Beyond Market - Issue 64

For Pr i vate Ci rcul at i on Vol ume 1 I ssue 64 26t h Mar 12
B
U
D
G
E
T
2
0
12
UNI ON BUDGET 20 12-13
While the budget this
year has been dubbed
as anti-people and
regressive, industry
experts say it is
balanced and serious,
in line with present
market conditions
www. ni rmal bang. com
EQUITIES*
|
DERIVATIVES*
|
COMMODITIES
|
CURRENCY*
|
MUTUAL FUNDS
^

|
IPOs
^

|
INSURANCE
^

|
DP*
REGD. OFFICE: Sonawala Building, 25 Bank Street, Fort, Mumbai - 400 001. Tel: 022 - 39267500 / 7501; Fax: 022 - 39267510 CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010
BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.
Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not oering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors #Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
Micro analysis.
Mega gains.
Trading at Nirmal Bang is based on extensive
research and in-depth analysis, where we
focus on the smallest of details and turn
them into an advantage for you.
Over the years, the analytical approach
coupled with decades of experience has
helped us maximize returns for our investors
and thereby inspire confidence in them.
SMS BANG to 54646
Contact at: 022-3926 9404 | e-mail: contact@nirmalbang.com
Its simplified... Beyond Market 26th Mar 12 3
DB Corner Page 5
A Crowd-Puller
Despite their introduction over a decade back, DVRs are getting their
due with the gap between them and ordinary equity shares narrowing
in recent times Page 6
Small Towns Hold Big Promises
Strong growth prospects, less competition, high yields and profitability
make tier-II and tier-III cities attractive for a number of businesses
Page 9
Putting Brakes On Populism
Although the proposals put forth in the railway budget are likely to hurt
the common man, these changes were long overdue as they can bring
the public utility back on track Page 12
Spinning A Web Of Deceit
Flawed government policies is the root of all evils plaguing the textile
industry in India Page 15
Union Budget 2012-13
While the budget this year has been dubbed as anti-people and
regressive, industry experts say it is balanced and serious, in line with
present market conditions Page 18
Alembic Pharmaceuticals Ltd: A Paradigm Shift
Change in product mix, shift from API to formulations, launch of new
products and higher economies of scale are likely to boost the
prospects of Alembic Pharmaceuticals Ltd Page 28
Rekindling Investor Interest
Through its latest directive, SEBI has tried to address key issues, which
are likely to boost the mutual fund industry Page 32
Dilip Bhatia, CEO, Ace Derivatives and Commodity Exchange Ltd speaks
to Beyond Market about Ace and its plans for the future Page 34
Delta Corp Ltd Page 38
Technical Outlook For The Fortnight Page 39
Speaking From Experience
The annual letter that Warren Buffett sends out to shareholders is a
treasure trove of information and can help investors a great deal, if
followed rightly Page 40
Action-Reaction
Corporate actions in the form of bonus, dividends and the likes have
far-reaching implications on investors and must therefore be
understood by them Page 44
Volume 1 Issue: 64, 26th Mar 12
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:
Savio Pashana, Afsana Tamboli
We, at Beyond Market welcome your views,
comments and feedback. Do help us to grow
better as per your liking. This is our attempt to
reach you better while crossing horizons...
Web: www.nirmalbang.com
beyondmarket@nirmalbang.com
Tel No: 022 - 3926 8047
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
Research Team:
Sunil Jain, Runjhun Jain,
Dipesh Mehta, Anand Shendge,
Manav Chopra, Vikas Salunkhe
A TEPI D TRI UMPH
BUDG
E
T
2 012
The fortnight gone by was witness to a host of major events in India. The general public was in for some serious thought-
provoking action due to the elections in Uttar Pradesh, the quarterly Monetary Policy Review by the Reserve Bank of India, the
Railway Budget, the Union Budget 2012-13 and the 100th century by master blaster Sachin Tendulkar. Amidst all this, Sachin
Tendulkars century was the only event that brought cheer to the people. This is because while the Railway Budget, despite attempts
to reduce deficit of the public utility, saw the resignation of Railway Minister Dinesh Trivedi, the Union Budget turned out to be a
damp squib.
The focus of the Union Budget 2012-13 was mainly fiscal consolidation. It did not propose concrete policy changes and develop-
ments and has, therefore, been termed as a non-event by industry experts. However, the increase in excise duty and service tax
could drive inflation higher in coming times. Another point of contention is that the budget fails to protect the common man from
the perils of inflation in the absence of concrete measures. The cover story attempts to explain the strengths and weaknesses of the
Union Budget 2012-13, with comments from doyens of the industry.
Apart from the Union Budget, the magazine also features an article on the Railway Budget. The Railway Budget, this year, is more
realistic than populist as it had been in the past few years. However, all eyes will be on the government to see how the ministry
implements the proposals put forth in the Railway Budget. Among other topics, there are articles on differential voting rights shares
(DVRs), the growing importance of tier-II and tier-III cities among companies, the problems faced by the textile industry owing to
flawed government policies and the new directives introduced by the Securities and Exchange Board of India (SEBI) to boost the
mutual fund industry, among others.
The Beyond Portrait section in this issue features Mr Dilip Bhatia, CEO at Ace Derivatives and Commodity Exchange Ltd. He
dwells upon the commodity market in India as well as Ace and its future plans, in the interview. In our endeavour to help you, our
readers, to take right financial decisions, we have introduced a new section called Beyond Price in this issue. The section will
cover interesting investment ideas below the price of Rs 100. You can definitely look for new stocks every month. And finally, the
Beyond Learning section features an article on the important issues that American investor and philanthropist Warren Buffett has
mentioned in his annual letter to shareholders. His suggestions are definitely worth your time and moneY.
Tushita Nigam
Editor
The mar kets are likely
to remain r ange-bound and
look positive on declines
for investment and tr ading in
the coming for tnight.
Disclaimer
It is safe to assume that my clients and I may have
an investment interest in the stocks/sectors
discussed. Investors are required to take an
independent decision before investing.
Investment in equity is subject to market risk. Our
research should not be considered as an advertise-
ment or advice, professional or otherwise. The
investor is requested to take into consideration all
the risk factors including their financial condition,
suitability to risk return profile and the like and
take professional advice before investing.
Nifty: 5,274.85
Sensex: 17,316.18
(as on 20th Mar 12)
part from the important
announcements by the
Indias Central Bank
and the government, the
assembly elections in Uttar Pradesh
dominated the news for a large part of
the previous fortnight. While the RBI
in its quarterly monetary policy
review retained key rates, both the
Railway Budget and the Union
Budget 2012 were lackluster. The
Congress party too failed to make a
mark in the assembly elections in
Uttar Pradesh, dashing its hopes of
ruling the largest state in the country.
The RBI kept the repo and the reverse
repo rates unchanged at 8.5% and
7.5%, respectively. But before
making any policy announcements, it
cut Cash Reserve Ratio (CRR) by 75
basis points to 4.75% in order to ease
the existing liquidity situation in the
economy. The RBI has indicated that
the benefit of the various measures it
has undertaken to ease liquidity will
be visible only in due course and has
even said that it may reduce interest
rates based on inflation outlook.
A policy paralysis was seen in the
opposition to the Railway Budget,
A
which led to the resignation of
Railway Minister, Dinesh Trivedi.
Even petrol and diesel prices were not
revised after the assembly election in
Uttar Pradesh.
The Union Budget on the other hand
was in line with expectations. The
Finance Minister has attempted to
reduce fiscal deficit by increasing
excise duty and service tax. However,
triggers for reforms were missing in
the budget. Despite all these
developments, FII inflows remained
strong during this period.
The markets are likely to remain
range-bound and look positive on
declines for investment and trading in
the coming fortnight. The Nifty has
support at the 5,100 level, while it has
resistance at the 5,520 level on the
upper side. Market participants can
look at buying around the support
level of 5,100.
Voltas Ltd (LTP: `122.40), JSW
Energy Ltd (LTP: `68.50), Bajaj
Finance Ltd (LTP: `794.50), Bombay
Dyeing & Mfg Co Ltd (LTP:
`508.70), MRF Ltd (LTP: `9,692.05)
and Reliance Power Ltd (LTP:
`125.70) are stocks that can be
considered from an investment and
trading perspective.
Oil prices continue to remain high
and are, therefore, a point of concern
in the coming fortnighT.
A
Crowd-Puller
Despite their introduction over a decade back,
DVRs are getting their due with the gap between
them and ordinary equity shares narrowing in
recent times
ave you ever wondered
what differential voting
rights (DVR) shares
mean? If yes, then you
are not alone. A large number of
people, especially retail investors, are
unfamiliar with this term. This,
despite the fact that it has been in
existence since nearly a decade now.
Nevertheless, DVRs offer more
potential in terms of returns. In fact,
since they are lesser known, DVRs of
some of the companies are
undervalued. Unlike their perception
of being a complicated product,
H
DVRs are simple to understand as
well as invest.
IMPORTANCE OF DVRS
Every ordinary equity share and its
owner have equal rights in a
company. If a company wants to take
a decision or take over another
company, it will have to seek the
approval of its owners or its
shareholders, who in turn, will
express their decision by exercising
their voting rights. If companies do
not get the requisite votes from their
shareholders, then it cannot pass any
resolution or take decisions on
matters that require the approval of
the shareholders.
There are practical issues too. If you
ask company managements what they
prefer, they would say they much
rather have institutional investors as
shareholders of the company, but
would also prefer them not interfering
in the day to day running of the
company. Many companies are
known to have found it difficult to
convince institutional shareholders or
large shareholders while seeking their
votes for particular decisions. Many a
times institutional investors block
certain resolutions and companies are
forced to rollback resolutions in the
event of opposition or the inability to
obtain enough votes.
There are circumstances when
companies want to raise funds by
issuing additional shares, but they
fear they would lose control as
issuance of additional shares could
result in the dilution of voting rights.
For instance, promoters of a company
have a 51% stake. And following the
issuance of additional shares, the
same could fall to 40%. In such a
situation, the company might fear
losing control and also face
difficulties in seeking approval.
Moreover, a higher stake dilution
could create the threat of a hostile
takeover of the company. All these
situations, particularly for family-run
businesses, could have devastating
effects on companies.
SOLUTION IN ITSELF
A DVR share, as the name suggests,
has solutions to all these problems or
the issues that companies and
investors face. These shares carry
differential voting rights. This means
the shares will remain the same in all
respects compared to the ordinary
listed equity shares, but will carry
differential voting rights.
In this case, say a investor who holds
100 DVR shares, might be having
voting rights equivalent of 10 or
one-tenth of every DVR, whereas an
ordinary equity shareholder who
holds 100 shares could have voting
rights equivalent to 100.
Through the DVR route, the company
may raise funds without diluting
rights because they could carry lower
voting rights. This might solve the
companys problem. But what about
the problems of investors? Why
would they have lesser voting rights
even if they really do not exercise
them? It is true in the Indian context
that not many, especially retail
investors, exercise their voting rights.
ADVANTAGE: DISCOUNTED
PRICE WITH HIGHER DIVIDEND
Why should one shareholder (DVR)
be deprived and the other be given
more privilege (in terms of voting
rights)? In view of these valid
arguments, the need to compensate
DVR holders with lower voting rights
arises. This is why companies offer
DVR shares at a lower price
compared to their counterparts -
ordinary equity shares. But what will
the investor do if the markets closed
for the next five years? Do not worry.
DVR holders are compensated with
higher dividends. This means that if
ordinary shareholders are issued 10%
dividend, the DVR holders get an
additional dividend of 15% or 5%.
Let us now take actual examples to
understand this better. In India,
leading automobile company, Tata
Motors, was the first to offer DVR
shares. Its DVR shares have one
voting right for every 10 DVR shares
held by its owners.
So, in this case voting rights are
almost one-tenth compared to voting
rights enjoyed by ordinary equity
shareholders. Therefore, if you buy
Tata Motors DVR today, they will
have lesser voting rights. However,
for the lesser voting rights you are
compensated by way of price.
Today ordinary equity shares of Tata
Motors are trading at around `279 per
share (as on 9th March) whereas
DVR shares are trading at around
`155 per share (as on 9th March).
This is almost a 45% discount
compared to ordinary shares. That
apart, Tata Motors pays a 5%
additional dividend. So as the
company is expected to declare per
share dividend of `4 next year to its
ordinary shareholders, the DVR
holders will get 5% higher dividend,
which will total to `4.2 per share.
In the first case, one is buying DVRs
at 45% discount. Secondly, if today
one invests in ordinary shares at `279,
then the dividend earnings will be
about 1.4%.
And if the same money is invested in
DVRs, then the dividend earnings
next year will be almost 2.8% if we
include the benefit of 5% higher
divided for DVR holders.
HOW MUCH DISCOUNT
By now it must be clear as to why
DVRs trade at a discount. However,
the bigger question is at how much
discount should DVRs trade at and
how should we value them.
The quantum of discount could
depend on several factors. But in
India, in general, the discount is
observed to be much more compared
to the discount in the global markets.
Globally, the concept of DVRs is
quite old and well understood by
investors. Many global giants like
Berkshire Hathaway, Google, News
Corp, etc have issued DVR shares in
the past. The global price pattern
suggests that most of them typically
trade at about 0-15% discount
compared to ordinary shares. In India
the discount is as high as 40% to 50%,
which many believe is not justified.

