infineeti+june+2010

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The Monthly Finance Magazine from IIFT

lume 4, Issue 2 | June 2010

AG BankThe Biggest IPO!!

Yuan AppreciationMoving towards Flexibility...

OIL DeregulatioThe Side Effects!!

Clouds of TurnmIn Europe


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INFINEETI | Vol 4

Indian Institute of Foreign Trade

June 2010

Editor-in-ChiefSoumya Kanti Bag

Editorial BoardAshutosh Sharma

Ritika YadavSayani GhoshSukrit Munjal

Coordinating CommitteeArun SinghalNeha Daga

DesignSoumya Kanti Bag

Feedback/ Queriesin [email protected]

in [email protected]

Team INFINEETI

Hello Friends,

The European crisis is the biggest challenge the world is facing, Meabout the problem, the steps being taken and the likely impact on Indi

discusses about the biggest IPO by Chinas Agricultural Bank till dait would shape the economy of China.

With this issue, In neeti has invited articles from the Industry expertinitiative off, Mr. Rahul Sonthalia has thrown up a startling fact which wto see in times to come - the U.S crisis may soon revisit the world! He ta option ARMS, and how they are going to have a staggering effect on tunsteady U.S. economy.

Sukrit is back with his analysis on the latest trends in The Indian StockSourav mulls over the implications of appreciation of Yuan and how ithance the process of global rebalancing.

Madhuri talks about the oil deregulation and how government is pulling amake this attempt a successful one.

Ashutosh thinks that Europe debt crisis can turn into a contagious diseasehis views on policy to be adopted and interdependence of growth and-dation. Finally, Arun tries to bring some element of fun in Finance with F

Happy reading!!

Soumya Kanti Bag (Editor-in-Chief)

From the Editors Desk


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INFINEETI | Vol 4


June 2010

Mehak Gandhi

Clouds of Financial Turmoil Over Eu

Europe seems to be enshrouded in dark clouds notmerely the ash spewed out by the Icelandic volcanothat has disrupted air travel but the clouds overEurope stemming from concerns over its nancialstability. The economic crisis has laid bare the in-herent weaknesses of the European economy. Thehuge budget de cits in Greece, Ireland, Italy, Por-tugal and Spain threaten to break the euros back.So far, the common currency has managed to pre-

vent any massive devaluation and an accompany-ing surge in in ation. But the present scenario withglobal equity markets on a downswing, euros fu-ture under the scanner and downbeat sentimentover Europe seems to have vast implications for

the fate of the fragile global economic

Unlike The US Crisis

As the struggle to maintain the euro theEuropean currency, to rebalance the Europomy and to sustain political cohesion of Etinues, many well-developed countries aring aware of the hazards of running unpre

levels of public debt as they emerge frorecession. The US budget de cit hit $2009, roughly 10% of the economys GDPHouse projects that the de cits this yea$1.6 trillion. The large de cits have e

Cover Story


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June 2010

parisons to Greece. However, US differs from Greeceand other smaller European countries whose mar-kets have come under speculative attack because itbene ts from a well-established currency, dollar, andits credit markets are considered safe havens in the

times of nancial turmoil. In US, it was the banks thatwere failing and yet being bailed out by the strongFederal Reserve, while in Europe, entire economiesare collapsing under the weight of debt. But whilethe authorities make strategic plans for Europe,they do so with the hindsight of the economic chal-lenges US had gone through. The public sentimentcontinues to be cautious, with the recent turmoil stillafresh in their minds, and it may take some timebefore faith all over the world is nally restored.

