Senior analyst jan 11(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 17

2

The Senior Analyst

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 economy
Yuan 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 on
also 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 the
that are against Chinese Yuan as the next reserve currency. But being the most widely accepted reserve

the 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.

3

The Senior Analyst

Now let us look at the factors which might prompt the Chinese government to work towards making the Renmimbi the next reserve
currency. The most important reason is overwhelming dependence of the Chinese on the US dollar. It is estimated that Beijing holds
about $2 (2.6) trillion of dollar assets mainly accumulated through purchase of US Treasuries and through exports to the USA. The USA
has been incurring rising budget deficits in recent years. This is major concern for the Chinese government as a weakening dollar could
seriously dent the Chinese reserves.
Movement towards global reserve currency
There 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 South
Korea. This currency swap will remove the need for using the Dollar when it comes to trade with these countries. It also carried out a
trade deal with Brazil valued at $95 billion in two other currencies other than the Dollar. The Chinese government is even thinking of
issuing bonds and loans to trading companies in Yuan rather than in Dollar. In fact banks like HSBC, Standard Chartered Bank are said to
have agreed to issuing bonds in Yuan. China has recently allowed Yuan to trade off shore in Hong Kong. Though the Yuan still remains a
foreign currency market for Hong Kong and the local currency is still the Hong Kong dollar, but the offshore financial centre is being used
as a laboratory to internationalize the Chinese currency.
Problems that needs to be tackled
In spite of the steps taken by the Chinese government there are various factors which pose practical and huge challenges to the Yuan
being the next Reserve Currency. The main challenge is that the dollar is too entrenched in the international currency market. However
the bigger issue is making the Yuan convertible with its value being determined by market conditions, governments and companies
around the world who would be allowed to freely trade, buy and sell the currency. Given the authoritarian nature of the Chinese
government, lowering of these financial trade barriers and allowing foreign trade access to the Chinese securities market seems like a
remote possibility. The absence of a large market for Yuan bonds is also seen as a hindrance. Currently only the Chinese Banks and the
Asian Development bank sell Yuan dominated bonds. According to some experts it is numerically impossible for the Yuan to become the
reserve currency as then China would have to run a large current account deficit so that the governments and the institutions which trade
in Yuan would get a chance to accumulate it. But currently China has a huge current account surplus which does not give foreigners to
accumulate the Yuan.
Things that China can do to favour its case
If the Chinese government does decide to make the Yuan as the next reserve currency, the expected time line is expected to be around
10 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 China
around 5 to 10 years to bring about a change through its land reforms, reforms in the energy sector, social welfare. China would have to
gradually make the Yuan convertible on the capital account. It needs a more liquid foreign exchange market, as the US treasury market is
currently the most liquid market. The bond markets and banking system needs to be more developed and there has to be proper
monitoring of cross-border capital flows. The importance of having functioning capital markets cannot be understated as investors and
Central Banks buying Yuan would not want to simply invest in paper currency and instead would want stocks and bonds that trade
transparently
Alternatives to the Yuan
In this context there are various other alternatives which are possible. One such possibility is establishing a multi currency system and the
use of Special Drawing Rights (SDR) which is based on a basket of currencies. The Euro is also gaining prominence and the developing
economies 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 currency
is 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 its
economic 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.

4

The Senior Analyst

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
disparity
5

The Senior Analyst

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 of
risk to your returns.
The second aspect to be considered is the relevance of Micro Finance Institutions in a realm where they charge exorbitant interest
rates. Interest rates of MFIs are currently in the bracket of 35-40 % which sounds very high. But we should not forget that it is high
because of huge risks involved and the demand of funds outstrips the supply. The alternative the consumer faces is that of private lenders
whose 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. Loans
provided 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 unchecked
could well lead to financial crisis. For example the compulsory priority lending requirement has resulted NPAs raising to 3.4% from last
year’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. The
very fact that market has not yet considered this segment as profitable shows that it makes very little business sense or the returns are too
insignificant to be considered desirable. In such a scenario it becomes more pertinent to eradicate barriers which might be preventing
entry while simultaneously creating an enabling environment which would allure institutions to consider delivering a financial inclusion
model 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 on
the 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 can
be said that banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income
group, treating it both as a business opportunity as well as a corporate social responsibility. They have to make use of all available
resources including technology and expertise available with them as well as the MFIs and NGOs. Taking banking to the sections
constituting “the bottom of the pyramid”, might appear to be considerably difficult and loss-making proposition however it should always
be remembered that even the relatively low margins on high volumes can be a very profitable proposition. Financial inclusion can emerge
as a commercially profitable business provided the government makes the right policy decisions and banks are prepared to think outside
the 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.

