Welingkars students write a report upon everything related to investment via the Niveshak Times!

1. Niveshak
THE INVESTOR VOLUME 3 ISSUE 11 November 2010
!
The Good, The Bad and The Ugly
Q2
Results
RALLYING STOCK MARKETS DUE THE IMPACT OF RISE IN CRUDE OIL PRICES
to HOT MONEY INFLOWS PG.08 ON THE INDIAN ECONOMY pg.20

2. FROM EDITOR’S DESK
Dear Niveshaks
I wonder when we are going to see this vicious circle coming to an
Niveshak end. The whole world witnessed the global downturn in 2008 followed by
Volume III debt crisis in Dubai and Greece. And now we see Ireland joining the league.
ISSUE XI While the US economy faced the repercussions due to reckless securitising
November 2010 of subprime mortgages and Greece collapsed under the burden of mis-
represented government spending, the Irish took an easier path to ruin:
by taking out enormous, unregulated loans. While the Irish government
Faculty Mentor might have underestimated the severity of the crisis in the last two years
Prof. N. Sivasankaran and have still not asked for assistance, but, given the kind of interconnected
framework i.e. Euro Zone in which they operate, its neighbouring countries
might not let this continue for a longer period of time. Although European
countries don’t affect our economy directly but they do affect sentiments,
THE TEAM capital flows, gold prices, and commodity prices and so on. Thus, it makes
Editor all the more important for a recovering economy like ours to maintain the
Bhavit Sharma growth momentum through timely and appropriate reforms.
The waves of concerns that Ireland and few other countries of Europe
Sub-Editors may find it difficult to meet their debt commitments couldn’t prevent them-
Durgesh Nandini Mohanty selves from reaching Indian bourses and dragged it below the psychologi-
Hitesh Gulati cal levels of 20,000 and 6,000, of Sensex and Nifty respectively. This really
Sumit Kedia makes me (and many of us) believe that we are truly an integral part of so
Tanvi Arora called Global village. Moving forward we can expect to see more down-
Upasna Agarwal side movement owing to the slowly building Asian cues specifically on con-
cerns that China may further tighten their monetary policy to curb inflation.
New Team But with the strong capital inflows from FIIs looking for greater returns and
Alok Agrawal sound Indian economy backed by solid fundamentals, our benchmark in-
Deep Mehta dices can surprise us by breaking its greatest achieved heights by the end
Jayant Kejriwal of this year.
Mrityunjay Choudhary
Rajat Sethia Last month’s cover story gave you a detailed analysis of the Coal In-
Sawan Singamsetty dia’s IPO and its future outlook. The stock, when listed on 4th November
Shashank Jain 2010, actually met all its expectations and got listed at Rs. 314 which was at
Tejas Vijay Pradhan approximately 30% above of what investors had paid. Truly a windfall for all
investors. I so wish I too had invested in it. In this month’s cover story, we are
Creative Team going to look, analyse and understand the second quarter results of differ-
Bhavya Aggarwal ent key sectors operating in India and their implications. At a time when In-
Swarnabha Mukherjee dian Financial services landscape is undergoing big time consolidation with
Vishal Goel the likes of Axis-Enam deal, we, in this edition, also present to you an article
on mergers and acquisitions. We are pleased to inform you that we have
Vivek Priyadarshi
introduced a new section in Niveshak called “Classroom” for your reading
pleasure. In this section, we will explain and elaborate a financial term with
the help of a conversation. We hope that this endeavour of ours will prove
All images, design and artwork
to be an interesting read for our readers and will help them understand
are copyright of
new terms in a much easier way with fun. Looking forward to your valuable
IIM Shillong Finance Club
feedback and suggestions.
©Finance Club Stay Invested.
Indian Institute of Management
Shillong
Bhavit Sharma
www.iims-niveshak.com (Editor -Niveshak)
Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears
no responsibility whatsoever.

3. CONTENTS
Niveshak Times Fingyaan
04 The Month That Was 16 Mergers and Acquisitions
in a Recession
finsight
Cover Story
19 Axis Enam Merger
11 Q2 Results – The Good,
the Bad and the Ugly!
CLASSROOM
23 Arbitrage
Article of the month
08 Rallying Stock Markets
due to Hot Money
Inflows
PERSPECTIVE
20 The Impact Of Rise In Crude
Oil Prices On The Indian
Economy FINLOUNGE
24 Crossword

4. www.iims-niveshak.com
The Niveshak Times
IRELAND TO SEEK EU-LED BAILOUT AS FINANCE MINISTER BRIAN
LENIHAN WORKS TO AVERT BANK COLLAPSE
TEAM NIVESHAK
IIM, Shillong
DOMESTIC BUSINESS erty loans above Rs. 75 lakhs, IDBI also increased its
Power Grid FPO garners 14.88 times oversub- interest rate for same by 25 basis points.
scription SEBI raises retail investor cap to Rs. 2 lakhs
The FPO offer from Power Grid Corporation of SEBI has doubled the upper limit for retail in-
India for its 84.17 crore shares in the price band vestment in public offers from Rs. 1 lakhs to Rs.
of Rs. 85-90 per share attracted a 14.88 times over- 2 lakhs to encourage greater investor participation
subscription of 1252.96 crore shares. The oversub- in share market through retail route. Now an inves-
scription reflects the continuing investor enthusiasm tor applying for shares up to Rs. 2 lakhs in an IPO
in stocks of state run entities which or FPO will be treated as retail investor which will
was also evident during the big- make him/her eligible for 5% discount on subscrip-
gest Indian IPO by Coal India Lim- tion’s face value. It is relatively easier to buy shares
ited. This FPO, which is estimated through retail investment due to relatively lower
to generate about Rs.7500 crore, share subscription by this category as compared to
is a part of the government plan HNI and institutional investor community. The total
to raise Rs. 40,000 crores in the shares at the disposal of retail investors shares in a
current fiscal year through stake public offer has remained unchanged at 35% and the
sale in state owned firms. After this FPO, the gov- corresponding allotments for HNI and institutional
The MonTh ThaT Was
ernment’s stake in Power Grid will come down from investors has also remain fixed at 15% and 50% re-
86.36% to 69.40%. spectively.
RBI hikes interest rates by 25 basis points India and China ranked higher in IMF’s quo-
To tame the rising inflation, RBI pushed up its ta
interest rates by 25 basis points with repo and re- G-20‘s decision to increase the quota for emerg-
verse repo rate being 6.25% and 5.25% respectively. ing economies by 6% in its meeting in South Korea
Though the WPI based inflation fell down marginally has resulted in India and China being elevated to 8th
from 8.62% in September to 8.58% in October, the and 3rd positions in quota status respectively. Now
latter figure is still considered to be above “comfort India’s quota in this 187 nation body has increased
level” by central bank, thus triggering its decision to from earlier 2.44% to 2.75% signaling its emergence
continue with its trend of increasing lending rates. as a major player in
It also tightened its norms on high value property new world econom-
loans as it increased the risk weight on property ic order. Emerging
loans exceeding Rs. 75 lakhs from 100% to 125% ir- economies contrib-
respective of its LTV (Loan to Asset Value) which also ute about 47.5% to
has been subjected to an upper limit of 80%. This world economy in
is likely to increase the difficulty of access to these terms of PPP (Pur-
loans as the banks are likely to reciprocate with a chasing Power Par-
hike in lending rates for such loans. ity) whereas their
IDBI goes for a rise in interest rates corresponding share in IMF prior to this decision
stood at 39.5%.
In view of policy rate hike by RBI, public sector
bank IDBI pushed up its interest rates by 50 basis India and Malaysia sign a free trade pact for
points. The benchmark prime lending rate has been next year
raised by 25 basis points to 13.50% with effect from India and Malaysia finalized a Comprehensive
4th November. It also raised its retail term deposit Economic Co-operation Agreement, CECA that is like-
rates by 10-50 basis points for its various maturity ly to increase annual bilateral trade to $15 billion by
schemes. With RBI increasing risk weight for prop- year 2015. Malaysia exports electrical and electronic
4 NIVESHAK VOLUME 3 ISSUE 11 november 2010