PRICE: A REFLECTION OF
LOW AWARENESS
Though this looks illogical, it is
largely on account of the fact that
despite having four listed DVRs at
present, the awareness of the product
is very low. This can be gauged from
the fact that most DVRs have very
low volumes or liquidity. Also, only
institutional investors or large
investors have invested in DVRs in
India. The participation of retail
investors is still very low.
It is possible that in the long run as a
result of increased awareness,
participation could increase, leading
to the discovery of the logical or
reasonable price of DVRs. In such a
situation, the current discount on
DVRs could also narrow down to the
global benchmark.
SHOULD YOU BUY DVRs
Given a chance what would you buy -
ordinary shares of Tata Motors or its
DVR, which are trading at 45%
discount and offering a far higher
dividend yield?
If you are an investor who is not
interested in voting rights, why not
invest in DVRs, which for no major
reason trades at much cheaper prices.
The odds are in favour of DVRs as in
the long run investors will not only
gain on account of structural
investment story but also on account
of higher dividends.
Imagine you have invested in the
DVR of a company which is in the
growth phase and is expected to
increase its dividend payouts over the
long term. In such a situation, the
dividend income alone could be far
more rewarding.
Not to forget, if in the long run, the
gap between DVR prices and
ordinary shares gets narrower, then
there will be an additional kicker to
the overall returns, which could be
very high if it happens at higher prices
in the future. Hence, factors like DVR
discount compared to ordinary shares,
dividend yield, ratio of voting rights
and size of the equity capital play a
critical role while determining the
price of DVRs.
However, simply going by the
discount on DVR shares may not
work always as rules of investing in
equity shares do not change for DVR
shares. This is nothing but one more
form of equity shares albeit with
lesser voting rights.
Investors need to carefully understand
the prospects of the company,
industry in which it is operating and
the company management like we do
before investing in equity shares of
the company.
To conclude, DVRs could be a far
better instrument for long-term
investors who are not very
enthusiastic about voting rights.
However, in the short term, the only
visible risk to these instruments is that
they trade with very thin volumes,
which is why they tend to fall higher
in falling markets as investors tend to
sell them at lower prices in a bid to
exit them.
However, this particular risk will
largely influence short-term
investors; long-term investors can
still leverage on them.
DETAILS OF LISTED DVRs
Tata Motors
Tata Motors issued DVRs in the year
2008 to fund its global acquisition. In
that year, the company announced
rights issue, which also comprised
DVR shares offered at `295 a share
compared to ordinary new shares
offered at `330 a share. In the case of
Tata Motors DVR, investors have
voting rights of one-tenth with the
privilege to get 5% additional
dividend compared to ordinary
shareholders of the company.
Pantaloon Retail
Pantaloon issued its DVRs in the year
2008 through the issuance of bonus
shares to existing ordinary
shareholders of the company. Its DVR
has voting rights of one for every 10
DVRs held by its owner.
However, its DVR investors enjoy
5% additional dividends compared to
ordinary shareholders of the
company. Currently, Pantaloons
DVR at the current price of `102 (as
on 13th March) is trading at 37%
discount to its ordinary shares which
are trading at `161 per share (as on
13th March).
Gujarat NRE Coke
The private sector coking coal
supplier, Gujarat NRE issued DVRs
in the year 2010. Its DVR carries a
voting right of one for every 100
DVRs held by its investors. Its DVR
at the current price of `15.3 per share
is trading at a 40% discount.
However, investors should be aware
that the trading volumes in the case of
Gujarat NREs DVR is very less. The
average two-week trading volumes in
the counter stood at just about 7,700
shares compared to 9.31 lakh shares
in the case of ordinary shares.
1ain Irrigation DVR
Jain Irrigation, which is the leading
player in micro irrigation system,
issued DVR shares recently in
November 11 in the form of bonus to
its existing shareholders. Its 10 DVRs
carry voting rights equal to voting
rights of one ordinary share.
Relatively, in the case of DVRs of
Jain Irrigation, the discount is larger
as currently its DVR is trading at
almost 50% discount at around `52
per share (as on 13th March)
compared to `108 per share price (as
on 13th March) in case of the ordinary
shares of Jain IrrigatioN.
Strong growth prospects,
less competition, high yields
and protability make tier-II
and tier-III cities attractive for
a number of businesses
n the last five years or so, the
demand fundamentals in India
have seen a distinct shift
towards tier-II and tier-III
cities where consumers have the same
aspirations as their counterparts in
large metros.
Consider this: Chandigarh has the
highest number of cars per person,
Lucknow has the second highest
proportion of graduates after Kolkata
and Ludhiana ranks extremely high in
terms of consumerism.
I
Indias younger and English-speaking
middle class population, which
mostly resides in tier-II cities such as
Chandigarh, Lucknow, Ludhiana,
Baddi, Surat, Pune, Nashik
Coimbatore, Visakhapatnam as well
as Kochi are driving demand like
never before.
Tier-II and tier-III cities have become
attractive destinations for several
businesses, be it retail, real estate,
financial services or IT. Economic
growth has trickled down from
SMALL
TOWNS
HOLD BIG
PROMISES
speculative buying helps in keeping
price and demand stable, which really
works for developers exposed to
volatile price and demand movements
in large cities.
A key demand driver for real estate
development across cities is the retail
sector. Experts believe that the
demand for real estate development in
tier-II and tier-III cities will expand
exponentially after the government
allows Foreign Direct Investment
(FDI) in the retail sector.
Foreign retailers such as Wal-mart
and Metro are already operating in the
cash-and-carry segment in smaller
cities such as Raipur and Ludhiana.
With FDI in retail, it is likely that
foreign retailers will open stores in
smaller cities. This is because unlike
metros, tier-II cities have lower real
estate costs attached to retail
operations. Retailers would also be
motivated by consumer
demographics of tier-II cities, which
are seeing an increase in income
generating young population.
Once foreign retail chains open shop
in smaller cities, infrastructure in
tier-II and tier-III cities will improve
because the retail chains will require
warehousing, cold storage and
logistics facilities.
This will have a multiplier effect
because as infrastructure improves,
more national retailers will move
towards tier-II cities. This will, in
turn, stimulate the demand for
commercial and residential real estate
in these cities.
It is not just retail and real estate
sector, even automobile companies
say that the demand for cars in
smaller cities, especially luxury cars,
has been rising in the last few years.
Spending on luxury cars such as
Bentley, Lamborghini, Aston Martin,
Ferrari, Maserati and Bugatti has
grown manifold.
This is quite a change from times
when spending on luxury items was
frowned upon in smaller cities. Cars
such as BMW, Mercedes, Jaguar and
Audi top the list of luxury cars bought
by the rich in cities such as Indore,
Lucknow and Coimbatore.
Realizing the demand potential from
tier-II and tier-III cities, auto
companies such as Mercedes and
BMW are increasing their dealership
in these cities.
While Mercedes has expanded to
Surat, Jaipur and Goa, BMW plans to
take the brand to Aurangabad, Surat,
Ludhiana, Goa, Nagpur, Kolhapur,
Jalandhar, Raipur and Noida.
Luxury car makers are also tweaking
their products to suit the demands of
buyers in smaller cities. Brands such
as Aston Martin, Porsche, Maserati
and Ferrari have introduced four-door
cars because buyers in tier-II cities
prefer four-door luxury sedans
compared to two-door sports cars.
Bike manufacturers are also targeting
the rich in non-metros such as
Guwahati, Jaipur, Bhubaneswar,
Lucknow, Kochi, Bellary and Indore.
For instance, Harley-Davidson plans
to open dealership centres in Kolkata,
Jaipur and Kochi.
A study by ratings agency, Crisil
makes it clear that rising income
levels and a greater propensity to
consume in Indias tier-II cities has
created an attractive opportunity for
retail finance players.
The study covered markets including
Bhopal, Coimbatore, Indore, Jaipur,
Kanpur, Kozhikode, Lucknow,
Ludhiana, Madurai, Mysore, Nagpur,
Nashik, Rajkot, Thiruvananthapuram,
and Visakhapatnam. These markets
metros to smaller cities thanks to
investments by information
technology (IT) and IT-Enabled
Services (ITeS) industries,
improvement in infrastructure as well
as increasing urbanization.
Information Technology, in particular,
has contributed a lot to the growth of
tier-II and tier-III cities. Take the case
of Bhubaneswar in Orissa, which has
become a hot property destination
after three IT companies - Tata
Consultancy Services, Infosys and
Wipro set up their campuses there.
In Kerala, cities such as Thrissur,
Trivandrum, Calicut and Kochi have
seen a lot of activity in property
markets in recent times because of the
growing presence of IT companies in
the cities and also because of the
demand for real estate from
non-residential Indians (NRIs).
Other smaller cities such as Baddi in
Himachal Pradesh and Pantnagar and
Rudrapur in Uttaranchal have
attracted a lot of residential
developers thanks to the respective
governments proactive policies.
Rudrapur, for instance, has seen
prices appreciating by more than 80%
in the past three years, which is higher
than the price appreciation in Indias
hottest property market, Mumbai.
It is not just Rudrapur. There are
many tier-II and tier-III cities like
Coimbatore, Visakhapatnam and
Kochi in the south and Pune, Nasik
and Nagpur in the West, which are
showing steady price appreciation.
Real estate developers are developing
a fancy for tier-II and tier-III cities
because returns in such cities are
stable and much better than metros
over the long-term. There is not much
speculative buying in smaller cities as
has been the case in larger markets
such as Mumbai and Delhi. Lack of
account for about 15% of the demand
for retail loans in India, as per the
report by Crisil.
Crisil research believes that growth
prospects in most of these markets are
very strong. The report estimates that
car loan disbursements in 10 of the 15
markets covered will clock a 20%
compounded annual growth rate
(CAGR) over the next two years
compared to a CAGR of around 13%
in larger cities.
Gold loans are expected to grow at a
much faster pace (more than 50%
annually) in five non-southern cities
covered in the study. Strong growth
prospects, less competition, high
yields and profitability compared
with larger cities make tier-II markets
an extremely attractive proposition
for financiers, as per industry experts
at Crisil research.
Reserve Bank of Indias mandate that
one-fourth of new branches must be
opened in rural and semi-urban
unbanked regions indicates that the
demand for retail loans will also come
from consumers from smaller cities.
These cities would be the main
drivers of retail loans in India, the
Crisil report said.
Crisil says that despite the difference
in volumes, higher profit margins can
make smaller towns as attractive as
metro cities. Banks, however, would
have to be careful about the asset
quality, which could be a concern for
choosing the right cities.
Yields in smaller cities, in products
such as home and two-wheeler loans
is higher while for asset quality again,
in 8 out of 15 cities, bad loans were
comparable to all-India standards.
Crisil says that this means that if
chosen carefully, the fear of more
loans turning bad in smaller markets
could be successfully combated.
Credit card companies have been a
step ahead of banks in offering their
services in smaller cities, where there
is a surge in borrowing for the
purpose of consumption.
Going by the success stories of
several businesses in tier-II and
tier-III cities, it is quite possible that
in the coming years, we may see more
and more companies targeting the
burgeoning demand potential in
smaller citieS.
CORPORATE OFFICE: B-2, 301/302, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel: 022 - 39268000 / 8001; Fax: 022 - 39268010 REGD. OFFI CE: Sonawal a Bui l di ng, 25 Bank St reet, For t, Mumbai - 400 001. Tel : 022 - 39267500 / 7501; Fax: 022 - 39267510
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing.
Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not oering for commodity segment. *Through Nirmal Bang Securities Pvt. Ltd. ^Distributors
#
Prepared by Research Analyst of Nirmal Bang Commodities Pvt. Ltd.
For job openings at Nirmal Bang, visit http://www.nirmalbang.com/careers.aspx
Now, Commodity Trading
Is No More A Puzzle.
Commodity trading can be confusing especially if one is
inexperienced and lacks the necessary skills to trade successfully.
At Nirmal Bang, 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.
PUTTING BRAKES ON POPULISM
Although the proposals put forth in the Railway Budget are
likely to hurt the common man, these changes were long overdue
as they can bring the public utility back on track
clear intention of turning railways
into a profit-making organization.

Apart from this, the Budget has
proposed an increase in fares across
classes on the basis of distance. It
intends to increase fares by 2 paise
per km for suburban and ordinary
second class; 3 paise per km for
mail/express second class; 5 paise per
km for sleeper class; 10 paise per km
for AC Chair Car, AC 3 tier and First
Class; 15 paise per km for AC 2 tier
and 30 paise per km for AC I.
The budget proposes to raise fares
with the inclusion of Fuel Adjustment
Component (FAC). It also suggests
raising the minimum fare and
platform ticket price to `5.
The Railway Budget has outlined
few green initiatives too. These
include setting up of 72 MW capacity
windmill plants in Andhra Pradesh,
Karnataka, Kerala, Tamil Nadu and
West Bengal, setting up of 200 remote
railway stations as green energy
stations, powered entirely by solar
energy and setting up of solar lighting
system at as many as 1,000 manned
level crossings.
It also proposes to introduce a Green
Train to run through the forests of
North Bengal. And it wants to equip
72,500 coaches with bio toilets. In
addition to this, the budget proposes
to come up with close to 725 new rail
projects that would connect cities
across the nation.
The Railway Budget 2012 has
allotted the highest ever plan outlay
of `60,100 crore that would be
financed in the following way:
Gross Budgetary Support: `24,000
crore
Railway SaIety Fund: `2,000 crore
Internal Resources: `18,050 crore
Extra Budgetary Resources:
`16,050 crore. This includes market
borrowing of `15,000 crore and
Public Private Partnership of `1,050
crore
Addition OI 725 New Lines: `6,872
crore allocated for the same
Proposal to electriIy 1,100 km rail
network at a cost of `828 crore
Through this budget, the railway
minister has demonstrated his
foresight in streamlining the
operations of railways.
The budget has revised gross traffic
receipts to `1,03,917 crore from
`1,06,239 crore for FY12. It has also
proposed to revise the working
expense to `75,650 crore from
`73,650 crore for FY12.
It has increased pension payments by
`1,000 crore. And the ministry has
discharged a total current dividend
liability of `6,735 crore.
IMPLICATIONS
There are certain implications or
benefits of these measures. Few
immediate ones include passenger
growth at 5.4%, gross receipts at
`1,32,552 crore, dividend payment
estimated at `6,676 crore, operating
ratio estimated at 84.9% and surplus
expected to be `15,557 crore.
These benefits need to be seen in the
light oI certain realities. Enhancing
the railway infrastructure is likely to
benefit several small construction
companies in the coming years.
The budget has assigned `7.35 lakh
crore in the twelfth five-year plan for
modernization, safety and capacity
additions of Indian Railways.
In comparison with the last five year
plan, this time the budget has almost
his years Railway Budget
was a strict departure from
the Budget the media,
corporations and the
travellers are used to.
The Budget this year focussed on
sense and it was a conscious effort on
the part of the Railway Minister
Dinesh Trivedi to come out with
measures that would address the
concerns of the ailing sector.
This time around the railways has
focussed more on safety and security
by increasing investment on
modernization as well as enhancing
railway infrastructure.
The ministry has identified five focus
areas - safety, consolidation,
decongestion and capacity
augmentation, modernisation and
improvement in the overall operating
ratios of the railways.
The railways have been making
losses for several years now. Hence,
the premise of the railway minister of
improving operational efficiency
instead doling out economical
journeys to travellers is a right step,
although not the most populist one.
We present to you a low down on
what this years Railway Budget
entails and how crucial and beneficial
the measures suggested in the budget
are for travellers and corporations.
MEASURES
The present budget addresses
operational concerns of the railways.
One oI the main initiatives
undertaken by the railways is the
formation of the Railway Tariff
Regularity, which would play a
crucial role in raising, maintaining or
reducing fares and would be
independent of interference of the
railway ministry. This step
demonstrates the railway ministers
T
quadrupled its investment in
improving infrastructure of the
railways. Over the next five years, the
budget proposes to award projects
related to the construction of railway
tunnels, tracks, bridges and terminals.
Mid-size construction companies are
likely to benefit from this investment,
which is spread over the next five
years. On an average, these
companies secure over 10% of their
revenues from the railways. This
would boost the revenues of these
companies, which have few orders
and high interest costs.
Besides this, the current Railway
Budget has proposed the setting up of
a company called Logistics
Corporation. Through this company,
the railways plans to construct
warehouses and multi modal logistics
parks for smooth transport and
storage of goods across the country.
It is estimated that the increase in
freight rates across the board will
impact prices and goods that use
railways as a mode of transport.
An estimate suggests that for the
industry the average increase of over
20% in freight rates (depending on
the class as well as distance), the cost
of production could increase between
1% and 3%, which will be absorbed
into the prices of final products.
Even in case of dairy products where
railway transport is used, the cost
might move up. Also increase in
passenger fares would bring in an
additional revenue of `4,000 crore to
the beleaguered railways. This will
bring down the rising costs of the
public utility.
Experts, however, are quite cautious
of the budget estimate of increasing
the surplus to `15,557 crore from
`1,492 crore in FY12. It relies heavily
on the growth in freight and
passenger fareS.
Spinning
A Web
Of Deceit
Flawed government
policies is the root of
all evils plaguing
the textile industry
in India
he government on 5th
March this year imposed a
ban on cotton exports.
However, it withdrew the ban within a
week following political pressure. If
the ban was not lifted, then besides
farmers, textile companies would
have had less cotton at their disposal.
During this season, cotton exports
touched 95 lakh bales. And an
additional 20 lakh bales are registered
to be exported. Last year, the
government exported around 70 lakh
bales of cotton.
T
Let us understand the implications of
the ban on cotton exports and the
subsequent withdrawal and the
problems that are being faced by
textile companies in the country due
to inconsistent government policies
and low demand in the present
economic slowdown.
It will also allow us to know if this
move would translate into less
production this year or whether this
would lead to a spurt in cotton prices.
Another aspect to look at is whether
this move would improve the
situation domestically.
cotton-surplus country, Indias cotton
export policy allows a chunk of its
production to be exported without
leaving enough stock of cotton for
domestic consumption.

