India's Opportunity in Africa

Hello

I found this useul article in Economic Times regarding India's Opportunity in Africa.

Here is the link:

http://lite.epaper.timesofindia.com/getpage.aspx?pageid=14&pagesize=&edid=&edlabel=ETM&mydateHid=25-05-2010&pubname=&edname=&publabel=ET

Happy Reading!!

Regards,

Saurav Tibrewal

Is ICICI Bank committing a mistake in acquiring BoR?

There is a saying in the modern corporate world, “Lunch or be lunch”. The quotation is apt with the recent trend of mergers and acquisitions. ICICI Bank, India’s biggest private sector bank is all set to make its third acquisition this year. After taking over Sangli Bank and Bank of Madura, it has offered to acquire Bank of Rajasthan. After HDFC Bank acquired Centurion Bank of Punjab in 2007, it is the biggest M & A in Banking Industry.

ICICI Bank has offered a swap deal of 25:118. This means that Bank of Rajasthan shareholders will get 25 shares of ICICI Bank for every 118 shares of Bank of Rajasthan. The swap ratio will value BOR at about 3000 crores which is nearly 1.5 times its current market capitalization. I would have mentioned almost double, had this post been written two days back.

Now, let us do an analysis of the merger with the little information we have. Has ICICI Bank taken the right decision to acquire BOR?

For the merger

1. Increased number of branches and presence in Rajasthan

BOR has currently 463 branches, which will take the tally of ICICI Bank’s branches to nearly 2470 after merger. More than that, it will give the acquirer much needed sizeable presence in northwestern desert state of Rajasthan.

2. Encountering competition

ICICI Bank is facing stiff competition from HDFC Bank and also the resurging Axis Bank. To remain as the top private player, it needs to grow bigger and what better way to grow than the path of acquisition.


Against the merger

1. Expensive Deal

ICICI Bank has valued BOR at a whopping 3000 crores which is much more than its market capitalization. It values the acquired bank at 2.9 times the book value in comparison to 1.89 times, which is the Indian Banking average. At a time, where the picture of global financial world again seems to be shallow with Greece crisis, this expensive deal may decrease EPS of ICICI Bank.

The market gave its judgment on the day of announcement when the shares of ICICI bank were down by over 7% and BoR’s shares hit an upper circuit of 20%. The shareholders of BOR are to reap benefits as their per share value has been valued at Rs. 188.42 as compared to Rs. 80 on the end of17th May, the day previous to the day of announcement.

2. Cultural Differences

BOR, though being a private bank, has been managed like a public sector bank, where the jobs were safe and the productivity per employee was low.

ICICI Bank may probably pay them higher but again the expectations to perform will go up. Even, the average age of employees in BOR is around 40 as compared to young age group of ICICI Bank. BoR had a profit per employee of Rs Rs 2.89 lakh for the financial year up to March 31, 2009, compared to Rs 11 lakh for ICICI Bank.

The staff union at BOR is opposing the merger and has even threatened to take legal action against the promoters, if the merger goes ahead.

3. Ownership not transparent

Tayal Family had been the promoters of Bank of Rajasthan holding 28.6 percent stake in the bank. But according to a SEBI order, they, in coalition with related parties, set to hold 55% shares in the company. Tayal family has been barred by SEBI ti access capital markets and deal in securities.

The SEBI investigation is in progress and thus the possibility of a scam in the said bank cannot be ignored.

4. RBI guidelines violation

A penalty of Rs. 25 lakhs was imposed on them for violating RBI norms of illegal acquisition of immovable property, non compliance with Know Your Customer guidelines, deletion of certain records and data in Bank’s IT system.

Thus, in a nut shell, it can be said that all is not well with the bank and it was highly mismanaged. After the merger, ICICI Bank may have to bear the brunt of many such things.

5. Low operating income

Bank of Rajasthan’s profit has increased over the years. But still, it has a low EPS and net profit margin. The profit till nine months ended in a negative of Rs. 44 crores for nine months ended December 2009 against a profit of Rs. 117 crores in the year ended March 2009.


Thus, the above indicates the pros and cons of this merger but apparently it seems that the arguments against the merger are higher. We have seen certain expensive deals in the recent past which has affected the acquirer in a pretty big way. Will this merger also go down as one of the worst deals or will ICICI bank prove analysts and critiques wrong needs to be seen?

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Know the risks before taking the equity call

Equity investment is associated with various kinds of risks.To be successful,an investor must identify these risks and understand their implications,says Nikhil Walavalkar

TWO planes colliding into two towers half-way across the world brought down financial markets all across the world.A fortnight-long dry spell is enough for share prices of some companies to tank.Markets are meant to react to external events.Some traders make a killing by betting on such events,but a majority of retail investors emerge losers.

