beyond market issue 120

8/16/2019 Beyond Market Issue 120

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RNI No. MAHENG/2009/28962 | Volume 8 Issue 04 | 01st - 15tMumbai | Pages 48 | For Pr ivate Circulat ion


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Editor-in-Chief & Publisher: Rakesh Bhandari

Editor: Tushita Nigam

Senior Sub-Editor: Kiran V Uchil

Art Director: Sachin Kamble

Junior Designer:Harshad Pawar

Operations: Namrata Sabbani

Printed and published by Mr Rakesh Bhandari

on behalf of Nirmal Bang Financial Services Pvt

Ltd, printed at Uchitha Graphic Printers Pvt Ltd

65, Ideal Ind. Estate, Senapati Bapat Marg,

Lower Parel, Mumbai – 400013 and published

at Nirmal Bang Financial Services Pvt Ltd, 19,

Sonawala Building, 25 Bank Street, Fort,

Mumbai-400001. Editor: Tushita Nigam

CORPORATE OFFICE

B-2, 301/302, Marathon Innova,

Off Ganpatrao Kadam Marg,

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[email protected]

Tel No: 022 - 3926 8047

Research Team: Sunil Jain,

Vikas Salunkhe, Swati Hotkar, Nirav Chheda

DB Corner – Page 5

You Lose, They Win

The move to deregulate small savings rates is a win-win for both the gover

well as the banks, but a loss to investors – Page 6

High Stakes

The ongoing assembly polls in five states are crucial for both BJP and Con

– Page 9

A Sweet Deal

Sugar stocks are back in favour after a period of prolonged lacklustre perf

– Page 12

Cleaning The Space

Home buyers, who have often been at the receiving end of builders’ ploys,

to benefit from the implementation of the Real Estate (Regulat

Development) Bill – Page 16

Hopes Reignited

The moderate standard goods and services tax rate recommended by th

Subramanian panel may ensure speedier passage of the GST bill – Page 19

Ticking Time Bomb

Bad loans of banks are alarmingly high, but the situation may be turning a

restart of stalled projects is helping corporates – Page 22

Both Cheer And Gloom

While the FMCG sector has every reason to cheer, retail and jewellery s

have witnessed a bit of a setback following announcements in Union

2016-17 – Page 25

Headroom For Growth

Rising disposable incomes, higher standards of living and increasing exp

purchase of premium products offers immense growth opportunity in th

improvement segment – Page 28

When Risky Is Attractive

Investors with a slightly higher risk appetite and an investment horizon of

months can consider credit opportunities funds – Page 31

A Bagful Of Goodies

A number of key announcements were made in Budget 2016, which will ev

benefit the insurance sector in India – Page 34

Technical Outlook For The Fortnight Gone By – Page 37

A Continuing Pattern

Flags and pennants are two chart patterns that signal the continuatio

previous trend – Page 38

The Dhandho Way Of Investing

Mohnish Pabrai offers a comprehensive framework on value inves

individual investors in his book ‘The Dhandho Investor’ – Page 42

Important Jargon For The Fortnight – Page 45

It’s simplified...Beyond Market 01st - 15th Apr ’16

olume 8 Issue: 04, 01st - 15th Apr ’16


4/48

Tushita Nigam

Editor


The state of the banking industry in a country broadly signifies theeconomic condition of that nation. The banking space in India has been

seeing a rise in its loan books, and more so in non-performing assets

(NPAs) since a while now. Record high NPAs show how adverse the

situation is.

Our cover story in the current issue sheds light on the dangerous situation

of rising NPAs and the inability of stressed sectors to clear the debt any

time soon.

Other articles in this issue cover topics such as deregulation of small

savings rates and its impact on the government, banks and investors, the

ongoing assembly elections that are crucial for not only the BJP but also

the Congress party as well as the sugar sector, which is gaining favour

once again and its subsequent impact on stocks of sugar companies.

Also, there are articles on the implementation of the much-awaited Real

Estate (Regulation and Development) Bill and its impact on home buyersas well as developers, the recommendations of the panel under Chief

Economic Adviser Arvind Subramanian that may help speed up the

passage of the Goods and Services Tax (GST) Bill, announcements made

in the Union Budget 2016-17 for sectors like FMCG, retail as well as

jewellery and growth opportunities for the home improvement segment in

the country.

The Beyond Basics section covers two articles. While one talks about

credit opportunities funds, the other one is on key announcements

pertaining to insurance made in the Union Budget 2016-17 that will

benefit the sector in the country.

Do not miss the article ‘The Dhandho Way Of Investing’ in the Beyond

Learning section. The article deconstructs the popular book by Mohnish

Pabrai and explains how investors can take cues from it to make right

investment decisionS.


5/48It’s simplified...Beyond Market 01st - 15th Apr ’16

DisclaimerIt is safe to assume that my clients and I may have an investment interest in the stocks/sectors

discussed. Investors are required to take an independent decision before investing. Investment in

equity is subject to market risk. Our research should not be considered as an advertisement oradvice, professional or otherwise. The investor is requested to take into consideration all the risk

factors including their financial condition, suitability to risk return profile and the like and take

professional advice before investing.

n the previous fortnight, the Reserve Bank of India (RBI) cut its policy interest rate by a quarter percentage

point, hinting at another cut later this year if inflation remains under check.

The RBI cut the repo rate — the rate at which it lends to banks — by 25 basis points (bps) to a five-year

low of 6.50%. It also raised the reverse repo rate by 25 bps. Apart from this, the RBI has also taken various

initiatives to improve liquidity in the system.

The Federal Reserve (Fed) put any increase in US interest rates on hold. It said the rates will remain unchangedfor at least another month, indicating slower rate increase in CY16. This led to depreciation of the US dollar, and,

hence, appreciation of other currencies.

The Indian stock markets are likely to remain range-bound in the coming fortnight. The Nifty has support at 7,525

and 7,400 levels. It has resistance at 7,740 and 7,820 levels, thereafter.

In the next fortnight, markets are likely to take direction from earnings results of India Inc that have started

pouring in, as well as initial expectation build-up on monsoons in IndiA.

I

The Indian stock markets likely to remain range-bou

in the coming fortnight

Sensex: 25,022.16

Nifty: 7,671.40

(As on 11th Apr ’16)


6/48It’s simplified...6 Beyond Market 01st - 15th Apr ’16


7/48It’s simplified... Beyond Market 01st - 15th Apr ’16

areas. The scheme operates through the countrywide

network of about 1.5 lakh post offices, 90% of which are

located in rural areas, more than 8,000 branches of public

sector banks and select private sector banks and more than

5 lakh small savings agents.

Small savings instruments can be classified under three

heads. These are:(i) postal deposits [comprising savings account, recurring

deposits, time deposits of varying maturities and monthly

income scheme (MIS)]

(ii) savings certificates [(National Small Savings

Certificate VIII (NSC) and Kisan Vikas Patra (KVP)] and

(iii) Social security schemes [(public provident fund (PPF)

and Senior Citizens’ Savings Scheme (SCSS)].

While post offices run all the schemes, the scheme of

Public Provident Fund and Senior Citizens Savings

Scheme are also operated through banks.

The two most popular instruments are MIS and KVP,

which account for nearly half of the total outstanding.

Generally, interest rates on SSS tend to be fairly stable,

even though other rates like bank deposit rates,

government bond yields or inflation in the economy move

in a wide range.

The government keeps interest rates on these schemes

stable in order to encourage savings in the economy.

From year 2012-13, interest rates on various SSS are beingrecalculated and notified in the month of March every year.

These rates are applicable for the next financial year. From

1st April, rates would be reset every quarter.

n 18th March the Indian government reduced

interest rates on various small savings schemes

(SSS). The cut was steep in the range of 40-130

basis points (bps).

The last cut in small savings schemes interest rates

happened in 2002-2003. While on one side the move is

negative for investors who invest in these schemes, positively the move should improve monetary policy

transmission in the economy.

The reduction in SSS rates is in line with the

recommendations made in December ’14 by the Shyamala

Gopinath Committee on Small Savings to ensure that

interest rates of SSS are market-linked.

