SBI, BOB, BOI, PNB, Canara Bank, and IDBI Bank in order to strengthen them to play a vital role in the economy. Tranche 3: The remaining portion of 20% will be allocated to banks based on their performance during the three quarters in the current year judged on the basis of certain performance. This will incentivize them to improve their performance in the current year.

Source: Press Information Bureau

Financial Year 2015-16




Total

`25,000 crore

`25,000 crore

`10,000 crore

`10,000 crore

`70,000 crore

(i)

(ii)

(iii)

(iv)

Tranches For Capital Infusion In Fy16

hina’s surprised devaluation of its currency and concerns over its economic health set off a

wave of panic-selling in equity as well as currency markets globally on the 24th of August.

Fears of currency war post yuan devaluation of 11th August only made matters worse for the markets.

Chinese growth has faltered in recent years. Its export-driven economic model has failed to clock higher growth rates. Stock markets have corrected in the recent past: 30% in

C June itself! To arrest the fall in Chinese equities, the authorities had enforced restrictions on selling in the stock market.

No new public offerings were allowed to tap the market. Majority shareholders were restricted from selling shares in the market.

With this as the context, the sudden devaluation of the Chinese currency by around 3% since 11th August is seen as a desperate attempt by Chinese authorities to boost exports and rescue the flagging economy of the country.

Since years now, a section of commentators have raised doubts about China’s financial systems. Many worried about asset bubbles in the real estate sector, waiting to be pricked. Recent developments from Chinese authorities imply heightened uncertainty about the true state of China’s growth.

CHINA MATTERS

China matters to the world. It is the world’s second largest economy, marching past Japan and Germany in recent years. It has over US $3 trillion foreign exchange reserves. It has

China's surprise devaluation of Yuan is seen as an admission of economic weakness, compounding the levels of uncertainty in the global financial markets



-50,000

-30,000

-10,000

10,000

30,000

50,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Export Import Trade De

India’s Trade With China

Source: Bloomberg

rates from September. Now, it is expected that the US would delay rate hike considering the volatility post the devaluation of the Chinese currency.

Also, as China’s exports share would increase with trading partners, mostly emerging nations, the balance of payments with these nations would weaken.

And if the US Fed raised rates, there would be flight to safety to US bonds, which, in turn, will make the balance of payments situation even worse, rendering emerging markets vulnerable.

IMPACT ON INDIA

India is not immune to Chinese factors, which are likely to have global implications. The benchmark Sensex fell the most i.e. 5.9% on 24th August since January ’09 on the back of heavy selling from foreign investors. The sell-off was accentuated further by margin calls by brokers.

FIIs sold stocks worth ̀ 5,275 crore on that day. The Sensex has dropped 6.5% so far this year. Rupee has depreciated as much as 3.7% since 11th August. So far in 2015, the rupee has depreciated 4.7%.

investments in US treasuries to the tune of US $1 trillion. China’s demand for commodities is huge. China’s share in global trade is humongous at around 14%. It is a major trading partner with most developed nations.

Thus, slowing China matters to all. It is estimated that 200 basis points lower growth in China would lower global growth by 40-50 bps.

IMPACT: COMMODITIES EXPORTERS

China’s demand for commodities is enormous. If China’s economy falters, prices of these raw materials will collapse further. This is bad news for nations exporting these commodities. Lower prices of commodities mean lower global growth.

Yuan devaluation is seen as an indication of authorities not being confident about China’s growth prospects. Canada, New Zealand, Australia, Korea, Thailand and Malaysia are likely to be the hardest hit as they export a lot to China.

IMPACT: CURRENCY WAR

With yuan devalued, China’s exports become cheaper. This is bad news for competition like Korea, Thailand and Malaysia as they often compete with China to export cheap goods to the rest of the world.

While currencies of most of these nations have corrected, the correction is not in tandem with that of yuan.

This will lead them to devalue their currencies, triggering a currency war. This can have serious implications on the global financial system.

Emerging Market Currencies Have Depreciated Significantly In 2015

Source: Bloomberg

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(20)

(15)

(10)

(5)

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10

DXY

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Chna

Phpp

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Ind

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Tha

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Russ

Kore

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Euro

Mex

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Aust

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Indo

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IMPACT: US FEDERAL RESERVE

Before yuan’s devaluation on 11th August, it was widely expected that the US Federal Reserve would start raising

Trade Balance

China is India’s largest goods trading partner. The bilateral trade between India and China, which was as low as US $2.9 billion in 2000-01 has reached US $72.3 billion in the year 2014-15.

However, India exports goods worth only $11.9 billion while it imports goods worth $60.4 billion. India has a whopping trade deficit with China. This deficit amounts to close to $50 billion in FY15 on account of rising imports coupled with weak export dynamics. With yuan devaluation, India’s trade deficit with China is likely to widen further.


THE EVENT

What Happened?

On 11th August, China devalued its currency by 1.9% against the US dollar - the biggest fall in two decades. The devaluation followed for the next two days. Yuan against the US dollar is now 4.5% below its pre-devaluation levels.

How Did Yuan Devalue?

Chinese yuan is not market-determined, which is to say that it does not move based on demand and supply for the currency, as it happens for the US Dollar or the Sterling Pound. The People’s Bank of China controls its value. It restricts yuan’s movement to 2% above or below a price that is fixed on a daily basis.

Now, since 11th August the price was fixed lower and markets started to trade with that as the benchmark. China said the devaluation was a “one-off” adjustment. Why Was Yuan Devalued?

Some experts believe yuan devaluation was an attempt to stimulate China’s economy, which has slowed down from its peak. Remember, China is an export-driven economy. According to some estimates, the yuan was overvalued by 25% to 30% over the last few years.

A stronger currency is not good for an export-driven economy as it renders exports uncompetitive. It is estimated that the 30% appreciation has chipped away some 2.5% from China’s growth rate. This year the Chinese economy is expected to grow less than 7%, its slowest rate since 1990, and could decelerate even more next year. The stock market has been in a free fall since June. Chinese exports have been falling lately: lower by 8.3% in July ’15 compared to a year earlier. Even in June ’15, exports had gone up by only 2.8%. These economic data triggered yuan devaluation.

What Is The Other Theory For Yuan Devaluation?

Some believe the currency was devalued so that yuan can be considered as one of the International Monetary Fund’s reserve currencies. The pre-condition for being IMF reserve currency is that the price is more market-determined than fixed. Remember, China has the aspiration to be a global currency.

Will Devaluation Help?

It is unclear as yet. While it will make exports cheaper as compared to its competition, a mere 4% to 5% depreciation will not make a significant impact on China’s exports. More so, the global demand is still weak. However, if China engineers yuan depreciation further, there are fears of a currency war with other export-driven economies following suit to devalue their currencies.

Why Are Markets Spooked?

Stock markets have been correcting for a while. China has put restrictions on selling in the market. No new public offerings are allowed to tap the market. There are restrictions on majority shareholders selling shares in the market.

Markets were expecting a rate cut by the Chinese central bank, which was not obliged. All these moves, along with yuan depreciation, set in panic about the Chinese economy.


Competitiveness

In the short term, a 4% yuan devaluation against the US dollar is unlikely to steal competitiveness from Indian exporters, as even the rupee has depreciated by the same amount.

However, if yuan depreciates more, it would be a different ball game altogether. China will be able to dump its produce in India.

Tyre makers, textile, capital goods, organic chemicals, petrochemicals and steel industry are already reeling under increasing cases of dumping from China as lower currency incentivizes the country’s exports.

India has already responded to the crisis by hiking import duty on all

steel products. The government and the Reserve Bank of India (RBI) will have to work towards making Indian goods more competitive and provide relief to exporters. IN A NUTSHELL

Commentary from most quarters is that India is well-placed to face any contagion emanating from China. India, in a way, has got limited exposure to China. In fact, some believe India tends to benefit due to the current developments in China as there are limited investing opportunities in the world due to heightened uncertainties. India may attract investor’s attention as its fundamentals have improved significantly over the past one year.

Oil at around $40 levels per barrel is helping India’s import bill.

The Current Account Deficit at 1.5% of GDP is under control. India’s forex reserves at US $380 billion are enough to curb volatility in currency markets and at the same time offer an 8-month cover on imports. Fiscal deficit at 3.9% of GDP is within manageable levels. With falling inflation, the RBI is set to take a loose monetary path in the months to come.

The only worry is that Indian markets are well equipped with the global financial system, and any negative news flow from China would compound the level of uncertainty. It remains to be seen as to when and by how much China will engineer its next round of depreciatioN.

ANOTHER ASIAN CRISIS!

So, Will The Asian Crisis Of 1997-1998 Repeat?

The fears are not totally untenable. The Asian crisis was preceded by a 7% devaluation in the Chinese yuan in early 1994. This introduced China as a competitor to countries like Thailand, Malaysia and Indonesia that had fashioned (East Asian miracle) export-driven growth models for their economies.

As exports fell for these economies, their current account swinged into deficit from surplus. This led to a collapse in their currencies, triggering financial markets to collapse across the globe. But What Could Save A Crisis?

The difference between the Asian crisis of 1997 and the current turmoil is that currencies of most other export-driven economies are not completely fixed to the dollar as it was in the 1990’s. Further, a fall in currencies can be absorbed as foreign exchange reserves of these nations are higher this time around. With a matured financial system, a full-blown crisis can be prevented.

Also, many experts believe China may not further devalue its currency for it may backfire as trade relations have only increased over the past few decades. Further, some currencies in the region such as the Thai Baht, Korean Won and Vietnamese Dong are over-valued and the adjustments will not be very painful.

he Reserve Bank of India (RBI) did not cut its policy repo rate on 4th August this year. Instead, it maintained

status quo on the rate at 7.25%. This was a widely expected move but was also a cause of disappointment for many, primarily the constituents of India Inc.

But with a less-than-satisfactory

T

A StrongProbabilityLow inflation and slowing growth could push the RBI to cut rates

monsoon and with inflationary risks still existing, the Reserve Bank thought it prudent to maintain status quo in its third bi-monthly monetary policy statement for this fiscal in early August.

However, economic growth is once again beginning to occupy centre stage and the clamour for rate cut is growing. Inflation has reduced,

thereby strengthening the cause of those calling for a rate cut to provide an impetus to growth.

Monsoon has been playing truant but fortunately has not been so bad as to be worrying. With another month to go for the monsoon season to end, a 70% to 75% rainfall for the season is still possible. And if this happens, then India need not worry much about



growth rate this fiscal.

Moody’s has cited weak monsoon as an important reason for lowering its growth projection. A sub-normal monsoon could adversely affect kharif crop production, thereby pulling down India’s economy.

Weak monsoon apart, Moody’s also cites the slow pace of economic reforms as another reason for pegging the country’s economic growth lower. Fitch also points to the latter aspect as the one that is holding back India’s great leap forward.

Sluggishness in pushing economic reforms will hold back India’s growth, it said, adding that a lack of pick-up in capital expenditure combined with a weak rural and export demand were also factors leading to the downward revision in its India growth projection. A rate cut by the Reserve Bank in the short-term could not only improve sentiment and business confidence but also go a long way in spurring growth, as India Inc has been proclaiming for nearly a year now.

The prevailing economic environment is also healthy - the Index of Industrial Production (IIP) data has been encouraging with the manufacturing sector showing improvement - factory output expanded at its fastest pace in four months in June at 3.8%, a point highlighted by Union Finance Minister Arun Jaitley, who described it as “a positive development”.

“The growth is boosted by 4.6% increase in manufacturing, while mining and electricity sectors continue to need attention. The growth in manufacturing led by consumer durables and basic goods is a positive development for the economy. It shows that the economy

growth is once again beginning to increasingly occupy mind space, especially given the oft-repeated assertions by ministers and government officials that India is capable of achieving an eight per cent-plus growth soon and that the country is well set on this track.

This seemed possible during the early euphoric days following the change in government in May ’14. Presently, prevailing conditions more or less rule out that possibility and instead point to an around 7% growth rate or a rate marginally above it.

The Reserve Bank, however, seems confident that its projected growth rate for this fiscal (FY16) at 7.6% is achievable and has retained this figure in its 4th August monetary policy statement.

This is heartening indeed but it must also be borne in mind that two well-known organizations - Fitch Ratings and Moody’s Investors Service - have revised downwards their growth projections for India for the current fiscal. Fitch, which had earlier projected a growth rate of 8% for FY16 has lately cut it to 7.8%, which is still higher than the Reserve Bank’s figure.

