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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 RBI’s 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 Livermore’s exploits reveal the genius behind the man who made fortunes on the bourses – Page 40 Important Jargon For The Fortnight – Page 45

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: Tel No: 022 - 3926 8047

Beyond Market 22nd May ’13

It’s simplified...

#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 RBI’s 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 RBI’s 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 investor’s 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

It’s simplified...

professional or otherwise.30 (As on 17th May’13) Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. This is propelling other markets up.280 and 6.65) and Sun Pharma Advanced Research Company Ltd (LTP: `153. shows that inflation is softening. 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. The Indian stock markets look good in the coming fortnight. The Nifty index has support at the 6. 5 . thereafter.. In the coming fortnight.70).The Indian stock markets look good in the coming fortnight. T The US markets have been rising steadily in the past few weeks due to good economic data.25% and kept the cash reserve ratio (CRR) for banks unchanged at 4%. Earnings results of US companies have also been good. indicating the likelihood of further rate cuts by the RBI in the upcoming policy review. Further. in line with the expectations. the April wholesale price index (WPI) inflation at 4. high current account deficit in India due to excessive gold imports has been a worrisome issue for the country. 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 7.89%.96% in March. JM Financial Ltd (LTP: `26. Indiabulls Real Estate Ltd (LTP: `85. market participants must look for any correction in the international markets as it could have a bearing on the markets in IndiA.. Our research should not be considered as an advertisement or advice. suitability to risk return profile and the like and take professional advice before investing. Investors are required to take an independent decision before investing.187. The investor is requested to take into consideration all the risk factors including their financial condition. The Japanese government too has continued with its easing policy. Beyond Market 22nd May ’13 It’s simplified.390 levels. India Inc’s March quarter earnings results have been rather weak. Also. These stocks can be bought at current levels and can be averaged out at lower levels. lower than 5. Also. Investment in equity is subject to market risk.10 Nifty: 6.45). which has supported the equity markets there. the European markets have been doing relatively well with major markets like Germany.45).35).100 level with upper side targets at 6. Sensex: 20.286. LIC Housing Finance Ltd (LTP: `275. as expected by the streets. France and the UK on nearly a four-year high. Stocks that can be considered from trading and investment perspectives are DLF Ltd (LTP: `249.


77% in the pre-policy trading.. during 2013-14. the lowest in 15 quarters. inflation and liquidity in the system are the three key considerations while taking a monetary stance. On all three identical 25 basis points (bps). Optimists had built-in expectations on the back of lower wholesale price inflation and the recent fall in gold and crude oil prices.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. The RBI has acknowledged this in its annual policy and has considered the fall in GDP growth in framing its policy stance. It needs to be supplemented by efforts towards easing supply bottlenecks. the outlook for global commodity prices and the forecast of normal monsoon. Beyond Market 22nd May ’13 To reiterate. growth. 7 T GDP Growth WPI By March’14 Money Supply Growth Deposit Growth Non-food Credit Growth 5.98. on 3rd May. while continuing its commitment to fiscal consolidation by the government.5%. GUIDANCE Among other things. Inflation The RBI expects WPI inflation to be range-bound around 5. Going by this trend. The RBI reiterated that monetary easing in itself cannot revive growth. the RBI expects a modest pick-up in economic activity only in the second half of the year. GDP growth in India for the October-December period last year has fallen to 4. improving governance and stepping up public investment. It’s simplified. Growth in agriculture will depend on normal monsoon.7% growth rate estimated by the government. the apex bank sounded cautious but nevertheless cut repo rate . the initial reaction to the policy was negative. Growth in services and exports may remain sluggish. Let us look at what RBI’s guidance for the same is and what it means for future actions. Further.1%-6. The 10-year benchmark bond yield spiked to 7. it also maintained that there is “little space for further monetary easing”. the central bank had said: “The headroom for further monetary easing remains ‘quite limited.2%. primarily because of the hawkish guidance by the RBI. 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. While the cut in the repo rate was on expected lines.5% during 2013-14. It has factored this in after studying the domestic demand-supply balance.the rate at which it lends to the banking system .25%.7% for the year 2013-14 as against the 6. the divergence between consumer price inflation. respectively. It has projected a more pessimistic (or realistic) growth rate of 5.8% as against 7. while CRR is the mandatory amount that a bank needs to keep aside for contingencies.70% 5% 13% 14% 15% Source: RBI . But the RBI does not think so. warranting a dovish tone. Is there a pattern in what the RBI does and what it says? In its mid-quarter monetary policy review of 19th March. RBI cut repo rate by 25 basis points to 7..8% with the banking index losing 2. 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. Indicator RBI’s guidance for FY14 Growth There are many who think that things are turning for the Indian economy. Repo rate is the rate at which banks borrow from the Reserve Bank against the pledge of government securities.06 level as against the pre-policy level of 53. Although wholesale price inflation (WPI) has been witnessing a fall in recent times. 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). which actually matters at the ground level is increasing and the RBI is cautious about it. given that global growth is unlikely to improve much from 2012. while keeping the cash reserve ratio (CRR) and statuary liquidity ratio (SLR) same at 4% and 23%. The Sensex extended losses to 0.’” This time around. when the apex bank reviewed its annual monetary policy. not only did it cut repo rate by 25 bps. The rupee also slipped to the 54.

A large current account deficit level year after year will put pressure on servicing of external liabilities.7% of GDP. which are volatile.. Thankfully. in which government polices play a major role.75% during FY13. The biggest risk to the economy stems from high current account deficit (CAD). Further. CPI. It is hoped that as the government starts spending. But lending rates have come off only by around 40 basis points. The other risk factor is that sustained revival of growth is not possible without a total revival in investment. 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 It’s simplified.39% in March).50 4.39% in April as against 10. in recent times both gold and oil prices have come down. which actually matters to individuals. growth could weaken even further and inflationary strains are likely to re-emerge. still hovers around double digit (latest 9.. This current account deficit has always been plugged by generous foreign money: foreign direct investment (FDI) and foreign institutional investors (FIIs). In the last quarter of FY13. the Reserve Bank of India has reduced repo rate by 1% and the cash reserve ratio (CRR) by 0. the collapse in private sector investment and the continuing risk of a wage-price spiral. the wholesale price inflation dropped to 6% in March. CAD peaked at about 6.75 4. This should help CAD come down too. Lastly. Beyond Market 22nd May ’13 .75 4. especially in rural India.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. 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. 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.00 4.25 2013 4. without policy efforts to unlock tight supply constraints and bring improvements in productivity and competitiveness. deposit growth at 14% and non-food credit growth at 15% for the fiscal. the RBI has assured infusion of liquidity through open market operations as needed to keep liquidity deficit within the RBI’s comfort level of plus/minus 1% of net demand and time liabilities. WILL INTEREST RATES COME DOWN? Cumulatively.25 2012 4. the liquidity in the system will improve. RISKS TO RBI’S GUIDANCE The RBI’s guidance is subject to risks. the lending rates of banks are not going to come down soon. According to the central bank.00 4. which in turn keeps interest rates at elevated levels. Risks that the Indian economy continues to face can be summed up as: twin deficits of current account and fiscal.Key Rates (In %) REPO RATE REVERSE REPO RATE 2012 2013 2012 2013 CASH RESERVE RATIO 4. the lowest in three years. at a very high level. foreign inflows may also stop abruptly. but the position remains vulnerable. money supply growth is projected at 13%. However.75 4. 8 Further. putting the country in a dire situation. But if the world turns more bearish. Even with the 25 bps cut in repo on 3rd May. there is also a risk to inflation due to supply constrains in the economy. Liquidity Liquidity in the system has remained tight. the gap with CPI is on the rise.

Also. experts expect the RBI to cut rates on 17th June. which translates into negative or low real rates. As the cash reserve ratio (CRR) does not earn any interest rates. While the recent fall in gold and oil prices can reverse. if banks manage well their other costs like cost of transactions. Lastly. It will also discourage stocking of gold. growth continues to languish and the RBI has taken a pro-growth stance. which will help contain current account deficit.. the RBI is likely to give higher weightage to WPI. non-banking financial companies should not give loans against gold coins weighing more than 50 gm per customer. This is on hopes of lower WPI. Customers are also lured towards assets like gold and real estate due to higher inflation rate. Measure: Foreign Institutional Investors have been allowed to hedge their currency risks by using exchange-traded currency futures in the domestic exchanges. it will take months for any meaningful interest rate cut by banks. Beyond Market 22nd May ’13 It’s simplified. it is estimated the prices may stay muted in the near future. RATE CUT IN THE OFFING? Despite a hawkish tone. which has an immediate implication. This will also improve liquidity to the local currency exchange. some bankers think a cut in the CRR.. Impact: Banks will have to set aside more money if they have such an exposure.earned minus interest expended). 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. Impact: With this measure. overheads and wage bills. the impact of which has a lag effect. Rate cut or no rate cut. Impact: This move will lower gold imports. keeping the current account deficit contained. Impact: Now. Even with higher CPI numbers. 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. 9 . This will bring transparency in the way rates are set. This move would ease operational complexities for FIIs. So. to meet the genuine need of export of gold jewellery. beginning with the June ’13 quarter. it would help boost trading volumes in these instruments. 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: It is a move towards further liberalization. banks would invest more in non-SLR securities such as corporate bonds. 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. the RBI is likely to keep a loose monetary stance by either tweaking it with other rates like CRR or SLR. For now. Draft guidelines will be issued by end-July ’13. could have been a better option than a cut in the repo rate. certificates of deposit and equities. Banks in turn will ask for higher interest rates from such companies that do not completely hedge their foreign currency exposure. The detailed guidelines will be finalized before the end of this month. banks cannot continue quoting different interest rates for the same product to different customers. This is primarily because the Reserve Bank of India has to accommodate higher government borrowing (`4. In addition to this. commercial papers. fair and transparent pricing policy of loans. Stock markets do not like falling NIMs for banks. All these indicators warrant further rate cuts in RBI’s monetary policy review slated to be announced in the second week of JunE. This will also force more and more companies to hedge their foreign exchange exposure completely.8 trillion net) in FY14. The RBI will also infuse liquidity through OMOs. Measure: Banks can only import gold on a consignment basis. More than half of the WPI basket consists of global commodities and the recent decline in commodity prices bodes well for WPI inflation. The move will curb higher loans against the yellow metal and help any systemic issue due to the fall in gold prices. especially retail loans.

