db corner -...

It’s simplified...Beyond Market 01st - 15th Dec ’14 3

DB Corner – Page 5

The Taskmaster

To align with the changing market realities and follow best international practices,

SEBI has formulated tougher and better delisting and insider trading norms – Page 6

Under Watchful Eyes

By implementing SEBI Research Analyst (RA) Regulations 2014, the market regulator is

hoping that investors will have access to more reliable and useful information to help

them make better investment decisions – Page 10

Seeking A Change

The removal of several quantitative restrictions in the government bond market will

pave the way for increased FII inflows - Page 14

Manufactured In India

The Make In India initiative has put the country on the global map and is encouraging

tie-ups with players from around the world – Page 17

Fit For Growth

The apparel industry is aligning itself with changing dynamics and claiming a share of

the growing market – Page 20

Progress At Last

By announcing reforms, the government has finally demonstrated its resolve to end

paralysis in the coal sector – Page 23

Windfall Gains

The fall in oil and commodity prices will push margins of FMCG companies higher, but

they are yet to pass on the benefits to consumers – Page 26

Part 3 – Cotton: A Rich Heritage

The manufacture of cotton cloth is a complex process that involves three main

processes – preparation, spinning and weaving of the raw material – before it is turned

into a finished product – Page 29

Mangalam Cement Ltd: Cementing Its Position

Mangalam Cement Ltd is likely to see growth in cement volumes on the back of

capacity expansion – 2

Renewed Optimism

With the mutual fund industry back on its feet, investors can consider MFs from a

long-term perspective – Page 36

Important Statistics for The Fortnight Gone By – Page 38

The Online Collaborators

For aspiring entrepreneurs, crowdfunding could be an appropriate alternative to raise

funds to achieve their entrepreneurial goals – Page 40

Closer To Perfection

Investors can consider Heikin-Ashi charts as they are easier to understand and predict

than candlestick charts – Page 42

Important Jargon For The Fortnight – Page 45

Volume 6 Issue: 18, 01st - 15th Dec ’14

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

PR & Communications: Dwiti BhutaOperations: Shreelatha Gollavathini

Printed and published by Mr Rakesh Bhandari on behalf of Nirmal Bang Financial Services Pvt Ltd, printed at Uchitha Graphic Printers Pvt Ltd65, Ideal Ind. Estate, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 and published at Nirmal Bang Financial Services Pvt Ltd, 19, Sonawala Building, 25 Bank Street, Fort, Mumbai-400001. Editor: Tushita Nigam

CORPORATE OFFICE B-2, 301/302, Marathon Innova,Off Ganpatrao Kadam Marg,Lower Parel (W), Mumbai - 400 013Tel: 022 - 3926 8000/8001

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

Research Team: Sunil Jain, Silky Jain, Manav Chopra,Vikas Salunkhe, Achala Jethmalani

The sectors that look good from investment and trading perspectives are finance and banking.

In the next fortnight, result expectations will start building up, which will be influenced by the ongoing movement of various international currencies and commodity priceS.


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 advertisement 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.

n the previous fortnight, European Central Bank (ECB) president Mario Draghi implied that quantitative

easing (QE), i.e. buying up government bonds from European countries, could be implemented early FY15. However, a clear picture will emerge only after ECB’s meeting in January.

In the US, the Federal Reserve has wound up the QE3 completely. Now the focus is on when the FED will start increasing interest rates. However, considering the current status of inflation, the increase in interest rates is still a while away.

Domestically, the Reserve Bank of India (RBI) kept key interest rates unchanged at the fifth bi-monthly monetary policy meet. This is in line with market expectations, which is a

I positive stance. The apex bank kept the repo rate unchanged at 8% and the cash reserve ratio at 4% as in the past. However, it appears that rate cuts could be announced after the Union Budget in February.

Crude oil prices continue to fall on the back of slowing demand in Europe and China and increased shale oil production in the US. This, in aggregate, is a positive for the Indian economy, especially its current account deficit (CAD), the fiscal deficit and inflation.

The Indian stock markets are likely to remain range-bound in the coming fortnight. Both the Nifty and Bank Nifty look bullish at the support levels. The Nifty has support around the 8,200 level and resistance around the 8,470 level. And the Bank Nifty has support around the 18,100 level.

The Indian stockmarkets are likely

to remain range-boundin the coming fortnight.

Sensex: 27,602.01Nifty: 8,292.90

(As on 11th Dec ’14)

successful when total shareholding of the promoter along with shares tendered in the public offer reaches 90% of the total share capital of the company. The earlier regulation prescribes a threshold, which is higher than 90%, or the aggregate percentage of pre-offer promoter shareholding is 50% of the offer size.

Impact: The single delisting threshold of 90% is simple. Clubbing the two changes, for successful delisting the acquirer has to achieve 90% or more ownership by getting at least 25% of the number of public shareholders to tender their shares.

Final Offer Price

The offer price will be determined through reverse book-building. New offer price would be the price at which promoter shareholding reaches the threshold of 90%.

Earlier, the final offer price was the price at which maximum number of shares are tendered by public shareholders in the reverse book- building process.

Differently put, the difference between the revised norm and the earlier rule is that the bid of each shareholder counts rather than the largest bid by a shareholder.

Impact: This clause will result in a more efficient price discovery mechanism. It will incentivise the retail shareholder to participate in the delisting process.

From the company’s perspective, since the delisting process is broad-based, the overall cost of delisting will be lowered.

Promoter Group Participation

New rule prohibits promoter or promoter group from making a

ndia’s capital markets regulator, the Securities and Exchange Board of India (SEBI), made few important

announcements post its board meet on 19th November.

Amendments pertaining to delisting and insider trading rules in particular have far-reaching implications. The new rules are yet to be notified by SEBI. Thus, the devil is in the details.

Nevertheless, let us take a look at these norms.

DELISTING

The revamp in delisting guidelines by SEBI follows a discussion paper that was released in May this year. The existing rules needed changes to make it fair to both the company and the shareholders.

SEBI had invited market feedback in May ’14 after releasing a discussion paper for public comments. Subsequently, the SEBI board made a decision to amend delisting norms.

The new norms balance the interest of shareholders and companies and makes it quicker and easier to delist from the exchanges.

Following are some of the important changes:

Use Of Stock Exchange Platform

SEBI has made it mandatory to use the stock exchange platform for delisting. So far in a delisting offer, shares used to be tendered and bought off-exchange.

Off-exchange deals attract capital gains tax for shareholders, leading to lower cash flow at the hands of investors in the process.

Impact: This move is a positive for

I shareholders. With the use of the exchange platform, the shareholder tendering shares will have to pay only the securities transaction tax (STT) and short-term capital gains tax.

Long-term capital gains tax is zero for stock market transactions as against off-exchange deals that attract a 10% long-term capital gains tax. This will push greater participation and result in better price discovery due to broader participation.

25% Public Shareholder Participation

SEBI has prescribed that at least 25% of public shareholders should tender their shares to make the delisting offer successful. They need to tender shares in the dematerialized form.

Further, the number of shareholders should be holders on the date on which the board approves the de-listing. The price discovery will be done according to the reverse book building process.

Impact: This clause empowers minority shareholders. The market regulator’s intention is to ensure that the delisting process is based on broad public participation.

The 25% shareholder requirement laid down by SEBI will break the promoter-speculator nexus or, for that matter, collusion between promoter and a few large institutional shareholders that are happy with the price offered by the promoter.

However, implementation is likely to be a challenge from the company’s perspective. Companies will not be able to delist without the support of minority shareholders.

A 90% Threshold

Delisting will be considered


delisting offer if they have sold shares of the company during a period of six months prior to the date of the board meeting, which is supposed to approve the delisting proposal.

Impact: The promoter group participation clause will address potential abuse by promoters who park shares with few friendly investors before delisting.

It is important for investors to remember, there have been cases of promoters selling shares to institutional investors and later buying them back while delisting. Timeline

Timelines for completing delisting have been reduced from 117 working days to 76 working days.

Impact: Shortened timeline reduces uncertainty during the delisting period. Speculative attacks are common once the company announces delisting plans. This is because most of the delisting happens at a premium to the market price.

Reduced timeline will limit entities from taking up significant positions after the delisting announcement. INSIDER TRADING

The SEBI board has approved a new insider trading regulation replacing the existing 1992 Act. Last year, a committee was set up under Justice Sodhi to review insider trading norms in India and recommend changes.

Most of the recommendations have been accepted. New regulations will

strengthen the legal and enforcement framework and align the Indian regime with international practices at the same time and facilitate legitimate business transactions. The features of the new norms are as under:

Definition Of An Insider

Under current rules, the definition of an insider is limited to senior management and levels below the senior management. Now, the definition of the insider also includes employees and immediate relatives.

Even people having contractual relationship with the company will be considered as insiders. Simply put, insider will include any person who is in possession or has access to unpublished price sensitive information (UPSI).

Delisting

Delisting is the reverse of listing. A public-listed company becomes private post a successful delisting program. The stock would no longer be traded on the exchanges post delisting. Simple as it may sound, there are many complexities involved.

Without going much into technicalities, for successful delisting, the promoter needs to take adequate regulatory permissions and increase its shareholding to a certain level by offering an exit opportunity to existing shareholders within a time frame. The exit price needs to be fair for shareholders to participate in the delisting program. Else, the delisting fails. Companies generally delist voluntarily when they want to restructure or get acquired by other companies, or when the promoter wants to go private. The company can also get compulsorily delisted in case of non-compliance with stock exchanges’ rules. Here, in this article, we discuss about voluntary delisting. Delisting is time-consuming. It is mired in controversies. The price discovery mechanism has been improper and unfair, forcing minority shareholders to stay away from bidding. Reportedly, there has been promoter-speculator (or even institutional investor) nexus. There have also been speculative attacks on the stock on delisting news, making delisting expensive for promoters.

The exit price for voluntary delisting of securities is determined by the promoter of the concerned company, which desires to get delisted, in accordance with the book-building process. The offer price has a floor price based on a formula. There is no ceiling on the maximum price. Price tussle has been the most cited issue between the promoter and shareholders. Subsequently, promoters offer a premium over current market price to give an exit to shareholders.

In the last 5 years, only 38 companies have attempted to delist in India. Shareholders have demanded higher premium for exit. The 29 companies that succeeded in delisting paid an average premium of over 60% above the floor price. For, the 9 companies that failed to delist, the average premium demanded on share price exceeded 100%.

It’s simplified...Beyond Market 01st - 15th Dec ’148

Insider Trading

The existing regulations on insider trading were enacted in 1992. Initial years witnessed very few investigations. However, a need was felt to review the norms after SEBI failed to crack few high-profile insider trading cases. Thus, the regulation was later amended in 2002.

However, SEBI had mixed success under the amended regulations as well. Several orders of SEBI were overturned by the Securities and Appellate Tribunal (SAT), due to lack of evidence. It was felt that the law had issues with procedural and evidentiary aspects. Thus, a revamp in the law was needed.

Further, few high profile cases, mostly emanating from the US made SEBI cautious of the ills of insider trading. To that effect, SEBI had demanded higher powers to root out the disease of insider trading from stock markets. A bill to give SEBI more power is stuck at the parliamentary level. This along with revamped insider trading norms would give SEBI a facelift.