Decisive Times for Europe

International markets have been on a see-saw rideas it is still not fully believed that the $1 trillion Eu-

ropean Union aid package to save troubled nationssuch as Greece and Spain will be enough to preventanother credit crisis. Europe has to bail out divergenteconomies lashed to a single currency, and theseeconomies had little control over national taxes andspending over the years. The consequences are 800billion euro ($1 trillion) splurged for a debt crisis ledby Greece, sagging con dence in the European Cen-tral Banks independence and speculative fears that acurrency designed to last forever might break apart.Germany is leading the way to x the loopholesoverlooked when euro was rst founded and decidewhether the currency will be used to promote growth

or censor in ation, and ultimately, whethcountries should be barred from the monunion. The German economy still looks stroultimately, even it cannot hold up Europe

The Greek crisis has spread to become a eurcrisis. Europes woes are manifestations ofing welfare states that can no longer delivethe entitlements that the politicians keep leg

ing. Greece is an extreme example, but othenot far behind. In the US, just three entitleprogrammes social security (for retirees), care (for the aged) and Medicaid (for themay swallow up 20% of GDP in 2020 as a7% today. Unfunded liabilities like guarapensions are growing everywhere. Thesepromises to spend money that is nancedwhich will have to be repaid by a future getion. This strategy was sustainable when theof bene ciaries to workers was low. Howthe coming years, western politicians will hcome to grips

Cover Story


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INFINEETI | Vol 4


June 2010

with the problem and ensure that change comes be-fore its too late.

The Impact On India

India, with its huge share of exports and foreigninvestments in GDP, is more sensitive than ever tothe global economy. The markets at home remainvolatile while reacting to global news. A weakeningcurrency in Europe is a worry for Indias export-fo-cused IT sector, which has only just recovered fromthe fallout of the US slowdown. Europe is the secondlargest market for the Indian IT industry, accountingfor nearly $15 billion worth of exports. The euro hasslid to its lowest since the Lehman Brothers collapseand while the dollar has strengthened against theeuro, it has not strengthened against the rupee tothe same extent. Cross currency hedges against the

euro and the pound are less common than rupee-dol-lar hedges. Companies usually ensure that a higherpercentage of dollar exposure is hedged, as com-pared to only a part of euro exposure. In the wakeof the current scenario, the revenue realization willbe lower and the weak euro would affect pro tability.

However, at the same time, this situation seen as a buying opportunity because everope is doing what it can to keep interest rateit is bullish for the equities. While the Europis likely to affect ows to India in the near ttaking is cut back, it is inevitable that in the lmarkets will stabilize and growth will returthe clouds clear, well realize that it was an imcorrection for the world economies and a goportunity to foresee the potential growth. Ultlife is all about exercising prudence in testin The author is a second year student of The IndianInstitute of Foreign Trade, Kolkata.

...

Cover Story


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June 2010

Ashish Sharma

Agriculture Bank of China - The Dragonish IPO

After a hiatus of a few months, IPO delugeseems to be back again. The enormity of thisdeluge can be judged by the fact that just two com-

panies, Agriculture Bank of China (AgBank) andPetroleo Brasileiro, state-controlled petroleummajor from Brazil are all set to raise $50 Billionfrom the capital market. This is a welcome changeafter what happened in the last quarter when asmany as 47 IPOs across the world were shelvedon apprehensions of sinking capital markets.

Bourses have been volatile for a while now onfears of the Sovereign Debt crises sending theworld economy into doldrums yet again. These ap-prehensions have sent stock indices from Tokyo toNew York to their lowest levels of 2010. Apparently,

the primary market in the emerging markeoutperformed their developed counterparemerging markets raising as much as three ti

amount than developed countries in the last

The government owned AgBank is all setall records as far as the size of IPO is concinitially planned to raise a whopping $30will overshadow the previous record of $IPO by Industrial and Commercial Bank oOctober 2006. AgBank is the last of thestate banks to list. With around 350 millioners, and has assets mainly in agro-based loaBank is issuing 53 Billion equity shares aning 15% of its stake in a dual listing that its shares traded in both Hong Kong and S


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While the Honk Kong arm would sell with a pricerange of HK$2.88-HK$3.48, the Shanghai arm will sellwith a price range of 2.52 Yuan to 2.68 Yuan. It in-tends to raise around $13.1 Billion from Hong Kongand $ 10.1 Billion from the Shanghai arm of the of-

fering. These gures value AgBank to be at 1.55 to1.79 times the estimated 2010 book value. Even theupper end of the range of IPO will make the IPOworth around $23 Billion against $30 Billion planned.This drop can be attributed to weak market senti-ments and the fact that the Chinese stock marketshave lost around 20 percent in the recent months.

