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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,
Lower Parel (W), Mumbai - 400 013
Tel: 022 - 3926 8000/8001
Web: www.nirmalbang.com
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
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olume 8 Issue: 04, 01st - 15th Apr ’16
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Tushita Nigam
Editor
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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.
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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)
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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
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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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.
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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:
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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
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It’s simplified...Beyond Market 01st - 15th Apr ’16
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.
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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,
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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.
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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.
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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
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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.
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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
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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