Morning Brief
Union cabinet is set to discuss proposal to allow foreign direct investment in limited liability partnership firms. (ToI)
* POWER FINANCE CORP: Says government likely to invite bids for the Tamil Nadu Ultra Mega Power Project by July-end. (FC)
Inflation & You
Food inflation touched a 52-week high level and analysts believe that it will soon spread to a broader basket of items and result in higher Wholesale Price Index (WPI)-based inflation.
These are some of the direct and indirect implications of a higher inflation rate:
Interest rate hardening
The RBI has already done multiple rounds of monetary policy tightening. The interest rates have already gone up a couple of percentage points across the board. It is quite likely RBI would have to further increase the interest rate in its policy review due towards the end of this month.
For you, it means higher EMIs on your loans.
Impact on stock markets
The rise in inflation impacts market sentiments. Higher inflation helps in driving the interest rate higher and hence borrowing becomes costly, both from market or financial institutions. The valuation of capital-intensive companies and sectors comes under pressure as their margins decrease under higher interest burden. Therefore, higher inflation influences the outlook for interest-rate sensitive sectors in the stock market.
Commodity prices
The price of many essential and primary commodities has shot up many folds in the last few quarters. Food inflation has again hit the 20 percent mark. People of every income category are facing the brunt of rising prices.
Strategies to cope with inflation
High inflation is quite a complex situation and is unlikely to come under control in the near term. The implications of higher inflation are quite widespread, especially for the economically weaker sections of society. Uncontrolled inflation is actually destructive for a country as it de-stabilises the economy, as it leads to consumers and investors changing their spending habits.
Here are some strategies you can adapt in the current situation:
Strategies for equity investors
Inflation influences market sentiments and investors should remain cautious as the valuations are quite high at the moment. In the absence of other positive factors, the market tends to come down due to these negative sentiments.
In addition to the general market direction, investors should remain cautious on their positions in interest rate sensitive sectors.
Strategies for debt investors
Due to higher rate of inflation, most debt market instruments have become unattractive as real interest rate (interest rate after factoring the rate of inflation) has gone negative. Investors in debt instruments should exercise patience and diversify part of their debt into other instruments like gold and silver which have a better outlook in the short to medium terms.
Strategies for borrowers
The environment is quite bad for borrowers. Interest rates have gone up across the board and people with large loans are paying higher EMIs. Since higher interest rates are here to stay for some time, it is advisable to look for alternative sources of income or reduce the loan burden by partial prepayment.
Railway bonds will earn you a tax-free...
The finance ministry on Monday approved issue of bonds by railways worth Rs 5,000 crore for the financial year ending March 31, 2010.
The bonds will be issued by Indian Railway Finance Corporation (IRFC), which will be tax-free, secured, redeemable and non-convertible, carrying an interest rate in the range of 6.5% to 7.25% per annum. The bonds will be available in the form of public issue.
In another order, the government approved notification of 10 years zero-coupon Bhavishya Nirman Bonds of National Bank of Agriculture and Rural Development (NABARD), again to be issued in this financial year. The number of bonds approved for issue are 95,20,000 with maturity value of Rs 20,000, each having life period of 10 years. Income on such bonds will be taxed only on maturity as capital gain.
IRFC bonds will create a good opportunity for investors in the high tax band. First of all, these are government-guaranteed bonds so there is no chance of default. In fact, in certain term, it is safer than bank deposits.
Besides this, the rates of return offered by the bonds are very attractive. According to a simple calculation, a 6.5% tax free return will be equivalent to 9.28% pre-tax return, which is a very handsome rate.
The highest return offered by five year fixed deposits of bank is around 8%. If one has to pay tax at the rate of 30% of the income, the net interest rate — in case the bane is offering a rate of 8% — would be only 5.6%.
But the other rate at 7.25% offered by the IRFC bond will be even more attractive. The 7.25% tax free return will be equivalent to 10.28% pre tax return. Presently, this is better than investing in debt mutual fund. The average return offered by debt mutual fund in 5 year is 7.75%. The return from the government securities in five year is even less at around 6.4%.
Central registry of mortgaged houses
In case of home loans, banks are entitled to mortgage of the property. The mortgage is normally either in the form of equitable mortgage or deposit of title deeds. The mortgage deed is not registered or noted in the records of any revenue authority. As such, the mortgage details are not reflected in revenue records. As a result, the encumbrance certificate issued by a subregistrar will not be able to highlight an existing mortgage. Moreover, the search certificate issued by an advocate won't be able to include this either.
One of the major reasons behind bad loans in mortgages is cases where a borrower takes a loan from more than one lender using duplicate documents. Sometimes, loans are taken for the same property from different sources, using duplicate documents.
