The Middle Man Paradise

Finance Minister Arun Jaitley in his interview to PTI in December 2015 outlined the optimism for Indian economy the government is projecting. He was quoted saying  “As the year ends, I look back with a sense of great satisfaction,”. However, the same optimism was not shared by many industry stalwarts and most households. So why is it that while the Finance Minister is satisfied with his economic performance, industry and public are still waiting for the “Acche Din”?

Although there are many factors, let us analysis it from the point of view of WPI and CPI.

What is WPI and CPI?

Wholesale Price Index (WPI) measures the changes over time general levels of price of goods and services as far as possible all transactions at first point of bulk sale in the domestic market.

Consumer Price Indices (CPI) on the other hand measure changes over time in general level of prices of goods and services that households acquire for the purpose of consumption.

While the two indices vary in terms of variation in base years, basket of items and weights allocated to the individual items, these indices are used as indicators of price movement in wholesale and consumer prices. Just as BSE Sensex is an index of 30 companies which gives a general indication of the movement of stock markets, WPI and CPI are used as inflation  indicators. WPI is also known as headline inflation while CPI as retail inflation.

So, what has been happening to the WPI and CPI?

Since May 2014, both WPI and CPI inflation rates have been moving downwards. In Nov’14, the WPI contracted to a negative 0.17% . What it means is wholesale prices of commodities in Nov’14 were cheaper by 0.17% as compared to Nov’13 (year on year comparison).

Although the movement of WPI and CPI is more or less synchronous in terms of direction, the gap between the two indices has widened in 2015. Simply put, even though wholesale prices had dropped, the retails prices did not reduce but inflated at an approximate rate of 5%.

Ideally in a really competitive integrated market, price changes at the upstream level, i.e., the raw material, intermediate goods and capital goods (WPI), get reflected in the final products and eventually in the CPI. However, our market is not integrated and the changes are not getting reflected in CPI. The benefit of lower production costs is getting lost in the value chain before it reaches the end consumer.

What are the effects to such a movement of WPI and CPI?

The WPI inflation has been declining for 15 straight months. This can be attributed to the significant fall in the global commodity prices, leading to a decline in the prices of raw materials. It also reflects the domestic conditions and dampened demand. So for manufacturers, while manufacturing is cheaper, selling is tougher.

The CPI inflation on the other hand has not reduced. While consumers have not enjoyed the benefit of lower costs, the traders and stockists on the other hand have enjoyed higher margins.

Are there specific industry examples?

The falling crude prices and the increasing government excise duty on it to stabilize prices is well know. This is reflected in the WPI and CPI chart. Though 2015, the Fuel and Power WPI inflation was negative at around -12%, however the Fuel & Light CPI remained positive at around 5%. The government has benefited from the global oil slump rather than passing the benefit to the consumer.

Similar examples over the past year can be seen in Clothing (Textile) industry. The traders and retailers have managed to increase margins without passing the benefit to customers. The food industry indices have behaved rather erratically bringing windfall gains for hoarders and stockists during the April to November 2015 period.

Textile Industry

Food Industry

How is this affecting India and me?

With manufacturing WPI dipping into the negative, job creation will be impacted. Retail inflation being higher, consumers will have to shell out more. The RBI is unlikely to prescribe another rate cut unless the CPI inflation is contained. Unless there is an overturn in the current trends, the retail prices shall continue to increase while the industrial demand remaining damp.

The only bright spot from the current scenario comes for infrastructure development in new projects. The commodity prices are at it lowest in 10 years and demand is expected to pick over a horizon of 2 years when the project shall become operational.

Do look at the inflation numbers released on 15th of each month. Questions? Suggestions? Got something to add? We would like to hear from you.

Want a business aspect to be researched before deciding on a key decision? Contact us.

The Next Banking Crisis

The long term optimism for India’s economic prospects has been recently unsettled by the short term vagaries of stock markets and news of banking crisis. The situation has left most of us confused about the 2016 outlook.

The graph to the left represents a long term forecast while the one in the right is short term data of the past. Although the stock markets have not done well in the short term, the long term mood remains upbeat. However, there is one critical factor which might spoil the party for India: Banking Crisis.

What is the banking NPA crisis?

A loan given by the bank becomes Non Performing Asset (NPA) when it ceases to generate income for the bank usually after waiting for a period of 90 days. In simple terms, bad loans that are not being paid by borrowers (like Vijay Mallya’s Kingfisher Airlines) are NPAs. These NPAs along with restructured assets (re-negotiation of loan terms with the bank) are known as Stressed Assets (SA)

SA = NPA + RA

Over the past years, the stressed assets have increased to 11.3% of total loans provided which means out of every 100 rupees lent, 11.3 rupees might not be repaid to the bank. This is a huge amount of money – nearly 7.7 lac crore rupees.

