Senior analyst jan 11(1)


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Senior analyst jan 11(1)

  1. 1. CONTENTS World Section• Will the Chinese Yuan be the next reserve currency? 3 Special Feature : Financial Inclusion• Financial Inclusion:Congealing Altruism & Profitability to 5 mitigate financial disparity• Using Microfinance for social upliftment through Financial Inclusion. 7 Stock Analysis• Equity Research Report::Nahar Spinning Mills 9 Economics• Analysis of Private Equity Investments in India in Second 11 half of 2010 and Beyond. 13• Key Trends & Issues in the Global Banking Sector.• Why Disinvestment For Indian Economy 15• The Demise of the Celtic Tiger 172The Senior Analyst
  2. 2. In the past few WILL THE CHINESE YUAN BE THE NEXT RESERVE CURRENCY? months we have seen that In the past few months we have seen that there has been a lot of speculation and hype about the Chinese Renmimbi (RMB) or the Yuan becoming the next reserve currency. In this article there has been we will focus on the various factors that can help and also the factors that are against the speculation regarding the Yuan, considering the global dynamics of politics and trade. a lot of Let us first understand what exactly is meant by a reserve currency. A reserve currency is one that forms significant part of foreign exchange reserves of governments and institutions which speculation enables a country to meet international debt obligations and to influence their domestic exchange rate.and hype about Factors that influence the use of a currency for reserves are as follows: •The size of the economy the Chinese • The importance of the economy in international trade •The openness of the financial markets Renmimbi • The convertibility of the currency • Use of the currency as currency peg (RMB) or the • Macroeconomic policies, as it influences the domestic environment A Brief on China’s past and current status of economyYuan becoming China’s success story is not new. Till the end of 15th century, China was the leader in technology & had the highest per-capita GDP on the planet. Europe overtook China in per the next capita GDP around 1500 but China remained the world’s biggest economy until well in the reserve 19th century. In fact in 1820, the middle kingdom accounted for one third of World’s economy. However the tide turned against China & by 1950 it suffered with one of the lowest currency. In per capita GDP in the World and accounted for less than 5% of world GDP. Since 1980s growth took off again, owing to demographic dividend, export driven growth, cheap & this article we abundant labour availability coupled with potential to become the world’s largest consumer market. With help of State initiatives, China’s fiscal revenues have increased 30 times over the will focus on past 20 years. Having maintained a phenomenal GDP growth rate of 9.5% for decades, China is now the World’s second largest economy. the various Problems with the US dollar as global reserve currency Currently US Dollar is the most widely held reserve currency as two thirds of the foreign factors that reserve of nations is in US Dollar terms. But things are no longer as smooth for the US Dollar as it used to be. There has been a steady decline in the dollar reserve holding percentage by can help and various countries. The global economic crisis of 2008 leading to rising US debt (The U.S.’s ratio of total debt to GDP is likely to exceed 90% this year) which keeps US dependent onalso the factors foreign financing and the increasing influence of China as a global power along with demand of countries like Russia for a new reserve currency have brought in the possibility of thethat are against Chinese Yuan as the next reserve currency. But being the most widely accepted reservethe speculation currency is no easy job and there are various factors at play which go for and against the Yuan. Inspite of the above mentioned facts, one important reason the US dollar remains the regarding the reserve currency is that the U.S. treasury market is the most liquid market which allows central banks to intervene in foreign exchange markets in order to smooth currency Yuan, fluctuations.considering the global dynamics of politics and trade.3The Senior Analyst
  3. 3. Now let us look at the factors which might prompt the Chinese government to work towards making the Renmimbi the next reservecurrency. The most important reason is overwhelming dependence of the Chinese on the US dollar. It is estimated that Beijing holdsabout $2 (2.6) trillion of dollar assets mainly accumulated through purchase of US Treasuries and through exports to the USA. The USAhas been incurring rising budget deficits in recent years. This is major concern for the Chinese government as a weakening dollar couldseriously dent the Chinese reserves.Movement towards global reserve currencyThere have been many steps taken by the Chinese government aimed at strengthening the cause of Yuan and improving its visibility.Recently Beijing carried out a series of currency swaps with central banks of countries like Argentina, Hong Kong, Malaysia and SouthKorea. This currency swap will remove the need for using the Dollar when it comes to trade with these countries. It also carried out atrade deal with Brazil valued at $95 billion in two other currencies other than the Dollar. The Chinese government is even thinking ofissuing bonds and loans to trading companies in Yuan rather than in Dollar. In fact banks like HSBC, Standard Chartered Bank are said tohave agreed to issuing bonds in Yuan. China has recently allowed Yuan to trade off shore in Hong Kong. Though the Yuan still remains aforeign currency market for Hong Kong and the local currency is still the Hong Kong dollar, but the offshore financial centre is being usedas a laboratory to internationalize the Chinese currency.Problems that needs to be tackledIn spite of the steps taken by the Chinese government there are various factors which pose practical and huge challenges to the Yuanbeing the next Reserve Currency. The main challenge is that the dollar is too entrenched in the international currency market. Howeverthe bigger issue is making the Yuan convertible with its value being determined by market conditions, governments and companiesaround the world who would be allowed to freely trade, buy and sell the currency. Given the authoritarian nature of the Chinesegovernment, lowering of these financial trade barriers and allowing foreign trade access to the Chinese securities market seems like aremote possibility. The absence of a large market for Yuan bonds is also seen as a hindrance. Currently only the Chinese Banks and theAsian Development bank sell Yuan dominated bonds. According to some experts it is numerically impossible for the Yuan to become thereserve currency as then China would have to run a large current account deficit so that the governments and the institutions which tradein Yuan would get a chance to accumulate it. But currently China has a huge current account surplus which does not give foreigners toaccumulate the Yuan.Things that China can do to favour its caseIf the Chinese government does decide to make the Yuan as the next reserve currency, the expected time line is expected to be around10 to 15 years. It has to push through the reforms before Yuan can be allowed to float freely against the dollar. It can easily take Chinaaround 5 to 10 years to bring about a change through its land reforms, reforms in the energy