To plead with the RBI to allow them to access other sources of funding such as ECB with a little ease. 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.. . this move will surely make it difficult for NBFCs in the coming days 10 Beyond Market 22nd May ’13 It’s simplified. the NBFCs will soon meet the governor of the Reserve Bank. the central bank said that it would take a re-look and issue the final guidelines with regards to credit enhancement for securitisation of I standard assets by June ’13. 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 RBI’s guidelines on securitisation of standard assets have been issued to prevent unhealthy practices.f the tight liquidity situation was not enough for banks and Non Banking Financial Companies (NBFCs). the Reserve Bank of India’s (RBI’s) modification of the securitisation process delivers another blow to the financial sector.. While announcing its annual credit policy.

however. 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. a large amount of money sitting in SPVs is being forced to make tough decisions. 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. 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. Also. the RBI thinks that since a securitized asset can now also be listed. But the RBI’s view may be lopsided as the truth about securitisation is farfetched from this utopian situation. 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. not be as easy as it sounds as these investments fall under the hold to maturity category.000 crore from `45. As a result. which as of now seems unlikely. 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. The volumes in the securitisation market have in fact dropped to `40. it will ensure greater investor participation. 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.carried out. 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. this was RBI’s 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. 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. Firstly. But the larger issue is definitely that of NBFCs who have thus far depended on the securitisation route to meet their funding needs. it is obvious that the capital adequacy of such NBFCs would be impacted as they are the originators of such asset pools. therefore. If this were to become difficult in the long run. RBI’s 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. It’s simplified. but the RBI last year introduced new norms for participants in the securitisation market. For an exit route banks may also consider selling their investments to mutual funds as they do not have the distribution tax. The quality of underlying assets is therefore a major concern for them. namely banks and NBFCs could no longer issue credit enhancements.. the banks too will have to pay more for such asset securitisation deals. Direct sales of their pools of loans has. This may. In fact. which it has etched out. 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.000 crore a year ago. Furthermore. This means that not only is the direct sale of pools of loans rendered unattractive. it would be no exaggeration to state that the growth of NBFCS in India has largely been through the securitisation route. They either have to fall in line or find some loopholes in the norm. The first route was far more attractive to NBFCs (though a tad costlier). 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. 11 .. 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 bank’s base rate and the yield that was being charged to the customer.


According to the market regulator. Trading in these illiquid scrips will be conducted only through periodic call auction sessions of one hour each throughout the trading session from 9. the cost of buying or exiting also increases due to lower volumes.224 stocks listed on the Bombay Stock Exchange (BSE). All the unmatched orders remaining at the end of a call auction session will stand cancelled. On the National Stock Exchange (NSE). While others see operational difficulties due to the new rules as a major hindrance in dealing with such thinly traded scrips. A few also belong to multinational companies with high promoter holding. over 2. all illiquid scrips will be moved to the call auction window. PERIODIC CALL AUCTION In normal market. Illiquid scrips often tend to be volatile and prices may sway sharply with just one large order. As per new rules. While the verdict is still not out on the new rule. A maximum price band of 20% shall be applicable on the scrips through the day.000 to `1. The financial performance of these companies may not be bad. 13 . this ‘one size fits all’ criteria is also applicable to well-run companies. Illiquidity has been a menace and rampant manipulation has been noticed in such scrips. As per media reports there are 1. CRITERIA FOR ILLIQUIDITY The SEBI has clearly defined the criteria for illiquid stocks. 8 minutes for order matching and trade confirmation and remaining 7 minutes shall be a buffer period.000 crore worth of investor wealth is blocked in illiquid scrips. 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. Further.. It is a well-known fact that many small investors have burnt their fingers as their decisions were influenced by false information like prices. sometimes even good companies can be categorized as illiquid. which is not fair. This in turn creates more illiquidity as investors shun such scrips. curb manipulation and improve price discovery and liquidity of illiquid scrips. It’s simplified.00. out of which around 160 stocks are illiquid. The latter see liquidity falling further in such scrips. The new rule prescribes penalty on people generating false volumes by simultaneously being a buyer and a seller at the same price. The market regulator proposed a ‘periodic call auction’ for illiquid scrips. volumes and spreads of such illiquid scrips.666 companies are listed. Of this one hour. 45 minutes shall be allowed for order entry.) Stock exchanges have to identify such illiquid scrips at the beginning of every quarter. The SEBI intends to cut volatility. let us see what the new rule is all about and discuss a few of its advantages and disadvantages. This has been a concern as entry or exit in such scrips becomes difficult. ILLIQUID SCRIPS Illiquid scrip is one where not much of trading takes place. The market is divided over these criteria as they fear exclusion of certain illiquid scrips. Some view this fall in volumes as an indicator of speculators filtering out of the system. The spirit of rule is missing. (Please see the box to know why higher trading volume or liquidity is an important parameter in choosing a potential stock.32 crore folio holders in these ‘illiquid’ stocks as on 16th Apr ’13. buy and sell orders are placed on an ongoing basis during trading hours and trades get executed if they match.30 pm instead of continuous trading. Higher volumes only on few occasions of those three months can mislead investors as overall calculation would still consider them as liquid.050 scrips are categorized as ‘illiquid’.. For starters the new rules follow a circular by SEBI in February. Many companies are illiquid because of low public holding. which came into effect from 8th April. This will keep brokers alert who will be diligent too. There will be auction sessions of one hour each throughout the trading hours with the first session starting at 9:30 am. it is estimated that around `80. 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. an illiquid scrip is one in which the average daily trading volume in a quarter is less than 10. Further. 1. Beyond Market 22nd May ’13 T Further.000 shares and the average daily number of trades is less than 50. So.) Out of the 5. order modification and order cancellation. (Please see box to know what volume and number of trades are.he market is divided in its opinion over new trading rules for illiquid scrips.30 am to 3. few experts feel.

will be a better estimate of the true value. So. then many traders or investors are involved in that movement and it will be easier to find someone to buy from or sell to. If fundamentals of the stock are strong. it will garner investor attention sooner or lateR.. It is only the volume which will tell whether the story behind the stock movement is genuine or not. Price in call auction. Beyond Market 22nd May ’13 . should investors avoid investing in illiquid stocks? Not really. Volume is an important indicator in technical analysis. but also offers little incentive for brokers to push illiquid stock as cost for them increases. Traders provide this liquidity and ease of entry or exit. This is not only painful to 14 investors. if 100 shares of a company exchange hands 10 times in a given period. This brings us to a term called ‘liquidity’. the computation of illiquid stocks by SEBI is flawed.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. Moreover. even more important than the stock price. And even within a day. Further with penalty on circular-trades stock price manipulation will be controlled. Other implications of the new rule would be a drift of volumes from cash segment to the derivatives market. 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. Volume also tells us the sentiment behind the movement in the stock. revealed each hour. Also. This fear will make these stocks even more illiquid. an investor should combine the volume with the price of the stock before taking a buying or selling decision.000 will be the volume while 10 would be the number of trades. If a stock moves on high volumes. If the markets have made strong price movement . This is also true when the price of a stock is falling with lower volumes. It is perceived that if a stock has risen to a significant level with lower volumes. 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. Instead of the cumbersome call auction mechanism many experts think a market making methodology. Volume of a stock is the number of shares that are traded in the stock exchange within a given period of time. 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. DISADVANTAGES As discussed earlier. Small companies wanting to raise money will face difficulty with the tag of ‘illiquid’. Investors should compare the volume of a stock on a particular day with the average trading volume for that particular stock. 1. ADVANTAGES Experts believe that problems of market abuse are smaller for illiquid stocks under the call auction.either up or down. the perceived strength of that move depends on the volume for that period. Positives for investors will be in the form of better price discovery and less overall transaction cost. 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. which is widely used in India and abroad could be used to enhance liquidity in illiquid scrips.. Therefore. It’s simplified. It makes sense to see the average volume over a period rather than single any day out. This information can be made available by the broker or from the exchanges’ website. it will be cumbersome to give new orders and track trades after every call auction as hourly roll-over is not allowed. it makes sense to see what period in the day the volume is concentrated. It is perceived that not many people are convinced about the downfall of that stock and are not selling. So. If SEBI’s objective is to curb price manipulation.

In March. There is a massive shortfall in funding in areas such as debt financing. 15 .. this year. But the infrastructure sector in India is fast Beyond Market 22nd May ’13 T drastic move becoming a roller-coaster ride with more downturns than progress. It is a way of showcasing the economic development of a country to woo foreign investors.. Scams such as the 2G spectrum allocation and coal allocation scams have turned away both domestic as well as foreign investors. Finance Minister P Chidambaram It’s simplified.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. at the annual spring meeting of the International Monetary Fund and the World Bank. which has increased the deficit in infrastructure financing in recent times.

be it at an early or later stage. However. 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. both forms of IDFs have to sign a tripartite agreement between the lender. Infrastructure funds are different from other funds as they have a long gestation period and require large investments. investment in the infrastructure sector was never the first choice for a majority of investors. In order to raise funds for public private partnership projects (PPP). the Placement Memorandum must be put on the website of Asset Management Companies and website of the recognized stock exchange.. the Budget turned out to be a populist one. concessionaire and the IDF.told the World Bank that India faces a $1 trillion infrastructure finance deficit over the next five years. If the fund is in the form of a trust. Before the announcement of IDFs. 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. wherein it would invest only in PPP projects. where it is proposed to be listed. IDF-MF would issue rupee-denominated units of five years’ maturity. according to which the Infrastructure Debt Funds can be set up either as a trust or a company. Infrastructure funds have other problems as well such as delay in obtaining government clearances. Investors. wherein the concessionaire would be a party which has entered into an agreement with the project authority to develop an infrastructure project. governmental agencies. red tapism and delays in completion of projects. 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. In recent norms. Also. which will further reduce the risk for foreign investors. These investments can be made in infrastructure projects at any time. Seeing the need for investment in infrastructure. Industries and corporates were expecting bold steps from Chidambaram when he presented his Union Budget 2013. the Indian government is largely dependent on domestic insurance and pension funds also as they have a long-term horizon. as a result. Beyond Market 22nd May ’13 . under which the credit risk would be borne by investors and not the IDF. the Securities and Exchange Board of India (SEBI). insurance funds as well as pension funds. These two forms of infrastructure funds have different regulatory bodies. international organizations. which have completed one year of commercial operations and have a buyout guarantee. However. 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. 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%. After allotment of units. IDFs will refinance up to 85% of the total debt covered by the concession agreement. International Finance Corporation or banks and would be regulated by India’s central bank. including Non Banking Financial Companies (NBFCs). SEBI has also expanded the investors in IDF to registered Foreign Institutional Investors (FIIs) including foreign central banks. According to the guidelines. Apart from foreign insurance funds and pension funds. In contrast to the above. 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. the Reserve Bank of India and will be called Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC). the investors can invest in a range of infrastructure assets in order to reduce their risks. The minimum capital requirement for NBFCs is as much as `150 crore. sovereign wealth funds. This delays the repayment cycle. it would be a mutual fund known as IDF-MF and will subsequently be regulated by stock market regulator. it would be formed by one or more sponsors. as long-term investors.. IDF-NBFC would have a very focused outlook. there was some respite in terms of promotion of Infrastructure Debt Funds (IDFs) and tax-free bonds. were not keen to invest in these infrastructure funds. Unfortunately for them. If the fund is in the form of a 16 company. the IDFs can extend the tenure of their schemes by up to two years in case there is a consensus of two-third investors. This statement came a month after he presented the yearly budget. NBFCs can issue bonds in both rupee or dollar denominated units. 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 It’s simplified.