5. www.iims-niveshak.com
The Niveshak Times
THE BIGGEST OPPORTUNITY FOR US IS NOT NECESSARILY TO DO MORE
THINGS, BUT TO BE GOLDMAN SACHS IN MORE PLACES: LLOYD BLANKFEIN
products, crude petroleum, palm oil and chemi- INTERNATIONAL BUSINESS
cal goods to India. Further, India has also invested US to go for second round of Quantitative
around $1.11 billion in nearly 100 manufacturing Easing:
projects in Malaysia. The deal expected to promote
Federal Reserve of US has announced its sec-
free movement of goods, services and investment
ond round of Quantitative Easing (QE) of $600 bil-
will be signed by leaders of both the countries by
lion to provide succor to languish-
31st January, 2011. This deal is more comprehen-
ing US economy. QE 2 action
sive than India-ASEAN one which came into effect
plan involves buying of trea-
at beginning of this year as it also covers services,
sury bonds of $75 billion
investment and technical barriers to trade and other
per month over the next 8
areas.
months to infuse $600 bil-
Cross Border Mergers embroiled in capital lion into the economy. The
gains tax tangle objective is to increase the
Two cross border mergers, one involving tele- excess reserves with the bank-
com giant Vodafone’s acquisition of Hutchison and ing system so as to keep the inter-
The MonTh ThaT Was
the other involving major drug maker, Sanofi –Aven- est rates low and thereby stimulate borrow-
tis’ pick up of majority stake in Shanta Biotechnics, ing and spending activities in the economy.
have come under the scanner of IT department for AIA’s $17.9 billion IPO is the 3rd biggest in
payment of capital gains tax. In Vodafone’s case, it world
has been asked by a three judge bench of Supreme
The Hong Kong IPO of AIA, the Asian insurance
Court headed by chief justice S.H. Kapadia to de-
unit of AIG was a huge hit among investors looking
posit Rs. 2500 crore by first week of December and
to invest in one of world’s most attractive financial
a bank guarantee of Rs. 8500 crore by second week
markets as it amassed $17.9 billion to become the
of January,2011. The total sum of Rs. 11ooo crore is
third biggest IPO in the world. A part of the proceeds
the capital gain tax which Vodafone has to pay for
will be used by AIG to pay back a portion of the
its acquisition of Hutchison shares. In other case,
$182.3 billion bailout that it received from US.
Sanofi-Aventis has been asked by IT department to
pay Rs. 700 crore as capital gain tax for its buying of Steve Ballmer sells $1.3 billion shares of Mi-
majority stake in Hyderabad based pharmaceutical crosoft
firm, Shanta Biotechnics valued at Rs. 3770 crore. Microsoft CEO, Steve Ballmer has laid off $1.3
Mutual Funds to go for quarterly basis dis- billion worth of shares in the company, a first in
closure of assets his tenure of seven years with the company. After
this sale the CEO still holds 350 million shares in
Association of Mutual Funds in India (AMFI)
company valued at
has decided to end the practice of monthly disclo-
$9 billion approxi-
sure of Assets Under Management (AUM) for mutual
mately. To avoid any
funds in India from October and adopt a quarterly
negative specula-
basis disclosure for period thereafter.”The average
tion that this chunk
AUM (AAUM) for each quarter (90-day average) will
sale of shares by the
be computed and uploaded on the Amfi website on
CEO may trigger, the
the first working day of the following month of every
company issued a statement on Steve’s behalf in
quarter, effective from quarter ending December 31,
which personal investment diversification and bet-
2010,” Amfi said. The move is an attempt to placate
ter year end tax planning were given as the reasons
prevalent feeling among mutual fund companies
behind his move.
about monthly disclosure of AUM putting too much
pressure on business.
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 5

6. www.iims-niveshak.com
Market Snapshot
FII, DII Net activity (in Rs. Crores)
BSE
AoM MonTh T Perspective
Source: www.bseindia.com
www.nseindia.com
TheFinGyaan haT Was
MARKET CAP (IN RS. CR)
BSE Mkt. Cap 72,21,148.40 BSE
Index Full Mkt. Cap 29,13,700.51 Index Open Close % Change
Index Free Float Mkt. Cap 15,45,165.99 SENSEX 20,272.49 19585.44 -3.39
Source: www.bseindia.com
MIDCAP 8302.56 8077.36 -2.71
SMALLCAP 10597.59 10237.29 -3.40
CURRENCY RATES AUTO 9964.35 9940.93 -0.24
INR / 1 USD 45.26 BANKEX 14165.91 13705.09 -3.25
INR / 1 Euro 61.78 Consumer Durables 6544.48 6455.92 -1.35
INR / 100 Jap. YEN 54.25 Capital Goods 15889.74 15625.49 -1.66
FinSight
INR / 1 Pound Sterling 72.60 FMCG 3620.89 3595.08 -0.71
Healthcare 6462.61 6579.76 1.81
IT 6023.54 5889.87 -2.22
Metal 16923.31 16461.15 -2.73
OIL & GAS 11137.96 10227.47 -8.17
POWER 3138.99 2981.36 -5.02
PSU 10199.39 9647.79 -5.41
REALTY 3653.32 3173.57 -13.13
TECk 3702.60 3617.55 -2.30
Source: www.bseindia.com
1st to 19th November 2010
Data as on 19th November 2010
6 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