sector, social welfare. China would have togradually make the Yuan convertible on the capital account. It needs a more liquid foreign exchange market, as the US treasury market iscurrently the most liquid market. The bond markets and banking system needs to be more developed and there has to be propermonitoring of cross-border capital flows. The importance of having functioning capital markets cannot be understated as investors andCentral Banks buying Yuan would not want to simply invest in paper currency and instead would want stocks and bonds that tradetransparentlyAlternatives to the YuanIn this context there are various other alternatives which are possible. One such possibility is establishing a multi currency system and theuse of Special Drawing Rights (SDR) which is based on a basket of currencies. The Euro is also gaining prominence and the developingeconomies are also playing an increasingly dominant role in world economic order.Whether the world order changes to accept Yuan or any other currency like Euro or a mixed bag of currency as the next reserve currencyis for all of us to see. The fact remains that hold of US dollar as the reserve currency is slipping and China on its part is using itseconomic might through trade exports to penetrate world market to garner support for the Yuan as the next global reserve currency.-Ankit Agarwal & Shachi Prakash(FMS) Whether the world order changes to accept Yuan or any other currency like Euro or a mixed bag of currency as the next reserve currency is for all of us to see.4The Senior Analyst
  4. 4. INTRODUCTION: UNDERSTANDING THE NEED Financial inclusion is delivery of call microfinance; a method of injecting banking services at an affordable cost capital into highly industrious groups to the vast sections of disadvantaged of people in villages across the and low income groups. This inclusion developing world. It was a perfect forms the basis of economic example where profitability and opportunity. It enables the poor to altruism went hand in hand leading to build savings, make investments and financial inclusion. Grameen Bank insure themselves against income made a profit of $ 680,000 in 2007 shocks thereby entailing progress of while providing access to credit to the nation. Yet the statistics on millions of underprivileged financial ‘exclusion in India are Bangladeshi’s. The bank expects to disheartening. Out of the 600,000 loan $1.4 billion in 2010 and continues habitations in the country, only about to challenge conventional banking 30,000, or just 5 per cent, have a wisdom by banking the "unbankable". commercial bank branch. Just about 2> The success story of Dharavi, a 40 per cent of the population across bustling industrial-slum in Mumbai is the country has bank accounts, and another heartening example where this ratio is much lower in the north- Financial inclusion proved to be a east of the country. viable business proposition. Hindu Business line reports that Dharavi exports goods worth $500-650 million ALTRUISM & every year. Initially though, Dharavi, PROFITABILITY CAN being situated right in the heart of CO-EXIST Mumbai, the most banked city in the country, did not have a commercial Financial inclusion is a potentially bank branch for a long time. The first viable business proposition; it is the commercial bank branch was opened key driver for social change and can in February 2007. In just three years, greatly ameliorate the imbalances in the bank registered business in excess society. Envisioning a plan for financial of Rs 44 crore. Today, there are nine inclusion which is profitable while ATMs in Dharavi, all of them being concurrently being altruistic can lead actively used. This proved that money to rapid growth both in urban and rural management is a well-understood part areas, thereby creating a country that of everyday life of the poor, and witnesses all-round development. therefore a viable business proposition. 1> One such format was established From the above successful models of by Muhammad Yunus. He started off in financial inclusion, it can be stated that the village of Jobra with a belief that banking the unbanked can indeed be a financial credit is “A Human Right” and win-win opportunity. However, such created a whole system that we now incidences of profitability cum altruistic Congealing Altruism & Financial Inclusion Profitability to mitigate financial disparity5The Senior Analyst
  5. 5. ALTRUISM & The primary objective of any business is to make profits. A failure to achieve this goal makes an organization unsustainable, thereby all other goals PROFITABILITY ARE redundant. Financial inclusion from this perspective is a secondary objective. Although there have been A MISMATCH instances where altruism and profitability have gone hand in hand, there is no denying the fact that tailoring your organizational goals to meet the goals of social upliftment can introduce a significant amount ofrisk to your returns. The second aspect to be considered is the relevance of Micro Finance Institutions in a realm where they charge exorbitant interestrates. Interest rates of MFIs are currently in the bracket of 35-40 % which sounds very high. But we should not forget that it is highbecause of huge risks involved and the demand of funds outstrips the supply. The alternative the consumer faces is that of private lenderswhose interest rates vary from 350-400 % depending on the desperation of customer. Hence, we are stuck in a conundrum where MFIs,though providing relief from the clutches of private lenders, cannot be considered an effective medium to eradicate poverty. Loansprovided at 30% interest rate cannot be considered a platform for altruism rather resemble more of a profit accruing venture. The third aspect is the government policy which forces banks to lend to categorized priority sectors. As the recent report on Non-Performing Assets of banks has shown, the banks NPAs have grown due to priority sector lending norms. This trend if left uncheckedcould well lead to financial crisis. For example the compulsory priority lending requirement has resulted NPAs raising to 3.4% from lastyear’s 2.5%. The numbers tell the tale of a clear dichotomy between profitability and altruism with severe repercussions looming large. Finally, the market tend to meet the demand for credit (if there are not too many impediments) only if it makes business sense. Thevery fact that market has not yet considered this segment as profitable shows that it makes very little business sense or the returns are tooinsignificant to be considered desirable. In such a scenario it becomes more pertinent to eradicate barriers which might be preventingentry while simultaneously creating an enabling environment which would allure institutions to consider delivering a financial inclusionmodel which balances altruism as well as profitability.CONCLUSION In today’s world financial exclusion can lead to social exclusion and in order to address this shortfall one needs a holistic approach onthe part of government and private players to bring about innovative financial products. After taking a comprehensive look towards the various possibilities and obstructions in amalgamating altruism and profitability it canbe said that banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low incomegroup, treating it both as a business opportunity as well as a corporate social responsibility. They have to make use of all availableresources including technology and expertise available with them as well as the MFIs and NGOs. Taking banking to the sectionsconstituting “the bottom of the pyramid”, might appear to be considerably difficult and loss-making proposition however it should alwaysbe remembered that even the relatively low margins on high volumes can be a very profitable proposition. Financial inclusion can emergeas a commercially profitable business provided the government makes the right policy decisions and banks are prepared to think outsidethe box! -Alnoor S Venkani & Clement Joy Kingsly(FMS) In today’s world financial exclusion can lead to social exclusion and in order to address this shortfall one needs a holistic approach on the part of government and private players to bring about innovative financial products.6The Senior Analyst