Moody’s has also cut its India growth rate projection from 7.5% to 7%, which is below the projections of both the Reserve Bank and Fitch. Moody’s has, however, retained its growth projection for FY17 at 7.5%. That these two globally-respected organizations have cut their India growth projections for this fiscal is not yet a cause of alarm but it does call for introspection and necessary remedial measures.

A rate cut by the Reserve Bank could still act as the much-needed tonic for India’s economy to regain its buoyancy and attain the 7.5% to 8%

the adverse effects of sub-normal monsoon on crop output in the country. However, much depends on rainfall in the late August to mid-September period.

The Reserve Bank has so far concentrated intensely on tackling inflation even at the cost of growth and with less-than-normal rainfall. Its stance of not cutting its repo rate in early-August is understandable.

However, going forward, it will have to cut rates as otherwise growth could be adversely affected. Inflation had risen in June but has declined in July and has generally evolved around the path projected by the Reserve Bank.

Inflation figures for July should provide a lot of comfort to the Reserve Bank. The Wholesale Price Index (WPI)-based inflation continued its decline for the ninth month in a row, falling to -4.05% in July as against -2.4% in June. What is, however, more significant is the decline in retail inflation - it slipped to 3.78% in July from an unexpected high of 5.4% in June.

A significant point that needs highlighting here is the sharp dip in food inflation, which should be very heartening for the apex bank. Food inflation slid from 5.4% in June to 2.15% in July fuelled by reduction in prices of fruits, vegetables, eggs and milk products. Inflation in fuel, light and housing also declined in July as compared to June.

The above should certainly inject a higher degree of comfort in the Reserve Bank of India; it also buttresses the call for a rate cut, which, if done, would be the fourth this year. (The Reserve Bank has already cut rates thrice this year by a total of 0.75%).

As mentioned earlier, economic

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is firmly on the growth path,” Arun Jaitley said.

Consumer goods had shown an encouraging performance with output growth at 6.6% while the performance of the consumer durables segment was even more encouraging at 16% with basic goods also doing well.

Jaitley further added that Index of Industrial Production (IIP) figures were consistent and needed to be read in line with the growth in indirect tax receipts, which rose over 37% to over `2.1 lakh crore in the April-July period this year on the back of higher excise duty collections.

With inflation under control, there is a case for a rate cut and there is a

feeling that the Reserve Bank will announce one such cut in the month of September when it is scheduled to come out with its fourth bi-monthly monetary policy statement.

There is a strong likelihood of a 0.25% rate cut then, which will bring down the repo rate to 7%. The Reserve Bank’s next monetary policy statement is scheduled for 29th September and while in the past, the apex bank has acted on its rates in between reviews, it is unlikely to do so this time as well.

For one, inflation and IIP figures to be released in September will indicate which way India’s economic wind is blowing and the Reserve Bank would like to take into account the latest figures before deciding on its course

of action. Secondly, the US Federal Reserve will be meeting in mid-September and there is speculation that it is likely to up its interest rate - if it does so, it would be for the first time in several years.

Since the Reserve Bank’s next monetary policy review is fixed for 29th September, only a few days after the US Federal Reserve’s meeting, the apex bank may prefer to wait for the outcome of that meeting before deciding on its next move.

There is pressure on the RBI to cut rates, now that inflation seems to be firmly under control. Economic growth, however, needs a fillip and a rate cut could just prove to be that effective stimulant needed to propel the Indian economy forwarD.

he Supreme Court-appointed Special Investigative Team (SIT) recently suggested markets

regulator Securities and Exchange Board of India (SEBI) to put in place regulations that would curb tax evasion and the influx of black money through stock markets. This directive caught media eye since many feel most unregistered foreign

T

ACCOUNTINGTHE

UNACCOUNTEDA SC-appointed committee has recommended SEBI to enforce

tighter KYC norms and scrutiny of final beneficial owners of P-Notes

to curb money laundering

investors use participatory notes to invest in the Indian markets.

So what are participatory notes and why is SEBI wary of it? Let us find out in this article.

THE BASICS

There are two main ways by which foreign investments come into the

Indian markets. One way is through foreign direct investments (FDIs) and the other way is through foreign institutional investors (FIIs).

However, there is yet another technique of investing in the Indian stock markets, which is known as offshore derivative investments (ODI). ODIs are investment products that are issued by foreign institutions



regulators. These disclosures include filling up the Know Your Customer (KYC) form to presenting PAN card and other personal details such as proof of address.

Besides evading regulatory norms and approvals, there are various categories of investors that regulators are wary of and are, therefore, keeping a close eye on these categories. There are largely four categories of foreign investors, which use P-Notes to invest in India.

Firstly, there are regular funds which invest with the sole aim of making as much returns as possible in Indian markets. These funds are invested in the Indian markets and in comparison with developed markets find returns from the Indian markets more attractive and sustainable.

Secondly, there are investors who have immense money outside India and want to bring it back into India. This money could belong to politicians, bureaucrats, celebrities and/or businessmen and other powerful and influential people in the society. These people would have made huge sums through or by way of gifts or under-invoicing.

Thirdly, there are foreign governments/entities who would like to acquire/control Indian entities by taking them over.

And lastly, there are terror financiers who could find this route attractive and simple.

Naturally, the first category of investors aims to earn returns/repatriate and benefit out of interest rate and currency value arbitrage. They enter and exit according to calculations. These investors pay applicable taxes and follow a large part of disclosure norms as laid down by the authorities.

to invest in the markets, which were causing immense volatility in the Indian markets.

When news of SEBI’s likelihood of coming out with proposals to curb participatory notes trickled in, Sensex lost 9% of its value in intra-day trading, leading to automatic suspension of trades for one hour.

Finance Minister Arun Jaitley issued a clarification stating that the government was not against FIIs and was not banning participatory notes. SEBI issued fresh rules regarding participatory notes on 25th Oct ’07. It said FIIs cannot issue fresh participatory notes (P-Notes) and existing exposures were to be wound up within 18 months. The Sensex bounced back following this announcement by SEBI.

The Sensex galloped 734.5 points to pass the much sought after 20,000-mark. This shows the extent of influence investments through participatory notes have on the Indian markets. The regulators have time and again found certain questionable intentions behind this route of investing in Indian markets.

THE ISSUES

The reason why participatory notes have become the potential route for investments in Indian stock markets is that they can evade regulatory and disclosure norms of regulators.

It is a well-known fact that foreign investments have to meet certain criteria of regulators. So, by choosing the participatory notes route, foreign investors have been investing in the Indian markets for a fairly large number of years.

This seems unfair to registered investors in India who follow disclosure norms laid down by the

to unregistered overseas investors that provide exposure to Indian markets through derivatives. Participatory notes or P-Notes, equity notes, capped return notes and participating return notes make up ODIs. Of these, participatory notes are quite popular with foreign investors as these have fewer registration requirements.

To elaborate further, participatory notes are offshore derivative instruments with Indian shares as underlying assets. These instruments are used to make investments in the stock markets. However, they are not used within the country. They are used outside India to invest in shares listed in the Indian stock market. That is why they are also called offshore derivative instruments.

Participatory notes are issued by brokers and FIIs that are registered with SEBI. The investment is made on behalf of foreign investors by registered brokers in India. This means that brokerages based in India buy shares of companies listed in India and then issue participatory notes to foreign investors. Any benefit in terms of dividend or capital gains is collected from the underlying securities. These brokers have to report the status of issuance of participatory notes to market regulator SEBI every quarter.

The reason why SEBI has been closely observing investments of foreign investors through participatory notes is due to the impact this instrument has had on the Indian markets in the past. It may be recalled that on 16th Oct ’07, SEBI had proposed curbs on participatory notes, which accounted for roughly 50% of FII investments in 2007.

SEBI did not know about the beneficial ownership of participatory notes. It was believed that hedge funds were using participatory notes

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The second category of investors too is not much detrimental to the Indian markets. Investors like bureaucrats, celebrities and other influential and powerful people, largely, bring back money to the Indian markets as KYC norms in so-called safe havens such as Switzerland, which have now become quite stringent.

Also, when money arrives in the Indian markets, it is declared by following KYC norms in India. It is the third category, which regulators are closely watching. These investors buy into shares of local Indian companies without its knowledge. According to experts, these investors try to wield their strength with the owners of companies in which they invest. In worst cases, they try to take over companies in which they have

invested. Experts point out that several sovereign funds based in China use private equities to invest in Indian companies. The intention here could be to acquire companies or indirectly hold stake in Indian companies. Experts point out that such investors have held stakes or bought shares of companies in software or oil or telecom, which are critical sectors.

Lastly, it is the fourth category, which experts point out that regulators and the public are concerned about. These terror financiers could use participatory notes to invest in India as they serve them well. One, it is the anonymity involved in P-Notes, which makes them more attractive. Two, domestic regulations on gifting of shares could also serve the purpose

of achieving ulterior motives.

It is estimated that more than 50% of funds, which are flowing into India are through P-Notes. This needs close examination. Because in this globalized world where markets are interlinked, allowing unknown investors can be risky for a growing economy like India. These unknown investors could also have political motive apart from gaining astronomical returns by investing in the country.

It is believed that recently the National Security Advisor had sounded the bugle against such investors, who were financing terror activities through banks and stock markets. Hence, P-Notes are on the close radar of the regulatorS.


Also, the government’s policies on business and manufacturing and other reforms in various sectors have led to optimism that it could be a market-friendly government.

GOLD AND PRECIOUS METALS

Meanwhile, investors have also lost some of their money in gold and real estate because of the recent decline and moderate returns from these assets. In India, gold prices have tumbled from a peak of `30,000/10 gram to about `25,000/10 gram currently. The correction in other precious metals is even more severe. Take for instance silver, which lost heavily in the last one year.

Investors are increasingly losing faith in gold and other precious metals because of low prices and grim outlook on these commodities.

REAL ESTATE

Similarly, real estate prices have started to fall and expectations are high that the prices might fall even further given huge inventory in most cities, unaffordable prices and subdued demand from buyers.

Traditionally, Indian investors tend to invest in real estate as an alternative asset class for generating returns. A part of this money, which was finding its incremental flow into precious metals and real estate, is now getting or is likely to get into equities, which as an asset class for many investors is looking attractive from a long-term investment perspective.

BANK DEPOSITS

On top of it, bank deposits, the largest in terms of asset holdings, are now becoming less attractive. This year, the RBI has cut repo rate by about 100 basis points and in tandem with this, banks have reduced deposit rates

iquidity has been the primary cause of booms and busts in the equity markets around the world.

Besides, liquidity is a precondition for the formation of any bull market. If there are more buyers for the same stock, price discovery takes place in an efficient manner.

Today, in the Indian context, liquidity is even more important to provide support to the market and lift the appetite of the market, which at times is susceptible to foreign money outflows resulting from global volatility and instability.

Currently, when a large part of the Indian equity is owned by foreign institutional investors, it is far more important to bring in retail money so that they too can enjoy the benefits.

FIIs

As of March ’15, 25.3% of the BSE-200 market capitalization is owned by foreign institutional investors (FIIs). While AUMs of mutual funds are flooded, the good news is that retail investors are coming back both in their individual capacity and through institutional channels like provident funds.

Though the money flowing through provident funds is on account of reforms in portfolio allocation, which was until now kept in debt and government securities, the direct entry of retail investors is, therefore, worth watching.

To put it in perspective, the credit of booms and the bull market of 2008 goes to this segment, which invested close to $25 billion that year. This is the highest investment ever made before 2008.

Once again retail investors are seen coming back to the equity markets

L after almost five years of muted participation. In terms of ownership, the holding of retail investors in BSE-200 is close to 8%, which is based on its current market capitalization of `8.61 lakh. In the first four months of the current fiscal, mutual funds have added as much as 11 lakh new accounts or folios.

This is huge as last year the industry added close to 25 lakh folios for the entire fiscal year 2014-15, indicating the growing interest of retail or domestic investors in equities. According to SEBI data, investors have about 3.3 crore accounts with mutual funds. That apart, in the first four months, equity mutual funds have garnered close to `39,000, which is one of the reasons why markets this year are expecting equity inflows from mutual funds to be in the region of about `80,000 to ̀ 90,000 crore compared to `65,000 crore last year.

SIPs

Systematic Investment Plans (SIPs) where investors allocate a certain amount of their savings into equities through mutual funds is going up, which is again a good sign of retail investors coming back to the market.

It is estimated that on an average SIPs used to garner about `1,200 crore in early 2014, which has now increased to about `2,100 crore to `2,200 crore per month.