Subsequently, the government announced plans to partially

deregulate interest rates on SSS with less than five years

maturity, effective from April ’16.

With the current move, interest rates on SSS will be

benchmarked against government bonds and will be reset

every quarter (instead of annual basis earlier).

SMALL SAVINGS SCHEMES

Small savings schemes (SSS) are deposit schemes offered

by the government to provide a risk-free investment and

social security option to households.

Investments under these schemes are fully secured as these

savings schemes carry implicit guarantee of thegovernment of India.

Small savings schemes is famous in small towns and rural

O

Tax Benefits On Small Savings Schemes

The small savings schemes enjoy income tax exemptions/rebate under different sections of the Income-tax Act.

Over 90% of small savings deposits enjoy similar tax treatment of interest as bank deposits do, albeit they have

slightly higher yields and tenors.

Following are the benefits under these schemes:

i) Deposits under National Savings Certificate (NSC-VIII Issue), Public Provident Fund (PPF), 5-Year Post

Office Time Deposit Account and Senior Citizen Savings Scheme enjoy income-tax deduction under Section

80C of the Income-tax Act, 1961.

ii) Interest accrued on NSC every year is deemed to have been reinvested under the scheme and, therefore, enjoys

rebate under Section 80C; whereas interest on PPF is fully exempt from tax under Section 10 (11).

iii) Interest earned on Post Office Savings Account enjoys tax exemption under Section 10(15).

iv) There is no tax deduction at source (TDS) on withdrawals under any of the small savings schemes except

Senior Citizens Savings Scheme 2004.

Source: Shyamala Gopinath Committee Report



Source: Finance Ministry

THE MOVE

The government has kept the interest setting formula

intact: The 10-year government of India bond will continue

to be the benchmark. For example, now, PPF will continue

to earn 25 bps (spread) more than the average 10-year yield

on government securities. (See table for schemes and new

rates.) The only change now is that notification of rateswill be done on a quarterly basis instead of the full

financial year. In schemes like senior citizens’ savings

scheme, NSC, KVP, etc, the new rates are applicable only

to new customers.

Savings Deposit

1-Year Time Deposit

2-Year Time Deposit

3-Year Time Deposit

5-Year Time Deposit5-Year Recurring Deposit

5-Year Senior Citizen Savings Scheme

5-Year Monthly Income Account Scheme

5-Year National Savings Certificate

Public Provident Fund Scheme

Kisan Vikas Patra

Sukanya Samriddhi Account Scheme

4.0%

8.4%

8.4%

8.4%

8.5%8.4%

9.3%

8.4%

8.5%

8.7%

8.7%

9.2%

4.0%

7.1%

7.2%

7.4%

7.9%7.4%

8.6%

7.8%

8.1%

8.1%

7.8%

8.6%

InstrumentExisting

RateNewRate

(1st Apr '15 to31st Mar '16)

(1st Apr '16 to30th Jun '16)

Interest Rate On Small Savings Schemes

THE IMPACT

Cut in SSS interest rates is good news for equity and long

-dated bond investors. But it is bad news for small savings

investors. In order to capture higher interest rates, industry

experts expect beeline by investors to invest before 31st

March in SSS.

But, over the long term, long-term investors would lose

much. For example, the average interest rate on SSS over

the last 15 years as per the new formula would have been

7.89%, only slightly lower than the 15-year historical

average of 8.36%.

WILL BANKS FOLLOW

With small savings rates reduced, in all likelihood, banks

will further cut their deposit rates. With cost coming down

due to lower deposit rates, banks have the room to pass on

any rate cut from the RBI in the future.

Indian bond prices jumped sharply, with yields touching a

low of 7.50% after the government reduced rates on small

savings scheme, expecting rate cut by Reserve Bank of

India (RBI) in the coming months.

Thus, lower small savings rates, along with marginal

cost-based pricing of loans from April ’16 will facilitate an

improvement in monetary policy transmission (lower

lending rates) from April onwards.

Secondly, even government, centre and state both, dependon these SSS for bridging their fiscal deficit. Now, lower

SSS participation due to lower rates will mean the

government will have to rely more on other sources of

financing, especially market borrowings, to finance their

fiscal deficit.

But, positively, this will also reduce the interest burden on

the central government as interest paid for borrowing from

these schemes is higher than market rates.

IN A NUTSHELL

Overall, the move to deregulate small savings rates is a

win-win for both the government and the banks. While

investors tend to loose, falling inflation and potential

interest rate cuts by the RBI should be positive for the

investment climate in the economy.

Higher monetary policy transmission will lead to lower

lending rates over time and will benefit consumers and

corporates thereby boosting growtH.

THE RATIONALE

Recently, banks cited high small savings rates as one of thefactors for slower monetary transmission. Even as the

Reserve Bank of India (RBI) reduced interest rates by 125

bps to a four-and-a-half-year low of 6.75%, banks have

transmitted (cut their base rates) only up to 70 bps.

As per banks, high rates on SSS make banks’ fixed

deposits uncompetitive and in turn do not allow banks to

reduce the cost of funds. While the data suggests

otherwise, banks fear cannibalization from SSS. For

instance, small savings are small in the context of total

commercial bank deposits in India at 7% now as against a

peak of 30% ten years ago. Hence, the importance of SSShas come down significantly over the years.

Outstanding small savings was around `6.41 lakh crore

(7% of bank deposits) as of August ’15, while bank

deposits were about `90 lakh crore. Within small savings,

deposits account for around 64% of total, followed by

certificates with 30% and PPF with 7%. Experts think the

impact of a cut in small savings rates in terms of banks

transmitting any rate cuts by RBI will be less.


9/48

lections are once again

around the corner - this

time to five state

assemblies, all important

ones. The elections, which began on

4th April will end on 16th May and

the results are scheduled to be

announced on 19th May.

The states going to polls are in the

south and east - Tamil Nadu, Kerala

and Puducherry (Pondicherry) which

is a Union Territory, in the south; and

West Bengal and Assam in the east.

This is another major test for Prime

Minister Narendra Modi and his

Bharatiya Janata Party (BJP), which

Ehas not had a good one year in the

electoral arena.

After winning the Lok Sabha election

in May ’14, Narendra Modi became

Prime Minister with the BJP bagging

an absolute majority on its own, and

then in its aftermath registering a

string of victories in state assemblyelections, the BJP has faced two

major defeats - the first in New Delhi

and the second one in Bihar, both last

year (2015).

The defeats in both Delhi and Bihar,

the first in early 2015 and the second

in the latter part of the year came as a

great shock to the BJP as just a year

ago the BJP was winning all elections.

In fact, in the Lok Sabha election of

2014, the BJP gained an absolute

majority on its own, a first for any

political party in India since Rajiv

Gandhi led the Congress to a

smashing victory in 1984.

In the state assembly elections that

followed, the BJP clinched several

victories, including in the prestigious

ones of Maharashtra and Haryana. It

also formed a government with a

coalition partner in Jammu and

Kashmir (J&K).

It was felt then that with a

It’s simplified... Beyond Market 01st - 15th Apr ’16



time but the question arises - will it be

enough for the BJP to send its

members to the Rajya Sabha?

West Bengal with as many as 294

constituencies has a multi-phase

election schedule and goes to polls on

4th, 11th, 17th, 21st, 25th and 30th ofApril and 5th of May.

Tamil Nadu and Puducherry are both

again not happy hunting grounds for

the BJP. The AIADMK led by

Jayalalithaa presently runs the

southern state while in neighbouring

Puducherry, a regional party - the All

India NR Congress (AINRC) is at the

helm of affairs.

The BJP tried desperately to forge analliance in Tamil Nadu but failed to

do so. The state faces a

multi-cornered contest, which could

favour the ruling AIADMK.

The best the BJP can hope for in

Tamil Nadu is to touch the double

digit figure, which, however, will not

help its cause of adding to its Rajya

Sabha numbers.

However, if it does touch doubledigits, it will be the party’s best-ever

performance in the state, something it

can shout about from the rooftops.

The BJP has virtually no footprint in

Puducherry and unless it cobbles up

an alliance with the AINRC (as in the

2014 Lok Sabha election), its chances

are very bleak.

