Financial Bulletin released fortnightly

1. financialdharma
Dear Readers:
It is well established now that the ongoing economic
slowdown has its roots in a collapse of investments. The
index of industrial production (IIP) figures for December
2013 reveals a negative growth in consumer durables.
While this slide has been taking place from July 2012, the
most obvious cause of weak consumption is inflation,
which undermines the ability of people to save and
consume. Once savings are eroded in the face of
persistent inflation, the effects are bound to be felt on
consumption. On the face of it the main task is to fix
inflation in order to get people to consume and save more
and, in turn, pave the way for growth. This 95th issue of
financialdharma talks about the stalled capital formation.
The other highlights in this bulletin are about the struggle
for inclusive funding, beating earnings forecast, watching
riot points and spotting real shareholder value for
investors.
Sincerely,
SSK
E: ssrikrishna@shubasri.com
SSK is an accomplished CA with extensive experience in
financial management with reputed organizations such
as Indal, Tatas, Wipro/GE Healthcare, Motorola and
Reliance. He has led several initiatives to transform the
financial and business results in these organizations. He
currently focuses his efforts in disseminating financial
literacy, mentoring and consulting services.
1 Copyrights reserved
A Fortnightly Financial Bulletin Friday February 14, 2014
 Financial Gyaan- The
struggle for inclusive
funding
 Beating earnings
forecast
 Crystal gazing –The
prospect of stalled
capital formation
 Watch risk aversion
 Jargon Buster:
Financial Inclusion
 Spotting real
shareholder value for
investors
in
A recent research by Wharton
experts reveals how vesting of
stock options can cause a close nit
team led by the CEO to pump up
the firm’s earnings to beat
forecasts, and thus its stock price,
by trimming expenses like R&D,
SG&A and capital expenditures.
This research study looked at
more than 2,000 firms from 2006
through 2010. Ironically, these
efforts to nudge the share price
were not very successful: Share
prices did not go up. The reason,
the markets knew all about this
gambit and they disregard higher
earnings that are due to spending
cuts prior to the earnings
announcement. Then why do this?
The
widespread
belief
of
indulgence by other organizations
in such practices is what motivates
all other organizations to succumb
to such lures. In fact this can be
somewhat likened to the teacher
who feels compelled to inflate
students’ grades; not doing so will
make the teacher stand out as an
underperformer. What matters is
aligning executive and shareholder
interests by using long vesting
periods.
Startups and small and medium enterprises (SMEs) are
struggling to seek inclusive access to market-based finance
and this predicament is hurting them the most. Catastrophe
lies ahead unless we take decisive action soon at various
levels. In this action one has to take a more granular view on
SMEs, distinguishing between firms of different sizes and thus
different needs and capabilities. More importantly, one has to
identify transformational entrepreneurs, who are driven by
new ideas and entrepreneurial spirit and with potentially high
growth opportunities for their enterprises. It is this group who
are most in need of finance, not only debt finance but also
equity and mezzanine forms of finance to match the risk
nature of these businesses. Further, there is a challenge of
scaling to cater to growing small enterprises that do not have
audited financial statements or collaterals is able assets and
that thus do not fit traditional bank lending models. Many of us
get carried away by the well-orchestrated moaning that we
lack the financial resources to make change happen. But the
fact is there is more than enough cash to solve the majority of
our financial problems afflicting SMEs. Cash is being hoarded
instead of being put to good use. People who do this are
stealing the country. The financial sector that is supposed to
serve SMEs is based on outdated models. What we really
need, is a renaissance of the financial sector to bring financial
stability. What counts is that we start the journey with a single
step. That’s what the financial sector needs to realize. The
good news is: that also means we have the power to start a
positive change!

2. financialdharma
an
Spotting real shareholder
value for investors
Publicly traded companies (those listed
in NSE/BSE) are organized to make
money the conventional way for scoring
this pursuit is by looking at the
company’s ability to grow various
flavors of earnings-operating earnings,
pretax earnings, net income and
earnings per share are all common
measures. This however is not the only
way to determine if there is real value in
the company’s shares. A company’s
real earnings are the earnings it makes
as liquid asset. Shareholder value
ultimately derives from liquid assets, the
assets that can be easily converted into
cash. In other words, the value is
dependent on how much it can grow its
earnings and amass liquid assets.
