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For Pr ivate Circulation

Volume 1 Issue 82

22nd M ay 13

# 24'&+%6#$.' 56'2

Experts expect the RBI to cut key rates in the upcoming mid-quarter monetary policy review on the back of lower WPI and the recent decline in commodity prices

DB Corner Page 5 A Predictable Step Experts expect the RBI to cut key rates in the upcoming mid-quarter monetary policy review on the back of lower WPI and the recent decline in commodity prices Page 6 Tough Going Although the RBIs guidelines on securitisation of standard assets have been issued to prevent unhealthy practices, this move will surely make it difficult for NBFCs in the coming days Page 10 Miscalculated? Although it is too early to dismiss the introduction of periodic call auction by SEBI as failure, the market regulator may have bungled in its attempt to curb price manipulation of illiquid shares Page 12 Propping Up The government is lending support to the infrastructure sector in the country by trying to woo foreign investors who have adopted a wait-and-watch strategy before making any drastic move Page 15 Fallen Out Of Favour Once regarded as the bellwether of the IT industry, Infosys has lost its Midas touch and seems to be replaced by TCS, in the already troubled sector Page 18 Rampant Misuse The rise in cases of corporate debt restructuring only goes to show how this tool is being misused to hide bad debts Page 20 Going With The Flow Following the adoption of austerity measures and cuts in public spending in Spain, Indian pharma companies have now shifted their focus to generic medicines Page 24 Mahindra & Mahindra Financial Services Ltd: Unmatched Performance A diversified product mix, coupled with rural leadership and strong parentage will continue to drive the success story of Mahindra & Mahindra Financial Services Ltd Page 27 Small Investments, Big Profits Despite the inherent risks, risk-averse investors can consider allocating a small portion of their portfolio to small- and mid-cap mutual fund schemes as these instruments enable them to earn big profits on their investments in the long run Page 32 Technical Outlook For The Fortnight Page 35 Embracing Old With The New Old stock market players can easily be brought into the fold by bridging the generation gap Page 36 Wisdom Of Jesse Livermore One of the greatest traders of all times, Jesse Livermores exploits reveal the genius behind the man who made fortunes on the bourses Page 40 Important Jargon For The Fortnight Page 45
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Volume 1

Issue: 82, 22nd May 13

Editor-in-Chief & Publisher: Rakesh Bhandari Editor: Tushita Nigam Senior Sub-Editor: Kiran V Uchil Art Director: Sachin Kamble Junior Designer: Sagar Padwal Marketing & Operations: Divya Bhurat, Shreelatha Gollavathini Research Team: Sunil Jain, Silky Jain, Dipesh Mehta, Anand Shendge, Manav Chopra, Vikas Salunkhe
HEAD OFFICE Nirmal Bang Financial Services Pvt Ltd Sonawala Building, 25 Bank Street, Fort, Mumbai - 400001 Tel. 022-3926 7500/7501 CORPORATE OFFICE B-2, 301/302, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013 Tel: 022 - 3926 8000/8001 We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons... Web: www.nirmalbang.com beyondmarket@nirmalbang.com Tel No: 022 - 3926 8047

Beyond Market 22nd May 13

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#574' 2155+$+.+6;
t its annual monetary policy review on 3rd May, the Reserve Bank of India (RBI) cut key interest rates for the third time since January, but said that there is little room for further policy easing. Despite the cuts, the initial reactions were negative due to the hawkish guidance by the RBI. In the upcoming monetary policy review in June, the street expects the RBI to trim rates yet again owing to the lower-than-expected wholesale price inflation data for April. In this backdrop, the cover story of this issue of Beyond Market explains why rate cut seems to be a real possibility in the RBIs monetary policy review in June by taking into account data on growth, inflation and liquidity in the system. Apart from this, we have covered topics like the RBIs guidelines on securitisation and its impact on banks and Non-Banking Financial Companies (NBFCs), in particular; the introduction of periodic call auction of illiquid shares and how it is aimed at curbing price manipulation; the different ways by which the government is trying to woo investors towards the infrastructure sector in India and the rising cases of corporate debt restructuring (CDR) and how investors should read the fine line before investing in companies that take the CDR route. Sectorally speaking, the beleaguered Information Technology (IT) industry in India is in the news because the original stars of the sector are losing their clout to their peers in the industry. On the pharmaceutical industry front, Indian pharma companies are seen shifting their focus to generics in Spain as it is offering them ample opportunity to grow. The Beyond Basics section features an article on the importance of dedicating a small portion of an investors portfolio to small- and mid-cap mutual fund schemes. In the Beyond Learning section, we have featured two very interesting articles. While one is on the generation gap between senior market participants and Gen X traders and investors and ways to bridge this gap, the other talks about Jesse Livermore, the great American stock trader and the advice he offers to the trader community through his books. Do not miss the Beyond Buzz section in the issue as we have covered two very interesting terms - divergence between Wholesale Price Index (WPI) and Consumer Price Index (CPI) and the Indian Bill Payment System (IBPS). Both these terms have been discussed in detail in this sectioN.

Tushita Nigam Editor

Beyond Market 22nd May 13

Its simplified...

The Indian stock markets look good in the coming fortnight.

he Reserve Bank of India (RBI) in its annual monetary and credit policy on 3rd May cut repo rate by 25 basis points (bps) to 7.25% and kept the cash reserve ratio (CRR) for banks unchanged at 4%, in line with the expectations. Further, the April wholesale price index (WPI) inflation at 4.89%, lower than 5.96% in March, shows that inflation is softening, indicating the likelihood of further rate cuts by the RBI in the upcoming policy review. India Incs March quarter earnings results have been rather weak, as expected by the streets. Also, high current account deficit in India due to excessive gold imports has been a worrisome issue for the country.

The US markets have been rising steadily in the past few weeks due to good economic data, coupled with liquidity pumped into the system by the Federal Reserve and other major central banks policies of ultra-low interest rates and asset purchases to stimulate their economies. Earnings results of US companies have also been good. Also, the European markets have been doing relatively well with major markets like Germany, France and the UK on nearly a four-year high. This is propelling other markets up. The Japanese government too has continued with its easing policy, which has supported the equity markets there. The Indian stock markets look good

in the coming fortnight. The Nifty index has support at the 6,100 level with upper side targets at 6,280 and 6,390 levels, thereafter. Stocks that can be considered from trading and investment perspectives are DLF Ltd (LTP: `249.45), Indiabulls Real Estate Ltd (LTP: `85.45), JM Financial Ltd (LTP: `26.70), LIC Housing Finance Ltd (LTP: `275.65) and Sun Pharma Advanced Research Company Ltd (LTP: `153.35). These stocks can be bought at current levels and can be averaged out at lower levels. In the coming fortnight, market participants must look for any correction in the international markets as it could have a bearing on the markets in IndiA.

Sensex: 20,286.10 Nifty: 6,187.30 (As on 17th May13)

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Beyond Market 22nd May 13

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Experts expect the RBI to cut key rates in the upcoming mid-quarter monetary policy review on the back of lower WPI and the recent decline in commodity prices
he Reserve Bank of India (RBI) cut key lending rates for the third consecutive time on 3rd May. On all three occasions, the apex bank sounded cautious but nevertheless cut repo rate - the rate at which it lends to the banking system - by identical 25 basis points (bps). Is there a pattern in what the RBI does and what it says? In its mid-quarter monetary policy review of 19th March, the central bank had said: The headroom for further monetary easing remains quite limited. This time around, on 3rd May, when the apex bank reviewed its annual monetary policy, not only did it cut repo rate by 25 bps, it also maintained that there is little space for further monetary easing. Going by this trend, can we expect the RBI to cut key rates in its mid-quarter monetary policy review on 17th June? The RBI has hinted at risks emanating from higher current account deficit (CAD) and consumer price inflation and has maintained that any future action will heavily depend on these two factors. Although wholesale price inflation (WPI) has been witnessing a fall in recent times, the divergence between consumer price inflation, which actually matters at the ground level is increasing and the RBI is cautious about it.
Beyond Market 22nd May 13

To reiterate, RBI cut repo rate by 25 basis points to 7.25%, while keeping the cash reserve ratio (CRR) and statuary liquidity ratio (SLR) same at 4% and 23%, respectively. Repo rate is the rate at which banks borrow from the Reserve Bank against the pledge of government securities, while CRR is the mandatory amount that a bank needs to keep aside for contingencies. Banks must maintain liquid assets like gold or other approved securities as reserves other than the cash with the RBI in a ratio to liabilities called statutory liquidity ratio (SLR). While the cut in the repo rate was on expected lines, the initial reaction to the policy was negative, primarily because of the hawkish guidance by the RBI. The 10-year benchmark bond yield spiked to 7.8% as against 7.77% in the pre-policy trading. The Sensex extended losses to 0.8% with the banking index losing 2.2%. The rupee also slipped to the 54.06 level as against the pre-policy level of 53.98. Optimists had built-in expectations on the back of lower wholesale price inflation and the recent fall in gold and crude oil prices, warranting a dovish tone. GUIDANCE Among other things, growth, inflation and liquidity in the system are the three key considerations while taking a monetary stance. Let us look at what RBIs guidance for the same is and what it means for future actions.
Indicator RBIs guidance for FY14

Growth There are many who think that things are turning for the Indian economy. But the RBI does not think so. It has projected a more pessimistic (or realistic) growth rate of 5.7% for the year 2013-14 as against the 6.1%-6.7% growth rate estimated by the government. GDP growth in India for the October-December period last year has fallen to 4.5%, the lowest in 15 quarters. The RBI has acknowledged this in its annual policy and has considered the fall in GDP growth in framing its policy stance. Further, during 2013-14, the RBI expects a modest pick-up in economic activity only in the second half of the year. The RBI reiterated that monetary easing in itself cannot revive growth. It needs to be supplemented by efforts towards easing supply bottlenecks, improving governance and stepping up public investment, while continuing its commitment to fiscal consolidation by the government. Growth in agriculture will depend on normal monsoon. The outlook for industrial activity remains subdued as pipeline of new investments has dried up and existing projects are stalled by bottlenecks and implementation issues. Growth in services and exports may remain sluggish, given that global growth is unlikely to improve much from 2012. Inflation The RBI expects WPI inflation to be range-bound around 5.5% during 2013-14. It has factored this in after studying the domestic demand-supply balance, the outlook for global commodity prices and the forecast of normal monsoon.
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GDP Growth WPI By March14 Money Supply Growth Deposit Growth Non-food Credit Growth

5.70% 5% 13% 14% 15%

Source: RBI

Key Rates (In %) REPO RATE REVERSE REPO RATE

2012

2013

2012

2013

CASH RESERVE RATIO

4.75

4.75

4.75

4.50

4.25
2012

4.25
2013

4.00

4.00

4.00

Apr 17 Jun 18 Jul 31 Sep 17 Oct 30 Dec 18 Jan 29 Mar 19 May 03


Source: RBI

It further endeavours to take WPI inflation at 5% by March 14. However, the wholesale price inflation dropped to 6% in March, the lowest in three years; the gap with CPI is on the rise. CPI, which actually matters to individuals, still hovers around double digit (latest 9.39% in April as against 10.39% in March). The RBI has reiterated that upside risk to inflation is still significant in the near term and that it could not afford to lower its guard on inflation. Liquidity Liquidity in the system has remained tight, which in turn keeps interest rates at elevated levels. Lack of government spending has hit liquidity in the banking system with banks borrowing more than `1 lakh crore from the liquidity adjustment facility (LAF) of the central bank. It is hoped that as the government starts spending, the liquidity in the system will improve. Further, the RBI has assured infusion of liquidity through open market operations as needed to keep liquidity deficit within the RBIs comfort level of plus/minus 1% of net demand and time liabilities.
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Further, money supply growth is projected at 13%, deposit growth at 14% and non-food credit growth at 15% for the fiscal. RISKS TO RBIS GUIDANCE The RBIs guidance is subject to risks. The biggest risk to the economy stems from high current account deficit (CAD). In the last quarter of FY13, CAD peaked at about 6.7% of GDP, at a very high level. This current account deficit has always been plugged by generous foreign money: foreign direct investment (FDI) and foreign institutional investors (FIIs), which are volatile. But if the world turns more bearish, foreign inflows may also stop abruptly, putting the country in a dire situation. A large current account deficit level year after year will put pressure on servicing of external liabilities. Thankfully, in recent times both gold and oil prices have come down. This should help CAD come down too, but the position remains vulnerable. The other risk factor is that sustained revival of growth is not possible without a total revival in investment, in which government polices play a major role. Lastly, there is also a risk