Not just the quantum, but each SIP contribution has gone up from an average of about `1,900 a month to `2,500 a month per folio.

The shift in money to equity markets is largely due to the strong rally in the markets recently, particularly with the formation of the new government and hopes of revival in the economy.

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partially, which is one of the reasons for bank deposits becoming less attractive among investors.

Importantly, if the Reserve Bank continues to cut rates further, this will certainly have an incremental impact on equities. Already major banks have signalled further cut in fixed deposit rates.

OTHER AVENUES

Meanwhile, as other avenues in terms of opportunities and returns they were offering are shirking, individuals are shifting to equities.

Moreover apart from mutual funds, there are other routes as well where retail money is being pumped into. Last year, Life Insurance Corporation of India (LIC) brought about `50,000 crore, which the market expects will add to the overall retail kitty.

PROVIDENT FUNDS

Finally, the big push or thrust is going to come from India’s provident funds. In April this year, Labour Ministry had notified a new investment pattern

for Employees’ Provident Fund Organisation (EPFO), which allowed the retirement body to invest at least 5% and up to 15% of its total funds in equity or equity-related schemes. To start with, the money is likely to come through exchange-traded funds (ETFs) route.

During the months of April-June, EPFO garnered a monthly incremental deposit of around `8,200 crore. Taking that into account EPFO could bring in over `5,000 crore annually from incremental deposits through ETFs. There is a long way to go. Even if EPFO puts in close to `5,000 to `6,000 crore into equity, it will be merely 1% of its `6.5 lakh crore corpus.

The EPFO chief KK Jalan, in an interview, said that if the experiment succeeds, then they are likely to reach the 15% limit on a growing corpus, which could mean close to `30,000 crore inflows annually via this investment route.

Thankfully, the process has started with the `5,000 crore investments in the first week of August.

SUM OF ITS PARTS

Keeping these factors in perspective, the addition of inflows over the next five years would be close to `9,00,000 crore or `10,00,000 crore domestic investors’ money. This is close to `2,00,000 crore worth of investments annually via domestic investors, which is quite high.

During the boom of 2008, domestic investors made about `1,20,000 crore investments in Indian equities, which was the highest and one of the reasons for the bull market of 2008.

That apart, this also looks good in terms of volatility or to provide stability to the market in case foreign portfolio money or tactical money goes out of the markets, particularly in the event of hike in rates by the US or impact on India from movements in markets like China and Europe.

The ability to withstand volatility in the global market and other events will improve when domestic money comes in, particularly long-term money through provident funds, LIC and SIPs in mutual fundS.

sk any 20-something about the number of times he visits a bank in a month to carry out

banking activities, and chances are he might shoot you a look as if you belong to a different planet! It is likely that he has never been to his bank’s branch at all! And why should he, given the fact that his smartphone

A can double up as his bank anytime!

MOBILE BANKING - ADAPT OR PERISH

The reach of mobile banking is all pervasive today and is not only restricted to the youth but has indeed taken the entire nation by storm. Anybody with access to the Internet

and a smartphone can carry out just about any banking transaction right from transfer and receipt of funds, payment of utility bills, insurance policy payments and booking tickets in a matter of seconds.

Even numbers bear witness. According to a recently published study on mobile banking entitled



monolithic entity, whereas they should have been classified just like their banked counterparts. In order to reach banking services to the unbanked, regional factors must be taken into consideration as they have a strong bearing on customer profile. This is the area that small finance banks and payment banks are expected to address.

Small finance banks will work on the commercial banking model. All basic banking activity such as accepting deposits and disbursing loans will be carried out by such banks. The difference, however, will be that they will lend to unserved and underserved sections of the society and the loan size or investment limit to single or group obligators will be capped at 10% to 15% of capital funds.

Also, 50% of their loan portfolio must comprise of loans upto `25 lakhs. With such a ceiling being applicable to small finance banks, they may want to focus on small business lending to begin with.

The differentiating factor will be if they can provide an additional advisory component that will help borrowers make optimum use of their funds and also keep repayments on schedule.

Payments banks, on the other hand, can offer basic payment and remittance services and issue ATM and debit cards but will not be allowed to issue credit cards or dole out loans. They can, however, be in the business of distributing simple financial products such as mutual funds and insurance products.

A successful payment bank will call for low cost of delivery, despite high service quality. Regular education and incentivization of customers must also be internalized by such banks in order to ensure that cashless

new phenomenon in India. Though it is a young concept it has caught the consumer pulse pretty early and is very popular with youngsters. The proof of the pudding lies in the fact that mobile wallets have surpassed the number of active users as compared to credit card holders across the country.

PayTm, the premiere mobile wallet service alone has a user base of 20 million. Credit card users on the other hand are 19 million in the nation, despite the fact that commercial banks have been issuing credit cards for quite some time now.

If numbers are the parameter to go by, it will be no exaggeration to state that this is only the beginning. According to market research firm, RNCOS, the mobile wallet market size that stands at `350 crore currently will shoot up to `1,210 crore by the year 2019. Therefore, as smartphones get cheaper and more and more people have access to cheaper Internet, mobile banking in India will take a whole new connotation.

FINANCIAL INCLUSION 2.0

While mobile banking is assuming greater proportion by the day in the country, another banking revolution is underway with the introduction of payments banks and small finance banks in the nation. These entities are expected to address financial inclusion, a problem that has been ailing the banking and financial sector for the longest time.

Despite priority sector targets, no frills banks, banking correspondents, and smart cards, banks in India have not been able to reach the larger populace. Nearly 60% of the Indian population still remains unbanked. The problem thus far has been that the unbanked were addressed as a

“Global Mobile Banking Report” carried out by KPMG and UBS, shows that adoption rate of mobile banking (between 50% to 60%) is the highest in developing nations like India, China, South Korea as well as South Africa.

With regards to India, the report specifically states that Indian customers are most likely to change their bank based on a better mobile banking experience. Therefore, the bank that does not have an efficient and effective mobile banking platform, is most likely to loose its customers to competition.

The need of the day is for banks to offer state-of-the-art mobile apps and also optimize the use of value-added services through the help of social media and cloud storage platforms.

MOBILE WALLETS - THE ‘IN THING’

Little wonder then that State Bank of India (SBI), the largest commercial bank in India, with a reach that runs well beyond city limits has launched a mobile wallet app christened “SBI Buddy” in association with Mastercard and Accenture.

SBI, that has been struggling hard to shed its image of being a state-run, old-school bank, is looking at this new mobile wallet as a step forward in its “ambition of becoming the provider-of-choice for customers’ everyday needs, both financial and non-financial.” as per Arundhati Bhattacharya, the CMD of the bank.

She too strongly believes that banking, going ahead, will be propelled by mobiles and offering a mobile wallet will help them strengthen their foothold in this new age of banking.

Mobile wallets, however, are not a


transactions become a daily spending habit with their customers.

The basic idea behind such banking entities was to keep things simple so as to reach out to the unbanked population with simple and easy-to-use products that would make their life simpler while instilling some financial discipline and security.

Since target customers are from the low-income households, migrant

workers and the unorganized sector, challenges are aplenty ahead, and it remains to be seen whether winds of change in financial inclusion will bear fruits as expected.

At the time of going to print, the Reserve Bank had granted an in-principle approval to 11 entities to begin payments banks. These are Reliance Industries, Tech Mahindra, Aditya Birla Nuvo, Airtel M Commerce Services, Department of

Posts, Fino PayTech, National Securities Depository Ltd (NSDL), Vodafone m-pesa , Cholamandalam Distribution Services.

Among individuals who have been selected by the Reserve Bank of India are Sun Pharma founder and Managing Director Dilip Shanghvi and PayTm founder Vijay Shekhar Sharma. These 11 entities have been selected from 41 applications that the RBI received till February this yeaR.

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models. It became a cumbersome task to compare each and every option. This gave the duo the idea to segregate all the data of products from different sites and give a one-stop place to make these comparisons. Thus in the year 2011, ‘smartprix.com’ came into existence.

During the first few months, they operated this start-up from their hostel room while studying for graduation and coding for the website in their spare time.

After graduation they started getting lucrative job offers. Instead, they chose to stick to their start-up and moved back to their hometown Bharatpur, a small town in Rajasthan. Soon their start-up was noticed by big e-commerce giants such as Amazon, Flipkart and Snapdeal and they started collaborating with Smartprix.

In FY14, Jasper Infotech Pvt Ltd, which runs e-commerce marketplace Snapdeal, bought a 10% stake in Smartprix, which is looking to raise more funds. Also, the company is expanding to other markets such as fashion retail.

According to Abhinav Choudhary, “We have over 1,000 brands on our site, listing some 10 million products. With the addition of fashion to our basket, we can become a heavyweight in the price comparison space.” However, he is not too excited about a mobile app-based business, a strategy adopted by Flipkart.

“Indian e-commerce is very price-sensitive and not everyone is going to be driven by what they see on an app. We have over 100 e-commerce businesses on our site and more are being added as we expand our business,” Abhinav Choudhary informs.

Another innovative start-up is

orn in Uttar Pradesh, Nemesh Singh went to Bhopal to pursue his course in Mechanical

Engineering. In 2002, he completed his B.E. (Mechanical) from a little-known college - Oriental Institute of Technology.

But as luck would have it, even a degree in Mechanical Engineering couldn’t help Nemesh secure a job. After a long, frustrating hunt for a job, Nemesh Singh along with three other unemployed engineer friends started a web developing firm operating from a house owned by his father. The company used to bid and work mainly on outsourced projects from freelance portals.

Soon, Nemesh Singh with his three co-founders faced another serious challenge when their company went bankrupt as the value of outsourced projects went down.

This bankruptcy was followed by another one, which eventually led them to huge success in the form of Appointy, an activity scheduler app.

According to Nemesh Singh, while working in his outsourcing firm he identified lack of proper application for scheduling appointments in industries such as healthcare and wellness. This team of four launched Appointy in 2004, but the problem according to Singh was, “We didn’t know how to monetise it.”

They chalked out a plan, and in the year 2011 they commercialized Appointy and started earning `6.3 lakh per month. Appointy became the favoured application for booking and scheduling appointments for an increasing number of companies.

According to the founder, they expect to cross revenue of `150 crore by 2018. Currently, the company has

B over 78,000 businesses in over 100 countries as clients and in every 6 seconds an appointment is booked through Appointy.

Interestingly, 70% of the total customers are from the United States even when no founder has set foot there. The owners didn’t go to foreign countries or any metros to achieve this target. In fact, according to Singh, all this happened without spending a single dollar in marketing. It all happened from a small city called Bhopal in Madhya Pradesh.

The story of Nemesh Singh is one among hundreds of entrepreneurs emerging from Tier-II cities or small towns in India. Across small towns in India from places as diverse as Dharamshala, Udupi, Udaipur and Guwahati, start-ups are cropping up.

Defying popular belief that start-ups are almost always based in metro cities where a person has access to facilities, more and more entrepreneurs are choosing smaller cities for their start-ups.

According to Karan Mohla of IDG Ventures India,“Unlike in years gone by, enterprising graduates from Tier-II and Tier-III towns are now keen on starting and building companies from their hometowns and not migrating to big cities.”

In fact many entrepreneurs are moving back to their hometowns from metros to start a business. Take the case of Abhinav Choudhary and Hitesh Khandelwal.

Abhinav Choudhary and Hitesh Khandelwal were studying computer science at IIT Delhi when out of necessity, the idea of ‘smartprix.com’ hit them. During their hostel days, they tried to go online to buy a mobile phone and got bombarded with several options of prices, brands and


Swap Novation

Swap novation is the creation of a new swap agreement, while simultaneously cancelling the original or old one. This may take place if the terms of one contract are changed or amended An example of swap novation is when a counterparty purchases or sells an option, or rolls a profit or loss from one transaction into an active swap. This process involves the substitution of another party for one of the original parties to the swap agreement. Also, this occurs when a clearing house acts as a central counterparty and becomes a buyer to the original seller or a seller to the original buyer.

LabinApp, an interactive virtual laboratory tool that allows teachers and students to perform science experiments on computers or on their mobile phones.

The company was founded by Girish Shirigannavar, an alumnus of BVB College of Engineering and Technology in Hubli along with college mates Pavan Shinde, Pramod Ramdurg and Vinayak Hulabutti.

Currently, the app is used by 50 institutions based in Hubli-Dharwad. But the company is planning to expand it to Karnataka and Maharashtra. For the purpose, the company has raised funds of `63 lakh from Unitus Seed Fund, a fund managed by Vinod Khosla and billionaire Ranjan Pai.