During the second half of calendar
year 2010, the stock-to-use ratio of
cotton - the stock of cotton that is left
for domestic consumption after
exports, was just 15% against the
world average of 40%. This led to a
shortage of cotton and the prices
doubled in the country leading to a
situation where the country started
exporting raw material and importing
finished products.

IN THE RECENT PAST

The December 11 quarter was a
reflection of improved business
environment for the textile industry.
In comparison with the corresponding
period last year, textile companies
across the value chain are expected to
display better performance.
Factors such as new cotton
production (this resulted in a fall in
cotton prices), strong demand after
getting rid of old inventory and
festive season are expected to help
boost the performance of textile
companies across the value chain of
the industry.

In the last few months, it has been
observed that garment-manufacturing
companies have been able to achieve
growth more in value terms than
volumes. Garment and fabric
manufacturing companies had higher
growth in value terms than volumes.
Sales in volume terms came down by
0.5%, whereas in value terms it
increased by 15% to 17%, thanks to
the timely increase in prices
introduced by these companies in the
December 11 quarter.
As a result, garment and fabric
manufacturing companies showed
growth of around 10% in their net
profits and 15% to 20% growth in
their net sales over last years
December quarter.

For companies in the lower end of the
value chain, comparison with last
years December quarter would not
be appropriate due to an extraordinary
situation of an all-time high cotton
and yarn prices.
Spinning mills, which form a
substantial part of the lower end of the
value chain of the industry, are
expected to report profits in the
December quarter from a loss-making
Companies such as Vardhman
Textiles, Nahar Spinning Mills, Nitin
Spinners and Sangam (India) are
likely to report better numbers in the
One of the main reasons for this is
that the textile companies, which had
a strong inventory pipeline benefited
from strong demand in terms of new
orders from fabric as well as
manufacturing companies in the
Apart from this, spinning mills would
also benefit from new prices of yarn,
which increased by 5% to 10% in the
December 11 quarter. Spinning mills
clocked more than 10% growth in
their net sales.

At present cotton prices are trading at
`34,667 per candy (Shankar-6). This
is quite cheap in comparison with
December 10 quarter prices which
were around `42,000 per candy
(Shankar-6).
The only problem that the textile
industry faces is the imposition of
13% excise duty on garment retailers,
which would continue to hit sales of
these companies.
THE BASICS
The textile industry is one of the
oldest and the highest employment-
generating sectors. Despite this,
earnings of most textile companies
have not registered phenomenal
growth since years. This is mainly
due to equipment and asset costs
incurred by textile companies during
the process of expansion.
To address this issue, the government
launched the Technology
Upgradation Fund Scheme (TUFS) in
2005, which helped textile companies
to stay afloat, albeit for a short period
of time. It helped in the expansion of
textile companies.
But when interest rates started
moving up, these companies suffered
a severe financial burden in terms of
high interest costs. Hence, despite
earning decent revenues, a huge part
of the revenues went towards meeting
interest expenses.

In the past five financial years ending
FY11, net sales of top 10 textile
companies in terms of revenues have
grown at a compounded annual
growth rate (CAGR) of 23%, while
for four years ending 2005 (pre-TUFS
period), the sales of textile companies
rose at a CAGR of 17%.
Similarly, the growth in operating
profits improved to 22.5% post-TUFS
as against 17.8% earlier. Very low
levels of net profit or losses in years
FY00, FY01 and FY02 make such a
comparison impossible. This is a
testimony to the fact that in the past
five years, the operating environment
for business in the textile industry has
improved, thanks to TUFS.

One of the impediments textile
players have been facing for years is
abrupt government policies
pertaining to the export of raw
materials. In spite of being a
SITUATION AT PRESENT
Less cotton would be available this
year since the government exported
more during this period. According to
the data released by the Office of the
Textile Commissioner, during this
cotton season from October
-September 12, of the total
production of 345 lakh bales of
cotton, at present 95 lakh bales have
been exported and further 20 lakh
bales are expected to be exported.
This means that only 230 lakh bales
of cotton will be available for
domestic consumption for this
season, which is a drop of over 11%
in the cotton available for local
consumption in comparison with the
previous cotton season.
As such there is weak demand in the
industry across the value chain. Many
textile companies are cautious about
going in for new orders for expansion.
These companies have learnt the
lesson of losing large amounts of
capital on pile up of inventory the
hard way.
In the last one-and-a-half years, there
was a huge pile up of inventories
across the value chain, which resulted
in a huge loss of capital. Its impact
can be seen in the extension of the end
of season sale for most textile
companies, which has gone beyond
January. At present, unsold inventory
of most companies is quite large,
which the companies are yet to
dispense with.
This is due to weak demand. In the
December 11 quarter itself, textile
and clothing production showed no
growth for seven consecutive months
ending October 11.
In October 11, textile and apparel
production fell by 3.2% and 6.8%,
respectively. Hence, there would not
be frenzied buying pattern this cotton
season. Also there is subdued demand
for apparels in the US and the
European markets due to the end of
festive seasoN.
EQUI TI ES | DERI VATI VES | COMMODI TI ES* | CURRENC Y | MUTUAL FUNDS
#
| I POs
#
| I NSURANCE
#
| DP
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not oering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd.
#
Distributors
SMS BANG to 54646
Contact at: 022-3926 9404, E-mail: contact@nirmalbang.com
Registered Oce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 264 1234 / 3027 2000 / 2005; Fax: 30272006
Corporate Oce: B-2, 301/302, 3rd Floor, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
B
U
D
G
E
T
2
0
12
UNI ON BUDGET 20 12-13
While the budget this year has been dubbed
as anti-people and regressive, industry
experts say it is balanced and serious,
in line with present market conditions
which threatened the post of the
Railway minister for making a
reformist move in his budget. Even
the poor show by the Congress
government in the recent state
elections was still fresh in the minds
of the people.
Nevertheless, people were expecting
some sort of direction in controlling
deficit, taming inflation and interest
rates and boosting investment cycle in
the corporate sector. A general
direction towards enforcement date of
the direct tax code (DTC), Goods and
Services Tax (GST) and a boost to the
infrastructure sector, especially
power, were high on the wish list.
While no Union Budget for a single
year in isolation can satisfy all
pockets, a general direction in the
way of proper governance and
progress is what is expected from the
most important financial document of
the nation. In that respect the question
is: has the finance minister delivered?
Consensus is that the Budget lacks
aggression due to political
compulsion, with reforms taking a
hit; yet being realistic in the current
environment. Let us analyze the
budget to get a clear picture.
KEY BUDGET FOCUS
Social spending, fiscal deficit and
infrastructure remained the theme of
the Union Budget 2012-13. While it
has estimated to contain the fiscal
deficit at 5.1% of the GDP, the
government has not projected any cut
in its expenditure. Last years fiscal
deficit shot well ahead of its
projections of 4.6% and stood at
5.9%. The slippage of 1% was due to
lower tax collections and a soaring
subsidy bill due to the surge in oil
prices and the failure to achieve the
disinvestment target.
Total receipts are projected to grow
from revised estimates of last fiscal of
`7,967 billion to `9,773 billion,
while, total expenditure for fiscal
2013 has been budgeted at `14,909
billion as against revised estimates of
`13,187 billion in fiscal 2012. In this
budget, the government has also
raised the outlay for social sector
schemes - from drinking water and
sanitation to education and health.
The question is where is the money
going to come from? For one, it has
hiked indirect taxes like service taxes
and excise duty to fill its coffers from
10% to 12%. Moreover, the
government, as expected, introduced
a negative list for service taxation to
help broaden the tax base.
Second, it expects to raise around
`30,000 crore from disinvestment
proceeds. Third, it expects an amount
of `58,200 crore from the auction of
hen Finance Minister
Pranab Mukherjee
opened his briefcase
to present the federal
budget on 16th March, some had
expected a magic wand which would
take care of the deteriorating fiscal
health, boost investment cycle and get
rid of the infamous policy paralysis
tag off its shoulder. Instead, what
came out was a card game, which the
gullible audience understands in
hindsight as a mere trick.
Magic or sleight of hand, the finance
minister did his job; with some people
in the corner applauding, and others
feeling dejected. The section that
expected magic from the finance
minister believed that being the
penultimate budget before the general
election in 2014, the UPA government
would seize every opportunity for
reforms and reserve the next union
budget for some populist measures.
The case for a reformist budget also
became stronger considering the slip
in GDP growth, higher inflation,
lower overseas investments,
ubiquitous scams, not to forget the
unpredictable western world, which is
facing its own problems.
However, in a run-up to the Union
Budget the expectations were low.
Especially after the recent
controversy over the Railway Budget,
W
Saravana Kumar, Chief Investment Officer, Tata AIG Life Insurance

The Union Budget 2012-13 was a sincere workman-like document
where the Finance Minister, Pranab Mukherjee made an attempt to
deliver moderate fiscal consolidation by increasing indirect taxes,
both excise and service tax. To summarize, though the Union Budget
has fallen short of big ticket reforms, it is broadly seen as credible as
the key assumptions on growth and projections on tax revenue appear
realistic. The overall budget had little surprises and was on expected
lines, being grounded in reality of a moderating Indian economy.
spectrum and license fees.
ARE THE NUMBERS
PROJECTED BY THE BUDGET
REALISTIC?
The budget (last years) was
presented in the first glimmer of hope.
But reality turned out to be different,
said the finance minister as
explanation to the awry predictions of
fiscal deficit. However, experts opine
that things have not changed much
and the estimates are a bit optimistic.
The governments reliance on share
sale of PSUs and hopes of higher
indirect taxes due to the hike in
service tax and excise duty may not
be entirely achievable considering
lower domestic growth and a weak
investor sentiment.
Also, hike in services taxes and excise
duty by 2% are inflationary in nature
as companies will pass these hikes to
customers. Also, in order to fix the
fiscal deficit, the government will
resort to huge borrowings from the
capital markets.
The government borrowing will be to
the tune of `5.69 lakh crore, higher by
around 12% as compared to last year,
which will leave no room for the
Reserve Bank of India (RBI) to tweak
with interest rates and crowding out
the private sector, thus hitting growth.
What happens to the monetary
policy? Surely tight, and interest rates
at elevated levels.
The government had gone wrong in
predicting the economic growth last
time too. It had estimated a growth of
9% for 2011-12 but settled way lower
than that at 6.9%.
This time the budget estimates a 7.6%
growth (+/-0.25%) for fiscal 2012-13,
which experts feel is optimistic given
that the headwinds, both local and
global, are still stronger. The
government expects crude oil prices
to remain near the $115/barrel mark.
It had expected crude oil prices to
remain at $90/barrel.
SUBSIDIES
The Union Budget also makes some
important announcements regarding
capping of` subsidies and it is
welcomed by experts. The current
budget says that for the coming fiscal,
subsidies will be slightly below 2% of
the GDP, and in three years time it
will be brought to 1.7% of the GDP.
Some subsidies, while being
inevitable, may become undesirable if
they compromise macroeconomic
fundamentals of the economy, said
the Finance Minister Pranab
Mukherjee in his budget speech.

