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For Pr ivate Circulation
Volume 1 Issue 81
02nd M ay ’13
While the purpose behind the setting up of the FSLRC
was to rewrite and streamline the financial sector laws,
its recommendations seem a little too ambitious, and
only time will tell if they will bear fruits
Contact At: 022 3926 9140,
e-mail: [email protected]
DB Corner – Page 5
Volume 1
Issue: 81, 02nd May ’13
Editor-in-Chief & Publisher: Rakesh Bhandari
Editor: Tushita Nigam
Senior Sub-Editor: Kiran V Uchil
Art Director: Sachin Kamble
Junior Designer: Sagar Padwal
Marketing & Operations:
Divya Bhurat, Shreelatha Gollavathini
Research Team:
Sunil Jain, Kavita Vempalli,
Dipesh Mehta, Anand Shendge,
Manav Chopra, Vikas Salunkhe
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Beyond Market 02nd May ’13
Food Security Or Electoral Gimmick
While the government is confident that the National Food Security Bill will
sail through in the Parliament, critics dismiss it as a stunt and are seeking
reforms in PDS before the implementation of this Bill– Page 6
Fine-tuning The Law
While the purpose behind the setting up of the FSLRC was to rewrite and
streamline the financial sector laws, its recommendations seem a little too
ambitious, and only time will tell if they will bear fruits – Page 10
A Short-term Hiccup
Despite the recent carnage, mid-cap stocks still look good from a long-term
perspective – Page 14
BRICS: Banking On Development
BRICS countries are mulling the formation of a new development bank, which
aims to fund infrastructure and allied projects throughout developing
nations – Page 17
A Growing Evil
Non-repayment of subsidized loans given to farmers through Kisan Credit
Cards by state-owned banks could result in rising number of NPAs – Page 20
Sweeter Than Before
After much deliberation, the government has finally announced a partial
decontrol of the sugar sector, which is hoped to make the business more
viable and attract large scale investments too – Page 22
Going Places, Literally
At a time when the hotel industry is witnessing a slowdown, the vacation
ownership sector is growing steadily against odds – Page 25
Face Off
The exposé by online magazine cobrapost.com only highlights the rampant
corruption in the banking industry, with no one showing the courage to fix
the problem - Page 28
Aegis Logistics Ltd: Going The Extra Mile
A leader in oil, gas and chemical logistics, Aegis Logistics Ltd is expanding its
liquid and auto gas business, which augurs well for the company, going
forward – Page 31
A Smart Gain
By making right investment decisions, home owners can avail tax exemption
on capital gains incurred by them – Page 36
Back In The Game
Despite having fallen out of favour with investors, close-ended funds are back
and can be considered by investors – Page 39
Important Statistics For The Fortnight Gone By – Page 42
Past Lessons To Chart A Better Future
Market participants can learn from their past mistakes and take right investment decisions – Page 43
Animal Kingdom Of A Different Kind
A different species of investors, much similar to animals found in the wild,
participate in the markets – Page 46
Important Jargon For The Fortnight – Page 49
It’s simplified...
3
DEFINING ROLES
A
well-framed law for the financial sector is of utmost importance to the economic growth of a country. Realizing the need
to simplify and update the existing financial laws in the country, the government of India had appointment a panel headed by
Justice BN Srikrishna. To that effect, the Financial Sector Legislative Reforms Commission (FSLRC) was set up to frame
regulations for the financial sector. The main aim of the Commission was to bring about efficiency and to put in place a
structured regulatory framework.
In March this year, the Commission submitted its recommendations to the Finance Ministry. Since then the recommendations
have been a topic of debate among financial regulators and experts. In our cover story we have discussed the recommendations of the FSLRC in detail and have tried to explain whether or not it will prove beneficial to market participants, the
markets and the country on the whole.
The other topics that have been covered in this issue include the National Food Security Bill and critics’ views on the same,
the recent carnage seen in mid-cap stocks and what an investor should do in such a scenario, the recently held BRICS summit
and its key takeaways as well as the issue of growing debt burden on state-owned banks due to Kisan Credit Cards, among
other topics.
We have also covered the recent announcement by the government regarding the partial decontrol of the sugar sector, the
vacation ownership industry in India and the need to enforce a regulatory framework to prevent
money laundering in the banking sector.
The Beyond Basics section features two very interesting articles. While one is on the different
ways individuals can avail tax exemptions on capital gains, the other article is on re-introduction
of close-ended mutual fund schemes by fund houses that are seeing the current market situation
as an opportunity to bring back such funds to the market.
Do not miss the Beyond Learning section as it features an article on how market participants
should analyze their past trades to make better and rewarding investment decision.
As you skim through the issue, you will come across a new series in the magazine, aptly named
‘Beyond Words’ where we have explained frequently occurring yet, not-so-commonly used terms
from the financial world. Learning is a never-ending process and, hence, it is our constant endeavour to simplify the financial world for our readers and make reading a pleasurable experiencE.
4
Beyond Market 02nd May ’13
Tushita Nigam
Editor
It’s simplified...
Market participants
are advised to buy on declines.
T
he German manufacturing
data contracted for the first
time in five months,
raising fears that the
European Central Bank (ECB) may
reduce interest rates at its meeting
next month.
In India too, the Reserve Bank of
India may reduce interest rates in its
monetary policy review on the back
of better-than-expected Wholesale
Price Index (WPI)-based inflation,
which hit a 40-month low of 5.96% in
the month of March.
Inflation is expected to decline further
due to the recent correction witnessed
in the prices of crude oil as well as
other commodities.
The fourth quarter earnings results of
Nifty: 5,871.45
Sensex: 19,286.72
(As on 26th Apr ’13)
Beyond Market 02nd May ’13
India Inc have been in line with
expectations or above it, the results
for IT sector have been mixed.
Market participants are advised to
buy on declines and they can look at
buying around the 5,860 level on the
Nifty, with support at the 5,820 level.
and investment perspectives.
The Reserve Bank of India monetary
policy meet and remaining earnings
results for Q4FY12-13 are likely to
give direction to the markets in the
coming fortnighT.
On the upper side, the Nifty is likely
to touch the 6,120 level if it crosses
the 5,940 level.
Aurobindo Pharma Ltd (LTP:
`190.20), Lupin Ltd (LTP: `684.70),
United Phosphorus Ltd (LTP:
`138.60), Mahindra & Mahindra
Financial Services Ltd (LTP:
`228.80),
MRF
Ltd
(LTP:
`13,588.60) and United Spirits Ltd
(LTP: `2,045.95) are some of the
stocks that look good from trading
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.
It’s simplified...
5
6
Beyond Market 02nd May ’13
It’s simplified...
While the government is confident that the
of $1.25/day.
National Food Security Bill will sail through in
The above figures are paradoxical.
India currently has an all time high
food production which co-exists with
mass hunger. India in 2011-12, hit
record high food grain production of
over 252 million tonnes, with record
production of wheat, rice and cotton.
the Parliament, critics dismiss it as a stunt and
are seeking reforms in PDS before the
implementation of this Bill
T
he Union Government has
cleared the National Food
Security Bill (NFSB) and
it is ready to be introduced
in the Parliament, which reopened for
work on 22nd Apr ’13.
was cleared by the cabinet last month.
The NFSB, which is touted as the big
mummy of all welfare schemes of the
UPA government, entitles 67% of
India’s population - 75% rural and
50% urban, to low cost food grains.
CONTEXT
Finance Minister P Chidambaram in
this year’s budget has set aside
`10,000 crore for incremental cost for
NFSB over and above the food
subsidy
to
emphasize
the
government’s
commitment
to
implementing the food security
scheme in the country.
The NFSB is an outcome of a promise
made to the people of India by the
UPA government for winning the
general elections of 2009. Just like
right to education (RTE) or right to
work (NREGA), the Bill seeks to
make food security a legal
entitlement to the people of India.
Given its importance, the NFSB has
created much interest, debate and
media attention in the national as well
as international arena.
Despite high economic growth in the
past one decade, India is not well
placed on few of the social
development parameters.
India has not done enough to reduce
hunger among children. Take for
instance the global hunger index
released by the International Food
Policy Research Institute for the year
2012. It places India in the 65th
position among 79 countries.
All other BRICS (Brazil, Russia,
India, China and South Africa)
countries have performed better than
India in dealing with hunger. In fact,
India ranks below neighbours Sri
Lanka, Pakistan and Nepal.
The Bill further hopes to reform the
existing Public Distribution System
(PDS) and explore innovative
mechanisms such as cash transfer and
food coupons for efficient delivery of
food grains.
Figures from the United Nation (UN)
are even more startling. According to
the UN, India has 29% of the 872.9
million
undernourished
people
globally, as measured in 2004-05.
India has 49% of the world’s
underweight children and 34% of the
world’s stunted children.
The standing committee gave its
recommendations on the Bill in
January this year and subsequently
the modified version of the initial Bill
Around
one-third
of
India’s
population, that is 400 million people,
still lives below the poverty line as on
2010 as per World Bank’s definition
Beyond Market 02nd May ’13
Even production of sugarcane, fruits,
vegetables and milk increased
appreciably in the past few decades.
In fact, since the green revolution of
the late 1960’s India has become self
sufficient in food grain production at
the national level. Though India faces
deficit in production of pulses and oil
seeds, she is more or less self
sufficient in cereals.
Then what has gone wrong and what
explains the paradoxical situation that
India is in currently! Clearly the
problem lies in distribution and not
production. India produces enough
but cannot make it available to the
needy. Food security at the micro
level remains a challenge for India,
both in terms of quantity and
nutritional value.
PDS AND ITS PROBLEMS
The government ensures food
security through various schemes and
thus provides food or food grains to
the needy.
The Public Distribution System is a
means of distributing food grain and
other basic commodities at subsidized
prices through ‘fair price shops’ or
ration shops.
The scheme has been in existence for
a long time now and has gone through
many changes. It is the heart of the
food security system in India. If India
has avoided a famine-like situation
post independence, the credit goes to
the PDS network. There are over 5
It’s simplified...
7
lakh fair price shops across India.
While the reach of PDS is
commendable, it is fraught with
controversies. A lot of families below
the poverty line have not been
enrolled. They don’t have ration cards
and, hence, suffer exclusion.
Further, cases of bogus ration cards
and illegal hoarding of food grains
which are later sold in the black
market are plenty. Quality of grains,
leakage,
corruption,
lack
of
transparency, accountability and a
proper
grievance
redressal
mechanism are the many problems
facing the existing distribution system
in the country.
PDS is jointly operated by the Centre
and state governments. The Centre
takes care of procurement of food
grains, storage and transportation.
State governments do the last mile
connectivity by identifying priority
households and distributing food and
food grains through the network of
ration shops.
In order to correct the shortcomings
of PDS, the government has been
undertaking reforms, both in
recognizing target beneficiaies and
distribution. Use of technology has
been encouraged. In 1997, the
existing PDS system was streamlined
to be called as targeted PDS (TPDS).
TPDS divides the population into
three heads - BPL (below poverty
line) above poverty line (APL) and
AAY (Antyodaya Anna Yojana or
poorest of poor).
Around 180 million households - 65
million below poverty line (BPL) and
115 million above poverty line (APL)
category families - get subsidized
rations under the public distribution
system through fair price shops.
Under the current public distribution
8
Beyond Market 02nd May ’13
system, BPL and AAY families get 35
kg of food grains per month, while
allocations for APL families range
between 15 kg and 35 kg. Currently,
rice is supplied to AAY families at
`3/kg, BPL families at `5.65/kg and
APL families at `8.30/kg. Wheat is
sold at `2/kg to AAY families, while
BPL gets wheat at `4.15/kg and APL
at `6.10/kg. NFSB hopes to distribute
at lower costs than TPDS.
NATIONAL FOOD SECURITY
BILL
The Bill proposes to provide 5 kg of
food grains to an individual every
month – rice at `3/kg, wheat at `2/kg
and cereals at `1/kg. Further for AAY
households, the bill entitles 35 kg of
food grains per month. There will be
revision in the rates after three years.
Further, under the Bill, pregnant
women (during pregnancy and six
months after child birth) and kids
between six months to six years will
be eligible for free meals. Women
would be paid `6,000 in installments
as maternity benefits.
Target beneficiaries would be decided
by state governments, while the
criteria to exclude 33% of the
population would be provided by the
Planning Commission. The state
government will have to pay
allowances if it fails to provide these
grains to the intended beneficiaries.
About 62 million tonnes of food
grains would be required to
implement the Bill, while food
subsidy is around at `1,24,747 crore
at 2013-14 costs, which is `23,800
crore higher than the existing level.
that with the roll out of the Food
Security Bill, food subsidy will swell
to 50%. Rising food subsidy could
worsen the government’s finances,
especially at a time when the
economy is growing at its slowest
pace in a decade.
The Centre’s food subsidy has more
than tripled in the past six years, from
about `24,000 crore in 2006-07 to an
estimated `88,977 crore in 2012-13.
The plan may further increase the
government’s Food Subsidy Bill.
In addition to the risk of higher fiscal
bill for the government, the need for
godowns to stock food grains is dire
as it is well known that food grains rot
in the open due to lack of proper
storage facilities.
Even as fiscal deficit will increase for
the government, some economists
have a different view on the Food
Security Bill. They feel that the
increase in subsidy may not be as
huge as it is made out to be.
Incremental food grains procurement
under NFSB would be 4-5 million
tonnes. Since around 10% to 15% of
food grains are siphoned off through
loop holes in PDS at the state
government level, experts think that
with the modernization of PDS and
inclusion of steps like Aadhaar,
National Population Register (NPR),
leakages will be corrected. This will
in fact help rein in food subsidy and
help better targeting.
OTHER CONCERNS
GOVERNMENT
Since the existing public distribution
system has failed in its mandate of
efficient food security, reliance on the
same for NFS is a concern.
Currently, food subsidy contributes to
40% of the overall subsidy outgo of
the government and experts believe
This raises doubt that the scheme
could be more of an electoral
gimmick
and
economically
misguided. Questions are also raised
IMPACT ON
FINANCES
It’s simplified...
whether such food security schemes
are a sensible use of public money
given high fiscal deficit that the
government is desperately trying to
tame at the moment.
Further, the Bill entitles food grains
like wheat, rice and millets and
ignores benefits of high nutritional
grains like cereals and pulses, which
would actually help eradicate
malnourishment in children.
It is well known that rural tastes have
been moving towards healthy food in
the recent past. In fact savings on
food in rural India may stoke demand
across other categories and create
sustained inflationary pressures.
The other concern that is equally
shared by every one is the impact the
Bill will have on price distortion in
the market, leaving little for private
traders. Farmers fear nationalization
of agriculture as well as loss of
bargaining power.