A strong backing by the state and cornerstone in-vestors should ensure that the offering goes aheaddespite weak market sentiments. Amongst theeleven strong cornerstone investors are Qatars sov-ereign investment fund, British bank Standard Char-tered and Hong Kongs richest tycoon Li Ka-Shing.

Despite the strong support from the government andthe cornerstone investors, there is suspicion about theIPO as the bank is considered to be the weakest of thefour banks in terms of the quality of loans and bad

loan burden. Further, since the return on cathe rural loans is typically 20-30 percent lethose in urban areas owing to small loan large monitoring costs the risk increases con

As I write this, the IPO has already besubscribed several times and all set to all records in the primary markets. Willmeet the investors expectation or set thments for the upcoming IPOs remains to

The author is a second year student of Instituteof Management Technology, Ghaziabad

...


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June 2010 Expert Speaks

Rahul Sonthalia

Option ARMs Threaten Housing Rebound

An Option ARM is an adjustable rate mortgage, a loan,popular during the housing boom for its low mini-mum payments before resetting at higher costs later.This helped a huge number of home buyers in US takeloans with very low monthly payments initially andwhich allowed them to pay less than even the monthlyaccrued interest thus resulting in a negative amortiza-

tion, which means that the unpaid portion of the accru-ing interest is added to the outstanding principal balance.

For example, if the borrower makes a minimum paymentof $1,000 and the ARM has accrued monthly interest inarrears of $1,500, $500 will be added to the borrowersloan balance and the next months interest-only paymentwill be calculated using the new, higher principal balance.

Shirley Breitmaiers mortgage payment started out at$98 when she bought a three-bedroom home in Galt, Cali-fornia, in 2007. The 73-year-old widow may see it jump to$3,500 a month in two years- says Bloomberg. The resetoccurs when the outstanding mortgage balance reaches

a level of 130-150% of the initial mortgage

About 1 million option ARMs are estimated tonext four years. About three quarters of those adjust next year and in 2011, with the peak comgust 2011 when about 54,000 loans recast, the

This reset will lead to further foreclosures will be a threat to the housing recovery. Tthan 30-35% fall in the value of propertyhelp the borrowers to re nance their mowhich will lead to a further slowdown inprices. This will also result in more write obalance sheets of the large banks/ lendingtions as the payments are dif cult to co

Thus the recovery in the US markets is still a lonThe author is the head of the Equity Research teamat Kredent Academy and the visiting faculty at IIFT

.


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June 2010

Sukrit Munjal

TAKING STOCK

The month of June began with volatility due toglobal economic conditions. As the month pro-gressed, worries over the Euro crisis subsided and

the decision of the Chinese Central bank to appre-ciate Yuan provided momentum to Indian markets.The markets also reacted positively to the govern-ments decision on deregulation of fuel prices. Onback of optimistic macro economic outlook, positivesentiments among market participants led both thebenchmark index, Sensex and Nifty, up by 4.45%and 4.46% over previous months close. At 6.13%growth, small-cap index outperformed, while themid-cap index closed in line with the benchmark.

FMCG, Auto, Capital goods and Oil& Gas sectorswere among the top performers. A surge of 48%

exports in coffee, coupled with good monto an increase in FMCG sector by 8.38%. tor saw a growth of 8.10%, majorly due to

auto sales number in the month of MayCapital Index grew by 7.71% due to pickuder in ows, while Oil & Gas sector gaito the governments decision on deregulafuel prices. Only the metal index closed inthe month of June. Weak demand from test consumer, China, coupled with increasprices; has put pressure on Margins in this

Futures & OptionsThe June series opened at 43,262 cr. a49,374 cr. last month, wherein the Nifty fu

Stock Watch


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June 2010Stock Watch

14,402 cr. and Stock futures were 28,860 cr. Therollovers to the June series were very low as theglobal scenario was not quite healthy but stillIndian markets were holding strong above the4,900 level which was considered to the stron-gest support from a long term perspective.