IDF will complement domestic banks in providing required funding to the infrastructure sector. Arvind Mayaram. This problem has been solved by India Ratings.39268010 Beyond Market 22nd May ’13 It’s simplified. The PMS Service is not o ering for commodity segment. Lower Parel (W). The initial three MF schemes of IL&FS IDF which aggregates to `15 billion have been assigned a rating of IND AAAidf-mf. However. Tel: 022 .com Disclaimer: Insurance is a subject matter of solicitation. Arvind Mayaram said. where we focus on the smallest of details and turn them into an advantage for you. SMS ‘BANG’ to 54646 | Contact at: 022-3926 9404 | e-mail: contact@nirmalbang. however. REGD. Trading at Nirmal Bang is based on extensive research and in-depth analysis. the country needs about $1 trillion for infrastructure sector funding in the next five years that is 2012-13 to 2016-17. However. Ltd. is that the target of $1 trillion cannot be achieved through domestic funds alone. because of lack of clarity on the projects. signed a Memorandum of Understanding with eight public sector banks.. Mumbai .nirmalbang. 50% would be funded by the government and the remaining 50% by private sector entities as well as financial institutions. Fitch. despite credit ratings. Department of Economic Affairs.39267500 / 7501. progress has been slow with little development seen on the ground. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. 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. Tel: 022 . Mega gains. the analytical approach coupled with decades of experience has helped us maximize returns for our investors and thereby inspire con dence in them. *Through Nirmal Bang Securities Pvt. Over the years. OFFICE: Sonawala Building. Foreign investment is urgently needed but as of now. which will denote high levels of fundamental credit risk. 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). Mumbai . Fort. experts believe that the first few months of IDF. Marathon Innova. 17 . will be dominated by domestic investors. 25 Bank Street. Ltd. Experts believe that EPFOs will certainly invest in IDFs as these are relatively safe. The truth. since the announcement of IDFs by the then FM Pranab Mukherjee.39268000 / 8001. which will assign credit ratings to these funds. Only time will tell if IDFs will successfully bridge the infrastructure funding deficit or noT. foreign investors have received IDFs with lukewarm response. O Ganpatrao Kadam Marg. Micro analysis. Please read the scheme related document carefully before investing. “This is very important because this will give confidence to investors especially from overseas Sovereign Wealth Fund and pension funds and others.Fund Organization (EPFO). EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* www.39267510 CORPORATE OFFICE: B-2. Mutual Fund investments are subject to market risk.” These ratings will be defined as IND AAAidf-mf denoting highest fundamental credit quality to IND Cidf-mf.400 013. Fax: 022 . Fax: 022 . He said that out of that.400 001. Chairman of IL&FS Group.. According to Ravi Parthasarathy. In terms of developments. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. the Indian branch of global rating agency. after the event said. 301/302. Experts feel a separate rating system for IDFs will encourage foreign investment.

In spite of such strong sentiments. lost touch be TCS. beginning April). mainly driven by global liquidity. the CNX IT index has declined by 12%. the benchmark index tracked globally. Nifty 50. Once regarded as the global face of India’s growth story. crossed the psychological mark of 6. Only recently.Fallen Out Of Favour Once the the its he Indian stock market has been surging ahead without any break since the past few weeks. a key component of the Nifty.. the Nifty 50 benchmark index has gained little more than 7% during the same time period. The earnings results for the first quarter of CY13 (January-March) 18 regarded bellwether IT has to by as of industry.. In contrast. It’s simplified. Beyond Market 22nd May ’13 . the Indian IT sector is losing its charm among global and domestic investors. has not kept pace with broader market indices. CNX IT Index. Since the beginning of the second quarter of the calendar year (that is. This looks amply clear when one compares the performance of CNX IT index with the Nifty. Infosys and in Midas seems the T replaced already troubled sector show more pain points for the sector. 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.100 and reached the highest level in calendar year 2013.

Wipro. It’s simplified. many of them are not providing such numbers. This was another shocker for IT investors in this result season. the result is not outstanding but in line with investor expectations. 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. The analyst community dumped the result saying it was very disappointing. decline in profitability numbers. it appears that Indian IT companies are going through tough times. has also shown signs of concern. it certainly does not make sense to say ‘all is well’ in the IT sector. The recent news of visa is just another example of this. Another large Indian IT company. Though the margin contracted by 60 basis points. the margin of Indian IT companies is drying up. the stock price of Infosys declined by almost 20% on a quarter-to-date (QTD) basis. 19 . 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.. too disappointed the street. Beyond Market 22nd May ’13 The only solace for investors was the largest software exporter. Let us look at the result of some top IT companies who usually define the trend in the industry. The stock of TCS is down a little more than 4% on a quarter-to-date basis. Some of the key reasons sighted are weak revenue guidance for the year. The revival may be a couple of quarters away and the company’s relative performance may remain soft in the interim. beating street expectations and bringing good news to the industry. revival in discretionary spending is a key factor. It looks like the quarterly results didn’t go down well in the investor community and they have realized these underlying pain points in the sector. It would take a while before their business starts running as usual. Infosys suspended the practice of giving EPS guidance and outlook on margins. Clients from this segment are becoming increasingly demanding and. Tata Consultancy Services (TCS). Overall. hence. The growth from linear business is unlikely to add much to the existing revenue of these companies. However. which will not only facilitate growth catch up. higher variability in margin. which claimed that the company had laid off 500 people a few months back and also lowered its annual bonus amount.. like any other sector. It can’t compensate for the damage done by the previous two big companies. The underlying factors for this lacklustre performance were more or the less same. continued pricing pressure.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. this came as a shocker. the stock dived down 8% on the next trading day. Add to this. Non-linear revenue is the key and most companies are struggling to get it. For Infosys. citing higher variability in margins. the pipeline looks healthy across geographies and expects to grow higher than the industry. uncertainty in visa issues and limited visibility in business growth. After it declared its quarterly and yearly results. That is. decline in margin and tepid guidance contributed towards the poor show. decline in pricing. Unfortunately. All these things point to the fact that even Cognizant. Investors are smart enough to figure this out and have punished these stocks ruthlessly. However. According to the management. clearly pointing to more uncertainty in their business. For instance. The annual revenue number is towards the lower end of the guidance. Cognizant Technology Solutions (CTS).4%.1% quarter-on-quarter (q-o-q). fewer deals. but can also potentially drive significant margin recovery. is going through some turbulent phase. which has outperformed its peers quarter after quarter. whose results were in line with expectations. Infosys. The company also delayed its annual performance cycle. on a day when the Nifty actually moved up by close to 1%. Previously. investors might find some silver lining and take appropriate positions in some undervalued stocks. tanked 20% on the day it announced its results. the US government is bringing in policy measures that may be counterproductive to Indian IT companies. For investors of the blue-chip stock. among others. which is not listed in the Indian stock market but is closely tracked by analysts. But skeptics believe not everything is going well within the company. The stock price of Wipro has declined by almost 18% on a quarter-to-date basis. There was a news report. The company reported a 17% jump in its quarterly revenue for the quarter ended March ’13. Looking at the numbers and events regarding these four companies. once the darling of the stock market and a must-have stock in the portfolio of almost every fund manager. The US dollar revenue grew at 3. it was decent at 28.

.RAMPANT MISUSE The rise in cases of corporate debt restructuring only goes to show how this tool is being misused to hide bad debts 20 Beyond Market 22nd May ’13 It’s simplified...