The only silver lining for the BJP is

that the elections in Tamil Nadu andPuducherry are scheduled for 16th

May and so there is still a possibility,

however remote, of cobbling-up some

sort of an alliance even if it be with

small parties.

Both Tamil Nadu (234 seats) and

Puducherry (30 seats) have their

elections on 16th May.

The BJP has never been a major

player in any of the states going to

polls in April-May barring Assam. A

victory in Assam will be a

tremendous morale-booster for the

BJP after its two huge losses last year.

Modi has already addressed rallies inAssam and the party is investing a lot

in the state. Political observers are of

the opinion that the BJP has a good

chance of winning Assam. A BJP

victory here will be a severe blow to

the Congress.

Assam has 126 constituencies and

goes to polls on 4th and 11th April.

In Kerala, where too the Congress is

presently in power, the wind seems to be blowing in favour of the CPM. If

the CPM wins, the Congress’

electoral fortunes on a downswing

since mid-2014, will slide further

southward, so to speak.

However, even if the Congress loses,

a CPM victory in Kerala will do the

BJP no good as the CPM is one of the

staunchest ideological opponents of

the BJP. A victorious CPM could get

some of its members elected to theRajya Sabha who then, without doubt,

will oppose the BJP there.

Kerala with its 120 constituencies

goes to polls on 16th May.

In West Bengal, the Trinamul

Congress (TMC) appears to be ahead

of all its opposition and according to

political observers seems poised to

retain power. Here too, the Congress

is weak and the CPM has lost much ofits clout.

The BJP, despite a heartening

performance in the last Lok Sabha

election, is still not strong enough to

garner a large number of seats.

However, it is expected to put-up its

best-ever performance in the state this

comfortable majority in the Lok

Sabha and with several assembly

wins to boost the party, Modi’s

government would be able to function

smoothly and proceed rapidly with

reforms in all spheres.

However, that was not to be as theopposition led by the Congress was in

a majority in the Upper House of

Parliament (Rajya Sabha) and it

succeeded in blocking the BJP there.

One of the most important bills

pertaining to the economy, the Goods

and Services Tax (GST) Bill, is still

stuck as the Opposition has not

allowed it to be passed.

For the BJP, winning state assemblyelections has become crucial as

members to the Rajya Sabha are

elected through these assemblies.

Hence, the more state assemblies the

BJP controls, the more members it

can send to the Rajya Sabha, thereby

buttressing its numbers there.

The victories in states such as

Jharkhand, Maharashtra and Haryana

will definitely help but the losses in

both Delhi and Bihar will be to itsdetriment. So, for the government to

get its Bills passed, especially those

linked to economic reforms, it is vital

for the BJP to do well in state

assembly elections.

This brings us to the April-May ’16

round of elections, which are crucial

to both the ruling BJP and the

opposition Congress. According to

observers, both the parties are not in a

strong position.

The Congress presently controls

Assam and Kerala but it appears that

its position is not all that comfortable

in both the states. In Assam, the BJP is

considered the front-runner while in

Kerala the Communists (CPM) are

likely to upset the Congress’

apple-cart.



Given that the BJP does not have

much of a presence in the states going

to polls this April-May (barring

Assam), the stakes are not too high

for it but for the opposition Congress,

losses in Assam and Kerala would be

a terrible blow.

If the BJP wins Assam, it will be a

great morale-booster for the national

party, which will then highlight the

Modi factor as a cause for its win in

the state. In the other states, whatever

the number of seats it wins, it will

position the wins as a major

achievement for the party.

For example, the BJP has never won a

seat in Kerala; this time the party has

entered into an alliance with theBharat Dharma Jana Sena (BDJS) and

hopes to open its account in the state

assembly. Even if it wins one seat it

will be something to crow about for

the BJP. Similar is the case in both

Tamil Nadu and Puducherry where

the BJP has never been a major factor

thus far.

A Congress loss on the other hand

could lead to pressure on the party to

allow Parliament to function and help

pass important bills including thevery important GST Bill.

Losses for the Congress in Assam and

Kerala will make it very difficult for

the party to rationalize its opposition

to the BJP in the Rajya Sabha; the

party may, in fact, be forced to take a

softer line.

On the other hand, a Congress win

would make it more aggressive

vis-à-vis the BJP and this could make passing bills in the Rajya Sabha very

difficult for the ruling BJP.

Thus, the present round of elections is

very crucial for both the principal

national parties. The BJP is pinning

its hopes on Assam and is investing a

lot in the other states with a view to

register as many victories as possible

in the polls.

In states such as Tamil Nadu and

Kerala, even winning half-a-dozenseats would be the equivalent of a big

victory for them.

A heartening performance for the BJP

could swing public opinion in its

favour and thus force the opposition

to abandon its confrontationist stance

in Parliament.

With the all-important election to the

Uttar Pradesh assembly slated for

next year, no party would like to goagainst public opinion and get

labelled as obstructionist. It is in this

context that a good performance by

the BJP could help the party turn the

tables on the CongresS.



India is likely to produce 25.64 million tons (MT) of sugar

as compared to the production of 28.3 MT in the last SS.

The sugar production in SS16 is almost equal to the

domestic consumption.

he cyclical sugar sector, which had fallen out of

market favour since some time is in the news

again. Hopes of better realization for mills on the

back of higher sugar prices have supported the

rally in sugar in recent weeks.

Due to a fall in domestic sugar production, owing to bad

weather and tightness in the global market, ex-mill sugar prices in India have already crossed `34/kg in the fortnight

ended 31st Mar ’16, highest in three years. Even global

prices soared to a one-year high in March ’16.

Excess domestic production for the past five years led to

subdued sugar prices in India, affecting profitability of

sugar mills. Higher ex-mill prices help narrow the gap

between what millers earn and what they have to pay to

farmers for cane, which typically runs into crores of rupees

every sugar season.

As on March ’16 mills were yet to pay around`15,000

crore to farmers for cane supply. With early signs of a

demand-supply mismatch in the sector and hopes of

government support, stock markets have started

anticipating a reversal in the sugar cycle and better

fortunes for sugar companies.

THE INFAMOUS CYCLE

Sugarcane and sugar production in India, which is the

second largest producer of sugar and the biggest consumer

in the world, typically follows a three to five year cycle.

Years of high production improves supply in the market,

thereby lowering sugar prices. This leads to lower

profitability for millers and higher sugarcane arrears to

farmers. Lower income for farmers forces them to shift to

other crops, leading to a fall in the area under cultivation

for sugarcane.

This leads to lower production and lower sugar availability

in the market. Scarce supply follows higher sugar prices,

leading to better profitability for millers and lower arrears

to farmers and thus the cycle continues.

SUPPLY

India is likely to produce less sugar this year as compared

to last year due to bad weather conditions in a few

important sugar-producing states.

Most estimates suggest that Indian sugar season (SS)

2015-16 (1st Oct ’15 to 30th Sept ’16) will witness lower

production as compared to previous SS 2014-15.

T

12.7

19.3

28.4

26.4

14.5

19

18.5

18.5

19.9

21.9

22.9

21

10.0

15.0

20.0

25.0

30.0

20 04- 05 20 05- 06 2 00 6- 07 20 07 -08 2 00 8- 09 20 09 -10

Sugar Producon Interna l Consumpon

24.4

26.3

25.124.4

28.3

26.0

20.8

22.622.8

24.2

25.625.6

10.0

15.0

20.0

25.0

30.0

20 10- 11 20 11- 12 20 12- 13 20 13- 14 20 14- 15 (P) 20 15- 16 (E)

Sugar Producon Internal Cons umpon

Sugar Production & Consumption

Infamous cane and sugar production cycle was a

self-correcting mechanism to surplus sugar and

shortages

High prices of sugarcane has resulted in surplus

sugarcane, which in turn, has caused continuous

surplus sugar production for 6 years in a row

India, being one of the largest producers as well as

consumers of sugar in the world, influences the world

sugar market.

Global sugar production is expected to fall by 13.3 MT to

171.1 MMT in year 2015-16, biggest decline since year

2008-09 as per research firm F.O Licht. This is mainly due

to lower sugar production from Asian countries like India

and Thailand.