to inflation due to supply constrains in the economy. According to the central bank, without policy efforts to unlock tight supply constraints and bring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains are likely to re-emerge. Risks that the Indian economy continues to face can be summed up as: twin deficits of current account and fiscal; the collapse in private sector investment and the continuing risk of a wage-price spiral, especially in rural India. WILL INTEREST RATES COME DOWN? Cumulatively, the Reserve Bank of India has reduced repo rate by 1% and the cash reserve ratio (CRR) by 0.75% during FY13. But lending rates have come off only by around 40 basis points. Even with the 25 bps cut in repo on 3rd May, the lending rates of banks are not going to come down soon. This is because the cost of borrowing for banks still remains high and they are not willing to take a hit on their net interest margins (NIMs: interest
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Beyond Market 22nd May 13

earned minus interest expended). Stock markets do not like falling NIMs for banks. In addition to this, to transmit the rate cut without sacrificing on NIMS would mean that banks will have to cut deposit rates for their customers. This is unlikely in a competitive space as banks fight to garner higher growth in deposits. Customers are also lured towards assets like gold and real estate due to higher inflation rate, which translates into negative or low real rates. As the cash reserve ratio (CRR) does not earn any interest rates, some bankers think a cut in the CRR, which has an immediate implication, could have been a better option than a cut in

the repo rate, the impact of which has a lag effect. For now, if banks manage well their other costs like cost of transactions, overheads and wage bills, it will take months for any meaningful interest rate cut by banks. RATE CUT IN THE OFFING? Despite a hawkish tone, experts expect the RBI to cut rates on 17th June. This is on hopes of lower WPI. More than half of the WPI basket consists of global commodities and the recent decline in commodity prices bodes well for WPI inflation. Even with higher CPI numbers, the RBI is likely to give higher weightage to WPI. While the recent fall in gold and oil prices can reverse, it is

estimated the prices may stay muted in the near future, keeping the current account deficit contained. Rate cut or no rate cut, the RBI is likely to keep a loose monetary stance by either tweaking it with other rates like CRR or SLR. This is primarily because the Reserve Bank of India has to accommodate higher government borrowing (`4.8 trillion net) in FY14. The RBI will also infuse liquidity through OMOs. Lastly, growth continues to languish and the RBI has taken a pro-growth stance. All these indicators warrant further rate cuts in RBIs monetary policy review slated to be announced in the second week of JunE.

OTHER REGULATORY MEASURES Measure: The RBI has increased risk weights and provisioning requirements on the exposure of banks to corporates that have unhedged forex exposure positions. Impact: Banks will have to set aside more money if they have such an exposure. Banks in turn will ask for higher interest rates from such companies that do not completely hedge their foreign currency exposure. This will also force more and more companies to hedge their foreign exchange exposure completely. Measure: Foreign Institutional Investors have been allowed to hedge their currency risks by using exchange-traded currency futures in the domestic exchanges. Impact: It is a move towards further liberalization. This move would ease operational complexities for FIIs. This will also improve liquidity to the local currency exchange. Draft guidelines will be issued by end-July 13. Measure: The RBI reduced the ceiling on statutory liquidity ratio (SLR) holdings under the held-to-maturity (HTM) category of banks holding to 23% from 25% in phases of 50 bps every quarter, beginning with the June 13 quarter. Impact: Now, banks would invest more in non-SLR securities such as corporate bonds, commercial papers, certificates of deposit and equities. So, it would help boost trading volumes in these instruments. The measure will also lead to more churning by bank treasuries translating into lower demand for long-tenure bonds Measure: Banks will have to follow a uniform, fair and transparent pricing policy of loans, especially retail loans. Impact: With this measure, banks cannot continue quoting different interest rates for the same product to different customers. This will bring transparency in the way rates are set. Measure: Banks can only import gold on a consignment basis, to meet the genuine need of export of gold jewellery. Also, non-banking financial companies should not give loans against gold coins weighing more than 50 gm per customer. The detailed guidelines will be finalized before the end of this month. Impact: This move will lower gold imports, which will help contain current account deficit. It will also discourage stocking of gold. The move will curb higher loans against the yellow metal and help any systemic issue due to the fall in gold prices.

Beyond Market 22nd May 13

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f the tight liquidity situation was not enough for banks and Non Banking Financial Companies (NBFCs), the Reserve Bank of Indias (RBIs) modification of the securitisation process delivers another blow to the financial sector. While announcing its annual credit policy, the central bank said that it would take a re-look and issue the final guidelines with regards to credit enhancement for securitisation of

standard assets by June 13. To plead with the RBI to allow them to access other sources of funding such as ECB with a little ease, the NBFCs will soon meet the governor of the Reserve Bank. Non Banking Financial Companies who are the worst impacted by these new norms are set to hold a meeting with the RBI to put forward their plea as their capital is going to remain under pressure.

NBFCs UNDER PRESSURE Securitisation is not just important for NBFCs but for banks as well who can meet their commitments to the priority sector as they buy pools of loans from NBFCs and microfinance institutions and sell them to investors in turn in the form of pass through certificates or PTCs as they are known in financial jargon. Traditionally there have been two ways by which securitisation is

Tough Going
Although the RBIs guidelines on securitisation of standard assets have been issued to prevent unhealthy practices, this move will surely make it difficult for NBFCs in the coming days

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Beyond Market 22nd May 13

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carried out. Firstly, the route in which an NBFC can directly sell its pools of loans to a bank or secondly in which a special purpose vehicle (SPV) is created for such a sale and this SPV is in turn responsible for issuing pass through certificates to the investors of the given loans. The first route was far more attractive to NBFCs (though a tad costlier), but the RBI last year introduced new norms for participants in the securitisation market, namely banks and NBFCs could no longer issue credit enhancements. These were the most important components of such a sale as they were the guarantee that an investor would look out for in case a borrower defaulted. The new norms further include a minimum holding period which was to be of six months and the introduction of a cap of 8% on the spread between the banks base rate and the yield that was being charged to the customer. Direct sales of their pools of loans has, therefore, become much less attractive for NBFCs who now have to bear a burden on their capital adequacy from where these credit enhancements are now deducted directly from their capital. RBIs CAUTIONARY MOVES The central bank obviously thinks of this as a cautious move as the ambit of the securitisation market is much larger now as they include asset classes such as gold loans. The quality of underlying assets is therefore a major concern for them. The logic behind the new norms especially the minimum holding period was also the fact that the RBI wanted to ensure that there are no
Beyond Market 22nd May 13

chances of frauds in the pool of assets and that the underlying loan holders are all real. Furthermore, the RBI thinks that since a securitized asset can now also be listed, it will ensure greater investor participation. Also, this was RBIs way of sending out a clear message to the banking sector to actually carry out priority sector lending directly rather than depending on such means. But the RBIs view may be lopsided as the truth about securitisation is farfetched from this utopian situation, which it has etched out. The volumes in the securitisation market have in fact dropped to `40,000 crore from `45,000 crore a year ago. It is also a double whammy for the securitisation market as the recently passed Finance Bill too proposes to levy a 30% distribution tax on the gross income of banks rather than the net income from June 13. This means that not only is the direct sale of pools of loans rendered unattractive, the banks too will have to pay more for such asset securitisation deals. As a result, a large amount of money sitting in SPVs is being forced to make tough decisions. They either have to fall in line or find some loopholes in the norm, which as of now seems unlikely. THE ROAD AHEAD The NBFCs and the microfinance institutions which had initially issued such pools of loans to the banks through these said SPVs had obviously not anticipated this distribution tax. The banks who had thought that a

portion of the priority sector lending requirements have been taken care of are in for trouble as they will now have to make use of the rest of the financial year to shore up their priority sector lending. For an exit route banks may also consider selling their investments to mutual funds as they do not have the distribution tax. This may, however, not be as easy as it sounds as these investments fall under the hold to maturity category. But the larger issue is definitely that of NBFCs who have thus far depended on the securitisation route to meet their funding needs. In fact, it would be no exaggeration to state that the growth of NBFCS in India has largely been through the securitisation route. If this were to become difficult in the long run, it is obvious that the capital adequacy of such NBFCs would be impacted as they are the originators of such asset pools. The impact would show on the profit growth and numbers of the NBFCs eventually and make the stock of such NBFCs less viable for investors who have been wanting to participate in the financial sector. This is unfortunate as a recent study by a domestic ratings agency shows that the quality of the underlying assets of such pools of loans has improved considerably over the last year or so as NBFCs have tightened their KYC norms. Though the originators of such loans are putting up a brave front, those familiar with the securitisation market know that there are only a handful of major NBFCs who dominate the securitisation market and it will be no strange occurrence if their stocks come under pressurE.
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he market is divided in its opinion over new trading rules for illiquid scrips, which came into effect from 8th April. The new rule mandated by the Securities and Exchange Board of India (SEBI) called the periodic call auction which intended to improve liquidity in thinly traded scrips has actually seen volumes falling in these scrips since its introduction. Some view this fall in volumes as an indicator of speculators filtering out of the system. While others see operational difficulties due to the new rules as a major hindrance in dealing with such thinly traded scrips. The latter see liquidity falling further in such scrips. While the verdict is still not out on the new rule, let us see what the new rule is all about and discuss a few of its advantages and disadvantages. For starters the new rules follow a circular by SEBI in February. The market regulator proposed a periodic call auction for illiquid scrips. Trading in these illiquid scrips will be conducted only through periodic call auction sessions of one hour each throughout the trading session from 9.30 am to 3.30 pm instead of continuous trading. The SEBI intends to cut volatility, curb manipulation and improve price discovery and liquidity of illiquid scrips. ILLIQUID SCRIPS Illiquid scrip is one where not much of trading takes place. Illiquidity has been a menace and rampant manipulation has been noticed in such scrips. Illiquid scrips often tend to be volatile and prices may sway sharply with just one large order. This has been a concern as entry or exit in such scrips becomes difficult.
Beyond Market 22nd May 13

Further, the cost of buying or exiting also increases due to lower volumes. It is a well-known fact that many small investors have burnt their fingers as their decisions were influenced by false information like prices, volumes and spreads of such illiquid scrips. This in turn creates more illiquidity as investors shun such scrips. (Please see the box to know why higher trading volume or liquidity is an important parameter in choosing a potential stock.) Out of the 5,224 stocks listed on the Bombay Stock Exchange (BSE), over 2,050 scrips are categorized as illiquid. On the National Stock Exchange (NSE), 1,666 companies are listed, out of which around 160 stocks are illiquid. As per media reports there are 1.32 crore folio holders in these illiquid stocks as on 16th Apr 13. Further, it is estimated that around `80,000 to `1,00,000 crore worth of investor wealth is blocked in illiquid scrips. CRITERIA FOR ILLIQUIDITY The SEBI has clearly defined the criteria for illiquid stocks. According to the market regulator, an illiquid scrip is one in which the average daily trading volume in a quarter is less than 10,000 shares and the average daily number of trades is less than 50. (Please see box to know what volume and number of trades are.) Stock exchanges have to identify such illiquid scrips at the beginning of every quarter. The market is divided over these criteria as they fear exclusion of certain illiquid scrips. Higher volumes only on few occasions of those three months can mislead investors as overall calculation would still consider them

as liquid. The spirit of rule is missing, few experts feel. Further, sometimes even good companies can be categorized as illiquid. So, this one size fits all criteria is also applicable to well-run companies, which is not fair. Many companies are illiquid because of low public holding. A few also belong to multinational companies with high promoter holding. The financial performance of these companies may not be bad. PERIODIC CALL AUCTION In normal market, buy and sell orders are placed on an ongoing basis during trading hours and trades get executed if they match. As per new rules, all illiquid scrips will be moved to the call auction window. There will be auction sessions of one hour each throughout the trading hours with the first session starting at 9:30 am. Of this one hour, 45 minutes shall be allowed for order entry, order modification and order cancellation, 8 minutes for order matching and trade confirmation and remaining 7 minutes shall be a buffer period. All the unmatched orders remaining at the end of a call auction session will stand cancelled. A maximum price band of 20% shall be applicable on the scrips through the day. These scrips can exit from the call auction mechanism to normal trading if they have remained in session for at least two quarters and are not illiquid. The new rule prescribes penalty on people generating false volumes by simultaneously being a buyer and a seller at the same price. This will keep brokers alert who will be diligent too.
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Why Is Volume Or Liquidity Important For Judging The Potential Of A Stock? Trading volume is perhaps the most important parameter while analyzing a stock, even more important than the stock price. It is only the volume which will tell whether the story behind the stock movement is genuine or not. Volume of a stock is the number of shares that are traded in the stock exchange within a given period of time. So, if 100 shares of a company exchange hands 10 times in a given period, 1,000 will be the volume while 10 would be the number of trades. It makes sense to see the average volume over a period rather than single any day out. And even within a day, it makes sense to see what period in the day the volume is concentrated. Investors should compare the volume of a stock on a particular day with the average trading volume for that particular stock. This information can be made available by the broker or from the exchanges website. Volume is an important indicator in technical analysis. If the markets have made strong price movement - either up or down, the perceived strength of that move depends on the volume for that period. It is perceived that if a stock has risen to a significant level with lower volumes, then there are less chances of further up-move for the stock as there are not many buyers for that stock in the market at that price level. This is also true when the price of a stock is falling with lower volumes. It is perceived that not many people are convinced about the downfall of that stock and are not selling. Volume also tells us the sentiment behind the movement in the stock. If a stock moves on high volumes, then many traders or investors are involved in that movement and it will be easier to find someone to buy from or sell to. This brings us to a term called liquidity. Buying or selling gold or real estate would be more difficult as it is less liquid while buying or selling stocks would be easier because of liquidity. Traders provide this liquidity and ease of entry or exit. So, an investor should combine the volume with the price of the stock before taking a buying or selling decision.