These are important words by the
finance minister and have been
widely interpreted by people as a
harbinger to fuel price hike.
Moreover, experts see upside risks to
food subsidy estimates as the
government is also keen to implement
the new Food Security Act in FY13.
However, to reach out to the targeted
beneficiary efficiently and without
leakage, the government in the Union
Budget announced the following
important measures.
A mobile-based Fertilizer
Management System has been
designed to provide end-to-end
information on the movement of
fertilizers and subsidies. Nation-wide
roll out during 2012.
All three public sector Oil
Marketing Companies (OMCs) have
launched LPG transparency portals to
improve customer service as well as
reduce leakage.
Endeavour to scale up and roll out
Aadhaar-enabled payments for
various government schemes in at
least 50 districts within the next six
months or so.
Abheek Barua, Chief Economist, HDFC Bank
The finance minister was saddled with a number of handicaps when
he presented the 2012-13 Budget. It is safe to say that the finance
minister would have worked with the assumption of a fairly sedate
economic growth on the one hand and the prospect of an elevated
inflation and higher subsidies on the other. It is not surprising that
with these constraints, Pranab Mukherjee presented a fairly
middle-of-the-road budget. However, there was little in terms of
actual initiatives that were announced in the budget. What we found
noteworthy was that the Finance Ministers aggregate expenditure
budgeted for next year is a good 18% higher than the budget estimates
for this year. Thus, fiscal consolidation has been largely on the back of higher revenue generation and
not any meaningful compression in expenditure.
TAX PROPOSAL & REFORMS
Not much has been delivered on the
tax reforms front in the Union
Budget. While some of the provisions
of the direct tax code (DTC) have
been proposed in the budget, the code
in entirety has been put on the back
burner. On the Goods and Services
Tax (GST), GST Network (GSTN)
has been proposed to be set up by
August 12 for its quick and efficient
rollout.
On the direct tax front, exemption
limit for the general category of
individual taxpayers has been
enhanced from `1,80,000 to
`2,00,000, giving tax relief of
`20,000 while the upper limit of 20%
tax slab has been raised from `8 lakh
to `10 lakh, thus ensuring higher cash
in the hands of the people for the
purpose of investment.
The budget has also proposed to
allow individual tax payers, a
deduction of up to `10,000 that will
be earned through interest from
savings accounts.
With a view to bring down tax
litigations and provide tax certainty to
foreign investors, the government has
also introduced the Advance Pricing
Agreement (APA) in the Finance Bill,
2012. An Advance Pricing Agreement
(APA) is an ahead-of-time agreement
between a taxpayer and a taxing
authority for some set of transactions
over a fixed period of time.

In a controversial proposal, the
finance minister has proposed
retrospective changes to Indias tax
rules, prompting speculation that
Vodafones $2.2 billion tax case could
be reopened as it has caused a huge
loss to the government in tax losses.
I propose to introduce a General Anti
Avoidance Rule (GAAR) in order to
counter aggressive tax avoidance
schemes, while ensuring that it is used
only in appropriate cases, by enabling
a review by a GAAR panel, the
finance minister said in his speech.
MORE PROPOSALS FOR
DIRECT TAX
Proposal to introduce General Anti
Avoidance Rule to counter aggressive
tax avoidance scheme.
Measures proposed to deter the
generation and use of unaccounted
money.
To provide low-cost funds to
stressed infrastructure sectors, rate of
withholding tax on interest payment
on ECBs is proposed to be reduced
from 20% to 5% for 3 years for some
of the sectors.
OTHER ANNOUNCEMENTS
To protect the financial health of
public sector banks and financial
institutions, `15,888 crore proposed
to be provided for capitalization. The
possibility of creating a financial
holding company to raise resources to
meet the capital requirements of PSU
banks is under examination.
Out of the 82 RRBs in India, 81
have successfully migrated to Core
Banking Solutions and have also
joined the National Electronic Fund
Transfer system. The proposal to
extend the scheme of capitalization of
weak RRBs by another two years to
enable States to contribute their share
National Manufacturing Policy
announced with the objective of
raising within a decade the share of
manufacturing in GDP to 25% and
creating 10 crore jobs.
The government has taken steps to
finalize pricing and investment
policies for urea to reduce Indias
import dependence on urea
`5,000 crore India Opportunities
Sunil Mehta, Country Head, AIG Investments
Contrary to expectations that the budget will be biased towards
populism, the Finance Minister maintained a good balance between
growth orientation and being inclusive. He clearly recognized the
importance of infrastructure in order to put India on a high growth
trajectory and tried addressing some of the key sectors like road and
power. These steps are likely to have a positive impact on propelling
long-term growth. Given the compulsions of a coalition government,
current political challenges, slowdown in the domestic economy and
increased linkages of India to the global economy, the FM has done
his best under these circumstances. While some may argue that the
budget speech should have taken a stronger position on key economic reforms, the Finance Minster
recognized that building consensus and delivering on these announcements would have been a
challenge.
Venture Fund to be set up with SIDBI
Target for agricultural credit raised
by `1,00,000 crore to `5,75,000 crore
in 2012-13.
Interest subvention scheme for
providing short-term crop loans to
farmers at 7% interest per annum to
be continued in 2012-13. Additional
subvention of 3% available for
prompt-paying farmers.
Budgetary allocation for rural
drinking water and sanitation
increased from `11,000 crore to
`14,000 crore, representing an
increase of over 27%.
For 2012-13, `25,555 crore
provided for Right to Education
(RTE), representing an increase of
21.7% over 2011-12.
6,000 schools proposed to be set up
at block level as model schools in the
Twelfth Plan.
A provision of `1,93,407 crore
made for Defence services, including
`79,579 crore for capital expenditure.
Any further requirement to be met.
On black money, the budget has
proposed to lay a white paper on
black money in the current session of
the Parliament
CAPITAL MARKETS
The Union Budget for 2012-13 has a
clutch of announcements pertaining
to the capital markets.
For equity markets, in order to ensure
long-term participation, the budget
has proposed a 20 percentage cut in
the Securities Transaction Tax (STT)
on delivery-based transaction from
0.125% to 0.1% of the transaction
value. This has fallen short of
expectations of a complete do away
with the STT that the broking
community had wished.
Currently, only 10% to 12% of the
overall transactions on both the
exchanges are delivery-based.
Further, a hike in service tax from
10% to 12% will negate the impact of
the STT cut.
To encourage the flow of savings in
financial instruments and improve the
depth of the capital markets, a scheme
for new investors whose annual
income is less than `10 lakh per year
called the Rajiv Gandhi Equity
Saving Scheme has been proposed.
According to this, a tax deduction of
50% would be given to those who
invest up to `50,000 directly into
equities. This will have a lock-in
period of three years.
So, if one invests `50,000, a claim for
tax deduction can be made for an
amount of `25,000. The details will
be announced in due course.
There are around 1.5 crore PAN
holders with income between `2 lakh
and `10 lakh. A back of the envelope
calculation suggest that this will
translate into a huge flow of funds
into the equity markets every year if
all those are eligible to take advantage
of the scheme.
Another important move pertains to
the primary market, where it has been
made mandatory for companies to
issue initial public offerings (IPOs) of
`10 crore and above in electronic
form through nation-wide broker
network of stock exchanges.
In order to provide for a wider
Rajesh Sud, CEO and Managing Director, Max New York Life
Insurance
At a macro level, the Union Budget 2012-13 is a balanced one. The
Finance Minister has taken a step to create an environment for
sustainable growth. The marginal increase in exemption limit on
personal taxation to `2 lakh and realignment of tax slabs would leave
more money in the hands of the consumers. However, the increase in
exemption limit is lower than expected, especially given the high
inflation rate. By increasing additional income tax relief to
investments up to `60,000 in long-term infrastructure bonds, the
Finance Minister has given incentive to long-term savings and
provides additional capital for the infrastructure sector. With respect to the life insurance sector, the
recommendations related to tax exemption under 80 C and 10 (10D) and increase in service tax would
bear a substantial impact. The service tax in products with explicit mortality charges will increase from
10% to 12% of the mortality charges where as in others the service tax on first year premium would
increase from 1.5% to 3% of the gross premium. This will result in different amounts for first year
premium and renewal premium in participating and annuity products, thus resulting in administrative
challenges.
V Srinivasan, Chief Financial Officer, Bharti AXA Life Insurance
Increasing the Sum Assured to Premium Ratio to 10 times will
promote long-term contracts. It will also encourage customers to go
in for higher protection. On the flip side, this will make life insurance
costly for old age bands if they procure a product after the age of 45
since mortality rates go up. Also, increasing the service tax rate by 2%
would result in an increase in cost of insurance for customers. Lifting
the 20% restriction in CENVAT credit and allowing 100% credit is a
very welcome move as it enables insurance companies to recover the
entire input service tax from the output service tax liability. Another
point to note is the bringing of insurance companies within the ambit
of Minimum Alternate Tax (MAT).
shareholder participation in key
decision-making of the listed
corporate, the budget has proposed an
electronic voting facility, which
would be mandatory for all the top
listed companies.
With the objective of encouraging
greater participation from foreign
players in the Indian capital markets,
the budget has also permitted
two-way fungibility of Indian
depository receipts. Two-way
fungibility means that receipts can be
converted into underlying shares and
vice versa (say IDRs of Standard
Chartered Bank). This will help bring
liquidity to IDRs listed on the Indian
bourses, going forward.
As far as bond markets are concerned,
the budget has opened the doors for
qualified foreign investors (QFI) to
access the Indian corporate bond
market. This will help broaden the
base and allow access of foreign
inflow into our country.
INFRASTRUCTURE
The Finance Minister in his budget
speech emphasized on the importance
of infrastructure for our country and
announced few very important
measures to boost the sector. It has
focused on two important issues of
funding and shortage of raw materials
that the industry has been facing in
the past couple of years. During the
Twelfth Plan period beginning this
year and ending in2017, investment
in infrastructure will go up to `50
lakh crore with half of the same
expected from the private sector.
Hence, in this regard, the budget
doubled the limit of issuance of
tax-free bonds to `60,000 crore. This
provides the much-needed solace to
the infrastructure players. Further, in
order to provide low-cost funds to
some stressed infrastructure sectors,
the rate of withholding tax on interest
payments on external commercial
borrowings is proposed to be reduced
from 20% to 5% for three years.
The budget also widened the ambit of
Viability Gap Funding scheme -
subsidizing private players for taking
PPP projects that are not viable - by
including new infrastructure areas
like irrigation, oil and gas storage
facilities and fertilizer and
telecommunication towers.
For roads, the government has
proposed to set a target of covering a
length of 8,800 km under the National
Highway Development Project in
FY13. Again, the allocation of the
Ministry has been enhanced by 14%
to `25,360 crore in 2012-13.
The budget also provided more
avenues of raising funds with
measures like relaxing ECB
guidelines. The budget has also
announced the launch of
Infrastructure Debt Fund with an
initial size of `8,000 crore. It also
proposed that the allocation under the
Rural Infrastructure Development
Fund (RIDF) be enhanced to `20,000
crore. The RIDF is hoped to provide
good opportunity to smaller
infrastructure players.
In a multi-tier corporate structure like
an infra company, which typically
operates with a special purpose
vehicle model, the budget proposed to
remove the cascading effect of the
Dividend Distribution Tax (DDT),
which is positive for infra companies.
The budget also proposes full
exemption from basic customs duty,
countervailing duty (a duty placed on
imported goods that are being
subsidized by the importing
government) and Special Additional
Duty (SAD is being extended to
equipment imported for road
construction projects awarded by
Metropolitan Development
Authorities. All these are seen as
positives for the infrastructure sector.
Revenue Receipts
- Tax Revenues
- Non-tax Revenues
Recoveries Of Loans
Other Receipts
Non-debt Capital Receipts
Borrowings And Other Liabilities
Total Receipts
Non-plan Expenditure
- Revenue Account
- Capital Account
Interest Payment
Plan Expenditure
- Revenue Account
- Capital Account
Total Expenditure
- Revenue Account
- Capital Account
Fiscal Deficit
Revenue Deficit
Primary Deficit
Percentage To Nominal GDP (%)
Revenue Receipts
- Tax Revenues
- Non-tax Revenues
Non-debt Capital Receipts
Total Receipts
Non-plan Expenditure
- Revenue Account
- Capital Account
Plan Expenditure
- Revenue Account
- Capital Account
Total Expenditure
- Revenue Account
- Capital Account
Fiscal Deficit
Revenue Deficit
5,403
4,433
969
61
6
67
3,370
5,470
6,087
5,590
497
1,922
2,752
2,348
405
8,840
7,938
902
(3,370
(2,535)
(1,448)
FY09
9.7
7.9
1.7
0.1
9.8
10.9
10
0.9
4.9
4.2
0.7
15.8
14.2
1.6
(6)
(4.5)
5,728
4,565
1,163
86
246
332
4,185
6,060
7,211
6,579
632
2,131
3,034
2,539
495
10,245
9,118
1,127
(4,185)
(3,390)
(2,054)
FY10
8.7
7
1.8
0.5
9.3
11
10
1
4.6
3.9
0.8
15.6
13.9
1.7
(6.4)
(5.2)
7,885
5,699
2,186
124
228
353
3,736
8,237
8,183
7,265
918
2,340
3,790
3,142
648
11,973
10,407
1,566
(3,736)
(2,523)
(1,396)
FY11
10
7.2
2.8
0.4
10.5
10.4
9.2
1.2
4.8
4
0.8
15.2
13.2
2
(4.7)
(3.2)
7,670
6,423
1,247
143
155
298
5,220
7,967
8,921
8,157
764
2,756
4,266
3,462
804
13,187
11,619
1,568
(5,220)
(3,950)
(2,464)
FY12RE
8.6
7.2
1.4
0.3
8.9
10
9.1
0.9
4.8
3.9
0.9
14.8
13
1.8
(5.9)
(4.4)
9,357
7,711
1,646
117
300
417
5,136
9,773
9,699
8,656
1,043
3,198
5,210
4,205
1,005
14,909
12,861
2,048
(5,136)
(3,504)
(1,938)
FY13BE
9.2
7.6
1.6
0.4
9.6
9.5
8.5
1
5.1
4.1
1
14.7
12.7
2
(5.1)
(3.4)
BUDGET ARITHMETICS
(` in billion)
FY09 FY10 FY11 FY12RE FY13BE
Source: Budget documents Note: RE: Revised estimates; BE: Budgeted estimates
OTHER IMPORTANT SECTOR-
SPECIFIC ANNOUNCEMENTS
POWER SECTOR
In some relief to the power sector, the
budget has proposed duty exemption
for coal and liquefied natural gas
(LNG) imports, extended tax breaks
for new projects and has allowed
utilities to replace high-cost rupee
debt with foreign borrowings through
external commercial borrowings.
It has asked Coal India to sign by
March-end firm agreements for
supply of fuel to power projects
commissioned up to December 11,
taking care of the issue of raw
materials of power companies. The
Union Budget has also proposed to
extend the sunset date clause for
setting up power sector undertakings
by one year. This clause allows
companies to claim a 100% deduction
in profits for 10 years.
AVIATION
A tax concession has been proposed
for parts of aircraft and testing
equipment for third party
maintenance, repair and overhaul of
civilian aircraft. MRO as it is
generally called is a huge cost for the
aviation industry. The budget also
proposed external commercial
borrowings (ECBs) to be permitted
for working capital requirement of
airline industry for a period of one
year, subject to a total ceiling of
around US $1 billion.
While it is unclear as to how the
industry will use this as the quality of
collateral remains a concern for the
sector, the Finance Minister also
emphasized that the proposal of
allowing Foreign Direct Investment
(FDI) of 49% in the beleaguered
industry is under active consideration.
Rana Kapoor, Managing Director & CEO, Yes Bank
It is a realistic budget. While the fiscal consolidation target of 5.1%
(expect 10-15 bps more) is a little higher than comfort levels, it is
fairly achievable if subsidy burdens are curtailed efficiently. There
was strong recognition by the Finance Minister that banking and
capital markets are the main intermediary and the key for transmitting
monetary policy. Measures towards deepening the corporate bond
market, attracting qualified foreign investments and increasing
participation of retail investor in equity and bond is very credible and
long term. The stress on infrastructure, which has been a key
bottleneck gets some breather. Infrastructure tax-free bonds would be
doubled in the coming year to `60,000 crore, giving tremendous impetus to almost all sectors.
Nimesh Shah, MD & CEO, ICICI Prudential AMC
The Union Budget has been a tight ropewalk between triggering a
roadmap for fiscal consolidation and managing development and
sentiments. The increase in service tax by 2% and an increase in
excise duty were anticipated and have resulted in some fiscal respite.
The introduction of the Rajiv Gandhi Savings scheme is a clear
positive for the equity market by way of increased long-term investor
participation. In addition, reduction in STT on delivery by 20% has
added to investors return potential for equity. Going forward, the
budget will have to be followed by a decrease in subsidy in tune with
budget estimates. The market will require the government to take the
fiscal consolidation roadmap ahead with possible increase in oil/ petrol prices, which will be crucial in
providing the RBI the headroom for significant rate action. Until then, it is over to affirmative
execution by the government.
For starters, a Union Budget is akin to a household budget
where income and expenditure of a family are sorted out,
prioritized and allocated as per the priority. Except for the
fact that for a nation the streams of income and
expenditure become much more complicated. The union
budget of the government comprises of many documents.
One of the important documents is the annual financial
statement, a statement of estimated receipt and
expenditure. The preparation of these statements
undergoes a process wherein all stakeholders like
individual ministries, tax authority, industry body, etc are
consulted. Estimates are made regarding receipts and
expenditure. The budget is then presented on the last day
of February every year in front of the Parliament by the
finance minister. However, in case of events like elections,
like we had this year in five states, the budget gets
postponed. The budget gets debated in the parliamentary
session, seeks approval and is enforced from the beginning
of the new fiscal year that is 1st April.
Like a household where the money is kept in a bank
account, the nations income is kept in an account called
the consolidated fund. All revenues received, loans raised
and receipts from recoveries of loans granted by the
government gets into the consolidated fund. All
expenditures of the government are made from this fund.
Any expenditure from this account requires the approval
of the Parliament.
Apart from this account, there are two more accounts. The
contingency fund, a `500-crore fund, which is used only
during emergencies and is approved by the President and
any amount withdrawn is made good from the
consolidated fund.
Public account is the other account where money in it does
not belong to the government, but acts as a mere banker.
Transactions relating to Provident Fund and small savings
collections, among others fall under this category and the
disbursements are also made from this account. It does not
need any parliamentary approval.
Now, according to the priorities set by the government, an
estimate of expenditure towards an individual scheme or
industry is made. These estimates as put in the budget
papers are called budget estimates for the following year.
It may be for a scheme or an industry. Once the financial
year gets underway, the scheme or the ministry may need
more funds than what was allocated.
The government then approaches the Parliament (during
the parliamentary session) for additional demand and gets
reflected in the revised estimates for the current year.
Actual amount is the final amount calculated once the
financial year is over and spent under different heads and
may exceed or fall short of the revised estimates.
The government usually raises resources from taxes.
According to the need, the taxes are altered and this
change in taxes is sometimes also called as the fiscal
policy of the government.
In order to have a systematic approach to the expenditure
and receipts, the government breaks it into different heads.
GOVERNMENT RECEIPTS
Revenue: It comprises of tax revenue and non-tax
revenue. Again, tax revenue can be divided into direct tax
and indirect tax. A direct tax is imposed and collected
directly from individuals or a company. Examples of direct
taxes are income tax, capital gains tax, gift tax, wealth tax,
etc. Indirect taxes include customs - a tax on imports,
service tax - a tax on services rendered and excise - a tax
Murthy Nagarajan, Head Fixed Income, Tata Asset Management
Ltd
The total gross borrowing programme of `5.69 lakh crores and net
borrowing of `4.79 crores is higher compared with market
expectation. The fiscal deficit number of 5.1% of the GDP is,
however, more realistic. The borrowing programme will be front
loaded, due to lower revenue receipts and higher redemptions in the
first half of the financial year. The 10-year G-Sec yields may trade in
the band of 8.10% to 8.60% in the first half of the financial year.
Impor tant Budget-Related Ter minologies
on production. Non-tax revenue includes administrative
receipts, net contribution of PSUs, including railways,
posts, currency and mint, etc.
Capital: It does not occur during the normal course of a
business. These arise when the government sells some of
its assets or borrows from external or internal sources.
Borrowings from different sources make up for
debt-creating capital receipts, while sale of assets are
classified as non-debt creating capital receipts.
Hence, government receipts can be classified into tax and
non-tax revenue and debt-creating and non-debt creating
capital receipts.
GOVERNMENT EXPENDITURE
Revenue: Broadly, the expenditure which does not result
in the creation of assets for the government is treated as
revenue expenditure. It covers normal activities of
departments, services, subsidies, interest payment of debt,
etc. All grants given to state governments and Union
Territories fall into this category, even as some of the funds
may be used for creating assets.
Capital: Capital expenditure results in creation of assets
in the economy and its benefits are reaped over a period of
time. It does not include operating expenditure. Examples
of capital expenditure are building infrastructure projects
like roads and ports, buying land, making buildings,
purchase of machinery and equipment, etc.
The total expenditure of the government is also divided
into plan and non-plan expenditures to have a clear picture
of allocation. This usually complements the Five-Year
Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance
The Union Budget has taken steps towards fiscal consolidation,
although somewhat less than expected. Revenue raising through
increase in excise duty and service tax rate from 10% to 12%, and
broad-basing the service tax was pragmatic and in line with
expectations. The move to a negative list on services tax and
harmonizing of service and excise tax at a higher rate are steps in the
right direction. However on subsidies, while there were no populist
measures, we need to see whether tough action on fuel and fertiliser
subsidies is taken later. Absent this, the budget would continue to be
exposed to volatility in commodity prices. Bond and equity markets
have both reacted negatively to the high market borrowing requirements.
Plans of the government. Both plan and non-plan
expenditures have revenue and capital parts.
PLAN AND NON-PLAN EXPENDITURES
Plan expenditure is directly related to expenditure on
schemes and programmes budgeted in the governments
plans. The non-plan expenditure is the expenditure
incurred on establishment and maintenance activities.
Non-plan capital expenditure mainly includes defence,
loans to public enterprises, loans to States, Union
Territories and foreign governments.
On the other hand, non-plan revenue expenditure includes
expenses on interest payments, subsidies (mainly on food
and fertilizers),wage and salary payments to government
employees, grants to governments of States and Union
Territories, pensions, police services, economic services in
various sectors, other general services like tax collection,
social services, and grants to foreign governments.
REVENUE DEFICIT
It is nothing but the difference between revenue
expenditure and revenue receipts.
FISCAL DEFICIT
It is nothing but the difference between the total
expenditure and the sum total of revenue receipts and
recovery of loans.
PRIMARY DEFICIT
Fiscal deficit minus interest payment is primary deficiT.
Change i n product mi x, shi ft from API to
formul ati ons, l aunch of new products and
hi gher economi es of scal e are l i kel y to boost the
prospects of Al embi c Pharmaceuti cal s Ltd
stablished in 1907, Alembic Pharmaceuticals
Ltd (APL) is a vertically integrated company
with presence in API, formulations and R&D.
The company has three API and two formulation facilities
at Panelav (Vadodara) and Baddi (Himachal Pradesh). It
has a state-of-the-art research centre at Vadodara.
E
A
PARADIGM
SHIFT
1907 - Started manufacturing tinctures and alcohol at
Vadodara
1940 - Started manufacturing cough syrup, vitamins,
tonics and sculpture drugs
1971 - Erthromycin manufactured for the first time in India
2001 - Started manufacturing Cephalosporic C
2004 - State-of-the-art research centre established in
Vadodara
2006 - USFDA approvals for API and formulation plants
2007 - Acquisition of non-oncology business of Dabur
Pharma
2011 - Demerged pharma business into Alembic Pharma
Demer ged Into Alembic Phar ma
The age-old Alembic Ltd demerged its pharmaceutical
Timeline
business into a different company Alembic
Pharmaceuticals in 2011 and retained its land reserves and
loss-making Pencillin business in Alembic Ltd. In this
way, the company created more value for its pharma
business, which could lead to re-rating of the separated
Alembic Pharmaceuticals.
INVESTMENT RATIONALE
Shift From API To For mulations
Alembic Pharmaceuticals Ltd is a vertically integrated
company, having presence in API, formulations and
research and development segments.
It has three API and two formulations plants - at Baddi
(Himachal Pradesh) and at Panelav (Gujarat). All plants
are currently working at full capacity.
Of the total capacity of API production, 30% to 35% is
used for captive purpose and the remaining is sold outside.
API contributes around 25% of the overall revenues.
However, being a commoditized and low-margin business,
APL is not planning any expansion activity on that front
despite overflowing orders. Instead, the company is
optimizing the current capacity by only accepting higher
margins or better orders for API. This provides a better mix
within the API portfolio.
For formulations, the company is outsourcing 35% of its
domestic production requirement. To have more reliance
and better margins, the company is seeking to reduce the
outsourcing portion and undertaking an expansion plan for
the same.
To meet its growth needs, APL is undertaking expansion at
its Panelav formulation plant. It is doubling the current
capacity of 2.6 bn tablets at the plant to 5 bn tablets. The
total capex is approximately `80 crore, largely from
internal accruals. The potential incremental sale from
incremental capacity is `350 crore. The expanded facility
is expected to be operational by Q3FY13.
As a consequence, the share of API is expected to come
down in the coming years. APL is expecting the
contribution of API to total sales to go down by 3% to 4%
year-on-year in the future. This would aid the company in
increasing EBITDA margins, which is expected to go to
17.1% in FY14E from 13.2% in FY11.
Higher Thr ust On Inter national Mar kets
APL operates both in regulated markets like the US,
Europe, etc (14% of revenues in FY11) as well as
semi-regulated markets like Russia, Africa, Vietnam, etc
(4% of revenues in FY11).
Alembic Pharma entered regulated markets 7 to 8 years
back and began filing products from 2005 onwards. In the
last five years, revenues from developed markets have
grown at a CAGR of 40% and currently contributes 17% of
revenues (as on 9MFY12; up from 14% in FY11).
For regulated markets, the company follows a
de-leveraged model wherein it partners with big
distributors or generic companies for distribution of their
products. This acts as a win-win situation for both the
parties involved, especially for Alembic as it can gain from
large distribution network of such companies and take
benefit of established marketing and sales capabilities. It
also reduces the upfront payment of APL and de-risks its
business model.

