Business Insights

Inflation in India

noreply@blogger.com (Geetika) — Mon, 29 Mar 2010 11:21:00 +0000

Inflation is defined as an overall increase in general price levels of goods and services within the economy. In other words, it is an increase in cost of living. Inflation is still the most neglected concept by the common man while building a retirement plan. Factoring the effects of inflation on your financial portfolio is extremely important as an unanticipated inflation can erode the purchasing power of your personal wealth.

In India, inflation is calculated as an annualized change in Wholesale Price Index (WPI) which includes a set of around 435 goods, unlike the Consumer Price Index (CPI) used by the rest of the world. Inflation figures based on WPI is considered to be understated as consumers pay prices higher that the wholesale prices.

Inflation results when too much money ends up purchasing too few goods. This happens when either the money supply flowing in the economy increases, or there is some supply constraint. The most common reason of inflation during modern times has been the increase in money supply. For the purpose of stimulating GDP growth in times of economic slowdown, the Indian government maintained loose monetary policies. Interest rates were maintained at low levels which increases disposable income in the hands of the citizens. Moreover, soaring crude oil prices also fueled inflationary pressure.

At the same time, mounting deficits and manufacturing overcapacity and threats of real estate bubbles cannot overrule the hyperinflationary trends in the future. Another crucial factor which continues to be ignored by policy makers in India is ‘Food Inflation’. Fast rising population coupled with slowing production capacity of cultivable land in the country could leas to hyperinflationary trends. Poor yield owing to water shortage and lack of adequate irrigation infrastructure has forced many farmers to quit agriculture and shift to other occupations. Without a credible and long-term strategy to boost land productivity, inflation over the long term cannot be avoided.

India's Power Sector

noreply@blogger.com (Geetika) — Tue, 02 Mar 2010 11:22:00 +0000

Power industry plays a very crucial role in an economy’s progress. Despite being the second fastest growing economy in the world, almost one-third of India’s population has no access to electricity. Several initiatives of several governments have failed to encourage private investments in power sector. India desperately needs to increase electricity generation to meet the drastically growing energy demands from growing middle class and industrial base. Opening up of Ultra Mega Power Projects (UMPP) is expected to attract private and even overseas capital into this sector.

India is a net importer of energy and 35% of its primary energy needed is met through imports. Its ironic that despite being rich in coal and gifted with abundant sources of renewable energy like solar, wind, hydro and bio-energy, the country has only 0.4% of the world’s hydrocarbon reverses. Lack of government support has forced several solar PV cell and module manufactures to focus on European markets which are supported by government subsidies.

Inflation: How it affects you?

noreply@blogger.com (Geetika) — Tue, 02 Mar 2010 08:51:00 +0000

We all know the importance of investing. But what your investment advisers and investment gurus will not tell you is: how inflation is slowly eating up your investment returns!

But first, what is inflation? Inflation is the increase in general price level of goods and services produced in a country. It does not imply that prices of all goods and services are increasing in same proportion. While Prices of some goods may rise relative to other goods and some may fall, but on an average, inflation can still be positive.

Inflation affects us in two important ways. First, it reduces the purchasing power of your income and second, it wipes out the real return you gain from your investments. Just take a look at a simple example. If average inflation this year was 5%, it means that a product that was worth Re.1 last year, can be bought for Rs.1.05 this year. This also means that the purchasing power of your rupee is reduced by 5%.

Effect of inflation gets worse when it impacts the real return on your investment. This can be best explained with a much simplified example. Assume your investment earned a 10% return this year. But if the annual inflation this year was 4%, then the real return that your investment generated was only 8% (i.e. nominal return less annual inflation). This is primarily because during the year, your money has lost some purchasing power due to inflation and a part of the nominal return will be for recovering that lost purchasing power.

It is therefore important to factor in the inflation trends in your investment decisions. Read more for investment options that can help you to protect your wealth from eroding due to inflation.

Indian Cement Industry: Set to grow

noreply@blogger.com (Geetika) — Mon, 28 Dec 2009 12:51:00 +0000

The one Indian industry which is set for growth over the coming years is the Cement Industry. The world’s second largest cement producer (after China) reached its total installed capacity to 231 million tones after adding 11 million tones of capacity during the first half of 2009.

The main characteristics of this industry is that it is highly fragmented, cyclical and highly capital intensive. There are around 125 large and 300 small cement plants. Some of the leading cement manufacturers are UltraTech/Grasim combine, Dalmia Cements, India Cements and Holcim. Returns depend on the vibrancy of the economy as a whole as it directly affects the sales realization and capacity utilization.

The industry is heavily dependent on 3 sectors; coal, power and transport. Energy and freight are the two major cost components. Over the last few years, while the proportion of energy cost has increased marginally, freight costs have declined.

Increasing government expenditure on infrastructure sector and rising demand for commercial and residential real estate development has resulted in higher demand for cement in the country. According to a report by the ICRA Industry Monitor, the installed cement capacity is expected to increase to 241 million tones per annum by the end of 2010. It also expects that driven by higher domestic demand and increasing utilization, India's cement industry may record an annual growth of 10% over the coming years.

Taking cue of the global economic slowdown which was affecting cement companies in India last year, Government’s initiative to re-impose counter-veiling duty and special counter-veiling duty this year will help provide a level playing field for domestic players. Moreover, it also appointed a coal regulator to facilitate timely and proper allocation of coal blocks to the important sectors like cement. As coal is one of the prime raw material used in cement production, this seems to be a positive move.

Growth potential of cement industry can be judged by the fact that the per capita cement consumption (156 kg) in India is still well below the global average consumption (396 kg). This gap can be expected to be covered in the coming years. Besides, housing sector accounts for almost 50% of the total cement consumption in the country and the large young population will ensure that the demand for infrastructure stays put.

The rising cost of energy, transportation raw material continues to pressure the industry as a whole. To sustain profitability, companies will have to explore alternate source of energy while at the same time enhance their operational efficiency.

Industry experts opine that the cement industries should now increase their focus on investing adequately in developing human resources that will be capable enough to address the professional needs of construction industry including advanced technologies and construction practices, project management construction and litigation.

Some of the concerns facing the Indian Cement Industry

REITs: Real Estate Investment Trusts

noreply@blogger.com (Geetika) — Fri, 04 Dec 2009 10:11:00 +0000

A Real Estate Investment Trust (REIT) is like a mutual fund that invests only in real estate. It can buy, manage, sell and develop real estates. It breaks down the ownership of real estate properties into units that are sold to investors. As per Draft Securities and Exchange Board of India (SEBI) (Real Estate Investment Trusts) Regulations 2008, REITs should carry a minimum net worth of rupees three crore at the time of registration, increasing to rupees five crore within three years from the date of grant of registration. As per the draft regulation, REITs should distribute 90% of its income (generally rental income) to its investors as regular dividends. By investing in REITs investors can reap the benefits of investing in real estate without going through the long and tedious procedure, besides REIT units can be easily liquidated unlike traditional properties.

REITs are typically established by sponsors that then enter into management agreement with Real Estate Asset Management Companies for managing their REIT schemes. Public is then invited to subscribe to the units of their schemes. Units under REIT schemes must be mandatorily listed on any recognized stock exchange within a period of six weeks from the closure of the scheme.

Broadly, REITs are classified as equity, mortgage or hybrid REITs. Equity REITs are the most common form of REIT especially in the US, the world’s largest REIT market. While Equity REITs earn revenue in the form of rents and leases by buying, developing or owning properties, Mortgage REITs earn interest from financing property deals.

