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Niveshak May, 2014 Issue
Niveshak May, 2014 Issue
VOLUME 7 ISSUE 5
May 2014
Niveshak
Volume VII
ISSUE V
May 2014
Faculty Chairman
Prof. P. Saravanan
THE TEAM
Akanksha Gupta
Apoorva Sharma
Gaurav Bhardwaj
Jatin Sethi
Kocherlakota Tarun
Mohit Gupta
Mohnish Khiani
Priyadarshi Agarwal
S C Chakravarthi V
All images, design and artwork
are copyright of
IIM Shillong Finance Club
Finance Club
Indian Institute of Management
Shillong
We hope that the month of May calmed down all the anxieties pertaining to new government and the higher market expectations related to the same. The month of May began
with twin blasts in Chennai Central which have shaken the entire country. In these blasts,
one person was reported to be killed and 14 other injured and the investigation is still
on. The very next was a historic one in the Indian elections where Narendra Modi gave a
thumping victory to BJP and there by the party was able make a simple majority in the
Lok Sabha, which was only witnessed in 1984 elections (25 years before!!). Creating history, BSE Sensex and NSE Nifty touched all their time highs of 25000 and 7500 within
a very short span of time. The 30 share index had a solid run for some few days during
which it has surged 1470 points to hit a new life-time high of 25373.63 points. Owing to
the huge loss in the Lok-Sabha elections, Bihar Chief Minister resigned from his post taking up full responsibility for the loss. Similar circumstances took place in the Congress
party when both the president and vice-president of the party (Sonia Gandhi and Rahul
Gandhi) offered to resign from their party post in lieu of the humiliating defeat faced
by them. Before the swearing in of Narendra Modi as the 14th Prime Minister of India,
another tragic event took place where in there was an attack on Indian Embassy in Herat,
Afghanistan. On the business side, the major breakthrough this month was the merger
of e-commerce majors of India Flipkart and Myntra. This merger is done in the expectation that their combined might can place them in a better position to take on Amazon
which has been aggressively making its presence felt in the Indian online retail. On the
international front, a nation- wide curfew had been imposed by Thailands military by
dissolving the government and constitution because of six-month long anti-government
protests. Credit Suisse agreed to pay a hefty fine of $196 million to settle charges that it
violated federal security laws by providing cross-border brokerage without registering
with the Securities and Exchange Commission.
In this May edition of Niveshak, our editors have covered the story about the Chinese
Debt Bomb, a major economic event that has recently gone almost unnoticed. The Article
of the month this time is Warren Buffet: Can his success be replicated? which explains
how Warren Buffet has become a successful investor and what are the key insights to
be learnt. FinGyan section covers recent challenges in Liqidity management India by
explaining the steps taken by RBI pertaining to Liquidity Adjustment Facility. Finsight
article Goldfinger gives a good insight about the gold prices. The FinPact section discusses Energy Future Holdings buyout, which was a failed decision. Finview has the excerpts from Mr.Rajesh Gupta, senior manager from one of the leading private banks.
Classroom section shares knowledge on prospectus.
We would like to thank our readers for their immense support and encouragement. You
remain our prime motivation factor that keeps our spirits high and give us the vigor and
vitality to keep working hard. Thank you.
Stay invested!
Team Niveshak
www.iims-niveshak.com
Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.
CONTENTS
Cover Story
Niveshak Times
14
FinGyaan
18
Finsight
26 Goldfinger
FinPact
FINVIEW
CLASSROOM
31 Prospectus
NIVESHAK
www.iims-niveshak.com
IIM Shillong
RBI Eased Gold Import Norms Under 20:80
Scheme
Under the 20:80 Scheme, Star trading houses and
premier trading houses, which are registered as
nominated agencies by the Directorate General of
Foreign Trade(DGFT) now can import gold. With this
move the number of institutions that import gold
will go up and will increase supply of gold. Besides,
it will also lead to fall in the prices of gold. The RBI
had imposed severe restrictions on gold imports to
combat the Current Account Deficit (CAD) and sliding
rupee in July 2013. RBI prescribed a 20:80 formula,
which tied imports with exports of gold. Under
the 20:80 Scheme, an importer has to ensure that
at least 20 percent of every lot of imported gold is
exclusively made available for exports as finished
good and the balance for domestic use. The facility
was available to the selected banks only and other
entities were barred from imports of gold. Welcoming
Reserve Banks this decision; the World Gold Council
(WGC) said this would help in increasing the official
supplies.
Flipkart India Pvt. Ltds Acquisition of
Myntra.com
Flipkart India Pvt. Ltds acquisition of Myntra.com
will help add scale and gain share in the key fashion
segment. This will help when the company plans an
initial public offering (IPO) of shares, which is on
the cards. Myntras chief executive officer Mukesh
Bansal said that it aims to achieve sales worth
Rs.20,000 crore by 2020, for which it needs to make
a cash investment of $200 million (Rs.1,172 crore).
