Finxpress 25 aug

August 25, 2013

Volume 5

AWAITED BREAK

After a hectic and stressful week, IMTians welcome this weekend. First

years had their first end terms. Great efforts were put in by the faculty to

familiarize students with varied subjects from IGD to FRA. This was

followed by students’ handwork and sleepless nights. After a successful

completion of first term, full of quizzes, presentations, parties and events

organized by various clubs, students are all set to open heartedly welcome

second term.

Economic situation of our country unfortunately continues to worsen. The

ever-widening current account deficit is held responsible for several of the

prevailing woes of economy, including fall of domestic currency in the

foreign exchange market, stock market crash to name a few. Rupee, slipped

to all time low of $65.75 intraday on Thursday. So far, steps taken by the

government authorities have not come to the rescue. Do read ‘In Focus’

section on Current account deficit, ‘Opinion’ section ‘Impending crisis of

India’ and ‘Term of the week’ includes WACC (weighted average cost of

capital)

We hope you enjoy reading the articles this week too. And amidst your busy

schedule you’ll find time to write an article for us. Your opinions are most

welcome. We are open for your suggestions, comments and

acknowledgement regarding our online magazine.

Have a joyful reading!!

Regards,

The Editorial Team

FinNiche Club

From The Editorial FinXpress

Volume 5

Aug 25,2013

FinXpress

Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.

FinNiche

August 2013 Page 1

CONTENTS

From The Editorial

In Focus: CAD

Opinion: The Impending

crisis of India

Term of The Week: WACC

Market This Week

News

Fun Corner

Page 2

IN FOCUS

India, 1991: Our Forex reserves a mere

enough to finance three weeks’ worth of

imports. And so we had to airlift our gold

reserves as a pledge with the International

Monetary Fund (IMF) for a loan. And thus

came forward our first step on the road to

globalization of economy.

India, 2013: Current Account Deficit of

4.8 % for the 2012-13 fiscal and expected

to widen in the first quarter of the current

fiscal. Its impacts - the free fall of the

domestic currency in the foreign exchange

market, stock market crash, inflation, fiscal

deficit and the list seems to be never

ending.

Question: Is it a repeat of the 1991fiasco

on the cards for us and also reversing the

path of globalization of economy?

To begin with for those who are new to this

term Current Account Deficit - it is the total

imports of goods, services and transfers

minus the country's total export of goods,

services and transfers or in other words

the gap between the inflow and outflow of

foreign currency. The top notch

economists of the world hold the opinion

that a CAD of 2.5% of a nation’s GDP is

acceptable in normal economic conditions

(though one might wonder how to define

these normal conditions).

The main reasons cited by the government

for this ever widening deficit are lower

imports and higher degree of imports of oil,

coal and unproductive assets like gold. As

otherwise, high imports of capital goods

and equipment reflect the growth in an

economy that though is not the case with

the Indian economy.

Now in order to keep this balance of

payment intact, the CAD then needs to be

financed which the finance minister,

Mr Chidambaram assures will be done

same as was done in the previous fiscal.

But the question that still lingers in mind is

that the reliance on foreign funds (through

FDI and FII) or the capital account for this

financing – how safe a bet will it prove to

be given the positive signs of recovery

shown in the western economy. Is it that

the FIIs would gradually pull off the Indian

markets?

The government is trying to do whatever it

can to stop this impending crisis by taking

up measures to lower the country’s

imports. To mention a few of them – it has

raised customs duty on precious metals

like gold, silver and platinum to 10%. RBI

imposed restrictions on import of gold

coins and medallions saying importers

would require license from Directorate

General of Foreign Trade. It also

announced stern measures, including

curbs on Indian firms investing abroad and

on outward remittances by resident

Indians. Unfortunately most of these do not

seem to work out for as per intentions of

the government.

We have somewhat entered in a vicious

circle as the rupee depreciation is likely to

inflate the fuel bill which in turn puts

pressure on the fiscal deficit and with RBI

having limited scope of cutting down key

monetary rates in view of CAD’s abnormal

figures lets the high inflation unchecked.

As put by Mr D. Subbarao it is only high

net fund inflows and increase in export

activities which could save the crisis-ridden

economy. What lays ahead us is a rocky

terrain and it is yet to be determined how

will we be able to walk past it.