The National Housing Bank (NHB) and the Credit Information Bureau of India Ltd (CIBIL) have joined hands to set up a central registry of mortgaged houses. Home loan defaults are expected to drop sharply with this move.
The repository was set up with a database of around six lakhs borrowal accounts compiled from 25 entities commercial banks and housing finance companies - and is expected to help lenders take an informed lending decision. The database accounts for a significant chunk of loan accounts in the country. Presently, the CIBIL database is accessible to only member organisations.
According to the Reserve Bank of India (RBI) database, there were around 5.7 million borrowal accounts with commercial banks in the country as on March 2009. With the increase in defaults in the housing sector due to duplicate sales deeds etc, CIBIL's mortgage check will enable more informed decisions while assessing new mortgage loan applications as well as better portfolio management. The comprehensive reference database will contain information on properties that owners have availed loans on, summaries of those loans, and open and close dates. The move is a part of the initiative to improve infrastructure in the housing finance market. As the home loan market evolves, there is a need to create appropriate infrastructure.
The NHB is also pushing for mandatory registration of equitable mortgages. This would increase the cost of home loans as lenders would have to pay a stamp duty which is related to the property value. The stamp duty is in turn recovered from the borrower. The NHB is also working with 10 major banks in the country to set up a central mortgage repository which will have electronic registration of mortgages, and will be mandatory for everybody.
Now, CIBIL has introduced mortgage check, in association with NHB. The mortgage check will contain information on property mortgaged to various banks, and details of existing loans and comprehensive information on such property. Mortgage check is an electronic database posted on the website of CIBIL.
Authorised persons from member organisations (banks) will be able to access the database to check a property for which loan is applied for. This will help lenders share and access mortgage information and contain bad transactions. In case the details of the property match with the database, the loan application will be declined.
This will help both the buyer and the lender as it would enable detection of fraudulent transactions.
Mutual Fund Review: Canara Robeco
This is a turnaround story. Launched in September 2003, it was only in 2007 that the fund began to give its peers serious competition. Coincidentally, that was the year Robeco took a stake in the AMC. Ever since then, the fund has outperformed both, its benchmark and the category average every single year. Over the 3-year period ended February 28, 2010, it delivered an annualised return of 17.14 per cent (category average: 10.32%, BSE 200: 10.27%).
Till 2006, the fund resembled a mid cap fund with the allocation to large cap stocks rarely exceeding 50 per cent, at times going to as low as 10 per cent. Also, the portfolio tended to be rather erratic. In certain months, there would be just 15 stocks in the portfolio and the number would jump to 55 the very next month, to drop to 41 within three months. This resulted in the fund being hit harder in market downturns. For instance, in the quarter ended March 2004, it shed 11 per cent (category average: -2%). Again, in the downfall in the quarter ended June 2006, it lost 19 per cent (category average: -12%) against the benchmark's fall of 10 per cent.
Ever since 2007, the fund has evolved into a stable offering, beating its peers in market downturns and upturns. The large cap exposure began to get seriously upped (peaking at 77% in 2008) and the portfolio began to be consistently diversified. "This fund is predominantly a large cap fund, but we do not ignore mid caps. What we tend to do is pick up emerging leaders within sub sectors. For instance, within the broad sectors of IT or Pharma, we pick up mid caps which are leaders within the sub-theme," says Chandan who took over the fund in July 2008. This played out well in 2009 when certain mid caps in the IT outsourcing space helped generate great returns.
Though individual stock holdings have not exceeded 7 per cent since 2007 (barring RIL and Bharti Airtel), and allocation to the Top 5 stocks has rarely crossed 30 per cent, the fund manager does not shirk from strong sector bets. "We do have very high conviction levels on the Indian domestic demand and consumption story. So on sectors that fall within them, we take strong bets. Through our internal research and analysis of the business, management and valuations, we then look for individual stock bets," he says.
Mutual Fund Review: UTI Opportunities
The right sectoral calls have helped this fund's performance in recent years
As the name implies, the fund has accomplished what it stated it would do. And in the bargain, has made money for its investors.
Launched in July 2005, it got off to a weak start. It delivered a meagre 11 per cent in 2006, underperforming both, its category and benchmark by huge margins. One of the reasons being the high allocation to mid cap stocks when it was large caps that rallied that year. Coupled with sector picks that went wrong, such as being overweight on Auto (BSE Auto was among the worst performing indices that year).
Come 2007, the fund began to make up for lost ground. Upadhyaya took over in March 2007 and since then the fund's performance has been more than impressive. Over the 3- year period ended February 28, 2010, it was the best performing fund in its category with an annualised return of 20.01 per cent, double than that of its benchmark (10.30%) and category average (10.32%).