6

The Senior Analyst

“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 needs
one 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 established
services 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.

7

The Senior Analyst

Financial inclusion in a financial system can volumes that translate low premiums into is eaten up as bribes in all forms of
be 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 Total
which 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 to
outreach of the system to the population. Backward Class households are financially impossible. For this certain measures are
Thanks to the nationalization program India excluded. There is denial from the already in place, but need to pursue them
is 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 policy
32,000 rural bank branches (with a total of direct funding from banks is a problem. change to encourage the public to invest
68,000 rural and semi-urban branches) Most schemes require paper work, their savings should be brought about. RBI
including public and private sector banks recommendations, forwarding of has already introduced policy changes in
and RRBs. There are more than 15,000 applications, and other processes which 2005. These include introduction of no frills
branches of RRB. Rural co-operative banks they can’t facilitate. Existing societal accounts without minimum balance
comprise about 98,000 retail outlets of mechanisms continue to regulate and clauses and Kisan Credit Cards for easy
Primary Agricultural Credit Societies
(PACS). The post office system, comprising
154,000 post office branches, has about
114 million savings accounts and services
110 million money orders. One of the major
indicators of health of a financial inclusion
of a system is “access to credit”. Despite
this vast network of banks, only about 30%
of Indians have a savings account. All of us
have heard stories of rural families literally
selling themselves off to moneylenders as
a result of not being able to service the
exorbitant rate of interests (an average of enforce the customary norms and rules of transactions, relaxation of Know Your
48%, as compared to 12.5% in commercial the caste system. Those, who challenge Customer (KYC) forms for accounts having
banks). There has been a disturbing trend the system face opposition in the form of balance of less than 50,000 and less than
of rise in borrowings from moneylenders social and economic boycott, violence, etc, 100,000 as loans annually, and reasonable
post 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 encouragement
So what is stopping us from utilizing the full access that these people face. A survey by of microfinance institutions who have tried
potential 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 their

alleviating ourselves from poverty? The being used by men to gain loans. One potential fully. But change can’t be brought
answer lies in looking at the problems of more reason is the self exclusion by the from one side. A population low on
financial 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. For
a dream to see a bank that offers savings
develop a belief that banks are intended for that, policies like right to education are
accounts for the poor with cheque book
facility 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 give
re 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 to
unattractive. Operational service is lacking
as 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)
8

The Senior Analyst

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
SPINNING
Group: B Market Cap :402.13cr
Promoter holding:63%

9

The Senior Analyst

Expenditure Analysis Depreciation Analysis Considering the stock will trade at
The 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 and
power and the fuel cost .The major part of
the raw material consumed by the
company are Raw cotton and cotton
yarn .In the fiscal year 2010-2011 the
cotton prices had a huge price fluctuations
at the end the Raw cotton per Kg in
January 2011 quoted at Rs 80/- in New
Delhi according to CMIE. Nahar has a
strategy to hold more inventory of Cotton
which forms around 90 percent of the raw
materials to avoid price fluctuation and
weather fluctuations. Power crisis is one of
the major threat to the company .The
company has mitigated the power risk by

installing captive power plant of 4.1 MW
capacity in July 2011.

Interest Analysis
Interest is one of the major expenses to the
company. In the fiscal year 2008-2010
because of the economic recession the
company in order to meet the financial
obligations of the company .The financial
leverage has shown a huge variation in that
particular year. The term loans and the
working capital loans are contracted at
interest rate of 5-8% .The weighted
average cost of interest rate is 5.75%. The
company plans to obtain 400 Cr term loans
at an interest rate of 5% with the help of
TUFS under textile ministry in fiscal year
2011 and 2012.

10

The Senior Analyst

ANALYSIS OF PRIVATE EQUITY
INVESTMENTS IN INDIA IN
SECOND HALF OF 2010 AND
BEYOND
Overview of PE Investments in India during July-Dec 2010
Deal volumes reported in September and October were lower compared to August.
Real Estate remained the favorite sector in September and October, unlike Energy in
August. Most of the investments in energy sector came from Blackstone investing in
Moser Baer for around $ 300Mn. Healthcare industry although having large number of
deals 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 project
for $ 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 India.
by 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 working
greater inflow of Private equity inflow into the country after the financial meltdown. with the PE/VC investors may cause their
There 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 aligning
very low premiums, which provided ample opportunity for PE and VC firms to invest with partners having similar vision.
in 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 through
Europe 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 relatively
some undervalued firms through Private equity.
small when compared to China/other

