At the crux of this entire political conundrum, the core issue, which lays quite forlorn and forgotten is the nuclear issue. Today the politicians might have turned it into an opportunity to topple the UPA Govt but few remember that it all started with the nuclear deal.
Surely few of these politicians would have actually taken the effort to read the 82-page nuclear deal and tried to understand what it is all about. Somehow that does not come as a surprise at all! So without getting into the “political” angle of it, let us take a look at what exactly is this nuclear issue. What would India gain if UPA wins the vote and what we stand to lose if the deal gets cancelled?
What exactly is nuclear power?
Nuclear power is generated using Uranium, which is a metal mined in various parts of the world. It produces around 11% of the world's energy needs, and produces huge amounts of energy from small amounts of fuel, without the pollution that you'd get from burning fossil fuels.
Where does India currently stand on nuclear power?
In India, nuclear power is being produced under the Nuclear Power Corporation of India. Seventeen reactors are under operation and five reactors are under construction. These power projects are highly capital intensive and currently, takes care of 2.8% of the power needs of the country. Amongst the 30 countries in the world that use nuclear power, India’s rank at 27 is one of the lowest.
Why nuclear power?
To take India’s economic growth rate to greater heights, there is no doubt that power would be required as the main fuel for this growth. Though coal, thermal and hydro fuel would remain India’s dominant energy mix, it cannot continue to depend on coal alone. Global warming considerations and the immediate availability of clean coal technologies may constrain the coal route at least in the short term. Hydropower may also face constraints that arise from changes in the hydrological cycle triggered by long term climatic change. Hence having nuclear power in India’s energy portfolio is crucial for preserving India’s energy security.
What does 123 agreement mean?
The 123 Agreement is the terms of engagement which operationalizes the treaty agreement between India and USA for transfer of civil nuclear technology. India’s right to test nuclear weapons, guarantees of lifetime fuel supply and India’s right to reprocess the spent fuel have all been covered in this agreement.
What is the Hyde Act?
The Henry J. Hyde United States-India Peaceful Atomic Energy Cooperation Act of 2006, it is known as the Hyde Act. It is the legal framework for this deal and provides the legal basis for the 123 Agreement with India.
What would the deal with USA mean for India?
The Govt has chalked out a roadmap wherein over the next 25 years, through the deal, it has set a target of generating 20,000 MWe (unit of nuclear power) as against the current 3,900 MWe.
The deal would provide India with access to American civilian nuclear technology. It would finally open up the door to US military technology, especially the fascinating US missile defense system.
Once the new reactors are set up, and they go critical without any time overrun, the nuclear power generation would take care of 8% of India’s total power requirement. More than 80% of the power generated in India comes from coal and thermal. And that will continue but just as oil has become critical today, coal will also one day reach such a stage. And unless we have backups ready, our entire country could get unplugged. Having nuclear power could help India, over the long run, offset the rising cost of coal.
Yes, price of uranium is also mounting. Between 2005 (when the India-US nuclear deal was first proposed) and 2007 (when the 123 Agreement was finalised), since then, the spot price of uranium has quadrupled. According to a June 2008 market assessment, a further 58 per cent increase is expected. But remember unlike oil, we are dealing with more mature economies here who will supply uranium and hopefully, they will prevent the present cartelization which we see in oil.
What is the cost of nuclear power?
At present, power from existing nuclear reactors costs, after huge subsidies, between Rs 2.70 and Rs 2.80 per kWh. The coal-fired Sasan mega power project in Madhya Pradesh will be supplying power at Rs 1.196 per unit. The real cost of power from existing nuclear reactors is around Rs 4 per unit; the cost of power produced by new reactors will be around Rs 5.50 per unit. But the economies of scale would soon start giving the advantages. Plus, these costs are today at the present levels of coal price, so when price of coal escalates further, cost would only go up.
What would the deal mean to Indian companies?
India has plans to set up 15 plants over the next 20 years. Business worth $100 billion is expected to be generated from this nuclear deal over the next 20 years. Apart from USA and France, which would benefit immensely, Indian companies too will get a part of this juicy pie. Over 400 Indian companies are expected to benefit, mainly for those involved in making equipment for nuclear power plants.
Why did the Left withdraw support?
The Left alleged that the deal would undermine the sovereignty of India's foreign policy. It has also stated that the Indian government was hiding certain clauses of the deal, which would harm India's indigenous nuclear program.
What's the road ahead?
The Govt has won the vote of confidence and has mentioned that it would go bull-headed for the IAEA meeting and would try to capitalise on the nuclear deal. However, the Govt needs to be cautious on the deal and must try to negotiate things in favour of the country rather than being excited and looking at the positive sides of deal only. It needs to keep in mind that a lot of independence will be lost by virtue of the deal in terms of the nuclear tests.
Ref: sptulsian.com
Tuesday, 22 July 2008
Markets Correlation with the Trust Vote
Markets Correlation with the Trust Vote
Nov 7, 1990
VP Singh
Lost
1381 (sensex on vote date)
+3.7%
Sensex up 2.2% next day at 1412
May 28, 1996
AB Vajpayee
Resigned before motion
3636 (sensex on vote date)
-0.5%
Sensex up 2.9% next day at 3740.40
April 11, 1997
HD Dewe Gowda
Won
3634 (sensex on vote date)
+1%
Sensex down 1.2% next day at 3589.70
April 17, 1999
ABVajpayee
Won
3327 (sensex on vote date)
-6.9%
Sensex up 3.7% next day at 451.4
July 22, 2008
Manmohan Singh
Won
14104.2 (sensex on vote date)
+1.83%
Sensex up 5.94% next day by 836 points at 14942.28
Ref: www.ndtvprofit.com
Nov 7, 1990
VP Singh
Lost
1381 (sensex on vote date)
+3.7%
Sensex up 2.2% next day at 1412
May 28, 1996
AB Vajpayee
Resigned before motion
3636 (sensex on vote date)
-0.5%
Sensex up 2.9% next day at 3740.40
April 11, 1997
HD Dewe Gowda
Won
3634 (sensex on vote date)
+1%
Sensex down 1.2% next day at 3589.70
April 17, 1999
ABVajpayee
Won
3327 (sensex on vote date)
-6.9%
Sensex up 3.7% next day at 451.4
July 22, 2008
Manmohan Singh
Won
14104.2 (sensex on vote date)
+1.83%
Sensex up 5.94% next day by 836 points at 14942.28
Ref: www.ndtvprofit.com
PE Ratio
When most investors think about the fundamental value of a company, they usually think of the price to earnings ratio. The P/E ratio tells you how much you are paying for each rupee of a company's earnings (profit). It is popular because it's easy to understand, but in some situations it can be misleading and is not a substitute for real fundamental research. Still, it is a useful tool for valuing an individual stock and can also be used to help you form an opinion on the likely future direction of the stock market as a whole.
Understanding the Price to Earnings Ratio
The P/E ratio is simply a mathematical calculation. It is the current price of one share of stock divided by earnings per share. The first thing to understand about the P/E ratio is that it is designed to value a share of stock, not a company, and stocks are priced per share. The P/E ratio tells you what the market is willing to pay right now for anticipated future earnings, assuming that the earnings remain constant into the future. A stock that has a P/E ratio of 15, for example, tells you that it will take 15 years of the company's earnings at the current rate to add up to your original purchase price.
To see if a stock is over- or under-valued, the first step is to compare its current P/E ratio to its past P/E ratio. This will give you an idea of how cheap or expensive the stock is relative to how it has been valued in the past. The next step would be to compare its P/E ratio to the ratios of other companies in the same industry. Companies in the same industry tend to have similar P/E ratios. If it is considerably higher or lower than its peers, you will want to do additional research to see why that it is.
When the P/E ratio is Low
Low P/E stocks are not necessarily a good value. If you were to buy a few stocks with low P/E ratios, you may soon discover the reasons they were so cheap. A low P/E ratio usually indicates that investors expect little to no growth in a company's earnings in the future, or possibly even a drop in earnings in the future.
Companies in some industries, such as homebuilders, historically have very low P/E ratios. So a home builder that you see with a P/E of 10 might actually be an all-time high for that company, indicating it might be overvalued. It is only when comparing its P/E ratio with its peers in the same industry that you can see how a company is valued compared to other companies in its industry.
Rather than indicating a bargain, an extremely low P/E ratio is often a sign of financial trouble or other problems with the company or industry. Investors using the P/E ratio to find potential bargains, often called value investors, must follow up and do extensive research to completely understand the company and the industry it operates in before making any investment. In fact, if you were to buy all low P/E stocks without further research, you would probably just end up with a portfolio of underperforming stocks.