FinNiche

CURRENT ACCOUNT DEFICIT —- By Pragun

August 2013

Page 4

OPINION

With Indian Rupee falling down an abyss,

a declining GDP growth rate, FIIs flooding

capital out of the country, stock markets

showing no clear sense of direction, falling

industrial production figures and a failed

government's overconfidence to set it all

right, the Indian economy clearly has tough

times ahead. The primary reason for this

impending crisis as cited by many

economists is the decline in consumption,

investment and exports due to high

inflation. The International Monetary Fund

(IMF) would typically prescribe higher

interest rates to suppress domestic

demand and lower imports to address the

current account deficit. Both however

seem less reasonable to the government

with general elections next year.

Everyone in UPA, from P Chidambaram to

Manmohan Singh and to every UPA

defender claims that the current economic

crisis is a result of the global meltdown of

2008. Mihir Sharma’s column in Business

Standard further vindicates this fact. To

justify, he puts forth similar problems faced

by five emerging economies - Indonesia,

Thailand, South Africa, Brazil and Turkey.

However, P Chidambaram, in an interview

with Mihir Sharma indirectly admitted that

the problem lay as much with the

government as with the global crisis. He

said: “We have delayed taking decisions.

We’ve paid a price for it.” Still, recent

moves by RBI show that the government is

(or rather wants to stay) oblivious to the

gravity of it all and is believing in the

miracle of "It Will Bounce Back Sooner or

Later".

The extent of the crisis can be gauzed

from the fact that the country's growth rate

has fallen to a meagre 5 per cent this year,

the index of industrial production is into

negative territory and CPI inflation has

shot to a 5 month high of 9.64 per cent

YOY. UPA's flagship programmes like

NREGS, Food Security Bill, employment

guarantee schemes have proved to be

colossal missteps. In times when the

economy is slowing down and we need

some quick fix solution, the government

should rely on short term measures like

fiscal consolidation and curbing

depreciation of Rupee rather than on eon

long schemes plagued with corruption and

inefficiencies.

According to Jim Walker of Asianomics

“The way the policy has been acting in

India over the course of 2-3 years has

been surprising that the market has held

up so well. Companies are under pressure,

earnings are under pressure, fiscal deficit

is out of control". This has even led to big

multinational firms like Nokia, Royal Dutch

Shell, Vodafone, LG Electronics etc. to

threaten the government to exit India on

grounds of political risk, weak policy

reforms and a hostile business

environment. Nokia for example is

deciding to shut down its plant in Tamil

Nadu, which is its largest in the world. This

decision was fuelled by the income tax

department slapping a Rs 2080 crore tax

demand on the company alleging that the

Indian arm did not deduct the stipulated

10 percent tax on royalty payments made

to the parent. If such an exodus does take

place, there would be huge job losses

leading to mounting unemployment levels

and a struggling industrial index.

FinNiche

The Impending Crisis in India —- By Mukul Gupta

August 2013

Page 6

FINANCIAL KNOWLEDGE

WACC-A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debts are included in a WACC calculation. Else being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk.

The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing:

Where:

Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

Businesses often discount cash flows at

WACC to determine the Net Present Value

(NPV) of a project, using the formula:

NPV = Present Value (PV) of the Cash

Flows discounted at WACC.

Broadly speaking, a company's assets are

financed by either debt or equity. WACC is

the average of the costs of these sources of

financing, each of which is weighted by its

respective use in the given situation. By

taking a weighted average, we can see how

much interest the company has to pay for

every dollar it finances. The discount rate to

be used is a weighted-average of the returns

expected by the different classes of capital

providers (holders of different types of equity

and debt), and must reflect the long-term

targeted capital structure as opposed to the

current capital structure. While a separate

discount rate can be developed for each

projection interval to reflect the changing

capital structure, the discount rate is usually

assumed to remain constant throughout the

projection period.

In situations where projections are judged to

be aggressive, it may be appropriate to use a

higher discount rate than if the projections are

deemed to be more reasonable. While

choosing the discount rate is a matter of

judgment, it is common practice to use the

weighted-average cost of capital (WACC) as

a starting point.

Considerations in Calculating WACC:

1. WACC must comprise a weighted-

average of the marginal costs of all

sources of capital (debt, equity, etc.) since

UFCF represents cash available to all

providers of capital.