Similarly two decades ago, Rohith Bhat, an alumnus of NMAM Institute of Technology, founded Robosoft Technologies, a company which makes apps especially for Apple. Soon, Robosoft became one of the few tech companies to work with Apple and has created products for Mac OS from the start. The advent of iPhone gave Robosoft opportunity to launch its own apps for Apple’s mobile platform.

Few months back, the app-making company received an influx of funds of about ̀ 74 crore from private equity firm Ascent Capital, apart from Kalaari Capital, which is its existing investor. According to Raja Kumar,

managing director of Ascent Capital, ”Robosoft has successfully demonstrated that an Indian company can create globally acclaimed mobile applications and games.”

While most entrepreneurs focus on online or computer technology for start-ups, software engineer Hemalatha Annamalai had other plans. In 2008, this alumnus of the Government College of Technology, Coimbatore, and Royal Melbourne Institute of Technology started electric vehicle manufacturer called Ampere at a small place called Sulur near Coimbatore.

Regarding her decision to enter manufacturing, Ms Annamalai says. “I came into manufacturing consciously as the scale potential is huge, unlike e-commerce and the Internet where only few companies can succeed.”

Even if the potential was huge, it was not an easy journey for Hemalatha Annamalai in the beginning. The first challenge came in the form of setting up of a core team, which according to Ms Annamalai is now the core strength of her company. Rural market is the target area for Ampere.

At first people were reluctant to accept the concept of electric vehicles but soon sales picked up. Ampere manufactures electric cycles, scooters, trolleys and special purpose vehicles called Ampere Boho, a three-wheeler for the disabled.

Farmers use electric bikes to transport chicken feed, eggs and grains. In 2009, Ampere supplied battery- operated three-wheelers to the Tamil Nadu Government. These vehicles were also bought by Red Cross in Karnataka. The vehicles are part of a waste management project running in the Kurudampalayam panchayat in Coimbatore district.

Ampere Vehicles received their first funding two years back from private equity firms Forum Synergies India and Spain’s IMI Investments. Furthermore, in July this year, Ratan Tata invested an undisclosed amount in the company. “These equity investments are a vote of confidence on Ampere’s brand strength, market presence and product design capabilities,” Annamalai says.

Even the government is focusing its attention on entrepreneurs and start-ups from Tier-II cities and small towns across the country.

Industry lobbying group Confederation of Indian Industry (CII) is planning to set up a center for excellence. This centre will help entrepreneurs to create business plans and provide help in other processes related to start-ups.

This step by CII proves that start-up is not a phenomenon limited to metros. Slowly but surely entrepreneurs across the country are realizing their dreams through start-ups in their own cities and townS.

etailers seem to be changing focus as they want to grab a pie of the fast-growing ethnic wear

segment, which intially used to be the consumers’ choice for wedding and festivals only. Now, with changing perspectives, contemporary designs, work-wear, varieties, silhouettes, etc, people, especially women, have taken a fancy for ethnic wear for a number of occasions.

With the boom in ethnic wear industry driving apparel sales, retailers have started vying for a significant share of the more than $25 billion segment. In fact, the ethnic wear market in India is more than $11 billion and is expected to grow at a CAGR of 8%, according to retailers.

The ethnic wear market in India stood at $13.1 billion in 2013. Out of this, the contribution of women’s ethnic

R wear was 88%, kid’s ethnic wear 9% and men’s ethnic wear only 3%. The ethnic wear market is expected to reach $19.6 billion in 2018, according to management consulting firm Technopak. Exponential growth in sales has attracted many new entrants to the segment. The market is getting redefined with brands and designers exploring opportunities in the sector, and targeting a new set of consumers based in domestic as well as the overseas market.

Comfort and affordability are the main drivers of this segment as most ethnic wear clothes are made from cotton for regular wear or pure silk for festive wear. Elegance and comfort are other factors that are luring working women towards ethnic clothes. So, it is not surprising that there has been a massive growth in

the market share of Indian ethnic brands over the years.

Owing to fundamental societal factors such as rapidly increasing women workforce, disposable income, mall culture, international recognition given to traditional Indian attires and aspiration for individuality, ethnic brands are cutting through competition posed by western outfit brands and attracting the interest of middle-aged and young women.

“Owning brand Jashn, one of the fastest growing ethnic brands, I would say that Indians are definitely embracing ethnic wear and going back to their roots. Though most women today are fond of western outfits, their love for ethnic wear has not died down. This can be seen through the steady growth in the ethnic wear segment over the past years and is said to grow further by



The growth of ethnic brands is largely offline at the moment. However, with changing paradigms of shopping seen in the last couple of years, retailers and designers have both opted actively for the online market space and claim to be catching up with their offline peers.

Manoj Gupta, founder, Craftsvilla.com, said in a statement, new ethnic brands will most likely come from online players, going forward. There is a broader trend of creation of new brands online rather than offline.

Clearly, online is growing faster than offline because of scalability, better reach and investment. The growth is mainly coming from the domestic market since general growth is faster in the domestic market. Furthermore, Internet is disrupting this market and providing wider reach to Tier-II and Tier-III towns.

Gupta of Craftsvilla said the company’s target customers are mostly from smaller towns and smaller metros. Potential buyers live in villages and Tier-III towns.

Experts say online retail is growing much faster than offline and ethnic wear sales are higher than western outfits. It is expected to grow at a CAGR of 8% every year.

The trend is not restricted to the domestic market only. It is spreading to international markets as well as there is a growing popularity of ethnic wear overseas.

The entire ethnic wear market is moving towards organized retail. However, there is significant growth in the international market and demand continues to be on the rise. Buyers are situated across the world. They hail from the US, Australia, Singapore, Malaysia and the Middle

have inspired several brands to quit mainstream fashion dominated by western wear and make a niche market space marked by the intersection of the best of international and Indian features. People are responding positively and enthusiastically to this change in retail and designer label industries, said experts. Praveen Sinha, Managing Director and Founder, Jabong.com also said that unlike yesteryears, ethnic brands now mirror the new age Indian woman. They have redefined the traditional Indian outfit as something a woman can wear and look simple yet stylish.

With the aim of giving the Indian woman variety in her day-to-day wear and to infuse a dose of excitement in her wardrobe, brands like W, Biba, Rangmanch and Fabindia, among others, have introduced contemporary, fashionable and stylised garments to complement different occasions. Apart from these, Jabong has brands like Meena Bazaar and Vishal whose forte is to provide pure ethnic products deep-rooted in Indian culture like lehengas, dress materials and sarees. Designer wear brands like Ritu Kumar, Rohit Bal, Neeta Lulla, Vikram Phadnis, Rocky S and so on are now available online and have also reached out to a wider consumer base, Sinha said. The online apparel market in India is flourishing like never before with more and more consumers getting wired to the Internet. Though the online market has made a niche for itself, it is the offline market where growth has been tremendous. Few online players claim they are growing faster than offline players as they have a wider reach.

8.4% over the next decade from present `61,679 crore.” Rahul Jashnani, Managing Director, Jashn, said recently. When Jashn had started off, ethnic wear for women was considered to be a niche market. In a very short span of time, ethnic wear has generated a large customer base among urban women. The company has remained an offline retail player for a really long time with several stores across the country mainly in malls.

But times are changing with online retail changing the whole dynamics of buying habits of consumers, at the comfort of home or office. It is playing a vital road in today’s day and age. Jashn is present on Myntra, Snapdeal, Jabong, Flipkart and Amazon as well. Jashn also has an online site where products are available exclusively. As far as revenues are concerned, offline sales contribute more as in consumers of ethnic wear like to touch-and-feel before purchasing. Brick-and-mortar stores contribute more revenue compared to online sales, Jashnani of Jashn claimed. Today, all high network places along with boardrooms across India are adapting chic Indian ethnic wear. It can also be said that the ethnic consumer base is divided into traditional and modern ethnic wear.

“The new collection supports a contemporary feel and structure, which is made to attract a younger audience whom we consider as our potential buyers,” Jashnani said.

Ethnic brands are no longer seen as carriers of ancient cultural value but their roles have evolved to a point where they are able to fuse power, femininity and modern fashion with traditional dressing. Factors like these

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East. But potential markets are the US, Australia and Singapore, informed Sinha of Jabong.

Ethnic brands are reaching different corners of the world via online platforms as well as through physical presence. Even Indians living abroad and foreigners are showing growing interest in what these brands have to offer. However, the growth magnitude is much higher in the domestic market, says Rupali Lakra, Fashion Designer & Founder, Pralii. According to Gupta of Craftsvilla, 2% of the company’s sales come from the international markets. However, he expects international ethnic wear to contribute 20% of Craftsvilla’s sales by 2017. Craftsvilla recently launched services in Singapore and Malaysia as of June ’15. Other geographies on the anvil are Thailand,

Indonesia, Philippines, Latin America, Argentina and Brazil.

“We plan to enter these countries and sell their local ethnic products to the local customers,” Manoj Gupta said, adding, “we believe that there is potential to target at least a fifth of our sales from international business.”

Global markets have always had a fondness for Indian ethnic styles. Ethnic wear has flooded fashion runways through styles, designs, colours, etc and you probably haven’t even realized it. Designers abroad have taken the intercultural barriers of the world and blurred them.

“The influence of Indian ethnic fashion on the industry is immeasurable. Through our sales we have seen a big rise in India’s rural markets, but at the same time the

feedback from the international market is immense. We ourselves have firmly planted roots in the Middle East region, with three stores in the UAE; one in Dubai and two in Abu Dhabi,” said Jashnani of Jashn.

The notion of ethnic dressing has changed remarkably over the years as has its reach. Older women no longer have the exclusive buying interest in ethnic brands, men who are aware of statement dressing, both old and young, young women, college goers and even teenagers are among active buyers of such ethnic brands.

Ethnic brands are synonymous with outfits which complement the female body and accentuate the male persona with fashionably unique designs and comfort, and people of all ages and lifestyles are drawn to these factors for dressinG.

Beyond Market 01st - 15th Sept ’1532


southern regions have been growing while prices in rest of India region have been flat or have dropped. Also, demand in eastern region has been growing at 8% while cement demand in rest of India has been growing in the range of 2 % to 3%.

In the eastern region, per capita cement consumption is lower in comparison with other regions. More so, there is a shortage of housing projects in the eastern region. With East Freight Corridor work, cement demand in the eastern region is expected to be robust. It is estimated that in the next two years, eastern region would add 11 MT in capacity.

In the past two quarters, south-based cement companies have shown a sharp turnaround in their financial performance. While small-sized companies such as NCL Industries, Deccan Cements, KCP and Sagar Cements have turned profitable, mid-sized ones such as The Ramco Cements (erstwhile Madras Cements) and India Cements have shown massive improvement in their corporate earnings.

The June ’15 quarter was the second consecutive quarter when these cement companies showed a stark improvement in their earnings. According to industry experts, the momentum is likely to continue for the next two years thanks to production discipline, fairly stable cement demand and limited capacity addition in the southern region.

For the next two years, there are two factors, which would boost demand in southern region. Firstly, companies from the south have been following high production discipline. This means that they are producing cement in accordance with demand.

Consequently, there is limited capacity addition for the next two

arly this year, Ultratech Cement, India’s largest cement company by capacity acquired two

plants of JP Associates; and Dalmia Cement acquired Bokaro Cement of JP Associates. And only recently, two units of French cement manufacturing giant Lafarge were acquired by Kolkata-based Birla Corp.

More importantly, the merger of Swiss cement giant Holcim and French cement giant Lafarge is a prime example of how ‘acquisitions’ have become a frequent development in the past one year. These acquisitions point to an overarching theme that is building up in India’s cement industry.

Here is a low-down on India’s cement industry, why consolidation is the most profitable way of expanding at present and the reason for foreign institutional investors’ bullish view on cement counters.

THE INDUSTRY

At present, India’s cement industry is dominated by two well-diversified players: Ultratech Cement and Holcim India through its holdings in ACC and Ambuja Cements.

Ultratech Cement with a cement capacity of 65 MT dominates the industry. However, if one considers the merger of Indian operations of Swiss construction materials major Holcim with that of French cement Lafarge, then Holcim India would be the largest player by capacity with cement capacity of 70.7 MT. This is followed by JP Associates, which is the third largest player by capacity with its cement capacity of 22 MT.

Apart from these three players, Shree Cement and The Ramco Cements come at fourth and fifth spots, respectively, with cement capacity of

E 18.5 MT and 15.5 MT, respectively. Rest of India’s cement industry has small and medium-sized players such as Dalmia Cement, Heidelberg Cement, Andhra Cement, and Orient Cement, which have cement capacity in the range of 5 MT to 10 MT.