Flipkart said it will invest $100 million in the fashion
business after the deal.
Both companies are running heavy losses and have
had to repeatedly dilute equity to raise funds.
Valuations of the companies are already absurdly
high. Valuations of the companies are already
absurdly high, with both being valued at about 1.6
times the value of annualized monthly sales. Sales
here refers to gross merchandise value (GMV), of
which the companys revenue is likely to be only
a fraction (the commission it earns on the sale).
Competition is just picking up, with Amazon.com
Inc. increasing its presence in India. Whats more,
wiser from the experience in western markets,
traditional retailers are increasingly offering online
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Article ofSnapshot
Market the Month
Cover Story
Market Snapshot
Source: www.bseindia.com
www.nseindia.com
85,93,245.88
Source: www.bseindia.com
CURRENCY RATES
INR/1USD
INR/1Euro
INR/100Jap.YEN
INR/1PoundSterling
INR/ 1 SGD
10.00%-10.25%
8.00% - 9.05%
RESERVE RATIOS
58.483
79.8058
57.57
98.6725
46.73
CURRENCY MOVEMENTS
CRR
SLR
4.00%
23%
POLICY RATES
Bank Rate
Repo rate
Reverse Repo rate
9.00%
8.00%
7.00%
Source: www.bseindia.com
26th April 2014 to 25th May 2014
Data as on 25th May 2014
MAY 2014
www.iims-niveshak.com
NIVESHAK
BSE
Index
Sensex
MIDCAP
Smallcap
AUTO
BANKEX
CD
CG
FMCG
Healthcare
IT
METAL
OIL&GAS
POWER
PSU
REALTY
TECK
Open
Close
% change
22688.07
7373.64
7597.34
13615.96
14910.3
6633.02
12589.52
6837.11
10619.78
8786.98
10432.38
9605.77
1741.18
6561.7
1472.17
4929.63
24693.35
8668.32
9128.04
14580.74
17523.13
8235.58
14775.05
6794.28
10073.03
8440.06
12538.05
11545.47
2287.46
8614.28
1976.96
4832.03
8.84%
17.56%
20.15%
7.09%
17.52%
24.16%
17.36%
-0.63%
-5.15%
-3.95%
20.18%
20.19%
31.37%
31.28%
34.29%
-1.98%
% CHANGE
Article of Snapshot
Market the Month
Cover Story
Cover Story
Market Snapshot
10
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Yamini Sandeep
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IIM Lucknow
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Cover Story
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Mohnish Khiani
IIM Shillong
A major economic event that has recently gone
almost unnoticed is Chinas first corporatebond default. The company was a solar-energyequipment firm called Shanghai Chaori, a
small, private, highly leveraged and not very
important company. But its debt default draws
our attention towards the state of the worlds
2nd largest economy. The Chinese economy is in
the middle of a debt crisis, which is comparable
to the likes of the one we saw during the fall
of Lehman Brothers. The default of Shanghai
Chaori was tiny by comparison as it could not
make an interest payment on a $163 million
bond outstanding, whereas Lehman Brothers
owed nearly $613 billion when it collapsed. But
this is just the tip of an iceberg that is currently
about double the size of Chinas GDP. By allowing
Shanghai Chaori to go bust, the Chinese have
signalled that they are no longer in denial about
the debt crisis they are facing. This certainly
matters in a country in which data and statistics
are precooked and every economic move, which
includes the run-up in debt itself, is planned.
And this problem is fast approaching, as only
last year Chinese banks wrote off more than
twice the level of bad loans than they did in
2012.
China, for years now, has been the driver of global
growth. Its consumption and infrastructure
booms have kept afloat thousands of mines,
Chinese consumers have poured billions into the
MAY 2014
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Cover Story
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Cover Story
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Cover Story
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FinGyaan
FinGyaan
RECENT CHALLENGES
IN LIQUIDITY
MANAGEMENT IN INDIA
Rajiv S Rao & Sandeep Ramesh
SPJIMR, Mumbai
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FinGyaan
Cover Story
FinGyaan
NIVESHAK
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FinGyaan
Article of the Month
Cover Story
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IIM Shillong
Whats an LBO?
Leverage BuyOut is a mechanism to buy
a company partially or completely through
borrowed sources of fundsE.g. If Nestle wants
to buy Amul, but do not have required funds,
it can raise debt from the market and later sell
assets of Amul to pay-off the debt it cannot pay
through the cash flows generated by both the
companies.
What is Private Equity?
Private Equity consists of investors contributing
funds tomake direct investments into private
companies or buys majority shares of public
companies eventually resulting in delisting of
the public company. Capital for private equity
is raised from retail and institutional investors,
and can be used to fund new expansion and
growth strategies or to strengthen its balance
sheet.