DISADVANTAGES As discussed earlier, the computation of illiquid stocks by SEBI is flawed. If SEBIs objective is to curb price manipulation, it could be achieved through stronger surveillance system. Some experts argue that as the criteria of illiquidity gets triggered even genuine investors will avoid illiquid stocks in fear of not getting a quick exit. This fear will make these stocks even more illiquid. Moreover, auction sessions of one hour will force investors to remain glued to the trading terminal or stay in constant touch with their brokers over the phone. This is not only painful to
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investors, but also offers little incentive for brokers to push illiquid stock as cost for them increases. Also, it will be cumbersome to give new orders and track trades after every call auction as hourly roll-over is not allowed. Other implications of the new rule would be a drift of volumes from cash segment to the derivatives market. Small companies wanting to raise money will face difficulty with the tag of illiquid. Instead of the cumbersome call auction mechanism many experts think a market making methodology, which is widely used in India and abroad could be used to enhance liquidity in illiquid scrips.

ADVANTAGES Experts believe that problems of market abuse are smaller for illiquid stocks under the call auction. Positives for investors will be in the form of better price discovery and less overall transaction cost. Price in call auction, revealed each hour, will be a better estimate of the true value. Further with penalty on circular-trades stock price manipulation will be controlled. Therefore, should investors avoid investing in illiquid stocks? Not really. If fundamentals of the stock are strong, it will garner investor attention sooner or lateR.
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Beyond Market 22nd May 13

The government is lending support to the infrastructure sector in the country by trying to woo foreign investors who have adopted a wait-and-watch strategy before making any

he growth of a nation by and large depends on the growth of its infrastructure sector. It is a way of showcasing the economic development of a country to woo foreign investors. But the infrastructure sector in India is fast
Beyond Market 22nd May 13

drastic move
becoming a roller-coaster ride with more downturns than progress. Scams such as the 2G spectrum allocation and coal allocation scams have turned away both domestic as well as foreign investors. There is a massive shortfall in funding in areas such as debt financing, which has increased the deficit in infrastructure financing in recent times. In March, this year, at the annual spring meeting of the International Monetary Fund and the World Bank, Finance Minister P Chidambaram
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told the World Bank that India faces a $1 trillion infrastructure finance deficit over the next five years. This statement came a month after he presented the yearly budget. Industries and corporates were expecting bold steps from Chidambaram when he presented his Union Budget 2013. Unfortunately for them, the Budget turned out to be a populist one. However, there was some respite in terms of promotion of Infrastructure Debt Funds (IDFs) and tax-free bonds. Before the announcement of IDFs, investment in the infrastructure sector was never the first choice for a majority of investors. Infrastructure funds are different from other funds as they have a long gestation period and require large investments. This delays the repayment cycle. Infrastructure funds have other problems as well such as delay in obtaining government clearances, red tapism and delays in completion of projects. Investors, as a result, were not keen to invest in these infrastructure funds. Seeing the need for investment in infrastructure, the then Finance Minister Pranab Mukherjee announced the formation of IDFs in Union Budget 2011-12 and later the Finance Ministry laid out the structure, according to which the Infrastructure Debt Funds can be set up either as a trust or a company. These two forms of infrastructure funds have different regulatory bodies. If the fund is in the form of a trust, it would be a mutual fund known as IDF-MF and will subsequently be regulated by stock market regulator, the Securities and Exchange Board of India (SEBI). If the fund is in the form of a
16

company, it would be formed by one or more sponsors, including Non Banking Financial Companies (NBFCs), International Finance Corporation or banks and would be regulated by Indias central bank, the Reserve Bank of India and will be called Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC). The minimum capital requirement for NBFCs is as much as `150 crore. According to the guidelines, both forms of IDFs have to sign a tripartite agreement between the lender, concessionaire and the IDF, wherein the concessionaire would be a party which has entered into an agreement with the project authority to develop an infrastructure project. In order to raise funds for public private partnership projects (PPP), IDF-MF would issue rupee-denominated units of five years maturity, under which the credit risk would be borne by investors and not the IDF. However, the investors can invest in a range of infrastructure assets in order to reduce their risks. These investments can be made in infrastructure projects at any time, be it at an early or later stage. In contrast to the above, IDF-NBFC would have a very focused outlook, wherein it would invest only in PPP projects, which have completed one year of commercial operations and have a buyout guarantee. NBFCs can issue bonds in both rupee or dollar denominated units, which will further reduce the risk for foreign investors. IDFs will refinance up to 85% of the total debt covered by the concession agreement. In recent norms, SEBI has permitted private placement to less than 50 investors as an alternative to new fund offer (NFO) to the public in the

case of IDFs. Also, the IDFs can extend the tenure of their schemes by up to two years in case there is a consensus of two-third investors. The new guidelines also state that an IDF scheme would be allowed to invest up to 30% of its Assets Under Management (AUM) in assets from the current ceiling of 20%, subject to the condition that the sponsor retains at least 30% of the assets sold to the Infrastructure Debt Fund till the assets are held in the portfolio. Any AAA-rated public sector unit (PSU) will qualify for investments for a tenure of 25 years whereas the tenure has been reduced to 15 years for AA-rated PSU. The guideline further states that mutual funds have to file a Placement Memorandum with the SEBI instead of a Scheme Information Document and a Key Information Memorandum for private placement. After allotment of units, the Placement Memorandum must be put on the website of Asset Management Companies and website of the recognized stock exchange, where it is proposed to be listed. SEBI has also expanded the investors in IDF to registered Foreign Institutional Investors (FIIs) including foreign central banks, governmental agencies, sovereign wealth funds, international organizations, insurance funds as well as pension funds, as long-term investors. Apart from foreign insurance funds and pension funds, the Indian government is largely dependent on domestic insurance and pension funds also as they have a long-term horizon. The buzz in the market is of huge funds flowing to infrastructure funds after the recent relaxation of investment norms for public sector bonds by the Employees Provident
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Beyond Market 22nd May 13

Fund Organization (EPFO). Experts believe that EPFOs will certainly invest in IDFs as these are relatively safe. However, since the announcement of IDFs by the then FM Pranab Mukherjee, progress has been slow with little development seen on the ground. In terms of developments, recently IL&FS Infra Asset Management Ltd (IAML) promoted by IL&FS Financial Services Ltd (IFIN) to manage the IL&FS Infrastructure Debt Fund (IIDF), signed a Memorandum of Understanding with eight public sector banks. According to Ravi Parthasarathy, Chairman of IL&FS Group, IDF will complement domestic banks in providing required funding to the infrastructure sector. Arvind Mayaram, Secretary, Department of Economic Affairs, after the event said, the country needs about $1

trillion for infrastructure sector funding in the next five years that is 2012-13 to 2016-17. He said that out of that, 50% would be funded by the government and the remaining 50% by private sector entities as well as financial institutions. The truth, however, is that the target of $1 trillion cannot be achieved through domestic funds alone. Foreign investment is urgently needed but as of now, foreign investors have received IDFs with lukewarm response, because of lack of clarity on the projects. Experts feel a separate rating system for IDFs will encourage foreign investment. This problem has been solved by India Ratings, the Indian branch of global rating agency, Fitch, which will assign credit ratings to these funds. Arvind Mayaram said, This is very

important because this will give confidence to investors especially from overseas Sovereign Wealth Fund and pension funds and others. These ratings will be defined as IND AAAidf-mf denoting highest fundamental credit quality to IND Cidf-mf, which will denote high levels of fundamental credit risk. The initial three MF schemes of IL&FS IDF which aggregates to `15 billion have been assigned a rating of IND AAAidf-mf. However, despite credit ratings, experts believe that the first few months of IDF, will be dominated by domestic investors. This phase will be over soon as it is hoped that global investors will start investing in IDFs to test the waters and see if there is potential for future growth. Only time will tell if IDFs will successfully bridge the infrastructure funding deficit or noT.

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Beyond Market 22nd May 13

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Fallen Out Of Favour


Once the the its
he Indian stock market has been surging ahead without any break since the past few weeks. Only recently, Nifty 50, the benchmark index tracked globally, crossed the psychological mark of 6,100 and reached the highest level in calendar year 2013. In spite of such strong sentiments, mainly driven by global liquidity, CNX IT Index, a key component of the Nifty, has not kept pace with broader market indices. Once regarded as the global face of Indias growth story, the Indian IT sector is losing its charm among global and domestic investors. Large cap IT stocks that used to be preferred by almost all fund managers do not seem to find favour with them in present times and the recent quarterly earnings results are testimony to this fact. The earnings results for the first quarter of CY13 (January-March)
18

regarded bellwether IT has to by

as of

industry, lost touch be TCS,

Infosys and in

Midas seems the

replaced

already

troubled sector
show more pain points for the sector. This looks amply clear when one compares the performance of CNX IT index with the Nifty. Since the beginning of the second quarter of the calendar year (that is, beginning April), the CNX IT index has declined by 12%. In contrast, the Nifty 50 benchmark index has gained little more than 7% during the same time period.
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The quarterly earnings results of most companies start coming in from the beginning of April and most Indian IT companies declare their results within the first one month (in April) after the end of the previous quarter. It looks like the quarterly results didnt go down well in the investor community and they have realized these underlying pain points in the sector. Let us look at the result of some top IT companies who usually define the trend in the industry. Infosys, once the darling of the stock market and a must-have stock in the portfolio of almost every fund manager, tanked 20% on the day it announced its results. That is, the stock price of Infosys declined by almost 20% on a quarter-to-date (QTD) basis. For investors of the blue-chip stock, this came as a shocker. The analyst community dumped the result saying it was very disappointing. Some of the key reasons sighted are weak revenue guidance for the year, decline in profitability numbers, higher variability in margin, continued pricing pressure, uncertainty in visa issues and limited visibility in business growth, among others. Another large Indian IT company, Wipro, too disappointed the street. After it declared its quarterly and yearly results, the stock dived down 8% on the next trading day; on a day when the Nifty actually moved up by close to 1%. This was another shocker for IT investors in this result season. The underlying factors for this lacklustre performance were more or the less same. The annual revenue number is towards the lower end of the guidance, decline in pricing, fewer deals, decline in margin and tepid guidance contributed towards the poor show. The stock price of Wipro has declined by almost 18% on a quarter-to-date basis.
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The only solace for investors was the largest software exporter, Tata Consultancy Services (TCS), whose results were in line with expectations. The US dollar revenue grew at 3.1% quarter-on-quarter (q-o-q). Though the margin contracted by 60 basis points, it was decent at 28.4%. According to the management, the pipeline looks healthy across geographies and expects to grow higher than the industry. Unfortunately, the result is not outstanding but in line with investor expectations. It cant compensate for the damage done by the previous two big companies. The stock of TCS is down a little more than 4% on a quarter-to-date basis. Cognizant Technology Solutions (CTS), which is not listed in the Indian stock market but is closely tracked by analysts, has also shown signs of concern. The company reported a 17% jump in its quarterly revenue for the quarter ended March 13, beating street expectations and bringing good news to the industry. But skeptics believe not everything is going well within the company. There was a news report, which claimed that the company had laid off 500 people a few months back and also lowered its annual bonus amount. The company also delayed its annual performance cycle. All these things point to the fact that even Cognizant, which has outperformed its peers quarter after quarter, is going through some turbulent phase. Looking at the numbers and events regarding these four companies, it certainly does not make sense to say all is well in the IT sector. Previously, these companies were more than happy to provide almost every profitability number (including guidance for future periods) that an