Equities,by their very nature,are susceptible to all kinds of risks.The reaction of the domestic market to the financial crisis in Greece is the most recent instance of how globalisation has increased linkages between Indian and overseas markets even if there is no direct connection between the economies.

Broadly,investors have to contend with two sets of risks one pertaining to the markets or systemic risk,and the other specific to the company.Here is a look at how the risks impact returns and how to handle them.

MARKET RISKS

You cannot ignore market risks while building a portfolio.There are instances,where all the company specific factors are in place but the price is not right,making it a risky bet, says Chetan Parikh,director of Jeetay Investments.During a market rally,a boom phase creates a situation where an investor buys shares at a price far higher than what the company is worth.In a downturn it is the other way round where irrespective of a companys performance the price declines.Price volatility arising out of broad market movements is attributable to systematic risk.There is no one solution to this risk and diversification does not help.If you can keep your calm and pick stocks at lower levels then you are likely to face limited loss when the markets fall,as there is enough margin of safety.Some investors prefer to buy put options if they are worried about market health and have a huge portfolio.

MANAGEMENT RISK

Lending money to a dishonest person brings with it the risk that he may default.The same holds true for dishonest managements.There are instances where companies keep coming out with announcements of new projects followed by pump and dump operations.Despite the regulatory crackdown,investors lose their money as they are forced to exit at near-zero value.It makes sense to ask about those you are getting into business with.Track record of the management is a must check point.It makes sense to let go an opportunity from an unknown entity and instead invest in well-managed company with a good investor-friendly track record.

BUSINESS ENVIRONMENT

This comprises economic environment and regulatory framework.Corporate earnings grow along with the growth in the real economy.It makes sense to keep a track of the growth in real economy.But if the regulators decide to change the rules of the game,such changes could impact the fortunes of companies.Especially in highly-regulated businesses it is imperative that you keep a track of regulatory changes,as it may have its repercussions on margins and volumes.

RISKS RELATED TO BUSINESS MODELS

Not all companies in a sector work in the same manner.They may have focus on certain markets,certain geographies and certain customers.A pharmaceutical company engaged in contract manufacturing will have different risk-reward than that of a researchdriven company.

To gauge the possible impact of any variable on a companys earnings,investors must have a good understanding of the business model of a company.This can be acquired by visiting company website and reading annual report of the company.If you are bullish about a sector,it makes sense to diversify your holding across business models within that sector to ensure that there is less risk involved in a concentrated portfolio.

GEARING RISKS

In a rising interest scenario,a company with high level of debt faces increased risks.As the interest rates rise,the interest burden also increases,taking its toll on the bottomline and adversely impacts shareholder returns.The worst scenario happens if the existing debt of the company matures in times of credit crunch,leading to terrible situation for the company.

It makes sense to go for companies with net positive cashflows.One can also look at zero debt or nominal debt companies, says Kunj Bansal,CIO,Sanlam SMC Investment Management India.If you are keen to go for a debt ridden company,ensure that the valuations are really low to ensure that you have some margin to fall back.

GEO-POLITICAL RISKS

Though the companies you invest are listed on Indian stock exchanges,they need not earn all their revenue in India.There are many companies that earn their revenue overseas.It is better to understand the geo-political framework of the countries.Especially in countries where democratic governments do not exist the risk is high.Recent issue of volcanic ash in European skies grounded airline shares.This underlined the risk associated with such low probabilityhigh impact black swan events.Diversification is the only way out here.It makes sense to have some meaning full diversification by investing in markets sharing low correlation with each other.

FOREIGN EXCHANGE RISKS

Companies earning their revenue or paying for their raw materials in foreign currency run the risk of fluctuations in foreign exchange.At a time when the global markets are turning more integrated,it is imperative to have a close look at the foreign exchange movements.A weak local currency is helpful for an exporting company,but makes the life miserable for a company that imports its raw material but cannot Risks associated with equity markets.The only solution to this problem is to identify earnings sensitivity at various level of cross currency rates and accordingly take positions,other things remaining the same.

The reward of investing in stocks depends on how well you steer clear of risks or manage the risks that you really cannot avoid.If you find it difficult,you will be better off allowing entities such as mutual funds to manage your money.

Source: Economic Times, New Delhi, 13th May 2010

Europe in a mess

ET in the classroom

Pushing China into revaluing its currency risks toppling the global recovery from its stabilising axis. Instead, Washington should face the crisis it

These were among the risks associated with the US’ insufficient stimulus, which was designed to placate members of Congress as much as it was to revive the economy. With soaring deficits, a second stimulus appears unlikely, and, with monetary policy at its limits and inflation hawks being barely kept at bay, there is little hope of help from that department, either. So, protectionism is taking pride of place.