Source: Indian Sugar Mills Association Report



Bumper production in the last five years had kept sugar

prices depressed. Even with lower sugar production in

SS16, the opening stock (surplus from previous years) is

likely to be around 7.5 MT.

THE FACTORS

Higher sugar prices are bad for consumers, but are good forsugar millers. So, will the production trail consumption?

There are a few things at play here, which will decide the

trend of sugar prices in the coming years.

Opening Stock

Owing to continuous surplus sugar production for six years

in a row, the opening stock is still high in the market.

Even with lower production in SS16, India is expected to

enter SS17 with an opening stock of 7.5 MT as compared

to around 9 MT in the last season. This is still high and willkeep sugar prices contained.

Exports

The government has set an export target of 4MT for sugar

mills to achieve during the current season. Sugar mills

have already exported 1.15 MT this season so far.

More exports are likely to fructify in months to come.

Exporting sugar in an environment of rising international

prices is good for Indian sugar mills.

Weather

Rainfall shortage was more acute in India in the past two

harvest seasons, leading to lower acreage of sugarcane.

However, there are expectations that monsoon would be

normal this season. This is good for sugarcane plantation

for the next year.

However, less rainfall and lower water availability in key

cane-producing regions like Maharashtra and Karnataka

will lower sugarcane acreage for SS17. Major disruptions

in these key cane-producing regions will alter sugar supplydynamics in the future.

Higher Cane Prices

Prices at which sugar millers buy cane from farmers have

increased over the years. This price is fixed by the

government and called the fair and remunerative price

(FRP). The FRP is the minimum price that sugarcane

farmers are guaranteed.

However, state governments are free to fix their own

state-advised price (SAP). Even millers can offer any price

above the FRP.

Higher fixed price burdens millers, making the industry

unviable. From `145 in SS12, the FRP for SS16 was fixed

at `230/quintal, up by `10 from the previous year. For the

next SS17, it is likely that the government may keep FRPat the same level or slightly increase it.

74.579.5 80.25 81. 18 81. 18

129.84

139.12

145

170

210

220

230

50

75

100

125

150

175

200

225

250

2 0 04 - 0 5 2 0 05 - 0 6 2 0 06 - 0 7 2 0 07 - 0 8 2 0 08 - 0 9 2 0 09 - 1 0 2 0 10 - 1 1 2 0 11 - 1 2 2 0 12 - 1 3 2 0 13 - 1 4 2 0 14 - 1 5 2 0 15 - 1 6

Cane Price Fixed By Government Of India As SMP/FRP

Source: Indian Sugar Mills Association Report

Ethanol

Currently, the government has mandated that 5% ethanol,

a by-product of sugar be mixed with petroleum. India has

witnessed highest production of ethanol SS15 since the

mandate has been announced.

Going ahead, it is expected that the government will

increase ethanol blend percentage to 10%. As per media

reports, against the present annual demand of about 460crore litres of ethanol for different purposes, only 250 crore

litres is available in the country.

Blending of ethanol with petrol will help farmers in getting

better prices and would thus increase their profitability.

Ethanol blending is environment-friendly as it is less

polluting. This will also help in containing imports of

fossil oil. Integrated sugar mills with appropriate ethanol

production facilities are likely to reap benefits from this

additional source of income.

Government Measures

In order to reduce cane arrears, the government has

extended financial assistance to millers in the form of soft

loans. The government has also extended a direct

production subsidy of `4.50 per quintal of cane crushed by

mills to farmers. This will ensure timely payment to

farmers by mills and reduce their cost of procurement.

Further, some state governments have also taken measures



Source: Government Data

to incentivize exports of raw sugar. All these measures by

the government will ensure economic viability of sugar

millers in the coming times.

IN A NUTSHELL

Despite delays in payments by millers, farmers keep

cultivating sugarcane as it offers better returns ascompared to other crops. While a steep increase in FRP for

sugarcane from 2009-10 onwards has increased the outgo

for millers, subdued sugar prices have only made matters

worse for them.

With sugar prices taking a turn and the government coming

into the scene to lighten the debt issue of the sector, sugar

mills are likely to make profits going ahead.

For instance, many millers have already started seeing

profits as sugar prices crossed above their productioncosts, which is around `33/kg of sugar. This, along with

higher ethanol blend with petroleum, makes the prospect

of the sector brighT.

DID YOU KNOW?

India is the largest consumer of sugar in the world and the second largest producer of sugar

after Brazil. Sugar industry is the second largest agro-based industry after textiles in India.

Around 5 crore sugarcane farmers and approximately 5 lakh sugar mill workers are directlydependent for their livelihood on sugar industry.

There are 714 installed sugar factories in the country as on 31st Oct ’15 , with total crushing

capacity to produce around 33 MT of sugar. The capacity is distributed equally between

private sector units and co-operative sector units.

Sugarcane accounted for 6% of the total value of agriculture output and occupied about 2.5%

of India’s gross cropped area in 2013-14. The area under sugarcane production has been

around 50 lakh hectares since 2011-12, which was a record production year for sugarcane

and sugar at 361 million tonnes and 26.3 million tonnes, respectively.

In terms of sugar production, Maharashtra is the largest producer (32%) followed by UttarPradesh (28%), though the share of this state in the production of cane is the highest at 38%.

Other major producers of sugar are Karnataka and Tamil Nadu with shares of 15% and 7%,

respectively.

Based on the production of sugarcane in India, sucrose content in it and the production of

sugar, it is estimated that about 70% of sugarcane is used for the production of sugar in the

country.

Molasses, bagasse and press mud are three important by-products of sugar. They are used for

making ethanol, power generation and manure, respectively.

Domestic demand of sugar primarily arises from direct household consumption and from bulk buyers like beverage companies, confectionaries, etc whereas external demand or

export usually depends on global sugar prices and the availability of surplus after meeting

domestic requirements.

As per the NSSO estimates (68th round), the per capita monthly consumption of sugar was

777 grams in rural areas and 862 grams in urban areas in 2011-12. The all India per capita

direct household consumption of sugar, therefore, would be 804 grams per month.



in obtaining approvals does slow

down a project, a good developer will

never launch a project without the

requisite approvals.

Solomon believes that contractors

should also be made liable for

maintaining quality and time line of projects. “Though the Bill will bring

the real estate sector into strong

regulatory framework, there are no

strong laws governing contractors

like in the USA and other countries.

In order to make the bill truly

effective and beneficial to home

buyers, designs made by architects

and engineers should also come under

the purview of the bill,” he said.

To be sure, in many ways the RealEstate Bill is quite harsh on

developers. For instance, the Bill

makes it mandatory for developers to

set aside 70% of project funds in a

dedicated bank account. The funds

that are set aside can be used only for

the development of the project and

would include construction and land

acquisition costs.

India Ratings & Research believes

that this will “especially impactdevelopers with projects in cities such

as Mumbai or high-end projects in

other cities, where the component of

land cost is much higher than the

construction cost”.

While the Bill is tough on developers,

it will go a long way in improving

transparency in the real estate sector.

Foreign investors have often

expressed concern over the

opaqueness of India’s real estatesector. With the passage of the Bill,

the real estate sector could see more

foreign investment.

“The Bill will instill confidence

amongst buyers and will boost

domestic and foreign investment in

real estate. The thrust of the Bill is on

transparency, greater accountability

he much-awaited and

controversial Real Estate

(Regulation and

Development) Bill was

passed in the Parliament on 15th

March. Will this bill bring succour to

the ailing real estate sector or will it

make things worse?

To begin with, the Bill covers both

commercial and residential projects.

It calls for the establishment of a Real

Estate Regulatory Authority in states

and Union Territories to regulate real

estate transactions and appoint

officers to settle disputes and provide

compensation too.

The Bill has made it mandatory for

developers to register projectsmeasuring more than 500 sq meters or

more than eight apartments with the

Real Estate Regulatory Authority.

This will apply to both new and

ongoing projects.

Developers will also have to disclose

project information such as details of

promoters, project plan, land status,

status of statutory approvals, names

and addresses of real estate agents,

contractors, architects, time frame forcompletion to the regulator and

customers, etc.