The mandate of this fund requires Upadhyaya to dynamically shift between sectors depending on the macro economic outlook and opportunities available in the market. How does he take such a call? "We hold on to a sector until we see a huge valuation gap between that sector and the market. Or, there has to be some fundamental development which is negative in the sector leading to a sell-off. Alternatively, it could just be that there is another sector that looks more attractive," he explains. In 2009, he moved out of FMCG and into IT. He got into Metals early in the cycle. He continued with Hero Honda and his bets on Tata Motors, ICICI Bank, Hindalco and Lanco Infratech made it for the fund.
By and large, Upadhyaya attempts to keep around 65-75 per cent of his portfolio in 4 to 5 select sectors which he believes will outperform the broader market in the short to medium-term. He also sticks to a 70 per cent large cap tilt and averages at around 40 stocks in the portfolio.
The high cash levels in the fund don't imply that he is not fully invested but indicate derivative exposures. "We employ derivatives either to hedge part of the portfolio or employ it for reverse arbitrage trades. Also, entry and exit is easier in the futures market because of high liquidity," he says.
India Inflation Challenge: Structural or Cyclical? | Nov 17,2010 | Morgan Stanley
India Does Not Have History of High Inflation
Historically, India's inflation has been lower compared with other emerging markets. Inflation WPI and CPI-Industrial Workers (CPI-IW) have averaged 5.3% and 6.8%, respectively, over the last 15 years compared with 11.2% (CPI) for emerging markets. Double-digit inflation is not the norm. Indeed, over the last 10 years on an annual average basis, WPI inflation crossed 10% not once while CPI-IW crossed 10% only one time. On a monthly basis, the two recent spikes in WPI inflation numbers to double-digit levels have been caused by oil prices spiking above US$140/bbl (in 2008) and severe drought affecting farm output, leading to a sharp rise in food inflation (2009) and other cyclical factors. Typically, double-digit inflation prompts policymaker responses as society at large has begun to expect inflation of around 5-5.5%.
Recall the Trend in 2003-07: Strong Growth and Manageable Inflation
We highlight that during 2003-07, India's GDP growth averaged 8.9% and WPI inflation averaged 5.5%. In other words, India has been able to transition to higher growth without the significant acceleration in inflation except for the recent cyclical spikes in inflation as discussed above. However, one could argue that in the initial part of the strong period, the country was operating with excess capacity, as measured by the usual trend in the current account, which was in surplus of 2.3% of GDP in F2004 (12 months ended March 2004). However, there was no major inflation pressure in this period. Inflation pressures picked up only in 2008, when oil prices shot up and summer crop/food grain output suffered a decline of 2.3%Y. The current account deficit also remained in the manageable range during this period with peak levels of just 1.3% of GDP in 2008.
What Helped Manage Inflation in 2003-07 Even as Growth Accelerated?
We believe that during 2003-07, there was a steady pick-up in growth and a commensurate rise in investments and productivity. India's investment to GDP gradually rose from 25.2% in F2003 to 37.7% in F2008 and savings to GDP rose from 26.3% in F2003 to 36.4% in F2008. Infrastructure spending also increased from a trough of 4.3% of GDP in F2003 to 6.4% in F2008. Capital deepening, a rise in trade to GDP, increased capital inflows, an improvement in technology and corporate management efficiency helped to improve productivity growth. Total factor productivity growth accelerated to 3.8% during 2003-07 from an average 2.4% in the 1990s.
Cyclical Factors Distort the Inflation Trend
As we explained in Part I (Inflation Challenge: Cyclical or Structural, Part I), the surge in crude oil prices in 2008 and supply shock in food production were the two key factors pushing headline inflation in India to double-digit levels on a monthly basis in the recent past. The spike to double-digit inflation rate was driven by global commodity prices price shock when crude oil prices rose to US$140/bbl in mid-2008. Further, summer (Kharif) food grain output declined by 12.1%Y for the 2009 summer crop, which accounted for about 50% of the full-year output. India saw one of the worst droughts in history in 2009. Note that this was in addition to a 2.3%Y decline in the 2008 summer crop due to bad weather.
Apart from these two supply shocks, in the recent period we believe that the government's desire to accelerate GDP growth at a time when investments and therefore capacity creation was affected temporarily by the credit crisis meant that the cyclical inflation pressures only increased. Generally, in the short term (up to one year), the fundamental capacities are fixed. Hence, it is difficult to increase capacity significantly in response to a sharp rise in demand. Normally, it takes 12-18 months for the work-in-progress to turn into commissioned capacity. The credit crisis had a significant impact on investment in India. India's investment trend tends to be highly influenced by the capital market environment. As the global credit crisis impaired capital markets, private corporate capex declined from 16.1% of GDP in F2008 to 12.7% in F2009 and further to 12.6% (our estimate) in F2010. On the other hand, the quick recovery in domestic demand from April 2009, driven by the government's aggressive fiscal and monetary policy as well as an improvement in global and local sentiment, resulted in a capacity stretch much earlier in the cycle than was normal.