The US Treasury has been charged by Congress to assess whether China is a ‘currency manipulator’. Although President Barack Obama has now delayed for some months when Treasury secretary Timothy Geithner must issue his report, the very concept of currency manipulation is flawed: all governments take actions that directly or indirectly affect the exchange rate. Reckless budget deficits can lead to a weak currency; so can low interest rates. Until the recent crisis in Greece, the US benefited from a weak dollar-euro exchange rate. Should Europeans have accused the US of ‘manipulating’ the exchange rate to expand exports at its expense?

Although US politicians focus on the bilateral trade deficit with China — which is persistently large — what matters is the multilateral balance. When demands for China to adjust its exchange rate began during George W Bush’s administration, its multilateral trade surplus was small. More recently, however, China has been running a large multilateral surplus as well.

Saudi Arabia also has a bilateral and multilateral surplus: Americans want its oil, and Saudis want fewer US products. Even in absolute value, Saudi Arabia’s multilateral merchandise surplus of $212 billion in 2008 dwarfs China’s $175 billion surplus; as a percentage of GDP, Saudi Arabia’s current-account surplus, at 11.5% of GDP, is more than twice that of China. Saudi Arabia’s surplus would be far higher were it not for US armaments exports.

In a global economy with deficient aggregate demand, current-account surpluses are a problem. But China’s current-account surplus is actually less than the combined figure for Japan and Germany; as a percentage of GDP, it is 5%, compared to Germany’s 5.2%.

Many factors other than exchange rates affect a country’s trade balance. A key determinant is national savings. US’ multilateral trade deficit will not be significantly narrowed until America saves significantly more; while the Great Recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits.

ADJUSTMENT in the exchange rate is likely to shift to where the US buys its textiles and apparel: from Bangladesh or Sri Lanka, rather than China. Meanwhile, a rise in the exchange rate is likely to contribute to inequality in China, as its poor farmers face increasing competition from the US’ highly subsidised farms. This is the real trade distortion in the global economy, one in which millions of poor people in developing countries are hurt as the US helps some of the world’s richest farmers.

During the 1997-98 Asian financial crisis, the renminbi’s stability played an important role in stabilising the region. So, too, the renminbi’s stability has helped the region maintain strong growth, from which the world benefits.

Some argue that China needs to adjust its exchange rate to prevent inflation or bubbles. Inflation remains contained but, more to the point, China’s government has an arsenal of other weapons — from taxes on capital inflows and capital-gains taxes to a variety of monetary instruments — at its disposal.

But exchange rates do affect the pattern of growth, and it is in China’s interest to restructure and move away from high dependence on export-led growth. China recognises that its currency needs to appreciate over the long run, and politicising the speed at which it does so has been counterproductive. (Since it began revaluing its exchange rate in July 2005, the adjustment has been half or more of what most experts think is required.) Moreover, starting a bilateral confrontation is unwise.

Since China’s multilateral surplus is the economic issue and many countries are concerned about it, the US should seek a multilateral, rules-based solution. Imposing unilateral duties after unilaterally labelling China a currency manipulator would undermine the multilateral system, with little payoff. China might respond by imposing duties on those American products effectively directly or indirectly subsidised by the US’ massive bailouts of its banks and car companies.

No one wins from a trade war. So, the US should be wary of igniting one in the midst of an uncertain global recovery — as popular as it might be with politicians whose constituents are justly concerned about high unemployment, and as easy as it is to look for blame elsewhere. Unfortunately, this global crisis was made in the US, and the country must look inward, not only to revive its economy, but also to prevent a recurrence.

(The author,

Joseph E Stiglitz,

is University Professor at Columbia University and recipient of the

2001 Nobel Prize in Economics)

Pehel an Initiative

This page is a platform where socially concerned people can find stories, articles, thought-provoking videos, shortfilms, facts, etc about the various issues faced by our society. We request people to upload any socially relevant videos, photos, articles or links on this page that might be useful in creating awarness about issues that need people's attention & support. We would also provide information about a few NGOs working in these fields for users to know and get connected to

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A Marketable Budget!

2^nd March 2010- The Kolkata wing of ‘Cash-O-Nova’, the Finance club at IIFT, organized a panel discussion on Union Budget 2010-11. The distinguished panel comprised of Dr. Ajitava RayChaudhari, former Head of Economics Department at Jadhavpur University, Mr. Gopal Aggarwal, Indirect Tax Consultant, PricewaterhouseCoopers and Mr. Chetan Panchamia, Head, Equity Research Division, Eastern Financial Ltd. The discussion was moderated by Dr. Ranajay Bhattacharya, an Economics graduate and Fulbright scholar and also a popular professor at IIFT.