In case a developer fails to register, a

penalty of 10% of the project cost will

be imposed and repeat offenders will

be jailed. A builder cannot make

changes to the approved project plan

without the written consent of

two-thirds of buyers of the project.

While these measures benefit home buyers, it could severely hurt

developers. Firstly, it will put an end

to pre-sales (sale of apartments before

a project is launched at a 5% to 15%

discount to launch price) which is one

of the ways builders raise funds for

new projects.

In the absence of pre-sales,

Tdevelopers could face cash crunch

and may have to partner with land

owners for new projects.

“This will put pressure on developers

to raise more funds (debt or equity),”

said a report by research firm, India

Ratings & Research.

“Organized players have access to

varied sources of funds, namely loans

from banks/non-banking financial

companies, non-convertible

debentures, private equity and

structured debt. Thus they are likely

to be able to tide over the liquidity

crunch, though the debt raising and

cost of such funding will result in

weaker credit profiles in the short

term,” it added

A clause in the Bill says that

developers must specify the time

frame for completion of projects and

adhere to it. If they do not deliver

projects as per the time frame, they

will have to pay penalty to home

buyers at the same rate that they

charge home buyers for delayed

payments. The Bill has also proposed

imprisonment of up to three years

apart from monetary penalty forviolation of rules.

Understandably, developers are upset

over this clause and have demanded

that there should be a time frame for

municipal and other authorities on

granting approval for projects.

“Government authorities have not

been included in this Bill though they

should have been. We know that

many delays in the projects happen because of the tedious nature of

getting approvals,” said Prashant

Solomon, Managing Director,

Chintels & Treasurer CREDAI NCR.

Realty Developers have often argued

that their projects are delayed because

of the delay in obtaining approvals.

This is not entirely true. While delay


18/48

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It’s simplified...18 Beyond Market 01st - 15th Apr ’16

of developers towards customers,

ensuring dedicated utilization of

project-related payments from

buyers. This will certainly lead to

growth of the organized real estate

sector in the country,” said Navin M

Raheja, Chairman and Managing

Director of Raheja Developers.

India’s real estate sector is in

doldrums with sales at an all-time

low. One of the reasons for slow

home sales is the lack of trust among

buyers. Home buyers are staying

away from making buying decisions

because they do not trust builders to

deliver projects on time.

The Bill could help in ensuring that

projects are delivered on time,therefore improving buyer

confidence. It will weed out fly-by-

night operators and land grabbers.

Gaurav Karnik, Partner & National

Leader - Real Estate & Infrastructure

at Ernst and Young India,

emphasized, “Real Estate Bill will

bring greater transparency, timely

completion of projects, reduction in

‘fly by night’ operators in the sector

through registration of brokers, etc

and ensure that customers are treated

fairly by ensuring no arbitrary

changes in project plans, full

disclosure on apartment size and

fairer penalty provisions.”

The Bill will help in balancing supply

of homes. In the short- to

medium-term, developers would

rather complete existing projects than

rush to launch new ones. This will

help in balancing demand and supply

of homes.

The Bill has invited a lot of criticism

as well. Many in the real estate

industry feel the Bill does not addressseveral issues such as: mechanism to

check building bylaw violations,

Occupancy Certificate, Violation of

Floor Area Ratio, etc.

The Bill does very little for

developers. It does not address their

genuine concerns of delay in

approvals, absence of single window

clearance mechanism, red-tapism,

etc. Praveen Jain, President of

NAREDCO elaborated that it would

have been more encouraging if

administrative reforms in terms of

introduction of a single window

process to facilitate quicker approval

process, would have been mentionedand provisions made in the Bill.

This would enable realty developers

to complete and hand over projects in

time and avoid procedural delays at

the cost of investments made by

developers and investment

institutions. We hope that this is done

at some stage going forward.

The implementation of the Bill can be

done only after all states create theirstate-level authorities which could

take more than a year.

There is also a fear that state-level

authorities may create multiplicity of

authorities and delay approval

process. But if the state governments

get it right and implement the Bill, it

could change the face of the industr Y.


19/48

he Goods and Services Tax

(GST) bill is the most

anticipated bill proposed by

the Modi government in the

past one year. The GST bill isexpected to end the “cobweb of

various taxes” across states prevalent

in the current taxation system and

change the direction of the markets.

However, constant opposition by the

Congress party and lack of majority

of the Bharatiya Janata Party (BJP) in

the Rajya Sabha and the two-third

Tmajority required for constitutional

amendments has prevented the

passage of the landform reform.

Nonetheless, an important questionthat needs to be answered is what

exactly should a common man expect

from the passage of the GST bill. Is

the GST bill a technical government

document that does not trickle down

to the common man?

Let us find out. But first we need to

look at the recommendations of the

GST panel under Chief Economic

Adviser Arvind Subramanian.

Here is a detailed analysis of the

recommendations made by the panelon the GST bill and its impact:

BASICS

The government-appointed panel on

GST is headed by Chief Economic

Advisor Arvind Subramanian. The

recommendations submitted by the

panel are:




precious metals is set on the higher

side, then it will help lower the

standard rate and that current rates of

taxation of precious metals are

extremely concessional.

If the rate is towards the higher end of

this slab (2%-6%), then it would be adampener for the branded jewellery

industry as they will become

expensive relative to mom-and-pop

jewellery stores, which mostly evade

taxes. It will give a temporary setback

to the market share gain of the

organized sector from the

unorganized sector.

Alcoholic Beverages

According to experts, beveragealcohol is most likely being kept out

of GST. The panel has recommended

that in the long run beverage alcohol

should be included. It is expected that

states will continue to have exclusive

rights to tax beverage alcohol.

At present, companies are able to

offset the VAT they pay on inputs like

glass and ethanol against the VAT

paid to the state for the end sale.

However, post-GST, this offset may

not be available as these two will

become completely independent

taxation systems, which could lead to

rising input costs and hit margins.

According to analysts, companies are

anticipating a proper approach by the

government to deal with this issue.

Personal Care

At present, home and personal care products like detergents, soaps,

toothpaste, skin creams and

shampoos have 24%-25% indirect tax

levied on them. This tax rate is arrived

at by combining 12.5% excise and

13%-14% state VAT as well as 1%

entry taxes.

According to analysts, GST will

calculations for various slabs.

IMPACT

Experts believe that most

recommendations of the GST panel

are likely to be accepted by the

government. Assuming this, here is asector-wise impact of the

recommendations made by the panel

on the GST bill:

Cigarette

At present, cigarette has a dual tax

structure in India. Excise duty is a

specific tax, and will continue in its

current form outside the GST regime.

The state Value Added Tax (VAT) is

ad valorem and will be replaced byGST. The recommended rate of 40%

is a sharp jump in comparison with

the current national tax rate of 25%,

which is an average of all states.

However, it is not absolutely certain

that the rate will be 40% as excise

duty is continuing separately. If there

is indeed such a sharp jump, it will be

quite negative in the first year of

implementation. It must be noted that

the cigarette industry has been under pressure with four consecutive years

of 12%-22% hike in excise duty.

Naturally, this is likely to push

cigarette prices in the long-term. In

the past four years, cigarette prices

have doubled and cigarette sales

volumes have been dropping close to

20% in FY13-16 period.

Branded Jewellery

No excise duty is levied on branded

jewellery at present. State VAT of 1%

is imposed on it. The panel on GST

has not given any specific

recommendation on precious metals.

The panel has taken a range of

2%-6% GST for calculation purposes.

Also, it has highlighted that if GST on

two main slabs for GST – a low slab

at 12% for essential goods and

services, and a standard rate of

17%-19% for most products. The slab

for demerit/luxury goods is set at

40%. No slab has been recommended

for precious metals.

However, the panel has recommended

a 2%-6% tax on precious metals to

compute standard rates, which is

above the 1% VAT applicable on them

in most of the states. According to the

panel, the current taxation on precious

metals is low.

rate for the standard slab could vary.

Factors that could impact the final taxrate are

(a) what goods and services are

exempt from GST,

(b) what items are in the low rate, and

(c) what is the rate on precious metals

where a range of 2%-6% has been

used for calculations but not

recommended by the panel.