However, in the long term, capacities are variable and can be increased in response to rising demand pressure without stoking inflationary expectations. We believe that the structural inflation trend in India should be lower, not higher, due to the possibility of improved supply-side conditions.
Structural Inflation Will Be Lower as Savings, Investments and Productivity Growth Rises
Over the past decade, India's headline WPI inflation has averaged 5.3%. As we mentioned in India and China: New Tigers of Asia, Part III, August 15, 2010, the combined effect of more favourable demographics and increased productive job opportunities should boost India's private savings level and push aggregate savings to 37-40% of GDP over the next ten years, allowing the country to maintain an investment-to-GDP ratio of 39-42%, we estimate. The increase in capacity through higher investments should ensure a shift in India's growth to a sustained rate of 9-10% in this period without overheating concerns. Recall that over the past five years, India's average GDP growth is 8.5% with infrastructure spending at 6.4% of GDP and inflation (WPI) averaging 5.5%. In this context, we believe that, in the coming three years, India's infrastructure spending to GDP will rise to 9-10%, ensuring that productivity growth remains strong. We expect the structural inflation trend to remain in the 5-5.5% range, with GDP growth likely closer to 8.5-9%.
What About the Structural Rise in Food Demand and Inflation?
Disentangling the cyclical component from the structural component is not easy. Food inflation has averaged 12.2%Y since summer 2008 due to two years of back-to-back poor farm output. Prior to that, during 2006 and 2007 when GDP growth averaged 9.7% and domestic food demand growth was strong, average food inflation was in the 6-7% range. This was higher than the preceding five-year (2001-05) period, when average food inflation was 3.4% and GDP growth was 6.6%. In other words, in the event of GDP growth remaining strong at 8.5-9%, considering the structural supply hurdles, food inflation is likely to remain high in the 6-7% range. The structural component in food inflation is all about protein. Over the last few years, the acceleration in the pace of per capita income growth, particularly in the lower income groups, is reflected in higher protein-related food items. Moreover, a similar trend in other developing nations has meant that the government cannot rely on imports to reduce the pressure on domestic food prices.
While structural demand growth has risen, particularly for protein-related food items, the supply side continues to be affected by structural problems. Productivity growth has remained lacklustre. Government spending on agriculture-related infrastructure services remains low. Land-holding structure is fragmented. About 63% of the farm-land area is with marginal, small and semi-medium farmers (about 100 million land holdings). Penetration of irrigation is still only 44.2% (net irrigated area as percentage of net sown area, F2008).
Moreover, the government's fertilizer policy had distorted the trend in fertilizer consumption, and therefore the mix of soil nutrients has resulted in low productivity. The good news is that the government is beginning to realize that supply-side reforms are key. It has begun to implement a reform in fertilizer pricing policy. The government is also working on increasing investments in the rural infrastructure.
We believe that in the medium term food inflation could average higher at 6-7%, assuming there is no major crop failure. We are also assuming that the government's efforts to improve productivity in the farm sector, inventory management as well as public distribution systems will take some time to improve. However, with the continued rise in non-farm investments, we expect productivity growth in that segment to ensure that overall inflation is maintained in the 5-5.5% range over the medium term.
Similar Trend in Other Asian Economies During Initial Phase of Take-Off
In the initial period of growth take-off, some parts of the economy tend to lag, and capacity creation in those areas is not anchored to high GDP growth. Moreover, investments in the economy tend to be higher than savings. During the initial phase of high growth, other Asian economies also faced slightly higher inflation trends and saw their current account in deficit or in very small surplus. For instance, in China, the current account balance remained in a small deficit or negligible surplus until the mid-1990s. China moved into high growth of 9%-plus on a sustained basis for the first time in the early 1980s from an average of 6.3% in the 1970s. Urban CPI in China averaged 8.1% in the 1980s compared with an average of 1.4% in the 1970s. We have seen a similar trend in other Asian economies such as Korea and Malaysia when they moved to a high-growth trend. Indeed, India appears to have managed the transition to a higher growth trajectory, with minimal inflation pressures compared with the other Asian Tigers.
Key Risk to Our View
The key, we believe, from a cyclical and structural perspective will be the government's policies. If the government and central bank attempt to boost growth through the support of loose fiscal and monetary policy instead of structural reforms, which help boosts savings and investments, inflation will likely be higher than expectations.
