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The Union Budget attempts to clean-up

fiscal accounting, chooses conservatism

by going in for a modest rise in capital

expenditure AUNIQUE

APPROACH

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Beyond Market 16th - 28th Feb ’21 It’s simpli�ed...3

DB Corner - Page 5

A Unique ApproachThe Union Budget attempts to clean-up �scal accounting, chooses conservatism by going in for a modest rise in capital expenditure – Page 6Lending SupportBy keeping key policy rates unchanged, the RBI is ensuring ample liquidity for the markets to bounce back and recover from the pandemic – Page 10Renewed InterestIndia’s economic recovery indicates growing interest among FIIs-DIIs – Page 13Broadening Investor BaseBy allowing retail investors online access to G-Secs, the RBI aims to encourage retail investment through �nancialization of domestic savings – Page 16Forti�edIncreased budgetary allocation towards the sector has made infrastructure funds quite attractive from an investment perspective – Page 19Cloudy ProspectsGameStop’s meteoric rise and fall is a contradiction between stock price and business fundamentals – Page 22Adding Life To InsuranceWhile the introduction of 74% FDI is hoped to revive the insurance industry, a certain section is not happy about other announcements pertaining to the sector – Page 25The Mighty Rise Of Online RetailCovid-19 has accelerated sales in online retail and the sector is set to grow manifold in the coming quarters – Page 28Rise From The AshesIncreased demand will give �llip to the cement sector, which had been struggling to survive – 2The Ideal Way ForwardThe government’s idea of privatizing loss-making enterprises and selling stake in state-owned companies may seem worthwhile but divesting pro�t-making ones is a debatable topic – Page 36

Hidden DangersThe Franklin Templeton catastrophe has shown that debt funds are not without risks. But by exercising reasonable diligence, investors can avoid the pitfalls – Page 39

Mutual Fund Recommendations - Page 42 Technical Outlook – Page 47

A Shift In NarrativeChanging times call for change in investment styles, and is evident in Howard Marks’ recent memo – Page 48

Important Jargon – Page 51

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

Art Director: Sachin KambleJunior Designer: Orianne Fernandes

Operations: Namrata Sabbani

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Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar Shewale, Nirav Chheda, Amit Bhuptani, Ritu Poddar, Aniket Jadhav, Swapnil Ufale

Volume 13 Issue: 02, 16th - 28th Feb ’21

Beyond Thinking

Beyond Basics

Beyond Learning

Beyond Numbers

Beyond Buzz

CONTENTS

THERIGHT

MOVESAt the start of February, Finance Minister Nirmala Sitharaman presented Union Budget 2021-22. She termed it as “a Budget like never before” and “a significant break from tradition, due to the coronavirus pandemic.”

However, it received mixed reviews in spite of no negative surprises, with focus on resetting the Indian economy that has been facing the repercussions of the deadly pandemic.

In our cover story, we have discussed in detail the shift in approach adopted by the Narendra Modi government, the borrowing strategy and where it can lead the economy and nation per se.

You will also come across other interesting reads in the current issue. These include articles explaining the crux of the monetary policy that was announced earlier this month, the interest shown by foreign and domestic institutional investors in the Indian economy after a long lull, the provision of online access to retail investors to invest in government securities (G-Secs) by the RBI, the increased budgetary allocation towards the infrastructure sector that will make infra funds an interesting investment option, and the lessons that investors can learn from the unlikely rise of the stock of US-based game retailer GameStop, signifying the alleged misdeeds of the Wall Street.

The other articles featured in this issue talk about the recent developments in the life insurance industry, the tremendous rise of online retail due to pandemic woes, a revival in the cement sector, and the proposed privatization of loss-making government entities.

In the Beyond Basics section, we have given a low-down on the Franklin Templeton fiasco and the red flags that investors should be wary of when making investments in such funds.

Do read an enthralling article in the Beyond Learning section. The article describes the recent memo by famed American investor Howard Marks and explains how value investing has evolved over the yearS.

Beyond Market 16th - 28th Feb ’21 It’s simpli�ed...

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Finance Minister Nirmala Sitharaman unveiled the budget for fiscal year 2021-22 on 1st February this year. The announcements in the budget have been made with the intention to revive the pandemic-hit economy.

The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) decided to keep key policy rates steady. Both the repo rate and the reverse repo rate stand unchanged at 4% and 3.35%, respectively. However, the Cash Reserve Ratio (CRR) has been raised to 4% and GDP forecasts have been revised, indicating revival in economic growth.

Fed Chairman Jerome Powell, in his testimony to Congress, said that inflation is still “soft” and the US economic outlook is still “highly uncertain,” easing fears of policy change by the central bank in the near term.

In the coming fortnight, the Indian stock markets look good. Nifty Futures has support at 15,000 and 14,850 levels. And 15,480 is the expected level on the upper side. Among sectors, one can look at metals from trading and investment perspectives.

Market participants are advised to watch out for the rise in the number of coronavirus cases in India along with commodity price movements and inflation numberS.

Among sectors, one canlook at metals

from trading andinvestment perspectives.

Nifty: 15,097.35Sensex: 51,039.31

(As on 25th Feb ’21)

5

DB CORNER

Beyond Market 16th - 28th Feb ’21 It’s simpli�ed...

The Union Budget attempts to clean-up

fiscal accounting, chooses conservatism

by going in for a modest rise in capital

expenditure

BEYOND THINKING

AUNIQUE

APPROACH



lower than `3.85 lakh crore BE, mainly due to a drop in dividend income. THE TOTAL EXPENDITURE The Centre’s total expenditure in 2020-21 is pegged to rise by `4.08 lakh crore to `34.5 lakh crore, or 28% over the previous fiscal, with higher subsidy payouts, higher spending on MGNREGA accounting for most of it.

The total expenditure of `34.5 lakh crore in 2020-21 is 13.4% higher than the BE of `30.42 lakh crore.

About `1.5 lakh crore would be spent for prepayment of outstanding food subsidy loans of the FCI. Another `62,000 crore is for clearing fertiliser subsidy dues, which adds up to `2.1 lakh crore.

However, experts say clearing up old dues is not a stimulus. Excluding these payments, the government spent only `2 lakh crore more in the pandemic year than a normal one.

Excluding clearing of pending dues, the government’s expendi-ture-to-GDP ratio works to around 16.6% for 2020-21, which would fall to 15.6% in the next fiscal.

This means that fiscal consolidation next year would be secured through heavy expenditure cuts.

However, excluding FCI pending dues of `3.07 lakh crore, the actual expenditure is down to `31.43 lakh crore, which is around 3.3% more than the BE of `30.42 lakh crore.

If compared with the total expendi-ture in 2019-20 (RE) of `26.86 lakh crore and excluding the food subsidies, the total expenditure in 2020-21 stands at `31.43 lakh crore, which is around 17% more than the

absolute numbers, it is `18.49 lakh crore, or about 132% more than `7.96 lakh crore of what was estimated when the budget was presented in February ’20 (Budgetary estimates, or BE).

So how did it end up with such a huge fiscal deficit?

First, the tax revenues are likely to drop 17.8%, or `2.89 lakh crore in 2020-21, with the net tax revenue aggregating `13.45 lakh crore (Revised estimates, or RE) against the budgeted `16.36 lakh crore.

Second, disinvestment proceeds were estimated at `2.1 lakh crore, which has been revised to just `32,000 crore or 15.2% of the expected amount.

Third, the government has decided to clear the pending food subsidy bill of Food Corporation of India (FCI), which buys wheat and rice from farmers at minimum support price and sells at a subsidized rate under the Public Distribution System (PDS).

The government, over the years, has been allocating less for food subsidy with the gap being filled by FCI by taking loans from the National Small Savings Fund.

As of March ’20, the FCI owed NSSF `2.55 lakh crore. The off-budgetary practice allowed the government to show lower expendi-ture and fiscal deficit. However, in this fiscal, the government has allocated `4.23 lakh crore towards food subsidy, which includes the `1.16 lakh crore bill for the current fiscal’s food subsidy bill and the rest `3.07 lakh crore are earlier years’ dues.

Fourthly, the non-tax revenue at `2.11 lakh crore was `1.74 lakh crore

Finance Minister Nirmala Sitharaman had promised her third Union Budget would be a “never-before” one.

Living up to the promise, the budget was immediately dubbed revolution-ary and a dream one, akin to the one presented by Manmohan Singh during liberalization and Yashwant Sinha in the early 2000s.

Acknowledging the extraordinary times, the Finance Minister diverged from the path of fiscal prudence to give an unprecedented stimulus with a thrust on heavy capital spending that would put the country on a growth highway.

However, doubts have since been raised whether the expenditure and income figures live up to the promise. Even Subramanian Swamy, BJP MP, fired a salvo.

“FM knowing or unknowingly claimed falsely in Parliament that Budget outlay for Health and Family Welfare had been increased 137%! She added the allocation for another Ministry for Drinking Water! Minus that Health & Family Welfare allocation has barely been increased,” Swamy tweeted recently.

So, what does the dive in numbers say? FISCAL DEFICIT

Raising eyebrows, the fiscal deficit hit 9.5% of GDP in 2020-21, its highest level in five decades. In


last financial year, but much of it was already accounted for in BE.

So while the government claims that it made a huge expenditure, the actual figures are just a tad above what was estimated for. EXPENDITURE IN THE NEXT FISCAL The government’s total expenditure is estimated to drastically fall to 1% in 2021-22.

Though the government is not spending more in 2021-22, the silver lining is that it is allocating more for capex.

The cuts will largely be borne by the social sector with spending on health, education, and rural development ministries falling in the next fiscal compared to the last five fiscals. CAPITAL EXPENDITURE The government is expected to make a capital expenditure of `4.39 lakh crore in 2020-21, which is 30.7% more than it spent in fiscal 2019-20. In the budget presented in February ’20, the minister has estimated a spend of `4.12 lakh crore, or around 22.6% more over the spend in 2019-20.

Interestingly, when the budget was presented in February ’20, there was no pandemic, and stimulus spending was not accounted for in BE. Compared to the BE figure of `4.12 lakh crore, the actual increase in capital expenditure to `4.39 lakh crore, as recorded in the RE, has been a less impressive 6.6%.

In the next fiscal, 2021-22, the FM has projected the capital expenditure to grow 34.5% to `5.54 lakh crore in 2021-22 in comparison with the budgeted expenditure of `4.12 lakh

crore in 2020-21. However, if compared with the revised estimates, or actual spending for the current fiscal, there is less gloss as it would grow by 26%.

The capex picture is again not so rosy when it comes to total capital expenditure, which includes budget plus internal and extra budgeted resources that includes capex by central public sector enterprises and Indian Railways.

Compared to the total capital expenditure of `9.77 lakh crore in 2019-20, the government in 2020-21 actually spent `10,84,651 crore, or around 11% more. However, in February ’20 it had budgeted for `10,84,748 crore. So, the govern-ment has actually spent less than what it has accounted for.

The government plans to spend `11.37 lakh crore towards total capital expenditure next fiscal, about 4.8% more than the spend in 2020-21. However, it is still less than the 14.4% expected rise in the nominal gross domestic product in 2021-22. SO WHERE DID THE GOVERN-MENT SPEND The government spent hugely on Mahatma Gandhi National Rural Employment Guarantee Scheme as part of Covid relief in 2020-21. But the proposed spending on it in 2021-2022 is marginally higher in nominal terms.

Though the spending on health increased 29% in 2020-21, it will see an 11% cut in the next fiscal as much of the allocation for health has gone to the Jal Shakti ministry.

The government has also raised its outlay sharply on the ministries of micro, small, and medium enterprises

and agriculture.

The spend on education is expected to drop sharply in fiscal 2022 compared to the last few years.

Defence spending would fall, mainly because of the fall in pension payments. The share of interest payments in overall spending is expected to remain largely the same despite rising debt levels.

Transfers to states are estimated to rise to their highest levels in several years in 2020-21 and stay higher in the next fiscal too.

Despite the big-spending talk, the finance ministry’s overall stance has remained conservative. INTEREST PAYMENTS Interest payments have been going up over the years and are expected to be at around `8.1 lakh crore in 2021-22. Interest payments are expected to be 51.5% and 52.4% of tax revenues in 2020-21 and 2021- 22, respectively, which means that more than half of the government’s taxes are going towards paying interest on its outstanding loans.

The disinvestment target for 2021-22 has been set at `1.75 lakh crore, which is very crucial as else the government will have to borrow more to meet the expenditure. TAX REVENUES The revised estimates peg this year’s gross taxes at a conservative figure of 9.9% of the GDP. For that to happen, taxes, net of excise, will need to contract 20% in the bygone quarter; instead, they have grown by 25%, and will likely end up 0.5% of GDP this year.

This is in contrast to earlier years

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CD-SL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX Member ID -0362 /ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Repository Ltd: 12013300 Nirmal Bang Securities Private Limited CIN: U99999MH1997PTC110659; Nirmal

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when they were over-budgeted. On a low base of 2020-21, taxes are likely to exceed budgeted levels in 2021-22.

The post-pandemic hike in fuel taxes is expected to cushion the fall in other sources of revenues this year, with the share of fuel taxes in revenues rising to their highest level in two decades. THE HOPE The budget has put a big thrust on infrastructure spending as it aims to

grow the capex from 1.6% of GDP pre-Covid to 2.5% in two years. With India’s investment-to-GDP ratio falling by 5 percentage points over the last decade and private sector manufacturing utilization rates at sub-70% for a long time, it is for the public sector to do the heavy lifting.

The government is paying for the capex push through disinvestment and privatization. It is looking to divest non-core public sector assets and replace them with physical and social infrastructure. If the execution is right, it may not turn out to be

selling family but swapping dud assets for productive ones.

The FM, by bringing FCI liabilities back in the budget, has made a move towards conservative and transparent fiscal accounting.

By doing away with the practice of budgeting for higher revenues and higher expenditure, the FM has chosen conservatism that will create a buffer if crude prices continue to rise. Also, the credibility of account-ing will bring down bond yields and the cost of capitaL.