Among various regions, the southern region has highest limestone reserves. Limestone is one of the main ingredients used in the production of cement. According to various government estimates, the southern India has 46,018.3 MT of limestone followed by 3,9051.2 MT in the northern region, 19,422 MT in the eastern region and 19,336 MT in the western region.

Due to this, the southern region accounts for 49% of India’s limestone resources. This is one of the chief reasons for southern region experiencing oversupply of cement and relatively lower demand. Consequently, cement utilisation in southern region is lower than the rest of India. It is estimated that cement capacity utilization grew below 54% in FY14 in southern region when compared to 75% in the rest of India.

It is estimated that there is an incremental demand of 23 MT in southern region between FY14-17. This incremental demand will emanate from two new states (Andhra Pradesh and Telangana). This incremental demand is higher than 20 MT cement capacity that unified Andhra Pradesh consumed at peak cement demand cycle, indicating higher demand in the coming years.

In comparison with this, cement demand in north will be 21 MT, in west 18 MT. And in east and central regions, cement demand will be 15 MT in the same period between FY14-17.

Cement prices in the eastern and


years, which would ensure that there is no stiff pricing war. Secondly, with the division of Andhra Pradesh into two new states – Andhra Pradesh and Telangana, cement demand is expected to pick up at least by March ’16 quarter.

This should boost capacity utilization of southern cement companies. As a result, with higher capacity utilization, south-based cement companies will improve their pricing power, going ahead.

WHY CONSOLIDATION?

It is estimated that the demand from across India has been growing in the range of 2% to 3% and in the next two to three years, cement demand is expected to improve to 8%.

Given this potential for demand growth, cement companies are following an inorganic way of expansion. One of the chief reasons for the aforementioned acquisition is the cost involved in setting up a cement plant.

It is estimated that the time required for setting up a greenfield cement plant has jumped two times to six years from three years earlier. This delay can be attributed primarily to the time taken in acquiring a land for the said project.

Besides, the cost of setting up a new cement plant has also gone up in the past three years. As per analysis, the cost of setting up a new cement plant has grown at a compound annual growth rate of 7% in the past four years to `7,500 per tonne.

Given relatively low cement demand, according to various estimates even if one considers capacity utilization of 80% at `300 per 50 kg, the return on capital employed (RoCE) on a new cement plant comes at a single digit

4.2%, which is not lucrative for a cement player.

Hence, setting up a new cement plant does not seem to be a viable option for cement players at present. This is why cement players go for the inorganic way of expansion since it will save more than six years of gestation period for them and also help them cater to cement demand, which is expected to improve by the end of the second half of FY16.

This inorganic way of expansion is going down well with foreign institutional investors (FIIs) also. FIIs have remained invested in cement stocks as key factors that would enhance cement business are playing out. There are three important factors that would ensure that the interest of FIIs’ in cement stocks would sustain in the coming quarters.

First, fall in operational expenses of cement firms is likely to boost their earnings. Falling coal and crude oil prices due to weak demand should keep freight costs for cement companies moderate. Power, fuel and transportation costs of cement and other raw materials form 55% to 60% of the operational expenses of cement companies. This saving in costs would translate into earnings for cement companies in the coming quarters.

With coal and pet coke prices both coming down, we expect operating cost growth of cement companies to come down to 2% to 3% at the end of FY15 from 5% at present. At least in calendar year 2015 coal and pet coke prices are expected to be subdued, which should help cement companies to save on their expenses.

Second, it is the composition of sectors in MSCI India Index that works in favour of cement

companies. In MSCI India Index, materials segment (which include cement, metals) has 6.8% weightage.

Unlike metals, since cement is domestically produced and consumed and has no direct link to international markets, foreign institutional investors have been overweight on the sector and buying cement stocks.

FIIs have been buying and holding on to cement stocks with at least two to three year investment period. In the last one-and-a-half years, FII holdings in mid-sized cement companies such as The Ramco Cements, JK Lakshmi Cement, Shree Cement, and Mangalam Cement have gone up to 18.8%, 10.8%, 10.6% and 1.58%, respectively from 13.7%, 8.65%, 7.77% and 0.09% .

Third, in order to benefit from the India growth story, besides banking stocks, cement stocks are better investments than infrastructure companies. Even after considering expansion, the average debt to equity ratio of most cement companies is 0.5 and they have funded their expansion through cash flows.

On the other hand, infrastructure companies fund their projects through external debt. So, for FIIs it makes more sense to be invested with cement companies since their balance sheets are lighter and they would be the first beneficiaries once demand growth picks up.

Typically, cement demand grows at 1.5 times the Gross Domestic Product (GDP) growth. For FY16, according to Bloomberg’s estimate, India’s GDP is expected to grow at 6.3%. This translates into cement demand growth of at least 8%. This should improve cement utilization levels to over 77% in FY16-17 period from 72% at present, which could boost operating profit of cement companieS.

ccess to essential medicines is abysmal in India despite the country achieving the distinction

of being a reliable source of quality medicines at affordable prices. The reason for low access is poor

A

A Digital CurePharma companies can turn the government’s ‘Digital India’ project

into a huge success by leveraging opportunities in this space

healthcare infrastructure. There is a shortage of diagnostic facilities, doctors, pharmacies as well as hospitals in the interiors of the country where 70% of the population lives. Due to this, the pharmaceutical industry has not penetrated well into

the country. This issue can be fixed by leveraging opportunities in the digital space. Prime Minister Narendra Modi recently launched the Digital India project with the vision to transform



medicines including mis-branded (not originating from the IP Address holder or genuine manufacturer) must be strictly monitored and punished. Above all, the ancient or antique Drugs & Cosmetics Act should be made ‘web-enabled’ and ‘internationally usable’ by incorporating appropriate amendments with all ‘safeguards’ to make the dream of affordable access to rural masses and to make “Health for all by 2020” not just a slogan but a realizable goal.

The large network of Indian post offices all over India can be made a partner in a Digital India-enabled “e-medicine” portal, which may as well, be promoted by the government with a high degree of transparency, without enriching the middlemen to eat away the ‘cream’ and leave the poor still “patiently suffering”.

The Digital India project can be a success in medical and pharmaceutical domain if the regulatory framework in India is also updated to support web-enabled services including diagnosis, prescription, distribution and eventual door delivery of goods and services to poor and deserving patients.

A classic example is a village called Akodara at the outskirts of Ahmedabad in Gujarat, which is India’s first digital village. This village with a population of less than 2,000 is adopted by ICICI bank and has an ATM. And anganwadis here have CCTVs and schools have audio visual teaching aids.

The villagers here buy biscuits from local kirana shops using their cell phones without exchanging any physical money. Selling agri products to the local market or milk to the local co-operative dairy is digitized and cashless transactions take place without the need for travelling.

able execution of the project in the healthcare sector will require an enabling infrastructure to maximize overall benefits.

Additionally, India should not miss the Digital India bus to address issues of “affordability-accessibility” without letting in “patient passengers” on board.

Recently a popular “e-retailer” was targeted and sued by the government for offering medicines through the web to the needy.

Instead of prosecuting those who make medicines available to the needy through the Web, India should amend its Drugs & Cosmetics Act, 1940 and have a new Drugs & Cosmetics Act, 2016 or by facilitating and empowering web-based solutions to address medicines for the masses on demand.

Needless to say that, Intellectual Property violations and patent and trademark infringements must be strictly prevented or avoided on the Web. The ‘Web operator’ should be allowed to tie up with a registered medicine wholesaler or retailer (or even manufacturers themselves) who should take all legal and regulatory responsibility to meet obligations under (to be amended) the Drugs & Cosmetics Act.

All medical prescriptions issued by qualified medical practitioners must be digitally uploaded or made available to dispense scheduled and restricted medicines. Over the counter (OTC) and non-scheduled (non-IP violative) medicines, AYUSH (ayurverda, yoga, naturopathy, unani, siddha and homoeopathy) and nutraceuticals must be freely available on the Internet to the needy.

Those who abuse the system or provide spurious or non-quality

India into a digitally empowered society and knowledge economy. Furthermore, this initiative aims to connect remote areas/villages to high-speed Internet service.

Now, since pharmaceuticals is a science and knowledge-based industry, the government’s vision fits quite well with that of the sector. In short, the Digital India project will open up ways to connect to remote villages of India. Digital India can be a success in the pharma industry as it will be able to penetrate all regions of India, including neglected parts of rural India, small towns and remote areas, if legal and regulatory support are provided with a network of hardware and personnel.

Through the Digital India project the pharma industry could reach out to doctors with innovative, cost-effective marketing and even connect with doctors on Skype and provide web-related technical inputs of products. Pharma companies could even organize and support hospitals for tele-medicines.

Furthermore, pharma companies can make use of the Digital India platform to establish contact with patients, get their diagnosis done online, extend expert medical help, that too online. Mobile application-based innovations are being employed for diagnosis, online examination and advanced consultations, monitoring and treatment of patients.

Technology is a great enabler and we have experienced its positive intervention across sectors. It is no different for healthcare delivery. Telemedicine, electronic health records, online consultations are all transforming ways in which patients are treated. E-healthcare forms a part of the Digital India initiative, but the

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Young villagers in Akodara often buy their requirements from e-commerce sites like Flipkart and Snapdeal. There is no reason why this model cannot be replicated to access medicines. Interestingly, all digital transactions take place in Gujarati as most villagers do not speak English.

Pharma companies would be interested in the Digital India project. This would help companies to expand their product availability and reach to the remotest village.

The concept of tele-medicine is also an area where hospitals and pharma

companies can work together for the benefit of patients in rural areas.

Currently, most patients from rural India are serviced by barefoot doctors. This would dramatically change with the implementation of the Digital India projecT.


operating levels.

Thankfully, there has been a similar correction in raw material prices of coking coal and iron ore but the quantum of the correction is less and the timing of the same does not perfectly hedge against this risk.

Its impact is quite visible in the quarterly result (Q1FY16) of steel companies that have mostly reported an inventory loss caused by high inventory cost of raw materials and finished goods.

The problem of inventory losses could continue in the coming quarters as well, a result of the lower prices. This is also why steel sector’s earnings are expected to remain subdued as a result of lower realisations, sales volumes and inventory losses for the next few quarters of FY15-16.

On top of this, companies will have to earn enough to service the interest cost to remain profitable. While this has already caused a huge loss to marginal players at operating levels, their sustainability is under threat as they are also sitting on huge debt and servicing the interest cost alone will be a huge task before these companies, particularly with shrinking cash flows and tighter credit terms.

To that extent, share prices of these steel companies are also seen reflecting the worry as most companies from the sector have lost close to 50% to 60% capitalization.

Industry experts believe the situation will not improve drastically as slowdown in China could stay for a long period given the shirking economy and rising exports.

In India as well, actual demand from some of the reforms that the

fter infrastructure, power, gems and jewellery, the steel sector now seems to be the new

cause of worry for India’s banking sector. According to estimates, loans that were given to steel plants run the risk of default owing to the recent weakness in the global steel market.

Globally, in the last six months or so steel prices have fallen drastically in the range of 30% as a result of weak demand. As per data compiled by World Steel Organisation, in 2015 during January and May, world steel production declined by 1.2%.

In fact, steel prices have corrected below levels seen during the global meltdown of 2008. Today, the situation is even more worrying as the industry believes that during the previous crisis, Chinese demand compensated for the fall in demand in the western world.

CHINESE DEMAND

But currently Chinese demand itself has fallen drastically. To survive, Chinese mills are exporting or dumping steel in other world markets, which are leading to further pressure on steel prices.

Strikingly, this year during January and May, Chinese steel production fell by 0.5%. China, which produces close to 800 million tonnes of steel or close to 50% of the global production, is witnessing an economic slowdown, particularly in construction.

This slowdown has hit domestic demand causing steel mills in China to operate at about 72% of their capacity, which is even lower than the 2008 level, which was 77%.

China is exporting and lowering its prices. In the first seven months of the current year, its steel export sales rose

A 27% to 62 million tonnes.

INDIAN SCENARIO

India is no different; it is importing cheaper steel from China. India, which produces about 88 million tonnes of steel annually, according to government data, saw its imports jump by 58% to 3.5 million tonnes in the four months ended July ’15.

To counter this, in the month of June, the Indian government raised import duty on long products from 5% to 7.5% and from 7.5% to 10% in the case of flat products.