Not all insider trading is illegal. Everyday promoters, directors, managers and other employees buy or sell securities of their company. The regulation on insider trading does not stop anybody from buying or selling securities of any company in the stock market.

Reportedly, insider trading is rampant in India. Information symmetry is needed to maintain sanctity of the markets and preserve the interest of retail investors, who are often on the losing side of illegalities in insider trading. In India, insider trading is considered a civil offence, and not a criminal offence. This means that one can get away by paying fines, but cannot be jailed for the same.

The media has reported that in the last three financial years, SEBI has investigated 57 cases. While warnings have been issued in all these cases, some people have also been suspended from the market. SEBI on many occasions has denied consent mechanism to resolve insider trading cases.

Impact: This is a welcome move as any trade undertaken by any of the employees or their immediate relatives will have to be disclosed by the company. This will improve transparency to a great deal.

Concept Of UPSI

Any information not generally available to the public, and which may impact price of a security is known as UPSI.

The existing regulations defined UPSI as one which is not published by the company or its agents. SEBI also added that on scrutiny if a connected person was in possession of UPSI, the onus will be on the accused to prove his or her innocence.Further, to ensure that investors’ interest is protected, SEBI has now

asked companies to disclose UPSI at least two days prior to trading if such information is ultimately permitted for communication to the public. Communication of UPSI has been prohibited except for legitimate purposes, performance of duties or discharge of legal obligations.

Impact: The move will rule out asymmetry of information in the market. Since the onus will now be on the accused to prove his or her innocence, it allows more scrutiny by SEBI in insider trading cases.

Legitimate Insider Trading

In line with Companies Act, 2013, derivative trading by directors and key management personnel on securities of the company has been prohibited. For legitimate business

deals, UPSI will have to be communicated. Further, every insider with access to price-sensitive information through the year will now have the option of formulating pre-scheduled trading plans. Impact: Pre-scheduled trading plans of insiders are in line with best global practices. This will ensure that harmless legitimate transactions are not curbed and shareholders can anticipate insider activity.

In A Nutshell

Revised delisting and insider trading norms, at the face of it, can be seen as a part of SEBI’s constant endeavour to review the existing regulatory framework to align with the changing market realities and follow best international practiceS.



recognized stock exchange in India, will need to enter into an agreement with a research analyst or a research entity that falls under the ambit of the new RA regulations. Individuals, corporates and partnership firms may seek registration under these new RA norms. Those who are exempted under the RA regulations are investment advisors, fund managers of a mutual fund, venture capital fund, alternative investment fund or asset management companies.

CAPITAL ADEQUACY

SEBI has also stipulated the minimum networth that a research entity must show in order to register as a research analyst.

individual or is a part of a partnership firm must show that he has tangible assets of at least `1 lakh.

liability partnership firm, which is willing to register as a research analyst must have a minimum net worth of `25 lakh.

Those who are functioning as research analysts currently must comply with the stipulated capital adequacy norms within a year of the commencement of these regulations. Proxy advisors have been granted three years to comply with these new regulatory norms. QUALIFICATION AND CERTIFICATION NEEDS

In order to ensure that people registering as research analysts are worthy enough of influencing investment decisions, SEBI has put in place some pre-requisites in relation to the qualifications that a research analyst is required to have.

F effect from 1st Dec ’14 will be applicable to existing research analysts. Such analysts will need to register with SEBI within six months at the most, after the regulations come into effect. The registration will be valid for a period of five years and must be renewed three months prior to its expiry.

WHAT DO THE RA REGULATIONS ENTAIL?

The following individuals come under the purview of the Research Analyst regulations:

preparation of the content and the publication of a research report. A research report, as defined by SEBI, is one that contains a recommendation or an opinion concerning a stock or any other public offer that can provide a basis for an investment decision.

reporting to the research analyst who is in charge of the publication of the research report.

company that is a SEBI-registered intermediary. They may also be engaged in other financial services such as investment banking or underwriting services and issue research analysis in their own name.

provides professional advice to the shareholders of a company or other institutional investors about how to exercise their rights as stakeholders. This may be with regard to a public offer or voting recommendations.

and engaged with the issuance of a research report with respect to a stock that may already be listed or is proposed to be listed in any

rom 1st Dec ’14, a quiet but significant change has taken place in the Indian markets. Now onwards, only

SEBI-registered analysts will be allowed to operate in the markets.

A research analyst is considered to be a market expert who can pre-empt trends. The integrity of the advice of a research analyst, his professional competence and an arms length relationship that he has to maintain with market movers, therefore, have a critical role to play in the investment decisions that both, a retail investor and a foreign institutional investor might make. The investment advice that a research analyst publishes in his report should strictly be based on data and performance of a stock or a sector and not mere speculation.

Thus, in order to safeguard the interest of investors, India’s capital market regulator, Securities and Exchange Board of India (SEBI), on 1st Sept ’14 for the first time issued a set of norms that are now applicable to research analysts.

Known as the SEBI Research Analyst (RA) Regulations 2014, these norms spell out various requirements with regard to experience, qualification, capital adequacy and compensation of research analysts. The market watchdog believes that regulating analysts will lead to purging of the investment ecosystem of irregularities such as insider trading that stems from certain motivated research reports.

Through the application of these new rules, SEBI will register and regulate those entities who provide research reports or make recommendations of “buy/sell/hold” on stocks or give their opinion on a public offering such as an initial public offering (IPO) or a follow-on public offer (FPO). The norms which came into


LIMITATIONS ON RESEARCH ANALYSTS

THE COMPENSATION FACTOR

SOME PERTINENT QUESTIONS REMAIN UNANSWERED


IN A NUTSHELL

E.

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present in the Indian Bond-Currency-Derivatives Nexus, there will be increased pressure to match market arrangements that are found in other emerging markets.

The research document recommends: (a) Removal of quantitative restrictions that impede foreign investment in rupee-denominated debt whether government or corporate(b) Opening up the onshore currency market to foreign investors(c) Expanding the credit derivatives market to include more types of underlying debt and wider participation(d) Making the government debt market operationally similar to equity markets.

The report states that participation by foreign investors in the domestic Bond-Currency-Derivatives Nexus will fuel market development and help achieve a deep and liquid market. This works in India’s favour as it serves the essential objective of domestic financial development.

These recommendations, however, are not easy to implement. A greater challenge is to make foreign investors interested in India’s bond markets. The size of India’s debt market, in comparison with the global debt market, is rather miniscule.

This means the government needs to provide a congenial environment for foreign investors to invest in India’s bond market. This is possible when quantitative restrictions on foreign investments in India’s bond market are removed. The SEBI Development Research Group report also stresses on the need for a strong framework where foreign investors are allowed to bring money to Indian issuers by purchasing rupee-denominated bondS.

Investors, which it merged and set a single limit of US$ 51 billion. This means the government wants to provide a strong platform for FIIs to participate and play a key role in India’s bond market.

According to a research presented by Ila Patnaik, Sarat Malik, Radhika Pandey and Prateek of the SEBI Development Research Group (DRG), there are a few massive advantages if FIIs continue to play a dominant role in India’s bond market.

The research report states that the outstanding stock of domestic bonds now exceeds $6 trillion compared with only $1 trillion in the mid-1990s. Along with an increase in the size of the local debt markets, foreign participation has also increased substantially over the last decade.

The report puts across a valid point. It states, “In contrast, the Indian policy framework on debt flows continues to be guided by the position adopted in the early 1990s. The regulatory framework is characterized by quantitative restrictions on foreign participation, resulting in limited investments by foreign investors.”

The researchers in their report highlight the need to open the government and corporate debt market to foreign investors and the removal of restrictions on foreign participation based on sound economic policy objectives.

They justified their stance by stating that foreign participation in the Indian bond market will help accelerate modernization of the debt market. According to their analogy, the development of the equity market from 1992 to 2001 was, to a certain extent, influenced by the need to match market arrangements that are found in other emerging markets. Also, if foreign investors are strongly

Till March ’04, the overall cap for FIIs to invest in government debt was US$1 billion with separate caps for 70:30 route and 100% debt route. The cap for the 70:30 route was US$ 100 million and for the 100% debt route the cap was US$ 900 million. Since then, investment limits have been raised continuously over the years.

At present, foreign borrowing consists of two parts. One is dollar-denominated debt, while the other is rupee-denominated debt. In dollar-denominated debt, the Indian government borrows in foreign currency-denominated debt, both bilateral and multilateral.

Besides, Indian companies borrow debt through external commercial borrowings (ECBs), which also include Foreign Currency Convertible Bonds (FCCBs) and fully repatriable NRI deposits.

Foreign investment in rupee-denominated debt means foreign investors buy bonds in the Indian debt market, denominated in rupees. These entail certain quantitative restrictions. There are different limits for foreign investments in government and corporate bonds. Moreover, there are further sub-limits across assets and investor classes, which apply to these investments also.

On 1st Apr ’13, a major step towards simplification of foreign investment limits in rupee-denominated bonds was taken. The two separate sub-limits in rupee-denominated government securities entailed short-term and long-term caps. The government abolished this and capped investments in government securities at US$ 25 billion.

Regarding investing in corporate bonds, the government had separate sub-limits for FIIs, Qualified Foreign

�e Make In India initiative has put the

country on the global map and is

encouraging tie-ups with players from

around the world

I ndia Inc is buzzing with the phrase ‘Make in India’. This particular term has been coined by the NDA government as part

of its campaign to turn the country into a global manufacturing hub.

In his first Independence Day speech as Prime Minister, Narendra Modi invited global companies to open manufacturing units with the promise of removing red tape and offering a red carpet welcome. Thus, the ‘Make in India’ program was launched.

According to the official website, ‘Make in India’ is a major new national program designed to facilitate investment, foster innovation, enhance skill

memorandum of understanding (MoU) with the Ministry of Textiles. Under the pact, Flipkart will provide weavers a marketplace to showcase their products along with support in data analytics and customer acquisition. This will help manufacturers to get remunerative prices for their products and scale up their business.

The weavers and craftsmen usually live in rural areas and towns where they have no financial resources to have a store or to travel to market their products. To solve the above mentioned problem, Flipkart will have collection centers to collect their products, thereby removing the need for middlemen.

development, protect intellectual property and build best-in-class manufacturing infrastructure.

Another aspect of the program is to bring India into the top 50 in the World Bank’s Ease of Doing Business Index ranking from the 134th position, where it currently stands.

Though the program is in its nascent stage, foreign companies are taking note of the opportunity whereas domestic manufacturers and retailers are starting to strategize on how to promote their products by riding the ‘Make in India’ wave.

Ahead of all is the e-commerce sector. For example, Flipkart has signed a



manufacture set-top boxes, IP phones, routers, and switching equipment, which could create 1,000 direct jobs and 10,000 indirect ones.

Technology companies such as IBM and HP have also shown interest in setting up manufacturing plants in India after the launch of the ‘Make in India’ initiative.

Infrastructure and engineering multinational companies such as GE and ThyssenKrupp are also looking for entry and expansion in India. Sistema, a Russian company, has also expressed interest in building a smart city in India. But since current government policies are not favourable, these companies are in a wait-and-watch mode.

Interestingly, the maximum interest shown by any foreign country or a global company is in the defence sector of India.