Some REITs can also be sector specific that invest only in commercial buildings (malls, office buildings, warehouses, community centers or entertainment centers) or residential buildings. Investors can choose schemes based on their risk appetites. Some of the key ratios to judge an REIT’s performance are NAV (Net Asset Value), AFFO (Adjusted Funds from Operations) and CAD (Cash Available for Distribution)

An advantage of investing through REIT is that they hire professionals and legal experts that make sure that the property they are investing in has a free title and is free from any legal mess. Moreover, as REITs invest in many sectors like retail, commercial and residential properties, investors can reap the benefits of diversification which they may be unable to do within their available resources.

In 2007, SEBI had introduced a draft regulation for REITs. Legislations governing the establishment of REITs were expected to be introduced by the end of 2009. However, the current bearish mood and lack of investor confidence in real estate markets seems to have forced the Indian Government to push away introducing any legislation as of now.

Given the lack of transparency and standardization in pricing of real estate properties, raising funds from capital markets is a major challenge for REITs that continue to deploy high level of debts to improve their returns. RBI too continues to maintain a cautious approach while lending to real estate sectors. Besides this, higher transaction costs and delays in obtaining approvals are creating bottlenecks.

Following are some of the reasons to believe that REITs will be a success in India.

1. Demand for residential and commercial spaces have picked up after a lull in 2008.
2. In India, Average rental yields are much higher (8.5% to 10%) compared to other countries (Japan: 3.5%, Singapore: 5.2%, Hong Kong: 5.7%).
3. Development yields are comparatively much higher in India compared to other developed countries.
4. Increasing urbanization and growing income will make sure that the demand for real estate attracts investment.

Experts suggest that awareness, expanded credit availability and increased adoption of REITs in India will increase the flow of information regarding rent and valuations resulting in improved transparency in pricing of properties. By gaining access to capital markets and exit routes REITs can improve margins and can reduce their overall cost of capital.

Investment Process

noreply@blogger.com (Geetika) — Tue, 17 Nov 2009 10:54:00 +0000

Any investor who sincerely works towards making the most of the current market trend will never underestimate the importance of having an investment strategy predefined before he starts investing. Investment environment is increasingly becoming complex and encompass various kinds of marketable securities. Nevertheless, importance of a well-defined and suitable investment strategy cannot be underestimated.

An investment strategy defines how an investor should go about choosing securities to invest in. It is a basic guide for where to invest, when to invest and how much to invest. There are five important steps in an investment process which should not be neglected. They are:

1. Defining an Investment strategy/policy
2. Analyzing securities
3. Constructing a portfolio to minimize risk
4. Evaluating the performance of the portfolio, and
5. Revising the portfolio

An investor cannot define his investment strategy unless he defines his investment objective and investment surplus to his disposal. Objective of making more money is very vague. Of course everyone wants to make more money! Objectives have to be clearly defined in terms of risk and return. Understanding the relationship between risk and return will go a long way while building a portfolio that can provide optimum returns for the amount of risk an investor can take.

A commonly neglected aspect while choosing a venue of investment is the individual tax status. It does not make sense for a tax-exempt investor to invest in government securities or other tax-exempt investment options.

The second step of analyzing securities enables the investor to distinguish between underpriced and overpriced stock. Return can be maximized by investing in stocks which are currently underpriced but have the potential to increase (remember buy low sell high). There are two approaches used for analyzing securities; Technical analysis and Fundamental analysis.

Technical analysis involves studying the trends of stock prices movements. Technical analysts claim that by studying recurring trends and patterns in price movements it is possible to predict near term price movements. This is based on the assumption that price trends and pattern repeat themselves.

On the other hand, fundamental analysts believe that intrinsic value is equal to the present value of all the cash flows that a firm expects to gain in the future. Present value is therefore computed by forecasting the timing and amount of future cash flows and discounting these by applying an appropriate discount rate. A stock is considered undervalued and worth investing in only if this intrinsic value is reasonably less than the stock’s current market price. This is based on the belief that mispriced stocks will be corrected by the market at some point of time in the future, and that underpriced stocks will appreciate and overpriced stocks will depreciate.

Get credit news to remain apace with changes in credit card policies

noreply@blogger.com (Geetika) — Mon, 16 Nov 2009 10:40:00 +0000

To stay current on what is happening in the financial markets and in the different sectors of the economy around you, its very important to be aware of recent credit news and information. This is more important in case of new developments that take place in the credit card industry. Changes in the financial markets do not affect all because you may not be having an investment portfolio consisting of stocks, bonds etc. But credit card is one thing that is common among all Americans.

It is unfortunate to learn that ignorance is one of the reasons why credit cardholders fell behind on payments. Due to the credit crunch there were many credit card issuers that changed their payment policies and reduced credit limits. However, many consumers were not aware of the same and continued using their credit cards as per older terms of their cards. This led to the increase in the number of delinquencies associated with credit cards.

In order to do away with the anomalies, the government introduced the new credit card regulations that were supposed to come into effect in February 2010. However, it is anticipated that these changes in the credit card policies will come into effect by 2009 end. These changes have been made keeping in mind the needs of the consumers. Consumers have been complaining about the changes in the policies and the irregularities that prevail in the mortgage market.

So, it is important to stay abreast with the latest developments that are taking place around you. If you get credit news about the mortgage market, you can prevent your property from being taken away by fraudsters. How is this possible?
There are many scammers in the mortgage market that take you for a ride. Instances of mortgage fraud are not uncommon and in the majority if the cases, it is found that borrowers that are ignorant are the victims of mortgage fraud like property flipping, appraisal fraud, etc.

Organized Indian Retail: Challenges ahead for Organized Retail

noreply@blogger.com (Geetika) — Tue, 10 Nov 2009 10:37:00 +0000

Booming economy, favorable demographic patterns, increasing per capita income and urbanization gave rise to a new sector in India: Organized Retail. Opening up of retail sector for FDI can be considered as the prime reason behind the blooming organized retail sector. Sensing this opportunity several companies ventured into this sector, including Reliance, Bharti and Pantaloons.

Despite the Government allowing only 51% of FDI in single format retail segment, global retail giants like Tesco, Wal-Mart and Metro AG are making inroads indirectly through franchise agreements and cash and carry wholesale trading, thus giving some serious competition to domestic retailers. Nevertheless, growth opportunity in this sector can be judged by the fact that only 3% of the total retail sector is organized and 97% of the sector still consists of local mom and pop stores.

Unfortunately, the growth strategy used by all organized retail players of increasing their number of stores backfired when rentals dramatically shot up following the global economic melt down. Profitability is seriously hampered and almost all major retailers are now struggling to maintain their bottom line. Average operating profit margin declined from 9.5% in 2007 to 7.9% in 2008. The worst part is that such a drastic growth in the number of stores was backed by significant leverage which is expected to further hurt these organized retailers’ liquidity and profitability levels.

Retailers are correcting their over enthusiastic strategies of the past and focusing on improving their business model. This section will review some of the challenges these organized retailers are facing on both macro as well as local levels.

Aggressive Expansion

Over the last few years Indian retailers most preferred mode of expansion was to increase their number of outlets across metros. Outlets were built wherever real estate was available and not where they were actually required, which led to ‘Clustering’. Following credit crunch in 2008, several outlets were cast strapped and had to be closed down simply because they were operating in unviable locations.

Poor Supply Chain Management

One of the major challenges for retailers is to reduce shrinkage which includes short-weighing, pilferage and poor product handling. While the average shrinking percentage of inventory in developed countries is 1% to 2% of Cost of Goods Sold, it is estimated to be much higher for Indian retailers, primarily due to the lack of focus on supply chain management. The existing supply chain is not devoid of inherent weakness of India’s infrastructure, besides being corrupted along the entire chain. Tracing shrinkage is a Hercules task as almost all the transactions still continue to be based on paper system. This gives rise to the need of third party logistics organizations that can provide services at competitive prices. Third party logistics is a concept still absent from the Indian retailers’ value chain.