However, this move did not in fact affect steel imports by India as steel prices in China fell further owing to devaluation of Yuan, making Chinese exports attractive. Due to the devaluation of the Chinese currency, the government in August again raised import duty for the second time to 12.5%.

In India, the landed price of steel has fallen from `36,000 per tonne a year ago to around `23,000 per tonne, currently. For many Indian steel manufacturers, at these prices, they cannot even produce steel.

Larger and the most integrated players are running at paper-thin margins, hoping that things do not get worse from here.

The companies are forced to cut prices as the landed price of steel has fallen. Also, because there is low demand in the domestic market, the pressure is mounting on companies to cut prices, particularly by those that are still profitable.

However, this is not the case with smaller and inefficient players, who are losing at these prices. Their operations have turned into losses as many of them now make losses at

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government talked about like ‘Make in India’ and spending on infrastructure is still away.

In fact, existing demand in the industry so far remains below expectation as a result of slowdown in real estate and construction as well as engineering space.

Additionally, there is growing concern about creation of new capacities. Companies like NMDC, SAIL, Tata Steel and others have been expanding their capacities, which will keep supply of steel in the domestic market higher.

This comes at a time when India has been adding more steel capacity, particularly with borrowed funds. If these capacities are not utilized properly for longer terms, they will have a negative implication even on bigger players.

In recent years, India’s steel sector capacity utilization ratio has fallen from 91% in the year 2012 to about 84% currently, which only indicates

that more and more capacities will be shut down under current circumstances, putting pressure on the banking system. Media reports indicate that Indian banks have a total loan exposure of close to `3 lakh crore to the steel sector, which includes the `1.2 lakh crore exposure to the mid- and small-sized companies.

Banks’ loan exposure to steel sector has grown at 21% annually over the last five years and today most banks, particularly PSU banks have exposure to this sector in the region of about 4% to 9%.

Stress is already sweeping banking systems where banks have started attributing their quarterly losses to their exposure to the steel sector.

Companies like Visa Steel and Bhushan Steel are already going through the corporate debt restructuring (CDR) route, while others like Electrosteel and Jai Balaji are in the news for soon making their

entry to Board for Industrial and Financial Reconstruction (BIFR).

In many of these cases, cash profits have fallen and net worth or equity capital of these companies is getting eroded. At current steel prices, losses of many of these companies will mount and some of them will actually go out of business because there will be no net worth or equity left to run the business.

For instance, in the case of Jai Balaji, accumulated losses have surpassed the net worth of the company, which is one of the conditions for BIFR.

Overall even though India, considering its per capita steel consumption of about 60 kg, which is significantly lower compared to the world average of 216 KG, holds promise and steel is core to the economic growth of the country, the pain in the sector and the companies is far from over as near-term issues about the viability of many of these companies will impact their balance sheets and their ability to do businesS.

The southern market will drive slow and steady growth for NCL with prices holding at high levels

stablished in 1983 by first generation entrepreneur Late K Ramachandra Raju, NCL Industries Ltd (NCL) is a Hyderabad-based company with business interests in cement,

particle board, ready mix concrete and hydro power.

NCL operates two cement plants, one each in Telangana and Andhra Pradesh with a combined capacity of 1.95 MT and contributes around 82% of total sales. The cement sold under the brand name ‘Nagarjuna’ established a premium brand image in the coastal districts of Andhra Pradesh. The brand ‘Nagarjuna’ enjoys brand loyalty and a premium position in the region.

E

In ASolid State

Source: Company Data, NB Research

Business Divisions

1.975 MTPA60000 TPA

NA15.75 MW

Capacity

Nalgonda and KondappalliNalgonda and Paonta SahibAutonagar and MedakSrisailam Dam and Tungabhadra Dam

Location

CementBoardsReady Mix ConcreteHydro Plant

NCL Business Divisions

The company started as a single product company with mere capacity of 2,000 MT per day, which gradually increased to 6,000 MT per day of cement. However, to diversify, NCL entered into the manufacture of high quality, affordable building materials.

With cement boards, pre-fabricated structures and ready mix concrete, the company forward integrated into value-added products. NCL has two small hydro power plants of 7.5 MW and 8.25 MW situated in Andhra Pradesh and Karnataka, respectively.

After experiencing a particularly turbulent phase of almost three years from early 2012 till mid-2015 due to a host of external issues like political headwinds in Andhra Pradesh



and pricing pressure on the south, the company started fructifying slowly. The company’s balance sheet faced huge stress during the distressed phase and had to resort to corporate debt restructuring (CDR).

INVESTMENT RATIONALE

The Southern Market Will Drive Slow And Steady Growth With Prices Holding At High Levels

Due to the cyclical nature of the cement industry, cement prices have shown large fluctuations in the last couple of years, which has given enough ache to the existing players in the southern region.

Southern markets witnessed a serious downturn in cement prices during FY12-15 due to overcapacity, weakness in demand, slow growth in economy, slowdown in construction activity, etc, impacting the demand for cement in southern markets, which resulted in reduction of prices as supply surpassed demand. However, the above trend is changing as cement prices have risen sharply in the southern region in the last 6-9 months.

The southern market, specifically Telangana and Andhra Pradesh, have seen strong pricing discipline in the last 6-9 months. Stable prices in southern markets and cost control have contributed to a better performance of NCL and helped it to turn the corner.

For, NCL Industries, Q1FY16 was the second consecutive quarter of strong cement realization resulting in improvement in profitability. We expect momentum to continue for the company on account of sustained volume growth, production discipline and strong pricing.

Better Utilization And Realization For NCL

NCL has been a unique company among smaller cement plants. Right from its inception, the company was focused on establishing a premium image for its brand ‘Nagarjuna’ cement. With an installed cement capacity of 1.95 MTPA, the company sells its cement under the brand name of ‘Nagarjuna’, which has an established presence in coastal Andhra Pradesh and Telangana.

NCL has been in the cement market for nearly three decades and has established the largest network of 1,500 dealers to penetrate the southern region under the brand name ‘Nagarjuna’. Strong focus on developing the retail market will enable NCL to sustain volume growth with better realizations as compared to other players in the southern region.

The company is one of the few cement manufacturers approved by the Indian Railways to manufacture and supply this kind of special grade cement due to its enhanced quality and performance characteristics required in the production of railway sleepers.

Since the last two years, Indian Railways had been holding back orders for new sleepers. But in the current year railways has started the process of tendering orders for new sleepers. The company is expecting good demand from this segment, which will help it to increase utilization more than its peers in the region.

The company has also forward integrated in the form of ready mix concrete and building materials such as laminated cement bonded particles, which helps NCL Industries in better capacity utilization.

The political turmoil in Andhra Pradesh has led to a sharp fall in infrastructure development in this region. However, signs of growth are slowly re-emerging following bifurcation of the state and political stability, which is expected to revive economic activity in the region with a pick-up in demand for infrastructure from both the states.NCL has the added advantage of being one of the plants close to the proposed capital of Andhra Pradesh (Amaravati). The new capital will require a lot of infrastructure development, which can create additional demand for cement.

Source: NB Research

Cement Prices In The Southern Region

Cement industry in southern India is stable, and is steadily growing due to demand, supply and price stability. Southern region, which had witnessed highest capacity addition of around 125 MT in the last five years, will see a considerable slowdown in fresh capacity addition by only 6 MTPA to 7 MTPA in the next two years.

This is expected to improve cement capacity utilization in the southern region to 61% to 63% over the next two years. Incremental demand and slowing new capacity additions have considerably reduced volatility in cement prices in the southern markets.

50

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350

400

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

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Jul-1

2

Oct-1

2

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13

Apr-1

3

Jul-1

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14

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Oct-1

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15

Apr-1

5

Jul-1

5

South

Contact: 022-39269600e-mail: [email protected]


One of NCL’s plants is located just 40 km away from the proposed capital and will act as a demand driver for the company. All in all, we feel NCL’s volume growth can be higher than the regional growth in demand from cement. This will help the company to improve utilization of plant and result in higher profitability.

FINANCIALS

Estimated To Register Strong Improvement, Going Forward

The company’s net sales have grown at a CAGR of 10.2% in the past five years. Given improvement in prospects, going forward, we estimate revenues to grow at a CAGR of 15.4% for FY15-17E and the PAT to grow at a CAGR of 171.5% in the same period.

NCL’s presence in Telangana and Andhra Pradesh region with stable cement prices, benefit of upcoming infrastructure in these regions, higher capacity utilization, forward integration, etc, will help NCL post strong financials in the coming period.

At the current market price (CMP) of `88, the stock is trading at 3.5x its FY16E EV/EBITDA. We value NCL’s business at 5x FY16E EV/EBITDA and have arrived at a price target of `138, implying an upside potential of 57% in the year. NCL looks like an attractive investment opportunity among small-cap stockS.

Source: NB Research

Profit and Loss (`Cr)

6.9%309-10

-11.70.9

-28.50.9

FY14

13.4%689.4

1.72.5

14.65.70.7

FY15

20.3%1077.2

813.526.826.7

0.5

FY16E

20.3%1115.7

9.217.930.932.5

0.4

FY17E

EBITDA Margin (%)EBITDA/Per TonnePAT Margin (%)EPS (`)ROCE (%)ROE (%)D/E (x)

Financials

Source: NB Research, Bloomberg

Companies(Crs)

1.95

2.35

3.25

Capacity(MTPA)

323.2

641.7

579.2

MarCap

125.8

315

316

NetDebt

3.5

5

7.9

EV/EBITDA

449.1

956.7

895.2

34.9

61.7

41.7

($)EV/Tonne

126.8

191

114

EBITDAEV

NCL Industries Ltd

Sagar Cement

Mangalam Cement

Peer Comparison (FY16E)

The ROE and ROCE, which was hit severely in FY13-14 due to poor margin performance, will improve in the period FY15-17E. The table delineates clearly the estimated improvement in the financial health of the cement company.

ATTRACTIVE VALUATION

NCL Industries Ltd trades at 3.5x FY16E EV/EBITDA and $34.9 in FY16E EV/tonne basis. The company’s cement volumes are expected to grow at a CAGR of 10% during FY15-17E and utilization is likely to improve from 55% in FY15 to 67% in FY17E.

Cement realizations are expected to remain strong during the same period, driven by a pick-up in demand for new capital investment. This, along with the benefit of operating leverage, would help improve margins of the company, going forward.

TTECHNICAL OUTLOOK FOR THE FORTNIGHT

echnically, the Nifty is trading below the 200-day moving average (DMA), that is, below the 8,450

level, which clearly indicates a cautious view.

An interesting observation on the daily chart is that the Nifty has touched the trend line of falling channel, that is 7,850 and even traded under the same for two trading sessions, quoted a low of 7,667 due to global selling.

The Nifty somehow managed to form support at 7,700-7,600 levels and showed some reversal but failed to exhibit a strong rally on the upside.

In the technical outlook for the previous fortnight, 8,200 target on the downside when the Nifty was trading at around 8,450 level was mentioned. However, the Nifty went far below.

In the coming month, we remain cautious. Looking at the overall momentum of stocks as well as both the indices, the Nifty and Bank Nifty, we believe that selling pressure may continue in the near term.

The downward channel indicates that if the Nifty once again breaks the 7,850-7,800 range, it may again slide towards 7,600-7,500 mark and these levels may act as good opportunities to generate a fresh long position in quality stocks.

On the flip side, 8,200 level may act as an immediate resistance level. Any move above the same, may open the door for 8,400-8,450 levels provided by 200-DMA.

The Nifty has immediate resistance at the 8,200 level and has support at the 7,800 level. The Nifty is also trading

below its long-term 100-200 DMAs, which is not a healthy sign.

Important oscillators RSI and MACD on the daily chart have turned positive, giving a sense of the occurrence of a short rally.

Immediate resistance can be seen at the 8,200 level and stability above this could extend the rally to 8,400/8,450 levels.

Overall, the mood of the markets will turn positive only if the Nifty starts trading above the 8,450 level on the closing basis. Until then, any sharp rally in the market should be used as a selling opportunity by traders and investors alike.

The Bank Nifty faces immediate resistance around the 17,800 level on upside and will continue to face selling pressure. There is an important support at the 16,500 level. Any move below 16,000-15,200 levels will drag the Bank Nifty towards 16,410.

On the Nifty Options front for the September series, the highest OI build up is witnessed near 7,800 Put strike, whereas on the Call side, it is observed at the 8,500 level.

We believe the markets will remain volatile with an increase in VIX and a host of global events lined up in the

first two weeks of expiry.