Recently under the ‘Make in India’ campaign, India’s defence minister Manohar Parrikar awarded work for constructing eight minesweepers to Goa Shipyard Ltd. He said, “Energy security and war are things in which you require your own resources during critical moments. Due to some reasons, if suppliers put embargo, the machinery will come to a halt.”

Russia is keen to work with India under this campaign and experts believe that the visit of Russian President Vladimir Putin on December 11-12 will bring new dimensions to the tie-up between the two countries.

Russia is India’s biggest defence partner. It is noteworthy that Russians have already agreed to build civil and light aircraft in our country. A move which has been welcomed by commerce and industry minister Nirmala Sitharaman.

the norms of producing the tag-line and the logo on our items.”

While Happily Unmarried is waiting for the norms, online printing company Printvenue has already come up with design templates for mobile screens and laptop sleeves. According to the company, they are receiving a lot of requests for ‘Make in India’-captioned products.

The Department of Industrial Policy and Promotion (DIPP) also plans to launch its own line of retail products around the ‘Make in India’ theme. The government wants private companies to use ‘Make in India’ official logo but with prior permission of the government.

According to Atul Chaturvedi, joint secretary at DIPP, “We want everyone to use the logo but there has to be a quality to it. The logo can’t be distorted on the will and desire of companies or individuals. We are being strict about it so that the logo doesn’t lose its character.”

The enthusiasm of e-commerce sites regarding the ‘Make in India’ campaign is slowly being picked up by multinational companies as well.

By 2020, Swedish furniture giant IKEA is targeting to double merchandise sourcing from India by tying up with small and medium enterprises (SMEs). IKEA which plans to open its first store in Telangana, has been sourcing from India for the last 27 years and about 315 million euros of products are sourced from India annually.

Like IKEA, technology giant Cisco has submitted a proposal, which says that the company is ready to invest $5 billion, over the next 5 years, to set up a production facility with contract manufacturing partners. According to the proposal, the facility will

Craftsman will sell their products under their brand-name with guidance from Flipkart on the right selling price, payment automation, proper packaging, transportation, brand building, etc.

According to the Ministry of Textiles, “This kind of a co-ordinated effort has been planned and executed for the first time with Flipkart for handloom weavers, which will bridge the missing linkages of market intelligence, market access and logistics and help Indian weavers in getting remunerative prices for their products.” Flipkart is not the only e-commerce site which is associating itself with the ‘Make in India’ campaign. ShopClues, an online marketplace, has launched a campaign where they plan to showcase merchandise from India’s iconic markets.

Taking credit for being the first e-commerce player to launch the ‘Make in India’ campaign, Radhika Aggarwal, the co-founder at ShopClues.com said, “We are the first e-commerce player to launch a special ‘Make in India’ initiative. Through this, we intend to turn the spotlight on numerous local manufacturers and small traders, and provide them a platform to gain a pan-India reach so that they can participate actively in the country’s retail revolution.”

Some e-commerce sites are going further ahead and launching ‘Make in India’ merchandise itself. Companies such as online retailer, Happily Unmarried, are planning to come up with ‘Make in India’ line of collection in clothing and accessories.

Happily Unmarried co-founder said, “We will start a series of these products, especially t-shirts and magnets that people are asking for the most, as soon as we get to know about


In his recent visit to India, French Defence Minister Yves Le Drian has also expressed interest in France being part of the ‘Make in India’ campaign. He met Manohar Parrikar to conclude the deal of 126 Rafale fighter aircraft whose negotiations have been dragging on since 2012.

Out of the 126 aircraft, 108 will be manufactured in India and 18 will be imported from France. Apart from aircraft, French DCNS Scorpene submarines are being built in India by Mazagon Dock Ltd in Mumbai and the first submarine is expected to be

delivered in 2016.

The problem is that although India has the advantage of a large base of low-cost labour and engineers, the cost of production is high because of lack of infrastructure, delay in land acquisition and difference in taxation across various states.

These factors work as a deterrent for foreign companies to invest in India. Experts believe huge reforms are needed to instill confidence among investors. As of now, these issues have been addressed on paper alone.

According to Indian Consul General BS Mubarak, “The government will accentuate upon the framework which will include time-bound project clearances through a single online portal, which will be further aided by an eight-member team dedicated to answering investor queries within 48 hours and addressing key issues, including labour laws, skill development and infrastructure.”

These enterprising endeavours showcase the potential of the ‘Make in India’ campaign to be a huge success in the countrY.

Micro analysis.Mega gains.Trading at Nirmal Bang is based on extensive

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FitFor

rowth�e apparel industry is aligning itself with changing dynamics and claiming a share of the growing market

he good response to the offer for sale of apparel maker Monte Carlo Fashions drives home an important point - the apparel industry, which is at a penultimate stage in

the textile value chain, has takers given the high margins in the segment and increasing tendency among buyers to move towards branded products.

The sale of apparels forms over 60% of India’s exports. This share of apparels in India’s total exports has been consistent. However, in recent years, one trend that is picking up is Indian textiles companies moving up the value chain and getting into manufacturing of apparels and their branding.

Quite naturally, margins are high as a textile company moves up the value chain. Besides, it also reduces the dependence on volatility of raw material costs such as cotton and cotton yarn. How big is the apparel industry in the country? What opportunities do Indian textile players have? Here is an analysis of the apparel industry in India.

In the past 10 years, the world’s textile tapestry has seen a considerable change. This change came about after the end of the Multi Fibre Agreement on 1st Jan ’05. The Multi Fibre Agreement was introduced in

T



men’s wear segment contributes the highest to the apparel market with a share of 42%, followed by women’s wear at 38% and kids at 20%.

Technopak expects the men’s wear segment to grow at a CAGR of 9%, while women’s wear is expected to grow at a CAGR of 10% for the next 10 years. The kid’s apparel market is expected to demonstrate the highest growth with a CAGR of 10.50%.

THE GROWTH DRIVERS

a) Men’s Apparel Unlike developed markets, men’s wear is a predominant segment in India and is larger than the women’s wear segment. Men’s wear market in India is estimated to be US$ 17,271 million in 2013 and is expected to grow at a CAGR of 9% to reach US$ 39,575 million in 2023.

The market remains dominated by popular product categories such as shirts and trousers. However, western wear categories such as denim, active wear and t-shirts are the fastest growing categories in this segment.

On a global level, there is an increasing shift in men’s wardrobe. There is a shift from buying traditional formal to buying casual and lifestyle apparels. With increased spending power and growing exposure to international fashion styles, the men’s wear wardrobe has expanded substantially.

In men’s wear, new niche segments are seen emerging. Sharp segmenting such as sports/gym wear, occasion- specific ethnic wear, casual wear, office wear, night wear and party wear are a few examples.

According to Technopak, in metros and mini-metros, the demand for denim with better fit and finish along with foreign brands will drive value

present across value chains.

Business becomes expensive and time-consuming for apparel-makers due to the presence of intermediaries like distributors, wholesalers, logistics players and agents who do not have transparency when dealing with the sale of inventory.

However, this trend is changing for the better. With the increasing number of foreign players coming to the country, Indian apparel manufacturers and other players have felt the need to be transparent and system-driven.

Hence, to be competitive, Indian brands and retailers have been following a value chain, which is fast, organized and transparent with the ability to deliver the right goods at the right time and place. More so, Indian brands have realized the importance of producing goods in right quantities and at right operating costs.

Today, Indian brands have realized the need for an integrated supply chain with clear coordination with all its intermediaries, which can help the retailer by providing convenience in ordering and receiving of merchandise and conversion, and reducing its inventory-carrying cost by supplying merchandise just-in-time when needed.

India’s apparel manufacturers today are transforming themselves into integrated set-ups where they have strategic partnerships with yarn manufacturers, textile manufacturers and logistics providers. With these strategic partnerships, they are just focusing on providing end-to-end solutions besides manufacturing for brands and retailers.

India’s apparel market can be broadly classified into three categories: men’s wear, women’s wear and kids’ wear. As per a research by Technopak, the

1974. Under this agreement, developing countries would export their textile products to developed countries with a specific quota allotted to each developing country.

When this agreement ended, developing countries like India, China and Bangladesh emerged as textile producers, while developed countries like the US, Europe and Japan emerged as consumers of textiles in developing countries.

One of the chief reasons for this is availability of cheap labour in developing countries. This helped them to save their production costs.

Interestingly, a strong consumer base is emerging in the domestic markets of developing nations. There is a big reason for this. As per a 2014 research report by consulting firm Technopak, the GDP growth in developed countries is expected to be slower.

The report says the annual GDP of developed countries would grow at a compounded annual growth rate (CAGR) of 2.4% from 2013 to 2018. This would directly impact the consumption of textile and apparel in the international market, which would, in essence, reduce the demand for textile products.

On the other hand, the annual GDP of developing countries seemed to be growing at a favourable CAGR of 5.4% from 2013 to 2018. This means that countries like India would have a substantial increase in consumers, which itself presents a high range of opportunities to apparel makers.

THE INDIAN STORY

The Indian apparel market is highly unorganized. There are independent retail stores, which serve as major retailers. Besides this, there are many region-specific players, which are


growth of India’s apparel market.

On the other hand, denim will drive volume growth in semi-urban and rural areas. The men’s denim market is expected to grow at 14% per year, says Technopak research.

Lastly, the male trousers market is no longer limited to traditional colours of blue, black, grey and brown. The demand for lightweight casual wear trousers is also increasing, points out Technopak research.

b) Women’s Apparel In the women’s wear market, there is an increasing preference for branded apparel. This is one of the chief reasons for regional brands and international brands expanding their geographical presence.

The women’s-wear market is expected to grow from US$ 15,493 million in 2013 at a CAGR of 10% to reach US$ 38,915 million in 2023. The growth in this market captures two preference shifts - shift from non-branded apparel to branded apparel and increasing share of western wear to ethnic wear. The rising number of women within the workforce and the tendency to experiment has driven the growth of contemporary ethnic wear, which imbibes trendy and fusion elements.

Today, women in India wear traditional ethnic wear only for special occasions. Further, growth of the salwar kameez market is largely driven by the increasing demand for kurtis that tend to be teamed typically with denims.

The women’s denim market is also showing encouraging growth at a CAGR of 15%. Most denim brands catering to male consumers have realised the growth potential of women denim users in the country.

The trend towards casualization, combined with a growing preference of look and comfort among women, drives the women’s denim market.

Women’s t-shirts and tops categories are also growing owing to increasing participation of women in workforce and a generic inclination towards western wear categories.

The women’s tops and shirts market is currently estimated at US$ 282 million and is expected to grow at a CAGR of 12% to US$ 876 million by 2023. The women’s t-shirts market of US$ 107 million is witnessing growth in tandem with the growth of all other casual wear categories and is estimated to grow at a CAGR of 15% to reach US$ 436 million by 2023.

c) Kids Apparel The kids’ apparel market, contributing 20% to the total fashion market, is the fastest growing segment in the apparel industry. It may grow at a CAGR of 10.50%.

The boys segment contributes 52% to the kids’ apparel market and the remaining is by the girls segment. The boys’ wear market may grow at a CAGR of 10% to reach US$ 11,156 million by 2023 from US$ 4,253 million in 2013.