They dread that they will have to rely
more on government for selling their
produce. Further, in case of a
drought-like
situation,
the
government will have to import food
grains, which will take away the title
of India being self sufficient in food
grain production.
Internationally the move has been
condemned as they fear over usage of
agri-land, which would be bad in the
longer run.
While the Bill in its current form
throws a lot of financial and
operational challenges, a higher
malnutrition level amid high overall
national prosperity has made such a
scheme imperative.
If implemented, the scheme, that is,
the National Food Security Bill would
be one of its kind in the world
catering to such a huge population. It
will also set a precedence for various
other developing nationS.
The most intelligent strategy in Chess is to be ready
with the next move. Similarly, currency trading
involves moves that are a combination of knowledge
and skill, backed by years of experience.
Currency Derivatives Trading with us keeps you a few
steps ahead, always.
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Beyond Market 02nd May ’13
It’s simplified...
9
A
t present India’s financial
law is fairly complex and
dated. The Reserve Bank
of India (RBI) Act and
the Insurance Act date back to 1934
and 1938, respectively. The Securities
Contract Regulation Act was enacted
in 1956. The world of finance has
changed radically since then.
Although these laws have been
amended in a piecemeal fashion from
time to time, the underlying
foundation remains unchanged. This
has led to unintentional regulatory
gaps, overlaps, inconsistencies and
regulatory arbitrage. A revamp in the
overall law was long overdue.
10
Beyond Market 02nd May ’13
While the purpose behind the setting up
of the FSLRC was to rewrite and
streamline the financial sector laws, its
recommendations seem a little too
ambitious, and only time will tell if they
will bear fruits
Keeping in mind the importance of
the financial sector in India’s growth
and the systemic risk involved in
financial
management,
the
government had appointed a panel
headed by Justice BN Srikrishna to
frame regulations for the financial
sector. And to that effect the Financial
Sector
Legislative
Reforms
Commission (FSLRC) was set up in
the year 2011. After two years, the
commission
submitted
its
recommendations to the Finance
Ministry in March ’13. The
recommendations have become a
subject of debate among finance
professionals, regulators, experts and
the media.
THE RECOMMENDATIONS
The panel has recommended an
‘Indian Financial Code’ containing
450 clauses and six schedules, which
replaces the bulk of the existing
financial laws. In all, the commission
has suggested seven agencies and
each of them will have distinct
functions as mentioned in this article.
It’s simplified...
Agency
Functions
A Unified Financial Authority (UFA) which will
The UFA will make regulations and issue
merge Securities & Exchange Board of India
guidelines for equities, commodities and
(SEBI), Forward Markets Commission (FMC),
insurance and pension products. It will provide a
Insurance Regulatory Development Authority
common platform for financial trading in
(IRDA) and Pension Fund Regulatory and
equities,
Development Authority (PFRDA).
commodity futures and corporate bonds.
Reserve Bank of India (RBI)
The RBI will be a monetary authority and a
government
bonds,
currencies,
banking regulator. It will no longer do debt
management for the government and it will no
longer regulate NBFCs.
Financial Sector Appellate Tribunal (FSAT)
Existing Securities & Appellate Tribunal (SAT)
will be subsumed in FSAT. FSAT will hear
appeals against other agencies.
Resolution Corporation (RC)
The existing Deposit Insurance & Credit
Guarantee Corporation (DICGC) will be
subsumed in RC. It will address the failure of
financial firms and protect consumers.
Financial Redressal Agency (FRA)
The FRA would address consumer complaints
across the entire financial system.
Public Debt Management Agency (PDMA)
The PDMA will raise resources for the
government by selling bonds.
Financial Stability And Development Council
It will collect data and identify potential
systemic risks.
Being a complex subject and a
collective work of many people, the
FSLRC was subject to debate and
disagreements within the panel.
Four members of the ten-member
panel have submitted their dissents on
a few proposals. The dissents range
from authorization requirements for
financial service providers to subdued
role of the RBI and increasingly
active role of the finance ministry in
the area.
In the following paragraphs we will
discuss the various agencies as
envisaged by Financial Sector
Legislative Reforms Commission in
more detail.
Beyond Market 02nd May ’13
UNIFIED
FINANCIAL
AUTHORITY (UFA)
The FSLRC proposes a single agency
called the Unified Financial Authority
(UFA),
which
will
subsume
regulators of capital markets,
commodities markets, insurance and
pension sector.
The need for a unified agency was felt
in the context of the jurisdictional
tussle witnessed between SEBI and
IRDA over ULIP a few years back.
The regulatory overlap led to
confusion at the cost of market
development and consumer interest.
Merging the different regulators will
lead to an exchange of information,
which will further lead to greater
transparency. The general functions
of UFA will include making
regulations, issuing guidance to
financial service providers and
supervising their conduct and taking
appropriate enforcement actions to
deal with violations.
All financial firms except banking
will come under the UFA’s domain. It
will also take over the work of
organized financial trading from the
RBI in areas connected to the bond
and currency derivatives and from the
Forward
Markets
Commission
(FMC) for commodity futures. Thus,
the UFA will provide a common
It’s simplified...
11
platform for financial trading in
equities,
government
bonds,
currencies, commodity futures and
corporate bonds.
The argument against the UFA is that
it covers a wide spectrum, each
requiring a different set of domain
expertise. A ‘one size fits all’
approach may not suit different
markets. Securities, commodities,
currencies, insurance as well as
pension funds have different
economic functions.
The UFA takes inspiration from UK’s
Financial Services Authority (FSA).
The FSA is seen as a failure in the UK
and is on its way out and being split
into the Prudential Regulation
Authority and the Financial Conduct
Authority. While the intention of the
UFA is noble, it could lead to
regulatory ineffectiveness.
RESERVE BANK OF INDIA (RBI)
Perhaps the most debated part of the
draft regulation is the provision for
the Reserve Bank of India (RBI).
Critics of FSLRC have gone to the
extent of saying that the FSLRC will
clip the wings of the RBI.
The RBI will be the monetary
authority and banking regulator. The
FSLRC says that NBFC and housing
finance companies should be taken
out of the purview of the RBI.
Further, rules for all inward-flowing
money will be made by the
government while, all outward
flowing rules will be made by the
RBI. This will essentially mean that
the RBI will have no role in foreign
exchange management and thereby in
exchange rates and foreign reserves.
Further, the debt management office
will be separated from the RBI.
The FSLRC recommends that the
Monetary Policy Committee (MPC)
12
Beyond Market 02nd May ’13
have eight members. In addition to
the Governor of the RBI and an
executive member of the board of the
RBI, there will be five external
members, two to be appointed by the
Union government in consultation
with the RBI governor and three by
the Union government.
In
addition,
a
representative
expressing the views of the ministry
of finance will participate but not
have voting rights.
It is feared that a lot of regulatory
power will move from the RBI to the
Finance Ministry. The monetary
policy will be decided by the
Committee (including five members
nominated by the government) and
not by a single individual (Governor)
as done today.
The FSLRC is of the opinion that the
central bank must be given a
quantitative monitorable objective
(price stability or growth) by the
government. Experts believe this will
increase transparency and enhance
accountability for the RBI but at the
same time give the government more
say in the monetary policy.
FINANCIAL
SECTOR
APPELLATE TRIBUNAL (FSAT)
The new finance code has drawn up a
single judicial tribunal for the
financial sector called the Financial
Sector Appellate Tribunal (FSAT).
The present Securities & Appellate
Tribunal (SAT) will be subsumed in
FSAT. The FSAT will hear appeals
against the RBI (for its regulatory
functions), the unified financial
authority, decisions of the FRA,
against the central government in its
capital control functions and some
elements of the work of the FSDC and
the Resolution Corporation.
In a great leap towards bringing
transparency in judicial functioning in
India, the proceedings will be
recorded and published.
RESOLUTION CORPORATION
(RC)
The resolution framework under the
FSLRC will be provided by a
Resolution Corporation. It will deal
with an array of financial firms such
as banks and insurance companies.
The existing Deposit Insurance &
Credit
Guarantee
Corporation
(DICGC), which insures customers if
a bank fails, will be subsumed in RC.
The objective of RC would be to
address the failure of the financial
firms and to protect consumers. A key
feature of the Resolution Corporation
will be speed of action.
The Corporation will concern itself
with all financial firms that make
highly
intense
promises
to
consumers, such as banks, insurance
companies and pension funds.
FINANCIAL REDRESS AGENCY
(FRA)
All consumer complaints about any
financial product from bank deposits
to exotic derivative products will be
handled by a common Financial
Redress Agency.
Consumers will be able to approach
the Financial Redress Agency (FRA),
which will be a single unified agency
spread across all sectors to look into
complaints of aggrieved consumers.
This would feature a low-cost process
through which the complaint of a
consumer against a financial firm
would be heard and remedies
awarded to the complainant. It will set
up a nationwide machinery to become
a one-stop shop where consumers can
carry their complaints against all
financial firms.
It’s simplified...
PUBLIC DEBT MANAGEMENT
AGENCY (PDMA)
Currently, the role of debt
management is split between the RBI
and the central government, with the
former managing market borrowings
for the government and the latter
managing external debt.
The FSLRC proposes a Public Debt
Management Agency
(PDMA),
which will do both tasks for the
government. The PDMA should
minimize the cost of borrowing of the
government in the long run.
The PDMA should co-ordinate the
Central
government
borrowing
calendar with the borrowings of State
governments to ensure that the
auctions of new issues are
appropriately spaced.
The government would be the key
decision-making body for PDMA.
Fostering a liquid as well as efficient
market for government securities
should be an integral function of the
Public Debt Management Agency.
FINANCIAL STABILITY AND
DEVELOPMENT
COUNCIL
(FSDC)
The FSLRC panel has suggested that
the FSDC be made a statutory body
with more powers. It will be headed
by the finance ministry.
The FSDC will set up a financial data
management centre that will collect
information from all regulators and
keep a watch on how each financial
conglomerate is doing. It will not be a
regulator but work as a monitoring
and supervisory agency.
The FSDC will assimilate and
transmit a system-wide financial data.
This database will serve to assist the
FSDC in conducting research on
systemic risk as well as study
system-wide trends.
OTHER RECOMMENDATIONS
Consumer Protection
The existing doctrine of ‘caveat
emptor’, meaning ‘buyers beware’ of
consumer protection will see it
change to ‘sellers beware’ if the
FSLRC goes through.
The ‘buyers beware’ doctrine holds
that since the buyer has been given all
information relating to a product, the
buyer is to be made responsible for all
risks associated with the product after
its purchase.
After FSLRC, a significant burden of
consumer protection will be placed
upon financial firms.
Few rights for customers as drafted in
the financial code are financial
service providers must act with
professional diligence; protection
against unfair contract terms;
protection against unfair conduct and
protection of personal information.
These rights essentially mean that
every citizen has a right to be
provided
suitable
advice
or
recommended suitable products from
financial service providers.
The financial firms will be ‘legally’
required to act in the best interest of
consumers and that consumers will
have legal recourse in case they have
been sold unsuitable products or
given unsuitable advice.
By incorporating these rights, the
consumers would be empowered to
move a court of law in case this right
is denied to them. While the penalties
for wrongdoers are not clear yet, the
Bill if passed and becomes a law,
could tilt the field in favour of the
financial consumers .
At present many public sector
financial firms [for example the Life
Insurance Corporation of India (LIC)
and the State Bank of India (SBI)] are
rooted in a specific law.
The Commission recommends that
they be converted into companies
under the Companies Act, 1956. This
would
help
enable
ownership-neutrality in regulation
and supervision.
The Financial Sector Legislative
Reforms Commission has proposed
that financial sector laws be reviewed
every three years.
The review will consist of an analysis
of costs and benefits of regulations. It
remains to seen whether the
recommendations would be taken in
toto given the dissenting voices
within the panel and among experts
and institutions involved.
But, if the draft becomes a law, some
provisions have the potential to do
exceptional justice to customer
protection and systemic risk: the main
reasons why financial laws are being
drafteD.
COCKROACH THEORY
It is a market theory that suggests that when a company reveals bad news to the public, there may be many more related
negative events that are yet to be revealed. The term comes from the common belief that seeing one cockroach is usually
evidence that there are many more than those that remain hidden.
Beyond Market 02nd May ’13
It’s simplified...
13
A
Short-Term
Hiccup
Despite the recent carnage,
mid-cap stocks still look good from a long-term perspective
14
Beyond Market 02nd May ’13
It’s simplified...
T
he sudden fall in share
prices
of
mid-cap
companies over the past
few months has become a
cause of worry for most investors,
including retail as well as high-net
worth individuals (HNIs).
Share prices of mid-cap companies
have crashed over 30% to 70% over
the last three months and many of
them have completely eroded both the
market capitalization and the faith of
the investors.
More importantly the carnage in
mid-caps took many by surprise as no
one was able to explain the sudden
correction in share prices. The gravity
of the event in fact led to a probe by
market regulator Securities and
Exchange Board of India (SEBI) to
check if correction in prices is due to
some irregularity or involvement of
operators in manipulating the prices.
LESS
TO
DO
FUNDAMENTALS
WITH
Most market participants believe that
the carnage in the mid-cap space has
less to do with the fundamentals of
the companies.
Apart from this, there is certainly a
growing worry that lower economic
growth is likely to dent the financial
performance of mid-cap companies.
That is because large corporates
across different sectors are facing
growth issues which will also cast its
shadow on the growth of mid-cap
companies, especially ancillary
companies, which cater to various
larger players.
Both investment and consumption
has come down and there is less hope
of a revival given the impending
elections next year and other issues in
terms of export demand as well as
interest rates.
Beyond Market 02nd May ’13
Besides, poor economic scenario
means bad news for companies which
are highly leveraged, hitting them in
terms of profitability. However, even
if one jots down all these points and
looks at the cumulative impact, there
is still not enough argument to explain
such a fall in mid-cap companies,
especially
in
cases
where
fundamentals of these companies still
remains strong.
THE EPICENTRE
The crash in mid-cap stocks punished
mostly those investors who kept on
averaging the cost of purchase at
lower prices in the hope of recovery
and valuations turning attractive. But
most of these investors have lost
heavily and those who went on a
buying spree with the leveraged
money are now swearing to invest in
mid caps as many of them are now
trading at historical lows and there is
no buyer even at lower prices.
many cases the promoters too were
riding the rally. Many of the Indian
companies’
promoters
were
leveraged. They pledged their shares
at higher prices as security to lenders
who provided them personal or
corporate loans.
In a poor economic environment
when most of the options to raise
funds were limited, a number of
companies raised additional funds to
manage their day to day businesses
from banks and NBFCs. In fact
financial institutions, especially
NBFCs started insisting on further
pledging of shares as security for
fresh and existing loans.