Till Q3FY12 the company has filed 41 ANDAs (including
four Para IV products) and has got 17 approvals. However,
it has launched only six out of them. Although this might
be seen as a negative on one hand, it provides huge growth
opportunity in the future on the other hand. APL is
expected to commercialize one more product in Q4FY12
and thereafter is likely to launch two products per quarter.
APL has also filed 59 DMFs and is expected to take this to
68 by FY12 end.
Source: Company Data, Nirmal Bang Research
3
8
8
9
13
9
3
11
19
28
41
50
FY07 FY08 FY09 FY10 FY11 FY12E
ANDAs Filings
6 11
11 11
17
12
6
17
28
39
56
68
FY07 FY08 FY09 FY10 FY11 FY12E
DMFs Filings
Mar gins
Sales And Sales Growth
Revenue from international markets is likely to be the next
big growth trigger for the company and is expected to grow
at a CAGR of 30%, post expansion.
Increasing Focus And Share Of Chronic Ther apies In
Domestic For mulations
Domestic formulations have contributed 57.5% of total
revenues (in FY11).
APL originally started as an acute player with a negligible
presence in the chronic segment. It is the market leader in
the Macrolide segment of Anti Infective and all its three
brands, namely Azithral, Roxid and Althrocin figure
among the Top 100 brands in India, with over 40%
market share in each of them. The segment is a cash cow
for the company with steady income and minimum
incremental efforts.
It entered the chronic segment through the acquisition of
the non-oncology portfolio of Dabur in 2007. Since then,
chronic portfolio at Alembic has been growing at a CAGR
of 20% to 25%, whereas acute portfolio is growing at a
CAGR of 7% to 9%. The chronic segment currently
contributes 35% of domestic formulations revenues, which
is expected to touch 50% in the next two years.
Lower dependence on the acute segment would provide
revenue stability (as acute segment is seasonally affected)
and better margins to the company.
To further reduce the dependence on acute therapies, APL
has identified three new therapeutic segments to expand -
Dermatology, CNS and Respiratory.
The strength of its current field force is 3,300 (2,700 MRs)
and it plans to add 200-300 more to expand the companys
spread in future identified therapies.
RISKS AND CONCERNS
Regulator y
Alembic Pharma Ltd operates in many countries and
derives 40% of its revenues from exports alone. Every
country has its own set of rules and regulations and the
company has to comply with them. Any error or non
compliance issue could impact future revenues and growth
prospects of the company.
Delay In Expansion Plans
Alembic Pharma is currently operating at full capacity,
which is limiting growth prospects of the company. To take
advantage of increasing demand, the company is
undertaking the expansion of its formulations plant, which
is expected to be operational by Q3FY13. However, any
delay in the plant or cost overrun can defer the growth
plans of the company and would impact our projections.
Dependence On Par tner s For Front-End Mar keting
Alembic Pharma partners with local generic companies in
the developed markets for front-end marketing of its
products. Although it provides de-risk to the business
model of the company, overdependence on front-end
companies also limits the overall gains of APL as it needs
to share profits with front-end companies. Despite having
product approvals it has to wait for the consent of the
partner to launch the product in the market. As a result, the
company may lose the market opportunity.
OUTLOOK
For FY11-14, we expect Alembic Pharmas revenues to
grow at 18.4%. However, PAT is expected to grow faster
that is, 38.6% during the same period on account of the
change in product mix, shift from API to formulations,
launch of new products and higher economies of scale.
5.2
22.2
14.8
18.1
0
5
10
15
20
25
0
500
1000
1500
2000
2500
FY11 FY12E FY13E FY14E
Sales Growth
13.1
15
16.2
17.1
7.1
8.9
10.2
11.5
0
2
4
6
8
10
12
14
16
18
FY11 FY12E FY13E FY14E
EBITDA Margins PAT Margins
%
%
`

i
n

c
r
o
r
e
With its planned strategy and concentration on higher margin revenue avenues, Alembic Pharma is at the right juncture to
take the next lead on higher growth trajectory. Alembic Pharma Ltd has all the elements of success in place competitive
management and correct business model at lower valuationS.
FY11A
FY12E
FY13E
FY14E
1192.40
1457.70
1674.90
1978.50
5.30
22.30
14.90
18.10
157.20
218.70
271.30
338.30
13.20
15.00
16.20
17.10
85.40
136.70
175.10
227.40
7.20
9.40
10.50
11.50
4.50
7.30
9.30
12.10
9.5
6.2
4.7
3.5
28.80
34.30
33.30
32.80
Financials
Year Net Sales
(` Cr )
Growth
(%)
EBITDA
(` Cr )
Mar gin
(%)
Adj PAT
(` Cr )
Mar gin
(%)
EPS
(`)
PE
(x)
ROE
(%)
QUAL