analyst on the street would like to see. However, many of them are not providing such numbers, clearly pointing to more uncertainty in their business. For instance, Infosys suspended the practice of giving EPS guidance and outlook on margins, citing higher variability in margins. The growth from linear business is unlikely to add much to the existing revenue of these companies. Clients from this segment are becoming increasingly demanding and, hence, the margin of Indian IT companies is drying up. Non-linear revenue is the key and most companies are struggling to get it. For Infosys, revival in discretionary spending is a key factor, which will not only facilitate growth catch up, but can also potentially drive significant margin recovery. The revival may be a couple of quarters away and the companys relative performance may remain soft in the interim. Add to this, the US government is bringing in policy measures that may be counterproductive to Indian IT companies. The recent news of visa is just another example of this. Overall, it appears that Indian IT companies are going through tough times. Investors are smart enough to figure this out and have punished these stocks ruthlessly. It would take a while before their business starts running as usual. However, like any other sector, investors might find some silver lining and take appropriate positions in some undervalued stocks. Bear in mind that this story attempts to provide investors with a high level picture of the sector and they would be better off doing more research on a company before taking their investment decisionS.
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RAMPANT MISUSE
The rise in cases of corporate debt restructuring only goes to show how this tool is being misused to hide bad debts

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n the last few years, corporate India has been struggling to do business. Thanks to high interest rates and an economic slowdown in the country, a lot of companies in capital-intensive sectors such as infrastructure, airlines, hospitality and the likes are opting for corporate debt restructuring (CDR) to avert any kind of financial eventuality in their businesses. So what is CDR? What does it mean when a company opts for CDR? Why do investors shy away from companies that opt for CDR? What are the issues involved when companies opt for CDR? And what exactly is the way forward for companies that go in for restructuring? Here is a low-down on all these questions. In the financial world, a company would opt for CDR when it is unable to meet the original terms and conditions of its debt obligations. Take for instance, a company X. It has a loan of around `100 crore and has borrowed this amount at an interest rate of 12% per annum. Now, due to unfavourable business conditions - it can be weak demand due to economic slowdown or high raw material prices, which cause delays in project implementation and consequently - the company is unable to service its debt. In such a situation, the company strikes a meeting with bankers and changes the terms and conditions of the loan. It can be change in the interest rate or increase in the tenure of the loan. Therefore, an investor who is invested with a company should realize that when a company goes in for restructuring, it means that it is not generating enough revenues to service its debt.
Beyond Market 22nd May 13

TRENDS In recent times, there has been a steep rise in the number and volume of debt obligations being restructured. This has brought corporate debt restructuring into focus of investors, sector experts and economists. Experts have observed that CDR guidelines in India work in favour of both borrowers as well as banks in times of economic slowdowns and cashflow problems. One of the possible reasons attributed to the increase in corporate debt restructuring in recent times is the economic slowdown in the country. Another argument that provides credence to increasing cases of CDR in recent times is over-leveraging by companies when times were good. A report by the Reserve Bank of India on corporate debt restructuring shows two distinct trends when it comes to doing debt restructuring. The report states between March 09 and March 12, while total gross advances of the banking system grew at a compound annual growth rate (CAGR) of less than 20%, restructured standard advances grew by over 40%. Subsequently, the proportion of Restructured Standard Advances to Gross Total Advances increased from 3.45% in March 11 to 4.68% in March 12. This shows the increasing trend of CDR in the last three fiscals. Apart from this, the report mentions that the ratio of restructured accounts to gross advances is the highest for the industries sector at 8.24% (with medium and large industries sector being at 9.34%). The ratio for agriculture stood at 1.45%, while that for services stood at 3.99% (with

micro as well as small services being 0.94%). While the ratio stood at 2.24% for priority sector advances, it stood at 5.83% for non-priority sector loans. The report says, The data clearly highlights the fact that restructuring is resorted to liberally in case of industrial sector (particularly large industries), while smaller borrower accounts such as agriculture and micro and small enterprises see less of restructuring. Some experts believe that due to such a favourable tilt towards provision of restructuring to industrial sector, there are certain grey areas which banks overlook and at the same time maintain their books spic-and-span. Take for instance, the case of lending to non-functioning Kingfisher Airlines. Banks such SBI, ICICI Bank, PNB and others had subscribed to the cumulative preference shares of Kingfisher Airlines. With the operations of Kingfisher Airlines in doldrums, the stock price of Kingfisher Airlines plummeted and as a consequence, banks have not been able to recover their investments. Now, banks are merely restructuring loans given to the beleaguered airlines company. Such preferential treatment needs to be avoided, as there is a strong possibility of even an established corporate entity of defaulting. In the coming quarters, this should serve as a lesson for many lenders when it comes to providing debt even to a long-established corporation or entity. GOING AHEAD Considering these developments, many experts believe that
Its simplified... 21

restructuring should be done under certain specific conditions. The RBI report says that the need for restructuring should arise only due to circumstances beyond the control of borrowers and not generally for errors/mismanagement by them. It suggests that restructuring proposals should be considered as a commercial point of view only even though benefit of doubt should be given to the customer. Experts are of the opinion that there has to be a uniform approach to standard and non-performing asset (NPA) accounts while examining restructuring proposals. The RBI report says that the viability of the project should be established and only after that should any restructuring proposal be considered. For this, it is critical that project appraisal standards are raised. By raising project standards, one can plug the possibility of projects becoming unviable. Another important factor that needs to be taken into account is the extent of leveraging. High leveraging increases risks associated with the completion of projects especially in uncertain business environments. Experts believe that there have been instances where debt availed is masqueraded as equity and many

other forms to avoid payments. One of the observations of the Reserve Bank of India report says that promoters equity component is being financed out of debt. The report also states, Debt flows are being structured as equity and of the private component of Public Private Partnership (PPP) projects (this is mostly seen in road projects) being debt finance. There is also the possibility of a company borrowing from another bank, which adds to debt servicing. Hence, it is crucial that at the time of restructuring, the companys projects are not leveraged. Refraining from over-leveraging also adds to the credibility of the borrower and it gives ample scope for banks and the borrower to restructure loans during tough business situations. It also gives a feeling of mutual sharing of financial burden between banks and the borrower. Restructuring proposals can also have meaning and business sense if the lender (banks and other institutions) does not part with a meaningful portion of debt and instead the lender postpones the repayment date of the principal amount. The RBI report suggests, Banks would do well to adopt the moneylender principle of greater

concern in the interest income in such situations if the borrower is servicing the loan regularly. Even where the bank has to make some sacrifice by sanctioning the restructuring proposal, there must be some provision for re-compensation when the borrower/borrowing unit comes out of trouble. In addition to this, given the low percentage of restructuring of loans to small and medium enterprises and the agricultural sector, there is a need for structured mechanism for considering restructuring proposals for larger company accounts. The report says This structure will need to be built at various levels at the state, the district, the region and the bank level. The functionaries at various levels will need to be empowered to assess and approve viable restructuring proposals. Without such delegation, it would be extremely difficult for the benefits of restructuring to percolate to the smaller accounts. Lastly, concerns need to be addressed related to the time frame for the completion of a project. Experts are of the opinion that a specific timeframe is needed. It can be 90 days. Because time is a very crucial factor for turnaround of projects and to lessen the viability of the projecT.

CARDBOARD BOX INDEX An index used by some investors to gauge industrial production by using the output of cardboard boxes to predict the purchases of non-durable consumer goods is known as cardboard box index. This is considered to be a relatively good measure. It is estimated that nearly 75% to 80% of all non-durable goods are shipped in corrugated containers. Therefore, the greater the amount of cardboard boxes being made, greater will be the amount of cash being invested by companies to produce goods.
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Following the adoption of austerity measures and

cuts in public spending in Spain, Indian have focus pharma now to

companies shifted their

pharmaceutical drugs worth `610.93 crore (US $135 million) to Spain during FY11, which is a mere 1.3% of Indias total drugs and pharma exports during the year. However, pharma exports to Spain have grown at a CAGR of nearly 7% during FY07-FY11. The government of Spain has made significant efforts and regulatory changes to reduce healthcare costs. This would entail increased use of generic medicines. This, therefore, augurs well for Indian pharma companies in the long run. However, generic medicines offer low margin opportunity for them due to prevalent pricing and reimbursement control in Spain. GENERIC DRUGS In August 11, the Spanish government passed a bill promoting generics a new system of prescribing medicines based on active pharmaceutical ingredients, thereby making it easier for generics to be used in the country. In Spain, the generic medicines market during the 12 months ending (July 10 June 11), only represented 10% of the total pharma market in value and 23% in volume. Today, the generic medicines market in Spain integrates as many as 187 active substances. Generally, European markets such as the UK, Germany and Netherlands are characterized by relatively high generic penetration (around 50%+), other key markets like France, Italy and Spain have low generic usage at around 25%. Apart from generic penetration, reimbursement policies and consequently pricing also differ across markets. The break-up of

branded and generic medicines in Spain is 87.4%:12.6% by value and 72.3%: 27.3% by volume. Agencia Espaola de Medicamentos y Productos Sanitarios (AEMPS) is responsible for the evaluation and authorization of drugs, while the Directorate-General of Pharmacy deals with both price setting and public reimbursement once the products have been authorized by the agency, that is, AEMPS. The manufacturing sites in Spain have obtained approvals from the US Food and Drug Administration (US FDA), the European Medicines Agency (EMEA), Pharmaceuticals as well as the Medical Devises Agency, Japan (PMDA). The government of Spain has concentrated its efforts on making significant public spending cuts in order to achieve the 2012 budget deficit target of 5.3% of the GDP, bringing it down from 8.9% of the GDP in 2011. During the last couple of years significant regulatory changes have been made by the government with focus on reducing public pharmaceutical spending, which has adversely impacted the revenue and profitability of the pharmaceutical industry in the country. GENERIC SPREAD The generic penetration is very low in Spain as compared to the other European countries. The government is focused on increasing the uptake of generic drugs in order to reduce the healthcare burden. The share of generic drugs rose by 40.3% y-o-y (value-wise) and 36.5% y-o-y (volume-wise) during 2011 on the back of significant regulatory changes implemented in the last
Its simplified... 25

generic medicines
pain is the fourth largest pharmaceutical market in Europe, according to IMS Health, a global pharma market researcher. Its market size was US $22.7 billion in CY11. The market is mainly dominated by branded medicines with a share of about 88%. Value-wise the market registered a CAGR growth of 4.4% during CY07-CY11. Presently, about 200 member companies of EFPIA (European Federation of Pharmaceutical Industries and Associations) operate in Spain. The highly regulated markets like the US, Germany, France and the United Kingdom have emerged as the leading suppliers of medicines to Spain. Of the four countries, three belong to the European Union. Due to strict manufacturing guidelines in their own countries, they are able to get easy access to the Spanish market. To a certain extent, Indian pharma companies have a very miniscule presence in the Spanish market. A few Indian companies like Aurobindo, Cadila Healtchare, Dr Reddys, Ranbaxy and Sun Pharma operate their business in Spain through their subsidiaries. These subsidiaries registered sales of about `143.2 crores (US $28 million) during FY12. India exported
Beyond Market 22nd May 13