BEYOND THINKING

LENDINGSUPPORT

By keeping key policy rates unchanged, the RBI is ensuring ample liquidity for the markets to

bounce back and recover from the pandemic



MPC’s growth estimates are in sync with the government’s expectations. The Economic Survey has estimated nominal GDP growth of 15.4% in FY22 and real GDP growth of 11%, while the Union Budget for 2021-22 has projected a nominal GDP growth of 14.4% in FY22 (BE). The IMF has projected India’s economy to contract by 8% in FY21 and grow by 11.5% in FY22. Clearly, the outlook on economic recovery too is optimistic. NEGATIVE REACTION While the inflation outlook is soft and economic growth is likely to see a revival in the next fiscal year, financial markets, especially bond markets, were not enthused by MPCs verdict of keeping policy rates unchanged. The yields on govern-ment bonds spiked (meaning the bond prices fell) after the monetary policy announcement. The markets were eyeing encourag-ing announcements from the RBI in helping revive the economy. Also, since the government announced a higher borrowing for the current fiscal year and for the next fiscal year, any indication on the borrowing calendar was highly anticipated. In the Union Budget, the government announced a higher government borrowing of `80,000 crore for the current fiscal year to `13.5 trillion (fiscal deficit at 9.5% of GDP). For FY22, the government has fixed the fiscal deficit at 6.8% and gross borrowing has been pegged at `12 trillion. Lack of any definite statement on yield management by the RBI had a bearing on government bonds. Bond markets were also worried about liquidity in the financial system. To address this, the RBI has announced a few measures.

meeting of the fiscal year 2020-21, the meet was widely watched out for as the government had presented the Union Budget for fiscal year 2021-22 just a few days prior to this announcement. INFLATION OUTLOOK Retail inflation for December stood at 4.59%, well within the upper band of the MPC mandate. Barring the month of December, retail inflation has stayed above 6% in the current fiscal year. Now, the MPC expects retail inflation for the January-March quarter of FY22 to be at 5.2%, against the earlier estimate of 5.8%. Softening of the retail inflation is mostly on the back of lower food inflation and easing of supply chains. For the first half of next fiscal year (April-September), inflation is expected to be in the range of 5% to 5.2%, marginally higher than 5.2% to 4.6% predicted by the MPC in its December ‘20 policy. For the subsequent October-December quarter, retail inflation is pegged at 4.3%. Clearly, the inflation outlook is benign, supporting MPC’s accommo-dative stance. ECONOMIC GROWTH PROJECTION The MPC has retained its gross domestic product outlook at a negative 7.5% for the full fiscal year 2020-21. For the next fiscal year, the RBI has pegged the growth at 10.5%.

MPC’s positive economic growth outlook is based on expectations of resilient rural demand, going forward, improving urban demand with fall in Covid cases and the spread of vaccination, and on government’s supportive measures announced in the Union Budget.

The Reserve Bank of India’s six-mem-ber monetary policy committee left policy interest rates unchanged in its February meet. All members of the MPC decided unanimously on this. Importantly, the MPC has maintained its ‘accommodative’ stance, implying that interest rates are not likely to rise in the near future. It is the mandate of the MPC to keep inflation measured by consumer price index (retail inflation) at 4% with a tolerance level of two percentage points on either side. To achieve this, the MPC uses the repurchase rate (Repo) as a tool and tweaks it when needed. Repo rate is the rate at which banks borrow from the RBI in times of liquidity crunch. This repo rate acts as a benchmark and influences other interest rates in the economy like banks’ lending and savings interest rates, corporate bonds, government bonds, etc. Thus, by tweaking the repo rate, the RBI ensures a stable interest rate environment in the financial system. Currently, the MPC has left the Repo rate unchanged at 4%. Retail inflation has been projected to soften, going forward, while economic growth is expected to revive in the next fiscal year 2021-22. The RBI has also announced other regulatory measures to ensure that sufficient liquidity is available in the system. Being the last monetary policy


OTHER MEASURES Restoration Of Cash Reserve RatioCRR or Cash Reserve Ratio is the amount of money that commercial banks have to mandatorily keep with the RBI in proportion to the deposits they take from the public. Banks get no interest on CRR. Because of the Covid-19 pandemic, the RBI had earlier lowered the CRR by 100 basis points to 3%. Now, the RBI wants to restore CRR back to 4%. But this will happen in two phases: first on 27th Mar ’21, the CRR will change to 3.5% and revert to 4% on 22nd May ’21. The move will suck out liquidity from the system, pushing interest rates higher in the near term. Relaxation Of Marginal Standing Facility BorrowingsIn order to ensure that commercial banks have enough liquidity, the RBI had earlier announced a special window called MSF where banks could borrow from the central bank. This window was only till March ’21. Now, this facility has been extended till 30th Sept ’21. This will ensure liquidity in the system. Government Bonds Accounts For Retail InvestorsThe RBI has also announced that retail investors will have online access while investing in government bonds. The facility will enable retail investors to open a government bond securities account with the RBI directly. Very few economies like the

US and Brazil have experimented with such an idea. Retail investors will be able to participate in both primary and secondary markets. Details on the schemes are yet to be made public by the RBI. Increased Limits For Banks On Statutory Liquidity Ratio Holdings In The HTM CategorySLR is a portion of banks’ deposits, which must be invested in RBI-man-dated avenues like cash, gold or bonds. Currently, the SLR is 18%. SLR ensures buyers for government bonds for its borrowing programme. The banking system’s current bond holding is at 30% of its assets against the SLR requirement of 18%. Further, these investments are classified as Held To Maturity (HTM) (bonds to be held till maturity), Available For Sale (AFS) (bonds to be sold before reaching maturity) and Held For Trading (HFT) (bonds bought for trading and making short-term gains). Banks have to value bonds periodi-cally and book losses if bond yield rises. So, more the securities held in the HTM basket, less volatile will be the bank’s balance sheet. Last year, the RBI increased the limit of SLR holdings in the HTM category from 19.5% to 22%, and was available till 31st Mar ’22 for securities acquired on or after 1st Sept ’20 to 31st Mar ’21. Now, this limit has been extended till 31st Mar ’23 for securities acquired between

1st Apr ’21 to 31st Mar ’22. The move will shield the bank’s balance sheet from the vagaries of the bond market and also ensure banks’ participation in government borrow-ing programmes. On Tap Targeted Long-Term Repo Operations Scheme Extended For NBFCsOn tap TLTRO were introduced by the RBI in March last year as a tool to enhance liquidity in the system in the wake of the Covid-19 crisis.

The LTRO lets banks borrow one- to three-year funds from the RBI at the Repo rate. It is called targeted as the money so borrowed must be invested in corporate bonds, commercial papers, and non-convertible deben-tures or for providing direct loans to specific sectors.

The RBI has come out with many tranches of TLTROs. Now, the scheme has been extended to NBFCs, which have been recently plagued by a liquidity crunch. IN A NUTSHELL The monetary policy for the next fiscal year will be highly contingent on the way inflation shapes up, going forward. While India is witnessing a bumper crop and supply chains have normalized, the jump in crude oil prices will be a risk. But given the impact of the Covid-19 pandemic on the economy, the MPC will continue to focus on growth recovery and keep policy rates loweR.

Repo Rate Reverse Repo RateMSF CRRSLR

Key Policy Rates

Feb'20 5.154.95.4

418.25

Mar'20 4.4

44.65

418.25

May'20 4

3.754.25

318

Aug'204

3.354.25

318

Oct'204

3.354.25

318

Dec'20 4

3.354.25

318

Feb’214

3.354.25

3*18

Source: RBI | *3.5% from March 27, 2021 and 4% from May 22, 2021

BEYOND THINKING

A film-maker in an interview once said, “If a film’s budget is small, it is art. And if a film’s budget is big, it becomes science.” The idea behind this is that when stakes are high, the focus shifts to reason and purpose from creative and wishful indulgence.

This is what has transpired in the past one year in India’s stock markets. Foreign Institutional Investors (FIIs) have been on a

indicate that all is not gloomy for strategic foreign investors. One of the most obvious crises the world is presently facing is the onslaught of coronavirus. According to the Union Health Ministry’s reports, the number of cases due to the coronavirus disease (Covid-19) in India stood at 10,880,603 earlier this month. This is not as high as the global tally of over 107 million, as per the Johns Hopkins University tracker, which also shows that the global death toll due to the disease stands at over 2.36 million.

Besides, India is implementing the world’s largest vaccination drive against Covid-19. According to the Union Health Ministry’s latest figures, more than 7.5 million healthcare and frontline workers

buying spree while Domestic Institutional Investors (DIIs) have been selling. So, how does one understand this trend? Here is the low-down on this: For foreign institutional investors or, simply put, foreign investors, who invest in a large basket of markets spread across countries, a key factor that convinces them to increase their investments in a particular market is the ability of that market to deal with crises.

This becomes even more significant if the crisis is global in nature. FIIs,with an exposure to the most important markets, have no prefer-ences. They function more on science than on emotions and sentiments. In the past one year, there are developments in India, which

RENEWEDINTEREST

India’s economic recovery indicates

growing interest among FIIs-DIIs



THE GDP STORY India’s Gross Domestic Product (GDP) has also shown strong resilience. India’s GDP dipped a historic 23.9% in the first quarter (Q1) of 2020. The contraction narrowed down to 7.5% in the second quarter (Q2).

According to PHD Chamber of Commerce and Industry (PHDCCI), India’s GDP is expected to record positive growth in the third and fourth quarters of 2020-21.

The expectation of positive GDP growth is based on various reforms undertaken by the government in the last 10 months along with a demand-boosting and investment-in-ducing budget, it said.

According to PHDCCI, nine out of 10 indicators of Quick Economic Trends (QET) of economic and business activity tracked by the agency have performed positive.

On the back of various reforms undertaken by the government in the last 10 months along with a demand-boosting and investment-in-ducing budget, expectations of a positive GDP growth in Q3 and in Q4 FY20-21 are becoming strong, PHDCCI said.

The industry body pointed out that economic and business indicators such as unemployment rate, stock market, GST collections, manufac-turing PMI, Forex reserves, railway freight, merchandise exports, exchange rate and passenger vehicle sales have shown positive sequential growth in January as compared with December ’20.

These indicators show promise of potential recovery and subsequent strong growth in India’s economy in the coming quarters. Given these

the implementation of GST. The increase in collections indicates that the economy is in a recovery mode.

This is despite the stringent lockdown in the past one year. Furthermore, this is the straight third month in the present fiscal when GST collections have crossed the `1 lakh crore-mark. IPO MARKET During December ’20, the listing of two Initial Public Offerings (IPOs) aggregating `1,351 crore, took the total resource mobilisation through main board IPOs to `15,971 crore during 2020-21 (up to December ’20), marking a sharp rebound from `10,487 crore in the corresponding period of the previous year.

Beginning with the first IPO that was issued in July ’20, healthcare and finance sector companies have garnered maximum amount of resources among all initial offerings. IMPORT-EXPORT After contracting for nine consecutive months, merchandise imports grew 7.6% on a year-on-year (y-o-y) comparison in December last year. Gold, electronic goods and vegetable oils contributed to this growth.

Apart from this, imports of pearls and precious stones, machinery, electronic goods and textiles increased meaningfully. This reflected the revival of domestic activity.

Also, with regards to exports, India’s merchandise exports reached pre-Covid levels in December ’20. Non-oil exports grew by 5.6% in December on a y-o-y basis. This will be the fourth consecutive month of positive growth in non-oil exports.

have been inoculated against the disease.

In the first phase of the drive, which commenced on 16th January, India aimed to vaccinate 30 million workers, who are scheduled to receive their second shot of the vaccine from 13th February onwards. Covishield and Covaxin - the two anti-Covid-19 vaccines - are being used in the country.

To a certain extent, given India’s population and its infrastructure, these developments do not paint any alarming picture for India’s economy. Additionally, the commentary on the recovery of the Indian economy is also positive. This is quite evident in the observations of India’s central bank, the Reserve Bank of India (RBI) in its recent report.

Let us understand these observations in some detail. The reason is that these observations will give us a clear idea as to why FIIs have been on a buying spree in India.

Here are a few important observa-tions of the RBI: INDUSTRIAL ACTIVITY Industrial activity is one of the important variables, which has improved meaningfully. The headline Purchasing Managers’ Index (PMI) manufacturing expanded in Decem-ber ’20 to 56.4, higher than Novem-ber’s reading of 56.3. Analysts point out that new orders and production have begun growing strongly in the past few months. GST COLLECTIONS India’s gross Goods and Services Tax (GST) collections touched a new high of over `1.15 lakh crore in December. This is the highest since


factors, it is no wonder that FIIs have invested considerably than DIIs.

In the past one year, since March, FIIs have bought in `19,7114.2 crore worth of Indian shares. In the same period, DIIs have sold `72,501.4 crore worth of Indian shares. Among key sectors, private banks, consumer, FMCG and IT have seen foreign flows as Indian companies have exhibited resilience and demonstrat-ed growth post the lifting of lockdown restrictions in the Decem-ber ’20 quarter. Besides, timely government reforms to instil confidence among corpora-tions have also played a crucial role in improving the outlook of FIIs regarding the Indian markets. Among emerging markets, India’s position has strengthened considerably.

In December last year, India jumped 14 positions to be ranked 63rd among 190 countries in the World Bank’s ease of doing business 2020 survey. Following reviews of data irregularities, the World Bank in its Doing Business survey downgraded China. This has worked in favour of

India. In a report by Dr S P Sharma, Chief Economist, PHD Chamber of Commerce and Industry, there are four parameters India scores well on. These are: STARTING A BUSINESS India made starting of a business easier by abolishing filing fees for the SPICe company incorporation form, electronic memorandum of association, and articles of associa-tion. This reform applies to both Delhi and Mumbai. CONSTRUCTION PERMITS India (Delhi) streamlined the process, reduced the time and cost of obtaining construction permits, and improved building quality control by strengthening professional certifica-tion requirements.

India (Mumbai) streamlined the process of obtaining a building permit and made it faster and less expensive to get a construction permit.

TRADING ACROSS BORDERS India made trading across borders easier by enabling post-clearance audits, integrating trade stakeholders in a single electronic platform, upgrading port infrastructures, and enhancing the electronic submission of documents. This reform applies to both Delhi and Mumbai. RESOLVING INSOLVENCY India made resolving insolvency easier by promoting reorganization proceedings in practice. India also made resolving insolvency more difficult by not allowing dissenting creditors to receive as much under reorganization as they would receive in liquidation. This reform applies to both Delhi and Mumbai. Given these factors, it is expected that FIIs’ interest in India will sustain for at least one year as India’s economy opens up fully in the coming quarters. A key aspect to note is the selling of DIIs, which is the result of profit-booking by investors since the markets are trading at new peakS.