Trai annuls 62 licences for rollout delays
Here's the bellwether of scams
THE telecom regulator has asked the government to cancel 62 of the 122 licences issued by former telecom minister A Raja under controversial circumstances in 2008 to new companies, including joint ventures of international operators such as Telenor ASA, Emirates Telecommunications Corp and Sistema JSFC, because they had not been able to launch services in time.The recommendations of the Telecom Regulatory Authority of India—which claims that its views were ignored by Mr Raja—strengthens the possibility of several licences issued in 2008 being revoked.
On an action-packed day, the telecom department, under new minister Kapil Sibal, decided to seek legal opinion on the validity of the telecom licences dished out by Mr Raja after the country's national auditor said 70% of these mobile permits were obtained through fraudulent means, an official aware of the development told ET.
It is also learnt that Mr Sibal convened a meeting of top officials of the telecom ministry to discuss the regulator's recommendations, but ET has been unable to ascertain the outcome of this meeting.
The Comptroller and Auditor General of India, or CAG, in its report on Tuesday said 85 of the 122 licences given to six companies, notably Uninor, Videocon, Loop Telecom, S Tel, Etisalat and Allianz Infratech, were illegal as these firms were not eligible to obtain them. The auditor added that these six companies had disclosed "incomplete information and submitted fictitious documents and used fraudulent means" for obtaining them. Many companies were allowed to change 'doctored and fictitious documents' later, in some cases even as late as 12 months after they had submitted their applications.
CAG said most licensees had prior information and even had pre-dated demand drafts, allowing them to jump the queue for spectrum. An earlier probe by the ministry of corporate affairs had also established that these companies were not eligible to receive mobile permits and had submitted doctored and fake documents along with their applications. Telcos missed deadlines
THE companies facing the threat of losing their licences claimed that they were not in violation of the rollout obligations. But, Trai officials said their investigations revealed that 34 licensees had not rolled out services while 28 had launched operations, but failed to meet the minimum criteria as specified in their agreements. India is divided into 22 telecom circles, and pan-India operators get individual licences for each region. Trai chairman JS Sarma, in a note to the communications ministry, said mobile permits held by Loop in 14 service areas, Etisalat DB Telecom in two service areas, Sistema Shyam Teleservices in 10 service areas, and Unitech Wireless in eight areas be withdrawn because of these lapses.
The regulator further recommended that 13 licences of Etisalat DB, five of Loop Telecom, and 10 of Videocon Telecommunications be cancelled, as the network rollouts undertaken by these companies fell short of the requisite conditions.
India's telecom regulations mandate that any company with a licence must meet the deadlines for commercial launch of services, and the telecom department has the powers to cancel licences of mobile phone companies in circles where they have not launched services even a year after getting the licence. The six new mobile phone companies had missed several deadlines for launching commercial services. Existing laws mandate mobile companies to provide commercial services in at least 10% of the district headquarters in a circle by the end of the first year. DoT can fine companies 5 lakh a week per circle for the first 13 weeks of delay. The fine goes up to 10 lakh each for the next 13 weeks, and to 20 lakh for delays up to 26 weeks.
Trai said imposing penalties for failure to roll out services would run into huge amounts. "So, we had suggested that these licences should be cancelled. This would vacate enormous amount of spectrum (radio waves)," the regulator added. CAG had slammed the telecom ministry for not recovering 679 crore as penalty or liquidated damages from six new operators for missing deadlines.
Refuting the regulator's arguments, Sistema Shyam, in which the Russian conglomerate holds 74% stake, said, "Amongst the new telecom operators, Sistema Shyam Teleservices Ltd (SSTL) was the first company to launch its services." "The company has complied with all its rollout obligations in all the 22 telecom circles and has already secured over 7 million voice subscribers and over 3,00,000 data customers," it said in a statement.
Norway's Telenor, which holds a controlling stake in Unitech Wireless had earlier warned that any move to cancel licences could impact foreign investment in India.
"We have not received any information from Trai regarding our licences in India. Therefore, we can't comment on this matter," Uninor said in an emailed statement, while adding that the company has launched its services across India... and is therefore a real operator." Loop Telecom's spokesperson said the company has not 'received any communication from Trai or DoT, and therefore could cannot comment on specifics'.
Axis wins Enam, buys its best for 2,067 cr
WIN-WIN DEAL POSITIVES FOR BOTH SIDES
Snaps Up Investment Banking, Institutional & Retail Broking Enam exits with handsome gains while deal will pay off for Axis in long term given strengths & profitability of investment banking & institutional broking units
AMBITIOUS private lender Axis Bank has snapped up the best of the house of Enam—one of Dalal Street's most influential brokerage-cum- investment banks.Axis, led by CEO Shikha Sharma, a former ICICI Bank director, will acquire Enam Securities' key businesses such as investment banking, institutional and retail broking, and distribution of financial products in an allstock deal worth 2,067 crore.