couple of years. As reported by lobby group Farmaindustria, IMS Health released figures showing that drug sales in Spain dropped by 11% in 2012. But the generic industry in Spain has enjoyed some growth in the face of branded pharma squeeze. Its market value has increased from 5% in 2008 to 17.4% in the year 2012. The Royal Decree Law 16/2012 allows for prescription by brand names of drugs and also prevents their replacement by any other cheaper drug. But if the prescription is by an active ingredient, then a generic drug at the same price is preferred over a branded drug. It also provides for de-listing of more than 400 medicines that are meant for minor syndromes such as heartburn, diarrhoea, constipation, cough, etc. It introduced a new variable co-payment system on the basis of users annual income. Also, the Reference Pricing System (RPS) was further reformed. The system keeps as reference price the lowest cost/treatment/day of the medicines that make up the group of medicines of the same active ingredient and route of administration and which must include as part of the National Health Systems pharma assistance at least one generic medicine or biosimilar medicine. However, the new wording of Article 93 leaves out of the RPS the

regulation of substitution, applicable to the homogeneous groupings by virtue of the conditions laid down in the new wording of Article 85. For this reason, all medicines eligible for one of the sets, regardless of whether or not they can be substituted mutually, are now affected by the Reference Pricing System. STREAMLINING REGULATION The Madrid government approved a controversial - Royal Decree 16/2012- law in April 12 to guarantee the sustainability of the National Health Service, aimed at saving 3.6 billion in coming years. The funding of the healthcare system will shift from one that provides coverage to all through general taxation to a system funded by social security contributions. This law incorporates and expands the latest cost-cutting measures: pricing review, de-listing, promotion of generics usage through prescription of the cheapest generic version of a drug, out-of-pocket payments for patients, limits to immigrants using the national healthcare system, and centralized purchasing of flu vaccines. The introduction of mandatory prescription by active ingredients in 2011 obligates pharmacists to offer the cheapest drug to promote generic dispensing, but unbranded medicines have also suffered harsh price cuts. IMS Health estimates that in the last

three months, generics have more than doubled their market share to almost 68%, although volume and revenues data may tell an absolutely different story. Hospitals owed more than 6.3 billion ($8 billion) to drug companies at the end of last year, according to lobby group Farmaindustria. Of the various austerity measures, the Royal Decree 9/11 on mandatory prescriptions by API has proved most effective in reducing the countrys pharma debt, although it has also created an unfavourable climate for pharmacies and pharmaceutical associations in terms of lower sales and revenues. There is lack of affinity between India and most EU countries. It is seen as a major constraint to Indias delivery of healthcare and related services to the EU market. It is also seen that healthcare is a highly personalized service where perceptions, attitudes and social and linguistic ties play an important role. Thus, Indias prospects were perceived to be limited to the UK market and a few EU countries that have English-speaking capabilities. The regulatory changes brought by the government reduced public pharma spending, resulting in nearly 7.6% y-o-y decline in pharmacies sales, leading to 5.1% y-o-y decline in total medicine sales in Spain during 2011, inviting generic producing countries like India to ring the belL.

CATEGORY KILLER Large companies that put less efficient and highly specialized merchants out of business are known as category killers. Category killers can attain this status by being cheaper, easier, bigger or more popular than the competition. One of the best examples of a category killer is Wal Mart. Its chain has put smaller stores in a wide range of specialized categories out of business.
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Beyond Market 22nd May 13

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Unmatched Performance
A diversified product mix, coupled with rural leadership and strong parentage will continue to drive the success story of Mahindra & Mahindra Financial Services Ltd
ahindra & Mahindra Financial Services (MMFS) Ltd is a subsidiary of Mahindra & Mahindra and is a leading non-banking financial company with strong focus on the rural and the semi-urban sector. It provides finance to most of the four-wheeler segment and is also into rural housing finance and insurance products through its subsidiaries. MMFSs major strength lies in its widespread and deep-penetrated network of 657 branches spread across rural and semi-urban markets in 25 states as on 31st Mar 13. We believe that MMFS has a large addressable market with further scope for deeper penetration into rural areas. The changing rural demographics, coupled with improving rural income and consumption provides sufficient growth opportunities, going forward for the company despite increasing competition. INVESTMENT RATIONALE Healthy Growth In AUM Despite sluggish growth witnessed in most of the auto OEM numbers, MMFS has been able to report strong AUM growth of 8.8% quarter-on-quarter (q-o-q) driven by increasing penetration in non-Mahindra OEMs and strong sales of Mahindra UVs. The company has moderated disbursements in commercial vehicles (CVs) and is focusing more on LCVs/SCVs/UVs and used vehicles, leading to strong growth. MMFS has
Beyond Market 22nd May 13
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been able to maintain a healthy growth record in its AUM and loan book in the last 3-4 years. Going forward, the management expects growth momentum to continue and believes that 23% to 25% growth is achievable in FY14E in the current scenario. Any improvement in the economic backdrop could even lead to higher growth. We believe that the company will continue to maintain its growth momentum, which will be aided by the new products launched, higher market share and benefit of network expansion. Diversified Product Portfolio

Growth In AUM
30000 25000 20000 15000 10000 5000 0 FY10 FY11 Loan Book FY12 AUM FY13

Source: Company Data, Nirmal Bang Research

The company has a well-diversified product profile. MMFS is no longer a M&M-dependent company and it has successfully reduced its exposure to M&M with more and more focus on non-M&M products. It has emerged as the second largest financier for Maruti over the years. Currently, the company caters to financing needs of most of the auto OEMs, be it Maruti, JCB, Eicher Motor, Tata Motors, Hyundai, Ford, etc. Recently, the company tied up with Toyota Kirloskar Motors to offer finance to its customers. Such a diversified model aids in mitigating the risk of concentration in case a particular segment or company faces weak demand. Break-Up Of AUM
FY09 FY10 FY11 FY12 FY13

Auto/UV (M&M) Tractors (M&M) Cars And Non M&M UVs, Tractors And SCV Commercial Vehicles And Construction Equipment Pre-owned Vehicles And Others
Source: Company Data, Nirmal Bang Research

38% 25% 24% 7% 6%

33% 23% 30% 8% 6%

31% 23% 31% 9% 6%

30% 20% 31% 12% 7%

32% 19% 27% 15% 7%

Extensive Branch Network Major Strength MMFSs major strength lies in its widespread and deep-penetrated branch network of 657 offices spread across rural and semi-urban markets in 25 states as on 31st Mar 13. Such an extensive branch network ensures no geographical concentration. Moreover, MMFS is the preferred choice for auto manufacturers particularly in unbanked rural areas as the company has an excellent understanding of the rural markets in India. Going forward, the management intends to continue to increase its branch network, which would help the company in facing increasing competition from other players in the industry.
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Branch Network
700 600 500 400 300 200 100 0 FY10 FY11 FY12 FY13 459 607 547 657

Source: Company Data, Nirmal Bang Research

Resulting from the expansion in branches, the operating cost of the company has increased by 26% year-on-year (y-o-y) in FY13. Despite expansion, the cost to income
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ratio of the company has remained broadly stable at 32.6% in FY13 and the management aims to bring down this ratio to nearly 30% in the next two years, which will be driven by operational efficiencies. Cost To Income Ratio
37% 36% 35% 34% 33% 32% 31% 30% FY11 FY12 FY13 32.6% 35.4% 36.3%

Post the changes in the securitization policy, the company has not undertaken any securitization transaction in 9MFY13. However, in Q4FY13 it securitized `1,433 crore of portfolio. Stable Asset Quality The company generally witnesses higher NPAs in Q1, which gradually lowers till Q4. As the rural population invests in agricultural operations before the onset of monsoon, a significant portion of cash is deployed in purchasing agri-inputs and, therefore, slows down the recovery process. However, by Q4 with the realization of sale proceeds from the harvest, the companys NPAs start declining with focus on the recovery process. Going forward, the management is maintaining asset quality with focus on believe MMFSs conservative lending diversified product portfolio will aid in quality risks. Movement Of NPAs
7% 6.4% 6% 5% 4% 3% 2% 1% 0% 0.9% 0.6% 4.0% 3.0% 3.0%

Source: Company Data, Nirmal Bang Research

Diversified Sources Of Funding MMFS has a diversified funding base, which ensures that the average cost of overall funding remains within control and is not impacted by any increase in any particular mode of funding. We believe that during an easing interest rate cycle, MMFS stands to benefit due to re-pricing of liabilities, whereas most of its loans are at a fixed rate and will help MMFS to sustain its margins. Funding Mix - By Investor
11% 12% 12% 9% Banks For Assignment Insurance Companies Banks Mutual Fund Others 56%

confident of recoveries. We practices and reducing asset

0.7%

1.0%

FY10

FY11 Gross NPA

FY12 Net NPA

FY13

Source: Company Data, Nirmal Bang Research

High Capital Adequacy In FY13, there was capital infusion of `867 crore via QIP (9.75 mn shares), which led to improvement in the capital adequacy ratio (CAR). Currently, CAR stands at 19.7% with tier I of 17%. We believe MMFS is adequately capitalized for robust loan growth, going forward. Capital Adequacy Ratio
20.5% 20.0% 19.7%

Source: Company Data, Nirmal Bang Research

Funding Mix By Type Of Instrument


1% 12% Bank Term Loan 11% 51% 25% NCD FD CP Assignment

19.5% 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% FY10 18.5%

20.3%

18.0%

FY11

FY12

FY13

Source: Company Data, Nirmal Bang Research

Source: Company Data, Nirmal Bang Research

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Strong Return Ratios


25% 20% 15% 10% 5% 0% FY10 FY11 RoNW RoA FY12 FY13 4.1% 4.1% 3.9% 4.0% 21.5% 22.0% 22.8% 23.5%

requirements, MMFS has an edge in this particular area. The management has set up an ambitious target of increasing the loan book from approximately `900 crore to `4,000 crore by FY15E. The company has already increased its customer base from 60,000 in FY12 to 1,25,000 in FY13. Mahindra Rural Housing Finance
Particulars FY11 FY12 FY13

Loans Disbursed No Of Customers Outstanding Loan Book Total Income PBT PAT

202.9 21981 315.2 48.6 12.2 8.9

266.8 33172 535.2 85.7 16.1 11.9

432.9 61332 879.5 140.4 27.4 20.3

Source: Company Data, Nirmal Bang Research

Banking On License A banking license will prove to a be another trigger for the company in the future as it already has a strong foothold in rural areas and it will also be able to benefit from lower cost of funds. Subsidiary Business Although vehicle financing forms more than 95% of its business, MMFS also offers varied financial services such as housing finance, personal loans, fixed deposits, distribution of third party products, insurance and mutual funds, among others. Mahindra Insurance Brokers Ltd offers tailor-made products, offering customer family protection. It aims to become a leading revenue broker by FY15E and is also focusing on renewal of premium as 60% to 65% of vehicles do not get renewed, which suggests a large untapped market for MIBL. Mahindra Insurance Brokers Ltd
Particulars FY11 FY12 FY13

Source: Company Data, Nirmal Bang Research

KEY HIGHLIGHTS OF Q4FY13 RESULTS MMFS reported a strong operating performance for Q4FY13, driven by robust AUM growth and superior asset quality. The net interest income increased 33.2% on a y-o-y basis. The profit before provisioning increased 20.7% q-o-q and 29.2% y-o-y. PAT grew by 54% y-o-y. The company reported exceptional item of `30.5 crore (profit of `64.3 crore on sale of shares of Mahindra Insurance Broking of which the company utilized `35.7 crore on general provision on standard assets). Adjusted for this PAT grew 41% y-o-y. Going forward, the management expects the growth momentum to continue and believes that 23% to 25% growth is achievable in FY14E in the current scenario. Such growth looks achievable as the company has achieved a loan growth of 37% in Q4, driven by 15% increase in LCVs and 54% increase in UVs, while passenger cars/vans declined 5% y-o-y. RISKS AND CONCERNS Any delay in monsoon will impact the asset quality of the company and lead to higher NPAs.  Any significant slowdown in rural and semi-urban markets could result in a slowdown in loan growth and can impact the asset quality of the company.  Increasing competition can lead to MMFS witnessing a slowdown in disbursements Higher-than-anticipated slowdown in the auto industry could impact the performance of the company.
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Total Income Net Premium PBT PAT No Of Policies No Of Employees


Source: Company Data, Nirmal Bang Research

51.7 289.1 32.9 21.8

46.5 413.8 20.1 13.5

86.3 553.8 51.2 34.3

508,877 703,730 802,829 379 451 463

MMFSL is catering to the housing finance requirements of the rural population through its 87.5% subsidiary, Mahindra Rural Housing Finance Ltd (MRHFL). The balance 12.5% stake is held by NHB. Due to the absence of any other player in the organized segment exclusively catering to rural and semi-urban housing loan
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Financials
Year

NII (` cr)

Growth (%)

Pre Prov Profit (` cr)

PAT (` cr)

EPS

PE (x)

P/BV (x)

ROE (%)

FY10A FY11A FY12A FY13A

1,058 1,359 1,750 2,424

21.5% 28.4% 28.7% 38.6%

762 886 1121 1610

356 493 644 907

6.26 8.66 11.31 15.94

40.12 28.97 22.18 15.75

8.14 5.61 4.71 3.12

21.5% 22% 22.8% 23.5%

Source: Company Data, Nirmal Bang Research

VALUATIONS AND RECOMMENDATION The diversified business model of the company augurs well with the little-of-everything-and-not-more-of-anything mantra of the company. Despite macros headwinds, we believe that such a diversified product mix coupled with rural leadership and strong parentage will continue to drive the success story of the company. Consistently strong asset growth, multi-product strategy with focus on high yielding products, relatively lower competition from private and public sector banks provides stability in margins. Moreover, strong return ratios and higher capital adequacy reinforces our confidence in the company. The stock is trading at 15.75x FY13 EPS and 3.12x FY13 P/BV, which is slightly on the higher side as compared to the peer group. However, given the niche business model with strong fundamentals, we believe that MMFS would continue to demand premium valuations amongst its competitorS.