In many cases pledging of shares
reached high levels. Promoters of
many mid and small-sized companies
pledged their shares to the extent of
60% to 90% to borrow and provide
additional securities.
In the absence of retail and
institutional buyers in the market,
liquidity in mid caps has dried
drastically. As many are still sitting on
losses, the recovery in share prices is
only looked at as an opportunity to
exit, thus leading to more supply.
The real issue began when the
markets started correcting around the
Union Budget. The initial correction
in share prices compelled promoters
to provide even more shares as
security to financiers owing to the
fear of losing control and crash in
share prices.
Mid caps came into limelight largely
around December last year and
January this year as a result of sudden
optimism about the Indian equity
markets led by policy push and heavy
buying by foreign investors in the
Indian equity markets.
NBFCs or financial institutions were
in a comfortable position till the time
there was enough security and loan
was covered with adequate number of
shares. However here share prices of
those companies were the prime
driver of collaterals needed.
This led to a strong build up in the
mid-cap space, which was considered
to be the key beneficiary of recovery
in markets and the economy. This is
also the period when a lot of investors
as well as operators started leveraging
and building their positions in the
mid-cap space.
If the share price falls, the companies
either have to provide more security
or the NBFC threatens to sell the
pledged shares in the open market to
recover their loan amount.
Besides operators and investors, in
Not just promoters, even market
operators who typically hold large
quantities of a particular company
were overleveraged. In many cases
It’s simplified...
15
their shares too were pledged with
financiers for loan, which was taken
for higher exposure.
their losses in one counter and started
selling others as well, leading to a
wider sell off.
So, even in cases where the promoters
were solvent enough, they were
forced to sell in the market if the
operators’ finances were in a bad
shape, leading to a correction which
could not be explained by many.
The problems accentuated and
reached such an extent that stock
exchanges and market regulator SEBI
immediately started talking about a
probe into the matter to find out about
any irregularities and manipulations,
as many believed that it was led by
market operators or was a result of
sell offs by a select group or
individuals who wanted to take
advantage of the situation and make
quick money.
WEAKNESS IN THE SYSTEM
This weakness in the mid-cap space
was visible and quite apparent. And
especially when volumes and
participation in the market was low,
mid caps were prone or susceptible to
any adverse situation.
Initially in January and February the
correction in mid caps started
selectively where one or two
companies were in the news for heavy
selling, which later on spread to other
counters
when
FIIs
started
withdrawing money from the Indian
equity markets.
In the absence of real buyers, mid
caps started to crack and operators
took advantage of the situation. When
the markets knew the prices were
crashing, operators and market
participants jumped into the wagon
and shorted many stocks, especially
in the futures and options segment,
leading to acceleration in correction.
Even more so, as share prices started
to crack, pledged shares of both
operators and promoters started
getting liquidated. The financiers due
to the lack of security and inability of
operators to meet enough margins
started to sell stocks in the open
market, which led to a sudden fall in
the mid-cap space.
This could not be restricted to a few
companies only as investors started to
liquidate other companies in their
portfolio in the hope of mitigating
16
Beyond Market 02nd May ’13
But this too impacted sentiments
badly and the fear of manipulation led
to more selling, which in the absence
of enough liquidity created mayhem
in mid cap stocks.
IS THERE MORE PAIN?
Now the real question is whether
there is more pain in this space. There
is a feeling among market participants
that a lot of distress selling has
already taken place. And since the
prices are now stabilizing, share
prices should not crash further. But
that does not assure of any weakness,
which is expected to continue.
There will be recovery and those
whose stocks that were sold in a hurry
due to lack of money will come back
to cover them. But that also will
initially happen in cases where there
is value and fundamentals of
companies are strong.
More importantly the selling took
place irrespective of fundamentals,
which is why the share prices in most
cases are trading at attractive
valuations. In many cases the
valuations have become compelling
and stocks are offering good dividend
yields. This is a good sign considering
that it could support share prices from
any further decline.
At the time of heavy selling,
valuations were largely ignored by
the markets. But during stability, the
markets will again go back and look
at valuations in comparison to the
companies’ own fundamentals.
WHAT CAN INVESTORS DO?
At this point in time buying mid caps
could be both an opportunity and a
trap. Keeping these things in mind,
investors should stick with quality
and not jump to buy them just because
the stock is trading at a lower price.
Instead, an intensive check on
fundamentals of companies and
valuations could provide some clue.
Companies with high debt and
excessive pledging of shares by
promoters should be avoided.
Companies which have solid business
in terms of assets, brand and cash
flows should attract attention.
Investors who want to avoid any
decision making and go through the
entire research process could
probably take a different route. They
can choose and invest in a good
mid-cap mutual fund scheme, which
has a good track record in terms of
performance, especially during the
recent carnage in the mid-cap space.
A mutual fund scheme of a reputed
fund house and a reputed mutual fund
manager should score high in the
minds of investors and could help to a
great extent.
There is a belief that may be over the
next one year mid caps may not
perform well given the several issues
about liquidity, participation and
fundamentals of the company and
economy, but valuations at which
some of these companies are trading
are at a historical low. This is why,
from the long-term perspective, these
could be attractive options compared
to their large-cap peerS.
It’s simplified...
BRICS countries are mulling the formation of a new development bank, which aims to fund infrastructure and allied
projects throughout developing nations
I
n 2009 when the first BRIC
(Brazil, Russia, India, China)
summit was held in Russia, it
was mocked at and called as an
insignificant meeting between a few
countries. As years passed and
alliances between member countries
grew, the West, which was going
through an economic turmoil, sat up
and took notice.
By then, BRICS (now including
South Africa) had shifted its focus to
Asia and Africa and when the 5th
BRICS summit was held on 27th
March ’13 in Durban, South Africa,
every developed country in the world
was watching closely. BRICS was no
Beyond Market 02nd May ’13
longer a small gathering of a select
few countries.
Statistics will help understand the
significance of BRICS. BRICS
countries represent almost 3 billion
people, with a combined nominal
GDP of US $14.9 trillion as of 2013,
which in simpler terms means about
40% of all the people on planet earth,
15% of global trade and 25% of the
world’s GDP.
The story of BRICS summit started
with the meeting of foreign ministers
of the initial four BRIC states (Brazil,
Russia, India, and China) in New
York in September ’06, which was
followed by a series of high-level
meetings and finally a full-scale
diplomatic meeting, which was held
in Yekaterinburg, Russia, on 16th
May ’08, which placed the foundation
of the BRICS summit.
On 16th June ’09, the first ever BRIC
summit was held in Yekaterinburg.
The focus of the first summit was on
how the four countries could better
co-operate with each other in terms of
development as well as on improving
the global economic situation.
South Africa began its efforts to join
the BRIC group in 2010 and became
an official member of the group on
It’s simplified...
17
24th Dec ’10. When South Africa
successfully hosted the latest BRICS
summit in March, this year, it proved
that it had the capability of becoming
a full member of BRIC.
This year at the BRICS summit
India’s Prime Minister Manmohan
Singh in a statement to the media after
the plenary session of the summit
informed, “The BRICS platform has
evolved tremendously since the first
summit at Yekaterinburg in 2009. Our
agenda encompasses diverse areas,
including
global
economic
developments, peace and security,
reforms of political and economic
institutions of global governance,
international
trade,
sustainable
development and food as well as
energy security. We have just
concluded very fruitful discussions on
many of these issues.”
Thanks to host country, South Africa,
the theme of the summit was ‘BRICS and Africa: Partnership for
Development,
Integration
and
Industrialization.’ A
declaration
called the ‘eThekwini Declaration
and Action Plan’ was issued after the
fifth BRICS summit at Durban in
South Africa. The declaration
underlines the need to widen and also
deepen co-operation between the
BRICS countries.
The declaration has an assertive ring
to it: Paragraph 3 of the eThekwini
Declaration states, “We will hold a
retreat together with African leaders
after this summit… The retreat is an
opportunity for BRICS and African
leaders to discuss how to strengthen
cooperation
between
BRICS
countries and the African continent.”
To further enhance trade among
BRICS countries and other African
countries, para 5 of the eThekwini
declaration mentions, “Within the
framework of the New Partnership for
Africa’s Development (NEPAD), we
18
Beyond Market 02nd May ’13
support African countries in their
industrialization process through
stimulating foreign direct investment
(FDI), knowledge exchange, capacity
-building as well as diversification of
imports from Africa.”
Experts believe the decision to make
BRICS summit Africa-centric was
taken because BRICS nations want to
position South Africa as the gateway
to Africa, which will take them a step
ahead of the West. This also suits the
purpose of South Africa, which has
growing designs for dominance over
other African countries.
It is important to note that almost 25%
of FDI from China, Russia and India
goes to Africa. In the next few years,
China plans to give Africa $20 billion
in loans.
Interestingly, parallel to the BRICS
summit, a BRICS business forum was
also held, which discussed issues
related to infrastructure, energy,
financial
services
and
agro-processing.
Following
the
recommendation of this forum, a
BRICS Business Council has been
formed which will comprise of five
top business leaders from each of the
member states.
South African billionaire, Patrice
Motsepe has been appointed as the
Chairman of the business council for
this year. This council will meet twice
a year and submit a report at each of
BRICS annual summits. Experts
believe that this council is a
significant step to boost intra-BRICS
trade, which reached US $350 billion
in the year 2012.
Apart from the council, there was a
discussion on linking BRICS
countries through a high-capacity
optic fibre cable network of 28,400
km. “This will remove the
dependency on developed countries
as
interconnection
points
by
providing a direct route among
BRICS countries,” said South
Africa’s President Jacob Zuma.
However, the center of the discussion
at the summit was the idea of creating
a BRICS-led development bank,
which was proposed by India’s Prime
Minister Manmohan Singh at the
BRICS summit held in New Delhi, in
the year 2012.
The proposal saw some resistance in
New Delhi, but in Durban all member
countries agreed upon the creation of
the development bank. Para 9 of the
declaration states: “Following the
report from our Finance Ministers
(FMs), we are satisfied that the
establishment of a New Development
Bank is feasible and viable. We have
agreed to establish the New
Development Bank.”
While details of the bank have not
been finalized, it is expected that the
bank will have an initial capitalization
of $50 billion, with focus on
infrastructure development. Many
experts see the move as a challenge to
the dominance of the dollar.
As South African President Jacob
Zuma stated, “(Leaders agreed) to
enter formal negotiations to establish
a BRICS-led new development bank
based on our own considerable
infrastructure needs, which amounts
to around US $4.5 trillion over the
next five years, but also to cooperate
with other emerging markets and
developing countries in future.”
A few experts believe that the bank
will
have
an
inward-looking
structure, which will gradually form a
credit line for countless projects on
which trade will be conducted
between the developing nations with
no role for US dollars.
The downside is that a deadline and
expected roadmap on creation of a
It’s simplified...
physical, functioning bank has not yet
been finalized. Also, there are many
issues which remain unsolved, which
could mean that the formation of the
bank could be a slow process.
Another significant development at
the latest BRICS summit was the
discussion
regarding
the
establishment of a financial safety net
by pooling foreign exchange reserves.
The members agreed to create a US$
100 billion Contingent Reserve
Arrangement (CRA) by trading in
their currencies for some transaction.
This fund will safeguard member
states from short-term liquidity
pressures, thereby strengthening
financial stability.
However, the timeline for this fund
has not been set and though
declaration
states
that
“the
establishment of the CRA with an
initial size of US $100 billion is
feasible and desirable subject to
internal legal frameworks and
appropriate
safeguards,”
many
experts believe that this sum is too
modest compared to half a trillion
dollars mobilized for the new firewall
fund at the International Monetary
Fund (IMF).
Taking the economical development
issue further, BRICS also agreed to
promote green economy to fight
global warming and climate change.
The delegates signed a multilateral
agreement on climate cooperation and
the green economy according to
which the nations will co-operate
with each other in terms of technical
and financial support to address the
dangers of climate change in
developing nations.
On the issue, India’s Prime Minister
Manmohan Singh said, “We need to
respond to all the persistent
weaknesses that threaten the world
economy… All of us need to work
together for the green economy and
cooperation in energy, food security,
health care and education.”
On a political level, as stated in
paragraph 20 of the declaration,
“China and Russia reiterate the
importance they attach to the status of
Brazil, India and South Africa in
international affairs and support their
aspiration to play a greater role in the
United Nations.”
However, some experts believe that
their promise falls short due to
Japan’s role in the G4. India’s Prime
Minister Manmohan Singh met
Chinese President Xi Jingping for the
first time at a high level meet after the
change in leadership in China. He
also met Russian President Vladimir
Putin regarding the issue of
Kundankulam reactor where he
assured Putin that the first unit of the
reactor will be operationalized by
next month.
As per the action plan, the summit
will be followed by several
year-round meetings and discussions
between ministers and businessmen
of member nations to further increase
trade and co-operation between
BRICS countries.
According to experts, the summit
really was a success in many ways as
the eThekwini Declaration is in a way
similar to the Delhi Action Plan
declared in the year 2012 at the New
Delhi BRICS summit, which was
largely fulfilled. In Durban, further
progress in discussion was seen on a
broad range of subjects but in terms of
deliverables, not much was achieved
at the summiT.
ANGELINA JOLIE STOCK INDEX
An index made up of a selection of stocks from companies associated with actress Angelina Jolie. Seen as one of the
world’s most influential celebrities, some analysts believe that companies connected with Jolie will outperform their
competition.
The index was created by Fred Fuld of Stockerblog.com; it includes stocks of movie studios and producers that have had
a connection with Angelina Jolie, such as Sony, Viacom and Time Warner. Because Jolie’s films usually earn large
box-office revenues and the companies that produce these movies should have higher profits.
ASSET VALUATION RESERVE
It is the capital required to be set aside in order to cover a company against unexpected debt. The asset valuation reserve
serves as a backup for equity and credit losses. A reserve will have capital gains or losses credited or debited against the
reserve account. Usually the asset reserve consists of two components, a default component and an equity component. The
default component protects future credit related losses and includes arrangements for corporate debt securities, preferred
stock, mortgage backed securities, etc.
Beyond Market 02nd May ’13
It’s simplified...
19
A
Growing
Evil
Non-repayment of subsidized loans given to
farmers through Kisan Credit Cards by state-owned
b a n k s c o u l d r e s u l t i n r i s i n g n u m b e r o f N PA s
I
ndia’s agrarian economy has
been facing a long-standing
problem of non-availability of
institutional credit for farmers
of the country.
Over the past few years, farmer
suicides have been on an alarming
rise, because they have not been able
to come out of the clutches of money
lenders at large who suck the very life
out of them.
Even in places where institutional
credit is available, farmers are unable
to get loans either because interest
rates are too high or the stringent
credit appraisal process does not
qualify them for institutional credit.
