March IIP Update
Is the EU bailout package enough?
Yet again the global financial markets yesterday cheered the fact that an ailing patient (EU) has being given a strong financial medicine. All the major Indices around the world were up by almost 4% on an average on account of this strong step by the EU members. A bailout package worth almost $1 trillion.
But the question is -
- Is this something to get overexcited and start buying stocks ?
- Is this bailout package enough to give a stability to the European financial system?
Well, the answer to the first question is NO. This is not something to get overexcited and start buying stocks. Most of the rally that happened yesterday was a short covering one and any market data do not point towards any kind of a fresh buying.
The answer to the second question is that YES it has partially given stability to the global financial system, especially EU, a short term stability. The medium and the long term risks still remain. This is clear by the fact that
- The yield on the Greece’s and other crisis ridden EU nations two year bond fell by a hefty amount (For Greece it almost halved), however the yield on the 10 year saw only a minor correction
- The difference between the LIBOR and the overnight indexed swap rate, the so-called Libor-OIS spread that rises as a signal banks are less willing to lend, climbed yesterday even after the rescue announcement
Thus, I strongly believe that the outlook has just improved for a very near term and there are record deficits in just about every country EU and something ultimately needs to be done about them. The current measures is just to stop a complete vertical fall and to prevent it making it look like a bubble burst. However, the slide should continue.
Moreover, what it has done is integrating a political union from an economic union, whereas the case is always the opposite around the world. Hence, if the countries getting aid do not comply to the will of the political bosses (Germany & France), could lead to an altogether different crisis.
Hence, one should use this momentum lead rally only for trading that too with strict stop loss since, nothing too good has happened
Depriciation and Impairment – IFRS and Indian GAAP
Link between Depreciation and Impairment under IFRS
When an item of Property, Plant and Equipment (PPE) is impaired i.e. recoverable amount < carrying amount, carrying amount is reduced to the amount of recoverable amount.
Asset should no more be carried more than their Recoverable amount.
Such a decrease in carrying amount is impairment and is booked in Profit and Loss.
After recognition of an impairment loss, the depreciation charge of the asset shall be adjusted in the future periods to allocate the asset’s revised carrying amount over its remaining useful life.
Example 1: More >
Weekly market update: May 3, 2010
Dear readers, if you will remember we used to post monthly market review till some time back. Modifying that a bit, we have come out with the weekly version of the update covering equity, currency, gilts, crude oil and a brief note on China interest rate move.
Equity markets
- Sensex slid 135 points or 0.7% for the week to close at 17558. The index started the week on a bullish note but later in the week negative global sentiments created due to rating downgrade of Greek bonds pushed the market down by 1.7% on Wednesday.
- Successive upward moves for the next two days helped the index to regain most of Wednesday’s loss. Federal Reserve of USA in its rate announcement re-iterated that “low interest rates are appropriate for an extended period of time.”
- With earning season coming to an end, markets are looking towards international economy for direction. American and European indices closed in red on Friday which has led to a gap-down opening in Indian markets.
- The news that EU and IMF have agreed for a bailout package for Greece will affect the markets positively. Markets are expected to remain range-bound with a positive bias and figures for cement sales and automobile sales will be watched closely.
Currency – USDINR
- Rupee started the week with a strengthening bias opening 13 paise up from last week’s close of Rs.44.22 per dollar but gradually during the week it weakened along with weakness observed in the equity markets.
- But towards the end of the week, buying from FIIs led to a strong come back in the rupee and it closed at its highest level in 2 weeks at Rs.44.25 per dollar, gaining 17 paise or 0.4% up from last week. This is the 4th straight monthly gain in rupee.
- RBI Governor Mr. Subbarao said in Washington that steps might be taken to curb the excess inflow of funds in the Indian markets as surging rupee is hitting exports. This would restrict any major upside move in rupee for the week but we expect that the rupee will strengthen this week buoyed by the inflow of funds.
Government Securities (G Sec/Gilts)
- 6.35% 2020 benchmark bond registered very low volumes for the week as new 10 year bond was to be issued by RBI. Yields on 7.02% 2016 bond fell 10 bps on Tuesday on short covering and value buying.
- Bond yields remained almost at the same level thereafter only to strengthen a bit before the auction results were announced on Friday, but aggressive pricing of new 2020 bond led to a sell-off in the bonds and the 7.02% 2016 bond closed at 7.55%, 11 bps down from previous week.
- The new 7.8% 2020 bond has been seeing good volumes in the first half of trading on Monday. We expect the trading volumes to shift to the new bond and bond markets to trade with a slight upward bias as traders resort to profit booking and markets take cues from international markets.