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Small Investments, Big Profits


Despite the inherent risks, risk-averse investors can consider allocating a small portion of their portfolio to small and mid-cap mutual fund schemes as these instruments enable them to earn big profits on their investments in the long run
he Indian equity markets have been volatile since the past few months with select stocks and sectors delivering phenomenal results. Although a few small and mid-cap stocks have been generating returns on a continuous basis, such stocks are
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known to be risky as compared to other equity schemes vying for investors attention. Schemes such as SBI Emerging Businesses Fund, Axis Midcap Fund and Franklin India Smaller Companies Fund have given

eye-popping returns in the past few years. A few of them are giving returns between 25% and 30% in the last one year. So the question that needs to be asked is whether this is the right time to invest in small- and mid-cap funds if
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Beyond Market 22nd May 13

they do not have it in their portfolios. Experienced investors feel that smalland mid-cap funds are great to get ahead of the markets against popular large-cap stocks. Yet, there are those who believe that small- and mid-cap funds are an invitation to disaster. If we look at these statements, we find that both of them hold ground and are right in their own ways. During the great bull rally of 2003 to 2007, many small- and mid-cap stocks repeatedly ran ahead of large-cap stocks and then fell back as sharply as they had risen. However, the moral of the story is not to avoid investing in small- and mid-cap stocks. Instead, investors can follow a pattern and exploit volatility in the markets to yield higher returns. Moreover, there is no right time to enter or exit the markets. And it is, therefore, said: Do not time the markets. No matter what, investors should have a minimum exposure to small- and mid-cap stocks. But the investors must be careful regarding the additional risks associated with such funds as they are extremely volatile in nature. The positive performance of many small- and mid-cap stocks is mainly due to cheap valuations of many quality stocks. However, the gap between valuations of small- and mid-cap stocks and large-cap stocks has narrowed down after the recent rally in small- and mid-cap stocks. In the past few weeks, we have seen good quality large-cap stocks rallying as their valuations are little attractive compared to other small- and mid-cap stocks. But there is always an opportunity to invest in high-growth stocks which is possible in small- and mid-cap companies. However, before deciding to invest in small- and mid-cap funds, investors
Beyond Market 22nd May 13

must choose a fund based on their investment objective. Many investors invest just for the sake of investment and then burn their fingers in the equity markets. But a prudent investor is one who looks for the funds investment objective and matches it with his own (his time frame and his risk-taking ability). While investing in equity, a fund manager may choose to invest in small-cap, mid-cap, large-cap or mixed-cap stocks depending upon his vision and the mandate of the fund he manages. Therefore, from an investors point of view, the fund manager should decide and try to match his investment objective with that of the fund. The success of any small- or mid-cap fund has a lot to do with the ability of the fund manager to pick up the right stock and exit at the right time. There are a few managers who are willing to take risks, while there are many who play safely. Therefore, in managing small- and mid-cap funds, the skill of a fund manager is one of the factors which can do wonders to the scheme. Investors should keep track of the fund manager who is managing the schemes that they have invested in. If investors are not investing in any new fund offer (NFO), then they should look at the history and the past performance of the scheme as it can give a fair idea of where the fund is tilting (that is, whether the scheme is aggressive or has growth or value style of investments). A thumb rule for new investors is to know that a fund that gives good returns over a longer period of time (say more than three or five years) is generally stable and they can invest accordingly in consultation with their

financial advisors. As said earlier, small- and mid-cap stocks bring in a lot of volatility as compared to say blue-chip or pure equity diversified funds. Before investing in small- and mid-cap stocks, investors should go through fact sheets on a monthly basis that are uploaded on their websites. Reading them can also help them learn about the overall performance of other schemes of that fund house and benefit from them. Besides, the fact sheet has all the necessary information along with the scheme objective, name of the fund manager, history and past performance of the fund, which help investors to pick the right fund according to their given risk profile. Unlike a large-cap mutual fund, the performance of a small- and mid-cap fund is largely dependent on the stock-picking capability of the fund manager. However, comparing the two categories is indeed wrong since both the categories behave totally different at different times in the equity markets. Sometimes small- and mid-caps follow large-caps in a rally as we are witnessing since the past few weeks. Sometimes it is the opposite, when mid- and small-cap stocks rally. However, what cannot be denied is that small- and mid-cap schemes can certainly boost the overall returns in an investors portfolio. However, one has to clearly understand that it is a high-risk, high-return strategy and small- and mid-cap stocks tend to outperform large-caps over the long term. But buy and hold is riskier in small- and mid-cap stocks, as it can go up as fast as it can crash, compared to the large-cap peers. Clearly, the smallIts simplified... 33

and mid-cap index has outperformed the BSE Sensex across market cycles in the past. So, how much should an investor allocate to mutual funds when it comes to his portfolio? We believe proper diversification can help investors create long-term value. For first timers who are also risk-averse investors, a large part of their portfolio can be devoted to fixed income funds. They can then gradually move towards diversified equity funds. Investors with higher risk appetites

could consider adding a mid-cap dimension through dedicated diversified small and mid-cap funds to the extent of about 20% to 40% of the equity portfolio. Furthermore, an allocation of 10% to 15% in thematic funds (banking, international, FMCG or technology) that are likely to drive Indias growth story in the future, could be considered by investors who wish to take even higher risks. We all know that investing directly in small- and mid-cap funds involves high risk and factors such as liquidity

risk and impact costs may play a major role in stock selection and such information is not easily available to most retail investors. Hence, any retail investor considering investment in small- and mid-cap funds can do so depending on their individual risks, return as well as liquidity preferences. Further, one should invest with a staggered approach and buy through systematic investment plans (SIPs). Buying through SIPs should help investors avoid timing the risks, while investing for a longer duratioN.

The most intelligent strategy in Chess is to be ready with the next move. Similarly, currency trading involves moves that are a combination of knowledge and skill, backed by years of experience. Currency Derivatives Trading with us keeps you a few steps ahead, always.

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP


Contact: 022-39268088 | e -mail: currencies@nirmalbang.com | www.nirmalbang.com
Registered O ce: Nirmal Bang Securities Private Limited. 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Dos and Donts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

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Beyond Market 22nd May 13

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TECHNICAL OUTLOOK FOR THE FORTNIGHT


he Indian markets maintained a positive momentum in May on the back of around 4% gains in the month of April. The markets gained around 4% in the first half of the month till 16th May. The ongoing rallies in the markets can be attributed to a host of reasons like continuous improvement in monthly inflation, coupled with less-than-expected Index of Industrial Production (IIP) number, which has increased hopes of further rate cut by the RBI. However, the biggest reason for the rallies is heavy buying by FIIs. Inflation based on the Wholesale Price Index (WPI) stood at 4.89% in the month of April. It was 5.96% in the month of March and 7.5% in April last year. The IIP for March was 2.5%, below street expectations of between 2% and 2.2%. On the Nifty Options side, for the May series, additions were being seen in Puts from strike 5,700-6,200 giving the market a strong bullish undertone. On the contrary, 6,200 Call has the maximum OI build up for Calls and will provide a strong resistance for the markets for the month of May. Moreover, if we look at the overall OI standing for Nifty Options, we find that the highest OI for Call and Put is at 6,200 and 6,000, followed by 6,400 Call and 5,900 Put, respectively. The important point to note in Options these days is the Volatility Index (VIX), which has been in an increasing trend after forming a base near the levels of 13-14. Whenever the market goes beyond the option writers (sellers) comfort
Beyond Market 22nd May 13

zone, we see the India VIX rising and the current rally from the levels of 5,500 is a clear example of that. Going ahead for a longer horizon of 1-2 months we expect India VIX to trade in a new range of 18-22. The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options can be seen hanging between a very broad range of 1-1.25 since the start of the May expiry. The current PCR-OI stands at 1.25 (as on 16th May) and it can also be assumed that there is a lot of hedging activity happening on the FII side by buying Puts as FIIs have remained net buyers in the cash segment. Going forward, we also expect the PCR-OI to remain in the broader range of 1.1-1.3 or 1.1-0.8. The Index has observed a sharp rally from its April 13 lows of the 5,480 level and has managed to exceed the falling resistance line drawn from the January highs, which had confirmed a trend reversal and hinted for markets to test life time highs. The overall parameters on the weekly charts continue to remain positive, which suggest that the market has formed a higher low in April 13. The recent rise has been accompanied by sharp volumes and good breath, which has confirmed the bullish bias. The Nifty has an immediate resistance area, which indicates 6,180-6,200 is an immediate hurdle and a reversal pattern has formed on the daily charts and closing above this is essential for a positive bias and continuation of the uptrend. Any

move beyond that may trigger a further upside till 6,280 and 6,350, which is a possibility over the next few weeks. However, for the uptrend to remain intact, the Nifty should sustain above the level of 6,050 in case of a further correction in the next few weeks. Since the past few trading sessions, the Bank Nifty has been in a strong uptrend, forming a series of higher tops and bottoms. The oscillator situation suggests positive momentum on higher time frame charts. However, there is insufficient evidence for any top and, therefore, we conclude that the advance is not done yet. The Index is likely to test the 13,450 and 13,600 levels on upside. The support resides at the 13,100 level on the downside and one should maintain a buy-on-dips approach. STRATEGY Looking at the current levels of VIX (18), we recommend traders to take advantage of the same and construct a Short Strangle Strategy at the 6,200 and 6,000 level. This can be simply initiated by Selling one 6,200 Call as well as simultaneously Selling one 6,000 Put. The combined premium inflow is seen somewhere between 100-105 and we expect this premium to shrink to levels of 60 and 38 till the last week of the expiry. The break-even is seen at 6,305 and 5,895, which is a good range to play for the expiry. One can exit the whole position if the Nifty spot closes above or below 6,300 or 5,900, respectivelY.
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P
EMBRACING OLD WITH THE NEW

arents and elders are a mine of knowledge for they have seen several rises and crashes in stock markets and are well aware of the perils and pitfalls of the markets as well as the tricks of the trade like the back of their hand. They have been on the trading floor of the BSE and have witnessed the euphoria, mayhem and chaos of the open outcry method firsthand. There is a lot that they can teach us, which all our MBAs in financial and securities markets may not teach. But alas, their words sound like Chinese to us and our words sound like French to them. There is a definite generation gap between them and us, especially due to the advent of technology and also the regulatory changes in the stock markets. The stock markets today are a completely different ball game and this has forced many veterans to shun the markets altogether. If this generation gap can somehow be bridged, then a huge number of senior folks, will be able to make a successful career in the markets even today. The onus therefore lies upon us to try and bring this generation back to the stock markets. But for this we have to first make a concerted effort to learn about the working of the stock markets from the days of yore and also learn the street lingo prevalent back then so that we can explain todays concept in a language they can understand. IMPORTANCE SENIORS OF STOCK MARKET FOR

Old stock market players can easily be brought into the fold by bridging the generation gap