A large part of shrinkage takes place within the retailer by its employees. Moreover, tracking an employee’s track record and background checks is difficult. Retailers are now joining hands to fight this battle by creating a database of employees and share it amongst themselves to avoid shrinkage from within.

Employee training and retention

The most common strategy applied by retailers to keep labor cost at minimum was to employ fresh graduates with no experience in retail sector. They have now realized that in difficult market situations, experienced and talented employees that have sound understanding of ground realities could give retailers a competitive advantage. Despite a downturn, need for skilled manpower still continues to be a major concern across the sector.

Managing working capital

One of the most important factors affecting a retailer’s profitability is the way it handles its working capital. Lower footfalls, resulting into lower sales has directly impacted Indian retailers’ working capital position. Discounting is now the most common technique used to turn slow moving inventory.

Besides lower footfalls another factor which is hurting retailers’ liquidity position is the significant amount of leverage they are carrying which was used earlier for aggressive expansion. Banks are now reluctant to finance retailers given the falling demand and plummeting profitability. Retailers are therefore finding it difficult to finance their working capital requirements.

Diversifying into untapped rural areas

Experts believe that the next phase of growth for organized retail sector will come from rural areas that account for half of the $300 billion domestic retail market. Retailers will have to focus on the previously untapped lower income strata by providing them access to credit facilities. On the back of souring commodity prices and improving productivity, rural economy is set to boom in the next decade.

Backward Integration

One way to improve efficiency and profitability is to remove unwanted intermediaries which eat into the already stressed margins. To improve rural economy, Indian Government approved Contract farming and Leasing. According to KPMG, this will bring about technology transfer, increase capital inflow and assure market for crop production, besides eliminating intermediaries. Pepsico and ITC’s e-chaupal are already benefitting from contract farming in Northern India.

Despite the above mentioned challenges, long term prospects of organized retailers are still very attractive. Important consolidations and partnerships can be expected soon for improving operating and cost efficiency. Focusing on supply chain management and partnering seem to be the need for an hour for organized retailers so as to leverage their expertise and financial muscle.

Indian Telecom Industry: Sharing Telecom Infrastructure

noreply@blogger.com (Geetika) — Wed, 04 Nov 2009 11:38:00 +0000

De-licensing, implementation of open-market policy and other liberal economic policies has helped the Indian Telecom sector register a remarkable growth during the last 5 years. Indian Telecom sector today is the second largest and the fastest growing telecom market in the world only after China. Competition is intense with 4 out of the top 10 telecom players accounting for two third of the entire mobile market.

While all major telecom companies like BSNL, Bharti, MTNL, Reliance and Tata Infocomm have experienced a drastic increase in their subscriber base over the last few years, Average Revenue per Unit (ARPU) continues to be a major concern as price competition shows no sign of boiling down. According to TRAI, as of December 2008, the total subscriber base stood at 346.9 million, growing from 0.9 million as on March 1998. Despite growing subscriber based, mobile penetration still continues to remain at a low 27% compared to 94% in the US. Moreover, growth has been primarily from metros and Class A circles.

Due to growing competition and declining ARPU, large telecom players including Bharti, BSNL and Reliance are now increasingly focusing on rural and Class B and C circles to capture the untapped subscriber base. Since growth will be coming from lower income strata, it can safely be assumed that APRU will continue to slide further.

ARPU and MoUs (Minutes of Usage) are two critical factors for a telecom company as it directly impacts its EBITDA (earnings before interest tax depreciation and amortization) margins and IRR (internal rate of return). In the past, telecom companies were able to improve their EBITDA figures by amortizing cost over large and growing subscriber base. However, cut-throat competition and declining ARPU is increasing the pressure on these companies’ EBITDA an IRR.

Sharing of telecom infrastructure seemed to be the most logical step towards improving capital efficiency and reducing the cost of maintaining passive telecom infrastructure, besides enabling them to focus on their core operations. Return on Capital Employed (RoCE) and Profits are also positively impacted when telecom operators prefer to lease towers instead of owning them.

A tower infrastructure company provides passive telecom infrastructure on a sharing basis to telecom operators by entering into Master Service Agreements (MSAs) with them. While sharing of telecom infrastructure is now the order of the day across the world, the extent to which they are shared depends on the competition and regulatory climate in each country.

In order to improve operational and capital efficiencies, large telecom companies including Bharti Airtel, Reliance Communications and Tata Teleservices, hived off their tower divisions as separate companies. This benefitted them not only in the form of reduced operating cost and capital requirement, but also unlocking of significant value. Tower infrastructure subsidiaries always have the advantage of an assured occupant. As per ICRA, telecom infrastructure can generate good returns after achieving an average occupancy ratio of 1.7.

Besides hived off telecom infrastructure subsidiaries, there are several Independent Telecom Infrastructure Companies (ITIC) that build passive and active telecom infrastructure on anticipatory basis and rent it out to operators. For example, Essar Telecom Infrastructure Limited, Xcel Telecom Private Limited, GTL Infrastructure Limited, Quippo Telecom Infrastructure Limited, Vision India Private Limited, Aster Infrastructure Private Limited and TVS Interconnect Systems Limited.

ITICs are at a disadvantage against other telecom infrastructure subsidiaries as they have no assured occupants. Moreover, large telecom operators have their own infrastructure subsidiaries. As such, ITICs focus on regional and new operators. Unitech, Swan Telecom and S Tel Limited are some of the new entrants that will bank on such ITICs to optimize their investment.

Mobile tariffs are currently so low that any further reduction in tariffs will be impossible. The only distinguishing factor will be the quality of service provided by telecom operators. Given the scarce spectrum coupled with ever increasing number of subscriber base, providing good quality of service will demand additional passive and active telecom infrastructure thus increasing the demand for ITICs. Introduction of mobile number portability with limited switching costs is seen to be another important factor that will drive the ITIC sector.

Driven by intensifying price competition, mobile tariffs are now the lowest in the world. Consolidation is now expected to be the strategic and most logical step in the future, which will be supported by the rapidly increasing number of ITICs.

IPO: Risks involved for Retail Investors

noreply@blogger.com (Geetika) — Mon, 02 Nov 2009 10:21:00 +0000

Markets seem to be improving. With some minor corrections happening on the way, medium and long term prospects of capital markets look bright. Taking a clue of this, several companies are planning to launch their much awaited, rather postponed IPOs soon. Around 20 companies will be raising about Rs.20,000 crores from the market in the next 6 months.

QIPs and High Networth Individuals are carrying huge surplus liquidity which will be diverted into such IPOs. However, if retail subscription numbers of recent IPOs is anything to go by, it has proven that retail investor seem to lack confidence. The 10 IPOs launched this year where undersubscribed by retail investors. For example, QIP subscription of the largest public IPO this year, NHPC was oversubscribed 29 times, but its retail portion was subscribed only 3.1 times.

While underwriters to the issue claim that the IPO is significantly underpriced, retails investors need to bear in mind that there are certain risks involved in investing at the time of an IPO which cannot be easily measured. Measuring risk profile of an IPO is difficult compared to the risk of a seasoned issue. Various models of IPO pricing behaviour also fail to explain the behaviour of IPO returns. They have their own risk profile which is different from the risk in investing in trading stocks.