When the P/E Ratio is High
Just as a low reading does not always mean a bargain, a high P/E ratio does not always mean a company is overvalued. There are many reasons investors might pay a premium for a company. P/E ratios can be especially misleading when a company has recently posted a loss. Due to what are often temporary problems, a company's P/E ratio will be restated, often in concert with accounting charges that have to be taken. These companies will then show a high P/E ratio or in some cases may not even have a P/E ratio available. As long as the problem is only temporary, the P/E ratio typically reverts to more normal levels after a few quarters. Let's look at a stock that is selling for Rs.58 and earned Rs. 0.40 a share last year. Its P/E ratio is 58/0.40 = 145, which is very high. It means that at the current earnings per share of 40 cents, it would take you 145 years to get back the price you paid for the stock. While your advisor might recommend investing for the long term, 145 years would be just a bit too long for most of us.
Naturally, investors aren't really willing to wait that long. What is missing from this analysis is growth. Investors must expect a sharp increase in earnings relatively soon, certainly much sooner than 145 years from now. You should be willing to pay a higher P/E ratio (calculated by current earnings) if you feel a company's earnings are going to grow in the future, since your payback time would be quicker. That is why a high P/E ratio doesn't always mean a stock is overvalued. To get a better reading, you should always bring in a company's expected growth rate. One way to do this is with a measure called PEG, the P/E ratio divided by the expected growth rate. This will tell you the amount investors are willing to pay for a stock's anticipated future earnings. Of course, very few companies would have exactly the same earnings quarter after quarter. That is another reason you would like to adjust the P/E ratio by the expected change in earnings in the future.
Those whose earnings per share are growing, and expected to continue growing, would justify a higher P/E ratio. Those with declining earnings should be lower.
Finding What P/E Ratio indicates "Fairly Valued"
The best way to value a company is to use discounted cash flows to calculate the present value. Most investors prefer to use a simple rule of thumb, which is why the P/E ratio is so popular. But drawing the conclusion of how long it will take you to be "paid back" from the P/E ratio assumes the company is in a mature stage where earnings are constant. When you use the discounted cash flows formula on a zero-growth company, you find that its fair P/E ratio is equal to 1/r, where r equals the discount rate (or rate of return you need to make the investment worthwhile). So if you require a rate of return of 10%, a fairly valued stock price for a mature company would have a P/E ratio of 10. Using a real interest rate of 2% (about the historical average) plus the 10 yr Govt. Bond rate of 7.5%, you would see that a fair P/E ratio would be around 11.
So the "number" for the P/E ratio that indicates a stock is fairly valued changes over time, and that change is driven primarily by the rate of return that is being demanded by investors. Naturally, every investor will have slightly different personal requirements, but what we are really interested in is the average required rate of return, which can also change over time. As mentioned earlier, the long-term historical real interest rate is around 2%. The real interest rate is the actual current interest rate minus the inflation rate. So the inflation rate is one of the biggest determinants of what a "fair" P/E ratio is. During the past few years, inflation has been extremely low (as well as interest rates), so an average P/E ratio around 12 would be fairly valued.
However, in the past year or so, inflation has been increasing dramatically, led by increases in commodity prices, and a higher inflation rate means that investors will begin demanding a higher rate of return. That in turn will decrease the number at which the P/E ratio would be considered fairly valued. For example, an increase of just 1% in the rate of inflation should translate into a decrease in the "fair" P/E ratio from 11 to 9.
Understanding the Price to Earnings Ratio
The P/E ratio is simply a mathematical calculation. It is the current price of one share of stock divided by earnings per share. The first thing to understand about the P/E ratio is that it is designed to value a share of stock, not a company, and stocks are priced per share. The P/E ratio tells you what the market is willing to pay right now for anticipated future earnings, assuming that the earnings remain constant into the future. A stock that has a P/E ratio of 15, for example, tells you that it will take 15 years of the company's earnings at the current rate to add up to your original purchase price.
To see if a stock is over- or under-valued, the first step is to compare its current P/E ratio to its past P/E ratio. This will give you an idea of how cheap or expensive the stock is relative to how it has been valued in the past. The next step would be to compare its P/E ratio to the ratios of other companies in the same industry. Companies in the same industry tend to have similar P/E ratios. If it is considerably higher or lower than its peers, you will want to do additional research to see why that it is.
When the P/E ratio is Low
Low P/E stocks are not necessarily a good value. If you were to buy a few stocks with low P/E ratios, you may soon discover the reasons they were so cheap. A low P/E ratio usually indicates that investors expect little to no growth in a company's earnings in the future, or possibly even a drop in earnings in the future.
Companies in some industries, such as homebuilders, historically have very low P/E ratios. So a home builder that you see with a P/E of 10 might actually be an all-time high for that company, indicating it might be overvalued. It is only when comparing its P/E ratio with its peers in the same industry that you can see how a company is valued compared to other companies in its industry.
Rather than indicating a bargain, an extremely low P/E ratio is often a sign of financial trouble or other problems with the company or industry. Investors using the P/E ratio to find potential bargains, often called value investors, must follow up and do extensive research to completely understand the company and the industry it operates in before making any investment. In fact, if you were to buy all low P/E stocks without further research, you would probably just end up with a portfolio of underperforming stocks.
When the P/E Ratio is High
Just as a low reading does not always mean a bargain, a high P/E ratio does not always mean a company is overvalued. There are many reasons investors might pay a premium for a company. P/E ratios can be especially misleading when a company has recently posted a loss. Due to what are often temporary problems, a company's P/E ratio will be restated, often in concert with accounting charges that have to be taken. These companies will then show a high P/E ratio or in some cases may not even have a P/E ratio available. As long as the problem is only temporary, the P/E ratio typically reverts to more normal levels after a few quarters. Let's look at a stock that is selling for Rs.58 and earned Rs. 0.40 a share last year. Its P/E ratio is 58/0.40 = 145, which is very high. It means that at the current earnings per share of 40 cents, it would take you 145 years to get back the price you paid for the stock. While your advisor might recommend investing for the long term, 145 years would be just a bit too long for most of us.
Naturally, investors aren't really willing to wait that long. What is missing from this analysis is growth. Investors must expect a sharp increase in earnings relatively soon, certainly much sooner than 145 years from now. You should be willing to pay a higher P/E ratio (calculated by current earnings) if you feel a company's earnings are going to grow in the future, since your payback time would be quicker. That is why a high P/E ratio doesn't always mean a stock is overvalued. To get a better reading, you should always bring in a company's expected growth rate. One way to do this is with a measure called PEG, the P/E ratio divided by the expected growth rate. This will tell you the amount investors are willing to pay for a stock's anticipated future earnings. Of course, very few companies would have exactly the same earnings quarter after quarter. That is another reason you would like to adjust the P/E ratio by the expected change in earnings in the future.
Those whose earnings per share are growing, and expected to continue growing, would justify a higher P/E ratio. Those with declining earnings should be lower.
Finding What P/E Ratio indicates "Fairly Valued"
The best way to value a company is to use discounted cash flows to calculate the present value. Most investors prefer to use a simple rule of thumb, which is why the P/E ratio is so popular. But drawing the conclusion of how long it will take you to be "paid back" from the P/E ratio assumes the company is in a mature stage where earnings are constant. When you use the discounted cash flows formula on a zero-growth company, you find that its fair P/E ratio is equal to 1/r, where r equals the discount rate (or rate of return you need to make the investment worthwhile). So if you require a rate of return of 10%, a fairly valued stock price for a mature company would have a P/E ratio of 10. Using a real interest rate of 2% (about the historical average) plus the 10 yr Govt. Bond rate of 7.5%, you would see that a fair P/E ratio would be around 11.
So the "number" for the P/E ratio that indicates a stock is fairly valued changes over time, and that change is driven primarily by the rate of return that is being demanded by investors. Naturally, every investor will have slightly different personal requirements, but what we are really interested in is the average required rate of return, which can also change over time. As mentioned earlier, the long-term historical real interest rate is around 2%. The real interest rate is the actual current interest rate minus the inflation rate. So the inflation rate is one of the biggest determinants of what a "fair" P/E ratio is. During the past few years, inflation has been extremely low (as well as interest rates), so an average P/E ratio around 12 would be fairly valued.
However, in the past year or so, inflation has been increasing dramatically, led by increases in commodity prices, and a higher inflation rate means that investors will begin demanding a higher rate of return. That in turn will decrease the number at which the P/E ratio would be considered fairly valued. For example, an increase of just 1% in the rate of inflation should translate into a decrease in the "fair" P/E ratio from 11 to 9.
Monday, 21 July 2008
Valuation of Securities (Equity) by Mutual Funds - SEBI
SEBI has made rules for valuation of securities by Mutual Funds. Lets look at the valuation Equity Securities for now.
Mutual funds shall categorise the securities according to the following norms
1. TRADED SECURITIES :
When a security (other than Government Securities) is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange or any other stock exchange, as the case may be, on the earliest previous day may be used provided such date is not more than thirty days prior to valuation date.