it can be weak demand due to economic slowdown or high raw material prices.the company is unable to service its debt.83% for non-priority sector loans. the report mentions that the ratio of restructured accounts to gross advances is the highest for the industries sector at 8. due to unfavourable business conditions . Such preferential treatment needs to be avoided.45%. In the financial world.” Some experts believe that due to such a favourable tilt towards provision of restructuring to industrial sector. a lot of companies in capital-intensive sectors such as infrastructure. This shows the increasing trend of CDR in the last three fiscals. it stood at 5. It can be change in the interest rate or increase in the tenure of the loan. Banks such SBI. there has been a steep rise in the number and volume of debt obligations being restructured. there are certain grey areas which banks overlook and at the same time maintain their books spic-and-span..45% in March ’11 to 4. as there is a strong possibility of even an established corporate entity of defaulting. One of the possible reasons attributed to the increase in corporate debt restructuring in recent times is the economic slowdown in the country. 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. airlines. a company would opt for CDR when it is unable to meet the original terms and conditions of its debt obligations. an investor who is invested with a company should realize that when a company goes in for restructuring. which cause delays in project implementation and consequently .. It has a loan of around `100 crore and has borrowed this amount at an interest rate of 12% per annum. the company strikes a meeting with bankers and changes the terms and conditions of the loan. it means that it is not generating enough revenues to service its debt. while smaller borrower accounts such as agriculture and micro and small enterprises see less of restructuring. the stock price of Kingfisher Airlines plummeted and as a consequence. 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.68% in March ’12. hospitality and the likes are opting for corporate debt restructuring (CDR) to avert any kind of financial eventuality in their businesses.n the last few years. 21 . Another argument that provides credence to increasing cases of CDR in recent times is over-leveraging by companies when times were good.94%). corporate India has been struggling to do business. this should serve as a lesson for many lenders when it comes to providing debt even to a long-established corporation or entity. restructured standard advances grew by over 40%. The report says. banks have not been able to recover their investments. ICICI Bank. many experts believe that It’s simplified. Now. Take for instance. The ratio for agriculture stood at 1. 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. a company X. while total gross advances of the banking system grew at a compound annual growth rate (CAGR) of less than 20%. the case of lending to non-functioning Kingfisher Airlines. While the ratio stood at 2.24% (with medium and large industries sector being at 9. Now.34%). In the coming quarters. Apart from this.99% (with micro as well as small services being 0. sector experts and economists. Subsequently. In such a situation. Beyond Market 22nd May ’13 I TRENDS In recent times. This has brought corporate debt restructuring into focus of investors. the proportion of Restructured Standard Advances to Gross Total Advances increased from 3. PNB and others had subscribed to the cumulative preference shares of Kingfisher Airlines. banks are merely restructuring loans given to the beleaguered airlines company. GOING AHEAD Considering these developments. “The data clearly highlights the fact that restructuring is resorted to liberally in case of industrial sector (particularly large industries). Thanks to high interest rates and an economic slowdown in the country. Take for instance.24% for priority sector advances. With the operations of Kingfisher Airlines in doldrums. while that for services stood at 3. Therefore.

The report says “This structure will need to be built at various levels – at the state.” There is also the possibility of a company borrowing from another bank. “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. The RBI report says that the viability of the project should be established and only after that should any restructuring proposal be considered. The functionaries at various levels will need to be empowered to assess and approve viable restructuring proposals. the region and the bank level. Hence.. 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. “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. It also gives a feeling of mutual sharing of financial burden between banks and the borrower. This is considered to be a relatively good measure. It can be 90 days.restructuring should be done under certain specific conditions. one can plug the possibility of projects becoming unviable. “Without such delegation. 22 Beyond Market 22nd May ’13 It’s simplified. Because ‘time’ is a very crucial factor for turnaround of projects and to lessen the viability of the projecT. 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. 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. there is a need for structured mechanism for considering restructuring proposals for larger company accounts. the company’s projects are not leveraged. it would be extremely difficult for the benefits of restructuring to percolate to the smaller accounts. the greater the amount of cardboard boxes being made. By raising project standards. High leveraging increases risks associated with the completion of projects especially in uncertain business environments. The report also states. Another important factor that needs to be taken into account is the extent of leveraging. . it is crucial that at the time of restructuring. Experts are of the opinion that a specific timeframe is needed. It is estimated that nearly 75% to 80% of all non-durable goods are shipped in corrugated containers. 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. For this. greater will be the amount of cash being invested by companies to produce goods. 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. concerns need to be addressed related to the time frame for the completion of a project.. 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. “Even where the bank has to make some sacrifice by sanctioning the restructuring proposal.” In addition to this.” Lastly. Therefore. Experts believe that there have been instances where debt availed is masqueraded as equity and many other forms to avoid payments. which adds to debt servicing. One of the observations of the Reserve Bank of India report says that promoter’s equity component is being financed out of debt. it is critical that project appraisal standards are raised. there must be some provision for re-compensation when the borrower/borrowing unit comes out of trouble. the district. given the low percentage of restructuring of loans to small and medium enterprises and the agricultural sector. The RBI report suggests.


.. .24 Beyond Market 22nd May ’13 It’s simplified.

Indian have focus pharma now to companies shifted their pharmaceutical drugs worth `610.. European markets such as the UK. GENERIC SPREAD The generic penetration is very low in Spain as compared to the other European countries. Value-wise the market registered a CAGR growth of 4. about 200 member companies of EFPIA (European Federation of Pharmaceutical Industries and Associations) operate in Spain. which is a mere 1. India exported Beyond Market 22nd May ’13 S . augurs well for Indian pharma companies in the long run. AEMPS. The manufacturing sites in Spain have obtained approvals from the US Food and Drug Administration (US FDA). The share of generic drugs rose by 40. three belong to the European Union. GENERIC DRUGS In August ’11. The break-up of branded and generic medicines in Spain is 87. they are able to get easy access to the Spanish market. Its market size was US $22.. Dr Reddy’s. Of the four countries. Today. which has adversely impacted the revenue and profitability of the pharmaceutical industry in the country.5% y-o-y (volume-wise) during 2011 on the back of significant regulatory changes implemented in the last It’s simplified. Generally. that is. the Spanish government passed a bill promoting generics – a new system of prescribing medicines based on active pharmaceutical ingredients. only represented 10% of the total pharma market in value and 23% in volume. 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. reimbursement policies and consequently pricing also differ across markets. while the Directorate-General of Pharmacy deals with both price setting and public reimbursement once the products have been authorized by the agency. Germany and Netherlands are characterized by relatively high generic penetration (around 50%+). Italy and Spain have low generic usage at around 25%. This. However.6% by value and 72. The market is mainly dominated by branded medicines with a share of about 88%. Apart from generic penetration.9% of the GDP in 2011. The highly regulated markets like the US.3% y-o-y (value-wise) and 36.4%:12. Due to strict manufacturing guidelines in their own countries. In Spain. the generic medicines market during the 12 months ending (July ’10 – June ’11). These subsidiaries registered sales of about `143. Germany. France and the United Kingdom have emerged as the leading suppliers of medicines to Spain. thereby making it easier for generics to be used in the country.3% of the GDP.3% of India’s total drugs and pharma exports during the year. Ranbaxy and Sun Pharma operate their business in Spain through their subsidiaries. Indian pharma companies have a very miniscule presence in the Spanish market. therefore. the generic medicines market in Spain integrates as many as 187 active substances. To a certain extent. The government is focused on increasing the uptake of generic drugs in order to reduce the healthcare burden. a global pharma market researcher. Presently. This would entail increased use of generic medicines. bringing it down from 8.7 billion in CY11.93 crore (US $135 million) to Spain during FY11.Following the adoption of austerity measures and cuts in public spending in Spain. pharma exports to Spain have grown at a CAGR of nearly 7% during FY07-FY11.3% by volume. generic medicines offer low margin opportunity for them due to prevalent pricing and reimbursement control in Spain. Japan (PMDA). 25 generic medicines pain is the fourth largest pharmaceutical market in Europe.2 crores (US $28 million) during FY12. the European Medicines Agency (EMEA). The government of Spain has made significant efforts and regulatory changes to reduce healthcare costs.4% during CY07-CY11. During the last couple of years significant regulatory changes have been made by the government with focus on reducing public pharmaceutical spending. Agencia Española de Medicamentos y Productos Sanitarios (AEMPS) is responsible for the evaluation and authorization of drugs.3%: 27. However. other key markets like France. Cadila Healtchare. according to IMS Health. Pharmaceuticals as well as the Medical Devises Agency. A few Indian companies like Aurobindo.

The introduction of mandatory prescription by active ingredients in 2011 obligates pharmacists to offer the cheapest drug to promote generic dispensing. leading to 5. The Royal Decree Law 16/2012 allows for prescription by brand names of drugs and also prevents their replacement by any other cheaper drug. India’s prospects were perceived to be limited to the UK market and a few EU countries that have English-speaking capabilities.Royal Decree 16/2012. but unbranded medicines have also suffered harsh price cuts. bigger or more popular than the competition. 26 Beyond Market 22nd May ’13 It’s simplified. IMS Health estimates that in the last three months. and centralized purchasing of flu vaccines. constipation.6 billion in coming years. It is seen as a major constraint to India’s delivery of healthcare and related services to the EU market.6% y-o-y decline in pharmacies sales. 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. It also provides for de-listing of more than 400 medicines that are meant for minor syndromes such as heartburn. But the generic industry in Spain has enjoyed some growth in the face of branded pharma squeeze. the new wording of Article 93 leaves out of the RPS the regulation of substitution. Also. inviting generic producing countries like India to ring the belL. then a generic drug at the same price is preferred over a branded drug. etc. cough. Thus. out-of-pocket payments for patients.couple of years. all medicines eligible for one of the sets. One of the best examples of a category killer is Wal Mart. STREAMLINING REGULATION The Madrid government approved a controversial . As reported by lobby group in April ’12 to guarantee the ‘sustainability of the National Health Service’. resulting in nearly 7. according to lobby group Farmaindustria. Its chain has put smaller stores in a wide range of specialized categories out of business. Of the various austerity measures. For this reason.. aimed at saving €3. are now affected by the Reference Pricing System. although volume and revenues data may tell an absolutely different story. Category killers can attain this status by being cheaper.3 billion ($8 billion) to drug companies at the end of last year. It introduced a new variable co-payment system on the basis of users’ annual income. Its market value has increased from 5% in 2008 to 17. However.. applicable to the homogeneous groupings by virtue of the conditions laid down in the new wording of Article 85. diarrhoea. de-listing. The regulatory changes brought by the government reduced public pharma spending. Hospitals owed more than €6. CATEGORY KILLER Large companies that put less efficient and highly specialized merchants out of business are known as category killers. regardless of whether or not they can be substituted mutually. .1% y-o-y decline in total medicine sales in Spain during 2011. generics have more than doubled their market share to almost 68%. limits to immigrants using the national healthcare system.4% in the year 2012. attitudes and social and linguistic ties play an important role. IMS Health released figures showing that drug sales in Spain dropped by 11% in 2012. This law incorporates and expands the latest cost-cutting measures: pricing review. But if the prescription is by an active ingredient. although it has also created an unfavourable climate for pharmacies and pharmaceutical associations in terms of lower sales and revenues. the Royal Decree 9/11 on mandatory prescriptions by API has proved most effective in reducing the country’s pharma debt. 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 System’s pharma assistance at least one generic medicine or biosimilar medicine. the Reference Pricing System (RPS) was further reformed. It is also seen that healthcare is a highly personalized service where perceptions. easier. promotion of generics usage through prescription of the cheapest generic version of a drug. There is lack of affinity between India and most EU countries.

leading to strong growth. MMFS’s 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. coupled with improving rural income and consumption provides sufficient growth opportunities. It provides finance to most of the four-wheeler segment and is also into rural housing finance and insurance products through its subsidiaries.. MMFS has Beyond Market 22nd May ’13 It’s simplified. The company has moderated disbursements in commercial vehicles (CVs) and is focusing more on LCVs/SCVs/UVs and used vehicles. going forward for the company despite increasing competition.Unmatched Performance A diversified product mix..8% quarter-on-quarter (q-o-q) driven by increasing penetration in non-Mahindra OEMs and strong sales of Mahindra UVs. 27 M . INVESTMENT RATIONALE Healthy Growth In AUM Despite sluggish growth witnessed in most of the auto OEM numbers. 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. MMFS has been able to report strong AUM growth of 8. We believe that MMFS has a large addressable market with further scope for deeper penetration into rural areas. The changing rural demographics.