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By allowing retail investors online access to G-Secs, the RBI aims to encourage

retail investment through financialization of domestic savings

BEYOND THINKING

BROADENINGINVESTOR BASE



government securities. This can be done by using a demat account and the NSE GoBid app.

The bids are non-competitive in nature, which means that the investor cannot specify the price at which he/she wants to bid for the govern-ment securities. The price discovered by other institutional investors is binding on the individual investor.

There is a separate ‘retail segment’ on the stock exchange already functional on which government securities can trade in the demat form. The RBI had also allowed retail investors to bid for State Development Loans (bonds issued by state governments in India) in June ’19. The immediate question that needs examination is: What is new, this time? This time the RBI is talking about allowing online access to both the primary and secondary market through the RBI itself. That stokes the moot question – Why did the RBI have to do that? The RBI is taking this path because all the efforts made so far have not borne desired results. Though the RBI has allowed government securities in demat account and retail segment on stock exchanges, there is almost no liquidity. The government securities market - the wholesale one - is a game played by giant investors.

Retail investors have no say in this market where the ticket size is pegged at `5 crore. Barring a few government bonds most of the bonds are illiquid and one needs a Constitu-ent Subsidiary General Ledger (CSGL) account to hold government securities to access that market.

The CSGL account is akin to a demat account that holds government securities and lets investors trade on

of the government borrowing programme in 2021-22, added Das.

Let us understand this new develop-ment in detail: The RBI expects retail borrowers to play a crucial role in the govern-ments’ plan of action. There are statistics which explain why individual investors are being invited into Government Securities (G-sec) markets.

One has to understand this in the context of the fact that the govern-ment has made it clear that it won’t shy away from spending more on capital expenditures to revive the economy.

The government has set the fiscal deficit target at 6.8% for FY21-22. This is way above market expecta-tions. When the government opts for high fiscal deficit – a situation wherein its expenses far exceed receipts, the market remains watchful of government borrowings, which is a means to fund fiscal deficit.

The government has fixed the borrowing number at `12.06 trillion compared to an expectation of `10 trillion. Though the Reserve Bank of India will do its level best to source as much money as it can by incentiv-izing large institutional investors, it cannot afford to rely on them fully. Hence, retail investors are also invited to the party – they term it broad-basing investor base. Though the idea is termed path-breaking by many industry observers, it is not new. The RBI and other stakeholders have taken multiple steps in this direction for a few years.

Individual investors can participate in non-competitive bidding when the RBI announces the auction of

The first monetary policy review of 2021 saw Reserve Bank of India walking a tightrope. On the one hand it announced the continuation of its soft money policy and on the other hand, it offered unconditional support to the expansionary fiscal policy.

For beginners, when the government - the largest borrower in the economy - decides to spend beyond its means, the cost of borrowing (or interest rate) goes up.

The central banker to the nation – RBI - has to manage the govern-ment’s borrowing programme and at the same time keep interest rates in the economy low. This is called an accommodative stance in industry parlance.

This is an uphill task and the RBI has left no stone unturned. While the RBI has been planning meticulously to achieve this feat with all available ammunition in its arsenal, it is also exploring new means. One such option is allowing retail investors online access to invest in government securities in both primary and secondary markets through the RBI.

RBI Governor Shaktikanta Das termed it a major structural reform, placing India among select few countries, which have similar facilities. This measure together with Held to Maturity (HTM) relaxation will facilitate smoother completion


BEYOND WORDSMonetarism

In simple terms, monetarism, a macroeconomic school of thought, refers to the role governments play in controlling the amount of money (in the form of coin, currency and bank deposits) in circulation. The concept of monetarism was first formulated by American economist Milton Friedman wherein he argues that excessive expansion of money supply is inherently inflationary, and that monetary authorities should focus solely on maintaining price stability.

Proponents of monetarism strongly believe that velocity (V) is constant and changes according to money supply (M). It is the sole determinant of economic growth, much against the views of Keynesian economists. Furthermore, many are of the opinion that monetarism is based on the belief that inflation has its roots in government printing too much money.

Negotiated Dealing System - Order Matching (NDS-OM). Even if you choose to convert your demat securities to CSGL format securities, there is no assurance that they will be sold at fair value.

Investors who buy government securities through the NSE Go-Bid format should be mentally prepared to hold it till maturity. Hence, there are not many takers for government securities. The Reserve Bank of India has realized that this is a major problem in attracting individual investors. Hence, the RBI is now talking about – Retail Direct. It is expected to announce some framework for individual investors to ensure that they get to participate in the govern-ment securities market more meaningfully.

Soon, we may see the RBI allowing online access to NDS-OM. It may further allow automatic conversion from demat to CSGL format (and the other way round). As of now it attracts costs and takes around 10 days.

Investors - especially high net-worth individuals - find the aforementioned idea of non-competitive bidding unattractive. It will be interesting if

the RBI allows even small investors to specify the price at which they would like to bid. The new system of facilitating retail participation will be a success if and only if the RBI ensures liquidity for retail investors. The RBI has to do much more than just create a retail segment.

There is a need for market-making wherein an institutional entity gives two-way quotes to retail investors. This will boost the confidence of retail investors as they can see a buyer for the securities they hold.

The RBI has to show how serious it is about this. For example, the RBI conducts Open Market Operations (OMO) from time to time. In it, the RBI purchases outstanding bonds from market participants by inviting offers from them.

It should also allow individual investors in these OMOs. When the RBI talks about structural reforms, investors can expect the aforesaid operational steps in the near future. These will help create a level playing field for individual investors in the medium term. But structural reforms call for more. A look at other government backed

investments - be it small saving schemes like Public Provident Fund, Sukanya Samriddhi Yojana, National Saving Certificate or even Postal Deposits - the rate of interest offered are higher than government bonds of similar tenure.

Non-Convertible Debentures offered by central Public Sector Undertak-ings offer higher rates of interest than government securities. As long as these options keep offering higher returns with similar credit risks, government bonds may take time to take off in the investment portfolios of retail investors.

Though the government has already announced linking the rate of return on Small Saving Schemes to market-determined interest rates, there is not much progress. These schemes are more of political tools than means of financing for the government.

Linking rates on these schemes to the market-determined rate of interest will bring them down. This is a difficult call. If the government does not walk on the path of reforms, then there will not be many takers for government securities. This is despite the fact that the RBI may be aiming to bring in individual investors into the government bonds markeT.

BEYOND THINKING

The recently concluded Union Budget 2021 had a series of announcements on the infrastructure sector in India.

It is common knowledge that infrastructure is the backbone of any economy as it employs a large

by them during the previous cycle.

As the positive business sentiment returns, greater interest and pick-up in private participation in the infrastructure is likely to be seen. We might also see high interest from global pension funds, sovereign funds, infra funds or strategic investors in acquiring some of the stressed infrastructure assets. All these factors will lead to an overall revival in the Indian economy. The infrastructure sector has gone through its challenges and to succeed in the stock market, stock selection is

number of people and creates scores of jobs directly and/or indirectly. Infrastructure is a highly capital-in-tensive segment. A positive business cycle is important for its healthy performance. Typically, factors such as cost-efficient finance coupled with supportive government policies and capital investment by private players are required for higher growth of the economy. Over the years, the infrastructure cycle has largely been led by the government as the private sector is yet to recover from the issues faced

FORTIFIED Increased budgetary allocation towards the sector has made infrastructure funds quite attractive from an investment perspective



indirectly associated with the infrastructure sector. Such long-term performance also influenced the 3-year and 5-year returns as well, leading to poor performance over their respective benchmarks.

Even the short-term performance of infrastructure funds was very poor. In the five-year and three-year period, these funds have given returns of 12.69% and 2.76%, respectively. However, they have managed to give returns of 22% in the last one year. But in recent months, the infra sector has started delivering returns. In the last three months, infrastructure funds have on an average given 31% returns.

Earlier, the operating environment of India’s construction industry was immensely challenging, with major infrastructure projects commonly incurring delays and cost overruns. Private sector investments have been unable to offer what was required as the companies needed to address their own highly leveraged positions.

But now the government has proposed an allocation of `5.54 lakh crore towards capital expenditure this year, which is 34.5% more than the previous budget’s allocation. In this year’s allocation, there has been a major emphasis on roads and highway infrastructure, along with railways. This includes increased demand for construction equipment, steel and cement, job creation, and more. The development of road infrastructure leads to better connectivity, which, in turn, boosts economic activity and spurs economic growth.

All these factors can lead to

amend relevant legislations. This will further ease access of finance to InvITs and REITs, thus, augmenting funds for infrastructure and real estate sectors. The budget has given the necessary boost to infrastructure development, which could reduce trade and transaction costs and improve factor productivity. Moreover, the focus on roads and railways will create an integrated market in India for smoother movement of goods and human resources.

Following in the footsteps of Delhi, the budget has given emphasis to the development of metro rails through the Public-Private Partnership (PPP) model in different parts of the country. It mentioned that a total of 702 km of conventional metro is operational and another 1,016 km of metro and RRTS are under construc-tion in 27 cities. IMPACT ON THE MUTUAL FUND INDUSTRY

Indian mutual funds had launched a series of funds in the pre-global financial crisis era. Between 2004 and 2007, the infrastructure sector was booming; fund houses rushed to launch infrastructure funds. But as markets corrected due to the crisis, investors who had bought these funds suffered losses. The condition of infrastructure remained fragile for the next few years. In the last 10 years, on an average, infrastructure funds have delivered returns of just 8.4%, much lower than other categories of equity funds.

The situation was so bad that many fund houses merged their infrastruc-ture-based funds with other schemes while others diversified their portfolios with stocks that were

the key. Announcements of various infrastructure projects also impacted this sector after the budget was presented. But investors that have invested in infrastructure funds will heave a sigh of relief. STEPS ANNOUNCED IN THE BUDGET

This year’s budget has lived up to expectations, both in terms of allocation towards infra-spend as well as steps to reform the sector.

The budget has given equal impor-tance to all physical infrastructure including roads and highways, railways, power, ports, shipping and airways, and petroleum and natural gas.

The government has allocated `20,000 crore to set up and capitalize a Development Financial Institution (DFI), which will act as a provider, enabler and catalyst for infrastructure financing. Also, `5 lakh crore lending portfolio will be created under the proposed DFI in three years. The budget has allocated `1,18,101 crore, the highest ever outlay for the Ministry of Road Transport and Highways. Of this, `1,08,230 crore will go towards capital expenditure.

A large amount of money has been earmarked for ongoing and new economic expressways. And `1,10,055 crore has been allocated to Railways out of which `1,07,100 crore is for capital expenditure with a promise to complete 100% electrifi-cation of broad gauge routes by December ’23. To further improve debt financing of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) by foreign portfolio investors, the government plans to

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sustained rally in infrastructure stocks in the years to come. WHAT CAN INVESTORS DO

Not only infrastructure funds but also other thematic funds are concentrated in nature and can be highly volatile. Though many may remain optimistic about the infrastructure sector,

several factors determine the pace of infrastructural development in any country.

Data shows that even the long-term performance of infra funds has been poor and such funds fall short of their more diversified peers.

It is possible to look at other

diversified equity funds for long-term growth.

However, if investors feel that the infrastructure sector has a long-term ‘story’, then they should allocate 5% to 10% of the amount towards such schemes by investing in mutual funds through Systematic Investment PlanS.

GameStop’s meteoric rise and fall is a contradiction between stock price and business fundamentals

BEYOND THINKING

CLOUDY PROSPECTS



shares to cover their losing bids.

There are millions of amateur traders collectively challenging the profes-sional and sophisticated might of Wall Street’s investors.

The surging shares of GameStop have emerged as a part of market frenzy that appears to have originated from a Reddit group named WallStreetBets, which is a communi-ty known for irreverent market discussions.

As a result of the messages that floated on this group, most traders rushed to buy options contracts that profited them from the rise in the share price, creating a feedback loop, further driving share prices higher. The brokerage firms selling these options had to buy shares as a hedge.

As more and more investors began buying options, the brokers were forced to buy more shares, thus generating demand for GameStop stocks and driving the company’s stock prices higher.

On the other side of the trade, big Wall Street investors, who were expecting a decline in the stock prices of GameStop by taking short positions, were forced to buy more shares to cover the open position or deal with the mark to market losses generated because of the short positions.

One of the data points suggested that at one point in time the short interest in its stock was exceeding the number of shares outstanding.

A huge amount of short position was created, which was later forced to unwind. The investors were effectively buying stocks to cut their losses and that itself generated a huge demand or panic buying. This caused a sudden spike in the share

downtrend caused by the pandemic.

The company lost almost $300 million through the 39 weeks in October ’20 and isn’t expected to turn profits until 2023. As mentioned by the firm in its 2019 annual report, the reason for its downfall is the massive shift in the gaming industry to the online space.

The annual report also mentioned changes in consumer preferences with teenagers today unwilling to buy physical video games and consoles as they are already available over the internet and can be down-loaded at a click without any delay.

Despite the downfall, GameStop, which was worth $300 million in August ’20, rose to a market capitalization of almost $34 billion by the end of January this year, hitting an all-time high of $483 a share as against the 52-week low of $2.57 per share.

WHAT IS HAPPENING WITH THE GAMESTOP STOCK

The rally in GameStop began in August after Chewy’s former co-founder Ryan Cohen bought a 9% stake in the company and later upped it to nearly 13%. Recently, Cohen struck a deal to take three people on to GameStop’s board of directors. Investors believed that Cohen would bring digital experience to the table, and the stocks began to surge.

However, the sudden surge in GameStop’s stock has a two-fold reason, both of which are far from the truth that the firm has strong fundamentals.

The first reason is that investors following the Reddit Group WallStreetBets bought in tons of GameStop options. And the second reason is that short-sellers bought

The Texas-based game retailer GameStop was up by more than 3000% in just a few months. No sooner did the video game retailer rise, than the stock crashed à la Tulip Mania.

GameStop is one of the few stock bubbles, which will be remembered in the history of stock markets as a significant investment event for showing us how emotions, liquidity, and an act of irrationality by investors can create a crash of this magnitude.

Let’s take a deep dive into the highs and lows of GameStop, the struggling video game retailer, and the possible lessons for investors. THE BACKGROUND

The recent coronavirus pandemic hit GameStop adversely. For the clueless, GameStop Corporation (GME) is a struggling, mid-sized retailer that follows the traditional brick-and-mortar business model to sell physical video games.

A few months back, GameStop was moving in the wrong direction and had planned to shut down 450 stores after being severely hit by the pandemic.