2. THINLY TRADED SECURITIES :
(i) Thinly Traded Equity/Equity Related Securities :
When trading in an equity/equity related security (such as convertible debentures, equity warrants, etc.) in a month is less than Rs. 5 lacs or the total volume is less than 50,000 shares, it shall be considered as a thinly traded security and valued accordingly.
Where a stock exchange identifies the "thinly traded" securities by applying the above parameters for the preceding calendar month and publishes/provides the required information along with the daily quotations, the same can be used by the mutual funds.
If the share is not listed on the stock exchanges which provide such information, then it will be obligatory on the part of the mutual fund to make its own analysis in line with the above criteria to check whether such securities are thinly traded which would then be valued accordingly.
In case trading in an equity security is suspended upto 30 days, then the last traded price would be considered for valuation of that security. If an equity security is suspended for more than 30 days, then the Asset Management Company/Trustees will decide the valuation norms to be followed and such norms would be documented and recorded.
(ii) Thinly Traded Debt Securities:
A debt security (other than Government Securities) that has a trading volume of less than Rs. 5 crores in the previous calendar month shall be considered as a thinly traded security based upon information provided by the relevant stock exchange on the volume of debt securities traded.
A thinly traded debt security as defined above would be valued as per the norms set for non-traded debt security.
3. NON TRADED SECURITIES :
When a security (other than Government Securities) is not traded on any stock exchange for a period of thirty days prior to the valuation date (instead of the existing provision of 60 days), the scrip must be treated as a ‘non traded’ security.
VALUATION OF NON-TRADED / THINLY TRADED SECURITIES
Non traded/ thinly traded securities shall be valued "in good faith" by the asset management company on the basis of the valuation principles laid down below :
(i) Non-traded / thinly traded equity securities:
(a) Based on the latest available Balance Sheet, net worth shall be calculated as follows :
(b) NET WORTH PER SHARE = [share capital+ reserves (excluding revaluation reserves) – Misc. expenditure and Debit Balance in P&L A/c] Divided by No. of Paid up Shares.
(c) AVERAGE CAPITALISATION RATE (P/E RATIO) for the industry based upon either BSE or NSE data (which should be followed consistently and changes, if any noted with proper justification thereof) shall be taken and discounted by 75% i.e. only 25% of the Industry average P/E shall be taken as capitalisation rate (P/E ratio). Earnings per share of the latest audited annual accounts will be considered for this purpose.
(d) The value as per the net worth value per share and the capital earning value calculated as above shall be averaged and further discounted by 10% for ill-liquidity so as to arrive at the FAIR VALUE PER SHARE.
(e) In case the EPS is negative, EPS value for that year shall be taken as zero for arriving at capitalised earning.
(f) In case where the latest balance sheet of the company is not available within nine months from the close of the year, unless the accounting year is changed, the shares of such companies shall be valued at zero.
(g) In case an individual security accounts for more than 5% of the total assets of the scheme, an independent valuer shall be appointed for the valuation of the said security.
Sunday, 20 July 2008
Equity Markets - whats ahead ?
Well I know thats a similar title as the previous post.... but just didnt want the previous one to get lengthier.
We have a come a long way from 130's to 13000's from the 80's till date. That's a 1300 times increase in 20 years. Thats a 26% CAGR in-spite of the fall from 20,873 (8th jan'08) to 13,635 (18th July'08).
Mr Amitabh Chakraborty's (President, Equities, Religare Securities; CFA; FRM) views on the markets are as follows (extracts):
- Limited downside from now.
- Sensex to be in the range of 10500 to 14500 this year
- There is a slow down of growth but not de-growth
- Estimate sales grwoth is 29% while estimated PAT growth is 18%
- Capital Goods sector looks good. the Banks look sluggish but may still come out surprisingly well.
- RBI should ease the rates by the year end.
- Oil should trade in the range of $100-110 per barrel.
- FED should hike rates by december leading to money flow from commodities to Equities.
- Political condition should be OK and the Government should prevail.
- Government is expected to go for Non Regulatory reforms (where no parliamentary approval is needed) till the next elections. This may lead to a rally in PSUs in the 2nd half of the year.
- Monsoons are good (except for Moong dal)
- Markets are oversold and should bounce back.
However, there were a few who, though not explicitly negative on the markets, showed some concerns like Mr Rajiv Anand from IDFC Mutual Fund. He believes that INFLATION should remain in double digits till 31st March.
So, it is advised that markets should return to moderate levels and investors should go shopping for long term assets. Its a SALE.
Equity Markets - The Road Ahead
Hi guys,
This saturday (19th July '08), I attended the All India Conference on Capital markets organised by the ICAI at the Taj Bengal, Kolkata where dignatories of the Capital markets arrived and presentade their views on the markets and the road ahead.
I was pleasantly surprised to note that almost all the speakers (trust me, they are the big shots in the industry) are positive on the marekets ahead.
I am keen to highlight some of the points Mr Nilesh Shah (Deputy Managing Director, ICICI Prudential AMC, managing close to US$14bn, a CA Gold Medalist and a Cost accountant) came up wth.
What went wrong with the markets?
REFORMS is the key word.
Get FDI attention
POSCO and Mittals are keen on getting in the markets and set up huge projects but are stuck since long. Japan is waiting to get approvals to make a rail frieght corridor between kolkata, Delhi and Bangalore, a deal worth $80bn.
Liberalise ECB guidelines
Allow Foreign Exchange to enter into the country, create capacity and infrastructure
Appreciate Rupee and control imported inflation
[please refer to my previous post where I have talked about the implications of artificially appreciating rupee ]
Execute - Increase supply, Increase export..... these will expand the GDP, maintain growth and bring down the inflationary expectations.
Mr Shah (and others) was positive on successfully fighting the oil crisis just the way we fought the Food Crisis in 70's and Foreign Exchange Crisis in the 90's.
He also mentioned a very interesting point that in 2009-10, Indian GDP can go up by about 1.5% with just 3 projects that are being executed.
Reliance Jamnagar project that is expected to add about $4-5 bn to the economy
Cairn India Oil Exploration project in Rajasthan
Reliance Gas Production at the KG basin that is expected to generate $25bn if the expectations meet (lets take it to $10 bn even if we consider Mr Ambani very optimistic at $25bn).
If India's GDP can go up by 1.5% by just 3 projects, there are projects worth $700bn in the pipeline. IMAGINE THE FUTURE AND POTENTIAL OF INDIAN GROWTH.
As a suggestions for the capital markets, he suggested to BUY AT EVERY DIP in the markets. the Valuations are Fair at 11x 1 Yr forward earnings.
He concluded being OPTIMISTIC ABOUT INDIA.
This saturday (19th July '08), I attended the All India Conference on Capital markets organised by the ICAI at the Taj Bengal, Kolkata where dignatories of the Capital markets arrived and presentade their views on the markets and the road ahead.
I was pleasantly surprised to note that almost all the speakers (trust me, they are the big shots in the industry) are positive on the marekets ahead.
I am keen to highlight some of the points Mr Nilesh Shah (Deputy Managing Director, ICICI Prudential AMC, managing close to US$14bn, a CA Gold Medalist and a Cost accountant) came up wth.
What went wrong with the markets?
- High Oil Price (India has the highest Oil import to GDP ratio)
- Higher Trade Deficit (weaker Rupee)
- Higher Inflation (backed by higher subsidy burden)
- High Fiscal Deficit
- High Interest rate
- Slowing Growth
- Traders are short and investors are sitting on cash
- Rising oil prices (India currently pays $50bn for oil annually)
- Monsoon has been good (June has been good, July has been a bit shaky in some parts of the country but still decent enough)
- Nuclear deal may materialise.
- Government is like to continue (winning the trust vote on the 22nd)
- Advance tax for 1Q09 are encouraging
- Valuations are attractive (though may get cheaper)
- India's FY08 ROE is about 25% which is the highest in Asia.
- Currently there is a negative correlation between oil and the capital markets but historically between Jan 2003 to December 2007, we saw a positive correlation between oil and the Nifty. So even if the oil continues to rise history says we may still see the capital markets going up. Though there are signals of oil prices coming down.
REFORMS is the key word.
Get FDI attention
POSCO and Mittals are keen on getting in the markets and set up huge projects but are stuck since long. Japan is waiting to get approvals to make a rail frieght corridor between kolkata, Delhi and Bangalore, a deal worth $80bn.
Liberalise ECB guidelines
Allow Foreign Exchange to enter into the country, create capacity and infrastructure
Appreciate Rupee and control imported inflation
[please refer to my previous post where I have talked about the implications of artificially appreciating rupee ]
Execute - Increase supply, Increase export..... these will expand the GDP, maintain growth and bring down the inflationary expectations.
Mr Shah (and others) was positive on successfully fighting the oil crisis just the way we fought the Food Crisis in 70's and Foreign Exchange Crisis in the 90's.
He also mentioned a very interesting point that in 2009-10, Indian GDP can go up by about 1.5% with just 3 projects that are being executed.