20
Beyond Market 02nd May ’13
GOOD
AWRY
INTENTIONS
GONE
To put an end to the woes of such
farmers, the government had
launched the Kisan Credit Card
(KCC) scheme over a decade ago to
enable them to avail of timely credit
to make purchases for agricultural
activities during the crop season.
Further, with the government turning
the heat on public sector banks to
push such schemes, nearly 20.3
million cards were issued till March
’12. However, this has given rise to
another problem, which is of lenders
facing the onslaught of rising bad
loans from this sector.
According to latest estimates by
public sector banks the outstanding
amount on such cards stands at `2
trillion, and may well rise in the days
to come, posing a systemic risk to the
financial services sector.
The banking sector is already reeling
under the pressure of bad loans,
which have risen persistently. At the
end of December ’12, the gross NPAs
of the banking sector stood below
`1,80,000 crore, a rise of 43% over
last year’s `1,25,000 crore.
So far corporates have largely been
responsible for the rise in the number
of bad loans in the banking sector. But
it seems as if there is yet another
It’s simplified...
problem pertaining to bad credit
which can soon become bigger than it
seems now.
The country’s largest public sector
commercial bank - State Bank of
India with the largest exposure to
such KCC loans (to the tune of
`44,000 crore) has already seen 5% of
these loans turn bad, raising the
heckles among other public sector
bankers too.
Another worrying trend is the practice
of ‘evergreening’ on such loans by
lenders themselves. Even when a
farmer is unable to repay his debts, he
is given a fresh loan to meet his
payment requirements. The lender
seems happy to start a new loan cycle
because even though bad loans are
increasing, it is not reflected in the
books till such time as the credit limit
on these Kisan Credit Cards is always
on a rise.
ARE BANKERS TURNING A
BLIND EYE?
This explains the reason why
outstanding loans on KCC have risen
about 30% in the last two years and
the number of cards issued has gone
up by around 13% over the past year.
Although there are no statistics to
establish that the bad loans are rising
due to evergreening, those in the
know state that there is enough reason
to worry now that this ongoing trend
is on an uptick.
With the government perpetually
setting tough targets for agricultural
lending, there is little hope that this is
a one off thing which can be stamped
out soon. The exposure of banks to
agricultural activities stood at `5.6
trillion in the beginning of the
calendar year and the government has
already proposed to increase the farm
credit target to `7 trillion for FY14.
For public sector lenders, it is a
double whammy. On one hand the
government keeps turning the
pressure on with regards to increasing
its farm credit portfolio, and on the
other hand it is witness to the fact that
the KCC scheme is not being utilized
in the manner it was conceptualized.
For instance, a Kisan Credit Card is
supposed to work like any of our
normal credit cards except for the fact
that the farmer is expected to make
farm-related
purchases.
The
repayment tenure is 12 months (a two
crop cycle) following which, the loan
should be treated as an NPA.
WHO WILL SHOULDER THE
BLAME?
However, it has been noted that the
farmers in question use Kisan Credit
Cards to fund weddings in the family
or to meet medical expenses.
Once the repayment tenure is over
they come and plead with the lenders
and if the lender pressurizes him to
repay, he threatens to commit suicide.
Lenders are therefore scared to
implement even standard recovery
mechanisms in such cases as they
tend to be politically sensitive and
may put their heads in the line of fire
owing to the same.
Some bankers closely associated with
agricultural lending blame the
government for interest rate subsidies
that have been provided to farmers,
which has encouraged them to misuse
schemes like Kisan Credit Card for
the purpose of consumption for all
reasons other than agriculture.
Certain bankers even go to the extent
of stating that some farmers do not
deliberately repay the loans, knowing
that the lenders are helpless and will
not be able to recover the money
without the will of the farmer himself.
It is no secret then that the UPA
government’s farm loan waiver of
`70,000 crore announced in Budget
2008 was a major reason why it could
return to power in 2009 elections. As
we stand at the threshold of yet other
general election, it seems as though
the UPA government is going all out
to please the voters and will do little
to address such concern.
However if bankers, regulators and
the government work in tandem and
realize that there is a veritable risk
from rising bad loans of Kisan Credit
Cards, the banking and financial
services sector may be facing the
threat of a downgrade yet agaiN.
BEAR SQUEEZE
A change in market conditions that forces pessimistic investors attempting to profit from price declines to buy back an
investment at a higher price than they sold it for. A bear squeeze can be an intentional event created by certain players in
the investment markets, usually central banks or market makers.
ACQUISITION INDIGESTION
It is a slang term describing an acquisition or merger in which the companies involved have trouble integrating with one
another. Acquisition indigestion may also describe a situation in which the purchasing company has difficulty making the
most of a takeover.
Beyond Market 02nd May ’13
It’s simplified...
21
Sweeter
Than Before
22
Beyond Market 02nd May ’13
It’s simplified...
After much deliberation, the
government
has
finally
announced
a
partial
decontrol
of
the
sugar
sector, which is hoped to
make the business more
viable and attract large scale
investments too
T
he government recently
announced its decision to
partially decontrol the
sugar
sector.
This
announcement brought cheer to the
sugar industry. In fact, the Sugar
Index outperformed the CNX Nifty
50 index by more than 10% in the first
week of April, the week the news
became public.
The Sugar Index, comprising
frontline sugar stocks, gained close to
9% during 11 trading sessions ending
12th Apr ’13. During this time period,
the broader market remained in the
red. The CNX Nifty 50 Index fell by
approximately
2%
in
the
corresponding time period.
Year-to-Date (YTD)
Performance Of Sugar Index
105
Sugar Index
100
95
90
WŽƐŝƟǀĞƌĞĂĐƟŽŶ
of sugar stocks
85
consider going long in selective sugar
company stocks.
After years of reluctant hope and
months of speculation, the Indian
government’s Cabinet Committee on
Economic Affairs finally approved
the partial decontrol of the sugar
industry. The proposal seeks to
abolish the levy-sugar mechanism,
under which private millers have to
sell a specified quantity of the
sweetener to the government at
concessional rates.
As per the new policy, the quarterly
release mechanism of sugar has been
dropped, which allows sugar mills to
sell sugar into the domestic market or
to export at will. The move is
expected to free up cash flows for
mills and allow them to better meet
their cane payments to farmers, thus
removing one of the major barriers to
good farmer-miller relationships,
which may in the end lead to less of a
swing in cane plantings and more
steady sugar production.
The policy also aims to end the levy
for sugar whereby mills are no longer
required to sell 10% of their sugar
production at a 40% discount to
market price to supply to subsidized
stores set up by the government.
However, there is a catch here. The
government has mentioned that levy
obligation has been dropped only for
two years. Obviously the new central
government that will come to power
in 2014 will take a final call on this.
And the political situation at that
point in time will decide the fate of
this particular rule.
80
75
2/1/2013
13/02/2013
28/03/2013
Source: BSE
In view of the structural change in the
industry, investors from this sector
need to keep a close eye on the
upcoming developments and could
Beyond Market 02nd May ’13
The decision taken on 14th Apr ’13
will eliminate the levy obligation
from the current season. So, sugar
produced after September ’12 is not
subject to the levy. It also sets up a
new tendering system whereby states
will buy sugar for the Public
Distribution System (PDS) from mills
through a transparent process, but
prices are capped at `32.
As PDS sugar is sold at `13.50, the
central government will offset the
`18.50 difference for two years.
Though it was discussed that the
finance ministry might increase
excise duties on sugar at the mill gate
to help compensate for the
government’s new financial burden
that will pay to keep, that decision has
not been made yet. Therefore, the
government must shoulder the burden
of the extra `2,500 crore per year to
subsidize PDS sugar.
Obviously, the dropping of the levy
obligation will boost profit margins of
sugar
companies
significantly.
Industry pundits estimate total
savings to be in the range of `3,000
crore. The Indian Sugar Mills
Association says that the two
decisions combined could lead to an
additional growth of 20% to 25% for
the industry.
Sugar production in the country is
estimated to touch 24.6 million
tonnes in 2012-13 marketing season
ending 30th September with the
cumulative turnover of `80,000 crore.
“The current sugar market has the
potential to double up and reach `1.6
lakh crore in the next five years,” says
an industry expert.
India’s sugar sector is gearing up for a
surge in mergers and acquisition
activities, big investments and
exciting retail products as the
government’s decision to ease
controls has revved up the world’s
biggest market for the sweetener.
Currently, major players in the sugar
industry are all domestic firms such
as Bajaj Hindhusthan, Shree Renuka
Sugars, Dhampur Sugar, Balrampur
Chini, EID Parry and Mawana
Sugars, among others. After the
It’s simplified...
23
decontrol policy of the government,
the sector is likely to see more merger
and acquisition activities. Overseas
players like Olam International,
Cargill and Noble Group are looking
at occupying a bigger pie of the
Indian sugar industry.
Foreign firms have been calling top
industry people as they are lured by
the size of the `80,000 crore market,
which is expected to double up in five
years. Trade sources say potential
investors are eyeing opportunities in
detail and have a preference for
business in top producer Maharashtra
although they are suspicious of
politically meddlesome UP.
As a result of all these positive
developments, sugar stocks have
surged upwards, beating negative
trends of the overall market in the
24
Beyond Market 02nd May ’13
month of April. Bajaj Hindusthan,
Shree Renuka Sugars and Balrampur
Chini Mills shares surged by 7.30%,
7.07% and 4.02%, respectively on the
day the news was made public. Part of
the overall impact had already been
factored in before the news. Some
momentum gained in stock prices
after the news.
Peer Comparison
55
50
45
40
35
30
25
20
15
Source: BSE
Shree Renuka Sugars
Though the positive news will boost
investor sentiments in the sugar
industry, there are some concerns that
need to be looked at carefully. The
relaxation in levy regulation is
applicable only for two years and it is
not clear what will happen from the
third year onwards.
Secondly, the control of sugarcane
pricing still rests in the hands of select
states. Depending on the political as
well as investment-friendly situation
of the individual states, companies’
benefits would vary.
Bajaj Hindusthan
Balrampur Chini
Hence, investors need to carefully
look at the plant location of individual
sugar companies and its existing
relationship with the government,
among others. This means that the full
benefit of a free market is yet to be
realized for sugar investorS.
It’s simplified...
,
Going Places
Literally
D
espite the lull in the
hospitality and leisure
industry, companies in
the business of vacation
ownership have performed better than
those from the hotel industry in the
past one-and-a-half years.
At a time when the
hotel
industry
is
witnessing a slowdown,
the vacation ownership
sector
is
growing
steadily, against odds
Be it cash flows from operations, debt
or growth in revenues, these
companies have done relatively better
than their peers from the hotel and
hospitality industry.
Let us understand the factors
responsible for the growth of the
vacation ownership industry and
subsequently its importance from an
investment point of view.
Beyond Market 02nd May ’13
THE BASICS
According to the data presented by
RCI, a global leader in vacation
exchange platform with over 4,000
affiliated resorts in approximately
100 countries, the vacation ownership
industry in India is growing at a
healthy rate of 18% every year since
the last five years.
In India itself there are 52 companies
that are into vacation ownership.
It’s simplified...
25
These companies have 102 resorts
and provide close to 5,000 rooms. The
annual maintenance fee of resorts
provided by these companies is in the
range of `7,000- `10,000/week.
Clocking 18% every year in the last
five years is no mean feat for an
industry, which is relatively nascent
in comparison with well-established
hotels across all segments.
In the US too, RCI notes that there is
a huge acceptance for vacation
ownership companies. One of the
findings of a survey conducted by
RCI says, “Strong ownership
satisfaction, high household incomes,
a desire for repeat purchases and a
propensity for frequent travel were
just a few of the many reasons
responsible for optimism in the
vacation ownership industry.”
It says, “Both prospective consumers
and current owners want to have a
wide selection of vacation options to
choose from and to be able to travel at
different times throughout the year.”
This shows that the future of vacation
ownership in India is a long success
story that would unfold in a strong
way in times to come.
THE FACTS
The RCI study also stated that few
owners felt their vacation plans were
being impacted by economic
slowdown and there were more
owners who intended to keep their
vacation ownership plans intact and
running, going forward.
One of the chief reasons for the huge
acceptance of the vacation ownership
concept in India is its dependence on
domestic travel. In the last five years,
even though outbound travel in India
has been affected, travel within the
country is growing well. This has
lifted the financial performance of
vacation ownership companies in the
recent years. This performance when
juxtaposed with hotel companies is
exceptionally good.
The study also found that more
owners were taking vacations and
there were very few who were cutting
back on travel expenses. The RCI
survey also revealed that 83% of
respondents were satisfied with their
current vacation ownership, while a
considerable 62% reported that they
owned two weeks or more of vacation
ownership per year.
Mahindra Holidays, which has a 72%
market share of India’s vacation
ownership market, has shown
reasonably better growth than hotel
companies. The company’s net sales
in the last five fiscals have grown at a
compound annual growth rate
(CAGR) of 13%, while its net profit
has shown a CAGR growth of
approximately 5%.
It was also found that the owners who
intended
to
acquire
vacation
ownership not only plan to acquire
more vacation ownership but also had
a huge purchasing power. The survey
also suggested that these people were
more than 1.2 million consumers.
In comparison with this, the financial
performance of Indian Hotels
Company, one of the largest players
in the hotel industry, has deteriorated
in the last five fiscals. Its net profit
has declined by a CAGR of 44%,
while its net sales has grown at a
meagre rate of 4% in the same period.
Another
study
conducted
Chadwick
Martin
Bailey,
26
Boston-based market research firm,
found that flexibility and variety were
among the most popular reasons cited
for the importance of selecting a
resort affiliated with an exchange
vacation company.
Beyond Market 02nd May ’13
by
a
Vacation ownership companies have
also done well on cash flows from
operations. And their growth in cash
flows is far better than their hotel
counterparts. Cash flow from
operations of East India Hotels (EIH),
which is one of the largest premium
hotel companies, has been flat in the
last five years.
On the other hand, Mahindra
Holidays’ cash flow from operations
has grown at a CAGR of 45% in the
same period. Also, in terms of
leverage,
vacation
ownership
companies have lighter balance sheet
than hotel companies.
Sterling Holidays Resorts, which has
been cutting its losses in the last few
years, has virtually no debt on its
books. Even Mahindra Holidays has a
negligible debt of `8 crore as of
FY12.
Due to their dependence on domestic
consumption
theme,
vacation
ownership companies have been
recording better business than most
hotel companies whose revenues are
impacted due to weak foreign tourist
arrivals. Foreign tourist arrivals in the
last five years has grown at a low
CAGR of 4.1%.
In the same period, the vacation
ownership segment has grown by
18% every year in the last five years
and the number of resorts in the
country grew by 33% to 104 in 2012.
Interestingly, the average occupancy
rates of these companies has been
over 70%. A study by Cushman &
Wakefield foresees India’s timeshare
industry to grow at an annual rate of
16% between 2006 and 2015.