India VIX, which measures the immediate 30-day volatility in the market, has doubled from 15 to 30. It finally settled near 22-24 levels. Going forward, it is likely to move higher and stay at elevated levels for the first part of expiry.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 0.75-1.05 in the month of August, implying bearish undertones in the market. OPTIONS STRATEGYNIFTY BEAR PUT SPREAD

This strategy can be initiated by ‘buying 1 lot 8000 PE (`170) and Selling 1 lot 7800 PE (`110) of the September series’. The net combined premium outflow comes around `60, which will also be the maximum loss for the strategy. The strategy will breakeven below 7,940 level. The maximum profit for the strategy will be limited to `140 premium amount.

The Nifty is expected to gradually move downwards towards the 7,800 level, which, in turn, would benefit the strategy. If the total premium comes in the range of around `100-`140, one can book profitS.

Nifty Daily Chart


Equity products have evolved with changing times and AMCs have begun offering equity saver funds that give returns in line with debt products, but with tax efficiency



another 25% to 30% in fixed income for regular income and lower risks, and the remaining portion to be hedged in arbitrage opportunities.

Although other funds also follow the same procedure, there could be a minor difference depending upon their in-house capabilities.

Tata Regular Saving Equity Fund was structured by changing some of the fundamental attributes of Tata Monthly Income Funds. In Tata Regular Saving Equity Fund, the strategy will be 0% to 35% allocation to net long equity, managed strategically as per Tata Red Line Strategy. The fund will maintain 65% to 90% exposure to equity and equity-related instruments including derivatives. Debt and money market instruments (including margin for derivatives) will have an indicative allocation of 10% to 35% under normal circumstances.

Unlike others, Tata Regular Saving Equity Fund has introduced an exclusive feature known as Tata Red Line Strategy to strategically manage equity allocation.

It is a known fact that equities are volatile in nature. But a long holding period helps neutralize volatility in equities. However, equity investing experience can further be improved by strategic equity re-balancing.

Most investors understand the general volatile nature of equity. However, there is a need to manage allocation to equity to safeguard against major market downturns like the Tech Bubble of 2000, Global Financial Crisis of 2008 and the European Crisis of 2010.

Tata Red Line Strategy uses trailing PE of CNX Nifty to strategically manage allocation to equity by cutting equity allocation during hyped

n his first Union Budget Finance Minister Arun Jaitley in July ’14, made debt funds at par with all debt products

available in the market. The tax advantage which debt funds enjoyed over other financial products was removed by the FM, which eventually impacted inflows into debt funds. A year later, fund houses have found a unique way to give investors returns with less risk, but with tax advantage of equity funds. These are called Equity Savings Funds.

In the past few months, many fund houses like Tata Asset Management Company (AMC), Axis AMC, Reliance AMC, SBI AMC and DSP BlackRock AMC have come out with a product category known as Equity Savings Funds. Several other fund houses are also planning to launch new schemes under this category.

Debt funds, particularly Fixed Maturity Plans (FMPs) were the worst hit, after the Finance Minister announced plans to hike the tax rate of long-term capital gains from 10% to 20% on transfer of mutual fund units and increase the holding period for such funds from 12 months to 36 months for this purpose. Until then, debt funds had enjoyed tax arbitrage as investors investing in debt mutual funds had to pay capital gains tax at 10.3% (without indexation) or 20.6% (with indexation).

At that time, the net outgo was significantly reduced for investors who used indexation benefits as it allowed them to adjust their total gains for inflation.

An investor in a simple fixed deposit is typically charged tax deducted at source (TDS) based on his income tax slab. Such idea of giving tax advantage to debt funds was meant to promote retail investors’ interest in

I such schemes. But there were some loopholes and debt funds evolved as a perfect place for fund houses to sell to corporates who wanted to park their idle cash at low rates.

But everything changed post Union Budget 2014 as there was complete parity among all debt products available in the markets. However, in the last few months some equity products have evolved and investors get returns in line with debt products, but with the tax efficiency of equity-oriented funds.

What Are Equity Savings Funds

Typically, most Equity Saver Funds are open-ended equity schemes that attempt to generate capital appreciation and income distribution, by investing in multiple asset classes - equity, hedged equity (arbitrage opportunities) and debt.

In the global market, research shows that the bulk of any portfolio’s performance can be explained by its asset allocation. Though such kind of asset allocation in India is a new concept, there is no major history to prove its returns records.

Equity Savings Funds rely on asset allocation across multiple asset classes in order to seek reasonable returns while bringing down risks for investors. For example, the recently launched Axis Equity Saver Fund will invest in different investment avenues like equity, arbitrage and debt within a common fund. Such combined portfolios have lower risks compared to pure equity products. Therefore, they allow investors to plan for their long-term goals without getting affected by short-term fluctuations in the market.

Axis Equity Saver Fund seeks to invest around 25% to 40% in equity (there is no bias in stock picking),


Zero-Cost Collar (Floating-Rate Instrument)

A zero-cost collar is constructed by combining a Call option and a Put option to the effect that protection on the downside is secured at the expense of giving up any upside profit potential beyond a specific level. The Put/Floor strike and the Call/Cap strike are determined so that the premium paid for the Put/Floor exactly matches the premium received from the sale of the Call/Cap. Therefore, this structure is said to be virtually “zero cost” (virtually so due to the fact that transaction costs are not zero).

valuation periods and reinvesting at long-term average valuations or lower. The strategy is termed as the Red Line Strategy as it draws a Red Line in terms of valuations beyond which it does not pay to remain invested in the markets.

Such funds offer a superior risk-return mix for long-term investors in a tax efficient structure. To give a small example, all gains on any debt investment with period of more than one year and less than three years are taxable.

Assume that a person has invested `10 lakh at a 9% rate of return (which is `90,000). In such a scenario, the investor’s capital gain of `90,000 will be taxable. If that investor is in the highest tax bracket (over 30%), then the tax payable will be around `30,000 which will give post-tax returns of over 6%. However, if you invest in such equity-oriented funds, there will be no tax payable and the investor can earn the entire 9% returns on his investment.

In such funds it has been observed that asset allocation portfolios are able to bring down risks and generate reasonable outcomes for investors across markets and time periods. In the Indian context, where high volatility of equities deters investors, asset allocation strategies are likely to help investors experience the power of long-term investments and achieve their financial goals through the mutual funds route.

However, investors should realize that although such funds use equity, arbitrage and fixed income funds give an equity tax advantage. They are low in risk since their assets lie in arbitrage opportunities and fixed income securities.

There are some risks in both equity and in debt. Equity funds will invest across market capitalization (it can have large-cap, mid-cap and even small-cap). The stock selection strategy in many funds would be a blend of top-down and bottom-up approach without any sector or market capitalization bias.

All companies selected will be analyzed taking into account financial ratios like return on capital employed, returns on capital, price to earnings and debt equity ratios. It would also look for business fundamentals like nature and stability of business, prospects of future growth and scalability, financial discipline and returns, valuations in relation to broad market and expected growth in earnings, the company’s financial strength and track record. While in debt if fund managers go on investing in longer duration papers and taking credit call, it can have a negative impact on returns of funds.

These funds lack track record. The entire category of ‘equity saver funds’ is new in the Indian context. So, there is hardly any history of how such funds perform in bull and bear markets. Many participants believe

that at a time when there is a general consensus of recovery in the economy, a high equity exposure would give added alpha to the fund. But how the fund will perform in a downturn or in continuously falling markets remains to be seen. One is also not sure how it will fare if and when arbitrage opportunities dry up in the equity markets.

IN A NUTSHELL

As said earlier, such funds are a new concept in India and it will take some time for investors to adapt to the new changes. Though there are more advantages for such funds like low risks and tax advantages, it also has its share of disadvantages.

No one knows how they will perform in rising market conditions and what will happen if there are no arbitrage opportunities. There are also chances that the government might give such funds the status of debt funds and the complete tax advantage would be wiped off.

This category of funds is for investors who already have investments in diversified equity funds and are looking to park some short-term money to save tax.

But investors who are about to start their investment journey should look at monthly income plans (MIPs) or balanced funds which can also provide same tax efficiency with history of performance behind theM.

f someone told you “Hey, watch out!” while you were on a cricket field, you would instinctively, cover your head

or duck so as to minimize injury. You take a short cut without assessing if a ball was heading your way, the

I

HEURISTICS:A MENTAL SHORT CUTHeuristics are useful tools to simplify decision-making in a complex scenario in the markets

trajectory of the ball, the speed of wind and its direction, and above all the probability of it hitting you.

Without accumulating, assimilating, assessing and analyzing the data points to reach an optimal solution,

your brain takes a short cut by using the least amount of data to reach a satisfactory solution. This mental short cut is called heuristics.

Thumb rules, intuition, educated guesses, gut feelings, stereotyping, or



easily as opposed to those which are completely unknown to them.

Availability representative heuristics makes us careful about dangerous situations. If we are able to recall that certain situations ended badly, we can take a cautious stance when a similar situation arises or is about to occur. However, every situation is different and so are the circumstances surrounding the situations. Hence, the outcomes of those situations are also not the same as before.

R E P R E S E N T A T I V E HEURISTICS

This is a type of mental shortcut, which relies on preconceived notions or ideas about any object or event that is ingrained in our psyche. In other words, it is a prototype or a stereotype about a certain category that is formed in our mind.

If any new information comes our way, we tend to put it in a specific category or a category that closely resembles that information. For example, if someone tells you he saw a 6-foot tall, heavily-built man in a khakhi uniform, the first image that would come to our mind is probably that of a police officer, whereas that man could very well be a sports teacher (physical trainer) of a school.

But our mind has a prototype of a policeman in our mind and it becomes easy to place any new information resembling this prototype in the same category – that of a policeman.

Impact Of Representative Heuristics On Investing

Stock markets are considered to be a random market. So, if the markets have gone up in 5 trading sessions in a row, your mind automatically tells you that the markets will definitely go down in the 6th trading session. A

behavioural finance. But we will discuss a few pertinent ones.

AVAILABILITY HEURISTICS

This is a mental shortcut, which relies on how easily an example or an outcome comes to mind. The rationale behind this notion is that if an event or situation can be recalled easily, it must be important or that the likelihood of it happening again in the future is much more as opposed to events we have no recollection of.

For example, events or situations regarding a stock that has recently been in the news can be readily recalled. Additionally, if a certain event has had a deep impact on our psyche in the past, say if there was a huge crash in the stock market during the last monetary policy, then that experience takes precedence over logical reasoning and you juxtapose that situation to future monetary policies and take a cautious stance with a negative outlook. All other relevant information regarding the economy, industry, stock, fundamentals and technicals is conveniently overlooked.

Impact Of Availability Heuristics On Investing

a. People tend to invest more in stocks, which have been in the news lately either for positive or negative reasons.b. After reading articles about investors becoming millionaires by investing in penny stocks, we tend to think that all penny stocks will be multi-baggers. Alternatively if you met a few people who lost almost everything overnight in the stock markets, it may make you averse to stock market investing.c. When making a choice between two or more companies, investors give preference to those companies they have heard about or can recall

just simple common sense are all examples of heuristics. We use heuristics or mental shortcuts almost every day in all situations.

Heuristics helps ease decision process by focusing on one or just a few of the important pieces of information and ignoring all other information. This helps protect our brain from information overload to reach a satisfactory outcome to a problem, if not an optimal one.

A calculated, researched decision involves a lot of things, gathering as much information as possible, segregating important information from useless ones, calculating all possible causes and effects of that decision, selecting the best course of action with the least amount of risk and the highest possibility of a favourable outcome and then implementing the decision.

Besides, more the information and data points, the more diverse and conflicting the signals that are generated from them can be. So instead of making life simpler, it simply confuses and complicates the decision process.

To put so much time and effort behind one decision is not a luxury that one can afford, especially in a stock market, which is fast-paced and highly volatile. You need to think and act fast to the changing dynamics of every trade and this is where mental short cuts or heuristics tend to gain an upper hand.

It has been showed that when an outcome is highly unpredictable or random (as in the case of stock markets), heuristics yield almost equal or sometimes even better results as compared to a well thought-out, researched and analyzed decision.

There are many heuristics in


series such as above which has Up, Up, Up, Up, Up, does not confirm to our belief of a random series, which according to our experience should look something like Up, Up, Down, Up, Down, Down, etc. And, hence, we immediately believe that a random market cannot go up 6 days in a row and assume that the next day will definitely be a Down day. In reality, however, chances of the markets going up on the 6th day are equal.

Representative heuristics also find application in chart analysis. People try to spot chart patterns and compare its prototypes such as head and shoulder, Elliot wave, triangles, etc.