Reliance Jamnagar project that is expected to add about $4-5 bn to the economy
Cairn India Oil Exploration project in Rajasthan
Reliance Gas Production at the KG basin that is expected to generate $25bn if the expectations meet (lets take it to $10 bn even if we consider Mr Ambani very optimistic at $25bn).
If India's GDP can go up by 1.5% by just 3 projects, there are projects worth $700bn in the pipeline. IMAGINE THE FUTURE AND POTENTIAL OF INDIAN GROWTH.
As a suggestions for the capital markets, he suggested to BUY AT EVERY DIP in the markets. the Valuations are Fair at 11x 1 Yr forward earnings.
He concluded being OPTIMISTIC ABOUT INDIA.
Wednesday, 16 July 2008
CAs in Practice - Scope
This is for all CAs in Practice or those who want to obtain a Certificate of practice.
We all know what a Practicing CA does. But most of who are not in practice would know that there are a lot of restrictions on a practicing CA. The olst important of them is that a Practicing CA is not allowed to enter into any other business without the prior approval of the CA Institute/council.
However, This is not the case any more. Although the council still maintains that a member holding Certificate of Practice (CoP) has to take prior approval, there has been major relaxations.
The Chartered Accountants Act states that ;-
A member of the Institute shall be deemed “to be in practice” when individually or in partnership with Chartered Accountants in practice, he, in consideration of remuneration
received or to be received-
(i) engages himself in the practice of accountancy; or
(ii) offers to perform or performs service involving the auditing or verification of financial transactions, books, accounts or records, or the preparation, verification or certification of financial accounting and related statements or holds himself out to the public as an
accountant; or
(iii) renders professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data; or
(iv) renders such other services as, in the opinion of the Council, are or may be rendered by a Chartered Accountant in practice: and the words “to be in practice” with their grammatical variations and cognate expressions shall be construed accordingly.
An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of Articled Clerks.
the Council has passed a resolution permitting a Chartered Accountant in practice to render entire range of “Management Consultancy and other Services”. The definition of the expression “Management Consultancy and other Services” is given below:
The expression “Management Consultancy and other Services” shall not include the function
of statutory or periodical audit, tax (both direct taxes and indirect taxes) representation or
advice concerning tax matters or acting as liquidator, trustee, executor, administrator,
arbitrator or receiver, but shall include the following
(i) Financial management planning and financial policy determination.
(ii) Capital structure planning and advice regarding raising finance.
(iii) Working capital management.
(iv) Preparing project reports and feasibility studies.
(v) Preparing cash budget, cash flow statements, profitability statements, statements of sources and application of funds etc.
(vi) Budgeting including capital budgets and revenue budgets.
(vii) Inventory management, material handling and storage.
(viii) Market research and demand studies.
(ix) Price-fixation and other management decision making.
(x) Management accounting systems, cost control and value analysis.
(xi) Control methods and management information and reporting.
(xii) Personnel recruitment and selection.
(xiii) Setting up executive incentive plans, wage incentive plans etc.
(xiv) Management and operational audits.
(xv) Valuation of shares and business and advice regarding amalgamation, merger and
acquisition.
(xvi) Business Policy, corporate planning, organisation development, growth and
diversification.
(xvii)Organisation structure and behaviour, development of human resources including design
and conduct of training programmes, work study, job-description, job evaluation and
evaluation of work loads.
(xviii)Systems analysis and design, and computer related services including selection of
hardware and development of software in all areas of services which can otherwise be
rendered by a Chartered Accountant in practice and also to carry out any other
professional services relating to EDP.
(xix) Acting as advisor or consultant to an issue,
(xx) Investment counselling in respect of securities [as defined in the Securities Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing so, the relevant provisions of the Code of Ethics must be kept in mind).
(xxi) Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the
relevant provisions of the Code of Ethics must be kept in mind).
(xxii)Quality Audit.
(xxiii) Environment Audit.
(xxiv)Energy Audit.
(xxv)Acting as Recovery Consultant in the Banking Sector.
(xxvi) Insurance Financial Advisory Services under the Insurance Regulatory &
Development Authority Act, 1999, including Insurance Brokerage.
The act of setting up of an establishment offering to perform accounting services would tantamount to being in practice even though no client has been served.
Some critical issues - but read between the lines.
The member of the Institute are now permitted to use the word 'CA' as prefix before their name irrespective of the fact that are in practice or not.
a member in practice cannot use any designation other than that of a Chartered Accountant, nor can he use any other description, whether in addition thereto or in substitution therefore. Nevertheless a member in practice may use any other letters or description indicating membership of Accountancy Bodies which have been approved by the Council or of bodies other than Accountancy Institutes so long as such use does not imply adoption of a designation and/or does not amount to advertisement or publicity.
For example, though a member cannot designate himself as a Cost Accountant, he can use the letters A.I.C.W.A. after his name, when he is a member of that Institute.
Not only this. The institute allows you to become a Director in a company subject to restrictions. Now the Inssitute also allows you to partner with NON CAs (subject to restrictions).
So now guys, do u really think its not worth obtaining the CoP. Obviously, there are stringent requirements for Practicing CAs. but its worth it.
We all know what a Practicing CA does. But most of who are not in practice would know that there are a lot of restrictions on a practicing CA. The olst important of them is that a Practicing CA is not allowed to enter into any other business without the prior approval of the CA Institute/council.
However, This is not the case any more. Although the council still maintains that a member holding Certificate of Practice (CoP) has to take prior approval, there has been major relaxations.
The Chartered Accountants Act states that ;-
A member of the Institute shall be deemed “to be in practice” when individually or in partnership with Chartered Accountants in practice, he, in consideration of remuneration
received or to be received-
(i) engages himself in the practice of accountancy; or
(ii) offers to perform or performs service involving the auditing or verification of financial transactions, books, accounts or records, or the preparation, verification or certification of financial accounting and related statements or holds himself out to the public as an
accountant; or
(iii) renders professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data; or
(iv) renders such other services as, in the opinion of the Council, are or may be rendered by a Chartered Accountant in practice: and the words “to be in practice” with their grammatical variations and cognate expressions shall be construed accordingly.
An associate or a fellow of the Institute who is a salaried employee of a Chartered Accountant in practice or a firm of such Chartered Accountants shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the training of Articled Clerks.
the Council has passed a resolution permitting a Chartered Accountant in practice to render entire range of “Management Consultancy and other Services”. The definition of the expression “Management Consultancy and other Services” is given below:
The expression “Management Consultancy and other Services” shall not include the function
of statutory or periodical audit, tax (both direct taxes and indirect taxes) representation or
advice concerning tax matters or acting as liquidator, trustee, executor, administrator,
arbitrator or receiver, but shall include the following
(i) Financial management planning and financial policy determination.
(ii) Capital structure planning and advice regarding raising finance.
(iii) Working capital management.
(iv) Preparing project reports and feasibility studies.
(v) Preparing cash budget, cash flow statements, profitability statements, statements of sources and application of funds etc.
(vi) Budgeting including capital budgets and revenue budgets.
(vii) Inventory management, material handling and storage.
(viii) Market research and demand studies.
(ix) Price-fixation and other management decision making.
(x) Management accounting systems, cost control and value analysis.
(xi) Control methods and management information and reporting.
(xii) Personnel recruitment and selection.
(xiii) Setting up executive incentive plans, wage incentive plans etc.
(xiv) Management and operational audits.
(xv) Valuation of shares and business and advice regarding amalgamation, merger and
acquisition.
(xvi) Business Policy, corporate planning, organisation development, growth and
diversification.
(xvii)Organisation structure and behaviour, development of human resources including design
and conduct of training programmes, work study, job-description, job evaluation and
evaluation of work loads.
(xviii)Systems analysis and design, and computer related services including selection of
hardware and development of software in all areas of services which can otherwise be
rendered by a Chartered Accountant in practice and also to carry out any other
professional services relating to EDP.
(xix) Acting as advisor or consultant to an issue,
(xx) Investment counselling in respect of securities [as defined in the Securities Contracts (Regulation) Act, 1956 and other financial instruments.] (In doing so, the relevant provisions of the Code of Ethics must be kept in mind).
(xxi) Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the
relevant provisions of the Code of Ethics must be kept in mind).
(xxii)Quality Audit.
(xxiii) Environment Audit.
(xxiv)Energy Audit.
(xxv)Acting as Recovery Consultant in the Banking Sector.
(xxvi) Insurance Financial Advisory Services under the Insurance Regulatory &
Development Authority Act, 1999, including Insurance Brokerage.
The act of setting up of an establishment offering to perform accounting services would tantamount to being in practice even though no client has been served.
Some critical issues - but read between the lines.
The member of the Institute are now permitted to use the word 'CA' as prefix before their name irrespective of the fact that are in practice or not.
a member in practice cannot use any designation other than that of a Chartered Accountant, nor can he use any other description, whether in addition thereto or in substitution therefore. Nevertheless a member in practice may use any other letters or description indicating membership of Accountancy Bodies which have been approved by the Council or of bodies other than Accountancy Institutes so long as such use does not imply adoption of a designation and/or does not amount to advertisement or publicity.