2. WACC must be computed after corporate

taxes, since UFCFs are computed after-

tax.

3. WACC must use nominal rates of return

built up from real rates and expected

inflation, because the expected UFCFs

are expressed in nominal terms.

4. WACC must be adjusted for the

systematic risk borne by each provider of

capital, since each expects a return that

compensates for the risk assumed.

5. While calculating the weighted-average of

the returns expected by various providers

of capital, market value weights for each

financing element (equity, debt, etc.) must

be used, because market values reflect

the true economic claim of each type of

financing outstanding whereas book

values may not.

6. Long-term WACCs should incorporate

assumptions regarding long-term debt

rates, not just current debt rates.

FinNiche

Weighted Average Cost of Capital (WACC)

—- By Divya Shree

August 2013

Page 7

FINANCIAL KNOWLEDGE FinNiche

Market This Week

In the week of Aug 19 -23 , the SENSEX opened at 18587.38 and slumped 0.40% to

close at the 18519.44 mark. The Nifty fell by 0.70% to close at 5471.75. The Indian ru-

pee which fell to its lowest level of 65.56 this week, has taken a massive toll on the In-

dian equities. It eventually closed at the 63.20 level after some pep talk by the govern-

ment. Sensex slumped nearly by 8.8% in the last one month, while the Nifty fell by 10%

in the same period of one month. The depreciating rupee has eroded the confidence of

traders and subdued the risk sentiment in the market on the whole.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 19,313.49

Fifty Days 19,237.52

Hundred and Fifty Days 19,373.28

Two Hundred Days 19,338.02

August 2013

Page 8

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 10.25%

Repo Rate 7.25%

Reverse Repo Rate 6.25%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 23%

INR / 1 USD 63.20

INR / 1 Euro 84.38

INR / 100 Jap. YEN 63.83

INR / 1 Pound Sterling 98.28

Commodity Unit Rs / Unit % Change

Gold 10 grams 31910.00 2.47%

Silver 1 Kg 53460.00 4.42%

Crude Oil 1 BBL 6461.48 0.23%

Base Rate 9.70%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8.0%-9.0%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 5,749.07

Fifty Days 5,756.42

Hundred And Fifty Days 5,844.04

Two Hundred Days 5,844.72

Key Policy Rates and Reserve Ratios

Exchange Rates

August 2013

Page 9

FINANCIAL KNOWLEDGE

Short Covering pushes up markets

Sensex, which had surged 408 points on

Thursday, rose further by 206.50 points, or

1.13 per cent, to end at 18,519.44. Nifty

rose 63.30 points, or 1.17 per cent, to

5,471.75.

This rise is seen mainly because of short

covering and as well as due to sustained

value buying in refinery, banking and auto

stocks along with Rupee recovery. The

capital goods sector index rose 2.04 per

cent banking index by 1.91 per cent to

10,791.32. Oil and Gas sector index rose

by 1.59 per cent to 8,191.04 and the auto

index by 1.5

Forget $, Re 1 = 1.5 Cents

Rupee fell by 6% this week breaching the

65 mark to an all-time intraday low,

touching 65.56 on Aug 22, 2013. However

Rupee closed at 63.20 on Friday, making a

stunning comeback, second-biggest rise in

a decade in absolute terms.

The experts’ opinions are as volatile as

rupee itself, some say it will reach 70 mark

due to high inflation, continual downgrades

in growth and the ineffective measure of

RBI whereas some are strong on 60 mark

as current account deficit to fall to 3.9 per

cent of GDP in 2013-14 compared with 4.8

per cent last year foreign capital inflows

are expected to pick up and attract $11

billion.

Emerging Markets not Emerging

Across the world, emerging market

currencies fell between 3 and 6 percent

this week. The rupee itself was down 6

percent on Thursday. All emerging

markets indices are also on a fall and

Indonesia with a 20 percent fall, Thailand

has seen a 17 percent fall, Philippines 11

percent and India more than 10 percent.

Experts say nearly a third of the money

invested in bond funds of BRICS have

been pulled out since May this year and

weight is shifting towards US. Ballooning

current account deficit and slowing growth

have turned the sentiment against these

emerging market economies.