  6. 6. “Financial inclusion is USING MICROFINANCE the timely delivery of financial services to FOR SOCIAL disadvantaged sections of society. UPLIFTMENT THROUGH Firstly, financial inclusion refers to a FINANCIAL INCLUSION So why is financial inclusion so important in the Indian context, to the extent of being a customer having compulsion, not a choice? There are ample theoretical and empirical evidence to show that access to a range of financial inclusion leads to economic growth and economic growth to poverty reduction. The formal financial works of Levine (1997) and Honohan (2004) show that a robust financial system can become services, from simple an effective poverty alleviation tool. There are large costs to small and poor entrepreneurs due to the market imperfections in a poorly developed financial system. These burdens include credit and savings informational asymmetries, transaction costs, and contract enforcement costs, compounded services to the more by lack of collateral, credit history, and contacts. For these entrepreneurs, access to financial complex such as services would smooth project financing, positively impacting growth and poverty alleviation. Access to finance is also an important incentive for new ideas and technologies. Additionally, insurance and a strong financial system encourages expansion in the market and competition for existing pensions. Secondly, firms. It ensures that poor households and small entrepreneurs need not depend on financial inclusion middlemen. On the other hand, an underdeveloped financial system can be uncompetitive, implies that conservative and inimical to poor or small entrepreneurs. In a seminal study looking at India’s vast banking system, Burgess and Pande (2003) show that the rural bank expansion customers have programme, mandated by the Indian government from 1977 – 1990, can explain access to more than approximately half of the drop in poverty from 61% in 1967 to 31% in 2000. India needsone financial services financial inclusion to make available the fruits of sustained 8% growth to all its citizens, especially the minority and the backwards. This can prove provider, which to be the answer to a lot of problems we face in our ensures a variety of times like rising extremism, naxalism, rising income competitive options. disparity and so on. In the Indian context, A look back at India’s financial inclusion history might be appropriate at this point. One of the major tipping points financial inclusion, for the nationalization of banks in 1969 was ensuring according to the credit access to agriculture and small-scale cottage Finance Minister’s industries. Towards this end, RBI stipulated that at least 40% of bank lending go towards this sector termed as 2006-07 budget the Priority Sector, 25% of which had to be extended to speech, was defined the weaker sections within the Priority Sector. Other as “the process of features of nationalised banking included the ‘Service ensuring access to Area Approach’ (SAA) wherein a single bank was assigned 15-20 villages, after which other banks could timely and adequate set up branches upon obtaining the initial bank’s credit and financial approval. Similarly, the 1:4 license rule was establishedservices by vulnerable in 1977 dictated that a bank could open a branch in a banked location only after opening four branches in groups at an unbanked locations. As a result the share of these affordable cost” sectors in the total advances of scheduled commercial banks rose from 14% in 1969 to 33% in 1980. However, the reforms introduced since 1991 in the banking system have had a heavy toll on small borrowers. The spread of banking credit facilities has not only halted but the number of small borrowers getting financial facilities too sharply declined in the post- liberalization period. From 1990-91 to 1996-97, loan accounts to agriculture fell by 5 million. While 52% of bank credit in rural areas went towards agriculture in 1985, the proportion fell to 38% in 1998. In fact, the present share (percent) of rural bank offices to total bank offices is equal to that of the 1980s, i.e., 45.69% in 2005 and 45.72% in 1980s.7The Senior Analyst
  7. 7. Financial inclusion in a financial system can volumes that translate low premiums into is eaten up as bribes in all forms ofbe measured by its “depth” and its fair profit. The Dr Rangarajan Committee financial institutions.“breadth”. While depth is the extent to report states that 49.77% of Scheduled How can India achieve its intention of Totalwhich the system is developed and works Caste households, 63.68% of Scheduled Financial Inclusion by 2012? To be frank,properly, breadth refers to the extent of Tribe households and 48.58% of Other standing at the current date, it is next tooutreach of the system to the population. Backward Class households are financially impossible. For this certain measures areThanks to the nationalization program India excluded. There is denial from the already in place, but need to pursue themis better placed than many other government machineries to extend the more actively.developing economies. There are over credit to the Scheduled Castes because Changes at the policy level: A policy32,000 rural bank branches (with a total of direct funding from banks is a problem. change to encourage the public to invest68,000 rural and semi-urban branches) Most schemes require paper work, their savings should be brought about. RBIincluding public and private sector banks recommendations, forwarding of has already introduced policy changes inand RRBs. There are more than 15,000 applications, and other processes which 2005. These include introduction of no frillsbranches of RRB. Rural co-operative banks they can’t facilitate. Existing societal accounts without minimum balancecomprise about 98,000 retail outlets of mechanisms continue to regulate and clauses and Kisan Credit Cards for easyPrimary Agricultural Credit Societies(PACS). The post office system, comprising154,000 post office branches, has about114 million savings accounts and services110 million money orders. One of the majorindicators of health of a financial inclusionof a system is “access to credit”. Despitethis vast network of banks, only about 30%of Indians have a savings account. All of ushave heard stories of rural families literallyselling themselves off to moneylenders asa result of not being able to service theexorbitant rate of interests (an average of enforce the customary norms and rules of transactions, relaxation of Know Your48%, as compared to 12.5% in commercial the caste system. Those, who challenge Customer (KYC) forms for accounts havingbanks). There has been a disturbing trend the system face