Besides, hotel companies have been
expanding their room inventory at a
time when the demand in the
hospitality industry has been weak.
As a result of this, revenues of hotel
companies have been dwindling in
the last five years.
It’s simplified...
At present, the supply of rooms in the
industry has grown at 23%, while the
demand has been steady at 21% at an
average occupancy rate of 57%. To
make matters worse, untoward
incidents related to foreign tourists in
the country, especially women have
also affected foreign tourist’s arrivals
in recent months.
In times of slowdown, in comparison
with the hotel business, vacation
ownership businesses have been
doing well.
At present, Sterling Holidays Resorts
has been making losses on a
consolidated basis. Despite the fact
that the company has been making
losses, it has been able to reduce its
losses in the last one year by
streamlining of its operations and by
making timely strategic investments
by private equity investors.
At present, the size of the time-share
industry in India is `750 crore. In the
United States, the time-share industry
forms 2% of its travel and tourism
industry. Industry experts believe that
even if one assumes the share of
time-share industry in India to
become 1% of its travel and tourism
industry, it would turn out to be a
`3,800 crore industry. This shows the
potential growth of the vacation
ownership industry in the countrY.
QUAL
AT NIRMAL BANG, YOU’RE MORE THAN
JUST A BUSINESS ASSOCIATE,
YOU’RE AN EQUAL PARTNER.
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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors
Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 8601; Fax: 39268610, Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
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Beyond Market 02nd May ’13
It’s simplified...
27
The exposé by online
magazine cobrapost.com
only highlights the rampant
corruption in the banking
industry, with no one
showing the courage to fix
the problem
FACE
OFF
28
Beyond Market 02nd May ’13
It’s simplified...
T
hose
who
follow
proceedings in the world
of finance woke up to
some disturbing news on
an ordinary day in the month of
March. An online magazine called
‘cobrapost.com’ had carried out a
sting operation on three best known
banks in India namely ICICI Bank,
HDFC Bank and Axis Bank.
It had found that it was rather easy for
anyone with bags of money to just
walk into any branch of these banks
and be entertained by officials who
would “help” in transferring funds
illegally and converting black money
into white.
In financial parlance, this malpractice
is referred to as “money laundering”
and has been a long-standing concern
for the financial services industry
world over.
Although the manner in which the
sting operation was carried out is
being debated by many men of letters
from the banking industry and
otherwise, it does raise the pertinent
question of whether or not our
financial systems are strong and
resilient to risks.
This comes at a time when the
banking industry is already reeling
under the pressure of mounting bad
loans, largely from the corporate
sector. The footage used in these sting
operations, now headlining on the
website, show how blatant and
nonchalant the banking officials are
regarding
matters
of
utmost
importance such as assessing the
credibility of a customer.
THREAT TO THE FINANCIAL
SYSTEM
Despite the seemingly strong
commitment
that
financial
institutions show towards taking to
task such miscreants, it has been
Beyond Market 02nd May ’13
estimated that globally the yearly
damage
attributed
to
money
laundering practices can range
between 2% and 5% of the global
GDP. The amount of loss in actual
terms maybe between $800 billion
and $2 trillion in a single year! In
India, official statistics state that the
Financial Intelligence Unit in India
has received a paltry number of
30,000 transactions that seem
suspicious in FY12.
In comparison to the size of the
banking industry in the country, this
number seems miniscule. What
makes it even more difficult to
believe is that we have strong and
resilient systems is a contradiction put
forth by another government agency,
the Central Bureau of Investigation.
In the beginning of 2012, a senior
CBI official had revealed that Indians
have $500 billion of illicit money
stashed away in tax havens abroad.
One might argue that in a country full
of scamsters where a new scam is
unearthed every other day, this may
not be alarming and perhaps does not
impact retail customers of these banks
directly, but that is akin to the ostrich
burying its head in the sand to run
away from a problem it is facing.
The truth is that when such reputed
financial institutions’ credibility is
under scrutiny, the retail investor’s
trust is breached and that is not a
happy situation to be in.
A PAPER TIGER?
How can one be at peace with the
thought that the bank one puts his
hard earned money in is party to
financial terrorism? Expectedly the
stock prices of banks named in the
expose tumbled between 1% and 4%
in single trading sessions as news of
the expose hit the market.
Unfortunately though, the response
by both the banking regulator as well
as the banks involved, was nothing
out of the ordinary.
While the banks were quick to
suspend services of officials in
question, who are being subjected to
internal enquiries as of now, the
response from regulators has been a
let down. Deputy Governor of RBI Dr
KC Chakraborty quickly responded
by saying: “There is ‘no scam’ as no
transaction had actually taken place.”
Though he acknowledged that our
banking system is not free of
loopholes, he seemed to completely
ignore the fact that a lid has been
blown off of a can of worms.
India, despite being a signatory to the
Financial Action Task Force on
Money Laundering or FATF is openly
flouting many global best practices
when it comes to combating money
laundering. FATF is an international
inter-governmental body that strives
to fight malpractices such as terrorist
financing and money laundering
through a set of regulatory standards.
In accordance with FATF standards,
the KYC or know your customer
norms have been put in place, which
requires every bank official to
thoroughly check the credentials of a
prospective customer, before offering
him/her any advice.
THE ROOT CAUSE
But what this expose reveals is that
when it comes to bags of money being
brought to the table by creatures who
live in the dark side of the law, it is
easy for them to persuade officials to
put aside compliance requirements to
meet cross-selling targets and worse
still to enhance personal gains in
terms of kickbacks such as foreign
trips and the likes!
The video footage shows that not only
It’s simplified...
29
were the bank officials ready to make
serious compromises with regulatory
standards, they were actually
suggesting ways and means to carry
out such illegal transactions!
To say that these transactions were
not carried out and “merely
suggested” shows an utter lack of
regard for the seriousness of the issue
by the regulators and bankers alike.
They seem to be turning a blind eye to
problem at hand, which is a rampant
corruption that runs deep among
those who have been trusted with
managing other people’s money.
India may have signed up for FATF,
but evidently much is left to be
desired when it comes to compliance
of ethical standards in banking.
The top management of these banks
may be feigning innocence at a time
like this, but it is utterly impossible to
believe that some senior officials are
blissfully
unaware
of
such
malpractices and do not encourage
their employees to walk the extra mile
when it comes to meeting targets.
It is an open secret that bankers are
under immense pressure in the
months of January to March each year
as the financial year draws to a close.
This is a time when third party
products are pushed, which results in
high
commissions
for
banks
subsequently helping them achieve
their annual targets.
The bankers who make such sales are
handsomely rewarded with the
promise of a bonus or an exotic trip to
a foreign locale! When a wealthy
customer, no matter what his
credentials are comes along, bankers
in question cannot resist the
temptation of entertaining them.
What then is the solution? Is it right to
presume that the Intelligence Unit and
the RBI have not done a good job of
keeping a hawk’s eye on the practices
of banks and have taken their so
called anti money laundering
measures at face value?
Perhaps it is time that even the central
bank, akin to developed countries,
segregates its supervisory role. The
time seems ripe to set up a full
fledged organization that will be
dedicated to ensuring implementation
of measures pertaining to combating
money laundering.
As for the Finance Ministry of the
country, instead of pushing for new
bank licenses to please a handful of
voters, time has come for it to focus
its attention on creating the necessary
regulatory framework for banks that
will ensure the enforcement of such
effective measureS.
Micro analysis. Mega gains.
Trading at Nirmal Bang is based on extensive research and in-depth
analysis, where we focus on the smallest of details and turn them into
an advantage for you.
Over the years, the analytical approach coupled with decades of
experience has helped us maximize returns for our investors and
thereby inspire confidence in them.
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SMS ‘BANG’ to 54646 | Contact at: 022-3926 9404 | e-mail: [email protected]
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
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30
Beyond Market 02nd May ’13
CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010
It’s simplified...
Going The
Extra Mile
A leader in oil, gas and chemical
logistics, Aegis Logistics Ltd is
expanding its liquid and auto
gas business, which augurs well
for the company, going forward
A
egis is India’s leading oil, gas and chemical
logistics company. It has four distinct but
related business segments viz: liquid
terminals, gas business (sourcing, industrial,
commercial cylinders and autogas), EPC business and
marine products.
It operates a network of bulk liquid handling terminals,
liquefied petroleum gas (LPG) terminals, filling plants,
pipelines and gas stations to deliver products and services.
Its client base includes many leading industrial companies
in India as well as individual retail customers whom they
serve at Aegis Autogas stations.
The Aegis Group also operates internationally through its
sourcing and trading subsidiaries located in Singapore.
Business Segments - Revenue Share
2%
98%
Liquid
Gas
Source: Company Data
Beyond Market 02nd May ’13
It’s simplified...
31
Sourcing
EBIT Contribution %
Aegis offers gas sourcing, storing and handling services to
various LPG bulk suppliers on an open terminal basis.
Aegis sources both pressurized and refrigerated cargos to
several major ports on the coastline of India, including its
own LPG terminals in Mumbai and Pipavav. The company
has established a wholly-owned subsidiary in Singapore in
2008 through which it procures petroleum products.
48%
52%
Liquid
Gas
Source: Company Data
LIQUID BUSINESS
Aegis provides third party logistics (3PL) services for over
50 petroleum, oil and chemical products, with its facilities
in Mumbai, Kochi and Haldia Ports. It offers long term,
spot and throuput contracts along with unloading, transfer
through jetty pipelines, storage and distribution. In
addition to this, it also provides services like customs
bonding, inventory management, just-in-time delivery and
on-site product quality testing.
Infrastructure Of Liquid Business
Existing Facilities
Port
Capacity (KL)
Trombay
Ambapada
Willington Island
Mumbai
Mumbai
Kochi
198000
75000
51000
Expansion
Haldia
Pipavav
Port
Q1FY14
FY15
64
136
Source: Company Data & Nirmal Bang Research
GAS BUSINESS
Aegis Logistics Ltd is a leader in sourcing, shipping and
distribution of LP gases (LPG and propane) into India. The
company handled around 700,000 MT of LPG in FY12.
The logistics solutions provider offers services such as
supply chain management from product planning,
sourcing and shipping to receipt, storage and dispatch by
pipeline as well as tankers to the point of consumption.
Sourcing
Retail
Gas
Business
Commercial
Product
Planning
Sourcing
Shipping
Storage
Dispatch
Commercial And Industrial LPG
Aegis supplies LPG in cylinders for commercial
requirements and in tankers for industrial users under the
brand name ‘Aegis Puregas’. Aegis has a wide distribution
network of LPG cylinders comprising LPG cylinder filling
plants, distributors, dealers and helps customers reduce
operating costs.
Retail Autogas
Capacity Operational Project Cost
(KL)
By
(` In Cr)
West Bengal 61000
Gujarat
120000
The company had built a 20,000 MT facility at Trombay in
1997 at an investment of `110 crore. It has another 2,750
MT facility at Pipavav. Nearly 80% of gas revenues come
from the sourcing business; and the income is fee based
and operates on margins, which are very low. Because of
this, gas business’ volume is 98% of the total sales.
However, it contributes only 52% to the EBIT.
Aegis imports, markets and distributes LPG on its own for
industrial purposes in the form of commercial cylinders
and for autogas retailing under the brand ‘Aegis Autogas’.
Gas distribution is a niche business in India and is growing
at 30% to 40% annually. It is relatively a higher margin
business compared to gas sourcing. Aegis has nearly 94
gas stations across 7 states, majorly through franchises.
O&M Services
Aegis launched its Engineering, Procurement, and
Construction (EPC) services division in response to the
growing trend of outsourcing in the oil and gas sector. This
division provides a full range of expertise deployed by
Aegis in its own liquid terminals and gas terminals
division to third party clients on an outsourced basis Aegis
received an O&M contract from Bharat Oman Refinery
Ltd in Madhya Pradesh for product storage and dispatch
operations in October ’10.
Industrial
The company has a total of five O&M contracts from
32
Beyond Market 02nd May ’13
It’s simplified...
various clients like ONGC, MRPL, BPCL and Piaggio.
Until now, the company was executing only O&M
services, but it is now looking to expand in the EPC
business also.
MARINE PRODUCTS BUSINESS
Aegis launched its Marine Products Division in January
’12. It aims to provide quality bunker fuels to ships calling
at Indian ports and its Customer Value Proposition is to
service the fuel requirements of ships in a timely,
environmentally responsible and cost effective manner,
while ensuring high quality standards.
A key advantage for Aegis is its ability to leverage its
existing tank farm infrastructure and waterfront operations
management at various ports to provide flexible and timely
refueling services to ship owners and charterers.
INVESTMENT RATIONALE
Expansion In The Cash Cow Division Of Liquid
Terminals To Drive Margins
The consumption of petroleum products has been growing
at a CAGR of 5% in the past 6 years and is expected to
grow this way, going forward. Aegis facilitates logistics to
most of these products and can thus cash in on the growing
demand through capacity expansion.
Aegis is engaged in providing logistics solutions for oil,
gas, chemicals and petrochemical industries and operates a
network of shore-based tank farm installations for the
receipt and handling of bulk liquids. It presently has three
operating port terminals, two in Mumbai with a capacity of
2,73,000 kilo litre (KL) and one in Kochi with a capacity
of 51,000 KL.
Liquid Capacities (KL)
FY14 and FY15, respectively. In Haldia, it has added up
capacity of 61,000 KL and commissioned in Q1FY14 at an
investment of `48 crore. Of this, `34 crore would be
serviced through debt and the rest through internal
accruals. Consequently, the company is adding up capacity
of approximately 1,20,000 KL at Pipavav with an
investment of `120 crore and 60% of this investment
would be serviced through debt. Post-expansion, the total
liquid capacity of Aegis would cross 5,00,000 KL.
The Kochi facility was under-utilized till Q2FY13 and
since Q3FY13 its utilization has improved to over 80%.
This is further expected to improve in the coming quarters
and would directly add to the margins. Apart from this, the
company had done de-bottlenecking at its Mumbai
terminal in December ’12, which has increased the
capacity by 20%.
Liquid revenues have been growing at a CQGR of 8.8% in
the past 4 quarters and the margins in this segment have
been as high as 58% and generally waiver approximately
50% to 55%. We expect this division to grow by 18% and
28% in FY13E and FY14E, respectively on the back of
addition of capacities in Haldia and higher capacity
utilization at Kochi and Mumbai. With the growing
contribution to the revenues from this segment, which has
superior margins, we expect overall margins of the
company to also improve, going forward.
Cap On Domestic Cylinders Will Drive Volumes In
High Margin Auto And Commercial Gas Segments
The consumption of LPG in India has been growing at a
CAGR of 7% in the past 9 years. The government of India
has been promoting the usage of LPG as it is safer and
environment friendly.