28 Branch Network 700 600 500 400 300 200 100 0 FY10 FY11 FY12 FY13 459 607 547 657 Source: Company Data. the cost to income It’s simplified. Nirmal Bang Research Resulting from the expansion in branches. Such a diversified model aids in mitigating the risk of concentration in case a particular segment or company faces weak demand. which would help the company in facing increasing competition from other players in the industry.. Tractors And SCV Commercial Vehicles And Construction Equipment Pre-owned Vehicles And Others Source: Company Data. Recently. Tata Motors. the operating cost of the company has increased by 26% year-on-year (y-o-y) in FY13. which will be aided by the new products launched. JCB.. Going forward. Beyond Market 22nd May ’13 . be it Maruti. Going forward. Hyundai. the company caters to financing needs of most of the auto OEMs. Such an extensive branch network ensures no geographical concentration. higher market share and benefit of network expansion. Currently. It has emerged as the second largest financier for Maruti over the years. etc.been able to maintain a healthy growth record in its AUM and loan book in the last 3-4 years. Any improvement in the economic backdrop could even lead to higher growth. Eicher Motor. the company tied up with Toyota Kirloskar Motors to offer finance to its customers. 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. 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. Break-Up Of AUM FY09 FY10 FY11 FY12 FY13 Auto/UV (M&M) Tractors (M&M) Cars And Non M&M UVs. the management expects growth momentum to continue and believes that 23% to 25% growth is achievable in FY14E in the current scenario. the management intends to continue to increase its branch network. 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 MMFS’s 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. 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. Moreover. Despite expansion. We believe that the company will continue to maintain its growth momentum. Ford.

a significant portion of cash is deployed in purchasing agri-inputs and. We believe that during an easing interest rate cycle.5% 20. We practices and reducing asset 0.0% FY11 FY12 FY13 Source: Company Data.4% 36. 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. which gradually lowers till Q4. MMFS stands to benefit due to re-pricing of liabilities. therefore. However. by Q4 with the realization of sale proceeds from the harvest.75 mn shares).0% 3. 29 .5% 20. Currently. CAR stands at 19.6% in FY13 and the management aims to bring down this ratio to nearly 30% in the next two years. We believe MMFS is adequately capitalized for robust loan growth. Going forward.0% 19.9% 0.5% 19. which led to improvement in the capital adequacy ratio (CAR). the company has not undertaken any securitization transaction in 9MFY13.ratio of the company has remained broadly stable at 32.5% FY10 18.0% FY10 FY11 Gross NPA FY12 Net NPA FY13 Source: Company Data. As the rural population invests in agricultural operations before the onset of monsoon.0% 17. going forward. Movement Of NPAs 7% 6.5% 17.0% 18. Cost To Income Ratio 37% 36% 35% 34% 33% 32% 31% 30% FY11 FY12 FY13 32.0% 16.3% 18.0% Source: Company Data. in Q4FY13 it securitized `1. Capital Adequacy Ratio 20. there was capital infusion of `867 crore via QIP (9. Nirmal Bang Research Funding Mix By Type Of Instrument 1% 12% Bank Term Loan 11% 51% 25% NCD FD CP Assignment 19. However. slows down the recovery process. Nirmal Bang Research High Capital Adequacy In FY13.7% with tier I of 17%. Nirmal Bang Research Diversified Sources Of Funding MMFS has a diversified funding base. Nirmal Bang Research Beyond Market 22nd May ’13 It’s simplified.6% 35.. which will be driven by operational efficiencies. the company’s NPAs start declining with focus on the recovery process.4% 6% 5% 4% 3% 2% 1% 0% 0. Stable Asset Quality The company generally witnesses higher NPAs in Q1.7% Source: Company Data. Funding Mix .3% Post the changes in the securitization policy.By Investor 11% 12% 12% 9% Banks For Assignment Insurance Companies Banks Mutual Fund Others 56% confident of recoveries.5% 18. Nirmal Bang Research Source: Company Data.6% 4.0% 3.433 crore of portfolio. whereas most of its loans are at a fixed rate and will help MMFS to sustain its margins.7% 1.. the management is maintaining asset quality with focus on believe MMFS’s conservative lending diversified product portfolio will aid in quality risks.

The management has set up an ambitious target of increasing the loan book from approximately `900 crore to `4. Due to the absence of any other player in the organized segment exclusively catering to rural and semi-urban housing loan 30 Beyond Market 22nd May ’13 .3 Source: Company Data. ‡ 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. the management expects the growth momentum to continue and believes that 23% to 25% growth is achievable in FY14E in the current scenario.730 802.1% 3. driven by 15% increase in LCVs and 54% increase in UVs.9 432.5 140.8 20.5% subsidiary. The company reported exceptional item of `30. MMFS also offers varied financial services such as housing finance.8% 23.1 11. RISKS AND CONCERNS ‡Any delay in monsoon will impact the asset quality of the company and lead to higher NPAs. Going forward.9 61332 879.2 8.829 379 451 463 MMFSL is catering to the housing finance requirements of the rural population through its 87.877 703. It’s simplified.5 86. Mahindra Rural Housing Finance Particulars FY11 FY12 FY13 Loans Disbursed No Of Customers Outstanding Loan Book Total Income PBT PAT 202. offering customer family protection. MMFS has an edge in this particular area.5% stake is held by NHB.2 85.7 289.2% y-o-y. The balance 12.3 508.1% 4.000 in FY12 to 1.4 20.1 32. Total Income Net Premium PBT PAT No Of Policies No Of Employees Source: Company Data.3 crore on sale of shares of Mahindra Insurance Broking of which the company utilized `35. Mahindra Rural Housing Finance Ltd (MRHFL). Nirmal Bang Research 51. Mahindra Insurance Brokers Ltd Particulars FY11 FY12 FY13 Source: Company Data..8 46. among others.8 33172 535.3 553.2 34.9 21981 315.25.9 21.5 crore (profit of `64.4 27. PAT grew by 54% y-o-y. Adjusted for this PAT grew 41% y-o-y.000 in FY13. ‡ 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. Subsidiary Business Although vehicle financing forms more than 95% of its business.Strong Return Ratios 25% 20% 15% 10% 5% 0% FY10 FY11 RoNW RoA FY12 FY13 4.9% 4.0% 22. insurance and mutual funds.0% 21. Such growth looks achievable as the company has achieved a loan growth of 37% in Q4.5% requirements.2% on a y-o-y basis.9 266. personal loans. 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. which suggests a large untapped market for MIBL. 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.5 413.. Nirmal Bang Research KEY HIGHLIGHTS OF Q4FY13 RESULTS MMFS reported a strong operating performance for Q4FY13.000 crore by FY15E.7 crore on general provision on standard assets).7% q-o-q and 29.6 12. while passenger cars/vans declined 5% y-o-y. The net interest income increased 33.5% 22. Mahindra Insurance Brokers Ltd offers tailor-made products.8 51. distribution of third party products. driven by robust AUM growth and superior asset quality.7 16. fixed deposits. The profit before provisioning increased 20.2 48.1 13. The company has already increased its customer base from 60.

424 21.058 1.5% Source: Company Data.12x FY13 P/BV. Beyond Market 22nd May ’13 It’s simplified. However. 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.94 40. Moreover.31 15. relatively lower competition from private and public sector banks provides stability in margins.359 1. 31 . Consistently strong asset growth.12 21.75 8. given the niche business model with strong fundamentals. The stock is trading at 15.6% 762 886 1121 1610 356 493 644 907 6.4% 28.97 22.71 3.5% 22% 22. strong return ratios and higher capital adequacy reinforces our confidence in the company.12 28.5% 28. multi-product strategy with focus on high yielding products.75x FY13 EPS and 3..7% 38.18 15. 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. we believe that MMFS would continue to demand premium valuations amongst its competitorS.14 5..66 11.Financials Year NII (` cr) Growth (%) Pre Prov Profit (` cr) PAT (` cr) EPS PE (x) P/BV (x) ROE (%) FY10A FY11A FY12A FY13A 1.61 4.26 8.750 2. which is slightly on the higher side as compared to the peer group. Despite macros headwinds.8% 23.