Those times are long gone when small investors could blindly throw in money at IPOs and expect to gain big return in no time. While IPOs still are a good investment option, the focus has shifted to long term return potential. Here we will brief on some of the points which retail investors should know before they plan to invest their hard earned money into IPOs.

The most important point to be kept in mind is that several companies that launch their IPOs are new ventures and do not have a track record of profitability. This in itself is a big risk as there is no parameter against which an investor can compare the valuation. The prospectus issued by such companies at time of filling for an IPO may be overblown and overoptimistic about their future prospects. Nevertheless, it is advisable to read through the prospectus as it does indicate risk and opportunities related to the company. It is a healthy sign, if the Company plans to use the amount raised towards expansion or research and development. Contrary to this, if the amount will be used to pay off existing debts and liabilities, it is a bad sign as it indicates that the company is unable to generate cash to pay off its debt.

The other important point worth mentioning here is that these are the companies which are not extensively covered by other analyst to uncover hidden risks. Moreover, investment banks and brokerage firms that do provide information have their own interest in pushing their clients’ IPOs to ensure their own future business with them. Similarly, opinion of magazines and newspapers may be biased because of their vested interests.

It has always been observed that retail investors are last to enter when signs of economic direction becomes clear. With the picture of economic recovery getting clearer, confidence and appetite of retail investors will improve and they will be inclined to invest in IPOs.

Sovereign Wealth Funds: India's Stand on SWFs

noreply@blogger.com (Geetika) — Fri, 23 Oct 2009 09:59:00 +0000

India has realized that SWFs can play an important role in financing its growing economy and has started drawing attention of Oman, Kuwait and Qatar, countries holding largest SWF assets. India and Oman recently entered into MoU with $100 million of seed capital increasing to approximately $1.5 billion over the next two years. Core sectors like infrastructure, telecom, health, tourism and utility are expected to benefit from this funding. At present, large pool of foreign exchange reserves have been invested in low yielding OECD government securities bonds and other low yield deposits.

Indian Government had announced in its recent meeting with Gulf nations that it needs around $500 billion investment over the next decade to fund their growing infrastructure requirements. This also presents an opportunity for rich and wealthy Gulf nations that are hunting for better investment avenues beyond developed countries which are still under recession post Subprime mortgage crisis.

A section of industry experts however opine that since India’s reserves are not derived by commodity exports, unlike cash rich Gulf nations, establishing its own SWF is not a good idea. With its current account deficit still running around 2% of its GDP, it makes more sense to hold as much reserve as possible as against long term investing through SWFs. While reserves of Middle East countries come from oil and commodity exports, India’s reserves are derived from FDIs, External Commercial Borrowings and other term credits.

Opening up to Islamic banking will enable India in attracting huge amount of SWFs which are being diverted to China and other emerging Asian economies. Singapore is cultivating Islamic Banking so as to leverage its position as a leading financial centre.

Sovereign Wealth Funds: Concerns attached with SWFs

noreply@blogger.com (Geetika) — Fri, 23 Oct 2009 09:23:00 +0000

Several countries are keeping their economies away from SWFs due to the concern that some investments are being diverted for political objective to acquire control of strategically important assets. It has been observed that OPECs have been diverting large pool of funds in acquiring strategic assets and investing in important sectors like infrastructure, telecom, energy and media across developed countries. After much opposition from US Congress, Abu Dhabi's Investment Authority had to withdraw from its ADIA Dubai Port after 9/11 terror attacks.

China Investment Corporation’s $5 billion stake in Morgan Stanley and acquisition of Citigroup by Abu Dhabi Investment Authority for $7.5 billion was severely criticized after the recent subprime crisis.

Lack of transparency continues to be a major concern for nations that are experiencing increasing SWF funding in their economies. SWFs are being criticized for inadequate disclosures regarding size and source of funds, investment objectives and their holding in private equity funds. While in the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, European Union preferred to avoid SWF funding. Some experts opine that such a fear is unwarranted if we compare the size of SWFs assets ($2 trillion) with the size of global investment funds assets ($20 trillion) and securities traded in dollars ($50 trillion).

IMG tried to address this concern of transparency and governance by issuing the Santiago Principles in 2007, a set of 24 voluntary principles to ensure transparency and sound governance by sovereign wealth funds (SWFs). However, very few SWFs have been following these principles seriously.

Sovereign Wealth Funds (SWFs)

noreply@blogger.com (Geetika) — Wed, 21 Oct 2009 13:03:00 +0000

Sovereign Wealth Funds (SWF) are owned and managed by governments or central banks of various countries around the world to invest their trade surplus globally, usually on a long term basis. They are funded by trade surplus of international trade, foreign currency deposit, International Monetary Fund reserves and other national funds like pension funds and oil funds. With subprime crisis haunting the global financial sectors, several SWFs are being criticized for investing heavily in Citigroup, Morgan Stanley and Merill Lynch which left them gasping for cash infusion. Nevertheless, from $500 million in 1990 to $3.8 trillion in assets today, SWFs have their presence now spread across 27 countries.

Around two-third of SWFs are held by the commodity and oil exporting and gulf countries like Qatar Investment Authority, primarily with the objective of diversifying their revenue streams and reduce oil-related risk and their dependence on oil export revenue.

Over the last decade, large current account surplus enabled Russia and China to build up their sovereign funds. They seemed to have realized (after Asian financial crisis of 1997-98) that it is better to build up their own reserves instead of depending on IMF to bail them out at the time of crisis. Russia and China now manage around $450 million and $1.44 trillion in SWF assets respectively.

Industry experts predict that assets under SWFs’ control could reach $12 trillion by the end of 2015.

The two main purposes of SWFs are short term foreign currency stabilization and liquidity management. The Global Financial Stability Report (2007) classified SMFs into five groups depending on investment objectives of their respective governments. They are:

(i) Stabilization Funds

(ii) Saving Funds for Future Generation

(iii) Reserve Investment Corporate

(iv) Development Funds; and

(v) Contingent Pension Reserve Fund.

During the period of rising oil prices, SWFs of oil exporting nations drastically due to increase in their foreign exchange reserves which are then used to make strategic acquisitions across the world. On the other hand, SWFs of emerging economies like China, Singapore, Malaysia and South Korea tend to grow steadily.

Another point of difference is the SWF to Foreign Reserve Exchange ratio which is used to determine the proportion of reserves which are invested using SWFs. It has been observed that OPEC have higher ratio compared to emerging economies. Last year, ratio for Qatar Investment Authority was 5.9 times compared to China Investment Corporation’s 0.12 times.

Cement Industry: Problem of Excess Capacity

noreply@blogger.com (Geetika) — Tue, 20 Oct 2009 10:26:00 +0000

According to CMIE (Centre for Monitoring Indian Economy), Cement industry is expected to increase its capacity by 30 million tones, reaching total capacity of around 276 million tones by March 2010. This will be the highest capacity addition in any single year. Given the current consumption levels of 178 million tones, expansion in capacity will put the pressure on the already plummeting cement prices.

Manufacturers have been cutting cement prices since September to ensure proper capacity utilization. The industry has been consolidating and the top five manufacturers now control around 60% of the entire production. The remaining capacity continues to be largely fragmented, primarily because cement is highly freight intensive and costly to be transported over large distance.

While the industry experienced a 10% growth in 2009, excess supply due to large capacity addition coupled with curtailed exports to Middle East and South East Asian Nations, the rate of growth can be expected to boil down.

Despite these challenges, industry experts opine that cement industry can be conservatively expected to grow 8% to 9% next year on the back of Government initiatives towards boosting the infrastructure and housing sector. Housing and Infrastructure sectors consume around 55% and 35$ of India’s cement output respectively and will now act as a major driver of growth for cement industry.