7. www.iims-niveshak.com
Market Snapshot
KEY INDICES RESERVE RATIOS
CPI (Sep. 2010) 9.81% CRR 6%
WPI 8.58% SLR 25%
IIP (Sep. 2010) 4.4% Source: www.rbi.org.in
Source: www.mospi.gov.in
AoM
LENDING / DEPOSIT RATES POLICY RATES
Base rate 7.5% - 8% Bank rate 6%
Savings Bank rate 3.50% Repo rate 6.25%
Deposit rate 6% - 7.5% Reverse Repo rate 5.25%
Source: www.rbi.org.in Source: www.rbi.org.in
Perspective
GLOBAL INFLATION RATES
The
American inflation CPI 1.17 % Oct-10
English inflation CPI 3.13% Oct-10
MonTh ThaT Was
Dutch inflation CPI 1.56% Oct-10
German inflation CPI 1.31% Oct-10
FinGyaan
Japanese inflation CPI 0.60% Sep-10
Source: www.global-rates.com
GLOBAL INTEREST RATES
Name of Interest Rate Current Rate Previous Rate Last Date of Change
American interest rate FED 0.25 % 1.00% 16-Dec-08
Brazilian interest rate BACEN 10.75 % 10.25% 21-Jul-10
FinSight
British interest rate BoE 0.50 % 1.00% 5-Mar-09
Canadian interest rate BOC 1.00% 0.75% 8-Sep-10
Chinese interest rate PBC 5.56% 5.31% 19-Oct-10
European interest rate ECB 1.00% 1.25% 7-May-09
Indian interest rate RBI 6.25% 6.00% 2-Nov-10
Japanese interest rate BoJ 0.10% 0.10% 5-Oct-10
Russian interest rate CBR 7.75% 8.00% 31-May-10
South African interest rate SARB 5.50% 6.00% 19-Nov-10
Swedish interest rate Riksbank 1.00% 0.75% 26-Oct-10
Swiss interest rate SNB 0.25% 0.50% 12-Mar-09
Source: www.global-rates.com
Data as on 19th November 2010
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 7

8. Rallying stock markets due to
HOT money Inflows
Akash Agarwal & Abhishek Dassani
XLRI Jamshedpur
Since January of this year, there in nearly $4.3 billion into the In-
The Indian stock
has been a surge in equity value dian markets in November and al-
market has been on across almost all the emerging mar- most $28.64 billion since the start of
the rise on account kets and India is no exception. Last this year. The domestic institutions
of the “hot money” month, the Bombay Stock Exchange have been a net seller which has
(BSE) Index (Sensex) closed at over helped in meeting the FII demands.
inflows from the 20000 points, while National Stock ”Hot money” refers to funds
FIIs. Currently, a lot Exchange’s index, the Nifty, closed at that are controlled by investors who
AoM
of investments are over 6000. Sensex jumped over 15 per actively seek short-term returns
happening in the cent since January, due to huge capi- (mostly FII’s). These investors scan
tal inflows, making the Indian stock the market for short-term, high inter-
emerging econo- market as one of the best performers. est rate investment opportunities and
mies. While FIIs have move their money from one invest-
Where did the capital inflows
certain positive im- ment asset to another very quickly.
come from?
pacts on the econ- Usually, the capital inflows
Higher FII inflows to India may
omy, on the other be attributed to the unclear growth
come from both the retail domestic
prospects in the west (US has slowed
hand they can also investors and the off shore investors
down while Germany and UK are up-
affect the economy in the form of foreign Institutional
beat) and unchanged interest rates
Investments (FII’s) and Foreign Di-
in a negative man- rect Investments (FDI’s). This had
signifying lower returns with the Fed-
ner if they are in eral Reserve, European Central Bank
been the case earlier during the mar-
(ECB), Bank of England (BOE) keep-
excess. ket rise of 2007 or before, but this
ing rates unchanged. Funds seeking
time it’s different. One of the major
better returns moved to the Asian
concerns that India is facing is that
emerging markets and in particular,
this ‘hot money’ is going into the
India has received
stock market rather than new proj-
large por-
ects and startup companies in the
tion of
form of long term fund- ing.
the in-
The investment in the
vestment.
stock market has more
than doubled this year, Overall Impact of
foreign direct invest- hot money inflows
ment (FDI) into
FIIs are usually
India fell more
not concerned about
than 25 per-
the issues of devel-
cent, com-
opment of the developing
pared to the
economies, whether or not this is
same period
ethical is another debate. Though
a year earlier.
there are obvious positive out-
So far, FIIs
comes for an economy due to the
have poured
incoming FIIs, these are also accom-
So far, FIIs have poured in
nearly $4.3 billion into the
Indian markets in November
and almost $28.64 billion
since the start of this year
8 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

9. panied with a host of other negative aspects. The outcome of losing competitiveness in exports is that
only reason for an FII to invest in a company is the it would force the organizations to become more in-
motive of profit. FIIs are usually very selective in novative and increase the productivity and quality.
their investment. They select companies that show
good results or have potential for future profitabil- Effect of Foreign institutional investors on
ity thus raising these companies’ stock prices and other emerging economies
hence their market capitalization. The firm, now FIIs have had many positive affects in other
with financial clout can even acquire other firms countries too like in OECD countries, where institu-
and grow even more. Apart from that, another posi- tional investors have contributed significantly to the
tive impact of FIIs is that it leads to a competition development of their financial markets and overall
among firms, all of them vying for the attention of economic growth. In China, for instance, when the
the FIIs which leads to greater efficiency, higher Qualified Foreign Institutional Investor (QFII) scheme
transparency and improved corporate governance. came into effect (it essentially allowed licensed for-
eign investors to buy and sell yuan denominated “A”
AoM
Macroeconomic impact shares in China’s stock exchanges which was closed
Due to these capital inflows, enormous inflows to foreign investors till then), the domestic markets
of foreign exchange occur, which exerts an upward was opened up for the foreign investment. This strat-
pressure on the Rupee. It soared up 9 percent against egy of QFIIs was also implemented in other places like
the dollar in the last 16 months. The appreciation Taiwan to ensure a stable flow of currency so that the
of the Rupee will obviously make the imports com- economic stability of the economy was maintained.
ing into India cheap and exports more expensive. In Mexico too, significant changes in its eco-
Thus, importers stand to gain from cheaper imports, nomic and political scenario have taken place
which in turn, lead to lower prices of these imported making it a preferred investment destination.
goods in the country leading to a deflationary trend.
Negative effects of excess FIIs in markets
The Foreign Institutional Investors usually
bring with them a lot more volatility into the fi-
nancial markets of the country than what may
have been experienced before. According to some
Indian analysts, the increasing bullishness in the
developing nations is leading the stocks in these
countries to become overvalued that may not be
justified even under country’s high growth rate.
There are also fears that some of the lessons from
Fig 1: Monthly Trade deficit in million dollars the recent financial crisis have been forgotten.
On the flip side, the appreciation of the Ru- According to Eswar S Prasad, Professor of Eco-
pee makes Indian exports less competitive in the nomics at Cornell University, there can be fairly
international markets. The major commodities that serious risks associated with the escalating equity
are exported are gems and jewelry, chemical and market if the hot money keeps pouring in India.
related products, engineering goods and textiles He fears that this might just be the boom phase
among others. If the Rupee appreciates, these sec- of a boom-bust cycle, with all the given risks.
tors would become less competitive due to exports
Mr. Prasad worries that one day or the oth-
becoming expensive and thus possibly would expe-
er most of the FIIs could suddenly withdraw their
rience a slowdown in growth. Earlier, exports would
invested money, as was done in early 2008, if
have led to the growth of these sectors. Thus, with
they saw any signs of a slow down in the In-
the fall in exports the possibilities of layoffs and
dian economy. The outflow of money from the
slower growth rates in these highly labor intensive
market could then decrease the real economic
sectors have increased. On the other side, a positive
growth in India, and hurt it tremendously, by de-
Funds seeking better returns
have moved to the Asian
emerging markets and in
particular, India has received
large portion of the investment
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 9

