October 13, 2013

Volume 12

God is Retiring

As you open this edition of FinXpress, we at FinNiche hope that you

had a great time during Passion ‘13. Continuing with our tradition we

bring to you yet another edition of FinXpress to create awareness

among the B-School fraternity regarding Finance as well as the current

issues going across the world.

A number of significant events occurred this past week. The RBI cut

the MSF rate by 50 bps to bring it down to 9%. The RBI hopes to

improve liquidity in the market by this step. Another major

development came in the non-finance sector, where Sachin Tendulkar

has announced his retirement after playing his 200th Test match. Do

look over the ‘News of the Week’ section for further noteworthy news

and updates. The ‘Market of the Week’ covers the latest trends in the

market this preceding week.

We hope that’s you find the articles in this edition of FinXpress

interesting as well as useful. We look forward for your feedback,

comments, acknowledgements as well as criticisms regarding the

same. Do write us back and let us know your opinions.

Happy Reading!!!

Regards, The Editorial Team

FinNiche Club

From The Editorial FinXpress

Volume 12

Oct 13, 2013

FinXpress

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

FinNiche

October 2013 Page 1

CONTENTS

From The Editorial

In Focus: Bharti -Walmart

What lies ahead?

Opinion: Do growth

projections matter?

Term of the Week :

Systematic Risk

Market This Week

News

Fun Corner

Page 2

IN FOCUS

Bharti Enterprises and the world's largest

retailer Wal-Mart almost decided to break

up their almost six-year-old 50:50

partnership in India which runs cash-and

carry stores “ Best Price”. The development,

though expected is still ironical as it comes

at a time when the government has opened

the multi-brand retail sector to foreign

investment and the Bharti-Walmart Joint

Venture was expected to be the first to

venture into this area.

Infact, Bharti Enterprises vice-chairman

said in September last year that the two

extending their JV to the front-end stores

was a “natural progression of the

partnership”. However, strains in the

relationship had emerged later when Wal-

Mart got embroiled in bribery charges,

leading the government to order an inquiry

into the matter. The charges led it to sack

its CFO which was later hired by Bharti

Airtel. Wal-Mart is also engaged into its

$100-million investment in Cedar Support

Services, which is a subsidiary of Bharti

Enterprises and the holding company of

Bharti Retail. Bharti, however, said that the

break-up of the joint venture was purely a

business decision and had nothing to do

with the corruption charges against Wal-

Mart. It said that all investments were done

in compliance of government guidelines.

Though both the companies have reiterated

their commitment to the businesses they

are in analysts are of the opinion that both

need a partner if they want to grow in their

respective businesses. Wal-Mart can have

100% holding in the cash-and-carry

business, but it does not make sense for it

to remain restricted to it in a growing

market like India. For front-end stores, it

needs an Indian partner. Theoretically,

Bharti can create an entire retail network

on its own, but a foreign collaboration

would help it with both finances and

domain expertise.

According to a joint statement issued by the

two:

Wal-Mart would acquire Bharti’s stake

in Bharti Walmart, which would give it

100% ownership of the Best Price

Modern Wholesale cash-and-carry

business, which runs 20 stores.

Bharti will, for its part, acquire the

debentures held by Wal-Mart in Cedar

Support Services, the holding

company of Bharti Retail Ltd that runs

the Easyday chain of retail stores.

It will acquire the CCDs held by Wal-

Mart in Cedar Support Services, a

company owned and controlled by

Bharti.

Going forward, as said above Wal-Mart will

continue to grow the cash-and-carry

business while working with the

government and interested stakeholders to

create conditions that enable foreign direct

investment (FDI) in multi-brand retail. On

the other hand, Bharti Retail will continue

to operate ‘easyday’ retail stores across all

formats and invest in and grow the

business.

FinNiche

Bharti-Walmart

What lies ahead? —- By Jagriti Kalra

October 2013

Page 3

IN FOCUS

With the two companies going their

separate ways, everyone’s attention is on

whether Wal-Mart will seek a new partner,

or enter the supermarkets business here,

or both, and on Bharti’s own retail plans.