We paint every item in a category with the same brush. We may presume a stock to be good just because it is a pharmaceutical company and of late the entire pharmaceutical sector is doing extremely well. We completely overlook other information such as whether the company is profitable, it has any problem areas, its competition, its management, etc.

Although representative heuristics helps investors to avoid complex analysis and reduces effort and helps separate out data, just because an event or object is representative of a category it does not mean that it will mimic exactly all characteristics of the category or that it cannot be an exception or an aberration.

AFFECT HEURISTICS

It is a mental short cut that relies on feeling or emotions while making a decision rather than intellect. These decisions are governed by fear, pleasure, hate, etc. This is a heuristic that we all are afflicted with.

Most of the times when investing or trading in the market, we go by our gut feeling rather than a carefully-researched decision. If you are in a happy mood, you are likely to

take on more risk, whereas if you are sad, you are likely to avoid risk. If a stock gives positive vibes, ignore other information and invest with a positive bias.

Affect Heuristics And Stock Markets

Instead of considering risks and benefits independently, if someone has a negative attitude towards a certain sector, say banking, then they perceive risks of that sector to be more than the benefits. Alternatively, if they feel positive about the IT sector, then they are likely to take on more risks because they feel that the benefits outweigh risks.

If someone has had a bad experience about investing in derivatives (F&O), then he may choose to completely avoid that route of trading in fear of losing again. Alternatively, if someone has had a series of profitable trades doing Options trading, then that person is expected to take on bigger risks based on the pleasure sensation that he derived from the profits.

If you recall that the last time you made a loss, you felt miserable the whole day, you are more likely to hold on to a losing position rather than book a loss just to avoid that feeling of pain and in the hope that someday you will earn profits.

Affect heuristics relies on the premise of listening to your heart and overriding your brain. It is always said that listen to your heart, but first assess whether the success rate of listening to your heart is greater than listening to your brain and only then take a decision.

ANCHORING HEURISTICS

It is a mental short cut, which people start off with an initial value or a reference point and make decisions around that reference point. In other

words, people get anchored on a number they have either seen or have set in their minds on and all further decisions are based on where the current number is in relation to that fixed number without paying any heed to the real valuation of the particular stock. Anchoring heuristics is the most common short cut found in the stock markets.

Anchoring And Stock Markets

Suppose a stock has fallen from its recent high of `100 and is now trading at `85, an investor will feel that he is getting the stock cheap because he has set 100 as his reference point. He will go ahead and buy at 85 even if the stock is still expensive valuation-wise. Say after a week, the stock has gone up to 92, even though the investor is making a profit, he will hold on to the stock because he feels that the recent high of 100 will be seen again.

Same is the case with portfolio holders. Consider that your initial portfolio of `1 lakh has risen to `3 lakh in the past 2 years. But off late in the past 6 months, the portfolio has come down to `2 lakh. Even though you are still making a profit of `1 lakh, you would refrain from selling because you have seen a profit of `3 lakh on paper and selling your portfolio for `2 lakh would be viewed as a notional loss of `1 lakh rather than a profit of `1 lakh.

While anchors are good as reference points to understand where the stock is trading in relation to the recent highs or lows, anchors should not become your target price, because then it can obscure real valuation.

In addition to the above heuristics, there are other heuristics too which are at play in our day-to-day decision-making process.

Some of these heuristics are discussed


below in brief.

SALIENCY HEURISTICS

This is a heuristic where individuals tend to overreact to any new piece of information. For example, a good quarterly result is followed by a larger-than-appropriate increase in share price, while a bad quarterly result sees excessive stock price erosion. Over a period of time, these excessive gains or losses seem to erode and investors get trapped.

RECOGNITION HEURISTICS

It is a mental short cut where people will place a higher value or premium on something that they recognize over an alternative, which is new or less familiar. While indulging in our stock-picking exercise, we prefer companies with the greatest name recognition and are even ready to pay a premium to own those shares over other lesser-known companies. It is not surprising to see that these are usually companies that are outperforming the markets.

CONSISTENCY HEURISTICS

A type of heuristics where a person responds to any situation in a way that allows them to remain consistent. This type of investor has a definite investing or trading plan and they stick to it no matter what market conditions are like.

For example, if he is an investor who has decided to invest `5,000 per month in a stock on the 1st of every month, no matter whether the stock is up or down, he will invest that `5,000 without paying attention to any other detail. Like if the investor has decided that he will book profits if the stock goes up 20% or book losses if the stock falls 20%, he will do so regardless of the future outlook of the said stock.

O V E R C O N F I D E N C E HEURISTICS

If an investor has a streak of successful trades, he starts to believe that he has learned the knack of making consistent profits in the markets. While this success may be attributed to his/her skill to some extent, there is also a very large component of luck in his success.

But the successful run makes the investor overconfident and he starts taking more risks and trades more often. Any new information or news in line with the investors’ view will increase his confidence and any negative news flow will be overlooked. While confidence is essential in the stock markets, overconfidence can be bad. One way to avoid being overconfident is by considering the consequences of being wrong.

SOCIAL PROOF

It is a mental short cut where if you are not sure about something, you assume that you should be guided by what other people are doing. In stock markets this is also known as herd mentality. Instead of doing your own research and finding an optimal solution, investors find it easier to stay with the crowd. Usually, this yields positive results because you are trading with the trend.

TRIAL AND ERROR HEURISTIC

This is the crudest form of heuristics. Investors try a strategy and see if it is successful. If yes, they continue using that strategy. But if it fails, they try a different strategy, until they find a strategy that yields steady profits.

PROS OF HEURISTICS

1. It saves time and effort in doing extensive research and gathering

information.2. It reduces information overload.3. It rids you of confusion and doubt by eliminating conflicting signals generated by different information.4. Markets are changing every second, and every second missed is an opportunity missed. Hence, heuristics helps investors to capitalize on these opportunities by saving valuable time spent on weighing all options.

CONS OF HEURISTICS

1. There are no short cuts to success and that is true for stock markets too. Heuristics are based on one or just a few inputs or pieces of information. All possible scenarios and angles are not considered in detail and, hence, there is always a chance of missing out on a crucial piece of information and being wrong.2. News or media or for that matter even our brain usually focuses only on the most relevant or recent event at a time. Investing purely on the basis of that one piece of information means completely ignoring the bigger picture. This can prove quite harmful.3. The current circumstances or conditions or chronology of events may not be same as the past event that you recall and, hence, forecasting results on the basis of the past may not turn out to be right.4. Heuristics relies on emotions rather than intellect and while the former may work in the field of love, in finance, the latter is usually right.

Heuristics can be used for quick decision-making with limited resources, unknown variables, uncertain outcomes, and too much or too little information.

A word of caution: Even if you are using heuristics, always be mindful of surroundings such as fundamentals, important news and events, significant levels, etc, so as to not be caught completely off guarD.

The Reserve Bank of India (RBI) released its annual report for the period 1st Jul ’14 to 30th Jun ’15. It laid out proposals for the coming year. The report shared its medium- and short-term outlook and key areas of concerns for the economy.

What Are The Challenges In The Current Macroeconomic Environment?

Despite efforts in recent years by the government and the RBI to restore macroeconomic stability to the economy, the RBI’s annual report said that there are three areas that are still “work in progress”.

First, economic growth is still below levels that the country is capable of. Second, inflation is still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates is muted even as the RBI cut rates from their side.

What Are The Short-Term Priorities For The RBI?

Given the area of concerns, the short-term macroeconomic priorities of the RBI are, therefore, clear: focus on bringing down inflation in line with the proposed glide path of 4% in the long term. The second priority is to work with the government and banks on speeding up the resolution of distressed projects and cleaning up bank balance sheets. The third priority is to ensure banks have the capital to make provisions, support new lending, and thus pass on future possible rate cuts.

What RBI Has To Say On Inflation?

The RBI said that low progress of monsoon is still a challenge for growth and inflation. The RBI reiterated its

IMPORTANT JARGONFOR THE FORTNIGHT

commitment to achieve projected consumer price index (CPI) measured inflation rate of 4% by March ’18. For the short term, the focus will be on fostering a gradual and durable disinflationary process towards the target of below 6% by January ’16. The retail inflation as measured by the consumer price index rose to 3.78% in July versus 5.01% in May.

What Does The RBI Have To Say On Reforms?

The RBI warned that the slow pace of reforms in the banking sector could lead to greater risk and to put banking reforms on the fast track is an urgent need. The report said that wherever possible, India has to move steadily but firmly. This hints at the inability of the government to push reforms due to low productivity in the recent parliamentary session.

What The RBI Has To Say On Banks?

The Reserve Bank said that bad debts in the banking system may prevent banks from lending freely. The report said that the financial sector needs to increase efficiency through competition.

The RBI warned that the banking sector will experience competition after two new universal banks and a number of payments and small finance banks start operations. It has also said that more participation in financial markets is needed to increase their size, depth, and liquidity.

What RBI Has To Say To Public Sector Banks?

Since PSBs undertake public interest activities like the rollout of accounts under the ‘Pradhan Mantri Jan Dhan Yojana’ or direct benefit transfers (DBT), the RBI hinted that the government should compensate PSBs for such activities since they have higher overall costs than private sector banks performing similar activities.

RBI’S ANNUAL REPORT FY15



not required to pay MAT. Foreign investors were of the view that MAT is applicable only to Indian companies and not on foreign companies or investors.

How Is It Calculated?

In order to make companies pay taxes, MAT was introduced from assessment year 1997-98. If a company’s tax liability after tax planning is less than the threshold 18.5%, then the company needs to pay MAT at the rate of 20%. MAT is applicable on profits as shown in the financial statements.

Payers of MAT are eligible for tax credit, which can be carried forward for 10 years and set off against tax payable under normal provisions.

Post The Committee Report, What The Government Has To Say?

The report has yet not been made public. The government has said that they will ‘favourably’ consider the recommendations of the committee, hinting that MAT will not be applicable retrospective. Further, the Union Budget has clearly said that MAT will not be applicable prospectively from 2015 onwards.

Why The Report Is Yet Not Made Public?

This is because on 29th September, the Supreme Court is due to hear a legal challenge filed by Mauritius-based Castleton Investment Ltd against the government over a number of tax-related issues, including one on whether MAT can be imposed on foreign investors.

Releasing the report would mean increased chances that the Supreme Court will side with Castleton and rule that the tax cannot be imposed on foreign investors. The government tends to lose tax revenue if the case goes against them.

What Is The Confusion?

Media has reported that the AP Shah Committee report is silent on whether foreign companies are liable to pay MAT. A majority of MAT dispute cases are related to foreign companies, not Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs).

The tax department contests that many FPIs are structured in India as companies. Thus, the confusion prevails. The confusion will be cleared only after the Supreme Court case on 29th SeptembeR.

AP SHAH COMMITTEE REPORT: MINI-MUM ALTERNATE TAX (MAT) NOT TO BE APPLIED RETROSPECTIVELY

What RBI Has To Say On Transfers To The Government? And What Does It Hint?

The RBI is a banker to the government. Any surplus is transferred to the government. This year the RBI transferred a record surplus of `659 billion to the government. This transfer will help in supporting recapitalization needs of public sector banks without any adverse effect on fiscal deficit.

Recently, the AP Shah-led three-member committee, looking into the applicability of minimum alternate tax (MAT) on foreign portfolio investors, submitted its report to the government. It might be recalled that the levy of MAT on FIIs had threatened India’s image as an attractive investment destination since May when the issue erupted, forcing the government to appoint the Shah panel.

What Does The Committee Report Say?

On 8th May, the government forwarded the MAT dispute with FPIs to a committee headed by Law Commission Chairman AP Shah and sought an early recommendation. The 64-page report said that foreign investors are not liable to pay MAT prior to 1st Apr ’15.

Retrospective levy was the core of the MAT issue. The panel sought views of various industry bodies, consulting firms and the Central Board of Direct Taxes before coming out with its recommendations.

What Is MAT?

A company can lower its tax liability using various exemptions. Besides exemptions, there are several deductions permitted. Companies in the past used to show profits, pay dividends to investors, but due to tax planning paid little or no tax to the government. This was hurting the government’s revenue. MAT is a way of making companies pay at least a minimum amount as tax.

What Is The Current Issue All About?

It all started with the income-tax department sending tax notices amounting to `602 crore to 68 FPIs seeking MAT on gains made in stocks. Media estimated MAT demand by tax officials from FPIs ranging between `7,000 crore and `40,000 crore. While the government thought the tax demand was legitimate, FPIs have contested that they are

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