10. priving the country of the short term capital.
For example, in 2008 India was growing at
the rate of 9.2% but its growth fell to 6.7 percent,
partly because the foreign investors took out bil- CROSSWORD SOLUTIONS
lions of dollars from Indian stock and the bonds
market. The decreased supply of capital severely OCTOBER 2010
hit the companies with large capital requirements.
Thus, when the economy opens to the
short term capital in the form of ‘hot mon- Across
ey’ by the FII, the risk of the capital sud-
denly moving out of the country increases. 4. Petrobras
Conclusion
It will not be wrong however, if we say that FIIs 5. CDO
AoM
have played a big role in the formation of capital
in the country. Some academicians even say that 6. CBOT
the overall liquidity in the capital market can be at-
tributed to the hot money poured in the country
by institutional investors. The surge in the rupee 7. Cairn
due to steady flow of dollars in the country also
has its own implications for the economy. However,
on the downside there are some severe implications
9. Peter Lynch
in terms of increased volatility in financial markets.
This volatility significantly impacts the small local
investors in these markets. If we look at the over-
all trend in the stock market today, many Indians
have become wary of the stock market. Individual Down
investors, for instance, did not jump at the recent
IPO of SKS Microfinance. The Coal India offering was 1. Revenue Recognition
also subscribed only 2.1 X times by the retail in-
vestors in contrast to the overall subscription of
15.3 times. In early 2008, however they clamored 2. Sarbox
to buy public offerings such as Reliance Power.
Another significant development that has 3. UTI AMC
been observed is that the Indian markets are
now no longer insulated from the world mar-
kets due to the international flow of goods 4. Plowback
and services and international flow of capital.
8. BVP
“There can be fairly seri-
ous risks associated with the
escalating equity market if the
hot money keeps pouring in
India” - Eswar S Prasad, Professor
of Economics,Cornell University
10 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

11. eG ood,
Th
Cover Story
Bad
the
and
gly!
t he U
Jayant kejriwal & deep mehta
Team Niveshak Results
With the economy growing at 8-9%, and robust de- ance was on account of higher-than-expected
mand of goods and services, the quarterly results of Q2 increase in raw material costs which were up
FY-11 were mostly in line with estimates. The Sensex hit 150bps Q-o-Q, after having risen 400bps in Q1FY11.
an all-time closing high of 21004.96 points on 5th No- Going forward, the major concerns are like-
vember 2010, mainly fuelled by FII inflows. The average lihood of a split in the joint venture of Hero and
growth of capital goods production remains healthy at Honda, with Hero group to acquire Honda’s 26%
over 28% in 2010-11, though the growth of IIP index in stake, around Rs. 9000 Crore at current mar-
September at 4.4% fell short of expectations. Data for ket prices. Also the Production at the Haridwar
the first six months of the fiscal year presents a trend plant is 1.4 million units annually which can be
of declining growth of capital goods over the course of stretched to 1.8 million. Hence, the possibil-
both Q1 and Q2 of 2010-11. The pace of growth of con- ity of further benefits from this plant is limited.
sumer durables, although healthy at 10.9% in September
Mahindra and Mahindra (M&M) reported a
2010, was considerably slower than the growth rates in
excess of 20% registered since April 2010. The healthy
growth in the production of consumer durables during
the previous months may have partly reflected building
up of inventory prior to the festival season in India. With
interest rates expected to climb following the lagged
transmission of monetary tightening, and the US Federal
Reserve announcing the second round of quantitative
easing (QE2) of USD 600 billion, it would be interesting
to see how the economy unfolds in the coming months.
Auto
The top-line performance in Q2FY11 for the in-
dustry, on the whole, has either been in line with the
estimates or has exceeded the estimates. The industry strong set of results in Q2FY11 with revenues of
is expected to grow at a CAGR of 13-15% for FY10-12E the automotive segment growing 23.7% YoY driven
aided by boisterous economic activity, favourable demo- by strong volume growth of three wheeler/small
graphics and higher income levels. The major concerns, trucks. Also, the segment’s revenues were boost-
however, are steep raw material prices and untoward ed by robust exports volume growth. The PAT grew
forex volatility, which could cause serious concern to by 7.9% YoY to Rs 758 crore further supported by
the whole of the value chain, going forward, as margins lower interest expenses. Since the successful in-
and bottom-line, could shrink to a certain extent. How- troduction of Gio and Maximo the company is ag-
ever, commodity prices could see some slowdown from gressively planning to expand its product portfolio
Q4FY11 with the easing of the demand-supply mismatch. in the Heavy Commercial Vehicle segment (~25-
50 tonnes category) with the Navistar vehicles.
Hero Honda Motors’ Q2FY11 net profit, down
15% Y-o-Y, was below market expectations. The vari- M&M with its proposed buy-out of South-Korea
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 11