11

The Senior Analyst

During the month of August, PE firms sector would also enhance investments in compared to investing $ 4.7Bn last year
started investing in India through the debt food and beverages industry. Rising through 331 deals in Infrastructure sector.
market for the first time. Therefore, the deal incomes and inflation are creating Infrastructure sector is likely lead the PE
volume during August shot up by around favorable condition for investments in this investment in 2011, leaving behind the
100%. KKR Private Equity was the first to it sector. financial services sector, which received
through their global NBFC arm. The prime d) Education the highest investment in 2010, primarily
advantage is enhancing company’s Education Industry which saw three fold due to increasing interest in real estate
v 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 large
relationship with the promoters, enhancing lucrative sector. With impending reforms in amount of PE capital being absorbed by
the 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 lesser
Sector wise Analysis of PE Investments However, the investment size mismatch is PE investments compared to $ 2.1Bn in
in 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 be
Although the poor infrastructure sector in employed with investments over $ 25Mn done in infrastructure sector, primarily due
India being one of the major deterrents for which PE firms are targeting. to banks unwilling to lend them and
PE 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 bond
finding the highest preference among the Technology market. Thereby, the PE funds would play a
PE Investors in recent times. Thereby, Alternate Energy & Clean Technology is crucial role in the infrastructure investment
Energy, Real Estate & Construction emerging as one of the major PE sector of India in 2011. Blackstone Group
together accounted for nearly two-thirds of investments in recent years as India alone may invest more than $ 1Bn in India
all PE investments by deal size. The largest struggles with power deficit and next year.
deal during the six month period came environmental worries. Moreover, the Indian PE firms may face stiff competition
from Blackstone group investing about $ policies of the government are encouraging from the foreign PE firms finding good
300Mn in Moser Baer for investing in investors to some extent, like levying tax investment opportunities in 2011. Other
power sector. Blackstone is reported to on the use of coal to fund the
further invest $ 1Bn for investing in renewable energy projects.
infrastructure for next few years, signifying International Finance
the continuing dominance of infrastructure Corporation (IFC) made 5
sector. deals alone since the month
b) BFSI, IT & Healthcare of August in this sector.
BFSI, IT and Healthcare sectors attracted f) Logistics
deals of relatively smaller value; however Investment in the logistics
they remained relatively significant in terms segment has shown
of total investments made. significant decline, the
c) 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 opening
Investments in retail remained miniscule
returns. Nearly $ 30Bn is waiting to be opportunities.
largely due to the untapped retail sector.
deployed next year, creating chances of
However, the impending decision on multi
even bigger deals. In 2010, PE firms -Shashank(National Institute of Industrial
branding retailing brings possibility for Engineering)
employed $ 8.3Bn through 376 deals,
huge investments. Unlocking the retailing

12

The Senior Analyst

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. The

signs 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
unprecedented
easing in liquidity
through liberal
monetary and
fiscal policies
helped no doubt,
as did the revival
in the equity
market.