In 2016, the physical video game retailer posted $9.4 billion in revenue. However, its sales went on declining to $8.3 billion in 2019 and fell off drastically to $6.5 billion in 2020, fuelled by the economic


BEYOND WORDSIrving Fisher

Irving Fisher was an American economist, statistician, inventor, eugenicist and progressive social campaigner. He is regarded as one of the earliest American neoclassical economists. However, his later work on debt deflation has been embraced by the post-Keynesian school. Fisher was also a pioneer of econometrics, including the development of index numbers. Fisher equation, the Fisher hypothesis, the international Fisher effect, the Fisher separation theorem and Fisher market are some of the concepts that have been named after Irving Fisher. He is renowned for his work in the area of capital theory. He has also contributed to the development of modern monetary theory. Fisher defined capital as any asset that produces a flow of income over time and showed that its value can be based on the present value of the net income generated by that asset. This is still the way economists view capital and income at present.

value and market capitalization of GameStop, causing it to touch nearly $34 billion.

WHAT IS A SHORT SQUEEZE

Short sellers expect a stock’s prices to fall. A sudden demand for the stock among investors forces short sellers to buy shares to cover their losses or pessimistic bets. When an enormous number of shares are sold short, it is known as a short squeeze.

The gradual unwinding of the short positions kept constant demand and prices of GameStop shares artificial-ly higher.

How Will All This End For Retail Investors As Well As Hedge Funds

Melvin Capital Management, a popular hedge fund, held short positions, expecting stocks of GME to fall and benefit from such a drop by selling the scrip without actually owning it.

In the latest move, high profile short sellers of GME stocks including Melvin Capital and Citron announced that they had recovered most or all of their positions.

The entire scenario is nothing but a stock market bubble. In simple terms, a stock market bubble is an

economic bubble in the stock market when market participants drive the stock’s prices above its value.

When a stock market bubble bursts, it brings tears and losses to short-term investors. The life inside the bubble is pleasant for both hedge funds and retail investors until someone pricks it.

This is the reason why quality shareholders stick to fundamentals when a stock market bubble is far away from fundamentals. Thus, it was clear that the stock bubble that was created by a sudden surge in GameStop’s stock prices, when over, left both retail investors and hedge funds in trouble by causing huge losses.

WHAT LESSONS CAN BE LEARNED

It is rightly said that challenging times bring the best lessons. And the market frenzy is the perfect example of the same.

The current scenario has taught us a few important lessons. Some of them are: • Always try to have a long-term investment approach • Invest in stocks with strong fundamentals • A stock/ asset bubble like this

generates more market losers than winners • Do not rely on stock tips/ rumours. Instead, do your homework well • When in doubt, stay out • It is better to avoid investing in meme stocks like GameStop • The stocks can fall drastically in seconds or minutes. And, hence, is not a good investment option for beginner traders • Never invest an amount, which you can’t afford to lose. Hence, it is better to be cautious than being greedy GME fell to the current level of $50.3 and now has a market capitali-zation of merely $3.5 billion. Many investors including the most intelligent and novices have lost huge sums of money by participating in the GameStop frenzy, also termed as the Tulip Mania of 2021.

Like any other stock market bubble of the past, emotions such as greed, fear of missing out on the rally, paying little attention to rational thinking and investing on the basis of rumours were a few of the common causes behind this crisis as well.

Remember what Warren Buffett has said: “Stay within your circle of competence because what wise people do in the beginning, fools do in the enD.”

BEYOND THINKING

Globally, insurance is one of the most capital-intensive businesses.

In the recently held Union Finance Budget, several steps were announced by the government, which will bring much-needed capital into the Indian insurance industry and increase the penetration of insurance in the country. Insurance regulator Insurance Regulatory and Development Authority of India (IRDAI) has taken various steps to improve the

premium to total population, also increased marginally from US $54 in 2018 to US $58 in 2019.

The life insurance industry in India has been on an upward trajectory. But given the country’s low insurance penetration, there exists a vast untapped opportunity for the insurance industry. Currently, insurance penetration is 3.76% of the Gross Domestic Product (GDP) as compared to the world average of around 7%. In this article we try to explain the recent announcements made by the government and its impact on the insurance industry in India. FDI IN INSURANCE FURTHER INCREASED TO 74%

The insurance sector in India has seen several reforms in the last few

penetration of insurance in the country, by way of announcements of several standard products.

But key budget announcements for the insurance industry include increase in foreign direct investments (FDI), initial public offering of Life Insurance Corporation of India (LIC) and privatization of one general insurance company.

All these announcements would increase penetration and revive life and non-life insurance sector in India. The penetration of insurance in India is low compared to other countries. Life insurance penetration in India, which is measured as a ratio of premium to gross domestic product (GDP), rose marginally from 2.74% in 2018 to 2.82% in 2019 while density, which is measured as ratio of

ADDING LIFETO INSURANCEWhile the introduction of 74% FDI is hoped to revive the insurance industry, a certain section is not happy about other announcements pertaining to the sector



for any of the previous years during the term of any of the policy. ULIPs offer policyholders both insurance as well as investment option. The amount of premium of an ULIP scheme is partly towards the insurance of the policyholder and partly towards the investment.

The investable portion of the premium is invested in equity, debt, money market or a mix of all based on the goals and risk appetite of the investor.

The deduction under section 80C is allowed for the investment made in ULIPs. An individual can claim a deduction for the investment made for himself, spouse or children and a Hindu Undivided Family (HUF) can claim a deduction for the investment made for any member of HUF.

Currently, section 10(10D) provides for exemption with respect to any sum received under ULIPs, including the sum allocated by way of bonus on such policy.

However, if the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured, then no exemption under this section would be allowed with respect to the sum received under the policy. But after the Budget announcement, restricting the exemption under section 10(10D) for payment of excess premium, the Finance Bill, 2021 has proposed to include some proviso to section 10(10D) that no exemption shall be available under this provision in respect of ULIPs issued on or after 1st Feb ’21 if the amount of premium payable for any of the previous years during the term of the policy exceeds `2.5 lakh. The government has stated that this

‘Indian-owned and controlled,’ a clear picture is available to global insurance players. Having said that, a lot will depend on the fine print of the conditions being proposed by the government. Once there is more clarity, it will have to be seen how many foreign investors will be willing to infuse capital without the ability to control the board.

Also, any conditionality and regulatory approvals attached to the payment of dividends to foreign investors may add another level of complexity.

The insurance industry feels that the IRDAI may also prescribe certain conditions to safeguard policyhold-ers’ money.

CHANGES IN UNIT-LINKED INSURANCE PLANS (ULIPS)

The surprising announcement came with regards to unit-linked insurance plans (ULIPs). The Finance Bill 2021 proposes to tax certain ULIPs and the relevant change in the taxation regime of ULIPs is proposed by withdrawing the exemption under section 10(10D) in respect of such plans and consequently, taxing them under section 112A of the Income Tax Act. In the Union Budget it was proposed that no exemption under section 10(10D) shall be available with respect to ULIPs issued on or after 1st Feb ’21 if the amount of premium payable for any of the previous year during the term of the policy exceeds `2.5 lakh.

Further, if the premium is payable by a person for more than one ULIP, the exemption shall be available only for those policies whose aggregate premium does not exceed `2.5 lakh,

years. In the recently held Union Budget, the government further hiked foreign direct investments (FDIs). The limit of foreign invest-ments in Indian insurers has been increased to 74% from 49%.

This move will lead to fresh capital for Indian insurers in both life as well as non-life industry. The budget also proposes to allow foreign ownership and control with safeguards.

“Under the new structure, the majority of directors on the board and key management persons would be resident Indians, with at least 50% of directors being independent directors, and specified percentage of profits being retained as general reserve,” Finance Minister Nirmala Sitharaman said in her budget speech.

Till 2015, foreign investment in the insurance sector was under the automatic route (that is, without government approval) and it was capped at 26%. In 2015, the govern-ment permitted Indian insurance companies to have up to 49% foreign investment, with the caveat that such companies remain ‘Indian-owned and controlled.’ This condition has been a limitation for several promi-nent global insurers from setting up business in India. FDI in insurance to 74%, which is proposed with safeguards, will possibly bring in more capital, and more importantly, fresh capital from companies, which have been waiting to enter India.

There were many players who wanted to increase their stake in their Indian joint ventures. Others had been waiting for more clarity on the FDI norms.

Now, with the announcements on



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move is to rationalize taxation of ULIPs and to provide parity; the non-exempt ULIPs shall be provided same concessional capital gains taxation regime as is available to mutual funds. This move would ensure that people will start investing in Equity-Linked Saving Schemes (ELSS) to save tax. INITIAL PUBLIC OFFERING OF LIC AND PRIVATIZATION OF ONE GENERAL INSURANCE COMPANY The government has estimated `1.75 lakh crore as receipts from disinvest-ments in the next financial year and everything will depend on how much they could raise by selling its stake in LIC.

Finance Minister Sitharaman has made it clear that the IPO of LIC would be launched in 2021-22. Even now we are yet to know the embedded value (EV) of LIC and other valuation parameters of the insurance behemoth.

However, it is believed that LIC is

worth `8 lakh crore to `11.5 lakh crore. This means that a 10% IPO could fetch the government Rs 80,000 crore to `1,10,000 crore.

Private valuation firm RBSA Advisors recently estimated LIC’s worth to be in the range of `9.9 lakh crore to `11.5 lakh crore. LIC has a lion’s share in India’s insurance business with close to 70% first-year life insurance premia fetched by it, largely due to the comfort of sovereign guarantee.

LIC shares its total surplus between policyholders and shareholders in the ratio of 95:5, irrespective of policy product mix. So, lower profits are shared with the shareholders.

In the case of private players, 100% of surplus generated from non-partic-ipating bonuses and 10% of surplus generated from participating business, are normally attributed to shareholders. The participating plan offers a baseline guarantee and pegs invest-ment returns from the profits that the

participating fund makes. The profits from the participating fund get distributed between the policyholder and the shareholder.

While in the non-participating plan, which comes with defined benefits or guaranteed returns, here, the benefits are defined upfront and so this fund pool doesn’t participate in profit-sharing.

Term policies or traditional plans where investment benefits are defined upfront are all non-partici-pating in nature and the insurer can pocket the entire profit after provi-sioning for the guarantees. Now, all eyes will be on the government on when it will declare the date of LIC’s IPO. On the other side, the government plans to privatize one more general insurance company. Currently, there are four public sector undertakings (PSUs) in India, with New India Assurance - the leading non-life insurer - already listed on the bourses. We have to wait and watch, which names are announced by the government for privatizatioN.

Covid-19 has accelerated sales in online retail and the sector is set to grow manifold in the coming quarters

BEYOND THINKING

THE MIGHTY RISEOF ONLINE RETA IL



than 50% of the $570 billion grocery retail space in India is addressable by e-grocery platforms. Of this, value-first households account for a significant 61% portion, with metro and tier-I markets covering more than 40% of this opportunity.

The RedSeer study shows that value-first households have unique grocery purchase priorities and behaviours. They stock-up most of their groceries, are focused on basic categories like staples and fresh edibles, and are quite content with a simple and hygienic assortment, as long as the products are affordable.

Grocery is the largest retail category and will also be where most market-places’ investments will be made in the next five years. This makes it an important category for growth for retailers and one that is going to drive future growth of online retail sales.

Online grocery sales for the largest online and offline retailers grew by a combined 65% to `6,820 crore in FY20, while collective losses measured `1,175 crore, according to a recent report.

WINNER TAKES ALL

The biggest winner in terms of sales was BigBasket, which accounted for 50% of sales growth, followed by DMart, Grofers, Spencer’s Retail, and StarQuick (Tata).

Most executives and experts credited the jump in growth to the Covid-19 pandemic and lockdowns, which pushed consumers towards online options for grocery and other purchases.

Manas Gupta, Head of Investor Relations at Grofers said, “At Grofers, we use our in-house technology platform to manage a

compared to more than 25% e-commerce adoption in China, and other developed economies that have 10-25% adoption rates.

Over the next few years, the Indian e-commerce economy will be bigger than modern retail today, Krishna-murthy said.

A BIG SHIFT

The pandemic brought in a major shift in consumer behavior, providing a boost to the Indian e-commerce industry. The coronavirus-induced lockdown forced people to stay indoors. Many turned to online platforms to buy groceries and other essentials during this time and have continued to do so even after the lockdown was lifted.

Experts reason that Covid-19-in-duced lockdowns and social distanc-ing led to a surge in online orders for groceries. The online orders were driven mainly by utility as 80% of those who ordered online during the lockdown did so for the purpose of convenience as opposed to price and selection.

E-GROCERY: A HEALTHY ADVANTAGE

The e-grocery market has grown 60% from CY20 and is expected to reach 41% to 49% by the first half of CY21, according to a recent report by home-grown consulting firm RedSeer.

The value-first segment of e-grocery, which refers to the households in India for whom affordability is the key pain point, and hence buying low-priced grocery is of the utmost importance, is projected to grow at 53% CAGR over the next five years – faster than the e-grocery market. As per RedSeer’s estimates, more

Covid-19 has brought a positive, permanent shift for Indian e-com-merce, said Flipkart Group CEO, Kalyan Krishnamurthy at an event recently. He expects the Indian e-commerce industry to touch $90 billion to $100 billion in the next 3 to 4 years.

The changes that India is mirroring are what is happening across developed economies such as the US and the UK, where the shift to e-commerce has accelerated largely due to the Covid-19 pandemic.

“Globally, e-commerce companies have seen a huge acceleration versus the traditional retailers,” said the Flipkart Group CEO adding, “the opportunities that modern retail present are significant for businesses of all sizes, including the kirana ecosystem. Flipkart is also doing its best to help small businesses and artisans embrace the power of technology and be a part of the modern retail opportunity.”

“Close to 100% of pin codes in India have seen e-commerce adoption. This includes all categories like fashion, grocery, appliances, furniture among others. More than 60% of transactions and orders in India come from tier-II cities and smaller towns. We still believe that we are scratching the surface when it comes to e-commerce adoption in India,” Krishnamurthy said.

He pointed out that only 3.5% of Indian commerce is online as


lean supply chain through a robust network of over 800 MSMEs. We have created a strong ecosystem that directly connects these MSMEs with the customers and enables us to deliver quality products at the lowest prices.”