With this, Enam will exit its famed agency businesses that will be demerged from Enam Securities to a wholly-owned Axis subsidiary. Close to 400 Enam officials will move to the new outfit that will be headed by Manish Chokhani—a key member of the Enam management and one of the four shareholders in Enam Securities.
Mr Chokhani, and the founders of Enam—Nemish Shah, Vallabh Bhanshali and Jagdish Master—will own a 3.3% equity in Axis after the bank issues new shares to them. The transaction will need approvals of RBI, Sebi, and the high courts of Gujarat and Mumbai.
The story was broken by ET NOW, this paper's business channel, at 12:35 pm on Wednesday, ahead of other broadcasters and wire services. Later in the afternoon, ET NOW correctly reported the swap ratio, which is 5.7 Axis Bank shares for one Enam share.
Mr Bhanshali, Enam chairman and the group's public face, is reluctant to call the deal a "selloff" or "acquisition". "This is a match of similar cultures, and synergies will kick in from Day 1... You may say we are known for IPOs, but for me Enam represents a set of values that will continue to survive," he said while jointly addressing the media with Ms Sharma.
Mr Bhanshali, whose firm has dominated the public issue market for 25 years and published the first nine research reports in an era when few attached importance to them, has been invited by Axis to join the bank's board. This, however, will have to be cleared by RBI.
As part of the deal, Enam and its founders will enter into a five-year non-compete agreement with Axis, and the private bank will have the right to use the Enam brand for two years. Deal came as a surprise to many
FOR Axis, the once-conservative lender that is undergoing a slow transformation under its new CEO, the deal is a strategic move to get into a lucrative business and shore up fee income, with Enam managing most large equity offerings, including the recent issuances by Coal India and Power Grid Corporation. "Since the days I was part of the start-up team in ICICI Securities, I have watched Enam, its franchise, quality and sustainability. This complements the corporate banking and debt market franchise of Axis," said Ms Sharma.
Senior bankers made a mental note of the deal, which was announced on a public holiday and came as a surprise to many. "It's a good move. All customer-centric banks need to offer a bouquet of products and this will strengthen the bank's corporate banking business," said Madhvi Puri Buch, CEO & MD of rival ICICI Securities and Ms Sharma's former colleague.
According to Rashesh Shah, chairman & CEO, Edelweiss Capital, the deal is fair priced. "Enam is expected to have a profit after tax of 100 crore for the full year. So, 2,000-odd crore for the full stake looks all right," he said. For the seven months between April 1 and October 20, the Enam arm recorded a pre-tax profit of 77 crore against a turnover of Rs 182 crore.
The deal with Axis excludes Enam's portfolio management service, asset management company and assets under Enam Holdings—the group's investment management arm—all of which will stay with Enam.
"With Axis Bank's distribution platform of almost 1,100 branches and Enam's retail network, the combined entity will have an opportunity to build a dominant retail franchise as well," said a joint press statement.
Anil Singhvi, former Gujarat Ambuja CEO and currently an investment banker, advised Enam while Macquarie Group advised Axis on the deal. "Today, ideas alone don't work... you need balance sheet strength," said Mr Singhvi, whose long association with Mr Bhansali and Ms Sharma helped him cobble the deal in less than a month.
India Drained Of 20 Lakh cr During 1948-2001: Study
ZEROING IN ON BLACK MONEY
$462000000000
IN A season of swindles, kickbacks and scams, here is some more on the mother of them all. Black money — the popular moniker given to the billions seeded by dirty deals and whisked away abroad from the taxman's prying eyes — has received much attention in recent years.The opposition never tires of screaming foul at the government. The government, for its part, is at pains to say it is doing all it can to track down the illegal stash.
Despite the cacophony, an estimate of the scads of black money in secret bank vaults overseas has long been one big unknown, resulting in a great deal of speculation and glib talk around the subject. Finally, some help is at hand.
A new study by an international watchdog on the illicit flight of money from the country, perhaps the first ever attempt at shedding light on a subject steeped in secrecy, concludes that India has been drained of $462 billion ( 20,556,848,000,000 or over 20 lakh crore) between 1948 and 2008. The amount is nearly 40% of India's gross domestic product, and nearly 12 times the size of the estimated loss to the government because of the 2G spectrum scam. The study has been authored by Dev Kar, a lead economist with the US-based Global Financial Integrity, a non-profit research body that has long crusaded against illegal capital flight.