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP
# # #
AT NIRMAL BANG, YOURE MORE THAN
JUST A BUSINESS ASSOCIATE,
YOURE AN EQUAL PARTNER.
Contact Person: Gaurav Mohta - 07738380299 & Nilesh Sonawane - 07738380027
Address: B-2, 301/302, 3rd Floor, Marathon Innova, O. G. K. Marg,
Lower Parel (W), Mumbai - 400013.
Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Dos and Donts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors
Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 8601; Fax: 39268610, Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
Through its latest directive,
SEBI has tried to address
key issues, which
are likely to boost the
mutual fund industry
arket regulator,
Securities and
Exchange Board of
India (SEBI) recently
came out with a circular for mutual
funds. Now, fund houses can use
more advertisement space to highlight
about the schemes. Also, fund houses
have been asked to bring down the
threshold for mark-to-market (MTM)
requirements in debt funds to 60 days
from 91 days earlier. These norms
will be applicable from 30th Sept 12.
Market participants say that the new
rules will lead to a lot of volatility in
the performance of liquid schemes.
But the move will also ensure that a
paper in which a mutual fund invests
shows the fair value, rather than the
amortization value.
SEBI has also asked fund houses to
complete due diligence for
M
distributors. Earlier it was projected
that fund houses might give the due
diligence process to some other entity,
but following instructions from the
regulator, it will be the duty of mutual
fund houses to complete the due
diligence process.

SEBI has also mandated that fund
houses appoint a separate fund
manager for each fund managed by it
unless investment objectives and
asset allocations are the same and the
portfolio is replicated across all funds
managed by the fund manager.
Overall, the move by the regulator
might bring some new investors into
mutual funds. In the last few years,
huge outflows from equity schemes
were seen as many distributors
stopped selling mutual funds. But this
step from the regulator will, on the
whole, help not only retail investors
REKINDLING
INVESTOR
INTEREST
VALUATION OF DEBT AND
MONEY MARKET MFs
SEBI has also decided to further
tighten valuation norms for debt
funds. It has decided to reduce the
threshold for mark-to-market
requirement on debt and money
market securities from 91 days to 60
days. Debt securities below the tenure
of 60 days will follow the
amortization method, while securities
maturing above 60 days will have to
be valued at their market prices.
The mark-to-market (MTM)
valuation for money market and
liquid instruments was started in July
10 by SEBI to avoid a repeat of the
liquidity crisis that was faced after the
collapse of Lehman Brothers in 2008.
In 2010, valuation norms that is
debt and money market instruments
eligibility for MTM valuations - was
reduced from 182 days to 91 days.
SEBI, in its release said, In case debt
and money market securities are not
traded on a particular valuation day,
then valuation through amortization
shall be restricted to securities having
residual maturity of up to 60 days
(currently 91 days), provided such
valuations are reflective of the fair
value of securities.
Liquid funds invest in short maturity
instruments like commercial papers,
certificates of deposits and treasury
bills. SEBI said to further enhance
transparency, the AMCs shall disclose
all details of debt and money market
securities transacted (including inter
scheme transfers) in its schemes
portfolio on AMCs website.
The same has be forwarded to the
Association of Mutual Funds in India
(AMFI) for consolidation and
dissemination as per the format
enclosed. The disclosures shall be
settled date wise on a daily basis with
a time lag of 30 days.
DUE DILIGENCE BY AMCs AND
SEPARATE FUND MANAGERS
Few months ago, SEBI had asked
fund houses to perform due diligence
on distributors. But there was not
much clarity then as fund houses were
planning to outsource the process.
Now, the regulator has finally asked
fund houses to complete the due
diligence process for distributors.
In its release, SEBI said, It is hereby
clarified that the due diligence of
distributors is solely the responsibility
of mutual funds. This responsibility
shall not be delegated to any agency.
However, mutual funds may take
assistance of an agency of repute
while carrying out the due diligence
process of distributors.
Fund houses were unhappy with the
move as it would increase their work
load. But the positive side is SBEI
has allowed them to take help of an
agency while carrying out the due
diligence procedure.
Finally, in order to address the issue
of conflict of interest wherein a fund
manager manages schemes of a
mutual fund and is engaged in other
permissible activities of fund houses,
the regulator has mandated that fund
houses should appoint a separate fund
manager for each fund managed by it
unless the investment objectives and
asset allocations are the same and the
portfolio is replicated across all funds
managed by the fund manager.
However, the market regulator also
stated that the replication of minimum
70% of the portfolio value shall be
considered as adequate for the
purpose of the said compliance,
provided the AMC has in place a
written policy for trade allocation and
it ensures at all points of time that the
fund manager shall not take
directionally opposite positions in the
schemes managed by hiM.
but also fund houses (except few top
fund houses) who are facing losses.
NEW ADVERTISEMENT NORMS
Securities and Exchange Board of
India (SEBI) has provided the much
needed relief to fund houses by
making several changes in
advertisement norms for mutual
funds. The new rule basically
simplifies and relaxes many of the old
rules. The new norms will save costs
for fund houses, while investors
might benefit from simple
advertisements, and thus help
penetrate mutual funds in rural India.
Earlier a strict advertising code by
SEBI was in place for mutual funds
ever since the first set of mutual fund
regulations was drafted in 1986. The
original advertising code
incorporated 19 rules dictating what a
mutual fund may or may not display
in its advertisements.

With new rules in place, advertising
code for mutual funds will be
principle-based from being
rule-based, requiring fund houses to
make fewer disclosures.
Under the new rule, risk factors with
more prominence in the past will now
be replaced by a disclaimer stating:
Mutual funds are subject to market
risk. Please read the scheme-related
offer documents carefully.
SEBI also said while advertising pay
out of dividends, all advertisements
shall disclose the dividends declared
or paid in rupees per unit along with
the face value of each unit of that
scheme and the prevailing NAV at the
time of declaration of the dividend.
The new advertisement norms might
save money for fund houses, which
are already posting losses year after
year and the new set of investors
might come and invest in MFs.
Q.
What accor ding to you is the
differentiating factor
between Ace and other
commodity exchanges and
how does the Kotak advan-
tage help?
Ace focuses on bringing differentiation
through its product design, delivery mecha-
nism, technology solution and customer
service.
In the product side, we have launched
soymeal contract, which is currently not
available on any other exchange in India.
With the launch of this contract, we now
offer trading in all the three constituents of
soya complex namely soybean, refined
soyoil and soya meal. In the technology side,
we have a unique Spread Window functional-
ity that helps the trader to take advantage of
calendar spreads with a single click.
In processes, we have ComFin- a facility that
provides a seamless delivery financing
through tie-ups with banks and financial
institutions.
The Kotak Group not only brings in more
than 25 years of financial expertise but also
the ability to pioneer many business practices
existing in the financial services industry.
Being an anchor investor, Kotak also lends
credibility and trust that it has built over the
years, to Ace.
Q. In the cur rent restr ictive environment
that commodity exchanges wor k in, how
difficult is it to launch contr acts?
The current environment, without the
passage of the FCRA Amendment Bill, limits
the scope of commodity exchanges to
introduce new products such as Options and
indices, which will be beneficial to the
farmers and other market participants. In
such a scenario, the contracts that can be
launched within each of the product basket
are limited.
Also, in the absence of a market making
mechanism (as exists in equity markets), it is
difficult to launch new products and attract
Our efforts have been to
garner volumes by growing
the markets. We want to do
this by launching contracts
that are not available on
other exchanges, getting
new market participants
and creating awareness
about futures trading.
Dilip Bhatia, CEO, Ace Der ivatives
and Commodity Exchange Ltd speaks
to Beyond Market about Ace and its
plans for the future
innovation. New exchanges provide
market participants an alternative
platform to hedge their risks and
increase their participation. Over a
period of time each of the players will
find its own area of dominance and at
that time we see possibilities of
alliances within various players to
work together.
Q. What does Ace do to provide an
efficient and tr ansparent pr ice
discover y platfor m?
liquidity in them.

Q. Do you think that being a
relatively new player it has been
difficult for you to gar ner enough
volumes as compared to your
peer s?
Being the fifth and the youngest
national exchange in the country is
obviously a challenge. However, we
are very happy with our growth story
in the last 15 months. We have more
than 500 members on the platform
with a substantial number actively
trading on the platform.
The Average Daily Traded Value and
Open Interest have also been increas-
ing steadily. The Exchange has
clocked an impressive volume growth
of over 100% in HY 2011 and 36% in
Dilip Bhatia
Chief Executive Officer (CEO) at
Ace Derivatives and Commodity
Exchange Ltd
A Chartered Accountant (CA) by
qualification, Dilip Bhatia comes with
17 years of rich and diverse experience
in the Banking and Finance sectors.
He joined the Kotak group in 2007 as Sr.
Vice President Kotak Securities. Prior
to Kotak, he was Project Leader with
AXA Investment Managers, COO with
Aegon International and COO for MF,
Broking for IL&FS Group.
In his free time, Mr Bhatia likes
traveling, watching movies and reading.
Q2 2011.
Q. What are your thoughts on
competition? Do you think that
there is space for more commodity
exchanges in the countr y and how
will it benefit the investor commu-
nity at lar ge?
Given the size and diversity of our
commodity sector and anticipated
reforms, new players will create
healthy competition and encourage
Ace was the first national-level multi
commodity exchange to calculate the
Final Settlement Price on the basis of
the last 3 days average spot price.
This has ensured a more efficient and
transparent price discovery mecha-
nism. To ensure that spot prices are
more reliable, Ace conducts polling
from multiple centers rather than a
single base center.
Q. How do you r ate the per for -
mance of the recently launched
soymeal and other agr i commodi-
ties on Ace?

We are extremely happy with the
performance of the Exchange in the
contracts currently being traded on
the exchange. Commodities such as
soybean and refined soyoil have
garnered a good market share,
ranging between 10% and 20%.
Additionally, open interest that is a
barometer of the market confidence is
above 1.2 lakh MT on a daily basis.
Soymeal, which was launched in the
month of January, has seen a good
response, with a fair amount of
interest from market participants.
Q. What are the plans of Ace in the
metal and precious metals space as
these are volume dr iver s in India?
Ace will be looking at launching
non-agri products within this
financial year after we have stabilized
all the products in the agri basket. We
feel it is very important that each and
every product that is launched gets
adequate focus and time to stabilize in
the market before launching a new
product.
Q. What are your future plans on
launching more contr acts and how
do you plan to ensure wider par tici-
pation in them?
We will look at launching at least two
more contracts in the agricultural
space before launching contracts in
the non-agri side. We would like to
bring in products that are well-
researched as well as relevant to
market participants.
Our efforts have been to garner
volumes by growing the markets -
launch contracts that are not available
on other exchanges, get new market
participants and create awareness
about futures trading.
Q. What have been the recent
initiatives of Ace with regar ds to
tr aining and awareness? What are
your future plans in this regar d?
Trading in commodity futures is still
at a very nascent stage in India with
the value of commodities traded in
India at 3.3 times the annual
consumption of such commodities as
compared to the global benchmark of
30-40 times. We would like to be a
part of the growth story and invest in
expanding the market.
Since the launch we have been
conducting various programmes to
train market participants on technol-
ogy features as well as investor
seminars to increase awareness about
commodity derivatives trading in
general as well as Ace in particular.
Going forward, we plan to conduct
regular awareness programmes along
with the regulator in various cities
and towns of India to spread aware-
ness of futures trading to farmers and
traders who can directly benefit from
the exchange platform by hedging
their risks.
Q. What needs to be done by the
regulator and exchange to unleash
the potential of the commodities
mar ket in the countr y?
One of the most anticipated reforms
for the growth of the commodity
markets in India is the passage of the
FCRA Amendment Bill in the parlia-
ment. The passage of this bill will
strengthen the regulator, provide
opportunities in launching products
such as Options and indices, and
allow foreign institutional investors
(FIIs) and corporates to trade.
The regulator should allow some
form of market making to ensure that
liquidity is attracted into the newly
launched contracts. This will also
play a pivotal role in the growth of the
newly set up exchanges.
Q. Do you have any plans to open a
spot exchange for agro commodi-
ties like NSEL?
We look at all businesses that support
and grow along with the futures
platform and Spot is one such
business. We are constantly evaluat-
ing the opportunities and will enter at
the right timE.
ACE DERIVATIVES AND
COMMODITY EXCHANGE
LTD
Kotak anchored, Ace Derivatives
and Commodity Exchange Ltd is a
screen -based online derivatives
exchange for commodities in
India. Ace Commodity Exchange,
earlier known as Ahmedabad
Commodity Exchange, has been in
existence for more than five
decades in the commodity
business.
The Kotak Group brings with it
more than 25 years of financial
expertise and has pioneered many
business practices existing in the
financial services industry.
Ace Commodity Exchange offers
futures trading in various
commodity complexes like
agricultural products, bullion, base
metals as well as energy.
Registered Oce: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610, Corporate Oce: B-2, 301/302, 3rd Floor, Marathon Innova, O Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010
Contact - Daisee Boga: +91-22-39268244, 7738068289
100 100 100 100 100 100 100 100 100
100 100 100 100 100 100 100 100 100 100
100 100 100 100 100 100 100 100 100
FINANCIALS
The company is expected to post net sales of `374.1 crore and `588.0 crore in FY12 and FY13, respectively. The PAT for
FY12 and FY13 is expected to be `60.7 crore and `68.2 crore, respectively.
Complete benefits of the expanded facilities would be visible in FY14E. The revenues of the company for FY14E are
expected to be around `820.3 crore and the EBITDA of `438.1 crore is likely. The net profit for the year should be around
`187.8 crore, translating into an EPS of `8.2 for the companY.
y virtue of possessing three
out of the six issued offshore
gaming licenses in the state of
Goa, Delta Corp Ltd (Delta Corp) is
the largest and the only listed
company within the gaming and
hospitality segment in India.
The company is rapidly expanding its
gaming position in Goa and is
currently setting up a casino in
Daman with full benefits to accrue
from FY14E.
INVESTMENT RATIONALE
Gaming Position Set To Grow
Five-Fold
The total gaming position of Delta
Corp Ltd is set to grow five-fold over
the next 12 months to 15 months with
the addition of a third casino as well
as the commencement of an
upcoming gaming and entertainment
facility in Daman.
Fixed-Cost Business Model,
Leading To A Significant
B
Improvement In Earnings
The companys business model is
fixed in nature with salaries and
administrative expenses consisting of
50% of the total cost. Taking the
fixed-cost business model into
consideration, earnings are set to
improve at a much higher pace as
compared to revenues.