Big Profits Despite the inherent risks.. Beyond Market 22nd May ’13 . Although a few small and mid-cap stocks have been generating returns on a continuous basis. Schemes such as SBI Emerging Businesses Fund. such stocks are 32 T known to be risky as compared to other equity schemes vying for investors’ attention. 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. Axis Midcap Fund and Franklin India Smaller Companies Fund have given eye-popping returns in the past few years.Small Investments. So the question that needs to be asked is whether this is the right time to invest in small.. A few of them are giving returns between 25% and 30% in the last one year.and mid-cap funds if It’s simplified.

high-return strategy and small.and mid-cap stocks. The success of any small. the skill of a fund manager is one of the factors which can do wonders to the scheme. But the investors must be careful regarding the additional risks associated with such funds as they are extremely volatile in nature.and mid-cap fund is largely dependent on the stock-picking capability of the fund manager. Therefore. As said earlier. However. The positive performance of many small. the fact sheet has all the necessary information along with the scheme objective.and mid-cap schemes can certainly boost the overall returns in an investor’s portfolio. the moral of the story is not to avoid investing in small. the performance of a small. name of the fund manager. However. But there is always an opportunity to invest in high-growth stocks which is possible in small.and mid-cap stocks bring in a lot of volatility as compared to say blue-chip or pure equity diversified funds. said: “Do not time the markets. large-cap or mixed-cap stocks depending upon his vision and the mandate of the fund he manages.and mid-cap stocks tend to outperform large-caps over the long term. the fund manager should decide and try to match his investment objective with that of the fund.and mid-cap funds. investors can follow a pattern and exploit volatility in the markets to yield higher returns. 33 . while there are many who play safely.and mid-cap stocks. But a prudent investor is one who looks for the fund’s investment objective and matches it with his own (his time frame and his risk-taking ability). which help investors to pick the right fund according to their given risk profile.and mid-cap stocks. There are a few managers who are willing to take risks. a fund manager may choose to invest in small-cap. the gap between valuations of small. Yet. when mid. But ‘buy and hold’ is riskier in small. in managing small. Besides. before deciding to invest in small. 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. whether the scheme is aggressive or has growth or value style of investments).. there are those who believe that small.and mid-cap funds. comparing the two categories is indeed wrong since both the categories behave totally different at different times in the equity markets. small. Therefore.and small-cap stocks rally.and mid-caps follow large-caps in a rally as we are witnessing since the past few weeks.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. If we look at these statements. many small. Moreover.and mid-cap funds are an invitation to disaster.and mid-cap stocks. there is no right time to enter or exit the markets. one has to clearly understand that it is a high-risk. investors should have a minimum exposure to small. Clearly. mid-cap. Experienced investors feel that smalland mid-cap funds are great to get ahead of the markets against popular large-cap stocks. Before investing in small. In the past few weeks.and mid-cap stocks repeatedly ran ahead of large-cap stocks and then fell back as sharply as they had risen. as it can go up as fast as it can crash. the smallIt’s simplified. Instead.and mid-cap stocks is mainly due to cheap valuations of many quality stocks. No matter what. Sometimes small. we find that both of them hold ground and are right in their own ways. Unlike a large-cap mutual fund. While investing in equity. However. what cannot be denied is that small. history and past performance of the fund. 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).they do not have it in their portfolios.and mid-cap stocks and large-cap stocks has narrowed down after the recent rally in small. However. During the great bull rally of 2003 to 2007. And it is.and mid-cap stocks. However. 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.. Sometimes it is the opposite. from an investor’s point of view. we have seen good quality large-cap stocks rallying as their valuations are little attractive compared to other small. However. Reading them can also help them learn about the overall performance of other schemes of that fund house and benefit from them. 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. investors should go through fact sheets on a monthly basis that are uploaded on their websites. therefore.and mid-cap companies.and mid-cap stocks. compared to the large-cap peers.

Buying through SIPs should help investors avoid timing the risks. investment in securities is subject to market risk 34 Beyond Market 22nd May ’13 It’s simplified. any retail investor considering investment in small.and mid-cap index has outperformed the BSE Sensex across market cycles in the past. FMCG or technology) that are likely to drive India’s growth story in the future.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. return as well as liquidity Registered O ce: Nirmal Bang Securities Private Limited. currency trading involves moves that are a combination of knowledge and skill. always. Currency Derivatives Trading with us keeps you a few steps ahead. Furthermore. Ltd. backed by years of experience. an allocation of 10% to 15% in thematic funds (banking. *Through Nirmal Bang Commodities Pvt.and mid-cap funds can do so depending on their individual risks. could be considered by investors who wish to take even higher risks. Tel: 3926 8600 / 01. The most intelligent strategy in Chess is to be ready with the next move. So. They can then gradually move towards diversified equity funds. #Distributors investment in securities is subject to market risk.. Mutual Fund investments are subject to market risk. EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP Contact: 022-39268088 | e -mail: currencies@nirmalbang. 38-B. For first timers who are also risk-averse investors. 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. one should invest with a staggered approach and buy through systematic investment plans (SIPs). Please read the scheme related document carefully before investing.nirmalbang.400001. Fax: 3926 8610 Disclaimer: Insurance is a subject matter of solicitation. Khatau Building. a large part of their portfolio can be devoted to fixed income funds. international. Through Nirmal Bang Securities Pvt. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Similarly. Ltd. while investing for a longer duratioN. Fort. Alkesh Dinesh Mody Marg. 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. Further. We all know that investing directly in small. 2nd | www. Hence. . Mumbai ..

1-0.180-6.050 in case of a further correction in the next few weeks. The current PCR-OI stands at 1.300 or 5. below street expectations of between 2% and 2.900 Put.280 and 6. for the uptrend to remain intact. It was 5. STRATEGY Looking at the current levels of VIX (18). The recent rise has been accompanied by sharp volumes and good breath. The markets gained around 4% in the first half of the month till 16th May. which has been in an increasing trend after forming a base near the levels of 13-14.450 and 13. we see the India VIX rising and the current rally from the levels of 5. The support resides at the 13. Whenever the market goes beyond the option writer’s (sellers) comfort Beyond Market 22nd May ’13 T zone. 6. The important point to note in Options these days is the Volatility Index (VIX). respectively. coupled with less-than-expected Index of Industrial Production (IIP) number. we also expect the PCR-OI to remain in the broader range of 1. The oscillator situation suggests positive momentum on higher time frame charts. which suggest that the market has formed a higher low in April ’13.200’ Call as well as simultaneously ‘Selling one 6.200 giving the market a strong bullish undertone.2%. additions were being seen in Puts from strike 5. Going forward.895.1-1. However.200 and 6. the biggest reason for the rallies is heavy buying by FIIs. However. we recommend traders to take advantage of the same and construct a Short Strangle Strategy at the 6. which indicates 6.3 or 1. for the May series. therefore. The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options can be seen hanging between a very broad range of 1-1. The ongoing rallies in the markets can be attributed to a host of reasons like continuous improvement in monthly inflation. which has increased hopes of further rate cut by the RBI. there is insufficient evidence for any top and. we conclude that the advance is not done yet.100 level on the downside and one should maintain a buy-on-dips approach.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. forming a series of higher tops and bottoms. 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. Since the past few trading sessions.5% in April last year. Going ahead for a longer horizon of 1-2 months we expect India VIX to trade in a new range of 18-22.89% in the month of April. One can exit the whole position if the Nifty spot closes above or below 6.000 level.900. This can be simply initiated by ‘Selling one 6.. followed by 6. On the Nifty Options side.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.8.000 Put’. Any move beyond that may trigger a further upside till 6.400 Call and 5. On the contrary. The IIP for March was 2.200 Call has the maximum OI build up for Calls and will provide a strong resistance for the markets for the month of May. Inflation based on the Wholesale Price Index (WPI) stood at 4. which had confirmed a trend reversal and hinted for markets to test life time highs. 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. which is a good range to play for the expiry. we find that the highest OI for Call and Put is at 6. 35 .305 and 5. The overall parameters on the weekly charts continue to remain positive. which is a possibility over the next few weeks.700-6. if we look at the overall OI standing for Nifty Options.500 is a clear example of that.5%. respectivelY.350.25 (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. the Bank Nifty has been in a strong uptrend. The Nifty has an immediate resistance area. However.96% in the month of March and 7.200 and 6. the Nifty should sustain above the level of 6. Moreover..25 since the start of the May expiry. It’s simplified.000. which has confirmed the bullish bias.600 levels on upside. The Index is likely to test the 13. The break-even is seen at 6.

If this generation gap can somehow be bridged. From the markets’ standpoint too. They have been on the trading floor of the BSE and have witnessed the euphoria. . 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 today’s concept in a language they can understand. their words sound like Chinese to us and our words sound like French to them. then a huge number of senior folks. For this reason. There is a definite generation gap between them and us. will be able to make a successful career in the markets even today. This in today’s world is just not enough to beat the ever increasing rate of inflation. mayhem and chaos of the open outcry method firsthand. which all our MBAs in financial and securities markets may not teach. 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.. The onus therefore lies upon us to try and bring this generation back to the stock markets. There is a lot that they can teach us. Let us now turn the clock backwards and go into 36 Beyond Market 22nd May ’13 It’s simplified. especially due to the advent of technology and also the regulatory changes in the stock markets. some amount of equity exposure in their respective portfolios is extremely essential. The stock markets today are a completely different ball game and this has forced many veterans to shun the markets altogether.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. But alas.. 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. 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. Not only will it help them achieve financial independence and boost their self-confidence.

just verbal and visual confirmation based on trust. 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 It’s simplified.m. They engaged in something known as the Open Outcry System. 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. The only point of contact between the market and the investor was the broker. There was no binding contract between the two parties. not to mention the mounting frustration of uncertainty. 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. The Open Outcry System literally meant that everybody was shouting at the top of their voice. Since shares were not available in the demat form. who in turn would be yelling out the sell price of the stock. highly specialized and extremely risky proposition. Badla An important component of yesteryear’s market.. that is. 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. 37 .flashback. and often there was huge discrepancy between the bid and the offer price and buying/selling huge quantities was very difficult. At other times it would be torn or mutilated and sometimes there would be problems pertaining to paperwork too. did not have it easy. This will not only help us understand their lingo. The brokers. 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. The risks were too high and threats of fraud and cheating were very much real. after the shares were bought. 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. what’s 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. All this meant sleepless nights for investors and additional effort on part of the broker. Remember there were no cell phones then and since the noise level was so loud. Bazaar Quite literally. there was hardly any liquidity in shares. Bhav It is the price of a stock or underlying security. if a broker wanted to buy 100 shares of ABC. let us try and learn a few words. This process took months since sometimes the certificates would get lost in transit. 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 or their representatives assembled on the floor of the stock exchange known as the Ring. but also help our elders to correlate the terms from their times with those of today. the headache was not over. from 12 noon to 2:30 p. The stock market session those days lasted for a mere two-and-a-half hours. The most common term that you would come across is “Bhav kya hai?”. Before the advent of electronic trading.. The most common phrase that you would hear is “Bazaar Kaisa Hai?”. they would not just end up in the investors’ demat accounts and be Beyond Market 22nd May ’13 transferred in their names. trying to communicate with other dealers. stock trading was a very difficult. jargon and phrases that were used in everyday parlance in those days. Ulta Badla or Undha Badla Popularly known as ‘Backwardation’ in western markets. which means “How’s the market? Dalal Street The Street on which the Bombay Stock Exchange building is situated in Mumbai. most of these transactions happened by using hand gestures and sign languages. the loss of time and value as well as the loss of selling opportunity in the interim period. too. it is the stock market. Now that we have a general idea as to how the stock market worked in those days. Also since there were very few participants in the market. Also. Seedha Badla Popularly known as ‘Contango’ in the western markets. Mandi A market that is going down or a short or a sell position in a stock or market is known as Mandi. So.