If the rate of precious metals is

towards the higher end and if less

items are put in the exempt oressential items list, then the standard

rate can be lower. The opposite also

holds true.

introduce a 1% tax on inter-state

movement of goods for the first few

years. However, the Subramanian

Committee has recommended that

this be done away with.

cigarettes should continue outside of

the GST framework, as per the panel,

citing international examples.

On alcohol, the panel recommends

bringing GST in the long run.

However, recognizing the massive

political opposition to this, they have

not used alcohol taxation in their


21/48

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become applicable for the entire chain

of personal care and home products.

Indirect taxes on these products could

fall significantly if the standard slab

of 17%-19% as proposed by the panel

is approved.

Also, paints and appliances attractsimilar indirect taxes of 24%-25%

and would also see a reduction. Some

food products like malted beverages

also have 22%-23% indirect taxation

and would gain from the panel’s

recommendation on GST.

If the rate of indirect taxes comes

down, companies may either pass it

on to consumers or retain the gains in

margins or do a mix of the two.

Analysts estimate consumers may

benefit once indirect taxes come

down. But not all companies may

pass on the tax benefits. Analysts say

that those companies that have

pricing power in specific categories

may retain margin gains while those

in competitive categories would pass

on the benefits to consumers.

In segments where competition is

stiff, companies could gain marketshare by passing on the benefit of less

indirect tax to consumers. It must be

noted that if a company passes on the

tax benefit to consumers, then the

price of the product will

automatically be cheaper.

Among companies, analysts point out

that Colgate and GlaxoSmithKline

Consumer Healthcare India are likely

to retain most of the gains in margins

due to low tax outgo as they have high pricing power.

Hindustan Unilever (HUL) may

follow a strategic approach in which

it will pass on prices in competitive

categories like detergents and soaps

and gain share from unorganized

players. It is likely to gain margins in

categories like skin care where it has

pricing power.

Asian Paints and Havells are likely to pass on most of the gains to

consumers and gain from

unorganized players.

Experts say long-term benefits of

GST will be visible and fewer

companies will evade taxes. GST will

ensure smooth transition of

companies from the unbranded

segment to the branded segment and

become more transparent in their

dealings with the government.

However, this will be evident at least

five years after the Goods and

Services Tax bill has been passeD.



the total credit to the sector has now

ballooned to 22%. Several infra

projects in road and power sectors are

stuck due to delays in securing

government approvals, land

acquisition, hurting corporates’

ability to repay debt.

Also, experts say infrastructure sector

entails long payback period and high

risks, and should be financed by

long-term funding sources such as

bonds and by insurance companies,

pension funds and other such

institutions. Long-term financing by

banks leads to maturity mismatches,

they said.

Also, the contribution of top

corporates to the persisting bad loan problem is immense.

According to a foreign brokerage,

debt at the 10 most indebted corporate

houses in India, including Lanco,

Jaypee, GMR and Essar, has risen

seven times over the past eight years.

Their loans were 12% of the credit in

the banking system in India and

formed 27% of corporate loans.

For four of the 10 groups, 40%-65%of group debt has been downgraded to

default rating. Financial stress is

forcing some of them to cut back on

capital expenditure and sell assets to

reduce debt.

LOSSES

The RBI review of banks’ books hit

profits of public sector banks with

some of them reporting huge losses as

they have to make higher provisioning for bad loans. For the

third quarter, India’s largest lender,

State Bank of India reported 61.7%

fall in its net profit to `1,120 crore

with fresh slippages during the

quarter at `20,692 crore, most of

which came from its loans to

companies. About 70% came out of

the RBI review. Almost a similar

ecently, a ticketless

traveller in a Mumbai

local train refused to pay

the fine, stunning the

authorities by asking to first recover

dues from liquor baron Vijay Mallya,

who owes a whopping `9,000 crore to

banks, before telling her to pony up.

She preferred to go to jail, not before

an outburst against lakhs of crores of

rupees of loans turning bad. The

incident showed that the pile-up of

soured loans at banks is so huge that it

has outraged a majority of Indians.

RECORD RISE IN NPAs

The total gross non-performing assets

(NPAs) in the banking system hasrisen to a record `4.5 lakh crore, or

6% of total advances as on 31st Dec

’15. They are likely to rise to `4.8

lakh crore to `5.3 lakh crore by

March ’16, according to a study by

ratings agency ICRA.

A total of `8 lakh crore worth of loans

are now categorized as stressed assets

- where borrowers have not repaid the

principal or the interest for over 90

days or restructured where the bankshave given the borrowers a longer

tenure to repay the loans.

From 8.8% of total advances in 2012,

such loans have rapidly risen to 15%

in June.

In December ’15 quarter, the 41 banks

that collectively account for 90% of

the total credit portfolio and deposits

of all scheduled commercial banks in

India showed gross NPAs addition of`1.4 lakh crore, as against a quarterly

average of `50,000 crore to `60,000

crore for the preceding three quarters,

the ratings agency estimates.

The grim situation was revealed

following an asset quality review

ordered by the Reserve Bank of India

last year. As most banks are yet to

R fully recognize the NPAs, it is likely

that bad loans’ addition will remain

high in the March quarter, taking up

gross NPAs to 6.2%-6.8% of total

assets. Along with this relatively high

level of other weak assets (9%-10%)

would ensure that bank profitability

remains low in this fiscal as well.

Another ratings agency Crisil said

loans turning bad from large

corporate advances could be in the

region of `2.1 lakh crore for the

system between January ’16 and

March ’17, with gross NPAs rising to

7.7% of total assets in this fiscal.

According to Crisil, around `1.4 lakh

crore worth of loans are recognized as

NPAs by some banks but not byothers, or about 30% of the bad loans.

About `40,000 crore of stressed

assets are currently not classified as

NPAs, and around `30,000 crore

under restructured assets.

WHY THE SUDDEN UPSURGE

IN BAD LOANS

Experts say between 2010 and 2013,

companies went on a debt binge to

expand, which is coming to hauntthem following a global demand and

price meltdown. Also, the banking

system’s high exposure to troubled

sectors of infrastructure and metals

has led them into this situation.

While infrastructure suffers from

weak balance sheets, metals sector is

facing global demand slump on the

onslaught of cheaper Chinese exports.

From an average 29% in 2005, the

total banking exposure to thesesectors has risen to about 50% now.

With these sectors in stress, it is

showing in the form of high NPAs,

said an expert.

In infrastructure, the most bank

lending is to the power sector, which

is facing falling demand and debt-

laden power plants. From 9% in 2005,



amount of fresh bad loans are

expected to be thrown up in the

March quarter.

Bank of India posted a huge loss at

`1,126.24 crore for the quarter ended

30th Sept ’15, the highest quarterly

loss posted by a bank in over adecade, on account of loans given to

large corporate houses turning bad.

HIGHER PROVISIONING

Banks need to set aside additional

capital as provisioning for all

accounts under the 5/25 scheme, a

special refinance window for core

sector loans and the cases where

Strategic Debt Restructuring (SDR),

is invoked under which banks canchange management. About `1.25

lakh crore loans are under the 5/25

scheme for which provisions have to

be made till the Q4 FY16.

SDR is a scheme where banks can

invoke debt restructuring and change

the management. About `30,000

crore loans are under SDR with about

10 companies under SDR currently.

Some of the accounts where the 5/25scheme is being implemented are

Bhushan Steel Ltd (which refinanced

`40,000 crore worth of loan), Essar

Steel (`25,000 crore) Tata Power

(`3,800 crore loan for its Mundra

UMPP), Adani Power (`15,000

crore), Vendanta (`10,200 crore), and

Jaypee Infratech (with a loan

outstanding of `10,300 crore).

While RBI will allow banks to hold

most of these accounts as standard,downgrading a few weak accounts

banks will have to make a provision

in all cases.

Both 5/25 and SDR schemes were

introduced in April ’15 wherein the

RBI let all core sector projects to be

refinanced every five or seven years

for a maximum period of 25 years.