Bharti has already appointed Raj Jain, the

former chief executive of Bharti-Wal-Mart,

as an adviser. On a similar ground, Wal-

Mart has publicly articulated its ambitions

to run supermarkets or invest in so-called

multi-brand retail in Asia’s third-largest

economy, but will need a partner to do so

because India allows a maximum

investment of 51% by foreign retailers in

supermarkets.

Reliance Retail Ltd, Kishore Biyani’s Future

Group and Aditya Birla Group’s More are

the only retailers without foreign

connections. Tata and Tesco already have a

relationship. And the Reliance group is

being mentioned as possible partners for

Wal-Mart, although the company

commented that it is unlikely to “rush into

another joint venture” and would instead

work with the government to create a more

conducive regulatory environment for

foreign retailers.

Some see the Bharti Wal-Mart breakup as

something that will create doubt in the

minds of other foreign retailers looking to

enter India. “A situation like this is likely to

raise questions on what environment India

is creating to do business here,” added

Kumar Rajagopalan chief executive at

Retailer’s Association of India.

But some of the foreign retailers who are

looking to enter India said the issue was of

no consequence-“What’s important is the

clarification on the policy. The company will

wait.”

FinNiche

October 2013

Page 4

OPINION

International Monetary Fund (IMF) has

revised its projection of India’s GDP growth

rate to 3.75% in 2013 from 5.7% estimated

earlier due to poor demand and weak

manufacturing and services sector

performance. Terming this estimate as

"pessimistic", the Planning minister Rajiv

Shukla sees this figure close to 5%. The

IMF, in its latest World Economic Outlook

report, also said India is among the

economies that may require more

tightening to address inflation pressure. In

the beginning of 2013, the EAC had

projected a year-end inflation rate of

between 6.5% and 7% and a current

account deficit (CAD) of 3.6%. While its

inflation projection has come true — in fact,

WPI based inflation has gone below 6 per

cent, its CAD forecast will most certainly

prove to be a gross underestimation,

unlikely to come down to below 5% even in

the most optimistic scenarios.

It is in that context that the track record of

some of these forecasters assumes

significance. Last year (2012-13), many of

them were way off the mark, with their

initial projections being disconcertingly

higher than those published subsequently

by the Central Statistics Office (CSO). The

above two cases are just a few of the

multitude of estimates which have

completely been at variance with the actual

figures. This sharp divergence among the

projections of the official forecasters is,

however, a matter of concern as it

diminishes the value of these forecasts as a

whole. Obviously, the validity of these

forecasts matter.

In a market economy, these occupy an

important place in decision-making. And,

naturally plenty of public finance

assumptions are themselves based on GDP

growth rates. An increase in GDP growth

rate fuels consumption as people expect

incomes to rise in the future. This in turn

kick starts the entire circular flow leading

to higher output levels. If these forecasts go

wrong, people who have overspent would be

left with very little money in their hands to

sustain. This would in turn lead to higher

borrowings and debt pile up.

One can argue that projections are based

on current and historical data and hence do

not always come true. However, that would

oversimplify things and be an absurd

justification to estimate forecasts which will

eventually go wrong. Growth forecasts form

the basis of many economic estimations

and hence one should carefully evaluate all

possible factors that affect an economic

variable. One can also argue that

projections deviate due to unforeseen

events like natural disasters or global

economy collapses. Such events, however,

seldom occur in a long time.

Another issue that can be raised is that

overestimated forecasts are merely to serve

the populist agenda of the government. This

raises the question "Can we trust any

growth estimate projected by the

Government of India in the coming

months"?