13

The Senior Analyst

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 emerging
money market as counterparty risk countries, which almost came
increased tremendously and the LIBOR- back to the pre-crisis level as a
OIS spread reached new heights. However, result of strong balance sheets
the sustained efforts of the Governments and better growth prospects.
and Central banks around the world helped Similar trend was observed for
the money market to settle down in 2010. credit market which continued its
Nasty surprises still lay in store though as tedious progress from the freezing
the sovereign debt crisis in Europe again over during the financial crisis.
put the money market under renewed Initially aided and abetted by the
stress in the middle of 2010. policy measures of the
The sovereign debt crisis posed one of the Government, it began to recover
strongest challenges to the global financial on its own as the liquidity and
industry during the year. Governments all market risks eased at the end of
over the world and especially those in the 2009. However, a large chunk of
fringes of Europe, struggled to recover the global credit demand is still
from the financial crisis and huge coming from Governments and
Government stimuli after years of over- other sovereign entities while
spending, low taxation and massive private credit market continue to remain Fig 1: Change in Return of Equity of Banks
welfare schemes. The tipping point came in stagnant. The corporate bond spread also Across Regions
the end of April 2010 when Standard and eased a little during the year even as the Fig 2: Gross NPA as percentage of total
Poor’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, which
lowered the ratings of the constitute 25% of global banking market,
Spanish and Portuguese recovered quickly from the financial
bonds. The EU had to stitch crisis. Their business model, which is
together a bail-out package for to act predominantly as gatherers of
Greece and the Greek savers as opposed to aggressive
Government had to undertake lenders like the western banks,
painful cost cutting measures. thrived in the economic conditions
This was followed by a period with rise in domestic savings and
of relative calm until history easy monetary policies. Banks in
was repeated again, this time China have seen a period of boom in
with Ireland. However, the the year 2009, lending twice as much
biggest worry still remained in in 2009 than in 2008.
Spain which had much bigger economy Fig: Growth Percentage in Credit Markets The Challenges Ahead
than Greece, Portugal or Ireland and a Looking forward to the days ahead, some
failure which can throw the global economy Key Trends in Performance of Banks of the biggest challenges of the banks over
into disarray. As the year came to a close, As a general rule in the developed the world would to be to meet increasing
the last word had not yet been spoken on economies, income of banks rose during capital requirements, address the issue of
the European debt crisis. the year although major part of the same rising delinquencies, recover from the
Equity markets across the world moved in came from trading fees, foreign exchange withdrawal of liberal monetary and fiscal
tandem and continued their recovery from gains, etc. Rising equity markets eased the policies, redressing balance sheet
the rock bottom of early 2009. However, pressure on banks and helped them weaknesses and dealing with a weak credit
the sovereign debt crisis and sluggish become profitable by providing them with market. The biggest market risk may come
recovery in the advanced economies again alternative profit sources. Better primary sometime in 2011 when the big spending
weakened the equity market in the markets also allowed a lot of banks to European nations as well as USA will have
developed 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 the
economies, however, had an altogether Regulatory capital as percentage of risk- subsequent pressure on the primary bond
different story to tell and the US Fed policy weighted assets thus increased for banks market may throw it into haywire. How
to keep interest rates at a historic low level across geographies. The problem of loan banks cope with these challenges may
opened up huge foreign investment in losses and write downs continued, very well determine their role in the new
them. 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 to

14

The Senior Analyst

Public sector WHY DISINVESTMENT FOR INDIAN
undertakings ECONOMY
were 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 4.7
infrastructure 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.

15

The Senior Analyst

In an era of globalization, liberalization We have seen every socialist country adopt Disinvestment will provide positive signs
and dissolution of boundaries between industrialization, rather efficient for the Indian equity markets and will work
nations, industrial competitiveness has industrialization, for appropriate growth, as a magnet to attract foreign and domestic
especially assumed an important role, be it China or Russia. We preferred money into the markets. It will allow PSU
necessitating privatization or disinvestment Russia’s old model. Now that we have seen to raise capital to fund their expansion
of PSUs. Though it is claimed by many even the social countries succeed with plans and improve resource allocation in
that ownership isn’t all that an important privatization and fail without it, it is high the economy. Disinvestment will help
indicator of an organization’s functioning time we implement it too in major respects. government in stimulating the economy
as is its management, it has been proven by while accessing less debt market borrowing.
an ample number of examples that private Implications of Disinvestment on Disinvestment will allow government to
controls of an organization bring about Indian Economy: have much better control over the market
drastic changes in its effectiveness. This is If India wants a continuous increased economy without upsetting norms of
especially true today when competitiveness growth, it has to scale to the next level of market behavior.
is essential not only for leading the industry performance. This is not an option but a
but 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 policy
Bureaucracy has been an inherent part of unemployment, and poverty levels are main intervention by government as 48 PSUs
PSUs 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 total
Private management has proven to be a India eclipsed by China and other South market cap of the exchange. This is
panacea in most such cases, including East Asian aspirants leaving India to its significant as a total of 4,880 odd
VSNL and Delhi Vidyut Board. The internal chaos. It needs a 10% rate of companies were listed on the exchange. As
success of these organizations after growth every year in its GDP to continue to of February 8, 2010, the BSE PSU index
privatization has been evident by turning be competitive with China and potential had a total market cap of Rs 17,14,466.96
from 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, time
as they did in past times in terms of As certain no. of shares are reserved for
reputation and awe, on the contrary are retail investors & Splitting the stocks of
stigmatized by the lack of efficiency and some big PSUs ,will attract more retail
social considerations of past times. investors. Market cap of PSUs can go
higher in future & can provide extra
Despite 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 an
sector units (PSUs) has traditionally been incentive & will keep momentum going.
characterized by poor management, slow This will be true democratization of
decision making procedures, lack of capital. Disinvestment would encourage
accountability, low productivity, citizens’ participation in management of
unsatisfactory quality of goods, excessive public enterprises and improve the
manpower utilization, labor intensive capitalization of stock markets. When
units, lack of technological up gradation, companies get listed on the bourse they
inadequate attention to R&D, inadequate has shown us how countries like Chile ,UK, adds certain economic and financial
human resource development and low rate China , New zealand ,Poland successfully benefits to the economy. Which is called
of return on capital. However, with used disinvestment to achieve new financial deepening, a term coined by
increasing privatization, disinvestment or economic heights. Many countries used development economists. Financial
change of control into hands of disinvestment as a sure means of restoring deepening improves the efficiency of the
professional managers, many organizations budgetary balance & to revive growth on a financial system as well as contributes to
have 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 countries
functioning 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 India
the 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 in
the government to generate revenue participation in domestic stock market – all the GDP of India & a large chunk of
surplus. But they were unable to perform to of which will promote ‘popular ‘capitalism working population is employed in
the expectations. Experts are in consensus that rewards risk taking and private PSUs .Economic super power dream is not
that disinvestment is unavoidable for the initiative, that is expected to yield superior possible without PSUs coming at par with
success 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.