Islamic Banking in India

noreply@blogger.com (Geetika) — Fri, 09 Oct 2009 12:04:00 +0000

State Bank of India, India’s largest lending bank and Life Insurance Corporation (LIC), the country’s largest insurance company are planning to launch Islamic products, despite a study by RBI concluding that Islamic banking is not feasible in the current regulatory environment. Amendment to the Banking Regulation Act of India, 1949 is the prerequisite to allow Islamic banking system to operate in India. Such changes however cannot be made without strong political will.

According to RBI, except offering basic current account facility, almost no other banking product in India can be modified to meet the conditions of Islamic banking. Shariah law prohibits making money out of money, therefore shunning the idea of paying interests to depositors.

While SBI is still working on the feasibility of launching Shariah-compliant products and changes in system that will be required, LIC is looking forward to launch Takaful products catering to Saudi nations. Takaful is the insurance equivalent of Shariah-compliant Islamic Banking.

Some experts suggest that given the fact that 15% of India population comprises of Muslims, Islamic banking will open up a significant resource for funds during this period of credit crunch. Most importantly, it will attract large number of cash rich Middle Eastern economies that are looking for new investment avenues.

Current Scenario of NBFCs

noreply@blogger.com (Geetika) — Thu, 08 Oct 2009 11:28:00 +0000

Global credit crisis followed by increase in interest rates in October and November 2008 resulted in widespread crisis of confidence. Chain of events after the collapse of Lehman Brothers is still fresh in the minds of investors. Non-Banking Finance Companies (NBFCs) in India were severely impacted due to economic slowdown coupled with fall in demand for financing as several businesses deferred their expansion plan. Stock prices of NBFCs’ crashed on the back of rising non-performing assets and several companies closed their operations. International NBFCs’ still continue to close down or sell their back end operations in India.

The positive news however is that, this crisis has forced NBFCs to improve their operations and strategies. Industry experts opine that they are much more mature today than they where during the last decade. Timely intervention of RBI helped reduce the negative effect of credit crunch on banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to grab new customers (including customers of other banks) and increase its market share in national mortgage market. Surprisingly it was able to maintain its profitability in 2009 (around 37%). HDFC, the largest NBFC in India, however experienced a slowdown in customer growth due to stiff competition, especially from LIC Housing Finance and tight

monetary conditions.

Other NBFCs that were stable during this period of credit crunch are Infrastructure Development Finance Company (IDFC) Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). Growth prospects are strong for these companies given the acute shortage of power in the country and expected increase in demand for infrastructure projects.

The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle purchases experienced a drastic reduction in new customer numbers. Fortunately, since vehicle finance is asset-based business, their asset quality did not suffer as against other consumer financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC which deals in second-hand vehicle financing was able to maintain its growth primarily due to its business model which does not entirely depends on health of the auto industry.

Indian Newspaper Industry

noreply@blogger.com (Geetika) — Wed, 07 Oct 2009 12:28:00 +0000

With 42% market share, newspaper continues to be a dominant advertising medium across the world. As most of the cost is fixed, profitability of a newspaper company is primarily driven by the circulation volume. Large newspaper companies around the world are becoming multi-dimensional and are increasing their stakes in television, radio, magazines and other businesses. They are also operating online news websites to take advantage of economics of scale achieved by sharing resources while providing a range of outlets to advertisers.

The most important characteristic of Newspaper industry is the significant start-up cost that is required for buildings, presses, establishing distribution channels and large editorial staff to develop original content on a daily basis. Building brand value and maintaining a large circulation volume therefore is crucial to recover these high fixed costs. While the rate of renewed subscription is usually high, gaining new subscribers gets difficult in tough competition scenarios.

Advertising is a major source of revenue which directly depends on the health of the economy. Advertising also depends on Circulation, which is the second most important source of revenue and is based on the number of copies sold and subscription rate charged. As circulation drops, advertising revenue also falls. Thus a small fall in circulation can have a much higher impact on a newspaper company’s total revenues.

Newsprint cost comprises of a large proportion of newspaper publishing cost. While it is procured by weight, its production is measured in number of copies produced, commonly referred to as GSM (grams per square meter). Normal wastage of newsprint during this process of conversion is around 3% to 5%.

Historically, newspaper has always been a profitable industry. Despite significant start-up and fixed costs, once a newspaper is able to establish its brand, its dominance is indisputable. However, the last decade witnessed melt-down of several large newspaper companies across US and Europe only because they ignored the threat coming from growing Internet penetration. Several newspapers have filed for bankruptcy or are already looking for a buyer.

Ironically, while analyst across the globe are debating whether any valuation proposition still exists in the outdated newspaper model, one industry continues to hold promises for future growth; the Indian Newspaper Industry. While American newspapers have been struggling to survive the competition from growing internet advertising, Indian newspaper experienced dramatic growth during 2000 and 2005.

Circulation of Dailies in India increased from 5,91,29,000 in 2001 to 7,29,39,000 in 2003 to 7,86,89,000 in 2005. The key drivers for the growth of newspaper penetration in India are the expanding middle class and improving literacy rates. Marginal (though increasing) internet penetration is also one of the important reasons why Indian newspaper industry has not yet come across stiff competition from this medium.

According to a KPMG-FICCI report, Indian print media can be expected to grow conservatively at around 9% over the next 4 to 5 years. However, the industry has been experiencing growing margin pressures due to increasing newsprint costs which are not yet being passed on to readers due to intense competition. Newsprint costs soared almost 50% last year. While Indian newspapers are the cheapest in the world, industry experts opine that it may not be long that newspaper companies will increase their circulation charges and advertising rates to counter the increasing newsprint costs.

Last year, several publishers postponed their plans to expand their capacity in the wake of drastically increasing newsprint costs. On the other hand, they were unable to increase advertising rates as advertisers are slowly moving to other cheap medium like the internet. Publishers are not concerned about the slowly shifting advertising revenue to mediums such as radio and internet.

Despite such concern one important growth area for Indian newspaper publishers is that several rural areas are still untapped. Improving literacy rates, increasing income and benefits from development schemes of the Government will definitely open up penetration opportunities for Indian publishers.

In House Developed Vs. Ready to Use Solution

noreply@blogger.com (Geetika) — Tue, 06 Oct 2009 09:35:00 +0000

A Liquidity Aggregator acts as a centralized trading portal by accepting and normalizing several data feeds, feeding that data into algorithmic engines and receiving orders and routing them into the market. By presenting available liquidity in a single and consolidated order book, Aggregator act as a ‘Virtual Forex Exchange’ for buy-side traders. Traders can get a complete picture of available liquidity in a single trading environment, which enables them to have maximum control over their order flow by easily sorting, analyzing and making profitable decisions. Aggregation solutions are developed using Complex Event Processing technology, which are real-time in nature. Leading banks have now recognized opportunities in providing market aggregation services to their customers, creating sophisticated order types and implementing smart-order routing technology.

Trading institutions and market making banks can build their own trading platform that provides an aggregated view of the market. On getting an aggregated view of the market, algorithms can be created to apply orders based on their trading strategies. Trading firms can also purchase a third party aggregating and trading platform with prebuilt screens, algorithms and connectivity (referred to as ‘Black-box solutions’). Alternatively, they can also apply systems which also come with pre-built features but can be configured to meet the trading firm’s specific trading needs, commonly known as ‘ White-box solutions’. White box solutions are particularly applied by top-tier hedge funds and large dealers.