opposition in the form of balance of less than 50,000 and less thanof rise in borrowings from moneylenders social and economic boycott, violence, etc, 100,000 as loans annually, and reasonablepost 1991, after steady decline post which negate their right to development. A pricing by banks for services rendered.nationalization. major problem is the barriers to credit Another crucial step is the encouragementSo what is stopping us from utilizing the full access that these people face. A survey by of microfinance institutions who have triedpotential of our banking infrastructure and Invest India Market Solutions (IIMS) shows to fill up the void created after the that there is a strong link between commercial banks left rural market. More annual income and ownership of and more developmental agencies are bank accounts by occupation group. using microfinance as a tool for sustainable A survey of bank managers in development, a trend started by Self- Madhya Pradesh revealed a Employed Women’s Association, SEWA. perception that women borrowers In conclusion, it can be said that, despite were more trustworthy and less of a having the requisite infrastructure in place, default risk (United Nations, 2006). the sheer apathy and lack of policy However, a greater percentage still implementation is holding back the poor believed that women were simply 400 million Indians from realizing theiralleviating ourselves from poverty? The being used by men to gain loans. One potential fully. But change can’t be broughtanswer lies in looking at the problems of more reason is the self exclusion by the from one side. A population low onfinancial inclusion on this country. It is still low income households from banking awareness and education can’t fully utilize facilities as they get intimidated and the benefits of institutional finance. Fora dream to see a bank that offers savings develop a belief that banks are intended for that, policies like right to education areaccounts for the poor with cheque bookfacility unless she/he keeps Rs 1,000 more educated and richer individuals. Also, crucial to raise the general education level,minimum balance. The health insurance almost 90% of the loans disbursed need especially the rural poor and backwards.companies set very low hospital tariffs for collaterals, which in case of rural poor is Also, strict vigil on eliminating social land. Hence, a major part of the landless ostracization has to be brought in to givere i m b u r s e m e n t w h i c h m a k e s t h e m poor get excluded. Plus, a 2006 UN survey everybody an equal opportunity tounattractive. Operational service is lackingas most insurance companies are ill suggests that 10-20% of the loan amount determine their own destiny.equipped to handle the necessary large -Soumyadipta Chakraborty & Yashowardhan Chaturvedi(XLRI)8The Senior Analyst
  8. 8. NAHAR SPINNING MILLS Introduction about Nahar Spinning contributing 14 % in total industrial Mills production, 17 % in foreign exchange It was started as a spinning and and 4% in GDP. Government policies hosiery unit in Ludhiana .The Company like Technology up-gradation fund is the part of Nahar Group of scheme (TUFS),Scheme of Integrated Companies. The group`s portfolio Textile Park(SITP) technology Mission include wool combing, spinning, of Cotton (TMC) and 2 % interest knitting, fabric, hosiery garments etc. subvention from exports has helped Nahar spinning mills is a blue chip in this sector to grow at a rapid rate. its group. Nahar Spinning’s T-shirts are From the recent past the India Textile being exported to reputed international products have become cheaper than brands such as GAP, Arrow, Old Navy, of china due to the appreciation of Pierre Cardin, Izod, and Quicksilver. Chinese Yuan and wage inflation in Recently the company got Golden China. The domestic factor which Trophy by the Apparel Export supports the growth of this industry Promotion Council and Gold Trophy by are increasing purchasing power of The Cotton Textiles Export Promotion both domestic and rural markets and Council. growing organized retail in India. Key Highlight of the company Segmented Revenue •The company is the best amongst Nahar has a current capacity of 3.35 its peers and has an attractive P/E lakh spindles to produce cotton yarn/ ratio of 4.77 and industry P/E is 9.06 Synthetic yarn respectively .It has • Spreads of cotton yarn is planned for an addition of 90000 increasing continuously spindles by July 2011. In the textile •The company is developing its and hosiery garments has a current own retail brand Cotton County capacity of 14 lakhs pieces per year. • The board has approved for a The current capacity utilization of capital expenditure of 400 Crore under garments is 50.57% .The domestic TUFS with a capacity expansion of and international demand for garments about 33 percent of current capacity will have the capability to push the capacity utilization to 87 % by Textile Sector Analysis 2013.The wastes are the material Indian Textile industry is having waste generated in spinning and significant presence in domestic and garments manufacturing sold at a global economy. Indian textile industry cheaper price. Around 65-70 percent plays a major role in Indian economy of the revenue comes from exports. by RESEARCH BSE Code:500296 NSE Code: NAHARSPING Industry: Textile REPORT::NAHAR SPINNINGGroup: B Market Cap :402.13cr Promoter holding:63%9The Senior Analyst
  9. 9. Expenditure Analysis Depreciation Analysis Considering the stock will trade atThe major part of the expenditure are The plant and machinery, Land and 5.5X PE the stock will reach a target building are the major fixed assets in the price of Rs200/- in 24 months with a organization. As per the previous financial growth rate of 79 percent. statements the depreciation for plant and machinery is at the rate of at 10 percent y- -Sanjeev Kumar & Selva Kumar(NITIE) o-y .The depreciation for land and building is at the rate of 12 percent y-o-y. In fiscal year 2010-2012 it has added machinery in the yarn segment.contributed by Raw material cost andpower and the fuel cost .The major part ofthe raw material consumed by thecompany are Raw cotton and cottonyarn .In the fiscal year 2010-2011 thecotton prices had a huge price fluctuationsat the end the Raw cotton per Kg inJanuary 2011 quoted at Rs 80/- in NewDelhi according to CMIE. Nahar has astrategy to hold more inventory of Cottonwhich forms around 90 percent of the rawmaterials to avoid price fluctuation andweather fluctuations. Power crisis is one ofthe major threat to the company .Thecompany has mitigated the power risk byinstalling captive power plant of 4.1 MWcapacity in July 2011.Interest AnalysisInterest is one of the major expenses to thecompany. In the fiscal year 2008-2010because of the economic recession thecompany in order to meet the financialobligations of the company .The financialleverage has shown a huge variation in thatparticular year. The term loans and theworking capital loans are contracted atinterest rate of 5-8% .The weightedaverage cost of interest rate is 5.75%. Thecompany plans to obtain 400 Cr term loansat an interest rate of 5% with the help ofTUFS under textile ministry in fiscal year2011 and 2012.10The Senior Analyst