Sectorally speaking, Metal, banking and sugarspace continued to be the laggards on Dalal Streetdue to negative sentiment seen in the global mar-kets. Even with all the negative sentiments acrossthe globe, Indian markets outperformed as hugeleadership was seen in Reliance Industries and theOil marketing companies after the government re-moved control over price of petrol, allowing it to

increase and decrease as per international crudeoil prices. Credit rating agency Crisil said the de-control of petrol price will positively impact the

nancial risk pro les of oil marketing companies.

During the month, foreign institutionsnet buyers of Rs. 7,713 cr. and the dtic players were sellers of Rs. 4,77

The author is a second year student of Indian

Institute of Foreign Trade, Kolkata

....


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June 2010

Sourav Roy

Yuan Appreciation-The OutcomesChina is facing a similar kind of pressure to re-valuate its Yuan as was faced by Japan duringthe 80s to revaluate its Yen. The undervaluation ofChinese Yuan has been a bone of contention in therelationship between China and other countries es-

pecially US. So, China has recently been under stronginternational pressure to revaluate its currency.

After the commencement of economic reforms in 1974 inChina, Yuan the Chinese currency was devalued on sev-eral occasions until 1994. After that China maintaineda constant rate for several years. It again revalued itscurrency in July 2005 under constant demand from the

US and the EU. From July 2005 to July 2008 China allowits Yuan to appreciate. But 2008 onwards, China has notallowed its Yuan to appreciate. This led to a consider-able pressure from other countries on the Chinese gov-ernment to appreciate its currency. Under this pressure,Peoples Bank of China announced on June 20, 2010

that it would follow more exible exchangeConsidering the growth rate of Chinese econhuge surplus they have, more exibility irate will strengthen Yuan against world cu

Markets across the world have been rallythe announcement of the latest exible rate regime followed by China. Floating ofYuan will help ease the tension between CUSA as USA blames the undervalued Chrency for its huge trade de cit with ChinYuan may be good for US exports to ChinaChina still forms a major pie of US import

er Yuan will increase in ation in the s

Any appreciation in the Chinese Yuan willthe purchasing power of Chinese people. Sopreciation will boosts internal consumption


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June 2010

thereby reducing the dependence on ex-port for economic growth thus help-ing in the process of global rebalancing.

Impact of oating Yuan on commodity market willdepend on the speed and extent to which Yuan willappreciate compared to US Dollar. It will affect thecommodity market by impacting export and importi.e. supply and demand from China. Any apprecia-tion of Yuan will make goods cheaper leading to anincrease in the imports. In turn, this will increase the

prices of commodities like metals, oil, etc. higher as

the Chinese will be able to import more raw materi-als until equilibrium will be found. Chinese airlineswill be bene ted by cheaper imported fuel. Globalmanufacturing and resource companies who supply

equipment and commodities will bene t from Yuanmovement as this will make their products cheaper.

If Yuan strengthens against the world curren-cies, competitors of China including India, Thai-land etc will gain, as appreciation will take some

of the edge away from the Chinese exporChinese goods will become comparativelyChinese currencys appreciation will brincomfort to other countries that are competiChina as they will be able to allow their cto appreciate. This will make them less coabout in ow of fund and help them curb tAlthough this is likely to be a slow processsignal a move in the right direction. Almostlysts urge caution, pointing out that any in the Yuan are likely to be slow and con

The author is a student at Institute of Manage-

ment Technology, Ghaziabad

..


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June 2010

Madhuri Gosh

Deregulation of Oil Prices and its Eff

On June 25, 2010, the Empowered Group ofMinisters (EGoM) took a major policy deci-sion on the countrys retail fuel pricing. After longdeliberation for more than a year, the EGoM hasfreed the price of petrol from the governmentscontrol. This EGoM decision is in sync with partialimplementation of Kirit Parekh Committees report.

Immediately after the announcement, petrol price

was increased by about Rs3.7/litre. Diesel prices havealso been increased by Rs2/litre and are going to bederegulated in a phased manner. In the cooking fuelsegment, domestic LPG prices have been increasedby Rs35/cylinder, and kerosene prices by Rs3/litre.