THE GOVERNMENT’S ROLE

With the banks in a mess, the

government on its part has promised

higher recapitalization of banks. It

plans to pump in `70,000 crore in the

next four fiscals, but the requirement

may be huge, say experts.

Rating agency Fitch sees

recapitalization to be over `1 lakh

crore. The government has promised

`25,000 crore in the current fiscal, but

the funds come with riders.

The finance ministry has asked banks

to pull all stops to recover bad loans

or they would not be recapitalized by

the government. In a big incentive,

the ministry has allowed the proceedsto go directly to banks’ profits.

Also, recoveries need to be 23%

higher than the previous year for the

banks. The RBI, on its part, has

amended some regulatory capital

determination principles to bolster

banks’ Tier I capital.

The government has also told banks

that naming and shaming defaulters,

filing suits against the defaulting borrowers, guarantors and attaching

the properties should be taken up to

recover the dues.

With stressed assets stabilized, the

government is planning the next

phase of transformation of the sector.

It would include consolidation as well

as sale of non-core assets, along with

other ways of raising funds.

WILFUL DEFAULTERS

While Mallya figures big on the list of

wilful defaulters, there are 5,275 such

borrowers who owe banks over

`6,000 crore ($8.56 billion),

according to the Credit Information

Bureau (India) Ltd. In 2002, the total

amount owed by wilful defaulters was

about `6,000 crore. This is a nine-fold

increase in the last 13 years.

Maharashtra has most wilful

defaulters with 1,138, who owe

`21,647 crore followed by West

Bengal with 710 and Andhra Pradesh

with 567 cases. But in terms of

defaults, Delhi is second with morethan `7,299 crore.

LIGHT AT END OF THE

TUNNEL

While banks have been in the news

for bad loans, there are indications

that things might be improving.

The three major troubled sectors,

which form the bulk of stressed assets

of a bank - steel, power and road building - are seeing easing of their

situation. In steel, the government has

raised safeguard duties on Chinese

steel, helping local firms to raise

prices, thus stemming imports.

This is good news for banks, which

have around a `1 lakh crore under

stress of the total `3 lakh crore

exposure to the sector.

In power sector, the crash in globalgas prices has come as a boon to

gas-based power plants as they can

import gas at the level of domestic

price of the fuel. The government’s

UDAY scheme to clean up debts of

power distribution companies will

also help banks as demand will go up.

In the road building sector, several

stalled projects are being restarted,

entailing investment of several

thousand crores of rupees.

The borrowers too are making

conscious efforts by selling off their

assets and repaying the debt; for

example Jaypee Group has sold its

entire steel business, Anil Ambani

Group - its tower arm - in their bid to

cut debt, which augurs well for the

debt-laden banking sectoR.


25/48

he Fast Moving Consumer

Goods (FMCG) sector has

every reason to cheer with

Finance Minister Arun

Jaitley’s emphasis on rural market in

Union Budget 2016-17.

It will help the sector to witness arevival in demand, which had tapered

Toff in the last couple of years due to

lower agricultural yield, resulting in

diminished disposable income in the

hands of rural consumers.

However, retail and jewellery sectors

are likely to be impacted by the

government’s announcements in therecent budget.




on the excise duty hike to customers.

Rakesh Biyani, Director of Future

Group, said, “Increase in taxes on

branded apparel, however, is

disappointing at a time when the

apparel industry is already going

through a slowdown. Due to higherexcise duty, domestic demand could

be impacted, causing a double

whammy to apparel manufacturers.”

Overall the increase in excise duty is

negative for branded retail players

like ABFRL, Monte Carlo, Shoppers

Stop, Indian Terrain and Arvind,

among others. This will increase the

retail sale price to the consumer,

which can impact volumes especially

when the overall demand is subdued.This will also increase pricing

differential with the unorganized,

private label brands which sell below

`1,000, experts said.

Arun Ganapathy, Chief Financial

Officer of Spykar Lifestyles Pvt Ltd,

said, “Budget 2016 doesn’t augur

well for apparel retailers. Excise duty,

which was withdrawn in Finance Bill,

2013 has again been imposed on

branded ready-made garments withMRP of `1,000 and above under two

options - 2% tax without input tax

credit and 12.5% with input tax

credit. The tariff value has also been

changed from 30% of MRP to 60% of

MRP. This would be an additional

cost on apparel players.

“Krishi Kalyan cess of 0.5% which

will be imposed effective 1st Jun ‘16

is an additional impact for us. Also, as

we are in the discretionary spendsector, no increase in personal income

tax slabs or any major tax benefit for

the common man is a negative for us

as his net cash flow has not

improved,” added Ganapathy.

Jewellers across the country went on

an indefinite strike since 2nd March

against the imposition of excise duty

the FMCG sector, initiatives to

support the revival of rural and urban

consumption should help bring

growth back on track.

Sunil Duggal, CEO of Dabur India

Ltd, too said, with a plethora of

announcements, be it in the form ofgreater focus on farmers and rural

development, promoting investments

in infrastructure and healthcare and

opening up of FDI in food processing,

Finance Minister Arun Jaitley has

taken positive steps that would boost

overall confidence and go a long way

in generating employment.

Improving connectivity from farm to

market, fast-tracking irrigation

projects, provisions towards interestsubvention for farmers and a crop

insurance scheme are also steps in the

right direction. These steps will help

millions of farmers recover from the

rough patch they have been going

through and go a long way in boosting

confidence and fuelling consumerism

in rural India, which would boost

FMCG sales.

While the FMCG sector has every

reason to cheer the retail sector and jewellery sector witnessed a bit of

setback with the finance minister

proposing to increase the excise duty

on gold jewellery to 1% (with input

tax credit benefit; 12.5% excise duty

with input tax credit) from nil earlier.

The government has proposed to

change the excise duty on branded

ready-made garments with a retail

sale price of `1,000 and above from

‘Nil without input tax credit or6%/12.5% with input tax credit’ to

‘2% without input tax credit or 12.5%

with input tax credit’.

The increase in taxes would result in

increase of branded apparels costing

`1,000 and above by around 2%

while the cost of gold jewellery will

increase by 1% as retailers will pass

The government aims to double the

income of farmers by 2022 and has

allocated `38,500 crore this year to

Mahatma Gandhi National Rural

Employment Guarantee Act

(MGNREGA) compared to `34,700

last year, highest ever amount spent in

a year on MGNREGA. Total amountallocated for rural development in the

budget was up by 10.3% from a year

ago to `87,800 crore.

The government will also pilot Direct

Benefit Transfer (DBT) for fertilizers

in a few districts of India after the

success of DBT in LPG. According to

experts, these announcements would

augur well for the FMCG sector and

the overall growth of the economy.

It will improve the overall

consumption in rural areas and will be

a positive for companies with higher

rural salience. The focus on

broad-based growth with a thrust on

rural, agriculture and farmer welfare

bodes well for FMCG companies.

Overall, the budget attempts to drive

inclusive growth focusing on the rural

economy, which is a positive for

FMCG companies.

A host of measures have been

proposed and budgets have been

allocated for increasing crop yield,

improving irrigation facilities,

unleashing new agricultural schemes,

enhancement of MGNREGA,

improved market access by providing

e-commerce platform for farmers,

better regulation of minimum support

price (MSP), through specific

initiatives like online and

decentralized procurement, accordingto Saugata Gupta, Managing Director

and CEO of Marico.

Vivek Gambhir, Managing Director

of Godrej Consumer Products Ltd,

said, “This is a responsible

‘rural-first’ Budget that attempts to

revive demand, while continuing on

the path of fiscal consolidation. For



Tesobono Swap

Tesobono swap is an offshore (cross-border) derivative operation, which was originally used by local banks in Mexico as

a means of leveraging Tesobono (bond) holdings. By definition, the Tesobono swap is a swap agreement between offshore

and Mexican banks, whereby the offshore bank pays Tesobono yields hedged by Tesobono holdings and receives LIBOR

plus and margined collateral. This swap allowed Mexican banks to establish leveraged position financed by short-term

U.S dollar from offshore banks. Leveraging positions is principally sought in order to enhance returns on domestic bonds

linked to dollar. Functionally, the Tesobono swap places both counterparties in a risk position identical to that associated

with a repurchase (repo) agreement. The Tesobono swap helped local banks circumvent the regulations of the Mexican

commission of exchange (Comision National de Valores) that banned holding financial assets on margin.

and the worst-affected with this

proposal are daily wage artisans.