For example, though a member cannot designate himself as a Cost Accountant, he can use the letters A.I.C.W.A. after his name, when he is a member of that Institute.
Not only this. The institute allows you to become a Director in a company subject to restrictions. Now the Inssitute also allows you to partner with NON CAs (subject to restrictions).
So now guys, do u really think its not worth obtaining the CoP. Obviously, there are stringent requirements for Practicing CAs. but its worth it.
Wednesday, 9 July 2008
M&A - Merger of cultures
It was an unusual request for healthcare giant Dr Reddy's Laboratories (DRL). In 2006, Catherine Dulak, while relocating to India from the US with her husband who was to join DRL, insisted on bringing her seven pet cats along.
The pharmaceutical company got the feline beauties shipped pronto in customised cages made on the basis of the specifications set by airlines and government agencies.
From feline imports to gastronomic solutions to worklife balance, India Inc is ready to offer the moon to prepare the ground for a smooth blend of Indian operations with the acquired outfits.
While non-Indian Infosys workers freshly recruited and posted in India get a chef specially flown in to cook food according to their taste buds, dal and curry are making their way into the office canteens of a Chinese company acquired by Mahindras.
Welcome to the world of mergers and acquisitions and cultural integration. As India Inc's appetite for companies on foreign shores grows, it is fast realising that the only way to address post-acquisition jitters is through sugared pills.
Acquisition, after all, is not just about getting bigger with new technology and brands, and more moolah. Today, it is equally, if not more importantly, about acquiring people who work for the company-labour unions, staff, officials and executives.
For instance, when Aditya Birla Group acquired Novellis in Canada, it got 12,800 people of different nationalities scaling five continents. For Tatas, the iconic Jaguar Land Rover brands came along with 16,000 people.
And human beings can't just be taken over with a brazen "Good morning, you are sold". It is not easy to make the two parties bond when, as Aditya Birla Group's HR head Santrupt Mishra says, people can't pronounce Aditya Birla and Indians know neither Spanish nor German.
The integration process is not without its share of humour. Globe-trotting CEOs can often be heard joking about the "morning after" syndrome after an acquisition.
Jokes apart, with more and more companies on the prowl, what was earlier envisaged as a filler for spare time has actually become serious business.
India Inc has been building its portfolio of acquisitions- Tata-Jaguar and Land Rover deal in the UK, Sona Okegawa's buyout of Thyssen-Krupp in Germany, Wipro's purchase of Unza in Singapore, Larsen and Toubro's acquisition of switchgear businesses of Malaysia's Tamco and Jindal Steel and Power's takeover of an iron ore mine in Bolivia, to name just a few.
Management experts suggest Indian companies should set an agenda of merging human resources by resolving cultural issues of the people in both the acquiring and the acquired companies.
Confidence building measures are an integral part of integration. Employees of the acquired company are usually gripped by low morale, restiveness, fear of job cuts, insecurity about the takeover and its implications, says, Adil Malia, president HR, Essar Group.
"When a company is taken over, there is a sense of the vanquished and the victor. It is only fair to put in place processes to make people feel they are on an equal footing. Otherwise acquisitions cannot succeed," says Malia, who has led Essar's acquisition of US-based Global Vantedge and Minnesota Steel and Canada-based Algoma Steel.
Also, employees of acquired units are terrified of being ordered around by a new boss and changes in management and in their designations.
Ganesh Shermon, head, human capital advisory, KPMG, says acquisitions can even fail over two diverse sets of employees in an acquired entity disagreeing over something as mundane as the practice of a female employee garlanding a foreigner company head. "If it goes unexplained, such a trivial issue may kick up a storm," he says.
No surprise then that the likes of Ratan Tata and Anand Mahindra pitch in with their ideas, initiatives and presence to ensure a smooth blending of people. Mahindra & Mahindra (M & M) banks on its cross functional teams that were set up two years back.
"High potential" candidates in the team get strategic training in soft skills and cross-cultural sensibilities. Ratan Tata's mantra is "light touch" integration. The organisational set-up has been rejigged to function independently and tap synergies.
Executives have been placed in charge of five core functions which are performed with a common approach across the Tata Steel Group. They then report to managing director of Tata Steel, B. Muthuraman and well as CEO of Corus, Philippe Varin.
Many mergers signify the coming together of the developed and emerging economies. Given the diverse circumstances and contexts, concerns range from compliance of corporate governance norms to child labour to policy on sexual harassment.
For Arcelor Mittal, already a European company with an Indian face, the yardsticks are in-house expertise, clear lines of succession and a winning streak while for the Tata Group, which is an Indian multinational, inculcation of the Tata way-ethics and values- is paramount.
"We obviously obtain prior knowledge about our would-be partners, their practices and how they operate in the world of business," says Jamshed Irani, director, Tata Sons. Ratan Tata likes to ensure a good connect with the management as per his corporate philosophy.
Tata prefers the management of an acquired entity to continue without undue intrusion. "We aim to put our imprint on the company, through the negotiation board, but the existing managers continue to run the company," says Tata.
Vijay Mallya's United Breweries Group, after acquiring Whyte and Mackay in France, has been keeping spirits up the way it knows best-over beer.
Says CFo Ravi Nedungadi, "Attending social dos is one of our tools to bridge the divide." M & M has used language skill courses- English for the Chinese staff and vice versa to integrate operations in China, says V.S. Parthasarathy, executive vice-president.
The company also created a bigger common canteen where managers eat with the rest of the staff to develop bonhomie. Along with Chinese food, Indian palate ticklers like dal and curry have been introduced too.
Anjali Bansal, country head of Spencer Stuart, feels that such efforts should be complemented by bringing in nuances of culture into the integration process.
Given the diversity of cultures and languages within India, it is not surprising that Indian acquirers have straddled the two worlds rather deftly. Indian companies have taken pains to go the extra length to make their new brand brethren comfortable.
Prabir Jha, Global HR head of DRL, has stuck to the elaborate and leisurely lunch which the employees of Roche-the Mexican company it acquired- were used to.
Though it is a luxury for Indians, the intention was to retain the practice so as not to create an impression that DRL was out to have its own way.
For Ravi Kant, managing director, Tata Motors, the real hurdle in the duediligence for the acquisition of Daewoo Commercial Vehicle Business in Korea was language. It became difficult to give a presentation to the Koreans.
*Mergers, acquisitions and cultural integration
Dr Reddy's Laboratories: The firm allows individual and institutional cultures to flower. It ships cats for executives relocating to India and permits long siesta lunches in Mexico.
TATA Group: For Ratan Tata, ethics and values are paramount and he prefers light touch integration between Indian and global operations.
AVB Group: To drive home the image of the company, employees of Novellis were asked to draw the picture of an animal that they thought represented the Aditya Birla Group.
Mahindra &; Mahindra: High potential candidates get strategic training in soft skills and crosscultural sensibilities.
Sona Koyo Steerings: Surinder Kapur is swamped by mails from the ThyssenKrupp team thanking him for making them feel like one big family.
The Tatas hired an army of translators and interpreters and within 72 hours, all the audio visuals, group brochures and other relevant material in English were translated into Korean and sent across to the management. Daewoo employees were also treated to a variety of Indian cuisine at an Indian evening.
Integration exercises are, however, more than just noodles and curries. Human resource maxims like compensation, benefits and training of employees are equally in vogue once the pay packets and skill sets have been figured out.
The inherent risks are of an exodus. When M & A deals fail to achieve anticipated synergies, there is every chance of talent fleeing the company.
Corporates like Apollo Tyres, Wipro and Tatas are thus arranging regular exchange visits of their employees.
Tatas have even had the labour unions from Jamshedpur visit the Corus facility to send out a message about their work culture.
DRL, which has shifted the head of the engineering unit in Roche, Mexico, to Hyderabad to integrate the skills and fill in the gaps in its Indian plants, has not lost a single person despite high attrition elsewhere in the industry. "This is without any loyalty bonus or golden handcuffs," says Jha.
Companies are also keen to extend its open-door HR policy to the expat workforce.
For instance, the practice of setting aside an afternoon slot of 2-3 p.m. for employees to interact with the senior management.
Vijay Mallya's mantra is not to impose his people on the acquired team so as to foster confidence. Mallya has only three representatives in Whyte & Mackay, the rest are French.
He allows employees to compete for various management positions. It has helped in getting people's loyalty to the company, explains Nedungadi.
In London, Anup Sahay, chief integration officer, Tata Steel and his team have made comforting gestures like retaining the two-day weekend compared to the Indian six work days.
With Corus in a poor shape due to long years of debt and low morale, plenty of fun and recreation has been introduced even in the midst of serious work, in a true Indian style.