The boys’ wear segment is dominated by school uniforms. The next big categories within boys’ wear are t-shirts, shirts and bottoms, which constitute 46% of the boys’ wear market in the country.

Denim is the fastest growing category in the boys’ wear segment, with an expected CAGR of 15%. The boy’s denim market is expected to reach US$ 355 million by 2023 from its current value of US$ 91 million.

Extension of denim brands to kids apparel and brand awareness of

denim products is contributing to the growth of kids’ denim market.

Designer kids’ apparel also seems to be a promising opportunity in the premium and luxury categories. The US$ 3,969 million girls’ wear market is poised to grow at a CAGR of 11% to reach US$ 11,213 million by 2023.

Like the boys wear segment, girls wear segment is also dominated by school uniforms with a market size of US$ 1,198 million and a projected CAGR of 11%.

The higher expected growth rate of girls’ school uniform market is attributed to the increasing awareness of girls’ education in semi-urban and rural areas.

The factors that drive the kids’ apparel market are increasing expenditure on kids and improved awareness of kids’ brands.

Additionally, due to increased media exposure, kids have also become more fashion conscious today and influence their parents to allow them to experiment with clothing.

Technopak feels branded kids’ wear retail is a high growth opportunity area as the market is dominated by local and unorganized players. The absence of a significant player in the mid-tier segment presents a huge prospect for apparel manufacturers.

It says there is still a substantial gap in the need for design and quality in kids’ apparel, offering ample opportunities for organized players.

Given these opportunities, it is for no reason that most traditional textiles companies such as Vardhman Textiles, Alok Industries, Arvind, TT Ltd and Mandhana Industries have been moving up the value chain to garner a pie of this huge markeT.


imports, which not only put pressure on Forex rates, but also lead to higher inflation as imported coal is costlier than domestic coal.

GOVERNMENT’S ROLE

Meanwhile, the government is targeting a three-fold increase in coal production to 1,500 million by the end of year 2019.

To achieve this, the government is expecting Coal India to double its production to about 1,000 million tonnes by 2019, as compared to the current production of about 490 million tonnes.

Besides, to achieve these goals, the government is also hoping to produce more coal with the participation of private sector companies and other PSUs like NTPC in the power space. However, this will not be easy without providing a proper policy framework. The government is now working on faster environment clearance, auction of coal blocks to the private sector and amendment to the land acquisition act, among the other reforms.

The biggest driver of this policy achievement would be state-run coal miner, Coal India given its size, expertise and resources. Coal India has monopoly in the domestic coal industry as it supplies almost 80% of India’s coal requirements.

In the past, Coal India has faced several issues. Since 2009-10, Coal India’s coal production has grown at a compounded annual growth rate (CAGR) of 1.8%.

The reasons for this tepid production growth have been several including environmental issues, land acquisition woes, settlement and rehabilitation problems, labour

power and steel companies. Mass cancellation of coal block licences is expected to cause serious supply disruptions and accelerate the power crisis in the country.

This will not only hit the power sector but will also impact the banking and capital goods industries. The Finance Ministry had earlier suggested that the cancellation of the allotted coal blocks could hit state-run banks to the tune of `96,400 crore.

Thankfully, the government immediately took steps to mitigate the impact of this decision. Within three weeks of the SC announcement, the government promptly passed an ordinance to auction coal blocks that required fewer approvals of only about 6-7 ministries.

Further, it said the cancelled coal blocks will again be auctioned by the end of March ’15.

However, the bigger problem is that of higher coal production. As per the inventory of Geological Resources of Indian Coal, the country has coal reserves of close to 3,00,000 million tonnes as against the current annual production of about 600 million tonnes of coal.

Despite huge reserves, India’s coal production is quite less, which the government believes needs to be tapped, especially in the light of the growing economy, which will not only require coal for existing projects but also for upcoming power projects in the country.

High economic growth will require increased electricity generation in the country to supply uninterrupted power to industries and light several new cities.

That apart, a large part of coal requirements today are met through

were not resolved. This sum is huge and could gravely impact the banking system in India.

LIGHT AT THE END OF THE TUNNEL

However, all is not lost for the sector as reforms are expected to kick in after the BJP government came to power. Thankfully, rather than emphasizing on building more power-generation capacity, the present government is more focused on clearing the on-going projects and executing the stalled projects.

That apart, several existing power projects are operating at low plant load factor (PLF) because of non-availability of coal.

Recently, Union Power Minister Piyush Goyal in Lok Sabha mentioned that the government had identified 53 power projects in the public and private sector that are stressed owing to the shortage of fuel, including coal.

Estimates suggest that if plant utilization of existing thermal power projects is increased to the threshold level, then that alone will add about 50% to the existing power generated in the country.

By focusing on existing and stalled projects, the government is trying to solve the country’s power problem in a timely manner, which is also expected to help reduce the huge losses these projects could cause to the banking sector, apart from spoiling the investment climate in the country for the power sector.

The single biggest issue as of now is to produce enough coal to fuel the existing and upcoming projects.

Problems compounded after the SC cancelled 214 coal blocks allocated to


issues, coal evacuation issues pertaining to logistics and law and order concerns in places where it is operating its mines.

In fiscal 2014, Coal India produced 462.4 million tonnes of coal as against the targeted production of 482 million tonnes. The company was able to meet merely 65% of supplies contracted by the company to these power plants.

However, the government and company officials have charted out a plan where they are looking to resolve issues pertaining to availability of coal for railways as well as faster environment clearances.

Coal secretaries will meet the management of Coal India’s subsidiaries in their states to understand and resolve issues at the

grass-roots level. That apart, equipment support from BEML, state-level coordination at ministry levels and among the different ministries is prioritized so that the production can be expedited.

In the current financial year, the company is targeting a production of 507 million tonnes, which is about 9% higher than last year.

To facilitate growth, the government is targeting three green field railway lines and improving existing infrastructures to make sure that another 350-400 million tonnes of coal can be accommodated.

However, industry experts believe that relying entirely on Coal India may not work in the long run because of its own concerns and inability to increase production. To resolve this

issue too, the government has decided to auction 100 more coal blocks over the next 6-8 months, which will help in de-risking and distribution of coal. This could help reduce the dependence on Coal India to a large extent and increase production.

That apart, coal swapping among end users and proposals to close down old and inefficient power plants are considered to be initiatives in the right direction, which will not only save cost, but also help companies to improve efficiencies.

Overall, the intent is right and policy actions are supportive. If they move in the right direction and some of the issues, particularly in the coal sector, are resolved this could be a huge game changer for the power sector in India and encourage investors to say there is light at the end of the tunneL.

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input costs.

But, how much of the gains from lower input prices will trickle down to higher EBITDA margins is yet to be seen. That’s because, as input prices fall attracting local players into the fray, companies will have to up their ad spends and promotional activities.

On the whole, expect margins to remain firm, translating into higher earnings for most companies.

With at least one quarter more to go before full revival in the economy, companies are hedging themselves from a possible slide in revenue growth by propping price-led growth, in the financial year’s third quarter (October-December).

To a large extent, top-line growth in the past few quarters was aided by price rather than volume. The latter is not expected to recover anytime soon, which means the only tool available to aid top-line growth is price.

Small soap and detergent manufacturers in some states have already passed on price cuts of 5% to 7% in recent weeks, experts said. The commodity down cycle has allowed smaller entities to take price cuts and more were in the offing, depending on the price movement of key inputs.

However, big FMCG players like Colgate, HUL and GCPL are yet to pass on the benefits to consumers. Colgate toothpaste has got more expensive. From `75 earlier, a Colgate Herbal 200g pack now costs `82, a 9% jump.

Select variants of essential items such as bars, detergent powders, creams, shampoos, and hair oils have all inched up by 1% to 15% in the month of November, even as prices of crude oil-linked derivatives, which are used as inputs in all these products, have

companies like GCPL and Marico among others, are expected to get better in the coming quarters due to low input costs. However, a pickup in volume growth seems unlikely in the near future.

“In a low-growth environment, our emphasis on market development and innovations has helped deliver another quarter of double-digit growth and a healthy improvement in operating margins,” HUL chairman Harish Manwani said in a statement.

In the July-September quarter, some consumer goods companies saw EBITDA margins improve. The movement of EBITDA margins was largely a function of intensity of advertising and promotional spends of most FMCG companies.

Hindustan Unilever Ltd, Dabur Ltd as well as Godrej Consumer Products Ltd (GCPL) reduced this metric in the quarter to support the companies’ EBITDA margins.

During times of lower palm oil prices, small local soap players come back to the market. This, in turn, pushes sales and promotion expenses, not necessarily advertising spends. Thus, the nature of competition is key to determine margin expansion due to falling input costs.

Going ahead, benefits of lower input costs should soon start showing in the gross margins of FMCG companies.

Experts say the full impact of soft input costs is likely to be visible from this quarter and is expected to continue in the next quarter as well.

They feel that in the second half of this financial year, gross margins of most companies should improve on a year-on-year basis given benign input costs. Soap and paint companies should benefit the most from lower

companies seems to be a thing of the past as analysts expect margin gains from the October-December quarter.

Margins of all FMCG companies like HUL, Godrej Consumer Products and Marico, among others, are expected to improve by around 60 to 70 basis points on an average owing to lower input costs, experts said.

“Oil prices and other commodity prices are softening, which would help to improve our margins in the coming quarters,” said Adi Godrej, chairman, Godrej Group. The growth in the second half of this financial year is expected to be better than the first half, both in terms of volume and margin expansion, with the economy expected to revive, said Godrej.

“In a challenging environment, we have delivered 23% growth well ahead of FMCG industry growth. Along with healthy top-line growth, we have also delivered good operating profit growth with 20% earnings before interest, taxes, depreciation and amortization growth,” added Godrej.

In July-September, the operating margin of Marico’s India business was 15.1% as against 17.6% a year ago, before corporate allocation.

The decline in margin this quarter was mainly on account of sustained hyper-inflation in raw material prices as the company chose to pass on only a part to the consumers, Marico said in a statement post results.

The company believes that an operating margin in the band of 17% to 18% is sustainable for the domestic business in the medium term. HUL management also said post results with commodity prices falling, input costs are expected to decline.

Margins of HUL and other FMCG


declined significantly.

In the past six months, inputs such as linear alkyl benzene (LAB), used in making detergents, and high density polyethylene (HDPE), used in packaging material, have all dropped. Crude oil is at $70/ barrel. Six months earlier, it was $112/ barrel.

The situation is no different in agricultural commodities. Palm oil, used in making soaps, is down 15% in the past six months. The price of copra, used in making hair oil, has grown at a slower rate (8%) in comparison with the year-ago period (two-fold).

Experts said commodity deflation builds a strong case for a price cut. Yet, none of the national-level consumer goods companies have cut prices significantly. On the contrary, they have increased prices.

GCPL’s Cinthol Deo Cologne soap has seen a 9% price rise in November.

Marico, maker of the Parachute brand of coconut oil, has said it will get a clearer picture on pricing by the month of February, when the new copra season begins. For the month of November, Marico marginally raised the price of its 175ml Parachute pack, by 0.8%.

The country’s largest consumer goods maker, Hindustan Unilever (HUL), has not said when it will begin cutting prices in most categories, though soap prices were reduced in November ’14.