12. based SUV maker, SsangYong Motor Co (SMC) can lever- ONGC’s Q2 net profit was up 5.87% YoY and
age SMC’s strong R&D capabilities and global footprint. net sales were up 20.64% YoY, mainly due to in-
Tata Motors Q2FY11 net sales were up 36% crease in crude oil sales volume by 11.3% and
lower subsidies(Due to increase in retail price of
Cover Story
YoY led by strong performance from core busi-
ness and significantly better performance from auto fuels, overall subsidies declined as a result
Jaguar Land Rover. Luxury car demand remains ro- subsidy burden shared by the ONGC fell 45% QoQ
bust particularly in China, Russia and the US. This to Rs 1480 crore). Gas business revenues improved
was on the back of a strong response to the newly 41%. Other income almost doubled QoQ to Rs 906
launched Indigo Manza. The latest launch of Aria in crore, mainly on account of dividend income from
the mid-premium UV segment is expected to fur- subsidiaries and higher interest income. Miscella-
ther improve market share in this growing segment. neous also accounted for a large part of the rise.
Maruti Suzuki for 2QFY2011 registered 27% OMCs: Post the deregulation of petrol prices
yoy growth in net sales while net profit at 598cr re- in June 2010 and price increases in LPG/ kerosene,
corded a 5% yoy jump. The production capacity has the three oil marketing companies (OMCs; IOC, BPCL
been increased to 1.3mn units (from 1.2mn) through and HPCL) have delivered significant outperfor-
de-bottlenecking exercise. The current production
rate is 110,000units/month. In October’2010 with
sales of 1, 18,908 units the company crossed the
one-lakh mark in domestic sales for the first time.
Company Revenue Net Profit EPS
Hero Honda 4551.95 505.6 25.32
M&M 5434.36 758.49 13.36
Tata Motors 28782 2222.99 38.91
Maruti Suzuki 9147.27 598.24 20.71
Revenue and Net Profit in Rs. Crores
mance (14-23%) against the Sensex since July 2010.
Oil & Gas IOC net sales for Q2FY11 increased 26.8%
Oil and gas industry in India is almost US$110 YoY due to higher crude prices and strong refin-
billion and oil accounts for almost 44% of India’s ing margin of US$6.6/bbl compared with US$2.7/
primary energy consumption. Demand for oil and bbl for HPCL and US$2.8/bbl for BPCL. With com-
gas is likely to increase from 186 million tonnes pensation of Rs. 7220 Crore from the govern-
of oil equivalent (mmtoe) to 233 (mmtoe) in the ment its net profit stood at Rs. 5293.95 crore.
year 2011-12. India is net importer of oil and its HPCL’s revenue increased 25.3% YoY
dependence on imports is 80% which is likely to primarily due to higher subsidy pay out
go up in near future which might also bring do- of Rs.2830 crore from the government.
mestic oil price equivalent to international price. BPCL reported impressive earnings of
RIL’s Q2 FY11 net profit was up 27.80 % YoY Rs.2142.22 crore supported by government subsidy
largely driven by high operating rates and improved of Rs.2950 crore and forex gain of Rs. 300 crore.
refining margins at US$ 7.9 per barrel as against US$
Company Revenue Net Profit EPS
6 per barrel in the corresponding period of the previ-
RIL 57479 4923 15.05
ous year. Its net sales were up 22.69% (YoY) helped
by higher gas output from its KG D6 block where it ONGC 18430 5388.77 25.19
aims to reach peak gas output of 80 million stan- IOC 77335.75 5293.95 21.8
dard cubic metres. Growth in the refining segment HPCL 30870.23 2089.61 61.71
was driven by the increase in throughput and high- BPCL 35434.77 2142.22 59.25
er oil prices. The company has struck three shale- Revenue and Net Profit in Rs. Crores
gas joint ventures with US firms so far this year.
With Chinese and Irish con-
cerns along with US Federal
Reserve’s QE2, it would be
interesting to see how the
economy unfolds in the coming
months
12 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

13. IT bottom-line due to lesser realization of dollars.
IT sector companies reported stron- Company Revenue Net Profit EPS
Cover Story
gest quarter in the last four years. The growth TCS 7267.45 1812.65 9.24
was visible across all segments and verticals. Infosys 6425 1641 28.59
TCS, the largest software exporter from India, Wipro 6556.9 1172.1 4.81
showed Q2 US GAAP consolidated net profit up 14%
Revenue and Net Profit in Rs. Crores
at Rs 1813 crore. The stock markets reacted posi-
tively with share price touching a 52-week high of Banking
Rs 1030.5. 53.7% of the revenue comes from North Banking sector showed very good growth in
America, with UK and India contributing 15.3%, this quarter with increase in focus on CASA (Current
9.9% resp. BFSI contributes to 44% of its revenue, and Savings Account) which reduces the cost of de-
followed by Telecom (12.8%) and Retail and Distri- posits (interest on savings account=3.5%,interest on
bution (10.9%).The streamlining in operations dur- current account=0%,lending rate= approx. 10%) and
ing slowdown was the major reason for expanded helps banks to increase NIM (Net Interest Margin).
margins. TCS added 19,923 employees in the quar-
ter which was the largest ever. The superior per-
formance was driven by volume growth of 11%.
For Infosys, 16% QoQ PAT growth was assist-
ed by addition of 27 clients in the quarter. North
America is even more significant with 65.8% con-
tribution. Europe with 21.8% and India just 2.1%.
Onsite revenues contributed 50.2% for this quarter.
Company was conservative on its guidance and so
stock prices took a minor beating. On the innovation
front, Infosys applied for 18 patent applications in
India and US taking the aggregate to 256 and it has SBI, the country’s leading lender, showed a
been granted 15 by US Patent and trademark office. 22% decline in consolidated profit on YoY basis, and
The third biggie Wipro announced IT services a marginal 0.5% growth YoY on a standalone basis.
revenue growth of 5.7% QoQ. Volume growth of It was a 14.2% decline QoQ. Probable reason could
6.6% was highest in 12 quarters. Strength of the ru- be higher provisions for bad loans which were partly
pee did cause margin squeeze by 2.5%. Americas due to acquisition of State Bank of Indore in August.
with 56% contribution, Europe with 27% and India Bank’s loan portfolio is well diversified with
9% formed the revenue dynamics for the quarter. no segment accounting for more than 21% of the
Financial services and Technology, Telecom and Me- loan book. There was a healthy growth in Non-
dia contribute 27%, 25% resp. to the revenue. Wipro Interest income on account of growth in loan pro-
cessing, cross selling, commission from increase in
government business. Higher slippages impacted
the asset quality of the bank. Mainly this was due
to defaults in Dubai and Agri-loan waiver scheme.
ICICI Bank, top private sector lender, showed
results that beat street estimates that were driven by
good credit growth and drop in provisions for bad loans.
Here, Net slippages were lower and NPA’s declined. A
concern was increase in operating expenses, which
will increase due to integration of Bank of Rajasthan.
announced a decrease in margins due to salary
hikes. It won a key project from the UID authority For HDFC Bank, 33% rise in Net profit (YoY) was
for the critical enrolment process for 2 states in In- driven by increase in NII (Net Investment Income - dif-
dia. It was particularly a disappointing quarter for ference between interest earned and paid). Again, the
Wipro, when its peers showed double digit growth. growth was due to stable margins, robust loan growth
and good CASA ratio. Retail loans which constitute
Overall, expect the volume growth to con-
52% of the total, grows when GDP slows down. Depos-
tinue on account of stable pricing through-
its increased by 30%, out of which half are low cost.
out the industry. Attrition remains a major con-
cern due to increase in demand of the laterals. Andhra and Axis bank showed 27%, 26%
Also, currency fluctuations can take a toll on the growth on the basis of interest earned due
to good loan approval and disbursement.
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 13