Marriages may be made in heaven but not of the business kind. Though Indian companies have woken up to the demands of peoples integration, there is still scope for adopting global practices to make the earthly unions work better.
Reference: India Today "Merger Mantras", 14th July and Factiva.com
The pharmaceutical company got the feline beauties shipped pronto in customised cages made on the basis of the specifications set by airlines and government agencies.
From feline imports to gastronomic solutions to worklife balance, India Inc is ready to offer the moon to prepare the ground for a smooth blend of Indian operations with the acquired outfits.
While non-Indian Infosys workers freshly recruited and posted in India get a chef specially flown in to cook food according to their taste buds, dal and curry are making their way into the office canteens of a Chinese company acquired by Mahindras.
Welcome to the world of mergers and acquisitions and cultural integration. As India Inc's appetite for companies on foreign shores grows, it is fast realising that the only way to address post-acquisition jitters is through sugared pills.
Acquisition, after all, is not just about getting bigger with new technology and brands, and more moolah. Today, it is equally, if not more importantly, about acquiring people who work for the company-labour unions, staff, officials and executives.
For instance, when Aditya Birla Group acquired Novellis in Canada, it got 12,800 people of different nationalities scaling five continents. For Tatas, the iconic Jaguar Land Rover brands came along with 16,000 people.
And human beings can't just be taken over with a brazen "Good morning, you are sold". It is not easy to make the two parties bond when, as Aditya Birla Group's HR head Santrupt Mishra says, people can't pronounce Aditya Birla and Indians know neither Spanish nor German.
The integration process is not without its share of humour. Globe-trotting CEOs can often be heard joking about the "morning after" syndrome after an acquisition.
Jokes apart, with more and more companies on the prowl, what was earlier envisaged as a filler for spare time has actually become serious business.
India Inc has been building its portfolio of acquisitions- Tata-Jaguar and Land Rover deal in the UK, Sona Okegawa's buyout of Thyssen-Krupp in Germany, Wipro's purchase of Unza in Singapore, Larsen and Toubro's acquisition of switchgear businesses of Malaysia's Tamco and Jindal Steel and Power's takeover of an iron ore mine in Bolivia, to name just a few.
Management experts suggest Indian companies should set an agenda of merging human resources by resolving cultural issues of the people in both the acquiring and the acquired companies.
Confidence building measures are an integral part of integration. Employees of the acquired company are usually gripped by low morale, restiveness, fear of job cuts, insecurity about the takeover and its implications, says, Adil Malia, president HR, Essar Group.
"When a company is taken over, there is a sense of the vanquished and the victor. It is only fair to put in place processes to make people feel they are on an equal footing. Otherwise acquisitions cannot succeed," says Malia, who has led Essar's acquisition of US-based Global Vantedge and Minnesota Steel and Canada-based Algoma Steel.
Also, employees of acquired units are terrified of being ordered around by a new boss and changes in management and in their designations.
Ganesh Shermon, head, human capital advisory, KPMG, says acquisitions can even fail over two diverse sets of employees in an acquired entity disagreeing over something as mundane as the practice of a female employee garlanding a foreigner company head. "If it goes unexplained, such a trivial issue may kick up a storm," he says.
No surprise then that the likes of Ratan Tata and Anand Mahindra pitch in with their ideas, initiatives and presence to ensure a smooth blending of people. Mahindra & Mahindra (M & M) banks on its cross functional teams that were set up two years back.
"High potential" candidates in the team get strategic training in soft skills and cross-cultural sensibilities. Ratan Tata's mantra is "light touch" integration. The organisational set-up has been rejigged to function independently and tap synergies.
Executives have been placed in charge of five core functions which are performed with a common approach across the Tata Steel Group. They then report to managing director of Tata Steel, B. Muthuraman and well as CEO of Corus, Philippe Varin.
Many mergers signify the coming together of the developed and emerging economies. Given the diverse circumstances and contexts, concerns range from compliance of corporate governance norms to child labour to policy on sexual harassment.
For Arcelor Mittal, already a European company with an Indian face, the yardsticks are in-house expertise, clear lines of succession and a winning streak while for the Tata Group, which is an Indian multinational, inculcation of the Tata way-ethics and values- is paramount.
"We obviously obtain prior knowledge about our would-be partners, their practices and how they operate in the world of business," says Jamshed Irani, director, Tata Sons. Ratan Tata likes to ensure a good connect with the management as per his corporate philosophy.
Tata prefers the management of an acquired entity to continue without undue intrusion. "We aim to put our imprint on the company, through the negotiation board, but the existing managers continue to run the company," says Tata.
Vijay Mallya's United Breweries Group, after acquiring Whyte and Mackay in France, has been keeping spirits up the way it knows best-over beer.
Says CFo Ravi Nedungadi, "Attending social dos is one of our tools to bridge the divide." M & M has used language skill courses- English for the Chinese staff and vice versa to integrate operations in China, says V.S. Parthasarathy, executive vice-president.
The company also created a bigger common canteen where managers eat with the rest of the staff to develop bonhomie. Along with Chinese food, Indian palate ticklers like dal and curry have been introduced too.
Anjali Bansal, country head of Spencer Stuart, feels that such efforts should be complemented by bringing in nuances of culture into the integration process.
Given the diversity of cultures and languages within India, it is not surprising that Indian acquirers have straddled the two worlds rather deftly. Indian companies have taken pains to go the extra length to make their new brand brethren comfortable.
Prabir Jha, Global HR head of DRL, has stuck to the elaborate and leisurely lunch which the employees of Roche-the Mexican company it acquired- were used to.
Though it is a luxury for Indians, the intention was to retain the practice so as not to create an impression that DRL was out to have its own way.
For Ravi Kant, managing director, Tata Motors, the real hurdle in the duediligence for the acquisition of Daewoo Commercial Vehicle Business in Korea was language. It became difficult to give a presentation to the Koreans.
*Mergers, acquisitions and cultural integration
Dr Reddy's Laboratories: The firm allows individual and institutional cultures to flower. It ships cats for executives relocating to India and permits long siesta lunches in Mexico.
TATA Group: For Ratan Tata, ethics and values are paramount and he prefers light touch integration between Indian and global operations.
AVB Group: To drive home the image of the company, employees of Novellis were asked to draw the picture of an animal that they thought represented the Aditya Birla Group.
Mahindra &; Mahindra: High potential candidates get strategic training in soft skills and crosscultural sensibilities.
Sona Koyo Steerings: Surinder Kapur is swamped by mails from the ThyssenKrupp team thanking him for making them feel like one big family.
The Tatas hired an army of translators and interpreters and within 72 hours, all the audio visuals, group brochures and other relevant material in English were translated into Korean and sent across to the management. Daewoo employees were also treated to a variety of Indian cuisine at an Indian evening.
Integration exercises are, however, more than just noodles and curries. Human resource maxims like compensation, benefits and training of employees are equally in vogue once the pay packets and skill sets have been figured out.
The inherent risks are of an exodus. When M & A deals fail to achieve anticipated synergies, there is every chance of talent fleeing the company.
Corporates like Apollo Tyres, Wipro and Tatas are thus arranging regular exchange visits of their employees.
Tatas have even had the labour unions from Jamshedpur visit the Corus facility to send out a message about their work culture.
DRL, which has shifted the head of the engineering unit in Roche, Mexico, to Hyderabad to integrate the skills and fill in the gaps in its Indian plants, has not lost a single person despite high attrition elsewhere in the industry. "This is without any loyalty bonus or golden handcuffs," says Jha.
Companies are also keen to extend its open-door HR policy to the expat workforce.
For instance, the practice of setting aside an afternoon slot of 2-3 p.m. for employees to interact with the senior management.
Vijay Mallya's mantra is not to impose his people on the acquired team so as to foster confidence. Mallya has only three representatives in Whyte & Mackay, the rest are French.
He allows employees to compete for various management positions. It has helped in getting people's loyalty to the company, explains Nedungadi.
In London, Anup Sahay, chief integration officer, Tata Steel and his team have made comforting gestures like retaining the two-day weekend compared to the Indian six work days.
With Corus in a poor shape due to long years of debt and low morale, plenty of fun and recreation has been introduced even in the midst of serious work, in a true Indian style.
Marriages may be made in heaven but not of the business kind. Though Indian companies have woken up to the demands of peoples integration, there is still scope for adopting global practices to make the earthly unions work better.
Reference: India Today "Merger Mantras", 14th July and Factiva.com
Weak Rupee Good for the Growth
We all know and are worried about the weakening Rupee against Dollar.
But RBI may let Rupee weaken against Dollar even if its inflationary in the short term. Besides, weakening Rupee is expected to reduce volatility on the external front.
India is witnessing a High Current Account Deficit. this means that on a trade weight basis, there is a downward pressure on Rupee. Some (including the new Govt supporter the Samajwadi party) are asking the Govt to appreciate Rupee using Forex Reserves. But if Rupee is kept artificially high, it will widen the deficit by encouraging imports although it will make oil imports cheaper. This would lead to instability in the economy.