Competitive Advantage

The biggest challenge faced by all market participants (including sell-side and buy-side traders and market makers) in Forex market place today is managing complexity driven by drastically growing trading volumes and growing dispersion in liquidity sources. Significant investment is essential for updating old technologies or risk losing money on trades. A well developed and maintained liquidity discovery and aggregation solution can provide a trading firm competitive advantage, especially for market making banks which have traditionally relied on EBS and Reuters for accessing liquidity. Banks are increasingly using aggregation tools not only to track the available liquidity in the market but also in their own orders books. For example, HSBC has internally built its own liquidity discovery solution by applying aggregation and algorithms. Large hedge funds and banks view algorithms as a competitive advantage and do not rely on third-party vendors for algorithm development.

Costly and Time-Consuming

According to TABB Group, by the end of this year, 68% of all forex trades will be executed online. Historically, only the largest corporate customers dealt electronically, however infrequently trading customers are also looking for trading electronically with their banks. To satisfy this growing clientele, banks are therefore focusing on building robust and scalable trading platform. They use Complex event processing technology to build a series of rules that enable them to locate the best available price. They can also build algorithms to reflect their trading habits and preferences instead of applying a standardized third party trading platform. However, developing such a platform in-house is costly and time-consuming which can be afforded by only a handful of tier one banks that have enough resources. By outsourcing technology to best suppliers, banks can reduce their time to market and IT costs.

Current market conditions have further aggravated the problem of lack of resources. Both tier 2 and tier 1 banks are therefore entering into partnerships with vendors and other banks for developing white-labeled solutions to capture forex business. Some banks prefer third party providers which provide the same tools but without the burden of in-house development cost and cost of maintaining and updating algorithms. Ready to use aggregated platforms act as a telecom grid wherein market participants can easily dial anyone and engage in a conversation without investing in infrastructure. Moreover, vendors are increasingly adopting FIX standards for trading and FIX FAST for providing market data, thus improving connectivity to execution venues and overall performance.

Changing Motives to Trade

Foreign exchange is now treated as an asset and the trading volume has increased drastically over the last few years. New market participants have different approaches and trading motives and demand different trading venues and trading styles. Traders may be active or passive, patient or impatient and may be informed or uninformed. Besides they may also have different risk-return expectations, investment time horizons and may react differently to market conditions. To satisfy varying needs of their customers and distribution channels, banks are now in the race to aggregate the fragmented forex market and provide their customers a single view of the market. Market making banks that lack resource to develop their own aggregated trading platforms can either outsource developing task or opt for white-labeling solutions. The choice generally depends on the proportion of their high frequency and low frequency customers. However, the biggest challenge they face is that the existing electronic infrastructure and aggregation system available provide limited flexibility and customization.

Control in Dealings

Some trading firms and market making banks prefer developing their own trading platforms based on their business strategies and risk appetite. In-house developed platforms provide them better control over their dealings. However, it is important to analyze the cost and return benefits of building an in-house platform. To keep up with the arms race, third party providers have started investing and building faster technologies and products that enable banks to provide different executable pricing streams to different customers based on their needs and trading motives.

Speed and Capacity

Speed of execution becomes a critical factor due to the ever increasing use of algorithmic trading. Increasing ticket volumes challenges banks and liquidity providers to get their prices out in the market fast enough and confirm trades at the rate at which they are being traded. While several banks continue spending heavily on their websites to keep it updated, internet lack capacity, cannot be scaled easily and can have security issues. Introduction of Black box trading has resulted in an increase in small ticket trading thus increasing trading frequency. As the number of tickets traded increases, it creates a real capacity constraint and cost pressures for banks and brokers. Not having enough capacity can further create latency issues. Developing solutions that takes care of both pre-trade and post-trade execution issues may not be cost-effective for banks and trading institutions.

Flexible and Customizable
Innovations in technologies enable system providers to unbundle and re-package their core services to provide optimal set of network and trading services to their customers. Given the dynamic nature of trading relationships and increasing number of available liquidity venues, flexibility is now considered to be the most important feature in a trading system by all market participants including liquidity providers, market making banks, buy-side and sell-side firms. White-label solution providers are now providing new and improved aggregation platforms that allow banks to not only provide prices in chosen currencies but also get liquidity from a partner banks when required. Market participants prefer solutions that are intuitive and stream best prices to their screens in customized ways besides allowing them to trade in large order sizes. New aggregators are also expected to have the ability to enable traders to trade unique order types, including sweeps, triggers, and time varying orders.

Integral’s FX Grid is one such trading platform which allow market participants to connect to its FX Grid through a single Integral API from which they can negotiate, execute and settle trades with counterparties. Besides providing system integration and eliminating the need to manage multiple systems and services, FX Grid also insulates its participants from changes in technology made by other participants in the network, such as modifications to their systems' APIs. It is an end-to-end automated system which allows for provisioning of liquidity, thus enabling banks to provide flexible and customized liquidity solutions to customers.

Implementation of Aggregation Platform

Market making banks today have access to a wide range of white-label solutions available in the market; however implementation of these services is equally important. While some of the older solutions available are considered to be very good at scanning the market, they lack in adaptability and dynamic decision making ability. Building a technology is only half the battle won, the other half lies in proper implementation and integration of this technology into strategic decision making.

Cost of Maintaining and Updating

Changing dynamics and increasing velocity of forex market demand constant monitoring of aggregating solutions and keeping them updated and in tune with the market developments. Liquidity venues and the way liquidity is posted are constantly changing. The importance of successfully choosing, upgrading and maintaining a system cannot be overlooked. Banks have realized that it does not make any business sense for them to build aggregation solutions themselves and spend heavily in maintaining them. They rather focus on creating value-added services and use the best available technology to launch these services quickly into the market. Purchasing white-label solutions is therefore a more efficient way to offer new services to their customers.

Disadvantages of Forex Aggregation

noreply@blogger.com (Geetika) — Tue, 06 Oct 2009 09:28:00 +0000

Forex Aggregation is still a fledgling technology. Applying Complex Event Processing and Stream Event Processing, this technology has advanced noticeably. However, there are still a number of challenges and issues that need to be addressed from implementation point of view primarily due to the nature of Forex market. The following section discusses some of the disadvantages and challenges of employing a Forex Aggregator.

Some of these are, in part, due to the nature of the FX market such as ‘multiple hitting’ and the ‘liquidity mirage’ leading to clients experiencing reduced success ratios in their trading.

Consolidating Different Systems and Technologies

For presenting information in an aggregated format, Aggregators have to deal with the different ways in which the data is provided by various liquidity sources. Some sources provide the data in industry standard FIX format and others provide it in a proprietary binary format. While some sources provide a level two order book, which displays live orders that a trader can trade against, others work on an RFQ system. Aggregating data from RFQ liquidity sources that continuously stream information is relatively easier. However, RFQ sources that do not stream data on a real time basis, Aggregators face a challenge of updating information on a real time basis as request for quotes have to placed every few minutes. Ensuring connectivity to all venues is therefore the biggest challenge for Aggregators. Experts suggest that the key for achieving this connectivity is to build and maintain relationships with the venues rather than any technical or technological wizardry.

Implementation and Latency Issues

Several buy-side trading firms are rethinking their approach of using an Aggregation service after not achieving the benefits they had expected. This may be primarily due to the attitude of many participants that expect unilateral access to every available liquidity source rather than taking a more selective view of aggregation and the sources and venues included within their trading strategy. Lack of strategic focus affects the effectiveness of aggregation. Besides challenges in implementation and method of delivery, Aggregators also face another major issue of latency with which the data is delivered. In other words, while the technology is very good, its application needs to be revised. Experts suggest that pure aggregation services alone are an incomplete solution and Algorithmic Traders can embed Aggregation services in their strategies to save valuable execution time and cost.