The Confederation of All India

Traders (CAIT) and All India Bullion

Jewellers and Swarnkar Federation

(AIBJSF) announced that they will

not withdraw their strike, till the timethe government withdraws the

proposed 1% excise duty on

non-silver jewellery.

In the aftermath of the strike called by

CAIT, in a statement, said, “The basic

fundamental of levying excise on

jewellery trade is untenable since the

finance minister in his budget speech

has announced imposition of excise

on manufacturing of gold and

diamond whereas jewellery tradersare sellers and not manufacturers.”

Although the AIBJSF is continuing

with the strike, three other

associations - GJF, ABJA and GJEPC

- called off the strike on 19th March

following government’s assurance

that there would be no harassment of

traders by tax officials.

A three-member committee, headed

by former Chief Economic Adviser tothe Finance Ministry, Ashok Lahiri,

has been constituted to look into

issues related to excise duty on

jewellery and find a solution. Over

3,00,000 jewellery shops owing

allegiance to more than 300

associations across India went on

strike since the excise duty

announcement in the budget

presented on 29th Feb ‘16.

Mehul Choksi, Chairman and

Managing Director of Gitanjali

Group, said, “Gold jewellery costs

will increase by around 1%, whichwill have an impact on demand.”

Krish Iyer, President and CEO of

Walmart India, however, pointed out

that there are a few positive

announcements too in the budget for

the retail sector.

“The Union Budget 2016 continues to

rightly focus on rural and

infrastructure sector. The planned

investment in these two criticalsectors will not only create jobs but

also give impetus to demand

generation and economic growth. The

government’s proposal to create an

e-market for our farmers through

‘Unified Agri Marketing platform’ is

very bold and forward-looking and

will positively impact the country’s

farmers. We will continue to

strengthen our Direct Farm

programme to complement

government vision to make adifference to the lives of our millions

of farmers,” said Iyer.

The decision by the government to

allow up to 100% foreign direct

investment (FDI) through FIPB in

marketing of food products produced

and manufactured in India is

progressive and will help in reducing

wastage, helping farm diversification

and encourage industry to produce

locally within the country. This

far-reaching reform will benefit

farmers, give impetus to food

processing industry and create vastemployment opportunities, Iyer said.

Maintaining fiscal discipline by

restricting fiscal deficit to 3.5% for

FY16-17 and commitment to ‘no

retrospective taxes’ will help control

inflation and boost investor

confidence respectively, Iyer added.

To discourage consumption of

tobacco and tobacco products, the

Finance Minister proposed to increaseexcise duties on various tobacco

products other than beedi by about

10% to 15%.

According to industry experts, it will

be a negative for all cigarette

companies as it is the fifth

consecutive hike. Though companies

will try and pass on the duty increase,

it will have an impact on their volume

growth (already facing immense

pressure in FY16).

Excise duty on rubber sheets and

resin rubber sheets for soles and heels

is being reduced from 12.5% to 6%

and is a positive for footwear

companies like Bata, Relaxo among

other, experts saiD.



earning members in a family has led

to improved affordability.

That apart, easy availability of credit

such as personal loan and loan for

renovation of houses has made it even

more convenient for consumers. This

is having a huge impact on the purchasing power of consumers, who

are no longer talking about housing as

a basic need.

Today, it has moved beyond

construction. Gradually, people are

spending a lot more on interiors,

lighting, tiling, furniture, luxurious

marbles, modular kitchens and

decorative bathroom fittings.

RISING URBANIZATION

One important factor that is driving

the attractiveness of the Indian home

segment is growing urbanization in

India. Urban India accounted for

31.2% of the population in 2011, up

from 27.8% in 2001.

During this period, India’s urban

population has grown at 2.8%

annually. People are moving from

rural places to urban areas in search of jobs and due to the existence of the

nuclear family culture. This will only

grow in times to come as the working

populations increases.

India’s rating agency, Crisil estimates

that the working population in the age

group of 20-59 years is expected to

grow to 54.2% by 2025 from 50.4%

in 2005.

Let us now look at each of thesesegments and markets that are

expected to benefit because of the

demand drivers mentioned earlier.

TILES

Thanks to product innovations, tiles

are slowly finding their place in every

nook and corner of a house, including

t is often said that if you want to

identify future emerging trends

look around you and see how

the world is changing. For

instance, today in India people are

talking about bullet trains, airports,

highways and many other things that

have been in existence in thedeveloped world for quite some time.

As a country’s economy grows, the

purchasing power improves, which

subsequently impacts the living

standards of people. They consume

things that allow them to enjoy better

life. This is why more and more

industries in the country are looking

at the middle class who have higher

income at this disposal.

Home improvement segment is being

considered as a potential wealth

creator by institutional and savvy

investors. This segment comprises of

tiles, kitchen accessories, laminates,

plywood, bathroom fittings and

sanitary products.

DRIVERS OF GROWTH

Before we dwell on individual

opportunities in these sectors andindustries, let us understand the

rationale behind it.

HOUSING SHORTAGE

India is the second most populous

country in the world with an

estimated population of 1.2 billion,

and growing at about 1.5% to 1.6%

annually. While India’s population

has been growing at a faster pace, the

need for housing has also beengrowing commensurately.

According to the National Housing

Bank (NHB), India’s housing

shortage is pegged at 43.9 million

units in rural and another 18.78

million units in urban areas. Of this,

95% shortage is in rural areas and

90% is in urban areas, among buyers

Ifrom economically weaker and

low-income group.

In fact the government has been

working to narrow down this gap by

earmarking schemes like ‘Housing

for all by 2022’. Besides, it is aiming

to build 100 smart cities, which isagain a big growth driver for ancillary

companies and industries that cater to

housing needs.

REPLACEMENT DEMAND

As per a government report made by

the Technical Group on Urban

Housing Shortage, about 10.5% of

total households in urban India or

approximately 80.4 million buyers

are older than 40 years. Importantly, itstates that out of these, close to 2.8%

or 2.3 million houses are obsolescent.

The report further says that the total

number of bad dwelling units as a

percentage of the total units is 8.1%.

It is quite obvious that there is huge

untapped replacement demand in the

housing industry, which will open up

gradually with further urbanization

and rise in incomes.

AFFORDABILITY AND

PURCHASING POWER

While population has been growing, a

large chunk comes from the middle to

low-income group. And over the last

decade or so because of rising income

led by higher government spending,

better pricing for agricultural outputs,

and increase in pay scale of

government employees, most of them

have seen a spurt in their overallincome levels.

In the last 15 years, India’s per capita

income has increased fourfold from

$400 to around $1,600 currently.

Also, there is a growing trend of

families having more than one

earning member. The growing

working class and addition of women



living room, kitchen, bathroom,

terrace, etc. The share of tiles in

flooring material is growing gradually

as it replaces other forms of flooring

mainly stone and marble.

Globally, this is a big industry

particularly in the developing and thedeveloped world where income levels

are high. India’s per capita

consumption at 0.6 in square metres is

far lower than 7.64 sq metres of Saudi

Arabia, 3.33 sq metres of China, 1.58

sq metres of Russia and 4.12 sq

metres of Brazil.

The Indian ceramic tile market is

estimated to be around `30,000 crore.

Barring the lull period of last two

years, largely caused by theslowdown in the realty sector in India,

the Indian ceramic tile industry has

been growing in the region of 12% to

15% annually, one of the fastest

growths recorded globally.

While the share of organized players

is estimated to be around 50% of the

sector, it is growing with larger

players making aggressive bets.

Furthermore, industry issues too are

getting resolved.

For instance, the availability of

cheaper gas has eased pressure on

margins for the industry. Further, the

anti-dumping duty on Chinese

vitrified tiles is expected to help the

industry in terms of easing

competition in the domestic market.

PLYWOOD AND LAMINATES

After a hou

beyond market issue 120

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