While the Covid-19 outbreak has nudged both modern and traditional retailers to take a relook at their strategies and business models, making an impact in e-commerce in a market dominated by deep-pocket-ed players will be a long haul.

GIANT STRIDES

No wonder, experts tracking the retail sector consider Reliance Retail’s JioMart as a major entrant with a massive potential to disrupt the e-commerce space.

Reliance Retail’s net profit jumped 88% to `1,830 crore in Q3 FY21 even as revenues for the same months were down 8% to `37,845 crore compared to a year ago, mainly dragged by the transfer of its petroleum retailing business to a separate Reliance-British Petroleum joint venture, coupled with lower sales at its supermarkets amid the pandemic.

The business delivered a healthy performance with record profit delivery in an operating environment that continued to remain challenging with sporadic Covid-related restric-tions and local issues. The value of sales and services for Q3 FY21 decreased by 8% Q-o-Q to `37,845 crore while EBITDA for Q3 FY21 increased by 54% Q-o-Q to a record `3,087 crore, with an underlying operating margin (excluding the impact of the investment income) at 7%, coming in ahead of last quarter and the same time last year.

This was led by a near doubling of Fashion and Lifestyle earnings, continued benefits from cost management initiatives, and a boost from a higher investment income of `775 crore.

Mukesh D Ambani, Chairman and Managing Director, Reliance Industries Ltd said, “At a time when the Indian economy is poised for a confident recovery, we have been able to contribute to it with our company’s performance in the third quarter of FY21. We have delivered strong operational results during the quarter with a robust revival in O2C and Retail segments, and steady growth in our Digital Services business. Reliance has employed 50,000 more people since March ’20.” Reliance said almost 96% of its brick-and-mortar stores were operational in this quarter compared to 85% functional outlets in the July-September quarter.

Reliance’s fashion online portal Ajio’s business jumped five times and e-commerce orders for all Reliance Retail units collectively recorded a 12 times increase compared to the same quarter last year.

In the quarter, Reliance Retail Ventures Ltd, the holding company of Reliance Retail completed raising of `47,265 crore by selling a 10.9% stake to a clutch of global private equity firms and that mega invest-ments have also helped Reliance Retail’s profits.

Reliance Retail opened more than 300 outlets in the quarter taking the total number of store count to more than 12,000.

Reliance said its retail unit income for the nine months of the current

fiscal year was `1,10,565 crore.

All in all, India’s online retail segment will give a thrust to the sector where brick-and-mortar stores were left high and dry due to the coronavirus pandemic.

OVERVIEW OF THE RETAIL SECTOR IN INDIA

Grocery• In grocery, while overall revenue was impacted by Covid-19-related restrictions, local issues, and the decision to transition market stores into fulfilment centres to enable New Commerce expansion, the continuing business delivered a healthy double-digit growth.

• The quarter saw the continued trend of lower footfalls being more than offset by higher bill values across the store network.

• Rapid scale-up of JioMart contin-ues with more traffic, customers and orders.

• Brand partnerships strengthened owned brand portfolios and impact-ful activation enabled the business to deliver robust growth in the festive period with staples, FMCG, and Indian sweets doing particularly well.

• As it expands its New Commerce footprint, the business continues to grow its bond and win-win partner-ships, both at the back-end with producers and at the front-end with merchants. The business is currently present in 23 cities and with invest-ments in supply chain and technolo-gy that are currently underway.

Fashion & Lifestyle• The Apparel & Footwear business staged a strong bounce-back driven by impactful event activation, which


Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risks. Investment in Securities/Commodities market are subject to market risks. Read all the related documents carefully before investing. Please read the Do’s and Don’ts prescribed by the Commodity Exchange before trading. We do not offer PMS Service for the Commodity segment .The securities quoted are exemplary and are not recommendatory. NIRMAL BANG SECURITIES PVT LTD – BSE (Member ID- 498): INB011072759, INF011072759, Exchange Registered Member in CDS; NSE MEMEBR ID- 09391): INB230939139, INF230939139, INE230939139; MSEI Member ID-1067) : INB260939138, INF260939138, INE260939139: Single Registration No.INZ000202536,PMS Registration No: INP000002981; Research Analyst Registration No: INH000001766; NSDL/ CDSL: IN-DP-CDSL 37-99. NIRMAL BANG COMMODITIES PVT LTD – MCX (Member ID -16590 /NCDEX Member ID -0362 /ICEX Member ID -1165) : Single Registration No. INZ000043630; NCDEX Spot: 10084; Comtrack Participants: CPID -5040; CDSL Commodity Reposito-ry Ltd: 12013300 Nirmal Bang Securities Private Limited CIN: U99999MH1997PTC110659; Nirmal Bang Commodities

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led to strong festive season perfor-mance and enabled 1.5X growth over the last quarter.

• Stores witnessed stepped-up conversions and increased average bill values over last year, driven by new collections across occasion wear and winter-wear.

• Ajio continues to scale new highs with 5X growth in orders over the

previous year and significant improvement across customer metrics and operating parameters.

• Relationships with merchants were further extended to 1,900 cities with 2X more merchant partners onboard-ed.

• Jewellery revenues grew in high double digits over last year and nearly doubled over the previous

quarter, aided by a strong festive and wedding season buying.

• With stores reopening, Luxury and Premium Brands more than doubled over the last quarter. Digital commerce revenues grew 3X over last year and the distance selling initiative pioneered by the business is contributing meaningfully both to sales and customer engagement for the retail sector in IndiA.

RISE FROMTHE ASHES

Increased demand will give

a fillip to the cement

sector, which had been

struggling to survive













BEYOND THINKING



quarter last year largely because of good volumes and low costs.

The company recorded a 14% sales volume growth in the quarter under review on a year-on-year compari-son. In the quarter, cement prices have been slightly volatile. But this has not changed analysts’ estimates. They highlight the fact that cement firms hiked prices to such an extent that a small fall would not affect margins and earnings much in the coming quarters.

This is one of the key reasons as to why Ultratech’s management in the conference call maintained that the December quarter’s financial performance was likely to sustain in the coming quarters.

The confidence that even if demand stagnates or does not show material improvement in the coming quarters is largely because cement prices are already trading at higher levels as compared to March ’20 figures.

According to a study by ratings agency ICRA, cement prices were higher by 29% y-o-y, 4% y-o-y and 3% y-o-y in the southern, western and northern markets, respectively, and lower by 4% in the eastern market in nine months of FY21. A study by CARE shows that due to various cost rationalization measures and overhead cost controls undertak-en by cement manufacturers, there has been an increase in operating profit margins (OPM), net profit margins (NPM) and interest coverage ratio during the December ’20 quarter.

The overall sales revenue of top 22 cement companies has increased by 14% during the December ’20 quarter on y-o-y comparison.

sified cement companies. A case in the point is the performance of industry leader Ultratech Cement. Ultratech Cement (116.7 MT) exceeded expectations of investors and analysts on two fronts: quantum of growth of key variables and commentaries of key firms regarding the trajectory of demand when market pundits had forecasted better outcome for cement companies in the December ’20 quarter.

Key statements in post-results earnings call of Ultratech Cement provided confidence to analysts about high likelihood of sustained momentum in demand and hence, pricing in the sector, for the next few quarters, at least.

The company’s management said that demand in urban pockets has revived. The management reiterated that demand in rural pockets continues to be robust thanks to uninterrupted construction activities in low-cost housing and Individual Home Builder (IHB) segments.

Besides, Ultratech’s management confidently stated that in the next few years the demand in the industry will outstrip incremental cement capacity. Based on these facts, analysts expect that unsold inventory of cement in the sector will come down. In the December ’20 quarter, Ultratech’s financial performance was much ahead of the street’s expectations. The company’s revenues grew 18% to `12,144 crore in the quarter under review on a year-on-year (y-o-y) comparison as opposed to analysts’ estimated growth of 5-9%.

Also, its net profit jumped more than two times to `1,584 crore in the quarter in comparison with the same

India’s cement sector has entered an interesting phase. In the past one year, the cement industry has changed considerably in terms of business. Demand has returned to the industry. Cement companies have announced plans to expand capaci-ties. Also, a view gaining credence is that this demand for cement is likely to sustain in the coming quarters. But the most important factor working in favour of cement companies is prices.

Let us explore the positive changes in the cement industry in greater detail.

THE INDUSTRY In the past nine months, cement companies have been able to raise prices. Increased availability of labour, prompt reforms measures by the government aimed at providing liquidity to contractors and ease of restrictions on the movement of goods and people have ensured improvement in construction activities in real estate and infrastruc-ture segments.

According to ratings agency CARE, sectorally, cement’s contribution is 55% to housing, low-cost housing (13%), infrastructure (22%) and industrial and commercial (10%).

Over the past six months, the demand across these sectors has been growing steadily, which is reflected in the December ’20 quarter earnings results of geographically well-diver-


According to CARE, there are a few important factors that have contribut-ed to this growth in sales. • The growth in the sector can be attributed to an uptick in real estate activities in tier-II and -III towns, which was downbeat initially but has started showing signs of recovery, aided by the current low-interest cost regime, and several other benefits being offered by authorities to home buyers as well as to developers. • Also, rural demand has sustained considering that monsoon rains have been favourable in most parts of the country. • The pickup in housing and institu-tional infrastructure projects has resulted in an increase in demand across markets during Q3 FY21. GOING AHEAD In the coming quarters, as India’s economy recovers, cement demand is expected to go up. The demand for cement is closely linked to the overall economic growth, particular-ly that of the housing and infrastruc-ture sector.

Growing demand from affordable housing and construction segments along with government infrastructure projects like roads, metros, airports, irrigation, etc will aid the sector and spur further demand.

ICRA expects cement demand to increase by 18% to 20% in FY22 over FY20-21 with volumes reaching FY19-20 levels.

Cement volumes are expected to be supported by rural demand, including affordable housing, along with recovery in the infrastructure segment to an extent.

A leading ratings agency in its sector

outlook for 2021 said, “The volumet-ric growth and the industry’s pricing discipline are likely to support the operating margins in FY22 at around 20% to 21%, notwithstanding some cost-side pressures.”

After a sharp contraction in volumes in FY21, ICRA expects cement demand to grow by 18% to 20% in FY22.

The rural off take is likely to be supported by positive farm sentiments with the timely sowing of rabi crops and favourable groundwa-ter and reservoir levels, which are both likely to boost rabi crop yields. Analysts point out that the demand for cement is expected to sustain largely due to government’s housing schemes.

According to ICRA the traction in the PMAY-Gramin is expected to continue and the PMAY-Urban has also picked up faster in recent months as against other housing segments owing to low ticket sizes and government incentives. Although urban housing has also seen a pickup in the recent months in select markets, the sustainability remains to be seen.

In addition to these, the recent announcements with special focus on real estate and PMAY-Urban, and infrastructure sectors as part of the Atmanirbhar Bharat 3.0 package, are likely to support cement demand. Lastly, India’s infrastructure sector will play a crucial role in providing stable demand for the sector.

According to various interactions with companies in the sector, the execution of infrastructure projects spread across transportation segments - roads, metros, railways and airports - has improved from

40% to 55% in March ’20 to 80% to 95% in urban, semi-urban and certain pockets of rural areas. This will boost volume expansion, going forward.

The government has already shown its firm commitment to the sector through announcements in the Union Budget with a jump of 34.5% in its allocation when compared to FY21.

Also, under the National Infrastruc-ture Pipeline (NIP), the government has increased the awarding of infrastructure projects for FY22. The government will award 7,400 infrastructure projects for FY22 from 6,835 projects in FY21.

As regards, the Bharatmala Pariyoja-na Project, the government will be awarding additional 8,500 km of national highway projects in the next one year. The government has already awarded 13,000 km length of roads projects under the Bharatmala Pariyojana Project. These announcements have come at a time when most construction and road companies are in better shape than a year ago.

According to various estimates of analysts, the order book to bill ratio of well-placed construction compa-nies is over 3. This means that the size of the order book of these companies provides visibility of revenues for at least three years.

Given these facts, it is amply evident that as the pace of execution of infrastructure projects increases, the demand for cement is expected to be stable or even materially grow in the coming quarters.

More importantly, since cement prices trade at high levels, margins of cement companies are likely to sustain even if demand stagnates or remains stable for a few monthS.


10:5510:55

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The government’s idea of privatizing loss-making enterprises and selling stake in state-owned companies may seem worthwhile but divesting profit-making ones is a debatable topic

BEYOND THINKING

THEIDEAL

WAYFORWARD



that will remain will be decided by the Union Cabinet based on recom-mendations by the government policy think tank, NITI Aayog.

This is a big policy shift by the government, which has made it clear that it has no intention of being in business. The government wants to involve private sector and global investors to raise finances from the sale of public sector enterprises at a time when the economy has been hit hard by the coronavirus pandemic. While the government’s plan is quite ambitious, the privatization process might not be as smooth as expected. In the past, privatization efforts have faced many challenges in the form of endless litigations by labour unions or disputes over valuation of government assets.

In BPCL’s privatization process, many court cases were filed on matters such as wage settlement and employee stock purchase scheme.

Privatization of banks in particular has always been a politically tricky issue. India’s banking system is dominated by state-owned banks. While some banks are doing well, several others require regular bailout packages from the government.

In this year’s budget too, the government announced bank recapitalization of $2.7 billion. Ila Patnaik, a Professor at the National Institute of Public Policy and Finance and former government advisor said, “For so many years, bank privatization was off the cards. The fact that it has been announced - even before you have a plan of which banks - is a very strong pro-reform-ist, pro-market signal.”

The United Forum of Bank Unions (UFBU), an umbrella body of nine unions, has already called for a

investors approved of the move, shares of public sector banks, moved upwards for almost a week.

Without a doubt, this is the boldest privatization move ever attempted by any Indian government.

Historically, the government has always looked at privatization as a means to raise money when times are hard. This is the first time the government is looking at privatiza-tion as a means of improving efficiency and achieving higher productivity.

According to the privatization policy, the government will maintain a bare minimum presence in only four strategic sectors, namely, atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services.

There will be a maximum of three or four public sector units in these key segments. The government will exit all other sectors where there are private players such as steel or pharmaceuticals. Public sector units will either be privatized or closed. “In four areas, a bare minimum number of firms will be retained and the rest will be privatized. In other sectors, all firms will be privatized,” said Nirmala Sitharaman.

According to Public Enterprises Survey 2018-19, there were 348 central public sector enterprises as of March ’19. Of these, 249 were operational. If all goes according to plan, the government is looking at reducing the number of public sector enterprises to around 25.