  10. 10. ANALYSIS OF PRIVATE EQUITYINVESTMENTS IN INDIA INSECOND HALF OF 2010 ANDBEYONDOverview of PE Investments in India during July-Dec 2010Deal volumes reported in September and October were lower compared to August.Real Estate remained the favorite sector in September and October, unlike Energy inAugust. Most of the investments in energy sector came from Blackstone investing inMoser Baer for around $ 300Mn. Healthcare industry although having large number ofdeals remained small in terms of value due to smaller deal sizes. HDFC VC’s 10%stake purchase in Lodha Group’s “World One”, the world’s tallest residential projectfor $ 111Mn was the largest PE deal during the given period in Real Estate, followed PE Investments in 2010 After two years of drooping Private Equity Investments in India, year 2010 saw a major shift with around 100% jump. The level of PE Investments in 2010 came out to be 7974Mn $ with around 325 deals. Moreover, the average investment per deal also rose from 14Mn to 24.5Mn per deal signifying investments in even bigger projects in 2010. Interestingly, the level of PE investments in 2010 nearly equaled the prior slowdown year investments of 2006 of 7485Mn $. The effect of Global Economic scenario causes the roller coaster ride of PE investments in India. However, there are many internal factors which are impeding the growth of PE investments: • Strong macroeconomic fundamentals are making India an attractive destination for PE investments. However, decreasing investment opportunities in developed countries is fuelling enough completion in Kotak Realty Fund’s $ 55.56Mn in EmaarMGF. • Removing legal roadblocks by regulators,Month wise analysis of PE investments which block PE investments in some sectors.July was the gloomiest period during the past four months, with the number of deals Thereby, diminishing its potential.being the least. Also the deal volume was very relatively small. India was witnessing • Reluctance of Indian businesses workinggreater inflow of Private equity inflow into the country after the financial meltdown. with the PE/VC investors may cause theirThere were two prime reasons for this drive: businesses remaining untapped. Promoters• Stocks of Indian markets were battered during the slowdown and were trading at can enhance their business value by aligningvery low premiums, which provided ample opportunity for PE and VC firms to invest with partners having similar some good companies. •PE firms need to understand the• Signals of strong economic growth in the emerging countries while the US and intricacies of the business in India throughEurope still not showing signs of recovery from the economic recession. honing their investment capabilities along each phase of investment life cycles.• Easy availability of cheap capital in from the US encouraged them to invest in Average deal size in India has been relativelysome undervalued firms through Private equity. small when compared to China/other11The Senior Analyst
  11. 11. During the month of August, PE firms sector would also enhance investments in compared to investing $ 4.7Bn last yearstarted investing in India through the debt food and beverages industry. Rising through 331 deals in Infrastructure for the first time. Therefore, the deal incomes and inflation are creating Infrastructure sector is likely lead the PEvolume during August shot up by around favorable condition for investments in this investment in 2011, leaving behind the100%. KKR Private Equity was the first to it sector. financial services sector, which receivedthrough their global NBFC arm. The prime d) Education the highest investment in 2010, primarilyadvantage is enhancing company’s Education Industry which saw three fold due to increasing interest in real estatev a l u a t i o n , t h e re b y b u i l d i n g b e t t e r raises in 2009 remained as one of the most post financial meltdown. Due to largerelationship with the promoters, enhancing lucrative sector. With impending reforms in amount of PE capital being absorbed bythe chances of conversion of PE Deal. the sector, the sector might witness the infrastructure sector, the financial phenomenal investments in recent years. services firms might receive much lesserSector wise Analysis of PE Investments However, the investment size mismatch is PE investments compared to $ 2.1Bn inin India acting as a major deterrent, due to limited 2010.a) Real Estate number to educational assets to be About 20-25% of PE investments would beAlthough the poor infrastructure sector in employed with investments over $ 25Mn done in infrastructure sector, primarily dueIndia being one of the major deterrents for which PE firms are targeting. to banks unwilling to lend them andPE investments coming to India, it is e) A l t e r n a t e E n e r g y a n d C l e a n secondarily due to small corporate bondfinding the highest preference among the Technology market. Thereby, the PE funds would play aPE Investors in recent times. Thereby, Alternate Energy & Clean Technology is crucial role in the infrastructure investmentEnergy, Real Estate & Construction emerging as one of the major PE sector of India in 2011. Blackstone Grouptogether accounted for nearly two-thirds of investments in recent years as India alone may invest more than $ 1Bn in Indiaall PE investments by deal size. The largest struggles with power deficit and next during the six month period came environmental worries. Moreover, the Indian PE firms may face stiff competitionfrom Blackstone group investing about $ policies of the government are encouraging from the foreign PE firms finding good300Mn in Moser Baer for investing in investors to some extent, like levying tax investment opportunities in 2011. Otherpower sector. Blackstone is reported to on the use of coal to fund thefurther invest $ 1Bn for investing in renewable energy projects.infrastructure for next few years, signifying International Financethe continuing dominance of infrastructure Corporation (IFC) made 5sector. deals alone since the monthb) BFSI, IT & Healthcare of August in this sector.BFSI, IT and Healthcare sectors attracted f) Logisticsdeals of relatively smaller value; however Investment in the logisticsthey remained relatively significant in terms segment has shownof total investments made. significant decline, thec) Retail and Food & Beverages primary reason being the mismatch between the deal sizes. While PE players are looking at deals of at least $ than the IPO exit route, secondary sales 50Mn, logistics companies are likely gain popularity next year, after 18 are agreeing for deals up secondary sales in 2010. Primarily due to to $ 20Mn. the lack of sufficient capital for next stage 5) Roadmap for the of growth by small Indian PE firms. Like, Private Equity Investment Warburg Pincus buying ICICI Venture in 2011 fund’s stake in Metroplis Healthcare. 2011 Like 2010, PE investments might witness an increasing number of are expected to flow into fund managers leaving their jobs with India with twice the global PE firms to open their own venture,Industry investments in 2010 and even greater with economy thriving and openingInvestments in retail remained miniscule returns. Nearly $ 30Bn is waiting to be opportunities.largely due to the untapped retail sector. deployed next year, creating chances ofHowever, the impending decision on multi even bigger deals. In 2010, PE firms -Shashank(National Institute of Industrialbranding retailing brings possibility for Engineering) employed $ 8.3Bn through 376 deals,huge investments. Unlocking the retailing12The Senior Analyst