Globally, economies are expected to follow tight monetary policy and the there are still signs of the US getting into a recession. This has led to a great uncertainty on the flows of funds globally.
China was expected to appreciate Yuan and this led to hot flows of money in China. Consequently, this has led to instability in Chinese economy.
If RBI steps in to appreciate Rupee, it will have to use forex reserves. This will subsidise the FIIs exiting the country. On the other hand, a weak rupee would act as a deterrent to such outflows.
Weak Rupee makes exports highky competitive which is positive for the growth and leads to increase in Fores Reserves. And since most exports are employment intensive, this is surely expected to boost growth.
Let me place a disclaimer: This post does not endorse my views and has been summarised from a report in the Economic Times dated July 9, 2008. U may have your own arguments and comments. Do post them here. Thanks
:o)
But RBI may let Rupee weaken against Dollar even if its inflationary in the short term. Besides, weakening Rupee is expected to reduce volatility on the external front.
India is witnessing a High Current Account Deficit. this means that on a trade weight basis, there is a downward pressure on Rupee. Some (including the new Govt supporter the Samajwadi party) are asking the Govt to appreciate Rupee using Forex Reserves. But if Rupee is kept artificially high, it will widen the deficit by encouraging imports although it will make oil imports cheaper. This would lead to instability in the economy.
Globally, economies are expected to follow tight monetary policy and the there are still signs of the US getting into a recession. This has led to a great uncertainty on the flows of funds globally.
China was expected to appreciate Yuan and this led to hot flows of money in China. Consequently, this has led to instability in Chinese economy.
If RBI steps in to appreciate Rupee, it will have to use forex reserves. This will subsidise the FIIs exiting the country. On the other hand, a weak rupee would act as a deterrent to such outflows.
Weak Rupee makes exports highky competitive which is positive for the growth and leads to increase in Fores Reserves. And since most exports are employment intensive, this is surely expected to boost growth.
Let me place a disclaimer: This post does not endorse my views and has been summarised from a report in the Economic Times dated July 9, 2008. U may have your own arguments and comments. Do post them here. Thanks
:o)
Monday, 7 July 2008
Guiding principles in Financial Modelling
A good financial modeler has the discipline of adhering to a list of guiding principles to help ensure that the development of the financial model achieves the desired results. By following these simple steps, a financial modeler should be able to build a financial model that is simple, accurate and most importantly consistent, to help build confidence in a financial decision making process.
Financial Modeling Discipline can be acquired in all 3 stages of the financial modeling process:
Financial Modeling Discipline can be acquired in all 3 stages of the financial modeling process:
- Specification Stage
- Design Stage
- Build Stage
Specification Stage
- Be very clear on the effort involved and the dependencies before committing to deadlines - the financial modeling exercise is usually on the critical path!
- Get the algebra right — make sure all revenues, cash flow inwards and assets are positive while expenses, cash outflows and liabilities are negative. This will ensure that we rarely use the minus sign in formulae and can use the sum() function.
- Avoid all calculations that will cause circular references.
Design Stage
- Ensure that each assumption is input only once in a financial model.
- Define scenario variables clearly in a separate “Scenario manager” section or worksheet in the financial model.
- Define the time unit that is to be used consistently throughout the financial model.
- Group all assumptions and inputs into one sheet and state units clearly in the financial model.
- Avoid executing complex calculations in the “Output section” of the financial model.
- Build an Interface sheet if you are working with a financial model with multiple workbooks.
Build Stage
- Always note all assumptions, sources and calculation methods in the financial model for future reference.
- Avoid complicated macros in the financial model if possible - macros make it difficult to follow logic, spot errors or amend the financial model, besides bloating the file size.
- Lay all financial model calculations in chronological order - Avoid having calculations in one row refer to calculations in lower rows.
- Do not try to do too much in one cell with a large complex calculation formula. Break the calculation into blocks.
- Lay the financial model calculations out in blocks, to enable copying formulae across columns or down rows saving time in developing and reviewing financial models.
- All financial model calculation and output sections should be locked to avoid inadvertent data entry therein.
- Include charts in the output section for easy understanding, analysis and auditing of the financial model.
- Always keep back-ups preferably on separate disks and leave the ‘autosave’ option on for your financial model workbook.
- Stick to a consistent version labelling system eg “company xyz_2/2/09_V02_DC”. Save several versions of your financial model each day and retain old versions.
- Avoid jumping to conclusions / sharing results based on preliminary financial model results.
OTHER POINTS TO NOTE
- Specify the purpose of the modelling. Every template/financial model must be backed by and based on a purpose.
- Test the model and preferably all possible formulae before actually working. Models are always prone to errors.
- Keep a documentation of all inputs, outputs and changes to the model.
- in case of formulated cells use if/error and iterations to avoid cells showing N/A, #REF!, #Value!, #DIV/0! etc.
Some Useful Excel spreadsheet functions are:
Audit functions
Grouping functions
Choose function
Range naming techniques
Calculate enable/disable option
Protecting worksheets
Filters (to display selected queries)
Data Sorting
Data input validation
Data tables for sensitivity analysis
Forms & Format controls for sensitivity analysis
Alternative Financial Valuation Concepts
A good financial modeler should also be aware that besides the most commonly used Discounted Cash Flow (DCF) approach and Market Multiples approach, there are a number of alternative financial valuation techniques that can be used to provide different viewpoints in a financial modeling and valuation exercise.
Alternative valuation techniques, when used in combination with the DCF or Market Multiples approach, allow investors or business owners form a holistic view through multiple perspectives on the value of the business under consideration.
Alternative valuation concepts include Asset Replacement Cost and Control Premium.
Asset Replacement Cost
Assessing the adjusted cost of replacing the useful assets of a business is a useful way of valuing capital intensive businesses such as those in the infrastructure and industrial related sectors.
Control Premium
The term “Control Premium” refers the the extra that typically must be paid to gain operating control of the business. An acquirer wanting control over the operations of a business is likely to want to pay a control premium as it will give the acquirer:
The ability to set dividends
Control over investment policy
Control over compensation
A good financial modeler should know that there is no one ‘best technique’ in financial valuation.
The appropriate valuation technique to use will depend upon a number of characteristics of the firm being valued.
Analysts valuing a firm or its equity have to choose between three different approaches and within each approach, between different models.
While the DCF approach is theoretically superior to the use of market multiples, in practice, it is advisable to use both in a financial modeling exercise. Ideally, first do a DCF and then seek confirmation in the form of multiples.
The issues that a financial modeler can consider whilst making choices on the types of valuation techniques to use in a financial model include the following:
- The level and quality of earnings
- Growth rate in earnings
- Percentage of FCF to equity paid out as dividends (dividend policy)
- Stability of leverage
- Number of quality of comparables available to use market multiples
- Type of business
A good financial modeler will typically consider several different valuation techniques in parallel to arrive at a “fair valuation” for the business under consideration.
Wednesday, 2 July 2008
Security analysis
Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a thorough understanding of financial statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and financial accounting.
While there is much overlap between the analytical tools used in security analysis and those used in corporate finance,security analysis tends to take the perspective of potential investors, whereas corporate finance tends to takean inside perspective such as that of a corporate financial manager.
Equity Value and Enterprise Value
The equity value of a firm is simply its market capitalization; that is, the market price per share multiplied by the number of outstanding shares. The enterprise value, also referred to as the firm value, is the equity value plus the net liabilities. The enterprise value is the value of the productive assets of the firm, not just its equity value, based on the accounting identity:
Note that net values of the assets and liabilities are used. Any cash and cash-equivalents would be used to offset the liabilities and therefore are not included in the enterprise value.
As an analogy, imagine purchasing a house with a market value of $100,000, for which the owner has $50,000 in equity and a $50,000 assumable mortgage. To purchase the house, the new owner would pay $50,000 in cash and assume the $50,000 mortgage, for a total capital structure of $100,000. If $20,000 of that market value were due to $20,000 in cash locked in a safe in the basement, and the owner pledged to leave the money in the house, the cash could be used to pay down the $50,000 mortgage and the net assets would become $80,000 and the net liabilities would become $30,000. The "enterprise value" of the house therefore would be $80,000.
Valuation Methods
Two types of approaches to valuation are discounted cash flow methods and financial ratio methods.
Two discounted cash flow approaches to valuation are:
- value the cash flow to equity, and
- value the cash flow to the enterprise.
The "cash flow to equity" approach to valuation directly discounts the firm's cash flow to the equity owners. This cash flow takes the form of dividends or share buybacks. While intuitively straightforward, this technique suffers from numerous drawbacks. First, it is not very useful in identifying areas of value creation. Second, changes in the dividend payout ratio result in a change in the calculated value of the company even though the operating performance might not change. This effect must be compensated by adjusting the discount rate to be consistent with the new payout ratio. Despite its drawbacks, the equity approach often is more appropriate when valuing financial institutions because it treats the firm's liabilities as a part of operations. Since banks have significant liabilities that are owed to the retail depositors, they indeed have significant liabilities that are part of operations.