Geographical Expansion
In addition to Goa, the company will
be commencing its gaming and
hospitality business in Daman. Delta
Corp is also exploring possible
avenues for expansion in new markets
within the region.
Real Estate Business In Kenya
Through a joint venture with a
wholly-owned subsidiary of Reliance
Industries Ltd (RIL), the company is
on track to develop nearly 1.2 million
square feet on 10 prime plots in
Kenyas capital city, Nairobi.
DELTA CORP LTD
DELTA CORP LTD
FY11
FY12 E
FY13 E
FY14 E
188.80
-0.50
57.20
39.50
191.5
137.8
252.4
438.1
8.2
2.7
3.0
8.2
Financials
NSE & Delta Corp Ltd
Particulars
(` Cr)
Net
Sales
Growth
%
EBITDA PAT EPS
Source: Company Data, Nirmal Bang Research *Sale proceeds from real estate property
Source: NSE
60
70
80
90
100
110
120
130
140
150
160
Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12
DELTA CORP LTD NSE S&P CNX NIFTY INDEX
165.6
60.7
68.2
187.8
*
376.0
374.1
588.0
820.3
*
he Nifty Futures pared
its gains by 4.68% (as on
19th Mar 12) in the
current March expiry on
the back of 11% gain in the January
expiry and a 7% gain in the February
expiry. The markets witnessed three
very important news triggers when it
entered into the March expiry.
First was the assembly election in
Uttar Pradesh. The failure of the
Congress party to perform well in UP
weighed on the markets. Second was
the Union Budget 2012-13, which
failed to provide any positive trigger
for the markets. And third was the
CRR cut by 75 basis points by the
RBI to ease liquidity crunch being
faced by banks. The RBI has kept key
policy rates unchanged in its
mid-quarter monetary policy review.
This too weighed on the markets,
especially banks.
On the Options side, for the March
series, aggressive Call writing has
been seen at strikes 5,500, 5,600 and
5,700. Call writing is being seen even
at 5,400 level following the
monetary policy review by the RBI
and the Union Budget. On the other
hand, Puts at 5,200 strike holds
maximum number of OI standings
over 8 million (as on 20th March),
giving a strong support to the market.
Moreover, if we look at the OI
standing for Nifty Options for the
April expiry, we find that the highest
OI for Call and Put is at 5,500 and
5,100, respectively, indicating
traders perception of a ranging
market in the coming month.
The important point to note in
Options these days is the Volatility
Index (VIX), which has been
decreasing post the election in UP (on
T
6th March) from the levels above 28.5
to the current level of 22, despite a
fall in the markets. This also implies
that Options traders are not expecting
much risk or a downside in the
markets. Going forward, we expect
VIX to further come down to the
levels of 17-18. Hence, market
participants are advised not to go long
on volatility (that is they should not
adopt long straddle or strangle
strategies) in the month of April.
Despite a correction in the markets,
we have not seen sell-offs coming
from FIIs. In fact, at every dip they
have remained net buyers in the
equity cash segment. They have
pumped in over `8,000 crore into the
Indian markets (up to 19th March) on
a month-to-date basis despite a
correction of over 4%, indicating that
every dip is seen as an opportunity to
buy in the Indian markets.
The long-term trend has turned
positive, but the overall medium trend
remains cautious and weak. The Nifty
has witnessed a decline from the
recent highs of the 5,499 level, which
poses a crucial hurdle to be crossed
immediately; positional traders can
maintain a positive bias only on the
decisive close above the 5,600 level.
Till then, they can expect selling
pressure to persist at higher levels.
There is an immediate support at the
5,170/5,080 levels (Fibonacci
Supports) on the downside and
resistance at the 5,470-5,550 levels.
The Nifty is also trading above its
long-term 200-day moving averages,
which is also a healthy sign.
Important oscillators RSI and MACD
on the daily chart have turned
negative, giving the sense of a short
rally occurring on the bourses.
TECHNICAL OUTLOOK FOR THE FORTNIGHT
Immediate support can be seen at the
200-day EMA of 5,200. The overall
mood of the markets will turn positive
only if the Nifty starts trading above
the 5,330 level on a closing basis.
The Nifty has strong support at the
5,200 level, which is the channel
support level in the weekly chart. Any
move below the 5,200-5,170 mark on
a closing basis will change the trend
of the Nifty till the time the positive
trend will be intact.
Market participants can buy on dips at
the 5,200-5,150 levels. A bounce back
from these levels will take the Nifty
towards the 5,470/5,600 levels, with a
support of 5,170/5,080 levels.
After a recent sharp rise from the
10,050 level, the Bank Nifty
registered a lower-high pattern to the
recent top formed in February 12.
There is an immediate support at the
10,100 and 10,000 levels on the
downside and a break below this
support level will see the index
starting a series of lower tops and
bottoms, showing bearish sentiment.
There is immediate resistance at the
10,450 and 10,500 levels on the
upside where selling pressure is
expected. On a closing basis below
the 10,000 level, the Bank Nifty index
would test 9,850, 9,760 and 9,550
levels, thereafter.
STRATEGY FOR APRIL EXPIRY
Short Strangle on the Nifty can be
initiated by selling 5,500CE and
5,100PE of the April series. The net
premium inflow comes up to `120,
which is also the maximum profit.
The loss remains unlimited beyond
the break-even range of 5620-4980 on
the NiftY.
SPEAKING
FROM EXPERIENCE
The annual letter that
Warren Buett sends out to
shareholders is a treasure
trove of information and
can help investors a great
deal, if followed rightly
he world is all ears when
Warren Buffett talks. And it
is not limited to investing
alone. His followers lap up
everything that Buffett says.
Unfortunately, he does not appear or
talk frequently in public.
Those who want to know what is
going on in his mind or find reasons
behind his actions, therefore, eagerly
wait for the annual letters he sends out
to his shareholders during this period
every year.
The annual letter, this time around,
has covered several important aspects
of investing. The first aspect relates to
buyback of shares, which holds
significance in the present context.
T
WHY BUY BACK SHARES
The guru of all gurus on the Wall
Street, Warren Buffett has been
approached by investors and leading
organizations many a times in the past
for his views on buy back of shares,
especially on how companies could
utilize the cash and equivalent in the
books of accounts.
In one of his interviews, Buffett had
said, Steve Jobs of Apple had sought
his views on the utilization of a huge
pile cash on which Apple was sitting.
In simple words, Buffett had said
there are only three things that
companies can do with the cash.
One, it could either spend on
acquisitions. Second, it could buy
back some shares from existing
shareholders and third, keep sitting on
the cash. As far as acquisitions go,
there are a host of things that one
needs to consider apart from the right
price. Buffett favours share buy back,
but with the following conditions.
In his letter he said Charlie Munger
and he favour repurchases when two
conditions are met. First, a company
should have ample funds to take care
of the operational and liquidity needs
of its business and second, its stock
should sell at a material discount to
the companys intrinsic business
value, conservatively calculated.
In fact, with the same logic his
company last year in the month of
September announced that Berkshire
would repurchase its shares at a price
of up to 110% of the book value.
Buffett has clearly indicated that if
share prices of companies are
undervalued and if the same company
has enough cash for operation and
other liabilities, then there is enough
reason to buy back the shares.
HOW A COMPANY AND ITS
SHAREHOLDERS BENEFIT
Charlie and I have mixed emotions
when Berkshire shares sell well
below the intrinsic value. We like
making money for continuing
shareholders and there is no surer way
to do that than by buying an asset
our own stock. At our limit price of
110% of the book value, repurchases
clearly increase Berkshires per-share
intrinsic value. And the more and the
cheaper we buy, the greater the gain
for continuing shareholders.
Buffett favours buying back shares at
a significant discount, which typically
helps in buying the stake of some of
the exiting shareholders at a cheaper
price, leading to value creation for the
continuing shareholders of that
particular company.
In fact, with the same rationale
Buffett recently bought a large stake
in IBM. Importantly and contrary to
typical investment wisdom, Buffett -
despite having bought a significant
amount of shares of IBM - wishes its
share prices languished so that IBM
could probably buy more shares back
from the market.
Here is some math he did in the case
of IBM. Today, IBM has 1.16 billion
shares outstanding, of which
Berkshire owns about 63.9 million or
5.5%. Naturally, what happens to the
companys earnings over the next five
years is of enormous importance.
Beyond that, the company will likely
spend $50 billion or so in those years
to repurchase shares, he explains.
If IBMs stock price averages by say
$200 during the period, then the
company will acquire 250 million
shares for its $50 billion. There would
consequently be 910 million shares
outstanding (as against the current
1.16 billion shares) and we would
own about 7% of the company.
In the second scenario he assumes
IBM buying shares at higher prices.
If the stock conversely sells for an
average of $300 during the five-year
period, IBM will acquire only 167
million shares. That would leave
about 990 million shares outstanding
after five years, of which we would
own 6.5%, says Buffett.
The logic is simple: If you are going
to be a net buyer of stocks in the
future, either directly with your own
money or through your ownership of
a company, you are hurt when stocks
rise. You benefit when stocks swoon,
he explains.
Effectively, Buffett wishes that IBMs
share price trades lower so that IBM
can buy more shares back with the
same amount of money, which is
allocated for the buy back.
As a result of the buyback, the
number of shares or outstanding
shares of the company will reduce
and thus the stake of the existing
shareholders will increase. The
continuing shareholders will have a
greater stake in the future of the
company and its earnings.
INVESTING: BACK TO BASICS
More importantly, besides his views
on buy back, his thoughts on
investing are worth reading. Today
the role of every other investment
asset like bond, gold and equity is
debated for one thing or the other.
With this background, Buffett tells his
readers or followers to get back to the
basics to demystify the confusion
among investors.
Here, the interesting observation is
that he describes investment
differently from what it is known or
described generally.
Investing is often described as the
process of laying out money now in
the expectation of receiving more
money in the future.
He says, at Berkshire we take a more
demanding approach, defining
investing as the transfer to others of
purchasing power now with the
reasoned expectation of receiving
more purchasing power after taxes
have been paid on nominal gains in
the future. More succinctly, investing
is forgoing consumption now in order
to have the ability to consume more at
a later date.
The American philanthropist explains
that if one invests his or her money in
a particular asset, then that asset class
should in the future give its owner
more purchasing power than it would
have otherwise given if kept idle with
the owner.
If, for instance, an investor keeps
`100 in his pocket for the next one
year, then the same would be worth
`90 if inflation is at 10%. It means
that after one year the same `100 will
buy goods worth `90 only. The basis
or premise of any investment is that
one would like to have more
purchasing power with the same
money in the future.
This might look simple but the way
the objective of investing is explained
is quite logical. This is just the
explanation of probably why we
invest. However, more interesting
points are yet to come as he explains
which asset class he prefers and why.
THE ASSET CLASS BUFFETT
PREFERS
If one wants to have more purchasing
power in the future, which asset class
would do the job? There are many
investment possibilities but Buffett
has made three major categories that
cover most of the investments.
He has explained the characteristic of
each investment, which drives the
point he wants to make as to why he
prefers a particular investment. The
characteristics he has explained will
not be found in text books. Yet, they
are very important for any investment
and investors.
Fixed Income: Risk Free?
The first category of investments
includes fixed income securities,
money market instruments or bonds,
which are very well known and
widely perceived to be less risky or
risk-free such as government bonds.