  12. 12. After a KEY TRENDS & ISSUES IN THE catastrophic GLOBAL BANKING SECTOR 2008 and a (2010) fragile 2009, the Introduction global banking After a catastrophic 2008 and a fragile 2009, the global banking industry showed signs of revival in the year 2010 even as numerous challenges, both remnants of the past and some industry showed emerging over the year, continued to lay siege to its strong and sustained recovery. Thesigns of revival in unprecedented easing in liquidity through liberal monetary and fiscal policies helped no doubt, as did the revival in the equity market. The banking sector as a whole showed a rise in the year 2010 net income, even though the earning quality remained a major issue, as most of it came from sources other than traditional interest income. Questions also remain over the capital levels in even as the banks as the Governments start to withdraw the stimuli effects and the norms of the enhanced Basel II regime come into force. numerous challenges, both Stricter Regulations remnants of the As the epicentre of the financial crisis lay in the banking industry itself, attempts were made to subject it to stricter regulation. The Basel Committee on Banking Supervision introduced past and some ‘The Capital and Liquidity Reform Package’ in July, 2010 introducing new agreed upon emerging over definitions in the treatment of capital, counterparty credit risk, leverage ratio, regulatory buffers and global liquidity standards. The Committee also stressed on introducing counter the year, cyclical provisions and buffers and credit-to-GDP gap was accepted as the best performing indicator for calibrating the same. In September 2010, the Committee introduced the continued to lay enhanced Basel II regime which significantly increased the capital requirements from the existing Basel II norms. In order to prevent the banks from facing immediate liquidity threats, siege to its a phased implementation of the same was suggested, starting from 2013 and continuing till strong and 2019. Also, a counter cyclical buffer measure was proposed in addition to the existing capital norms of Basel II. sustained recovery. The unprecedentedeasing in liquidity through liberal monetary and fiscal policieshelped no doubt,as did the revival in the equity market.13The Senior Analyst
  13. 13. Global Financial Markets completely recover their losses.The year 2007 and 2008 has seen an The opposite was true, however,unprecedented contraction in the global for bank stocks in the emergingmoney market as counterparty risk countries, which almost cameincreased tremendously and the LIBOR- back to the pre-crisis level as aOIS spread reached new heights. However, result of strong balance sheetsthe sustained efforts of the Governments and better growth prospects.and Central banks around the world helped Similar trend was observed forthe money market to settle down in 2010. credit market which continued itsNasty surprises still lay in store though as tedious progress from the freezingthe sovereign debt crisis in Europe again over during the financial crisis.put the money market under renewed Initially aided and abetted by thestress in the middle of 2010. policy measures of theThe sovereign debt crisis posed one of the Government, it began to recoverstrongest challenges to the global financial on its own as the liquidity andindustry during the year. Governments all market risks eased at the end ofover the world and especially those in the 2009. However, a large chunk offringes of Europe, struggled to recover the global credit demand is stillfrom the financial crisis and huge coming from Governments andGovernment stimuli after years of over- other sovereign entities whilespending, low taxation and massive private credit market continue to remain Fig 1: Change in Return of Equity of Bankswelfare schemes. The tipping point came in stagnant. The corporate bond spread also Across Regionsthe end of April 2010 when Standard and eased a little during the year even as the Fig 2: Gross NPA as percentage of totalPoor’s downgraded the Greek bonds to recovery was affected by the sovereign loans in banks‘junk’ status and at the same time also debt crisis of Europe. Banks in the emerging economies, whichlowered the ratings of the constitute 25% of global banking market,Spanish and Portuguese recovered quickly from the financialbonds. The EU had to stitch crisis. Their business model, which istogether a bail-out package for to act predominantly as gatherers ofGreece and the Greek savers as opposed to aggressiveGovernment had to undertake lenders like the western banks,painful cost cutting measures. thrived in the economic conditionsThis was followed by a period with rise in domestic savings andof relative calm until history easy monetary policies. Banks inwas repeated again, this time China have seen a period of boom inwith Ireland. However, the the year 2009, lending twice as muchbiggest worry still remained in in 2009 than in 2008.Spain which had much bigger economy Fig: Growth Percentage in Credit Markets The Challenges Aheadthan Greece, Portugal or Ireland and a Looking forward to the days ahead, somefailure which can throw the global economy Key Trends in Performance of Banks of the biggest challenges of the banks overinto disarray. As the year came to a close, As a general rule in the developed the world would to be to meet increasingthe last word had not yet been spoken on economies, income of banks rose during capital requirements, address the issue ofthe European debt crisis. the year although major part of the same rising delinquencies, recover from theEquity markets across the world moved in came from trading fees, foreign exchange withdrawal of liberal monetary and fiscaltandem and continued their recovery from gains, etc. Rising equity markets eased the policies, redressing balance sheetthe rock bottom of early 2009. However, pressure on banks and helped them weaknesses and dealing with a weak creditthe sovereign debt crisis and sluggish become profitable by providing them with market. The biggest market risk may comerecovery in the advanced economies again alternative profit sources. Better primary sometime in 2011 when the big spendingweakened the equity market in the markets also allowed a lot of banks to European nations as well as USA will havedeveloped economies. Emerging s u b s t i t u t e c a p i t a l f ro m t h e s a m e . to roll over their sovereign bonds and theeconomies, however, had an altogether Regulatory capital as percentage of risk- subsequent pressure on the primary bonddifferent story to tell and the US Fed policy weighted assets thus increased for banks market may throw it into haywire. Howto keep interest rates at a historic low level across geographies. The problem of loan banks cope with these challenges mayopened up huge foreign investment in losses and write downs continued, very well determine their role in the newthem. Bank stocks in the developed however, as the percentage of non- world economy.economies continued their slow progress performing assets kept increasing. -Sayan Majumder & Shifa Shalini Tirkey(XLRI)from the nadir but were unable to14The Senior Analyst