LPG Consumption In India ('000 MT)
20000
15350
14234
10456
10849
12191
14331
10245
13135
9305
12010
8351
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
(11 months)
15000
FY15E
273000
51000 61000
FY14E
273000
51000 61000
FY13E
273000
51000
FY12
273000
FY11
267000
FY10
237000
51000
FY09
237000
51000
0
100000
120000
300000
0
Kochi
51000
200000
5000
Mumbai
51000
Haldia
Pipavav
400000
500000
Source: Company Data
Aegis has embarked on capacity expansion at Haldia and
Pipavav ports, which are expected to be operational in
Beyond Market 02nd May ’13
10000
Source: Petroleum Ministry
Nearly 96% of LPG is consumed domestically and the
balance is used for industrial, commercial and autogas. Out
of this total demand, 30% is fulfilled through imports.
Aegis has a 20% market share in imports.
However, the penetration of LPG in India is quite low at
45% only and that it is only 20% in rural India. As
penetration improves, there will be enough scope for LPG
consumption to increase from here.
It’s simplified...
33
account. This would set a fair stage for private players as
compared to OMCs. As the subsidy will be directly
transferred to the beneficiary, he/she will have to purchase
an LPG cylinder from the open market and in the open
market, private players will compete with OMCs.
LPG Penetration In India
88%
100%
80%
60%
45%
40%
19.6%
20%
0%
Urban
Rural
Total
Source: Government Of India
In September ’12, the Indian government imposed a cap on
subsidized cylinders at 6 and then increased to 9 in a year
for domestic use, which was aimed at lowering the subsidy
burden of the government. This means the supply of
household cylinders will get restricted and the consumers
will have to pay the market price for cylinders beyond nine
in a year.
This decision by the government has had a negative impact
on Aegis’s sourcing business in Q3 and Q4FY13 with a
drop in overall gas volumes since oil companies made
rigorous KYC checks and cancelled multiple connections.
However, the company management has indicated that
OMCs have again come back for higher sourcing of LPG
in the month of March.
LPG Consumption In FY13 ('000 MT)
1320
1326
1316
1332
1302
1295
1280
1260
1273
1301
1279
1308
1273
1240
1220
1229
Source: Petroleum Ministry
On the positive side, this reform is expected to curb the
diversion of subsidized cooking gas cylinder to
commercial and auto gas usage. This will enlarge
commercial and auto gas market and create a level-playing
field for parallel marketers like Aegis Logistics Ltd, which
is poised to capitalize on this opportunity in the gas
distribution business.
The sourcing business of Aegis has very thin margins of
around $3 to $4 per tonne whereas auto, commercial and
industrial gas distribution is of high margin of around 7%
to 10%. In the trade off of sourcing and other gas
businesses, Aegis is likely to gain.
Moreover, Aadhar card campaign would facilitate for
direct transfer of LPG subsidy into the beneficiary’s
34
Beyond Market 02nd May ’13
Number Of Gas Stations
160
140
120
100
80
60
40
20
0
150
66
55
FY09
FY10
74
80
FY11
FY12
92
9M FY13
FY15
Source: Company Data
Change In Hedging Policy – To Reduce Volatility In
Earnings
1340
1300
Aegis has plans to expand its retail autogas business to tap
this huge opportunity. Currently, it operates nearly 94 auto
stations in 7 states under the brand name ‘Aegis Autogas’
and has plans to take the count to 150 by FY15. Aegis is
likely to add 20 stations per fiscal. The company also runs
packed LPG cylinders for commercial and industrial usage
under the brand name of ‘Aegis Puregas’ with 34
distribution outlets in Maharashtra, Karnataka and Gujarat.
Aegis is an importer of gas and currency fluctuations affect
the company’s profitability. In September ’11 when the
rupee depreciated sharply against the dollar, the company
was caught on a wrong foot and was incurring huge
currency losses. To cover this loss, it entered into large
Options trade. Though the Options trade helped it to
reduce some forex losses, it created huge volatility in the
company’s results.
Quarterly Result Analysis
(` cr)
EBIDTA
PAT
Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13
27.4
16.6
-28.8
-18.5
24.5
-57.2
68.1
80.2
-25.1
4.4
-44.3
37.6
-39.3
-6.9
Source: Company Data
The reported EBITDA of 9 months of FY13 indicates a
loss of `108.9 crore. However, if we reduce various lags of
options transactions, then normalized EBITDA gives a
different picture.
In order to reduce the volatility in earnings, Aegis changed
its hedging policy in September ’12 and has begun taking
plain vanilla forward contracts of 15-20 days’ payment
cycle for LPG cargoes. The outstanding old Options
expired in February ’13 and the premium of this would be
amortized till Q4FY13.
It’s simplified...
Going forward with plain vanilla forward contracts, the result will be less volatile and will give a true picture of the
operational performance of the company. We believe the normalized reported result will improve the valuation of Aegis
Logistics Ltd.
RISKS
Dependence Of Economic Growth
The logistics industry is closely linked to the country’s economic growth and any slowdown in economic activities will
impact the growth of Aegis.
Exchange Volatility
Any volatility in the Indian currency would impact Aegis since the company is an importer of gas. However, post huge
forex losses in FY12, Aegis has begun taking only plain vanilla forward contracts of 15-20 days for LPG cargoes.
Fluctuations In Gas Prices
India imports 30% of its gas requirements. Consequently, any change in gas prices globally would affect volumes of gas
imports of Aegis.
CONCLUSION
Aegis Logistics Ltd (Aegis) is a leader in oil, gas and chemical logistics. In addition to this, it is also a leader in sourcing,
shipping, and distribution of LP gases (LPG and propane) into India.
The company is in the process of expanding its cash generating liquid business’s storage capacity from the current
3,24,000 KL to 3,85,000 in FY14 and further to over 5,00,000 KL by FY15. It is also expanding its auto gas retailing
business, which would augur well for the company, coupled with the Indian government’s decision to put a cap on
subsidized domestic cylinders.
Financials
Year
Consolidated
Net Sales
(` cr)
Growth
(%)
EBITDA
(` cr)
FY11A
1811.1
494%
83.5
FY12A
4463.8
146.5%
FY13E
4090.3
FY14E
4313.2
Margin
(%)
Ad PAT
(` cr)
Margin
(%)
EPS
(`)
PE
(x)
EV/EBITDA ROE
(x)
4.6%
46.7
2.6%
15
9.6
6.2
20%
112.3
2.5%
19.7
0.4%
5.9
24.4
6
8%
-8.4%
157.9
3.9%
39.9
1%
11.9
12.1
3.1
14%
5.5%
163
3.8%
75.3
1.7%
22.6
6.4
3.1
23%
Source: Company Data And Nirmal Bang Research
We expect margins of the company to remain firm with increasing proportion of high margin businesses like liquid (53%
margin) and autogas retailing (10% margin). We expect EBIDTA of the company to grow at a CAGR of 20% during
FY12-FY14. At the current market price, the stock is trading at EV/EBIDTA and a P/E of 2.9x and 6.0x, respectively for
its FY14E earnings and looks attractivE.
BADWILL
The negative effect felt by a company when shareholders and the investment community find out that is has done
something that is not in accordance with good business practices. Although typically not expressed in a dollar amount,
badwill can play out in the form of decreased revenue, loss of clients or suppliers, loss of market share and federal
indictments for any crimes committed.
Beyond Market 02nd May ’13
It’s simplified...
35
A Smart
36
Beyond Market 02nd May ’13
Gain
It’s simplified...
By
making
right
investment decisions,
home
owners
can
avail tax exemption
on
capital
gains
incurred by them
I
f you want to sell a property
and move to a bigger one, then
you need to chart out the
options available to you in
order to claim an exemption on the
capital gains incurred. First things
first – it is important to take into
consideration the holding period of
the asset at the time of sale. The profit
arising on the sale of any asset is
termed as capital gains depending on
the period of holding (long term or
short term).
In case of property, whether
residential or commercial, if the
holding period is more than 36
months, it is considered as a
long-term asset whereas for any other
financial asset, that is shares, mutual
funds, ETFs etc, if the holding period
is more than 12 months, it is
considered as a long-term asset.
However, short-term capital gains
arising from the sale of any asset,
except shares and equity mutual
funds, is treated as normal income.
Also, it is taxed at regular slab rates
of the taxpayer.
It is becoming increasingly important
to consider tax implications before
planning any investments since taxes
could prove to be really heavy on
your pockets if not planned properly,
especially in case of properties where
you incur huge capital gains.
Moreover, it becomes even more
important to consider capital gains
tax on property because nowadays
Beyond Market 02nd May ’13
there is a shift in investment
perspective in a property from self
occupancy to buying a property for
the purpose of investment.
If you already have a property on
which you are claiming exemptions
under section 80C for the principal
amount of the home loan and under
section 24 for the interest component
of the home loan, then you are
required to hold the property at least
for a period of 5 years. If the property
is sold within the period of 5 years,
then the deductions availed in the
earlier years for the principal portion
of the home loan u/s 80C will be
treated as income of the year in which
the property is sold and taxed at your
slab rates.
However, deductions claimed for the
interest portion of the home loan will
not be affected. But if the buyer had
purchased the said house by
reinvesting the capital gains incurred
on the sale of any other asset, then the
period of holding the asset would
reduce to 3 years.
Broadly categorized, there are three
options available to claim an
exemption on long-term capital gains
incurred. Let us look at each of them
one by one.
I. SELL A HOUSE – BUY A
HOUSE
If an individual wishes to buy a
property from the sale proceeds of the
existing property, then the long-term
capital gains incurred will be exempt
under ‘section 54’ to the extent of
long-term capital gains incurred or
investment
in
new
property,
whichever amount is lower.
However, the condition is that the
new property should be purchased
within a period of two years from the
sale of the existing property (3 years
in case of an under construction
property) or within 1 year prior to the
sale of the existing property.
This means that it is not necessary
that the new house be purchased from
the sale proceeds of the existing
property, given that the new property
was purchased a year before the sale.
However, if you have not invested
your long-term capital gains on the
existing property in a new property
till the due date of filing tax returns
(31st July), you are required to invest
the entire long-term capital gains in a
Capital Gain Account Scheme
(CGAS) with any nationalized bank
in order to avail of an exemption in
the current year.
In the future, you can withdraw this
amount from CGAS and utilize it to
invest in a new property within the
specified duration as discussed
earlier. If the entire LTCG from
CGAS is not utilized for investment
in a new property, then the difference
amount will be added back to your
income and taxed at slab rates.
II. SELL ANYTHING – BUY
BONDS
If you have incurred capital gains on
the sale of any long-term asset,
(including property) and you do not
wish to reinvest that money in
property, you can still avail of an
exemption under ‘section 54EC’ if
you invest the long-term capital gains
incurred in specified bonds which are
‘National Highway Authority of
India’
(NHAI)
or
‘Rural
Electrification Corporation’ (REC).
The investment needs to be done
within a period of 6 months from the
date of sale of the existing asset.
However, there is a restriction on the
investment amount to the maximum
extent of `50 lakhs in aggregate and a
lock in period of 3 years.
Needless to say, if the withdrawal is
It’s simplified...
37
done before the period of 3 years or if
the bonds are pledged as security for
any loan, it is considered as a transfer
for income tax purposes and the
capital gains exemption availed
earlier will be taxed as normal income
in the year of withdrawal.
This is generally used by senior
citizens or those hailing from the
middle class category, who may not
want to invest a huge sum in another
property or may want income in a
regular form by way of interests.
III. SELL ANYTHING BUT A
HOUSE – BUY A HOUSE
On incurring long-term capital gains
on the sale of any asset (excluding
property), and if you wish to buy a
property in return, then you can claim
an exemption under ‘section 54F’ of
the entire long-term capital gains
incurred by you if you invest the
entire net sales consideration in an
altogether new property.
Alternatively, if the amount of
investment in the new property is
lower than the net sales consideration,
then you can avail of an exemption on
the proportionate amount so invested
or long-term capital gains, whichever
is lower.
The duration within which the
investment in the property needs to be
made and the conditions for
investment in CGAS remain the same
as mentioned in point 1 for section 54.
However, there is restriction on
properties that can be held as on the
date of purchase of the new property.
The assessee can own not more than
one property in addition to the new
property being purchased unlike
section 54, where there is no
restriction on the number of
properties held in addition to the new
property. If this condition is not
satisfied, then the entire long-term
capital gains incurred will be taxed at
the respective tax rate (10% without
or 20% with indexation).
The benefit of section 54 and section
54F is available to only individuals
and HUF whereas the benefit of
section 54EC is available to all
assesses. In case a loan is taken to
purchase the new property (whether
ready
possession
or
under
construction), the benefits of
deduction will also be availed under
section 80C for the principal portion
of the home loan and under section 24
for interest portion of the home loan.
The second most important thing that
needs to be kept in mind is that the
new assets purchased (as discussed
earlier) on reinvestment of capital
gains on the existing assets should be
held for a period of 3 years from the
date of purchase of the asset.
If it is redeemed or sold within a
period of 3 years since the purchase,
then the entire long-term capital gains
exempted earlier will be treated as
short-term capital gains along with
the benefits of the principal portion
availed under section 80C and the
same will be taxed at your slab rates.
Hence, timing of the investment and
sale are very important factors that
must be considered before making
investment decisions. Plan your taxes
but don’t let taxes plan yoU.
AIR POCKET STOCK
It is a stock that experiences a sudden drop, similar to a plane hitting an air pocket. Air pocket stocks are usually the result
of investors reacting to negative news. This is almost always caused by shareholders selling their stocks because of
unexpected bad news. An air pocket stock is not necessarily in dire straits. More often than not, the abrupt, drop caused
by disgruntled investors is usually the end of the correction.
TURKEY, INDONESIA, MEXICO AND PHILIPPINES (TIMPs)
Four smaller markets with an acronym of their own - Turkey, Indonesia, Mexico and the Philippines, the TIMPs have
excelled.
The TIMPs are blessed with rapid growth as are many emerging economies. The International Monetary Fund forecasts
inflation-adjusted increases in gross domestic product this year.
Each TIMP country has some idiosyncratic feature that adds to its appeal. Turkey’s location, which allows it to bridge Asia
and Europe along one axis and Russia and the Arab world along the other; Mexico’s “manufacturing renaissance”;
Indonesia’s middle class, which is growing swiftly by Asian standards; and the Philippines’ booming call center industry.
38
Beyond Market 02nd May ’13
It’s simplified...
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Despite having fallen out of favour with
investors,, close-ended funds are back and
can be considered by investors
Beyond Market 02nd May ’13
It’s simplified...
39
C
lose-ended
equity
schemes which were out
of favour in the past five
years are back in vogue.