Talking about risk, he says, the risk of
a particular instrument should not be
measured by beta or the volatility of
its returns. The risk of an investment
should be measured in terms of the
probability of that investment causing
its owner a loss of purchasing power
over his or her holding period.
A risk-averse investor might keep all
his money in the bank deposit for 10
years. But what if the same money
loses its value? It is possible that an
investment might not fluctuate in its
value or remain risk-free but still
cause immense loss to the purchasing
power of its owner.
Buffett says, Most currency-based
investments are thought of as safe.
In truth, they are among the most
dangerous assets. Their beta may be
zero, but their risk is huge. On the
contrary, assets can fluctuate greatly
in price and not be risky as long as
they are reasonably certain to deliver
increased purchasing power over their
holding period.
Over the past century, these
instruments have destroyed the
purchasing power of investors in
many countries, even as the holders
continue to receive timely payments
of interest and principal. Even in the
US, where the wish for a stable
currency is strong, the dollar has
fallen a staggering 86% in value since
1965, when I took over the
management of Berkshire.
He also gave a historical perspective
to this view. Today it takes about $7
to buy what $1 could have bought in
1965. What it means is that just to
maintain the same level of purchasing
power the instrument should generate
about 4.3% tax-free returns over this
period. This might look reasonable
because he says during the same
47-year period, continuous rolling of
US Treasury bills produced 5.7%
returns annually, he said.
However, if one takes personal tax
into account, the yield would have
been lower by about 1.4% or at 4.3%.
Now it will be foolish to assume
interest after tax as income. And if we
consider invisible tax, that is,
inflation into account, that 4.3% too
would get evaporated.
Due to these reasons, he said: Under
todays conditions, therefore, I do not
like currency-based investments.
Today, a wry comment that Wall
Streeter Shelby Cullom Davis made
long ago seems apt: Bonds promoted
as offering risk-free returns are now
priced to deliver return-free risk.
Unproductive Asset: Gold
In the second category of investments
he involves investments in assets that
will never produce anything, but are
bought in the hope that someone else
who also knows that the assets will
be forever unproductive will pay
more for them in the future. Such
assets like gold produce nothing
except for some small industrial
applications but are bought in the
hope that there will be somebody who
will buy the same piece of gold at
higher prices in the future.
He said what motivates most gold
purchasers is their belief that the
ranks of the fearful will grow. During
the past decade that belief has proved
correct. Beyond that, the rising price
has on its own generated additional
buying enthusiasm, attracting
purchasers who see the rise as
validating an investment thesis.
As bandwagon investors join any
party, they create their own truth for
a while. Over the past 15 years, both
Internet stocks and houses have
demonstrated the extraordinary
excesses that can be created by
combining an initially sensible thesis
with well-publicized rising prices.
In these bubbles, an army of
originally skeptical investors
succumbed to the proof delivered
by the market, and the pool of buyers
- for a time - expanded sufficiently to
keep the bandwagon rolling. But
bubbles blown large enough
inevitably pop. And then the old
proverb is confirmed once again:
What the wise man does in the
beginning, the fool does in the end.

Today the worlds gold stock is
about 170,000 metric tonnes. If all of
this gold were melted together, it
would form a cube of about 68 feet
per side. At $1,750 per ounce golds
price as I write this the value would
be $9.6 trillion. Call this cube pile A.
Lets now create pile B costing an
equal amount. For that, we could buy
all the US cropland (400 million acres
with an output of about $200 billion
annually), plus 16 Exxon Mobils (the
worlds most profitable company, one
earning more than $40 billion
annually). After these purchases, we
would have about $1 trillion left for
walking-around money. Can you
imagine an investor with $9.6 trillion
selecting pile A over pile B?
A century from now the 400 million
acres of farmland will have produced
staggering amounts of corn, wheat,
cotton and other such crops and will
continue to produce that valuable
bounty, whatever the currency may
be. Exxon Mobil will probably have
delivered trillions of dollars in
dividends to its shareholders and will
also hold assets worth many more
trillions (and, remember, you get 16
Exxons for that sum).
The 1,70,000 tonnes of gold will be
unchanged in size and still incapable
of producing anything. You can
fondle the cube of yellow metal, but it
will not respond. Admittedly, when
people a century from now are
fearful, its likely many will still rush
to gold.
Im confident, however, that the $9.6
trillion current valuation of pile A will
compound over the century at a rate
that is far inferior to that achieved by
pile B.
What seems obvious from his view on
gold or for that matter the assets
which are non-productive is that he is
a firm believer of investing in assets
which are productive.
A tonne of gold bought today for say
`250 crore will remain a ton even
after holding it for 20 years. However,
if the same money (`250 crore) is
invested in productive assets or say in
a business that grows over the years
and becomes say worth `2,500 crore,
there is a high possibility that the
buyer would pay that much amount to
buy that business.
However, in the case of gold it will
not grow. The only assumption is that
the buyer would pay more for the
same quantity.
Invest In Productive Asset
This is the reason why Warren Buffett
prefers or favours next and the last
category of investments - productive
assets - in the current context.
Buffett says, Our first two categories
enjoy maximum popularity at peaks
of fear: Terror over economic collapse
drives individuals to currency-based
assets, most particularly US
obligations and fear of currency
collapse fosters movement to sterile
assets such as gold.
Unlike the first two categories,
productive assets may be business,
farms or real estates that have the
ability to take care of inflation and
most importantly, maintain and
increase the purchasing power of the
owner of the asset.
Whether the currency a century from
now is based on gold, seashells, shark
teeth, or a piece of paper (as today),
people will be willing to exchange a
couple of minutes of their daily
labour for a Coca-Cola or some Sees
peanut brittle.
In the future the population of
United States will move more goods,
consume more food and require more
living space than it does now. People
will forever exchange what they
produce for what others produce.
informs BuffetT.
ny event or action taken
by a company which
affects its share price
and consequently the
shareholders is known as corporate
action. Some of these actions can
have a direct bearing on the
movement of the stock of a company
in the stock market.
Let us try and understand the impact
of a few common corporate events on
a stock.
BONUS
These are additional shares issued to
existing shareholders free of cost.
Say, for example, you are holding 100
A
shares of a company and if the
company issues bonus in the ratio of
1:1, then after the bonus, you will
hold 200 shares of the same company
at no extra cost. It is the method of
rewarding investors by companies
which have huge reserves. The
companies convert these free reserves
into equity and issue them as bonus
shares to existing shareholders.
Implications Of Bonus
There is no change in the Iace value
of the share
Liquidity in the share increases
There is no change in the wealth oI
the investor
EPS and book value get reduced.
Equity capital increases
Accumulated proIits come down
post bonus
The share price gets adjusted
downwards in proportion with the
bonus ratio. However, a bonus
ACTION-REACTION
Corporate action in the
form of bonus, dividends
and the likes have
far-reaching implications
on investors and must
therefore be understood
by them
announcement is generally viewed as
a positive move, indicating strong
fundamentals of a company and,
hence, post announcement, market
forces can make the stock rise.
STOCK SPLIT
The sub-division of existing shares of
a company into multiple shares by
altering the face value of the share is
known as stock split. A company
whose share price is quite high may
announce a stock split so that the
liquidity in the stock increases and the
stock price appears reasonably priced
for investing.
For example, you are holding 40
shares of a company with a face value
of `10 and the stock is currently
trading at a price of `1,000 in the
market. If a stock split is announced
in the ratio of 10:1, then the stock will
trade at a price of `100 post split but
the face value will now have become
1. You will now hold 400 shares of the
same company. So, while your total
investment corpus has remained the
same, the number of shares in your
hands has increased.
Implications Of Stock Split
The Iace value oI the share
decreases according to the split ratio
The total outstanding shares oI the
company increases
Liquidity in the stock increases
No change in investor wealth
Investors now hold more shares oI
the same company at no extra cost
A stock split does not indicate
anything by way of company
fundamentals and, hence, does not
affect the rise or fall of the share price
post split
However, due to the change in the
price of the stock post split, there may
be an increased buying interest by
investors who wanted to buy the
shares but were not comfortable with
the high prices previously
REVERSE STOCK SPLIT
This is exactly the opposite of a stock
split. A reverse stock split involves
decreasing the number of outstanding
shares of a company by increasing the
face value of the shares. It is not a
very common occurrence but
sometimes a company has to do a
reverse stock split because the stock
price has become so low that it risks
being delisted or the company intends
to make the stock price appear more
respectable for investors to even
consider buying it.
Implications Of Rever se Stock Split
The Iace value to the share will
increase in proportion to the reverse
split ratio.
Many institutions invest only in
shares, which trade above a certain
price range and refrain from stocks
below this level, branding them as
penny stocks. Hence, post reverse
split and the rise in the share prices,
these shares come on the buying radar
of such investors.
The number oI outstanding shares
reduces
Liquidity in the stock decreases
It is a method by which companies
try to avoid delisting
A higher stock price will give the
impression of it being a robust and a
large-cap company
DIVIDENDS
Dividends are nothing but a portion of
the profits that a company returns to
its shareholders. A company may
either use its profits to reinvest in its
business or distribute it amongst its
shareholders as dividends. Although
it is not mandatory for companies to
declare dividends, many companies
dole out huge dividends because they
have reached a saturation point in
terms of its growth and, hence, cannot
find any significant area within the
business where the money can be put
to good use. It is also issued because a
regular dividend payout instils
confidence amongst investors
regarding the investor-friendly
approach of the company and strong
fundamentals of the company.
Dividends are calculated on the face
value and not the share price of the
stock. So, if a stock with a face value
of `10 is trading at a price of `500
declares a 50% dividend, the investor
will get `5 per share, which is 50% of
the face value of `10.
Implications Of Dividends
Ideally the stock price should Iall by
the amount of the dividend declared
per share. But this may or may not
happen depending on market
conditions and the dividend amount
Immediately post the announcement
of the dividend, a stock may
appreciate in price because many
investors rush in to buy the stock so
that they can get the extra dividend
income from it
Regular dividend-paying companies
have good liquidity and less volatility
as they find a place in the portfolio of
most fund houses and investors
With each dividend received in the
hands of the shareholders, the
acquisition cost price of the share
comes down
Dividend income can be an
excellent source of added income
BUYBACK
A corporate action wherein a
company repurchases its own
outstanding shares is known as
buyback. A company usually buys
back its shares to increase its
ownership, or if it has surplus cash, or
to reduce liquidity in the stock or if it
wants to delist, etc. The company can
do this by two ways. That is, it can
either buy shares from its existing
shareholders at a price that is usually
higher than the prevailing market
price or it can buy shares directly
from the open market.
Implications Of Buybacks
II a buyback is oIIered to
shareholders at a price that is much
higher than the prevailing market
price, then the investor could benefit
by tendering his shares for buyback.
The number oI outstanding shares in
the market reduces
Since the number oI shares reduces,
the EPS increases, which is a
favourable indicator for fundamental
analysts.
A company investing money in itselI
and buying its own shares shows that
the management has Iaith in its own
company and, hence, the stock may
appreciate on news oI the buyback.
II a stock has been beaten down to
irrational levels, a higher buyback
price can help revive the stock price
in the markets
Buybacks can be a Iorm oI deIence
against a hostile takeover
RIGHTS ISSUE
A company looking to raise Iresh
Iunds can come out with a rights issue
whereby the existing shareholders oI
a company are given the right to buy
additional shares of the company in
the primary market at a determined
price. This price is usually at a
discount to the prevailing market
price. Otherwise there would be no
takers. II the rights issue remains
undersubscribed by its existing
shareholders, then the company might
look at other avenues to raise capital.
Implications Of Rights Issue
Existing investors can buy additional
shares of a company at a discount,
thereby decreasing the overall cost of
the acquisition
Since the rights issue oIIers shares
generally at a discount, post-rights
share prices usually fall
The cash reserve oI the company
reduces since it gets used up in
issuing new shares
II the money raised through a rights
issue is used in optimization and
expansion oI the business processes,
it is a positive sign for investors
MERGER AND ACQUISITION
Mer ger
A mutual decision between two
companies to combine its operation
and Iinances where one company
surrenders its stock to another is
known as merger. Usually two
companies of more or less equal size
come together for a merger.
Acquisition
It is the process by which one
company acquires a majority stake or
buys out another company without
any surrender of shares by the target
company. Usually in an acquisition, a
larger company buys out a smaller
company.
Implications Of M&A
Generally in an M&A, the target
company whose shares are being
bought out sees a temporary spurt in
its stock price because it usually gets
a premium for its stock.
Conversely, the acquiring company
sees a fall in the stock price because it
has to pay out more money.
II the companies involved in the
M&A are complementary in nature or
Irom allied industries, then M&A
may be beneficial because overhead
costs such as duplicate departments,
extra staII hiring, additional
expansion expenses can be reduced.
Also since production goes up, the
company is able to cater to higher
demand
The combined entity can achieve a
market leadership status
Along with the assets, there are also
a lot of liabilities and debt that can
come along with an M&A action and
the company should be able to
mitigate it eIIectively. Otherwise, the
markets may punish the stock.
NAME CHANGE
Just what the name implies. It is a way
by which a company changes its old
name to a new name. For example,
Ganesh Engineering` may become
Shri Ashtavinayak Engeneering
Works` and the stock starts trading
with the new name on the bourses.
Everything else about the company
remains the same.
Implications Of Name Change
There is no impact on the
fundamentals of a company.
However, there may be a
psychological effect of such name
changes. For example, during the
dot.com boom, companies with
suIIixes like inIotech, techno, etc, in
their names rose without any real
Iundamentals. Hence, stocks could
benefit if they change their name to
such names and ride the rising tide.
Alternatively, during a negative
sentiment such as in the infrastructure
sector any company with a suIIix
inIra` were punished severely. So
companies would do well to change
their name to try and avoid being
caught in the down wave.
Some companies have names which
do not reflect their area of core
business (a sugar company with the
name engineering` as the suIIix) can
be missed by sectoral investors. Such
stocks can benefit if they change their
name, which better reIlects their core
businesses at first sight.
Remember most of the corporate
action announcements come with a
record date. Only investors whose
names appear on the company`s list
on the record date are eligible for
corporate beneIits. So always make
note of this date and make sure that
you are holding shares before the
record datE.
DISCLAIMER
In the preparation of the content of this magazine, Nirmal Bang Securities Private Limited has used information that is publicly available, including information developed in-house. Such information
has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgement of Nirmal Bang
Securities Private Limited at the date of this publication/ communication and are subject to change at any point without notice. This is not a solicitation or any offer to buy or sell. This publication/
communication is for information purposes only and is not intended to provide professional, investment or any other type of advice or recommendation and does not take into account the particular
investment objectives, financial situation or needs of individual recipients. For data reference to any third party in this material no such party will assume any liability for the same. Further, all opinion
included in this magazine are as of date and are subject to change without any notice. All recipients of this magazine should seek appropriate professional advice and carefully read the offer document
and before dealing and/ or transacting in any of the products referred to in this material make their own investigation. Nirmal Bang Securities Private Limited, its directors, officers, employees and other
personnel shall not be liable for any loss (financial or otherwise), damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary and consequential, as also any loss of
profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible/ are liable for any decision taken on the basis of this material. This magazine
is prepared for private circulation only. Nirmal Bang Securities Private Limited, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang
Securities Private Limited or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.
RNI Reg. No. MAHENG/2009/28962
WWW.nirmalbang.com
Nothing is more rewarding than helping people achieve their nancial goals. At Nirmal Bang, our
team of dedicated and experienced research analysts do just that. They give calls on prominent
business channels, print media and newswire services, benetting scores and transforming lives.
At Nirmal Bang, its a relationship beyond broking.

Beyond Market - Issue 64

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Beyond Market - Issue 64

Uploaded by

Copyright:

Available Formats

For Pr i vate Ci rcul at i on Vol ume 1 I ssue 64 26t h Mar 12

You might also like