Mr Kar, a former senior economist with the International Monetary Fund, says illicit financial flows out of India have grown at 11.5% a year, debunking a popular notion that economic reforms that began nearly two decades ago had tempered the creation and stashing away of black money overseas. Outflows accelerated after reforms
IF CAPITAL outflows were a child of the independence era, the problem came of age in the years after the reforms kicked in. Nearly 50% of the total illegal outflows occurred since 1991. Around a third of the money exited the country between 2000 and 2008.
"It shows that reforms seem to have accelerated the transfer of black money abroad," says Mr Kar, whose study titled 'The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008' sifts through piles of data on the issue over a period of 61 years. The study, which Mr Kar says is the most comprehensive one yet on illicit financial flows from India, will be made public on Thursday.
His report comes amid a renewed government push in recent months to pursue black money stashed abroad. In late August, the government signed an agreement with Switzerland — its banks top a list of usual suspects — that will enable exchange of information on tax evaders. New Delhi is also in talks with at least 20 tax havens, particularly Mauritius, to extract similar information.
The government is also attempting to gain a measure of the total unaccounted money circulating in the economy. The finance ministry last week approached the National Institute of Public Finance and Policy to get a fix on such money.
But M Govinda Rao, director of the institute, says his think-tank is yet to decide on going ahead with the exercise because it is not an easy task. "A study on this subject is a huge challenge because one is dealing with a very big problem that covers hordes of money from many sectors," he says.
Black money turned into an election issue during the 2009 general elections, with the BJP harping on the issue throughout its campaign. Its leader LK Advani has been the most vocal critic of the government on this issue, time and again questioning the government's resolve to chase illegal funds. Mr Advani recently urged the government to publish a white paper on the issue.
While Mr Advani was unavailable for comment, the government's detractors on this issue say there is more talk than action to address this issue.
"Everybody knows about the gravity of the problem, but the government has not shown the political will to bring the money back to India," says Prakash Karat, general secretary of the Communist Party of India (Marxist).
The government has, however, received praise from Paris-based Organisation for Economic Cooperation and Development, which has been at the forefront of the fight against tax evasion. OECD, whose relentless offensive is largely credited with lifting the veil of secrecy over umpteen tax havens, hailed India's efforts to crack down on tax evasion and sign information exchange agreements earlier this year.
These are but short-lived answers, say experts, adding that an overhaul in the global financial system is central to a lasting solution. New tax havens will spring forth when pressure mounts on existing ones.
That is not to say there are only a few tax havens out there. Indeed, at least 91 such hotspots flourish across the globe. Asian countries, particularly Thailand, Singapore, Hong Kong and Macau, too are emerging as new destinations for parking illicit funds.
Besides Switzerland and Mauritius, Indian money is also said to end up in Seychelles and Macau. Due to the illicit nature of these deposits, pinpointing the journey's end of the bulk of India's black money is tenuous at best.
The GFI study gives a measure of the amount of money that the government is chasing, but it is only a fraction of the $1.4 trillion that the BJP claims is the illegal stash.
GFI acknowledges as much, saying its figure is conservative and hasn't taken into account smuggling and certain types of trade mischief. It also admits to gaps in available statistics, lamenting the lack of data on the consolidated fiscal balance with the government, which has hampered research. If these indicators were counted, India's total illicit outflows would well be half a trillion dollars.
But Mr Kar says the $1.4 trillion figure was an "estimate", while the numbers in the latest report are based on real data.
Still, GFI says that by no stretch of imagination is its calculation insignificant, more so when viewed against the country's existing external debt at nearly $230 billion.
"It means India could not only have contracted less debt or even paid it off, but another half would also have been left over for poverty alleviation and economic development," says Mr Kar. "There is no question that this huge loss of capital has set India back in its struggle to eradicate poverty and illiteracy."
The study has based its findings on the World Bank Residual Model that tracks illicit outflows by measuring the disparity in a country's recorded source and use of funds. It also delves into IMF's 'trade-mispricing' model that compares a country's recorded imports to what the world says it exported to the country as well as the recorded exports against its global imports. The gaps tell the story.
The perpetrators of illicit outflows, says the study, are wealthy individuals and private companies. Black money is also abetted by the existence of an 'underground' economy that emerged out of illegal activities and assets spawned by such activities.
The unabated growth of slush funds is borne out of a growing affinity of culprits for offshore financial centres, or tax havens, at the expense of banks in developed countries such as the US, France and the United Kingdom. The study finds that the share of deposits in offshore tax havens grew to 54.2% in 2009 from 36.4% in 1995.
The study is as much an indictment of feckless government action as it is about shedding a light on the nature of illicit financial flows. "The sharp rise in illicit flows means that tax evasion (which is part and parcel of such flows) is also increasing sharply," says Mr Kar.
"In the absence of good governance and poor institutional oversight, the desire for the hidden accumulation of wealth drives more of such transfers," he adds.