16

The Senior Analyst

The Demise of the Celtic Tiger
Eschewed sovereign bonds. Record high reported a 13 billion euros decrease in its as it is the major economy driver and it
government borrowings. Large fiscal deposits this year, which is almost 17%. would be drastic setback for the growth
deficit. 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 one
Ireland was not willing to agree to external they somehow needed funds to support given to Greece earlier. The interest rate for
rumours that it needed an aid package. the sector and revive the declining the package is higher than Greece’s but
The Irish government kept supporting its economy. Apart from this, currently the Ireland has 10 years to pay-off its loans
claim by stating just two reasons. Firstly, country is spending close to 19 billion whereas Greece was only given a time of 3
their loan was not supposed to be euros which is more than what it receives years. The first instalment would be due
refinanced 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 and
investment which is the key driver of the government. everyone had positive expectations from it.
country’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 seen
Finally on 21st November, the Irish from all the Eurozone members to accept from the fact that private investors have
government 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 lacking
banking sector, an external state financial
aid was required. feared that the damaging effects might initially is still the same and government is
What led to the bailout? spread to other debt ridden European not likely to be able to raise more money
The 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 bailout
lowest among the EU nations. This has in relaxing the tense atmosphere and in mechanism is that EU members have a
attracted many companies to setup their fact ease pressure on other countries with common centralized monetary authority
base in the country and due to this the mounting debts. but a decentralized fiscal authority. This
economy had been booming. The first – the Eurozone, EU and the IMF. Each leads to a situation where the two policies
major setback came with the burst of the contributed 22.5 billion euros which don’t complement each other making it
real 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 getting
which sent the world economies into Denmark and Britain as bilateral loans. money from stronger countries like
recession mode. The Irish banks were Irish PM, Brian Cowen disclosed that the Germany, which in fact is from the common
severely hit by both these developments. package would be having two major steps. tax payer there. The complaints from them
Since then the budget deficits have been First would be to revamp the deteriorated being troubled for no reason at all
constantly increasing and have reached a Irish banks and make them much smaller continuously increase. This money is then
high recently, amounting to about one-third than they were. Second would be to transferred to an affected economy which
of the economic output this year. This led reduce the budget deficits by decreasing is forced to cut its spending and survive
to a rapid surge in bond yields which are government spending and increasing under severe austerity measures. The
currently at an all-time high. The Finance taxes. whole concept is flawed from within as it
Minister, Mr. Lenihan announced that the To address to the first step, 10 billion euros simply adds more debt to a country’s
increasing interest rates would make it have been immediately given to the economic situation which is already under
impossible for the government to raise government-backed banks so that they a load of debt.
money the next year and hence the have sum back-up funds for their All in all, the money has been forwarded to
banking sector would need a back-up fund sustenance. Another 25 billion euros have the country, the measures and the
to support itself. been set aside particularly for the banking deadlines have been set, but the effect
This 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’s
the citizens and they started withdrawing been given time till 2015 to decrease its monetary authority has a very major role to
their funds. The government holds a major annual deficit to 3%, which currently is at play now. He must review the policies
stake in many large banks but provides an all time high of 32%. being used in EU, related to the common
only a blanket guarantee to them. Due to As far as the taxation rules were monetary authority and the common
this, the two largest banks of the country, concerned, Ireland got its way and the currency and also he must check the
Allied Irish Bank and Anglo Irish Bank were government was given full freedom to set efficiency of loaning large amounts to
finding it immensely difficult to get any its own tax plans. Regarding this, Mr. already debt stricken countries, or in other
deposits 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)

17

The Senior Analyst

Senior analyst jan 11(1)

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