Once a balance sheet is strengthened, the
Private Equity players exits from the company
selling its assets and pocketing the profits.
There is no emotion involved, no buzzwords
like consumer-focus or brand equity, it is pure
MAY 2014
capitalism.
What is the Difference between Buyout
and Leveraged Buyout?
In the case of a buyout or a management
buyout, the management of the company
retains its control and takes it away from the
public. They usually do this when they see that
the stock market is not doing enough justice
to the fundamentals of the company and thus
consolidates their control over the company
In the case of a leveraged buyout, the PE firm
that arranges the funds also aims to take
control of the company. While a MBO is done
to rejuvenate the company, LBO deal is done
with the relentless pursuit of profit and can
even mean liquidation of the company to pay
off the debt obligations that were procured
during the buyout. Most PE investments are
highly leveraged and raise money from high risk
instruments and junk bonds.
Major players in the PE business
Private equity companies hire the best brains
and continue to attract the best talents. They
hire fresh graduates from top B-Schools and
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MAY 2014
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its profits
In most of the cases however PE firms exit the
company before the repayment period is reached
and thus save themselves from the burden of
paying the returns to the bondholders.
This entire junk bond thus places the LBO market
on a morally wrong footing.
The giant deal as it stands today:
Unfortunately the deal materialised in Oct 2007
and in the very next year the world was to
see the greatest financial crisis after the Great
Depression of 1929.
Despite involving the best brains of corporate
America, KKR, TPG and Goldman Sachs could
only recover 3% of their investments and the
company as it stands today would file for
bankruptcy next month.
The deal was primarily based on rising gas prices
instead the gas prices fell post 2008 crisis and
a hydraulic fracturing created a surge in US Gas
supplies. The company registered 10 straight
quarterly losses since 2011 and Warrant Buffet
was to quote the investment as one the biggest
mistakes of his company. The bankruptcy
filing would be the fifth biggest non-financial
bankruptcy in the world.
What is the insight from here?
The best brains of corporate America took a
company that was started in 1882, soon after
the invention of incandescent light bulb to a
bankruptcy. It is a lesson for all of us as budding
managers to see where our goal lies in striking
an investment deal. There was no question
on the planning and execution of the deal but
what it lacked was care for the society and was
thus not sustainable. Sustainable leadership in
the world of Finance is hard to learn given the
models and case studies we learn are mainly
developed out of the Game of Greed practiced in
Corporate America. But as Dylan said the times
they are a changing, there will be a change
where Finance caters not only to the 1% but to
the whole 100% of the Globe.
25
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Goldfinger
Ronak Ravindran
Bangalore University
MAY 2014
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Finsight
Classroom
Cover Story
28
NIVESHAK
MAY 2014
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FinView
Cover Story
FinGyaan
NIVESHAK
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FinGyaan
FinView
30
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prospectus
FinFunda
of the
Month
Gaurav bharadwaj
IIM Shillong
Classroom
Cover Story
CLASSROOM
32
FIN-Q
1. After PwC acquired Booz and Co, what is its new name?
2. The first commercial cellphone Motorola Dynatac went for sale on March 13, 1984. What
was its price then?
3. X is a metric that comprises of the stocks of the companies associated with a famous
personality Y. Due to the power and influence of this celebrity Y, it is believed by some
analysts that the stocks of index will always outperform their competition. Y also formerly
held a position at the UNHCR. Identify X and Y.
4. This rule prohibits banks from proprietary trading and restricts investment in hedge
funds and private equity by commercial banks and their affiliates. Which rule are we talking about? Name the act which the rule is a part of.
5. Mulberry raised prices of one of its luxury handbags range by 10 per cent. Interestingly,
the demand for this range of handbags doubled. How would you classify this product in
terms of economics?
6. Which countrys foreign market is known as Rembrandt Market?
7. Identify the person and the company he founded
All entries should be mailed at niveshak.iims@gmail.com by 10th June, 2014 23:59 hrs One
lucky winner will receive cash prize of Rs. 500/-
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WINNERS
Article of the Month
Yamini Sandeep
IIM Lucknow
FIN - Q
Swati Pamnani
IIM Shillong
ANNOUNCEMENTS
ALL ARE INVITED
Team Niveshak invites articles from B-Schools all across India. We are looking for
original articles related to finance & economics. Students can also contribute puzzles
and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the Article of the Month and would be
awarded cash prize of Rs.1500/- along with a certificate.
Instructions
Please send your articles before 10th June, 2014 to niveshak.iims@gmail.com
The subject line of the mail must be Article for Niveshak_<Article Title>
Do mention your name, institute name and batch with your article
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Please do NOT send PDF files and kindly stick to the format
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