RBI ups FII investment limit in Mahindra

Life space to 49%

Reserve Bank of India has increased

foreign investment limit in Mahindra Life

space Developers (erstwhile Mahindra

Gesco Developers) to 49 percent from 30

percent.

The holdings of FIIs in the company has

reached 29.23 percent of the paid up

equity capital, according to filing on August

19. Promoter Mahindra & Mahindra holds

51.04 percent stake in the company as of

June 2013. The stock was down 0.2

percent to close at Rs 438.55 on Friday.

RBI penalizes six more Banks

The Reserve Bank of India (RBI) on Friday

imposed penalty of Rs 50 lakh to 2 crore

on six more state-owned banks for

violation of Know Your Customer (KYC)

and anti-money laundering (ALM) norms.

Those public sector lenders included

Allahabad Bank, Bank of Maharashtra,

Corporation Bank, Dena Bank, IDBI Bank,

and Indian Bank.

Gold hits 9-month high; silver regains

Rs 54K mark

Gold staged a smart rally and hit a

nine-month high at the domestic bullion

amid jewellery and investment demand in

FinNiche

NEWS

August 2013

Page 10

FINANCIAL KNOWLEDGE

the backdrop of surge in global commodity

market. Silver also surged on heavy

speculative as well as industrial demand.

Standard gold finished at Rs 31,790 from

Friday's closing level of Rs 31,160 and

Silver ready finished at Rs 54,260 per kg

from its previous closing level of Rs

52,000.

Globally, gold vaulted by a hefty USD 25

gain to touch a two-month high after

weaker-than-expected housing and jobless

claims data.

FM meets top bankers to shore up fund

inflows

Finance Minister P Chidambaram held a

closed-door meeting on Aug 24 with top

bankers to take stock of the situation in the

wake of rupee volatility and ways to shore

up foreign capital to bridge the widening

current account gap.

The minister had said that there is no need

for "excessive or unwarranted pessimism"

and said the recent liquidity control

measures taken by the Reserve Bank to

reduce volatility in Forex market and quell

speculation would be revisited with return

of stability.

Diesel price hike of Rs 3/L likely

Adding to the chorus of a possible diesel

price hike, Jal Irani, managing director-oil

& gas research, Macquarie says the

government is likely to hike prices by

Rs 2-3 per liter. Steep correction seen in

the Indian currency has made a fuel hike a

desperate need of the hour.

Metal stocks shine on Chinese

manufacturing PMI data

Tata Steel shares rallied more than 4

percent while Jindal Steel, SAIL, Sterlite

Industries and NMDC were up 1.5-2.5

percent on Aug 22, after the Chinese

August HSBC flash manufacturing PMI

data increased to four-month high at 50.1

as against 47.7 in July. According to

Nomura, the rupee depreciation will benefit

Indian companies significantly and

bottoming out of global metal prices will be

helpful.

Govt bans duty free TV imports by air

travelers

The government on Aug 19, banned duty-

free import of flat screen television by air

travelers in a bid to prop up rupee, which

declined below the 63 level against US

dollar.

In an order to contain the Current Account

Deficit (CAD) and arrest declining value of

rupee, the government has raised duty on

gold, platinum and silver to 10 percent.

ITC to consider demerger Wimco

A meeting of the board of directors of the

company will be held on August 28 to

consider a proposal for demerger of the

non-engineering business comprising

safety matches bus iness and

agri (forestry) business of Wimco into the

company as reported by ITC to BSE.

ITC along with Russell Credit, a wholly

owned unit, holds 98.21 per cent of

Wimco's share capital. ITC shares rose

0.10 per cent to Rs 308.25 at the close on

the BSE.

FinNiche

NEWS

August 2013

FinNiche

Fun Corner

CARTOONS

FUN CORNER

Page 11

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Volume 5 Publisher : V.V.Raviteja

August 2013

Fin Quiz 1. What is a Balloon Loan?

2. Identify the person who is known to be the pioneer in

mutual fund industry and often referred as the Father

of Index Fund investing ?

3. What is a bad credit loan?

4. First Indian woman CEO of a foreign bank?

5. Where is paper currency manufactured in India?

Last Week’s Answers

1. EBITDA

2. Put Option

3 Capitalization Ratio

4. Repo

5 Debt Ratio

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