The price cut on 100g bars of Lux, Lifebuoy and Dove soap brands was between 4% and 10% this month. However, the price of some of its shampoos, detergents and creams were increased by 1% to 20% at the same time.

Not surprisingly, shares of

fast-moving consumer goods (FMCG) companies, along with paint and tyre manufacturers, are expected to come into focus as a decline in crude oil prices is likely to improve their profit margins.

Crude oil is an important raw material for products in these sectors. FMCG major Colgate, Asian Paints and JK Tyre are among the top picks if oil prices remain weak, experts said.

The US Energy Information Administration, the Organization of Petroleum Exporting Countries and the International Energy Agency have all cut their projections for oil-demand growth.

By-products of crude oil are used in making shampoo ingredients and detergents while PET bottles used to store water and hair oil are a petroleum-based plastic product.

Crude oil derivatives account for 15% to 30% of the total cost of making FMCG products, almost a third of raw material costs for paint companies and for 25% to 30% of production costs for tyre companies.

Analysts say FMCG companies spend an additional 15%-30% of their total costs on packaging and the current decline in crude prices is estimated to boost margins by 6% to 8%.

Companies like Hindustan Unilever, Godrej Consumer and Dabur have the highest exposure to petroleum-related raw materials in the FMCG space.

Industry experts are likely to be choosy about picking winners from these sectors as many of the stock valuations are expensive.

Hindustan Unilever, Godrej Consumer, Dabur and Asian Paints are all trading above price-to-earnings (P/E) multiples of 40 times their

trailing 12-month earnings, which is on the expensive side, said analysts.

As a result of these high valuations, many consumer companies have underperformed the broader markets over the past one year. Hindustan Unilever has gained 21%, Godrej Consumer has risen 22%, Dabur has moved up 32% while Asian Paints has rallied 49%.

Down nearly 40% since June, international crude prices are close to levels last seen in 2009, when the global economy was gripped by its worst slump since the 1930s.

Indians though are not enjoying commensurate savings on fuel bills - retail prices of petrol and diesel are not declining at the same pace as the plummeting price of crude.

Consumers are paying 8.32% less for diesel and 11.31% less for petrol than on 1st June, experts said.

But there are indirect gains too. The sharp fall in global crude oil prices has a favourable impact on India’s macro economy, setting off multiple growth boosters.

The timing of this windfall could not have been better for India’s economy. A new government with a huge mandate is in office and the business is at the cusp of an upturn.

The most obvious positive fallout is on price rise. Consumer prices are likely to ease too, though to a much lesser extent, according to estimates by industry watchers.

The spare cash from fuel cost savings, howsoever small, should increase consumer discretionary spending. Higher consumption of FMCG products adds to corporate incomes. Abating input costs too will widen profit margins for businesseS.


fibre is between 20 mm and 24 mm.

About 44% of the total cotton produced in India is of the medium staple variety. Rajasthan, Punjab, Tamil Nadu, Madhya Pradesh, Uttar Pradesh, Karnataka and Maharashtra are its main producers.

c) Short Staple Cotton

Short staple cotton is inferior cotton whose fibre is less than 20 mm long. It is used for manufacturing inferior cloth and fetches lesser price. It is produced mainly in Andhra Pradesh, Rajasthan, Haryana, Uttar Pradesh and Punjab.

THE INDIAN PICTURE

For a long time, India used to be a cotton-deficit country. Therefore, India would import cotton from the international markets. Till the 1970s, India would import massive quantities of cotton in the range of 8 to 9 lakh bales per annum.

Subsequently, the government launched special schemes like intensive cotton production programmes through successive five-year plans. This provided the necessary fillip to cotton production in India.

There was an increase in the area and sowing of hybrid varieties of cotton in the mid-1970s. Experts point out that due to intensive cotton production, India has become self-sufficient in this commodity.

In the year 2000, the Indian government launched ‘Technology Mission on Cotton’, which helped in increasing the yield as well as production of cotton through the development of high-yielding varieties, appropriate transfer of technology and better farm management practices.

are removed. Some cotton goes through a comber that gives more short fibres and makes a stronger lustrous yarn.

Cotton is essentially a kharif crop, which requires around six to eight months to become ripe. Depending on climatic conditions, the time of sowing of cotton and its harvesting varies in the country.

In the Indian states of Punjab and Haryana, cotton seeds are sown in April-May period and harvested in the December-January period. It must be noted that winter frost can damage cotton crop.

In the peninsular part of India, cotton seeds are sown up to October and harvested between the months of January and May because there is no danger of winter frost in these areas. In Tamil Nadu, it is grown both as a kharif and as a rabi crop.

There are three broad types of cotton. These categories are defined on the basis of the length, strength and structure of its fibre – long staple cotton, medium staple cotton and short staple cotton.

a) Long Staple Cotton

Long staple cotton has the longest fibre and its length varies from 24 mm to 27 mm. The fibre is long, fine and shiny. It is used for making fine and superior quality cloth. This is a lucrative category since it fetches higher price.

Long staple cotton forms a large part of the cotton produced in India. It is largely grown in Punjab, Haryana, Maharashtra, Tamil Nadu, Madhya Pradesh, Gujarat and Andhra Pradesh.

b) Medium Staple Cotton

The length of medium staple cotton

present-day Peru and Mexico. This was probably 5,000 years ago. Cotton was grown, spun and woven in ancient India, China, Egypt and Pakistan around 3000 BC. It is estimated that around 800 AD, Arabic traders may have introduced cotton to the Spanish people.

By the fourteenth century, Mediterranean farmers were cultivating cotton and shipping the fibre to the Netherlands for spinning and weaving.

In the Indian subcontinent, cotton has been cultivated for manufacturing textile products since 1750 BC, which is the date ascribed to the Mohenjodaro fragments of the Indus Valley Civilization.

By the sixth or seventh century AD, the more robust annual variety of cotton, Gossypium herbaceum, was grown in India. By the thirteenth century, its cultivation spread across the west and south-east Asia.

PRODUCTION PROCESS

After cultivation, cotton is harvested at the farm, and goes through multiple processes. Before processing, there are three stages. When cotton arrives at a textile mill, it is fed into the cleaning machines with the help of several blenders.

In the cleaning machines, trash is removed from cotton by mixing and breaking it into smaller pieces. This is called ginning.

Then the cotton is sucked through a pipe into picking machines where it is repeatedly struck by beaters in order to knock out the dirt and separate lumps of cotton into smaller pieces.

Cotton then goes to the carding machine, where the fibres are separated and trash and short fibres


Cotton Corporation of India, a government undertaking, has also been proactive in its initiatives in ensuring low cotton wastage and providing right business environment for farmers and textile mills. A case in the point is contract farming.

For a long time, the quality of cotton produced in the country used to be comparatively more contaminated.

Farmers were suffering due to higher cost of production and low productivity and the end user - textile mills - would find it difficult to consume the available cotton since it generally contained a mixture of varieties with higher percentage of trash and contamination.

Under contract farming, farmers are

expected to form associations and textile mills and other co-ordinating agencies are entrusted with all the extension services including various inputs and marketing support for such cotton produce.

The scheme, in its extended form, benefitted both the cotton growers through low-cost of production and higher productivity and the textile mills too with the availability of quality cotton comparable with international standards.

To give a boost to cotton production in the country through contract farming, Cotton Corporation of India has been undertaking contract farming programme in all the cotton growing states since 2002-03 and signing MoUs every year with the

Farmers’ Association.

All these developments have resulted in a turnaround in the production of cotton in the country in the last six to seven years.

According to Cotton Corporation of India, the yield per hectare, which was stagnant at about 300 kg/ha for more than 10 years, has increased substantially and reached a level of 552 kg/ha in the cotton season 2013-14.

Today, cotton cultivation for the current cotton season is higher than the previous season. The area under cotton cultivation in India is at a record high of 12.5 million hectares in comparison with 11.7 million hectares in the previous yeaR.

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Mangalam Cement Ltd is likely to see growth in cement volumes on the back of capacity expansion

angalam Cement Ltd (MCL), promoted in 1978, is a part of the BK Birla Group. The company is engaged in the manufacture of cement and has a capacity of 3.25 MTPA

(million tonnes per annum) along with 48.65 MW of captive power plant.

Its cement and power plants are located at Rajasthan and it sells three products in cement - OPC grade 43, OPC grade 53 and PPC - under the brand name Birla Uttam Cement.

Currently, MCL sells 60% PPC and 40% OPC. The company sells 51% of the total output in the northern region and 49% in the central region. The major selling markets in both the regions are Rajasthan, Delhi, Haryana, Uttar Pradesh and Madhya Pradesh.

M

CementingIts Position

Source: Company Data, Nirmal Bang Research

Cement Volume Break-up (%)

MANGALAM CEMENT

31%

12%36%

13%

8%

Rajasthan Delhi UP MP Haryana

At present, Rajasthan constitutes 31% of the company’s cement volumes. It will increase to 50% on account of the sales tax benefit scheme announced by the state government on new capacity of 1.25 MTPA.

As per management calculation, the company will receive sales tax subsidy for 7 years starting from FY15. MCL will receive subsidy of around `20 crore in FY15 (assuming the



capita). The demand for cement is set to be primarily driven by infrastructure projects, especially in Madhya Pradesh. In Uttar Pradesh, the demand is expected to gradually pick up over the next 5 years with the execution of the announced projects.

Commercial development is also expected to drive demand in the region with the development of office spaces and retail projects.

Realization To Improve With Revival In Demand

Average pan-India cement prices reported moderate growth of 1.8% year-on-year (y-o-y) in 2013-14, owing to a slowdown in demand.

The confluence of high cost/leveraged capacity additions and subdued realizations/demand has resulted in unfavourable operational economics.

However, we expect realizations to improve from here on owing to demand recovery under the stable government. We expect realization for MCL to grow at a CAGR of 14.5% for FY14-16E.

new capacity will operate for nine months). Thereafter, from FY16-21, it will be around `27 crore per year.

INVESTMENT RATIONALE

Recent Capacity Addition To Drive Growth

MCL’s additional clinker capacity of 0.5 MTPA and cement capacity of 1.25 MTPA in Morak (Rajasthan) were put under trial run in the Q4FY14 and has already started commercial production from June ’14.

Post these expansions, MCL’s clinker and cement capacity stand at 2.3 MTPA and 3.25 MTPA, respectively. Increased capacity would enable MCL to maintain its market share and will lead to volume growth from FY15 onwards.

We expect the company to report robust volume CAGR of 18.4% over FY14-FY16E owing to stabilization of new capacity and favourable demand-supply situation.


Volume Growth Trend

Strategically Located In Sound Markets

Northern Region Growth in demand is expected to be led by housing and infrastructure segments. Rajasthan, Punjab, Haryana and Delhi are likely to remain the key cement-consuming centres. The probable commissioning of large DMIC projects by H2FY15E would lead to higher cement demand growth in North and West regions.

While real estate development in the Delhi region is likely to be slow over the medium term, healthy execution of projects is expected in areas around Chandigarh. Individual housing projects are expected to continue to drive demand in the region.

Central Region The central region is one of the lowest cement-consuming regions in India (140 kg per capita vs India’s 192 kg per

Profitability Increase Potential - Efficiencies Targeted

The usage of pet coke in kiln operations of MGC has significantly reduced the consumption of high grade limestone from 16% to 8‐9%, thereby resulting in significant cost savings.