Crude Oil
- Crude oil opened the week on bearish note at $85.22 per barrel owing to concerns regarding Goldman Sachs case and growing uncertainty in the Euro region regarding Greece and fears of it spreading other Euro region economies. Crude fell for the first two trading sessions reaching a low of $ 81.70 on Tuesday.
- Thereafter, crude showed a consistent rise over the entire week, rising $5 from the intraweek lows, ending the week at $86.15 per barrel on Friday owing to optimism regarding the Euro zone, pointing to a strengthening economy in the second quarter, lower unemployment figures in US and Greece readied severe austerity measures on Thursday to secure a multi-billion-euro aid from IMF and EU and avoid default.
- Crude are likely to rise in the coming week as well, on expectations of strong international markets and announcement of bailout package for Greece of €30 billion by IMF and Euro region.
China interest rate move
- The People’s Bank of China (PBOC) announced Sunday it was increasing commercial banks’ reserve requirement ratio (RRR) by 0.5 percentage points, taking the RRR of large banks to 17% and that of small- and medium-sized banks to 15%.
- The increase, which goes into effect May 10, is the PBOC’s third such hike this year and is estimated to drain out about 300 billion yuan ($43.9 billion) in liquidity from the Chinese banking system.
- The RRR hike is viewed as a fundamentally positive tightening measure, as it is still in the early part of the tightening cycle, which should help contain inflationary pressures, prolong the current economic expansion cycle and provide cushion for future policy flexibility.
- The RRR hike is likely to have a modest immediate impact on banks’ margins as they are forced to park more funds with the PBOC at low interest rates. But subsequently, banks’ interest-rate margins were likely to improve, as tighter credit conditions would boost interest rates in the interbank money markets, where most of the listed banks are net lenders.
Hope this was informative. Your suggestions/comments would be highly appreciated.
Authors: Praveen Bajaj, MBA Finance
Abhijeet Ahir,MBA Finance
European Crisis: Alexander would be Crying in his Grave…!!!
You must be wondering why am I mentioning about Alexander the Great in a finance blog. However, I believe that whatever is going on with Greece currently, the title of my blog is not inappropriate.
Since, Tuesday when the Sovereign rating of Greece was cut down to JUNK status, the whole world is wondering whether or not Greece will get any bailout or will default. The Greek bonds are currently yielding around 22% and this makes me happy, that India despite being an developing nation is yielding only around 8%. (Since all the text books are proved wrong which says that a developing country like India will always yield more than a developed economy).
The only possible thing that could save Greece from restructuring its debt (which is equivalent of a default) and bring some cheers to Alexander the Great is a bailout package. However, the biggest road block to this bailout package is the European super power Germany. The German public opinion is firmly set against dipping into the tax payers wallet to help the Greece. Thus the German Government is in a tight spot:
- On one hand it can agree to extend the aid to Greece and face a voters backlash and send its party to a crashing defeat in the regional elections in Germany on May 9th
- Or on the other just sit back and and let the Greeks default and trigger this credit problem into other larger debt burdened EU members.
- This would also lead to a problem for different private sector banks in EU area who currently holds Greek Bonds and this would lead to another crisis of its kind
However, if you believe conspiracy theory, what I see that the one of the key beneficiary of this whole Greece episode is Germany. What has this Greece problem done, is that it has substantially weakened the EURO and Germany whose major portion of GDP is export dependent is benefiting highly from this and in order to bring down the Chinese dominance the Germany is deliberately postponing the bailout, so that it can prosper in the export market.
Hence, I see no clear direction for markets at least before 19th when Greece has to either fund its debt obligations from the bailout money (if it gets) of default. I had highlighted the kind of possible threat EURO area is to the world markets over a year back, you can use the link to re confirm. So, I would again say that the things are not as good as it looks like. Nifty has a major resistance around 5330-50 and any new long trading positions should be taken only once this hurdle is crossed.
Till then keep doing SIP in the stocks I had already discussed in my earlier posts.
Happy Investing…!!!
To read earlier post on the same subject, click here
Author name:Rahul Sonthalia, Research Head, Kredent
Greece Crisis: Is Spain the next Greece??
PIGS as the financial media call the four countries: Portugal, Italy, Greece and Spain are one of the biggest risks to the current global financial stability. When much of the attention is grabbed by the troubled Greece, the Spanish economy is in reality in a position worse than that of the Greece.