So, what is the RBI doing?

The Reserve Bank of India has identified the problem and proactive steps have been taken to contain it. In a recent Asset Quality Review (AQR) the RBI asked banks to recognise some top defaulting accounts as non-performing ones and provide for them. “Providing” means writing off/provisioning here or in simple terms, accepting the loss of a loan. The result was that the aggregate net profit of the 39 listed banks fell 98% to Rs.307 crore in the December quarter from Rs.16,806 crore in the year earlier.

The RBI in its diktat has cleared its intent is to have clean and fully provisioned bank balance sheets by March 2017.

The previous banking subprime crisis in 2009 did not affect our banking system. What is different this time?

Black money. Yes, the circulation of black money in the real estate sector in India was the major reason behind aversion of the subprime crisis in India. Let us understand this by an example. Mr. A purchases who purchases a house for Rs 1 crore, paid Rs 50 lacs through bank loan (“officially”) and Rs 50 lacs in cash (“black money”) to save on stamp duty and capital gains for the seller.

Now when property prices fell in 2009 during the subprime crisis the bank loan was still comfortably within the value of the property. This is because the bank provided a loan only on the “official” value of the property of Rs 50 lacs instead of the market value of Rs 1 crore. In the US, banks offered mortgages at 100% of the value of the property, hence when the property rates dropped drastically, banks were not able to recover their dues.

Black money in today’s scenario cannot save the banking system from willful defaulters and bad loans.

How does this affect me and the Indian economy?

Banks are expected to mop up their NPAs upto March 2017. Each quarterly results may bring booking of losses and writing off bad loans. Stock markets tend to react adversely to red bottom lines. Banking stocks are hence expected to underperform.

Moreover, loans will be sanctioned after more scrutiny than before. Sanctioned loans may also be disbursed based on priority to customers with better credit. In spite of lowering of interest rates, we may see reduced credit growth since banks would lower funding to high risk projects. The GDP growth projection of 7.5% set by the finance minister in such a case might be a tough ask.

External factors such as declining exports, global slowdown, falling commodity prices could rock the ship, but internal deficiencies in banking and infrastructure can sink it. As Muhammad Ali puts it

It isn’t the mountains ahead to climb that wear you out; it’s the pebble in your shoe.

Questions? Suggestions? Got something to add? We would like to hear from you.

Want to fund your business? Contact us.

 

Finance behind Free Basics by Facebook

There has been a lot of chatter recently about big billboards or full page adverts in national newspapers of “Free Basics” by Facebook. So does it make you wonder why Facebook is spending soo much money on something that it wants to give out free?

Some Basics

Net Neutrality

The principle that Internet service providers (like Reliance, Airtel) should enable access to all content and applications regardless of the source, and without favoring or blocking particular products or websites.

Free Basics (erstwhile internet.org)

Free Basics makes the internet accessible to more people by providing them access to a range of free basic services like news, maternal health, travel, local jobs, sports, communication, and local government information.

Why is Facebook giving away free internet (via tie-up with service providers)?

About a billion of India’s population does not have internet access. Out of those who have Internet access, only 12.5 crores use Facebook. Which means facebook still has a potential client list of around 116 crore Indians.

However, to bring these users onto Facebook, the first step is to increase internet penetration in India. Here is where Free Basics comes in. It is offering free basic internet connectivity to bring more users onto the net.

Now imagine if a current user base of 155 crores worldwide gives Facebook a market capitalization of $ 288 billions (Rs 19,23,480 crores approx) what would another 116 crores add? So when Mark Zuckerberg tells us his campaign is for benefit of the poor in India, I feel it is quite a brilliant business strategy.

What about profits? Does Facebook earn profits from the campaign?

Zuckerberg says there aren’t any adverts on Free Basics version of Facebook. But Facebook has not ruled out showing adverts on Free Basics in future. Also if we believe Facebook’s claim that 50 per cent of new internet users upgrade from Free Basics to the paid internet, then you have a steady stream of people moving on to Facebook’s full site.

Imagine a situation where a single organisation has the ability to reach a billion people together. The marketing reach as well as Facebook’s ability to command prices of its adverts in the future shall become unchallenged and unparalleled.