Most senior citizens have only limited source of income in the form of pension and interest income from fixed deposits. This in todays world is just not enough to beat the ever increasing rate of inflation. For this reason, some amount of equity exposure in their respective portfolios is extremely essential. Not only will it help them achieve financial independence and boost their self-confidence, but it will also give senior citizens a sense of satisfaction of having contributed something to the family income while becoming active members of the society. From the markets standpoint too, a large portion of the money that is lying idle in savings account of a huge section of our seniors can be diverted to the markets and it will add to the liquidity in the market. Let us now turn the clock backwards and go into

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Beyond Market 22nd May 13

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flashback. Before the advent of electronic trading, stock trading was a very difficult, highly specialized and extremely risky proposition. The stock market session those days lasted for a mere two-and-a-half hours, from 12 noon to 2:30 p.m. Traders and investors did not have the luxury of trading from the comfort of their homes like we do. There were no trading terminals or tablets/laptops or apps where the buy and sell rates would flash constantly. The only point of contact between the market and the investor was the broker. One had to constantly call up the broker to find out the ask and bid quotes so as to place and confirm the orders. The brokers, too, did not have it easy. They engaged in something known as the Open Outcry System. The brokers or their representatives assembled on the floor of the stock exchange known as the Ring. The Open Outcry System literally meant that everybody was shouting at the top of their voice, trying to communicate with other dealers. So, if a broker wanted to buy 100 shares of ABC, he would have to shout out his buy price and look out for an opposite selling broker for the same security on the entire floor, who in turn would be yelling out the sell price of the stock. Remember there were no cell phones then and since the noise level was so loud, most of these transactions happened by using hand gestures and sign languages. Also, after the shares were bought, the headache was not over. Since shares were not available in the demat form, they would not just end up in the investors demat accounts and be
Beyond Market 22nd May 13

transferred in their names. Physical share certificates (a flimsy paper) had to be sent over to registrars of the company to transfer it in the name of the new investor. This process took months since sometimes the certificates would get lost in transit. At other times it would be torn or mutilated and sometimes there would be problems pertaining to paperwork too. All this meant sleepless nights for investors and additional effort on part of the broker, not to mention the mounting frustration of uncertainty, the loss of time and value as well as the loss of selling opportunity in the interim period. Also since there were very few participants in the market, there was hardly any liquidity in shares, and often there was huge discrepancy between the bid and the offer price and buying/selling huge quantities was very difficult. There was no binding contract between the two parties, just verbal and visual confirmation based on trust. The risks were too high and threats of fraud and cheating were very much real. Now that we have a general idea as to how the stock market worked in those days, let us try and learn a few words, jargon and phrases that were used in everyday parlance in those days. This will not only help us understand their lingo, but also help our elders to correlate the terms from their times with those of today. Bazaar Quite literally, it is the stock market. The most common phrase that you would hear is Bazaar Kaisa Hai?, which means Hows the market?

Dalal Street The Street on which the Bombay Stock Exchange building is situated in Mumbai. Bhav It is the price of a stock or underlying security. The most common term that you would come across is Bhav kya hai?, that is, whats the price? Teji A market that is going up or if a trader has initiated a long/buy position in a stock or market is known as Teji. Mandi A market that is going down or a short or a sell position in a stock or market is known as Mandi. Badla An important component of yesteryears market, Badla is a system where there was a provision to carry forward buy or sell trades to the next settlement without the actual delivery of shares or payment for shares bought by paying a small price known as badla. Seedha Badla Popularly known as Contango in the western markets, Seedha Badla is the carry over charge paid by the buyer of shares to the seller to avoid taking delivery of shares and carry forward the buy positions to the next settlement cycle. Ulta Badla or Undha Badla Popularly known as Backwardation in western markets, it is the charge paid by a seller to the buyer to avoid delivering shares that he has sold and carrying over the sell position to the
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next settlement. Badliwala A financier who helps finance the badla transactions is popularly known as a Badliwala. Chalu Upla A form of carry forward mechanism wherein an existing position (chalu) is squared up on one exchange and a fresh (upla) position is initiated on another exchange upon payment of a charge is known as Chalu Upla. Dabba Better known as Bucket Trading in the west. Dabba involves a few unscrupulous individuals who take the buy/sell orders from their clients but do not actually enter trades in the exchanges. They just jot it down in a book and make or receive payments at the end of each week. Sauda Book A book where the buy and sell transactions are recorded by the members is known as Sauda Book. Bhav Copy A paper that would come out on the evening of each trading day showing the closing rates of each stock traded in the market is known as Bhav Copy.

Khangi Bhav Infamously known as Kerb Trading, Khangi Bhav is an illegal practice wherein transactions are carried out after the official close of trading hours of the markets by unauthorized dealers, often just outside the stock exchange building. Footpathia A Kerb trader or the one who deals in stocks outside exchanges, mostly on the footpath is known as Footpathia. Kapli Kapli is a form used by brokers to inform exchanges of the transactions done by them for the purpose of matching and settlement. Taravaniwala Or Jobber Basically an arbitrage trader who buys and sells the same security almost simultaneously for a small price difference and pockets the margin is commonly known as Taravaniwala or Jobber. Patavat Settling a transaction in cash rather than shares is known as Patavat. Fataakya It is a slang used to describe day

traders or speculators who trade very quickly and in huge volumes. They are known as fataakya because they trade very fast, that is fatafat. Now that both generations are almost on the same level playing field, we just need to help our elders undertake their first trade and then they will all be set. 1. Help them open a demat and trading account in their name. 2. Help them assess their risk profile and their goals and suggest a healthy mix of good quality mid and large stocks with good dividend payouts for a sustained tax-free income. 3. Help them learn how to operate the computer and the Internet. 4. Make them read market-related books and magazines. 5. Help them understand business news. If they do not understand English, there are many Hindi business channels, which will make the job much easier for them. 6. Hold handholding sessions and mock trading sessions with them. 7. Be on their constant beck and call to solve any doubts or problems that they may have. Bear in mind that, not only will this exercise bridge the generation gap as far as the stock markets are concerned, but it will also bridge the gap between you and your elders both on the personal as well as the emotional fronT.

COILED MARKET Coiled market is referred to a market that is believed to have the potential to make a strong move in one direction after being pushed in the opposite direction. The idea is that if a market should be headed in one direction based on its fundamentals but is pushed in the other direction, then it will eventually make a strong move in the original fundamental direction. This coiled move will often be more substantial than what might have been the case if it had gone in the expected direction to begin with. Coiled markets often arise when the market has been held down artificially. This happens in commodities markets, such as gold and silver. Investors looking to capitalize on coiled markets will use both fundamental and technical analysis to identify markets or specific equities that exhibit the characteristics of a coiled market.
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Beyond Market 22nd May 13

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Contact At: 022 3926 9140, e-mail: distributionhelpdesk@nirmalbang.com

Wisdom of Jesse Livermore

One of the greatest traders of all times, Jesse Livermores exploits reveal the genius behind the man who made fortunes on the bourses

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Beyond Market 22nd May 13

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esse Livermore is the greatest trader of all times. Considered as the God of traders, Livermore did not keep the secret of making money to himself. He shared his thoughts, trading strategies and secrets of making money in the markets in two books, which are still treated as Bible by the trader community.

FIRST BE RIGHT Livermore said, It is not the bull side or the bear side; in the markets, what matters is the right side. A right trade at the right time. And to be right, he advocated trading in leading stocks and strong industry groups because that is where he believed the biggest winners are identified and big money is made. The basic objective is that they are the most participated stocks and liquid, too. It is much more reliable and easy to read the behaviour of such stocks. They are true companions of the trader because such stocks exhibit the real picture of what a typical trader is seeking or expecting. WHEN TO TRADE? The first two trading rules that he developed in his early trading pertained to the timing of entering a trade that is when to enter a trade and when not to enter the trade. As per Livermores observations, one should enter a trade only when there are enough triggers or favourable conditions. It is believed that when all odds are in your favour, the chances of being right increases. While trading, entering a trade and exiting a trade is most crucial. He in fact developed a check list that used to help him before entering any trade. He always wanted to trade with the trend and not against it so that chances of a right trade were higher. SIT TIGHT If your trade is right and the trend is in your favour, then the most important thing to do in trading according to Livermore is to sit tight on the trade. He believed that big money is only made when you are not only right but also when you sit tight on the trade.

He believed that holding on to a trade was the single most important factor that set him apart from the crowd. WHEN TO SELL He believed that one should not try to time the trade and sell at the top. He said, I never buy at the bottom and I always sell too soon. Before selling one should look for a reaction. Prices may come down and then again make a new high. The best thing is that if prices fall from the top and they resist a bounce back, then you need to get into action and this is the time when one needs to sell. THERE IS ALWAYS A TRADE He believed that irrespective of the direction of the market, there is always a trade to be made. Taking cues from market direction downward or upward - he used to initiate trades, which were either long trades or short trades. AVOID FREQUENT TRADES AND TOO MANY STOCKS This means one should not trade in the markets all the time. This is because there will be times in the markets when conditions are not favourable. Further, trading in too many stocks too often would lead to nowhere. He believed that money cannot consistently be made every day and every week. One should make few smart trades and earn some profits out of them. Instead of frequent trades, one should hold cash in ones portfolio. KEEP CASH IN RESERVE Livermore felt that cash is king. A trader without cash is equivalent to a blockbuster hero with no movies. Livermore stressed that traders must
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His strategies, thoughts on structure of markets, psychology of speculators, traders, brokers, insiders, companies and investors are relevant for traders and investors even today. Livermore made his first trade at the age of 15. His trading career saw several ups and downs. And his experience has resulted in a list of dos and donts, which is for those who wants to learn from them. Enumerated in this article are some of his key strategies, thoughts and learnings for traders and investors. PREPARING FOR BATTLE The most important thing for a person to do in trading is to believe in himself and his judgment. Livermore said this principle is important if one wants to make a living in this game. This is why he advised not to fall prey to tips. It is said that ones own judgment and guesswork helps a person to develop his brain power. Therefore, the best way is to guess right. One should be a serious observer of prices, be able to think, relate, calculate and remember the behaviour of prices because everything is in the price. A successful trader like Livermore enjoyed the process of making money more than the money itself as well as advocated building strong processes, discipline and a good mindset.
Beyond Market 22nd May 13

fight the urge to constantly trade. Instead of keeping the cash busy, one can wait for the right opportunity. Jesse Livermore felt that a trader should always keep a portion of his/her account in cash so that one is armed to take what the market offers you. He said patience is the key to success, not speed. TIMING A TRADE He raised the most important aspect of trading when he said that buying on a rising market is the most comfortable way to buy stocks. In trading, the point is not so much to buy as cheap as possible or go short at top prices, but to buy or sell at the right time. He said: When I am bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don't buy long stocks on scale down, I buy on a scale up. Livermore advised not to try buying cheap but to buy effectively. Similarly in case one wants to short a stock it is foolish to look for a peak. He emphasized on using the trend effectively and accordingly building the position . I came to learn that even when one is properly bearish at the very beginning of a bear market, it is well not to begin selling in bulk until there is no danger of the engine backfiring, remarked Jesse Livermore. TOO HIGH TOO LOW This is also the reason Livermore believed that stocks are never too high to begin buying or too low to begin selling. However, this does not mean buying or selling or initiating a trade at one go. After the initial
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transaction, one should not indulge in second transaction until the first trade shows a profit. This is the most important rule of trading because it will ensure that losses are kept to a minimum level. MANAGING A TRADE Livermore believed that as long as one is right and a stock is functioning in the desired direction, then it is wise for the person to hold on to the stock. Never be in a hurry to book profits early until the said stock shows a sign of reversal. Likewise, he also strictly advised and followed stop losses. He said if a particular position goes wrong, one should get out immediately with a small loss rather than averaging on the losing trade. What appears to be a good trade in the beginning could actually turn out to be a bad trade by the end of it. Markets do not function according to the position that one has taken, it is we who have to function how the markets behave. As long as a company stock is behaving right and the market is supporting, one should ride on the winning trade and get out of a losing trade early. Jesse Livermore said, Profits always take care of themselves but losses never do. Instead, he emphasized on adding more to the winning position. So if one is long in a particular stock and that stock shows some profit in initial trade, and if the trend continues, he should add more stocks to the winning position. Real money is only made in positions which are showing profits from the beginning. This entitles a minimum scope for risk as well as a maximum scope for booking profits.