FinNiche

Do Growth Projections Matter? —- By Mukul Gupta

October 2013

Page 5

FINANCIAL KNOWLEDGE

Systematic Risk

Systematic risk is a term mostly used in

portfolio management. A risk averse

investor generally adopts a strategy which

gives the best possible return at minimum

risk. To achieve this objective, the investor

invests in asset classes which are

negatively correlated, a technique most

commonly known as diversification. By

doing so, the investor is able to eliminate

some part of the risk called unsystematic

risk. However, risk also depends on general

market conditions which cannot be

diversified away. This type of risk is called

systematic risk or market risk.

The concept of systematic risk applies to

individual securities as well as to portfolios.

Some securities' returns are highly

correlated with overall market returns.

Examples of firms that are highly correlated

with market returns are luxury goods

manufacturers such as Ferrari automobiles

and Harley Davidson motorcycles. These

firms have high systematic risk (i.e., they

are very responsive to market, or

systematic, changes). Other firms, such as

utility companies, respond very little to

changes in the systematic risk factors.

These firms have very little systematic risk.

Hence, total risk (as measured by standard

deviation) can be broken down into its

component parts: unsystematic risk and

systematic risk.

Mathematically:

Total Risk = Systematic Risk +

Unsystematic Risk

Do you actually have to buy all the

securities in the market to diversify away

unsystematic risk? No. Academic studies

have shown that as you increase the

number of stocks in a portfolio, the

portfolio's risk falls toward the level of

market risk. One study showed that it only

took about 12 to 18 stocks in a portfolio to

achieve 90% of the maximum diversification

possible. Another study indicated it took 30

securities. Whatever the number, it is

significantly less than all the securities. The

graph provides a general representation of

this concept. Note, in the graph, that once

you get to 30 or so securities in a portfolio,

the standard deviation remains constant.

The remaining risk is systematic, or non-

diversifiable risk.

One important conclusion of this

discussion is that return on a stock

depends on the level of systematic risk and

not total risk. The argument supporting

this conclusion is that investors will not be

compensated for the risk which can be

diversified away. It is however based on the

assumption that diversification is free. In

other words, since unsystematic risk can be

completely diversified away as the number

of stocks in the portfolio increase and

diversification is free, investors will not be

compensated for bearing unsystematic risk.

To sum up, systematic risk is measured by

the contribution of a security to the risk of

a well-diversified portfolio, and the expected

equilibrium return (required return) on an

individual security will depend on its

systematic risk.

FinNiche

Term of the Week —- By Mukul Gupta

October 2013

Page 6

FINANCIAL KNOWLEDGE FinNiche

Market This Week

This week witnessed NSE Nifty witnessing its highest three week intra-day trading

levels. Riding on the back of record high sales of Jaguar unit for Tata motors and

Infosys raising its low end fiscal outlook. Benchmark BSE index also gained up to

0.73%, with investors hopeful about a positive resolution on ongoing USA debt

ceiling crisis. Market sentiments was further bolstered by the fact that the likes of

JP Morgan are in talks to gain entry in to Benchmark indices for emerging markets

debt.

SENSEX Simple Moving Averages

BSE SENSEX

CNX Nifty

Thirty Days 19,661.60

Fifty Days 19,286.24

Hundred and Fifty Days 19,359.73

Two Hundred Days 19,424.52

October 2013

Page 7

FINANCIAL KNOWLEDGE FinNiche

Bank Rate 9.00%

Repo Rate 7.50%

Reverse Repo Rate 6.50%

Cash Reserve Ratio 4%

Statutory Liquidity Ratio 23%

INR / 1 USD 61.15

INR / 1 Euro 82.78

INR / 100 Jap. YEN 62.15

INR / 1 Pound Sterling 97.77

Commodity Unit Rs / Unit % Change

Gold 10 grams 28350.00 -1.76%

Silver 1 Kg 46850.00 -2.93%

Crude Oil 1 bbl 6216.00 -1.91%

Base Rate 9.8%-10.25%

Savings Deposit Rate 4.0%

Term Deposit Rate 8%-9.0%

Nifty Simple Moving Averages

Commodities

Lending / Deposit Rates

Thirty Days 5,870.8

Fifty Days 5,773.5

Hundred And Fifty Days 5,843.5

Two Hundred Days 5,881.6

Key Policy Rates and Reserve Ratios

Exchange Rates

October 2013

Page 8

Financial Knowledge

Bharti Walmart part ways

Bharti Enterprises and Wal-mart ended

their 6 year old partnership after deciding to

operate retail stores independently in India.