Recently, the company upgraded its kiln capacity, which will help in reducing power consumption by 8 units per tonne of clinker and coal consumption by 1%.

We expect EBITDA per tonne to improve to `733 per tonne in FY16 from `241 per tonne in FY14 on the back of higher realization and recent cost initiatives undertaken by the company.

-5%-7.4%

8.8%

13%

-0.5%

24%

12%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

0.5

1

1.5

2

2.5

3

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Volumes YoY (%)


Realization Growth Trend

7.3%

-9.4%

11.4%

6.3%

-0.8%

16.6%

12.5%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0500

100015002000250030003500400045005000


Realisa on (` /Ton) YoY (%)


Source: CRISIL Source: CRISIL

Source: CRISIL

Source: CRISIL

INDUSTRY OVERVIEW

Demand Growth To Be Driven In The Second Half

Demand has been consistently weak over the last 12-18 months. The key reason for the weakness in demand has been a slowdown in both government and private expenditure and the slow pace of infrastructure growth.

This slowdown moderated cement demand growth to 4-5% during FY11-14E vs 8-9% growth witnessed during the FY05-10 period.

We expect cement demand to be boosted by the new government’s stated focus on infrastructure and low-cost housing in the coming years.

The cement industry added an installed capacity of 23 MTPA in FY13 with higher addition in the eastern and central regions. The overall capacity additions from FY09-FY13 were 134 MT, while it is expected that additional capacity additions in the next 6 years (FY14-FY19E) will be 72 MT, suggesting consolidation.

Despite weak operating rates, capacity additions in southern India have been around 3-4 MTPA given the good availability of limestone in the region and prospects of outbound supply.

Demand Pickup Along With Consolidation Will Lead To Higher Profitability

Average pan-India cement prices reported moderate growth of 1.8% y-o-y in 2013-14 due to slowdown in demand. But the confluence of high cost/leveraged capacity additions and subdued realizations/demand has led to unfavourable operational economics. Realizations may improve as the leveraged tail of the cement industry will find it difficult to sustain operations under status quo.

In addition to this, moderation in capacity additions/ revival in demand on the back of strong government and favourable base (following a prolonged slump) and industry consolidation (as large producers with strong balance sheets absorb weak and leveraged producers) will help in realization growth.


EBITDA Trend

250

280

310

340

370

400

Jan-12 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14

East West North Central South North East

(`/bag)

31.2%1,058

368521

642

241

546

733

12.0%15.2%

17.6%

6.7%

13.4%15.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

200

400

600

800

1000

1200


EBITDA/Ton EBITDA margin

88%

207243

282

314 341 353 364385

401 406 413

85%77% 74%

70% 69% 69% 68% 69%73%

78%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

50

100

150

200

250

300

350

400

450

FY09 FY10 FY11 FY12 FY13 FY14E FY15P FY16P FY17P FY18P FY19P

Trend In Cement Operating Rates

Trend In Domestic Cement Prices

Total e ec ve capacity Pan India opera ng rates

1

30

41

34 33

24 23 22 22

57

4

0

5

10

15

20

25

30

35

40

45

Installed Capacity Addition

Region-wise Capacity Addition Over Next Two Years

7.8

2014-15P 2015-16P

5.4 5.8

2.31.2

12.5

7.8

01 1

0

2

4

6

8

10

12

14

North East West South Central North East West South Central

156 MTPA

60 MTPA


Cost Pressures To Ease

The Indian cement industry has witnessed significant cost pressures in two key cost components: energy and freight. The average cost structure of Indian cement companies is: 1) 25-30% power and fuel costs; 2) 25-30% freight expenses, which also track the diesel price increase for road transport and railway fare hikes; 3) 15-20% raw material costs for fly ash, gypsum, etc, and 4) 20-25% employee + other expenses, which are largely fixed.

Costs have increased in FY14 across the board, driven by lower ‘linkage’ coal, higher global coal prices, diesel prices, higher fixed costs and INR depreciation.

We expect cost pressure to ease in FY15/FY16 led by: 1) 11% YTD dip in international coal prices 2) rising usage of pet coke 3) a likely reduction in freight cost as rising demand brings down distance.

Source: Bloomberg

45

50

55

60

65

70

60

70

80

90

100

110

Jan-12 Jun-12 Nov-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14

Interna onal Coal Price USD/INR

(US$/tn) (US$/INR)

International Coal Prices Easing Off

Increased Pricing Pressure

The performance of the cement sector depends upon pricing movement to a large extent. We have factored in a 14.5% CAGR in average realization through FY14-FY16E. Lower-than-expected increase will pose a downside risk to our estimates. Input Cost Pressure

Historically, cement companies have been able to pass on the rise in input costs to the end consumers. However, in a scenario of oversupply, the companies may not be in a position to pass on the increase in input costs. Therefore, a substantial increase in pet coke prices, domestic coal prices, and crude oil prices can pose a downside risk to our estimates about MCL.

VALUATIONS AND RECOMMENDATION

Under a strong government, the cement sector will benefit from a potentially faster recovery in the investment cycle, especially infrastructure.

While sector profitability could remain under pressure over the next 1-2 quarters, the long-pending infrastructure projects could be fast-tracked by the new government, resulting in demand recovery and higher profitability in the next two years.

The company has started commercial production of its additional cement capacity of 1.25MTPA from June ’14.

On the back of this expansion, we estimate cement volumes to grow at a CAGR of 18.4% during FY14-16E. Realizations are also expected to improve at a rate of 14.5% CAGR during the same period, driven by a pick-up in demand. This, along with the benefit of operating leverage would help in improving margins, going forward.

At the current market price, MCL is trading at 8.5x and 5.4x of its FY15E and FY16E EV/EBITDA, respectivelY.


698.7

687.5

987.2

1239.2

Year Net Sales (` cr)

12.30%

-1.60%

43.60%

25.50%

Growth(%)

123.3

46

132.5

195.6

EBITDA(` cr)

17.60%

6.70%

13.40%

15.80%

Margin(%)

10.3

27

15.7

7.6

PE(x)

77.4

29.6

51

104.8

11.10%

4.30%

5.20%

8.50%

Margin(%)

76.3

57

56.3

52.4

EV/ton

29

11.1

19.1

39.3

EPS(`)

Adj PAT(` cr)

FY13A

FY14A

FY15E

FY16E

Financials

RISK FACTORS

Sharp Drop In Demand

Our estimates factor in 18.4% CAGR volume growth in FY14-16E, respectively. A sharp drop in demand is a risk to the volume estimates for MCL.


Players with only a handful of equity schemes like Quantum Mutual Fund, Mirae Asset Management, IIFL Mutual Fund and PPFAS Mutual Fund also earned modest profits in 2013-14.

However, a large number of these fund houses would have gained after the change in investors’ preferences and a regulatory shift that helped the industry to register positive numbers.

We all are quite aware of the fact that margins in managing debt funds are low compared to equity funds. But in the last few months, we have seen many long-term income funds hiking their exit loads and increasing charges, which also helped fund houses to gain via debt funds.

IN A NUTSHELL

Though assets under management (AUM) of mutual funds have crossed the `10 lakh crore-mark in October ’14 and there is renewed fondness for mutual funds, just 4% of Indian investors are investing in mutual funds. So, there is a huge scope for the fund industry to grow.

Many players argue that they will reach `20 lakh crore AUM in the next few years, although the overall exposure in equity is still below 30%. It will require constant attention and investment awareness by fund houses to expand their reach and tap semi-urban and rural areas.

For retail investors, this is the time to stay invested from a long-term perspective and not exit with minimal gains. Most of the negatives for the India growth story are behind us and with the new government, we expect GDP to rise in the years to come. If investors stay put for long and can digest volatility over the period of time, they will have less regrets, going forwarD.

one year and since April, the mutual fund industry saw an addition of over two lakh folios.

SPURT IN AMCs

Year 2013-14 was tough for asset management companies. But that did not deter them from registering strong growth on the back of cost-control measures and management fees.

For 2013-14, profit-after-tax (PAT) of top ten fund houses stood at `1,604 crore, a rise of 42% compared to 2012-13. HDFC Mutual Fund gave a PAT of over `350 crore, while Reliance Mutual fund came second with a PAT of `304 crore.

The major reason for top fund houses registering strong profits was that a large part of the equity assets of the MF industry is shared by the top 10 players. Along with a huge equity corpus, strict cost-control measures following redemptions from equity schemes helped these fund houses to stay profitable during the year. Many fund houses were careful in managing their costs and they also earned decent profits from the portfolio management services (PMS) desk.

For many players like ICICI Prudential Mutual Fund, Birla Sun Life Mutual Fund, UTI Mutual Fund and Kotak Mahindra Mutual Fund, positive performances of their funds were noticed, which in-turn helped them to get fresh money from retail investors. Few of them like IDFC Mutual Fund, Kotak Mutual Fund and SBI Mutual Fund saw a multiple-fold rise in their PAT in 2013-14 compared to 2012-13.

Yet the most surprising part of the year was that not only top fund houses but many small and medium fund houses too registered decent profits, indicating that good quality fund management is always rewarded.

were constant outflows from equity funds. But debt funds, mainly income funds and long-term funds continued to get money on the assumption that interest rates would fall, giving advantage to such products.

But in July-August last year, suddenly there was a currency crises in India as the US announced its plans to roll back its quantitative easing (QE) program. However, few months down the line, things stabilized and once again the focus has shifted to the fall in interest rates. Also in 2013, equity markets had not seen a positive rally and many small- and mid-cap companies were trading at a discount.

Even before India went to polls in March this year, equity markets had seen a sharp rise hoping that it would get a pro-reform government. Since the formation of the BJP-led NDA government, there has been no looking back and the equity markets have posted new highs on a regular basis. With such a strong government at the centre, even foreign institutional investors (FIIs) started pouring money into India.

Along with FIIs, domestic investors started participating in the India story. The biggest beneficiary of retail money coming into equity markets was the mutual fund industry due to net inflows into equity schemes.

As per the Association of Mutual Funds in India (AMFI) data, since May ’14, equity funds recorded inflows of over `39,000 crore. New investors started coming into mutual funds as schemes started giving strong returns.

In the last one year, on an average, multi-cap funds gave returns of over 61%, while mid- and small-cap funds on an average, gave returns of around 85% for the same time frame. Even folios saw a multiple rise in the last


STECHNICAL OUTLOOK FOR THE FORTNIGHT

ince September ’14, the global economy has continued to moderate, largely on account of

recessionary fears haunting the 18-nation Euro-zone as headwinds from recessionary forces have persis-tently weakened industrial production in the region.

Even as the US economy has gathered momentum, the slowdown in China and also somewhat in Japan has led the Central bankers (in China and Japan) to opt for an accommoda-tive monetary policy stance so as to boost their respective economies.

In the milieu of high global economic growth uncertainty, India is riding high on optimism as the new govern-ment at the helm is keeping the investment sentiment intact by endur-ing policy announcements.

The recent clearance of the Insurance Laws (Amendment) Bill (yet to be cleared by the Parliament), Electricity (Amendment) Act, with PSU banks permitted to raise capital from the market with a minimum 52% stake-holding by the government, by the Cabinet will further bolster investor sentiments in the country.