5. 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. often just outside the stock exchange building. not only will this exercise bridge the generation gap as far as the stock markets are concerned. 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. we just need to help our elders undertake their first trade and then they will all be set. 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. Hold handholding sessions and mock trading sessions with them. Kapli Kapli is a form used by brokers to inform exchanges of the transactions done by them for the purpose of matching and settlement. Bear in mind that. Coiled markets often arise when the market has been held down artificially. The idea is that if a market should be headed in one direction based on its fundamentals but is pushed in the other direction. Badliwala A financier who helps finance the badla transactions is popularly known as a Badliwala. Be on their constant beck and call to solve any doubts or problems that they may have. Help them learn how to operate the computer and the Internet. there are many Hindi business channels. 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. then it will eventually make a strong move in the original fundamental direction. such as gold and silver. Help them understand business news. that is fatafat. 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. If they do not understand English. Sauda Book A book where the ‘buy’ and ‘sell’ transactions are recorded by the members is known as Sauda Book. Help them open a demat and trading account in their name. Make them read market-related books and magazines. They just jot it down in a book and make or receive payments at the end of each week. 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. They are known as fataakya because they trade very fast. settlement. Dabba involves a few unscrupulous individuals who take the buy/sell orders from their clients but do not actually enter trades in the exchanges. This happens in commodities markets. mostly on the footpath is known as Footpathia. 38 Beyond Market 22nd May ’13 It’s simplified.. Patavat Settling a transaction in cash rather than shares is known as Patavat. . Now that both generations are almost on the same level playing field. Footpathia A Kerb trader or the one who deals in stocks outside exchanges. 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. 7. 6. 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. Dabba Better known as Bucket Trading in the west. which will make the job much easier for them. Fataakya It is a slang used to describe day traders or speculators who trade very quickly and in huge volumes. 2. 4. 3. but it will also bridge the gap between you and your elders both on the personal as well as the emotional fronT.

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.. Jesse Livermore’s exploits reveal the genius behind the man who made fortunes on the bourses 40 Beyond Market 22nd May ’13 It’s simplified.Wisdom of Jesse Livermore One of the greatest traders of all times..

. Prices may come down and then again make a new high. thoughts on structure of markets. Livermore said this principle is important if one wants to make a living in this game. This is because there will be times in the markets when conditions are not favourable. Enumerated in this article are some of his key strategies. 41 His strategies. One should be a serious observer of prices. Beyond Market 22nd May ’13 . One should make few smart trades and earn some profits out of them. A trader without cash is equivalent to a blockbuster hero with no movies. entering a trade and exiting a trade is most crucial. He said. traders.” A right trade at the right time. His trading career saw several ups and downs. then the most important thing to do in trading according to Livermore is to sit tight on the trade. be able to think. He in fact developed a check list that used to help him before entering any trade. PREPARING FOR BATTLE The most important thing for a person to do in trading is to believe in himself and his judgment. then you need to get into action and this is the time when one needs to sell. He believed that money cannot consistently be made every day and every week. Therefore. psychology of speculators. SIT TIGHT If your trade is right and the trend is in your favour. He shared his thoughts. brokers. Considered as the God of traders. As per Livermore’s observations. While trading. It is said that one’s own judgment and guesswork helps a person to develop his brain power. in the markets.” Before selling one should look for a reaction. which were either long trades or short trades. discipline and a good mindset. one should enter a trade only when there are enough triggers or favourable conditions. Taking cues from market direction downward or upward . trading strategies and secrets of making money in the markets in two books. And to be right. relate.. 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. FIRST BE RIGHT Livermore said. The basic objective is that they are the most participated stocks and liquid.he used to initiate trades. He always wanted to trade with the trend and not against it so that chances of a right trade were higher. A successful trader like Livermore enjoyed the process of making money more than the money itself as well as advocated building strong processes. KEEP CASH IN RESERVE Livermore felt that cash is king. The best thing is that if prices fall from the top and they resist a bounce back. insiders. companies and investors are relevant for traders and investors even today. Livermore made his first trade at the age of 15. 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. what matters is the right side. This is why he advised not to fall prey to tips. It is much more reliable and easy to read the behaviour of such stocks. thoughts and learnings for traders and investors. trading in too many stocks too often would lead to nowhere. He believed that holding on to a trade was the single most important factor that set him apart from the crowd.J esse Livermore is the greatest trader of all times. WHEN TO SELL He believed that one should not try to time the trade and sell at the top. there is always a trade to be made. It is believed that when all odds are in your favour. “It is not the bull side or the bear side. the chances of being right increases. “I never buy at the bottom and I always sell too soon. too. Instead of frequent trades. which is for those who wants to learn from them. They are true companions of the trader because such stocks exhibit the real picture of what a typical trader is seeking or expecting. Livermore stressed that traders must It’s simplified. THERE IS ALWAYS A TRADE He believed that irrespective of the direction of the market. Further. AVOID FREQUENT TRADES AND TOO MANY STOCKS This means one should not trade in the markets all the time. calculate and remember the behaviour of prices because everything is in the price. He believed that big money is only made when you are not only right but also when you sit tight on the trade. one should hold cash in one’s portfolio. And his experience has resulted in a list of do’s and don’ts. the best way is to guess right. which are still treated as Bible by the trader community. Livermore did not keep the secret of making money to himself.

He emphasized on using the trend effectively and accordingly building the position . However. it is a time to get out of the trade. Similarly in case one wants to short a stock it is foolish to look for a peak. Whether it is a losing position or a winning position. The biggest mistake traders make is that they start accumulating a lot of losing trades or stocks in a portfolio as investments.” remarked Jesse Livermore. For him his strategy. Here. Livermore thinks it is time to rethink and get out of the trade. he also strictly advised and followed stop losses. He said if a particular position goes wrong.. one can wait for the right opportunity. In case of reversal if a profitable trade starts becoming a losing trade. But when these natural reactions do not seem to be natural. 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. one should get out immediately with a small loss rather than averaging on the losing trade. I don't buy long stocks on scale down. the point is not so much to buy as cheap as possible or go short at top prices.. MANAGING A TRADE Livermore believed that as long as one is right and a stock is functioning in the desired direction. He said: “When I am bearish and I sell a stock. Instead of keeping the cash busy. then it is wise for the person to hold on to the stock. After the initial 42 transaction. In fact a similar thing could also happen in a winning trade when we start attributing fundamentals of companies to profits. each sale must be at a lower level than the previous sale. there is one more thing to note. Too much confidence leads to nowhere because it overlaps the rationality of the trade. He said patience is the key to success. As long as a company stock is behaving right and the market is supporting. This entitles a minimum scope for risk as well as a maximum scope for booking profits. Markets do not function according to the position that one has taken. he should add more stocks to the winning position. TRADE REVERSAL Jesse Livermore closely watched his trade.fight the urge to constantly trade. one should ride on the winning trade and get out of a losing trade early. a trade should be treated as trade and not as investment. Jesse Livermore said. it is well not to begin selling in bulk until there is no danger of the engine backfiring.” Livermore advised not to try buying cheap but to buy effectively. Similarly. “Profits always take care of themselves but losses never do. “I came to learn that even when one is properly bearish at the very beginning of a bear market. this trading style according to Jesse Livermore is a major mistake. 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 person’s trading career. SPECULATION INVESTMENT AND Many people make the mistake of holding on to a losing trade. Never be in a hurry to book profits early until the said stock shows a sign of reversal. plan and set of rules are more important than proving It’s simplified. I buy on a scale up. When I am buying. but to buy or sell at the right time. If a profitable trade reversed along with the rest of the market. the reverse is true. and if the trend continues.” Instead. this does not mean buying or selling or initiating a trade at one go. he emphasized on adding more to the winning position. However. So if one is long in a particular stock and that stock shows some profit in initial trade. Real money is only made in positions which are showing profits from the beginning. In trading. This is the most important rule of trading because it will ensure that losses are kept to a minimum level. one should not indulge in second transaction until the first trade shows a profit. I must buy on a rising scale. What appears to be a good trade in the beginning could actually turn out to be a bad trade by the end of it. a good trader never regrets. 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. Beyond Market 22nd May ’13 . 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. A trade in uptrend or downtrend could have several natural reactions in between during its journey. not speed. Likewise. it is we who have to function how the markets behave. then he would quickly consolidate his position in the stock.

He in fact went broke on several occasions. who average on their losing trades and who refuse to be wrong and are probably suckers in the market. An investor must study general conditions of the market to seize them so as to be able to anticipate probabilities. Keeping these things in mind. 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. which cost him millions. 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. then it is time to believe that something unusual is going to happen. they not only lose money but also faith in themselves and question their ability as traders. It is very important to maintain the right temperament. SIGNS OF WARNING On a broader level. 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. And for a sucker play. Despite knowing many traders do what they are not supposed to do and when they make mistakes. a man gets a sucker pay.” Markets and its participants are full of tricks and comprise those who make mistakes. but with earning my successes by hard study and clear thinking. Similarly. Good news or bad news everything is in the price. confidence and ego.upward or downward? This is possible when the markets lack enough reason in either direction. Prices largely know the news before they actually happen and they start to behave in line.his gut feeling to the market. CLUES LIE IN PRICES Tape reading was an important part of his trading game. STRATEGIES FOR A NARROW MARKET What should a trader do when the markets lack clear direction . He said that a market can and does often cease to be a bull market long before prices generally begin to break. This is because they are the ones who create a lot of money for smart traders. He had predicted the stock market crash of 1929. he believed in gaining the experience and learning to not repeat the same mistakes again. Livermore made several mistakes. Livermore would keep an eye on the undertone of the selected leading stocks and industries to gauge the behaviour of price. Whatever happens in the stock It’s simplified. it is too late to wait for the news flash before selling a stock or buying a stock. I was no Beyond Market 22nd May ’13 longer betting blindly or concerned with mastering the technique of the game. He believed everything is in price. then it is time to take stock of the situation or possible reversal. he wouldn’t own a blessed thing. 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. who do not learn from their mistakes. If leading stocks cease to advance in rising markets.. Throughout his life. If an investor carefully studies the behaviour of prices. He also said that if a man didn’t make mistakes he would own the world in a month. one of the greatest crashes in stock market history. Stocks start reacting much before companies announce any developments. well before it actually took place by just observing the price behaviour of markets and leading stocks. in a falling market if leading stocks resist to fall. Most traders refuse to be wrong till they are proved wrong. SOMETHING IS WRONG In trading. But if he didn’t profit from his mistakes. Traders make a lot of mistakes and many of them are the same mistakes. The difficulty here is to fight with your own conviction. 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. wise traders do not argue. Those who fight with the market actually fight with themselves. Prices tell you everything from when to sell to when to buy. However. Livermore emphasized that it is not wise to fight the trend. 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 Livermore’s trading secrets. 43 . Even while he was in the losing side of the game.. he/she will find that markets typically start reacting much before the news. then there is reason to look for a reversal in the ongoing trend. I also had found out that nobody was immune to the danger of making sucker plays. He said. “I learned that I had to work for my money.