Wal-mart will buy out the Indian firm’s

stake in their 50:50 cash – and – carry joint

venture, which runs 20 Best Price Modern

Wholesale stores in India, for an

undisclosed sum. Bharti will acquire $100

million of compulsory convertible

debentures held by Wal-mart in Cedar

Support Services, a company owned and

controlled by Bharti.

Flipkart's valuation neck to neck with

P&G India, Tata Global Beverages

Flipkart, the Amazon of India mopped up

$160 million (Rs 976 crore) from mostly new

investors and is now valued at over $1.6

billion, or Rs 9760 crore. Flipkart is worth

more than the total market cap of all 15

listed retail companies, including Future

Retail, Shoppers Stop etc. This huge

investing is indicative of the growth

potential of the online retailing industry in

India which is expanding at 54% annually.

MSF rate cut by 50 bps to 9% to improve

liquidity

The RBI reduced the rate under the

marginal standing facility (MSF) by 50 basis

points to 9%, and introduced lending to

banks for 7 and 14 days instead of the

current practice of just 1 day to expand the

financial markets. This is considered to be

the passing of the benefits of the rupee

stabilization and to improve the liquidity in

the system.

Arundhati Bhattacharya – The first

woman to head SBI

Arundhati Bhattacharya after contending

against 3 top notch officials of the SBI was

confirmed elevation as the chairperson of

the State Bank of India. She will serve as

the 24th chairperson of the country’s largest

lender bank and the first ever woman to do

so for SBI. Her biggest responsibility is to

cut the share of bad loans which has

surpassed 5% of the total loan book

Even GOD has to retire

Try to digest the numbers…463 ODIs,

18426 runs, 49 centuries and now 198

tests, 15837 runs, 51 centuries! The first

batsman to score a 200 in ODIs, the first

and only batsman to score 100 centuries in

international cricket…..the records keep on

pouring. Yes finally the curtains will fall on

the 24 year long illustrious career of Sachin

Tendulkar who will retire after playing his

200th test against West Indies on the Indian

soil. The cricket fans across the world will

surely miss this legend on the field and

cricket would never be same as before.

Launch of $1-bn offshore rupee

denominated bonds

The International Finance Corporation (IFC)

has launched India’s first offshore rupee

bond issue, which looks to raise $1 billion,

in Washington DC. It is a key step in the

process of internationalization of rupee

bond market and to check its acceptance by

the world.

Infy surprise for markets

Infy on Friday announced its second

consecutive quarter better than expected

results. The company managed a 3.8%

growth in dollar denominated sales against

the forecasted figure of 2.5% - 3%. Its share

closed at Rs 3278, 4.70% higher than the

previous day’s close, irrespective of the

declared fall of operating margins.

The current performance is seen to be a

result of greater flexibility in taking on

outsourcing contracts at lower price points

and willingness to accept higher risks which

also form part of the contracts.

FinNiche

NEWS

October 2013

FinNiche

Fun Corner

FinQuiz

1. Perpetual bonds are ______.

2.The worst bear market in the US history is also called ————— 3.Index funds are ________. 4.Sudden rise/drop in stock prices is called ______.

5.Inflation is characterized by rise in prices. It causes worth of dollar to be _________.

Last week’s FinQuiz answers

FUN CORNER

Page 9

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Volume 12, Publisher: Priyam Khattar

October 2013

1. Floatation 2. Government 3. Financial Times Stock Exchange 4. Zero 5. Delinquency Answers given by:- Ankit Agarwal

CARTOONS