The biggest positive for India – as a net importer of crude oil – has been the steep fall in crude oil prices. The fall in crude oil prices will substan-tially improve India’s fiscal deficit and its current account deficit (as ~30.0% of India’s import constitutes of oil imports).

Also, softening of international crude oil prices since September has eased price pressures in transport and communication segment of CPI inflation, and fuel and power segment in WPI. This has raised chances of a

rate cut sooner than anticipated.

All in all, in the wake of slowing global economic growth, robust capital inflows into the economy (given resilient INR to USD and improving macros vis-à-vis other emerging markets) and policy announcements by the Modi-led government, it is certain that India is poised for higher growth.

December has been rather tough on Indian equities. The Nifty lost 3.5% from the start of this month, with key benchmark indices losing heavily on the back of global cues. Increased volatility in the global markets, both from the west and China in the last few days, was causing a bit of choppi-ness in the Indian markets too.

However, the policy announcements under Narendra Modi’s leadership look positive for the economy. As far as the markets are concerned, there has been some amount of selling. The Nifty registered an all-time high of 8,626 points (as on 4th December), after that we witnessed a huge selling pressure which can be attributed to general profit booking by FII’s.

However, the Nifty fell nearly 350 points to 8,272 (as on 11th December) from the all-time high of 8,626, which is from a short-term perspective.

Going by the weakness and volatility seen on Dalal Street in the past few trading sessions, one should use every dip in the market as a buying opportu-nity. There is not much of a reason for the markets to go down badly, except for volatility in currencies. Technically, the weekly chart on the higher degree indicates that the Nifty

is trading in higher tops and higher bottom pattern since last year and it is continuing to do so, indicating a potential upmove.

Another interesting fact is that the Nifty is trading in the upward rising channel (low-5933, low-7,723, high 8,180) and it is on the verge of taking support of 8,180 level.

Looking at the rising channel and short-term averages, that is the 50-DMA, we believe the Nifty may have cluster support, i.e. 8,180-8,200 mark, and from here on some bounce back can be expected.

On the flip side, 8,380 will be the immediate resistance level. The overall view is cautious as Nifty will trade in the range of 8,180-8,380 levels. Any breakout on either side will open its target of 8,640 level.

The Bank Nifty faces immediate resistance around the 18,650 level on upside. On a decisive close above this level, one can expect it to rise to the levels of 19,000 and 19,200. There is an immediate support at 18,300 level on the downside.

The Bank Nifty is showing strong signs of revival and is holding firmly above its 20-day average of the Bollinger band daily chart on the closing basis. It now has immediate support at 18,300 and it will remain firm till 18,300 level is maintained.

Positional traders can now trail the stop loss of long positions at 18,000 as it has now emerged as a key support level for the index. If the Bank Nifty manages to sustain above the 18,300 level, then the recent gains may extend higher and the Bank Nifty may test 19,000/19,200 levels in the coming sessionS.

alk to any entrepreneur around about the most difficult part of getting his venture started, and unless

he is flush with funds, he is likely to say that it is fundraising for his business that has made him run from pillar to post.

Typically, the fundraising process for entrepreneurs has been tedious, frustrating and more often than not, fruitless. But that was until the concept of “crowdfunding” came by.

Simply put, this is a process of raising funds for a small business from a group of interested investors online.

T

The Online CollaboratorsFor aspiring entrepreneurs, crowdfunding could be an appropriate alternative to raise funds to

achieve their entrepreneurial goals

venture to the investor.

interested, you wait for him to schedule a call with you.

business plan.

meetings and calls.

the investor to be completed

goes right.

Now, compare this procedure with crowdfunding.

crowdfunding platform for your

TRADITIONAL FUNDING VS CROWDFUNDING

To put crowdfunding in context, let us take a look at how offline or

an entrepreneur, this is how traditional fund raising works for you:

your contacts and networks to examine who could connect you to potential investors.

you a warm introduction to the VC or

executive summary of your new



the early stage. With more and more ideas getting funded through crowdfunding platforms, there is a good chance that most of these ventures will not see the light of day, and investors will run out of luck. If too many of these small or micro ventures get scrapped, what seems wonderful as a funding option for budding entrepreneurs today, may soon face regulatory ire.

SEBI TAKING NOTE OF CROWDFUNDING

The good news is that market regulator SEBI has taken cognizance of the potential of crowdfunding in India. As a result, it has proposed a framework for the regulation of crowdfunding in start-ups.

Under the proposed regulatory framework, crowdfunding platforms can be provided only by SEBI registered entities and aspiring companies can raise upto `10 crore in a year through this route. SEBI has further proposed that only accredited investors or investors who fall in the category of companies, institutional investors, HNIs and financially secure retail investors can participate in crowdfunding activities as the level of risk associated with crowdfunding is pretty high.

In each generation, entrepreneurs have resorted to new forms of fundraising to make life easier. One such funding innovation is crowdfunding. Like anything and everything else that is new, there promises to be many a hiccup.

Over the years, however, as more and more entrepreneurs resort to crowdfunding, this investment avenue is expected to become a viable and established fundraising route for entrepreneurs in the futurE.

for lack of investments can now approach crowdfunding platforms with ideas for their new business.

With a motley group of investors coming together to fund a host of ideas, entrepreneurs are no longer limited to a watertight payback window. This gives them the freedom to explore their ideas and push boundaries. In fact, crowdfunding is the best option for niche ideas that have not had access to attention of traditional investors.

The other aspect that cannot be ignored as far as the success of crowdfunding is concerned is the omnipresent social media. Good projects and ventures can get a huge amount of attention from social media and raise much more money than was initially intended. Thus, crowdfunding can be an effective marketing vehicle as well.

INVESTORS GET A WHOLE HOST OF BENEFITS TOO

From the investor’s perspective, anybody who has a little capital and is interested in funding interesting ideas can participate in crowdfunding. The profits that an investor is entitled to will be directly proportionate to his value of investment.

Exit from crowdfunding is also easier, for the investor will no longer have the entrepreneur to sell and can make a private placement of his equity to other members of the “crowd.”

POSSIBLE DISADVANTAGES OF CROWDFUNDING

But this does not mean that everything is hunky dory. Let us take a look at the cons of crowdfunding. As entrepreneurs do not have access to investors face to face, they lose out on the opportunity of honing their business and strengthening its base in

business venture

keeping with the details that are required by the platform

conducts its stipulated due diligence

investment-worthy, your online profile is created

campaign now launched, interested investors review your plan

between the investors’ interests and that of your business proposal and you receive your funds right away.

HOW ENTREPRENEURS STAND TO GAIN

Naturally, this is a dream come true for all entrepreneurs who have been beating their heads over fund-raising requirements. More often than not, they have no idea where to get started or how to pitch their business plans to offline investors.

When you approach a crowdfunding platform, you not only get access to a larger pool of potential investors, you receive the much needed guidance from the founders of these investment platforms that help you create a professional profile and a comprehensive business plan.

With access to crowdfunding, entrepreneurs are expected to come up with lesser capital from themselves, and since the huge efforts to raise money almost come to a naught, they can focus on the business and honing it. With crowdfunding having become the order of the day, and many more aspiring entrepreneurs warming up to this idea, a lot more interesting, complex and niche ideas are getting funded.

Those potential entrepreneurs who come from humble backgrounds and have been forced to shelve their ideas

CLOSER

TPERFECTIONInvestors can consider

Heikin-Ashi charts as

they are easier to

understand and predict

than candlestick charts here are more than 100 candlestick patterns and signals. Of these, many patterns contradict each other and give conflicting signals and false indications. And traders find it very difficult to learn and follow all the patterns accurately.

This is the main reason why many investors discontinue using candlestick charting. But what if someone told you that you could still follow candlesticks without having to learn numerous patterns while reducing noise and the number of false signals too?

Well, the improved version of your very own candlestick charts is known as Heikin-Ashi.

T

Heikin-Ashi is an offshoot of the famous Japanese candlestick developed by the Japanese themselves in their endeavor to make technical analysis faster and more reliable. Heikin means “average” and Ashi means “pace”. So, basically a Heikin-Ashi chart shows the average pace of prices. It is aimed at making candlestick charts more readable, enabling the trend to be clearly visible at a glance, and reducing the number of false signals.

REGULAR CANDLESTICK

It is important to first learn the mechanism of classical candlesticks to better understand a Heikin-Ashi chart. Although, we have covered candlesticks in our previous issues, here is a brief synopsis of candlesticks to refresh your memory.

UpperShadow

LowerShadow

BODY

HIGH

CLOSE

OPEN

LOW

UpperShadow

LowerShadow

BODY

HIGH

OPEN

CLOSE

LOW

REGULAR CANDLESTICKS

In a classical candlestick chart, every candle represents four basics - Open, High, Low and Close of the session.

The rectangular or cylindrical part of the candles is known as the body. It may be hollow (white) or filled (black or coloured). If the stock closes higher than the opening price, a hollow body is drawn, with the base of the body representing the open



Since Heikin-Ashi uses the concept of averaging, a couple of erratic moves or countertrend days are smoothened out, leaving the viewer with a very clear-cut representation as to the direction of that trend.

For example, if there are 2 or 3 down days in a total of 10 up days, a Heikin-Ashi chart can clearly show that the trend is firmly up by avoiding unnecessary change of colour of the candles. Below is just a diagrammatic representation to give you a rough idea of how a Heikin-Ashi chart can smoothen out the trend and make it visible at one glance.

2. HA Close: It is the average of the current sessions High, Open, Low, and Close.HA Close = current H+L+O+C 4

3. HA High: It is the highest value out of the current sessions - High, Open, or Close.HA High = maximum of current high, open, or close

4. HA Low: It is the lowest value out of the current sessions - Low, Open, or Close.HA Low = lowest value of the current low, open or close

The HA candle is hollow (white) when the HA close is above the HA open. The HA candle is filled (black) when the HA close is below the HA open. In this respect, it is similar to the regular candlesticks.

Many charting softwares available currently show HA candles in colour; for instance, an Up candle or Positive candle (where the close was above the open) is shown in green or blue. A Down candle or a Negative Candle (where the close was below the open) is shown in Red.

In fact, the use of colours is the main advantage of Heikin-Ashi charting, which makes visual interpretation of the trend very easy.

A long body forms when the difference between the open and close is high and a short body forms when the difference between open and close is less. When the open and close are virtually equal, we get dojis or spinning tops.

One can select the time interval according to one’s trading strategy - such as hourly, daily, weekly, or monthly chart - where each candle will represent an hour, a day, a week or a month, respectively.

price and the top of the body representing the closing price.

If the stock closes lower than the opening price, a filled candle is plotted, with the top of the body representing the opening price and the bottom of the body representing the closing price.

The long or short thin lines above and below the body represent the high and the low, respectively, and are called shadows or wicks, or tails. The high is marked by the top of the upper shadow and the low is marked by the bottom of the lower shadow.

Patterns are formed with different combinations of the above candles.

CONSTRUCTION OF HEIKIN -ASHI (HA)

The construction of a Heikin-Ashi candle remains the same as your regular candlesticks but where it differs is in the calculation of its High, Low, Open, and Close.