No. Mumbai . Commodity trading can be confusing especially if one is inexperienced and lacks the necessary skills to trade successfully. Livermore believed that instead of hoping. Tel: 022 . So. It is quite often that despite our own reading and understanding. an investor must fear. FMC Code-MCX/TCM/CORP/0490. cut his trade instead of allowing his emotions to take over the trade. Mutual Fund investments are subject to market risk.400 013. Now. trading too has its share of ups and downs. he must hope. O Ganpatrao Kadam Marg. No NSDL: IN-DP-NSDL-136-2000. HABITS OF SPENDING As a trader makes profits. NO. The PMS Service is not o ering for commodity segment. A losing trade attracts Disclaimer: Insurance is a subject matter of solicitation. 16590. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. experts should not take over your decision-making power and your own reading of the situation. LEARN TO CONTROL YOUR EMOTIONS Even if somebody knows the rules of the game. Mumbai .nirmalbang. So there are many such basic emotions that could prove to be the biggest hindrance. we want somebody to tell us whether it is good to buy or sell.39267510 CORPORATE OFFICE: B-2. He believed that in trading. and hope that his profit may become a bigger profit. A person’s ability to control greed and fear. Ltd. our team of seasoned analysts with years of experience and in-depth knowledge can help you spot the underlying clues and create the investment strategies that best suit your commodity trading requirements. 301/302. OFFICE: Sonawala Building. INF011072759 & INE011072759. MCX REGN. MCX SX-INE260939139. This is why Livermore felt that one should keep some money in a safE. It is absolutely wrong to gamble in stocks the way the average man does. splurging a lot of money on unnecessary things. 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.39268000 / 8001. NSE SEBI REGN No. Fax: 022 . But they are hard to get away when one is not making profits and when one is actually incurring losses. AMFI REGN. but goes higher. He said such habits are good when you are making profits. One should stick to his or her original plan. 00362. 25 Bank Street. He must fear that his loss may develop into a much bigger loss. EQUITIES* | DERIVATIVES* | COMMODITIES | CURRENCY* | MUTUAL FUNDS^ | IPOs^ | INSURANCE^ | DP* www. instead of fearing.. Fort. INB230939139. Some of these ups and downs could be very severe in nature. Marathon Innova. Fax: 022 . it is easy to develop a spending habit indulging in high lifestyle. PMS-INP000002981 44 Beyond Market 22nd May ’13 It’s simplified. Markets are full of experts including some of those who regularly give their views. But here Livermore cautioned against such habits. arn-49454 NCDEX REGN. Commodity Trading Is No More A Puzzle. REGD. INB011072759. However.39267500 / 7501. INF230939139 & INE230939139 DP SEBI REGN. .39268010 BSE SEBI REGN No.400 today has happened before and will happen again. No. yet the biggest and the most important thing that makes a trader and a trade successful are how one deals with emotions. keep an eye on such trades because buying them on the line could be a profitable trade. At Nirmal Bang. Please read the scheme related document carefully before investing. FMC Code-0075. while balancing on hope and despair and other such basic instincts of human nature are important in trading. CDS(I)l: IN-DP-CDSL-37-99. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. A trader should be ready to make changes.. Tel: 022 . Like any other profession. while a gaining trade attracts hopes. EXPERTS’ VIEW Livermore lost several millions when he relied too much on experts. circumstances change and conditions change and there is no surety that the price will behave the way you desire. Ltd. *Through Nirmal Bang Securities Pvt. Lower Parel (W).

. Third. etc (26. First. Why Is WPI RBI’s Main Measure? Policymakers like WPI as it is broad-based with many commodities and items. medical care. The Consumer Price Index (CPI)-based inflation fell to 9. beverages and tobacco group (49. Second.39% in March ’13. Even as WPI is near the Reserve Bank of India’s (RBI’s) comfort level of 5%. etc..39% in April ’13 from 10. bedding and footwear group (4.5% in CPI-new compared to 14. WPI is more of non-food manufactured products and tradable items. fuel and light group (9.71% weight). a 13-month low. There are three key differences in the composition of sub-components of the two indices. WPI is broadly divided into three sub-categories – primary articles group (20. CPI-new includes services and housing. But divergence between the two is on the rise.77%) and miscellaneous group consisting of education. While WPI gets affected by prices of international commodities and rupee fluctuations.73%). quality of price collection and weighting. which helps in continuous monitoring. The change in prices in the wholesale markets (captured by WPI) gets transmitted to the retail market (captured by CPI).91%) and manufactured products (64. albeit with a lag. clothing.IMPORTANT JARGON FOR THE FORTNIGHT DIVERGENCE BETWEEN WPI & CPI nflation data for April has shown a benign trend. This index does not cover non-commodity producing sectors like services and non-tradable commodities. 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. CPI on the other hand is broadly divided into five sub-categories . However. first time below the 5% mark since November ’09. Where Do WPI and CPI Differ? Not only is the composition of baskets of WPI and CPI Beyond Market 22nd May ’13 I different. transport and communication. 45 . Thus.71) for food versus 24. fuel products (14. Why The Divergence? Clearly from the composition of each. but also the weights of items in the baskets are very different.3% in the WPI.11% weight).49%). However. 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 It’s simplified. education. which came into existence from the year 2011 is an improved version of the old CPI. Wholesale Price Index (WPI)-based inflation fell to 4.96% in the previous month. CPI lacks in terms of representation. the wedge between the two cannot go The data is frequently available with a slight lag. Has RBI’s more liking for WPI backfired at the cost of households? The RBI’s annual monetary policy saw target-setting for WPI at 5% by March ’14. both of which are missing from the WPI. WPI and CPI should converge in the medium term. housing group (9. fuel-related category has a lower weight of 9. CPI-new has a much higher weight (49.31%). the new CPI time series.89% in April ’13 from 5. while CPI is more of food products and heavyweight miscellaneous items. households continue to face higher inflation even for basic items.9% in the WPI.97%). the CPI is sensitive to change in prices of food items and services like medical bills.

It’s simplified. Cash and cheque collections constitute over 90% and electronic payments through ECS continue to be low. Thus. IBPS will include any bank’s branch. business correspondents. CPI was also higher due to housing inflation and hike in diesel prices and power tariffs. cash and cheques continue to be the preferred mode of payment for a vast majority of the populace. they have a limitation. taxes. leading to higher demand for food in particular protein-based items. cheque. They do not have a tie-up with all billers across the length and breadth of the country.’ Why IBPS? Currently. Further. Hence. insurance premium. Outlook For WPI & CPI With the trend being benign. particularly housing as well as slower growth in the domestic demand. utility payments. credit/debit cards.800 million bills are generated each year in top 20 cities in the country. moderation in asset prices. aggregators and banks. depending on the changes in the above variables WPI and CPI will move accordingly. university fees. it has no inter-operability. despite the measures of the RBI to introduce alternative 46 I Beyond Market 22nd May ’13 . One can also pay bills via agents called aggregators. retail agents of aggregators. payment methods and instruments. commodities prices and weak pricing power in manufacturing. IBPS points could be business correspondents. school fees and many more at a single bill payment point. or electronically by electronic transfer mode like online. which will enable payment of any bill at any place and allow consumers to make payment by cash. cheques. physically by cash. The key factors to watch out for are monsoon. With IBPS. It is estimated that over 30. NEFT. lagged impact of slower government spending growth. the landscape of bill payment in India is likely to alter dramatically. How Will It Work? This payment model will enable the setting up of a centralized infrastructure. ATMs. The central bank calls it ‘India bill payment system. one can pay bills physically or electronically. bringing all the billers and banks to a bill platform through the aggregators. bill payment in India would be standardized. IBPS will offer consumers a single bill payment point. Inflation is likely to moderate going forward due to lower international prices for commodities. INDIA BILL PAYMENT SYSTEM (IBPS) f things go as planned. record rabi crop production coming to the market. prepaid payment instruments at the bill payment points. The value of bank notes and coins in circulation as a percentage of the GDP (12.. With this. Even accessibility of aggregators is poor in areas beyond metros. ATMs and bank branches.. you can pay your dues of essential services. not far from your place of work or residence. like Brazil. etc providing accessibility and instant confirmation of payment made through SMS or otherwise. A consumer visits the IBPS point with the details of the bill to be paid. there will be a single platform for billers. Mexico and Russia. A Reserve Bank of India (RBI) panel has recently mooted an electronic bill payment system. 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. examination fees. It will enable payment of any bill at any place. post offices. The IBPS points may also be operated by a non-banking entity. 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. However. with IBPS. A receipt will be generated for the consumer by IBPS confirming the fulfilment of the transaction.04%) is very high in the country when compared to other emerging markets. demand draft. Benefits Of IBPS Now. etc. 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. international oil prices and minimum support prices (MSP) for farmers. CPI remained in double digits due to both supply side constraints and rising incomes. most forecasters expect inflationary pressures to subside significantly in 2013-14. not far from their place of work or residence. The Reserve Bank wants to fix this and encourage more non-cash transactions and migration of payments to electronic channels. Further.