SPECULATION INVESTMENT

AND

Many people make the mistake of holding on to a losing trade. Taking a losing position home and worrying about it day and night in the hope of recouping the losses is the most foolish thing and surely lead to the demise of a persons trading career. The biggest mistake traders make is that they start accumulating a lot of losing trades or stocks in a portfolio as investments. However, this trading style according to Jesse Livermore is a major mistake. Whether it is a losing position or a winning position, a trade should be treated as trade and not as investment. In fact a similar thing could also happen in a winning trade when we start attributing fundamentals of companies to profits. TRADE REVERSAL Jesse Livermore closely watched his trade. If a profitable trade reversed along with the rest of the market, then he would quickly consolidate his position in the stock. A trade in uptrend or downtrend could have several natural reactions in between during its journey. But when these natural reactions do not seem to be natural, Livermore thinks it is time to rethink and get out of the trade. In case of reversal if a profitable trade starts becoming a losing trade, it is a time to get out of the trade. Here, there is one more thing to note. Too much confidence leads to nowhere because it overlaps the rationality of the trade. Similarly, a good trader never regrets. For him his strategy, plan and set of rules are more important than proving
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Beyond Market 22nd May 13

his gut feeling to the market. Those who fight with the market actually fight with themselves. STRATEGIES FOR A NARROW MARKET What should a trader do when the markets lack clear direction - upward or downward? This is possible when the markets lack enough reason in either direction. Livermore believed that when prices are not moving anywhere there is no point in guessing a bull side or a bear side of the market. He suggested that in such situations the best thing to do is to wait for the right opportunity when prices break the rage or when prices start to break the resistance in either direction of the stock markets. CLUES LIE IN PRICES Tape reading was an important part of his trading game. He believed everything is in price. Prices tell you everything from when to sell to when to buy. Good news or bad news everything is in the price. If an investor carefully studies the behaviour of prices, he/she will find that markets typically start reacting much before the news. Stocks start reacting much before companies announce any developments. He had predicted the stock market crash of 1929, one of the greatest crashes in stock market history, well before it actually took place by just observing the price behaviour of markets and leading stocks. An investor must study general conditions of the market to seize them so as to be able to anticipate probabilities. He said, I learned that I had to work for my money. I was no
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longer betting blindly or concerned with mastering the technique of the game, but with earning my successes by hard study and clear thinking. I also had found out that nobody was immune to the danger of making sucker plays. And for a sucker play, a man gets a sucker pay. Markets and its participants are full of tricks and comprise those who make mistakes, who do not learn from their mistakes, who average on their losing trades and who refuse to be wrong and are probably suckers in the market. This is because they are the ones who create a lot of money for smart traders. SIGNS OF WARNING On a broader level, Livermore would keep an eye on the undertone of the selected leading stocks and industries to gauge the behaviour of price. He said that a market can and does often cease to be a bull market long before prices generally begin to break. His warning signs will give a market participant early indication if he notices those stocks which had been leaders of the market and reacted several points from the top and are refusing to come back. If leading stocks cease to advance in rising markets, then it is time to take stock of the situation or possible reversal. Similarly, in a falling market if leading stocks resist to fall, then there is reason to look for a reversal in the ongoing trend. SOMETHING IS WRONG In trading, it is too late to wait for the news flash before selling a stock or buying a stock. Prices largely know the news before they actually happen and they start to behave in line. Keeping these things in mind,

Livermore emphasized that it is not wise to fight the trend, if there is a crash in share prices of a particular stock and it behaves unusually as compared to the overall market and its peers, then it is time to believe that something unusual is going to happen. The difficulty here is to fight with your own conviction, confidence and ego. Most traders refuse to be wrong till they are proved wrong. However, wise traders do not argue; they are prepared to change before they are proved wrong. LEARNING FROM MISTAKES There is no end to learning even after reading and learning so much about Livermores trading secrets. Traders make a lot of mistakes and many of them are the same mistakes. Sticking to rules of the game is very important especially in the learning period because in this period mistakes could cause a lot of damage and lead to disappointments too. It is very important to maintain the right temperament. Despite knowing many traders do what they are not supposed to do and when they make mistakes, they not only lose money but also faith in themselves and question their ability as traders. Throughout his life, Livermore made several mistakes, which cost him millions. He in fact went broke on several occasions. Even while he was in the losing side of the game, he believed in gaining the experience and learning to not repeat the same mistakes again. He also said that if a man didnt make mistakes he would own the world in a month. But if he didnt profit from his mistakes, he wouldnt own a blessed thing. Whatever happens in the stock
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market today has happened before and will happen again. LEARN TO CONTROL YOUR EMOTIONS Even if somebody knows the rules of the game, yet the biggest and the most important thing that makes a trader and a trade successful are how one deals with emotions. A losing trade attracts fear, while a gaining trade attracts hopes. So there are many such basic emotions that could prove to be the biggest hindrance. A persons ability to control greed and fear, while balancing on hope and despair and other such basic instincts of human nature are important in trading. One should stick to his or her original plan. Livermore believed that instead of hoping, an investor must fear; instead of fearing, he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a bigger profit.

It is absolutely wrong to gamble in stocks the way the average man does. However, circumstances change and conditions change and there is no surety that the price will behave the way you desire. A trader should be ready to make changes, cut his trade instead of allowing his emotions to take over the trade. EXPERTS VIEW Livermore lost several millions when he relied too much on experts. It is quite often that despite our own reading and understanding, we want somebody to tell us whether it is good to buy or sell. Markets are full of experts including some of those who regularly give their views. He believed that in trading, experts should not take over your decision-making power and your own reading of the situation. MAGIC NUMBER It was his old theory which Jesse

Livermore developed over years of experience that when a stock crosses key figures like `100 or `200 or `300 for the first time the price does not stop at that even figure, but goes higher. So, keep an eye on such trades because buying them on the line could be a profitable trade. HABITS OF SPENDING As a trader makes profits, it is easy to develop a spending habit indulging in high lifestyle, splurging a lot of money on unnecessary things. But here Livermore cautioned against such habits. He said such habits are good when you are making profits. But they are hard to get away when one is not making profits and when one is actually incurring losses. Like any other profession, trading too has its share of ups and downs. Some of these ups and downs could be very severe in nature. This is why Livermore felt that one should keep some money in a safE.

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Beyond Market 22nd May 13

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IMPORTANT JARGON FOR THE FORTNIGHT


DIVERGENCE BETWEEN WPI & CPI
nflation data for April has shown a benign trend. Wholesale Price Index (WPI)-based inflation fell to 4.89% in April 13 from 5.96% in the previous month, first time below the 5% mark since November 09. The Consumer Price Index (CPI)-based inflation fell to 9.39% in April 13 from 10.39% in March 13, a 13-month low. However, the wedge between the two cannot go unnoticed. The change in prices in the wholesale markets (captured by WPI) gets transmitted to the retail market (captured by CPI), albeit with a lag. Thus, WPI and CPI should converge in the medium term. But divergence between the two is on the rise. Even as WPI is near the Reserve Bank of Indias (RBIs) comfort level of 5%, households continue to face higher inflation even for basic items. Has RBIs more liking for WPI backfired at the cost of households? The RBIs annual monetary policy saw target-setting for WPI at 5% by March 14, but there was no target set for CPI: which actually is representative of the price rise at the ground level! CPI is the preferred measure worldwide but in India WPI remains the main measure. Why Is WPI RBIs Main Measure? Policymakers like WPI as it is broad-based with many commodities and items. The data is frequently available with a slight lag, which helps in continuous monitoring. CPI lacks in terms of representation, quality of price collection and weighting. However, the new CPI time series, which came into existence from the year 2011 is an improved version of the old CPI. Where Do WPI and CPI Differ? Not only is the composition of baskets of WPI and CPI
Beyond Market 22nd May 13

different, but also the weights of items in the baskets are very different. WPI is broadly divided into three sub-categories primary articles group (20.11% weight), fuel products (14.91%) and manufactured products (64.97%). This index does not cover non-commodity producing sectors like services and non-tradable commodities. CPI on the other hand is broadly divided into five sub-categories - food, beverages and tobacco group (49.71% weight), fuel and light group (9.49%), clothing, bedding and footwear group (4.73%), housing group (9.77%) and miscellaneous group consisting of education, medical care, transport and communication, etc (26.31%). There are three key differences in the composition of sub-components of the two indices. First, CPI-new has a much higher weight (49.71) for food versus 24.3% in the WPI. Second, fuel-related category has a lower weight of 9.5% in CPI-new compared to 14.9% in the WPI. Third, CPI-new includes services and housing, both of which are missing from the WPI. Why The Divergence? Clearly from the composition of each, WPI is more of non-food manufactured products and tradable items, while CPI is more of food products and heavyweight miscellaneous items. While WPI gets affected by prices of international commodities and rupee fluctuations, the CPI is sensitive to change in prices of food items and services like medical bills, education, etc. The main criticism against WPI is that it does not include services which form 60% of the Indian economy! While WPI was on a downtrend because of falling
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international commodities prices and weak pricing power in manufacturing, CPI remained in double digits due to both supply side constraints and rising incomes, leading to higher demand for food in particular protein-based items. CPI was also higher due to housing inflation and hike in diesel prices and power tariffs. Outlook For WPI & CPI With the trend being benign, most forecasters expect inflationary pressures to subside significantly in 2013-14. Inflation is likely to moderate going forward due to lower international prices for commodities, record rabi crop production coming to the market, lagged impact of slower government spending growth, moderation in asset prices, particularly housing as well as slower growth in the domestic demand. The key factors to watch out for are monsoon, international oil prices and minimum support prices (MSP) for farmers. Thus, depending on the changes in the above variables WPI and CPI will move accordingly.

payment methods and instruments. The value of bank notes and coins in circulation as a percentage of the GDP (12.04%) is very high in the country when compared to other emerging markets, like Brazil, Mexico and Russia. The Reserve Bank wants to fix this and encourage more non-cash transactions and migration of payments to electronic channels. Benefits Of IBPS Now, with IBPS, there will be a single platform for billers, aggregators and banks. IBPS will offer consumers a single bill payment point, not far from their place of work or residence, which will enable payment of any bill at any place and allow consumers to make payment by cash, cheques, credit/debit cards, prepaid payment instruments at the bill payment points. Further, IBPS will include any banks branch, post offices, business correspondents, retail agents of aggregators, ATMs, etc providing accessibility and instant confirmation of payment made through SMS or otherwise. IBPS will not only enhance consumer confidence and experience but also reduce the expenditure incurred by billers on collection of bills at their own collection centers. The proposed system will meet not only the usual bill payment needs but also have the flexibility to enable one-off payments and person-to-person fund transfers in the future. It is estimated that over 30,800 million bills are generated each year in top 20 cities in the country. Cash and cheque collections constitute over 90% and electronic payments through ECS continue to be low. With IBPS, bill payment in India would be standardized. How Will It Work? This payment model will enable the setting up of a centralized infrastructure, bringing all the billers and banks to a bill platform through the aggregators. A consumer visits the IBPS point with the details of the bill to be paid. IBPS points could be business correspondents, agents, ATMs and bank branches. The IBPS points may also be operated by a non-banking entity. A receipt will be generated for the consumer by IBPS confirming the fulfilment of the transaction. The Indian Bill Payment System will provide for online registration of complaints from customers and the first point of contact would provide the customer supporT.
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INDIA BILL PAYMENT SYSTEM (IBPS)


f things go as planned, the landscape of bill payment in India is likely to alter dramatically. A Reserve Bank of India (RBI) panel has recently mooted an electronic bill payment system. With this, you can pay your dues of essential services, insurance premium, utility payments, taxes, university fees, examination fees, school fees and many more at a single bill payment point, not far from your place of work or residence. It will enable payment of any bill at any place. The central bank calls it India bill payment system. Why IBPS? Currently, one can pay bills physically or electronically; physically by cash, cheque, demand draft, or electronically by electronic transfer mode like online, NEFT, etc. One can also pay bills via agents called aggregators. However, they have a limitation. They do not have a tie-up with all billers across the length and breadth of the country. Hence, it has no inter-operability. Even accessibility of aggregators is poor in areas beyond metros. Further, cash and cheques continue to be the preferred mode of payment for a vast majority of the populace, despite the measures of the RBI to introduce alternative
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Beyond Market 22nd May 13