The size of the Indian Internet Market in terms of gross merchandise value is likely to rise from $11 billion in 2013 to $137 billion by 2020 according to a Morgan Stanley Report. This gives a phenomenal compound annual growth rate (CAGR) of 43%. Facebook will leverage its position as a market leader and boost its revenues as well in the rapidly expanding internet market.

What about moral duties and net neutrality?

Violation of Net Neutrality may be wrong morally and may be detrimental to consumer interest in the long run, but as a business strategy, Facebook is doing everything right! The moral outrage may become a thorn in the eye for Zukerburg and a PR nightmare but as Mario Puzo puts in the Godfather “It’s not personal. It’s strictly business”.

Questions? Suggestions? Got something to add? We would like to hear from you.

Want a slice of the Indian Internet Market? Want to create your online brand presence?  Contact us.

What the Fed rate hike means for you?

Janet Yellen, ‘Chair of the US Fed’ is the most powerful banker in the world, and she just provided you with an opportunity late last night. The US Federal Reserve (our RBI equivalent) announced its first rate increase of the Federal Funds Rate (our repo rate equivalent) in 9 years by 0.25%. So what does this mean? Let us begin from the beginning.

Reduction in Fed Funds Rate – December 2008

To overcome the 2008 financial crisis, the Fed drastically slashed the funds rate from 5.25% to 0.25% to encourage borrowings and thereby pump huge amounts of money into the slowing economy. An analogy can be drawn to a dying man put on ventilator. Once the man is stable, the ventilator is removed and he is allowed to breathe on his own. The reduction in rates was like putting the US economy on ventilator.

Why the Fed Rate Hike now?

The US economy has to be taken off the ventilator some time. With all the key indicators like unemployment and inflation under control, the Fed has started hiking the rates. But the Fed’s statement suggested that rates would remain historically low well into the future, saying it expects “only gradual increases.” The Fed Funds rates since 1970s is plotted below.

How does it affect India?

Fed Rate increase leads to higher rate of return on savings in form of bonds or FD in the US. Investors shall thus be lured towards investing in US rather than riskier emerging economies. The rate hike affects India in two major ways:

 

How does it affect me? And what are the opportunities ?

Post the hike, Japan’s Nikkei added 1.9 per cent, on top of Tuesday’s 2.6 per cent advance. Australian stocks climbed 1.6 per cent, while South Korea put on 0.8 per cent. US stocks have of course jumped. The rate hike is perceived as a mark of confidence in the slowing world economy. Indian Market has already corrected itself previously while preparing for the Fed rate hike, so today it is expected to bounce back.

Gold rates have slumped nearly 10 percent this year, partly due to uncertainty in the Fed rate hike. Now that uncertainty has been removed, gold price in India is expected to rise with increase in dollar rate in the short run. In the longer run however, when dollar gives better returns, gold rates should reduce internationally.

The Dollar jumped nearly 1 percent against a basket of major currencies last night. It is expected to test 70 rupee levels in the coming months. It is a good time to book export orders.

Questions? Suggestions? Got something to add? We would like to hear from you.

Want to book export orders now? Contact us.

Profiting through Branding – A Saffron Story

The first country that comes to mind when we talk about Saffron is Spain. Spain is famous for its aromatic high quality saffron. But before we go further, here are a few facts about Saffron:

Saffron Fact Sheet

So, how is it possible that a country that produces just 2 Metric Ton (MT) exports 134 MT and a country that produces 90% of world saffron is unheard of?

Recent History

Iran’s nuclear program resulted in crippling international sanctions effectively blocking access to the lucrative American and European markets. Saffron produced in Iran had to be smuggled out of the country which mostly ended up in Spain.

Spain which enjoyed good international repute for its quality, capitalizing on the Iranian crisis. Iranian saffron was passed off as high quality Spanish Saffron at a premium. Purchases made at $2000 for a Kilogram were sold in retail at prices nearing $7000 per kilogram.

How was this windfall gain achieved?

The gains were a result of two things: Branding and Unethical practices. While we shall not talk about the latter, it is important to understand that Spain was able to get premium rates only because of its established brands or Lovemark.

What are Lovemarks? And how is Spain or Iran concerned with it?

Kevin Roberts placed a product into one of 4 quadrants based on love and respect it commanded from the customers.

For example: A Watch is a ‘Product’, Timex is a ‘Brand’, Rolex is a ‘Lovemark’ while the Moto 360 smart watch is ‘Fad’.

Iran sold its saffron by Kilogram as a commodity while Spain packed the same saffron in beautiful glass containers of 1 to 10 grams and sold in under a brand name at 3 times the rates. Iranian Saffron hence falls in the first quadrant of Products, while Spanish Saffron enjoyed a position in the Lovemarks quadrant.