Not all these companies will be privatized. Loss-making state enterprises will be shut down. The final number of public sector units

In this year’s Union Budget, India’s Finance Minister, Nirmala Sithara-man announced that the government would privatize all Public Sector Enterprises (PSEs) except for those in strategic sectors.

This bold move does not come as a surprise because the Narendra Modi government did come to power on the promise of “minimum govern-ment, maximum governance.”

The privatization policy will be implemented over the next few years. In 2021-22, the PSEs that will be privatized include Bharat Petroleum Corp Ltd, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, Bharat Earth Movers Ltd, and Pawan Hans.

The government will privatize airports operated by the Airports Authority of India (AAI) from tier-II and -III cities in 2021-22.

It will also privatize two public sector banks. While the names of the banks have not yet been disclosed, experts believe the likely candidates are Punjab & Sind Bank, Bank of Maharashtra and Bank of India.

The government has also proposed to increase the cap on Foreign Direct Investment (FDI) in insurance companies from 49% to 74%.

The announcement of the privatiza-tion policy sent ripples across the stock market. In an indication that


BEYOND WORDSInvisible Hand

Scottish economist, philosopher and author Adam Smith introduced the concept invisible hand in The Theory of Moral Sentiments, written in 1759. Smith says that if everybody acts from an area of self-interest, spurred on by the profit motive, the economy will work more efficiently, and more productively, than it would do if economic activity is directed instead by a central planner. He adds, “It is as if an ‘invisible hand’ guides the actions of individuals to combine for the common good. Invisible hand characterizes the means through which beneficial social and economic outcomes may arise from accumulated self-interested actions of individuals without intention.

two-day strike from 15th March to protest against the privatization. Unions have always opposed privatization and it won’t be easy to go through with the plan.

But if successful, this could result in more privatization. “Privatizing a couple of small banks will not make a significant difference to credit growth in the short run but it eliminates something that was earlier sacrosanct as a principle. It is a little like sticking your toe in the door for possible big change later,” said Montek Singh Ahluwalia, Deputy Chairman of UPA’s Planning Commission.

Privatization of other PSEs will not be easy either. For one, the private sector has not shown much interest in the government’s proposal to sell its assets. While the assets owned by public sector units may look attractive, large debt on the books of companies such as Air India or NTPC has dissuaded the private sector. A case in point is Air India.

The government approved the sale of Air India in 2017. But it is yet to find a buyer. Legacy problems and regulatory risks in sectors such as minerals, mining, power, steel as well as oil and gas might make some PSEs unattractive.

Some PSEs such as Engineers India may not find any takers at all because it is a lot easier to set up a consulting company than to buy a loss-making one.

“India is in a position where it must be less sentimental about the sale of Public Sector Units. This will require dynamism from the private sector. We want more people to compete,” said Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management, referring to the lukewarm response by the private sector to the privatization plan.

In seven years since the Modi government came to power, the government has not sold even one public sector company. The reasons for this are many. The privatization process is fraught with difficulties. Asset valuation is a controversial and subjective process, which can lead to charges of corruption and litigations.

In the case of Air India, its debt overhang makes it an unattractive purchase, unless the government settles for a lower valuation. But if the government lowers the asking price, it could lead to charges of selling the family silver for nothing, resulting in a ‘no sale’ for years.

There are those who argue that the government should not sell profit-making units. “Public sector banks, whatever their weaknesses, are the pivot around which a number of programmes are evolved and implemented. The answer is not wholesale privatization,” P Chidam-baram, Congress leader and former Finance Minister said.

Workers unions can also delay the privatization process with their

protests and mass mobilizations. The government faces opposition even from unions within its own ruling alliance. “It is a big step provided it gets done. Implementation is the elephant in the room,” said DK Joshi, Chief Economist with CRISIL, a research and analytical company.

Lastly, bureaucrats who will implement the privatization process do not have the competence required to manage large complicated stake sales. While the process may seem tedious, it is not entirely impossible to privatize PSEs. It will, however, take a lot of convincing and effort by the government.

Processes will have to be put in place to allay fears and keep away allegations of corruption. For instance, to avoid allegations of large stake sale to one private company, the government can sell shares in the market at regular intervals. This will also take care of accusations that the timing of the sale was not right.

The government could even set up a website to provide information about all the assets available for sale so that the private sector can evaluate them and ensure transparency in sale.

The government may not succeed in achieving its privatization target. But, it can make good progress if it rethinks the process and makes it easier for investors to buy assets. It will have to take all shareholders along and ensure that it doesn’t get dragged into a stalematE.

The Franklin Templeton catastrophe has shown that debt funds are not without risks. But by exercising

BEYOND BASICS

Debt funds are known to be low in risk and are at times even considered equivalent to or at par with fixed deposits in terms of safety with the rationale that the principal is never at risk. That’s why low-risk investors tend to invest in debt funds.

a lower rating.

Unfortunately, some investors have learnt it the hard way thanks to the sudden events that unfolded at Franklin Templeton Mutual Fund with respect to six debt funds.

On 23rd Apr ’20, Franklin Templeton the ninth largest mutual fund then with an AUM of `1.16 trillion as of March ’20, announced the closure of six of its debt mutual fund schemes having a combined AUM of `258.56 billion.

This meant that investments were

While debt funds are supposed to have low risks, how low the risk is, is totally dependent on the underlying portfolio of bonds (government bonds, corporate bonds) that the fund holds.

So, the safety of the scheme is as good as its underlying portfolio even though it is a debt fund.

Funds with high quantum of government securities and Triple-A (AAA) rated securities that tend to be liquid come with low risks. Thus, the return is lower as compared to schemes that invest in securities with

HIDDEN DANGERS



But Franklin Templeton chose to ignore this warning and continued with its aggressive credit strategy, which was to buy low-rated illiquid securities.

It had another chance to set its shop in order when the Non-banking finance company (NBFC) crisis emerged in the aftermath of the IL&FS fiasco.

Most mutual fund companies in the country responded to the changing market scenario and balanced their portfolios to higher grade investments.

Franklin continued to invest in low grade illiquid bonds even after SEBI’s 2019 framework warned AMCs not to invest in securities with high risks.

As companies started defaulting due to the liquidity crisis in the market on account of the IL&FS group’s catastrophe, downgrades started happening.

Franklin, however, created side pockets to handle this situation. Franklin India Short-Term Plan and Franklin India Credit Risk Fund have three side-pockets each as per the March ’20 factsheet.

Thus, the coronavirus-induced liquidity crunch was only the catalyst that exposed an underlying issue with the way these mutual fund schemes were being managed by Franklin Templeton.

INVESTMENTS IN RISKY SECURITIES WITH A LONGER TENURE

Short tenure schemes such as Franklin India Low Duration Fund and Franklin India Ultra Short Bond Fund meant that for three to six months, the investment tenure had

At times they were the only investors in the securities, leading to a concentration risk. Their strategy was fairly successful in times of stability when there were no redemption pressures and there was a constant inflow of funds.

By and large, these risky bets provided Franklin Templeton with above average returns, resulting in these schemes standing out among their peers.

When the Covid-19 pandemic struck, Franklin Templeton was handicapped as redemption pressures meant that they had to liquidate their investments and that’s where they got stuck.

This is because after liquidating the liquid investments (government and AAA-rated securities), the fund house was left with largely illiquid securities with redemption demand not fully met.

Franklin Templeton resorted to borrowings. But it was unsustainable as redemption pressure kept building. Unable to cope up with the pace of redemptions, the company decided to close six of its funds.

There were multiple issues at play here - exposure to securities with low credit ratings, investments in longer tenure dated securities and also concentration risks.

COMPLACENCY: AN UNDERLYING ISSUE

Franklin Templeton had a scare in 2016 and ought to have cleaned up its portfolio when Franklin Templeton Asset Management bought its schemes comprising the entire holding in Jindal Steel and Power Ltd (JSPL) after a series of downgrades, which eventually rated them ‘D’.

frozen for investors, that is, they were not allowed to withdraw, transfer or make any new investments in these schemes.

The company cited severe redemption pressure and illiquidity in the bond markets on the back of the Covid-19 pandemic-induced market dislocation as the key reason behind this drastic step.

The funds that form a part of this defamed list include Franklin India Low Duration Fund, Franklin India Ultra Short Bond Fund, Franklin India Short-Term Income Plan, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund.

This unprecedented event shocked investors as they were left wondering how they would redeem their investments. This was an isolated event and the RBI announced a liquidity facility for mutual funds of `500 billion via the banking channel four days after this untoward incident took place.

The question that comes to the fore is: was this incident purely the fallout of the heightened redemption pressure caused by the Covid-19 outbreak and the disruption in the bond markets or was there an inherent problem with the way these funds were managed given that other fund houses did not succumb to the pandemic?

Franklin Templeton’s strategy was focussed on beating market returns (Franklin India Ultra Short Bond Fund’s performance in each of the calendar years from 2015 to 2019 was in the top quintile) and that came at a price because it compromised on the choice of instruments investing in largely illiquid and low-grade securities.


28% of its assets in securities with credit rating A and below while other fund houses had about 3% on an average.

Franklin India Low Duration Fund, which is a product with a six to twelve months horizon, had around 44% in A-rated and below securities when other fund houses had 10% or lower invested in these categories.

Thus, the exposure to riskier assets with a longer tenure did not tie in with the product type.

SOLE LENDER OR LARGEST LENDER IN A FEW COMPANIES

One of the key principles of investing is to avoid concentration risk. Franklin Templeton threw caution to the wind and justified it by saying, “The ownership pattern of an issuance is unlikely to have any impact on the credit risk.” This is against the basic tenant of investing.

For Franklin Templeton, the justification was that it worked all these years. But that doesn’t make it right.

The company reaped the benefits by being among the only investors in AU Finance, Equitas Finance, Tata Sky and Mahindra World City. However, when there is a need for liquidity, liquidating these kinds of investments becomes a major hindrance.

The six closed Franklin Templeton schemes’ exposure to Renew Power Ltd was 89% of total borrowings from all mutual funds and the exposure of four schemes to AP Capital Region Development Authority was 82.42% of the total borrowing from mutual funds, bringing to the fore the high-risk strategy adopted by the company.

HOW DOES WINDING UP WORK

Franklin will have to sell/ liquidate its existing portfolio of underlying corporate bonds and securities.

Investors will no longer be able to withdraw money based on the declared NAV. Instead, they will have to wait since the money is frozen.

Meanwhile, Franklin Templeton will try to find buyers for its underlying assets and the uncertainty arises because there may be no buyers for low-rated securities.

This, in turn, means that Franklin Templeton will have to wait till the maturity of the security for the company to pay back what is owed, the time frame of which may vary from security to security.

Thus, uncertainty will prevail for investors as they have no definite timeline. In addition to this, the absence of visibility on how much of the investment will eventually be returned makes matter worse for investors.

HOW WILL MONEY BE RETURNED TO INVESTORS

Five of the six schemes are cash positive and have a collective corpus of `97.70 billion as of 29th Jan ’21.

They include Franklin India Low Duration Fund (65% cash), Franklin India Ultra Short Bond Fund (53% cash), Franklin India Dynamic Accrual Fund (41% cash), Franklin India Credit Risk Fund (25% cash) and Franklin India Short Term Income Plan (11% cash).

Investors will be paid in a staggered manner. The Supreme Court of India has directed cash positive schemes to

distribute monies to the unit holders in proportion to the units held by them, and SBI Mutual Fund is to oversee the distribution of funds and not Franklin Templeton.

KEY TAKEAWAYS FROM THE FRANKLIN TEMPLETON CRISIS

Unlike the way debt funds are marketed, there is an element of risk in debt funds too. But the extent varies depending on the quality of the underlying holdings.

Looking for best yields should not be the only criteria while selecting debt funds.

Since debt securities ought to be rated, looking at the ratings will give investors a clear picture of how risky a portfolio is.

There is no doubt that the ratings given by credit ratings agencies in the country are not sacrosanct given the fact that companies such as DHFL and IL&FS were both rated AAA by them before being moved to the default category.

But it can be used as one of the filters to figure out what proportion of the portfolio is in high-grade securities.

Equity funds are easier to exit as the market is liquid. However, in case of debt funds, if the fund manager has made a bad decision, liquidating the low-quality paper may be a problem as there may be no takers, forcing the fund to wait until maturity for pay back.

Although the markets regulator is present to protect and safeguard the interest of the investor, he/she must exercise due diligence before selecting any debt fund to avoid getting burnT.