  14. 14. Public sector WHY DISINVESTMENT FOR INDIAN undertakings ECONOMYwere established PSUs… Why after all? To illustrate the trailing scenario, the average return on capital employed (ROCE) by PSUs in India as a part have been way too low as compared to the cost of borrowing. For instance, between 1940 and 2002, the average ROCE was 3.4% as against 8.6% average cost of borrowing. PSE of mixed survey by NCAER shows that PAT has never exceeded 5% of sales for or 6% of capital employed. The government pays a higher interest though, by at least 3 percentage points. economy with the objective of As per an NCAER study report the cost structure of PSES is much more than the private sector (the following table shows a comparative scale) : providing PSES Private sector POWER & FUELS/NET SALES 19.5 5 necessary Wages/net sales 23.3 6.5 Interest/net sales 11.7 4.7infrastructure for the fast growth Lack of autonomy, political interference, nepotism & corruption has further deteriorated the situation. For instance, the head of a PSU is appointed by the Government, who in turn of economy & to appoints all employees who play major roles in the organization. So directly or indirectly the Government itself controls the appointment of all manpower in these organizations. It is not safeguard the business of the Government to do business, i.e. it is best controlled by experts and against professional managers. If we look at figures, on 31.3.1997, 242 central PSUs had a investment of Rs.1,93,121 crores. monopoly of By the end of year 2000-01, total investment was touching Rs.274,114 crores. Of these, 104 were making losses and about 53 were performing below expectations. Profit making industrialist enterprises are mostly in sectors like petroleum and allied sectors, because they are benefitted from State monopoly. losses of the 104 loss making units were around Rs. 58,620 community. crores as on 31.3.1997.which put pressure on capital expenditure and contribute to fiscal However, the deficit.These losses are a permanent phenomenon and keep borrowing just for their functioning is a temporary unsustainable solution. entire In this year’s budget revenue expenditure has increased due to interest payments, wages and mechanism did salaries of Government employees and subsidies. This leaves Government with very less money for capital expenditure on social and physical infrastructure. Government is forced to not turn out as put aside resources for the sustenance of many non-viable PSEs. In addition to that there is a efficient as it huge amount of debt overhang, which needs to be serviced and reduced before money is available to invest in infrastructure. Disinvestment of the Maruti Udyog Ltd.will work as a ought to be, all beacon for future. thanks to the prevailing hierarchy and bureaucracy.15The Senior Analyst
  15. 15. In an era of globalization, liberalization We have seen every socialist country adopt Disinvestment will provide positive signsand dissolution of boundaries between industrialization, rather efficient for the Indian equity markets and will worknations, industrial competitiveness has industrialization, for appropriate growth, as a magnet to attract foreign and domesticespecially assumed an important role, be it China or Russia. We preferred money into the markets. It will allow PSUnecessitating privatization or disinvestment Russia’s old model. Now that we have seen to raise capital to fund their expansionof PSUs. Though it is claimed by many even the social countries succeed with plans and improve resource allocation inthat ownership isn’t all that an important privatization and fail without it, it is high the economy. Disinvestment will helpindicator of an organization’s functioning time we implement it too in major respects. government in stimulating the economyas is its management, it has been proven by while accessing less debt market ample number of examples that private Implications of Disinvestment on Disinvestment will allow government tocontrols of an organization bring about Indian Economy: have much better control over the marketdrastic changes in its effectiveness. This is If India wants a continuous increased economy without upsetting norms ofespecially true today when competitiveness growth, it has to scale to the next level of market essential not only for leading the industry performance. This is not an option but abut for mere survival. necessity and disinvestment is a tool to get In future disinvestment will assume the role there. Increased population, of a major instrument of policyBureaucracy has been an inherent part of unemployment, and poverty levels are main intervention by government as 48 PSUsPSUs and attempts to overcome it have reasons why India needs to scale. The cost listed on BSE as of February 8, 2010,been unsuccessful if not inadequate. of not scaling to the next level will see account for close to the 30% of the totalPrivate management has proven to be a India eclipsed by China and other South market cap of the exchange. This ispanacea in most such cases, including East Asian aspirants leaving India to its significant as a total of 4,880 oddVSNL and Delhi Vidyut Board. The internal chaos. It needs a 10% rate of companies were listed on the exchange. Assuccess of these organizations after growth every year in its GDP to continue to of February 8, 2010, the BSE PSU indexprivatization has been evident by turning be competitive with China and potential had a total market cap of Rs 17,14,466.96from red to black within a short span of emergent nations in South East Asia. crore.time. PSUs no longer enjoy the privileges In the context of macroeconomics, timeas they did in past times in terms of As certain no. of shares are reserved forreputation and awe, on the contrary are retail investors & Splitting the stocks ofstigmatized by the lack of efficiency and some big PSUs ,will attract more retailsocial considerations of past times. investors. Market cap of PSUs can go higher in future & can provide extraDespite huge injection of funds in the past money in the kitty of govt. 5%decades the functioning of many public Reservation for employees will work as ansector units (PSUs) has traditionally been incentive & will keep momentum going.characterized by poor management, slow This will be true democratization ofdecision making procedures, lack of capital. Disinvestment would encourageaccountability, low productivity, citizens’ participation in management ofunsatisfactory quality of goods, excessive public enterprises and improve themanpower utilization, labor intensive capitalization of stock markets. Whenunits, lack of technological up gradation, companies get listed on the bourse theyinadequate attention to R&D, inadequate has shown us how countries like Chile ,UK, adds certain economic and financialhuman resource development and low rate China , New zealand ,Poland successfully benefits to the economy. Which is calledof return on capital. However, with used disinvestment to achieve new financial deepening, a term coined byincreasing privatization, disinvestment or economic heights. Many countries used development economists. Financialchange of control into hands of disinvestment as a sure means of restoring deepening improves the efficiency of theprofessional managers, many organizations budgetary balance & to revive growth on a financial system as well as contributes tohave seen the tables turn. Some examples sustainable basis after facing economic GDP growth.are IRCTC and CRIS to facilitate the crisis in 80s.Analysis of these countriesfunctioning of Indian Railways etc. before & after disinvestment shows that market-driven economies are more efficient Latest loan bribery case(in LIC,PNB etc.) than the state-planned economies has shown the wrongdoing, loopholes &Inefficient PSU’s contributed largely for drawbacks in the working of PSUs. If Indiathe macro-economic crisis faced by India At the micro level, the change in ownership has to become a economic super power,during 1980’s. Primary purpose to establish will increase domestic competition, hence working way of PSUs have to be changed.them was to provide employment and help efficiency; and encourage public PSUs contribute about more than 1/4th inthe government to generate revenue participation in domestic stock market – all the GDP of India & a large chunk ofsurplus. But they were unable to perform to of which will promote ‘popular ‘capitalism working population is employed inthe expectations. Experts are in consensus that rewards risk taking and private PSUs .Economic super power dream is notthat disinvestment is unavoidable for the initiative, that is expected to yield superior possible without PSUs coming at par withsuccess of second generation reforms. economic outcomes. Disinvestment shows private sector.Health of the stock market is also linked that govt means business which will attract -Jagriti Gupta & Vipin Patel(FMS)with the progress of economic reforms. FDI, FII to finance projects in India.16The Senior Analyst