However, cooking fuels will continue to be suIt seems although, that the increase in kerosedomestic LPG prices is less than that proposKirit Parekh Committee. The deregulation prices in a phased manner is contrary to thplete deregulation recommended by the com

The policy change is viewed as an instancgovernment parleying with the Industr

also another frontier for making pro t-ing to the Government the reduction in subsidies has been made to manageable and the Improved pro tability situatio-stream companies post the APM (Adm


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June 2010

of increased competition due to the deregu

There are however pertinent questions rounding the timeline of the diesel pricregulation, the frequency of change in

rol price and the pricing band for petrol. The absence of announcement of susharing formulae makes it dif cult tthe bene ciaries of the deregulation

Subsidy for under recoveries on the sacooking fuel to the private marketers is

still under consideration. Deregulation es on stability in crude prices, stablelower product cracks of subsidized prostable and reform-oriented government,der recoveries and subsidy sharing stru

All said, the announcement of petrol dertion seems to be a step in the right directiowill bene t PSU oil companies, viz. ON-dia, GAIL, IOC, HPCL and BPCL. The doil companies are likely to be key benwhile there is a neutral outlook for the upsoil companies as many analysts are still

Pricing Mechanism) gas price hike, enables themto bear a relatively higher subsidy burden. It hasalso made efforts towards divestment in IOC.According to FICCI, the government has takena very nuanced approach in freeing up petrol

prices. The government has marginally increasedprices, maybe considering the possible political fall-out in case the prices were increased signi cantly.Experts say that if the recommendation of the KiritParikh committee would have been accepted in total-ity under recoveries would have come down drasti-cally. Signi cantly lower under recoveries along withcash subsidy of Rs200, 000 million to be provided bythe government would have resulted in a reductionsubsidy-sharing burden for ONGC, OIL and GAIL tothe levels of around Rs16, 000 million -20,000mil-lion. Thus, we were not anticipating any increasein the retail prices of kerosene and domestic LPG.

The deregulation of auto fuels is likely to result in the

re-entry of private players like Reliance Industries(RIL) and Essar Oil (EOL) that had closed down theirretail operations due to lack of a level-playing eld,EOL has already started to ramp up its entire retail ac-count of the proposed de-regulation outlet network,with most of it having started and rest about to start.RIL has also started opening its retail outlets, and thecompany would get more aggressive if the govern-ment policy regarding the complete deregulation ofdiesel prices gets clearer. Even BPCL, could ramp upits retail operations at a much faster pace as it hasoverlapping presence with RIL in the highway seg-ment, and is likely to be the most affected on account


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ing whether the move will lead to improvementin the earnings of the Oil Marketing Companies(OMCs) or upstream segment or government -nances. Many say, the extent of the oil bonds issued

may determine the fate of the OMCs going ahead.

There are in ationary concerns as Government

takes a subdued outlook on crude oil prices. Fornow this seems to be Governments step towardsstabilizing countrys oil economy by tackling thestructural problem of oil subsidies in the coun-try and being scally responsible as well as sendcorrect price signals to consumers so that thereis no wastage of scarce resources. There is how-ever need to evolve a mechanism to provide acushion against the volatility in global oil prices.

Having said that, we cannot forget the previous un-successful experience of the Centre on dismantling

of administered pricing mechanism (APM)(which had to be later folded up in 2004 wgovernments interference when the OMCs wpass on the increasing crude prices to the cons

We certainly hope that this time around the Gments decision is a sound economic one and tion to reform the oil sector is met with bett

The author is a second year student of The Indian Institute of Foreign Trade, Delhi

...


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June 2010

Ashutosh Sharma

2010 European sovereign debt crisis: Is it into a contagious disease

Europeans are seemingly coping with the traumaof 2010 European sovereign debt crisis. Threeof the semi nalist teams in FIFA 2010 are fromEurope and people are enjoying the moment withhope that Europe will emerge as the winner of FIFAworld cup once again. However the uneven mac-roeconomic performance of member countries ofEurope may overshadow the possible win. Batter-ing the eurozone is scary to the nancial marketswith their cups of sorrows continues to ll. In the

midst of a fragile and easily reversible recoveryafter a very severe recession, governments acrossEurope in both de cit and Fiscal countries areannouncing scal austerity packages that are goingto prolong the recession for sure and damaging theprospects of recovery especially in employment.