Small Cap Funds

SCHEME NAME NAVHistoric Return (%)

1 Year 10 Years5 Years 7 YearsAUM (Cr)

3 Years

Axis Small Cap Fund - Reg - GrowthDSP Small Cap Fund - Reg - GrowthSBI Small Cap Fund - GrowthNifty Smallcap 100 TRI

42 77 78

9,925

20.533.334.831.4

14.95.49.9

0

18.515.520.813.3

2322.828.1

15

-18.221.2

10

3,724 5,812 6,594

-

Multicap Funds/Flexicap Funds



3 Years

Aditya Birla Sun Life Flexi Cap Fund - GrowthCanara Robeco Flexi Cap Fund - GrowthMahindra Manulife Multi Cap Badhat Yojana UTI Flexi Cap Fund - GrowthAxis Flexi Cap Fund - Reg - GrowthS&P BSE 500 TRI

943 186

15 212

16 23,987

19.122.526.531.418.926.8

10.315.212.618.617.212.3

17.218.5

-18.5

-17.3

18.416.4

-18.1

-16.2

14.213.5

-14.9

-12.4

12,131 3,121

385 14,606

7,009 -

Large Cap Funds



3 Years

Axis Bluechip Fund - GrowthMirae Asset Large Cap Fund - Reg - GrowthCanara Robeco Bluechip Equity Fund - GrowthIDFC Large Cap Fund - Reg - GrowthNifty 50 TRI

40 67 36 43

21,273

18.222.825.320.924.9

17.312.917.111.714.4

18.218.518.615.317.2

1718.616.712.914.9

14.315.513.710.6

12

21,868 21,746

1,506 649

-

BEYOND NUMBERS

Beyond Market 16th - 28th Feb ’21 It’s simplified...42

MUTUAL FUND BLACKBOARDPerformance Of Mutual Fund Schemes From Different Categories

Mid Cap Funds



3 Years

DSP Midcap Fund - Reg - GrowthEdelweiss Mid Cap Fund - GrowthAxis Midcap Fund - GrowthInvesco India Mid Cap Fund - GrowthKotak Emerging Equity Fund - Reg - GrowthNifty Midcap 100 TRI

75 39 54 69 56

30,251

22.833

26.126.428.629.6

10.910.518.213.612.4

6.9

18.418.119.7

1819

15.5

21.322.422.121.223.618.4

16.518.2

-17.817.9

13

9,815 1,061 8,608 1,195 9,162

-

Large & Mid Cap Funds



3 Years

Mirae Asset Emerging Bluechip Fund - GrowthCanara Robeco Emerging Equities - GrowthPrincipal Emerging Bluechip Fund - GrowthInvesco India Growth Opportunities Fund - GrowthKotak Equity Opportunities Fund - Reg - GrowthTata Large & Mid Cap Fund - Reg - GrowthNIFTY Large Midcap 250 TRI

79 130 144

44 161 280

9,797

32.724.125.717.920.325.828.2

16.912

10.611.712.412.911.8

23.219.919.616.817.3

1618

26.125

22.116.717.816.818.4

22.719.717.713.613.914.1

14

14,416 7,203 2,328 3,445 4,675 1,886

-

Contra/Value Fund



3 Years

Invesco India Contra Fund - GrowthUTI Value Opportunities Fund - GrowthS&P BSE 500 TRI

65 84

23,987

24.825.126.8

11.912.912.3

18.615.517.3

20.214

16.2

15.412.512.4

5,922 5,156

-

Dynamic Asset Allocation Funds



3 Years

ICICI Prudential Balanced Advantage Fund - Reg Nippon India Balanced Advantage Fund - GrowthEdelweiss Balanced Advantage Fund - GrowthKotak Balanced Advantage Fund - Reg - GrowthNIFTY 50 Hybrid Composite Debt 65:35 Index

45 109

32 13

12,973

15.913

25.915.221.9

10.48.6

12.6-

13.7

12.913.712.8

-15

1313.513.2

-13.5

12.710.911.1

-11.3

28,257 2,887 2,464 6,245

-

Hybrid Aggressive



3 Years

Canara Robeco Equity Hybrid Fund - GrowthSBI Equity Hybrid Fund - GrowthMirae Asset Hybrid - Equity Fund - Reg - GrowthNIFTY 50 Hybrid Composite Debt 65:35 Index

213 174

19 12,973

20.315.6

2121.9

13.411.912.213.7

1614.115.7

15

16.716

-13.5

13.713.5

-11.3

4,208 34,653

4,384 -

ELSS Schemes (Tax Saving u/s 80-C)



3 Years

Aditya Birla Sun Life Tax Relief 96 - GrowthAxis Long Term Equity Fund - GrowthCanara Robeco Equity Tax Saver Fund - GrowthInvesco India Tax Plan - GrowthMirae Asset Tax Saver Fund - Reg - GrowthS&P BSE 200 TRI

39 62 96 69 26

7,735

17.819.830.220.732.926.5

8.215.718.112.816.513.4

14.817.519.3

1723.217.5

17.720.1

1818.3

-16.1

13.718.214.615.2

-12.5

12,595 25,508

1,534 1,377 5,648

-

Focused Fund



3 Years

Axis Focused 25 Fund - GrowthICICI Prudential Focused Equity Fund - Ret - GrowthSBI Focused Equity Fund - GrowthS&P BSE 500 TRI

39 40

189 23,987

20.439.116.526.8

15.611.812.912.3

20.215.117.317.3

18.514.119.616.2

-11.617.512.4

13,660 978

12,520 -

Solution Oriented



3 Years

HDFC Childrens Gift FundTata Retirement Savings Fund - Moderate Plan - RegTata Retirement Savings Fund - Progressive Plan - RegTata Retirement Savings Fund - Conservative PlanS&P BSE 200 TRI

156 38 37 24

7,735

22.315.816.110.726.5

10.99.39.97.9

13.4

15.215.217.210.117.5

15.217.717.810.416.1

14.5---

12.5

3,965 1,276

919 162

-


Sector/Thematic



3 Years

Canara Robeco Consumer Trends Fund - Reg - GrowthMirae Asset Great Consumer Fund - GrowthICICI Prudential Technology Fund - GrowthNippon India Pharma Fund - GrowthBNP Paribas India Consumption Fund - Reg - GrowthICICI Pru Banking and Financial Services FundS&P BSE 500 TRI

57 45

104 248

16 76

23,987

23.917

67.249.917.710.426.8

16.911.427.321.2

-9.2

12.3

21.218.521.412.9

-20.317.3

2117.4

1816.5

-20.916.2

15.9-

18.816.9

-15.512.4

491 1,101 1,412 4,197

633 3,211

-

Gold



3 Year

HDFC Gold Fund - GrowthKotak Gold Fund - Reg - GrowthNippon India Gold Savings Fund - GrowthPrices of Gold

15 19 19

45,954

9.812.3

8.910.7

1314.312.814.5

8.69.58.39.7

4.64.74.3

6

---

8.4

1,113 827

1,348 -

Arbitrage Fund


3 Months 3 Years1 Year 2 YearsAUM (Cr)

6 Months

IDFC Arbitrage Fund - Reg - GrowthKotak Equity Arbitrage Fund - Reg - GrowthTata Arbitrage Fund - Reg - GrowthNippon India Arbitrage Fund - Growth

25 29 11 21

3.23.73.53.3

3.43.83.83.5

3.44

4.63.9

4.85.15.5

5

5.25.4

-5.5

6,877 15,528

3,335 9,515

Index Fund



3 Years

HDFC Index Fund-NIFTY 50 PlanICICI Prudential Nifty Next 50 Index Fund - GrowthUTI Nifty Index Fund - GrowthNifty 50 TRI

137 31 99

21,273

23.821.124.224.9

13.86

1414.4

16.615.116.717.2

14.416.414.514.9

11.212.311.3

12

2,344 919

3,097 -

FoF Overseas



3 Years

PGIM India Global Equity Opportunities Fund 38 66 34.6 23.9 13.3 11.8 769

Liquid Fund


2 WeeksYTM

3 Months 1 YearAUM (Cr)

1 Month

Aditya Birla Sun Life Liquid Fund - Reg - GrowthICICI Prudential Liquid Fund - Reg - GrowthKotak Liquid Fund - Reg - GrowthNippon India Liquid Fund - GrowthMahindra Manulife Liquid Fund - Reg - GrowthCRISIL Liquid Fund Index

328 302

4,126 4,980 1,325

-

3.63.43.33.63.4

4

3.43.33.33.43.33.8

2.92.92.92.9

33.4

44

3.83.9

44.3

3.433.513.453.483.43

-

31,306 39,319 26,755 19,338

1,700 -



Money Market Funds


3 MonthsYTM

1 Year 3 YearsAUM (Cr)

6 Months

Aditya Birla Sun Life Money Manager Fund SBI Savings Fund - GrowthHDFC Money Market Fund - GrowthTata Money Market Fund - Reg - GrowthCRISIL Liquid Fund Index

284 32

4,396 3,620

-

3.23

3.13.33.4

3.93.53.7

43.6

6.15.26.1

64.3

7.46.77.24.6

-

3.953.8

3.733.69

-

10,189 21,463 10,530

1,874 -

Ultra Short Term Funds


3 MonthsYTM


6 Months

HDFC Ultra Short Term Fund - Reg - GrowthICICI Prudential Ultra Short Term Fund - GrowthUTI Ultra Short Term Fund - GrowthAditya Birla Sun Life Savings Fund - Reg - GrowthNIFTY Ultra Short Duration Debt Index

12 22

3,247 420

4,240

33.53.5

33.5

44.74.24.33.8

5.95.95.36.25.1

-7.3

57.5

7

3.985

4.944.15

-

18,196 8,495 2,136

16,119 -

Short Term Funds


3 MonthsYTM


6 Months

HDFC Short Term Debt Fund - GrowthNippon India Short Term Fund - GrowthICICI Prudential Short Term Fund - Growth

24 41 46

1.21.22.2

5.25

5.5

8.47.38.4

8.87.88.5

5.485.435.11

18,390 8,987

24,170

Low Duration Funds


3 MonthsYTM


6 Months

HDFC Low Duration Fund - GrowthICICI Prudential Savings Fund - Reg - GrowthKotak Low Duration Fund - Std - Growth

45 416

2,618

4.34.92.2

5.55.94.4

7.37.56.8

7.48

7.6

4.784.594.66

25,667 26,706 12,262

Banking & PSU Bond Funds


3 MonthsYTM


6 Months

HDFC Banking and PSU Debt Fund - Reg - GrowthTata Banking & PSU Debt Fund - Reg - GrowthKotak Banking and PSU Debt Fund - Reg - GrowthNippon India Banking & PSU Debt Fund - Reg

18 11 50 16

1.4-0.50.8

-0.4

5.34.34.74.1

7.97.47.6

8

8.6-

8.98.9

5.455.35

5.45.14

10,735 707

11,292 7,712

Corporate Bond Funds


3 MonthsYTM


6 Months

ICICI Prudential Corporate Bond Fund - Reg - GrowthIDFC Corporate Bond Fund - Reg - GrowthHDFC Corporate Bond Fund - GrowthUTI Corporate Bond Fund - Reg - Growth

23 15 25 13

1.9-0.60.5

-0.3

5.14.3

54.8

8.58.98.87.8

8.78.39.1

-

4.755.185.355.27

21,156 22,999 30,847

3,600

Floater Fund


3 MonthsYTM


6 Months

Aditya Birla Sun Life Floating Rate Fund - Reg Nippon India Floating Rate Fund - Growth

264 34

10.6

45.1

6.98.7

7.98.3

4.714.92

9,684 16,057


Disclaimer : Mutual Fund Investments are subject to market risks. Please read the offer document carefully before investing. Past performance is no guarantee of future performance. Returns are of Growth option of Regular plans. Returns which are below 1 year

period are Annualized Returns. Source: - ICRA MFI, NAV as on 19th Feb ’21

Dynamic Bond Fund


3 MonthsYTM


6 Months

ICICI Prudential All Seasons Bond Fund - GrowthIDFC D B F - Reg - GrowthKotak Dynamic Bond Fund - Reg - GrowthCRISIL Corporate Bond Composite Index*

28 27 29

-

2-4.8-2.9

-

62.14.8

-

8.87.77.4

-

9.39.79.3

-

6.025.836.32

-

5,472 3,205 2,763

-

Gilt Fund


3 MonthsYTM


6 Months

Nippon India Gilt Securities Fund - GrowthKotak Gilt Fund - GrowthIDFC G Sec Fund - Invt Plan - Reg - Growth

30 75 27

-4.7-0.9-4.8

1.14.22.3

6.38.58.5

10.310

11.3

5.665.715.85

1,762 958

2,370

Credit Risk Fund


3 MonthsYTM


6 Months

ICICI Prudential Credit Risk Fund - Growth HDFC Credit Risk Debt Fund - Reg - Growth SBI Credit Risk Fund - Growth

24 18 34

4.95.82.6

7.810.1

7.5

8.19

7.5

8.58.37.2

7.678.057.27

7,007 6,848 3,632

Medium to Long Duration Fund


3 MonthsYTM


6 Months

ICICI Prudential Bond Fund - GrowthSBI Magnum Income Fund - Growth

31 54

-2.8-0.7

3.55.8

7.67.9

8.59.1

5.66.39

3,792 1,773

Medium Duration Fund


3 MonthsYTM


6 Months

ICICI Prudential Medium Term Bond Fund - GrowthHDFC Medium Term Debt Fund - GrowthSBI Magnum Medium Duration Fund - Growth

34 43 39

2.32

0.3

87.57.4

7.87.18.9

8.18

9.4

6.896.696.22

6,365 2,906 7,629

Overnight Fund


2 WeeksYTM

3 Months 1 YearAUM (Cr)

1 Month

IDFC Overnight Fund - Reg - GrowthTata Overnight Fund - Reg - GrowthSBI Overnight Fund - GrowthICICI Prudential Overnight Fund - Reg - GrowthNippon India Overnight Fund - Reg - GrowthCRISIL Liquid Fund Index

1,091 1,080 3,308

110 110

-

2.82.82.82.82.8

4

2.92.92.92.92.93.8

2.82.92.92.92.93.4

3333

3.14.3

3.233.283.233.413.23

-

1,511 2,063

15,772 10,059

5,278 -

BEYOND NUMBERS

TECHNICAL OUTLOOK all-time high of 15,431.35.

Profit-booking at higher levels was witnessed, dragging the Nifty towards 14,650. Looking at the Extension, the Nifty appears to have strong resistance at 15,100-15,170 levels. As long as the Nifty trades below the 15,100 level, the short-term view will remain cautious.

If the Nifty surpasses 15,100 on closing basis and consolidates for two trading sessions at least, then we may witness a positive momentum, which might take the Nifty towards 15,540-15,600.

On the flip side, support is placed at 14,600-14,500. If the Nifty continues to trade below the psychological mark of 15,000, then a fall towards 14,600-14,500 levels seems likely.

The short-term trend is cautious as profit-booking is witnessed at higher levels. Though the short-term trend is cautious, it is a stock-specific market as sectoral rotation is visible in the markets.

Traders and investors should be patient and wait for any dips towards 14,600-14,500, which are important support levels from where buying could be seen by retail investors.

Based on the technical set-up of the Nifty, it is advisable to be light on long positions and to hold on to them with a strict stop loss.

However, investors could pocket gains at higher levels and wait for an opportunity for any dips towards support levels.

Market participants should be stock-specific and follow the trend till it reverses.

On the Nifty Options front for the March series, the highest Open Interest (OI) build up is witnessed near 15,500 and 16,000 Call strikes, whereas on the Put side, it is observed at the 14,500 and 14,000 strikes.

India VIX, which measures the immediate 30-day volatility in the market, remained in the range of 19-26 for most part of February. Going forward, VIX is likely to cool off further in mid-March.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 0.98-1.65 in the month of February. Going forward, it is expected to remain in the range of 1.00-1.80 in March.

The markets are believed to remain range-bound. For further upper trend the Nifty is likely to give a breakout above 15,500 and for lower trend, the breakdown is below 14,500. Till then, the Nifty is likely to remain in the range of 15,500 to 14,500.

The nearest supports are placed at 14,500 and 14,000 with bouts of volatility likely to come with the index finding resistance at 15,300 and 15,500 levels on the upside.