  16. 16. The Demise of the Celtic TigerEschewed sovereign bonds. Record high reported a 13 billion euros decrease in its as it is the major economy driver and itgovernment borrowings. Large fiscal deposits this year, which is almost 17%. would be drastic setback for the growthdeficit. Collapsing banking sector. So many The crisis hit banks were the most opportunities if it were to be altered.problems and still the government of concerning factor for the government as The package is a bit different from the oneIreland was not willing to agree to external they somehow needed funds to support given to Greece earlier. The interest rate forrumours that it needed an aid package. the sector and revive the declining the package is higher than Greece’s butThe Irish government kept supporting its economy. Apart from this, currently the Ireland has 10 years to pay-off its loansclaim by stating just two reasons. Firstly, country is spending close to 19 billion whereas Greece was only given a time of 3their loan was not supposed to be euros which is more than what it receives years. The first instalment would be duerefinanced till 2011 and secondly, they did from its revenues and taxes. The rising within 4.5 years.not want to lose control over their fiscal budget deficits are yet another factor of Has it worked?policy and end up discouraging foreign c o n c e r n f o r t h e a l re a d y b u rd e n e d The bailout package has been paid out andinvestment which is the key driver of the government. everyone had positive expectations from’s growth for almost two decades The plan of Action But have these expectations been met?now. The country was coming under pressure The answer to the question can be seenFinally on 21st November, the Irish from all the Eurozone members to accept from the fact that private investors havegovernment gave in and announced that to the fact that the economy was not in a still no urge to buy Irish government bonds.uplift the deteriorating condition of the condition to survive on its own as they The demand for bonds which was lackingbanking sector, an external state financialaid was required. feared that the damaging effects might initially is still the same and government isWhat led to the bailout? spread to other debt ridden European not likely to be able to raise more moneyThe economy was a hub for financial countries like Portugal and Spain. The from the market.investors since the 90’s as it charged a belief was unanimous that Ireland asking So what exactly went wrong?corporate tax rate of 12.5% which is the for a bailout package might actually result The main cause for the failure of the bailoutlowest among the EU nations. This has in relaxing the tense atmosphere and in mechanism is that EU members have aattracted many companies to setup their fact ease pressure on other countries with common centralized monetary authoritybase in the country and due to this the mounting debts. but a decentralized fiscal authority. Thiseconomy had been booming. The first – the Eurozone, EU and the IMF. Each leads to a situation where the two policiesmajor setback came with the burst of the contributed 22.5 billion euros which don’t complement each other making itreal estate bubble in 2008. This was closely amounts to roughly 29.8 billion USD. The impossible to solve these situations.followed by the fall of Lehmann Brothers rest of the amount was given by Sweden, The bailout mechanism relies on gettingwhich sent the world economies into Denmark and Britain as bilateral loans. money from stronger countries likerecession mode. The Irish banks were Irish PM, Brian Cowen disclosed that the Germany, which in fact is from the commonseverely hit by both these developments. package would be having two major steps. tax payer there. The complaints from themSince then the budget deficits have been First would be to revamp the deteriorated being troubled for no reason at allconstantly increasing and have reached a Irish banks and make them much smaller continuously increase. This money is thenhigh recently, amounting to about one-third than they were. Second would be to transferred to an affected economy whichof the economic output this year. This led reduce the budget deficits by decreasing is forced to cut its spending and surviveto a rapid surge in bond yields which are government spending and increasing under severe austerity measures. Thecurrently at an all-time high. The Finance taxes. whole concept is flawed from within as itMinister, Mr. Lenihan announced that the To address to the first step, 10 billion euros simply adds more debt to a country’sincreasing interest rates would make it have been immediately given to the economic situation which is already underimpossible for the government to raise government-backed banks so that they a load of the next year and hence the have sum back-up funds for their All in all, the money has been forwarded tobanking sector would need a back-up fund sustenance. Another 25 billion euros have the country, the measures and theto support itself. been set aside particularly for the banking deadlines have been set, but the effectThis deteriorating financial health of the sector only. The rest of the loans have been which was perceived is far from achieved.economy was immediately perceived by set aside for the second step. Ireland has Jean Claude Trichet, the head of Europe’sthe citizens and they started withdrawing been given time till 2015 to decrease its monetary authority has a very major role totheir funds. The government holds a major annual deficit to 3%, which currently is at play now. He must review the policiesstake in many large banks but provides an all time high of 32%. being used in EU, related to the commononly a blanket guarantee to them. Due to As far as the taxation rules were monetary authority and the commonthis, the two largest banks of the country, concerned, Ireland got its way and the currency and also he must check theAllied Irish Bank and Anglo Irish Bank were government was given full freedom to set efficiency of loaning large amounts tofinding it immensely difficult to get any its own tax plans. Regarding this, Mr. already debt stricken countries, or in otherdeposits from the market. Allied Irish Bank Cowen commented that the 12.5% words what they call the bailout package. corporation tax would remain unchanged -Harpreet Singh & Vaibhav Juneja(FMS)17The Senior Analyst