Liquidity Mirage

While liquidity aggregation is beneficial especially for buy-side traders, it could also become counterproductive. Banks dealing in forex typically display the same price on multiple portals and electronic trading sites, thus creating a certain level of duplication. The liquidity displayed by the Aggregator may therefore not be true liquidity.

Advantages of Aggregation

noreply@blogger.com (Geetika) — Tue, 06 Oct 2009 09:26:00 +0000

Virtual Forex Exchange

A Liquidity Aggregator acts as a centralized trading portal by accepting and normalizing several data feeds, feeding that data into algorithmic engines and receiving orders and routing them into the market. By presenting the liquidity in a single and consolidated order book, Aggregators act as a ‘Virtual Forex Exchange’ for buy-side traders. Traders can get a complete picture of available liquidity in a single trading environment, which enables them to have maximum control over their order flow by easily sorting, analyzing and making profitable decisions.

Limiting Transaction Costs

By accessing multiple sources of liquidity, Forex Aggregators put back the market together for buy-side traders. Besides lowering transaction costs and time spent for searching liquidity, they also limit the potential risks involved by placing all execution orders in one order ticket. The cost of aggregation services will be offset as traders spend less time searching for the best price.

Increasing Trading Efficiency

By employing Aggregators, traders will no longer require to subscribe to multiple portals on their desktops. By aggregating the functionality, pricing and liquidity under one portal, traders can save on the cost of staff and infrastructure which they would have otherwise employed for managing various portal connections under traditional execution system. A major challenge faced by traders using traditional execution process is the ‘last look provision’. Bank portals have a waiting period of several hundred milliseconds to several seconds before a deal is executed. Seconds can make a huge impact on profitability especially for algorithmic trading system. However, by aggregating various liquidity sources, last look provisions can be minimized, thereby increasing trading efficiency.

Better Price Discovery

Forex Aggregators internally match trade orders between all buy-side traders and liquidity providers thus providing better price discovery, greater liquidity. This further improves the response time and order confirmations for the users.

Maintaining Anonymity

Buy-side firms prefer maintaining anonymity while trading in Forex marketplace as they do not prefer reveal their trading strategies. Forex Aggregators enable them to execute daily currency flows without revealing their position or identity.

Smart Order Routing

Forex Aggregators also allow for ‘smart order routing’, wherein buy-side firms can continuously observe all the liquidity sources to determine where the best market opportunities lie. After an order is executed, the Aggregator automatically decides where to route, how much of the total amount to send to which venue and what orders to send. Also, users can refer to only one screen instead of referring to several single or multi-screen portals at the same time, thus saving on cost of employing systems for each trading venue. Besides delivering efficiency gains, this technology also enables market players to retain more trading value. Forex players are therefore giving increasing services that deliver a single point of access to market liquidity, combined with a common trading record.

Forex Aggregation

noreply@blogger.com (Geetika) — Tue, 06 Oct 2009 09:22:00 +0000

Banks have historically been the principle source of liquidity and major market makers in Forex market. Banks dealing in forex and other providers of liquidity to the market are referred to as sell-side players. A customer (including a multinational bank or a treasurer) interested in engaging in forex transaction was required to call his/her bank and place a ‘Request for Quote’ (RFQ). Depending upon the credit rating of the customer, the bank would provide him/her a quote based on the current pricing of desired currency and a mark-up. For obtaining the best and the fairest price available, the customer would therefore be required to call several banks to place RFQs. This is however an inefficient and cumbersome process, given the number of phone calls, assembly of the quote information from several banks, and then placing of additional phone calls to finalize orders. Besides, the customer would also be required to have a credit established with all these banks prior to placing RFQs.

Alternatively, for achieving the best and fair deal, the customer can simply visit web sites of several banks and get quotes and place orders online. Almost all the sell-side dealers now offer an online portal for forex dealings. Several banks now maintain Forex trading via the FIX Protocol Specification, in support of both executable streaming prices and the Request for Quote trading model. Currently, there are also several multi-bank foreign exchange portals available on the internet wherein a large number of multi-national banks, such as JPMorgan Chase, Deutsche Bank and Citibank, provide their quotes to a portal. By subscribing onto such portals, customers can receive and view, at one location, a set of quotes from some of the largest providers of liquidity in the foreign exchange market.

Availability of several Forex avenues can be beneficial for buy-side traders as they can spread their orders over as many different venues while maintaining anonymity. However, this also increases complications as information regarding actual orders for foreign exchange simultaneously exists on several Forex trading platforms including direct bank quotes, electronic exchange and multi-bank portals. When liquidity is fragmented, multiple trading venues or destinations are required to complete a given order size at a given price which leads to direct and indirect costs for buy-side traders. The direct costs include ticket charges for splitting orders across portals. Adding new portals also increases the chances of information leakage. The time spent searching for liquidity across venues and associated overheads involved in connecting to each venue adds to the indirect costs. Moreover, a customer who subscribes to several portals and is a member of several exchanges may need several screens in front of him to be able to view and take advantage of all of the information available simultaneously. Dispersed liquidity therefore leads to increase in trades, decrease in order sizes, thus making it extremely difficult to gain complete market visibility which further results in higher costs and inefficient executions. Fragmentation of liquidity is the single most important reason why seeking liquidity and aggregating the market for optimizing execution is the key for players in Over-the-Counter Forex market.

Forex Aggregators effectively address the issue of fragmented liquidity by linking traders and brokers, as well as liquidity providers to one another to facilitate and provide for distribution of foreign exchange information and execution of foreign exchange transactions. Developed on Complex Event Processing (CEP) technology, Aggregators facilitate price discovery and provide buy-side institutions and traders with the best price offer and increased liquidity by aggregating liquidity providers. In simple words, Aggregation services enables buy-side firms to easily access a range of different liquidity streams including bank APIs, ECNs and other multi-bank platforms through a single screen.

Liquidity aggregation tools can be classified into two broad categories. The first category is typically an Execution Management System, which create an organized and integrated environment where various market participants can come together to provide full visibility and transparency. Such tools have open and clear rules for price discovery and trade execution. Integral’s FX Grid and FX Inside Professional trading platforms fall into this category.

The second type of liquidity aggregation is often referred to as ‘Aggregators’. Evolved from CEP technology, they provide aggregation engines or algorithmic engines to buy-side traders for developing and executing ‘black box’ trading methods that are inherently non-transparent. Players that employ these engines can program them to decide when and how to trade as well as using aggregation for price discovery and best execution. In contrast to Execution Management Systems, Aggregators have no rules guiding their execution models. They can filter and display the market data according to the pre-defined criteria of the end user. Players can therefore use them for arbitraging one source of price with another.

Foreign Exchange Markets

noreply@blogger.com (Geetika) — Tue, 06 Oct 2009 09:20:00 +0000

Foreign currency market continues to remain non-centralized and fragmented. While the collective daily volume in spot, forward and swap foreign exchange market is around 3 trillion, lack of transparent price discovery and liquidity amongst numerous institutional Forex dealing platforms still remains a prime concern due to the fragmented nature of Forex market. Given the increasing interest in online foreign exchange dealings, new and improved trading venues are becoming available. Foreign exchange is now being treated as an asset class by investors, thus further increasing the depth of the market and driving trading volumes higher. However, traders still find it difficult to get a complete and true picture of liquidity in forex market. They are therefore left competing for order flow with decreasing ability to offset trades efficiently.