14. With economy expected to grow robustly ics grew by 28%. This was boosted by acquisition of
and good monsoons, it looks good for the bank- Derma Rx in May 2010. Rise in copra prices by 26%
ing industry with credit growth bound to improve. attributed to 100bps reduction in EBITDA. Volume
But, with RBI planning to give licence to NBFC’s growth has been good. So, due to rising costs, vol-
Cover Story
to open banks, competition will increase and de- ume growth may be prioritized over margin growth.
celerate the pace of expansion. Also, focus on le- Moving onto Dabur, margins expanded by
veraging branches, promotional activities to at- 29bps to 22.4% despite increased inflation and tax-
tract customers will be the broad theme so as to ation. Hair care, its largest category grew at 5.8%.
increase market share. Also, rising NPA’s will also Reduction in employee costs (% of sales) and ef-
be a challenge, especially in retail and SME seg- ficient operations were main reasons for increase
ment where loans are provided without adequate in margins. But, on the negative was 2nd succes-
securities. RBI’s recent increase in Repo, Reverse sive quarter of de-growth in Shampoo business.
Repo rates will influence the banks other income.
ITC showed good performance in ciga-
Company Revenue Net Profit EPS rettes despite hike in prices. For its FMCG
space, margins have improved with person-
SBI 19808.09 2501.37 39.39
al-care products and biscuits gaining stability.
ICICI 6309.1 1236.27 10.91
Overall, high inflation will prevent companies
HDFC 4810 912.14 19.8
from raising prices significantly in order to preserve
Axis 3624.25 735.14 18.01
market share. But, good monsoons augur well for the
Revenue and Net Profit in Rs. Crores FMCG sector. While competitive intensity will remain
high, focus will be on cost and cash management.
FMCG
Talking of the FMCG sector, it was a mixed Company Revenue Net Profit EPS
bag. It has been a story of declining margins due HUL 4764.67 566.12 2.59
to rising raw materials cost across the sector. MARICO 540 59.66 0.98
DABUR 800.5 126.18 0.72
ITC 5147.18 1246.74 1.63
Revenue and Net Profit in Rs. Crores
Conclusion
India Inc. is set forth for a good second half
going by the Q2 numbers. But it remains to be seen
if they can reduce the impact of higher input costs.
Also, with increasing recruitment, salary costs
will also tend to reduce margins.With selling pres-
Hindustan Unilever Ltd. reported Q2FY11 sure seen in domestic markets due to Chinese and
net profit of Rs. 566.12 crores versus Rs. Irish concerns, it will be interesting to see the impact
420 crores in Q2FY10 i.e. gain of 34.76% YoY. it will have on different sectors.Good demand was
After adjustments, PAT stood at Rs.533.65 vs. seen in Auto and IT sectors, but 2G spectrum scam
499 crores i.e. a growth of 6.8%. All the three ma- will definitely impact telecom companies which are
jor segments viz. soaps and detergents, personal already struggling due to competitive pressures. For
products, and beverages showed growths of 6.3%, banking, second half of the year usually sees an in-
14.7% and 9.3% resp. But again, due to increasing crese in credit growth - which is good news. FMCG
ad-spend the EBIT margins have slipped, by 190bp, space will continue to see rising product costs as the
330bp and 160bp respectively. Costs of basic raw companies will pass on the load to customers so as
materials like palm oil, benzene have increased by to protect margins. Also, incresing participation by
46% and 100% resp. Company had to hike prices FMCG companies in international territories is some-
in certain products so as to protect margins. Pre- thing to look forward to. With promising recruitment
launch of brands like Rin, Lifebuoy did help to im- figures from Wipro, TCS and Infosys and good growth
prove the bottom-line. It was 6th successive quarter guidance from HCL, IT is likely to take off. So, overall
of double digit growth for personal care products. India Inc, looks set to continue their growth story and
For Marico, there was a volume growth across tackle the competetive dynamics and international
businesses with PAT growing 15% over Q2FY10. The pressures so that we continue to report many such
main contributor was Parachute Coconut oil at 10%, success stories in the issues ahead.
Saffola Oil at 18%. Revenues from Kaya Skin Clin-
14 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

16. Mergers and
Acquisitions in a
Ankit Sinha
IIM Bangalore
Introduction firms, as well as external factors
While M&A may Mergers and Acquisitions such as global economic environ-
seem a natural (M&A) are an important activity for ment and government regulations.
the growth of any organization. M&A The major positive effects can
mode of expansion be increased market share and lower
activity can have significant ramifi-
in a booming econ- cations for the management as well cost of operations due to economies
omy, the reasons as the investors. While this may of scale. The emerging company may
for pursuing M&A seem a natural mode of expansion be more competitive, with improved
in a booming economy, the reasons profitability and enhanced EPS. Also,
activity in recession-
for pursuing M&A activity in reces- there can be an increase in the indus-
ary times may not be sionary times may not be apparent. try knowledge of the organizations.
apparent as pursu- Pursuing deals in recession seems On the other hand, the con-
ing deals in reces- risky and impractical. Credit markets cerned companies may face signifi-
sion seems risky and and equity markets are depressed. cant legal expenses and takeover
Historically, M&A’s have eroded costs, both tangible and intan-
impractical. How- shareholder value rather than cre- gible. There can be potential de-
ever, strategic M&As ating it. However, strategic M&As in valuation of equity and lowered
in recession can add recession can add value leading to industry innovation. The merger
value leading to sig- significant advantage for companies. of two large firms can also sup-
press competition, and may lead
nificant advantage Pros and Cons of M&A Activity
to increased costs to customers.
for companies. The pros and cons are primar-
Whether a merger or an acqui-
ily decided by taking into account
sition is successful depends on how
the short term and long term ef-
the positive and negative effects
fects of M&As. This depends on
weigh against each other. This is
internal factors like nature and
highly subjective to individual M&As.
strategic outlook of concerned
Name Period Characteristics Outcome Sources of
Financing
Wave 1890s-1903 Horizontal Mergers Formation of Cash
1 Monopolies
Wave 1910s-1929 Vertical Mergers Formation of Equity
FinGyaan
2 Oligopolies
Wave 1950s-1973 Conglomerate Growth through Equity
3 Mergers diversification
Wave 1981-1989 Hostile Takeovers, Elimination of Debt Financed/
4 Corporate Raiding inefficiencies Cash Paid
Wave 1993-2001 Cross Borders Adjustment to Equity
5 Mergers globalization
processes
..
“Going downhill, everybody
picks up speed.”-Business
Proverb
16 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