At least three fund houses are coming
out with close-ended equity schemes
in such a volatile environment.
In fact IDFC Mutual fund has already
launched
its
IDFC
Equity
Opportunity-Series I, which is a
three-year close-ended scheme.
Other fund houses such as Reliance
Mutual Fund and Axis Mutual Fund
have already filed an offer document
with the market regulator Securities
and Exchange Board of India (SEBI)
seeking to launch their close-ended
mutual fund scheme.
IDFC Equity Opportunity-Series I
would invest 65% to 100% of its
portfolio in equities and the
remaining part of the portfolio in debt
and money-market instruments. The
scheme would invest in a diversified
basket of stocks without any
capitalization bias. The performance
of the scheme would be benchmarked
to the BSE 500 Index.
The fund will try to pick up stocks on
the basis of long track record and
good corporate governance of
companies. Consistent cash flows or
attractive dividend yields will also be
considered in the stock selection
process along with strong balance
sheets of companies.
The fund in the initial stage would be
in small companies by market
capitalization, which is likely to
benefit from an expected recovery in
the Indian economy.
The fund offers a dividend option. A
person can also invest in this fund by
taking the direct route. The minimum
application amount in the fund is
`5,000. There is no entry or exit load
in this fund. The units will be listed
40
Beyond Market 02nd May ’13
on the Bombay Stock Exchange.
According to officials from IDFC MF
the main reason for coming out with
an equity close-ended scheme is that
if there is a reversal in the Indian
economy, smaller firms would
bounce back faster. This will, in turn,
affect their valuations.
The basic investment strategy of the
scheme
is
to
focus
on
profit-generation capability, low debt
on books, cash flows and good
governance of a company.
The investment universe for this fund
is beyond the top 200-250 companies
listed by market capitalization.
Therefore, though the fund is not
biased
towards
any
market
capitalization, the intention is to
capture the dormant opportunity in
small- to medium-sized companies.
Similarly, Reliance Mutual Fund
plans to launch a series of five-year
and 10-year close-ended equity
schemes. The scheme would invest
over 80% in equities and the
remaining in debt and money market
securities. The performance of the
scheme would be benchmarked to the
BSE 200 index.
While Axis Mutual Fund is planning
to come out with a scheme with a five
year lock-in period, the scheme will
automatically turn open-ended after
the lock-in period.
Let us understand what exactly are
close-ended schemes, their features
and whether they really benefit retail
investors or not.
Investors must be aware of the fact
that mutual funds are classified
according to the nature of their
investment, investment philosophy
and risk profile. However, equity as
well as debt funds differ on the basis
of their structure, that is, open-ended
and close-ended. The main difference
between the two is flexibility of sale
and purchase of units.
As the name suggests, a close-ended
fund is close-ended for its entire term
and investors can sell their units only
through stock exchanges.
The unit capital of close-ended
schemes is fixed and investors can
sell specific number of units and can
buy units only during the new fund
offer (NFO) period. This further
means that no new investor can enter
the scheme once it closes down. Nor
can they exit till the end of the
scheme’s term.
However, to provide a platform to
investors to exit before the term in
case of an emergency, fund houses list
their close-ended schemes on a stock
exchange where investors are allowed
to sell their units.
Trading on a stock exchange enables
investors to buy and sell units through
a broker in the same manner as
transacting shares of a company. The
units may trade at a premium or
discount to the net asset value (NAV)
depending on investors’ expectations
of the fund’s future performance as
well as prospects.
The demand and supply of fund units
and other market factors also affect
their price. The number of
outstanding units of a close-ended
fund does not change as a result of
trading on the stock exchange.
During the boom in the markets
between 2004 and 2008, we saw
many fund houses coming out with
close-ended schemes. During that
period,
the
performance
of
close-ended schemes was not very
inspiring to say the least.
It is believed that the structure of
close-ended schemes also takes away
It’s simplified...
investors’
most
effective
risk-mitigation approach in a volatile
market. By looking at the past history
of close-ended schemes, one can say
that it was the way to collect money
during the boom phase in the Indian
equity
markets. Also,
some
regulations helped fund houses to
come out with close-ended products
at that time.
As the markets entered 2008 during
the financial crisis, fund houses
stopped coming out with close-ended
schemes due to the ordinary and
below average returns and change in
SEBI’s regulation. Close-ended
schemes also suffered due to their
premature withdrawals.
At that time several close-ended
funds offered a quarterly redemption
window to investors and in some
cases there was even a monthly
redemption window. But in the year
2008 as well as 2009, open-ended
schemes
hugely
outperformed
close-ended schemes.
In the initial years of the funds in
India, public sectors banks (there
were no private fund players)
launched
mostly
close-ended
schemes. But later on as markets
developed and new players started
coming in, fund houses started
coming out with open-ended schemes
or turned their close-ended schemes
into open-ended schemes.
IN A NUTSHELL
The ban on entry loads and streaks of
measures from the market regulator
has led to less monetary benefits to
fund houses who were shying away
from launching close-ended schemes.
That the fund houses are coming out
with close-ended schemes now means
they have done their homework well.
However, the ones to gain from this
will surely be retail investors. But one
has to always remember the thumb
rule that returns in equities are not
guaranteed and even after staying
invested for three years, investors
might receive average returns based
on movement in the equity markets
and stock selection.
While considering this product,
investors should be well aware of the
risks associated with close-ended
schemes and only then invest in them.
Further, investors should always look
at their risk, return requirements and
investment horizon, before investing
in mutual fundS.
Now, Commodity Trading Is No More A Puzzle.
Commodity trading can be confusing especially if one is
inexperienced and lacks the necessary skills to trade
successfully. At Nirmal Bang, our team of seasoned
analysts with years of experience and in-depth
knowledge can help you spot the underlying clues and
create the investment strategies that best suit your
commodity trading requirements.
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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.
Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
R E G D. O F F I C E : S o n awa l a B u i l d i n g, 2 5 B a n k St re e t, Fo r t, M u m b a i - 4 0 0 0 0 1 . Te l : 0 2 2 - 3 9 2 6 7 5 0 0 / 7 5 0 1 ; Fa x : 0 2 2 - 3 9 2 6 7 5 1 0 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010
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Beyond Market 02nd May ’13
It’s simplified...
41
TECHNICAL OUTLOOK FOR THE FORTNIGHT
T
he markets maintained a
positive momentum in the
April expiry series owing
to optimism regarding the
likely rate cut in the monetary policy
review and the probability of lower
current account deficit due to fall in
crude oil prices. The markets gained
around 4% in the April series with
Bank Nifty being the star performer
with 12% gains.
The RBI is going to announce its
annual monetary policy for 2013-14
on 3rd May ’13. Better-than-expected
March inflation has improved
optimism regarding monetary easing
by the RBI. The Wholesale Price
Index (WPI) for India touched a
40-month low of 5.96% for the month
of March. Core inflation was also
below 4% for the month of March.
According to data released by the
government, the Index of Industrial
Production (IIP) slipped to 0.6% in
February this year due to contraction
in power generation and mining
output and poor performance of the
manufacturing sector. This was above
street expectation of -1.7%.
India’s current account deficit is
expected to improve due to the fall in
gold prices, coupled with lower crude
oil prices.
Nifty April series saw rollovers of
around 66% at a cost of only 0.09%
v/s a 3-month average of 57% at a
cost of 0.58%. These rollovers are not
considered as good as previous
expiries as the cost at which the
rollovers took place were way lower
than its three-month average. A
similar case was found in rollovers of
the Bank Nifty (67.72% at a cost of
-0.39% v/s 58.93% at a cost of 0.65%
3-month average).
42
Beyond Market 02nd May ’13
On the Nifty Options front, for the
May series, highest OI build up was
seen at 5,800 Put and 5,900 Call to the
tune of approximately 5 million each
(as on 26th April) indicating a narrow
trading range before the RBI policy
meet scheduled on 3rd May ’13.
India VIX, which measures the
immediate 30-day volatility in the
market, has been choppy these days
and is trading in a broad range of 1317 (currently at 13.86) (as on 26th
April). Going forward, it has already
formed a strong base of 13 and we
may see an upward breakout. Levels
of 19 and 22 can be seen on India VIX
in the days to come.
The PCR-OI for Nifty Options is
hanging between the broader range of
0.7-1.25 since a couple of expiries.
The current Put Call Ratio–Open
Interest (PCR-OI) stands at 1.03 (as
on 26th April). Going forward, we
expect it to remain in this range and a
sell on rise (near 1.2) and buy on dips
strategy (0.8) can be adopted.
The Nifty Index rallied from the April
’13 lows of 5,477 and the advance
surpassed the 5,900 level. The Nifty
has an immediate resistance area,
which indicates level 5,970 is a
crucial hurdle to be crossed
immediately. Recently, a reversal
pattern was formed on the daily charts
and a closing above this is essential
for positive bias as well as
continuation of the uptrend.
Any move beyond that may trigger a
further upside till 6,120 and 6,180
levels, which is a possibility over the
next few weeks. However, for the
uptrend to remain intact, the Nifty
should sustain above the level of
5,750 in case of a further correction in
the next few weeks.
Since the past few trading sessions,
the Nifty has been in a strong uptrend,
forming a series of higher tops and
bottoms. The oscillator situation
suggests the absence of a negative
divergence pattern.
However, there is insufficient
evidence for any top and, therefore,
we conclude that the advance is not
done yet. The Index is likely to test
6,120 and 6,200 levels on the upside.
The support resides at the 5,750 level
on the downside and one should
maintain a buy-on-dips approach.
After taking support near its longterm averages, the Bank Nifty has
observed a parabolic move and has
managed to sustain above the level of
12,700, which is a bullish signal.
The Bank Nifty faces strong
resistance around the 12,820 level on
the upside where selling pressure is
expected. One should maintain a
positive bias only on close above this
for an upside potential to 13,15013,200; there is an immediate Support
at 12,560-12,520 levels on downside.
OPTIONS STRATEGY
BEAR PUT RATIO SPREAD
It can be initiated by ‘buying one lot
of 5,900 Put and selling two lots of
5,700 Put. The 5,900 Put is trading at
100 and 5,700 Put is at 35 (as on 26th
April). The net cost comes to `30 (i.e.
100-(2*35)). The maximum profit is
170 if as expected the Nifty May
contract sees some correction and
expires at the 5,700 level. Maximum
loss would be unlimited if the Nifty
breaches the recent low of 5,530. If
the Nifty stays above the 5,900 level
at expiry, a maximum of `30 would
be a loss. Profit range at expiry is seen
between 5,870 and 5,530 levelS.
It’s simplified...
PAST LESSONS
TO CHART A
BETTER FUTURE
Market participants can learn from
their past mistakes and take right
investment decisions
Beyond Market 02nd May ’13
It’s simplified...
43
S
ometimes some lessons are
better learnt the hard way.
And this applies to the stock
markets too. Often we listen
to views and recommendations of
friends, family, market experts and
learn various investment strategies,
while gobbling up every book on
fundamentals and technicals. But our
past experience in the stock markets
is indeed our best teacher.
Self-analysis or past trade analysis is
therefore important. A person’s
trading history, believe it or not, has a
pattern and a language of its own,
which needs to be translated and
interpreted so as to avoid the same
mistakes again.
PURPOSE OF
ANALYSIS
PAST TRADE
Your past trades will unravel answers
to most of the below-mentioned
questions:
‡$UH\RXDWUDGHURUDQLQYHVWRU"
‡$UH\RXPDNLQJSURILWVRUORVVHVDW
WKHHQGRIHDFKPRQWK"
‡ $UH \RX RYHUWUDGLQJ RU
XQGHUWUDGLQJ"
‡ +RZ PXFK ORVV GR \RX HQGXUH
EHIRUHH[LWLQJDORVLQJSRVLWLRQ"
‡$UH\RXDSHUSHWXDOEXOORUDEHDU"
‡$UH\RXLQYHVWLQJDWWKHSHDNRUDW
WKHERWWRP"
‡$UH\RXDFRQWUDULDQLQYHVWRU"
‡ +RZ RIWHQ GRHV \RXU VWRS ORVV JHW
KLW"
‡ +RZ RIWHQ GR \RX DYHUDJH DQG DW
ZKDWSHUFHQWDJHV"
‡'R\RXH[LW\RXUZLQQLQJSRVLWLRQV
LQDKXUU\"
‡ 'R \RX KROG RQ WR \RXU ORVLQJ
SRVLWLRQVORQJHQRXJK"
‡'R\RXKDYHVRPHWUDGLQJIDYRXULWH
VWRFN"
‡$UH\RXIHDUIXORUJUHHG\"
Once you realize your strengths and
weaknesses and your trading
personality, biases and mistakes, etc,
you can alter and modify you trading
44
Beyond Market 02nd May ’13
strategies accordingly to have a better
all-round approach.
M A T H E M A T I C A L
INTERPRETATION OF PAST
TRADES
The mentioned analysis gives you a
subjective idea about your behaviour
and performance in the markets. But
what
you
need
is
definite
number(s)/figures so that you can do
a quantitative analysis of the same.
Remember: Select a good sample of
approximately 50 to 60 past trades.
Don’t keep the sample size too small
or too large, lest the results may be
inconclusive or vague.
‡:,1/2665$7,2
Basically it is a
number of times
winning trade as
number of times
losing trade.
measure
you have
compared
you have
of the
had a
to the
had a
The win-loss ratio tells whether your
trading system is good or bad. The
win-loss ratio by itself is not of much
significance since it does not take into
account the amount of profit in rupees
to the amount of loss in rupees, it just
tells you what your probability of
executing a profitable trade is.
For example, if you take past 10
trades and you have made a loss in 9
out of those 10 trades with a total loss
amount of `5,000 and the single
profitable trade of `8,000, then your
trading strategy is considered to be a
profitable strategy even though your
win ratio is just 10%.
So, to get a better picture of your
success to failure, you have the
Profit/Loss ratio.
‡352),7/2665$7,2
It is a ratio of the average profit size
of winning trades divided by the
average loss size on losing trades.
For example, if in your last 50 trades,
you have 30 winning trades and 20
losing trades, then your
Average Value Of Winning Trades
= Total Gain Amount
Total Number Of Winning Trades
Win-Loss Ratio = Winning Trades
Average Value Of Losing Trades
= Total Loss Amount
Total Number Of Losing Trades
Losing Trades
= 30
20
So, the Win-loss ratio = 3:2
It means that for every 3 profitable
trades you are making 2 loss-making
trades.
Win Ratio = Winning Trades
x 100
Total Number Of Trades
Win Ratio = 30 x 100 = 60%
50
Loss Ratio = 100 – 60 = 40%
This means that if you execute 100
trades, on an average 60 trades will be
profitable, while approximately 40
trades will be loss-making ones.