Due to the decentralized, segmented and over-the-counter nature of Forex market, liquidity has always been dispersed. However, in the last ten years the number of sources from where liquidity can be sourced has increased enormously. Forex Liquidity Aggregators are tools that enable market participants to view all of the various sources of liquidity on one screen. Last few years have seen a drastic increase in a number of solutions being developed and applied by numerous buy-side firms.Given the segmented and over-the counter nature of Forex market, the need for fast and easy way to access multiple sources of liquidity for establishing the right price and market depth cannot be underestimated.

Liquidity Aggregation tools that enable forex traders to view all of the various sources of liquidity on one screen are now considered to be a vital trading tool especially for buy-side traders. Forex Aggregators act as a centralized trading portal for accepting and normalizing data from various liquidity sources, feeding this information into algorithmic engines, receiving orders and routing them out into the marketplace. This enables traders to have access to all available liquidity in a single trading platform, thus enabling them to sort, analyze and achieve trading efficiency. However, Aggregation is still relatively a new concept and the focus is not on the quality of this technology but on the way it is applied.

Overview of Indian Banking Sector

noreply@blogger.com (Geetika) — Fri, 25 Sep 2009 11:28:00 +0000

Liberalization of Indian Banking sector post 1991 led to a shift in banking culture from Class banking to Mass banking. This sector was and will continue to be the backbone of Indian economy. According to RBI, Indian banking industry is now well-regulated and adequately capitalized compared to banks across other developed countries. This has helped them in remaining resilient in the wake of global meltdown and sub-prime crisis.

Increasing presence of foreign banks, heightened competition and rapid technological advancement forced banks to become cost efficient and financially strong. Taking risks is part of a banks core business. They borrow money in the form of deposits and leverage it to lend it to borrowers at a higher rate. Banks therefore need to be highly regulated as even a small liquidity problem can create panic amongst depositors’, further deteriorating liquidity.

Since accepting deposits and providing loans and credit is primary business of a bank, some loans are bound to go bad. Making provisions for such losses on bad debts is therefore important to maintain liquidity. They also carry huge liabilities in the form of customer deposits. The best parameter used to judge a bank is the level of Non-Performing Assets it is carrying on its balance sheet. These are loans that do not pay off their principle amount or interest for at least 90 days. Due to its peculiar nature of business, cash flow statements of banks do not provide much insight into their performance.

Five important factors that investors should judge before investing in a bank are capital adequacy, credit quality, liquidity position, earnings and capital efficiency. Recent sub-prime crisis has highlighted the importance of banks’ credit quality.

Banks usually pay-out dividends and are high yielding stocks. Performance of banking stocks on stock markets is directly impacted by overall economy’s health and changes in interest rates announced by RBI. This is reflected on Bankex, the index for banking stocks.

Indian banks are still recovering from the last year’s sub-prime effect and experts believe that several banks are still trading at a much lower price-to-earning ratio compared to the overall market. While public sector banks are shedding their excess flab by pruning manpower and NPAs, private banks are seen consolidating though mergers and acquisitions.

Government’s effort to encourage public sector banks to keep lending during the slowdown is expected to show positive results as soon as the economy shows positive signs. Private Banks played smart by shifting their focus from corporate lending to retail lending to cap their losses. Besides, indications from RBI that it does not plan to increase interest rates any time soon also helped improve investor sentiments about banking stocks. Experts believe that credit off-take will increase around 18% to 22% during the remaining part of this year driven by soaring demand from corporate sector.

Valuation of Early Ventures

noreply@blogger.com (Geetika) — Wed, 23 Sep 2009 12:49:00 +0000

In previous blogs, we have discussed several valuation models, including the famous Dividend Discounting Model, Earnings Capitalization and P/E ratio. While these traditional methods can be used to value companies with track record of revenues and profits, they are irrelevant for determining value of a start-up company. Too many assumptions of moving variables make valuing early ventures using these methods useless.

Determining expected growth rate of revenue and profits is meaningless when the success of a start-up cannot be confirmed. A market may reject the new product or the regulators might not approve the product in the first place. Moreover, several ventures may be based on new ideas which are not yet tested and do not have an established market. Valuing start-ups is still important, especially for investors as it helps them in deciding the percentage of ownership they will receive. Investors in early ventures expect to gain a good multiple on their investment. In other words, the business should be expected to reach a higher Market-to-Book ratio.

It is normal for start-ups to lose money during initial years. Several new technology companies which are internet based tend to be loss making even at the time they are being sold. While Price to Sales can be applied, it completely ignores the operating efficiency, growth rate and relative market size.

It is generally observed that new technology companies are valued higher than companies from other sectors like consumer products, chemical and other manufacturing sectors. One prime factor distinguishing technology sector and traditional sectors is that while traditional companies face geographical constraints due to product weight, jurisdiction wise regulation etc; technological companies can avoid these constraints by using third-party distributors or internet. They can expand and grow globally very fast compared to other sectors, that too with a very low capital base. Moreover, their gross margins can easily range between 70% and 100%, as against commodity companies that run on low margins.

Successful ventures can either be sold to larger companies or they can opt for an IPO. Early venture investors tend to determine two values; the potential value at the time of next round of fund raising and the potential value of the company at the time of exit or sale. They then determine the value of the venture today to get an idea of the multiple they would gain. This method is referred to as ‘Venture Capital Method’.

For valuing a start-up, a venture capitalist also depends on his intuitions and knowledge and perception about the industry. Following are some of the important factors which the investor should examine while judging the value of an early venture:

Valuations of comparable publicly listed companies
Addressable size of the market
Valuations of merger and acquisition transactions
Gross margins of similar companies
Expected long run growth rate
How different is the new product or service

Several start-ups launch new products and services. In such cases, it is difficult to judge competitiveness of these ventures and valuing them based on comparative valuations will be inappropriate. Using Cash Flow Discounting Model would be ideal in such cases if it is possible to forecast future cash flows. Several venture capitalists prefer valuing intangibles to overcome the shortcomings of traditional methods.

Valuing Real Estate Companies

noreply@blogger.com (Geetika) — Tue, 22 Sep 2009 07:37:00 +0000

Last few years saw real estate property prices go through the roof. Three factors that impact property price are property cost, interest rate and income levels. Given the fact that in India, shortage of residential units is approximately 19 million, demand side will never be an issue. Reduction in interest rates and tax incentives for home loan repayment drastically increased the affordability and demand of residential properties after 2005. And as supply lags behind the demand for residential properties, prices logically rose drastically. Similarly, growth in IT and ITES sector and organized retail sector resulted in increase in commercial property prices.

Driven by soaring commercial and residential property prices, valuation of real estate companies also increased dramatically. Some investors consider size of ‘land banks’ as a key parameter for investing in real estate companies, and give little importance to margins and execution time taken to complete these projects. The major pitfall of this approach is that even loss making realty companies will be valued highly, despite having poor fundamentals.

While size of land banks held do provide indication about expected growth of a real estate company’s revenue, investors should also consider certain ratios specific to this industry. Operating margin and Return on Capital Employed should not be ignored as they provide valuable insight into a realty company’s operating efficiency. Also, since realty projects have long gestation period, it is important to understand how the company is financed. Hence, debt to equity and working capital to sales are very important ratios to be applied while analyzing real estate companies.

Investors who value real estate companies based on the total land held use ‘best price per square foot’ method to value the land size, experts opine that since it tends to ignore the risks involved, using ‘normalized price per square foot’ or ‘profit per square foot’ are more appropriate methods. According to some experts, Price to Earnings ratio and Price to Sales are appropriate methods for valuing real estate companies.

One major shortcoming of valuing land banks for determining the value of real estate companies is that there is no standard price which can be used. Moreover, land prices defer widely from location to location. Using higher values per square feet will tend to overvalue companies.