Greece and Spain are considered to be theters of the European debt crisis but in facish and Greek banks were no worse than bthe strong eurozone countries, especially Gwhich has taken a condescending attitudeproblems of Greece and Spain. It acted likson pill and speeded the concern about pdefault to the other parts of the European eand thereby fearing the possibility of contathe entire eurozone. The countries that are c

under nancial pressure and those that arpotentially under pressure very soon are recoas PIIGS (Portugal, Ireland, Italy, Greece anOut of them Ireland and Greece are facingpossibility of sovereign default. These counalready facing a hard time from nanci


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June 2010

that have forced up bond yields and created adrought of credit to borrowers in these countries.And those holding such debt are unavoidably atsome risk of a fall in the value of their assets.

European banks had as much as $2.95 trillionin loans outstanding to these ve countries atthe end of December 2009. Chart 1 shows thatbanks based in France, Germany, the U.K. andthe Netherlands have invested a signi cantpart of their lending in these ve countries.

Source : Bank for International Settle-ments Quarterly report , Basel June 2010.

Considering the worst effected countries of Euro-

pean crisis Greece and Spain. Chart 2 shows thatFrench and German Banks together account for morethan half of Greek debt. In Spain, the proportion isless but the amounts involved are signi cantly more.

Chart 2 : Banks exposure to Spain and

Credit lending by governments accounts than one- fth of the total exposure ofthese countries. Hence the lending of bankcountries is denominated by private debt. Ternment bond market is the focus of thecrisis which is causing a possibility of sdefault of these countries. The more thmarkets strike the government bond mark


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June 2010

more the governments of Greece and Spain are forcedto announce and implement severe austerity packag-es that entail large cuts in public expenditure with ad-verse effects on employment and output. This effect

is seemingly propagating to other parts of Europebecause of interdependency between the economies.

The European Union is 53 years old now dating fromthe treaty of Rome in 1957.Probably it is sufferingfrom mid life crisis. The expressions of this mid life

crisis have started coming up and will become moreand more evident in near future. It is possible thatwhat is being considered as a crisis of currency andbond markets of Europe can affect the recovery ofthe world from the 2008 recession. The earlier aimsof the European project, such as peace and unity arelooking timid under the pressure of nancial mar-kets. Union does not appear to be able to deliver thepromised security and prosperity to all its citizens.

Union should try to remodel the interdependenceleading to a greater drive for scal integration aswell as a focus on wage-lead growth in the entire

region. European Union helped world in dication of market powers and a serious-

native to USA. Today when Union is undthreat of disintegration, serious austerity m

sures may lead to little option but to cut budgetary de cits of countries rapidly ima steep recession and a drop in imports. Acing both growth and scal consolidationhighly unlikely growth will have to give The author is a second year student of TheIndian Institute of Foreign Trade, Delhi.

...


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June 2010 Fun-with-Fin

Feeling bombarded with the fnance jargons??? Not really!So you think you have it in you? Infneeti introduces Finword, amonthly crossword, which will test your mettle as well as build on

your knowledge.

FIN-WORD

ACROSS2 Level of companys debt in relation to its equity capital3 Type of annuity where payment starts at a later date6 Type of bonds whose coupons are sold seperately11 Institution planning worlds biggest ipo12 Name of a ower having some signi cance in nance13 The general tendency of a economic crisis to spread

DOWN1 Relationship between price and earning of a shar4 The price level at which analysts think people w5 Entering into an agreement to reduce or eliminat6 Transaction consisting of converting receivablsecurity7 The most simpli ed and basic type of nanci8 Science related to specialising in nance and 9 A type of debt which can be redemeed earlier th10 Amount paid by an insurer to the insured to comthe loss

** Answer to be published in the next issue.Please send in your entry to in [email protected] rst correct entry will have his/her namepublished in the magazine.

Last Finnwords Winner: Deepak Agarwal


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INFINEETI | Vol 4, Issue 2 June 2010

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Indian Institute of Foreign TradeNew Delhi | Kolkata

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