Dr. Bhattacharya stated that like every year the current budget too reflected the tussle between economics and politics. He set the tone by stating that this budget was “less popular” than the previous one. However this view was opposed by Dr. RayChaudhary who stated the dual problem of growth and inflation that India faces and said that only innovative budgets would be the way out. He explained how strong social programmes and the rise of the Indian middle class had helped fuel demand but due to poor monsoons we had short supply. This was causing the inflation and he thought only long term measure such as projects under Bharat Nirman like building roads and in general agriculture infrastructure would be the way out. He stressed that budget being basically a one year plan could not cure the problem of inflation; rather what it could do is set the road map for the future. He also emphasized the need to remove the subsidies unless it was absolutely ensured that it benefitted the intended persons. He welcomed the idea of Unique Identification number (UID) programme as a solution to this problem. He did criticize the hike in indirect taxes as this would hit the poorer people more than the middle class and rich.

Mr. Aggarwal voiced a similar opinion on the increase in indirect tax. He reiterated that while the change in slabs made the budget a good one for the middle and high income families, the poor were not incentivized enough. However, he lauded the fact that the honourable finance minister had set a specific date (April 2011) for the Goods and Services Tax (GST). He saw this as a step which will remove the cascading effect of the various excise tax, customs tax etc. He also spotted a trend of a fall in the excise tax and increase in service tax. He said that this was an indicator that India was slowly but steadily moving towards service taxes. He rated the budget a modest 7 on a scale of 10.

Stock market’s reaction is an important indicator of the marketability of a budget and according to Mr. Panchamia the budget was a very marketable one. It not only addressed the question of fiscal consolidation but also stated that the aim was to get the fiscal deficit down to 5.5% of GDP. This was in fact what the market was looking forward to hear as this would mean a better rating from credit agencies, thereby ensuring more inflow of FII. However he did mention that the oil subsidy had caused the debt market to give thumbs down to the budget. He was of the view that markets would be bullish as long as we avoided global pitfalls.

We also witnessed a very good discussion at the end of the session with the floor been thrown open to the students. Prof. RayChaudhari pacified the concerns raised by the students regarding overheating of economy by emphasizing on the importance of technological development. He favoured more focus on developing infrastructure over doling out subsidies. Mr. Chetan was optimistic regarding the disinvestment of the PSUs and Mr. Aggarwal felt that there was a high probability of IT tax cuts being extended by the turn of the year. The session was closed on a positive note with the speakers reasserting that there were definite benefits from this budget such as the bringing of the GST. The final assessment termed it a budget on expected lines and definitely not a path breaking one.

By: Sayani Ghosh

MBA(IB)

2009-11, IIFT

Piggybacking on Comics

written by Janani Kandaswamy

Imagine Asterix deriving his strength from Maggi soup in-stead of druid‘s potion, or Calvin playing with a Lego toy instead of Hobbes. Sounds preposterous? Maybe not. With a lot of fore thinking and planning, marketers are targeting a huge segment of customers by capitalizing on the unique place that comics hold among various age groups.

Using comic characters to reach across to children allows the advertisements to become a part of their world. Bubba the cat, for instance is the mascot for Cadbury India‘s bubblegum brand Bubbaloo. Chandamama also figures in Parle‘s strategy of promoting the multi-coloured confectionery Poppins.

What is so attractive about comics as a marketing media for children?

Comics are an integral part of childhood. The intensity of children‘s engagement with comics is very high.

Comics brands such as Tinkle, Amar Chitra Katha and Double Digest are contemplating the idea of tying up with automobile and consumer durable brands. ACK Media, the owner of these comics has already churned out comics featuring LIC India, Kirloskar Brothers Ltd and the National Stock Exchange. An-other brand called Virgin comics is keen to extend its services to a lifestyle brand and a consumer products company. In the coming years there is bound to be more marketing oriented companies following the comics route of attracting young consumers.

On the other end, adults are also being targeted by advertisers. The best example would be Google who marketed their internet browser chrome through an online comic book created by Scott McCloud. The book explained the inner workings of chrome and was de-signed as a printed comic for journalists and bloggers. With good presentation, thought, useful information and easy language it created the awareness which led to a firm entrenchment of Chrome in the minds of its potential users.

With the arrival of comics as a reliable means to garner attention for a product, the marketers have to refine the groundwork they do before zeroing in on a particular medium (web/print etc). There is no single comic for everyone. So creators need to initially identify the type of people who are likely to enjoy it. Once the general audience is identified, they have to deter-mine the influencers in that group and what social media they tend to gather around.

Keeping in mind the success of comics as a marketing medium, we might just get to see our favourite comic characters assuming the roles of brand ambassadors. Now wouldn‘t that be refreshing!!!