There are two ways to look at this-(i)
terminal value which assumes for the
sake of calculating potential return that
at some future point a company will
close down its operations and turn
everything into cash, giving the money
to shareholders; and (ii) tangible
shareholder value that comes from
returns from invested capital generated
by the company’s operations. If a
company has excess liquidity than what
it needs, it can deploy those assets in
two ways to benefit shareholdersdividends and share buyback. Knowing
what is on the balance sheet is crucial
for understanding whether or not the
company in which one is investing is
2 Copyrights reserved
capable of generating real value to the
shareholders.
A Fortnightly Financial Bulletin Friday February 14, 2014
Financial inclusion is defined as
the ability of an individual,
household, or group to access
appropriate financial services or
products. Without this ability to
have access to the formal
financial services delivered by
regulated financial institutions
people are often referred to as
financially
excluded.
An
estimated 2.5 billion workingage adults globally have no
access to the types of formal
financial services delivered by
regulated financial institutions.
This inclusion is all about (a) the
broadening of financial services
to those people who do not
have
access
to
financial
services
sector;
(b)
the
deepening of financial services
for people who have minimal
financial services; and (c)
greater financial literacy and
consumer protection so that
those who are offered the
"
products can make appropriate
choices.
in
The emerging markets are caught in
a severe bout of investor risk
aversion arising on the belief that the
US economy no longer justifies
emergency levels of interest rates.
Benjamin Graham once wrote that
the point of investing is not to
manage returns but to manage risks.
In the long-run, returns are driven by
shifts in risks. In the short run, what
changes more frequently and drives
markets more immediately, is
investors’ appetite for risk. In
hindsight investors take on a lot of
risk, and there are times when they
prefer to sit on cash waiting it out.
Risk appetite is not random. High
risk appetite is often bred by low
yields on historically safe assets like
government debt. Instability in highyielding markets or higher returns
from safe assets breeds risk aversion.
This measure identified “riot points”
of extreme lows in risk appetite
widespread across all risky assets
such as small cap equities or low
grade corporate debt in developed
economies.
These
risk-averse
periods are not driven by notions of
value, but by the imperatives of
escape
Unless the root problem of stalled capital formation is addressed GDP growth
cannot pick up. The scaling down of last fiscal’s GDP growth to 4.5% versus
the earlier 5% estimate, could well be the precursor to the real crisis that
relates to gross capital formation (GCF): the stock of fixed assets added to
an economy and contributing to its future production growth. In any
progressive emerging economy it is the accumulation of such capital stock
from factories to roads and power plants that increases at a faster rate than
GDP. India witnessed an average annual GCF growth of 15.2% from 2004-05
to 2010-11, well exceeding the GDP increase of 8.5% a year. This trend has,
however, reversed subsequently with the dip in GCF growth to 6.4% in 201112 and a mere 2.4% in 2012-13 respectively. This has been more than the
corresponding fall in GDP rates to 6.7% and 4.5%. But the actual extent of
drying up of investments can be gauged only from examining the
components within GCF. One such impediment is enormous increase in nonperforming assets (NPAs) in the banking sector, which has stalled revival of
lending operations. This growth in NPAs has resulted in the GCF decline in
manufacturing that has recorded negative growth of 17.5% in FY 2011-12
and 13.2% in FY 2012-13. It is mainly sectors such as trade, road transport
and real estate that have posted high or reasonably positive growth in capital
formation. But these don’t require much by way of machinery and capital
stock. Besides, the slowdown in growth and investments in services might
well show up in the data for 2013-14.What emerges from all this is that the
current slowdown is primarily about a collapse of investments. When
corporates began going slow in putting up new manufacturing facilities
around mid-2011, the effects of it were felt on job creation, incomes and
consumption over time. We are clearly in a situation where no growth pick-up
is possible without a resumption of the stalled capital accumulation process.