Though India cannot end its black money problem alone, there are challenges it must address by itself, says the study. Legal institutions and procedures need to be strengthened and streamlined. The guilty should be punished --the architects of the Commonwealth Games scam, for example -- swiftly. And tax policies must be rationalised.
"Sure, black money is there in most countries but if it worsens poverty, robs human rights and drives centrifugal forces such as naxals, it becomes a problem that can no longer be ignored," says Mr Kar.
ICICI Bank Resarch Reports 2010
ICICIdirect_ApolloTyres_Q2FY11
ICICIdirect_BharatiShipyard_Q2FY11
ICICIdirect_FortisHealthcare_Q2FY11
ICICIdirect_GatewayDistriparks_Q2FY11
ICICIdirect GreatOffshore Q2FY11
ICICIdirect_HindustanDorr_Q2FY11
ICICIdirect_IDFC_Q2FY11
ICICIdirect_IndiaCement_Q2FY11
ICICIdirect_IndiaCement_Q2FY11
ICICIdirect_JindalSAW_Q2FY11
ICICIdirect_Motogaze_November2010
ICICIdirect_OILIndia_Q2FY11
ICICIdirect_OrientalBank_Q2FY11
ICICIdirect_OrientPaper_Q2FY11
ICICIdirect_PantaloonRetail_Q1FY11
ICICIdirect_PantaloonRetail_Q1FY11
ICICIdirect_TulipTelecom_Q2FY11
ICICIdirect_UnityInfratech_Q2FY11
Expect rural demand to pick up substantially: Orient Papers
Expect rural demand to pick up substantially: Orient Papers
ML Pachisia, managing director of Orient Papers, in an exclusive interview with CNBC-TV18 said, he sees demand picking up this week onwards. Paper prices, he said, prices had improved to a large extent but he sees further price increase in the short-term.
Pachisa added that he expects rural demand to pick up substantially, while he also sees a 30% volume growth in electronic consumer durables.
Below is a verbatim transcript of the interview.
Q: Your cement division profits have come off significantly; can you take us through what is going around in the markets that you sell in and by when you expect some recovery?
A: Our cement performance for the last quarter has to be seen in the context of whatever has happened in the South India cement space and in spite of the fact that the profits have been lower than our previous years or any previous quarter, I think we have done amongst the best in the South Indian space. The cement prices have gone down substantially during that monsoon period—heavy monsoons lower demand large in capacities but all the same because of two factors. One, our cost structure is generally amongst the lowest in the industry and second, we have had 31% growth even in the last quarter in our cement volume in spite of the fact that Andhra was minus 4% and Maharashtra grew only by 8%. We have been able to increase our market share. These two factors have helped us to perform better than most others.
As far as current situation is concerned the prices have been improved to a large extent. However, the demand in its full swing is yet to come back. There were festivities in all these areas and now I believe that from this week onwards demand should also start picking up post monsoon. Everybody expects that since the monsoons have been very good the rural demand will pickup substantially.
Last year the rural demand was the one which helps cement industry so we do expect the demand to pickup gradually and that should help the cement industry in the south as well.
Q: By how much have prices moved up and by how much do you expect them to firm up by the end of this year if at all?
A: The prices in South have more or less gone back to where they were before the fall took place; they had gone down by Rs 50-60 per bag, they have recovered Rs 30-40 already. Right now we are not considering any further price increase in the short-term, let the demand pick up and as and when the demand picks up in full swing we will see. But right now we are working at a reasonable level of EBITDA margins and we do expect the Q3 to be substantially better than the Q2.
Q: What about the paperboard division. Take us through the segmental performance there and what you can expect going forward?
A: The paper division for the Q1 and Q2 quarter had suffered because there was water scarcity in that area. It has now back in full swing and at the same time we have finished construction of a very large water reservoir to take care of future water security. We have created water reservoir for 250 million gallons which will last us for two months during the summer season.
This was not the case earlier for our paper division but the last two years because of very scanty monsoon in that area we have face this problem so hopefully next year onwards we should not have this water problem. Right now paper division is doing reasonably well. It should get back to its normal performance when it was amongst the top four-five paper companies in the country in terms of EBITDA percentage.
Q: For the electrical division while your volumes are growing at a smart rate, the margin seems to be under a lot of pressure because of raw material price hikes?
A: That's true in case of electrical division; again we have had more than 30% growth in volumes in the fans division. However the price of copper, aluminium, steel have gone up substantially from the levels ruling in the last year and therefore the margins are relatively from the last year's level which was an exceptional year, relatively the margins are lower however the margins are fairly satisfactory and for this division the major season is that in the last second half of the year so substantially we expect both volumes and margins to be better.