While other European nations like France and Germany — and even Britain — are beginning to show signs of economic growth, Spain remains stuck in recession. Spain is the only G20 country that remained in recession in 4Q of 2009 and the IMF forecasts that it will remain so till 2011.
Some of the most worry-some statistics from Spain, which clearly highlights the risks are:
- Unemployment of around 18% while the average for EU is only 9.5
- Although lower than average Debt to GDP ratio, it has doubled in last one year, etc
There are some noted economists who believe that it will take Spain 7-8 years running the same amount of deficits to become the next Greece, however others say that the crisis is much serious than it looks at the face.
Hence, I believe that Spain’s problems coupled with debt issues of other EU countries poses a serious threat to the financial markets. We can expect more sovereign rate cuts like what has happened to Portugal and Greece last Tuesday.
Author name: Rahul Sonthalia, Research Head, Kredent
Sector View: Aviation
Indian Aviation Industry: When will it Fly High…?
Our expert Mr Rahul Sonthalia offers his advice regarding sectors you should invest in and where you should stay away from. Visit our Stock tips sections for company specific views on investing.
Hospitality and Aviation Industry performed below the potential in spite of their good days and later a move towards heavy losses were noticed due to competition & recession backed by cost curtailing techniques & restricted investments. An expected boom in the Travel & Tourism Industry is expected in next upcoming decade that will contribute Rs. 8500 billion to the GDP.
However, Government’s contribution to the Tourism Infrastructure sector stands around 0.1% with Rs.1050 crore in the Budget 2010. In contrast to other neighbouring nations, India seems to be an expensive nation in hospitality industry. However, currently they are offering budgeted category rooms but norms related to acquisition of licenses may hinder their process to promote the same sector.
The Aviation Industry on the other hand can be backed up by Government support by introduction of low cost carriers and speeding up Infrastructural Projects.
Weakening Head wings
- Although Travel & Tourism Industry has gained much potential over last few years with increase in number of Travelers but it is still the Airlines Industry that finds traces of financial crises. to see rising credit costs for new planes, while hedging against fuel prices would become increasingly difficult as a result of the crisis
- It is yet not clearly defined that how any rescue package will work for the airline unless it deals with big expenses such as rising credit costs for new planes & hedging against fuel prices would become increasingly difficult as a result of the crisis
- Jet Airways has already taken up initials for Business Re engineering by converting up to two thirds of its capacity to its low cost services, Jet Konnect. Besides leasing out at least seven of its Boeing 777-300ER planes, even selling one to an Emirate in UAE
- Company like Kingfisher Airlines saddled with high volume of debt canceled the proposal to buy new airbus instead are returning their leased A320 aircrafts With 15%, market Share currently Indigo Airlines has taken competitive advantage over other operators by paring with thrift conscious customer base & operating in limited sectors. It is expected to increase its business more at a decreasing rate with its competitor Spicejet
In the near future both Kingfisher Airlines and Jet Airways are expected to diversify their operations to international sectors with doubling the units of aircraft they are currently earned with. However, with increased number of operations, infrastructural drawback at airports may be a hurdle for swift operation. However, the year 2010 may be a good opportunity for the Tourism & Aviation Industry backed by government support and the Common Wealth Games in 2010.
Author name: Rahul Sonthalia, Research Head, Kredent
Valuation of Business: Analysis of environment and Industry
“Valuation of Business” (valuation of companies) is a series of articles launched by MoneyBol to apprise our readers about different aspects Valuation of business. In first such articles we will look at analysis of environment and the respective industry.
Analysis of environment
Before analyzing any business concern, it is very important to analyze the environment it exists in on the date of valuation. The aspects of environment which should not be overlooked in any case are:
- Political
- Social
- Legal
- Economic
- Socio-political
- Technological
These forces are largely outside the control and influence of a business, yet each one of them has the potential to impact the business both positively and negatively.
Analysis of industry trends
The kind of industry a business belongs to largely determines the valuation technique to be used. To assess the structure of any industry it is important to determine the strength of the following 5 forces:
- Bargaining power of suppliers
- Bargaining power of buyers
- Threat of new entrants
- Threat of substitutes
- Rivalry among competitors
Together, the strength of these forces determines the profit potential in an industry by influencing the prices, costs, and required investments of businesses—the elements of return on investment. Stronger forces are associated with a more challenging business environment.
Also, the general price movement of the shares of companies of a particular industry largely influences the price movement of any individual company. Hence this factor must not be ignored before jumping into any conclusions.
Keep visiting our website for further articles which would take up company specific ananlysis for valuation.
Author name: Preeti Patawari, MBA- Intl Business (IMT)