17. M&A Waves and their common characteris- strong markets, remained strong in first 3 quarters
tics of 2008 ($50 bn a quarter).
M&A activity has been historically clustered in • PE Activity has bottomed out and is likely to
distinct waves. The waves have been summarized in rise in future. The volumes of PE deals fell by 72%
the above table. from 2007 levels and there was negligible PE activity
The waves comprise of some common charac- in megadeals
teristics. They originate in periods marked by eco- • Proportion of overpaid deals rose to 61%.
nomic recovery. Wave 2 started during economic
recovery after market crash and First World War.
Similarly, Wave 3 started after economic recovery
after Second World War. The waves also occur in
periods of rapid credit expansion and burgeoning
credit markets. Industrial and technological shocks
often precede takeover waves. For example, Wave
1 was preceded by development of trading on NYSE
while wave 4 was preceded by development of junk
bonds and technological innovations in electronics.
Changes in regulatory mechanisms also lead to take-
overs. This is illustrated by the fact that changes in
antitrust policy and deregulation of financial sector Exhibit 2: Share of global M&A by geography of target
preceded Wave 4. M&A Activity in 2009
M&A Activity in recent years M&A activity was stable in 2009. Corporate M&A
activity was in line with 2008 levels. PE accounted
In the aftermath of the worldwide cri-
for just 4% of global M&A, compared to 20% in 2006
sis, M&A activity took a sharp hit. This is evi-
and 2007. Also, there was a significant decrease in
dent from Exhibit 1. Both the number of deals
cross border activity as a share of total M&A value. It
and deal value decreased greatly after 2007.
experienced a 10% decrease from total 41% in 2007.
However, M&A activity spread around the globe
with companies in Asia-Pacific accounting for 26%
of global M&A in 2009. In 2008, this share was only
19%. (Exhibit 2) More value was created for targets
as compared to acquirers. Total deal value added
was just below the long term average. (Exhibit 3)
FinGyaan
Exhibit 1: Deal Value, $ billion and volume
Year 2008 saw a reversal of trends in previ-
ous years. Some of the key changes observed were:
• Cross border M&A activity decreased from
41% in 2007 to 35% in 2008.
• There was a shift in focus from megadeals
(>$10 bn).
Exhibit 3: Average annual deal value added
• Hostile activity, generally resulting from
M&A activity has been his-
torically clustered in distinct
waves originating in periods
marked by economic recovery.
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 17

18. Exhibit 4: Average acquirer excess return during various years
Advantages of M&A in recession ers. Several strategies can help the companies to
Contrary to the popular beliefs, M&A activ- successfully carry out M&A activity in recessions.
ity in recessionary times can lead to significant Firstly, organizations should define a corporate
benefits. Companies that are strategically and fi- strategy which is at the core of the company and
nancially superior will find rare opportunities in allows it to invest with a clear thesis. Danaher Cor-
recession to improve their competitive position. poration can be a suitable example in this regard.
For buyers, strong companies with short term It engages in M&A to strengthen its base of real as-
risk may be available cheaply. For sellers, reces- sets. It made 10 acquisitions in last downturn, in-
sion provides opportunity for strategic divestures cluding Gilbarco. Gilbarco turned out to be the part
and portfolio rebalancing. As seen from exhibit 4, of the third most profitable product line in 2008.
Acquisitions completed during and right after the Secondly, companies should also buy and di-
last recession (2001-02) generated almost triple vest frequently and consistently through cycles.
the excess returns (“Excess returns” is defined as They should always keep in mind a list of po-
shareholder returns from four weeks before to four tential targets. For example, Cintas maintains a
weeks after the deal, compared to peers) of ac- pipeline of priority targets and cultivates strong
quisitions made during the preceding boom years. relationships with them. Thus, it can often ap-
According to Bob Filek, partner with PwC Transac- proach a target long before other acquirers. Cin-
tion Services, “M&A activity in 2010 will be driv- tas has sustained its sales growth for 39 years.
en by strategic buyers who have access to capi- Thirdly, companies should tailor merger in-
FinGyaan
tal and the strategic vision to capitalize on some tegration efforts to deal thesis and the sources
of the best values we have seen in recent times.” of value. This can be accomplished by increased
due diligence from the M&A team. Often, buyers
Strategies for M&As during recession
in the same industry overlook the details as they
From the previous discussion, it can be in- believe that they know the industry. They con-
ferred that M&A activity in recession can lead to duct cursory reviews of the target company and
significant benefits, and separate the leaders from are often surprised to find out the actual valua-
the laggards. Organizations that proceed carefully tions to be much cheaper than they anticipated.
can generate significant returns for their sharehold-
Companies that are strategi-
cally and financially superior
will find rare opportunities
in recession to improve their
competitive position.
18 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

19. EN
X IS AM merger
A
Rajat Sethia
Team Niveshak
Axis Bank Ltd., India’s top- underwriting business while in M&A,
ranked lending institution, strength- Axis isn’t in the top 20. Axis is top Weeks after lead-
ened its equity underwriting op- ranked in the debt sales and loan managing the
erations by merging with Enam syndication business. The merger
Securities Pvt. Ltd in a transaction will help Axis to gain significant
successful Rs
valued at $455 million. The trans- presence even in the equities and 15,000-crore Coal
action would combine Axis’s invest- M&A advisory business. India IPO, Enam
ment bank with Enam’s advisory ser- Securities sold off its
vice, as well as its institutional and Comparison with other deals
retail equities units. It won’t include The Axis Enam transaction is investment banking,
Enam’s portfolio management ser- the second-largest involving India’s corporate advisory
vice and asset management units. investment banks and securities and equity distri-
The acquired businesses of Enam firms.
bution divisions to
complement the strong corporate Merrill Lynch & Co. spent $500
banking and debt capital market million in December 2005 to buy con- India’s fourth-largest
franchise of Axis Bank. Macquarie trol of its Indian venture DSP Merrill bank, Axis Bank. The
Group acted as the advisor to Axis Lynch Ltd. from its local partners, deal will combine
Bank on the transaction. valuing that business at $1 billion. capital at Axis bank
Axis will swap 5.7 shares for Morgan Stanley paid $445 mil-
each one of closely held Enam. Enam
with the clients and
lion in February 2007 for Mumbai-
shareholders will get a 3.3 percent based JM Financial Ltd.’s stake in a distribution network
stake in Axis following the transac- business that traded in stocks for managed by Enam.
tion, and Enam’s Manish Chokhani, local and foreign institutions. At the
will act as the CEO and MD of the same time, JM Financial paid $20
entity to be created by the combi- million to buy out Morgan Stanley’s
nation. Axis’s first financial-services share of that venture’s investment-
acquisition will combine capital at bank, fixed-income and retail units.
India’s fourth-largest bank with the Axis Bank’s rivals have made
clients and distribution network acquisitions in recent years to add
managed by Enam. The deal is a win- clients and outlets. ICICI Bank Ltd.,
win for both Axis and Enam. While ranked No. 2 among the nation’s
Axis gets the back-end distribution lenders, bought smaller rival Bank of
which will bolster its front-end bank- Rajasthan Ltd., based in northwest FinSight
ing segment, Enam will be able to India, in August through a share
build its balance-sheet using a bank swap in a transaction worth as much
base. Rankings as 23 billion rupees.
Enam Securities is ranked third HDFC Bank Ltd. bought regional
among equity-underwriters in India, lender Centurion Bank of Punjab Ltd.
with equity sales of Rs. 1.02 tril- in July 2008 for 71.2 billion rupees in
lion rupees this year. In M&A space, India’s biggest banking acquisition.
Enam Securities is ranked No. 9. Axis
is ranked at No. 16 in the equity
“For us to build a balance-
sheet, we thought that combin-
ing forces would be an extraor-
dinary opportunity.” Vallabh
Bhansali, co- founder and
chairman of Enam
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 19