The benefit of creating a Lovemark or at least a Brand is quite evident from the profitability of Spanish Saffron.

Where is India placed in this quadrant?

Most of India’s exports are “Products”. Lacs of tons of Isabgol is exported to the west which is then subsequently imported in the form of branded laxatives and health supplements.

Exporters and businessmen locally, must leverage cheaper labour and increasingly maturing packaging industry in India to create world renowned brands. If India wants to take center stage in international markets, brand creation and subsequently moving to Lovemarks is the only way.

 

Questions? Suggestions? Got something to add? We would like to hear from you.

Want to take your local business international? Or create a brand/lovemark? Contact us.

 

Image credit: http://www.lovemarks.com/

What is the future of Solar Power in India?

Whether or not the world leaders will be able to provide a legally-binding treaty on climate change in the forthcoming UN Paris summit remains to be seen but none the less a lot of emphasis has been laid on renewable power and its prospects. In the recent past, two headlines found more attention than most others:

• The record bid of Rs 4.63/kWh by the US based SunEdison for a 500 Mw solar park in Andhra Pradesh.
• The ambitious 100 GW solar power generation target by the Government of India by 2022.

Before we get into the financials and nitty-gritties of Solar power generation, here are a few basics:

• kWh (Kilowatt Hour) represents energy consumed while kW (Kilowatt) represents power. In other words, if an electric motor of 1 kW is switched on for one hour it consumes 1 kWh of energy. The cost of switching on the motor shall be Rs 4.63 which is the supply price bid by SunEdison.
• 1 GW = 1000MW, 1MW = 1000 kW while 1kW = 1000 W.

So here are answers to a few questions that come to mind first:

What does the 100GW solar target translate to in terms of money?

This would mean it requires an investment of around Rs.6.5 trillion over the next five years. Piyush Goyal, Minister of Power, Coal and Renewable Energy, India puts the figure at $250 billion (Rs 16.25 trillion) as investment opportunity in the renewable energy space.

What does the price bid of Rs 4.63/kWh mean?

Companies like SunEdison, Canada’s SkyPower Ltd, Energon and SunSource Energy are aggressively bidding to develop Solar parks and to supply . Companies like Adani, Rattan India, Reliance and SoftBank are also in the foray. The cost of capital and equipment, modules, inverters, BOP—balance of plant costs have come down. Hence, the price bids have dropped from Rs 12.76/kWh in 2011 to Rs 4.63/kWh in 2015. To give a perspective, a residential household pays to Torrent Power (coal based power) a rate of Rs 7.40/kWh. 

Movement of Solar Power Bids in 5 years in India

Great! Does this mean we’ll soon get cheaper power?

Although the price bids have dropped below the Rs 5/kWh levels, the profit making ability of these projects is yet to be seen. Many industry experts believe these recent bids are untenable. Also since the projects are small (500 Mw being biggest) the impact of these projects on overall supply to the grid is minuscule. Total peak power demand in the FY 2015-16 in India is estimated to be 156,862 Mw. So hold your horses for now, because the impact of these project might take a few years to reach you.

Okay. Is there a business opportunity here?

If you really want to invest in solar, look at the solar roof top segment in the industry. The government plans 40 GW energy from roof-top and distributed generation projects. Since 2010 solar installations in the U.S. have increased six-fold—from 2,000 to more than 12,000 megawatts worth. The boom continues in the US roof top solar installations despite sluggish growth in other solar sectors. In India, with the government committed to its targets and promise of savings to household on electricity bills, the next revolution just might yellow.

When we talk about Solar, it is also important to look at ancillary industries like energy storage systems, low iron glasses, inverters, electrical equipment. Remember, Ashok Leyland was the biggest benefactor of the coal allocations. It is good time to get into one of the ancillary industries as well.

Where else will solar power have an impact in India?

We are set to reduce our carbon footprint in ever increasing polluted cities. New Delhi is the most polluted city in the world, a ranking we do not appreciate being on the top. Solar power also offers power to remote villages which are off grid presently. Social indicators shall improve with power to everyone. Because in the end, it is not all about the money.

The coming year is set to bring in a whirlwind change in the way we look at solar energy. The nonviable philanthropist solar energy is all set to become the common man’s respite very soon. So put your shades on and keep an eye on the sun!

Questions? Suggestions? Got something to add? We would like to hear from you.

To get a detailed solar industry insight report, please contact us.