Heikin-Ashi uses values from both the previous session (previous candle) as well as the current session and incorporates averaging into its calculation of H, L, O, C; and this helps in smoothening of the graph, reducing noise and avoiding gaps. Since the candles are averaged, they don’t reflect the exact Open, High, Low, and close of that current session, unlike regular candlesticks.

For ease, we shall refer to Heikin-Ashi as “HA.”

Its calculation is as follows:

1. HA Open: It is the average of the open and close of the previous candle.HA Open = average of previous HA open and HA close,HA Open = previous O + C 2

ADVANTAGES OF HA OVER REGULAR CANDLESTICKS

1. HA is much easier to interpret visually and does not require sophisticated charting softwares for interpretation.2. One doesn’t require to learn a lot of different chart patterns unlike regular candlesticks.3. HA charts reduce the chance of getting false signals quite significantly.4. Since HA uses averages, a certain trend until it changes drastically is not seen on the charts and hence there is less frequent change in colour and often we get a series of same coloured candles, indicating a continuous trend. Regular candlesticks can be very confusing visually since there is frequent change in the colour of the candles. 5. Also, trend reversal is easily spotted due to the change in the colour of the candles. 6. Since every candle of HA uses the value from the previous candle, there


are no gaps in the charts unlike regular candlesticks.7. HA is slower than candlesticks and its signals are delayed. This prevents rushing in, making mistakes and trading against the trend.8. HA candles are related to each other since values from previous candles are also used. Regular candlestick candles are independent. Therefore, erratic moves from a single trading session do not cause much fluctuation.

DIFFERENT CANDLES

1. Bullish Candles

They are also known as Positive Candles. HA candles that have long bodies with long upper shadows with virtually no lower shadow, indicate Bullishness. It shows that the price stayed above the open price and never went below it during the entire trading session. In other words, the open price was the lowest price and there was no fresh low.

2. Bearish Candles

These are also known as Negative Candles. When HA candles have long bodies with long lower shadow but virtually no upper shadow, it indicates Bearishness. It shows that after opening, the prices never went above the opening price, that is, the opening price was the highest price of the trading session.

3. Reversal Candles

Reversal candles in HA look like dojis or spinning tops. In that, they have very small bodies but long upper and lower wicks or shadows. The long shadows indicate that the price swung widely on both sides, that is, highs and lows, but the crowd was undecided on the eventual direction of the prices, and, hence, the price

closed almost at the same level as the open, and, hence, the small body and long shadows. Dojis or spinning tops signal indecision, which is a precursor to a reversal and, hence, such candles should be tracked closely by investors.

with short body but long shadows at both ends indicate uncertainty and a possible reversal. If you are of the risk-taking types, you can trade contrary to the existing trend. Conversely, you could wait for confirmation of trend reversal by watching a couple of subsequent candles and colour changes.

Another popular way to trade Heikin-Ashi candles is to wait for a change in colour of the candles. It signals that a change in trend is about to happen or has already happened. After the change in colour happens, basically trade with the trend up or down, until such time that there is a change in colour of the candles in the opposite direction or an opposite shadow appears, that is, when a blue candle with a lower shadow forms after a series of blue candles with no lower shadow.

HA works better when used with other indicators such as RSI, MACD, stochastics, etc. It is a bit of a trial and error method to see which indicator works best with your individual style of investing along with Heikin Ashi. This not only helps in confirming the trend direction, but also in finding out your entry and exit points, setting your stops, and increasing the chances of success.

For example, wait for both slow and fast stochastic lines to move above the oversold line from below as well as a series of blue/green candles with no lower shadows to initiate fresh longs confidently.

Heikin-Ashi is a great tool for those investors who are impatient and want to enter and exit at the first signal they see. It helps them wait for the trend to be properly established before getting in and helps them stay in trade for a longer time and avoid getting out early at the first sign of weaknesS.

Doji HA candles withsmall bodies but longshadows on either side

Usually signalling a reversal in trend

Bearish HA candleswith long lowershadows but virtuallyno upper shadow

Bullish HA candles with longupper shadow but virtually nolower shadow

HOW TO TRADE

(white) or blue/green candles indicate an uptrend. One can initiate fresh longs or at least exit shorts.

(white) or blue/green candles with no lower shadow but long upper shadow, indicate strong uptrend. One can go long aggressively or hold onto the existing longs.

(white) or blue/green candles with the appearance of lower shadows, indicate that the uptrend may be weakening. Investors must avoid fresh buying and be on the vigil for a trend reversal.

red candles indicate a downtrend. One can exit the long positions or initiate fresh longs.

red candles with no upper shadow but long lower shadow, indicate strong downtrend. One can go short aggressively or hold onto your existing shorts.

red candles with the appearance of upper shadow, indicate that the downtrend may be weakening. Avoid fresh selling and be on the vigil for a trend reversal.

The Reserve Bank of India (RBI) reviewed its monetary policy on 2nd December. The RBI maintained a status quo on policy rates. But it hinted at a rate cut in 2015, if inflation remains benign and the government succeeds in achieving the fiscal deficit target. In fact, the RBI has gone ahead and said that a change in the monetary policy stance is likely next year even outside the policy review cycle.

Q What Was Expected From The RBI In This Review?

After hawkish statements in the previous review, analysts were expecting a status quo in the 2nd December policy. However, there was pressure on the RBI from industry lobby and the government to reduce rates to boost growth.

Q But Where Does The Data Stand?

Data stands mixed. CPI fell to 5.52% in October, declining below RBI’s 16th January target of 6%. This was mainly on the back of falling commodities and crude oil prices.

Oil has corrected over 35% since the beginning of the year and 24% since the previous policy review. Further, driven by manufacturing sector, index of industrial production (IIP) grew 2.5% year-on-year (y-o-y) in Sept ’14, following a growth of 0.5% in Aug ’14.

Q So, What Did The RBI Do?

The RBI did not succumb to pressure and said it would wait for sustained disinflation. It maintained a status quo: Repo rate at 8%; Reverse Repo at 7%; Cash Reserve Ratio at 4%; MSF Rate at 9%; Statutory Liquidity Ratio at 22%.

Q What Are All These Tools?

RBI employs tools that directly or indirectly impact

IMPORTANT JARGONFOR THE FORTNIGHT

interest rates and liquidity in the system.

Repo Rate: It is the rate at which banks borrow from the RBI. Higher repo rate means higher cost of funds for banks, which, in turn, means higher cost for borrowers.

Reverse Repo Rate: It is the rate at which banks lend to the RBI. The Reverse Repo rate changes with the change in repo rate and is set at 100 bps (1%) below the Repo rate. This rate sets the floor for interest rates in the system.

Marginal Standing Facility (MSF): This facility is used by banks to borrow from the RBI at an interest rate higher than the repo rate during liquidity crunch in the system.

Cash Reserve Ratio (CRR): It is the amount of money the banks need to maintain as reserve with the RBI as a percentage of its net deposits. CRR is inversely proportional to liquidity in the system.

Statutory Liquidity Ratio (SLR): It is the amount of money the banks need to maintain by investing in government and state government securities as a percentage of its net deposits. Banks are mandated currently to invest 22% of its net deposits in SLR securities.

Open Market Operations (OMO): The RBI purchases government securities (G-Secs), also called (OMO purchases) from banks to increase the liquidity in the system or sell its stock of G-Secs (OMO sales) to drain out excess liquidity from the banking system. This impacts banks’ cost of funds. Q So What Is RBI’s Outlook On Inflation?

On inflation, the RBI revised down its CPI forecast for March ’15 to 6%. It has a January ’16 CPI target of 6%, which is within reach. There was an upside risk of achieving this target in the September policy meeting. Over the next 12-month period, the RBI expects inflation

RBI: POLICY RATES UNCHANGED, HINTS AT RATE CUT IN 2015



to hover around 6%. Changes in inflation expectations, base effect and the government’s fiscal health pose uncertainties to inflation target.

Q What Is The Outlook On Growth?

The Reserve Bank retained its growth projections of 5.5% for 2014-15. On the assumption of a normal monsoon, the country’s apex bank expects a gradual pick-up in momentum through 2015-16.

The RBI said softening of inflation, easing of commodity prices and input costs, comfortable liquidity conditions and rising business confidence are helping a turnaround in the economy. However, it said there are infrastructural constraints and lack of assured supply of key inputs, in particular coal, power, land and minerals. Other Important Announcements

The RBI announced plans for banks to take higher equity stake as part of debt restructuring. The RBI is in talks with SEBI to make it legally applicable. This is positive for small companies laden with debt.

RBI Governor Raghuram Rajan also mentioned that the RBI is in the process of finalizing the monetary policy framework, and the government is comfortable with adopting an inflation target of around 4% with a band of +/-2% beyond 2016. This is the beginning of RBI’s formal inflation targeting.

Q Why The Reversal Now?

Both the government and the Reserve Bank have been slowly reversing the measures taken to curb gold imports of the yellow metal since the beginning of the year, though import tax of 10% prevails.

A comfortable current account deficit (CAD) number and industry pressure also led the government and the RBI to reverse some of the moves. Reportedly, gold smuggling into India has also increased sharply warranting a reversal of the earlier decision.

Q But Gold Imports Have Increased Off-Late? Will CAD Not Overshoot?

Reversal of curbs has come as a surprise to many, especially since gold imports have jumped sharply in September (~100 tonnes) and October (~150 tonnes), on the back of the wedding season and the fall in gold prices.

Now, because of the abolition of the 80:20 rule, gold imports will rise by $8 billion annually. However, this will get offset by lower oil costs, as every $10 fall in crude prices lowers the oil import bill by about $9 billion. There is a level of comfort in terms of CAD.

Q Will This Not Lead to An Increase In Investments In The Yellow Metal? Is It Bad For Productive Financial Investments?

No. The demand for gold in India is around 1,100 tonnes to 1,150 tonnes. Out of this, 350 tonnes to 400 tonnes is investment demand and around 650 tonnes to 700 tonnes is jewellery consumption demand. If the gold prices are going down, there might not be an investment demand for the yellow metal.

In addition to this, real rates (interest rates are higher than inflation) are turning positive. So, people are turning towards financial savings. Hence, there might not be a real cause for worry from increased investments in gold, which is considered as non-productive investment.

What Is The Impact On The Jewellery Sector?

The scrapping of the 80:20 scheme by the RBI comes as a big relief for the jewellery industry. For one, it increases the availability of the yellow metal, which in turn, would reduce prices. Reduced prices mean lower working capital requirements and lower lease costs. The relaxation in norms would also improve legal supply of the yellow metal in the systeM.

RBI WITHDRAWS 80:20 RULE FOR GOLD IMPORT

On 28th November, the Reserve Bank of India (RBI) withdrew the gold importing scheme called 80:20 scheme, which was introduced in 2013.

Under that scheme, for every 100 kg of gold imported, 20 kg of gold had to be compulsorily exported, thereby tying imports with exports with the aim to keep the current account deficit under control. Q Why Such A Scheme In The First Place?

The government imposed curbs on gold imports to narrow a record current account deficit (CAD) and stop a plunge in the rupee in May-July ’13.

The government increased import taxes three times in 2013 to 10% and RBI introduced the 80:20 rule. The move helped CAD to come down to 1.7% of GDP.

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