The "cash flow to the enterprise" approach values the equity of the firm as the value of the operations less the value of the debt. The value of the operations is the present value of the future free cash flows expected to be generated. The free cash flow is calculated by taking the operating earnings (earnings excluding interest expenses), subtracting items that required cash but that did not reduce reported earnings, and adding non-cash items that did reduce reported earnings but that did not result in cash expenditures. Interest and dividend payments are not subtracted since we are calculating the free cash flow available to all capital providers, both equity and debt, before financing. The result is the cash generated by operations. The free cash flow basically is the cash that would be available to shareholders if the firm had no debt - the cash produced by the business regardless of the way it is financed. The expected future cash flow then is discounted by the weighted average cost of capital to determine the enterprise value. The value of the equity then is the enterprise value less the value of the debt.
When valuing cash flows, pro forma projections are made a certain number of years into the future, then a terminal value is calculated for years thereafter and discounted back to the present.
Free Cash Flow Calculation
The free cash flow (FCF) is calculated by starting with the profits after taxes, then adding back depreciation that reduced earnings even though it was not a cash outflow, then adding back after-tax interest (since we are interested in the cash flow from operations), and adding back any non-cash decrease in net working capital (NWC). For example, if accounts receivable decreased, this decrease had a positive effect on cash flow.
If the accounting earnings are negative and the free cash flow is positive, the carry-forward tax benefit is in effect realized in the current year and must be added to the FCF calculation.
Leverage
In 1958, economists and now Nobel laureates Franco Modigliani and Merton H. Miller proposed that the capital structure of a firm did not affect its value, assuming no taxes, no bankruptcy costs, no transaction costs, that the firm's investment decisions are independent of capital structure, and that managers, shareholders, and bondholders have the same information. The mix of debt and equity simply reallocates the cash flow between stockholders and bondholders, but the total amount of the cash flow is independent of the capital structure. According to Modigliani and Miller's first proposition, the value of the firm if levered equals the value if unlevered:
However, the assumptions behind Proposition I do not all hold. One of the more unrealistic assumptions is that of no taxes. Since the firm benefits from the tax deduction associated with interest paid on the debt, the value of the levered firm becomes:
where tc = marginal corporate tax rate.
When considering the effect of taxes on firm value, it is worthwhile to consider taxes from a potential investors point of view. For equity investors, the firm first must pay taxes at the corporate tax rate, tc, then the investor must pay taxes at the individual equity holder tax rate, te. Then for debt holders
For equity holders,
The relative advantage (if any) of equity to debt can be expressed as:
RA > 1 signifies a relative advantage for equity financing.
RA < 1 signifies a relative advantage for debt financing.
One can define T as the net advantage of debt :
For T positive, there is a net advantage from using debt; for T negative there is a net disadvantage.
Empirical evidence suggests that T is small; in equilibrium T = 0. This is known as Miller's equilibrium and implies that the capital structure does not affect enterprise value (though it can affect equity value, even if T=0).
Calculating the Cost of Capital
Note that the return on assets, ra, sometimes is referred to as ru, the unlevered return.
Gordon Dividend Model:
P0 = Div1 / ( re – g )
where
P0 = current stock price,
Div1 = dividend paid out one year from now,
re = return of equity
g = dividend growth rate
Then:
re = ( Div1 / P0 ) + g
Capital Asset Pricing Model:
The security market line is used to calculate the expected return on equity:
re = rf + βe ( rm – rf )
where
rf = risk-free rate,
rm = market return
βe = equity beta
However, this model ignores the effect of corporate income taxes.
Considering corporate income taxes:
re = rf ( 1 – tc ) + βe [ rm – rf ( 1 – tc ) ]
where tc = corporate tax rate.
Once the expected return on equity and on debt are known, the weighted average cost of capital can be calculated using Modigliani and Miller's second proposition:
WACC = re E / ( E + D ) + rd D / ( E + D )
Taking into account the tax shield:
WACC = re E / ( E + D ) + rd ( 1 – tc ) D / ( E + D )
For T = 0 (no tax advantage for debt), the WACC is equivalent to the return on assets, ra.
rd is calculated using the CAPM:
For a levered firm in an environment in which there are both corporate and personal income taxes and in which there is no tax advantage to debt (T=0), WACC is equal to ra, and the above WACC equation can be rearranged to solve for re:
re = ra + (D/E)[ ra – rd(1 – tc) ]
From this equation it is evident that if a firm with a constant future free cash flow increases its debt-to-equity ratio, for example by issuing debt and repurchasing some of its shares, its cost of equity will increase.
ra also can be calculated directly by first obtaining a value for the asset beta, βa, and then applying the CAPM. The asset beta is:
Then return on assets is calculated as:
ra = rf ( 1 – tc ) + βa [ rm – rf ( 1 – tc ) ]
In summary, for the case in which there is personal taxation and in which Miller's Equilibrium holds ( T = 0 ), the following equations describe the expected returns on equity, debt, and assets:
re = rf ( 1 – tc ) + βe [ rm – rf ( 1 – tc ) ]
ra = rf ( 1 – tc ) + βa [ rm – rf ( 1 – tc ) ]
rd = rf + βd [ rm – rf ( 1 – tc ) ]
The cost of capital also can be calculated using historical averages. The arithmetic mean generally is used for this calculation, though some argue that the geometric mean should be used.
Finally, the cost of equity can be determined from financial ratios. For example, the cost of unleveraged equity is:
re,U = [ re, L + rf,debt ( 1 – tc ) D/E ] / ( 1 + D/E )
re,L = b(1+g) / (P/E) + g
where b = dividend payout ratio
g = ( 1 – b ) (ROE)
where (1 – b) = plough-back ratio.
The payout ratio can be calculated using dividend and earnings ratios:
b = ( Dividend / Price ) ( Price / Earnings)
Share Buy-Back
Take a firm that is 100% equity financed in an environment in which T is not equal to zero; i.e., there is a net tax advantage to debt. If the firm decides to issue debt and buyback shares, the levered value of the firm then is:
The number of shares that could be repurchased then is:
where the price per share after relevering is:
VL / (original number of outstanding shares)
The buyback will lower the firm's WACC.
Project Valuation
The NPV of a capital investment made by a firm, assuming that the investment results in an annual free cash flow P received at the end of each year beginning with the first year, and assuming that the asset is financed using current debt/equity ratios, is equal to:
Warrant Valuation
Warrants are call options issued by the firm and that would require new shares to be issued if exercised. Any outstanding warrants must be considered when valuing the equity of the firm. The Black-Scholes option pricing formula can be used to value the firm's warrants.
Valuation Calculation
Once the free cash flow and WACC are known, the valuation calculation can be made. If the free cash flow is equally distributed across the year, an adjustment is necessary to shift the year-end cash flows to mid-year. This adjustment is performed by shifting the cash flow by one-half of a year by multiplying the valuation by ( 1 + WACC )1/2.
The enterprise value includes the value of any outstanding warrants. The value of the warrants must be subtracted from the enterprise value to calculate the equity value. This result is divided by the current number of outstanding shares to yield the per share equity value.
PEG Ratio
As a rule of thumb, the P/E ratio of a stock should be equal to the earnings growth rate. Mathematically, this can be shown as follows:
P = D / re + PVGO
where
P = price
D = annual dividend
re = return on equity
PVGO = present value of growth opportunities.
For high growth firms, PVGO usually dominates D / re. PVGO is equal to the earnings divided by the earnings growth rate.
Treatment of Goodwill
Prior to 2002, amortization of goodwill was an expense on the income statement, but unlike depreciation of fixed assets, amortization of goodwill is not tax deductible.
In 2002, FASB Statement No. 142 discontinued the depreciation of goodwill and specified that it be kept on the books as a non-depreciating asset and written off only when its value is determined to have declined.
Glossary
APV: Adjusted Present Value
CAPM: Capital Asset Pricing Model
EBIT: Earnings Before Interest and Taxes
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization
Enterprise Value: Market value of a firm's equity plus the net market value of its debt.
- Enterprise value = market cap + LTD - net cash & investments
FCF: Free Cash Flow
LTD: Long-Term Debt
MRP: Market risk premium, defined as rm – rf , unless it specifically is referred to as tax-adjusted market risk premium, in which case there would be a factor to adjust rf for taxes.
NOPLAT: Net Operating Profits Less Adjusted Taxes
OLS: Ordinary Least Squares (method of regression)
PEG: The ratio of P/E to growth rate in earnings.
RADR: Risk Adjusted Discount Rate
RAYTM: Rating-Adjusted Yield-To-Maturity
ROE: Return On Equity; equivalent to the expected return on retained earnings
YTM: Yield To Maturity
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