Profit/Loss Ratio
= Average Value Of Winning Trades
Average Value Of Losing Trades
So, from the above example if the
total profit out of 30 winning trades is
`36,000, and the total loss of the 20
losing trades if `12,000, then the
Profit/Loss Ratio will be:
Average Value Of Winning Trades
= 36000 = 1200
30
Average Value Of Losing Trades
= 12000 = 600
20
It’s simplified...
So, Profit/Loss Ratio or Edge Ratio
= 1200
600
Profit/Loss Ratio or Edge Ratio = 2:1
Find out ways and means to reduce
and minimize your outgoings
wherever possible. After all a rupee
saved is a rupee earned.
This indicates that on an average the
amount lost in your losing trade is
twice the amount gained in your
winning trade. Profit/loss ratio is a
barometer to measure the efficacy of
your trading system. Therefore, in the
above case, the profit/loss ratio
suggests that your trading strategy is
quite profitable. Ideally you should
have a profit/loss ratio of 2:1 or 3:1 or
it is better to make some serious
money in the market.
‡180%(52)75$'(6
Remember individually both win/loss
and profit/loss ratio do not paint a
complete picture but together they
provide invaluable information. For
instance, if you have a low win/loss
ratio, you can still make profits in the
markets if your profit/loss ratio is
high. Conversely, even if your
win/loss ratio is high, you can still be
making huge losses if your profit/loss
ratio is low.
‡ CALCULATING YOUR EXPENSES
Even if both the given ratios show
that your profit percentage is quite
high, there is one very important
thing, which you should take into
account. It is your overhead expense
related to each and every trade. Say
for instance, you undertake 10 trades
with a total profit of `10,000, and a
total loss of `2,000, you would think
that you did great and made a profit of
`8,000.
But your overhead expenses such as
brokerage charges, transaction and
demat charges, taxes, internet
expenses, electricity, subscription
charges for market monitoring
software, magazine and business
newspaper subscription, etc amount
to a staggering `5000. So, in fact you
end up with a very small amount.
Beyond Market 02nd May ’13
Calculate the total number of trades
undertaken by you over the past one
year. If you are trading excessively,
then it could mean that you are
trading on instinct as well as
compulsiveness rather than reason or
research, which means that you are
shooting in the dark hoping to get
lucky. This is never a good strategy.
Conversely, if you are trading
sparingly, then it means that you are
either not confident about your trades
or do not have enough time or
knowledge to monitor and trade the
markets on a regular basis. This too
can be detrimental to your financial
health as your capital remains
unutilized in your bank and you are
missing out on various other trading
opportunities in the market.
There is no set number as to the
number of trades that one should take
in a year or a month. To each his own.
But it should be a number that is
easily manageable and comfortable
for you and which does not put undue
strain on your corpus or excess
burden on your expenses.
0 $ 7 + ( 0 $ 7 , & $ /
$33/,&$7,212)3$6775$'(
ANALYSIS:
7+(.(//<&5,7(5,21
A formula designed by John Larry
Kelly. Jr. during his work at AT&T
Bell Laboratories is used by
gamblers, horse racing enthusiasts
and stock market traders and
investors alike to help determine the
maximum money that should be
allocated to each trade or bet.
.HOO\)RUPXOD
KELLY% = W – [(1-W)/R]
Where,
W = Winning probability.
R = It is the ratio of the average profit
size on the winning trades divided by
the average loss size of the losing
trades
Applying the same example from
earlier,
‘W’ is calculated by dividing the
number of positive trades by the total
number of trades.
W = 30/50 = 0.6
‘R’ is the ratio of the average profit
size on winning trades divided by the
average loss size on losing trades
R = Average value of winning trades
Average value of losing trades
=
1200
600
R = 2
So, incorporating the above data in
the Kelly Formula
KELLY% = W – [(1-W)/R]
= 0.6 – [(1-0.6)/2]
= 0.6 – 0.4/2
= 0.6 – 0.2
KELLY % = 0.4 or 40%
,QWHUSUHWDWLRQ,PSOHPHQWDWLRQ
If the Kelly% is 0.4, you should
commit no more than 40% of your
entire investment corpus to a single
trade. What this does is help you
remain in the market for a longer time
as opposed to losing everything if you
bet the entire corpus in a single trade
and lose it all.
Remember we are all in the market to
make profits and the longer you
remain solvent, the higher are your
chances of becoming successfuL.
It’s simplified...
45
ANIMAL KINGDOM O
A different species of
investors, much similar to
animals found in the wild,
participate in the markets
46
Beyond Market 02nd May ’13
I
n our school days, each one of
us must have written an essay
on our visit to the zoo. Today,
let us take a trip down memory
lane and visit a zoo, albeit of a
different kind – the stock market zoo,
where the animals are similar to those
in a normal zoo but their appearances,
characteristics and personalities are
quite different, and frankly scary.
investor who believes that the
markets or a specific stock will rise or
go up. They are buyers in the market
and when the stock market is going
up, it is known as a bull market.
BEAR
However, before you proceed; just a
word of caution. Please do not go
close to the zoo, for these animals
would surely bite you.
A bear is the exact opposite of a bull.
A bear is an investor who believes
that the market or a specific stock will
fall or go down. They are sellers of
the stock and when the stock market
is going down, then it is known as a
bear market.
BULL
DEER
The commonest of all stock market
animals is the bull. A bull is an
An investor who is uncertain or
undecided about the direction of the
It’s simplified...
OF A DIFFERENT KIND
market and does not take any position
in the market, he is known as a deer.
When the market is not going in either
direction and is trading flat, it is
known as a deer market.
SHEEP
An investor who does not have any
opinion or view of his own about the
market/stock and instead relies on
views and recommendations of others
such as friends, family, analysts, etc is
known as a sheep. Such investors are
usually the last entrants and more
often than not incur huge losses.
STAG
An investor who is rapidly changing
Beyond Market 02nd May ’13
loyalties and quickly changing from
being a bull to a bear and vice versa is
known as a stag.
A stag attempts to make money in
both directions by buying and selling
rapidly and undertaking multiple
trades, sometimes within minutes.
Basically, a stag is a high volume,
high risk trader.
PIG
An investor who has big profits on his
position - either long or short - but
fails to book his profits in hopes of
higher gains, only to see all his profits
erode and finally realizes a loss is
known as a pig. Pig investors are
greedy and a mere 20% to 25% profit
is just not enough for them.
Pigs have only one role in the market
and that is to get slaughtered so that
the bulls and the bears can feed on
them and make profits.
CHICKEN
An investor who exits the stock
markets completely owing to the
perpetual fear of losing all his
investments in the stock markets and
shifts his investment to safer avenues
such as fixed income and other debt
instruments is a chicken.
LAME DUCK
An inefficient trader who has made
It’s simplified...
47
poor investment and trading decisions
in the stock markets leading to huge
losses on a sustainable basis to the
point that he/she has gone bankrupt
and defaulted on his/her debt
obligation is known as a lame duck.
OSTRICH
An investor who fails to react or
simply chooses to ignore important
information and events which have a
bearing on his/her investment is
known as an ostrich.
Just like an ostrich, which sticks its
head in the sand on the first sign of
danger, an ostrich investor choses to
ignore any news or event that will
signal a threat to his stock and cling
on to it in the hope that better times
are just round the corner.
ELEPHANT
Large institutions such as mutual
funds, pension funds and insurance
companies who buy or sell in huge
quantities in the stock markets are
known as elephants.
Just like the size of an elephant, the
quantum of volume that an elephant
generates in the market dictates to a
large extent how a market or a stock
will perform.
usually found near the Arctic. In the
stock markets, lemmings are a type of
investors who are herd followers.
They do not do any research or try to
find out information about the
markets or the stock they want to
invest in.
LEMMING
They follow the crowd which usually
enters the markets once the smart
money (institutions and mutual funds,
etc) has left the markets and the prices
are already too high and are on the
verge of a collapse. Lemmings are
known for their so called ‘mass
suicide’ during their migration during
which they all jump into the river in
thousands and a majority of them do
not make it out alive.
Lemming is a type of rodent, which is
So, what kind of an investor are yoU?
In that, if the elephant enters a stock,
it will rise significantly and if the
elephant exits a stock, then it will
plummet drastically.
SMS ‘BANG’ to 54646
Contact at: 022-3926 9404, E-mail: [email protected]
Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006
Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981
EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS # | IPOs # | INSURANCE # | DP
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors
48
Beyond Market 02nd May ’13
It’s simplified...
IMPORTANT JARGON
FOR THE FORTNIGHT
ABENOMICS
Recent data has shown that Japanese exports are rising.
Business sentiment among manufacturers is improving.
And foreign investors are buying Japanese stocks like
never before.
So, what has prompted a sudden change in sentiment
towards Japan, a developed nation, but one that is
struggling with deflation and lower growth over the last
two decades? Has anything major unfolded? The answer is
an economic experiment that Japan has undertaken. It is
called ‘Abenomics’ in the world of finance.
What Is ‘Abenomics?’
Abenomics refers to economic ideas of Shinzo Abe, the
new Prime Minster of Japan, who won the election last
December on a promise of massive monetary and fiscal
stimulus to end deflation in the third-largest economy in
the world.
Early this year Japan announced a massive fiscal stimulus.
The stimulus initiative included $117 billion in central
government spending and which was heavy on
infrastructure spending and disaster preparedness. The
stimulus would boost real GDP by 2% and create 6 lakh
new jobs.
billion - $700 billion) per year and it will buy government
bonds at a pace of 50 trillion yen. Plus, it will also buy
exchange-traded funds and other assets. Monetary
stimulus will increase expenditure, which will generate
growth. Both the fiscal and monetary policies are dubbed
as ‘Abenomics’
Impact
While there has been a small rise in Japanese exports,
improving business confidence and surging investment
flows since the beginning of the loose monetary policy, it’s
too early to say whether there would be a sustained boost
to economic activity. Value of the yen has depreciated
against the US dollar and Chinese yuan. This will help
Japanese exports and increase output.
Further, the loose policy will take interest rates lower,
prompting corporates to take up expansion plans, which
will ultimately drive stock prices higher.
Indirect impact is seen in the form of lower Chinese
exports due to rising yuan (exports will be costlier as yuan
appreciates). This would lead to lower Chinese growth.
This will mean lower demand for metals from China and a
correction in commodity prices.
It further called for monetary easing by the Bank of Japan
(BoJ). And to that effect, the Bank of Japan on 4th April
shocked the world with a promise to inject about $1.4
trillion into the economy in the next couple of years. BoJ
has targeted inflation rate, currently in the negative to 2%
in the next two years. BoJ is going to increase the money
supply in the system.
Japan has maintained that falling yen is only a byproduct
of the stimulus steps taken to pull the country out of
deflation. The fact that G20 has backed the monetary plans
of Japan indicates that the impact on trade would,
however, be benign.
In order to attain the target, Bank of Japan will now
increase the monetary base by 60-70 trillion yen ($600
Critics say the policy is short sighted and will have an
adverse impact on Japan in the long term. The sharp and
Beyond Market 02nd May ’13
Critics
It’s simplified...
49
prolonged depreciation of yen could destabilize global
trade flows. They say it will have an adverse effect on
Japan’s trade partners.
Critics of Abenomics point out that if the gamble goes
wrong and quantitative easing does not give rise to
inflation, then it could damage Japan’s economy further,
adding to the debt load of the government.
Interest rates for corporates would go up. It could create
asset-price bubbles that may have painful consequences
later. Japan may move from deflation to a well-entrenched
inflation, which would be difficult to control.
Impact On India
Cheap money in Japan will lead Japanese fund managers
to allocate more funds to India for higher yields.
CATEGORY A, B AND C MINES IN
KARNATAKA
T
he Indian steel industry heaved a sigh of relief on 18th
April as the Supreme Court selectively lifted the over
one-and-half-year-old mining ban in Karnataka. Share
prices of JSW Steel, Kalyani Steel and Sesa Goa, which
have an exposure to Karnataka rose 2% to 15% on hopes
of higher iron ore availability, which would lead to better
capacity utilization.
Category A, B And C Mines
The Supreme Court in July-August ’11 imposed a
complete ban on iron ore mining on findings of large scale
irregularities and violation of environmental laws in three
districts of Karnataka. Based on the kind of irregularities,
iron ore mines were categorized as A, B and C - A-with
minor or no irregularities, B-with moderate irregularities
and C being illegal with serious irregularities.
Karnataka, India’s second-biggest producer of the ore
before the ban, constituted about 18% of the total iron ore
production in the country in FY10, which fell to 8% in
FY12 due to the ban on mining.
India used to produce about 200 million tonnes (MT) of
iron ore in a year and export about half of that, mostly to
top buyer China. But the government came down hard on
iron ore mines in Karnataka. With the aim to curb illegal
mining in 2010 and to enforce steps to retain output at
home, it slashed exports to just over 30 MT last year.
50
Beyond Market 02nd May ’13
The ban resulted in underutilization of capacity by
steelmakers based out of the state. While subsequently the
Supreme Court allowed state-run NMDC to extract as
much as 1 MT of ore a month, it also ordered all sales to be
made through online auctions. The availability of iron ore
remained scarce and steel companies had to rely on
imports, thus raising their input costs.
The Supreme Court Verdict
Now, as per the Supreme Court order, Category-B mines
(63 leases) will be allowed to restart mining subject to
necessary statutory clearances and completion of relief and
rehabilitation (R&R) work.
The apex court cancelled leases of all Category-C mines
(49 leases) and lifted the ban on all Category-A mines. It
also said that the cancelled mines will be put up for auction
through a transparent process.
JSW Steel has shown interest in participating in the
auctions. The operation of seven mines situated in or near
the Karnataka-Andhra Pradesh inter-state boundary will
remain suspended until finalization of the inter-state
boundary dispute.
What It Means To The Industry?
While 18 Category-A mines were allowed to operate in
September last year, only 10 mines have started.
Category-A mines are likely to produce about 6 MT by
end-FY14. Category-B mines will open slowly due to
compliance with R&R plans and could reach a production
capacity of about 4 MT by end-FY14, taking the overall
production to 20 MT. The production could increase to
about 23 MT by end-FY15.
Even after the opening of Category-B mines, any
meaningful production is expected only after six to eight
months as mining will resume post implementation of the
time-consuming R&R plans.
The production numbers are still short of the total iron ore
requirement for Karnataka, which is 35 MT. At peak, it
used to be 50 MT. Post the lifting of the ban, only 117 (45
Category-A and 72 Category-B mines) out of the total 166
mines in Karnataka can restart.
Nevertheless restarting of mines will provide some relief
to those steelmakers and miners whose margins have
shrunk in the past 12 months. Meanwhile, sector experts
are keeping an eye on the manner in which Category-C
mines maybe openeD.
It’s simplified...