20. THE IMPACT OF RISE IN CRUDE OIL PRICES ON
THE INDIAN ECONOMY
AMITKUMAR RAJANI
Welingkar Institute of Management, Mumbai
INDIA’S CRUDE OIL REQUIRE- needs. The Energy Information Ad-
Crude oil is one of
MENTS ministration (EIA) expects India to
the most essential become the 4th largest net importer
India is emerging as an eco-
commodity. A slight nomic powerhouse of the 21st cen- of oil in the world by 2025, behind
fluctuation in crude tury & a large consumer of energy the United States, China, and Japan.
oil prices can have resources. Despite the global finan- OIL UNDER-RECOVERIES
both direct and cial crisis, India’s demand for energy
The dependence on crude oil
continues to rise. But India still faces
indirect influence tremendous challenges in meeting
imports is chronic for a developing
country like India as the current re-
on Indian economy, its energy requirements. In order
source utilisation pattern does not
and will continue to to sustain the rate of growth, In-
contain alternatives to imported
dia needs to develop a reliable pool
affect, considering of energy resources which can be
crude oil. Further, in a situation of
the fact that India is unabated rise in oil prices the prob-
tapped in the long run.
lem tends to get compounded.
6th largest importer
Perspective
Government Owned Oil Market-
of oil in the world. ing Companies (OMCs) in India sell
petroleum products (excluding Pet-
rol) at a subsidized rate. The losses
incurred by these companies are
called “Under Recoveries”. The Gov-
ernment of India compensates the
OMCs for these under recoveries ei-
ther through cash payment or issue
Oil meets about 24% of India’s
of bonds.
commercial energy requirements. In
2009, with a consumption of 3 mil- Under recoveries of OMCs for
lion barrels per day, India was the FY 2008-09 were Rs. 1,03,292 Crores.
4th largest oil consumer in the world The Government issued oil bonds to
after the United States, China, and the tune of Rs. 71,292 Crores whereas
Japan. the remaining burden of Rs. 32,000
Crores was shared by Upstream Oil
India’s proven reserves of
Companies.
crude oil and oil production have not
witnessed any significant improve- ECONOMIC IMPACT OF RISE IN
ment in the last few decades. As OIL PRICES
a result, India largely relies on im- India’s huge dependence on
ported crude oil to meet its energy Imported Crude Oil makes it vulner-
requirements. able to the shocks & disruptions
In 2009, India was the 6th larg- in the Global Oil Market. Any sharp
est net importer of oil in the world, spike in oil prices in the global mar-
importing nearly 2.1 million barrels ket results in an unfavorable eco-
per day, or about 70 %, of its oil nomic situation in India. The reasons
In 2009, with a consumption
of 3 million barrels per day,
India was the 4th largest oil
consumer in the world after
the United States, China, and
Japan
20 NIVESHAK VOLUME 3 ISSUE 11 NOVEMBER 2010

21. for the same are outlined below. e) WORSENING FISCAL DEFICIT: India’s Fiscal
a) RISE IN COST OF IMPORTS: The first victim of Deficit for 2009-10 stood at 6.6 % of Gross Domestic
rise in crude oil prices is the state exchequer. Ev- Product (GDP). Rise in crude oil prices would worsen
ery increase of $1 per barrel in Indian crude basket the situation as Government has to shell out more
prices pushes up the annual oil import bill by $1.2 money in the form of fuel subsidy to OMCs.
billion. It also leads to a faster depletion of India’s f) REDUCED AMOUNT FOR INFRASTRUCTURE IN-
Foreign Exchange (FOREX) Reserves. VESTMENT: India aims to invest $1 Trillion in infra-
b) WIDENING OF TRADE DEFICIT: India’s trade structure development during the 12th Five Year
deficit for 2009-10 was $117.3 billion. The steep in- Plan (2012-17). High prices of crude oil (leading to
crease in imports due to high oil prices leads to a higher fuel subsidy & increase in fiscal deficit) have
Perspective
further widening of the trade deficit. the potential to derail the government’s plans as
they eat into the amount of disbursal available with
c) INCREASE IN OIL UNDER RECOVERIES: As the
the government for infrastructure & social develop-
pricing of Diesel, LPG & Kerosene is still under gov-
ment schemes.
ernment control, any rise in international oil prices
is not reflected in the domestic market. The inability A continuous rise in the subsidy bill & worsen-
of OMCs to sell fuel at the market defined rate re- ing fiscal deficit has forced the federal government
sults in higher under recoveries. to deregulate the petrol prices in the domestic mar-
ket while in-principle approval has been given for
d) MOUNTING FUEL SUBSIDY BURDEN: Any hike
deregulation of diesel prices.
in price of imported crude oil is absorbed by the
OMCs along with the Upstream Oil Companies & IMPACT OF HIKE IN FUEL PRICES IN THE DO-
the federal government. The fuel subsidy bill has MESTIC MARKET
witnessed a continuous rise for the past few years.
The hike in fuel prices in the domestic market
From FY 2005-06 to FY 2008-09, Government’s fuel
has a cascading effect on the Indian Economy. The
subsidy bill amounts to Rs. 1,42,203 Crores.
same is explained below.
a) INFLATION: Rise in fuel prices has a direct
impact on the prevailing inflation rate in the econ-
omy. Higher fuel prices (in particular Diesel) lead
to increase in transportation costs across the coun-
try. As a result, the price of essential commodi-
ties (such as food items, cement etc) shoots up.
An inflationary expectation among traders leads to
hoarding which pushes the spiraling inflation rate
further up.
b) EROSION OF PROFIT MARGINS: Rise in infla-
tion rate in turn leads to erosion of profit margins
of business enterprises as the key inputs for busi-
ness become costlier & consumers reduce their
The dependence on crude oil
imports is chronic for a devel-
oping country like India as
the current resource utilization
pattern does not contain alter-
natives to imported crude oil.
© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG 21