OPTIONS STRATEGY

Long StrangleIt can be initiated by ‘Buying 1 lot 10MAR 15200 CE (`160) and Buying 1 lot 10MAR 14800 PE (`150)’. The premium outflow comes to around 310 points, which is also your maximum loss. One should, however, place a stop loss at 240 point (70 point loss). The maximum gain is unlimited and one should place the Target at 450 points (a gain of 140 pointS).

ebruary was a good month for the markets as compared to January this year. Bulls prevailed over bears in the tug of war in the February series, demonstrating their strength.

The Nifty touched an all-time high of 15,430 in the February series.

One day prior to the expiry date of the derivative contract (also called derivative expiry), a major technical glitch shut down trading on the NSE for four hours. Brokers demanded better guidelines and longer hours to be able to square off or roll over their trades rather than leave it to the last day of the expiry. After the markets reopened, the Bulls were back in great form, helping the Nifty to touch 15,000.

FII buying was the mainstay of the current rally, pushing it to record highs.

The coming month is highly important for the markets as we are heading to the end of the financial year. Therefore, we need to keep an eye on the news flow and market sentiments.

Technically, as per the Extension Theory (Low-7,511.10, High- 11,794.25, Low-10,790.20), the Nifty has almost touched the 161.8%, that is, 15,470 levels by quoting an

F


BEYOND LEARNING

Oaktree Capital Co-founder and Co-chairman Howard Marks has renewed the debate on value versus growth investing with his recent memo titled ‘Something of Value.’

It reflects Marks’ clarity of thoughts, historical perspectives and insights on the subject of value investing, and will be poured over time and again by investors seeking the precise meaning of value and growth investing, which has evolved since

rate.

The realistic rate is nothing but the summation of a “risk free rate” (applicable on government instru-ments) and a “risk premium” to compensate for the uncertainties arising from the macro and micro economic factors.

However, determining the value is more than just a simple mathematical calculation. It involves making informed judgements on relevant inputs. This discounting cash flow (or DCF) is the primary method for value investors to arrive at their investment decision on the basis of long-term company fundamentals.

The important bit to realize is that the intrinsic worth of a financial instrument may be very different

Benjamin Graham.

Key takeaways from the memo have been listed in this article for your consideration. WHAT IS VALUE INVESTING

Value investing refers to the identifi-cation and quantification of the inherent worth of a company, which is based primarily on its ability to generate cash flow and to buy the stock of the company if its prevalent price represents a reasonable discount from the inherent worth or the intrinsic value.

The worth of a company can be broadly calculated by summation of all estimated cash flows as far into the future as possible and then subsequently discounted at a realistic

A SHIFT INNARRATIVE

Changing times call for change in investment styles, and is evident in Howard Marks’ recent memo



displayed stellar performance and their valuations rose to great levels before rapidly falling between 1972 and 1974.

Due to this fall, the Nifty Fifty returns turned negative for several years. However, it must be highlight-ed that even in the Nifty Fifty, nearly half the companies gave reasonably good returns, even keeping pre-crash levels of 1972 as yardstick. This suggests that even higher valuations can be justified to an extent for exceptional companies.

THE DEBATE ABOUT VALUE VS GROWTH

“The two approaches – value and growth – have divided the invest-ment world for the last fifty years. They’ve become not only schools of investing thought but also labels used to differentiate products, managers and organizations,” said Howard Marks.

Value and growth approaches have historically been viewed as distinct and have largely divided the opinions of the investment world.

Given the trends over the past decade or so favouring growth investing approach over value investing approach, there is an increase in echo from the investment community that the value approach of investing is past its sell-by date.

However, proponents of value approach are of the view that the resurgence of the approach is due any moment. While there are notable differences in the approaches pertaining to choice of business models, outlook to investment and response to interest rate corrections, investment wizard Howard Marks believes that the two approaches are not meant to be mutually exclusive. According to him, this distinction is

of even laymen, efficient market hypothesis hold good. The focus has moved away from identifying observable information to focus on superior judgements regarding qualitative factors and the ability to reasonably predict future trends.

LOW VALUATION NO LONGER MEANS VALUE

Low valuation does not necessarily translate into good value. A stock trading at a low Price-to-Earnings (P/E) ratio may appear attractive in the current state. But the important aspect to be considered is whether the current earnings are indicative of the strong fundamentals of the company and whether they can serve as a predictor for the sustained performance of the company.

Howard Marks writes, “It’s easy to be seduced by the former (low value stocks), but a stock with a low P/E ratio, for example, is likely to be a bargain only if its current earnings and recent earnings growth are indicative of the future.

Just pursuing low valuation metrics can lead you to so-called “value traps” - things that look cheap on numbers but aren’t because they have operating weaknesses or because the sales and earnings creating those valuations can’t be replicated in the future.”

EVOLUTION OF GROWTH INVESTING

The evolution of growth investing occurred primarily at the start of the 1960s, which was characterized by increasing investor interest in rapid growth stocks. It was during this time that the Nifty Fifty came into being and became the focal point of leading institutional investors.

In the initial phase, the Nifty Fifty

from what is being quoted in the market, and the job of the value investor is to primarily identify stocks, which are trading at a discount from their inherent worth or intrinsic value, thereby creating portfolio value.

HOW HAS VALUE INVESTING EVOLVED Value investing has evolved in a big way over the years. In earlier times, efficient market hypothesis did not necessarily hold true. The competing players in the market were far fewer and access to information was relatively difficult. Without the current toolkit of computer terminals, software and spreadsheets, the information was more difficult to discern at that time.

Further, access to real-time informa-tion was far more limited with investors relying primarily on newspapers or publications to undertake research of a stock. The scene was such that even gaining access to a company’s annual report was a tedious task.

Warren Buffett coined the term “Cigar Butt” approach to refer to value investing famously initiated by Benjamin Graham wherein he would stress on searching for companies whose shares were selling at a discount in relation to the liquidation value of balance sheet assets.

Buffett compared this approach to searching for used cigar butts having that last puff left in them. In the old days, it was easier for knowledgeable investors to buy stocks of these companies owing to information silos where attractive deals were out in the open. However, the scenario has changed completely at present.

With the availability of real-time, updated information at the disposal


BEYOND WORDSQ Ratio

Q Ratio explains the ratio between the market value of a physical asset and its replacement value. When the market value equals the replacement value, it brings about equilibrium. In simple terms, Q Ratio helps ascertain if a particular business or market is overvalued or undervalued.

This ratio was first introduced by Nicholas Kaldor in the year 1966 in his article “Marginal Productivity and the Macro-Economic Theories of Distribution: Comment on Samuelson and Modigliani.” However, it earned fame 10 years hence thanks to the work of James Tobin. It goes by Tobin’s Q as well as Kaldor’s V after their founders.

counterproductive. Given the potentially complex interconnected world, the combination of both approaches is the way to go.

DANGERS OF BOTH APPROACHES

Considered in silos, there is an inherent bias and danger in both approaches. Given the complex macroeconomic and microeconomic environment, the companies today are exposed to further sensitivity presenting both positive and negative outcomes.

From growth investing aspect, successful businesses have ample room for growth and durability and the ability to generate high returns. On the flip side, there is an increas-ing possibility for overvaluing, undeserving companies.

He writes, “Growth investing often entails belief in unproven business models that can suffer serious setbacks from time to time, requiring investors to have deep conviction so as to be able to hang on. When they’re rising, growth stocks typically incorporate a level of optimism that can evaporate during corrections, testing even the most steeled investor.”

Similarly, Howard Marks writes, “Much of value investing is based on

the assumption of ‘reversion to the mean.’” In other words, “what goes up must come down (and what comes down must go up).” Value investors often look for bargains among the things that have come down.

Their goal, of course, is to buy underpriced assets and capture the discounts. But then, by definition, their potential gain is largely limited to the amount of the discount. Once they’ve benefitted from the closing of the valuation gap, “the juice is out of the orange,” so they should sell and move on to the next situation.”

He further adds, “In Graham’s day, cigar butts could be found in good supply, valued precisely, bought very cheaply with confidence, and then sold once the price had risen to converge with the value.”

Given the inherent scepticism built into the value investing approach, it can lead to a bias. Too much focus on price and precise calculation of the intrinsic value and applying margin of safety may not always work.

That bias could lead to outright dismissal of certain investing opportunities. Value-based investing needs to adapt with changing times and not focus exceedingly on formula-based investing as this will likely lead to massive errors in

turbulent times.

HOW SHOULD INVESTORS APPROACH BOTH INVEST-MENT STYLES TODAY

The natural mind-set of a value investor is biased towards scepti-cism. This leads to a limited response approach in fluid, changing times. Value investors justify this by pointing at historical bear runs that cause large sums of value depletion.

While it is true that this scepticism reduces the probability of losing money, it is also true that the same reduces the probability of making adequate returns. In today’s world change is the only constant and the world is rapidly evolving and the scepticism should be paired with a more receptive and open-minded approach. Then only a view should be formed. Innovators are often disregarded as absurd in the beginning when compared with the prevailing yardstick. Once the innovation becomes successful, the seemingly crazy and absurd idea becomes the norm. Just like low price doesn’t mean good value or high price doesn`t mean bad value, a mutually exclusive approach will be inade-quate in the given scenario. A fluid approach combining the aspects of both is the way forwarD.

Recently, capital markets regulator, the Securities and Exchange Board of India (SEBI) relaxed Initial Public Offering (IPO) norms for larger issues.

The media has reported that the move will benefit the IPO of Life Insurance Corporation of India (LIC), which may come around October this year. Q. What Has SEBI Announced? In its board meeting on 17th February, SEBI cut the minimum dilution requirement for Initial Public Offering for larger public issues. It is called the Minimum Public Offer (MPO) requirement. Q. What Is The Minimum Public Offer (MPO) Requirement? There are SEBI rules on how much a company can divest in an IPO based on what the post-listing market capitalization (number of shares multiplied by share price) the company intends to achieve.

This, in turn, depends on the number of shares that are put on the block and the issue price. SEBI has relaxed MPO norms for large issues.

IMPORTANTJARGON

Q. What Are The Existing Norms? Under the prevailing Initial Public Offering norms, issuers with post-issue market capitalization of `4,000 crore or more are required to offer to the public at least 10% of its post-issue market capital. Q. What Are The New MPO Norms? Issuers with post-issue market capitalization of `1 trillion are required to offer to the public shares worth at least `10,000 crore.

For issues with post-listing market capitalization exceeding `1 trillion, an additional 5% of the incremental amount beyond `1 trillion will have to be offered to the public.

For example, if the company intends to achieve a post-issue market capitalization of `1,50,000 crore, then the company will have to come out with a public offer of `12,500 crore (`0,000 crore + 5% of `50,000 crore, which is `2,500 crore). The IPO size would have been `15,000 crore based on prevailing norms. Q. What Is The Context To Such Tweaks In MPO Norms? The announcement follows a consultation paper by the

EASING OF IPOs NORMS BY SEBI AND LIC

BEYOND BUZZ


regulator in November to review the requirement of minimum public offer for large issuers. The minimum offer to public requirements was last revised in the year 2014. Q. What Did The Consultation Paper Argue? There were representations to SEBI from market participants that the prevailing MPO norms were cumbersome.

Besides, large issuers already have investments by private equity and other strategic investors who are classified as public shareholders post-listing.

The norms forced unnecessary dilution for promoters. Moreover, there are minimum public shareholding norms that companies have to abide by. Q. What Do Minimum Public Shareholding Norms Prescribe? These norms provide that companies need to achieve 25% public shareholding within three years from the date of listing.

For big players, these norms were indeed burdensome and a lot depended on market absorption capacity for such shares. Q. What Are The New Minimum Public Shareholding Norms? SEBI also extended timing for large issues to meet minimum public shareholding norms. These issuers shall be required to achieve at least 10% public shareholding in two years and at least 25% public shareholding within five years from the date of listing. Q. What Will Be The Implication Of Tweaking Of These Public Offer Norms? Change in minimum public offer norms will ensure lesser dilution for promoters or existing shareholders for larger public offers. Further, relaxation of minimum shareholding norms will give more time for large companies to meet minimum public shareholding requirements. Q. Why Is The Media Saying That The Move Will Help LIC’s IPO? The media is speculating that SEBI has tweaked both

these norms to facilitate LIC’s IPO, which could be the largest public offer that India has witnessed so far. LIC may tap the market in the second half of fiscal year 2021-22. Q. What Is The Status Of LIC’s IPO? The government is preparing the ground for LIC’s IPO. LIC is currently undergoing an evaluation process by actuarial firms. The government is working on deriving its valuation.

There are reports that LIC could be valued (for 100% stake) anywhere between `10 lakh crore and `15 lakh crore. The insurer has assets worth `34 trillion. The government owns 95% in LIC. It might be considering diluting just 5% of the stake in the LIC IPO. Q. What Groundwork Is The Government Laying? The government will have to amend the LIC Act. It will also have to ensure that the LIC abides by various provisions of the Companies Act.

It will have to change the way the insurer audits its books. The government will also have to increase its authorized share capital from `100 crore now to `25,000 crore. Q. So, What Is The Hurdle? The hurdle is its mega size! Prevailing MPO norms of 10% would have meant that LIC’s IPO size would have been around `1 lakh crore. This may be too much for the market to absorb. Further, the minimum public shareholding norm of 25% in three years would have meant even more papers from LIC, which could crowd out private issuers.

But at the same time, the government is banking on LIC stake sale to meet a part of its divestment target of `1.75 lakh crore for FY22.

Further, the government plans to have at least 75% stake in LIC for the first five years post the IPO, and subsequently hold at least 51% in the insurer at all times after five years of the proposed IPO. This implies that LIC shares will be offloaded every year and each tranche would be as big.

Tweaking MPO and minimum public shareholding norms for large issuers is a fine balance that SEBI has undertaken, which would help the government sell some of its stake in LIC without much disruptioN.


FLIGHT OFUNICORNSThe number of unicorns is likely to rise this year, but global and domestic slowdown may lower the tempo

RNI No. MAHENG/2009/28962 | Volume 12 Issue 01 | 16th - 31st Jan ’20Mumbai | Pages 56 | For Pr ivate Circulat ion

and reforms, the Finance Minister has

wholesome budget that has something or other for all constituents

RNI No. MAHENG/2009/28962 | Volume 12 Issue 02 | 16th - 29th Feb ’20Mumbai | Pages 52 | For Pr ivate Circulat ion

11:15

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